LEXIS-NEXIS® Congressional Universe-Document
LEXIS-NEXIS® Congressional
Copyright 2000
Federal News Service, Inc.
Federal News Service
April 13, 2000, Thursday
SECTION: PREPARED TESTIMONY
LENGTH: 2779 words
HEADLINE: PREPARED TESTIMONY OF SCOTT J. MACEY THE ERISA INDUSTRY COMMITTEE
BEFORE THE
SENATE COMMITTEE ON HEALTH, EDUCATION, LABOR AND PENSIONS
SUBJECT - PROTECTING PENSION ASSETS IN BANKRUPTCY
BODY:
My name is Scott J. Macey. I am a member of the Board of Directors and a former
Chairman of The ERISA Industry Committee (commonly known as
"ERIC"), on whose behalf I appear today. I also serve as Senior Counsel of Actuarial
Sciences Associates, which provides benefits advice and administration for AT&T.
ERIC is gratified that, in holding these hearings, the Senate Committee on
Health, Education, Labor, and Pensions is seeking to protect the retirement
benefits of American workers and their families. Protecting retirement benefits
in
bankruptcy is in accord with the purposes and requirements of the Employee Retirement
Income Security Act (ERISA) and is consistent with sound
bankruptcy policy as well.
ERIC, a nonprofit association, is the only organization in Washington, D.C.
that represents exclusively the employee benefit plan interests of America's
largest employers. ERIC's members provide comprehensive
retirement, health care coverage, and other economic security benefits directly
to some 25 million active and retired workers and their families. ERIC has a
strong interest in proposals affecting its members' ability to deliver those
benefits, their cost and effectiveness, and the role of those benefits in the
American economy.
In my remarks today, I will address both the general issues of importance to
employer-sponsored retirement plans and, as you requested, the particular
issues faced by employer-sponsored defined benefit plans.
ERISA's STRONG ANTI-ALIENATION PROVISIONS ARE INTEGRAL TO A SOUND NATIONAL
RETIREMENT POLICY
ERISA requires that
"Each pension plan shall provide that benefits provided under the plan may not
be assigned or alienated."/1 Similarly, the Internal Revenue Code (IRC) states that a pension trust will
not be qualified under its provisions unless
"the plan of which such trust is a part provides that the benefits provided
under the plan may not be assigned or alienated."/2 The current ERISA and Internal Revenue Code anti-alienation provisions were
preceded by similar Internal Revenue Code provisions dating back to 1938./3
ERISA's anti-alienation provisions are integral to the overarching purpose of
this landmark
reform law: to provide financial security for working American's by assuring that the
pension benefits they earn actually will be available to them when they retire.
In enacting ERISA, Congress expressed an overriding concern that a pension plan
participant's actual receipt of retirement benefits not be subjected to the
whims of financial misfortune. This intent is expressly embodied in ERISA's
vesting and funding requirements as well as in its anti-alienation provisions.
The legislative history of ERISA states that:
"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."/4
The ERISA and Internal Revenue Code anti-alienation protections apply equally
to rank and file employees, highly
compensated employees, and substantial owners, even though ERISA and the Code
saw fit to distinguish among these classes for other purposes.
Congress has created only very narrow exceptions to the general prohibition
against the alienation of retirement benefits. The Retirement Equity Act of
1984 amended ERISA and the Internal Revenue Code to permit the alienation of
benefits under a qualified domestic relations order for spousal support and
maintenance under very limited circumstances an exception that is in concert
with ERISA's purposes of providing retirement security and that is
fundamentally contrary to proposals to permit creditors to claim all or a
portion of an individual's retirement benefits in
bankruptcy. Even a qualified domestic relations order is forbidden from requiring any type
or form of benefit not provided for under the terms of the plan.
The Taxpayer Relief Act of 1997 also amended ERISA and the
Internal Revenue Code to provide that an order or settlement agreement may
provide that a participant's retirement benefit will be reduced to satisfy his
or her liability to the retirement plan if (1) the participant has been
convicted of a crime involving the plan, (2) the participant is subject to a
civil judgment or consent order in connection with a violation of ERISA's
fiduciary standards, or (3) the participant has entered into a settlement
agreement with the Labor Department or the PBGC in connection with a violation
of ERISA's fiduciary standards. This provision also protects the participant's
spouse's right to a survivor annuity. As with the qualified domestic relations
order exception, this provision promotes retirement security and is wholly
inconsistent with any proposal to allow a third-party creditor to make a
bankruptcy claim against an individual's retirement benefits.
PROTECTING RETIREMENT ASSETS IN
BANKRUPTCY IS IN ACCORD WITH
SOUND
BANKRUPTCY POLICY
Historically, the first and most basic policy of
bankruptcy is to provide debtors who have not defrauded creditors with a
"fresh start."
