The Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits accrued by participants covered under private-sector defined benefit pension plans in the event the employer sponsoring the plan becomes insolvent. If a plan sponsor is unable to meet its benefit obligation to participants, the PBGC will pay the pension benefit, but only up to certain limits established under Department of Labor regulations.
PBGC collects premiums from the employers, i.e., plan sponsors, in order to provide this federally mandated insurance. The premium for single-employer plans has two components: a flat dollar (flat rate) premium, which is simply a flat dollar charge for each participant covered under the plan, and a variable rate premium, which is a percentage of the deficit between the pension assets and the actuarially determined pension obligation (also referred to as the “unfunded vested benefits”).
Recent pension law changes have increased both the flat and variable premium rates used to determine the total annual premium paid to insure single-employer defined benefit plans. As a result, plan sponsors are and will be paying substantially higher premiums than they have in the past. For example, the flat rate premium in 2012 was $35 per participant; in 2016 it is $64 per participant, and will increase to $80 per participant in 2019. In 2012 the variable rate premium was $9 per $1,000 of unfunded vested benefits. For 2016 the variable rate premium is $30 per $1,000 of unfunded vested benefits and will increase to at least $41 in 2019.
A consequence of the dramatic rise in PBGC premiums is that the penalty for submitting premium payments after they are due, i.e., filing late, has also increased, as the penalty imposed by the PBGC is determined as a percentage of the unpaid premium. Currently, the penalty for plan sponsors that self-correct an underpaid filing is 1% per month (capped at 50%) of the unpaid amount. A plan sponsor can self-correct a late filing as long as the PBGC has not notified the plan sponsor that there is or may be an underpayment. For plan sponsors that receive notice from the PBGC that there is, or may be, an underpayment, the penalty is 5% per month (capped at 100%) of the unpaid amount.
The PBGC recently proposed a reduction to the penalty amount to reduce the financial burden imposed on plan sponsors. The proposed rule change would reduce the penalty by 50%; the self-correcting penalty will be reduced from 1% to 0.5% per month with a 25% cap and from 5% to 2.5% per month with a 50% cap for filings in which the PBGC gives notice.
The PBGC also proposed creating a new penalty waiver for plan sponsors that have a “good” compliance history and that act promptly to correct any underpayments. A plan would be considered to have a good compliance history if payment of all premiums for the five plan years preceding the year of the delinquency was made on time. A late payment would not be assessed against a plan if the PBGC did not require payment of a penalty (e.g., when an entire penalty is waived). The PBGC would consider the correction to be prompt if the premium shortfall for which the penalty is assessed was made good within 30 days after the PBGC notified the plan in writing that there was, or might be, a problem. If both of the conditions are met, the PBGC will waive 80% of any resulting penalty. Under this scenario, the penalty would be reduced from 2.5% per month to 0.5% per month, which is the same amount as if the plan had self-corrected.
This proposal could drastically reduce the financial burden imposed on a plan for underpaid and late filings. For example, a plan with a $1 million premium that is two months late (after notice from the PBGC) would have a $100,000 penalty (two months at 5% per month times the amount outstanding) under the current regulation. Under the proposed regulation, this penalty would be reduced to $50,000. The penalty could be further reduced to $10,000, if the plan is eligible for the compliant plan partial waiver of 80%.
Comments on the proposal are due to the PBGC by June 27, 2016. Only after the comments are reviewed and finalized will plan sponsors know when these new reduced penalties would be effective. Until then, plan sponsors are urged to file on time to avoid the mandated penalties.