The same day that it rejected Central States Pension Fund’s benefit suspension application, the US Department of the Treasury explained to Congress its reasons for doing so. In a May 10 letter from Treasury Secretary Jacob J. Lew to congressional leaders with jurisdiction over the Multiemployer Pension Reform Act of 2014 (MPRA), the Treasury Department advised that Central States Pension Fund’s application failed to meet several of the MPRA’s technical requirements.

Summarizing the specific items outlined in rejection notice itself, Secretary Lew’s letter explains the application failed to demonstrate that the proposed benefit reductions would avoid plan insolvency and that the proposed suspensions were equitably distributed among certain participant groups. Additionally, the notices provided to plan participants were not understandable to the average person. Pointing out some of the specific criticism about the MPRA that the Treasury Department heard during the application period, the letter nevertheless advises Congress that the larger funding issues facing Central States Pension Fund and other multiemployer plans remain unsolved, especially as the Pension Benefit Guaranty Corporation simultaneously heads toward insolvency. Secretary Lew’s letter explains that the Treasury Department’s rejection of the application may provide participants with some short-term relief but points out that even larger cuts may be required in the future to meet the MPRA’s requirements.

The US Department of the Treasury today rejected Central States Pension Fund’s application for benefit suspensions under the Multiemployer Pension Reform Act of 2014 (MPRA). The rejection comes less than one day before the end of Treasury’s statutory 225-day application review period, after which an automatic approval would have kicked in. 

Treasury says it rejected the application because Central States failed to satisfy three of MPRA’s criteria: 

(1) The Plan’s investment and entry age return assumptions were not reasonable.

(2) The proposed suspensions were not equitably distributed across the UPS participant and beneficiary populations.

(3) The suspension notices were drafted in an overly complicated manner (i.e., not easily understood by the average plan participant).

Treasury did not state whether it was allowing the Plan an opportunity to resubmit an application, or on what timeframe. Stay tuned for more updates and analysis.

The US District Court for the District of Massachusetts recently ruled that two private equity funds were trades or businesses and in common control with a bankrupt company, and thereby liable for the multiemployer pension plan withdrawal liability obligations of the bankrupt company. The case, Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, was heard on remand from the prior appeal to the US Court of Appeals for the First Circuit. The district court rejected the company’s choice of organizational structures based on state law, holding that such choice and state law should not determine whether investment funds that are trades or businesses may be part of the same controlled group of businesses.

Under ERISA and the Internal Revenue Code (the Code), members of the same controlled group have joint and several liability for certain employee benefit liabilities of each group member, including single employer defined benefit plan funding and Pension Benefit Guaranty Corporation (PBGC) premiums, medical plan COBRA obligations, and multiemployer pension plan contribution, withdrawal, and termination liability. The Sun Capital cases involve multiemployer pension plan withdrawal liability. For ERISA and the Code, a controlled group requires an ownership/control threshold (at least 80% for a parent-subsidiary relationship or, for a brother-sister relationship, five or fewer individuals with 80% overall ownership and 50% identical ownership) among trades or business.

Prior to 2007, based on a few IRS rulings, an investment fund was not treated as a trade or business. In 2007, the PBGC issued an opinion letter taking a contrary position, concluding that a private equity fund was a trade or business jointly and severally liable for the unfunded benefit liabilities of one of its portfolio companies. This PBGC opinion letter was judicially endorsed in Sheet Metal Workers National Pension Fund v. Palladium Equity Partners, LLC. Other cases have also held passive investors to be engaged in a trade or business. 

The Sun Capital decisions involve certain private equity funds referred to as “Sun Fund III” and “Sun Fund IV.” The funds owned 30% and 70%, respectively, of an LLC, which owned through a holding company 100% of Scott Brass, Inc. (SBI). SBI was the entity that, upon its bankruptcy, incurred withdrawal liability regarding a multiemployer pension plan. The pension fund demanded withdrawal liability from SBI and also from the Sun Funds, claiming the funds were part of a joint venture under common control. In 2010, the Sun Funds sued in district court, asserting that it was not part of a joint venture and not under common control. The district court’s 2012 decision ruled that the Sun Funds were not trades or businesses and did not address the common control issue. Upon appeal by the pension fund, the First Circuit held that a private equity fund (Sun Fund IV) might be held jointly and severally liable as a “trade or business” for the unfunded pension obligations of its portfolio companies and remanded to the district court for further proceedings to determine (1) whether Sun Fund III LP and Sun Fund III QP, LP are engaged in a “trade or business” and (2) whether Sun Fund III and Sun Fund IV were under “common control.” Upon remand, the district court held that the Sun Fund III was engaged in a trade or business and that the funds were under common control. 

Regarding whether the funds were under common control, the district court also addressed the separate issue of whether to ignore the structure chosen by the private equity fund (i.e., a less than 80% investment by its Fund III and a greater than 20% investment by its related, although not parallel, Fund IV) and to deem a partnership/joint venture to exist among the related funds rather than the entity formed below them. On this issue, the court held that the investments by the related funds in an LLC that owned the operating company subject to pension liabilities were disregarded and instead deemed the funds to have formed a partnership-in-fact with joint and several liability for the portfolio company’s liability. The determination about whether a partnership-in-fact exists is made under principles of federal tax law.

Although it is unclear whether the district court’s holdings will be upheld on appeal and/or in other circuits, the decision raises many questions about organization and liability for private equity funds and other investors.

