Professional entity, PBGC coverage

[Jakyasar]

Hi

Law firm.

CB plan, effective 2024. For 2024 had 15 active participants with 0% vesting - vesting effective with inception of the plan.

During 2025 exceeded 25 active participants (26 in total), again all with 0% vested balances.

During 2026 dropped to 20 active participants. No partial termination issues. It will never exceed 20 again.

So, during 2025, plan is covered by PBGC and will be so for 2026 and all future years, at least according to PBGC rules that I am aware of.

Any way out of this, is there anything I can do? Am I missing an option here? Really sucks that for 1 year only they are paying the price for it.

Thanks

[truphao]

I had an almost exactly the same situation.  Plan failed 401(a)(26) in 2025 and we had to add 2 people, which increased the cout to 26. In 2026 the Plan is being terminated, it does not get sillier than that.  Spoke informally to PBGC and also vetted the situation with 2 ERISA attorneys.  The answer was a consistent "No" from everyone.

[Jakyasar]

Thank you for sharing your information. When you say "no", do you mean it must be covered? I just cannot find any way out of it by law.

[truphao]

yes, must be covered, I could not find any way out of the coverage either - that what I meant by "no".

[Jakyasar]

Thank you, really sucks that the rules are so stringent and have no flexibility.

[Peter Gulia]

Without remarking on a particular situation, and imagining only a future plan design:

Could a professional-service employer divide its workers and potentially eligible participants into two plans—one for self-employed individuals, and another for employees?

For a small-enough professional-service employer might that result in one or both of those plans being excepted from PBGC coverage under ERISA § 4021(b)(13)?

Beyond anything about PBGC premiums, an employer might have other reasons for separating pension plans. For example, at least for individual-account retirement plans, some law firms prefer to separate plans between a non-ERISA plan for partners and an ERISA-governed plan for employees.

But are there restrictions against, or disadvantages to, separating defined-benefit pension plans?

If plans of one employer are separate, must or may they be tested together for however minimum-participation, coverage, nondiscrimination, and top-heavy rules might apply?

I have no supposition; I ask out of ignorance.

[Bill Presson]

1 hour ago, Peter Gulia said:

Without remarking on a particular situation, and imagining only a future plan design:

Could a professional-service employer divide its workers and potentially eligible participants into two plans—one for self-employed individuals, and another for employees?

For a small-enough professional-service employer might that result in one or both of those plans being excepted from PBGC coverage under ERISA § 4021(b)(13)?

Beyond anything about PBGC premiums, an employer might have other reasons for separating pension plans. For example, at least for individual-account retirement plans, some law firms prefer to separate plans between a non-ERISA plan for partners and an ERISA-governed plan for employees.

But are there restrictions against, or disadvantages to, separating defined-benefit pension plans?

If plans of one employer are separate, must or may they be tested together for however minimum-participation, coverage, nondiscrimination, and top-heavy rules might apply?

I have no supposition; I ask out of ignorance.

Peter, you would probably run afoul of the 401(a)(26) minimum participation rules.

[Jakyasar]

A follow up situation, in theory.

If 26 active participants were achieved during 2025 but 3 of them terminated during 2025 (entered 7/1/2025 but terminated 8/1/2025) with no vested balance (or vested balance), would this plan still be covered as 26 actives were achieved during 2025 and once the plan hit 26 actives, no going back?

[truphao]

take a look at the instructions....if I remember correctly it goes along the lines of "at least one day during the Plan Year"....

[Peter Gulia]

The statute’s exception is for a plan “established and maintained by a professional service employer which does not at any time after September 2, 1974, have more than 25 active participants in the plan.” ERISA § 4021(b)(13), as unofficially compiled in 29 U.S.C. § 1321(b)(13) https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapIII-subtitleB-sec1321.htm.

PBGC’s form to request a coverage determination paraphrases the same text. https://www.pbgc.gov/sites/default/files/coverage-determination-form.pdf.

PBGC’s Comprehensive Premium Filing Instructions for 2026 Plan Years gives an example similar to the situation Jakyasar describes. See page 7 [pdf page 9] example 4 https://www.pbgc.gov/sites/default/files/documents/2026-premium-payment-instructions.pdf.

Example 4 — A professional service employer maintains Plan D, a calendar plan year plan. From plan inception through August 31, 2026, Plan D never had more than 25 active Participants and was not a covered plan under ERISA section 4021. On September 1, 2026, a few employees were hired and became covered by the plan resulting in a total active Participant count of 26 and therefore, the plan became a covered plan on that date. Plan D will continue to be a covered plan regardless of how many active Participants the plan has in the future. Note that the Premium Payment Year begins on January 1, 2026, even though the plan did not become covered until after that date. The due date for the plan’s first premium filing is December 1, 2026 (the first business day on or after the 90th day after September 1, 2026) because this date is later than the Normal Premium Due Date (October 15, 2026).