Hostess Brands Is Latest Case Highlighting Funding Challenges of Multiemployer Plans

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Analysis of Funding Challenges Facing Multiemployer Plans

  • Key Topic: Hostess Brands is the latest example of an employer that has tried using bankruptcy to avoid paying its withdrawal liabilities.

  • Key Takeaway: Multiemployer plan proponents will ask Congress to change some of the PPA requirements.

By Florence Olsen

Recent efforts by Hostess Brands Inc. to use bankruptcy to discharge withdrawal liabilities totaling nearly $2 billion highlight a persistent and serious problem for multiemployer plans, a retirement industry official told BNA.

Employers such as snack food maker Hostess have tried using bankruptcy to avoid their withdrawal obligations, to the detriment of multiemployer plan participants, their beneficiaries, and the employers that continue to contribute to those plans, Randy G. DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP), said in a Nov. 20 interview.

NCCMP made that same argument in an amicus brief that it submitted in February to the U.S. Bankruptcy Court for the Southern District of New York in the Chapter 11 case of Hostess Brands Inc. More recently, Hostess announced Nov. 16 that it had decided to seek bankruptcy court permission to shut down its operations and liquidate its business in the wake of a bakers' union strike, and that request was approved by a bankruptcy judge Nov. 21, the company said (see related article in this issue).

In the case of Hostess, the employer's withdrawal liabilities are “enormous,” and it should not be permitted “just to dump those on its competitors,” DeFrehn said.

Withdrawal liability refers to the statutory obligation of an employer that contributes to a multiemployer plan to pay off its share of benefit obligations before it withdraws from the plan. Hostess has withdrawal liabilities associated with 42 multiemployer plans, according to the Pension Benefit Guaranty Corporation.

PBGC Concerns
Several large multiemployer plans face potentially greater financial challenges than those to which Hostess has been a contributing employer. Those plans--one in the transportation, communication, and utilities industry category, and the other in the agriculture, mining, and construction industry category--are the primary sources of an anticipated $27 billion in multiemployer plan liabilities for PBGC, which the agency highlighted in its 2012 annual report.

PBGC's multiemployer pension insurance program covers about 10 million workers and retirees in about 1,500 multiemployer plans. For fiscal 2012, the agency reported a funding deficit of $5.2 billion in the multiemployer program.

“Our estimate is there are between 5 percent and 7 percent of plans that, under the current rules, are possibly headed for insolvency that will require PBGC assistance,” DeFrehn said.

Sunsetting of Funding Rules
DeFrehn and other proponents of multiemployer plans are focused on a Dec. 31, 2014, deadline, when statutory funding rules for underfunded plans whose status is “endangered” or “critical” are scheduled to expire. Those groups will ask Congress to reauthorize and modify the multiemployer funding rules under the Employee Retirement Income Security Act.

The groups hope that Congress will take action by the end of 2013, DeFrehn said.

“We're looking at what kinds of changes would be appropriate to recommend as well as some other more fundamental changes to ERISA to get multiemployer plans on a more stable footing going forward,” he said.

Legislative ideas discussed in 2010 for improving multiemployer plan funding could be revived and supplemented with some new ideas, all of which could be beneficial to plan participants, contributing employers, and PBGC, DeFrehn said.

“We'll be coming out with some recommendations very soon,” he said.

Modifications Needed
The Pension Protection Act of 2006, which amended ERISA's funding rules for multiemployer plans, created new rules requiring that underfunded plans establish and follow funding improvement or rehabilitation procedures. If a multiemployer plan is underfunded and its status is endangered, PPA requires the plan sponsor to adopt a funding improvement plan. If the underfunded plan is deemed critical, the sponsor must adopt a rehabilitation plan.

“We will be recommending a change to the treatment of the additional contributions required by funding improvement or rehabilitation plans,” DeFrehn said.

Contributing employers should not be penalized for remaining in a multiemployer plan and paying higher contribution rates by having their withdrawal liability increased, he said.

“It's an equity issue,” DeFrehn said.

Although PPA's funding improvement and rehabilitation rules for underfunded plans generally have been beneficial, trustees occasionally have gone too far in their efforts to comply with the letter of the law, DeFrehn said.

“It hasn't happened very often, but there are a couple of plans where the contribution rates going forward will reach a rate where none of the contributing employers will be able to successfully bid on work,” because they will not be competitive, he said.

“We believe such plans will have to be revisited in the future,” DeFrehn said.

PBGC Actions
PBGC reported that, in fiscal 2012, it helped multiemployer plans survive by permitting certain plans to protect new contributing employers from the plans' withdrawal liabilities. The agency also allowed some multiemployer plans to pay off their withdrawal liabilities and be treated as new employers for withdrawal liability purposes.

PBGC has shown a willingness “to be flexible and to consider alternative models that can work for particular plans and particular industries,” DeFrehn said.

“The jury is still out on how those plans will work in the long term, but we're supportive of anything that helps keep the employers in the game and provides long-term benefits for the participants,” he said.

By Florence Olsen

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