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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.
from Spencer’s Benefits Reports: In a unanimous decision, the U.S. Supreme Court has ruled that a merger into a multiemployer plan is not a permissible means of terminating a pension plan under ERISA, and therefore the directors of a bankrupt company did not breach their fiduciary duties under ERISA by failing to adequately consider the proposed merger. The case is Beck v. PACE International Union (Docket No. 05-1448).
In the facts of the case, Crown Vantage, Inc., was the parent company of Crown Paper Company, which operated seven paper mills in the eastern United States and employed 2,600 workers. The employees were covered by collective bargaining agreements with the PACE International Union. Members of Crown’s board of directors served as the trustees for the company’s 18 pension plans.
In March 2000, Crown filed a petition for bankruptcy and began liquidating its assets. The Pension Benefit Guaranty Corporation filed proofs of claims totaling millions of dollars for the liability that it would have been forced to assume if it had taken over Crown’s pension plans. Then, in July 2001, Crown’s board of directors began to obtain quotes for the purchase of an annuity as a means of effecting a standard termination of the pension plans under ERISA Sec. 4041.
During the summer of 2001, PACE proposed a merger of the 17 pension plans that covered Crown’s hourly employees into the PACE Industrial Union Management Pension Fund (PIUMPF), a multiemployer pension plan. PACE preferred this option because the merger offered the possibility that retirees might receive more than the minimum benefits.
Crown’s attorneys met with a PACE representative in August 2001 to discuss the proposed merger. Then, on Sept. 26, 2001, PIUMPF’s actuary reported that the merger was feasible, and Crown’s attorneys requested more information. That same day, Crown’s board of directors met and reviewed bids for annuities, and Crown learned that a reversion to the company of remaining assets in the plan would be possible if it terminated 12 of the pension plans through the purchase of an annuity. The board also agreed to compare the proposed merger to the annuity options once it received final annuity bids.
Crown’s board of directors met again on Oct. 9, 2001, to review the final annuity bids, with the understanding that the bids would expire within 24 hours. The board did not consider the PIUMPF merger at this meeting, and it did not ask its actuary to analyze the proposed merger. The board decided to purchase an annuity as a means of terminating the 12 pension plans through Hartford Life Insurance Company. Crown deposited more than $84 million with Hartford the following day. The remaining five pension plans covering hourly workers were to remain the responsibility of Georgia Pacific Company, the successor to a prior plan sponsor.
Subsequently, PACE filed suit against Crown in the bankruptcy court on behalf of its members and former member plan participants. In the suit, PACE alleged that Crown had breached its fiduciary duties under ERISA by failing to “perform a diligent investigation into the PIUMPF merger proposal” and by failing to discharge its duties solely in the interest of the plan participants. The bankruptcy court granted a preliminary injunction ordering all cash assets remaining in the pension plans to be placed in an interest-bearing account, and that no reversion of assets to Crown could occur pending the court’s final decision. Although PACE had asked the bankruptcy court to void the annuity transaction with Hartford, the court declined to do so and allowed Crown to complete the termination process. Crown then appealed the bankruptcy court’s order to the U.S. District Court for the Northern District of Illinois, arguing that it was not subject to fiduciary obligations in terminating the plan and that it did not breach its fiduciary duties. However, the district court affirmed the bankruptcy court’s ruling, as did the Ninth Circuit U.S. Court of Appeals.
Crown then took the case to the Supreme Court, which reversed the Ninth Circuit’s ruling. In rendering its decision, the Court initially observed, “It is well established in this Court’s cases that an employer’s decision whether to terminate an ERISA plan is a settlor function immune from ERISA’s fiduciary obligations. The idea that the decision whether to merge could switch from a settlor to a fiduciary function depending upon the context in which the merger proposal is raised is an odd one. But once it is realized that a merger is simply a transfer of assets and liabilities, PACE’s argument becomes somewhat more plausible: The purchase of an annuity is akin to a transfer of assets and liabilities (to an insurance company), and if Crown was subject to fiduciary duties in selecting an annuity provider, why could it automatically disregard PIUMPF simply because PIUMPF happened to be a multiemployer plan rather than an insurer? There is, however, an antecedent question. In order to affirm the judgment below, we would have to conclude (as the Ninth Circuit did) that merger is, in the first place, a permissible form of plan termination under ERISA.”
The Court went on to explain, “At issue in this case is section 4041(b)(3)(A), the provision of ERISA setting forth the permissible methods of terminating a single-employer plan and distributing plan assets to participants and beneficiaries. The PBGC’s regulations impose in substance the same requirements. Section 4041(b)(3)(A), sets forth a specific order of priority for asset distribution, including (under certain circumstances) reversions of excess funds to the plan sponsor. The parties to this case all agree that section 4041(b)(3)(A)(i) refers to the purchase of annuities, and that section 4041(b)(3)(A)(ii) allows for lump sum distributions at present discounted value. As PACE concedes, purchase of annuity contracts and lump sum payments are by far the most common distribution methods. To affirm the Ninth Circuit, we would have to decide that merger is a permissible method as well. And we would have to do that over the objection of the PBGC, which (joined by the Department of Labor) disagrees with the Ninth Circuit, taking the position that section 4041(b)(3)(A) does not permit merger as a method of termination because merger is an alternative to (rather than an example of) plan termination. In reviewing the judgment below, we thus must examine whether the PBGC’s policy is based upon a permissible construction of the statute. We believe it is.”
In conclusion, the Court stated, “The structure of ERISA amply supports the conclusion that section 4041(b)(3)(A)(ii) does not cover merger. Merger is nowhere mentioned in section 4041, and is instead dealt with in an entirely different set of statutory sections setting forth entirely different rules and procedures. [ERISA] section 208, the general merger provision, in fact quite clearly contemplates that merger and termination are not one and the same. Most critically, plans seeking to terminate must provide advance notice to the PBGC. The PBGC has the authority to halt the termination if it determines that plan assets are insufficient to cover plan liabilities. Merger, by contrast, involves considerably less PBGC oversight, and the PBGC has no similar ability to cancel. For all of the foregoing reasons, we believe that the PBGC’s construction of the statute is a permissible one, and indeed the more plausible. Crown did not breach its fiduciary obligations in failing to consider PACE’s merger proposal because merger is not a permissible form of termination.”
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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