February 3, 2006

PBGC Premiums Increased Significantly by the 2005 Deficit Reduction Act

On February 1, 2006, the U.S. House of Representatives passed the Deficit Reduction Act of 2005 (S. 1932)1, which the Senate passed late last year. A provision of the bill that received little attention outside of the benefits community increases Pension Benefit Guaranty Corporation (PBGC) premiums for both single employer and multiemployer defined benefit plans, starting with the 2006 plan year.

At the time this Compliance Alert was posted, President Bush had not yet signed the bill into law. He is expected to do so shortly.

SINGLE EMPLOYER PREMIUMS

In 2006, the annual per capita premium payable by all PBGC-covered single employer plans increases by almost 58 percent: from $19 to $30.2 For 2007 and subsequent years, it will be indexed for inflation, using the same wage-based index that is currently used for Social Security indexing. Increases will be rounded to the nearest dollar.

A special premium will be assessed in the case of a distress termination of an underfunded single employer plan, unless the employer is liquidated. This special assessment applies to plan terminations in bankruptcy proceedings filed on or after October 18, 2005. The charge is $1,250 per participant (as of the day before the termination). To avoid a direct clash with the bankruptcy laws, if the employer is in a bankruptcy reorganization, the special premium does not become payable until the bankruptcy proceeding is concluded. The premium is payable annually, for each of the three years following the termination date or, if later, the employer's exit from bankruptcy. Absent further action by Congress, this special assessment will not apply to terminations that take place after December 31, 2010.

THE MULTIEMPLOYER PREMIUM

Starting in 2006, the annual per capita multiemployer premium is almost four times higher than it was in 2005: from $2.60 to $8.00. (The multiemployer premium had not risen since 1989.) As with the indexing for the single employer premium discussed above, for 2007 and subsequent years, the multiemployer premium will be indexed for inflation, using the same wage-based index that is currently used for Social Security indexing. Increases will be rounded to the nearest dollar.

COMPLIANCE INFORMATION SHOULD BE AVAILABLE SOON

The PBGC's 2006 premium-payment forms and instructions3 will, presumably, be modified to alert plan sponsors to the new generally-applicable premium rates.

Questions employers may have about the application of these changes and the interplay between the bankruptcy laws and the new assessment on distress terminations should be addressed to their attorneys. Segal Company consultants can be retained to work with pension plan sponsors and their attorneys to comply with the PBGC requirements.

 

1 To see S. 1932, which is more than 1,000 pages, click here. The PBGC premium increase provision is in Section 8101 on pages 459-466. (To return to the Compliance Alert text, click here.)
2 The amount or timing of this increase could be modified by the pension reform legislation currently under consideration in Congress. For example, the House pension reform bill would phase it in over 3 to 5 years, and the Senate version would set a much lower rate for new pension plans or those sponsored by small employers. Also, unlike the Deficit Reduction Act, the pension reform legislation is likely to expand the applicability of PBGC variable-rate premiums. (To return to the Compliance Alert text, click here.)
3 To access premium forms and instructions available on the PBGC's Web site, click here. (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.