PBGC Sets Rule on Termination Liability Calculations

June 15, 2006 (PLANSPONSOR.com) - The Pension Benefit Guaranty Corporation (PBGC) specified Thursday how to calculate the liability that occurs when an employer closes its operations and causes more than 20% of employees covered by a defined benefit plan to be unemployed.

A news release by the agency said the change would alter parts of the PBGC’s termination regulations, Title 29 in the Code of Federal Regulations, more specifically, the liability for the termination of single-employer plans (part 4062 ) and the rule governing withdrawal liability for plans under multiple controlled groups (part 4063 ).

The new rule will set a calculation method that the agency has used for assessing liabilities on a case-by-case basis, according to the announcement.

The liability calculation first divides the number of plan participants left unemployed by the closing of the facility by the number of current employees that are plan participants. That number is then multiplied by the amount of underfunded liabilities.  


According to the PBGC, this amount is held and distributed by a third party, but if the plan terminates within five years, the payment is treated as a plan asset. If the plan does not terminate within five years, the payment is returned to the employer. In lieu of the liability payment, the contributing sponsor may be required to furnish a bond to the PBGC to be held for the benefit of the plan, the release said.

“This rule provides a simple, equitable formula for calculating employer liability arising from a cessation of operations,” said Vince Snowbarger, acting PBGC Executive Director, in the news release. The rule will become effective on July 16, 2006.