When a company is bought, your pension may be affected. The transaction generally faces one of four outcomes. It could be kept under the new ownership, merged into the buyer’s plan, frozen so it stops growing, or be terminated entirely.
And although your earned benefits up to that point are legally protected, future accruals can change. There are several variables that go into determining the future of your pension plan.
Type of Company Sale Affects Pension Plan
According to accounting firm CLA, determining what happens to a pension plan comes down to whether the company is going through an asset sale or a stock sale.
If it is an asset sale, only assets are passed to the buyer. Typically, the seller maintains ownership of the company and the associated retirement plan. At that point, the seller can choose whether to maintain or terminate the pension plan.
In a stock sale, the buyer acquires the entire company and takes responsibility for the retirement plan. This includes any historical issues. Typically, in a stock sale, the buyer can’t terminate the plan.
What Happens if a Plan Terminates
Typically, there are two main ways a plan can end. It can be trusteed by the Pension Benefit Guaranty Corporation (PBGC), or the plan could end in a standard termination. According to the PBGC, the standard termination is the most common.
PBGC Trustees Manage Failed and Distressed Plans
The PBGC is a U.S. federal agency that protects private-sector pension plans. It pays guaranteed retirement benefits if a plan fails. The PBGC trustees take over the plan if it doesn’t have enough funds to pay the benefits it owes to participants.
If the pension plan isn’t fully funded, the employer may apply for a distress termination if the company is in financial distress.
According to the PBGC, the company must prove to a bankruptcy court or to the PBGC that it can’t remain in business unless the plan is terminated. Once the application for distress termination is granted, the PBGC takes over the plan as a trustee and pays benefits up to the legal limits. It uses the plan’s assets and PBGC funds to do so.
Standard Termination of a Retirement Plan
According to the IRS, if a company terminates its retirement plan, it generally notifies all plan participants. If allowed, it distributes the plan’s assets to the plan participants as soon as administratively feasible. This usually happens within a year of notification.
Regardless of the plan’s vesting schedule, once a plan is terminated, each employee is 100 percent vested. This means the employee is vested in the accrued benefits of their defined benefit plan and the account balance of their defined contribution plan.
If the person receiving the benefit is under 59.5 years old, the amount received may be subject to a ten percent early withdrawal tax unless the distributed assets are rolled over into another qualified plan. This could be the current retirement plan of a new company or an IRA, according to the IRS.
Merging One Retirement Plan With Another
A retirement plan can merge with another plan. However, the merger of the plans cannot violate the anti-cutback rule. The anti-cutback rule, according to the IRS, protects participants’ accrued benefits, early retirement benefits, retirement-type subsidies, and any other optional benefits offered under the existing plan.
In other words, the merged plan can’t reduce or eliminate protected benefits. However, the new plan may make changes to a plan’s administrative terms, such as a plan administrator or investment choices.
What Happens When a Fund Is Transferred to an Insurance Company
Sometimes, when terminating a plan, the employer purchases annuities from an insurance company to secure and pay out lifetime benefits to plan participants.
For example, according to the Pension Rights Center, in 2012, Verizon and General Motors arranged for Prudential Insurance Company to pay the pensions of certain groups of their salaried retirees. Both companies transferred assets to Prudential. This meant that the PBGC no longer insured these pensions.
If you are retired and receiving your pension, your monthly benefits should stay the same regardless of whether it’s an annuity.
If you haven’t retired and your pension is transferred to an insurance company, ensure that your employer and the insurance company have all the correct information that goes into determining your benefit.
Who Guarantees a Pension That’s With an Insurance Annuity
Every state, including the District of Columbia and Puerto Rico, has a State Guaranty Association. This is a nonprofit institution established to protect insurance policyholders living in that state if an insurance company becomes insolvent. All insurance companies licensed in a state are required to participate in the state’s State Guaranty Association. However, there is a maximum liability that the State Guaranty Association will pay if an insurance company becomes insolvent.
