Benefit Guarantees
What is the Pension Benefit Guaranty Corporation (PBGC)?
PBGC is a federal agency created by the Employee Retirement Income Security Act
of 1974 (ERISA) to protect pension benefits in private-sector traditional
pension plans known as defined benefit plans. If your plan ends without
sufficient money to pay all benefits, PBGC's
insurance program will pay you the benefit provided by your pension plan up to
the limits set by law. (Most people receive the full benefit they had earned
before the plan ended.) Your plan is insured even if your employer fails to pay
the required premiums. Our financing comes from insurance premiums paid by
companies whose plans we protect, from our investments, and from the assets of
pension plans that we take over, but not from taxes.
What types of plans are insured by PBGC?
PBGC insures defined benefit plans, the type that promise to pay a specific
monthly benefit at retirement. PBGC does not insure retirement plans that do
not promise specific benefit amounts ("defined contribution pension
plans"), such as profit-sharing or 401(k) plans.
This booklet covers only single-employer plans,
which are normally sponsored by an individual company for the benefit of its
workers. Another PBGC program insures multiemployer plans covering unionized
workers of non-related employers in the same industry, such as trucking or
construction.
How can I find out if my pension plan is insured by
PBGC?
The easiest way is to ask your employer or plan administrator for a copy of the
"Summary Plan Description," or SPD. The SPD will state whether your
plan is covered by the PBGC program. Although PBGC insures most defined benefit
plans, some are not covered. For example, plans offered by "professional
service employers" (such as doctors and lawyers) with fewer than 26
employees, by church groups or by federal, state or local governments usually
are not insured.
When can an employer end a pension plan?
Employers can end a pension plan through a process called "plan
termination." There are two ways an employer can terminate its pension
plan.
The employer can end the plan in a standard termination
but only after showing PBGC that the plan has enough money to pay all benefits
owed to participants. The plan must either purchase an annuity from an
insurance company (which will provide you with lifetime benefits when you
retire) or, if your plan allows, issue one lump-sum payment that covers your
entire benefit. Before purchasing your annuity, your plan administrator must
give you an advance notice that identifies the insurance company (or companies)
that your employer may select to provide the annuity. PBGC's
guarantee ends when your employer purchases your annuity or gives you the
lump-sum payment.
If the plan is not fully funded, the employer may apply for a distress termination if the employer is in financial
distress. To do so, however, the employer must prove to a bankruptcy court or
to PBGC that the employer cannot remain in business unless the plan is
terminated. If the application is granted, PBGC will take over the plan as
trustee and pay plan benefits, up to the legal limits, using plan assets and
PBGC guarantee funds.
When does PBGC terminate a pension plan?
Under certain circumstances, PBGC may take action on its own to end a pension
plan. Most terminations initiated by PBGC occur when PBGC determines that plan
termination is needed to protect the interests of plan participants or of the
PBGC insurance program. PBGC can do so if, for example, a plan does not have
enough money to pay benefits currently due.
How can I find out if my pension plan is underfunded?
If you are in a single-employer plan insured by PBGC that has been less than
80% funded for the past year or two and less than 90% funded for several years,
your plan administrator is required to give you an annual written notice of the
plan's funded percentage and the limitations on PBGC's
insurance guarantees. You also have a legal right to obtain information about
your plan's funding by requesting the information in writing from your plan
administrator.
How will I know if my pension plan is ending?
If your employer wants to end the plan, your plan administrator must notify you
in writing that your plan is ending. You must get this notice, called the Notice
of Intent to Terminate, at least 60 days before the "termination"
date. If PBGC is terminating the plan, we notify the plan administrator and
often publish a notice about our action in local and national newspapers.
What other information should I receive?
In a standard termination, you should receive a
second letter describing the benefits you will receive, called the Notice of
Plan Benefits, generally no later than six months after the date proposed for
your plan's termination.
In a distress termination or a termination
initiated by PBGC, our communication with you begins when we take over your
plan as trustee. Initially we will provide you with general information about
the pension insurance program and our guarantees. We will be able to provide
more specific information about your benefits after we have had an opportunity
to review the plan's records, assets, benefit liabilities, and your
participation in the plan.
Can I earn additional benefits after my plan ends?
No. After the plan ends, you cannot earn additional benefits.
What happens when PBGC takes over my plan?
PBGC reviews your plan's records to determine what benefits each person will
receive. To ensure PBGC has the correct information, we will ask you to
complete an Information Form.
If you are already receiving a pension, we will continue paying you without
interruption during our review. These payments will be an estimate of the benefits that PBGC can pay under the
insurance program, and they may be less than you were receiving from your plan.
If you have not yet retired, we will pay you an estimated benefit when you
become eligible and apply to PBGC to begin payments. About four months before
you are ready for your benefits to begin, contact PBGC by calling the
We pay most benefits by Electronic Direct Deposit, sending your monthly
payments directly to your financial institution. If you do not want to use
direct deposit, you may still receive your benefit by check.
What happens if PBGC's
estimate is too high or too low?
If PBGC underpaid your benefit, we will make it up in a single payment with
interest when we have completed our calculations. If we overpaid you, we will
reduce future payments until the overpayment has been repaid. The reduction is
usually no more than 10 percent of each payment.
What benefits does PBGC guarantee?
