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PBGC Premium Changes Require Sponsor Analysis, Action

Single-employer and multiemployer pension plan sponsors face important changes with respect to their PBGC premiums.

First, on January 3, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule on the payment of premiums for large plans (plans with 500 or more participants) that will be effective for premiums due for the 2014 premium payment year. Under the final rule, the due date for the flat-rate premium has been moved to 9 months following the beginning of the plan year (October 15 for calendar year plans). This change applies to both single-employer and multiemployer plans.

Second, the Bipartisan Budget Act of 2013 increased the single-employer premium rates starting in 2015. These changes affect both flat-rate and variable-rate premiums. In addition, the cap on variable-rate premiums was increased to $500. The increases do not depend on the size of the plan.

Action Needed Now: Plan sponsors need to understand the effect of the changes. The most immediate effect is to delay payment of the flat-rate premium due at the end of February 2014 to October 15, 2014, for large plans with a calendar plan year. The payment in October will be based upon an actual participant count, not an estimated count.

Background

PBGC guarantees benefits (up to certain levels) for both single-employer and multiemployer pension plans. The PBGC is funded by premiums paid with respect to the plans. The premium calculation for single-employer plans has two elements. The first element is a flat-rate premium based on a fixed amount multiplied by the number of participants ($49 for 2014). The second element is a variable-rate premium per $1,000 of underfunding ($14 for 2014) based on the difference between the premium funding target and plan assets. Currently, the variable-rate premium is capped at $412 per participant (in 2014).

Multiemployer plans pay only a flat-rate premium, which was $12 per participant for 2013, and will be indexed to wage growth beginning this year (but will stay at $12 for 2014).

Under the current regulations, different due dates and computation rules apply to small plans, mid-sized plans, and large plans, which are defined by the number of participants (i.e., fewer than 100, 100-499, and 500 or more, respectively). Large plans pay an estimate of the flat-rate premium by the end of the 2nd month of the plan year, and then pay the variable-rate premium as well as a reconciliation of the flat-rate estimate within 9 months after the beginning of the plan year. For mid-sized plans, the due date for paying both the flat-rate and variable-rate premiums is 9 months after the beginning of the plan year. Small plans have until the next plan year to pay both the flat-rate and variable-rate premiums.

Proposed Regulation Changes

In July 2013, the PBGC proposed several changes to its premium calculation and payment rules, including:

  1. The due date for all plans would be changed to 9 months following the first day of the plan year. The current estimated flat-rate premium that large plans must pay by the end of the second month of the plan year would be eliminated.
  2. Small plans would be allowed to base the variable-rate premium on the data for the prior plan year, e.g., 2013 data for the 2014 premium.
  3. The maximum penalty for late filings or underpayment of premiums for plans that correct the mistake before receiving notice of underpayment from the PBGC would be reduced from 100% of the premium due to 50% of the premium due.
  4. The safe harbors that excuse underpayment of the estimated flat-rate premium would be eliminated.
  5. The due date for the final premium for single-employer plans that terminate in a standard termination would be clarified so that it is the earliest of the normal due date, the last day for filing the certification of distribution, or the date when the post-distribution certification is actually filed.

Final Regulation - Change in Premium Due Date Only

The final regulation issued on January 3, 2014 only addresses the premium filing date for large plans. The entire flat-rate premium will now be due 9 months after the beginning of the year, which is October 15 for a calendar year plan. No estimated flat-rate premium is due.

The other changes that the PBGC proposed will be addressed in future regulations.

Cheiron Observation: The change to the payment date for large plans was favorably commented upon. Other aspects of the proposed regulations had less favorable comments, and would not apply until later. Therefore, the PBGC issued a final rule on the part that was well received and that would be effective first. It remains to be seen what changes will be made to the remainder of the proposed rules. In the meantime, plans and sponsors should comply with the existing regulations.

Budget Act Premium Amount Changes

The Bipartisan Budget Act of 2013 increased the premium rates for single-employer plans for 2015 and later years. The increase in the variable-rate premium was another $5 for 2015 and $5 for 2016. This increase is on top of the increase that was added by Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012, with a result that the variable-rate premium increase for 2015 is $10. Accordingly, the variable-rate premium per $1,000 of underfunding will be $28 (or more, depending on indexing) in 2016. The following chart shows the resulting flat-rate single-employer premium rate for 2014-2016, and later.

Year

Flat-Rate Premium

2014

$49

2015

$57

2016

$64

2017 and later

$64 indexed to wage growth

Cheiron Observations: The revision in the premium due date for large plans is welcome relief. Large plans will save money because they will not be required to pay an estimated flat-rate premium by the end of the 2nd month in the plan year. This will also avoid the need to prepare a reconciliation schedule.

The increase in the premium rates makes the maintenance of single-employer plans more expensive. The 2012 flat-rate premium of $35 will have almost doubled by 2016. This per participant increase will likely accelerate the desire to reduce the number of participants in defined benefit plans. The effect of the resulting reduction in participants may mean that the amount of premiums sent to the PBGC is less than anticipated by those who wrote the law.

Conclusion

The PBGC acted timely to issue the new premium due date in time for the initial application to 2014 premiums. We expect that the agency will act timely to address the other proposals in advance of the relevant dates to which they would apply.

Cheiron consultants can assist plan sponsors in evaluating the effects of the changes and discuss potential strategies to minimize the impact of PBGC premiums.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.

 
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