The Pension Benefit Guaranty Corporation and Single-Employer Plan Terminations

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Recent high-profile terminations of defined benefit pension plans have focused attention on the
process for terminating plans and the Pension Benefit Guaranty Corporation (PBGC). The
Employee Retirement Income Security Act (ERISA) regulates plan terminations. It provides for
three types of single-employer plan terminations—standard, distress, and involuntary—and
imposes different responsibilities on the PBGC for each type. This report discusses ERISA’s
procedures for terminating single-employer plans and the PBGC’s role in such terminations.

he Employee Retirement Income Security Act of 1974 (ERISA) includes a plan
termination insurance program for defined benefit pension plans. Defined benefit plans are
those where participants are promised a specified future benefit, which traditionally is an T

annuity beginning at retirement. Various types of pension plans are not covered by the insurance
program, including defined contribution plans (individual account plans), government plans, and ¹
church plans. The insurance program distinguishes between single-employer plans and
multiemployer plans (i.e., collectively bargained plans to which more than one company makes
contributions). This report discusses only the termination of single-employer plans.
The insurance program is administered by the Pension Benefit Guaranty Corporation (PBGC).
The PBGC has two primary responsibilities. First, it oversees plan terminations, which is the
focus of this report. Second, the PBGC pays the guaranteed benefits of terminated plans, subject
to statutory limitations. For more information on the PBGC and its payment of benefits, see CRS
Report 95-118, Pension Benefit Guaranty Corporation: A Fact Sheet, by John J. Topoleski.
ERISA provides for three types of single-employer plan terminations: standard, distress, and
involuntary. The plan administrator initiates a standard or distress termination, whereas the PBGC
initiates an involuntary termination.
A standard termination occurs when a plan administrator decides to terminate a plan that has ²
assets sufficient to meet its benefit liabilities. The plan administrator initiates the termination by ³
giving written notice to each affected party of the intent to terminate the plan between 60 and 90 ⁴
days in advance of the proposed termination date. He or she must then report information about
the plan to the PBGC, including a certification by an enrolled actuary that the plan’s assets are ⁵
sufficient to meet all benefit liabilities. The plan administrator is also responsible for informing
the plan participants and beneficiaries of the benefits due them, including the data and underlying ⁶
actuarial assumptions used to compute the benefits.
The PBGC’s involvement in a standard termination is minimal, and its role is basically to confirm
that the above requirements have been met. Upon receiving the plan information, the PBGC
generally has 60 days to review it and either approve the termination or send out a notice of ⁷
noncompliance. If the PBGC determines the requirements have been met, the termination
proceeds. The plan administrator then distributes the plan’s assets to participants and beneficiaries

¹^ERISA^§⁴⁰²¹^(b^);²⁹^U.S.C^.^§¹³²¹^(b^).
²^ERISA^§⁴⁰⁴¹^(b^);²⁹^U.S.C^.^§¹³⁴¹^(b^).
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⁵^ERISA^§⁴⁰⁴¹^(b⁾⁽²^)(A^{); 2}⁹^U.^S.^{C. §}¹³⁴¹⁽^b⁾⁽²^)(A^).
⁶^ERISA^§⁴⁰⁴¹^(b⁾⁽²^)(B);²⁹^U.^S.^{C. §}¹³⁴¹⁽^b⁾⁽²^)(B)^.
⁷^ERISA^§⁴⁰⁴¹^(b⁾⁽²^)(C);²⁹^U.^S.^{C. §}¹³⁴¹⁽^b⁾⁽²^)(C)^.

