Is Your Defined Benefit/Cash Balance Plan Really Covered by the Pension Benefit Guaranty Corporation (PBGC)?

Certain Defined Benefit plans are exempt from PBGC coverage such as Professional Service Employers that have 25 or fewer participants.

Apr 25, 2017

The fact that premiums are paid to the PBGC does not determine coverage status!

The PBGC is a government corporation, which insures benefits in DB plans when the plan assets are insufficient to pay them. Sponsors of plans covered by the PBGC are required to pay annual premiums to the PBGC for this coverage. Certain plans are exempt from PBGC coverage such as Professional Service Employers that have 25 or fewer participants.

Who is a Professional Service Employer?

The Employee Retirement Income Security Act (ERISA) states that, a professional service employer is one that (1) is owned or controlled by professional individuals, or by executors or administrators of principal individuals and (2) the principal business of which is the provision of professional services.

Who are Professional Individuals?

ERISA lists certain types of job classifications as professionals: physicians, dentists, chiropractors, osteopaths, optometrists, other licensed practitioners of the healing arts, lawyers, public accountants, public engineers, architects, draftsmen, actuaries, psychologists, social or physical scientists, and performing artists.

But this is not an exclusive list, simply a list of examples. Other job classifications may represent professional individuals; if the PBGC makes that determination.

What are some of the things the PBGC will be looking at to arrive at their determination?

  • The years of experience of the business owner(s).
  • The type of clientele being served.
  • The element of public trust.
  • The presence of government licensing requirements.
  • The presence of continuing education requirements.
  • The organizations with which the company is affiliated, directly, or indirectly through their employees.
  • How the company owners represent themselves in their marketing material, including their website.
  • The way their industry presents itself to the public, including the marketing of the professionalism of their colleagues, members, or advisors.

What should you do if you are not sure about being a Professional Service Employer?

You should ask the PBGC for a ruling as to whether your plan is covered; the PBGC does not charge a fee for that ruling request, but there may be a charge by your professional advisor to handle that filing for you.

In a recent PBGC determination, a company providing financial advisor services was considered a Professional Service Employer and not subject to coverage; a complete surprise to those in our industry.

If you have been assuming that your plan is (or is not) covered and it may not be the case, you will need to speak with your actuary to help you make this determination and consider if this assumption had led to higher contributions and deductions that could be challenged on audit.

Finally, if the PBGC determines that you are not a covered plan, you can apply for a refund of any premiums you paid over the last six years.

Not being a covered plan may not be a bad thing!!

Please contact us, we can help!