Overview
Employers can terminate their pension plans at will but they must pay the benefits they owe. This can happen in a variety of ways. This resource provides more information about that process.
When employers terminate their pension plans, they are required to make sure everyone owed a benefit is paid before the plan stops operating. Most of the time, this happens without any problems. On rare occasions, however, a pension plan might accidentally fail to pay someone before the plan terminates.
At PBGC, we call individuals who were not paid by a now-terminated pension plan Potentially Omitted Participants, or “POPs.”
PBGC is willing to review POP claims as part of its insurance program. That said, individuals making POP claims to PBGC must support their claims with significant evidence to show that they were never paid.
Quick facts
- Employers can terminate their pension plans, but they must make sure that everyone owed a benefit is paid when the plan ends or has been paid previously.
- Benefits can be paid by making lump sum cash distributions, offering rollovers, or purchasing annuities from an insurance company.
- Rarely, terminating pension plans will accidentally fail to pay someone their benefit. These individuals are known as potentially omitted participants or POPs.
- POPs can submit benefit claims to PBGC and PBGC will pay benefits only if there is evidence that the POP was never paid during or prior to the plan’s termination. This often requires significant documentation provided by the participant.
What happens when a plan terminates?
There are two main ways pension plans can end – the plan could be trusteed by PBGC, or the plan could end in a standard termination. Standard terminations are much more common.
A plan is trusteed by PBGC if the plan does not have enough funds to pay the benefits it owes to participants. When a plan is trusteed, PBGC becomes responsible for administering the retirement plan and paying the benefits up to the PBGC guarantee. PBGC ultimately trustees a small percentage of the thousands of pension plans it insures.
However, in most cases when a plan ends, the pension plan has the funds it needs to pay the benefits it owes and is legally required to pay those benefits as part of the termination process. This process is called a standard termination. During a standard termination, the plan can pay benefits in the following ways:
- A single lump sum cash distribution,
- A rollover into another retirement account, such as an IRA or 401(k), or
- By purchasing a monthly annuity on behalf of the person owed the benefit.
When a plan undergoing a standard termination purchases annuities for its beneficiaries, those annuities must provide a benefit equal to what the benefit-earner would have received from the pension plan. Annuities are typically purchased from a private insurance company and the pension plan usually purchases multiple annuities at once under a group annuity contract. The insurance company then becomes responsible for making monthly payments to the individuals who earned retirement benefits under the plan once they become eligible to retire.
What is PBGC’s role in a standard termination?
While pension plans are ongoing, they participate in PBGC’s insurance program by paying PBGC premiums, complying with plan funding and reporting requirements, and other plan sponsor responsibilities. Plans that end in a standard termination must continue to do those activities up until the standard termination process is completed and the plan has paid all the benefits it owes.
Terminating plans must submit paperwork to PBGC notifying PBGC of their intent to terminate, and must then submit follow-up documentation showing that all individuals owed benefits were paid. This means that PBGC often has records of who was paid via a lump sum and who was included in an annuity purchase for any insured pension plan that ended in a standard termination.
PBGC also audits a statistically significant sample of standard terminations each year and additionally audits plans where there is reason to believe there may be a problem, which helps reduce the likelihood that any individuals will not be paid their benefits. If errors are discovered upon audit, PBGC will require that any affected participants be require that any affected participants receive their benefit.
What if a terminating pension plan accidentally fails to pay someone it owes a benefit?
On rare occasions, a plan undergoing a standard termination may fail to pay everyone it owes a benefit and the mistake is not caught in a standard termination audit. If a beneficiary was left unpaid at the time of standard termination, their name will not appear in the distribution and annuity purchase records the plan is required to submit to PBGC as part of the standard termination process.
If an individual who earned a benefit from a terminated pension plan does not appear in this data, this may be an indicator that they never received their benefit, but it is not a guarantee that they never received their benefit. This is because of the possibility that the individual was paid prior to the standard termination process. Distribution and annuity purchase data that terminating plans submit to PBGC would not reflect payments made before the plan began its standard termination.
When might someone have been paid their entire benefit prior to a plan’s standard termination?
It is important to note that some individuals may have been paid their entire pension benefits prior to the plan’s standard termination. Depending on the rules of the pension plan, individuals may have the ability to request to collect or rollover their entire pension benefit in a one-time, single lump sum payment. This could be a standard option that the pension plan offers when individuals reach an eligible retirement age and, in some cases, plans will offer limited-time windows to take lump sum distributions or rollovers even when this option is not normally offered. This means that it is possible for individuals in some pension plans to have already received all of the benefits owed to them from a pension plan prior to the plan’s standard termination.
Additionally, pension plans may require individuals no longer working in employment covered by the plan to take a distribution or rollover of their benefit if it falls below a certain amount, even if that person has not reached an otherwise eligible age to receive retirement benefits. For many years this amount was $3,500, but this amount was increased to $5,000 in 1997 and then to $7,000 in 2024. The current lump sum value of someone’s pension benefit can fluctuate depending on interest rates at the time, so it is possible for the lump sum value of someone’s benefit to drop below the threshold for mandatory payments even though it had previously been too high.
It can be easy for individuals who were paid their benefits under these circumstances to later forget that they already received their benefit. This is because the payment may have been small, the payment may have taken place many years ago, and receiving the payment under these circumstances would not have required the individual to fill out the same paperwork that is normally necessary when proactively requesting a benefit payment.
If you make a POP claim, PBGC will need to determine whether your benefit was already paid to you as a lump sum. PBGC will conduct research using the records provided to it by the pension plan, but it may need you to provide additional documentation, such as old tax returns for years when a lump sum payment appears likely to have occurred. If you have a copy of a Social Security Administration’s Potential Private Pension Benefit Information notice it can also be helpful to determine whether you earned a pension benefit under a particular plan. Please note, however, that it is possible to receive this notice even if you received a lump sum payment already. Visit our Advocate resource titled So you received an SSA notice for more information.
Individuals who believe they were owed a benefit at the time of a plan’s standard termination, but were never paid through a lump sum distribution, rollover or annuity purchase, can submit a POP claim to PBGC. If PBGC determines that the POP claim is payable based on the documentation provided, PBGC will pay the individual’s benefit under its insurance program.