Plan Terminations and the PBGC: A Refresher

Editor’s Note: This is the third of a four-part series concerning a recent ASPPA webinar by Kelsey Mayo, ASEA Director of Regulatory Policy and Partner at Poyner & Spruill LLP, in which she took a look at the basics about plan freezes and terminations in the context of current circumstances and regulations. The discussion put a special emphasis on compliance, since knowledge of the procedures for these functions can be helpful in avoiding mistakes, complications and even penalties. This first installment, on freezing a DB plan, is here; the second, on terminating a plan, is here. 

Plans covered by the PBGC must follow the PBGC’s Standard Termination Process:

• Select a proposed termination date. 
• Issue a Notice of Intent to Terminate to affected parties. This must be done at least 60 days and not more than 90 days before the proposed termination date. A good sample notice is provided.  
• Issue a Notice of Plan Benefits to participants, beneficiaries and alternate payees. This is to be done no later than the filing of PBGC Form 500 Standard Termination Notice. 
• File PBGC Form 500, Standard Termination Notice, including the Schedule EA-S, on or before the 180th day after the proposed termination date. The PBGC has 60 days after receiving a Form 500 to review a termination for compliance.
• Provide a Notice of Annuity Provider to affected parties. This must be done no later than 45 days before distribution date, if benefits may be distributed as annuity.
• Distribute plan assets to satisfy all benefits by distribution deadline. Distributions cannot begin until the PBGC’s review period ends.  
• The distribution deadline is the later of: (1) 180 days after PBGC’s 60-day review period expires; or (2) 120 days after receipt of FDL if the plan administrator submits a valid request for an IRS determination letter before filing Form 500.
• Distributions must follow the rules for missing participants, if applicable.
• Provide a Notice of Annuity Contract. This is to be provided to participants who choose to receive as an annuity, and done no later than 30 days after the annuity contract is available.
• File a Post-distribution Certification PBGC Form 501. This is to be done no later than 30 days after all benefits are distributed. The PBGC may assess a late penalty if it is filed more than 90 days after benefits are distributed, Mayo warned.

Distress Terminations 

When there is a distress termination, the PBGC must determine that the plan sponsor and each affiliate meet one of the following (not necessarily the same factor): 

• a bankruptcy petition has been filed, either concerning a liquidation or a reorganization about which the bankruptcy court has determined company will not be able to reorganize with the plan intact and approves the plan termination; 
• the entity cannot continue in business unless the plan is terminated; or 
• the costs of providing pension coverage have become unreasonably burdensome only because of a decline in the number of employees the plan covered. 

Steps to Take. When there is a distress termination, said Mayo, the following steps should be taken.

• A pre-filing consultation call with the PBGC’s Corporate Finance and Restructuring Department is recommended; Mayo suggests discussing the filing process and ensuring that the filing of a distress termination is appropriate.
• Select a proposed termination date; it will be established by the plan administrator and agreed to by PBGC. 
• Identify which of the four distress tests each plan sponsor and affiliate satisfy.
• Issue a Notice of Intent to Terminate (NOIT) to affected parties 60–90 days before proposed termination date. The NOIT is to be filed with the PBGC on PBGC Form 600; the PBGC will then make a tentative determination whether distress termination can proceed. 
• Reduce the benefits of participants in pay status to the estimated benefit amounts payable on termination under ERISA. This is to begin on the proposed termination date. 
• File a Distress Termination Notice (PBGC Form 601) with the PBGC on or before the 120th day after the proposed termination date.

PBGC-Initiated Terminations

When there are insufficient assets to pay benefits, the PBGC initiates a termination to protect participants and pension insurance system. “This is kind of the hammer,” Mayo said, and often involves abandonment. It may occur when: 

• the plan has not met the minimum funding requirements;
• the plan cannot pay current benefits when due; 
• a lump sum payment has been made to a participant who is a substantial owner of the sponsoring company; or
• a loss to the PBGC is expected to increase unreasonably if the plan is not terminated. 

Tips

Mayo offered some tips on the PBGC termination process.

• Review rules for computing due dates, consider creating a termination schedule.
• Request extensions when needed.
• Begin collecting data necessary to complete termination process, including participant and beneficiary information and addresses, as well as the location and value of plan assets. 
• If considering a distress termination, a pre-conference consultation is valuable. 
• Remember that all plans with at least 300 participants will be audited. The PBGC will randomly select smaller plans for audit as well. 

Available on Demand

The ASPPA Webcast “Plan Freezes and Terminations” is available on demand. More information is available here.