A pension plan may be terminated only by following certain specific rules. A plan that has enough money to pay all benefits owed participants and beneficiaries may terminate in a standard termination. For each participant or beneficiary, the plan administrator either purchases an annuity from an insurance company or, if the plan permits, pays the benefit owed in another form (such as a lump sum).
Filing a Standard Termination
PBGC's regulation Part 4041 sets out the various notices and filing requirements for effecting a standard termination. Required forms include:
- Standard Termination Notice (Form 500)
- Post-Distribution Certification for Standard Termination (Form 501)
The standard termination forms and instructions are available on PBGC’s Forms for Practitioners and Employers webpage.
No. A valid standard termination filing requires original signatures by the plan administrator on the Forms 500 (Standard Termination Notice) and 501 (the Post-Distribution Certification) and by the enrolled actuary on the Schedule EA-S (the Standard Termination Certification of Sufficiency). See GENERAL INSTRUCTIONS FOR FORM 500 AND 501 under the Standard Termination Filing Instructions for more information.
Plan termination filings, standard-termination–related inquiries and coverage requests should be sent to:
Pension Benefit Guaranty Corporation Standard Termination Compliance Division Processing and Technical Assistance Branch 1200 K Street NW Washington, DC 20005-4026
The plan administrator should notify PBGC of a decision not to proceed with a termination after having filed a Form 500 (Standard Termination Notice) with the agency. PBGC will contact the plan administrator for information if the agency fails to receive all required filings. Correspondence should be addressed to:
Pension Benefit Guaranty Corporation Technical Assistance Branch 1200 K Street NW Washington, DC 20005-4026
In the Notice of Intent to Terminate that is provided to affected parties, the plan administrator must inform them that they will be notified if the termination is canceled. The plan administrator therefore should notify affected parties promptly after deciding not to terminate the plan. Thereafter, if a decision is made to again proceed with the termination, the process must begin with a new date of plan termination and Notice of Intent to Terminate.
A Notice of Intent to Terminate (NOIT) must be issued to affected parties (other than the PBGC) at least 60 days and 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, and employee organizations representing participants. (See 29 CFR 4041.23) A model NOIT is provided in Appendix B of the standard termination filing instructions.
A Notice of Plan Benefits must be issued to participants, beneficiaries of deceased participants, and alternate payees no later than the time the plan administrator files the Standard Termination Notice (PBGC Form 500) with the PBGC. (See 29 CFR 4041.24)
A Standard Termination Notice (PBGC Form 500, including the Schedule EA-S) must be filed with the PBGC on or before the 180th day after the proposed termination date. (See 29 CFR 4041.25) Note:The PBGC has 60 days after receiving a complete Form 500 to review the termination for compliance with the law and regulations. (See 29 CFR 4041.26)
A Notice of Annuity Information must be provided to affected parties other than the PBGC no later than 45 days before the distribution date if benefits may be distributed in an annuity form. (See 29 CFR 4041.23 (b)(5) and 4041.27)
A Schedule MP and the applicable attachment(s) must be sent to the PBGC if the plan has missing participants. (See 29 CFR Part 4050)
A Notice of Annuity Contract must be provided to participants receiving their plan benefits in the form of an annuity no later than 30 days after the contract is available. (See 29 CFR 4041.28 (d))
A Post-Distribution Certification (PBGC Form 501) must be filed with the PBGC no later than 30 days after all plan benefits are distributed. The PBGC will assess a penalty for late filings only to the extent the certification is filed more than 90 days after the distribution deadline (See 29 CFR 4041.29)
Distribution of Benefits
Yes. A rollover of an amount exceeding a plan's de minimis cash-out level is an optional form of distribution that, when elected by a married participant, is subject to spousal consent. The plan may have a cash-out level of up to $5,000 without spousal consent. Distributions from the plan must comply with the written terms of the plan as well as the requirements of ERISA.
Yes. One purpose of the notice is to help participants make informed elections between lump sums and annuity benefits. Also, even a participant who has already elected a lump sum may change the election. This notice is not required in the case of a participant or beneficiary who will receive a nonconsensual de minimis cash-out.
