Budget Act Includes Increase in PBGC Premiums; Flat-rate Premium Due Date is Pushed Back for Large Plans | Practical Law

Budget Act Includes Increase in PBGC Premiums; Flat-rate Premium Due Date is Pushed Back for Large Plans | Practical Law

President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which among other things provides for increases to the flat-rate and variable-rate Pension Benefit Guaranty Corporation (PBGC) premiums beginning in 2015. In a separate final rule, the PBGC announced that it would push the flat-rate premium due date for large plans back to the variable-rate premium due date (October 15 for calendar year plans), effective for 2014.

Budget Act Includes Increase in PBGC Premiums; Flat-rate Premium Due Date is Pushed Back for Large Plans

by Practical Law Employee Benefits & Executive Compensation
Published on 02 Jan 2014 • USA (National/Federal)
President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which among other things provides for increases to the flat-rate and variable-rate Pension Benefit Guaranty Corporation (PBGC) premiums beginning in 2015. In a separate final rule, the PBGC announced that it would push the flat-rate premium due date for large plans back to the variable-rate premium due date (October 15 for calendar year plans), effective for 2014.
Recent legislation and final regulations affect Pension Benefit Guaranty Corporation (PBGC) premiums and the dates these premium payments are due, including:
  • New legislation that provides significant increases to PBGC premiums beginning in 2015, and also increases the variable-rate cap starting in 2016.
  • A final rule issed by the PBGC which moves the flat-rate premium due date for large plans to the same day that variable-rate premiums are due (October 15 for calendar year plans), effective for 2014.

PBGC Premium Increases

On December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013 (Act), which among other things provides for increases to the flat and variable-rate PBGC premiums beginning in 2015. The law also increases the variable rate cap starting in 2016. These changes build on increases to premium levels for 2013 and 2014 previously adopted in the Moving Ahead for Progress in the 21st Century (MAP–21) Act (see Legal Update, President Obama Signs Transportation Bill with Pension Funding Provisions).
Employers sponsoring defined benefit plans must pay premiums to the PBGC to insure the plan benefits for participants. Premiums are based on the number of participants in the plan. In addition, underfunded single-employer plans generally must pay an additional annual variable-rate premium based on a certain dollar amount per $1,000 of unfunded vested benefits.
Section 703 of the Act amends Section 4006 of ERISA (29 U.S.C. § 1306) by adjusting the flat-rate premium, variable-rate premium and variable rate cap that employers who sponsor defined benefit plans must pay to the PBGC as follows:
  • Flat-rate Premiums. Flat rate premiums are:
    • increased from the current $49 per participant to $57 per participant for plan years beginning in 2015 and $64 for plan years in 2016; and
    • tied to increases in the national average wage index for plan years beginning after 2016.
  • Variable-rate Premiums. Variable-rate premiums (which were tied to the national average wage index starting in 2013) are increased based on a plan's funding level, by $10 per $1,000 of unfunded vested benefits for plan years beginning in 2015 and $5 for plan years beginning in 2016. Rates after 2016 will continue to be tied to the wage index.
  • Variable Rate Premium Cap. The variable rate cap is increased to $500 for plan years beginning after 2015 and tied to increases in the national average wage index for plan years beginning after 2016.
These changes are estimated to increase premium payment by approximately $8 billion over ten years.

Flat-rate Premium Due Date

On January 2, 2014, the PBGC issued a final rule moving the flat-rate premium due date for large plans to the same date that variable-rate premiums are due for these plans (79 Fed. Reg. 347-50 (Jan. 3, 2014)). Accordingly, flat-rate premiums for large plans will be due 9 ½ months after the beginning of the premium payment year (October 15 for calendar year plans). This change is incorporated into PBGC regulations governing payment of premiums (29 C.F.R. § 4007.8 and 29 C.F.R. § 4007.11).
The PBGC noted that, in recent years, flat-rate premium due dates have depended on the size of the plan and type of premium, with the result that large plans pay flat-rate premiums early in the year. Harmonizing large plans' flat-rate due date with the due date for variable-rate premiums, according to the PBGC, will:
  • Reduce the number of large plans' premium transactions with the PBGC by two by both unifying the due dates and eliminating interest payments due to shortfalls in early-year flat-rate premium estimates.
  • Allow plan consultants to perform all of a plan's premium filing work at one time, once a year.
  • Simplify the PBGC's premium processing systems and save it money on future changes to those systems.
The due date change, which is effective for 2014, grew out of a July 2013 rule that proposed unifying premium filing due dates for all plans, among numerous other envisioned changes (see Legal Update, PBGC Proposed Regulations Simplify and Coordinate Premium Rate and Payment Rules). The other changes proposed in the rule, including adjusting the due date for plans of other sizes, will appear in a separate final rule. The change for large plans was made ahead of these other proposals, according to the PBGC, because of the approaching large-plan flat-rate filing deadline of February 28, 2014, and because of the uniformly positive reaction to the proposed change.