Vol. 78, No. 7, July
Congressional Delegation Championed Employee Benefit Protections in
Wisconsin's congressional delegation worked
together to write provisions protecting employee benefit plans that are
part of the Bankruptcy Abuse and Consumer Protection Act of 2005
by Kevin M. Maroney
he need to reform the Bankruptcy Code's treatment of employee
benefit plans was brought to light by two situations that arose in
Wisconsin in the late 1980s: the Louis Allis Corp. bankruptcy and the
Pabst Brewing Co.'s termination of its retiree health program. These
incidents showed the extent to which workers' benefits are vulnerable
when an employer becomes insolvent, and they motivated our state's
congressional delegation to create better protections for our system of
The Louis Allis situation. The Louis Allis Corp.
began manufacturing large electric motors at its plant on E. Stewart
Street in Milwaukee in 1906. Louis Allis closed its doors almost a
century later on Oct. 20, 1998, and filed for bankruptcy under Chapter 7
of the Bankruptcy Code. At the time of the filing, Louis Allis had
issued payroll checks to its employees that were not honored by the
bank. In addition, funds that Louis Allis had deducted from workers'
paychecks for contribution to a 401(k) plan and a group health plan were
never deposited in the appropriate accounts. A Milwaukee lender held a
security interest in all Louis Allis assets and sought relief from the
Bankruptcy Code's automatic stay provisions to obtain the debtor's
assets, which included employee benefit plan assets. The U.S. Department
of Labor estimated that about $176,000 in employee contributions and
about $30,000 in employer contributions were missing from the 401(k)
plan. The extent of the lost health plan contributions was unknown. The
Solicitor of Labor brought an action that restored a portion of these
assets by offsetting the 401(k) benefits of the company's president.
The Pabst Brewing situation. Beginning in 1882,
workers at the Pabst Brewing Co. brewed "Blue Ribbon" beer and tied silk
ribbons to the bottles. When Pabst's fortunes waned, the brewery, in an
effort to reduce costs, announced on Sept. 1, 1996, that it was cutting
off retiree health benefits for about 800 individuals because it could
no longer afford to pay the benefits. The majority of these retirees had
been covered under collective bargaining agreements. The retirees and
their union leaders believed that Pabst had made a promise of lifetime
retiree health benefits as part of their labor contract negotiations.
The case was widely covered in the local media. A temporary restraining
order issued by Judge Myron Gordon prevented Pabst from immediately
terminating the retirees' health benefits. Two members of Wisconsin's
congressional delegation - former Reps. Gerald Kleczka and Thomas
Barrett - were present in the courtroom when Judge Gordon issued the
order. Ultimately, that order did not stand, and the U.S. Court of
Appeals for the Seventh Circuit ruled that the language in the
collective bargaining agreement allowed Pabst to terminate the retirees'
Both Louis Allis and Pabst were venerable Milwaukee institutions, and
their workers, retirees, and workers' families were deeply affected by
the loss of employee benefits in these cases. Wisconsin's congressional
delegation reacted to these cases and eventually succeeded in obtaining
bipartisan support for provisions intended to better protect workers'
benefits in bankruptcy. Remedial provisions were enacted as part of the
BACPA, in no small part because Wisconsin was well represented on the
House and Senate Judiciary Committees in the eight years leading up to
the BACPA's enactment. Rep. F. James Sensenbrenner (current chair of the
House Judiciary Committee) chaired a House Judiciary Subcommittee and
worked closely with Rep. Tammy Baldwin when key amendments were offered
during the ongoing committee consideration of the measure. Sen. Herb
Kohl made certain that corresponding provisions were included as part of
the Senate version of the measure. This sidebar summarizes the employee
benefits provisions that Wisconsin legislators advanced as part of the
BACPA, as well as related provisions.
Protection of Employee Contributions to Employee Benefit
Plans (Sec. 323). In response to the Louis Allis case, the
BACPA amended the Bankruptcy Code's definition of "property of the
estate" to specifically exclude amounts an employer withholds from wages
for contribution to an employee benefit plan. The definition of an
employee benefit plan includes plans covered under the Employee
Retirement Income Security Act (ERISA), governmental plans, and
contributions to state health insurance plans. Under this provision, any
amount withheld from wages is protected as long as the withholding was
intended for contribution to an employee benefit plan. The provision
protects contributions to health plans, flexible spending accounts,
401(k) plans, profit sharing plans, and disability plans. It appears
that these new protections will apply to health savings accounts only if
the individual accounts were part of an ERISA-covered plan.
Employer Contributions to Employee Benefit Plans are Given
Priority (Sec. 1401). The Louis Allis case also involved the
employer's failure to deposit required employer contributions to its
401(k) plan. In such situations, the employee benefit plan generally
becomes an unsecured creditor of the estate. Under prior law, only
$4,000 per employee (less wages and other benefit payments) was afforded
preferential treatment under the Bankruptcy Code's system of priorities.
The BACPA expanded the amount of benefits receiving this favorable
treatment to $10,000 per employee (less wages and other benefit
payments.) To be eligible for preferential treatment, the claim must be
for services rendered in the 180 days before the bankruptcy filing, or
the date the employer ceased doing business.
Retiree Health Care (Sec. 1403). While Congress has
made numerous attempts to protect retiree health benefits, the BACPA
advances this effort by making it more difficult for retiree health
benefits to be reduced or eliminated in a bankruptcy proceeding. The
BACPA improves current law by allowing the court to reinstate retiree
health care benefits if the benefits were reduced or eliminated within
180 days of the filing and the employer was insolvent at the time. A
bankruptcy court may restore retiree health benefits under these
circumstances, unless the balance of the equities in the case favor
modifying the benefits.
Obligation to Administer the Employee Benefit Plan (Sec.
446). Prior to the BACPA, it was not uncommon for a
debtor-employer to abandon its employee benefit plan when filing for
bankruptcy, thereby exposing 401(k) participants to a risk of loss and
causing health plan participants to lose coverage. The BACPA amends a
debtor's duties to require that it continue to administer an employee
benefit plan if at the time of the filing the debtor was a plan
administrator. The plan administrator must administer the plan unless a
bankruptcy trustee has been appointed in the proceeding, in which case
the trustee must administer the plan.
Protection of Retirement Savings in Bankruptcy (Sec.
224). In bankruptcy proceedings, retirement savings in
ERISA-qualified pension plans have long enjoyed protection from
creditors.1 Prior to the BACPA, however,
there was no uniform federal protection for retirement savings in
individual retirement accounts (IRAs), Roth IRAs, and other non-ERISA
retirement plans, including governmental pension plans. State law
protections for these assets varied from state to state, with many
exemptions being contingent on a showing of actual need for the income.
The BACPA creates uniform federal protection of up to $1 million
(indexed to the Consumer Price Index) for retirement savings in these
types of plans. The bill also makes technical changes to the bankruptcy
law to allow repayment of participant loans from 401(k) plans and to
protect those loans from discharge.
Post-petition Wages and Benefits. Wages owed to
workers for post-petition services receive first priority treatment as
administrative expenses under the Bankruptcy Code. However, prior to the
BACPA, judicial awards of back wages to address violations of labor laws
were treated as unsecured claims, which provided little assurance that
workers would receive their back pay. This disparate treatment created
an incentive for employers in financial difficulty to avoid settling
discrimination cases with the National Labor Relations Board, since it
was likely that the back pay award could be discharged in bankruptcy.
The BACPA amended the Bankruptcy Code to include judicial awards of
wages as administrative expenses, greatly increasing the likelihood that
workers in these situations would be paid.
1See Patterson v. Schumate, 504
U.S. 753 (1992).