Pensions, along with Social Security, are the core of most people’s reliable income in retirement – they’re what many people plan to live off of, or at least use to cover their most essential expenses. If you’re receiving a pension, or have one coming, you’ve probably contributed to your pension fund for years, maybe decades, and you’ve built up a sizable chunk of change – hopefully with a little help from your employer – to draw from in retirement.
But what if your employer goes bankrupt? Well, if the company is liquidated, the pension plan will be terminated (and the same can happen in the case of reorganization).
Who’s Protecting Your Pension?
So where does that leave you? Will you still get your pension? If so, will it be reduced? Will it be delayed while the courts sort out the mess?
There’s (mostly) good news.
Nearly all pensions – with the notable exception of pensions from professional service employers (doctors, lawyers, etc.) with fewer than twenty-six employees – are insured by the Pension Benefit Guaranty Corporation.
The PBGC is a federal corporation funded by premium payments from the insured pensions that serves as a backstop to make sure pensions are as safe as possible. It was established in 1974 to ensure an orderly transition and the continuation of benefit checks in case something happened to former employers.
That doesn’t mean you have nothing to worry about, though. If you were planning on receiving a large pension benefit and the plan wasn’t fully funded when the company went under, your payments may be reduced down to the maximum guaranteed benefit.
The maximum guaranteed benefit from the PBGC is defined based on the age you start drawing your pension. In 2024, for a sixty-five-year old, the maximum guaranteed benefit was $85,295 per year, or $76,766 if your pension includes survivor benefits. If you start claiming your benefits before you turn sixty-five, then your maximum guaranteed benefit will be lower. If you start claiming after you turn sixty-five, the maximum guaranteed benefit will be higher.
The maximum guaranteed benefit is adjusted for inflation every year. The PBGC uses the same cost of living adjustment calculation as Social Security.
What Happens When the PBGC Steps In?
Once the PBGC steps in it will go through and review the plan to make a determination on how much you will receive. Thankfully, if you are already receiving pension benefits, you will continue to receive your normal amount while they are reviewing the plan.
If you have not already started your pension benefits the PBGC will tell you what your estimated benefits will be when you apply to start your benefits.
Alternatively, if your pension benefits are relatively small you can take a lump sum payment instead of the ongoing benefits – and you can choose to have this money deposited directly into your traditional IRA account, which is treated as a tax-free rollover. This option is available to you if the value of your benefits is less than $5,000 (if your plan ended before 2024), or $7,000 (if your plan ended in 2024 or later).
It’s good to know the PBGC is around just in case, but hopefully you never have to learn more about their inner workings. It’s much easier to just keep receiving the checks from your employer’s fund.
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