The Pension Benefit Guaranty Corporation (PBGC) can be the largest unsecured creditor in chapter 11 cases and is usually a very influential member of creditors’ committees, which can lead to feuds with other creditors. For example, in In re Revstone Industries LLC,[1] PBGC agreed with the debtor to settle PBGC’s allowed general unsecured claim of $95 million for $80 million. The creditors’ committee moved to remove PBGC from the committee, arguing that the settlement conflicted with a competing reorganization plan proposed by the committee. Ultimately, the creditors’ committee withdrew its motion when, as part of a global settlement, PBGC agreed to lower its recovery to $75 million.
To face off against this powerful player, bankruptcy practitioners must understand what claims the PBGC can assert against a debtor for pension liabilities. This article provides an overview of the nature and priority of PBGC claims in chapter 11 cases.[2]
What Is the PBGC?
The PBGC is part of the U.S. Department of Labor.[3] The PBGC ensures that the benefits that a company promised to its employees under a defined-benefit pension plan (DB plan) are paid if the company cannot adequately fund the plan.[4]
A DB plan is generally a pension plan that provides for the payment of benefits in an amount determined by a formula that is typically based on factors such as the duration of an employee’s service and/or the amount of the employee’s compensation. DB plan benefits are usually distributed without regard to the future availability of plan funds, sometimes resulting in a situation where the plan funds are insufficient to pay benefits.
Under the Employee Retirement Income Security Act (ERISA), plan sponsors must pay insurance premiums to the PBGC to insure against the termination or insolvency of the DB plan.
Types of DB Plans
Pension plans are classified as single-employer or multiemployer plans. A multiemployer plan is a DB plan toward which more than one employer is required to contribute. It is maintained under a collective bargaining agreement between a labor union and more than one employer.[5] A single-employer plan is a plan that is not a multi-employer plan.[6]
The PBGC insures single-employer DB plans[7] against plan termination by paying the vested guaranteed benefits of plan participants, subject to statutory limits. PBGC generally guarantees the same types of benefits under multi-employer plans, but its role in multi-employer plans is more limited. When one of the contributing employers withdraws from a multi-employer plan, the plan continues operating with the other contributing employers. The withdrawing employer is liable to the multi-employer plan for its share of underfunded benefits (withdrawal liability).[8] Because the claim against the withdrawing company belongs to the multi-employer plan and not to the PBGC, multi-employer plans are beyond the scope of this article.
PBGC Insurance Premiums[9]
All companies with DB plans pay annual flat-rate premiums. Additionally, single-employer DB plans pay variable rate premiums if the plan is underfunded, and a termination premium if the plan is terminated in a distressed or involuntary termination. These premiums partly fund the PBGC’s operations.
Termination of Single-Employer DB Plans
There are three types of terminations: standard, distress and involuntary. A company with an adequately funded DB plan can elect a standard termination.[10] The company must distribute the accrued benefits (those benefits earned by the employee as of the date of DB plan termination) to its employees through annuities or lump-sum payments.[11] DP plan assets must be sufficient to satisfy all benefit obligations on the date of distribution, or, with limited exception, the PBGC will deny the termination. A standard termination does not trigger the PBGC’s insurance function, since the DB plan is adequately funded.
Generally, to voluntarily terminate an underfunded DB plan (insufficient assets), the company must initiate a distress termination.[12] A distress termination triggers the PBGC’s insurance functions. The PBGC becomes the DB plan trustee and pays the portion of the guaranteed pension benefits that exceeds the DB plan’s assets. The PBGC guarantees vested benefits up to a statutorily set monthly limit.[13] To implement a distress termination, the company must establish that neither it nor any members of its controlled group[14] (if applicable) can keep funding the DB plan due to financial distress. To meet the financial distress test, the company and the members of its controlled group must each satisfy any one of the following conditions:[15]
- It is liquidating through bankruptcy;
- It is reorganizing in bankruptcy and the court determines that DB plan termination is imperative to a successful reorganization;
- It will be unable to pay its debts when they are due and continue in business unless the DB plan is terminated; or
- Its pension costs have become unreasonably burdensome as a result of a declining workforce.
