Today, I would like to speak to you about the Employee Retirement Income Security Act (ERISA) Withdrawal Liability Bonds. Previously, I spoke about when a company is being sold and the union requires a bond from the buyer to guarantee the unfunded pension obligations for five and a half years, the amount of which is calculated through a formula. For ERISA Withdrawal Liability Bonds, we’re going to look at section 4204(a)(1).
This is also a five and a half year bond, but in this case, the seller of the company is required to obtain the bond. The bond amount is set by the union, many of which use the Siegel method to calculate the bond amount. This bond would function similarly to the buyer’s bond, but in this case, the seller is required to bond the whole amount of the unfunded withdrawal liability, whereas the buyer’s bond is generally an average of the past three years. Given that the bond is the whole withdrawal liability, the bond amount is generally much higher, and given that it’s a five and a half year term, at times, it’s very difficult to obtain — nonetheless, my office has been able to issue many of these surety bonds with favorable terms.
Working with a knowledgeable agent, such as myself, we can discuss the ins and outs of what you need to do. The obligation is such that, provided the new owner continues to fund the pension contributions annually for five and a half years, the bond would eventually be released by the union and there would be no claim or liability on the bond.
If the new owner is unable to continue funding the pension contributions, there would be a possible payout on the bond. Given that it is the seller’s obligation to obtain, but there is a performance aspect from the buyer, we generally suggest that the buyer also indemnify the surety for the bond, so that they are also financially liable to the surety in the event they are not able to fund it.
This bond comes up when you have businesses being sold and you have union employees. The union requires the seller to get a bond pursuant to labor code section 4204(a)(3).
The bond is a financial guarantee of payment for the full amount of the withdrawal liability. So, what the seller would need to do is speak to the union, get their calculation of the withdrawal liability, and send that to the surety, along with the financial statement for the surety to underwrite. Again, this is an extension of credit and a financial guarantee, so the surety is going to want to see that the seller has very strong financials in order to issue the bond without collateral.
The surety may require the indemnity from the underlying asset which is being sold to guarantee the bond since they are the entity required to continue to fund the pension. Since the entity applying for the bond (presumably your client) is ultimately liable for the bond to the surety through the indemnity agreement, it makes sense to limit the risk for the surety and your client by requiring that the entity be sold to guarantee the bond as well. If they are setting up a new corporate entity once sold, that entity should also indemnify the surety.
It’s also good to know what the terms for the bond are ahead of time. So, if you’re negotiating with the buyer about how the sale should be structured, maybe they would also provide indemnity for the bond. You want to do this ahead of time so that when you go to the negotiation table, you know exactly what is going to be required.
PEDERSEN & SONS SURETY BOND AGENCY, INC.
15 Maiden Lane Suite #800
New York, NY 10038
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