How does PBGC's Maximum Guarantee Limit apply to benefits in the terminated pension plan of US Airways pilots?
The maximum monthly benefit guaranteeable by PBGC is stated in terms of a monthly benefit from PBGC at age 65 in the form of a life-only annuity. PBGC is prohibited under the Employee Retirement Income Security Act (ERISA) from guaranteeing benefits with a higher actuarial value for participants whose payments from PBGC start earlier than age 65 or include survivor benefits.
The monthly benefit PBGC can guarantee for a retiree whose payments from PBGC begin before age 65 is lower to account for the longer expected payout period. This is not an "early withdrawal penalty" for the younger retiree. It is how the law equalizes the level of protection among retirees of different ages receiving PBGC guarantees in a failed plan.
Thousands of steelworkers and other participants who retired in their 50s or early 60s have had their benefits reduced because of this rule. Social Security operates in the same way as the PBGC maximum guarantee limit — a person who commences his or her Social Security benefit at age 62 receives a lower monthly benefit than if he or she waited until age 65 or later.
The law does not take into consideration a plan's "normal retirement age" in defining the maximum guarantee; rather, it explicitly expresses the maximum guarantee limit in terms of "the actuarial value of a monthly benefit in the form of a life annuity commencing at age 65." (ERISA §4022(b)(3).)
Upon the termination of the Retirement Income Plan for Pilots of US Airways. Inc. (Pilots' Plan), many pilots had accrued pension benefits that were above the maximum guarantee. If plan assets allow PBGC to pay more than a participant's guaranteed benefit, we do so. ERISA allocates plan assets among guaranteed and non-guaranteed benefits according to statutory priorities. Priority Category 3 (PC3) is usually the highest priority category containing non-guaranteed benefits as well as guaranteed benefits.
Generally, PC3 benefits are benefits that were provided under the plan for five years before plan termination and are payable to participants who retired (or were eligible to retire) three years or more before plan termination. Since the earliest retirement age allowed under the terms of the Pilots' Plan is age 50, participants who were age 53 or older on March 31, 2003, have benefits in PC3. Because the Pilots' Plan had enough assets to pay for all benefits assigned to PC3, PBGC pays all guaranteed and non-guaranteed benefits in PC3.
However, because plan assets were insufficient to provide the remaining non-guaranteed benefits in lower priority categories, many pilots suffered considerable benefit losses as a result of the employer's failure to adequately fund promised benefits.