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This booklet answers some of the most frequently asked questions about the Pension Benefit Guaranty Corporation (PBGC) and its termination insurance program for single-employer defined benefit pension plans. The answers apply to pension plan terminations taking place in 1994. For terminations that occurred in previous years, different rules may apply.
Additional information can be obtained from PBGC at the following address:
PBGC
Technical Assistance
Suite 930
1200 K Street, N.W.
Washington, DC 20005-4026
Telephone: (202) 326-4000
TTY/TDD: (202) 326-4179
NOTE: These telephone numbers are not toll-free numbers, and PBGC cannot accept collect calls.
Information in this booklet will be provided to sensory impaired individuals upon request.
The Pension Benefit Guaranty Corporation (PBGC) is a U.S. Government agency established by the Employee Retirement Income Security Act of 1974 (ERISA). PBGC administers two insurance programs that guarantee the payment of basic retirement benefits, within limits set by law, to participants of private defined benefit pension plans. PBGC programs are financed by premiums paid by employers sponsoring covered plans, in, vestment returns on PBGC assets, and recoveries from employers responsible for underfunded terminated plans.
A defined benefit pension plan is one that promises a specified monthly benefit at retirement. The amount of the defined benefit usually is based on factors such as age, earnings, and years of service. The plan may state this promised benefit as a specific dollar amount (for example, $100 per month at retirement), or through a formula used to calculate the benefit (for example, $10 per month for every year of service with your employer)
The PBGC insurance program described in this booklet covers most defined benefit pension plans sponsored either by a single employer or, if the plan is not collectively bargained, by a group of employers. PBGC also administers another insurance program -- not covered here -- for multiemployer pension plans, which are collectively bargained plans to which two or more unrelated employers are required to contribute.
Ask your plan administrator. Although PBGC insures most defined benefit plans, ERISA does exclude certain ones from PBGC coverage. For example, plans sponsored 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. In addition, PBGC does not insure defined contribution plans such as profit sharing, stock bonus, 401(k)'s or thrift plans.
If your plan is insured by PBGC, your plan administrator or employer must pay premiums to PBGC for insurance coverage as long as the plan continues. However, failure to pay these premiums does not cancel a plan's legally required insurance coverage. When an insured plan terminates with insufficient assets to pay guaranteed benefits, PBGC guarantees payment of benefits under the plan, subject to certain limitations described in more detail later in this booklet. PBGC steps in to pay benefits only when a plan does not have enough assets to pay at least the PBGC-guaranteed benefits.
Pension plans are terminated generally for business reasons or to substitute another plan. The law restricts the ways in which a termination may occur. However, your employer may terminate your plan in a "standard" or "distress" termination if certain legal requirements are met. In addition, PBGC may initiate termination of an underfunded plan when necessary to protect the interests of the plan participants, of the plan, or of PBGC.
A standard termination is a process through which an employer may end a fully funded plan. The plan administrator must first demonstrate to PBGC that the plan has enough money to provide all the pension benefits that, as of the date of plan termination, participants have earned under the plan. This amount is called the plan's "benefit liability."
If the plan qualifies for a standard termination, PBGC allows the administrator to complete the termination and distribute the plan assets by purchasing annuities from an insurance company, which pays benefits to each participant upon retirement, or by making lump-sum or other distributions provided by the plan. Whether you receive an annuity or a lump-sum payment, you will receive full payment of your earned benefit, including non-vested amounts. Once promised benefits are provided through the purchase of an annuity or through a lump-sum or other distribution, the PBGC guarantee ends. Plan participants must be informed of the identity of the insurer that will provide annuities 60 days before the proposed date of termination, if known at that time, but no later than 45 days before assets are distributed.
A distress termination is a process through which an employer may end a plan that does not have enough assets to pay all benefits. To do so, however, the employer must prove to PBGC that it and each of its corporate affiliates meet one of four strict financial distress tests. Basically, employers must show that they are in such poor financial condition, or that the pension costs are so burdensome, that the employer cannot continue in business and support the plan.
If the plan can pay at least the PBGC-guaranteed benefits, PBGC authorizes the administrator to distribute the plan assets as in a standard termination, although participants may not receive all benefits. If the plan does not have enough money to pay the PBGC-guaranteed benefits, PBGC will step in, take the plan over, and use PBGC funds to make sure that the guaranteed benefits due to participants are paid. PBGC, as trustee of the plan, will seek to recover plan underfunding from the employer; any recovery may increase the amount participants receive above the guarantee level.
