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Guest Article

PPA Cap on Variable Premiums for Small Plans: Geometric Growth!

By Jeffrey F. Hartmann, FSA, MSPA
Louis Kravitz & Associates, Inc.
August 14, 2006


Practitioners need to carefully read the provision of the Pension Protection Act of 2006 ("PPA") that concerns PBGC premiums for small plans.

Section 405 of PPA provides a cap on variable premiums starting in 2007 for plans with 25 or fewer employees. It states that the premium for each participant shall not exceed $5 multiplied by the number of participants in the plan.

Most of the online published summaries of PPA that I have seen to date describe this section as being simply a $5 cap per participant, but that is not correct. Upon closer inspection, one finds that the cap grows geometrically with plan size, because you are multiplying twice by the number of participants. This effect is shown on page 95 of the Joint Committee on Taxation's 376-page report, which provides an illustration: "For example, under the provision, in the case of a plan with 20 participants, the total variable rate premium is not more than $2,000, that is, (20 x $5) x 20."

Here is a table which I have prepared, showing how the total cap on variable premiums varies according to plan size:

Number of ParticipantsPer-Participant cap
(number of participants
times $5)
Variable Premium Cap
(number of participants
times $5
times number of participants)
1$5$5
2$10$20
3$15$45
4$20$80
5$25$125
10$50$500
20$100$2,000
25$125$3,125

Jeffrey F. Hartmann, FSA, MSPA
LOUIS KRAVITZ & ASSOCIATES, INC.
15760 Ventura Boulevard, Suite 910
Encino, California 91436-3017
(818) 995-6100 FAX: (818) 379-6100
Writer's Direct Line: (818) 379-6104
Writer's Direct FAX: (818) 379-6104
Web: http://www.lkravitz.com


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