The information about priority categories is simplified. None of the information takes precedence over legislation, regulations, or specific interpretations or rulings.
When a plan that PBGC insures terminates without enough assets to pay all of the pension benefits promised by the plan, PBGC becomes trustee of the plan and calculates the amount of participants' benefits that PBGC can pay according to the Employee Retirement Income Security Act (ERISA).
ERISA requires that, when PBGC takes over a plan, we calculate each participant's benefit in two ways:
- First, we calculate the benefits that we guarantee for each participant based on the plan's terms and ERISA. This is the minimum amount that PBGC will pay. (For more information on guaranteed benefits, see What PBGC Guarantees and PBGC's Guarantees for Single-Employer Pension Plans.)
- Second, we calculate the benefits that we can pay using the assets available in the plan when it terminated. The benefits that we can pay from plan assets are calculated according to the terms of the plan and the "priority categories" process required by ERISA (described in detail below).
If plan assets allow PBGC to pay more than a participant's guaranteed benefit, we will do so. PBGC also may pay additional amounts based on our recoveries from employers—for example, a recovery in a bankruptcy case. However, PBGC can never pay a participant a pension benefit greater than what the plan promised.
Priority Categories: PBGC uses ERISA's "priority categories" process to determine the benefits payable from plan assets. Here's how the process works:
- PBGC determines which of the six priority categories (described below) each plan participant's benefits fall into. A participant's benefit may be divided among several priority categories—for example, a portion in priority category 3 (PC3), a portion in priority category 4 (PC4), and a portion in priority category 5 (PC5).
- Next, PBGC adds up the values of the benefits for all the participants in each priority category.
- PBGC then looks at the plan's assets to see how much of the benefits the assets can pay in each of the priority categories. We start with PC1 and determine whether the assets will cover the values of benefits, if any, in that category. If so, then the remaining assets go to the next priority category (PC2), and so on until the plan's assets run out. In the category in which the assets run out, PBGC divides the assets among the benefits in that category under ERISA's rules.
Based on the above process, PBGC determines how much of a participant's plan benefit can be paid from the plan's assets. PBGC then compares that amount to the amount of the participant's guaranteed benefit and pays the guaranteed benefit plus any additional amount funded by the plan assets.
Below is a brief summary of the six priority categories. You can also see a chart that shows the priority categories process.
PC1 (Voluntary employee contributions)
First, plan assets go to benefits derived from voluntary employee contributions to the plan. PBGC does not guarantee these benefits. (It is extremely rare for a plan to have PC1 benefits.)
PC2 (Mandatory employee contributions)
Next, any remaining assets go to benefits derived from an employee's mandatory contributions. This is money a participant paid into the plan as a condition of employment or plan participation, or to get employer-funded plan benefits. PBGC guarantees most of these benefits and it is rare for plan assets to run out in PC2. (It is not typical for a plan to have PC2 benefits.)
PC3 (Participants who retired, or could have retired, 3 years or more before plan termination)
Next, any remaining assets go to benefits promised to participants who were retired, or eligible to retire, three years or more before the date the plan terminated. PC3 benefits can be a mix of guaranteed and nonguaranteed benefits.
Example: If a plan's termination date was August 1, 2010, participants who retired or were eligible to retire on or before August 1, 2007, will have benefits in PC3. A participant who first became eligible to retire after August 1, 2007, will not have any benefits in PC3.
What date is used to calculate a person's PC3 benefit?
- For a participant who retired more than three years before the plan termination date, PBGC generally uses that person's actual retirement date to calculate the PC3 benefit.
- For a participant who was eligible to retire three years or more before the plan termination date, but did not retire, PBGC generally calculates the PC3 benefit as of three years before the plan termination date.
- In both cases, PC3 benefits generally do not include benefit increases that were made during the five years before the plan termination date.
Typically, if a participant receives more from PBGC than his or her guaranteed benefit, it is because all or much of the participant's benefit is in PC3, and plan assets cover all or most PC3 benefits. See PC3 Benefits – Q&As for more information.
Note: If the plan terminated while the employer was in a bankruptcy that started on or after September 16, 2006, the employer's bankruptcy filing date is used instead of the plan termination date for PC3 eligibility and benefit calculations.
Example: If a plan terminated on August 1, 2010, while the employer was in bankruptcy, and the employer's bankruptcy filing date was November 1, 2008, participants who were retired or eligible to retire on or before November 1, 2005, will have benefits in PC3. A participant who first became eligible to retire after November 1, 2005, will not have any benefits in PC3.
PC4 (All other guaranteed benefits)
Next, any remaining assets go to benefits that PBGC guarantees but that do not fall within earlier priority categories—for example, the guaranteed benefits of participants who have no benefits in PC3. Typically, there are not enough plan assets to fully pay for PC4 benefits, so PBGC uses its insurance funds to make up the shortfall.
PC4 also may include some benefits that PBGC does not guarantee for participants who are receiving benefits from two or more PBGC-trusteed plans and for participants who owned at least half of the company that sponsored the plan. PBGC pays these nonguaranteed benefits only if there are enough plan assets allocated to PC4 to pay for these benefits.
Note: If the plan terminated while the employer was in a bankruptcy that started on or after September 16, 2006, the employer's bankruptcy filing date is used instead of the plan termination date for determining guaranteed benefits.
PC5 and PC6 (All other nonguaranteed benefits)
Next, any remaining assets go to other benefits promised by the plan but not guaranteed by PBGC—for example, benefits that exceed PBGC's guarantee and that do not fall into any of the earlier priority categories. These benefits are in PC5 if they are nonforfeitable (generally, vested benefits); otherwise, they are in PC6. It is not typical for a plan that PBGC takes over to have enough assets or recoveries from employers to pay significant benefits in PC5 or PC6.