PBGC can initiate an involuntary termination if the DB plan does not have sufficient assets to pay benefits that are currently due.[16] In involuntary terminations, the PBGC becomes the DB plan trustee and assumes the DB plan assets.
PBGC Claims Against a Chapter 11 Debtor
In connection with a single-employer DB plan, the PBGC can assert claims against a chapter 11 debtor for accrued and unpaid minimum funding contributions, unfunded benefit liability, insurance premiums and termination premiums. The company and each member of its controlled group are jointly and severally liable to the PBGC for these claims.[17]
Minimum Funding Contribution Claims
A company sponsoring a DB plan must meet minimum funding requirements imposed by ERISA and the Internal Revenue Code (IRC). These funding requirements are based on actuarial calculations and assumptions involving expected retirement age, years of service, compensation, employee turnover and mortality.
Minimum funding contributions due and unpaid prior to a bankruptcy filing may be secured claims in certain circumstances discussed below. Typically, claims for minimum funding contributions are general unsecured claims (GUCs). A fraction of the GUCs may be entitled to priority under Bankruptcy Code § 507(a)(5) if the claim is attributed to services rendered within 180 days prior to the DB plan sponsor’s bankruptcy filing. Minimum funding contribution claims accruing after the bankruptcy filing have administrative expense priority under Bankruptcy Code §§ 503(b)(1) and 507(a)(2).[18]
Unfunded Benefit Liability Claims
An unfunded benefit liability claim arises as of the DB plan termination date in a distress or involuntary termination where the current value of the assets in the terminated DB plan is insufficient to satisfy the benefit liabilities under the DB plan.[19] This claim is typically incurred prepetition and treated as a GUC. However, in certain circumstances discussed below, it can be a secured claim. If the DB plan is terminated during bankruptcy proceedings, the portion of the unfunded benefit liability claim related to services rendered postpetition has administrative expense priority.[20]
Insurance Premium Claims
The liability for insurance premiums arises the first day of the DB plan year, but the payment is not due for several months.[21] These premiums continue to accrue until the DB plan is terminated. Accordingly, the PBGC may file a claim in the bankruptcy case for accrued and unpaid insurance premiums. These claims are typically GUCs. However, the PBGC may have an administrative priority claim for premiums accrued after the bankruptcy filing.
Termination Premium Claims
A company must pay annual termination premiums of $1,250 per enrolled participant (counted immediately before termination) during the three calendar years following DB plan termination.[22] In a chapter 11 reorganization, the three-year period starts upon the debtor’s discharge.[23] Termination premiums do not apply to liquidating companies.
Premiums related to the prepetition termination of the DB plan are considered GUCs. In a chapter 11 reorganization, termination premiums resulting from a postpetition termination are non-dischargeable claims.[24]
PBGC Statutory Liens
The PBGC can perfect and enforce statutory liens on minimum funding contribution claims (funding liens) and unfunded benefit liability claims (termination liens).[25] A funding lien arises in favor of the DB plan when unpaid minimum funding contributions exceed $1 million.[26] The lien covers the aggregate amount of all unpaid contributions plus interest.[27] A termination lien arises in favor of the PBGC when a DB plan sponsor terminates the DB plan but fails to pay its unfunded benefit liabilities upon the PBGC’s demand.[28] The lien covers the lesser of the unfunded benefit liability or 30 percent of the collective net worth of the controlled group.[29]
Both statutory liens are imposed on all the property of the DB plan sponsor and each member of its controlled group. These statutory liens become effective and enforceable when the PBGC files a notice of the lien in the appropriate recording office.[30] Perfected PBGC liens have priority over security interests that have not been properly perfected at, or prior to, the time the PBGC records the lien.[31] If the DB plan sponsor is in bankruptcy, the automatic stay prevents the liens from attaching postpetition to the debtor’s property. However, the liens can attach and perfect against the assets of members of the controlled group that are not in bankruptcy.
