Defined Benefit Plan Annual Funding Notices<p> Model Notices with Cross-References to 5500 Forms

3/11/2009

The Pension Protection Act (PPA) requires an annual funding notice for most Defined Benefit (DB) plans that are subject to the PBGC. Under the PPA, the Department of Labor was required to provide a model annual funding notice not later than August 17, 2007. A model notice was released along with several Q&As on February 10, 2009 in Field Assistance Bulletin No. 2009-01 ("FAB 2009-1"). At the end of this article we provide annotated model annual funding notices with cross-references to the 5500 forms for single employer and multiemployer plans. However, we will first provide some basic background information on the new annual funding notice requirements.

Background

Although the PPA appears to require the annual funding notice for all DB plans covered by PBGC, FAB 2009-1 clarifies that the DOL will not take enforcement action against an insolvent multiemployer plan that is in compliance with the insolvency notice requirements under ERISA, since the annual notice may be redundant in those circumstances.

Please note that DB plans not subject to PBGC must still file a summary annual report ("SAR"). All DB plans are subject to PBGC coverage except for those offered by "professional service employers" (such as doctors and lawyers) with fewer than 26 employees, by church groups, or by federal, state or local governments.

The annual funding notice must generally be provided by a date dependent on the size of the DB plan. For plans with more than 100 participants, the annual funding notice must be provided no later than 120 days after the end of the 2008 plan year. Smaller plans with 100 or fewer participants eligible for the extended 5500 filing deadlines have until the 5500 is filed. The 2008 plan year is the plan year that begins after 12/31/07.

As mentioned above, the annual funding notice replaces the Summary Annual Report (SAR) for DB plans subject to PBGC. The annual funding notice also replaces the PBGC section 4011 notices for under-funded plans that were previously required (no longer required for plan years beginning after 12/31/06). As noted above, DB plans that are not subject to PBGC must continue to provide SARs.

The annual funding notice must be distributed to:

The PBGC (FAB 2009-01 clarifies that DOL will take no action against single-employer plans with liabilities less than $50 million for failure to submit the notices to the PBGC, provided notices are provided within 30 days of a request by PBGC)
- Multiemployer plans should submit the annual funding notice electronically to multiemployerprogram@pbgc.gov or to:
  PBGC
  ATTN: Multiemployer Data Coordinator
  1200 K Street NW., Suite 930
  Washington, DC 20005-4026
- Single employer plans that need to submit the Annual Funding Notice to PBGC may submit the Annual Funding Notice electronically to single-employerAFN@pbgc.gov or to:
  PBGC
  ATTN: Single-employer AFN Coordinator
  1200 K Street NW., Suite 270
  Washington, DC 20005-4026
Each plan participant and beneficiary;
Each labor organization representing participants/beneficiaries (if applicable); and
For multiemployer plans, each employer with an obligation to contribute to the plan.

Annotated Model Notices

On the next several pages, we provide the model notices for single employer and multi employer plans. We have removed the DOL instructions and instead provided our annotations in italics. Wherever possible, we have indicated what information may be inserted from 5500 information. Information that must be included by the user is indicated in bold type font, as are sentences or phrases that should only be provided if applicable. Please note that the annotations are our best estimate as to the source of the required information. We welcome any comments as to any modifications that may be required.

Model Single-Employer Plan Notice

[return to top]

Annual Funding Notice

For [insert name of pension plan]

Introduction

This notice includes important funding information about your pension plan ("the Plan"). This notice also provides a summary of federal rules governing the termination of single-employer defined benefit pension plans and of benefit payments guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. This notice is for the plan year beginning [Part I, 5500] and ending [Part I, 5500] ("Plan Year").

Funding Target Attainment Percentage

The funding target attainment percentage of a plan is a measure of how well the plan is funded on a particular date. This percentage for a plan year is obtained by dividing the Plan's Net Plan Assets by Plan Liabilities on the Valuation Date. In general, the higher the percentage, the better funded the plan. The Plan's funding target attainment percentage for the Plan Year and 2 preceding plan years is shown in the chart below, along with a statement of the value of the Plan's assets and liabilities for the same period.

