Pension Plan Funding Levels: AFTAP Thresholds, Premiums, and PBGC Rules

Pension plan funding levels measure whether a plan currently holds enough assets to pay every benefit it has promised, expressed as a percentage of assets to the present value of future obligations. A plan at 100% is fully funded. Anything less is underfunded, and federal law attaches sharper consequences the further the percentage falls: restrictions on lump sums, frozen benefit accruals, higher insurance premiums, excise taxes on the employer, and, in the worst cases, statutory liens on company property.

How the Percentage Is Calculated

Actuaries compare two figures. On one side, plan assets, valued either at current market prices or through a smoothed actuarial value that averages market swings over several years. On the other, plan liabilities: every future benefit payment promised to every participant, discounted back to a single present-day dollar amount.

The discount rate does most of the work. A lower rate makes future obligations look more expensive today, dropping the funding percentage even when investments haven’t moved. Federal law requires single-employer plans to use three segment rates derived from high-quality corporate bond yields, each tied to a different time horizon. A stabilization corridor holds those rates within 95% to 105% of a 25-year average, which keeps short-term rate swings from distorting the number.¹

Demographic assumptions matter too. Life expectancy, expected retirement ages, and the payout forms participants are likely to choose all feed the liability estimate. The IRS publishes mortality improvement rates that plans must use in these projections.²

Single-Employer Funding Thresholds and What They Trigger

The Pension Protection Act of 2006 set up a tiered system that ratchets up regulatory pressure as a plan’s funding percentage falls. The adjusted funding target attainment percentage, or AFTAP, is the specific number that drives most of these consequences.

At-Risk Status

A single-employer plan enters at-risk status when both of these were true in the preceding plan year: the regular funding target attainment percentage was below 80%, and the at-risk funding target attainment percentage was below 70%.³ The at-risk calculation assumes every eligible worker retires as early as possible and picks the most expensive payout option.⁴

Once classified as at-risk, the plan’s required contributions rise two ways. Future liability calculations must use those pessimistic assumptions, and a loading factor gets added on top: $700 per participant plus 4% of the regular funding target.³ The loading factor phases in for plans that haven’t been at-risk for two of the four preceding years; chronically underfunded plans get the full charge immediately.

AFTAP Below 80%: No Benefit Improvements

Once the AFTAP drops below 80%, the plan cannot adopt any amendment that increases benefit obligations. That covers new benefit formulas, faster accrual rates, and accelerated vesting schedules.⁵

AFTAP Between 60% and 80%: Lump Sums Capped

In this range, lump-sum payouts and other accelerated distributions are limited. A participant can receive the lesser of 50% of what they would otherwise get, or the present value of the PBGC maximum guarantee for that participant.⁵

AFTAP Below 60%: Full Freeze

Below 60%, the plan must freeze entirely. No new benefits accrue, and all lump-sum and other accelerated payments stop. If the employer is in bankruptcy, accelerated distributions are blocked entirely unless the actuary certifies an AFTAP of at least 100%.⁵

These restrictions lift automatically once the actuary certifies an improved AFTAP.

Multiemployer Plan Status Zones

Multiemployer plans, which cover workers across multiple employers under collective bargaining agreements, use a separate color-coded classification.

Green zone (healthy): funded percentage of at least 80% with no projected funding deficiency. No special corrective action required.
Yellow zone (endangered): funded percentage below 80%, or a current or projected accumulated funding deficiency within the next seven plan years. The plan sponsor must adopt a funding improvement plan within 240 days of the actuary’s certification. During the improvement period, the sponsor cannot accept a bargaining agreement that reduces contributions, suspends them for any service period, or excludes younger or newly hired employees.⁶
Red zone (critical): most commonly, a funded percentage below 65% combined with a projected inability to pay benefits within seven years. The plan must adopt a rehabilitation plan, suspend lump-sum payouts, and may reduce adjustable benefits.⁷
Critical and declining: meets critical criteria and is projected to become insolvent within 14 to 19 years, depending on the ratio of retirees to active workers. The plan may apply to the Treasury Department for approval to suspend benefits already being paid to retirees, subject to a participant vote.

