Final PBGC Regulations for Calculating the Single-Employer Variable-Rate Premium also Revise Filing Deadlines

In addition to having to pay a flat-rate, per-capita premium to the Pension Benefit Guaranty Corporation (PBGC),¹ sponsors of pension plans that are not multiemployer plans (i.e., single-employer and multiple-employer plans) must pay a variable-rate premium (VRP), which depends on the value of their unfunded vested benefits. The Pension Protection Act of 2006 (PPA’06) changed the funding rules on which the VRP is based and eliminated the full-funding limit exemption from the VRP.

The PBGC recently issued final regulations for calculating the VRP.² The regulations, which also revise the filing deadlines, are very similar to proposed regulations issued in May 2007. This Compliance Alert summarizes the highlights.

GUIDANCE ON THE VARIABLE-RATE PREMIUM CALCULATION

The PPA’06 premium funding target only takes into account unfunded vested benefits. The VRP is still calculated as 0.9 percent of unfunded vested benefits. For the interest assumption used to determine the value, special segment rates apply.³ For 2008 calendar-year plans, the segment rates are: 4.93 percent, 6.13 percent and 6.69 percent. For certain underfunded plans that are “at-risk” according to criteria in the PPA’06 funding rules, the at-risk assumptions regarding retirement age and benefit payment choices that are required for funding must be used for VRP purposes as well.

The PBGC’s final regulations:

• Permit the Use of an Alternative Premium Funding Target This alternative, which is designed to reduce the calculation burden, uses the same yield-curve interest rates that the actuary used for plan funding purposes. The election of this alternative (and likewise, a revocation of the election) is irrevocable for five years. Locking in the election for five years keeps plans from calculating the premium funding target both ways and using the lower amount each year.
• Clarify the Meaning of Vested Benefits Guidance was lacking in the past on whether certain benefits were considered vested for premium purposes. The regulations specify that vested benefits must include qualified pre-retirement survivor annuities and Social Security supplements, if certain conditions are met.
• Confirm Use of the Market Value of Assets This value must be used as of the measurement date, regardless of the asset valuation method used for funding. Pending employer contributions for the year can be included, but they must be discounted with interest to the beginning of the plan year. The market value of assets is determined without regard to whether the plan has a credit balance.
• Eliminate the Alternative Calculation Method This method, which was allowed under the pre-PPA’06 rules, involved rolling forward prior year values to the current year. It is no longer permitted.

In addition, a special per-participant cap applies to plans with 25 or fewer employees, as described in prior regulations.⁴

NEW FILING DUE DATES

The regulations revise the VRP due dates to permit larger plans to make VRP filings based on estimated liabilities that can be reconciled by a later date, without penalty. In addition, small plans are given more time to file. Details follow:

• Small Plans Flat-rate premiums as well as VRPs for small plans are due on the last day of the sixteenth full calendar month that begins on or after the first day of the plan year. These are plans that paid premiums for the prior year based on fewer than 100 participants.
• Mid-Size Plans This new category consists of plans with at least 100 but fewer than 500 participants. For them, VRPs and flat-rate premiums are still due on the fifteenth day of the tenth full calendar month that begins on or after the first day of the plan year. However, the regulations allow VRP filings to be made based on estimated liabilities that can be corrected by the final VRP filing date (i.e., by six and a half months later).
• Large Plans The due dates for plans with 500 or more participants are the same as for mid-size plans, except that large plans must pay estimated flat-rate premiums by the end of the second month of the plan year.
• Newly Covered and New Plans The due date for the flat-rate premium and the VPR for the first plan year of new plans and plans newly covered by the PGBC’s guarantee program is the later of (1) the last day of the sixteenth full calendar month that begins on or after the first day of the plan year (the plan’s effective date in the case of a new plan) or (2) 90 days after the day of the plan’s adoption.

For example, the 2008 filing due dates for ongoing calendar-year plans are summarized in the following table:

The regulations clarify that in order to correct the VRP without penalty by the payment date the estimate must be based on:

• A reasonable estimate of the plan’s premium funding target for the plan year (as certified by the plan’s actuary) that takes into account the most current data available to the plan’s enrolled actuary and is determined in accordance with generally accepted actuarial principles and practices, and
• A final determination of the market value of the plan’s assets.

If preliminary asset values are used, the plan could be subject to penalties (whether the mistaken figure is lower or higher than the true figure). The PBGC will consider a request for a penalty waiver based on facts and circumstances.

NEXT STEPS FOR PENSION PLAN SPONSORS

Plan sponsors should discuss with their actuary whether to use the standard premium funding target or the alternative premium funding target. Although the alternative premium funding target would simplify the calculation, in many cases the VRP for the 2008 plan year would be lower using the standard premium funding target.

Sponsors should also make sure their plan administrative systems take into account the need to meet the new premium filing deadlines.

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on PPA’06 and related regulations. The Segal Company can be retained for actuarial calculations, assistance with plan design, participant communications and to work with plan sponsors and their attorneys on compliance.

1	For more information, see The Segal Company’s October 30, 2007 Compliance Alert, “PBGC Issues Flat-Rate Premium Increase and Maximum Benefit Guarantee for 2008.” (To return to the Compliance Alert text, click here.)
2	The final regulations were published in the Federal Register on March 21, 2008. On the PBGC’s Web site there are forms and instructions (To return to the Compliance Alert text, click here.)
3	These are the same segment rates used for calculating lump sums under Section 417(e) of the Internal Revenue Code, but without the phase-in required for that purpose. For more information, see Segal’s November 2007 Bulletin, “IRS Issues Long-Awaited Guidance Needed to Calculate Pension Lump Sums”. (To return to the Compliance Alert text, click here.)
4	Those PBGC regulations were published in the Federal Register on December 17, 2007. (To return to the Compliance Alert text, click here.)

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice. For back issues of Compliance Alert click here.

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