Retirement Savings Plan
Part 8: Your Benefit During A Plan Termination Or Company Merger
As noted at the beginning of this
Article, employers are not required to offer a retirement plan and plans can be
modified and/or terminated.
What happens when a plan is terminated?
Federal law provides some measures to protect employees who participated in
plans that are terminated, both defined benefit and defined contribution. When a
plan is terminated, the current employees must become 100 percent vested in
their accrued benefits. This means you have a right to all the benefits that you
have earned at the time of the plan termination, even benefits in which you were
not vested and would have lost if you had left the employer. If there is a
partial termination of a plan, for example, if your employer closes a particular
plant or division that results in the end of employment of a substantial
percentage of plan participants, the affected employees must be immediately 100
percent vested to the extent the plan is funded.
What if your terminated defined benefit plan does not have enough money to
pay the benefits?
The Federal government, through the Pension Benefit Guaranty Corporation (PBGC),
insures most private defined benefit plans. For terminated defined benefit plans
with insufficient money to pay all of the benefits, the PBGC will guarantee the
payment of your vested pension benefits up to the limits set by law. For further
information on plan termination guarantees, contact the Pension Benefit Guaranty
Corporation toll free at 1.800.400.7242, or visit the Web site.
What happens if a defined contribution plan is terminated?
The PBGC does not guarantee benefits for defined contribution plans. If you are
in a defined contribution plan that is in the process of terminating, the plan
fiduciaries and trustees should take actions to maintain the plan until they
terminate it and pay out the assets.
Is your accrued benefit protected if your plan merges with another plan?
Your plan rules and investment choices are likely to change if your company
merges with another. Your employer may choose to merge your plan with another
plan. If your plan is terminated as a result of the merger, the benefits that
you have accrued cannot be reduced. You must receive a benefit that is at least
equal to the benefit you were entitled to before the merger. In a defined
contribution plan, the value of your account may still fluctuate after the
merger based on the performance of the investments.
Special rules apply to mergers of multiemployer defined benefit plans, which
generally are under the jurisdiction of the PBGC. Contact the PBGC for further
What if your employer goes bankrupt?
Generally, your retirement assets should not be at risk if your employer
declares bankruptcy . Federal law requires that retirement plans fund promised
benefits adequately and keep plan assets separate from the employer’s business
assets. The funds must be held in trust or invested in an insurance contract.
The employers’ creditors cannot make a claim on retirement plan funds. However,
it is a good idea to confirm that any contributions your employer deducts from
your paycheck are forwarded to the plan’s trust or insurance contract in a
Significant business events such as bankruptcies, mergers, and acquisitions can
result in employers abandoning their individual account plans (e.g., 401k
plans), leaving no plan fiduciary
to manage it. In this situation, participants often have great difficulty in
accessing the benefits they have earned and have no one to contact with
questions. Custodians such as banks, insurers, and mutual fund companies are
left holding the assets of these plans but do not have the authority to
terminate the plans and distribute the assets. In response, the Department of
Labor issued rules to create a voluntary process for the custodian to wind up
the plan’s business so that benefit distributions can be made and the plan
terminated. Information about this program can be found on the Department’s Web
If your former employer has gone out of business, arrangements should have been
made so a plan official remains responsible for the payment of benefits and
other plan business.
Keep a file with information on your plan and company. If the company no longer
exists under its former name, you might find some information on the Internet by
entering the former name in a search engine. If your plan is abandoned, use the
search function on the EBSA Web site, at www.dol.gov/ebsa, to find out if the
plan’s custodian is terminating the plan and the custodian’s contact
If your plan merges, make sure you read the communications about changes in your
plan, including changes in benefits and investment choices.
If your retirement benefit remains with a former employer, keep current on any
changes your former employer makes, including changes of address, mergers, or
If you move, give the plan your new contact information.