Bankruptcy and Benefit Plans

1. Bankruptcy and Benefit Plans 2006 Enrolled Actuaries Meeting � Session 205 March 27, 2006 Mark Dungan Gary Ford Towers Perrin Groom Law Group, Chtd.

2. Groom Law Group, Chtd./Towers Perrin 2

3. Groom Law Group, Chtd./Towers Perrin 3 Cost Reduction Strategies Merge poorly funded plan with well funded plan [subject to 401(a)(33) restriction] Short-term cost deferment may be achieved by requesting funding waivers or extension of amortization bases [IRC 412(d)/(e)] Must prove temporary substantial business hardship Collateral may be required Limited impact on reducing additional funding charges Contributions + Investment Return on Plan Assets = Benefit + Administrative Expenses Absent improved investment return and/or expense reduction, benefits must be reduced to reduce contribution requirements

4. Groom Law Group, Chtd./Towers Perrin 4 Benefit Reductions Reduce rate of future accruals Cut back benefit formula (% or $ accrual rate) Extend pay averaging period (FAE to Career Pay) Close participation (no new entrants) Complete plan freeze (pay and service) Does not necessarily eliminate contribution requirements Replacement plan (e.g., employer contributions to DC plan) may result in higher total retirement plan costs Retroactive plan amendment under IRC 412(c)

5. Groom Law Group, Chtd./Towers Perrin 5 PBGC's Toolkit Involuntary Termination Threat of Involuntary Termination Facility Shutdown Liability Evade or Avoid Transaction Lien for Minimum Funding Waiver Lien for Unpaid Contribution Reporting Requirements Restoration Seat on Creditors� Committee

6. Groom Law Group, Chtd./Towers Perrin 6 Involuntary TerminationThreat of Involuntary Termination While not authorized by statute, PBGC uses the threat of involuntary termination to negotiate protection for a plan when the agency believes a transaction increases its risk. Transactions include � Debt restructuring Change in controlled group Triggering additional benefits under the plan, e.g., shutdown benefits

7. Groom Law Group, Chtd./Towers Perrin 7 Facility Shutdown Liability Potential liability is triggered if, as a result of a cessation of operations at a facility, more than 20% of active participants are separated from employment. The shutdown must be reported to PBGC within 60 days after it occurs. PBGC may assess liability for a share of the liability that would have arisen as if the plan had terminated. The liability is measured by multiplying the termination liability by the percentage reduction in active participants.

8. Groom Law Group, Chtd./Towers Perrin 8 Facility Shutdown Liability If the plan does not terminate within five years after the facility shutdown, the liability payment is refunded, without interest. In lieu of liability, PBGC may require a bond of up to 150% of the facility shutdown liability. Generally, PBGC uses the threat of facility shutdown liability to negotiate increased contributions, security, or other protections for the plan.

9. Groom Law Group, Chtd./Towers Perrin 9 Evade or Avoid Transaction If a principal purpose of a business transaction is to evade liability under Title IV of ERISA And the pension plan involved in the transaction terminates within five years Then PBGC may ignore the transaction and assess liability against the parties as if the plan had terminated at the time of the transaction.

10. Groom Law Group, Chtd./Towers Perrin 10 Lien for Minimum Funding Waiver The Internal Revenue Service may waive the minimum funding requirement for up to three years in any 15 year period (or extend the amortization period for certain liabilities). Security to PBGC in favor of the plan in the amount of the waived contribution or extended liability may be required as a condition of the waiver or extension.

11. Groom Law Group, Chtd./Towers Perrin 11 Lien for Unpaid Contribution If a required minimum funding contribution is not made when due and the balance of unpaid contributions exceeds $1 million Then a lien arises in the amount of the unpaid balance on the assets of the plan sponsor and all members of its controlled group. PBGC can perfect the lien against the assets of entities that are not in bankruptcy. The security interest gives PBGC leverage to negotiate arrangements to contribute to the plan.