In either a standard or distress termination, your plan administrator must inform you in writing that your pension plan is being terminated. This notice, called the Notice of Intent to Terminate, must be sent to each plan participant, beneficiary of a deceased participant, union representing plan participants, and alternate payee under a Qualified Domestic Relations Order, at least 60 and not more than 90 days before the proposed termination date. When PBGC initiates the termination of an underfunded pension plan, PBGC usually publishes a notice of the termination in legal advertisements in newspapers.
In a standard termination, your plan administrator must send you a second notice, called the Notice of Plan Benefits, no later than when PBGC is notified of the termination. This notice must be written in plain language and generally must tell you the amount of your benefit, the form in which your benefit has been valued, and the personal data and assumptions used in calculating your benefit. In a distress termination, full information concerning your benefits will be sent to PBGC, which will then notify you about the benefits payable to you under the insurance program.
If PBGC has to step in and use its funds to pay guaranteed benefits, PBGC will become trustee of your plan and notify all plan participants of this, action. When PBGC becomes trustee, it takes over the records of plan participants, continues benefit payments to current retirees without interruption, and begins benefit payments to new retirees. PBGC also will notify you of the benefit amount you will receive from PBGC and of your right to appeal PBGC's benefit determination.
The provisions of your plan, your age, and the form in which your benefit is paid determine the amount of your benefit. If you have been receiving monthly pension payments and PBGC becomes trustee of. your plan, PBGC initially will continue payments based on an estimate of the benefit you should receive under the insurance program.. PBGC will then examine the provisions of your plan and your personal data in detail, calculate your benefit, and notify you of the benefit amount you are due.
If you are underpaid, you will receive the amount underpaid plus interest in a lump sum when your final benefit is determined. If you are overpaid, you will have to pay back the overpayments. Generally, PBGC recovers overpayments by reducing the monthly benefit payment, but by no more than 10 percent of the monthly benefit amount.
PBGC only withholds Federal income taxes, not state taxes. You will have to make arrangements to pay other amounts now being withheld.
PBGC guarantees "basic benefits" -- those vested monthly pension benefits that provide income when you retire. Basic benefits include pension benefits beginning at normal retirement age, certain early retirement and disability benefits, and certain benefits for survivors of deceased plan participants. The type of benefit guaranteed by PBGC depends on the benefit you are entitled to receive as of the date of plan termination. However, all benefits that a pension plan provides may not be basic benefits and, therefore, may not be guaranteed under the insurance program. For example, health and welfare benefits and vacation pay are not guaranteed.
If you retire before plan termination and your benefit includes a survivor's benefit, or you are receiving a survivor's benefit before plan termination,n, the survivors benefit will be paid by PBGC. If you begin receiving a benefit after plan termination, PBGC will pay you a "joint-and-survivor" annuity if you are married at retirement, unless you waive the annuity with your spouse's consent. A joint-and-survivor annuity generally provides a reduced benefit for the participant's life, with a portion of the benefit continuing to the surviving spouse. Between plan termination and your retirement, PBGC also provides you with "preretirement survivor annuity" coverage for any period during which you were married, unless you waive the coverage with your spouse's consent. This coverage provides a survivor benefit if you die before retiring. Monthly benefits for the participant and beneficiary generally will be reduced for this coverage.
The amount you receive will depend on how long you worked under the plan, the provisions of your pension plan, on funding by the employer prior to plan termination, on PBGC's recoveries from the employer after plan termination, on PBGC's maximum guarantee limit on the date of plan termination, and on the extent to which pre-termination benefit increases are guaranteed. Benefit amounts will vary from participant to participant: The amount you receive will never be more than you would have received if your pension plan had remained in operation and will never be less than the amount guaranteed by PBGC.
Benefits guaranteed by PBGC are subject to a maximum limit set annually by law, under provisions of ERISA. For pension plans terminating in 1994, the maximum guaranteed amount is $2,556.82 per month ($30,681.84 yearly) for a participant who retires at age 65. This maximum monthly payment must be reduced if your benefit is paid or payable to you before age 65, or is paid to you in a form other than an annuity for your life alone, such as a form that provides for survivors' benefits. Examples of the maximum guarantee appear in the table on the last page.
Yes. If your plan has been amended to increase basic benefits and is terminated within five years after the adoption or effective date of the amendment, whichever is later, the increase may not be fully guaranteed. In such a case, PBGC must apply a "phase in rule," guaranteeing the larger of 20% or $20 per month of the increase in benefits for each whole year since the amendment. There are other limitations as well, including a special rule for participants who own more than 10% of the company sponsoring the pension plan.
Q. What if my pension plan provides benefits other than guaranteed benefits, or my benefits are more than PBGC guarantees -- will I receive these benefits if my underfunded plan terminates?
