ERISA’s Free Look Rule
ERISA’s free look rule provides an exception to the employer withdrawal liability rules for new employers. Under the free look rule (ERISA § 4210), an employer who withdraws from a multiemployer plan in complete or partial withdrawal is not liable to the plan for withdrawal liability if certain conditions are met:
- The employer did not contribute to the plan before 1980;
- The employer contributed to the plan for no more than the lesser of six plan years or the number of years required for vesting. For most plans, the free look period is five years, the time required for vesting;
- The employer’s contributions were less than 2% of all contributions to the plan each year;
- The employer never avoided withdrawal liability by using the free look rule;
- The plan is amended to permit the free look rule, including required language from the Internal Revenue Code;
- The ratio of plan assets to benefit payments for the plan year before the employer began contributing must be at least eight to one.
The free look rule is not required; the plan trustees decide whether the plan will offer the free look rule. On the one hand, the free look rule might result in an increase in administrative cost to the plan. On the other hand, any employer that exercises its right under the free look rule to leave the plan would do so before its employees vest in the plan, while the plan retains the employer’s contributions. Allowing the participation of new employers under the free look rule is one way to bring more contributing employers into a plan.
For more information regarding the free look rule, please contact your Trust Fund counsel.
Kristina M. Zinnen