Bankruptcy Pension Q&A
1. Can the Retirement Plan be terminated?
Under the collective bargaining agreement, the Company may terminate the Retirement Plan only with AFA’s consent. However, if the Company is in reorganization in bankruptcy and meets certain stringent conditions specified in the Bankruptcy Code, including in Section 1113, a bankruptcy court could allow abrogation of the collective bargaining agreement in this respect and permit the Company to terminate the Retirement Plan without AFA’s consent. Even if a termination instituted by the Company (a so-called “voluntary termination”) is permissible under the foregoing, it may not occur unless it also meets the requirements for either a “standard termination” or a “distress termination,” which are discussed in the following questions.
In addition, the Pension Benefit Guaranty Corporation (PBGC), the federal government agency that administers and guarantees certain pension benefits, could act on its own to terminate the Retirement Plan (a so-called “involuntary termination”), if it determines that the plan has not met applicable minimum funding standards or will be unable to pay benefits when due, or if it determines that its possible long-run loss in providing guaranteed benefits under the plan will increase unreasonably if the plan is not terminated.
The Employee Retirement Income Security Act of 1974, as amended (ERISA), requires that the plan administrator provide 60-day advance written notice to all affected parties of its intent to terminate a plan. If the PBGC is advised that the proposed plan termination violates a collective bargaining agreement and that the termination is being challenged under procedures specified in the collective bargaining agreement, the PBGC will suspend the termination proceeding until resolution of the challenge. However, the PBGC still has the authority to proceed with an involuntary termination, if the requirements of an involuntary termination are met.
2. What are the requirements for a “standard termination,” and how are plan assets allocated in that event?
If a pension plan's assets exceed its liabilities, it may be terminated in a “standard termination.” In a “standard termination,” plan assets are used to purchase insurance company annuities designed to cover all liabilities of the plan (for all active, retired and terminated participants and survivors). The Retirement Plan provides that any assets remaining after such a fully funded termination would revert to the Company.
3. What are the requirements for a “distress termination”?
If a pension plan's liabilities exceed its assets, the Retirement Plan may be terminated only in a “distress termination.” A “distress termination” may occur only if the PBGC determines that the entity sponsoring the plan (i.e., the Company), as well as each entity in the sponsor's controlled group of entities, satisfies one of four alternate criteria for a distress termination, pursuant to Section 4041(c) of ERISA, as follows:
- The entity is in liquidation in bankruptcy, or the entity is in reorganization in bankruptcy, and the bankruptcy court determines that unless the plan is terminated the entity will not be able to pay its debts pursuant to a plan of reorganization and will be unable to continue in business outside the reorganization process, and the court approves the plan termination, or
- The PBGC determines that termination is required to enable the entity to pay its debts and continue in business, or
- The PBGC determines that termination is required for the entity to avoid pension plan costs that have become unreasonably burdensome solely as a result of a decline in the entity's workforce covered by all of the entity's pension plans.
4. What happens to the Pension Plan if UAL files for bankruptcy?
Any filing typically does not have an immediate effect on a defined benefit pension plan. Active employees will not lose currently vested pension benefits as a result of bankruptcy and retirees receiving a benefit will continue to do so. There is no advantage to be gained by rushing to file for retirement prior to a bankruptcy filing. As a part of a restructuring under bankruptcy, UAL could attempt to terminate the pension plan. AFA would vigorously oppose any such action. Even if this happened, the plan would still be obligated to pay all vested and funded benefits for current and future retirees. If the plan did not have sufficient assets to pay for the vested benefits (a “distress termination”), the Pension Benefit Guaranty Corporation would guarantee payment of vested pension benefits, subject to certain regulations and maximums. The Defined Contribution Plan (The 401(k)) is not affected by a bankruptcy filing.
5. How are retiree medical benefits affected by a bankruptcy?
A filing does not have an immediate impact on retiree medical benefits. They are not guaranteed by a governmental agency. However, they are part of the Flight Attendant Collective Bargaining Agreement. A Company may not modify benefits unless AFA agrees to such modification or unless the court specifically authorizes modification. Similar to the requirements that must be met to modify any collective bargaining agreements, the bankruptcy code sets certain procedures to obtain permanent modifications to these benefits.
6. Is the pension Plan “fully funded?”
The funding level of the Pension Plan is based on the investments of the plan assets. As the market goes up and down, so does the funding level of the Plan. United was not required to make a contribution to the Flight Attendant Plan in 2002 because the funding level of the plan, plus credits in the plan, did not require it. This does not mean the plan is “fully funded’” but is funded at the legally required level.