	2008 Plan Year	2007 Plan Year	2006 Plan Year
1. Valuation Date	[line 1, SB]
2. Plan Assets
a. Total Plan Assets	[line 2b, SB]	N/A	N/A
b. Funding Standard Carryover Balance	[13(a), SB]	N/A	N/A
c. Prefunding Balance	[N/A]	N/A	N/A
d. Net Plan Assets (a) - (b) - (c) = (d)	[calculated from above]	N/A	N/A
3. Plan Liabilities	[line 3d(2), SB]	N/A	N/A
4. At-Risk Liabilities	[line 4(a), SB if applicable; otherwise, N/A]	N/A	N/A
5. Funding Target Attainment Percentage (2d)/(3)	[Calculated from above]	N/A	N/A

NOTE: The form SB requires the funding target attainment percentage to be corrected for interest if the valuation date is not the first of the year and further requires plans in at-risk status to report a funding target attainment percentage with the at-risk liabilities as the denominator. FAB 2009-1 allows plans to instead calculate the funding target attainment percentage by dividing net plan assets by plan liabilities.

Transition Data

For a brief transition period, the Plan is not required by law to report certain funding related information because such information may not exist for plan years before 2008. The plan has entered "not applicable" in the chart above to identify the information it does not have. In lieu of that information, however, the Plan is providing you with comparable information that reflects the funding status of the Plan under the law then in effect. For 2007, the Plan's "funding target attainment percentage" was [calculated from net plan assets divided by plan liabilities; if the percentage is equal to or greater than 100 percent, you may insert "at least 100 percent"], the Plan's net assets were [(line 1b(2)*) - (Line 9h) of 2007 Schedule B], and Plan liabilities were [line 2b(4), column 2 of 2007 Schedule B]. For 2006, the Plan's "funded current liability percentage" was [Line 2c of 2006 Schedule B (or calculated from lines 1b(2) and 2b if greater than 70%); if the percentage is equal to or greater than 100 percent, you may insert "at least 100 percent"], the Plan's assets were [line 1b(2) of 2006 Schedule B], and Plan liabilities were [line 2b(4), column 2 of 2006 Schedule B].

* NOTE: Line 1b(2) of the 2007 Schedule SB should not be used if it is less than 90% or more than 110% of the fair market value of the assets as of the valuation date (Line 1b(1) of the 2007 Schedule SB). In this case, 90% or 110% of Line 1b(1) of the 2007 Schedule SB would be inserted above in place of Line 1b(2). See Q-16 of FAB 2009-1.

Credit Balances

Credit balances were subtracted from the Plan's assets before calculating the funding target attainment percentage in the chart above. While pension plans are permitted to maintain credit balances (called "funding standard carryover balance" or "prefunding balance") for funding purposes, such credits may not be taken into account when calculating a plan's funding target attainment percentage. A plan might have a credit balance, for example, if in a prior year an employer made contributions at a level in excess of the minimum level required by law. Generally, the excess payments are counted as "credits" and may be applied in future years toward the minimum level of contributions a plan sponsor is required by law to make to the plan in those years.

At-Risk Status [include this section only in the case of a plan required to report At-Risk Liabilities - if Line 4 of Schedule SB is checked]

If a plan's funding target attainment percentage for the prior plan year is below a specified legal threshold, the plan is considered under law to be in "at-risk" status. "At-risk" plans are required to use actuarial assumptions that result in a higher value of plan liabilities and, consequently, require more funding by the employer. For example, plans in "at-risk" status are required to assume that all workers eligible to retire in the next 10 years will do so as soon as they can, and that they will take their distribution in whatever form would create the highest cost to the plan, without regard to whether those workers actually do so. The Plan has been determined to be in "at-risk" status in 2008. The increased liabilities to the Plan as a result of being in "at-risk" status are reflected in the At-Risk Liabilities row in the chart above.

Fair Market Value of Assets

Participant Information

The total number of participants in the plan as of the Plan's valuation date was [enter value*]. Of this number, [enter value**] were active participants, [enter value**] were retired or separated from service and receiving benefits, and [enter value**] were retired or separated from service and entitled to future benefits.

* If the valuation date is the first day of the plan year this information may be taken from Line 6 of the 5500. If the valuation date is another date, the value will need to be determined as of the valuation date.

** Similar numbers are provided in the 5500, lines 7(a), (b) and (c). However, the 5500 values are from the end of the plan year. FAB 2009-1 indicates this information should be as of the valuation date (typically, the first day of the plan year).

Funding & Investment Policies

The law requires that every pension plan have a procedure for establishing a funding policy to carry out the plan objectives. A funding policy relates to the level of contributions needed to pay for promised benefits. The funding policy of the Plan is [insert a summary statement of the Plan's funding policy].