If your plan contains enough money at termination to pay the additional benefits, you should receive them. If your plan does not have enough money at termination to pay all promised benefits but does have sufficient assets to pay some non-guaranteed benefits, or if PBGC recovers sufficient amounts from your employer, some participants may receive a portion of their nonguaranteed benefit in addition to their guaranteed benefit.
If your plan terminates with enough money to cover at least guaranteed benefits and it doesn't rule out lump-sum distributions, then you may choose a lump-sum option. If your plan is trusteed by PBGC and the plan allowed or required employee contributions, you may elect a lump-sum return of these contributions with interest. If you choose a refund of these contributions, PBGC will reduce the amount of your monthly benefit to reflect the refund. If the value of your benefit is $3,500 or less as of the date your plan terminated, and PBGC trustees your plan, PBGC., pays your benefit in a lump-sum payment if you were not retired when the plan terminated.
Yes. You can make a "tax-free rollover" into an Individual Retirement Account (IRA), but under the new tax provisions it must be in a direct rollover from your plan to the IRA. By choosing this rollover, you can defer taxes on your distribution until you begin receiving benefits from your IRA. The Internal Revenue Service (IRS) administers the laws controlling IRA's. For more information, call or write the IRS office nearest you.
No. PBGC does not have an annual COLA provision. Although the maximum amount guaranteed is adjusted yearly for inflation, the maximum amount applicable to a particular plan is fixed as of that plan's date of termination. (See table on last page for maximum guarantee levels.) However, COLAs provided by your plan that were effective prior to plan termination are guaranteed subject to the maximum guarantee and "phase-in" limits described on pages 9 and 10.
If you have already retired when PBGC becomes trustee of your plan, you will continue receiving at least your estimated guaranteed pension on a monthly basis. If you have not yet retired, PBGC will begin paying your benefits when you become eligible and apply.
PBGC will make every effort to assure that your benefit payments continue without interruption until PBGC assumes control of the plan. You are not required to do anything until you receive a letter from PBGC requesting the information it needs in order to maintain plan records. PBGC, also will notify you if adjustments are necessary in the amount of your benefits because of the limitations on PBGC's guarantees.
When PBGC becomes trustee of a terminated plan, it obtains a list of plan participants from the plan administrator. If you have changed your name or address, or if you believe that the plan administrator does not have the information PBGC will need to get in touch with you, send the plan administrator or PBGC the correct information. You may contact PBGC at the address in the front of this booklet. Please be sure to identify the name of your pension plan in all correspondence to PBGC. PBGC will contact you to let you know it has become trustee of your plan. You also will be informed of the amount of your benefit that PBGC will pay and the procedure for filing an application for benefits when you are ready to retire.
PBGC will be glad to answer questions you may have about its insurance programs or retirement guarantees. Write or call PBGC at the address or telephone number listed in the front of this booklet. However, for specific questions concerning your plan, contact your plan administrator. If PBGC has trusteed your plan, then PBGC will provide you with the name of a person to contact.
Examples of the maximum guarantee for a single life annuity with no survivor benefits are shown for retirement at ages 65, 62, 60 and 55. The maximum is further reduced if the benefit is paid in a form other than annuity for a single life alone such as a form that provides for survivor benefits. The actual guarantee limit will depend on a participant's date of birth and plan provisions.
Monthly Monthly Monthly Monthly
Year Plan Guarantee Guarantee Guarantee Guarantee
Terminated Limit At Limit At Limit At Limit At
Age 65 Age 62 Age 60 Age 55
1981 $1,261.36 $996.47 $819.88 $567.61
1982 $1,380.68 $1,090.74 $897.44 $621.31
1983 $1,517.05 $1,198.47 $986.08 $682.67
1984 $1,602.27 $1,265.79 $1,041.48 $721.02
1985 $1,687.50 $1,333.13 $1,096.88 $759.38
1986 $1,789.77 $1,413.92 $1,163.35 $805.40
1987 $1,857.95 $1,467.78 $1,207.67 $836.08
1988 $1,909.09 $1,508.18 $1,240.91 $859.09
1989 $2,028.41 $1,602.44 $1,318.47 $912.78
1990 $2,164.77 $1,710.17 $1,407.10 $974.15
1991 $2,250.00 $1,777.50 $1,462.50 $1,012.50
1992 $2,352.27 $1,858.29 $1,528.98 $1,058.52
1993 $2,437.50 $1,925.50 $1584.38 $1,096.88
1994 $2,556.82 $2,019.89 $1,661.93 $1,150.57
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