How Well Funded Is Your Pension Plan? And Why Should You Care?

How Well Funded Is Your Pension Plan? And Why Should You Care?

Once a year, pension plan administrators are required to furnish participants with an “annual funding notice” regarding the funded status of the plan.

For both single-employer and multiemployer plans, the annual funding notice MUST include (i) the plan’s funded percentage for the most recent plan year and the two preceding plan years, (ii) a statement of the value of the plan’s assets and liabilities, (iii) a description of how the plan’s assets are invested, (iv) a statement of the total number of participants and beneficiaries covered by the plan, (v) a written explanation of any new events that have a material effect on the plan’s liabilities or assets, and (vi) a description of the benefits under the plan that are eligible to be insured by the Pension Benefit Guaranty Corporation (PBGC), a federally chartered corporation created to protect participants’ interests in their employer-provided pension benefits. The PBGC has two insurance programs for guaranteeing pension benefits: a single-employer program, and a multiemployer program. Both programs are funded by insurance premiums plans pay the PBGC.

A decreasing funded percentage in a single-employer plan suggests the sponsoring employer is having financial difficulties and is unable to make the requisite contributions to fully fund the plan. In that case, the employer may apply for a “distress termination” of the plan if it can show the bankruptcy court or PBGC that it is in financial distress and 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 a statutory limit. The PBGC may also take action on its own to terminate a single-employer plan if the termination is needed to protect the interests of plan participants, such as where the plan does not have sufficient funds to pay benefits currently due.

With multiemployer plans, the annual funding notice must also include a statement as to whether the plan is in “endangered” status (funded percentage is less than 80%), “critical” status (funded percentage is less than 65%), or “critical and declining” status (plan is projected to become insolvent within 15 years). When a multiemployer plan becomes insolvent, it may request a “loan” from the PBGC [the loans are not expected to be repaid]. However, as a condition of the loan, the plan must reduce participants’ benefits to the PBGC maximum guarantee limit, which often is much less than the benefit the participant earned under the plan. [Currently, the maximum annual guarantee limit under the multiemployer program is $12,870–less if the employee worked fewer than 30 years.]. Due to many multiemployer plans becoming insolvent in recent years, the PBGC’s multiemployer insurance program is itself expected to become insolvent by 2025. In that event, the PBGC estimates that most participants would receive less than $2,000/year because the PBGC would only be able to provide financial assistance equal to its annual insurance premium revenue.

As evident from the foregoing, the annual funding notice provides participants with valuable information from which they may make informed decisions respecting their current and future employment and the pension benefits promised by their employer(s). Therefore, the annual funding notice must be furnished to participants EVERY year and no later than 120 days after the close of the plan year. The plan administrator may not wait for participants to request the notice. If the notice is not timely furnished, the plan administrator is subject to personal liability in the amount of up to $110/day for each date the notice is late.

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