Pension Surcharge and Bankruptcy Filing Fees Become Law
The Deficit Reduction Act of 2005, (P.L. 109-171) has two significant implications for the insolvency profession. A pension termination surcharge on insolvent companies will change the business landscape, while increases in filing fees for chapter 7 liquidation cases and chapter 13 repayment plans will directly increase bankruptcy legal costs.
While a major overhaul of the pension reform system remains pending in Congress, the Deficit Reduction Act establishes an employer-paid termination premium of $1,250 per plan participant for three consecutive years for single-employer plan sponsors where the company is terminated on an involuntary or distressed-termination basis. For sponsors whose plans were terminated while the program was being reorganized under chapter 11, the premium would be levied after the sponsor emerges from bankruptcy. The surcharge gives the Pension Benefit Guaranty Corp. (PBGC) a greater claim in bankruptcy proceedings in both reorganization and liquidation scenarios. The termination premium provision will sunset after five years.
The PBGC is the federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA). It currently insures the pensions of 44.1 million American workers and retirees in 30,00 defined benefit pension plans. The surcharge is part of a package that is designed to address the PBGC's $23 billion long-term deficit, and the law also increases PBGC premiums for both single and multi-employer pension plans. However, this termination surcharge is particularly onerous on struggling companies and can represent an enormous financial burden. For example, Delta Airlines, which has approximately 28,000 retirees, would have to prove to the court that it could pay a termination surcharge of $105 million within three years to exit bankruptcy. Such substantial additional costs are likely to shift more companies from chapter 11 reorganizations to chapter 7 liquidations.
Unlike earlier versions of the Deficit Reduction Act, the PBGC provisions in the law include no language stating that they would be superseded by the future enactment of comprehensive pension legislation. Thus, while the new law does add momentum to House and Senate efforts to complete work early in the year on the pension law, it appears unlikely that the surcharge would be jettisoned in the subsequent reform package. Further undermining any efforts to repeal the surcharge is inclusion in the conference report of a requirement of a study by the Government Accountability Office (GAO) regarding the effect of the premium tax on plan sponsors and members. The 2007 reporting date could provide an justification for delaying repeal of the surcharge.
Bankruptcy filing fee increases were also slipped into the new deficit reduction law. The fee increase would take effect 60 days after enactment, in early April 2006. Chapter 7 fees would increase to $245, and chapter 13 fees would increase to $235. Due to a drafting error, fees for chapter 9 and 11 were not increased. Congress may increase the chapter 11 fees subsequently in general technical corrections legislation, but the date of such consideration is uncertain.