LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

April 13, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 3161 words

HEADLINE: PREPARED TESTIMONY OF JAMES S. RAY ON BEHALF OF THE AMERICAN FEDERATION OF LABOR CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO)

BEFORE THE SENATE COMMITTEE ON HEALTH, EDUCATION, LABOR AND PENSIONS

SUBJECT - PROTECTING PENSION ASSETS IN BANKRUPTCY

BODY:
Mr. Chairman and Members of the Committee:

My name is James S. Ray. I am pleased to appear before you today on behalf of the American Federation of Labor-Congress of Industrial Organizations ("AFLCIO"), an organization with a demonstrated dedication to the retirement income security of American workers and their families. The AFL-CIO is a voluntary federation of 68 national and international labor unions, representing 13 million working women and men of every race and ethnicity and from every walk of life. The mission of the AFLCIO is to improve the lives of working families to bring economic justice to the workplace and social justice to our Nation.

Pension benefit security is a critical issue for union members. Millions of union workers now count on negotiated pension benefits when they reach retirement. Today, more than 17,000 retirement plans are collectively bargained, and unions represent roughly 3 in 10 retirement plan participants including close to half of all private sector defined benefit plan participants. Pensions are a crucial piece of our national income system. While Social Security provides a core floor of protections for working families, it is not designed to provide an adequate retirement income by it self. Keep in mind that the average workers receives just $804 per month, or $9,648 per year, in Social Security benefits. That's less than what a year-round, full- time wage worker earns. Union workers participate in thousands of employee pension plans covered by the Employee Retirement Income Security Act of 1974 ("ERISA"). A large portion of these workers participate in labor- management, multiemployer pension funds established under the Labor Management Relations ("Taft-Hartley") Act. Among these workers are members of the 15 international and national unions affiliated with the Building and Construction Trades Department of the AFL-CIO. A great many union members in public employment depend for their retirement security on governmental pension plans that are not covered by ERISA.

I have been authorized to represent that the views expressed herein are supported by the National Coordinating Committee for Multiemployer Plans ("NCCMP"), a non-profit organization of multiemployer pension, health and welfare funds that has served as a resource for Congress, regulatory agencies, the courts and other policymaking bodies for more than 25 years.

Section 303(c) Waiver

The subject of this hearing is Section 303(c) of the proposed Bankruptcy Reform Act of 2000 (H.R. 833) as passed by the Senate. This section would permit debtors to waive the bankruptcy exemption that protects their pension benefits from creditors. A waiver could be obtained by contract with creditors prior to the initiation of a bankruptcy proceeding. For example, the waiver could be included as a term or condition in a credit card application or installment loan agreement at the insistence of a lender. If the individual accepts the waiver language, his or her pension benefits would be included in the bankruptcy estate, payable to creditors, as understand the waiver language.

This waiver prevision has been interpreted by many reviewers as applying to benefits from ERISA-covered pension plans, including multiemployer pension funds and single employer plans. Some have read the prevision as applying only to nonERISA retirement savings, such as public employee governmental pension plans, and Individual Retirement Accounts ("IRAs"). In either case, the waiver provision would undermine the Nation's retirement income security policy.

Retirement Policy & ERISA Safeguards Section 303(c) would work a dramatic reversal in well-founded, national retirement policy. ERISA - one of the greatest achievements of this Committee declared in 1974 a national policy of promoting employee pension plans and of protecting the interests of employees and their beneficiaries in such plans. Congress found -

"...that the continued well-being and security of millions of employees and their dependents are directly affected by: ..... these plans; they are affected with a national public interest," and declared a national policy-

"to protect...the interests of participants in employee benefit plans and their participants,..."1

When, in 1980, Congress amended ERISA to adjust the regulation of multiemployer pension plans, it again found that "the continued well- being and security of millions of employees, retirees, and their dependents are directly affected by multiemployer pension plans," and it declared a policy to promote the maintenance and growth of multiemployer plans? And, when Congress amended ERISA in 1986 to adjust the regulation of single employer pension plans, it again found that of "the continued well-being and retirement income security of millions of workers, retirees, and their dependents are directly affected by such plans," and declared a policy "to encourage the maintenance and growth of single-employer defined benefit pension plans.