Yes, there is a deadline for distributing assets to provide for all benefits under the plan, either by paying lump sums (as permitted) or buying an annuity contract. The deadline is normally the later of (a) 180 days after the end of the PBGC's 60-day (or extended) review period or (b) if the plan administrator has timely submitted a valid IRS determination letter request, 120 days after receipt of a favorable determination letter. The deadline may be extended. (See the instructions for the plan termination forms booklet for more details .) (This deadline does not apply to distributions of excess assets to participants or to the plan sponsor.)
You may either purchase an annuity from an insurance company or transfer the value of the benefit to PBGC. Regardless of the option you select, information on how missing participants are handled must be reported to PBGC. See “How to Handle Missing Participants” for more information.
No. The PDC is due 30 days after you complete distribution in satisfaction of all plan benefits. The PDC includes a plan administrator's certification that assets in excess of those needed to satisfy benefit liabilities have been or will be distributed in accordance with applicable provisions of ERISA and implementing regulations. PBGC will not assess a penalty if the PDC is filed within 90 days after the deadline for completing the distribution.
PBGC has provided guidance in Technical Updates 07-3 and 08-4:
- Technical Update 07-3 provides guidance where the plan's termination date is before the effective date of the PPA 2006 changes to the interest rate and mortality table used in calculating minimum lump sum values. In these cases, the PPA 2006 changes do not apply. Minimum lump sums are determined by pre-PPA 2006 rules regardless of when the lump sum is paid.
- Technical Update 08-4 provides guidance where the plan's termination date is on or after the effective date of the PPA 2006 changes to the interest rate and mortality table used in calculating minimum lump sum values. In these cases, assuming the plan was amended to reflect the PPA 2006 changes before termination, the interest rate basis and mortality assumption are tied to the plan year in which the payment was made, not the plan year in which the plan terminated. For example, assume a calendar year plan is amended in 2008 to reflect PPA 2006 minimum lump sum assumptions and terminates on July 1, 2009. Also assume that the plan has a one-year stability period and a two-month lookback. Therefore, a lump sum paid in 2010 is calculated using the following assumptions:
- Interest-based on the phase-in percentage for the plan year beginning in 2010 and the November 2009 rates. Accordingly, a lump sum paid in 2010 would be determined using a blended rate based on a 60 percent weighting of the November 2009 segment rates and a 40 percent weighting of the November 2009 30-year Treasury rate.
- Mortality-based on the RP-2000 unisex mortality table project, in accordance with IRS rules, for annuity starting dates in 2010.
Standard Termination Audits
Plans are selected from all standard terminations completed during the target period to meet our statutory requirement of a statistically significant sample. Currently, PBGC selects all plans with a participant count of more than 300 for audit. For plans with a participant count of 300 or fewer, PBGC randomly selects plans to audit. PBGC also may audit a plan when we have reason to believe there may be a problem (for example, when we receive a complaint by plan participants or a plan practitioner). In addition, PBGC audits all plans that distribute plan assets in satisfaction of plan liabilities before or without filing a Standard Termination Notice (Form 500) in accordance with the standard termination regulations. (PBGC reserves the right to take any other appropriate action in such circumstances.)
PBGC requires that participants and beneficiaries be made whole. For example, if participants did not receive all of the benefits to which they were entitled, the plan administrator must distribute additional benefits; or if participants were not given all of the options available to them under the plan, the plan administrator must provide those options and honor any changes requested. If the plan administrator does not cooperate in correcting errors, PBGC has the authority to nullify the termination or may ask a court to direct the additional payments to be made.
While PBGC makes the determination whether additional amounts are owed to participants, the income tax consequences for the plan sponsor, plan, and plan participants would be determined by Internal Revenue Code rules and regulations. You may wish to ask the IRS or your tax advisor(s) for specific guidance.
Conversion of a defined benefit plan into a defined contribution plan (whether a target benefit, profit-sharing, 401(k), or other type of defined contribution plan) is a voluntary termination of the defined benefit plan and is subject to all the rules and requirements governing terminations of defined benefit plans. This includes all notices to participants and beneficiaries and filings with PBGC. Benefit elections and spousal consents are governed by the applicable provisions of the Internal Revenue Code and the implementing regulations.
For plan termination and coverage inquiries and requests (e.g., requests for plan termination-related forms and booklets, questions about the missing participants program) or other plan-related questions (e.g., participant notice requirements) call us at 800-736-2444. For TTY/ASCII users, call the federal relay service toll-free at 800-877-8339 and ask to be connected to 800-736-2444.