PBGC Coverage — What It Means for Your Defined Benefit Plan
When professionals hear about PBGC coverage, they often have one of two reactions: “Wait, what’s that?” or “Isn’t that just for big union pensions?”
In reality, the Pension Benefit Guaranty Corporation (PBGC) plays a critical role in securing the future of your defined benefit (DB) plan—and it’s just as relevant to a two-person medical office as it is to a Fortune 500 pension. If your defined benefit plan is covered by the PBGC, your participants—including yourself—have a federal backstop that guarantees your retirement benefits in the event of plan failure or business closure.
The issue is that many small business owners, particularly in professional practices, either don’t know about PBGC coverage or avoid it due to misconceptions. This chapter is designed to clear the fog. You’ll learn:
What the PBGC is and how it works
What types of plans are covered
What coverage provides in worst-case scenarios
Why PBGC coverage is a good thing, not something to fear
How our firm designs PBGC-covered plans with full compliance and risk control
Let’s take a closer look at how this little-known federal agency helps protect your pension and your peace of mind.
What Is the PBGC?
The Pension Benefit Guaranty Corporation is a U.S. government agency created by the Employee Retirement Income Security Act of 1974 (ERISA). Its mission is to protect the retirement incomes of more than 33 million workers and retirees in private-sector defined benefit plans.
Think of the PBGC as the pension equivalent of the FDIC. Just as the FDIC protects your bank deposits up to a certain amount, the PBGC guarantees pension benefits—within limits—if your plan terminates without sufficient assets.
The PBGC doesn’t use taxpayer dollars. It’s funded by:
Insurance premiums paid by covered pension plans
Recoveries from failed plans and responsible parties
Investment earnings from its trust fund
PBGC-Covered vs. Non-Covered Plans
Not all DB plans are covered by the PBGC. Coverage depends on a few key factors.
Plans That Are Covered:
✅ Defined benefit plans sponsored by private-sector employers (e.g., medical practices, law firms, dental offices)
✅ Plans that include at least one non-owner W-2 employee
✅ Plans that are not sponsored by churches, governments, or owner-only arrangements
Plans That Are Not Covered:
🚫 “Owner-only” plans (where the only participants are owners or spouses)
🚫 Government or church-sponsored pension plans
🚫 Plans under certain multiemployer or professional employer organization (PEO) structures
In other words, most small professional practices can and should be covered by PBGC—as long as they include a W-2 employee and are properly structured.
Our firm ensures your plan design qualifies for PBGC coverage if it’s in your best interest.
What Does PBGC Coverage Actually Do?
If your PBGC-covered plan is terminated—for example, if you retire and dissolve the business, or if the business becomes insolvent—PBGC coverage ensures that participants still receive their promised benefits.
The PBGC takes over the plan’s assets and pays benefits up to a maximum guaranteed amount, which adjusts annually.
As of 2025, the maximum guaranteed annual benefit at age 65 is approximately $85,289 (or $7,107.45 per month) for a single-life annuity. If benefits begin earlier, the maximum is reduced accordingly. If they begin later, they’re increased.
✅ Important: Most small-plan participants and owners are well within this cap.
The PBGC will continue paying out benefits—even if the plan’s assets are insufficient or the business has no remaining value.
This means your retirement benefit—and those of your employees—are federally insured.
How Much Does PBGC Coverage Cost?
The PBGC is funded in part by flat-rate premiums paid annually by each covered plan.
In 2025, the flat-rate premium is:
$101 per participant per year
Plus a variable-rate premium for underfunded plans (capped at $686 per participant)
For a small practice with three partners and five employees, the total annual premium might be:
8 participants x $101 = $808/year
No variable-rate premium (plan is well-funded)
That’s an extremely low cost for federal insurance that protects potentially millions in retirement assets.
Why Small Practices Avoid PBGC (And Why They Shouldn’t)
Some business owners are advised to avoid PBGC coverage altogether—often due to misunderstandings about cost, compliance burden, or liability.
Let’s address the most common fears:
❌ “PBGC premiums are too expensive.”
