Following are answers to questions frequently asked by employers and pension professionals relating to termination of defined benefit pension plans insured by the Pension Benefit Guaranty Corporation. If you do not find the answer to your particular question, please contact our customer service representatives for assistance at the addresses and telephone numbers listed below.
- What types of plans are insured by PBGC?
- Does PBGC cover plans that only cover self-employed individuals?
- If my plan, in the normal course of administration, pays out all benefits of all participants except substantial owners of the sponsoring company, is the plan still covered by PBGC? What do I need to do?
- What is a plan termination?
- May I file my signed standard termination forms by fax?
- What happens if the plan administrator decides not to terminate the plan after a filing has been made with PBGC?
- Do I have to give spousal election forms to participants whose distributions exceed the plan's de minimis cash-out level if the participants are just rolling over their distributions to another employer-sponsored plan or an individual retirement account?
- Do plan administrators have to provide the notice of identity of insurers to participants expected to elect lump sums?
- Should I wait to file the Post-Distribution Certification (PDC) until all assets, including excess assets, have been distributed?
- What are the premium payment rules regarding terminating plans and why are payment notices sometimes sent to terminated plans?
- Why do I continue to receive premium filing booklets for my terminated plan, and how do I stop this mailing?
- How does PBGC decide which standard terminations to audit?
- Does PBGC nullify the termination if it finds a distribution error during the standard termination audit?
- How do I close out my plan if I can't locate every participant and beneficiary?
- My plan isn't terminating but I have a number of "missing participants." May I turn their benefits over to PBGC?
- Is a "diligent search" required if an annuity is purchased for a missing participant?
- What requirements must be met for a "diligent search" before money can be paid to PBGC?
- When must a "diligent search" be made?
- May I use PBGC's Missing Participants Program for a participant whose whereabouts are known but who refuses to return the election forms?
- Does 20% tax withholding apply to the transfer of a participant's benefit to PBGC under the Missing Participants Program?
- If a PBGC audit finds that additional amounts are due participants after I have completed benefit distributions to all participants in a standard termination, what are the tax consequences of the subsequent supplemental distributions?
- When replacing a defined benefit plan with a defined contribution plan, may the assets in the defined benefit plan be merged or transferred directly into the defined contribution plan without participant and spousal consent?
- Where should checks and filings for standard and distress terminations be sent to PBGC?
- Where should inquiries be directed?
PBGC insures most private-sector defined benefit pension plans. This is the type of plan that promises to pay a specified monthly benefit at retirement, usually based on salary or a stated dollar amount and years of service. PBGC does not insure certain types of defined benefit plans, such as government retirement plans or plans of professional service employers (such as doctors and attorneys) with 25 or fewer active participants. PBGC also does not insure defined contribution plans, (i.e., plans in which benefits are based solely on the assets in the participant's individual account, such as profit-sharing, 401(k), and target benefit plans).
Plans covering only self-employed individuals are not automatically exempt from PBGC coverage. However, PBGC does not cover a plan that covers only self-employed individuals if all participants and beneficiaries are substantial owners (i.e., each participant or beneficiary owns more than 10% of the business). A plan that covers a self-employed person who is not a substantial owner (e.g., a partner who owns 10% or less of the partnership) is covered by PBGC unless the plan is exempt for another reason (such as the exemption for plans maintained by professional service employers that at all times since September 1974 have had 25 or fewer active participants).
(For purposes of PBGC coverage of a defined benefit pension plan, a substantial owner is defined to be an individual who owns the entire interest in an unincorporated trade or business or, generally, more than 10% of a partnership or corporation.)
3. If my plan, in the normal course of administration, pays out all benefits of all participants except substantial owners of the sponsoring company, is the plan still covered by PBGC? What do I need to do?
No, the plan would no longer be covered by PBGC. However, PBGC will not know to remove your plan from the premium database unless you notify us of this occurrence by writing to PBGC, Technical Assistance Branch, Suite 930, 1200 K Street NW, Washington, DC 20005-4026.
A premium is due for the last plan year in which the plan had at least one participant who was not a substantial owner. If the plan subsequently terminates after it has ceased being covered by PBGC, no termination filing with PBGC would be required. If the plan continues and non-substantial-owner employees enter the plan in a subsequent plan year, the plan will become covered again and must begin paying premiums again.
TYPES OF PLAN TERMINATIONS
A pension plan is 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 a lump sum.
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.
Under certain conditions, PBGC may terminate a pension plan, even if a company has not filed to terminate the plan on its own initiative. PBGC will take such action if a plan does not have sufficient assets to pay benefits currently due and may do so in other cases. This is called an involuntary termination.
