Nearly 45 percent of the 10.1 million participants in multiemployer defined benefit plans are construction industry workers or retirees. And the Financial Accounting Standards Board (FASB) recently released an exposure draft on an accounting standard related to these plans, which would increase the compliance burden for contractors and construction companies.
Under current accounting standards, employers disclose only their total contributions to multiemployer pension plans. New rules being considered by FASB-which oversees U.S. Generally Accepted Accounting Principles-will require additional disclosures, but these disclosures may not be as extensive as originally proposed.
While construction executives want to ensure that multiemployer pension plans are well-funded, they are watching the progress of the proposed new rules carefully. Employers have expressed several concerns about the proposed rules, including:
- Possible consequences associated with disclosing potential withdrawal liabilities in financial statements, especially when the employer is healthy and has no intention of withdrawing from the plan or plans in which it participates
- The information-gathering costs involved for the employers
- The variability in the amounts of plan assets and liabilities that are subject to large changes in value depending on the economy
- The accuracy of financial data, given what often are many months-long gaps between the year-ends of the plan and the employers
- Whether plan trustees will fully disclosure the additional information employers need to comply with the rules
- Whether employers have any recourse if they cannot obtain the information required to disclose from the plan trustees.
FASB issued the exposure draft in response to the increase in underfunding of multiemployer plans. The board wants to address what it believes to be a deficiency of disclosure in participant's financial statements. Since issuing the draft in September 2010, FASB has held several meetings to deliberate the draft for its Accounting Standards Update titled "Compensation-Retirement Benefits-Multiemployer Plans: Disclosure about an Employer's Participation in a Multiemployer Plan."
Fortunately, board members have responded to some of the concerns expressed by employers. Originally, FASB had proposed that employers would be required to disclose their estimated withdrawal liabilities associated with multiemployer pension plans. This is no longer included in the proposed new standard. Additional disclosures no longer in FASB's latest proposal include: the number of multiemployer plans in which an employer participates; total assets and accumulated benefit obligation of the plans; contributions to a plan as a percentage of total contributions; percentage of covered employees; and additional supplemental information.
The following revisions are included in FASB's new proposal. According to the board's June 6 Action Alert, for each multiemployer plan, employers would be required to disclose:
- The legal name and employer identification number of the plan
- As of the date of each balance sheet presented, the most recent Pension Protection Act of 2006 "zone" status pertaining to whether the plan's funding is endangered or critical-or, if the zone status is not available, whether the plan was less than 65 percent funded, between 65 and 80 percent funded or more than 80 percent funded
- Whether a funding improvement plan or rehabilitation plan was pending or had been implemented
- Whether the entity paid a surcharge to the plan
- The expiration date of any associated collective bargaining agreements
- Whether the employer's contributions represent more than 5 percent of the total contributions to the plan
- Contributions made to all multiemployer plans for each annual period that an income statement is presented
- Contributions made to each individually material plan and the total aggregate contributions made to all other plans for each annual period that an income statement is presented.
The proposed rules are the result of widespread concerns about whether the risks undertaken by employer participants in multiemployer plans are sufficiently transparent. Since the economy began faltering in 2008, asset values plunged, resulting in large unfunded obligations. The lack of current disclosure requirements regarding the impact of such underfunding on employer's future cash contributions resulted in the issuance of the exposure draft.
As construction executives know, collective bargaining agreements once dictated their responsibilities to multiemployer pension trusts and pension recipients. These agreements generally covered employer requirements to make contributions. Plan trustees, not employers, oversaw compliance and financial reporting.
The 1974 Employee Retirement Income Security Act (ERISA) and 1980 Multiemployer Pension Plan Amendments Act (MPPAA) brought employers into more direct contact with multiemployer benefit plan financial management. Under MPPAA, employers became subject to liabilities associated with withdrawals from the multiemployer plans, increasing their financial risks in the case of underfunded plans.
Under employer withdrawal liability, if an employer withdraws from an underfunded multiemployer pension plan, it is required to pay its share of the underfunding to the plan. This averts the possibility of a small number of employers being left with the full responsibility of the unfunded liability.
FASB's proposed rules are expected to be finalized this year. Under the current proposal, the rules would become effective for public companies for fiscal years ending after December 15, 2011, and for nonpublic companies for fiscal years beginning on or after December 15, 2011.
As the potential implementation date nears, employers should devise strategies for collecting and analyzing the information needed under the new rules. Strategies should include key procedures and resources identified by plan administrators, legal advisors and HR managers.
Construction Business Owner, August 2011
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