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).

Does PBGC cover plans for self-employed individuals?

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.)

What is a plan termination?

A pension plan is terminated only by following certain specific rules:

A plan that has enough money to pay all benefits owed to 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.

May I file my signed standard termination forms by fax?

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.)

What happens after a filing has been submitted if the plan administrator decides not to terminate the plan?

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.

Do I have to give spousal election forms to participants in rollover situations?

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.

Do plan administrators have to provide the notice of identity of insurers to participants expected to elect lump sums?

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.

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