The process, prescribed by the IRS, that a Plan Sponsor must go through to end a pension plan. PBGC coverage ends once a plan is terminated. There are two ways an employer can terminate its pension plan:
- Standard termination – occurs when a pension plan has enough money to pay all benefits owed to participants. The plan must either purchase an annuity from an insurance company to provide the participants’ benefits or offer participants a single lump-sum payment of the entire benefit.
- Distress termination – occurs when a pension plan is not fully funded and the employer is in financial distress. The employer must prove to a bankruptcy court or the PBGC that it cannot remain in business unless the plan is terminated. PBGC will take over the plan as trustee and pay guaranteed plan benefits using plan assets and PBGC guarantee funds.