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Wednesday, September 21, 2011

The Pension Benefit Guaranty Corporation and Single-Employer Plan Terminations

Jennifer Staman
Legislative Attorney

Erika K. Lunder
Legislative Attorney

Recent economic conditions have generated attention with respect to the Pension Benefit Guaranty Corporation (PBGC) and defined benefit pension plans, including the process for terminating plans. The Employee Retirement Income Security Act (ERISA) regulates plan terminations. It provides for three types of single-employer plan terminations—standard, distress, and involuntary—and imposes different responsibilities on the PBGC for each type.

A standard termination occurs when a plan administrator decides to terminate a plan that has assets sufficient to meet its benefit liabilities. The PBGC’s involvement in a standard termination is minimal, with its role basically limited to confirming all legal requirements have been met. In a standard termination, the plan sponsor has no further liability to the PBGC or plan participants. The sponsor may be able to recapture any assets remaining after participants have received their share, although the reversion may be subject to tax.

A distress termination occurs when a plan administrator seeks to terminate a plan that does not have sufficient assets to cover all the benefits owed to plan participants and beneficiaries. The PBGC is responsible for ensuring that all criteria for termination have been met, as well as for determining whether the plan’s assets are sufficient to pay the guaranteed benefits and/or meet all benefit liabilities. Meanwhile, the plan sponsor and members of its controlled group are jointly and severally liable to the PBGC for the amount that the benefit liabilities exceed plan assets, with interest, at termination.

An involuntary termination occurs when the PBGC decides a plan should be terminated. The agency must initiate termination proceedings once it determines a plan does not have assets available to pay benefits currently due. It may seek termination under certain circumstances, including the plan has not met the minimum funding requirements; the plan will not be able to pay benefits when due; or the long-run loss to the PBGC may be expected to increase unreasonably if the plan is not terminated. In an involuntary termination, the sponsor and controlled group are jointly and severally liable to the PBGC for the unfunded liabilities.

The PBGC is broadly authorized to make any investigation it deems necessary to enforce ERISA and may assess a penalty against anyone who fails to provide a required notice or other material information. In addition, plan participants, beneficiaries, fiduciaries, and sponsors who are adversely affected by an action of another that violates the termination provisions may file suit in U.S. district court to enjoin the action or obtain other equitable relief. Employee organizations representing affected participants and beneficiaries are also able to file a claim, and the PBGC has the right to intervene in any action.

Finally, if the PBGC determines that a plan should not be terminated, it may stop the termination proceedings and restore the plan. It even has the authority to restore a terminated plan.

Date of Report: September 1, 2011
Number of Pages:
Order Number: R
Price: $19.95

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