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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
An employer that terminated a defined benefit plan while undergoing a Chapter 11 bankruptcy reorganization could not avoid paying a termination premium to the PBGC by calling the termination premium an unsecured, pre-petition claim that was dischargeable under the Bankruptcy Code, the U.S. Court of Appeals in New York City (CA-2) has ruled in PBGC v. Oneida.
PBGC termination premium
Under ERISA §4006(a)(7), in certain circumstances an employer terminating a single-employer plan must pay a termination premium to the PBGC. Under the “general rule,” payment is owed from the first month following the month in which the termination date occurs. Under a “special rule,” however, if the plan is terminated during a bankruptcy reorganization proceeding, then the general rule does not apply until the first month following the month in which the employer is dismissed from the bankruptcy proceeding.
The bankruptcy court ruled in the employer’s favor, determining the termination premium to be a dischargeable pre-petition claim because of the broad definition afforded the term “claim” in the bankruptcy context. The PBGC’s claim to the premium payment existed prior to bankruptcy but was subject to a contingency.
PBGC’s right to payment
In reversing the bankruptcy court, the circuit court acknowledged the broad reach of a bankruptcy “claim” but argued that a valid bankruptcy claim requires the existence of (1) a right to payment that (2) arose before the filing of the petition. Courts must evaluate the substantive law underlying the right to payment — in this case the ERISA plan termination provisions — to determine the validity of the claim.
ERISA §4006(a)(7) sets forth the PBGC’s right to the payment, but when was the right to payment created? According to the appellate court, the “special rule” contained in ERISA §4006(a)(7)(B) clearly states that the PBGC’s right to payment does not exist until the employer is discharged from bankruptcy. (“The obvious purpose of this rule,” the court noted, “is to prevent employers from evading the termination premium while seeking reorganization in bankruptcy.”) Even the broad construction of the term “claim” in bankruptcy proceedings cannot include a right of payment that hasn’t yet arisen under ERISA.
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