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IRS Allows Distressed DB Plans to Modify Payouts

Companies under bankruptcy protection may now rescind the lump-sum payment option for members.
Reported by Featured Author

(February 13, 2013) – A new regulation adopted by the United States’ Internal Revenue Service and Treasury Department gives failing corporate sponsors of defined benefit (DB) plans a measure of flexibility on benefit payouts. 

Plans sponsored by single employers who are in bankruptcy may now eliminate the lump-sum option for members, which was previously protected by “anti-cutback” requirements. Regular benefits still cannot be altered due to insolvency. 

“This change only applies in limited circumstances,” cautioned Jeffrey Capwell, a partner at lawfirm McGuireWoods and an employee benefit expert. “I would characterize it as an indication of sensitivity to concerns for companies in bankruptcy.” 

Capwell did however point out that this measure is already in by a plan sponsor seeking bankruptcy protection: AMR Corporation—the holding company for American Airlines. On November 29, 2011, the company filed for relief under chapter 11 of the Bankruptcy Code, and the restructuring process is ongoing. Last February, the firm announced its desire to terminate pensions for 130,000 employees and retirees, much to the consternation of members and the Pension Benefit Guaranty Corporation (PBGC). 

The airline’s proposed termination of its pensions would have been the largest in history, the PBGC asserted at the time, while also reiterating that pension termination should only be a last resort and not part of a business strategy to take advantage of the bankruptcy process. The following month, AMR announced it would freeze, not terminate the pensions of its non-pilot employees. Members will not lose the value of their pensions, but under this regulation change, also cannot collect it in a lump sum if AMR so chooses. 

“While this is a limited change, it’s a good thing even if it keeps just a few plans out of the distressed route,” Capwell told aiCIO. “If a DB plan is taken over in a bankruptcy situation, there is a limit on how much of the benefits the PBGC will cover. Members typically take haircuts when they’re transferred over to the PBGC. In my opinion, and I think that of most people, anything that keeps plans solvent and out of the distressed route is good thing.”