Legislation recently introduced in the Senate would place many restrictions on the ability of a corporation navigating bankruptcy to change the compensation and benefits of employees and retirees. The bill would also create a presumption that retiree health benefits are fully vested. The “Bankruptcy Fairness and Employee Benefits Protection Act of 2014” (S. 2418) was introduced on June 3 by Senator Jay Rockefeller and its cosponsor, Senator Elizabeth Warren, and is currently before the Senate Judiciary Committee. No further action has yet been taken.
The proposed legislation would amend title 11, the Bankruptcy Code, and title 29, the Employee Retirement Income Security Act of 1974 (“ERISA”), of the United States Code. Various changes to the Bankruptcy Code would place greater restrictions on corporations going through a bankruptcy by limiting reductions in the compensation and benefits of employees and retirees, requiring funding of retiree health benefits in excess of that approved by the bankruptcy court, increasing the amount of unpaid wages that receive priority treatment, limiting payments and bonuses to insiders, and forcing employers to continue funding pension plans after filing for bankruptcy protection. The Bill would amend ERISA by requiring employers to provide employees more extensive guidance as to the vesting rights of their health care benefits. More significantly, S. 2418 would create a presumption that employee health benefits fully vest at retirement or upon the completion of 20 years with the employer.
Like most legislation, the bill proposes changes in many different areas, some of which are not addressed in this article, such as expanding the rights of municipal employees and retirees to align more closely with those enjoyed by employees of corporations during a bankruptcy. There is a provision intended to further restrict the venue in which a corporation could file for bankruptcy. Another provision would prohibit employers and unions from agreeing in collective bargaining to any arrangement that would reduce the health benefits of an already retired employee. Finally, the Government Accountability Office would be required to produce a report outlining the strategies used by employers to avoid paying benefits and the impact of such actions.
Restrictions on changes to compensation and benefits
The Bankruptcy Code currently allows a court to approve a bankruptcy or restructuring plan that proposes “necessary modifications” to employee and retiree benefits agreed to in a collective bargaining agreement. Under the bill, though, the employer would be restricted to the “minimum modifications” necessary to avoid liquidation. If a plan proposed changes to the health benefits of employees or retirees, it would need to include at least comparable changes for those of officers and directors. The resulting health benefits of officers and directors could also not be “more generous than those of employees” or retirees. The bill further instructs that any changes to employee or retiree compensation, including wages and pension benefits, would need to be accompanied by changes for officers and directors that were at least of equal percentage. Last, if the approved plan reduced employee compensation or benefits, employees would be entitled to a claim for damages.
Extended funding of retiree health benefits
If a corporation’s approved bankruptcy plan modified retired employees’ health benefits, the bill would require the employer to pay such retirees cash sufficient to cover two years of either continuation coverage, also known as COBRA, or some comparable health insurance plan found through the exchange created by the Affordable Care Act. The bankruptcy court could force an employer to pay for the loss of a retiree’s health benefits beyond two years if it was found “to be in the interest of fairness and equity.” If modifications to a retiree’s health benefits were not covered by these extended payments, the retired employee would now have a claim for damages.
Increased priority for unpaid wages and limitations on bonuses
Title 11 currently provides for priority treatment in bankruptcy of up to $12,475 in employee wages and other compensation earned in the 180 days before filing. The bill would amend this provision to give priority for up to $25,000 of wages and compensation earned within one year before the filing. The bankruptcy court would also be able to prohibit payments to insiders made within the year before filing, if such payment “was not made in the ordinary course of business […] or resulted in unjust enrichment.” Additionally, bonus payments to insiders – including incentive-based bonuses – would be prohibited in bankruptcy.
Continued funding of pension plans after filing
The bill would add a section to the Bankruptcy Code requiring employers to continue making payments to pension plans after filing, as they become due according to provisions of ERISA. Such payments not made would be reclassified as “administrative expenses,” thus attaching higher priority claim treatment. Finally, a lien could be imposed for such missed contributions “without regard to whether such contributions became due or whether such lien arose before or after the filing of the petition.”
Presumption of vesting for retiree health benefits
The proposed legislation would provide for vesting of retiree health benefits, like ERISA’s provision for vesting of pension plans. If a retired employee or their beneficiary brought an action to recover for reductions in health benefits, this bill would create a presumption that such health benefits fully vested on the date the employee retired or completed 20 years of work with the employer. Such health benefits could not, therefore, be modified for the life of the employee or, if longer, the life of the employee’s spouse. This presumption could only be overcome if the employer was able to show, by clear and convincing evidence, that the terms of the plan permit a modification of benefits and that the employee was made aware, by clear and unambiguous terms, that such modification was permitted prior to joining the plan.
Additional information would also be required to be included in summary plan descriptions that employers are obligated to provide employees prior to joining such health plans. It would be mandatory, under the proposed legislation, that such descriptions explain whether the plan may be unilaterally modified or terminated. Finally, employers would be required to explain in the description when and to what extent the plans fully vest as to employees, retired employees, and beneficiaries.
The legislation is not likely to be enacted this year, or even make it past the Judiciary Committee. It is important, though, for employers and plan managers to be aware of potential changes to anticipate in the future. These concerns could be relevant to calculations used to form long-term plans. If similar legislation gained more traction in the future, it could have significant impacts on the strategies used to provide for health benefits and pension plans of employees and retirees.
Reprinted with permission from Employee Benefit Review – September 2014