In furtherance of this declared policy, Congress included in ERISA, and in corresponding provisions of the Internal Revenue Code, various restrictions and requirements designed to protect the benefits of plan participants and beneficiaries. Among these are requirements that plan assets be held in trust for the exclusive benefit of the participants and beneficiaries and for the sole purposes of paying benefits and defraying the plan's administrative expenses.4

Also among these protective provisions are prohibitions on the assignment, alienation, garnishment or attachment of pension benefits,s These anti- alienation provisions-

"...reflect ( ) a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for wrongs done them."5

This policy of protecting pension benefits from creditors was explained by this Committee's House counterpart in its report On the ERISA bill:

"To further ensure that the employee's accrued benefits are actually available for retirement purposes, the committee bill also contains a provision requiring the plan to provide that benefits may not be assigned or alienated."7 In its Guidry decision, the Supreme Court recognized that the antialienation provisions are so central to ERISA's protective scheme that it refused to recognize any exceptions. In its Patterson decision,/8 the Supreme Court specifically declined to recognize any exceptions to the ERISA anti-alienation provisions in the bankruptcy context, in part, to "minimize ( ) the possibility that creditors will engage in strategic manipulation of the bankruptcy laws in order to gain access to otherwise inaccessible funds.

"9 The Court held that a debtor's pension benefits under an ERISA covered plan are excluded from the bankruptcy estate by operation of Section 541(c)(2) of the Bankruptcy Code 10 and ERISA's anti- alienation provisions. That holding, in the Court's words -

"...also gives full and appropriate effect to ERISA's goal of protecting pension benefits. This Court has described that goal as one of ensuring that 'if a worker has been promised a defined pension benefit upon retirement - and if he has fulfilled whatever conditions are required to obtain a vested benefit - he actually will receive, it."

Congress revisited ERISA's anti-alienation rules in the Retirement Equity Act of 1984 ("REA")12 After considerable deliberation through the normal legislative process, Congress decided to create a limited exception to the anti-alienation provisions for a "qualified domestic relations order" ("QDRO") dividing a plan participant's pension benefits with a spouse, former spouse, or dependent? The QDRO exception was deemed to be consistent with ERISA's purposes in allowing the sharing of pension benefits among an existing or former family unit. The exception was narrowly drawn to prevent undermining the anti-alienation rules. In particular, the class of individuals who could share in the participant's pension benefits was strictly circumscribed - a spouse, former spouse, child or other dependent of the participant and the QDRO must meet certain federal standards designed to protect the plan as well as the participants and beneficiaries?

The Supreme Court had occasion to review REA's ERISA amendments in its Boggs decision. And, the Court again remarked on the importance of the antialienation provisions to the Congressional scheme for protecting pension benefits in the course of holding that ERISA bars a surviving spouse from a testamentary transfer of her benefits:

"...it would be inimical to ERISA's purposes to permit testamentary recipients to acquire a competing interest in undistributed pension benefits, which are intended to provide a stream of income to participants and their beneficiaries .... Pension benefits support participants and beneficiaries in their retirement years, and ERISA pension plan safeguards are designed to further this end .... Under respondents' approach, retirees could find their retirement benefits reduced by substantial sums because they have been diverted to testamentary recipients. Retirement benefits and the income stream provided for by ERISA-regulated plans would be disrupted in the name of protecting a participant spouse's successors over plan participants and beneficiaries. Respondents' logic would.even permit a spouse to transfer an interest in a pension plan to creditors, a result incompatible with a spendthrift provision such as (ERISA Section 206(d)(1))."15

