You started a defined benefit plan for your company, and now for all of your plan participants you have promised a certain amount of benefits when they reach retirement. You may be wondering what happens if the worst-case scenario, like bankruptcy or a distressed plan termination of any kind occurs.
Your plan may be covered by the Pension Benefit Guaranty Corporation, PBGC. The PBGC is a federal corporation but in place by the Employee Retirement Income Security Act (ERISA), to provide benefits to participants in a covered defined benefit pension plan in the event that the plan terminates with assets insufficient funds to provide all the accrued benefits.
There are limitations to the benefits and the private sector entities that are covered by the PBGC. An employer sponsored defined benefit plan may be exempt from PBGC coverage if the plan
- Does not cover more than 25 active participants and is maintained by a professional service employer
- Is solely for owners
- As excess benefit plans for certain employees
- Indian tribal governments
The key distinction from the specification above is the phrase “professional service employer.” Though you may consider yourself a professional, do you qualify as one in the eyes of the PBGC? The following list was provided from the PBGC professional services that are exempt from coverage.
- physicians
- dentists
- chiropractors
- osteopaths
- optometrists
- other licensed practitioners of the healing arts
- lawyers
- public accountants
- public engineers
- architects
- draftsmen
- actuaries
- psychologists
- social or physical scientists
- performing artists
This list is not exhaustive, and there is a process to submit a request for coverage determination with the PBGC. The form can be mailed or emailed to the PBGC directly, and there are extensive instructions on their website.
Once a defined benefit pension plan is determined to be a PBGC covered plan, the plan will need to report annual financial and actuarial information utilizing their online e-filing system. Typically, this responsibility can be handled by the TPA or actuary. Defined benefit plans are required to complete actuarial valuations on an annual basis as part of the qualified plan requirements.
The information from the actuarial valuation will be used to complete the PBGC e-4010 filing. The e-4010 form must be submitted electronically on or before the 105th day after the close of the filer’s information year. For defined benefit pension plans with a year end of December 31st, the filing would be due on April 15th. PBGC coverage is also included on the form on the form 5500 when reporting to the IRS and Department of Labor.
This information that is reported to the PBGC is utilized to determine if a defined benefit pension plan has sufficient funds with in the plan to pay all benefits owed to participants at the time of a plan termination. In general, a defined-benefit plan termination is initiated by the plan sponsor, with the previously submitted PBGC filings and the final plan termination filing the employer must demonstrate to the PBGC that there are sufficient assets under the plan to pay all benefits owed to participants. In the event there are not sufficient assets the PBGC will takeover the administration of the plan.
The PBGC may only partially cover benefits. Typically, only the basic benefits upon achieving retirement age are covered which does not include certain death or supplemental benefits.
The guaranteed maximum for participants is determined utilizing a formula that is dictated by federal law. Periodically there are increased tied to a Social Security index. For cover single employer plans the formula used to determine benefit pay outs is determined by age and payment form.
Older individuals will receive less checks over the span of their expected lifetime, therefore they will receive a greater amount. As opposed to younger individuals or early retirees, who will receive a great number of checks over their expected lifetime, which results in a lower amount. Although, in the end the results balance out. The PBGC posts the annual maximum guarantee tables on their website, as well as previous years maximum guarantees.
The PBGC is a safety net, that will provide some reassurance to both participants and plan sponsors that the benefits that were promised will be insured. Allowing easier sleep for participants and owners alike, at least when planning for retirement is concerned.