As shown above, premiums are minimal. For most small plans, the flat-rate premium is all that’s required. The peace of mind it provides far outweighs the cost.
❌ “I’ll be liable forever if something goes wrong.”
PBGC coverage limits your liability, not increases it. It’s the lack of coverage that exposes you to risk if the plan is underfunded or terminated incorrectly.
❌ “I don’t want the government involved in my retirement plan.”
PBGC coverage doesn’t involve active government oversight. It’s an insurance program. You still own and manage your plan—PBGC only steps in if the plan is terminated and cannot meet its obligations.
Our firm handles all PBGC filings and premiums for you—there’s no extra burden on your end.
Real-World Example: Why PBGC Coverage Matters
Case: Drs. Lee & Carter Family Medicine
Two partners (ages 59 and 51), six W-2 employees
Defined benefit plan in place for 10 years
One partner retires and dissolves their share; practice sold to a hospital system
The plan is underfunded by $80,000 due to poor investment returns in year 9
Because the plan is PBGC-covered:
The PBGC steps in and pays full benefits to all participants (within guaranteed limits)
Neither doctor is personally liable for the shortfall
Employees receive their promised benefits, even after the practice ceases operations
Without PBGC coverage, the plan could have defaulted, participants might have received less, and the owners could have faced personal liability.
PBGC Coverage and Plan Design: What We Do
At our firm, we evaluate PBGC eligibility and benefit as part of every defined benefit plan design.
If PBGC coverage is appropriate, we:
Ensure your business and plan structure meet the coverage requirements
File the annual PBGC premium forms and pay premiums on your behalf
Maintain proper documentation to confirm coverage in the event of plan termination
Include PBGC considerations in your plan’s investment and funding strategy
If your plan is exempt (owner-only), we advise on alternative risk mitigation strategies, including:
Conservative investment allocations
Overfunding buffers
Personal liability insurance (where appropriate)
Rollout strategies before retirement
Either way, you’re not navigating PBGC on your own. We build it into the plan from day one.
Can I Opt Out of PBGC Coverage?
Only under specific circumstances.
Plans that qualify for the owner-only exemption (no W-2 employees other than the owner/spouse) are not required to pay PBGC premiums and are not covered. If your business fits this profile, you won’t be eligible for PBGC—but you also won’t pay the fee.
However, you cannot opt out of PBGC if:
Your plan includes even one non-owner W-2 employee
Your business is not a church or government entity
Your plan is subject to ERISA rules
If your CPA or TPA has told you otherwise, it’s worth a second opinion. PBGC coverage is a compliance requirement, not a preference.
What Happens When You Terminate a PBGC-Covered Plan?
If you terminate your defined benefit plan—due to retirement, sale of the business, or restructuring—PBGC coverage protects the distribution process.
Our firm will:
File the appropriate standard termination notices with the PBGC
Confirm that the plan is fully funded before distributions
Issue benefit election notices to participants
Coordinate the purchase of annuities or the lump sum rollovers
File Form 501 after the plan is terminated and distributions are complete
This process ensures that all promised benefits are secured and that the plan is closed out with full federal protection and compliance.
Peace of Mind for Pennies on the Dollar
In the big picture, PBGC coverage:
Costs very little
Protects a lot
Is easy to manage with the right partner
Reinforces participant trust
Reduces fiduciary liability for the business owner
If you’re contributing six figures annually to a DB plan—or planning to—it makes sense to insure that promise. PBGC is the way to do it.
You insure your car, your practice, and your home. Why not your pension?
Summary: What You Need to Know About PBGC
✅ PBGC is a federal insurance agency that backs defined benefit plans
✅ Most small professional practices can and should be covered
✅ Coverage protects against plan failure and shortfalls
✅ Annual premiums are low—usually $101 per participant
✅ Plans with even one non-owner W-2 employee are generally required to be covered
✅ Our firm handles all PBGC compliance, filings, and risk management for you
In short: PBGC is not something to fear—it’s something to leverage. It’s the safety net that turns your defined benefit plan from a great idea into a secure, long-term asset.