CRS – The Effect of Firm Bankruptcy on Retiree Benefits, with Applications to the Automotive and Coal Industries. Carol Rapaport, Analyst in Health Care Financing, September 22, 2014.

“Benefits for retired employees are of particular interest to policy makers because of the growing number of retirees and forecasts indicating that some future retirees may not have the necessary financial resources to maintain their standards of living. Part of this congressional concern is what happens when bankrupt employers are unable to provide promised pension and health benefits to their retired employees. In chapter 11 bankruptcy reorganization, the employer receives protections against its financial commitments in the hope that it may once again become profitable. This protection could include not having to honor obligations concerning pensions and retiree health insurance. Its employees may therefore be at risk of not receiving some of their promised benefits. Unionized and nonunionized employees may be treated differently under the law because unionized workers have a legal contract governing their terms and conditions of employment. The costs to the employers for the pension, health insurance, and other benefits promised to retired employees are known as legacy costs, and different costs are subject to different federal laws. Although employers are required to prefund their defined benefit pension trusts, the level of required funding may not be present as the employer enters bankruptcy. The Pension Benefit Guaranty Corporation (PBGC), a quasi-public agency, monitors the finances of pension plans. The PBGC becomes the trustee of and pays the benefits to participants in terminated, underfunded single-employer pension plans. PBGC benefits are subject to a statutory maximum that may be less than the retiree was promised by his or her employer. The PBGC has been running deficits for several years, and the deficit for one of its two programs is at an all-time record high. PBGC funding comes from employer premiums set by Congress, the assets of the plans it takes over, and investment returns. There is no taxpayer funding. Some retirees receive health benefits from their former employer. Retiree health benefits, however, are not insured by any public agency, and employers are not required to prefund health benefits. On the other hand, employees (perhaps represented by their unions) can fund health benefits (for active and retired employees) through a tax-preferred trust fund known as a Voluntary Employees’ Beneficiary Association (VEBA). When the employer and union agree to form a VEBA, and it is approved by the bankruptcy court, the employer generally contributes a collectively bargained level of funding to the VEBA. Providing the contribution usually fulfills the employer’s total responsibility for retiree health care. All subsequent retiree health benefit decisions are transferred to the trustees of the VEBA.  After a discussion of these issues, this report provides three examples of bankruptcy proceedings where the retirees’ pensions and health insurance benefits received substantial federal attention: the General Motors Corporation, the Delphi Corporation, and the Patriot Coal Corporation. During bankruptcy proceedings for the General Motors Corporation (commonly known as Old GM or pre-bankruptcy GM) bankruptcy, retiree health benefits were central and pensions, although underfunded, were not a major issue. Old GM’s main union, the United Auto Workers (UAW), accepted stock in the General Motors Company (commonly known as New GM or postbankruptcy GM) as a partial funding source for its retiree health care VEBA. The VEBA has covered retiree health benefits since 2010. It was intended to cover retiree health benefits for 80 years, but it is unclear how long its funding will last.”