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PBGC Final Rule Significantly Reduces Penalties for Late Premium Payments
Practical Law Legal Update w-003-5654 (Approx. 5 pages)
PBGC Final Rule Significantly Reduces Penalties for Late Premium Payments
by Practical Law Employee Benefits & Executive Compensation
| Published on 22 Sep 2016 • USA (National/Federal) |
The Pension Benefit Guaranty Corporation (PBGC) issued a final rule that significantly reduces the penalty rates charged for late payment of premiums by all plans and provides a waiver of most of the penalty for plans that have demonstrated good compliance with premium requirements.
On September 22, 2016, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule that reduces the penalty rates charged for late payment of premiums by all plans and provides a waiver of most of the penalty for plans that have demonstrated good compliance with premium requirements. It also provides a table summarizing the effect of the changes. The final rule adopts the proposed rule issued in April 2016 with certain clarifications.
Background
Sections 4006 and 4007 of the Employee Retirement Income Security Act of 1974 (ERISA) provide that plans insured under Title IV must pay premiums to the PBGC (29 U.S.C. §§ 1306 and 1307). ERISA authorizes the PBGC to assess a penalty if a premium is not paid when due of up to 100% of the overdue amount. The penalty for late payment of a premium is a percentage of the amount paid late multiplied by the number of full or partial months the amount is late, subject to a floor of $25 or the amount of the unpaid premium if less.
Under the current regulations, late payment penalties accrue at a rate of:
- For late payments that are self-corrected (meaning that the premium underpayment is corrected before the PBGC gives notice that there is or may be an underpayment), 1% capped at 50% of the unpaid amount.
- For all other late payments, 5% capped at 100% of the unpaid amount.
The current regulations also authorize the PBGC to waive late premium payment penalties.
On April 28, 2016, the PBGC issued a proposed rule (81 Fed. Reg. 25363) to reduce penalty rates for late payment of annual premiums and create a new automatic waiver of 80% of penalties for plans that have not self-corrected but demonstrate good compliance histories. The final rule was issued after taking into consideration comments received on the proposed rule.
Final Rule
The final rule adopts the proposed rule with certain clarifications. Specifically, the final rule:
- Cuts the current penalty rates and caps in half and eliminates the floor (see Reduced Penalty Rates).
- Creates a new penalty waiver (80% of the penalty assessed) that applies to underpayments by plans that have not self-corrected but have good compliance histories if corrected promptly after notice by the PBGC (see Recognition of Good Premium Compliance).
Reduced Penalty Rates
The PBGC acknowledged the rise in penalties over the years as Congress has significantly increased PBGC premium rates. In the preamble to the final rule, the PBGC expressed its view that a reduction in penalties will still provide plans with an adequate incentive for compliance because the payment of a penalty (regardless of the amount) typically results in improvement of a plan's compliance systems.
The final rule cuts the penalty rates and caps in half. Under the final rule, late penalties accrue at a rate of:
- For late payments that are self-corrected, 1/2% capped at 25% of the unpaid amount.
- For all other late payments, 2 1/2% capped at 50% of the unpaid amount.
Additionally, the final rule eliminates the floor on penalty assessments.
Recognition of Good Premium Compliance
In the preamble, the PBGC explains that plans that have demonstrated a commitment to premium compliance, even if a plan corrects an underpayment only after notice from the PBGC, should also be entitled to lower penalties. Such a commitment is demonstrated by:
- A history of consistent compliance.
- Prompt action to correct an underpayment when notified by the PBGC.
The final rule provides that the PBGC will automatically waive 80% of penalties assessed at the higher rate where the plan both:
- Has a five year record of premium compliance, meaning that the plan timely paid all premiums for the five plan years preceding the year of the underpayment. A late payment will not count against a plan if the PBGC did not require payment of a penalty, such as where the penalty was waived.
- Promptly corrects, meaning that the plan pays the underpayment no later than 30 days after the PBGC notifies the plan.
This change effectively makes the penalty rate for plans that demonstrate good compliance the same as the penalty rate for plans that self-correct.
The final rule also makes certain clarifying changes to the proposed rule.
Effective Date and Applicability Date
The final rule is effective 30 days after publication in the Federal Register.
The changes made by the rule apply to late premium payments for plan years beginning after 2015.
Practical Implications
The final rule provides significant relief to plans that fail to pay PBGC premiums when due, even those plans that have not self-corrected or demonstrated good premium compliance. Employee benefit plan attorneys and plan administrators should familiarize themselves with this guidance and ensure that at a minimum their plans consistently demonstrate a commitment to premium compliance to take advantage of the final rule's lowest rates.