Employers could end up having to pay millions of dollars more to underfunded industry pension plans depending on how the Supreme Court rules in a case it could hear as early as this fall.
A decision by the nation's highest court in favor of a Milwaukee brewery workers' underfunded pension plan could allow other industry pension plans to jack up by as much as two percentage points the interest rate they charge employers when they calculate withdrawal liability, said Susan Katz Hoffman, partner at the Philadelphia law firm Pepper, Hamilton & Scheetz. Ms. Hoffman currently represents several employers facing such liabilities.
At issue in the case, Milwaukee Brewery Workers' Pension Plan v. Jos. Schlitz Brewing Co. and the Stroh Brewery Co., is whether employers should have to pay a full year's worth of interest on their share of the pension fund's vested but unfunded promises in the year they withdraw from such plans, even if they left the plan on the last day of the year, and even if they had paid in right until that date.
"The question is should we be charged interest on the whole sum of withdrawal liability from the first of the year. But we were making contributions before the withdrawal ... so we say it's not fair," said James W. Greer, partner at Whyte Hirschboeck Dudek, a Milwaukee law firm representing the brewery.
Schlitz quit the Milwaukee brewery workers plan on Aug. 14, 1981. The next year, the brewer was purchased by The Stroh Brewery Co., Detroit. At issue is $1.6 million in interest for 1981, which has now grown to more than $3.5 million, said Michael G. Bruton, attorney with Pretzel & Stouffer, Chicago, which is representing the pension plan.
Schlitz began paying its withdrawal liability to the plan Oct. 29, 1981, so it skipped payments for little more than two months.
"It's an important issue to employers who are dealing with withdrawal liability payments," Ms. Hoffman said. The high court ruling could be particularly important to employers that wish to quickly pay off their dues to such group pension plans, she noted. At the heart of the dispute is the calculation of the interest employers must pay on their withdrawal liability. The Multiemployer Pension Plan Amendments Act, which regulates union plans, imposes a withdrawal liability on employers that bow out of group plans, and gives employers up to 20 years to pay it off, according to a set payment schedule. Moreover, employers are required to pay interest - at the same rate assumed by the plan - on the principal.
What makes the issue controversial is that the law stipulates pension plans must calculate this liability as of the last day of the previous year and assumes employers that quit the plan will not start paying their share of the plan's unfunded promises until January of the year following their withdrawal, regardless of when they actually start paying up. In fact, employers are not actually required to pay until the pension plan demands the money.
What this does is create a year's gap between the day on which the liability is calculated, and employers are expected to start paying.
But employers that have quit group plans in the middle of a year have fought against paying interest on a liability they argue didn't exist until that date. Meanwhile, the union plans contend the employers' liabilities pre-date withdrawal and because employers are allowed to pay off their liability over an extended period of time, charging them interest on their share of the unfunded benefits from the valuation date makes sense.
The Teamsters Central States, Southeast and Southwest Areas Pension Fund, for example, which filed a companion brief with the Milwaukee Brewery Workers Pension Fund before the 7th U.S.Circuit Court of Appeals, noted in its court documents that it had charged employers that left the plans a full year's rate of interest - 8% - in the 13 years since the law was enacted, and had collected about $370 million in withdrawal liability from employers over that period. The Teamsters' pension plan also was expected to file papers supporting the Milwaukee brewery workers before the Supreme Court.
"If you don't allow interest to be charged in the gap year, there will be somewhat of a shortfall in the amount the withdrawing employer will be paying to the plan .*.*. and the reason Congress set up the statutory scheme that they did is to attempt to make sure plans are made whole when the employer withdraws," explained Mr. Bruton. What makes the outcome of the case hard to predict is the different interpretations coming from appellate courts. In the Schlitz case, the 7th U.S. Circuit Court of Appeals noted that the law "does not authorize the assessment of interest before an employer's obligation to pay arises."
Yet, the 3rd Circuit, in an earlier case - Ray Huber et al. vs. Casablanca Industries Inc. - reasoned the prescribed payment schedule to mean the first payment, including interest, is due at the end of the first year after the withdrawal liability is calculated.
And the 4th U.S. Circuit Court of Appeals, in Borden Inc. vs. Bakery & Confectionery Union, decided the law does not state withdrawing employers must pay interest on any liability incurred for the period before they actually must start paying money.
The National Coordinating Committee for Multiemployer Plans, which had filed a brief supporting the union plan in the Casablanca case, also is supporting the Milwaukee brewery workers' plan before the Supreme Court.
Peter K. Schmidt, partner at the Washington law firm Arnold & Porter, who represents the Multiemployer Plan committee, said: "The Supreme Court will decide it the way the 3rd Circuit did. That is my prediction and my hope."