12. Groom Law Group, Chtd./Towers Perrin 12 Reporting Requirements Annual filing of corporate financial and plan actuarial information required for certain plan sponsors. Notice to PBGC of "reportable events," which include � 20% reduction in participant count during a plan year Failure to make a required contribution (must be reported in 10 days if more than $1 million) Change in contributing sponsor or controlled group Transfer of more than 3% of plan benefit liabilities to a plan outside the controlled group Application for minimum funding waiver Loan default Bankruptcy filing PBGC may assess liability of up to $1,100 per day for failure to provide required information.

13. Groom Law Group, Chtd./Towers Perrin 13 Restoration PBGC has broad authority to restore a terminated plan if "appropriate and consistent with its duties" under Title IV of ERISA. PBGC views a plan (defined benefit or defined contribution) that makes up benefits lost as a result of plan termination as an abuse of the termination insurance program. The agency has used its restoration authority to restore a terminated plan where the plan sponsor established an "abusive follow on plan" after plan termination. PBGC may review the benefit replacement ratio of a plan established after termination to assure that the new plan is not abusive.

14. Groom Law Group, Chtd./Towers Perrin 14 Effects of Bankruptcy Filing Chapter 11 filing does not itself alter ERISA obligations, but it can -- Temporarily alleviate funding obligations Provide mechanism and leverage to alter collective bargaining obligations with respect to pension plan Permit debtor to meet reorganization distress test for plan termination Permit satisfaction of termination liability at less than 100 cents on the dollar Permit possible reduction in amount of termination liability claim

15. Groom Law Group, Chtd./Towers Perrin 15 Temporarily Alleviates Funding Requirements Permits debtor to stop paying "pre-petition" portion of minimum funding contributions. Automatic stay in bankruptcy prevents PBGC from perfecting lien for missed contributions. 10% excise tax assessed by IRS on funding deficiency likely to be treated as a penalty entitled to low priority in bankruptcy. If plan continues after bankruptcy, however, missed contributions must be made up after emergence. Could make post-emergence contributions unmanageable.

16. Groom Law Group, Chtd./Towers Perrin 16 Offers Potential to Alter Collective Bargaining Obligations Potential use of section 1113 to reject collective bargaining agreement gives debtor leverage to negotiate concessions with union concerning benefit plans (and other issues). If negotiation is not successful, debtor can use section 1113 to modify or reject collective bargaining obligations.

17. Groom Law Group, Chtd./Towers Perrin 17 Permits Use of Reorganization Distress Test Company must be in Chapter 11 to meet reorganization distress test. Bankruptcy court may provide a friendly forum for demonstrating distress, although PBGC will object to distress termination motion if it does not believe that the distress standard has been met.

18. Groom Law Group, Chtd./Towers Perrin 18 Permits Debtor to Satisfy Termination Liability at Cents on the Dollar Because PBGC's termination liability claim is treated as a general unsecured claim, it generally will be paid at less than 100 cents on the dollar.

19. Groom Law Group, Chtd./Towers Perrin 19 Permits Possible Reduction of Termination Liability Claim Amount Bankruptcy Court may reduce PBGC's termination liability claim under "prudent investor rate" theory for valuing plan liabilities. Gives debtor leverage to negotiate settlement of claim with PBGC, especially in the Second, Sixth and Tenth Circuits.

20. Groom Law Group, Chtd./Towers Perrin 20 Impact on Pension Accounting Bankruptcy alone does not directly affect FAS 87 Net periodic pension cost under FAS 87 and year-end disclosures under FAS 132 continue Freezing a DB pension plan generally results in curtailment accounting under FAS 88 Plan termination generally results in both curtailment and settlement accounting under FAS 88 Contingency claim typically established if gain recognized from plan termination While nonqualified plans are often rejected, partial rejection (elimination of benefits for only inactives) would be treated as a negative plan amendment Fresh start accounting upon emergence from bankruptcy (assuming plans are not terminated prior to emergence) Above statements also apply to retiree welfare plans (FAS 106)

21. Groom Law Group, Chtd./Towers Perrin 21 Restrictions on DB Plans of Sponsors in Bankruptcy IRC 401(a)(33) prohibition on plan improvements Any increase in benefits Any change in the accrual of benefits Any change in rate benefits become nonforfeitable Exceptions CL > 100% funded after amendment Reasonable and de minimis Repeal of 412(c)(8) retroactive amendment Required for qualification

