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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. Generally, the limit is permanently established for each pension plan based on the plan's termination date except for cases in which termination occurs during a plan sponsor's bankruptcy or for certain airline industry plans. For pension plans terminating in 2008, the maximum guaranteed amount is $4,312.50 per month ($51,750.00 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 1,183,000 workers and retirees of 3,793 underfunded plans that have been terminated in PBGC's 33-year history, and 122,000 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 more than 169,000 standard terminations since PBGC's creation.
Distress Termination:
A company in financial distress may voluntarily terminate a pension plan if:
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:
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:
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, Washington, DC 20005-4026. |