Which type of retirement plan requires Pension Benefit Guaranty Corporation (PBGC) insurance coverage?

The traditional defined benefit pension plan is the type of retirement plan that requires insurance coverage through the Pension Benefit Guaranty Corporation (PBGC). This insurance exists to protect pension benefits in the event that the employer cannot meet its obligations to pay pensions.

Defined benefit plans promise retirees a specified monthly payout at retirement, based on a formula typically considering factors like salary history and length of employment. This creates significant liabilities for employers, and the PBGC was established to safeguard the pension rights of employees if a company becomes financially troubled and cannot fulfill its pension commitments. Under PBGC coverage, retirees can receive a guaranteed portion of their pension benefits, offering an essential safety net.

In contrast, other options like Section 401(k) plans, Roth IRAs, and SEP plans do not require PBGC insurance because they are defined contribution plans or individual retirement accounts where the retirement benefits are based on the contributions made and investment performance, not on a predefined guaranteed payout. Therefore, these plans do not pose the same type of liability that requires insurance through the PBGC.