Pension funded status is a single percentage that tells you whether your plan has enough money today to pay every benefit it has promised. The number is the funded ratio: plan assets divided by the present value of plan liabilities. At 100 percent, the plan holds a dollar for every dollar it owes. Below that, there’s a gap, and federal law attaches real consequences, including capped lump sums, frozen accruals, and in the worst cases, cuts to checks already being paid, to specific thresholds as the ratio falls.
How the Ratio Is Calculated
Plan assets are the market value of everything held in the plan’s trust on the measurement date: stocks, bonds, cash, and other investments. Federal law requires those assets to sit in a separate trust, walled off from the company’s general accounts so corporate creditors cannot reach them.
Plan liabilities are harder. They represent the present value of every future benefit already earned by every participant, including retirees collecting checks today and workers decades from retirement. Actuaries compress all those future monthly payments into a single dollar figure using discount rates and life-expectancy tables. A modest change in either assumption can shift the liability by millions, which is why two plans with identical benefit formulas can report very different funded ratios.
For single-employer plans, the discount rates are not a free choice. The IRS publishes three segment rates each month, drawn from 24-month averages of high-quality corporate bond yields. For plan years from 2020 through 2030, those averages must stay within a corridor of 95 to 105 percent of a 25-year average, which smooths out short-term rate spikes and crashes.1Internal Revenue Service. Pension Plan Funding Segment Rates Mortality is similarly standardized: plan actuaries must use the IRS static mortality tables, with the 2026 version set out in Notice 2025-40.2Internal Revenue Service. Notice 2025-40 – Updated Static Mortality Tables for Defined Benefit Pension Plans for 2026
The ratio gets recalculated at least once a year because markets move, interest rates change, and the participant population shifts.
What Happens as a Single-Employer Plan’s Funded Status Drops
Single-employer plans face automatic restrictions tied to the adjusted funding target attainment percentage, a version of the funded ratio that accounts for employer credit balances. Two thresholds matter to participants.
Below 80 percent, the plan cannot adopt any amendment that would increase benefits, and lump-sum distributions are capped at the lesser of 50 percent of what the participant would otherwise receive, or the present value of the PBGC’s maximum guarantee for that person.3Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single Employer Plans If you were planning to take your pension as a single payment, this is where the plan can cut that payment in half.
Below 60 percent, lump sums and other accelerated distributions stop entirely. The plan cannot pay shutdown benefits or other contingent event benefits. Benefit accruals freeze, so participants stop earning any additional pension credit for future service.3Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single Employer Plans
An employer can lift either restriction by making a special contribution large enough to push the funded percentage back above the threshold. In practice, the companies most likely to be stuck below 80 or 60 percent are also the ones with the least cash available to write that check, so the restrictions tend to persist once they take hold.
Zone Status for Multiemployer Plans
Multiemployer plans, the kind jointly sponsored by a union and a group of employers, run on a color-coded warning system created by the Pension Protection Act of 2006. Each year the plan actuary certifies which zone the plan falls into, and that classification triggers specific legal obligations. Single-employer plans do not use these zones.
Green Zone plans meet minimum funding standards and are not projected to run a deficit. No corrective action is required.