Alienation would make a
"fresh start" unattainable. Federal Reserve Chairman Alan Greenspan stated on March 27,
2000, before the Senate Special Committee on Aging:
"Any sustainable retirement system - public or private - requires that
sufficient resources be set aside over a lifetime of work to fund an adequate
level of retirement consumption." Allowing the alienation of retirement assets in
bankruptcy would in one stroke eviscerate the ability of an individual to accumulate the
resources necessary to be self-supporting when he or she can no longer work. It
would force the individual to rely in retirement on public aid funds a result
contrary to both retirement policy and
bankruptcy
policy.
Qualified retirement plans cannot be used to defraud creditors. It is important
to remember also that, because of their design and because of the limits that
the internal revenue code imposes on them, qualified retirement plans simply
cannot be used as part of a scheme to divert assets prior to a
bankruptcy. As this Committee is aware, the amount of money an individual can set aside in
a retirement plan is strictly limited by numerous limits imposed by the
Internal Revenue Code. Excise taxes and other penalties are applied if
contributions exceed allowable limits.
It is particularly absurd to view defined benefit plans as a vehicle for asset
diversion prior to
bankruptcy. Under these plans, contributions are both required and limited by Internal
Revenue Code restrictions. Individual participants in defined benefit plans do
not have discretion regarding contributions to the plan.
Contributions instead are made by the employer sponsoring the plan in
accordance with the funding requirements of the law and are deposited in a
trust fund.
Thus, protecting retirement plan assets in
bankruptcy is fully in accord with sound
bankruptcy policy for two reasons: (1) preserving an individual's retirement benefits
enables the individual to make a fresh start after
bankruptcy and (2) the stringent legal restrictions on retirement plans prevent
individuals from using retirement plans to evade their obligations to creditors.
THE PROTECTION OF RETIREMENT BENEFITS FROM
BANKRUPTCY CLAIMS HAS BEEN AFFIRMED BY THE SUPREME COURT AND SHOULD BE EXTENDED
In the 1980s, the harmony between retirement policy and
bankruptcy policy was threatened as creditors frequently attempted to divert retirement
benefits. By 1991, one member of the U.S. Chamber of Commerce who maintained a
qualified retirement plan was facing
85
bankruptcy cases in which creditors of plan participants were seeking to recover
retirement plan benefits./5 This unfortunate and costly situation was remedied
for ERISA plans by the unanimous decision of the Supreme Court in Patterson v.
Shumate, which affirmed the exclusion of qualified retirement benefits assets
from the
bankruptcy estate.
Because the holding in Patterson v. Shumate is limited to plans subject to
ERISA Section 206(d)(1), the status of benefits provided by certain other
tax-qualified savings vehicles (such as individual retirement accounts, church
plans, and government plans) remain exposed to the confusion spawned by
continued claims by creditors.
The
bankruptcy reform legislation (S.625 Section 224) approved by the Senate (with similar
provisions also included in the House-passed
bankruptcy reform bill H.R.833 Section203) wisely closes the
gap in federal
bankruptcy law by providing a federal exemption under 11 USC Section 522 for all
tax-qualified retirement funds and accounts. The exemption would be available
under both the default exemption scheme and the state opt-out scheme./6
Section 303(0 of S.625 should be removed. Without public debate or discussion,
however, a provision also has been included in the Senate
bankruptcy bill that would, in practice, vitiate the clear intent of the provisions in
the House and Senate bills that establish a new federal exemption for
retirement benefits. This provision, Section 303(c) of S.625, would permit
unsecured creditors to enforce a waiver executed by an individual with respect
to the retirement plan exemption available under the state opt-out scheme.
As a practical matter, this encourages potential creditors to
include such a waiver in the small print of any credit card application or
other similar document. Thousands of individuals will unwittingly subject their
retirement security to the whims of financial misfortune. Less sophisticated
individuals will be particularly vulnerable to the disastrous effects such
waivers could have on their retirement security. We can say that individuals
should read -- and understand -- all the fine print that accompanies credit
applications but you and I both know that is not going to happen. The result
will be the
bankruptcy of retirement protection - and, we submit, the undermining of the basic tenet
of national
bankruptcy policy to provide a way for individuals to settle their debts and restart
their lives.
For these and all the other reasons outlined below, we strongly urge Senators
to remove Section 303(c) from any Conference bill.
THE CONSEQUENCES OF CREDITOR ATTEMPTS TO CAPTURE RETIREMENT BENEFITS ARE SEVERE
AND EXCEED ANY IMMEDIATE
GAIN TO THE CREDITOR.
ERISA and the Internal Revenue Code unequivocally prohibit plans from allowing
the alienation of benefits to creditors.
Fiduciary violations and plan disqualification. If a plan allows or makes
payments to third-party creditors, the plan administrator will be subject to
penalties and to suit for violating ERISA's fiduciary standards and a
tax-qualified plan will be subject to disqualification under the Internal
Revenue Code.