STANDARD TERMINATION FILINGS
No. A valid standard termination filing requires original signatures by the plan administrator on the Forms 500 and 501 and by the enrolled actuary on the Schedule EA-S. See GENERAL INSTRUCTIONS FOR FORM 500 AND 501 under the Standard Termination Filing Instructions for more information. (The Form 500 is the Standard Termination Notice; the Form 501 is the Post-Distribution Certification; the Schedule EA-S is the Standard Termination Certification of Sufficiency.)
While there is no requirement that the plan administrator 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 for the termination. The plan administrator may therefore wish to inform PBGC of a decision not to proceed to avoid needless communications. Correspondence should be addressed to PBGC, Technical Assistance Branch, Suite 930, 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.
DISTRIBUTION OF BENEFITS
7. Do I have to give spousal election forms to participants whose distributions exceed the plan's de minimis cash-out level if the participants are just rolling over their distributions to another employer-sponsored plan or an individual retirement account?
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 (increased from $3,500 by the Taxpayer Relief Act of 1997, effective for plan years beginning after 8/5/97) 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.
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. However, under a new penalty policy adopted in March 1997 to provide penalty relief, PBGC will not assess a penalty if the PDC is filed within 90 days after the deadline for completing the distribution.
PREMIUMS FOR TERMINATED PLANS
10. What are the premium payment rules regarding terminating plans and why are payment notices sometimes sent to terminated plans?
STANDARD TERMINATION AUDITS
Plans are randomly selected from among all terminations completed during the target period, to meet our statutory requirement of a statistically significant sample. 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).
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.
PBGC's Missing Participants Program, created by the Retirement Protection Act of 1994, locates people owed benefits from PBGC-insured defined benefit pension plans closed out through a standard termination. An employer choosing to terminate a fully funded pension plan must distribute all plan benefits to participants and beneficiaries before completing the plan's termination. If someone cannot be found after a diligent search, the plan administrator must either purchase an annuity from a private insurer in that person's name and provide information on the missing person and insurer to PBGC or transfer the value of the person's benefit to PBGC's Missing Participants Program.
Click here for Pension Search fact sheet on PBGC's Missing Participants Program.
No. ERISA limits PBGC's Missing Participants Program to terminated plans. Ongoing defined benefit plans and plans that aren't covered by PBGC are not eligible for this program.
A diligent search is required by law for any missing participant, whether you pay a benefit directly to PBGC for the participant or purchase an annuity.
A plan administrator frequently learns a participant or beneficiary is missing after sending the Notice of Intent to Terminate to the person's last known address. After learning that the person is missing, the plan administrator is required to conduct a diligent search. A diligent search includes seeking out any beneficiaries of the missing participant whose names and addresses are known to the plan administrator. It also includes use of a commercial locator service, such as a credit reporting firm. The participant may not be charged for the search. The plan administrator must complete the diligent search before transferring money to PBGC for the person's benefit.
A diligent search must begin not more than 6 months before notices of intent to terminate are issued. It must be carried on in such a manner that if the individual is found, distribution to the individual can reasonably be expected to be made in a timely manner.
No. The Missing Participants Program is only for unlocatable participants. The plan administrator should purchase an annuity to provide benefits if the participant fails to make an election.
No. PBGC has received an information letter from the Internal Revenue Service regarding the tax treatment of amounts transferred to PBGC for a missing participant.
21. If a PBGC audit finds that additional amounts are due participants after I have completed benefit distributions to all participants in a standard termination, what are the tax consequences of the subsequent supplemental distributions?
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.
OTHER STANDARD TERMINATION QUESTIONS
22. When replacing a defined benefit plan with a defined contribution plan, may the assets in the defined benefit plan be merged or transferred directly into the defined contribution plan without participant and spousal consent?
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.
ADDRESSES AND PHONE NUMBERS
It is very important that the correct mailing address be used, in particular for the submission of checks and forms, as there are different addresses for different situations. If you are unsure of whether you have the correct address, please contact PBGC first for clarification ( click here for the telephone numbers and addresses of PBGC's customer service representatives).
Plan terminations and coverage requests should be sent to:
Pension Benefit Guaranty Corporation
Technical Assistance Branch, Suite 930
1200 K Street NW
Washington, DC 20005-4026
Missing participant program payments and vouchers should be sent to:
Pension Benefit Guaranty Corporation
P.O. Box 64523
Baltimore, MD 21264-4523
The mailing address for premium checks and filings may be found in PBGC's FAQs on Premiums.
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):
For TTY/TDD users, call the federal relay service toll-free at 1-800-877-8339 and ask to be connected to the number listed above.
Pension Benefit Guaranty Corporation
Technical Assistance Branch, Suite 930
1200 K Street NW
Washington, DC 20005-4026
See PBGC's FAQs on Premiums for the appropriate telephone number and address for premium-related inquiries and requests.