The Pension Benefit Guaranty Corporation (PBGC) has revised its regulations on payment of premiums. This revision completes PBGC's recent effort to simplify the premium payment rules and provide plans with relief from penalties.

Action Needed Now: Plan sponsors should carefully review the revised rules and understand how the changes affect their plans. Sponsors of small plans should be particularly aware that due dates for premiums will be earlier than in previous years, but transition relief is available for 2014.

Background and Overview

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.

Prior to this rulemaking, plans were subject to different due dates for premiums depending on plan size and the type of premium owed. Under this system, plan size was based on the number of participants in the plan, with small plans having fewer than 100 participants, mid-size plans having 100 to 499 participants, and large plans having 500 or more participants.

In July 2013, PBGC issued proposed regulations to revise several provisions of the premium regulations. The revisions that would affect large plans were finalized in January (see Cheiron's previous Pension Alert. The new regulations complete the revisions to the premium regulations.

Changes Made by Revised Regulations

The notable substantive changes made by the revised regulations are described below. Except as indicated, the changes are effective for 2014 and later plan years.

Due Date Changes

Uniform Due Dates for Annual Premiums

Prior to 2014, annual PBGC premiums were due at different times depending on the size of the plan and the type of premium owed. The new regulations simplify this system and provide that all premiums will be due on the same date, regardless of plan size or premium type. Effective for 2014 plan years and later, all premiums will be due on the fifteenth day of the 10^th calendar month of the plan year (i.e., October 15^th for calendar year plans). However, small plans will receive transition relief for 2014, and will not owe premiums for the plan year beginning in 2014 until the fifteenth day of the 14^th calendar month after the start of the plan year (i.e., February 15^th, 2015 for calendar year plans).

By 2015, all premium due dates will be fully unified, including for small plans. The old and new premium deadlines for 2014 for calendar year plans are summarized in the following table:

The revised regulations eliminate these categories for purposes of premium due dates. However, the regulations do maintain a definition of a small plan, but change the definition to refer to plans that either have no more than 100 participants, or that value benefits on a date that is not the first day of the premium payment year. Note that the revised regulations continue to use the old definition of small plans (plans with fewer than 100 participants) for application of the 2014 transition rule.

Due Dates for Terminating Plans

A plan terminating in a standard termination will owe premiums to PBGC for the final plan year, but the due date for these premiums could often occur after the plan has closed its books. In order to ensure that terminating plans pay the premiums owed for the final plan year, the regulations change the due date for terminating plans to the earlier of two dates: (1) the ordinary due date for premiums or (2) the date the post-distribution certification is actually filed.

Due Dates for New and Newly Covered Plans

The revised rules modify the due dates for premiums of plans that are new or newly covered by Title IV of ERISA. Under the new rules: (1) the due date for newly covered plans is 90 days after the date that the plan became covered by Title IV and (2) the due date for new small plans that form as a result of non-de minimis consolidations and spinoffs (i.e., continuation plans) will be extended until 90 days after the valuation date of the plan's unfunded vested benefits.

Changes to Variable-Rate Premium Rules

"Look-back" Rule for Small Plans

Certain small plans (as defined in the revised regulations) value their benefits at a date that is too late for purposes of meeting the new uniform premium due date (October 15^th for calendar year plans). The proposed and final revised regulations allow small plans to value their benefits by "looking back" at data from the prior year. This will allow these plans to calculate their variable-rate premiums in time to meet the new uniform premium due dates.

Note that the revised regulations provide for two exceptions to the look-back rule:

• New plans are entirely exempt from variable-rate premiums (except for new plans resulting from a non-de minimis consolidation or spinoff);
• Small plans (as defined in the revised regulations) may choose to opt out of the look-back method and use the current year's valuation of benefits. Details will be provided in the PBGC premium instructions.

Final-Year Variable-Rate Premium Exemption

The revised regulations expand the variable-rate premium exemption for plans undergoing a standard termination, so that all such plans are exempt from variable-rate premiums for the year that the plans close out.

Penalty Relief

The most significant penalty relief provided for in the revised regulations is a new cap on penalties for plans that self-correct for failing to pay premiums timely. In general, plans that self-correct are subject to a 1 percent per month penalty (compared to a normal penalty rate of 5 percent per month). However, because there is a cap on penalties at 100 percent of the unpaid amount, plans that self-corrected after 100 months or more would not receive any leniency from penalties. The revised regulations change this so that penalties owed by self-correcting plans are capped at 50 percent of the underpayment.

The final regulations also make several other smaller changes providing for penalty relief. Please refer to the regulations for additional information about these changes.

Conclusion

The revised rules complete PBGC's recent regulatory effort to modify and simplify the premium payment process. Plan sponsors should be aware of the impact that these changes will have on their plans beginning in 2014.

Cheiron consultants can assist you in analyzing the impact of the revised regulations.

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.