Don't take the cost of multiemployer benefit plans for granted.

Most financial executives are involved in the design, financing, and administration of company-sponsored employee benefit plans, and they are well aware of the subtleties of such plans. But few are involved with--and understand--the multiemployer (Taft-Hartley) plans covering their union employees. Most financial executives assume that the company's costs and liabilities are limited to the contribution negotiated with the unions.

This assumption is, in a word, wrong. You might be surprised to learn, for example, that:

* Part or all of your company's contribution to the union plan may not be deductible. Even worse, it may result in an excise tax penalty.

* Your company could be charged a "withdrawal liability" over and above what it has already contributed.

* You may actually be subsidizing your competitors. In certain circumstances, your company's negotiated contribution may be higher than necessary to provide employee benefits.

These and other nasty surprises can be avoided--or at least minimized--by answering some basic questions.

Why are multiemployer

plans ignored?

Most company managements pay little attention to their multiemployer pension plans because they are not aware of the issues involved. They assume the company's commitment is limited to the contributions it makes to the plan. And because the company has limited control of the plans (even if company representati8ves participate as trustees, they must share control with the other trustees), they are reluctant to become involved. These factors, combined with the fact that a accounting for multi-employer plans is much simpler than for employer-sponsored plans, lead companies down the dangerous path of not-so-benign neglect. And, with the FASB's adoption of Statement 106 ("Employers Accounting for Post-retirement Benefits Other than Pensions"), the situation has become even more important.

What can go wrong?

Here are some things you need to be aware of:

* You could be assessed a withdrawal liability, which is an obligation for continuing contributions on behalf of your employees for whom contributions are no longer being made through the plan.

* Company contributions to the trust fund may not be deductible.

* Your negotiated contributions don't cover the cost of benefits either because employee benefits are greater than you expected or because your contributions don't provide the benefits you've promised.

* The plan is economically inefficient either because it is poorly managed or because the demographics of your company's population put you at a disadvantage in comparison with the demographics of the plan as a whole.

* A potential buyer of part or all of your business may be reluctant to assume the multiemployer obligation.

Let's take these nasty surprises one by one:

Withdrawal liability. Simply put, withdrawal liability is each company's share of the amount by which plan assets fall short of the value of vested benefits at any point in time. A withdrawal liability typically results from:

* Decertification of the union, leading to a cessation of contributions to support benefits promised by the plan.

* Change in union affiliation to a group not participating in the plan, once again leading to a cessation of contributions to the plan.

* Discontinuing or selling an operation, or shifting its work outside the jurisdiction of the union.

* A dramatic, sustained reduction in your company's level of participation in the plan.

If a withdrawal liability is assessed, the company can meet the obligation either by continuing to make contributions to the plan or by negotiating an immediate settlement of the obligation.

The concept of the withdrawal liability has recently been extended to welfare benefit funds for retirees. Because many multiemployer welfare plans have not incorporated withdrawal liability provisions and because there is no legal mandate for such a provision, as there is with pensions, a company that stops participating in a welfare fund in effect can walk away from its obligation for retiree medical or death benefits. The liability for these employees is transferred to the remaining employmers participating in the fund.

Nondeductibility of contributions. Because contributions to pension trust funds, whether under company-sponsored or multiemployer plans, are governed by specific deduction limits, contributions by employers that exceed those limits are not deductible. And that's not all. The IRS imposes a 10-percent excise tax each year on any nondeductible contributions that remain in the trust.

The nondeductibility of contributions was rarely a concern in the past because multiemployer plans historically have been poorly funded. But with the restrictive full-funding limit (150 percent of accumulated liability) introduced by the Omnibus Budget Reconciliation Act of 1987; the build-up of plan assets due to good market performance during the 1980s; relatively low levels of inflation, which have muted demands for growth in benefits; and the ever-weakening power of unions, which has undermined their ability to demand benefit increases, deductibility of contributions is now a concern.

These are two solutions: raise benefits or lower contributions. There are obstacles to both of these solutions, however, and sometimes the solution is worse than the problem. But the first hurdle to overcome is awareness. The plan's actuary may not have advised the trustees of the problem, so you have to be on the lookout for it.