22. Groom Law Group, Chtd./Towers Perrin 22 Pension Plan Termination Title IV of ERISA offers the only means to terminate tax-qualified, defined benefit pension plans Termination Stops future benefit accruals Stops future minimum funding obligations Matures PBGC's claim for unfunded benefit liabilities

23. Groom Law Group, Chtd./Towers Perrin 23 Pension Plan Termination Under ERISA, an underfunded plan may be terminated in A "distress" termination initiated by the plan administrator An "involuntary" termination initiated by PBGC

24. Groom Law Group, Chtd./Towers Perrin 24 Distress Termination Plan administrator must Issue notice of intent to terminate to plan participants, beneficiaries, union, and PBGC Propose a date of plan termination at least 60 but not more than 90 days after the date the notice is issued Plan sponsor and each member of its controlled group must meet one of four distress tests. Two tests may be relevant in bankruptcy -- "Reorganization" distress test demonstrated to bankruptcy court for controlled group members in Chapter 11 Similar "business continuation" test demonstrated to PBGC for controlled group members not in Chapter 11

25. Groom Law Group, Chtd./Towers Perrin 25 Distress Termination Tests For reorganization distress test, bankruptcy court must find that, unless the plan is terminated, the company will be unable to pay all its debts pursuant to a plan of reorganization and will be unable to continue in business outside Chapter 11 This test can be met by demonstrating to the Bankruptcy Court that � Debtor has taken all reasonable measures to cut costs generally and to reduce pension obligations (funding waiver, benefit freeze, reduction of other operating costs) Debtor will not have sufficient cash flow after emergence to make minimum required contributions to the plan Debtor is unable to obtain financing to reorganize or exit bankruptcy unless the plan is terminated

26. Groom Law Group, Chtd./Towers Perrin 26 Distress Termination Tests For business continuation test, controlled group members not in bankruptcy must make a similar showing to PBGC -- Unless a distress termination occurs, the company will be unable to pay its debts when due and will be unable to continue in business

27. Groom Law Group, Chtd./Towers Perrin 27 Distress Termination PBGC reviews -- Documentation that required notice of intent to terminate has been issued Documentation that distress test has been met by each controlled group member Information about the funded status of the plan If all requirements for distress termination have been met, PBGC and plan administrator sign an agreement terminating the plan and appointing PBGC trustee of the plan.

28. Groom Law Group, Chtd./Towers Perrin 28 Distress Termination PBGC must stop processing a distress termination when it is notified of a challenge to the termination under an existing collective bargaining agreement. PBGC may resume processing only after it is notified that the challenge has been resolved to permit termination.

29. Groom Law Group, Chtd./Towers Perrin 29 Involuntary Termination PBGC may initiate a plan termination after making one of four statutory findings, two of which are potentially relevant in bankruptcy � Plan has not met the minimum funding standard as applied to annual contribution requirement (i.e., not triggered by a missed quarterly payment) PBGC's possible long run loss with respect to the plan may increase unreasonably if the plan is not terminated May proceed notwithstanding the plan sponsor's collective bargaining obligation to continue the plan.

30. Groom Law Group, Chtd./Towers Perrin 30 Long Run Loss PBGC compares its liability risk with respect to the plan assuming a termination before a transaction to its liability risk after the transaction. If the transaction would significantly increase plan liabilities or reduce PBGC's ability to collect termination liability, PBGC may conclude that it faces a long run loss if the plan is not terminated.

31. Groom Law Group, Chtd./Towers Perrin 31 Involuntary Termination After PBGC makes one of the statutory findings, plan administrator can agree to PBGC�s termination and appointment as trustee. If plan administrator does not agree, PBGC can file a court action. The court may order termination if it finds that termination is necessary � To protect the interests of plan participants To avoid any unreasonable deterioration of the plan's financial condition or To avoid any unreasonable increase in PBGC's liability

32. Groom Law Group, Chtd./Towers Perrin 32 Date of Plan Termination Date of plan termination is the date as of which � Benefit accruals stop Contribution obligation stops Liability to PBGC is measured

33. Groom Law Group, Chtd./Towers Perrin 33 Date of Plan Termination In a distress termination, date of plan termination is the date proposed by the plan administrator at least 60 days but not more than 90 days after the notice of intent to terminate is issued. In an involuntary termination, the date is set by agreement between PBGC and the plan administrator.

