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Aloha Airlines Flight Attendants
Retirement Plan Termination Update
Prepared by AFA Legal Department in consultation with hired outside counsel
[09.06.08] -- This is a comprehensive update on the status of the termination of the Retirement Plan for the Flight Attendants of Aloha Airlines, Inc. (the “Plan”).
At the outset, we want to remind AFA members about two facts: first, the Plan has been sponsored and administered by Aloha Airlines (the “Company”) and, except as provided in the AFA collective bargaining agreement (the “Contract”), AFA never had control over the Plan; and second, with the Company’s bankruptcy and liquidation, AFA no longer has legal standing to object to the Plan termination process because the bankruptcy court has rejected the Contract (thereby eliminating all of the Company’s obligations under the Contract). This means that the Contract no longer exists and neither party – AFA and the Company – have rights or obligations under the Contract with respect to anything formerly covered by the Contract, including the Plan.
The Chapter 7 Trustee, Dane Field, is acting in the legal capacity of the Company and, although he has consulted with the Plan’s Benefits Board, on which there are two AFA representatives, regarding the Plan termination process including Plan amendments and government filings, he is legally free to act without obtaining the Benefit Board’s or AFA’s consent to any action he takes on behalf of the Company or the Plan.
Below is a discussion of each step that has been or will be taken in order to complete the Plan termination process.
I. Plan Amendments
A. Plan Termination Amendment – Amendment No. 2
Plan Amendment No. 2, executed by the Chapter 7 Trustee on August 12, 2008: (i) memorializes the Plan’s termination effective March 20, 2008, (ii) provides for the ability to receive partial distribution on October 1, 2008, and (iii) provides that the Plan may pay reasonable expenses incurred in connection with the termination. Each of these provisions is discussed separately below.
1. Termination of Plan effective March 20, 2008
Amendment 2 memorializes the Plan’s termination on March 20, 2008 (the date on which the Company filed a petition for bankruptcy) in accordance with the Plan’s terms.
2. Partial Distribution scheduled for October 1, 2008
As explained in Pension Update #4, when retirement plans terminate, distributions are withheld until the IRS has issued a determination letter confirming that the plan document complies with all applicable rules as of the termination. Through the efforts of the AFA and the Union-appointed members of the Benefits Board, Amendment 2 included a provision that allows you to receive a partial distribution of up to 50% of your account balances (as of December 31, 2007). These distributions are available beginning October 1, 2008 and each of you should have already received a distribution packet in the mail providing details on how to apply for your eligible benefits.
3. Plan Expenses
One issue that has received considerable attention is the issue of payment of expenses relating to the implementation of the Plan’s termination.
Historically, expenses of administering the Plan (other than Trustee fees) have been paid by the Company. Plan Amendment No. 2 included a provision that allows Plan expenses incurred in connection with the Plan termination to be charged to the Plan.
Although AFA proposed to revise the amendment to potentially reduce the financial burden on the Plan, the Chapter 7 Trustee (who is acting in the legal capacity of the Company) was under no contractual or other legal obligation to accept AFA’s proposal. As stated above, the Bankruptcy Court rejected the collective bargaining agreement in May (so effectively it no longer exists) and, unfortunately, there were no legal bases on which AFA could prevent the adoption of this amendment.
More recently, the Chapter 7 Trustee has filed a Motion with the Court to allow “ordinary” expenses to be charged to the Plan. The detailed discussion of this Motion and AFA’s response that is being filed with the Bankruptcy Court is discussed below.
4. Successor Plan Administrator
AFA and its members of the Benefits Board recommended that Amendment No. 2 include a provision that designates the Benefits Board as the successor Plan Administrator (currently the Chapter 7 Trustee is the Plan Administrator) and that it be given full power to amend the Plan in the event the bankruptcy estate is settled before the IRS has issued a favorable determination letter. This was intended to prevent any future problems if the IRS were to require any amendments, and would clarify the division of fiduciary authority in carrying out the final distribution of plan benefits and payment of expenses.
