PLR 200730029: Prebankruptcy pension amendment avoids benefit increase restriction

Plain-English summary

An employer agreed to increase a pension benefit multiplier in a collective bargaining agreement three days before filing for Chapter 11 bankruptcy. The IRS ruled that the restriction in § 401(a)(33), which addresses benefit increasing amendments adopted while an employer is a debtor, did not apply. The amendment was effectively adopted when the agreement was signed, before the employer became a debtor. The letter also stated that the parallel ERISA restriction did not apply.

Ruling snapshot

• Question: Does the bankruptcy period restriction apply to a benefit increase agreed to before the filing?
• Outcome: No; the amendment was adopted before the employer became a bankruptcy debtor.
• Key authorities: IRC § 401(a)(33)(A); ERISA § 204(i)(1).

Full text (IRS public release)

Significant Index No. 0401.00-00

200730029
DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION

MAY 02 2007

T: EP:RA:T2
Re:
Plan X =
Plan Y =
Company =

This letter constitutes notice that, with respect to the Plan, section 401(a)(33)(A) of the Internal Revenue Code (“Code”) and section 204(i)(1) of the Employment Retirement Income Security Act of 1974 (“ERISA”) do not apply to the amendment described below.

Section 401(a)(33)(A) of the Code provides that a plan is not a qualified plan if an amendment is adopted while the employer is a debtor in a case under title 11, United States Code, or similar Federal or State law, and such amendment increases liabilities

of the plan by reason of (i) any increase in benefits, (ii) any change in the accrual of benefits, or (iii) any change in the rate at which benefits become nonforfeitable under the plan, with respect to employees of the debtor, and such amendment is effective prior to the effective date of such employer's plan of reorganization.

Section 204(i)(1) of ERISA prohibits a plan amendment that increases the liabilities of a plan maintained by an employer that is a debtor under Title 11 of the United States Code, or similar Federal or State law, by reason of (A) any increase in benefits, (B) any change in the accrual of benefits, or (C) any change in the rate at which benefits become nonforfeitable under the plan, with respect to employees of the debtor, and such amendment is effective prior to the effective date of such employer's plan of reorganization.

The Company is a supplier of cockpit modules, automotive floors, acoustic systems instrument panels, automotive fabric, plastic-based trim, and convertible-top systems. On the Company and substantially all of its domestic subsidiaries filed for protection under Chapter 11 of the U.S. Bankruptcy Code, seeking reorganization relief.

200730029
, |

The Plan is a defined benefit plan that was formed on from the merger of

Plan X and Plan Y. The Plan covers salaried, hourly, union, and non-union employees under various benefit formulas.

On three days prior to filing for Chapter 11 bankruptcy protection, the Company entered into a collective-bargaining agreement with a union representing certain participants in the Plan to increase the monthly retirement benefit multiplier under the Plan for these participants. It is clear from the information submitted with the request that the Company was not a debtor in bankruptcy when the amendment in question was effectively adopted by the signing of the collective-bargaining agreement. Because the amendment was adopted prior to the date of the Company’s bankruptcy filing, which is also the date the Company became a debtor in bankruptcy,

section 401(a)(33) of the Code and section 204(i)(1) of ERISA do not apply to the amendment.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

We have sent a copy of this letter to the

; to the ~ and to your
authorized representative pursuant to a power of attorney on file in this office.

If you require further assistance in this matter, please contact.

Sincerely yours,
James E. Holland, Jr., Manager

Employee Plans Technical