American Allowed to Eliminate Lump Sums

December 14, 2012 (PLANSPONSOR.com) – A bankruptcy court has allowed for the elimination of the lump sum and installment forms of optional benefit payments currently provided for in the American Airlines, Inc. Pilot Retirement Benefit Program Fixed Income Plan.

A determination by the Pension Benefit Guaranty Corporation (PBGC) that the amendment allowing for the elimination of the optional forms of benefits is necessary to avoid termination of the plan prior to completion of the bankruptcy case and that plan assets are insufficient to cover all PBGC-guaranteed benefits was the final item needed for the court to make its decision.    

“[I]f pilots could continue to receive a lump sum upon the Debtors’ emergence from chapter 11, it would fuel a massive wave of pilot retirements. These retirements would create a pilot shortage which, in turn, would result in an operational crisis involving the wholesale cancellation of flights and the grounding of airplanes, with a corresponding devastating reduction in revenue and profitability.In short, if American cannot eliminate the principal motivation for this wave of retirements and preserve its ability to meet its business plan by enacting the Amendment, it will have no choice but to terminate the Pilot Plan,” AMR, American Airlines parent company, said in its motion before the court (see “AMR Asks to Eliminate Certain Pension Payments”).  

Under current regulations, an employee benefit plan sponsor that is a debtor in a bankruptcy case may amend its defined benefit pension plan to eliminate a lump-sum option if the following four conditions are met:  

  • The plan’s “enrolled actuary”—the actuary responsible for calculating the contribution required for a given plan year—has certified that, for the plan year for which the amendment is being sought, the plan’s AFTAP is less than 100%;    
  • The plan is at the time not permitted to make any “prohibited payment”—generally a payment that is in excess of the monthly amounts payable under a single life annuity—because the plan sponsor is a debtor in a bankruptcy case;    
  • The bankruptcy court has issued an order stating that the adoption of the amendment is necessary to avoid a distress termination or an involuntary termination of the plan prior to completion of the bankruptcy case; and    
  • The Pension Benefit Guaranty Corporation (PBGC) has issued a determination that the amendment is necessary to avoid termination of the plan prior to completion of the bankruptcy case and that plan assets are insufficient to cover all PBGC-guaranteed benefits.  

 

“This is what happens when government and business rolls up their sleeves to make things better. The new rule gives companies another way to preserve pensions,” said PBGC Director Josh Gotbaum, in a statement.  

The court’s opinion and PBGC’s determination letter is here.

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