The Pension Benefit Guaranty Corporation (PBGC) is a federal agency that guarantees the payment of pension benefits when private company pension plans are unable to pay all promised benefits.
If a PBGC-covered plan terminates and does not have enough money to pay all promised benefits, the PBGC will take over the plan and pay benefits up to the PBGC-maximum guaranteed level. The PBGC protects the pension benefits of approximately 44 million Americans in more than 27,500 private employer pension plans. The PBGC is currently paying monthly benefits to approximately 800,000 retirees.
The PBGC was established under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA). The PBGC’s main goals are as follows:
- Encourage the continuation and maintenance of pension plans
- Provide for timely and uninterrupted payment of pension benefits to participants and beneficiaries
- Maintain PBGC premiums at the lowest level consistent with all PBGC’s obligations under ERISA
The PBGC funds benefits with PBGC insurance premiums collected from plan sponsors, the assets of plans that the PBGC takes over, recoveries from plan sponsors, and investment earnings on the PBGC’s assets. The PBGC receives no taxpayer funding.
The PBGC covers only defined benefit plans. A defined benefit plan typically defines the participant’s benefit in terms of a lifetime monthly benefit using a formula based upon a participant’s years of service and possibly average compensation. Cash balance plans and pension equity plans are also defined benefit plans. The PBGC does not cover defined contribution plans such as 401(k) plans, profit sharing plans, money purchase plans, SEPs, and SIMPLEs.
The PBGC covers all defined benefit plans (including cash balance plans) unless the defined benefit plan qualifies for a statutory PBGC coverage exemption. Common plans that are exempted from PBGC coverage are as follows: Owner-only plans, professional employer plans with fewer than twenty-six employees, and governmental employers.
PBGC coverage is not optional. If a defined benefit plan does not qualify for a coverage exemption, the plan is covered by the PBGC. If a defined benefit plan does qualify for a coverage exemption, the plan cannot optionally elect to be covered by the PBGC.
The PBGC covers both single-employer and mutli-employer pension plans. As the word implies, the single employer plans are typically plans sponsored by a single employer. Multi-employer plans (also called Taft-Hartley plans) are plans that are sponsored by unions and individuals participate according to collective bargaining agreements with their employers. Our articles will focus only on single-employer pension plans and not multi-employer plans.
If the PBGC takes over a pension plan, participants receive the lesser of the benefit according to the taken-over plan’s formula and the PBGC maximum benefit. The PBGC maximum benefit is set by statute and is indexed for inflation. For 2011, the maximum monthly benefit for a 65 year old retiree is $4,500. The maximum benefit is reduced if payments start prior to age 65 and the maximum benefit is increased if payments start after attainment of age 65. The maximum benefit is also decreased if the payment form provides a death benefit for the participant’s beneficiary.
The above is a brief introduction to the PBGC. Our next articles will delve further into which plans are covered by the PBGC, PBGC maximum benefits, PBGC premiums, participant notices and reportable events.
Please check back often for additions to this series. Read more articles in this series: