On April 28, 2016, the Pension Benefit Guaranty Corporation (PBGC) issued a proposed regulation that would reduce penalty rates for the late payment of PBGC premiums and waive most of the penalty for plans that demonstrate good compliance with premium requirements. The lower penalties would be effective starting with late premiums for plan years beginning after 2015. Therefore, they would be applicable for 2016 premium payments, which are due on October 17, 2016 for calendar-year plans.¹ A copy of the proposed regulation is at this link.

Action Needed Now: Plan sponsors should review the proposal, understand its impact, and decide whether to submit any comments to the PBGC. Comments are due on or before June 27, 2016.

Background

PBGC guarantees the benefits of both single-employer and multiemployer pension plans up to certain levels. Plans covered by PBGC's insurance programs must pay annual premiums to the agency. Multiemployer plans pay a flat-rate premium based on the number of participants in the plan. Single-employer plans also pay a flat-rate premium based on the number of participants, as well as a variable-rate premium based on the plan's unfunded vested benefits (the difference between premium funding target and plan assets). Multiemployer plans do not pay the variable-rate premium.

In 2014, the PBGC revised its regulations so that premiums are generally now due on the fifteenth day of the 10^th month of the plan year, which is usually October 15 for a calendar-year plan.² (If the due date falls on a Saturday, Sunday, or Federal holiday, the PBGC uses the next business day.) Under the current rules, if premium payments are late, the PBGC requires plans to pay both interest and a late payment penalty on the unpaid amount. The late payment penalty is a percentage of the amount paid late multiplied by the number of full or partial months that the amount is late, subject to a floor of $25 (or the amount of premium paid late, if less). The late payment percentage depends on whether the late payment is "self-corrected" or whether the PBGC gives notice of the late amount. For self-correction, the penalty is one percent (1%) per month of the unpaid amount, capped at 50%. If PBGC gives notice of the late amount, the penalty is five percent (5%) per month of the unpaid amount, capped at 100%.

Proposed Regulation

Penalties Cut in Half: Under the proposed regulation, the penalties are cut in half. Thus, the 1% self-correction penalty becomes ½% with a 25% cap, and the 5% penalty becomes 2 ½% with a cap of 50%. The $25 dollar floor is eliminated.

Automatic Waiver for Good Premium Compliance: In addition, the proposed regulation creates an "automatic waiver" of 80% of the penalties assessed at the higher rate if the following two conditions are satisfied. First, the plan must have a five-year record of premium compliance. This generally means timely payment of all premiums for the five plan years preceding the year of the delinquency. Second, there must be prompt correction. This means that the premium shortfall for which a penalty is being assessed must be paid within 30 days after PBGC notifies the plan that there is (or might be) a problem. Under the automatic 80% waiver, the 2½% penalty amount is reduced to ½% (the same as the self-correction amount); however the caps on the penalties remain unchanged.

Example:

If a plan paid a $1 million premium two months late (after notice from PBGC), the penalty under the current regulation would be $100,000 (two months times 5 percent times $1 million). Under the proposed regulation, the penalty would be $50,000 (two months times 2½ percent times $1 million). If the plan qualified for the automatic partial waiver, the penalty would be reduced by 80 percent, from $50,000 to $10,000.

The following chart illustrates the new penalty rates under the proposed regulation:

CHEIRON OBSERVATIONS

The proposed penalty relief is good news for plans and plan sponsors. With the increase in PBGC premiums over the past few years, the potential penalties could be substantial. The proposed changes should still encourage compliance with timely payment of premiums but lessen the absolute impact of mistakes. The PBGC proposal does not change the requirement to pay interest on the late premium payments. The rate of interest is mandated by law and not subject to the discretion of the PBGC.

Cheiron pension consultants can assist plan sponsors with their review and consideration of the impact of the proposed regulation.

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

¹ That is because October 15, 2016 falls on a Saturday and the PBGC will use the next business day.