PBGC Coverage Exemption: The Complete Guide

Looking to Get $100,000+ Into Retirement?

We'll show you the #1 tax and retirement strategy!

PBGC covers all defined benefit plans. Only those plans meant for substantial owners are exempted from this coverage. Including even one, not notable employee eliminates a plan from qualifying for the exemption.

  • A substantial owner meets the following requirements;
  • 100% ownership of the unincorporated trade or business
  • Direct or indirect ownership of 10% or more of a capital interest in a partnership
  • Direct or indirect ownership of 10% or more of profit interest in a partnership
  • Own 10% or more voting rights of a corporation
  • Own 10% or more of a corporation’s stock value

The ownership attribution rules mainly used to determine controlled groups also apply when ascertaining the stock ownership. Under these rules, stock owned by an owner also belongs to their spouse. Therefore, the owner-only exemption will apply if all participants are substantial owners or their spouses. Children of a significant owner are not attributed to stock ownership. Including them in a benefit plan eliminates the plan from PBGC coverage exemption.

Different plans may also have rules that may change a plan’s reporting or testing requirements but do not specify the PBGC coverage exemption. Some plans are exempted from filing Form 5500 or prefer to file Form 5500-EZ compared to Form 5500-SF or the standard Form 5500. Filing Form 5500-EZ requires that:

  • The plan covers the 100% owner of the unincorporated or incorporated business or only the partners in a partnership.
  • The plan may include the business owner’s spouse or partners’ spouses.
  • No other employee is covered.

Filing Form 5500-EZ does not require ownership of more than 10% of the employer compared to PBGC’s substantial owner exemption. This means that not all eligible plans to file Form 5500-EZ qualify to be exempted from PBGC coverage.

Non-discriminatory testing also considers a 5% ownership of an employer as a Highly Compensated Employee (HCE). PBGC coverage exemption requires a 10% ownership. Therefore, it is not enough for a defined benefit plan covering all HCEs to claim an exemption.

Suppose a PBGC-covered plan terminates without enough assets to distribute to all beneficiaries. In that case, PBGC allows the majority owner to waive a portion of his benefits to be distributed to other participants for their exclusive benefit.

A majority owner, in this case, owns 50% or more of the employer, which is different from the 100% ownership requirement when determining a substantial owner for PBGC coverage exemption.

Paul Sundin

Get a FREE 30 Minute Consultation

Reach out to us today and we'll show you our favorite strategies! We can show you how to structure a plan for maximum tax benefit and provide you with a custom plan design.

Leave a Comment