Federal court imposes personal liability for multiemployer pension plan liabilities

by Saul Ewing LLP
Contact

Summary

A recent case highlights the risk of personal liability for multiemployer and other defined benefit pension plan liabilities. Owners of closely held corporations that contribute to multiemployer or single employer defined benefit pension plans (DB Plans) should assess and, if possible, take some reasonably uncomplicated actions to reduce the personal liability risk.

The case, Central States, Southeast and Southwest Areas Pension Fund v. Nagy, No. 11-3055, 2013 WL 1706413 (7th Cir. Apr. 22, 2013) found an individual personally liable for the almost $3.7 million withdrawal liability owed to a multiemployer pension plan by a contributing corporation. The risk is equally applicable to single employer defined benefit pension plan liabilities and PBGC premium obligations. While the case does not forge any significant new developments, it serves as a reminder to owners of closely held corporations that contribute to multiemployer or single employer DB Plans to assess and, if possible, take action to reduce the personal liability risk.

The personal liability risk addressed in Nagy involved an individual having an ownership interest in a corporation that was assessed a withdrawal liability by a multiemployer pension plan. The individual also had an interest in other income activities including leasing of property to the corporation and as an independent contractor to an unrelated business. The primary issues in the case involved whether each of the other income activities constituted a trade or business and the court held the other activities did constitute trades or businesses. Under long established law, businesses having sufficient ownership or service relationships (an ERISA related employer group) have joint and several liability for many DB Plan liabilities, including multiemployer pension plan liabilities, of any of the ERISA related employers. As a result, due to sufficient common ownership among the corporation and the other businesses (in this case the individual appears to have had 100 percent of the corporation and was the sole proprietor and deemed 100 percent owner of the leasing and independent contractor businesses), the corporation and other businesses constituted a common control group (one form of an ERISA related employer group) for purposes of joint and several liability for the withdrawal liability. Further, since a proprietor or independent contractor is obligated for liabilities of the proprietorship or self employment, the withdrawal became a personal liability of the individual.

One of the primary issues in the appeal was whether the leasing activity constituted a trade or business. Generally, the question becomes a determination as to whether the leasing activity is merely a passive investment or an active trade or business. The rule applied by the 7th Circuit Court deciding Nagy is that the leasing of property to the corporation that incurred the ERISA liability will be deemed to be a trade or business. There is some inconsistency in decisions regarding whether particular leasing activities constitute a trade or business rather than a passive investment. However, any such activity poses a personal liability risk, particularly if the leasing is to the corporation responsible for creating the ERISA liability.

While Nagy involved withdrawal liability to a multiemployer pension plan and proprietorship and independent contractor facts, the personal liability risk that it illustrates has broader application. In addition to multiemployer pension plan withdrawal liability, the risk extends to other DB Plan liabilities including obligations related to single employer DB Plan contributions, termination underfunding and PBGC premiums. The risk of personal liability also extends to a partner having general liability under applicable state business law. Therefore, if a proprietorship or partnership is a trade or business and it becomes liable for a DB Plan liability incurred by another member of its ERISA related employer group, the individual proprietor, independent contractor or general partner will incur personal liability for the DB Plan liability.

The personal liability risk could arise directly from a proprietorship or partnership sponsoring a DB Plan rather than one sponsored by an another member of an ERISA related employer group. However, that risk is generally recognized and unlikely to occur. As in Nagy, the risk generally would arise in a situation involving an ERISA related employer group where an individual owner fails to recognize the personal liability risk that can arise when an ERISA related employer group member conducts activities in the form of a general partnership, proprietorship or independent contractor.

The principal lesson from Nagy is that personal liability is a risk if (i) an individual conducts a trade or business as a general partner or sole proprietor, including provision of services as an independent contractor or conducting sufficient leasing activities, (ii) that trade or business is a member of an ERISA related employer group because of sufficient ownership or service relationships and (iii) any member of the ERISA related employer group has a DB Plan liability. A shareholder of a closely held corporation that has or has the potential for having any DB Plan liability should examine the shareholder’s other income activities to assess the risk of becoming personally liable for any DB Plan liability of the corporation. Where there is a possible risk, consideration should be given to converting the general partnership or proprietorship to a corporate or limited liability company form.

If the risk is present, the individual exposed to personal liability risk should not expect that the existence of an ERISA related employer group or general partner or proprietor businesses will remain undisclosed. As to a withdrawal liability to a multiemployer pension plan, one type of DB Plan liability, the fund will typically request information, including tax returns, including from an owner, seeking to identify ERISA related employer group members. Of particular interest will be Schedule C, Profit and Loss from Business (Sole Proprietorship), which would include independent contractor income, Schedule E, Supplemental Income and Loss (including from rental activities, partnerships and trusts) and Schedule F, Profit or Loss from Farming. The same inquiries could be expected if an underfunded DB plan seeks a distress termination.

While not establishing significant new law, Nagy indicates some individuals continue to either be unaware of the personal liability risk or have lost a gamble on a recognized and assumed risk. If the situation might apply to you, feel free to contact us for a careful examination of your situation to accurately assess the personal liability risk.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing LLP | Attorney Advertising

Written by:

Saul Ewing LLP
Contact
more
less

Saul Ewing LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.