What the Employer Owes Each Year

Federal law requires the employer to contribute enough to cover the target normal cost (the present value of benefits earned during the current year) plus any shortfall amortization charges when assets fall below the funding target.¹

For plan years beginning after 2021, shortfalls are spread over 15 years in level annual installments. Earlier plan years used a 7-year period. Each year a new shortfall arises, it starts its own 15-year base, so a chronically underfunded plan can carry several overlapping amortization schedules at once.¹

Calendar-year plans owe quarterly installments on April 15, July 15, October 15, and the following January 15. Non-calendar plans use the equivalent months of their fiscal year. Missing a quarterly payment starts interest running.¹

Penalties When Contributions Are Missed

When an employer misses required minimum contributions, IRC §4971 imposes an excise tax. For single-employer plans, the initial tax is 10% of the unpaid minimum required contributions remaining at year-end. For multiemployer plans, the initial rate is 5% of the accumulated funding deficiency.⁸

If the employer still hasn’t caught up by the end of the taxable period (generally the time between the initial failure and the date the IRS mails a deficiency notice), the additional tax jumps to 100% of the unpaid amount.⁸ That is not a typo. The second-tier penalty equals the full missed contribution.

A separate 10% excise tax applies to liquidity shortfalls, when the plan doesn’t hold enough liquid assets to cover next-quarter benefit payments and the employer fails to make up the difference with its required installment. If the liquidity problem lasts five consecutive quarters, that penalty also escalates to 100%.⁸

Once unpaid required contributions and accumulated interest exceed $1 million, a statutory lien automatically attaches to all property of the employer and any controlled-group member. The lien covers real and personal property and secures the plan’s claim ahead of most other creditors.¹ It remains until the contributions are paid or the funding target attainment percentage reaches 100%.

PBGC Premiums Rise With Underfunding

Every defined benefit plan covered by the Pension Benefit Guaranty Corporation pays annual insurance premiums, and underfunded plans pay much more. For 2026, single-employer plans owe:

A flat-rate premium of $111 per participant, regardless of funding level.⁹
A variable-rate premium of $52 per $1,000 of unfunded vested benefits, capped at $751 per participant.⁹

The variable-rate premium is where the cost of underfunding really shows up. A plan with 1,000 participants and $50 million in unfunded benefits would owe $2.6 million in variable-rate premiums alone, on top of the $111,000 flat charge. Legislation enacted in 2022 locked the $52 rate in place and eliminated its inflation indexing. The per-participant cap is still indexed and rose from $686 in 2024 to $751 in 2026.¹⁰ A fully funded plan pays zero variable-rate premium.

What PBGC Guarantees If a Plan Fails

When a single-employer plan terminates without enough assets to cover promised benefits, the PBGC steps in as trustee and pays participants up to a legal maximum. For plans terminating in 2026, a participant retiring at age 65 with a straight-life annuity can receive up to $7,789.77 per month, roughly $93,477 per year.¹¹ The cap for a joint-and-survivor annuity is $7,010.79 per month. Both maximums drop for participants who retire before 65.

Participants in generous plans sometimes find that their promised benefit exceeds what the PBGC will cover. Benefit increases adopted within the five years before termination are phased in rather than guaranteed at full value right away. When the plan sponsor is in bankruptcy, the applicable guarantee table is set by the bankruptcy filing date, not the later plan termination date.¹¹

Multiemployer guarantees work differently and sit considerably lower. The formula ties the guarantee to years of service rather than a flat monthly cap, so long-tenured participants in low-benefit plans may come close to their full benefit while higher earners see larger reductions. The PBGC’s multiemployer program has had its own solvency problems, though the American Rescue Plan Act of 2021 provided significant financial assistance to the most distressed plans.

1
Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans
2
Internal Revenue Service. Pension Plan Mortality Tables
3
eCFR. 26 CFR 1.430(i)-1 – Special Rules for Plans in At-Risk Status
4
U.S. Department of Labor. Annual Funding Notice Template – Section: At-Risk Status
5
Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans
6
Justia Law. 29 USC 1085 – Additional Funding Rules for Multiemployer Plans in Endangered Status or Critical Status
7
Internal Revenue Service. Multiemployer Plans
8
Office of the Law Revision Counsel. 26 USC 4971 – Taxes on Failure to Meet Minimum Funding Standards
9
Pension Benefit Guaranty Corporation. Comprehensive Premium Filing Instructions for 2026 Plan Years
10
Pension Benefit Guaranty Corporation. Premium Rates
11
Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables