When Bankruptcy Meets ERISA is not the latest Gary Marshall film or the sequel to Sleepless in Seattle, it is the very real mess created when a plan sponsor files Chapter 7 bankruptcy. In the last month, there has been so much written about Hostess disappearing, and almost nothing written about Hostess’ pension plan disappearing, which I think is the real Hostess story – it is not about a future without Twinkies, but about the men and women who made the Twinkies facing a future where Hostess made their vested retirement benefits disappear. Unfortunately, Hostess is not alone. Over the last several years, there are a number of companies, and one U.S. Territory (the Northern Mariana Islands Retirement Fund) which have looked to a bankruptcy court to resolve their underfunded pension issues.
Since the first step to solving a problem is recognizing that it exists, the Dept. of Labor has taken the lead on this one ahead of the bankruptcy courts. Last week, the Dept. of Labor released new proposed regulations updating the Abandoned Plan Program, in part to address this situation. The preamble states:
“Pursuant to these proposed amendments, chapter 7 plans would be considered abandoned upon the Bankruptcy Court’s entry of an order for relief with respect to the plan sponsor’s bankruptcy proceeding. The bankruptcy trustee or a designee would be eligible to terminate and wind up such plans under procedures similar to those provided under the Department’s current Abandoned Plan Regulations. If the bankruptcy trustee winds up the plan under the Abandoned Plan Program, the trustee’s expenses would have to be consistent with industry rates for similar services ordinarily charged by qualified termination administrators that are not bankruptcy trustees. The proposed amendment to the class exemption would permit bankruptcy trustees, as with qualified termination administrators under the current Abandoned Plan Regulations, to pay themselves from the assets of the plan (a prohibited transaction) for terminating and winding up a chapter 7 plan under an industry rates standard.”
The regs are a little long but well worth reading, and it is great to see the DOL tackle this issue. I’m hoping the bankruptcy courts recognize that winding up a qualified plan is not something a bankruptcy trustee can pick up on the fly, and that the bankruptcy trustees will be permitted to bring in ERISA experts on terminating plans and distributing the assets.