Echoes of ERISA's policy of promoting and protecting pension coverage have been heard in recent Congressional calls for Americans to save more for their retirement and to not depend totally upon public programs for retirement income security. For example, in enacting the Savings Are Vital To Everyone's Retirement Act ("SAVER") of 1997,16 Congress declared a purpose "to advance the public's knowledge and understanding of retirement savings and its critical importance to the future well-being of American workers and their families."17 The Act requires the Labor Department to "maintain an ongoing program of outreach to the public designed to effectively promote retirement income savings by the public,"18 and requires the convening of national summits to, among other objectives, "advance the public's knowledge and understanding of retirement savings and its critical importance to the future well-being of American workers and their families."19

Impact on Workers

The Section 303(c) waiver provision would eviscerate the national policy of promoting and protecting savings for retirement. By permitting, indeed encouraging, the diversion of pension benefits to creditors, the waiver provision would ensure the impoverishment and dependence on public assistance of more senior citizens.

The workers covered by multiemployer pension funds are generally people of modest means employed in industries such as building and construction, retail, janitorial services, food, hotel and restaurant, and clothing and textiles. These are people who must rely on credit for essential purchases such as cars, furniture, televisions, and other household appliances, not to mention housing. They would be compelled by lenders to pledge their pension benefits in order to support current consumption.

Workers are at a distinct disadvantage when dealing with lending institutions and other businesses that have ample legal and financial resources and expertise. They are vulnerable to manipulation by lenders who draft the fine print in standardized credit and loan applications that are essentially contracts of adhesion. In a bankruptcy setting, debtors may be enticed by lenders' offers of more credit if only they will reaffirm their debt and pledge their pension benefits as security.

These are not people who can control and use retirement plans to hide assets from creditors. They have no influence over the amount of contributions made to their pension funds, except through the collective bargaining process and through how much they work in contribution-generating employment under the bargaining agreement.

Similarly, in a single employer plan context, the workers do not control the company's plan. They cannot misuse their plan to hide assets from creditors.

Contrary to the claims of bankruptcy abuse, workers and retirees generally file for bankruptcy protection because of job loss, medical problems, or domestic difficulties, not to abuse creditors? Their pension benefits may be their only source of financial support until Social Security benefits become available.

In short, enactment of Section 303(c) would shred to tatters the retirement income protections that Congress has deemed essential to the Nation's well-being for more than a quarter-century. It would shamefully sacrifice the retirement income security of middle America to the business interests of lenders.

Plan Administration

A secondary, but still important policy consideration underlying ERISA's anti-alienation rules is the effect of benefit diversions to third-parties on a pension plan itself. Congress was mindful that, particularly in the case of multiemployer plans, costs of administration translate into lower benefits for covered workers and their families."

Benefits and administrative costs are paid out of the same pot, the pension trust fund. That fund is built on the amounts that the workers, through their union, agree to forego in wages in return for employer contributions. The workers pay for plan administration by taking lower pay so that the plan can operate. Although this takes a backseat to our concern about the well-being of seniors, it is clear that the antialienation rules protect plans from the expense of dealing with claims by creditors against participants' benefits.

Section 303(c) would upset this ERISA protection for plans as well. Plans would be enveloped in administrative activities and in litigation over creditors' claims. Confronted by a creditor's claim, the plan's officials would have a fiduciary duty to investigate the claim's validity and, perhaps, resist enforcement of the claim (through litigation or otherwise) to protect the participant's benefits.

To the extent that the claim is recognized, the plan might be compelled to make multiple partial benefit payments - some to the pensioner and some to one or more creditors. It might be that Section 303(c) would be interpreted as permitting creditors or courts to compel a plan to disgorge assets before benefits would be distributed to the debtor-participant under the plan's terms. Or, it might be that Section 303(c) would be construed as allowing creditors or courts to compel a plan to make a distribution in a form not available under the terms of the plan (e.g., lump sum). Where creditors are given an interest in future benefit distributions, the plan would have to keep records and perform other administrative tasks to ensure proper payment to the creditor and the participant.

