ERISA Withdrawal Liability: Make Sure to Look Before You Leap Into Mergers and Acquisitions
Faced with pressures to hold down costs, health care institutions are seeking economies of scale through a growing number of mergers and acquisitions. When reviewing a prospective merger or acquisition, institutions should take care to perform a thorough due diligence review of labor issues. High among those issues should be a determination of whether any of the employees of the target entity are represented by a union and, if so, whether the employer is required to contribute to a multi-employer pension plan under the collective bargaining agreement. The acquiring entity must then determine whether the pension fund is “underfunded” under ERISA because the transaction may trigger “withdrawal liability” for the selling entity (and potential successor liability to the purchaser for that withdrawal liability), or a merger partner may bring in that contingent liability with it.
Under ERISA, the purpose of “withdrawal liability” is to impose on employers liability for their proportionate share of the pension plan’s underfunding, triggered by the employer’s partial or complete withdrawal from the pension plan. A complete withdrawal occurs when the employer “permanently ceases to have an obligation to contribute under the plan” or “permanently ceases all covered operations under the plan,” such as when the business closes down, negotiates a new collective bargaining agreement without an obligation to contribute to the fund, or sells its assets to an employer that does not assume the existing collective bargaining agreement. A partial withdrawal occurs when an employer experiences a 70 percent decline in its contributions, or when it ceases to have an obligation to contribute under one (but not all) of its collective bargaining agreements or one (but not all) of its facilities, and continues to perform work for which it previously would have been obligated to contribute.
In recent years, many multi-employer pension funds have become severely underfunded, leading to potential withdrawal liability of many millions of dollars for employers who cease or substantially reduce their participation in such funds. Generally, withdrawal liability is imposed upon the employer that had the contractual obligation to contribute to the pension fund. However, although the general federal common law rule of successor liability holds that a buyer of assets is not liable for the debts and liabilities of the seller, in recent years courts have expanded an exception to that common law doctrine and increasingly hold buyers responsible for the seller’s withdrawal liability.
For example, withdrawal liability cases before the Seventh Circuit have imposed successor liability on the showing of two elements: (i) notice of the potential liability prior to the purchase and (ii) substantial continuity in the operation of the business before and after the sale. Where a purchaser intends to run essentially the same business, using the same equipment, facilities and employees, and to target the same customers, courts are increasingly receptive to holding the purchaser liable as a successor for any unpaid withdrawal liability of the seller.
If the prospective acquiring entity is willing to continue contributions to the pension fund, it can avoid potential withdrawal liability through use of ERISA’s Section 4204 asset sale provisions. Under this provision, the purchaser agrees to continue the required contributions to the pension plan under the collective bargaining agreement and -- upon compliance with the statute -- complete or partial withdrawal of the employer from the multi-employer plan does not immediately occur by virtue of the sale. But this process does not eliminate the potential withdrawal liability; it only eliminates the transaction as a trigger for incurring it. The prospective purchaser becomes a contributing employer to the pension fund and thus takes on the obligation to pay withdrawal liability should it close, bargain out of the obligation to contribute to the pension fund, sell its assets, or even if its employees vote to decertify the union.
Before entering into such an agreement, a prospective purchaser should fully analyze the potential financial impact of taking on such a potentially large contingent liability, including the long-term viability of the pension fund involved.
Potential purchasers should be mindful of all the aspects of potential successor liability as they structure and enter into asset purchase transactions. Specifically, they should:
perform careful due diligence regarding a target’s multi-employer pension plan obligations and potential withdrawal liability;
consider structuring the transaction to account for any withdrawal liability, either through indemnification provisions or a reduction of the purchase price, if due diligence uncovers potential withdrawal liability;
perform careful due diligence on the financial status of the pension fund involved before entering into an ERISA 4204 agreement, and of the major contributing employers to that pension fund to make a judgment on the long-term viability of the fund.