Once money is contributed to the Plan, the money is invested by plan officials called fiduciaries. Specific investments are made in accordance with the Plan's investment policy. Generally speaking, an investment policy is a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions. The investment policy of the Plan is [insert a summary statement of the Plan's investment policy].

In accordance with the Plan's investment policy, the Plan's assets were allocated among the following categories of investments, as of the end of the Plan Year. These allocations are percentages of total assets:

NOTE: The values in the following chart can be taken from Schedule H and the line numbers below are from the Schedule H. Small plans not filing a Schedule H, however, will have to determine this information.

Asset Allocations	Percentage
1. Interest-bearing cash	Line 1c(1)(b) / total assets
2. U.S. Government securities	Line 1c(2)(b) / total assets
3. Corporate debt instruments (other than employer securities):
Preferred	Line 1c(3)(A)(b) / total assets
All other	Line 1c(3)(B)(b) / total assets
4. Corporate stocks (other than employer securities):
Preferred	Line 1c(4)(A)(b) / total assets
All other	Line 1c(4)(A)(b) / total assets
5. Partnership/joint venture interests	Line 1c(5)(b) / total assets
6. Real estate (other than employer real property)	Line 1c(6)(b) / total assets
7. Loans (other than to participants)	Line 1c(7)(b) / total assets
8. Participant loans	Line 1c(8)(b) / total assets
9. Value of interest in common/collective trusts	Line 1c(9)(b) / total assets
10. Value of interest in pooled separate accounts	Line 1c(10)(b) / total assets
11. Value of interest in master trust investment accounts	Line 1c(11)(b) / total assets
12. Value of interest in 103-12 investment entities	Line 1c(12)(b) / total assets
13. Value of interest in registered investment companies (e.g., mutual funds)	Line 1c(13)(b) / total assets
14. Value of funds held in insurance co. general account (unallocated contracts)	Line 1c(14)(b) / total assets
15. Employer-related investments:
Employer Securities	Line 1d(1)(b) / total assets
Employer real property	Line 1d(2)(b) / total assets
16. Buildings and other property used in plan operation	Line 1e(b) / total assets
17. Other	Line 1c(15(b) / total assets

Events with Material Effect on Assets or Liabilities [include this section only if applicable]

Federal law requires the plan administrator to provide in this notice a written explanation of events, taking effect in the current plan year, which are expected to have a material effect on plan liabilities or assets. For the plan year beginning on [insert beginning of plan year for year after plan year to which notice relates] and ending on [insert end of plan year for year after plan year to which notice relates], the following events are expected to have such an effect: [insert explanation of any plan amendment, scheduled benefit increase or reduction, or other known event taking effect in the current plan year and having a material effect on plan liabilities or assets for the year, as well as a projection to the end of the current plan year of the effect of the amendment, scheduled increase or reduction, or event on plan liabilities].

Right to Request a Copy of the Annual Report

A pension plan is required to file with the US Department of Labor an annual report (i.e., Form 5500) containing financial and other information about the plan. Copies of the annual report are available from the US Department of Labor, Employee Benefits Security Administration's Public Disclosure Room at 200 Constitution Avenue, NW, Room N-1513, Washington, DC 20210, or by calling 202.693.8673. Or you may obtain a copy of the Plan's annual report by making a written request to the plan administrator [or by going to the following intranet site : _______].

Summary of Rules Governing Termination of Single-Employer Plans

Employers can end a pension plan through a process called "plan termination." There are two ways an employer can terminate its pension plan. The employer can end the plan in a "standard termination" but only after showing the PBGC that the plan has enough money to pay all benefits owed to 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 one lump-sum payment that covers your entire benefit. Before purchasing your annuity, your plan administrator must give you advance notice that identifies the insurance company (or companies) that your employer may select to provide the annuity. The PBGC's guarantee ends when your employer purchases your annuity or gives you the lump-sum payment.

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 as trustee and pay 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. Most terminations initiated by the PBGC occur when the PBGC determines that plan termination is needed to protect the interests of plan participants or of the PBGC insurance program. The PBGC can do so if, for example, a plan does not have enough money to pay benefits currently due.

Benefit Payments Guaranteed by the PBGC

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

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 a straight life annuity, for a 65-year-old person in a plan that terminates in 2009. [The maximum benefit may be reduced for an individual who is younger than age 65 (only if the plan permits commencement of benefits before age 65)]. The maximum benefit will also be reduced when a benefit is provided to a survivor of a plan participant.

