Distress Termination

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DEFINITION of 'Distress Termination'

A thinning of an employee base that takes place when a company's benefits plan has insufficient funds to cover the expenses associated with paying the employees' earned benefits. This frequently occurs when a company can no longer stay in business, or when the business attempts to avoid or delay closing. Once a plan is terminated, all activities, such as benefit accruals and vesting, end.

INVESTOPEDIA EXPLAINS 'Distress Termination'

A company may chooses to terminate a benefits plan for many reasons: if it has declared bankruptcy, if it has filed a petition to reorganize in bankruptcy and it is determined that the company cannot reorganize with the plan intact, if it demonstrates that it cannot remain in business unless the pension plan is terminated or if it can demonstrate that the costs associated with the pension plan have become unreasonable due to a decline in the number of participating employees. The Pension Benefit Guaranty Corporation (PBGC), established by The Employee Retirement Income Security Act of 1974 (ERISA), protects the pensions of private defined benefit pension plans, and pays benefits to pensioners of failed pension plans.

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