If an employer faces economic difficulties as a result of an influenza pandemic, can the employer terminate their pension plan, and if so, what happens to employees’ and retirees’ benefits?
Answer:
Federal law generally does not prohibit employers from terminating their pension plans. The law does protect rights to benefits earned before the plan is terminated and requires that employers follow certain rules when terminating plans. There is, however, no right to earn additional benefits under the plan. The benefits employees’ are entitled to will depend on the type of plan and how long individual employees have worked for the employer.
If employees were covered by a defined benefit plan, the employees’ benefits generally will depend on a formula that is contained in the plan documents and Summary Plan Description (SPD). The plan’s formula may include factors such as age, length of service and pay. Benefits may not be payable under the plan until an employee reaches normal retirement age, generally age 65 or some other age specified in the plan documents and SPD.
The termination of defined benefit plans is also regulated by the Pension Benefit Guaranty Corporation (PBGC), which guarantees certain benefits in the event that the plan’s assets are not sufficient to pay benefits. Information on the PBGC’s plan termination insurance program is available from PBGC’s Customer Service Center at 1-800-400-7242.
If the employees were covered by a defined contribution plan, such as a 401(k) plan, profit sharing, or employee stock ownership plan, each participant has an individual account in the plan. Contributions, earnings, and investment gains or losses are credited to this individual account. Employees are always 100% vested in any contributions they made to the plan, including investment gains and earnings on the employees’ contributions, less any investment losses and expenses. In addition, depending on the terms of the plan, employees may be vested in part or all of their employer’s contributions. Employees will be automatically 100% vested in the employer contributions to the plan when the plan is terminated.
Note: As an overall matter, employers should be guided in their relationship with their employees not only by federal employment law, but by their own employee handbooks, manuals, and contracts (including bargaining agreements), and by any applicable state or local laws. Not all of the employment laws referenced apply to all employers or all employees, particularly state and local government agencies. For information on whether a particular employer or employee is covered by a law, please use the links provided for more detailed information. This information is not intended for federal agencies or federal employees -- they should contact the U.S. Office of Personnel Management (OPM) for guidance.
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Last Updated: 01/25/2008
