ERISA PLAN TERMINATION

A looming ERISA plan termination affects administrators of retirement plans and employees alike. It is important for both parties to understand the laws and procedures involved when benefit programs for employees are called into question.

In the following article, we will discuss mandates and compliance regulations related to ERISA plan termination in relation to the rights of both plan administrators and employees.

What Insurance Exists for ERISA Plan Termination?

What are the next steps for employees or plan administrators to take once an employee benefits plan connected to employee pensions becomes untenable for an organization?

There are two distinct units into which laws surrounding ERISA plan termination fall:

  1. Plans under a single employer
  2. Plans under multiple employers

Below is a brief elaboration on each type.

Plans Under a Single Employer

Under a single employer, standard procedure applies for ERISA plan termination. Plans become completely vested, meaning that employers are obligated to purchase the annuity contract outright for employees who have received benefits through the program. The administrator of an organization’s retirement program will have all salient information on payment options for employees, i.e. lump sum payment vs. annuitized payment.

If standard termination procedure applies, it means that the employer has enough resources in the benefits pool beyond debts to fully pay all benefits. If resources in the benefits pool are less than debts, the employer is legally obligated to provide the remainder out-of-pocket in order to make up the difference. Optionally, employers can enhance the benefits pool for their employees if there are excess resources remaining after the ERISA plan termination process completed. The viability of this is largely dependent on the original configuration of the employee benefits plan.

Alternately, involuntary termination is a situation in which the employer is forced to end a benefits program due to financial distress. This occurs mainly in three circumstances:

  1. Layoffs and financial woes make an employer’s investment in benefits an unmanageable expense
  2. Continued contribution to benefits funds threaten to bankrupt the business
  3. The company is actually undergoing bankruptcy

The PBGC (Pension Benefit Guaranty Corporation) is the adjudicating body that hears cases for involuntary plan terminations. Employers must successfully petition the PBGC to proceed. Once PBGC has accepted the employer’s petition, the government body evaluates the difference between company resources and accrued debts. The result of this outcome determines whether the PBGC will intercede as the arbiter of a standard procedure for termination.

It is important to note that payouts for pension funds by the PBGC may not match the amount the employer originally agreed to provide. Therefore, it is beneficial for businesses to seek the help of a compliance management company that can help navigate the maze of regulations surrounding ERISA plan terminations.

Plans Under Multiple Employers

The nature of ERISA plan terminations under multiple employers is mostly identical to terminations under a single employer. However, there are few notable exceptions in relation to what employers must demonstrate in order to proceed with the termination process.

First, multiple employers must demonstrate that they can take their current benefits plan and exchange it for a plan that provides a defined contribution for employees. Second, all employers involved in the contribution process must stop providing contributions and remove themselves from the plan. Third, the employers must demonstrate that they have amended the first version of the plan to end all further credits to employee plans relative to services rendered after plan termination has taken place.

Individual Considerations for ERISA Regulations

To reiterate, employers and employees need to be on a level playing field when it comes to understanding ERISA plan terminations. If you need to comprehend the ever-changing set of complicated laws and regulations governing employee benefit plans, it is highly advised that individuals seek out consultation with experienced compliance specialists. Expert help can ensure that the rights and responsibilities of all parties involved in a termination process are understood and protected.

About The Author

Caroline Castagno is a founding partner of RCP-Solutions.  Additionally, Caroline served as the COO of RCP until April 2012, when she assumed the role of CEO.  Prior to founding RCP, Caroline worked as the VP of Marketing at Keane Unclaimed Property.