34. Groom Law Group, Chtd./Towers Perrin 34 Date of Plan Termination If PBGC and the plan administrator do not agree, the date is set by the court. Generally, courts have required a termination date on or after the date plan participants receive actual or constructive notice that the plan will be terminated and they will no longer accrue benefits under the plan.

35. Groom Law Group, Chtd./Towers Perrin 35 Effect of Plan Termination PBGC is appointed trustee and pays benefits up to legal limits. For plans that terminate in 2006, the maximum guarantee cap is $47,659.08 at age 65. ($21,446.64 at age 55) Participants who have retired or could have retired three years before the date of plan termination may receive more, depending on the plan's funded level on the date of plan termination. Participants and beneficiaries do not have claims against the plan sponsor for the difference between the benefit paid by PBGC and the benefit they would have received if the plan had been fully funded upon termination. PBGC has a claim for all unfunded benefit liabilities, including non-guaranteed benefit liabilities, and shares its recovery with participants.

36. Groom Law Group, Chtd./Towers Perrin 36 Liability to PBGC Termination Liability Difference between value of plan liabilities and value of plan assets on date of plan termination Unpaid Contribution Liability Unpaid contributions due the plan, if any, pro-rated to the date of plan termination. Premium Liability PBGC premiums accrue until the earlier of the date plan assets are distributed or a trustee is appointed under a plan termination procedure.

37. Groom Law Group, Chtd./Towers Perrin 37 Liability to PBGC Termination liability, contribution liability, and premium liability are "joint and several" obligations of the plan sponsor and each member of its "controlled group.� Controlled group, generally, means A group of trades or businesses linked by at least an 80% ownership interest (parent subsidiary) Two or more trades or businesses at least 80% owned by five or fewer persons (brother-sister)

38. Groom Law Group, Chtd./Towers Perrin 38 Liability to PBGC PBGC may seek payment of 100 percent of the joint and several obligation from any one or more controlled group members. PBGC may not collect more than 100 percent of the amount owed. In bankruptcy, PBGC files its entire claim separately against each debtor in the controlled group. PBGC can pursue its claim against non-debtor controlled group members as well.

39. Groom Law Group, Chtd./Towers Perrin 39 Amount of PBGC's Termination Liability Claim Outside of bankruptcy, PBGC's termination liability claim is determined using conservative PBGC assumptions (e.g., for discount rate, mortality, retirement age). PBGC assumptions produce a benefit liability value that roughly tracks the cost of purchasing an annuity contract from a private insurer to provide plan benefits. In bankruptcy, courts have measured plan liabilities using a "prudent investor rate" assumption. The prudent investor rate is the long term rate of return a plan could expect to receive from a portfolio prudently invested in stocks, bonds and the like. This rate can be substantially higher than the interest rate assumption in PBGC's regulation, which can result in a substantially lower termination liability claim. But prudent investor rate rejected in 2003 US Airways pilots plan litigation.

40. Groom Law Group, Chtd./Towers Perrin 40 Lien and Priority Status If termination liability is not paid on demand, a lien arises in the amount of the lesser of the termination liability or 30 percent of the net worth of the controlled group. PBGC may perfect this lien to obtain a security interest in the assets of the plan sponsor and controlled group. In bankruptcy, the automatic stay prevents PBGC from perfecting its lien. PBGC's claim for termination liability is treated as a general unsecured claim. Unpaid contribution claims attributable to pre-petition services generally are treated as general unsecured claims, except claims attributable to service during the 180 days before filing receive priority treatment under section 507(a)(4) of the Bankruptcy Code. Contributions attributable to post-petition service may receive administrative priority treatment. For plan years commencing after the bankruptcy petition, PBGC asserts administrative priority for its premium claim. PBGC does not assert priority for pre-petition plan year premiums.

