Guest Article

(From the April 7, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Issues Final "Variable-Rate Premium" Regulations to Implement PPA Changes Effective for Plan Years after 2007

PBGC issued final regulations to implement changes made by the Pension Protection Act (PPA) of 2006 to the variable-rate premium rules. 73 FR 15065 (March 21, 2008). The final regulations, nearly the same as those proposed by PBGC in May 2007, are effective for plan years beginning on or after January 1, 2008. They do not address other PPA changes affecting PBGC premiums, including the variable-rate premium cap for small employer plans, the new termination premium, and the provision authorizing PBGC to pay interest on premium overpayment refunds.

The PPA did not change the variable-rate premium (VRP) rate: it continues to be $9.00 for each $1,000 (or fraction thereof) of unfunded vested benefits (UVB). However, the PPA repealed the "full-funding exemption" and made certain other changes designed to conform the VRP to the new funding rules. These latter changes are the primary focus of the regulations.

VRP Determination Dates

As noted, the VRP rate is $9.00 for each $1,000 of UVBs. According to ERISA § 4006(a)(3)(E)(ii), a plan's UVBs are determined "as of the close of the preceding plan year." After applying the VRP rate to the plan's UVBs, the plan sponsor must divide the result by the plan's participant count as of the close of the preceding plan year, and then multiply the "per-participant VRP" by the number of participants "in [the] plan during the plan year" to determine the total VRP owed. As under the prior regulations, the new final regulations measure this count as of a single determination date, which is the last day of the prior year (participant count date in the regulations), except for new or newly covered plans.

Before the PPA, a plan's UVBs were determined by reference to its unfunded current liability, which was calculated by taking into account only vested benefits. However, the PPA eliminates the current liability concept. Thus, the PPA changed ERISA § 4006(a)(3)(E)(iii) to define UVBs as --

In general, new ERISA § 303(g) requires a plan's funding target to be determined as of the plan's "valuation date." Subject to an exception for small plans, the first day of the plan year will be the valuation date in most cases. As a result, the regulations provide that the valuation date for purposes of ERISA § 4006(a)(3)(E)(iv) is the same as for purposes of ERISA § 303(g)(2)(B) -- i.e., the plan's valuation date.

Unfortunately, these statutory provisions create ambiguity about the date for measuring a plan's UVBs. Specifically, ERISA § 4006(a)(3)(E)(ii) refers to the "close of the preceding plan year" while ERISA §4006(a)(3)(E)(iii) refers to the valuation date. The regulations resolve this ambiguity by requiring "...that UVBs be measured as of the valuation date in the premium payment year rather than a date in the prior plan year." The regulations refer to this date as the "UVB valuation date." According to the preamble to the regulations, "It would be burdensome and impractical to require plans that must do funding valuations as of the first day of a plan year to do separate valuations as of the last day for VRP purposes."

There are specific requirements that small plans must follow to determine the vested benefits covered if they do not have a valuation date as of the beginning of the plan year.

Computing the VRP

In general, the PPA requires plans to calculate their funding targets and plan asset values the same way for premium purposes and funding purposes, except as otherwise provided in new ERISA §4006(a)(3)(E)(iii) and (iv). For premium purposes, funding targets are to be calculated by only taking into account vested benefits and by using "spot rates" based on bond yields for a single recent month rather than the 24-month average rates used for funding purposes. In order to distinguish the funding target used for premium purposes from that used for funding purposes, the regulations introduce the term "premium funding target."

The regulations give plan sponsors the option to elect to use an "alternative premium funding target" in lieu of the premium funding target. The alternative premium funding target is the same as the funding target used for purposes of the funding rules, except it is calculated by only taking vested benefits into account. According to the preamble to the regulations the PBGC expects the instructions for the post-PPA Form 5500 Annual Reports will require plan sponsors to compute the vested portion of the funding target (broken down by participant category) anyway, so the alternative premium funding target option can eliminate the need to do a second calculation for premium purposes.

Plan sponsors that elect to use the alternative premium funding target would be bound by that election for five years. The purpose of this rule, according to the preamble, is to prevent plan sponsors from picking the better premium funding target each year. In the PBGC's words, "the reason for permitting use of the alternative premium funding target is to reduce not premiums but the burden of computing premiums." The deadline for making an election (or revocation of an election) to use the alternative premium funding target is the VRP due date for the first plan year for which the election (or revocation) will apply. This will allow an election or revocation to be made at the same time as a plan's VRP filing for the first plan year to which it applies, even if the plan year ends before the due date. PBGC will provide for such elections (and revocations) in its electronic premium filing application.

