If you have a Defined Benefit Plan, it may be covered by the PBGC.
What is the PBGC? How does PBGC coverage impact your Defined Benefit Plan? We will answer these and other questions in this article.
The Pension Benefit Guaranty Corporation (“PBGC”) is a government agency that insures Defined Benefits for Plan participants. If a covered Defined Benefit Plan is unable to pay promised benefits, the PBGC pays these benefits up to specified limits. If the PBGC does not cover the Plan, it does not guarantee participant benefits.
Note that the PBGC distinguishes between single-employer and multiemployer plans. In this article, we only discuss single-employer plans.
Defined Benefit employers subject to PBGC coverage pay annual premiums. The PBGC also receives assets and recoveries from Plans that the agency has taken over.
In addition to paying PBGC premiums, employers must report specified events. The PBGC has designated certain events as “red flags” that may result in the employer’s inability to pay promised benefits and require the PBGC to make up any shortfall. Moreover, the PBGC requires a more extensive Plan termination process for covered Defined Benefit Plans. On the bright side, pension law provides covered Plans with a potentially higher deductible limit.
The PBGC only covers Defined Benefit Plans. It does not cover Defined Contribution Plans such as 401(k) or Profit Sharing Plans. However, the PBGC does not cover all Defined Benefit Plans. In fact, pension rules exempt many small Defined Benefit Plans from PBGC coverage, premiums, and requirements.
For small Plans, the most common PBGC exemptions are for small professional service employers and employers covering only substantial owners.
To qualify for the first exemption, the employer must never have covered more than 25 employed participants on any given day. In addition, the employer must provide “professional services” and be owned or controlled by at least one “professional individual”.
For the second exemption to apply, the Plan must only cover substantial owners. Substantial owners are those who own the entire interest in an unincorporated business or more than 10% in the case of a corporation or partnership.
There also are coverage exceptions for certain Puerto Rico Plans, governmental Plans, Church Plans, and non-qualified plans.
PBGC coverage is not always clear. In such cases, the employer can request a coverage determination from the PBGC.
No. Covered plans cannot “opt-out” of coverage by electing to forego guaranteed benefits in exchange for not paying premiums or complying with other obligations. Conversely, non-covered Plans cannot pay premiums to receive coverage or receive a higher deduction.
As stated, the PBGC guarantees the benefits for Defined Benefit participants. However, the PBGC does not guarantee all benefits. For example, the PBGC limits its guarantee based on the age of the participant and whether the participant is a majority owner.
PBGC premiums help pay for benefit guarantees. There are two types of PBGC premiums. A flat-rate based on participant count and a variable rate based on the Plan’s funded status.
The flat-rate premium in 2024 is $101 per participant. Due to legislative changes, the flat-rate has increased dramatically over the last several years. In fact, in 2012, the premium rate was only $35 per participant.
The 2024 variable rate premium rate is 5.2% times the unfunded vested liability of the Defined Benefit Plan. The variable premium is zero if there is no unfunded vested liability. Similar to the flat-rate premium, legislation has significantly increased the variable premium rate. For example, in 2012, the rate was 0.9% versus 5.2% in 2024.
In some cases, the variable rate premium is capped. If the employer has 25 or fewer employees, the variable rate premium is limited to $5 times the number of participants squared. For all employers, the 2024 variable rate premium is capped at $686 per participant.
The employer submits and pays PBGC premiums each year. An Enrolled Actuary must certify the calculation of the variable rate premium unless the Plan is exempt or decides to pay the small employer cap in lieu of calculating the unfunded liability.
Underfunded, larger employers may be subject to the PBGC 4010 filing. This filing requires that the employer report certain identifying, financial and actuarial information. Smaller plans are generally exempt from this filing.
Rather than distributing the Summary Annual Report (“SAR”), PBGC covered plans must provide participants with the Annual Funding Notice (“AFN”). The AFN is much more extensive than the SAR and requires more time to complete. For example, the AFN includes a 3-year history of the Plan’s funded status, a projected funded status, information regarding the Plan’s asset allocation, PBGC guarantees, and a number of other disclosures. The SAR, on the other hand, is much more straightforward and easier to prepare.
The PBGC has specified a list of events it deems to be “red flags” that may impair the ability of the employer to meet its benefit obligations. By requiring this reporting, the PBGC is better able to recognize and address potential issues, further limiting its exposure. These events are called “Reportable Events” and may not always indicate an employer issue. However, the reporting of these events provides the PBGC data to decide whether or not to take further action.
The PBGC has a number of events it has specified as “reportable”. Examples include missing funding requirements, distribution of benefits to a substantial owner, liquidation, and a large reduction in employed participants. In some cases, the employer must report the event in advance. In other cases, the employer must report the event within 30 days after it occurs. PBGC requirements exempt small Plan reporting for certain events. For example, if a small employer pays a quarterly contribution late, the employer generally need not report it to the PBGC. However, if the employer pays the annual contribution late, it must report that event to the PBGC.
Employers disclose Reportable Events using either the PBGC Form 10, Form 10-Advance, or Form 200.
The Plan termination process for PBGC plans is more extensive and requires additional time to complete than a non-covered Plan. We may cover the Plan termination process for PBGC and non-PBGC Plans in another article.
As described, the PBGC insures benefits for Defined Benefit Plans.
Being covered creates many additional employer obligations including cost of coverage, more extensive participant disclosures, and additional government reporting. However, certain plans, particularly small Defined Benefit Plans, may be exempt from PBGC coverage and its requirements.