ERISA Considerations in Business Change Transactions
Files
Description
Professor Billman describes the relationship of the Employee Retirement Income Security Act of 1974 to the Internal Revenue Code's regulation of “qualified” retirement plans. He points out that ERISA was essentially concerned with ensuring adequate funding of “defined benefit plans,” but that loopholes in the law quickly appeared. Congress responded by enacting amendments in 1986 and 1987: to prohibit “standard” termination or withdrawal unless plan benefits, not merely minimum statutory benefits, are adequately funded, and to restrict “distress” terminations. The author then looks at the implications of ERISA and Code liability for business change transactions, and cautions that both internal employer revamping and sales of assets may involve significant ERISA liabilities for all parties. In contrast, he notes, a mere change in corporate identity or a stock sale in and of itself will not have ERISA implications. Professor Billman explores the use of plan termination as a financing device to obtain recovery of plan assets in excess of adequately funded benefits, including the important question of what interest rate may appropriately be projected. He also questions whether the fiduciary obligations of plan trustees necessarily restrict their use of plan assets to prevent takeovers. The purpose of this chapter is to highlight and analyze selected issues that may arise under ERISA in the course of business change transactions. This chapter examines the basic questions affecting pension plans in business change transactions. As a preliminary matter, some basic definitions should be established and some terminology clarified. First, ERISA I means different things depending upon the context. It is both (1) a statute that significantly amended the Internal Revenue Code of 1954 in the qualified retirement plan context and (2) a separate statute beginning at 29 United States Code section 1000 (the so-called “labor provisions” of ERISA). In this chapter, ERISA will be used when referring to 29 United States Code, and the Code will be used when referring to the Internal Revenue Code provisions. Second, “pension plan” is a phrase with varying meanings under ERISA and the Code. When used herein, pension plan refers to an “employee pension benefit plan” as defined in section 3(2) of ERISA-any plan, fund, or program that provides for the payment of retirement income to employees or for the deferral of income by employees to a date beyond the termination of employment. “Defined benefit plan" and "defined contribution plan” will be used to describe the two major categories of qualified pension plans under the Code. One cannot examine the effect of ERISA upon business change transactions without considering various tax issues that may arise in those transactions. The reasons for this are quite straightforward. First, ERISA and the Code are an interrelated, integrated pair of statutes. Legal issues affecting pension plans arise under both statutes. Second, for most pension plans, the tax law plays a critical role in their existence and operation. Code sections 401-418E contain a series of rules establishing a special “qualified” status for pension plans. Significant tax benefits for both employers and employees attach to securing this status. Employers will normally not engage in business change transactions without determining whether those transactions will adversely affect these tax benefits. Thus, the following discussion will attempt to integrate important considerations under both the Code and ERISA for pension plans in business change transactions.
Source Publication
Labor Law and Business Change: Theoretical and Transactional Perspectives
Source Editors/Authors
Samuel Estreicher, Daniel G. Collins
Publication Date
1988
Edition
1
Recommended Citation
Billman, Brookes D., "ERISA Considerations in Business Change Transactions" (1988). Faculty Chapters. 1122.
https://gretchen.law.nyu.edu/fac-chapt/1122