The Chapter 7 Trustee believes that such an amendment can be adopted in the future if it appeared that the bankruptcy estate would likely close before the IRS has issued a determination letter. We agreed that there was no immediate need for this amendment, but AFA will continue to monitor the bankruptcy estate and IRS determination letter processes and will recommend this amendment as necessary.
B. Amendment No. 3 - Voluntary Correction Program (VCP)
amendment
This amendment is needed to comply with IRS regulations. The Plan was not amended earlier to comply with these regulations, and Amendment No. 3 is a model amendment prepared by the IRS for plan sponsors to adopt in this situation.
Amendment No. 3 will be submitted to the IRS along with the Form 5310 (“Application for Determination for Terminating Plans”), discussed below. The IRS will issue a “compliance statement” concurrently with the IRS determination letter.
C. Amendment No. 4 - Pension Protection Act
This amendment updates the Plan to permit non-spouse rollovers in accordance with the Pension Protection Act of 2006.
D. Amendment No. 5 - Timing of Distributions
This amendment was adopted on AFA’s recommendation to improve flexibility regarding the timing of benefit commencement. Before this amendment, participants had to wait at least 30 days from the time they received required notices (that are included in the application mailings) before they could receive their benefit. This amendment ensured that the 50% partial distributions could be made on time even if there was a delay in completing and mailing the benefit application materials. It also will allow benefits to be paid within 30 days of receiving an IRS determination letter.
II. Bankruptcy Update
A. AFA Claim
AFA filed a claim with the Bankruptcy Court on August 15, 2008 in the amount of $5,235,771 (plus interest). This amount represents amounts due for “any unpaid compensation or benefits…including but not limited to wages, expenses, vacation, sick leave and personal leave, severance, medical and dental insurance, disability insurance, accidental death and dismemberment insurance, life insurance, retirement plan benefits and contributions, and health benefits.”
B. Chapter 7 Trustee Motion to Amend Plan to Pay “Ordinary” Plan Expenses with Plan Funds
As discussed above, Amendment No. 2 authorized the payment of “termination” expenses with Plan funds rather than those of the bankruptcy estate. After adopting this amendment, however, the Chapter 7 Trustee determined that not all expected expenses are properly classified as “termination” expenses and that the Plan must be amended if Plan funds are to be used to pay for expenses incurred in the normal course of plan administration. These expenses are referred to in the Chapter 7 Trustee’s motion and below as “ordinary” expenses.
For example, the cost of preparing annual reports to the government is a common expense associated with the routine administration of retirement plans. However, this expense is not specific to the Plan termination and, consequently, the Plan must be amended for the Chapter 7 Trustee to comply with the Employee Retirement Income Security Act of 1974 (“ERISA”) if Plan funds are used to pay for this expense and other “ordinary” administrative expenses. Accordingly, the Chapter 7 Trustee filed a motion with the Bankruptcy Court on August 20 seeking the Court’s approval to amend the Plan to cover these expenses.
AFA and its outside pension and bankruptcy counsels have carefully considered this motion and have decided to file a response with the Bankruptcy Court. AFA’s Response aims to maximize the ability of the Plan to reach any bankruptcy estate funds that might be available to pay Plan expenses if the Plan were not amended.
In other words, AFA’s Response requests the Bankruptcy Court to require that the Trustee’s amendment also provide that the Plan may recover expenses that it has paid. This would allow the Plan to pay necessary administrative expenses up front without the Chapter 7 Trustee violating the requirements of ERISA, but would also preserve any claim the Plan’s may have with respect to estate funds.
According to the most recently filed Motion, the estimated expenses for all of the Company’s Plans total almost $750,000, of which $104,000 is attributable to the Flight Attendants Pension Plan.
After the Trustee’s claim was filed, the expected termination costs have been revised upward. AFA believes that the total expenses will translate to approximately .34% (about one third of one percent) to .50% (about one half of one percent) of the Plan’s assets. AFA believes the Bankruptcy Court will find this amount is reasonable.
