PBGC proposed regs lower penalties for late payment of premiums

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed regulations that would significantly lower the rate of penalties charged for the late payment of premiums by defined benefit plans and would provide a waiver of most of the penalties for plans with good compliance with premium requirements. The proposed changes would apply to both single-employer and multiemployer plans for late annual (flat- and variable-rate) premium payments for plan years beginning after 2015.

The PBGC notes that, as plan premiums have risen, so have the penalties. “We think penalties should be no more than necessary to encourage timely payments,” said PBGC Director Tom Reeder. “I’m committed to doing everything I can to help companies keep their pension plans.”

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 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 proposed regulations would cut 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).

The PBGC would also create a new penalty waiver that would apply to underpayments by plans with good payment histories if corrected promptly after notice from PBGC. Under the proposal, PBGC would waive 80% of the penalty otherwise applicable to such a plan. Thus, the penalty would be 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 would mean timely payment of all premiums for the five plan years preceding the year of the delinquency, as shown by the plan’s premium filings. Second, there must be prompt correction. This would mean that the premium shortfall for which a penalty was being assessed was made good within 30 days after PBGC notified the plan in writing that there was or might be a problem. The PBGC explains that a plan that met the first condition would be assessed a penalty at the normally applicable rate, but it could earn an 80% waiver (that is, a waiver of all penalties above the lower “self-correction” rate) by paying the premium shortfall within 30 days.

Source: 81 FR 25363, April 28, 2016.

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