The PBGC guarantees "basic benefits" earned before a plan is terminated, which includes:

pension benefits at normal retirement age;*
most early retirement benefits**;
annuity benefits for survivors of plan participants;* and
disability benefits for a disability that occurred before the date the plan terminated.**

The PBGC does not guarantee certain types of benefits:

The PBGC does not guarantee benefits for which you do not have a vested right when a plan terminates, usually because you have not worked enough years for the company.**
The PBGC does not guarantee 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 are not guaranteed. Those that have been in place for less than five years are only partly guaranteed.**
Early retirement payments that are greater than payments at normal retirement age may not be guaranteed. For example, a supplemental benefit that stops when you become eligible for Social Security may not be guaranteed.**
Benefits other than pension benefits, such as health insurance, life insurance, death benefits, vacation pay, or severance pay, are not guaranteed.*
The PBGC generally does not pay lump sums exceeding $5,000.*

NOTE: Most plans will offer the benefits noted with an (*): normal retirement age, annuity benefits' age, service requirements, etc. Only plans that offer the benefits noted with (**) should include those sentences: early retirement benefits, disability benefits, vesting schedule, etc.

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.

Corporate Information on File with PBGC [Include this section only if reporting under section 4010 of ERISA was required for the Plan Year]

The law requires a plan sponsor to provide the PBGC with financial information about the sponsor and the plan under certain circumstances, such as when the funding target attainment percentage of the plan (or any other pension plan sponsored by a member of the sponsor's controlled group) falls below 80 percent (other triggers may also apply). The sponsor of the Plan, [enter name of plan sponsor], and each member of its controlled group, if any, was subject to this requirement to provide corporate financial information and plan actuarial information to the PBGC. The PBGC uses this information for oversight and monitoring purposes.

Where to Get More Information

For more information about this notice, you may contact [enter name of plan administrator and if applicable, principal administrative officer], at [enter phone number and address and insert email address if appropriate]. For identification purposes, the official plan number is [enter plan number] and the plan sponsor's employer identification number or "EIN" is [enter EIN of plan sponsor]. For more information about the PBGC and benefit guarantees, go to PBGC's Web site, www.pbgc.gov, or call PBGC toll-free at 1.800.400.7242 (TTY/TDD users may call the Federal relay service toll free at 1.800.877.8339 and ask to be connected to 1.800.400.7242).

Model Multiemployer Plan Notice

[return to top]

Annual Funding Notice

For [insert name of pension plan]

Introduction

This notice includes important funding information about your pension plan ("the Plan"). This notice also provides a summary of federal rules governing multiemployer plans in reorganization and insolvent plans and benefit payments guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. This notice is for the plan year beginning [Part I, 5500] and ending [Part I, 5500] (referred to hereafter as "Plan Year").

Funded Percentage

The funded percentage of a plan is a measure of how well that plan is funded. This percentage is obtained by dividing the Plan's assets by its liabilities on the valuation date for the plan year. In general, the higher the percentage, the better funded the plan. The Plan's funded percentage for the Plan Year and 2 preceding plan years is set forth in the chart below, along with a statement of the value of the Plan's assets and liabilities for the same period.

	2008 Plan Year	2007 Plan Year	2006 Plan Year
Valuation Date	[Line 1a, MB]	N/A	N/A
Funded Percentage	[Line 4b, MB]	N/A	N/A
Value of Assets	[Line 1b(2), MB]	N/A	N/A
Value of Liabilities	[Line 1c(3), MB]	N/A	N/A

Transition Data

For a brief transition period, the Plan is not required by law to report certain funding related information because such information may not exist for plan years before 2008. The plan has entered "not applicable" in the chart above to identify the information it does not have. In lieu of that information, however, the Plan is providing you with comparable information that reflects the funding status of the Plan under the law then in effect. For 2007, the Plan's "funded current liability percentage" was [Line 2c of 2007 Schedule B (or calculated from lines 1b(2) and 2b if greater than 70%). If the percentage is equal to or greater than 100 percent, you may insert "at least 100 percent".], the Plan's assets were [line 1b(2) of 2007 Schedule B], and Plan liabilities were [line 2b(4), column 2 of 2007 Schedule B]. For 2006, the Plan's "funded current liability percentage" was [Line 2c of 2006 Schedule B (or calculated from lines 1b(2) and 2b if greater than 70%). If the percentage is equal to or greater than 100 percent, you may insert "at least 100 percent".], the Plan's assets were [line 1b(2) of 2007 Schedule B], and Plan liabilities were [line 2b(4), column 2 of 2007 Schedule B].