Lastly, Bankruptcy Code § 545(2) may prevent debtors from avoiding PBGC liens that remained unperfected at the commencement of the bankruptcy case. First, § 545(2) excepts IRC § 6323 tax liens from the type of statutory lien that a debtor may avoid. ERISA § 1368(c) determines the priority of termination liens by applying IRC § 6323, and funding liens are treated similarly to termination liens.[32] Second, in Title 11 cases, PBGC liens are treated in the same manner as a tax lien for taxes due and owing to the U.S.[33]
Closing Thoughts
With a deficit of $19.3 billion in its single-employer program, the PBGC will be an aggressive contestant in chapter 11 cases. Therefore, the survey says: “Don’t rely on the Wheel of Fortune; prepare yourself well through due diligence and a thorough understanding of pension liabilities.”
[1] Bankr. D. Del., Case No. 12-13262.
[2] For a comprehensive analysis of pension issues in bankruptcy, in addition to the sources cited in this article, see ABI’s Pension Manual, A Practical Guide to Pension Issues Arising in Business Bankruptcy Cases (2006).
[3] 29 U.S.C. § 1302; see also www.pbgc.gov/home.html.
[4] The PBGC only oversees DB plans in the private sector and it is not involved with state or governmental pensions.
[5] 29 U.S.C. § 1002(37)(A); 29 U.S.C. §1301(3).
[6] 29 U.S.C. § 1002(41).
[7] 29 U.S.C. § 1301(15).
[8] 29 U.S.C. § 1301(12).
[9] 29 U.S.C. §§ 1306-1307; see also www.pbgc.gov/prac/prem/premium-rates.html.
[10] 29 U.S.C. § 1341(b).
[11] 29 U.S.C. § 1341(b)(3).
[12] 29 U.S.C. § 1341(c).
[13] For plans terminating in 2015, the maximum monthly guarantee for participants retiring at age 65 is $5,011. See www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html.
[14] The controlled group rules are complicated and outside the scope of this article. Generally, a controlled group is comprised of affiliated companies under “common control,” which generally requires 80 percent or more common ownership. See 29 U.S.C. § 1301(14).
[15] 29 U.S.C. § 1341(c)(2)(B).
[16] 29 U.S.C. § 1342(a).
[17] 29 U.S.C. § 1082(b)(2); 29 U.S.C. § 1362(a); 29 U.S.C. § 1307(e)(2); see also PBGC v. Ouimet Corp., 630 F.2d 4 (1st Cir. 1980) (allocating termination liability to solvent members of controlled group).
[18] In re Sunarhauserman Inc., 126 F.3d 811, 817 (6th Cir. 1997).
[19] 29 U.S.C. § 1362(b).
[20] In re Bayly Corp., 163 F.3d 1205 (10th Cir. 1998) (concluding that if a DB plan is terminated post-petition, but the benefits had accrued prepetition, the claim for unfunded benefit liability is a GUC).
[21] 29 U.S.C. §§ 1306 and 1307; 9 William L. Norton, Jr. and William L. Norton III, Norton Bankruptcy Law and Practice § 176:39 (3d ed. 2014).
[22] 29 U.S.C. § 1306(a)(7).
[23] Id.
[24] PBGC v. Oneida Ltd., 562 F.3d 154 (2d Cir. 2009).
[25] 26 U.S.C. § 430(k)(5); 29 U.S.C. § 1368.
[26] 26 U.S.C. § 430(k).
[27] 26 U.S.C. § 430(k)(3).
[28] 29 C.F.R. § 4068.
[29] 29 U.S.C. § 1368(a).
[30] PBGC liens on real property are filed with the local land registry where the real property is located. 26 U.S.C. § 6323(f). PBGC liens on personal property are filed in the office of the secretary of state of the state where the principal executive office of the corporation is located. Id.
[31] A perfected PBGC lien may prime certain advances made under a secured revolving loan if disbursed after the perfection of the PBGC lien. See 29 U.S.C. § 6323(d) (“safe harbor” for revolving disbursements made within 45 days after PBGC lien’s filing).
[32] 26 U.S.C. § 430(k)(4)(c) provides that the amount subject to the funding lien is treated as taxes due and owing to the U.S. and rules similar to 29 U.S.C. § 1368 (termination liens).
[33] 29 U.S.C. § 1368(c)(2); 26 U.S.C. § 430(k)(4)(c).