Yellow Zone, or endangered status, applies when the funded ratio is below 80 percent, or the actuary projects an accumulated funding deficiency within the next six plan years. Trustees must adopt a funding improvement plan.4Office of the Law Revision Counsel. 26 USC 432 – Additional Funding Rules for Multiemployer Plans Defined in Section 431(b)(3)
Red Zone, or critical status, has several triggers. The most commonly cited is a funded ratio below 65 percent combined with projected assets insufficient to cover benefits over the next seven years. Other triggers include a current or near-term accumulated funding deficiency, or a situation where plan costs outpace expected contributions while inactive participants outnumber active ones. A plan at 70 percent can enter the Red Zone if it has a projected funding deficiency soon, while a plan at 63 percent might not qualify if projected contributions are large enough to cover near-term benefits. Trustees must adopt a rehabilitation plan within 240 days, and bargaining parties receive revised benefit or contribution schedules designed to pull the plan out of critical status.4Office of the Law Revision Counsel. 26 USC 432 – Additional Funding Rules for Multiemployer Plans Defined in Section 431(b)(3)
Critical and Declining Status
A fourth category, added by the Multiemployer Pension Reform Act of 2014, applies when a plan meets the Red Zone criteria and the actuary projects insolvency within 15 plan years. That window stretches to 20 years if the ratio of inactive to active participants exceeds two to one, or the funded percentage is below 80 percent.5Internal Revenue Service. Expanded Zone Status for Actuarial Certifications for Multiemployer Plans
This classification unlocks something that used to be essentially off-limits: cutting benefits already in pay status. Trustees can apply to the Treasury Department to suspend earned benefits, including checks retirees are currently receiving. The floor is 110 percent of the amount the PBGC would guarantee. Participants over 80 are fully exempt from any cut, those between 75 and 80 get partial protection, and disability-based benefits cannot be reduced. Treasury must approve the application after consulting with the PBGC and the Department of Labor, and participants then vote. A majority of all eligible voters must reject the suspension to block it, unless the PBGC determines the plan is systemically important, in which case the suspension proceeds regardless of the vote.6Federal Register. Suspension of Benefits Under the Multiemployer Pension Reform Act of 2014
The American Rescue Plan Act of 2021 created a one-time lifeline for the hardest-hit multiemployer plans. Eligible plans can apply to the PBGC for special financial assistance, a lump-sum transfer sized to keep the plan solvent through 2051. Eligibility covers plans that were in critical and declining status during any plan year beginning in 2020 through 2022, plans that had already received Treasury-approved benefit suspensions, and plans that became insolvent after December 2014 and remained insolvent as of March 2021.7Pension Benefit Guaranty Corporation. American Rescue Plan Act FAQs If your plan received this assistance, the solvency clock has been reset.
What the PBGC Guarantees If the Plan Fails
The Pension Benefit Guaranty Corporation is the federal agency that insures private-sector defined benefit plans. It does not cover government plans, church plans, or defined contribution accounts like 401(k)s. Two separate insurance programs handle single-employer and multiemployer plans, with very different guarantee amounts.8Pension Benefit Guaranty Corporation. Understanding Your Pension and PBGC Coverage
When a single-employer plan terminates without enough money to pay all promised benefits, the PBGC takes over as trustee and pays benefits up to a statutory maximum. For 2026, a participant retiring at age 65 under a straight-life annuity can receive up to $7,789.77 per month. The cap drops to $7,010.79 per month for a joint-and-50-percent-survivor annuity with a same-age spouse. Retiring before 65 reduces the cap; retiring after 65 raises it.9Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables The guarantee locks in at the date the plan terminates, or the date the employer entered bankruptcy if that came first. Anyone whose promised benefit exceeds the cap loses the overage permanently.
The multiemployer program works differently. The PBGC does not take over a failed multiemployer plan; it provides financial assistance so the plan can keep paying benefits. The per-participant guarantee is calculated from years of service and is substantially lower than the single-employer cap. For long-service workers, the guaranteed level can fall well short of what the plan originally promised.
How to Read Your Annual Funding Notice
Every defined benefit plan must send an Annual Funding Notice to participants, beneficiaries, and contributing labor organizations within 120 days after the end of the plan year. This is the primary tool for tracking your plan’s health. The notice must include the funded percentage for the current year and the two preceding years, the dollar amounts of assets and liabilities as of the valuation date, participant counts broken into active, retired, and separated-vested categories, the trust’s investment allocation across asset classes, and a summary of PBGC coverage.10eCFR. 29 CFR 2520.101-5 – Annual Funding Notice for Defined Benefit Plans
If the administrator fails to send the notice, a court can impose a penalty of up to $100 per day for each participant who did not receive it.11Office of the Law Revision Counsel. 29 USC 1132 – Civil Enforcement
Most people glance at the notice and file it. Look at the three-year trend instead. A plan that moved from 92 percent to 85 percent to 78 percent is heading toward the restriction thresholds quickly, and the trajectory matters more than any single year’s figure.
Federal law also lets you request additional documents, including the full actuarial valuation report and the plan’s Form 5500 filing, which contains granular financial data the funding notice only summarizes. The plan administrator must respond within 30 days. If you believe the plan is not complying with funding or disclosure rules, you can file a complaint with the Department of Labor’s Employee Benefits Security Administration.
For participants in plans approaching the 80 percent or 60 percent thresholds, the practical point is simple. If you’re eligible for a lump sum and the funded ratio is trending down, waiting could mean the payout gets cut in half or blocked entirely once restrictions kick in. That is a reason to watch the numbers and talk to a financial advisor before the window narrows, not a reason to panic.