41. Groom Law Group, Chtd./Towers Perrin 41 Retiree Health Plans Under section 1114 of the Bankruptcy Code -- Debtor shall timely pay and shall not modify any retiree benefits Except upon court order or agreement with the retirees� authorized representative. Retiree benefits include Medical, surgical or hospital care benefits Sickness, accident, disability or death benefits For retired employees, their spouses and dependents Under any plan, fund or program maintained in whole or in part prior to Chapter 11 filing. Most courts have interpreted section 1114 to apply only to �vested� benefits.

42. Groom Law Group, Chtd./Towers Perrin 42 Vesting of Welfare Benefits ERISA does not require vesting of non-pension benefits. Retiree benefits may become vested by contract, however, through language in the plan document, summary plan description, collective bargaining agreements, and the like.

43. Groom Law Group, Chtd./Towers Perrin 43 Modification Process If retiree benefits are protected by section 1114, the debtor must continue to pay them until modified. Retiree benefits may be modified by agreement with the retirees� authorized representative. Retiree benefits also may be modified by court order after Debtor � Makes proposal to retirees� representative that provides for modification necessary to permit reorganization and assures that all creditors, the Debtor, and affected parties are treated fairly and equitably Gives retirees� representative relevant information required to evaluate the proposal Meets and confers with retirees' representative in good faith If retirees� representative refuses to accept the proposal without good cause, court may order modification if modification � Is necessary to permit reorganization Treats parties fairly and equitably

44. Groom Law Group, Chtd./Towers Perrin 44 Amendment to Section 1114 Permits Bankruptcy Court, upon motion, to reinstate retiree benefits -- Modified within 180 days before filing While debtor was insolvent Unless balance of the equities clearly favors the modification Debtors have been able to avoid section 1114 issues by modifying or terminating retiree benefits before a Chapter 11 filing. The amendment could hamper debtors' ability to avoid section 1114 arguments.

45. Groom Law Group, Chtd./Towers Perrin 45 COBRA Considerations Loss of retiree health benefits as a result of a former employer�s Chapter 11 filing is a �qualifying event� that requires the employer to offer continuation coverage to the retiree. The maximum duration of COBRA coverage for this qualifying event is until the retiree dies and, for surviving spouse and dependent children, until 36 months after the retiree dies. The obligation to provide COBRA continuation coverage ends, however, when the employer and its controlled group members no longer offer health coverage. Although the retiree must pay for continuation coverage, the amount the employer is permitted to charge generally is far less than the cost for those who elect this coverage because of adverse selection.

46. Groom Law Group, Chtd./Towers Perrin 46 Plan of Reorganization Forecast of cash contribution requirements and accounting expense my be significant components Assumptions subject to additional scrutiny (creditors, potential investors, unions, bankruptcy court) Asset return Discount rate Salary scale Mortality table Retirement age Medical trend Challenges of dealing with temporary legislation

47. Groom Law Group, Chtd./Towers Perrin 47 Reporting & Disclosure Participant Notices Notice of Intent to Terminate (60-90 days in advance) Notice to Interested Parties (if seeking Determination Letter) Notice of Reduction in Accruals (45 days in advance) Notice of Underfunded Status (ERISA 4011) Failure to Meet Minimum Funding Standards Summary Annual Report Summary of Material Modifications Potential PBGC Filings Form 10 Advance (bankruptcy, CIC, transfer of liabilities) � 30 days in advance if nonpublic, $50m underfunded, funded <90% Form 10 (above events) due 30 days after occurance Form 200 (missed contributions > $1m) due 10 days after ERISA 4010 ($50m underfunded) financial disclosures Form 601 Schedule EA-D certification of funding level

48. Groom Law Group, Chtd./Towers Perrin 48 Reporting & Disclosures (cont.) DOL/IRS Form 5500 filing required for termination year Form 5310-A notice and certification of merger, spinoff or transfer Form 5300 Determination Letter Request FAS Plan freeze likely result in curtailment accounting under FAS 88 Plan termination will likely result in both curtailment (if plan not previously frozen) and settlement accounting under FAS 88 Fresh start accounting upon emergence from bankruptcy