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Distress Terminations of Underfunded Pension Plans
Recent bankruptcies in the airline industry have highlighted the liabilities associated with underfunded defined benefit pension plans. Debtors seeking to restructure and reorganize into viable entities have to make difficult business decisions related to their sponsorship of defined benefit pension plans. The future funding costs and investment risks associated with continued sponsorship of underfunded defined benefit pension plans make pension plans a central issue in large Chapter 11 cases. In some recent Chapter 11 cases, the pension underfunding has exceeded several billion dollars (eg, the underfunding associated with United Airlines various plans alone were approximately $8 billion). In an effort to shed underfunded pension plans in bankruptcy, debtors may elect to seek a 'distress termination' of their plans. Prior to Congress' amendment of the Employee Retirement Security Act of 1974 (ERISA) in 1986, plan sponsors had an unrestricted right to terminate pension plans at any time by providing advance notice to the PBGC. The 1986 amendments to ERISA restricted the ability of debtors to unilaterally terminate pension plans with unfunded benefits. Thereafter, debtors must pursue a distress termination if they wish to terminate an underfunded pension plan in bankruptcy. A distress termination is in contrast to a standard termination where there are sufficient plan assets to fund the promised pension benefits or an involuntary termination instituted by the PBGC.
Under ERISA Section 4041(c)(2)(B), if one of four tests are met by the contributing sponsor and each member of the contributing sponsor's controlled group as of the proposed termination date, then a distress termination of the pension plan will be permitted. For purposes of this article, I focus on distress terminations sought in a Chapter 11 case, referred to as the reorganization test, rather than Chapter 7 liquidation. In a Chapter 11 case, the debtor must prove that unless the pension plan is terminated, it will be unable to: 1) pay all of its debts pursuant to a plan of reorganization; and 2) continue in business outside Chapter 11 reorganization.
Statutory Requirements
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