In Trustees of Local 138 Pension Trust Fund v. F.W. Honerkamp Co. Inc., (2d Cir. Aug. 17, 2012), the Second Circuit Court of Appeals unanimously affirmed a District Court finding that the Pension Protection Act of 2006 (the “PPA”) does not prevent an employer from withdrawing from a multiemployer pension plan that reaches “critical status.”1  Addressing an issue of first impression, the Second Circuit rejected the Fund’s requirement that the employer make ongoing pension contributions pursuant to the Fund’s rehabilitation plan. 

Congress enacted the PPA to combat threats of actual or forecasted termination of multiemployer pension plans. Under the PPA, employers participating in a pension plan in “critical status” (i.e., less than 65 percent funded) must contribute an additional surcharge of five to ten percent of the contribution amount required under the applicable collective bargaining agreements (“CBAs”). Additionally, once a plan reaches critical status, the plan’s sponsor (i.e., Trustee) must adopt a rehabilitation plan that establishes new schedules of benefit reductions and contribution increases. Participating employers and unions may choose from these schedules to negotiate successor CBAs.

If the bargaining parties fail to adopt a contribution plan, the PPA provides that “the plan sponsor shall implement the default schedule,” which “assumes that there are no increases in contributions under the plan other than the increases necessary to emerge from critical status after [benefits]…have been reduced to the maximum extent permitted by law.” See Employee Retirement Income Security Act of 1974 (“ERISA”) § 305(e); 29 U.S.C. § 1085(e).

The Local 138 Pension Trust Fund (the “Fund”) is a multiemployer defined-benefit pension plan. F.W. Honerkamp Co. Inc. (the “Company”), a New York distributor of wood chips, entered into CBAs with the Bakery Drivers Local Union No. 802 (the “Union”). The CBAs were set to expire in late 2008 and obligated the Company to contribute to the Fund on behalf of its employees.

In March 2008, the trustees of the Fund (the “Trustees”) announced that the Fund was in “critical status” as defined by the PPA and began drafting a rehabilitation plan (the “Plan”) for the Fund. The Plan set forth several new schedules of reduced benefits and increased contributions. The Trustees determined that the Fund was unlikely to emerge from critical status within the statutory ten-year rehabilitation period because the employer contribution rates to achieve the rehabilitation would exceed the amounts that employers would have had to pay to withdraw from the Fund under MPPAA.  Assuming that employers would withdraw from the Fund if the cost of participating exceeded the cost of withdrawing, the Trustees “imposed approximately the same burden actuarially on employers that a withdrawal from the Fund would produce.”  Rather than pull the Fund out of critical status as dictated by the Plan’s “default schedule”, the Plan (through its non-default schedules) merely delayed the Fund’s expected date of insolvency by three years. The Plan’s primary reliance on the non-default schedules was based on the Trustees' expectation that contribution rates necessary for the Fund to emergence from critical status were “unreasonably high.”

The Company and Union subsequently negotiated successor CBAs that provided for the Company’s withdrawal from the Fund in favor of a 401(k) retirement plan. When the Company informed the Trustees that it intended to withdraw from the Fund, the Trustees responded that the PPA required the Company to contribute to the Fund under the Plan’s “default” schedule – the Plan’s rehabilitative schedule. The Company countered that withdrawal was permissible and that it would be liable only to pay withdrawal liability as calculated under the MPPAA.

In February 2010, the Trustees sued the Company in the United States District Court for the Southern District of New York. The Trustees argued that the PPA prevented the Company from withdrawing after the Fund reached critical status and sought to compel the Company to make retroactive and prospective contributions under the Plan. The Company maintained that it could withdraw from the Fund as long as it paid withdrawal liability. The District Court granted summary judgment in favor of the Company.

The Trustees appealed to the Second Circuit Court of Appeals, arguing that the District Court erred in holding that the PPA did not prevent the Company from withdrawing from the Fund after it entered critical status. The Second Circuit rejected this argument, affirming the District Court.

The Second Circuit noted that this was an issue of statutory interpretation and looked primarily to Congressional intent. Though the text of the PPA does not address the issue directly, the Court cited provisions of the PPA evidencing that Congress understood that employers may withdraw from plans in critical status. For example, the statute revises the calculation of withdrawal liability for pension plans that enter critical status. See, e.g., ERISA § 305(e)(9), 29 U.S.C. § 1085(e)(9).

The Second Circuit also cited numerous instances in which Congress, when enacting the PPA, amended other provisions of ERISA dealing with withdrawal and withdrawal liability without indicating that it intended to abrogate an employer’s ability to withdraw from pension plans in critical status. Additionally, the Second Circuit noted that the Pension Benefit Guaranty Corporation (the “PBGC”), the government agency traditionally afforded substantial deference in its interpretation of ERISA and the insurer of protected pension benefits, also recognized an employer’s ability to withdraw from a pension plan in critical status. For example, in interpreting the PPA, the PBGC adopted regulations for calculating an employer’s liability upon withdrawal from a plan in critical status.

The Second Circuit also noted that various sections of the Trustees’ own Plan implicitly recognized an employer’s ability to withdraw at any time. The Second Circuit concluded that Congress’ goal in enacting the PPA was not to forbid employers from withdrawing from underfunded pension plans. The PPA and accompanying statutes aim to protect beneficiaries of multiemployer pension plans by keeping these plans adequately funded. According to the Second Circuit, the Company’s withdrawal from the Fund while paying liability under the MPPAA “largely comports with the goals of the PPA.” For these reasons, the Second Circuit found that when Congress enacted the PPA, it did not intend to prevent employers from withdrawing from multiemployer pension plans that enter critical status.

The decision in F.W. Honerkamp evidences the efforts of pension funds to shore up the underfunding of vested benefits through limits on an employer’s ability to withdraw from a fund that reaches critical status. It further shows that courts appear reluctant to go beyond the express language of the statute to assist with this goal.