Bankruptcy practitioners and plan beneficiaries should take note of a little-known ERISA amendment that impacts bankruptcy cases filed on or after September 16, 2006. On June 30, 2008, the Pension Benefit Guaranty Corporation (the "PBGC") released a proposed rule clarifying how Section 404 ("Section 404") of the Pension Protection Act of 2006 (the "PPA") will be implemented. Section 404 amends Title IV of ERISA in certain key respects. Specifically, it mandates that where an underfunded, PBGC-insured, single-employer pension plan terminates while the contributing plan sponsor is in bankruptcy, the PBGC's guaranteed benefits under Section 4022 of ERISA and the amount of benefits entitled to priority in "priority category 3" under Section 4044(a)(3) of ERISA are to be determined as of the bankruptcy filing date rather than as of the actual plan termination date. In short, in the event of a contributing sponsor's bankruptcy, Section 404 fixes the PBGC's guaranteed liability to plan participants as of the petition date regardless of when the plan is actually terminated.

A contributing sponsor's pension plan is typically terminated at some point long after a bankruptcy filing. Upon termination of an underfunded plan (either through an involuntary or distress termination), the PBGC becomes the statutory trustee of the plan and assumes responsibility for paying benefits accrued under the terminated plan through the termination date, subject to certain statutory limitations. Importantly, the plan termination date served as the trigger date for determining the amount of benefits guaranteed by the PBGC under Section 4022 of ERISA and the amount of any additional benefits payable under Section 4044 of ERISA.

Prior to the enactment of Section 404, the statutory liability of the PBGC grew during the post-petition, pretermination period. The PBGC asserted that this was a "persistent problem" for it because "the funded status of plans often deteriorate[d] significantly while the plan sponsor [was] in bankruptcy. Many sponsors have failed to make minimum contributions to their plans during the bankruptcy, while the plan continues to pay retiree benefits as usual and employees continue to earn additional benefits." Upon termination of an underfunded plan, the PBGC became responsible for a portion of the unpaid liabilities to plan participants for which the PBGC received largely an unsecured claim.¹

Section 404 will dramatically change the playing field for the PBGC by fixing the PBGC's guaranteed pension related liabilities at the time of the bankruptcy filing rather than the actual plan termination date. Plan participants should be aware that the amendment, effective for bankruptcy cases filed on or after September 16, 2006, has a significant impact on their rights under a terminated plan because benefits accrued during the post-petition period will not be guaranteed by the PBGC.

It should be emphasized that the filing of bankruptcy does not automatically trigger plan termination. An underfunded plan of a bankrupt contributing sponsor will only be terminated effective as of the petition date if the plan is actually terminated through either an involuntary or distress termination. This permits a debtor to continue negotiating with respect to pension liabilities (with unions, for example) while limiting the PBGC's exposure during that negotiation period. Section 404 may, however, prompt debtors to conclude pension disputes and negotiations earlier in a bankruptcy case, as plan participants will want certainty regarding the status of their plans.

Comments to the proposed rule are due by September 2, 2008.