New Disclosure Requirements for Multiemployer Defined Benefit Plans
Employers operating in unionized industries (construction, manufacturing or transportation, to name a few) often participate in a multiemployer plan as a means to cost effectively provide benefits to union employees. This type of plan also enables unionized employees to accumulate retirement benefits in a single plan. The assets of such a plan are commingled by their very nature, since funds contributed through numerous unrelated employers are included in one plan.
It becomes challenging when one of the participating employers of the multiemployer plan cannot meet its funding obligations. Unfortunately, the nonpaying employer’s obligations become the responsibility of the remaining employers. However, these remaining employers are not required to recognize a liability for their share of the unfunded obligation and are only required to record a withdrawal liability if it becomes probable that they will cease participation in the plan. In fact, prior to Accounting Standards Update 2011-09, Disclosures About an Employer’s Participation in a Multiemployer Plan, the disclosures for multiemployer plans were the same as for single-employer plans, even though the inherent nature of the plans and their potential risks and obligations greatly differ.
So, how does a potential investor in an entity which is party to collective bargaining agreements value that contractor for purposes of a potential investment, without understanding the funded status of the multiemployer plans it participates in and future potential cash flow obligations? The answer is it really can’t, until now.
To assist financial statement users in assessing the potential future/off-balance-sheet obligations of an employer participating in a multiemployer plan, the Financial Accounting Standards Board issued Accounting Standards Update 2011-09, Disclosures About an Employer’s Participation in a Multiemployer Plan. The new disclosure requirements (in tabular format) included in a participating employer’s financial statements are:
- Each significant plan’s legal name and employer identification number.
- Each plan’s financial health, as indicated by its zone status as provided for in the Pension Protection Act of 2006. If the zone status is not available, an employer will be required to disclose whether the plan is less than 65-percent funded (red zone), 65- to 80-percent funded (yellow zone) or more than 80-percent funded (green zone).
- Expiration dates of collective bargaining agreements and minimum funding requirements, if any.
- A qualitative description that helps readers understand the significance of the collective bargaining agreements, such as the portion of the employees covered.
- Plans in which the participating employer represents more than 5 percent of the plan’s total contribution.
- Plans that are severely underfunded and subject to a funding-improvement plan.
- The amount of employer contributions made to each individually significant plan and to all plans in the aggregate.
- Whether or not a surcharge was paid to the plan; a quantifiable disclosure is not required.
- Any changes affecting the comparability from period to period for each period in which an income statement is presented, such as a business combination or divestiture, change in the contractual employer contribution rate or change in the number employees covered by the plan during the year.
- Further requirements are information that is available through the date at which subsequent events have been evaluated is to be used, as well as certifications of funding zones must be completed within 90 days after the start of the plan year.
Such information includes all collective bargaining agreements the company is a party to, funding zone certifications and a schedule of contributions made to each plan.
In order to prepare for these expanded disclosures, it is recommended that companies contact their plan administrators on a timely basis to ensure they will provide the required information. The effective date for Accounting Standards Update 2011-09 is for periods ending after December 15, 2012, for private companies; the rules have already been effective for public companies.