But even if the trustees are aware, the preferred approach, which is to lower contributions, may be difficult to do. Because bargaining agreements do not generally condition continued contributions on deductibility, you may have to bargain for the right to stop making nondeductible contributions. And raising benefits, while it lowers the funded status, can lead to an inefficient use of funds or even to problems with a withdrawal liability.

Contributions don't cover the cost of benefits. Shrinking employment in a declining industry translates directly into reduced contributions to the multiemployer plan. If the plan does not have sufficient assets to provide promised benefits, either those benefits must decrease or contributions must increase to keep the plan funding in actuarial balance.

Even in a healthy industry, a plan dominated by one or two employers can have an inadequate contribution base if one of those prominent employers should fail.

Surprises also result from a misunderstanding about contributions or benefits. Some welfare funds, for example, incude a maintenance-of-benefits provision for employees who leave the covered group. Companies that remain in the group may have to pick up the tab unless the plan has a provision for a withdrawal liability.

Another surprise: manipulation of a benefit formula to increase the benefit. Take for example, a pension plan that offers three levels of contributions ($.50, $.75, or $1 per hour of service) and three corresponding levels of retirement benefits ($10, $15, or $20 per month per year of service). If the plan bases the benefits on the contribution rate in the year preceding retirement, the benefit formula can be manipulated. So a bargaining unit of a small group of long-service employees nearing retirement for whom contributions were made at the $.50 per hour level for 29 years can negotiate an increase of contributions to $1.00 per hour for the final year before retirement, thereby doubling their benefits. But another bargaining unit that contributed $1.00 per hour for the entire 30-year period is paying almost twice as much for the same benefit.

It is important, therefore, to read the plan document carefully or to get detailed, written answers to questions about the plan's particulars. This is especially true when you are first joining a plan.

Troublesome demographics. The level of benefits provided by a given level of contributions to a multiemployer plan members. The amount of contribution needed to support those benefits is derived by the plan's actuary from a study of the plan population. But if your company's employees are younger or have a shorter service than does the total plan population, you may have to pay more to provide benefits to your employees than is actuarially needed. In effect, you will be subsidizing competitors.

The reluctant buyer. Another problem of which you should be aware: multiemployer arrangements can put off a potential buyer for your company because they limit the buyer's ability to consolidate operations or otherwise bnefit from the business combination. While this could kill a deal, it's more likely to lead to a less favorable price.

What to do?

First, get the labor relations, benefits, and finance departments together on a team to oversee multiemployer plans. Because the labor relations department negotiates the contract calling for participation in the plan, it becomes the link among the company, the trustees, and the unions.

But, as expert as labor relations may be in negotiating the contract, it typically does not have the expertise to do a complete job of overseeing the company's participation in multiemployer plans. a better approach is to form a team of representatives from the labor relations, finance, and benefits departments. by pooling expertise, such a team creates a greater awareness of the pitfalls of multiemployer plans.

Second, identify the multiemployer pension plans in which the company participates and the company's level of participation (number of participants and contributions).

Third, design a questionnaire to send to each plan in which your employees participate, and assign someone to do an aggressive follow up to get the information. You should also use the questionnaire in the future to evaluate multiemployer plans before you become involved.

Your company should have up-to-date information on withdrawal liability in its back pocket at all times to help in business decisions. With the feedback from the questionnaire as a guide, compile a list of the potential withdrawal liability for each plan and the continuing contributions required to fund it. Include on the list the circumstances that can trigger a full or partial withdrawal liability and the ways to avoid the liability.

If your survey indicates a problem with deductibility, you need to take some action. The solution may be resolved simply by using other assumptions in the actuarial evaluation, certainly a good place to start. But it might involve one of the other two courses of action already suggested.

Many companies are reluctant to ask questions about withdrawal liability for fear of revealing business plans, but if you ask the same information each year you shouldn't need to worry.

Finally, identify and implement any necessary improvements in plans in which the company participates and develop some criteria that will help the company avoid future participation in a plan that has unfavorable characteristics. For example, you may decide to require that all contracts negotiated in the future condition contributions on deductibility.

The pitfalls of multiemployer plans can be avoided just by giving them a little bit of attention -- which is a little bit more than they receive in many companies. That small investment, especially by a multidisciplinary team, may not pay huge dividends, but it can help the company avoid some major disasters.