Is Your Pension Guaranteed? What does the PBGC Guarantee?

by Papa Boomer on May 6, 2010

What happens if the company you worked for goes “belly up’?  Can the company you worked for terminate your plan?  What can a Boomer plan on?

Is Your Pension Guaranteed? What does the PBGC Guarantee?
Creative Commons License photo credit: patrick h. lauke

Employers can end a pension plan through a process called” Plan Termination”.  There are two ways an employer can terminate a pension plan.  The employer can end the plan in a “standard termination” but only after showing the Pension Benefit Guaranty Corporation (here after referred to as “PBGC “) that the plan has enough money to pay all benefits owed to the 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 a one lump sum payment that covers your entire benefit.

What if the plan is not fully funded?

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 the PBGC that the employer cannot remain in business unless the plan is terminated.  If the application is granted, the PBGC will take over the plan and pay the plan benefits, up to the legal limits, using plan assets and PBGC guarantee funds.  (Under certain circumstances, the PBGC may take action on its own to end a pension plan without an application if it determines that there is not enough money to pay benefits currently due.)

If a single employer pension plan terminates without enough money to pay all the benefits, the PBGC will take over the plan and pay benefits through its insurance program.  Most participants and beneficiaries receive all of the pension benefits they would have received under the plan, but some people may lose certain benefits that are not guaranteed.   

Guaranty “Limits” of the Pension Benefit Guaranty Corporation

The PBGC pays pension benefits up to certain maximum limits.  The maximum guaranteed benefit is $4,500 per month, or $54,000 per year, payable in the form of straight life annuity, for a 65 year old person in a plan that terminates in 2010.  The maximum benefit may be reduced for an individual who is younger than 65.  The maximum benefit will also be reduced when a benefit is provided to a survivor of a plan participant.

PBGC Maximum Monthly Guarantees (see: PBGC Tables)

What is Guaranteed by the PBGC?

The PBGC does guarantees “basic benefits” earned before a plan is teminated, which includes:

  • Pension benefits at normal retirement age
  • Most early retirement benefits
  • Annuity benefits for survivors of plan participants
  • Disability benefits for a disability that occurred before the date the plan terminated

What is not Guaranteed?

The PBGC does not guarantee certain types of benefits.

The PBGC does not guarantee:

  • Benefits for for which you do not have a vested right when the plan terminates, usually because you have not worked enough years with the company.
  • Benefits for which you have not met all age, service, or other requirements at the time the plan terminates.
  • Benefit increases and new benefits that have been in place for less than one year.
  • Benefits in place for less than five years are only partly guaranteed.
  • Early retirement benefits that are greater than payments at normal retirement age.
  • Health and welfare benefits.
  • Vacation pay.
  • Severance benefits.
  • Lump sum death benefits for a death that occurs after the date the plan ends.
  • Disability benefits for a disability that occurs after the plan’s termination date.
  • Lump sum payments exceeding $5,000 are generally not paid.

Even if certain benefits are not guaranteed, participants and beneficiaries still may receive some of those benefits from the PBGC depending on how much money the terminated plan has and how much the PBGC collects from the employer.

In Summary

In summary, your pension benefits are guaranteed to legal limits by the PBGC, other benefits not considered part of the actual pension plan such as health care insurance, life insurance, vacation benefits, and severance payments are not considered part of a pension plan and may not necessarily be covered.  So, …When they say nothing in life is guaranteed! … They are wrong!  PB.

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{ 2 comments… read them below or add one }

Bank Guarantee March 15, 2011 at 3:58 pm

Most of the people don’t know about their Pension benefits, your article its very helpful.

Pamela August 20, 2011 at 8:08 pm

My employer has been shut down by a goverment agency and they are in run-off, no new business, and maybe total conservatorship in 60 days.

I have been working towards taking the early retirement my employer offered, 20 years service and age 55. Right now I have 18 years service at age 48.

I’ve read the information on the PBGC web site but I am still unclear on something. From what I understand from maximum benefits chart, I would be eligible for $1395 per month if age 48 and the plan terminated in 2011. What I am not totally clear on is would that be payable at age 55 for early retirement or, would that not be paid until normal retirement age?

According to what I just read in your post, “Benefits for which you have not met all age, service, or other requirements at the time the plan terminates.”, that looks like if the plan gets taken over by PBGC before I reach age 55/20 years, I will not be able to receive a pension at age 55.

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