FAQs: Plan Funding
A: The Pension Protection Act of 2006 (PPA 2006) established benefit restrictions for underfunded plans. Depending on how underfunded a plan is, the plan may be restricted in its ability to pay out benefits as lump sums, and the sponsor may be restricted from amending the plan to increase benefits.
Regulatory and enforcement authority over ongoing plans is primarily the responsibility of the Employee Benefits Security Administration (EBSA) of the Department of Labor, the Employee Plans office of the Internal Revenue Service, and the Department of Treasury. PBGC does have certain regulatory and enforcement authority. For example, PBGC can perfect and enforce a statutory lien if an employer has not made required minimum funding contributions and unpaid amounts total more than $1 million.
PBGC monitors plans through a variety of reporting requirements. These reporting requirements may prompt further PBGC investigation and action to protect plan funding. For example, PBGC's reportable events regulation requires written notice to PBGC of certain events involving the plan or the company that may expose plan participants and PBGC's insurance program to risk. In addition, under the agency's Early Warning Program, PBGC monitors corporate transactions and bankruptcy proceedings that may threaten funding or continuation of ongoing plans. PBGC negotiates financial protections to keep these plans ongoing for workers and retirees and to limit losses to those individuals and PBGC if termination does occur. Finally, PPA 2006 requires controlled groups with at least one plan that is less than 80 percent funded to report annually additional information that will enable PBGC to better monitor the situation. This monitoring activity also sends the important message that employers have a duty to fund their plans.
A: There are several things PBGC can do to prevent termination or mitigate potential losses. When PBGC learns that an employer has not made required minimum funding contributions, and unpaid amounts total more than $1 million, PBGC can perfect and enforce a statutory lien on behalf of the pension plan against property of the plan sponsor or members of its controlled group. PBGC seeks protections for plans as part of business transactions that might otherwise significantly increase the risk of termination under the agency's Early Warning Program. For example, PBGC has obtained additional contributions or security on behalf of the plan and persuaded potential purchasers of plan sponsors to assume their pension plans. PBGC also encourages sponsors to explore all possible funding avenues that facilitate continuation of their pension plans.
PBGC also may seek these or other protections as a result of reportable events or annual reporting on plan underfunding as described in the preceding question and answer.
In bankruptcies, PBGC seeks to continue plan funding and prevent unwarranted terminations and, if a plan does terminate, to obtain the highest recoveries possible in the bankruptcy on behalf of participants and the insurance program. PBGC also seeks recoveries from members of the plan sponsor's controlled group that are not in bankruptcy.
A: PBGC strongly encourages plan sponsors that face financial hardship to explore every alternative to plan termination. Where a sponsor claims it can no longer afford to fund its plan, PBGC requires the sponsor to prove that the statutory criteria for plan termination are met, whether the sponsor is in or outside of bankruptcy. The statutory criteria generally require that the sponsor will not be able to successfully reorganize or continue in business unless the plan is terminated.
Most underfunded plans terminate because the employer has gone out of business, liquidated, or sold its assets in an insolvency situation. In other instances, lenders or other investors who are funding a bankruptcy work-out will not participate in the reorganization unless the plan is terminated.
The Deficit Reduction Act of 2005 (DRA) imposed a new premium for most affected plans of $1,250 per participant for three years on a plan sponsor that terminates an underfunded pension plan. This may deter some employers from seeking to terminate an underfunded plan. The termination premium, which was to sunset in 2010 under DRA, was made permanent under the Pension Protection Act of 2006.