Another Multiemployer Pension Fund Cautionary Tale: Employer Does Not Owe Withdrawal Liability, But May Still Owe An “Exit Fee”

Employers that completely or partially withdraw from underfunded multiemployer pension funds are well aware that they may owe the fund withdrawal liability—an assessment against the employer of its allocable share of the fund’s underfunding, provided under ERISA. Imagine an employer that finds out its withdrawal liability is reduced to zero under the “de minimis reduction,” an exception under ERISA which reduces or eliminates withdrawal liability when the amount would be relatively small (under $150,000). Now imagine that employer’s reaction when it finds out that even though it owes no withdrawal liability based on the de minimis exception, it may still have to pay the fund an “exit fee” built into the fund’s trust agreement.

The Four-C-Aire Case

In Sheet Metal Workers’ National Pension Fund v. Four-C-Aire, Inc. (4th Cir. July 3, 2019), the pension fund’s trust documents provided that an employer would be required to pay the fund an “exit fee” if the employer ceased having an obligation to participate in the fund resulting in a withdrawal with no withdrawal liability (e.g., because of the de minimis reduction). The exit fee equaled the employer’s contributions to the fund for the 36-month period preceding the month the employer ceased having an obligation to contribute to the fund. By adding this exit fee to its trust documents, the fund created a mechanism to require withdrawing employers to pay to leave the fund, even when no statutory withdrawal liability was owed.

In the case, the participating employer, Four-C-Aire, withdrew when its CBA expired without any new agreement to contribute to the fund but did not owe any withdrawal liability due to the de minimis reduction. Four-C-Aire failed to pay the exit fee. The fund sued under ERISA Section 515, seeking payment of the exit fee as a delinquent contribution. Four-C-Aire argued that its obligations under its CBA, including the obligation to pay the exit fee, ceased when its CBA expired. However, during the term of the CBA, the pension fund amended its trust documents to provide that the exit fee was independent of any CBA and continued to apply after the termination of a CBA, regardless of any CBA language to the contrary.

The Fourth Circuit Court of Appeals ruled that the fund’s exit fee delinquent contribution action could go to trial. The court said that Four-C-Aire was a party to a CBA which incorporated by reference the fund’s trust documents, including any amendments to those documents and any policies and procedures adopted by the fund’s board of trustees. Because of this incorporation, Four-C-Aire was bound by the terms of the trust documents, including the amended language added during the term of the CBA providing that the obligation of an employer to pay the exit fee survived expiration of the CBA.

Consequences for Employers Participating in Multiemployer Pension Funds

The take-away of this case for employers participating in multiemployer pension funds is that in many cases, the employer will be bound by the terms of its CBA, and by the terms of the pension fund’s trust documents, and fund policies and procedures, including amendments to those documents adopted while the employer is participating in the fund. The broad nature of many fund documents arguably gives considerable power to pension funds to impose onerous terms on participating employers mid-CBA. To protect their interests, participating employers should obtain copies of all fund trust and other documents, read them carefully, and consult with experienced benefits counsel, so they can understand their obligations and options, which may include both ERISA withdrawal liability and fund imposed contractual liability.

About the Author:

Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Chair of the Firm’s Employee Benefits and Executive Compensation Practice Group. His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement and other deferred compensation plans. He can be reached at 734-623-1945 or and you can visit his bio here.