What is an Allocation Of Plan Assets On Termination

Allocation of Plan Assets on Termination is the procedure that occurs upon the termination of any kind of pension plan. The allocation of plan assets on termination can occur in one of two ways: either each employee is repaid their contributions plus interest, or else the employees are categorized based on their entitlement to benefits.

BREAKING DOWN Allocation Of Plan Assets On Termination

Allocation of Plan Assets on Termination is usually done by the plan administrator or trustee. Different types of employees will favor one type of allocation over the other. For example, highly compensated employees may come out ahead in the latter type of allocation listed above, while rank-and-file employees may benefit more from the former.

A pension plan, also known as a defined-benefit plan or a qualified-benefit plan, is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and assumes investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

A pension plan can be terminated at the request of the employer or by the Pension Benefit Guaranty Corporation (PBGC), a U.S. government agency formed to protect pension benefits in private-sector defined-benefit plans. To complete a standard termination, an employer must demonstrate to the PBGC that the plan has sufficient assets to pay all obligations owed to its employees.

Payments can be made to employees through the purchase of an annuity that provides lifetime benefits upon retirement or, if permitted by the plan, through a one-time lump-sum payment that covers an employee’s entire benefit. Prior to choosing the annuity option, the plan administrator is required to provide advance notice to plan participants of the insurance companies the employer may select as the annuity provider. 

Distress Termination of Plan Assets 

When a pension plan is not fully funded, employers in financial distress can apply for a distress termination of plan assets. To quality for this type of disbursement, the employer must demonstrate to the PBGC or a bankruptcy court that it cannot remain in business unless the 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.

If the application is granted, the PBGC takes over as plan trustee and pays benefits, up to legal limits, using the plan’s existing assets as well as PBGC guarantee funds.