by purchasing annuities from a commercial insurer or by other permissible means.⁸ If there are
missing participants, the plan administrator may, after a diligent search, transfer their distributions ⁹
to the PBGC, which will hold them until the participants are found. The plan administrator’s ¹⁰
final action is to certify to the PBGC that the assets have been distributed, and the plan is
terminated.
A distress termination occurs when a plan administrator seeks to terminate a plan that does not ¹¹
have sufficient assets to cover all the benefits owed to plan participants and beneficiaries. The
plan may be terminated only if its contributing sponsor, or a member of the sponsor’s controlled ¹²
group, has (1) filed a petition for liquidation or reorganization in bankruptcy or insolvency
proceedings or (2) demonstrated that termination is required to enable payment of debts while
staying in business or to avoid unreasonably burdensome pension costs caused by a declining
workforce.
The plan administrator initiates a distress termination by giving written notice to each affected ¹³
party between 60 and 90 days in advance of the proposed termination date. He or she then must ¹⁴
file a distress termination notice with the PBGC. The notice includes information required by
the PBGC to determine whether the plan meets the criteria for a distress termination and a
certification by an enrolled actuary detailing the value of the plan assets and benefit liabilities.
Based on this information, the PBGC determines whether the distress termination criteria are met ¹⁵
and must notify the plan administrator as soon as practicable regarding its determination. If the
distress criteria have not been met, the plan continues to operate. If the criteria are met, the next
step is for the PBGC to determine whether the plan’s assets are sufficient to pay the benefits
guaranteed by the PBGC and/or meet all benefit liabilities. These amounts may be different
because, as mentioned, the benefits guaranteed by the PBGC under the plan insurance termination
program are subject to statutory limitations; therefore, the benefit liabilities owed under the plan
may exceed the benefits guaranteed by the PBGC. If the plan’s assets are not sufficient to pay the
guaranteed benefits, the PBGC must commence involuntary termination proceedings (discussed ¹⁶
below). Otherwise, the distress termination generally continues with the plan administrator
distributing the plan’s assets to participants and beneficiaries by purchasing annuities from a ¹⁷
commercial insurer or by other permissible means. If the plan administrator discovers during the
distribution that the plan’s assets are not sufficient to cover benefits, he or she must notify the

⁸^ER^I^S^A^{§ 4}⁰⁴¹⁽^b⁾⁽³⁾^;^{29 U}^.^S.C^.^{§ 1}³⁴¹⁽^b⁾⁽³⁾^.
⁹^ER^I^S^A^{§ 4}⁰⁵⁰^{; 2}⁹^U^.^S.C^.^§¹³⁵⁰^.
¹⁰^ERISA^§⁴⁰⁴¹^(b⁾⁽³^)(B);²⁹^U.^S.^{C. §}¹³⁴¹⁽^b⁾⁽³^)(B)^.
¹¹^ERISA^§⁴⁰⁴¹^{(c); 2}⁹^U.S^.^C.^§¹³⁴¹^(c).
¹²^For^pur^pos^e^s^of^the^plaⁿ^te^r^m^ina^t^ion^pr^ov^isⁱ^ons^{, “}^c^o^ntr^o^lle^{d g}^r^o^up^m^e^aⁿ^s^,^{in c}^oⁿⁿ^e^c^tio^{n w}^{ith a}ⁿ^y^pe^r^s^{on, a}^g^r^o^u^p
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¹⁵^ERISA^§⁴⁰⁴¹^(c)(2^)(C);²⁹^U^.^S.^{C. §}¹³⁴¹⁽^c)(2⁾⁽^C).
¹⁶^ERSIA^{§ 4}⁰⁴¹^(c^)(3)(B)(iii)^{; 2}⁹^U.S.C.^{§ 1}³⁴¹^(c^)(3)(B)(iiⁱ^).
¹⁷^ERISA^§⁴⁰⁴¹^(c)(3^{)(B)(i) an}^d⁽ⁱⁱ⁾^{; 2}⁹^U.S.C^.^§¹³⁴¹^(c)(3^{)(B)(i) an}^d^(ii).

