A clear guide to how PBGC assigns pension benefits into priority categories when a single-employer plan terminates.
When a single-employer pension plan is taken over by the Pension Benefit Guaranty Corporation (PBGC), the benefits owed to participants are sorted into “priority categories.” These categories help determine how plan assets—and some of PBGC’s recoveries—are used to pay benefits beyond what PBGC guarantees.
Understanding Priority Categories in PBGC-Trusteed Plans
When a pension plan sponsored by a single employer fails, PBGC steps in to protect participants’ retirement income. But PBGC does not automatically guarantee every dollar of promised benefits. To ensure fairness, ERISA requires PBGC to sort all benefits into six Priority Categories (PC1 through PC6). This structure clarifies who gets paid first and how remaining assets are allocated.
These categories matter because they determine whether a participant may receive benefits above the PBGC guarantee. Understanding how they work can help retirees and employees know what to expect during a plan termination.
How the Six Priority Categories Work
PBGC assigns each participant’s pension benefits into one of six legally defined groups:
Priority Category 1 (PC1): Basic Benefits Already in Pay Status
This includes benefits that were already being paid (or could have been paid) at least three years before the plan termination date.
Example: A retiree who started receiving payments several years before the termination will have those payments considered first.
Priority Category 2 (PC2): Mandatory Employee Contributions
If employees paid required contributions into the plan, the value of those contributions—plus interest—falls into this category.
Priority Category 3 (PC3): Benefits Participants Earned Long Before Termination
This category captures benefits earned at least five years before termination, giving long-service employees priority.
Priority Category 4 (PC4): Benefits Guaranteed by PBGC’s Phase-In Rules
PBGC’s guarantee grows over time as new benefits are added. Benefits that meet this phase-in test fall into PC4.
Priority Category 5 (PC5): Other Vested Benefits
These benefits are fully earned but do not fit into earlier categories.
Priority Category 6 (PC6): Non-Vested and Recently Added Benefits
This final category includes the least protected benefits—typically new, supplemental, or non-vested additions.
Matching Assets to Priority Categories
Once benefits are placed into categories, PBGC allocates the plan’s available assets:
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The plan’s own assets go first to pay PC1, then PC2, and so on.
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If assets run out before reaching all categories, PBGC uses part of its recoveries from the former plan sponsor under ERISA Section 4022(c) (known as 4022(c) Benefit recoveries).
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Only after these resources are allocated does PBGC determine whether it can pay benefits that exceed its standard guarantee limits.
This process protects long-standing retirees and employees who earned benefits many years before the plan’s collapse.
A Simple Example
Imagine a pension plan that terminates with $50 million in assets:
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PC1 benefits require $8 million → Fully paid
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PC2 benefits require $6 million → Fully paid
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PC3 benefits require $20 million → Fully paid
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PC4 benefits require $25 million → Only $16 million remains → Partially paid
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PC5 and PC6 benefits → No remaining assets available
PBGC then uses eligible recoveries from the employer to partially fill the remaining gaps. Whether participants in PC4–PC6 ultimately receive benefits above the PBGC guarantee depends on the size of the recoveries and the plan’s specific facts.
Why Priority Categories Matter for Participants
These categories help determine:
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Whether you receive more than the PBGC-guaranteed amount
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How fairly assets are used after a plan termination
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How long-earned benefits are protected
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What to expect during the PBGC claim and calculation process
For anyone in a PBGC-trusteed plan, knowing your Priority Category offers insight into how your benefits may be handled.
Final Summary
Priority Categories in PBGC-trusteed single-employer plans provide a structured, legally mandated system for deciding how plan assets and PBGC recoveries are applied after a plan termination. By assigning benefits into six categories—from long-standing pay-status benefits to recent or non-vested additions—PBGC can determine whether participants may receive benefits beyond the guaranteed amount. Understanding these categories helps employees and retirees navigate the financial and emotional uncertainty of a pension plan termination.
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