Tribune Company Bankruptcy and the ESOP

The Chapter 11 bankruptcy filing by the Tribune Company will have only a nominal effect on employee retirement benefits. The ESOP was formed in 2007 as a new plan (a prior ESOP was cashed out as part of the transaction). No existing employee funds were used to help fund the plan. Before the ESOP transaction, the Tribune funded a 401(k) plan with up to a 4% of pay match, plus up to an additional 5% more depending on profits (of which there were none recently and certainly would not have been this year no matter who owned the company). With the ESOP, the company replaced its contribution to the 401(k) with a hybrid defined contribution/defined benefit pension plan that received an automatic 3% of pay contribution. No ESOP allocations had been scheduled until 2009. So the net impact on retirement is small.

The bankruptcy may trigger some complex tax issues. As a 100% S ESOP, the Tribune has just one shareholder. But if the reorganization is structured so that there are more than 100, or one or more owners are not qualified S owners (such as non-U.S. citizens or non-tax-paying entities), the S election will be broken, causing potential taxation issues. In addition, if the company's assets are sold, there could be built-in gains taxes if the benefit is greater than the company's taxable income (a very likely scenario). Cancellation of debt could also trigger tax issues.

While most new stories described how the bankruptcy would have little effect on employee retirement plans, the New York Times and a Reuters wire story that did not appear widely picked up both got it very wrong, asserting that employee pension money had been used to pay for the buyout. None of the stories provided any context about ESOPs in general, much less the fact that, overall, ESOP participants have about three times the retirement assets and the same amount of diversified assets as comparable employees in comparable companies. Getting that story out to decision makers will be essential in the coming year.