When Small Pension Plans Move In and Out of PBGC Coverage

Many small pension plans are exempt from PBGC pension insurance coverage. These include “substantial owner” plans, where all participants in the plan own (directly or indirectly) more than 10% of the corporation’s stock. This post highlights what happens when the classification of a “substantial owner” plan changes, and what happens next.

We often see “substantial owner” plans when a pension plan covers only a business owner and their spouse. These plans are not covered by the PBGC and don’t have to pay PBGC pension insurance premiums. However, once there are any non-substantial owners in the plan (e.g., hiring one non-owner employee), things change.

Here’s the key points:

– A pension plan ceases to be a “substantial owner” plan (and is then covered by the PBGC) on the date when a non-substantial owner becomes a participant in the plan (PBGC Blue Book Q&A #2005-11).

– A plan returns to “substantial owner” classification when there are no longer any non-substantial owners participating in the plan. This interpretation is documented in PBGC Opinion Letter 90-6.


Suppose that Jones is the sole owner and participant in the Jones Pension Plan. After several years, Jones hires Smith (a non-owner) to work at the company. If Smith is hired in June 2010 and becomes a participant in the plan on July 1, 2011, then the plan is subject to PBGC coverage on that date as well. From that point on, PBGC premiums and filings must be completed annually.

Now, suppose that Smith terminates employment after a couple of years. Jones should notify the PBGC that the only remaining participant in the plan is a substantial owner. The PBGC will then confirm that the plan is no longer subject to PBGC coverage.

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