A termination premium is an extra fee paid to the PBGC after certain pension plan terminations, helping protect retirees and the pension insurance system.
When a traditional pension plan ends, there can be significant financial consequences—especially for workers and retirees who rely on those benefits. One lesser-known but important cost is the Termination Premium, which applies only to single-employer defined benefit plans. Understanding how this premium works can help employers, employees, and advisors better navigate pension plan terminations.
Understanding the Termination Premium
A Termination Premium is an annual premium paid to the Pension Benefit Guaranty Corporation (PBGC) after specific types of pension plan terminations. It is designed to help offset the financial strain placed on the PBGC insurance system when a pension plan ends under difficult circumstances.
This premium applies only in two situations:
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Distress terminations, where an employer proves it cannot continue the plan due to severe financial hardship
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PBGC-initiated terminations, where the PBGC steps in because the plan cannot meet its obligations
In these cases, the employer must continue paying premiums after the plan has already terminated, which surprises many plan sponsors.
How Much Is the Termination Premium?
For most single-employer plans, the termination premium is:
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$1,250 per participant per year
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Paid for three consecutive years
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Total cost: $3,750 per participant
There is one major exception. For certain airline-related pension plans, the premium is higher:
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$2,500 per participant per year
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Paid for three consecutive years
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Total cost: $7,500 per participant
The premium is charged annually, even though the pension plan itself no longer exists.
Why Does the PBGC Charge a Termination Premium?
The PBGC insures private-sector defined benefit pensions. When a financially troubled employer terminates a plan, the PBGC often assumes responsibility for paying guaranteed benefits. This can be costly, especially for large plans.
The termination premium serves several purposes:
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Helps recover part of the cost of taking over failed pension plans
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Discourages employers from abandoning pension promises too easily
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Supports the long-term financial stability of the PBGC insurance program
In simple terms, it is a way to make employers share responsibility for the consequences of a failed pension plan.
A Simple Real-Life Example
Imagine a manufacturing company with 400 pension participants that undergoes a distress termination.
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Annual termination premium: 400 × $1,250 = $500,000
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Paid for three years: $1.5 million total
Even though the pension plan is already terminated, the company must still budget for this premium for three additional years. This cost can significantly affect post-bankruptcy or restructuring finances.
When the Termination Premium Does Not Apply
Not all pension terminations trigger this premium. It generally does not apply to:
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Standard terminations where the plan is fully funded
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Multiemployer pension plans
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Plans that meet specific statutory exceptions
This distinction is important when evaluating pension exit strategies.
How the Termination Premium Fits into PBGC Rules
The termination premium is part of broader PBGC premium rules that include flat-rate premiums and variable-rate premiums while a plan is active. It specifically targets higher-risk terminations that shift liabilities to the PBGC.
People often search for related topics such as what is a termination premium, PBGC termination rules, single-employer pension plan termination, and PBGC premiums explained when learning how pension insurance works.
Why This Matters for Employers and Employees
For employers, the termination premium represents a real post-termination financial obligation that must be planned for carefully. For employees and retirees, it reinforces the idea that pension promises are backed by a structured insurance system—even when a plan fails.
In short, the Termination Premium helps protect the pension safety net. It ensures that when single-employer plans end under distress, the financial burden does not fall entirely on the PBGC—and ultimately on other insured plans and taxpayers.
