Types of Terminations

ERISA provides for three types of single-employer plan terminations: standard, distress, and involuntary. Standard Termination

A standard termination occurs when a plan administrator decides to terminate a plan that has assets sufficient to meet its benefit liabilities. The PBGC's involvement in a standard termination is minimal, and its role is basically to confirm that the above requirements have been met. Distress Termination

A distress termination occurs when a plan administrator seeks to terminate a plan that does not have sufficient assets to cover all the benefits owed to plan participants and beneficiaries. If the criteria are met, the PBGC must then determine whether the plan's assets are sufficient to pay the benefits guaranteed by the PBGC and/or meet all benefit liabilities. Involuntary Termination

An involuntary termination occurs when the PBGC decides a plan should be terminated. The PBGC must initiate termination proceedings once it determines a plan does not have assets available to pay benefits currently due. The PBGC may seek to terminate a plan if
the plan has not met the minimum funding requirements or there has been notification from the Treasury Secretary that a notice of deficiency concerning the initial tax on a funding deficiency has been mailed; the plan will not be able to pay benefits when due; a distribution of at least $10,000 has been made to a participant who is a substantial owner of the sponsoring company and, immediately after the distribution, the plan has unfunded nonforfeitable benefits; or the long-run loss to the PBGC may reasonably be expected to increase unreasonably if the plan is not terminated. Employer Liability

		Standard Termination

In a standard termination, the plan sponsor has no further liability to the PBGC or plan participants. The plan sponsor may be able to recapture any assets remaining after participants have received their share, which is known as a "reversion." Distress and Involuntary Terminations

In a distress termination and an involuntary termination, the plan sponsor and members of its controlled group are jointly and severally liable to the PBGC for, among other things, the amount that the benefit liabilities exceed plan assets, with interest, at termination. Enforcement and Penalties

The PBGC is broadly authorized to make any investigation it deems necessary to enforce ERISA and may assess a penalty against anyone who fails to provide a required notice or other material information. In addition, plan participants, beneficiaries, fiduciaries, and sponsors who are adversely affected by an action of another (other than the PBGC) that violates the termination provisions may file suit in U.S. district court to enjoin the action or obtain other equitable relief. Employee organizations representing affected participants and beneficiaries are also able to file a claim, and the PBGC has the right to intervene in any action.
Questions may arise regarding the pensions of private-sector workers and how pension plans may be terminated, particularly in instances where a company experiences financial difficulties. The Employee Retirement Income Security Act (ERISA) regulates plan terminations and provides for three types of single-employer plan terminations—standard, distress, and involuntary—and imposes different responsibilities on the Pension Benefit Guaranty Corporation (PBGC) for each type.
A standard termination occurs when a plan administrator decides to terminate a plan that has assets sufficient to meet its benefit liabilities. The PBGC's involvement in a standard termination is minimal, with its role basically limited to confirming all legal requirements have been met. In a standard termination, the plan sponsor has no further liability to the PBGC or plan participants. The sponsor may be able to recapture any assets remaining after participants have received their share, although the reversion may be subject to tax.
A distress termination occurs when a plan administrator seeks to terminate a plan that does not have sufficient assets to cover all the benefits owed to plan participants and beneficiaries. The PBGC is responsible for ensuring that all criteria for termination have been met, as well as for determining whether the plan's assets are sufficient to pay the guaranteed benefits and/or meet all benefit liabilities. Meanwhile, the plan sponsor and members of its controlled group are jointly and severally liable to the PBGC for the amount that the benefit liabilities exceed plan assets, with interest, at termination.
An involuntary termination occurs when the PBGC decides a plan should be terminated. The agency must initiate termination proceedings once it determines a plan does not have assets available to pay benefits currently due. It may seek termination under certain circumstances, including the plan has not met the minimum funding requirements; the plan will not be able to pay benefits when due; or the long-run loss to the PBGC may be expected to increase unreasonably if the plan is not terminated. In an involuntary termination, the sponsor and controlled group are jointly and severally liable to the PBGC for the unfunded liabilities.
The PBGC is broadly authorized to make any investigation it deems necessary to enforce ERISA and may assess a penalty against anyone who fails to provide a required notice or other material information. In addition, plan participants, beneficiaries, fiduciaries, and sponsors who are adversely affected by an action of another that violates the termination provisions may file suit in U.S. district court to enjoin the action or obtain other equitable relief. Employee organizations representing affected participants and beneficiaries are also able to file a claim, and the PBGC has the right to intervene in any action.