Withdrawal liability

Definition

The bill a union pension plan sends an employer that stops contributing to it.

Why It Matters

A company whose union contract makes it pay into a multiemployer pension plan owes the plan its share of the unfunded vested benefits once it withdraws, completely or in part. An asset sale is the usual trigger, because the seller stops contributing when the operations leave it. Federal law lets the sale avoid that if it is bona fide and at arm's length, and three things hold. The buyer takes on contributions for substantially the same number of contribution base units. It posts a bond or escrow for five plan years, sized to the seller's recent annual contributions. And the purchase agreement keeps the seller secondarily liable for those five years. A stock purchase leaves the employer in place, and the liability with it. Ask the plan for the seller's estimate before the letter of intent.

In numbers: A seller that contributed $80,000, $90,000 and $100,000 over its last three plan years needs the buyer to post $100,000 for five plan years, the larger of the $90,000 average and the last year's $100,000.