On March 31, the Pension Benefit Guaranty Corporation (PBGC) released a report showing that the current assets of its multiemployer insurance program are a small fraction of the amount needed to cover the guaranteed benefits for more than 1 million people whose plans are expected to become insolvent in the next decade. The PBGC director explained, “[t]his report offers vital information for Congress as it considers how to stabilize the program and put it on sound financial footing.” Read the PBGC’s press release and full report—PBGC Insurance of Multiemployer Plans: A Five Year Report.

On February 9, the US Department of the Treasury (Treasury) released additional proposed regulations implementing the benefit suspension provisions of the Multiemployer Pension Reform Act of 2014 (MPRA).

The proposed regulations address MPRA’s rule for multiemployer plans in “critical and declining” status that includes benefits attributable to a participant’s service with any employer that has (1) withdrawn from the plan in a complete withdrawal, (2) paid its full withdrawal liability, and (3) assumed liability, pursuant to a collective bargaining agreement, for providing benefits to participants and beneficiaries that is equal to any benefits for such participants and beneficiaries reduced as a result of the financial status of the plan.

Importantly, these proposed regulations do not affect the larger community of multiemployer pension plans or employers that contribute to them. They are exclusively important to the Central States, Southeast and Southwest Areas Pension Fund (CSPF) and its largest contributing employer, United Parcel Service Inc. (UPS).

The proposed regulations trace their genesis to a 2007 labor agreement between UPS and the Teamsters, in which it was agreed that UPS could withdraw from the CSPF for a lump sum payment of $6.1 billion. As part of that agreement, UPS established a new jointly trusteed single-employer pension plan for UPS’s employees who were previously covered under the CSPF. UPS also guaranteed that it would provide benefits to participants and beneficiaries that were equal to any benefits reduced as a result of the financial status of the CSPF (referred to as the “make-whole agreement” in the proposed regulations).

Earlier this month, in Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael's Floor Covering, Inc. (9/11/15), the US Court of Appeals for the Ninth Circuit, for the first time, found successor liability as a means to hold companies responsible for multiemployer pension plan withdrawal liability. Although the Ninth Circuit has previously applied successor liability in other labor and employment contexts, including in situations where multiemployer plans seek delinquent multiemployer pension plan contributions from companies under a successor liability theory, this is the first time the appeals court has explicitly applied successor liability in the context of multiemployer pension plan withdrawal liability.

In Michael’s Floor Covering, the court found that, in general, a successor employer may be subject to multiemployer pension plan withdrawal liability and, in particular, a construction industry successor employer can be subject to such liability, “so long as the successor took over the business with notice of the liability.” For purposes of imposing such withdrawal liability, the court held that “the most important factor in assessing whether an employer is a successor [] is whether there is substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” The court's ruling also sets out the list of factors courts should consider when deciding whether a company is a successor that can be held liable for multiemployer withdrawal liability.

View the original story.

A recent Seventh Circuit Court of Appeals case highlights a troubling trend of courts finding successor liability for multiemployer pension contributions and withdrawal liability following corporate asset sale transactions.

In 1990, the Seventh Circuit held in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac that under ERISA, a purchaser of assets could be liable for delinquent pension contributions owed by the seller to a multiemployer pension fund, provided that there is sufficient evidence of continuity of operations and the purchaser knew of the liability of the seller.

Subsequently, in 2011, the Third Circuit in Einhorn v. M.L. Ruberton Construction Co. reversed a lower court ruling and held that a purchaser of assets of an employer obligated to contribute to a multiemployer benefit plan may, where there was a continuity of operations and the purchaser knew of delinquency, be held liable for the delinquent contributions.

Recently, in Tsareff v. Manweb Services, Inc., the Seventh Circuit has taken what some may consider a step too far in holding that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had known of the seller’s “contingent” withdrawal liability that would be triggered by the sale. The Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable.

*UPDATE*

As we were posting, the IRS released draft instructions for 2015 ACA reporting. These draft instructions confirm that for 2015 reporting, ALEs that contribute to multiemployer health plans need only to receive confirmation from each such plan of three things: that the plan (1) offers minimum essential coverage that is affordable, (2) provides minimum value to individuals who satisfy the plan’s eligibility conditions, and (3) offers minimum essential coverage to those individuals’ dependents. The ALEs do not need more detailed information from the multiemployer plans to complete their 2015 reports. This IRS clarification is welcome guidance to ALEs that contribute to one or more multiemployer plans, as it simplifies their preparation for 2015 reporting.

* * *

The Affordable Care Act (ACA) reporting requirements are in full force for 2015. These reporting rules require both applicable large employers (ALEs, which are generally employers with 50 or more full-time employees) and other entities that provide minimum essential health coverage—including multiemployer health plans—to gather and report certain information to the IRS and covered individuals. These entities must report 2015 health coverage information to individuals by February 1, 2016 (the annual due date is January 31, but the date is adjusted for 2016 because January 31 is a Sunday) and to the IRS by the end of February or March 2016, depending on the number of reports.

Identifying and capturing the required information can be a daunting task for an ALE. ALEs must collect a significant amount of data for each full-time employee (i.e., an employee who works on average 30 or more hours a week or 130 or more hours a month) for each month of 2015. This information includes: (i) each month that an employee enrolled in coverage (or the reason an employee was not enrolled); (ii) each month an employee was offered minimum essential coverage providing minimum value; (iii) each month that minimum essential coverage was offered to the employee’s spouse and/or dependent children under age 26; and (iv) the dollar amount of the employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value that was offered.