The Department of Labor’s Employee Benefits Security Administration has granted an exemption allowing Northwest Airlines to contribute privately held stock of a regional airline affiliate (Pinnacle Airlines) in lieu of cash to its three defined benefit pension plans for its 72,854 employees. The Employee Retirement Income Security Act (ERISA) generally prohibits in-kind contributions except under certain statutory exceptions or if the Labor Department grants an exemption. It has been reported that the Department of Labor has used its exemption authority to grant relief for similar types of transactions in the past; e.g., in 1989 to Pan Am shortly before the airline collapsed, and in 1994 to General Motors.
This exemption will mean more available cash for financially strapped Northwest. The minute I saw that announcement, I thought of Enron's 401(k) plan where many Enron employees' accounts were overloaded with Enron stock. They thought they had stock in one of the best U.S. companies, only to find out it was virtually worthless.
The two situations aren't analogous and the Department of Labor, as a condition to issuing the exemption, is requiring certain investors protections be put in place. But, the dangers of funding a retirement plan with company or a subsidiary's stock still bothers me.
CPAs involved in providing retirement and financial planning advice to any of those 72,854 Northwest employees should be aware of this ruling by the Department of Labor so that they can properly advise their clients. However, I think other CPAs should be interested in the Northwest exemption, as well I would expect other financially strapped companies to follow Northwest's lead. There are a number of companies having trouble meeting their pension liabilities and using stock as a contribution instead of cash to meet certain obligations might be might attractive to some of them.