Fair Market Value of Assets

Asset values in the chart above are actuarial values, not market values. Market values tend to show a clearer picture of a plan's funded status as of a given point in time. However, because market values can fluctuate daily based on factors in the marketplace, such as changes in the stock market, pension law allows plans to use actuarial values for funding purposes. While actuarial values fluctuate less than market values, they are estimates. As of [enter the last day of the Plan Year], the fair market value of the Plan's assets was [enter manually-calculated value]. On this same date, the Plan's liabilities were [enter manually-calculated value]. As of [enter the last day of the previous Plan Year], the fair market value of the Plan's assets was [enter manually-calculated value]. On this same date, the Plan's liabilities were [enter manually-calculated value]. As of [enter the last day of the Plan Year two years preceding], the fair market value of the Plan's assets was [enter manually-calculated value]. On this same date, the Plan's liabilities were [enter manually-calculated value].

Participant Information

** Similar numbers are provided in the 5500, lines 7(a), (b) and (c) for the end of the plan year. FAB 2009-1 indicates this information should be as of the valuation date.

Funding & Investment Policies

Asset Allocations	Percentage
1. Interest-bearing cash	Line 1c(1)(b) / total assets
2. U.S. Government securities	Line 1c(2)(b) / total assets
3. Corporate debt instruments (other than employer securities):
Preferred	Line 1c(3)(A)(b) / total assets
All other	Line 1c(3)(B)(b) / total assets
4. Corporate stocks (other than employer securities):
Preferred	Line 1c(4)(A)(b) / total assets
All other	Line 1c(4)(A)(b) / total assets
5. Partnership/joint venture interests	Line 1c(5)(b) / total assets
6. Real estate (other than employer real property)	Line 1c(6)(b) / total assets
7. Loans (other than to participants)	Line 1c(7)(b) / total assets
8. Participant loans	Line 1c(8)(b) / total assets
9. Value of interest in common/collective trusts	Line 1c(9)(b) / total assets
10. Value of interest in pooled separate accounts	Line 1c(10)(b) / total assets
11. Value of interest in master trust investment accounts	Line 1c(11)(b) / total assets
12. Value of interest in 103-12 investment entities	Line 1c(12)(b) / total assets
13. Value of interest in registered investment companies (e.g., mutual funds)	Line 1c(13)(b) / total assets
14. Value of funds held in insurance co. general account (unallocated contracts)	Line 1c(14)(b) / total assets
15. Employer-related investments:
Employer Securities	Line 1d(1)(b) / total assets
Employer real property	Line 1d(2)(b) / total assets
16. Buildings and other property used in plan operation	Line 1e(b) / total assets
17. Other	Line 1c(15(b) / total assets

Critical or Endangered Status

Under federal pension law a plan generally will be considered to be in "endangered" status if, at the beginning of the plan year, the funded percentage of the plan is less than 80 percent or in "critical" status if the percentage is less than 65 percent (other factors may also apply). If a pension plan enters endangered status, the trustees of the plan are required to adopt a funding improvement plan. Similarly, if a pension plan enters critical status, the trustees of the plan are required to adopt a rehabilitation plan. Rehabilitation and funding improvement plans establish steps and benchmarks for pension plans to improve their funding status over a specified period of time.

[if MB line 4 is "N"]

The Plan was not in endangered or critical status in the Plan Year.

[if MB line 4 is not "N"]

The Plan was in ["endangered" / "critical"] status in the Plan Year because [insert summary description of why plan was in this status based on statutory factors]. In an effort to improve the Plan's funding situation, the trustees adopted [insert summary of Plan's funding improvement or rehabilitation plan, including when adopted and expected duration, and a description of any update to the plan adopted during the plan year to which the notice relates].

You may obtain a copy of the Plan's funding improvement or rehabilitation plan and the actuarial and financial data that demonstrate any action taken by the plan toward fiscal improvement by contacting the plan administrator. [Or you may obtain this information at the following intranet address:______].

