With enactment of the Employee Retirement Income Security Act (ERISA), Congress established the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a federally chartered corporation overseen by the U.S. Department of Labor.
ERISA was enacted to lead the way in pension reform by offering protection for the retirement benefits received by millions of retirees in the U.S. The PBGC’s mission is to help maintain private-sector pension plans and guarantee that employees have continuing access to their retirement income.
There are four sources for the funds in the PBGC as follows:
- Insurance premiums paid by the employers who sponsor private-employer pension plans;
- Assets held by the failed pension plans that the PBGC takes over;
- Unfunded pension liabilities that it recovers from the bankruptcy estates of plan sponsors;
- Its own Investment income.
Basically, the PBGC is funded by insurance premiums, but the American Rescue Plan Act of 2021 also makes general federal tax revenues available to help at-risk multiemployer pension plans covered by the PBGC.
PBGC pays monthly retirement benefits to more than 800,000 retirees who were previously paid a pension by some 5,000 single-employer pension plans that have been terminated. PBGC is responsible for ensuring payment of the current and future pensions of some 1.5 million people. It also insures the pensions of more than 35 million participants in ongoing plans.
The PBGC’s assets allow it to fund eligible, private-sector pension plans, so that workers will continue to get paid even if the employer cannot pay the promised pension. The PBGC acts as a sort of insurer for unpaid payments from private pension plans up to a certain limit.
How Does the PBGC Work Exactly?
Millions of Americans rely on their employer-sponsored 401(k) accounts to provide support when they retire. An employee contribution retirement plan depends on the value of those 401(k) account investments to pay a retiree throughout their retirement. Only a small number of retired workers are covered by employer pension plans that do not depend on investment markets, e.g. stock markets and mutual funds, for their funding.
Normally, if the employer makes poor investments for the pension plans or goes bankrupt, employees are left with little or no pension when they retire. They may not have any other resources to fall back on, because they relied on the promise of their employer’s pension plan. The PBGC guarantees that there will be funds in the retirement plans to pay these workers in their retirement.
The PBGC steps up when the employer goes bankrupt, goes out of business, disappears or is otherwise unable to pay as promised under the pension plans. When the PBGC’s guarantee is triggered, the PBGC steps in and funds that amount of the employee’s pension that remains unpaid because of the employer’s issue.
The PBGC can do this in part because it ensures pension payments under plans that are not excessively high. It is also financially conservative in that it reduces the retirement incomes of workers who retire relatively young and start receiving benefits early. Employers who sponsor PBGC-covered pension plans generally cannot waive PBGC coverage, nor can they trigger coverage simply by paying the PBGC premiums, if their plans are not otherwise eligible for it.
Are There Plans Not Covered By The PBGC?
PBGC covers most private-sector pension plans, but excludes others. Among the excluded plans are 401(k) retirement programs. A 401(k) retirement plan is a plan sponsored by an employer, but managed by the employee. In a 401(k) plan, both the employer and employee make contributions to a 401(k) account. The employee manages the investment choices for the account.
The employee decides what percentage of their salary will be contributed to their account, which the employer can decide to match or not. It is essentially an investment account that the employee hopes to grow over time. The terms of a 401(k) plan include certain penalties that the employee must pay if they withdraw funds before the permitted retirement age.
Certain small professional service plans also are not covered by the PBGC. A small professional service plan is one that has not covered more than 25 active participants since 1974. Also it is owned and controlled by licensed professionals, such as lawyers, accountants, doctors, dentists and the like.
In addition, substantial owner plans are not covered. These are plans in which the entire interest in an unincorporated trade or business is controlled by the owners. Also, the owners own more than ten percent in the case of a partnership or more than ten percent in value of the voting stock or all the stock in the case of a corporation. These ownership characteristics must have prevailed within the last 60 months.
The PBGC also does not cover public-sector pension plans, such as those that serve state and local government workers.
Finally, church plans and plans based in Puerto Rico also are not covered, although there are a few exceptions. If a person is concerned about whether their particular pension plan is covered by PBGC, a person can request a coverage determination from the PBGC..
What Is the Latest News About the Pension Benefit Guaranty Corporation?
The PBGC has guaranteed the retirement security of millions of Americans participating in private-sector, defined-benefit pension plans since 1974. In November of 2018 the PBGC reported that it had covered 4,919 failed single-employer plans and 81 multiemployer plans covering 62,300 retirees.
The PBGC’s single-employer program showed a “positive net position” in years past, meaning that it had enough funds to fulfill its obligations to retirees. But it was predicted that its multi-employer program would run out of money by approximately 2025. Multiemployer pension plans are plans that cover union members; union members may well work for different employers. For example, union members in the auto workers union may work for any number of auto manufacturers who are covered by the same collective bargaining agreement.
Basically, the PBGC is funded by insurance premiums, but the American Rescue Plan Act of 2021 also makes general federal tax revenues available to help at-risk multiemployer pension plans covered by the PBGC, so it should not run out of funds as predicted earlier. The 2021 law allows plans in financial trouble to apply to the PBGC for additional funding, enough to cover their obligations through the year 2051.
Do I Need an Attorney for Help with the PBGC?
If you are an employer or employee who is interested in learning more about whether the PBGC can help with your pension situation, you can find more information on the PBGC website or by requesting a coverage benefit determination. Or, you can consult a qualified workers’ compensation lawyer.
Employees who have determined they are covered by the PBGC and that their employer is violating its pension obligations should consult an experienced employment lawyer. An employment attorney can help you understand your rights and help you navigate through the necessary procedures to ensure you receive your pension benefits.
ERISA does provide that a person whose health or retirement plans are covered by the law may file a lawsuit in federal court to enforce the law. So, if you feel that your rights are not being protected, you should consult an employment lawyer to find out what you can do to protect your health and pension benefits
