Is PBGC Coverage Required for Your Plan?

The Pension Benefit Guaranty Corporation was established on September 2, 1974 under President Gerald R. Ford with the signing of ERISA (the Employee Retirement Income Security Act). According to Ford, “Under this law, the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed.” President Ford was correct; this program did much to help America’s retirees. However, it is not without flaw, and a recent IRS audit case has brought to light some new problems within the PBGC.

Before we get ahead of ourselves, let’s start by outlining exactly what the PBGC is and what it does: essentially this organization acts as an insurance policy for defined benefit pension plans offered by private-sector employers. However, there are some plans that the PBGC does not support. These include: “Professional service employers” that currently, and at no point in the plans history, have more than 25 active participants, church groups and federal, state or local governments.

It is easy to label churches and government organizations as being such, but it has recently proven to be difficult to determine what exactly it means to be a “professional service employer.” In her article Surprise! You Are (or Are Not) a Professional. And You Are (or Are Not) Covered by the PBGC, Ilene Ferenczy tells of a recent IRS audit where a financial advisor was deemed a professional, and therefore his plan was exempt from PBGC coverage. The financial advisor had been operating as if he was eligible for PBGC coverage because he had no reason to suspect otherwise. Since similar occupations such as computer network specialists, real estate brokers, and general contractors are not considered professionals, he felt safe in assuming that he wasn’t one either.  However, it seems that the formerly objective definition of “professional” under PBGC is becoming increasingly subjective, and this could pose many consequences down the line.

According to Ferenczy, this new confusion in definition has led many advisors who are not eligible for PBGC coverage to continue to operate their plans as if they are. She gives us a startling statistic: a search of DB plans with an occupational code of either insurance broker or investment advisor was run, and it found that of the 650 plans, 68% of them had been coded as being PBGC-covered. This means that they had been paying unnecessary premiums and incorrectly calculating their plan contributions. In the event of an audit, this could have detrimental consequences.

So, it is easy to see that plan sponsors need more predictability when it comes to determining whether or not they are covered under PBGC, and in light of this new information, it may be time that you double check with your actuary to make sure that your plan is indeed eligible for the PGBC coverage you’ve already been operating under.

For further information about PBGC coverage, go to:

To read about the recent audit case and its outcomes, go to: