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1 (January 22, 2002)

handle is hein.crs/crsmthabavm0001 and id is 1 raw text is: Order Code RS21115 January 22, 2002 The Enron Bankruptcy and Employer Stock in Retirement Plans Patrick J. Purcell Specialist in Social Legislation Domestic Social Policy Division Summary On December 2, 2001 the Enron Corporation filed for Chapter 11 bankruptcy protection in federal court in New York. Like many companies, Enron sponsors a retirement plan - a 40 1(k) - for its employees to which they can contribute a portion of their pay on a tax-deferred basis. As of December 31, 2000, 62% of the assets held in the corporation's 401(k) retirement plan consisted of shares of Enron stock. Some Enron employees held even larger percentages of Enron stock in their 401(k) accounts. Shares of Enron, which in January 2001 traded for more than $80 per share, were in January 2002 worth less than 70 cents each. Consequently, the company's bankruptcy has substantially reduced the value of many of its employees' retirement accounts. The financial losses suffered by participants in the Enron Corporation's 401(k) plan have prompted questions about the laws and regulations that govern these plans. This CRS Report describes the current laws governing the holding of employer stock in employee retirement plans and summarizes some key policy questions that pension analysts have raised about holding such stock in defined contribution retirement plans. This report will be updated as further legislative developments occur. The two kinds of retirement plans. Sponsorship of retirement plans by employers is voluntary, but any firm that sponsors a plan for its employees must abide by the standards established under the Employee Retirement Income Security Act of 1974 (P.L. 93-406), popularly known as ERISA. In order for a plan to be tax-qualified - that is for contributions to the plan and investment earnings on those contributions to be eligible for deferral of federal income taxes - the plan must also comply with the relevant sections of the Internal Revenue Code of 1986. Retirement plans are legally classified as either defined benefit plans or defined contribution plans. In a defined benefit plan, an employer pays retired workers a pension benefit based on a pre-determined formula, usually related to the employee's length of service and average salary in the years immediately preceding retirement. Each year, the employer must contribute money to a pension trust to fund the retirement benefits that the firm's employees earned that year. A trustee or other fiduciary appointed by the employer determines how to invest those funds. (A fiduciary is an individual, company, or association responsible for managing Congressional Research Service + The Library of Congress CRS Report for Congress Received through the CRS Web

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