The Pension Benefit Guaranty Corporation (PBGC) issued a final rule making significant changes to the premium due dates, variable-rate premiums and penalties for late payments within its regulations on premium rates and payment of premiums, among other changes. The final rule is generally effective for 2014 and later plan years.
On March 10, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule making significant changes to its regulations on premium rates and payment of premiums. The final rule, which is very similar to the proposed rule issued in July of 2013:
Creates one uniform due date (generally, October 15th) for premium filings for plans of all sizes. The final rule provides a transition rule for 2014 for small plans (see Transition Rule for Small Plans).
Makes changes to variable-rate premium rules, including:
creating a "look-back" rule for small plans that bases the premium on prior-year data; and
exempts most plans from the premium for any year in which it completes a standard termination, or, for small plans, for the first year of coverage.
Provides for relief from penalties for late payment.
Makes other changes, including coordinating changes with MAP-21.
The final rule is generally effective for 2014 and later plan years. The exemption from the variable rate premium rules for a plan closing in a standard termination is applicable for a plan that completes distribution of its assets in compliance with the single-employer termination regulation on or after April 10, 2014.
Due Date Changes
The final rule amends the due date rules in its regulations on premium rates and payment of premiums by:
Premium due dates currently depend on plan size, with large, mid-size and small plans all paying flat-rate and variable-rate premiums according to different schedules. The final rule eliminates the current system of three premium due dates and returns to one uniform due date for both flat-rate and variable-rate premiums of plans of all sizes.
For calendar-year plans of all sizes, the due date will be October 15. However, the final rule provides a transition rule to give small plans more time to adjust to the new rules.
For small plans, the uniform due date causes a timing issue under current rules (because small plans value plan benefits at the end of the year). To solve this problem, the final rule creates a look-back rule for small plans that values plan benefits based on prior-year data (see Look-back Rule for Small Plans).
Transition Rule for Small Plans
Shifting immediately from the old due date schedule to the new schedule would result in two premium due dates for small plans in the initial transition year. To avoid the doubling up of premiums for 2014, the final rule provides a one-time extension by extending the transition year due date by four months (from October 15, 2014 to February 15, 2015, for calendar-year plans) for plans that would otherwise have two premium due dates in 2014.
This means a small plan would pay its 2014 premiums on February 15, 2015 and its 2015 premiums on October 15, 2015.
The final rule includes a chart illustrating the due dates for plans of all sizes in 2014 and 2015.
In addition, a 60-day penalty waiver is available in cases of financial hardship.
Special Due Date for Terminating Plans
Under current rules, for a plan terminating in a standard termination, the final premium may be due months after the plan is terminated. The final rule creates a new premium due date for terminating plans that coordinates with the final step in a standard termination, a plan's filing of the post-distribution certification under PGBC Regulation 4041.29. A plan administrator of a terminating plan must file this certification between 30-90 days after the last benefit distribution date.
Under the final rule, the special premium due date for a terminating plan's final year would be the earliest of:
The normal premium due date.
The date when the post-distribution certification is actually filed.
Practically this accelerates the premium deadline for terminating plans that close out within the first six and one-half months of the final year. However, the final rule also exempts plans from variable-rate premiums for the final year (even if the termination date comes within that year), which reduces the burden of computing a variable-rate premium under this accelerated deadline (see First-year and Final-year Variable-rate Premium Exemptions).
New Plan Due Date Modification
The current premium payment regulation includes a special due date provision for new and newly covered plans. The final rule modifies the current provision to:
Restore Alternative Due Dates for Newly Covered Plans. For newly covered plans, the PBGC restores the alternative due date of 90 days after pension plan termination insurance coverage begins under Title IV of ERISA (which was eliminated under the Pension Protection Act of 2006 (PPA)).
