Are you considering laying off employees? Does your company contribute to a multi-employer pension fund (e.g. a union pension fund)? If so, you need to know about the partial withdrawal liability rules.
You may already know that if you stop contributing to a union pension fund, the fund could send you a bill for your company’s share of the plan’s funding shortfall. This is your company’s withdrawal liability. (If you don’t already know about withdrawal liability, please reach out to us.) But, you may not know that the pension fund could send you a withdrawal liability bill if you reduce your contributions, even if you do not completely stop contributing. This is a partial withdrawal. The rules for partial withdrawals are not the same as for complete withdrawals and we’ve found that many employers do not know they exist.
The 70% Partial Withdrawl Rules
An employer has a partial withdrawal if it reduces its pension fund contributions by at least 70%. Less common is when an employer stops contributing under one or more of its collective bargaining agreements or for one or more of its facilities, but continues to perform the covered work. Any of these scenarios will trigger the employer’s partial withdrawal liability and possibly a bill from the pension fund.
The 70% partial withdrawal rules impose partial withdrawal liability if the company fails to make sufficient contributions in each of three plan years compared to a high base year over a rolling five-year period.
Of course, that 70% rule isn’t as straightforward as it sounds. To calculate whether your company’s contributions have declined by 70%, you first have to calculate how much you contributed for your “high base year.” The high base year is actually the average of the contributions for the two years when your contributions were the highest during the five years prior to the “three-year testing period.” The three-year testing period is the plan year you’re testing for and the two prior years.
As an example, if you’re testing whether there will be a partial withdrawal in 2020, you first have to calculate the average of the contributions your company made for the two highest years from 2013 through 2017 (assuming a calendar year plan). If during each of 2018, 2019 and 2020, your company made contributions of less than 30% of the high base year contribution amount, then it’s had a partial withdrawal. If the company’s contributions exceeded 30% of the average high base year contribution in any of 2018 and 2019 or 2020, there has not been a partial withdrawal.
Many employers are weighing their staffing options right now. If your company contributes to a multi-employer pension plan and you anticipate a significant workforce reduction over the next few years, make sure you understand the partial withdrawal rules and your exposure to a potentially large withdrawal liability bill. If you need help, let us know and we’ll guide you through it.