Termination Premiums Under ERISA Held to Be Dischargeable Prepetition Claims

The controversy at issue in the court's decision originated from The Deficit Reduction Act of 2005 ('DRA'), which amended the Employee Retirement Income Security Act of 1974 ('ERISA') to require a debtor that effectuates a 'distress' termination of an underfunded pension plan in Chapter 11 to pay termination premiums to the Pension Benefit Guaranty Corporation (the 'PBGC') following its discharge in bankruptcy. (The termination premiums are not applicable to a debtor that does not receive a bankruptcy discharge, including a debtor that liquidates after terminating its pension plan obligations.) Those premiums, set at $1,250 per employee covered by the terminated plan, per year for three years, could amount to hundreds of millions of dollars in post-bankruptcy liabilities for reorganized debtors, and could limit significantly the benefits of terminating an underfunded pension plan in Chapter 11. In certain cases, the cost of the termination premiums could even exceed the amount of the terminated pension funding liability.