PBGC, which may then be required to initiate an involuntary termination. If there are missing
participants, the plan administrator may transfer their distributions to the PBGC after a diligent ¹⁸
search. The plan administrator then certifies the distribution to the PBGC and the plan is
terminated.
An involuntary termination occurs when the PBGC decides a plan should be terminated.¹⁹ 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 the plan has been
notified by 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 lump-sum payment 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.
A trustee, who may be the PBGC, may be appointed to administer the plan until it is ordered to be ²⁰
terminated. The trustee may be appointed by a U.S. district court upon petition by the PBGC or
plan administrator, or the PBGC and plan administrator may agree to the appointment without
court involvement. Once appointed, the trustee is responsible for the plan’s administration, ²¹
including management of the plan’s assets.
After the PBGC has given notice to the plan administrator, the plan may be terminated in one of
two ways. First, the PBGC may file a petition with the U.S. district court for a ruling that the plan
must be terminated to protect the participants’ interests, to avoid an unreasonable deterioration of ²²
the plan’s financial condition, or to avoid an unreasonable increase in the PBGC’s liability. If a
trustee has been appointed, he or she may intervene in the proceeding. The PBGC may file the
petition regardless of whether there is a pending proceeding (1) involving bankruptcy, mortgage
foreclosure or equity receivership, (2) to reorganize, conserve or liquidate the plan or its property, ²³
or (3) to enforce a lien against the plan’s property. Furthermore, the court may stay any pending ²⁴
proceedings that involve plan property. If the court agrees with the PBGC that the plan should
be terminated, the court will then appoint a trustee, or authorize the existing trustee, to terminate
the plan.

¹⁸^ER^I^S^A^{§ 4}⁰⁵⁰^{; 2}⁹^U^.^S.C^.^§¹³⁵⁰^.
¹⁹^ER^I^S^A^{§ 4}⁰⁴²^{; 2}⁹^U^.^S.C^.^§¹³⁴²^.
²⁰^ERISA^§⁴⁰⁴²^(b^);²⁹^U.S.C^.^§¹³⁴²^(b^).
²¹^ERISA^§⁴⁰⁴²^(d^);²⁹^U.S.C^.^§¹³⁴²^(d^).
²²^ERISA^§⁴⁰⁴²^(c)(1^);²⁹^U^.^S.C.^§¹³⁴²⁽^c)(¹^).
²³^ERISA^§⁴⁰⁴²^{(e); 2}⁹^U.S^.^C.^§¹³⁴²^(e).
²⁴^ER^I^S^A^{§ 4}⁰⁴²⁽^f⁾^;^{29 U}^.^S.C^.^§¹³⁴²⁽^f⁾^.

Alternatively, the PBGC and plan administrator may agree to terminate the plan without court ²⁵
proceedings. There is no requirement under ERISA that plan participants and other interested
parties receive notice or an opportunity to be heard prior to the PBGC and plan administrator ²⁶
coming to an agreement to terminate the plan.
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.” A reversion may be subject to an
excise tax at a 20% rate, which is increased to 50% if the plan sponsor does not take certain ²⁷
actions, such as establishing a qualified replacement plan.
In a distress termination, 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 ²⁸
interest, at termination. The PBGC will have a claim to recover at least some of these amounts.
If successful, the PBGC will pay some of the recovery to plan participants as additional benefits
and will keep the remaining amount to help cover its losses.
The employer’s payment for the liability is due on the plan’s termination date. The PBGC is ²⁹
authorized to make arrangements with the liable parties for the payments, and any amount in
excess of 30% of the collective net worth of the sponsor and controlled group will be paid under ³⁰
commercially reasonable terms. In addition, the PBGC may claim a lien for up to 30% of the ³¹
collective net worth of the sponsor and controlled group. The PBGC may bring a civil action in
U.S. district court to enforce the lien, which generally must be filed within six years of the plan’s
termination date. The lien has the same priority as a federal tax lien in section 6323 of the Internal ³²
Revenue Code and is treated as a federal tax lien in bankruptcy proceedings.
In an involuntary termination, the sponsor and controlled group are jointly and severally liable to
the PBGC for the unfunded liabilities in the same manner as discussed above for a distress
termination. The sponsor and controlled group are also liable to the trustee for the outstanding
balance of the accumulated funding deficiencies, the outstanding balance of the funding

