Are Cash Balance Plans Protected by the PBGC? Complete Guide

The Pension Benefit Guaranty Corporation (PBGC) plays a crucial role in safeguarding retirement benefits for workers in the U.S. As a federal agency, the PBGC provides insurance coverage for specific pension plans, including cash balance plans.

Cash balance plans have emerged as a hybrid retirement savings vehicle, combining elements of traditional defined benefit and contribution plans. These plans allow individuals to accumulate retirement savings in individual accounts while providing the security and guarantees associated with traditional pensions.

In a cash balance plan, employees have individual accounts that receive contributions from their employer, typically based on a percentage of their salary and often supplemented with an interest credit. The account balances grow over time, and employees can choose between a lifetime annuity or a lump sum distribution upon retirement.

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The PBGC’s insurance coverage for cash balance plans provides an added layer of protection, ensuring that participants receive their promised benefits even if the plan cannot meet its obligations. With the growing popularity of cash balance plans, understanding the role of the PBGC becomes crucial in comprehending the safeguards in place for individuals’ retirement savings.

What is a cash balance plan?

A cash balance plan is an employer-sponsored retirement plan that falls under the category of a defined benefit plan. It combines features of both traditional pension plans and defined contribution plans.

In a cash balance plan, the employer sets up an individual account for each employee and credits the account with a specified contribution amount and an interest credit, typically based on a predetermined rate or index. The account balance grows over time as contributions and interest credits are added. The employer bears the investment risk and is responsible for meeting the plan’s funding obligations.

Unlike a traditional pension plan, which provides a specific monthly benefit at retirement based on factors like years of service and salary history, a cash balance plan expresses the benefit as a hypothetical account balance. This account balance represents the accumulated value of the contributions and interest credits.

Upon retirement, an employee with a cash balance plan generally has two options. They can either receive a lifetime annuity based on the account balance, which provides a regular stream of income, or they can choose to take a lump sum distribution, which pays out the accumulated value of the account balance in a single payment.

Cash balance plans have gained popularity in recent years because they offer portability and greater transparency to employees. The accounts are portable, meaning employees can take their account balances with them if they change employers. Additionally, employees can easily track the growth of their account balances over time, as the plan specifies the contributions and interest credits added to their accounts.

Are cash balance plans protected by PBGC?

The Pension Benefit Guaranty Corporation (PBGC) in the U.S. generally protects cash balance plans. The PBGC is a federal agency providing coverage for specific defined-benefit pension plans.

Cash balance plans are defined benefit plans that combine features of traditional pensions and defined contribution plans. In a cash balance plan, employees have an account balance that grows with a specified contribution amount and an interest credit. Upon retirement, the employee can typically choose between receiving a lifetime annuity based on the account balance or taking a lump sum distribution.

The PBGC protects participants in defined benefit pension plans, including cash balance plans, if the plan is terminated with insufficient assets to cover its obligations. If a covered plan cannot pay the promised benefits, the PBGC steps in and pays guaranteed benefits, subject to certain limits set by law.

However, it’s important to note that the PBGC’s coverage limits can change over time. So, checking the current PBGC guidelines or consulting a qualified financial professional for the most up-to-date information on the specific protections provided is advisable.

What are the cash balance plan exceptions to PBGC coverage?

The Pension Benefit Guaranty Corporation (PBGC) provides coverage for most private-sector defined benefit pension plans in the United States. However, there are certain exceptions to PBGC coverage. Here are some standard exceptions:

  1. Governmental Plans: PBGC coverage generally does not extend to federal, state, or local government entities-sponsored pension plans. These plans are not subject to PBGC insurance but may have their protections under applicable laws and regulations.
  2. Church Plans: Certain pension plans sponsored by churches or associated organizations are exempt from PBGC coverage. These plans can be subject to different regulations and protections, often governed by the Employee Retirement Income Security Act (ERISA) exemption for church plans.
  3. Small Plans: In general, PBGC coverage is optional for pension plans with fewer than 25 participants at the beginning of the plan year. However, a small plan can elect to have PBGC coverage voluntarily.
  4. Specific Professional Service Employer Plans: Some professional service employer plans, such as those for doctors, lawyers, and other similar professional groups, may be exempt from PBGC coverage if specific requirements are met.

It’s always advisable to consult the current PBGC guidelines and relevant legal and regulatory provisions to determine the specific coverage and exceptions that apply to a defined benefit plan.

Final thoughts

The PBGC serves as an important safeguard for participants in various retirement plans, including cash balance plans. While cash balance plans offer unique features that blend elements of traditional pensions and defined contribution plans, the PBGC provides a safety net by insuring covered defined benefit plans in the event of plan termination with insufficient assets. This insurance coverage offers reassurance to participants that their retirement benefits will be protected, subject to certain limits and guidelines set by the PBGC.

As the landscape of retirement plans continues to evolve, cash balance plans have gained popularity due to their portability and transparency. These plans provide employees with individual account balances that grow through contributions and interest credits, offering employees greater visibility into their retirement savings.

However, it is important for individuals to review their specific cash balance plan and consult with financial professionals to fully understand the plan’s features, eligibility criteria, and the extent of PBGC coverage, as rules and regulations may vary.

Paul Sundin

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