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Background: The Pension Benefit Guaranty Corporation (PBGC) was
created by the Employee Retirement Income Security Act of 1974
(ERISA) to protect the pensions of participants in private
defined benefit pension plans. In underfunded single-employer
pension plans, PBGC guarantees participants' benefits if the
employer can no longer stay in business and fund its pensions.
Ending a plan in such a situation is known as a "distress
termination," if carried out by the employer, or "involuntary
termination" if PBGC must take action to protect the plan
benefits. An employer also may use a "standard termination" to
end a plan, but only if the plan has enough assets to provide
full plan benefits. In PBGC's separate multiemployer program,
pension plans normally are not terminated. If a multiemployer
plan becomes insolvent, it receives financial assistance from
PBGC to enable the plan to pay participants their guaranteed
benefits.
Types of Termination: Specifically, PBGC was created to protect
the retirement security of participants whose pension plans
terminate without sufficient assets to pay all promised benefits.
Cessation of a plan under these circumstances is a distress
termination or involuntary termination. At the time of
termination, activities under a pension plan such as benefit
accruals and vesting cease; PBGC steps in and uses its own assets
to insure that participants do not lose all their benefits as
occurred prior to 1974.
Benefit payments actually earned are guaranteed up to a monthly
limit that is set by law. For pension plans terminating in 2004,
the maximum guaranteed amount is $3,698.86 per month ($44,386.32 yearly) for a participant retiring at age 65. This maximum
monthly payment must be reduced for any benefit that is paid or
payable to a participant before age 65, or is paid to a
participant in a form other than an annuity for the participant's
life alone, such as a form that provides for survivor's benefits.
The maximum is increased for anyone who retires after age 65.
Some 834,000 workers and retirees of 3,287 underfunded plans that
have been terminated in PBGC's 29-year history, and 100,000 participating in multiemployer plans receiving financial assistance, depend on PBGC for
their retirement income.
ERISA also provides protection for participants whose pension
plans terminate with sufficient assets to pay for all benefits.
Cessation of a plan under these circumstances is a standard
termination. As of the date of this event, all activities under
the plan cease, all benefits become fully vested, and the
benefits are distributed under ERISA guidelines and PBGC's
insurance responsibility ends. There have been about 163,000
standard terminations since PBGC's creation.
Distress Termination: A company in financial distress may
voluntarily terminate a pension plan if:
- the plan administrator has issued a notice of intent to
terminate to affected parties, including PBGC, at least
60 days, and no more than 90 days, in advance of the
proposed termination date;
- the plan administrator has issued a subsequent
termination notice to PBGC, which includes data
concerning the number of participants and the plan's
assets and liabilities; and
- PBGC has determined that the plan sponsor and each of
its corporate affiliates have satisfied at least one of
the following financial distress tests - though not
necessarily the same test:
- a petition has been filed seeking liquidation in bankruptcy;
- a petition has been filed seeking reorganization
in bankruptcy, and the bankruptcy court (or an
appropriate state court) has determined that the
company will not be able to reorganize with the
plan intact and approves the plan termination;
- it has been demonstrated that the sponsor or
affiliate cannot continue in business unless the
plan is terminated; or
- it has been demonstrated that the costs of
providing pension coverage have become
unreasonably burdensome solely as a result of a
decline in the number of employees covered by the
plan.
Involuntary Termination: The law provides that PBGC may
terminate a pension plan, even if a company has not filed to
terminate a plan on its own initiative, if:
- the plan has not met the minimum funding requirements;
- the plan cannot pay current benefits when due;
- a lump sum payment has been made to a participant who
is a substantial owner of the sponsoring company; or
- the loss to PBGC is expected to increase unreasonably
if the plan is not terminated.
PBGC must terminate a plan if assets are unavailable to pay
benefits currently due.
Standard Termination: A plan may terminate only if plan assets
are sufficient to satisfy all plan benefits and if the plan
administrator has taken the following steps:
- Issued a Notice of Intent to Terminate to affected
parties other than PBGC at least 60 days, and no more
than 90 days, before the proposed termination date; it
also must inform plan participants that PBGC's
guarantee of their benefits will cease upon
distribution of plan assets;
- Informed plan participants of the identity of the
private insurer from whom an annuity is being purchased
or the names of insurers from whom bids will be sought
no later than 45 days before the distribution of plan
assets;
- Sent each plan participant a notice that includes the
benefit the participant has earned and data the plan
used to calculate the value of the benefit;
- Submitted a termination notice to PBGC, which includes
certified data on the plan's assets and liabilities as
of the proposed date of distribution; and
- Distributed plan assets to cover all benefit
liabilities under the plan.
Plans must provide PBGC with the names of any missing
participants and either money to pay their benefits or the name
of the insurer holding their annuities. Before sending money to
PBGC, the plan administrator must conduct a diligent search that
includes using a commercial locator service.
If assets cannot cover all benefit liabilities, the plan
administrator must notify PBGC and stop the termination process.
If the plan administrator does not follow proper procedures,
PBGC may issue a Notice of Noncompliance that nullifies the
proposed termination.
Annuity insurer selections are fiduciary decisions and must
comply with fiduciary provisions of Title I of ERISA, which is
enforced by the Department of Labor.
Single copies of publications and fact sheets are available from: Pension Benefit Guaranty Corporation, Communications and Public Affairs Department, 1200 K Street NW, Suite 240, Washington, DC 20005-4026.
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