When a multiemployer plan terminates under section 4041A(a)(2) of the Employee Retirement Income Security Act, as amended, ERISA imposes certain obligations and rules on the plan sponsor.
Section 4041A of ERISA governs the payment of benefits to participants in terminated multiemployer plans. Section 4041A(c) provides that, except as provided in section 4041A(f)(1), the plan sponsor of a plan terminated by mass withdrawal shall --
- limit the payment of benefits to benefits which are nonforfeitable under the plan as of the date of termination, and
- pay benefits attributable to employer contributions, other than death benefits, only in the form of an annuity, unless plan assets are distributed in full satisfaction of all nonforfeitable benefits under the plan.
ERISA section 4041A(f)(1) permits a plan sponsor to pay a participant's entire nonforfeitable benefit attributable to employer contributions (other than a death benefit) in a form other than an annuity if the value of the benefit does not exceed $1,750. In addition, that section allows the PBGC to authorize the payment of benefits other than nonforfeitable benefits and the payment of nonforfeitable benefits with a value in excess of $1,750 in a form other than an annuity. The PBGC may authorize such payment if it determines that the payment is not adverse to the interests of participants and beneficiaries generally and does not unreasonably increase the PBGC's risk of loss with respect to the plan. Pursuant to its authority under section 4041A(f), the PBGC has granted blanket approval for payment of a Qualified Preretirement Survivor Annuity to the surviving spouse of a participant who dies after termination (see 29 CFR § 4041A.22(c) and (d)), if plan assets are sufficient to provide for all nonforfeitable benefits.
Closing out a terminated multiemployer plan
The plan sponsor of a plan terminated by mass withdrawal may distribute plan assets in full satisfaction of all nonforfeitable benefits under the plan. PBGC authorization of the distribution is not required if the rules below are followed.
To make such a distribution, the plan sponsor must determine each participant's entire nonforfeitable benefit under the plan and must ensure that each participant receives that amount. Each participant with a benefit payable as an annuity under the plan must receive that benefit in the form of an annuity unless the participant elects with spousal consent another form of distribution provided by the plan. Both the participant's election and the spouse's consent must be in writing. A participant may be offered additional forms of distribution (e.g., lump-sum payment of the commuted value of the annuity or transfer of such value to an individual account plan) that are permitted by the plan document. However, when a participant is afforded the opportunity to elect alternative forms of distribution, he or she must be advised of the estimated amounts of the annuity and of the alternative form(s) of distribution. A participant need not be offered an annuity if the present value of his or her annuity does not exceed $5,000.
However, if participants are being offered the opportunity to transfer their benefits to an individual account plan, their benefits may not be transferred without their consent. This applies even for a benefit that has a present value of $5,000 or less. In such cases, if an annuity is not offered, the participant must be offered a lump-sum distribution.
Under ERISA section 4219(c)(8), an employer's obligation to make withdrawal liability payments to a terminated plan ceases at the end of the plan year in which plan assets on hand (exclusive of withdrawal liability claims) are sufficient to meet the plan's obligations, as determined by PBGC. The PBGC has determined that, for purposes of section 4219(c)(8), a distribution of plan assets in full satisfaction of all nonforfeitable benefits under a plan establishes that the plan assets on hand are sufficient to meet all obligations of the plan.
We request that if a distribution of plan assets is made in full satisfaction of all nonforfeitable benefits under the plan, the PBGC be notified within 60 days of the date of distribution. This notification will enable the PBGC to remove the plan from the premium payment mailing list. Please direct such notifications to: Multiemployer Program Division (MEPD), Office of Insurance Programs (Suite 930), PBGC, 1200 K Street, N.W., Washington, D.C. 20005.
Duties if a terminated multiemployer plan is not closed out
If a plan does not close out by distributing plan assets in full satisfaction of all nonforfeitable benefits, section 4281 of ERISA imposes additional obligations on the plan sponsor. The most significant of these are the requirements relating to benefit reductions and benefit suspensions. Section 4281(b) requires that the value of the plan's nonforfeitable benefits and the value of plan assets, including outstanding claims for withdrawal liability, be valued as of the end of the plan year of termination and each plan year thereafter. The PBGC has published a final regulation containing rules for this valuation (29 CFR Part 4281). If the section 4281 valuation indicates that the value of nonforfeitable benefits exceeds the value of plan assets, the plan sponsor is required by section 4281(c)(1) to amend the plan to reduce benefits under the plan to the extent necessary to ensure that the plan's assets are sufficient, as determined and certified in accordance with regulations prescribed by the corporation, to discharge when due all of the plan's obligations with respect to nonforfeitable benefits. The benefits subject to reduction under section 4281(c) are benefits that are not guaranteeable benefits pursuant to section 4022A(b) of ERISA.
Once a plan has been amended to eliminate all benefits that are nonguaranteeable under section 4022A(b), the plan sponsor is required by section 4281(d) to monitor the plan̓s solvency. If the plan becomes insolvent (i.e., its available resources are insufficient to pay benefits due under the plan for a plan year), the plan sponsor is required to suspend the payment of benefits that cannot be paid from the plan's available resources, but not below the level of benefits guaranteed by PBGC under section 4022A(c). If the plan's available resources are less than the amount necessary to pay benefits at the guaranteed level, the plan sponsor is required to apply to the PBGC for financial assistance so that benefits can be paid at the guaranteed level. The PBGC has published a final regulation containing rules for the administration of plans that have terminated by mass withdrawal, including solvency determinations and notices to participants, beneficiaries and the PBGC of benefit reductions and suspensions (29 CFR Part 4041A).
Collection of withdrawal liability
The plan sponsor has a statutory duty to determine, assess, and collect withdrawal liability if the plan is underfunded at termination. ERISA provides special rules regarding withdrawal liability in the case of a mass-withdrawal-termination. Employers may lose the benefit of any de minimis reduction under section 4209(c) and the 20-year payment limitation under section 4219(c)(1)(B). In addition, section 4219(c)(1)(D) requires that all unfunded vested benefits be allocated among all such employers. The PBGC has issued a final regulation that establishes rules for redetermination of withdrawal liability upon mass withdrawal (29 CFR Part 4219). (As noted above, the distribution of plan assets in full satisfaction of all nonforfeitable benefits results in the cessation of employers’ withdrawal liability payment obligations.)