- Small professional service plans
- Substantial owner plans
- Certain Puerto Rico plans
- Certain church plans
PBGC insures most private-sector (i.e., non-governmental) defined benefit pension plans.
When a PBGC-covered single-employer plan fails, PBGC pays participants their earned benefits up to certain legal limits. When a PBGC-covered multiemployer plan becomes insolvent, PBGC provides financial assistance so that the plan can pay benefits up to certain legal limits. Covered plans must comply with PBGC’s rules and requirements, including paying PBGC premiums.
Sponsors of covered plans cannot waive coverage. Similarly, with very few exceptions (i.e., church plans and certain plans based in Puerto Rico), non-covered plans cannot elect to be covered. If a plan is not covered by PBGC, paying PBGC premiums will not trigger coverage.
Whether a private-sector defined benefit plan is or is not covered by PBGC is based on the law (See ERISA Section 4021). In most cases, if such a plan satisfies the section 401(a) tax requirements of the Internal Revenue Code (i.e., if it is a “qualified defined benefit plan”), it is covered by PBGC. However, there are some exceptions as explained below.
Although it’s usually easy to determine if a qualified defined benefit plan is (or is not) covered by PBGC, that isn’t always the case. If you are not absolutely certain your defined benefit plan is (or is not) covered by PBGC, it is very important that you request a coverage determination.
Private-sector defined benefit plans that are not covered by PBGC
Small Professional Service Plans
A private-sector qualified defined benefit plan is exempt from PBGC coverage if:
- It has not covered more than 25 active participants at any time since ERISA was enacted (September 2, 1974), and
- It is established and maintained by a “professional service employer.”
For this purpose, an organization, partnership, etc. is considered a “professional service employer” if its principal business is the performance of professional services and it is owned or controlled by one or more “professional individuals.” ERISA 4021(c)(2)(B) lists 16 types of people considered “professional individuals” for this purpose (e.g., physicians, attorneys, and architects), but the law makes clear that the list is not exhaustive.
With respect to professions that aren’t explicitly listed in the statute (e.g., financial advisors), PBGC will make a determination as to whether the individual in question is a “professional individual” based on an analysis of the services performed and the expertise required to perform them.
Factors PBGC considers when determining whether someone is a “professional individual”
PBGC makes these determinations on a case-by-case basis, taking into account, among other things, the individual’s educational degrees, certifications, and accreditations. For example, in the context of financial/investment advisors, PBGC looks at all of the following:
- Educational background
- Level of education required for position
- Coursework taken
- Licensures and certifications (mandatory and optional)
- Examinations requirements
- Continuing education requirements
- Years of work experience
- Teaching experience
- Public trust/ethical standards
- Securities and Exchange Commission and/or Financial Industry Regulatory Authority registration.
In a situation where the individual’s knowledge comes from a general academic education, an apprenticeship, or from training in the performance of routine mental, manual, or physical processes, PBGC generally finds that the person does not meet the standard of a “professional individual.” On the other hand, if a person provides services which require knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, PBGC generally finds that the individual is a professional. In addition, to be considered a “professional individual,” the individual’s performance must require the consistent exercise of discretion and judgment and be predominantly intellectual in character.
Lastly, to qualify for the small professional service plan exemption, the professional individual(s) must be engaged in the same professional service as the principal business of the plan sponsor. For example, consider a situation where:
- Company X is owned by an attorney, John Smith.
- Company X sponsors a defined benefit plan that has never had more than 25 participants.
- Company X’s primary business is the sale of insurance products.
In this scenario, despite the fact that the company’s owner is an attorney (a profession that’s on the statutory list of professional individuals), Company X’s defined benefit plan would not qualify for the professional service plan coverage exception.
Examples of PBGC decisions regarding Small Professional Service Plan Determinations
Substantial Owner Plans
A private-sector qualified defined benefit plan is exempt from PBGC coverage if it is established and maintained exclusively for substantial owners of the plan sponsor (i.e., if all participants are substantial owners).
A participant is a substantial owner if, at any time during the last 60 months, the participant:
- Owns the entire interest in an unincorporated trade or business, or
- In the case of a partnership, is a partner who owns, directly or indirectly, more than ten percent of either the capital interest or the profits interest in such partnership, or
- In the case of a corporation, owns directly or indirectly more than ten percent in value of either the voting stock of that corporation or all the stock of that corporation.
The constructive ownership rules, including spousal attribution rules, of IRC § 414(c) and § 1563(e) apply only in the case of a corporation.
Certain Puerto Rico Plans
Some Puerto Rico based defined benefit plans (i.e., plans that cover only Puerto Rican residents) are covered by PBGC and some are not. PBGC coverage depends on whether the plan is considered a qualified plan under IRC 401(a).
In general, a Puerto Rico based plan does not meet the 401(a) qualification requirements, and thus is not covered by PBGC, if the trust was created or organized in Puerto Rico.
Puerto Rico plans that do not meet the 401(a) qualification requirements may make an irrevocable election to be considered a qualified plan. See Treasury Regulation §1.401(a)-50 and ERISA § 1022(i)(2). Plans making this election are covered by PBGC.
Puerto Rico Plans that are unsure of their PBGC coverage status should request a coverage determination. In particular, plans that were created or organized in Puerto Rico that have been operating under the assumption that they are covered by PBGC (and that have been paying PBGC premiums accordingly) should request a coverage determination if they did not make an election in accordance with Treasury Regulation §1.401(a)-50.
Certain Church Plans
A private-sector defined benefit plan established and maintained for its employees by a tax-exempt church, convention, or an association of churches is generally considered a “church plan.” See IRC § 414(e). Church plans are generally not covered by PBGC.
Exception to general “non-coverage” rule
IRC § 410(d) provides that church plans may make an irrevocable election to be subject to certain IRC § 401(a) tax qualification requirements (e.g., participation, vesting, funding). Plans making a 410(d) election may also choose to be covered by PBGC. This is accomplished by notifying PBGC that it wishes to be covered by PBGC.
Accordingly, a church plan is exempt from PBGC coverage unless it makes a 410(d) election and notifies the PBGC of its desire to be covered by PBGC.
Reviewing coverage determination requests
PBGC defers to the Internal Revenue Service when determining whether a plan is a church plan. Therefore, when reviewing coverage determination requests from plans that believe they qualify for the church plan exception, PBGC’s longstanding practice is to require that plans first obtain an IRS private letter ruling (PLR) indicating that the plan is a church plan. This keeps the responsibility for making church plan determinations with the agency that has the authority to define the criteria and ensures consistency.
Requesting a coverage determination
Because PBGC coverage is based on the law, and the determination is controlled by the facts and circumstances surrounding the establishment and operation of each individual pension plan, it is sometimes very difficult for plan sponsors, practitioners and participants to know if their plan is protected by the PBGC insurance program. Plan sponsors should be certain that their plan is (or is not) covered. Requests for a coverage determination may be submitted to PBGC:
By email at:
By mail at:
Pension Benefit Guaranty Corporation
To speak to someone before submitting a coverage determination request, call 800-736-2444 or 202-326-4242.
Because each situation is unique, PBGC does not provide a comprehensive list of information to be included in a request for a coverage determination. Instead, PBGC asks that the request contain sufficient information to enable PBGC to make a determination. The following table illustrates the types of information that can be helpful.
Reason for requesting determination
|Small professional service plan||
Substantial Owner Plan
Puerto Rico Plan