The results of disqualification are catastrophic. If a plan is disqualified,
the employer may lose its deductions for contributions to the plan, plan
participants may be taxed immediately on the value of their funded vested
benefits, and earnings on the plan trust become taxable. Even if the IRS does
not impose this draconian penalty, the employer may be required to restore
funds to the plan and may face stiff financial penalties.
Litigation. Since it is very clear that a plan cannot
allow alienation to occur, there is no choice but to engage in costly
litigation over creditors' claims. Thus, the chief result of the waiver
provision we are discussing today will be increased litigation. In fostering an
increasingly confused legal climate, it is likely that plans currently
protected by Patterson v. Shumate will again become targets of creditor claims
as well.
Discouragement of retirement plans. Besides the up-front cost of this
wrongheaded approach, the potential for litigation, if widespread, will deter
employers from establishing and maintaining retirement plans. Thus, the waiver
provision not only undermines the retirement security of individuals, it also
undermines this Congress's and this Committee's commitment to encourage and
expand our voluntary employer- sponsored retirement system.Excessive penalties
for plan participants. If the plan distributed all or a portion of a
participant's benefit contrary to the requirements of
ERISA, the Internal Revenue Code, and the plan's provisions, the employee could
be subjected to income and excise taxes on the distribution.
Defined benefit plans unduly burdened. The prospect of allowing the alienation
of benefits in defined benefit plans is particularly disturbing for several
reasons.
First, under a defined benefit plan, the employee does not have any assets to
alienate. Under these plans, the employee accrues a benefit over his or her
entire career with the employer that sponsors the defined benefit plan. The
employer promises to pay this benefit and holds assets in a trust in order to
insure that money will be there to pay benefits when they are due regardless of
the fortunes of the employer at that time. This trust assets are the property
of the plan, not of the employee.
Second, benefits typically may not be paid from a defined benefit plan until
the employee retires. In many cases this could be
decades after the employee has passed through his or her
bankruptcy event. A defined benefit plan simply is not a realistic source of money for a
creditor.
Third, many defined benefit plans do not provide for lump-sum distributions of
accrued benefits. Many plans provide payments only in annuity form. Thus, the
benefits under a defined benefit plan often do not translate into a value that
a creditor can immediately access.
Fourth, because the benefit under a defined benefit plan does not become fixed
until after the employee retires, it is difficult to identify the benefit to
which a creditor's claim would apply. Even the present value of the benefit at
any given time is dependent on current interest rates. Future changes in
interest rates will change the value of the
benefit.
Fifth, the joint and survivor annuity requirements of defined benefit plans
ensure that benefits are available for elderly surviving, creating an important
resource against one of our most pressing retirement policy problems -
providing retirement income for older women. Creditor claims against a worker's
benefit would in many cases exacerbate this pressing national concern.
Reduced pension portability. Finally, Mr. Chairman, how this Congress chooses
to address creditor claims against retirement benefits will either enhance or
undermine one of today's most sought-after policy goals: increasing pension
portability. ERIC applauds the leadership you and this Committee have exercised
in considering legislation to increase the ability of an individual to transfer
his or her retirement assets from one qualified plan to another of a same or a
different type. Key legislation
under consideration in the Senate that would substantially increase pension
portability includes: The Retirement Account Portability Act of 1999 (S.1357)
by Senator Jeffords and the pension
reform amendments that were included in the Senate
bankruptcy reform bill (S.625). In addition, the Pension Coverage and Portability Act (S.741) by
Senator Graham of Florida, Senator Grassley, and several cosponsors, and the
Income Security Enhancement Act of 1999 (S.8) by Senator Daschle and several
cosponsors include similar and important portability initiatives.
Because of the potential inconsistent treatment in
bankruptcy of funds held in different tax-qualified vehicles, however, individuals may
unwittingly expose their retirement assets to claims by creditors when they
roll their benefits from an ERISA-governed plan into a more vulnerable vehicle.
Anyone aware of this potential danger will be loathe to
transfer his or her benefits even though that might otherwise be the best
decision for the individual. Unless Congress enacts legislation that (1) enacts
a federal exemption under
bankruptcy for all tax-qualified retirement benefits and (2) removes the waiver provision
in []303 of the Senate bill, Congress's portability goals will be undermined.
Mr. Chairman, I thank you for the opportunity to present our views to this
Committee. I will be pleased to address any questions you and the Members of
the Committee may have.
FOOTNOTES:
1 ERISA Section 206(d)(1).
2 IRC Section 401(a)(13).
3 P.L. 75-554, Section 165.
4 H. Rept. 807, 93rd Cong., 2nd Session, 68 (1974).
5 Cited in The Chamber of Commerce of the United States of America as amicus
curiae supporting respondent in
Patterson v. Shumate, U.S. Supreme Court, No. 91-913, pages 25-26.
6 11 USC Section 522(d) and Section 522(b)(2), respectively.
END
LOAD-DATE: April 15, 2000