Order Code RS22624
March 14, 2007
The Pension Benefit Guaranty Corporation
and Single-Employer Plan Terminations
Jennifer Staman and Erika Lunder
Legislative Attorneys
American Law Division
Summary
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.
The 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 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 church plans.1 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 Paul J. Graney.
1 ERISA § 4021(b); 29 U.S.C. § 1321(b).

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Types of Terminations
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.
Standard Termination. A standard termination occurs when a plan administrator
decides to terminate a plan that has assets sufficient to meet its benefit liabilities.2 The
plan administrator initiates the termination by giving written notice to each affected party3
of the intent to terminate the plan between 60 and 90 days in advance of the proposed
termination date.4 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 sufficient to meet
all benefit liabilities.5 The plan administrator is also responsible for informing the plan
participants and beneficiaries of the benefits due them, including the data and underlying
actuarial assumptions used to compute the benefits.6
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 noncompliance.7 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 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 to the
PBGC, which will hold them until the participants are found.9 The plan administrator’s
final action is to certify to the PBGC that the assets have been distributed,10 and the plan
is terminated.
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.11 The plan may be terminated only if its
2 ERISA § 4041(b); 29 U.S.C. § 1341(b).
3 Affected parties include plan participants, beneficiaries of deceased participants, alternate
payees under qualified domestic relations orders, employee organizations representing plan
participants, and any person who has been designated to receive notice on behalf of the affected
party. ERISA § 4001(a)(21); 29 U.S.C. § 1301(a)(21).
4 ERISA § 4041(a)(2); 29 U.S.C. § 1341(a)(2); 29 C.F.R. § 4041.23(a).
5 ERISA § 4041(b)(2)(A); 29 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).
8 ERISA § 4041(b)(3); 29 U.S.C. § 1341(b)(3).
9 ERISA § 4050; 29 U.S.C. § 1350.
10 ERISA § 4041(b)(3)(B); 29 U.S.C. § 1341(b)(3)(B).
11 ERISA § 4041(c); 29 U.S.C. § 1341(c).

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contributing sponsor, or a member of the sponsor’s controlled group,12 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 party between 60 and 90 days in advance of the proposed termination date.13
He or she then must file a distress termination notice with the PBGC.14 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 and must notify the plan administrator as soon as practicable regarding its
determination.15 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 below).16 Otherwise, the distress termination generally continues with the plan
administrator distributing the plan’s assets to participants and beneficiaries by purchasing
annuities from a commercial insurer or by other permissible means.17 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 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 search.18 The plan administrator
then certifies the distribution to the PBGC and the plan is terminated.
Involuntary Termination. An involuntary termination occurs when the PBGC
decides a plan should be terminated.19 The PBGC must initiate termination proceedings
12 For purposes of the plan termination provisions, “controlled group means, in connection with
any person, a group consisting of such person and all other persons under common control with
such person,” as determined under PBGC regulations. ERISA § 4001(14); 29 U.S.C. § 1301(14).
13 ERISA § 4041(a)(2); 29 U.S.C. § 1341(a)(2); 29 C.F.R. § 4041.23(a).
14 ERISA § 4041(c)(2)(A); 29 U.S.C. § 1341(c)(2)(A).
15 ERISA § 4041(c)(2)(C); 29 U.S.C. § 1341(c)(2)(C).
16 ERSIA § 4041(c)(3)(B)(iii); 29 U.S.C. § 1341(c)(3)(B)(iii).
17 ERISA § 4041(c)(3)(B)(i) and (ii); 29 U.S.C. § 1341(c)(3)(B)(i) and (ii).
18 ERISA § 4050; 29 U.S.C. § 1350.
19 ERISA § 4042; 29 U.S.C. § 1342.

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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 terminated.20 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, including management of the plan’s assets.21
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 the plan’s financial condition, or to avoid an
unreasonable increase in the PBGC’s liability.22 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, or (3) to
enforce a lien against the plan’s property.23 Furthermore, the court may stay any pending
proceedings that involve plan property.24 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.
Alternatively, the PBGC and plan administrator may agree to terminate the plan
without court proceedings.25 There is no requirement under ERISA that plan participants
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); 29 U.S.C. § 1342(e).
24 ERISA § 4042(f); 29 U.S.C. § 1342(f).
25 ERISA § 4042(c)(1); 29 U.S.C. § 1342(c)(1).

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and other interested parties receive notice or an opportunity to be heard prior to the PBGC
and plan administrator coming to an agreement to terminate the plan.26
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.” 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 actions, such as establishing a qualified
replacement plan.27
Distress Termination. 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 interest, at termination.28 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 authorized to make arrangements with the liable parties for the payments,29 and
any amount in excess of 30% of the collective net worth of the sponsor and controlled
group will be paid under commercially reasonable terms.30 In addition, the PBGC may
claim a lien for up to 30% of the collective net worth of the sponsor and controlled
group.31 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 Revenue Code and
is treated as a federal tax lien in bankruptcy proceedings.32
Involuntary Termination. 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 deficiencies
waived prior to termination, and the outstanding balance of the decreases in the minimum
26 See In Re Jones & Laughlin Hourly Pension Plan v. LTV Steel Co., 824 F.2d 197 (2nd Cir.
1987).
27 Internal Revenue Code § 4980.
28 ERISA § 4062(b)(1); 29 U.S.C. § 1362(b)(1).
29 ERISA § 4067; 29 U.S.C. § 1367.
30 ERISA § 4062(b)(2)(B); 29 U.S.C. § 1362(b)(2)(B).
31 ERISA § 4068; 29 U.S.C. § 1368.
32 ERISA § 4068(c); 29 U.S.C. § 1368(c).

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funding standard allowed prior to termination.33 These amounts are due, plus interest, on
the date of termination.
Attempt To Evade Liability. 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 company can still be treated as a
contributing sponsor at the plan’s termination date.34 Thus, the company may be held
liable for the unfunded liabilities.
Enforcement and Penalties
The PBGC is broadly authorized to make any investigation it deems necessary to
enforce ERISA35 and may assess a penalty against anyone who fails to provide a required
notice or other material information.36 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 in U.S. district court to enjoin the action or obtain
other equitable relief.37 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.
Plan Restoration
If the PBGC determines that a plan should not be terminated, it may stop the
termination proceedings and restore the plan.38 The PBGC may even restore a terminated
plan. When determining whether a plan should be restored, the PBGC may look at
subsequent pension plans sponsored by the employer.39 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); 29 U.S.C. § 1362(c).
34 ERISA § 4069; 29 U.S.C. § 1369.
35 ERISA § 4003(a); 29 U.S.C. § 1303(a).
36 ERISA § 4071; 29 U.S.C. § 1371.
37 ERISA § 4070; 29 U.S.C. § 1370.
38 ERISA § 4047; 29 U.S.C. § 1347.
39 See PBGC v. LTV Corp., 496 U.S. 633 (1990).