Benefits and Bankruptcy – A (Very) Brief Explanation of Employee Benefits

By Alexander Renfro, Georgetown University Law Center, LL.M. 2012

Though I doubt I need to introduce the reader to the Bankruptcy Code, the world of employee benefits may need a bit more of an introduction, both definitional and historical. The core question one might ask at the outset is “So, what are benefits, anyway?” After all, we can all make fairly accurate guesses at the definition and nature of “employee.” Indeed, these suppositions are likely correct in the benefits world, as ERISA does not feature a definition of “employee,” relying instead on common law conceptions of the term. “Benefits”, however, is a rather vague and broad term. Are benefits accessions to wealth, realized and recognized, like taxable income, perhaps? Are they limited statutorily to a small list of possibilities, such as retirement savings and visits to certain doctors? Maybe benefits are defined by facts and circumstances.

Unfortunately, but rightly so, “benefits” is not easily defined or couched into any solid definition. The term is broad to the point of challenging an individual to determine its limits. Ballantine’s Law Dictionary offers a hazy relation between benefit and value. Indeed, benefits may be thought of as anything of value, or anything that adds value to something else. I realize that this definition does not do much in the way of clearing things up, but the existential breadth of the term simply does not allow simple, clear defining. Consider the examples discussed in the Internal Revenue Code Section 132 of “certain fringe benefits” for a starting place. By these examples, the donuts provided in the office on Friday are fringe benefits. Use of the elevator as opposed to taking the stairs could be considered a fringe benefit. Such use may be especially beneficial if only a select group of individuals are allowed to use the elevator, as a professor of mine recently noted. In my old office building, another company occupied two floors, one of which was accessible only by keycard.  Fringe benefit.  I invite the reader to pause and note the staggering array of fringe benefits one might imagine. Now consider that these are only the fringe benefits. We can easily scale up into other benefits such as retirement plans, executive compensation plans, health/dental/vision plans, etc. Golden parachutes, golden handcuffs, daycare centers at the office, all are benefits. The limits are merely one’s imagination.

Coming back down to earth, we can now accurately define employee benefits as any benefit bestowed on an employee by an employer. Though the term “benefit” may still be frighteningly broad, we can take comfort that in practice, most benefits are not so far-fetched. 401(k)s, while complex in structure and regulation, are not unimaginable as a benefit to most folks. This then, is the purview of the field of employee benefits, unless another field supersedes it, such as other labor laws, the tax code, or, relevant to our work, bankruptcy laws. Considering the relative youth of ERISA, one commonly comes across such prior regulations.

Having defined employee benefits, we shall now take a look at the history of its regulation. Benefits such as retirement or healthcare were not commonly offered at any time before the 1900s, either because they were viewed as unimportant (recall from the previous issue that healthcare was not viewed with great import even back in the 1970s when ERISA was enacted) or because most workers simply did not outlive their jobs. Indeed, when Social Security was first passed in 1935, the average life expectancy of Americans was 61.5, 3.5 years before one qualified to receive Social Security. Compared with today’s average life expectancy of approximately 78 years, one can see how participation in retirement plans has naturally risen and become more prominent and important in our lives over the past 80 years.

As with any emerging trend, the legal world was slow to catch up, relying for better or worse on related but indirect precedents. The first retirement plans were construed in many ways, depending on the court, from a mere revocable offer of a gift to employees to a binding unilateral contract. Employers increasingly grew to enjoy offering retirement plans, especially in the industrial fields, as they provided attractive retention mechanisms and ensured that older, less productive workers left the workforce and were replaced by younger laborers. That being said, employers were unsurprisingly unwilling to take on liabilities associated with the offering of retirement plans, such as being bound by contract under state laws. Plans were less expensive, after all, when they were not a guaranteed liability on the employer’s books.

A dichotomy thus arose between employees wanting promises kept and employers looking to keep costs down. Congress slowly waded into these treacherous waters, enacting laws such as tax-favorable trusts for retirement plans, which encouraged employers to book liabilities in favor of getting a break in taxes. While certainly an incentive, the regulations did not offer any regulations on properly funding such trusts, an omission which became glaringly obvious in the collapse of the bankruptcy of the automaker Studebaker in the early 1960s. Studebaker had a traditional pension plan which was grossly underfunded at the time of its bankruptcy, which left most workers with a pittance of their “guaranteed” retirement. Though the employees may have had a contract claim against Studebaker, its bankruptcy overrode any state-law remedies, leaving the employees without recourse.

Following the Studebaker debacle, calls for pension reform became increasingly vocal, and Congress responded a little over a decade later with ERISA. ERISA, at its core, represents a bargain between ensuring protection for employees while not so heavily restricting plans that no employer would wish to offer one anymore. Plan offerings were left voluntary for employers to put forward, though with regards to healthcare plans, this may no longer be true under President Obama’s Affordable Care Act. Furthermore, plans were given a most tax-efficient treatment, as deductions for qualified retirement plans could be taken in the current year, while employees could defer inclusion of their retirement in gross income until retirement or beyond. The resulting tax expenditure for 401(k)s alone, as of 2009, was approximately $44 billion annually and rising, a fairly significant potential revenue stream the government has foregone to encourage retirement plan offerings and participation. These expenditures came at a price, of course, with a large increase in regulations covering plan administration and disclosure, structure, funding (theoretically avoiding any future Studebaker situations, until Enron came along), personal liability for those in charge of the plan, enforcement provisions allowing both employees and the federal government to sue regarding the plan, and more. In essence, ERISA states that if an employer chooses to have a plan (another broad and somewhat vague term), the employer must create a certain type of plan which protects their employees in certain ways.

As healthcare came to prominence, new provisions were added to ERISA, creating what those in the industry call the alphabet soup of regulations. Terms we have all heard at one time or another, such as COBRA or HIPAA, were added to this increasingly voluminous statute. The result is the statute we see today, coupled with the growth of a swelling body of case law interpreting it and the evolution of the laws which preceded it in various other codes. Its purview is naturally wide as an existential matter, and its regulation is ever-increasing due in part to its youth and certain employers’ attempts to circumvent current regulations (again, see Enron). Though it defies attempts to couch it in simple terms or conceive of its scope in one thought, in terms of bankruptcy, the field is luckily and perhaps unluckily smaller. While there may be less to review, a lack of guidance can get lawyers in great trouble should they unknowingly stumble down the wrong path. Now that we have at least a firmer grip on the field than we did before, we can confidently begin exploring this path.

Alexander Renfro received his J.D. from SMU Dedman School of Law in Dallas, Texas, where he graduated with honors, and is a current student at the Georgetown University Law Center, seeking an LL. M. in Taxation with a Certificate in Employee Benefits. Mr. Renfro has worked for and continues to assist fellow NACTT contributor Sidney Scheinberg on matters of bankruptcy, replevins, and commercial debt litigation. Mr. Renfro aims to weave his passions for bankruptcy and employee benefits into his practice into the future.

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