A flat-rate premium is the fixed annual fee that every PBGC-insured pension plan must pay per participant. Single-employer plans pay higher rates than multiemployer plans.
The flat-rate premium is one of the most important cost components that employers must pay to the Pension Benefit Guaranty Corporation (PBGC) to keep their defined benefit pension plans insured. Understanding how this premium works helps both employers and employees better appreciate how pension protection is funded and why plan costs differ.
What Is a Flat-Rate Premium?
A Flat-Rate Premium is the standard, fixed annual premium that PBGC-insured defined benefit plans pay for each participant covered under the plan. It is charged every year, regardless of the plan’s financial condition. Because the amount is calculated on a per-participant basis, plans with more employees pay more in total premiums.
The PBGC uses these premiums to protect workers’ pension benefits if an employer becomes unable to meet its obligations. While both single-employer and multiemployer plans pay flat-rate premiums, the rates are higher for single-employer plans because these plans carry different risk characteristics and funding structures.
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How the Flat-Rate Premium Works
Every year, employers must report the number of participants in their PBGC-insured pension plans. PBGC then applies the flat-rate premium amount to that count.
Here’s the simple breakdown:
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Single-employer plans pay a higher flat-rate premium per participant.
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Multiemployer plans pay a lower flat-rate premium.
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The total annual premium = flat-rate amount × number of participants.
For example, if a single-employer plan has 1,000 participants and the flat-rate premium is $100 per participant, the employer owes $100,000 for that year.
Flat-Rate vs. Variable-Rate Premiums
A key point that often confuses people is that single-employer plans may owe an additional cost known as a Variable-Rate Premium (VRP). This charge is separate from the flat-rate premium.
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The flat-rate premium is fixed and applies to all covered plans.
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The variable-rate premium depends on the plan’s level of underfunding. In other words, if the plan does not have enough assets to cover all promised benefits, the employer pays an additional amount for each dollar of underfunding.
Multiemployer plans do not pay variable-rate premiums.
This structure creates an incentive for single-employer plan sponsors to maintain strong funding levels because lower underfunding means lower total premiums.
Why Flat-Rate Premiums Matter
Flat-rate premiums help keep the PBGC financially stable so it can protect retirees’ benefits if a plan fails. For employees, this means added security. For employers, however, these premiums are a recurring cost of offering a traditional pension plan.
Key reasons these premiums matter:
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They support the long-term solvency of the PBGC.
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They affect the overall cost of operating a defined benefit plan.
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They help ensure workers receive promised retirement income even if their employer faces financial trouble.
Real-Life Example
Imagine a manufacturing company that sponsors a single-employer pension plan for 500 workers. Regardless of how well the plan is funded, the company must pay the flat-rate premium every year. If the plan becomes underfunded, the company may also owe a variable-rate premium, increasing its total costs.
Meanwhile, a construction industry pension fund that operates as a multiemployer plan will pay a lower flat-rate premium and is not responsible for variable-rate premiums. This difference affects how industries structure their retirement benefits.
Summary
A Flat-Rate Premium is the fixed annual fee that PBGC-insured pension plans pay per participant. Single-employer plans are charged more than multiemployer plans, and they may also pay a variable-rate premium if their plans are underfunded. This system ensures that the PBGC has the resources it needs to protect workers’ pension benefits.
Understanding flat-rate premiums helps employers accurately budget for pension costs and helps employees see how their retirement security is maintained behind the scenes.