PBGC guarantees "basic benefits" earned before your plan ended, which
include (1) pension benefits at normal retirement age, (2) most early
retirement benefits, (3) disability benefits for disabilities that occurred
before the plan was terminated, and (4) certain benefits for survivors of plan
participants. PBGC does not guarantee health care, vacation pay, or severance
pay.
The pension benefit PBGC pays depends on (1) provisions of your plan, (2) legal
limits, (3) the form of your benefit, (4) your age, and (5) amounts PBGC
recovers from employers for plan underfunding.
What is the maximum amount that PBGC can guarantee?
PBGC's maximum benefit guarantee is set each year
under provisions of ERISA. For pension plans ending in 2004, the maximum
guaranteed amount is $3,698.86 per month ($44,386.32 per year) for workers who
retire at age 65. This guarantee amount is lower if you begin receiving
payments from PBGC before age 65 or if your pension includes benefits for a
survivor or other beneficiary. The guarantee amount may be higher if you retire
after age 65 or if you are over age 65 and receiving benefits when the plan
ends. The table at the end of this booklet shows PBGC's
maximum guarantee for retirement at various ages. For certain disability
benefits, special rules apply (see the following question). Other guarantee
limitations that may apply are described in the questions and answers that
follow.
How does the maximum benefit guarantee apply to the
benefits of disabled workers?
If you met your plan's requirements for a disability benefit before your plan
ended (whether or not you applied for the benefit), and you have a Social
Security disability award for that disability, PBGC will not reduce the maximum benefit guarantee if you begin
receiving payments from PBGC before age 65. For pension plans ending in 2004,
the maximum guaranteed amount of disability benefit is $3,698.86 per month
($44,386.32 per year) for workers who retire at age 65 or
any younger age. Other adjustments to the maximum guarantee are the same
as for non-disabled workers: the maximum is increased if you begin receiving
payments from PBGC after age 65 and it is reduced if your pension includes
benefits for a surviving spouse or other beneficiary.
Are there other limits on PBGC's
guarantee?
Yes. For example, if your plan was created or amended to increase benefits
within five years before it ended, your benefit may not be fully guaranteed.
PBGC guarantees the larger of 20% of the benefit or
$20 per month for each full year the benefit was in effect. If you own more
than 10% of the business, stricter limits apply. Also, if your plan provides
supplemental benefits, such as temporary payments, they may not be fully
guaranteed. Generally, PBGC does not guarantee any monthly pension amount that
is greater than the monthly benefit your plan would have provided if you had
retired at your normal retirement age.
Does PBGC pay survivor benefits?
PBGC pays survivor benefits if the benefit form you elected (or elect in the
future from PBGC) provides for survivor benefits. PBGC will allow all future
retirees, whether or not married, to elect a benefit form that provides
survivor benefits.
If you are married and die before electing a benefit form, we will pay your
surviving spouse a survivor benefit beginning at the earliest date your plan
states you can retire.
If you are entitled to or are receiving a survivor benefit when your plan ends,
PBGC will continue to pay your survivor benefit for the period provided by your
plan.
Can I receive my benefit from PBGC in a lump sum?
Normally, we pay benefits in monthly payments for life rather than as a lump
sum. However, if the total value of your benefit is $5,000 or less, you can
receive a lump-sum payment.
Can I put my lump sum into an Individual Retirement
Arrangement (IRA)?
Yes, you generally can put all or part of your lump sum into a traditional IRA
or other qualified plan. If you have PBGC pay the lump sum directly to your IRA or other plan, PBGC will not
withhold tax from the payment. With this type of payment, called a
"tax-free rollover," you will not have to pay tax until you receive
payments from the IRA or other plan. You can get more information about
tax-free rollovers by contacting your local Internal Revenue Service office,
calling 1-800-TAX-FORM, or visiting www.irs.gov.
Will PBGC adjust my pension yearly for inflation?
No, there is no cost-of-living adjustment. Your benefit is fixed as of the date
your plan ended.
Will my deductions stay the same if PBGC takes over my
plan?
PBGC only deducts federal income taxes. You will have to pay separately the
state taxes and other amounts (such as health insurance) now being deducted.
What is the new health coverage tax credit?
Certain PBGC benefit recipients who are age 55 or over and are covered by
qualified health insurance are eligible for the Health Coverage Tax Credit
(HCTC) administered by the Internal Revenue Service.
The credit is not available to everyone. For example, a PBGC benefit recipient
receiving certain specified health coverage, such as Medicare, will be
ineligible to use the HCTC program. For more information about this program and
about what is considered qualified health insurance, you may call the
PBGC MAXIMUM MONTHLY GUARANTEES
Below are examples of the maximum guarantee for a single life annuity with no
survivor benefits for retirement at ages 65, 62, 60 or 55. The maximum is lower
if the benefit is paid in a form other than a single life annuity, such as a
form that provides for survivor benefits. The pension benefit that PBGC can pay
will depend on your age, the provisions of your plan, the form of your benefit,
the legal limits on what PBGC can guarantee, and amounts PBGC recovers from
employers for plan underfunding.
[Monthly
Guarantee Table]
Single copies of publications and fact sheets are available from: Pension
Benefit Guaranty Corporation, Communications and Public Affairs Department,