Events with Material Effect on Assets or Liabilities [insert this section only if applicable]

Federal law requires trustees to provide in this notice a written explanation of events, taking effect in the current plan year, which are expected to have a material effect on plan liabilities or assets. For the plan year beginning on [insert date] and ending on [insert date], the following events are expected to have such an effect: [insert explanation of any plan amendment, scheduled benefit increase or reduction, or other known event taking effect in the current plan year and having a material effect on plan liabilities and assets for the year, as well as a projection to the end of the current plan year of the effect of the amendment, scheduled increase or reduction, or event on plan liabilities].

Right to Request a Copy of the Annual Report

A pension plan is required to file with the US Department of Labor an annual report (i.e., Form 5500) containing financial and other information about the plan. Copies of the annual report are available from the US Department of Labor, Employee Benefits Security Administration's Public Disclosure Room at 200 Constitution Avenue, NW, Room N-1513, Washington, DC 20210, or by calling 202.693.8673. Or you may obtain a copy of the Plan's annual report by making a written request to the plan administrator. [Or you may obtain this information at the following intranet address:______].

Summary of Rules Governing Plans in Reorganization and Insolvent Plans

Federal law has a number of special rules that apply to financially troubled multiemployer plans. Under so-called "plan reorganization rules," a plan with adverse financial experience may need to increase required contributions and may, under certain circumstances, reduce benefits that are not eligible for the PBGC's guarantee (generally, benefits that have been in effect for less than 60 months). If a plan is in reorganization status, it must provide notification that the plan is in reorganization status and that, if contributions are not increased, accrued benefits under the plan may be reduced or an excise tax may be imposed (or both). The law requires the plan to furnish this notification to each contributing employer and the labor organization.

Despite the special plan reorganization rules, a plan in reorganization nevertheless could become insolvent. A plan is insolvent for a plan year if its available financial resources are not sufficient to pay benefits when due for the plan year. An insolvent plan must reduce benefit payments to the highest level that can be paid from the plan's available financial resources. If such resources are not enough to pay benefits at a level specified by law (see Benefit Payments Guaranteed by the PBGC, below), the plan must apply to the PBGC for financial assistance. The PBGC, by law, will loan the plan the amount necessary to pay benefits at the guaranteed level. Reduced benefits may be restored if the plan's financial condition improves.

A plan that becomes insolvent must provide prompt notification of the insolvency to participants and beneficiaries, contributing employers, labor unions representing participants, and PBGC. In addition, participants and beneficiaries also must receive information regarding whether, and how, their benefits will be reduced or affected as a result of the insolvency, including loss of a lump sum option. This information will be provided for each year the plan is insolvent.

Benefit Payments Guaranteed by the PBGC

The maximum benefit that the PBGC guarantees is set by law. Only vested benefits are guaranteed. Specifically, the PBGC guarantees a monthly benefit payment equal to 100 percent of the first $11 of the Plan's monthly benefit accrual rate, plus 75 percent of the next $33 of the accrual rate, times each year of credited service. The PBGC's maximum guarantee, therefore, is $35.75 per month times a participant's years of credited service.

Example 1: If a participant with 10 years of credited service has an accrued monthly benefit of $500, the accrual rate for purposes of determining the PBGC guarantee would be determined by dividing the monthly benefit by the participant's years of service ($500/10), which equals $50. The guaranteed amount for a $50 monthly accrual rate is equal to the sum of $11 plus $24.75 (.75 x $33), or $35.75. Thus, the participant's guaranteed monthly benefit is $357.50 ($35.75 x 10).

Example 2: If the participant in Example 1 has an accrued monthly benefit of $200, the accrual rate for purposes of determining the guarantee would be $20 (or $200/10). The guaranteed amount for a $20 monthly accrual rate is equal to the sum of $11 plus $6.75 (.75 x $9), or $17.75. Thus, the participant's guaranteed monthly benefit would be $177.50 ($17.75 x 10).

The PBGC guarantees pension benefits payable at normal retirement age and some early retirement benefits. In calculating a person's monthly payment, the PBGC will disregard any benefit increases that were made under the plan within 60 months before the earlier of the plan's termination or insolvency (or benefits that were in effect for less than 60 months at the time of termination or insolvency). Similarly, the PBGC does not guarantee pre-retirement death benefits to a spouse or beneficiary (e.g., a qualified pre-retirement survivor annuity) if the participant dies after the plan terminates, benefits above the normal retirement benefit, disability benefits not in pay status, or non-pension benefits, such as health insurance, life insurance, death benefits, vacation pay, or severance pay.

Where to Get More Information

If you have any questions or comments, please feel free to contact us at support@ftwilliam.com or call 800.596.0714.

Return to Articles.