The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 significantly modified the treatment of key employee retention plans (KERPs) and severance plans in bankruptcy, by adding a new �503(c) to the Bankruptcy Code. The new �503(c) eliminates much of the discretion that debtors had previously enjoyed in implementing KERPs and severance plans and that bankruptcy courts enjoyed in evaluating and approving them.

Under the new �503(c)(1)(A), approval of a KERP requires a showing that the insider beneficiary has a “bona fide job offer from another business at the same or greater rate of compensation” than that proposed by the debtor. The statute also fixes the measure of acceptable KERP payments by linking them to a multiple of bonuses available to nonmanagement employees or a fraction of earlier bonuses paid to the insider. 11 U.S.C. �503(c)(1)(C). Approval of severance payments to insiders now requires a demonstration that (a) the payments part of a program generally available to full-time employees and (b) the amount of the payments will not exceed 10 times the mean severance payable to nonmanagerial employees. 11 U.S.C. �503(c)(2).

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