PBGC issues final regs lowering late premium payment penalties, providing new waiver

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations that lower the late premium payment penalties for plan years beginning in 2016 or later. Under the final regulations, late payment penalty rates and caps are reduced by 50%. In addition, for plans with good compliance histories that pay promptly after a PBGC underpayment notification, penalties are reduced even more (an 80% reduction, on top of the above 50% reduction). The final regulations are effective October 24, 2016, and apply to both single-employer and multiemployer defined benefit plans for late annual (flat- and variable-rate) premiums for plan years beginning after 2015.

Late premium payment penalty reduction

Currently, 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 premium paid late, if less). The PBGC uses a two-tiered penalty structure that rewards self-correction. A lower rate of 1% of the late payment per month applies when a delinquency is corrected before the PBGC notifies the sponsor. A higher rate of 5% applies if the correction is made following PBGC notification. Penalties in the first category are capped at 50% of the late amount, and 100% in the second instance. The smallest penalty assessed is the lesser of $25 or the amount of unpaid premiums.

The PBGC noted that, as the premium amounts have increased over time, the penalties for late payment have also risen because they are calculated as a percentage of the premiums. “We’re committed to reducing the regulatory burdens of sponsoring a pension plan,” said PBGC Director Tom Reeder. “This change is one of the ways we can help employers that are keeping their defined benefit pension plans and providing the security of lifetime income for workers and retirees,” Reeder said.

The final regulations cuts the rates and caps in half (to 1/2% with a 25% cap and 2 1/2% with a 50% cap, respectively) and eliminate the floor on penalty assessments (so if the penalty assessment is less than $25, it will not be automatically inflated to the floor amount).

New penalty waiver

The PBGC has also created a new penalty waiver that applies to underpayments by plans with good payment histories if corrected promptly after notice from the PBGC. Under the final regulations, the PBGC will waive 80% of the penalty otherwise applicable to such a plan. Thus, the penalty is reduced from 2 1/2% per month (with a 50% cap) to 1/2% per month (with a 25% cap)—the same result as if the plan had self-corrected.

There are two conditions for the 80% waiver. First, the plan must have a five-year record of premium payment compliance. Generally, this means timely payment of all premiums for the five plan years preceding the year of the delinquency, as shown by the plan’s premium filings. The PBGC explains, though, that a late premium will not count against a plan if the PBGC did not require payment of a penalty, such as when there was a waiver of the entire penalty. The PBGC will judge a plan on its coverage years if the plan was not in existence as a covered plan for a full five years.

Second, there must be prompt correction. This means that the premium shortfall for which a penalty is being assessed is paid within 30 days after the PBGC notifies the plan in writing that there is or might be a problem. The PBGC explains that a plan that meets the first condition and is assessed a penalty at the 2 1/2% rate will qualify for an automatic 80% reduction by paying the premium shortfall within 30 days.

The PBGC has made two clarifying changes to the text describing the 80% waiver. The amount waived is now described as 80% of the amount ‘‘assessed,’’ rather than the amount ‘‘otherwise applicable.’’ And the amount that must have been paid by the end of the 30-day period is now described as the ‘‘total amount of premium’’ for the year, rather than the ‘‘amount of unpaid premium.’’

Source: PBGC News Release No. 16-14, September 22, 2016.

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