Second Circuit clarifies decades-old ERISA ambiguity affecting multiemployer plans
A federal appeals court handed employers a major win on pension costs, ruling that a school bus company owes nothing after its workers switched unions.
The U.S. Court of Appeals for the Second Circuit delivered its decision February 18, settling a dispute that has puzzled benefits professionals for decades: What does an employer really owe when employees vote to change their union representation and pension plans come along for the ride?
For Mar-Can Transportation Company, a school bus operator serving Westchester and New York Counties in New York State, the answer turned out to be far better than expected. The company walked away owing zero dollars in withdrawal liability to its old pension plan, instead of the $1.8 million the fund had demanded.
The case offers a roadmap for benefits teams navigating the tricky intersection of union elections and pension obligations, particularly in industries where multiemployer plans are common.
Here's what happened. In March 2020, Mar-Can's employees voted to leave Teamsters Local 553 and join the Amalgamated Transit Workers. When the National Labor Relations Board certified the election results, Mar-Can had no choice but to pull out of the Teamsters-affiliated Local 854 Pension Fund and start contributing to the new union's plan.
Under federal pension law, that withdrawal typically comes with a price tag. In April 2020, the old pension fund assessed Mar-Can approximately $1.8 million in withdrawal liability, essentially its share of unfunded pension promises.
But there was a complication. The law also required the old fund to transfer pension responsibilities for the 144 active workers who switched unions. That meant moving $5.5 million in pension liabilities and $3.7 million in assets to the new plan.
Mar-Can objected that if the old fund was offloading $1.8 million more in liabilities than assets through the transfer, that should reduce what the company owed. The old fund disagreed, insisting Mar-Can still had to pay the full amount.
The disagreement hinged on how to read a particularly murky section of the Employee Retirement Income Security Act. The provision says an employer's withdrawal liability should be reduced by the amount that "unfunded vested benefits" transferred exceeds assets transferred. Simple enough, except nobody could agree on what "unfunded vested benefits" actually means in this context.
The old fund argued it means liabilities minus assets, and then you subtract assets again. Under that math, Mar-Can would get no reduction at all. Mar-Can said it simply means the liabilities transferred, which you then reduce by the assets transferred.
After the company sued and won in district court, the pension fund appealed.
The Second Circuit rejected the fund's interpretation. Writing for the panel, Circuit Judge Carney found the fund's approach would let it have its cake and eat it too. The fund would collect $1.8 million from Mar-Can while simultaneously unloading $1.8 million in net liabilities. That's a $3.6 million benefit from a withdrawal liability pegged at $1.8 million.
The court also noted something that should concern any HR team dealing with union workforces. Under the fund's interpretation, an employer forced to switch pension plans because workers chose a new union would face higher withdrawal liability than an employer that voluntarily leaves a plan. That seemed backwards given that Congress enacted these rules to discourage employers from abandoning pension funds, not to penalize workers for exercising their rights.
The legislative history backed this up. When Congress debated the pension amendments in 1980, witnesses raised concerns that imposing heavy withdrawal liability on union-switching situations could interfere with workers' ability to choose their representatives. Some worried unions might even use the threat of withdrawal liability to pressure employers during contract negotiations.
For benefits professionals, the takeaway is clear. When calculating withdrawal liability under these circumstances, count the total liabilities being transferred, subtract the assets being transferred, and that's your reduction. Don't count the assets twice.
The decision is binding in New York, Connecticut and Vermont, and could influence how courts elsewhere handle similar disputes. Two other local transportation companies facing identical situations with the same pension fund are waiting in the wings, their cases on hold pending this decision.
