Pension Benefit Guaranty Corporation, or PBGC, insures defined benefit plans offered by private-sector employers. The PBGC only covers certain employer’s who established defined benefit plans. Being protected by the PBGC has some advantages and disadvantages.
PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans. If a defined benefit plan ends ( “plan termination”) without sufficient money to pay all benefits, PBGC’s insurance program will pay the benefit provided by the pension plan up to the limits set by law. PBGC is funded from insurance premiums paid by companies whose plans protected by the PBGC, from the assets of pension plans that have been taken over, and from recoveries from the companies formerly responsible for the plans, but not from taxes.
PBGC insures defined benefit plans offered by private-sector employers. Most promise to pay a specified benefit, usually a monthly amount, at retirement. Others, including cash-balance plans, may state the promised benefit as a single value. PBGC does not insure defined contribution plans, such as a 401(k) plan.
PBGC usually does not insure plans offered by:
- professional service employers (such as doctors and lawyers) that have never had more than 25 active participants since the enactment date of ERISA, the federal pension law
- church groups
- federal, state, or local governments
The PBGC offers protection against pension plans being terminated without paying all sufficient benefits to plan participants. However, being covered by the PBGC means additional fees for insurance as well as limits on employer profit sharing contributions.
