A plan that does not have enough money to pay all benefits owed participants and beneficiaries may be terminated only if the employer and the members of the employer's "controlled group" of affiliated companies each meets one of the distress termination tests. To do so, however, the employer must prove that the controlled group is financially unable to support the plan. PBGC takes over the plan as trustee and uses its own assets and any remaining assets in the plan to make sure that current and future retirees of the plan receive their pension benefits, within the legal limits. PBGC also tries to collect plan underfunding from employers and shares a portion of its recoveries with participants and beneficiaries.
A company in financial distress may seek to 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.
If a plan does not qualify for a distress termination, PBGC will notify the plan sponsor that the conditions for distress termination have not been met and the plan will remain ongoing under close monitoring by PBGC.
Below is an overview of the steps involved in filing a distress termination. For detailed information, see, Distress Termination Filing Instructions. The forms can be found on PBGC's Forms for Practitioners page.
The distress termination forms require the submission of distress test information as part of the Form 600 filing, rather than as part of the Form 601 filing as was the case with the prior version of the forms. This change will help PBGC determine whether distress criteria have been met at an earlier date. If you initiated a termination using a prior version of the forms, please contact PBGC (numbers given below at "Contact info for distress terminations").
Steps for filing a distress termination:
- Select a proposed termination date.
- Identify which of the four distress tests can be satisfied by each contributing sponsor and controlled group member. Each controlled group member can satisfy a different test.
- Issue a notice called "Notice of Intent to Terminate (NOIT)" to all "affected parties" at least 60 days but not more than 90 days before the proposed termination date. Affected parties include participants, beneficiaries of deceased participants, alternate payees under qualified domestic relations orders, employee organizations representing participants, and the PBGC. The form for issuing a NOIT (Form 600) is provided in the downloadable forms package.
- Beginning on the proposed termination date, reduce the benefits of those participants currently being paid to the estimated benefit amounts which will be payable by PBGC upon termination under ERISA in accordance with 29 CFR Part 4022, Subpart D.
- File a Distress Termination Notice (PBGC Form 601, including the Schedule EA-D) with the PBGC on or before the 120th day after the proposed termination.
- File participant and benefit information with the PBGC by the later of (1) 120 days after the proposed termination date or (2) 30 days after receipt of the PBGC's determination that the requirements for a distress termination have been satisfied.
- If the plan has sufficient assets to provide at least all guaranteed benefits: The plan must then meet certain requirements for notifying participants, distributing benefits (including benefits of Missing Participants) and filing a Post-Distribution Certification (PBGC Form 602) with the PBGC. See the forms package for more details.
- If a plan terminates in a distress termination without sufficient assets to pay all benefit liabilities, the contributing sponsor(s) and each controlled group member are jointly and severally liable to the PBGC under ERISA section 4062(b) for the total amount of the unfunded benefit liabilities determined in accordance with 29 CFR 4022 Subpart D.
Summaries of how PBGC staff has responded to questions about various issues, including bankruptcy and distress terminations are available on PBGC’s Staff Responses to Practitioner Questions webpage. The responses reflect the views of individual staff members and do not represent the official position of PBGC.