Pension Reform Changes Airline and Credit Counseling Requirements

Pension Reform Changes Airline and Credit Counseling Requirements

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Because the press has characterized pension legacy costs as a major cause of corporate bankruptcies, some in Washington have viewed the entire Pension Protection Act of 2006 (H.R. 4) as bankruptcy legislation. In addition to modifying contribution requirements for pension plans, the bill does make several bankruptcy-specific modifications and changes of interest to the insolvency community.

The new law extends the current $1,250-per-participant employer-paid bankruptcy termination surcharge. It also maintains the prohibition on plan benefit increases while a funding waiver is in effect or a plan sponsor is involved in bankruptcy proceedings. It adds bankruptcy to the category of periods in which accelerated forms of distributions, such as lump-sums, are barred. By providing that funding of deferred compensation for the top five officers is recognized in current income if companies don't fund employee contributions to pension plans, it establishes bankruptcy as one of the triggers that will make restrictions on funding nonqualified deferred compensation plans applicable.

Special treatment for airlines in bankruptcy was a controversial sticking point in moving the legislation. Under H.R. 4, in general, airlines that opt for a "hard freeze" of their pension plans will have an additional 10 years to meet their funding obligations. The bill also gives airlines that opt for a "soft freeze" of their pension plans an additional three years to meet their funding obligations. All airlines would be subject to a $2,500 per plan participant bankruptcy termination surcharge.

According to ABI Immediate Past President John Penn of Haynes and Boone in Fort Worth, Texas, "the disparate treatment among airlines in calculating their obligations is troubling on many levels. Allowing those with frozen plans substantially better terms than those honoring their financial obligations appears to be politically, rather than economically, motivated. If the goal was to keep companies from freezing or terminating their defined benefit plan, benefiting those that froze their plans seems counterproductive." Senators from Texas and Ohio, where American and Continental are based, had refused to support H.R. 4 given that Delta and Northwest would have more time to pay off their pension liabilities. Although President Bush signed the bill into law, this inconsistency in treatment among airlines may be addressed in a new bill when Congress returns from the August recess.

Unrelated to pension reform, but in reaction to recent Internal Revenue Service (IRS) investigations of credit counseling agencies, H.R. 4 establishes several new requirements on credit counseling agencies. Subject to a four-year transition rule, credit counseling agencies must limit the allowable amount of debt management plan (DMP) income of these agencies to 50 percent of revenues. According to Leslie Linfield of the Institute for Financial Literacy in Portland, Maine, "the new restrictions...on how much an organization can earn from creditor fair share will no doubt impact both large and small debt-management providers as they will be forced to diversify their funding sources away from creditor funding."

In addition, to stem alleged abuse of consumers facing bankruptcy, the new law also prohibits credit counseling agencies from establishing a separate charge for credit repair-type services, requires fee policies to be established allowing for the waiver of fees and prohibits fees based on a percentage of the consumer's debt, payments to a debt-management plan or the projected or actual savings to the consumer resulting from enrolling in a debt-management plan. The combination of changes in the new law may threaten the viability of larger agencies as tax-exempt, although they could well continue operating as taxable entities.

Journal Date: 
Friday, September 1, 2006