By: Ronald Kramer

Since the passage of the Pension Protection Act in 2006, there has been an ongoing debate as to whether a surcharge imposed by a multiemployer pension plan in critical status is part of the employer’s “contribution rate” such that that extra amount — which can be 10% of an employer’s contribution — counts when a fund determines what a withdrawn employer’s “highest contribution rate” is for purposes of calculating the employer’s withdrawal liability payment schedule.  Under ERISA, an employer assessed withdrawal liability has the right to pay that off over time plus interest, with its annual payment equal to no more than its highest three year annual  average of contribution base units in the ten plan years prior to the withdrawal times “the highest contribution rate at which the employer had an obligation to contribute under the plan” in the past ten plan years.  ERISA Section 4219(c)(1)(C)(i)(II).  With many highly underfunded funds assessing so much withdrawal liability that the 20-year cap on annual payments applies, inclusion of a surcharge as part of the contribution rate can significantly increase an employer’s withdrawal liability.

While not all withdrawal liability arbitration decisions are published, at least two arbitrators have found that the surcharge should be considered when determining the highest contribution rate:  American B.D. Company and Local 863 IBT Fund (Taldone, 2013); and IBT Local 863 Pension Fund and C&C Groceries, Inc. (Irvings, 2012) (“C&S”).  In what appears to be the first published court decision, however, the District Court for the District of New Jersey reversed C&S, finding that a surcharge is not part of the contribution rate for purposes of setting an employer’s payment schedule.  Board of Trustees of the IBT Local 863 Pension Fund v. C&S Wholesale Grocers/Woodbridge Logistics LLC, Case No. 12-7823 (D.N.J. March 19, 2014).

The court in C&S looked to ERISA to determine what was meant by the “highest contribution rate at which the employer had an obligation to contribute under the plan.”  While “contribution rate” is undefined, ERISA defines “obligation to contribute” as an obligation to contribute arising “under one of more collective bargaining (or related) agreements,” or “as a result of a duty under applicable labor-management relations law.”  ERISA Section 4212(a).  Given this, the court found that a surcharge required by the PPA arises under ERISA, not a collective bargaining agreement or labor-management relations law.  Thus, the surcharge could not be considered part of the contribution rate.

The court then proceeded to reject the fund’s four arguments for considering the surcharge part of the contribution rate.  First, the court rejected claims that ERISA Section 305(e)(7)(B) somehow established that surcharges are the same as contributions when it provided that they are due and payable the same as the contributions upon which they are based, and if delinquent shall be treated as delinquent contributions.  The court determined that “contribution rates” provided for in a contract, while they might help determine the total value of contributions made by an employer, are distinct from contributions.  Thus, even if surcharges and contributions were the same, the underlying contribution rates were different.

Second, the court dismissed claims that ERISA Section 305(e)(9)(B), which requires that surcharges generally be disregarded in determining the allocation of unfunded vested benefits to a withdrawing employer, did not by implication mean that the surcharge should be included in the contribution rate for the payment schedule.  The court determined that Congress needed to address the application of the surcharge to the allocation of unfunded vested benefits specifically because withdrawal liability determinations are calculated based upon “the total amount required to be contributed” under the plan, with no reference to the contribution rate required under a contract, as provided for with regard to the payment schedule calculation.

Third, the court rejected fund claims that the 2008 amendment to ERISA Section 305(c)(9)(B), which replaced broader language that surcharges should be disregarded in determining “an employer’s withdrawal liability” under Section 4211 with the aforementioned mentioned “allocation of unfunded vested benefits” under Section 4211, meant that Congress deliberately chose not to exclude the surcharge from the contribution rate calculation.  The court found that the more likely explanation for the amendment was that Congress wanted to match the language in this section with the specific terminology utilized in ERISA Section 4211.

Last, but not least, the court rejected fund claims that plan provisions requiring employers to make payments to the plan “to the full extent of the law” somehow required the inclusion of the surcharge in the highest contribution rate.  The plan defined “Employer Payments,” however, as payments owed or made by employers in accordance with a contract or the fund’s trust document.  The court found nothing in the plan requiring the incorporation of the surcharge into the contribution rate, or equating “Employer Payments” under the contract or trust agreement with a statutory surcharge.

C&S is one opinion as to an issue that admittedly has become rarer as fewer and fewer employers remain subject to the surcharge.  For an employer that has withdrawn or will be  at a time when its contribution rate plus the applicable surcharge would in theory be its highest contribution rate, however, this remains a significant issue.  Sooner or later an appellate court will weigh in — perhaps in C&S.  Stay tuned.