As for valuing assets when computing the VRP, ERISA § 4006(a)(3)(E)(iii)(II) refers to "the fair market value of plan assets for the plan year which are held by the plan on the valuation date." For premium purposes, the regulations do not permit or require any averaging of plan asset values, and do not require plan sponsors to reduce asset values by prefunding and funding standard carryover balances. Prior year contributions are included only to the extent they have been received by the filing due date and are discounted to the valuation date using the effective interest rate of ERISA § 303(h)(2)(A).

The final regulations make clear the implicit assumption in the proposed regulations that, although a transition rule applies to the determination of the funding target, no transition rule will apply to the calculation of the premium funding target. However, since the alternative premium funding target is based directly on the funding target under ERISA § 303(d)(1), which if elected will be calculated using the transition rule, use of the alternative premium funding target will to that extent reflect use of the transition rule.

What Are Vested Benefits?

The regulations clarify that certain benefits are "vested" for premium purposes. First, the regulations provide that benefits not protected by IRC § 411(d)(6) -- and thus which could be eliminated or reduced by plan amendment or the occurrence of a condition or event -- would be vested for premium purposes so long as the benefit has not actually been eliminated or reduced. Additionally, benefits payable at a participant's death -- i.e., a qualified pre-retirement survivor annuity, a post-retirement survivor annuity, and a benefit that returns a participant's mandatory employee contributions -- would be considered vested for premium purposes even though the participant is still alive.

Responding to public comment, in the final regulations PBGC clarified that the new vesting provisions are not intended to be an exhaustive treatment on the subject, but rather to provide clarification with regard only to the specific cases mentioned. In furtherance of that objective, PBGC added two new specific cases in which benefits are not considered vested for premium purposes: a pre-retirement lump sum death benefit (other than one that returns mandatory employee contributions) where the participant is living, and a disability benefit where the participant is not disabled.

A commentator disclosed that many practitioners have not been treating as vested the benefits that PBGC would consider vested under the regulation. PBGC responded that the regulation is effective for plan years beginning after 2007, and it has no plans to focus on the vesting issue in audits of premium filings for earlier years.

Due Dates and Penalty Rules

The regulations establish premium due dates for plans based on size: the "small" plan category applies to plans with fewer than 100 participants; the "mid-size" category applies to plans with 100 or more, but less than 500, participants; and the "large" plan category applies to plans with 500 or more participants.

The premium payment deadline for small plans is the "last day of the sixteenth full calendar month that begins on or after the first day of the premium payment year (for calendar-year plans, April 30 of the year following the premium payment year)." The current premium payment due date -- "the 15th day of the tenth full calendar month that begins on or after the first day of the premium payment year (October 15th for calendar-year plans)" -- is retained for mid-size plans. These payment deadlines for small and mid-size plans apply both to flat-rate premiums and to the VRP.

For large plans, the regulations apply the same "15th day of the tenth full calendar month that begins on or after the first day of the premium payment year" deadline as applies to mid-size plans for purposes of the VRP. The deadline for large plans to pay the flat-rate premium continues to be "the last day of the second full calendar month following the close of the plan year preceding the premium payment year." Additionally, the special safe harbor relief for flat-rate filings that are consistent with the reported participant count for the prior plan year continues to apply. Additional relief is added for the unusual case when a plan goes from small plan status one year to large plan status the next, in the form of a safe harbor where a small plan's flat-rate due date for the plan year preceding the premium payment year is later than the large-plan flat rate due date for the premium year.

Additionally, the regulations permit mid-size and large plans to make estimated VRP filings and provide a penalty-free "true-up" period to correct underpayments. The plan administrator has to submit the estimated VRP by the VRP due date, and make any corrections by the small-plan due date. Interest accrues on any underpayment amount from the VRP due date until the date the shortfall is paid. The estimated VRP is based on a final determination of the market value of the plan's assets and a reasonable estimate of the plan's premium funding target for the premium payment year. The estimate of the premium funding target must be certified by the plan's enrolled actuary and, like other premium information filed with PBGC, is subject to audit. The penalty relief is based on the reporting of a final figure for the value of assets by the VRP due date, and the relief is lost if there is a mistake in the assets as reported (regardless of whether the mistaken figure is lower or higher than the true figure). However, PBGC will consider a request for a penalty waiver. The provision of a period for "true-up" is not an extension of the VRP due date, and so does not provide additional time to make an alternative premium funding target election.

The preamble to the regulations includes the following table of due dates for calendar year plans for the 2008 premium payment year.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.