Provide Alternative Due Dates for New Small Plans Created in Consolidations and Spin-offs. The final rule provides an alternative due date for new small plans resulting from non-de minimis consolidations and spin-offs. These plans are excluded from the new look-back rule that bases a small plan's variable-rate premium on prior-year data and instead must pay a variable-rate premium based on current-year data (see First-year and Final-year Variable Rate Premium Exemptions).
Variable-rate Premium Changes
The final rule makes several changes to variable-rate premiums, including:
The final rule requires small plans to determine unfunded vested benefits (UVBs), on which variable-rate premiums are based, by looking back to data for the prior year. (It would not involve any "rolling forward" or other modification of prior year data as was the case under regulations that were in place pre-PPA.) This "look-back" rule would apply only to the variable-rate premium, not to the flat-rate premium.
A small plan is defined to include a plan with either:
A participant count for the premium payment year of 100 or fewer (the proposed regulation used a participant count of "up to 100").
A funding valuation date that is not at the beginning of the premium payment year.
Basing this definition on a plan's participant count in the premium payment year (rather than the year prior to the premium payment year) will exclude many new or newly covered plans (which have no prior year) from using the delayed small plan due date that is permitted under current rules for their first year . However, it does align a small plan's premium due date with the Form 5500 due date (as typically extended) and corresponding valuation.
First-year and Final-year Variable-rate Premium Exemptions
Because a new plan does not have a prior year to look back to, the final rule exempts small plans that are new or newly covered from the variable-rate premium.
The PBGC considers plans created by consolidation or spin-off to be new plans. To avoid creating incentives to spin-off underfunded small plans to avoid paying variable-rate premiums, the PBGC proposal excludes non-de minimis consolidated or spun-off plans from this exemption and instead bases their variable-rate premiums on current year data, with an alternative due date available (see New Plan Due Date Modifications).
The final rule also expands the current exemption from the variable-rate premium to include the year in which a plan closes out, regardless of when the termination date is. This is conditioned only on the completion of a standard termination.
Clarifying Calculation of Premium Funding Target for At-risk Plans
ERISA Section 303(i)(1)(A)(i) requires the use of special actuarial assumptions in calculating an at-risk plan's funding target, including that a "loading factor" (described in ERISA Section 303(i)(1)(C)) be included in the funding target of an at-risk plan which has been considered at-risk for two of the past four years. There is some ambiguity under the current premium rates regulation regarding the term "participant" in the loading factor calculation for at-risk plans, including:
Whether the term "participant" in the loading factor provision is meant to refer only to vested participants in the premium context.
How participants are counted for purposes of the premium rates regulations and the IRS regulations on special rules for at-risk plans.
The final rule resolves this ambiguity by providing that the participant count to use in calculating the loading factor to be reflected in the premium funding target is the same participant count used to compute the load for funding purposes.
The final rule makes a number of changes to the PBGC's penalty structure, including:
Lowering the Self-correction Penalty Cap. To encourage voluntary payment of unpaid or underpaid premiums, the proposal caps the self-correction penalty at 50% of the unpaid amount.
Expansion of Penalty Waiver Authority. The appendix to the regulations states that PBGC may waive all or part of a premium penalty but that PBGC intends to exercise this waiver authority only in "narrow circumstances." The PBGC proposal removes the reference to narrow circumstances to avoid an implication that PBGC considers its waiver authority more narrowly circumscribed than in fact it does.
Codification of Seven-day Penalty Waiver Rule. The proposal codifies a policy, announced in September 2011, that for plan years beginning after 2010, it would waive premium payment penalties assessed solely because premium payments were late by seven days or less.
Removal of Unneeded Flat-rate Safe Harbors. The proposal eliminates the flat-rate safe harbor provisions from the premium payment regulation, since the change in due dates (see Uniform Due Dates for Plans of All Sizes) will render them unnecessary.
The rule finalizes several other changes made by the proposed regulations, including changes:
To the variable-rate premium cap.
To the exemption for standard terminations.
For liability for premiums in distress and involuntary terminations.