May an employer terminate a pension plan?

Author: James O'Keefe, The Seabreeze Group LLC

Yes. An employer may terminate a pension plan. When this action is taken it is often in response to extreme financial pressures, in order to compete with other companies who do not offer a pension plan, or in response to employee desires to establish a defined contribution (401k) plan. When a plan terminates, additional benefits do not accrue to employees after the termination of the plan.

An employer may end the plan in a standard termination but only after showing the Pension Benefit Guaranty Corporation (PBGC) that the plan has enough money to pay all benefits owed to participants. A minimum of sixty (60) days' notice is required.

If the plan is not fully funded, the employer may apply for a distress termination if they are in financial distress. To do so, they must prove to a bankruptcy court or to the PBGC that the employer cannot remain in business unless the plan is terminated. If the application is granted, the PBGC will take over the plan as trustee and pay plan benefits, up to the legal limits, using plan assets and PBGC guaranteed funds.