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Benefits Notes Post

Another Way to be Hit with Withdrawal Liability

Employers who participate in multiemployer pension funds know that if they withdraw from those funds they may be required to pay withdrawal liability if the plan is underfunded. Employers who sell their assets to an unrelated buyer can avoid that withdrawal liability if the buyer agrees to assume an obligation to contribute to the pension fund for substantially the same number of contribution base units as the seller was contributing and meets certain other requirements. If the buyer does not meet these requirements, then the selling employer will be considered to have withdrawn from the fund and can be assessed withdrawal liability even if the buyer continues to participate in the fund after the sale.

In a recent case from the U.S. District Court for the Northern District of California, the court refused to dismiss the claim of the multiemployer fund that a buyer was a successor employer to a seller who failed to pay its withdrawal liability. The buyer had not met the requirements for assuming the seller’s obligation to contribute to the fund but had in fact entered into a collective bargaining agreement to contribute to the fund after the sale. The seller had withdrawn from the multiemployer fund after selling its assets to the buyer. The fund waited about five years to assess withdrawal liability against the seller, which then challenged the assessment on the grounds that the fund had waited too long to make the assessment. The fund rejected that timeliness claim and then sued the seller to collect the withdrawal liability. The fund later amended its complaint to add the buyer as a defendant claiming that the buyer was responsible for the seller’s withdrawal liability on the theory that the buyer was a successor employer to the seller.

The buyer asserted that it was not the withdrawing employer and therefore could not be held liable for the seller’s withdrawal liability. The court refused to dismiss the claim on a motion to dismiss, stating that the buyer could be responsible for the seller’s withdrawal liability if the buyer was the alter ego of or successor to the seller. The court noted that buyers have been found liable for delinquent contributions to a multiemployer fund where the buyer was a successor employer to the seller who owed the contributions. Of course, delinquent contributions would have been owed at the time of the purchase transaction. Withdrawal liability, on the other hand, typically arises as a result of the purchase transaction itself and so would not be owed until after the purchase transaction. Nevertheless, the court concluded that a buyer could be responsible for the seller’s withdrawal liability if the buyer is a successor employer to the seller and if the buyer had knowledge of the fact that the seller was liable for the pension fund’s unfunded liabilities. The court noted that the buyer substantially continued the seller’s automotive dealership operations, including using the same business name, providing the same services, using the same facilities, machinery and equipment, employing the same employees, completing work in process and serving the same customers. Thus, under the facts as alleged, the buyer could be considered the successor to the seller and therefore liable for the seller’s withdrawal liability.

Because this case was decided on a motion to dismiss, the facts alleged in the complaint were treated as true. Therefore, we do not know whether the buyer will actually have to pay the withdrawal liability imposed on the seller. However, the fact that the court found that the buyer could be liable for the withdrawal liability raises the stakes for buyers of assets of employers who will be withdrawing from multiemployer pension funds. Many of those pension funds have substantial withdrawal liability at present. Buyers and sellers who are well advised negotiate carefully the extent to which the buyer will or will not assume that liability. This case suggests that buyers who take steps not to assume the liability may nevertheless find themselves having to pay the liability under a successor employer theory. Unless the case is overturned on appeal, this may make it more difficult for employers who participate in underfunded multiemployer pension funds to sell their businesses.