Unless a defined benefit plan (including a cash balance plan) qualifies for an exemption under ERISA, the plan is subject to PBGC coverage. ERISA provides an exemption from PBGC coverage for certain professional service employer plans. Remember that an employer cannot opt into PBGC coverage. Therefore, a company that meets the professional service employer exemption cannot opt into PBGC coverage.
Professional Service Employer Defined
ERISA Section 4021(c)(2) defines a professional service employer as a business owned by one or more professionals and whose primary business purpose is to provide professional services. But, who exactly is a professional for this purpose? ERISA Section 4021(c)(2)(B) provides a non-exclusive list of professionals:
• Other licensed practitioners of the healing arts,
• Attorneys at law,
• Public accountants,
• Public engineers,
• Social or physical scientists, and
• Performing artists.
Since the list defined in ERISA is not exhaustive, the PBGC will, on occasion, issue guidance about which additional professionals may or may not be considered professional for purposes of satisfying the professional service exemption. For example, the PBGC has determined that while management consultants are not a professional service employer, the PBGC has determined that economists do qualify for the PBGC coverage exemption.
Twenty-five Active Participants Threshold
In order to qualify for the professional service employer exemption from PBGC coverage, the employer must always have had twenty-five or fewer active participants since the plan’s effective date (or if later the effective date of ERISA). Once an employer crosses the twenty-five participant threshold, the plan will be covered by the PBGC even if the participant count falls below twenty-six at some point in the future. Additional considerations in determining the twenty-five active participant count are:
• Terminated employees who are due a benefit are not included in the count.
• Active employees who are excluded from the plan by job class
are not included in the count.
• Active employees who have not yet met the plan’s age and service requirement are not included in the participant count.
Read more articles in this series:
– Introduction to the PBGC
– Surveyor Versus Surveying Consultant
– PBGC FAQs