Pension Plan Termination Fact Sheet
Types of Termination:
PBGC guarantees participants' benefits in underfunded single-employer pension plans if the employer goes out of business and cannot fund pensions. Single-employer plans can terminate in other ways as well. Types of single-employer termination are:
- Distress termination
- Even when a company is reorganizing in bankruptcy, PBGC works to keep employers that sponsor pension plans responsible for their own obligations; distress termination is a last resort.
- When a company cannot stay in business and fund pensions (and under some other circumstances – see below) it can file a distress termination
- PBGC steps in and pays retirees the benefits they are owed, up to legal limits
- Involuntary termination
- When PBGC is forced to take action to protect a pension plan or the pension insurance system, the agency initiates an involuntary termination
- As in a distress termination, PBGC becomes responsible to pay retirees the benefits they are owed, up to legal limits
- Standard termination
- A pension plan can file a standard termination if it can pay all of the benefits owed.
- In a standard termination, PBGC reviews the termination to make sure that the plan administrator follows all required steps to ensure proper notification to workers and retirees and proper arrangements for payment
- PBGC does not become responsible for benefit payments.
In PBGC's separate multiemployer program, pension plans are not typically terminated. If a multiemployer plan cannot pay benefits when they are due, PBGC provides financial assistance. The plan itself remains responsible for paying participants their guaranteed benefits.
To learn more about guaranteed benefits, please see our Guaranteed Benefits page.
Even if a company is reorganizing in bankruptcy, PBGC works for the pension plan to continue through reorganization. However, 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.
To learn more about distress terminations, please see our Distress Terminations FAQs.
PBGC may terminate a pension plan – even if a company has not filed its own plan termination – 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.
By law, PBGC must terminate a plan if it cannot pay benefits currently due. To learn more about involuntary terminations, please see our PBGC-Initiated Terminations FAQs.
A plan may terminate only if the plan can pay all of the benefits it owes, and if the plan administrator has taken the following steps:
- To the plan participants/parties other than PBGC:
- Issued a Notice of Intent to Terminate to affected parties other than PBGC between 60 and 90 days before the proposed termination date
- Informed participants that PBGC's guarantee of their benefits will cease upon distribution of plan assets
- Informed participants what private insurer an annuity is being purchased from, or the names of insurers from whom bids will be sought no later than 45 days before the distribution of plan assets
- Sent participants a notice that includes the benefit they earned and data the plan used to calculate the value of the benefit
- Distributed plan assets to cover all benefit liabilities
- To PBGC:
- Submitted a termination notice that includes certified data on the plan's assets and liabilities
- Provided the names of any missing participants
- Provided either money to pay missing participants' benefits or the name of the insurer holding their annuities
- Plan administrator conducted a diligent search – that includes using a commercial locator service – before sending money to PBGC
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
To learn more about standard terminations, please see our Standard Terminations FAQs.