²⁵^ERISA^§⁴⁰⁴²^(c)(1^);²⁹^U^.^S.C.^§¹³⁴²⁽^c)(¹^).
²⁶^Se^e^Iⁿ^R^e^J^o^ne^s^&^L^a^ug^{hlin H}^o^u^r^ly^P^e^ns^ion^P^l^aⁿ^v^.^L^T^V^Ste^e^l^C^o^{., 8}²⁴^F.^2d¹⁹^{7 (}²^nd^Cⁱ^r^.¹⁹⁸⁷⁾^.
²⁷^Iⁿ^te^rⁿ^a^l^R^e^v^e^nue^C^ode^{§ 4}⁹⁸⁰^.
²⁸^ER^I^S^A^{§ 4}⁰⁶²⁽^b⁾⁽¹⁾^;^{29 U}^.^S.C^.^{§ 1}³⁶²⁽^b⁾⁽¹⁾^.
²⁹^ER^I^S^A^{§ 4}⁰⁶⁷^{; 2}⁹^U^.^S.C^.^§¹³⁶⁷^.
³⁰^ERISA^§⁴⁰⁶²^(b⁾⁽²^)(B);²⁹^U.^S.^{C. §}¹³⁶²⁽^b⁾⁽²^)(B)^.
³¹^ER^I^S^A^{§ 4}⁰⁶⁸^{; 2}⁹^U^.^S.C^.^§¹³⁶⁸^.
³²^ERISA^§⁴⁰⁶⁸^{(c); 2}⁹^U.S^.^C.^§¹³⁶⁸^(c).

deficiencies waived prior to termination, and the outstanding balance of the decreases in the ³³
minimum funding standard allowed prior to termination. These amounts are due, plus interest,
on the date of termination.
If a company sells or transfers a business with an underfunded pension plan in order to evade
liability and the plan is ended within five years of the sale or transfer, ERISA provides that the ³⁴
company can still be treated as a contributing sponsor at the plan’s termination date. Thus, the
company may be held liable for the unfunded liabilities.
The PBGC is broadly authorized to make any investigation it deems necessary to enforce ³⁵
ERISA and may assess a penalty against anyone who fails to provide a required notice or other ³⁶
material information. The penalty is limited to $1,000 for each day the failure occurs. 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 ³⁷
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.
If the PBGC determines that a plan should not be terminated, it may stop the termination ³⁸
proceedings and restore the plan. The PBGC may even restore a terminated plan. When
determining whether a plan should be restored, the PBGC may look at subsequent pension plans ³⁹
sponsored by the employer. The PBGC may be particularly interested in any subsequent plan
that appears to be a “follow-on plan.” A follow-on plan is designed so that when its benefits are
added to the benefits being paid by the PBGC under the termination insurance program for the
first plan, the total benefits are roughly the same as the first plan’s benefits. Thus, the employees
receive approximately what they expected to receive under the first plan, but the PBGC, rather
than the employer, is responsible for paying some of the benefits.

³³^ERISA^§⁴⁰⁶²^{(c); 2}⁹^U.S^.^C.^§¹³⁶²^(c).
³⁴^ER^I^S^A^{§ 4}⁰⁶⁹^{; 2}⁹^U^.^S.C^.^§¹³⁶⁹^.
³⁵^ERISA^§⁴⁰⁰³^{(a); 2}⁹^U.S^.^C.^§¹³⁰³^(a).
³⁶^ER^I^S^A^{§ 4}⁰⁷¹^{; 2}⁹^U^.^S.C^.^§¹³⁷¹^.
³⁷^ER^I^S^A^{§ 4}⁰⁷⁰^{; 2}⁹^U^.^S.C^.^§¹³⁷⁰^.
³⁸^ER^I^S^A^{§ 4}⁰⁴⁷^{; 2}⁹^U^.^S.C^.^§¹³⁴⁷^.
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