Standard Termination

Overview

Standard termination refers to the process whereby an employer voluntarily elects to end a defined benefit pension plan after ensuring that all of its obligations to participants and beneficiaries are fully met. This type of termination complies with guidelines set forth by the Employee Retirement Income Security Act (ERISA) and is overseen by the Pension Benefit Guaranty Corporation (PBGC).

Process

1. Notice of Intent to Terminate:

   • The employer must provide participants, beneficiaries, and the PBGC with a notice outlining the intent to terminate at least 60 days before the proposed termination date.

2. Final Payment of Benefits:

   • The plan must ensure that it has enough assets to cover all accrued benefits owed to participants and beneficiaries. Affected stakeholders are informed about the specific process and timeline for receiving their benefits.

3. Submission to PBGC:

   • The employer submits a standard termination notice, including all requisite certifications and documentation, to the PBGC for review.

4. Distribution of Benefits:

   • The distribution of plan assets can take several forms, including lump-sum payments, annuities, or transferring the assets to another qualified plan.

5. Final Distribution Timeline:

   • Benefit distributions must be completed by no later than 24 months following the proposed termination date.

Examples

1. Corporation A decides to terminate its pension plan because it has moved most of its workforce from defined benefit plans to defined contribution plans. The corporation follows a standard termination process, ensuring all plan participants receive their entitled benefits.

2. Hospital B conducts a standard termination of its defined benefit pension plan. Due to sound financial management, the plan has sufficient assets to cover all benefits, and the hospital proceeds with the termination after notifying the PBGC and all participants.

Frequently Asked Questions

Q1: What happens if a pension plan does not have enough assets to meet its obligations at termination?
A1: If a plan lacks sufficient assets, it cannot undergo a standard termination and may have to consider a distress termination or allow the PBGC to step in to address the shortfall.

Q2: How does the PBGC get involved in a standard termination?
A2: The PBGC reviews the termination notice and certifications to ensure compliance, protecting participants’ interests and confirming that promises to employees are met.

Q3: Can participants lose their vested benefits in a standard termination?
A3: No, in a standard termination, participants must receive all accrued and vested benefits.

Q4: Can an employer terminate a plan without PBGC approval?
A4: An employer must follow the required notification and filing steps with the PBGC, which includes submitting a standard termination notice for review.

Q5: What forms of benefit distribution are permitted in a standard termination?
A5: Permitted forms include lump-sum payments, annuity purchases, and transfers to other qualified retirement plans.

Related Terms

• Termination of a Plan: The broader concept encompassing both standard and distress terminations of defined benefit pension plans.

• Defined Benefit Plan: A pension plan where benefits are calculated based on factors such as salary history and duration of employment.

• PBGC (Pension Benefit Guaranty Corporation): A federal agency that protects pension benefits in private-sector defined benefit plans.

Online Resources

• PBGC Standard Termination FAQs: Official PBGC FAQ page regarding standard termination procedures and guidelines.

• ERISA Guidelines: Comprehensive information from the U.S. Department of Labor on ERISA requirements.

• Internal Revenue Service (IRS) Retirement Plans: IRS resources on various types of retirement plans, including defined benefit plans.

Suggested Books

1. “ERISA and Employee Benefits Law: The Essentials” by Peter M. Gerhart:

   • Offers an accessible introduction to ERISA and employee benefits law.

2. “The Pension Answer Book” by Stephen J. Krass:

   • A reference guide providing detailed information about pension regulations and termination processes.

3. “Pension Plan Terminations” by Frank J. Mirabelli:

   • Provides in-depth coverage of the legal and practical issues surrounding the termination of pension plans.

Fundamentals of Standard Termination: Employment Law Basics Quiz

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