Multiemployer plans have learned from their experience with QDROs that divisions of pension benefits can impose substantial burdens on the plans, multiplying their work and expense without any offsetting increase in plan income. At least in the case of QDROs, the benefit division is among persons in the class that ERISA was designed to protect - participants and beneficiaries. Burdening plans with the administration of creditors' claims would be tantamount to a tax on the participants and beneficiaries as a whole for the benefit of unrelated business enterprises. Retirement ..... plans should not have to subsidize their participants' creditors.

Public Employee Plans & IRAs

To the extent that the Section 303(c) waiver is read as applying only to non-ERISA plans, we note that the retirement savings policy concerns expressed above would still apply with respect to the millions of public employees who are covered . by state and local government pension plans.

Moreover, IRAs are, by themselves, retirement savings vehicles. Moreover, they are used by workers, with the encouragement of Congress and the Tax Code, as vehicles for tax-free rollovers of benefit distributions from ERISA-covered and other tax-qualified plans. Indeed, Congress has promoted IRAs as means for pension portability and retirement security for mobile workers.

Conclusion

Again, we urge this Committee to do all within its power to prevent the enactment of the Section 303(c) waiver provision. It would be beneath the dignity of Congress to allow such an outrageous reversal of national retirement policy, particularly without the knowledge and due deliberation of the body.

Thank you, Mr. Chairman. I would be pleased to answer any questions that you or the other Senators may have.

FOOTNOTES:

1 ERISA Sections 2(a), (b); 29 U.S.C. Sections 1001(a), (b). See also Boggs v. Boggs, 530 U.S. 833, 845-465, 852 (1997)('The principal object of the statute is to protect plan participants and beneficiaries.')

2 PUBLIC LAW No. 96-364, Section 3; 29 U.S.C. Section 1001a.

3 PUBLIC LAW NO. 99-272, Section 11021; 29 U.S.C. Section 1001b.

4 See ERISA Sections 403, 404, 29 U.S.C. Section 1103, 1104.

5 ERISA Section 206(d)(1), 29 U.S.C. Section 1056(d)(1), states: "Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." See also Code Section 401(a)(13), 26 U.S.C. Section(a)(13); TREASURY REGULATIONS, 26 C.F.R. Section 1.401(a)-13(b)(1).

6 Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365, 376 (1990) (remedial constructive trust imposed by court on pension benefits of judgment debtor violated ERISA's antialienation bar).

7 Committee on Education and Labor, H.Rep. No. 779, 93rd Cong. 2nd Sess. at 66, reprinted in II LEGISLATIVE HISTORY OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT, Senate Committee on Labor and Public Welfare (Comm. Print 1976) at 2655.

8 Patterson v. Shumate, 504 U.S. 753 (1992).

9 Id. at 764.

10 11 U.S.C. Section 541(c)(2).

11 504 U.S. at 764-65, quoting Nachman v. PBGC, 446 U.S. 359, 375 (1980).

12 PUBLIC LAW NO. 98-397, 98 STAT. 1426 (1984).

13 See ERISA Section 206(d)(3), 29 U.S.C. Section 1056(d)(3); Code Section 414(p)(1), 26 U.S.C. Section 414(p)(1).

14 See Boggs, 520 U.S. at 844.

15 Boggs, 520 U.S. at 852 (emphasis added).

16 PUBLIC LAW NO. 105-92, 111 STAT. 2139 (1997).

17 Id., Section 2(b)(1).

18 ERISA Section 516(a), 29 U.S.C. Section 1146(a), as added by SAVER Act Section 3.

19 ERISA Section 517(a), 29 U.S.C. Section 1147(a), as added by SAVER Act Section 4.

20 See Sullivan, Warren, Westbrook, From Golden Years to Bankrupt Years, NORTON BANKRUPTCY LAW ADVISOR, Issue No. 7, July 1998, West Group Publishers, Rochester, New York; Warren, The Bankruptcy Crisis, 73 INDIANA LAW JOURNAL 1079 (Fall 1998).

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LOAD-DATE: April 14, 2000