Note that the expenses incurred by the AFA for legal advice in connection with the Aloha fight attendant plan termination and bankruptcy filings are being paid by the AFA and not the Plan.
Even if the Court grants AFA’s motion, AFA believes the likelihood is very low that there will be funds in the bankruptcy estate available to repay Plan expenses. The Chapter 7 Trustee’s budget for administering the entire bankruptcy estate is $650,000. Professional fees incurred in connection with the Company’s retirement plans are only one aspect of the overall administration of the Plan.
Despite these concerns, in its effort to exhaust all avenues of potential relief for the affected Flight Attendants, AFA decided to file a response with the Bankruptcy Court.
A copy of AFA’s response will be posted at www.afaaloha.com.
III. Other Items for Terminating Plan
A. Form 5310 – Application for a Determination Letter
1. Form 5310 will be filed on or around September 9, 2008. A copy of the required “Notice to Interested Parties” is included in the recent mailings from Bank of Hawaii.
2. Typically, it takes 6-10 months for the IRS to process a Form 5310 and issue a determination letter. However, we will ask for help from AFA’s Legislative Affairs contacts to expedite this process.
B. Form 5500 – Annual Report to the Department of Labor
1. The Chapter 7 Trustee will file the 2007 Form 5500 no later than October 15, 2008.
2. In the unlikely event that the IRS issues a favorable determination letter and Plan assets are distributed before December 31, 2008, then the 2008 Form 5500 will be the Plan’s final annual return.
3. If the Plan has not distributed all funds by December 31, 2008, the Plan will also have to file a Form 5500 that covers the short period beginning on January 1, 2009 and ending on the date on which the Plan’s funds have been fully distributed.
IV. Final Determination Letter and Asset Distribution
On or about September 9th, the Chapter 7 Trustee will file a request for a determination letter from the IRS that confirms the Plan meets all written requirements under the Internal Revenue Code and related legal authority for tax qualified status.
Tax qualified status is necessary for (1) the Company’s contributions to be tax deductible as a business expense, (2) the deferral of taxation on amounts contributed to employees’ accounts, and (3) the deferral of taxation on earnings on those contributions.
Failure to satisfy any tax qualification requirements must be promptly and properly corrected. Failure to be “qualified” results in severe tax consequences to both the plan sponsor and the plan participants.
In order to preserve this favorable tax treatment, Plan administrators such as the Chapter 7 Trustee routinely withhold all benefit payments until after the IRS has issued a determination letter. A determination letter prevents the IRS from later challenging the tax qualified status of a Plan based on deficiencies found in the plan document.
AFA has carefully reviewed the amended Plan document and expects that the IRS will issue a determination letter without requiring any additional amendments to the Plan.
Securing a final determination letter generally is a very time consuming process. Typically, the processing time for a determination letter is six to ten months. AFA will take all reasonable measures to accelerate this process so that your benefits can be distributed as quickly as possible.
After the Chapter 7 Trustee receives a determination letter from the IRS, it will mail another set of forms and notices similar to those mailed out in late August. Your remaining benefits will be paid after your completed forms are received and processed.
V. Closing Comments
AFA, the MEC, and the appointed members of Benefits Board have worked very hard to ensure a smooth termination of the Plan. We want to remind the membership that neither the MEC officers nor the Benefits Board members are compensated by the Plan or AFA. Your officers and representatives have worked countless hours over these past several months to secure a partial distribution and also to ensure that the Plan termination process is being properly administered.
Indeed, without these efforts by the MEC and AFA members of the Benefits Board, no benefits would be paid until after the IRS has issued a determination letter; you would not have the option to receive a partial distribution. Notably, they were able to achieve this right on your behalf without a collective bargaining agreement or any other bargaining leverage.
Furthermore, these members have continued to volunteer their time and effort despite outstanding concerns regarding their fiduciary insurance coverage, which are currently being resolved. AFA is grateful for each of these volunteers careful work at each stage of the termination process and heartily thanks each for all the time and effort expended during this challenging time.
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