Guest Article

(From the May 17, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Proposes Participant Notice Expanded Enforcement Program and New Penalty; Announces Voluntary Correction Program

The Pension Benefit Guaranty Corporation on May 6 proposed an expanded enforcement program and new penalty structure for violations of the ERISA section 4011 Participant Notice requirement for certain underfunded pension plans. 69 FR 25797 (May 7, 2004). At the same time the PBGC announced a very generous Voluntary Correction Program (VCP) that plan administrators can use to correct any violations of the Participant Notice requirement for 2002 or 2003 plan years without paying a penalty. 69 FR 25792 (May 7, 2004). The VCP will be available for a limited time only, so plan administrators will need to act quickly in order to take advantage of this opportunity.

Due to historically low interest rates and the recent bear market, many plan administrators have been forced to deal with the Participant Notice rules for the first time during the past few years. Recent PBGC audits also indicate noncompliance is on the rise. PBGC believes the reason is that many plan administrators do not know about or understand the Participant Notice rules.

Plan administrators may want to take advantage of the VCP offer even if they do not believe they violated the Participant Notice requirement for 2002 or 2003 plan years, particularly if they have to issue a 2004 Participant Notice. The PBGC designed the VCP so that plan administrators can use a single notice to correct violations from 2002 or 2003 and comply with the 2004 Participant Notice requirement. Furthermore, participating in the VCP will not increase the likelihood a plan will be selected for a compliance audit in the future.

Summary of Participant Notice Requirement

In general, ERISA section 4011 requires administrators of certain underfunded pension plans to notify participants and beneficiaries of the plans' funding status and the PBGC's guaranteed benefit limits (the "Participant Notice"). The PBGC may assess a penalty of up to $1,100 per day against the plan administrator for failing to provide a Participant Notice when required or for omitting material information from a Participant Notice. ERISA section 4071. The PBGC's current penalty policy generally caps the total per violation penalty at $100 times the number of plan participants, but PBGC may adjust the penalty amount on a case-by-case basis.

A plan administrator must provide the Participant Notice for a plan year if the plan is required to pay a variable rate premium for that plan year, unless the plan meets the Deficit Reduction Contribution ("DRC") Exception Test for that plan year or the prior plan year. The DRC Exception Test applies if a plan is--

For 2002 and 2003 plan years there was a chance that a plan not required to pay a variable rate premium would nonetheless be required to issue a Participant Notice. This was because the Job Creation and Worker Assistance Act ("JCWAA") amended ERISA to permit plans to use 100 percent of the 30- year Treasury rate to calculate unfunded vested benefits under the variable rate premium rules for 2002 and 2003 plan years, but not for purposes of the Participant Notice rules.

The recently enacted Pension Funding Equity Act ("PFEA") amended ERISA to permit pension plans to use a long-term corporate bond rate for purposes of the variable rate premium rules for 2004 and 2005 plan years. But unlike the JCWAA, the PFEA made the interest rate change applicable to the Participant Notice rules as well.

If a plan administrator is required to send a Participant Notice, it must be issued no later than two months after the deadline (including extensions) for filing the plan's Form 5500 annual report for the previous year. Some common due dates for calendar year plans for the 2004 Participant Notice follow.

The plan administrator must send the Participant Notice to each participant, beneficiary of a deceased participant, alternate payee, and union representing any participants for purposes of collective bargaining. For this purpose, the term "participant" does not include anyone whose entire benefit has been annuitized or paid out in a lump sum.

Finally, plan administrators generally must certify on their annual PBGC premium filings (Form 1 or Form 1-EZ) that, for the prior plan year: (1) a Participant Notice was not required to be issued; (2) a Participant Notice was issued as required; or (3) an explanation is attached (e.g., because a required Participant Notice was issued late).

Participant Notice Voluntary Correction Program

Under the VCP, plan administrators that failed to comply with the Participant Notice requirements for the 2002 or 2003 plan years can correct such failure(s) without paying a penalty. (According to the PBGC, the VCP focuses on the 2002 and 2003 plan years in part because of possible confusion over the JCWAA's interaction with the variable rate premium and Participant Notice rules.) However, the PBGC also will not pursue failures to provide a pre- 2002 Participant Notice if the plan administrator uses the VCP to correct any 2002 or 2003 Participant Notice failures.

In order to be eligible for VCP relief the 2002 or 2003 Participant Notice must have been due before May 7, 2004, and the relevant Participant Notice may not, as of that date, be the subject of a PBGC audit proceeding. For purposes of determining the Participant Notice due date, the plan administrator can disregard any deadline extension resulting from a disaster relief notice.

To claim relief, the plan administrator must issue a VCP corrective notice by the due date for the plan's 2004 Participant Notice, or by the due date that would apply if the plan were required to issue a 2004 Participant Notice. The plan administrator also must notify the PBGC not more than 30 days after the due date for issuing the VCP corrective notice. This notice to the PBGC must include the name and telephone number of a person the PBGC can contact with questions, as well as a copy of the VCP corrective notice. The PBGC will issue a written acknowledgement of the notification for the plan administrator's records.

(A special rule applies if the plan administrator issued an otherwise valid 2002 or 2003 Participant Notice late, but before May 7, 2004. In this case the PBGC will treat the plan administrator as having participated in the VCP and will not assess any penalty for that failure or pursue any pre-2002 Participant Notice failure. However, the plan administrator will not be required to send a VCP corrective notice or notify the PBGC.)

The VCP corrective notice must include the plan's funded current liability percentage for both the 2002 and 2003 plan year, even if the plan administrator is correcting a failure for only one of those years, and may include the funded current liability percentage for 2004. It also must include all the information required for a 2004 Participant Notice-- e.g., current information on funding waivers, missed contributions, and limitations on the PBGC's guarantee-- even if the plan administrator is not required to issue a 2004 Participant Notice. (If the plan administrator is required to issue a 2004 Participant Notice, the PBGC will treat a valid VCP corrective notice as meeting the requirements for the 2004 Notice.)

The VCP corrective notice does not have to disclose that a Participant Notice failure occurred in the 2002 or 2003 plan year (or both), or that the plan administrator is participating in a voluntary correction program. A model VCP corrective notice is available on the PBGC's Web site, at http://www.pbgc.gov/participantnotice/. (Also available from this site is a VCP Fact Sheet and a series of Frequently Asked Questions, as well as links to other information about the VCP and the Participant Notice requirement.)

Significantly, the VCP corrective notice must be issued only to those persons entitled to receive the plan's 2004 Participant Notice (or would be entitled if a 2004 Participant Notice were required). Thus, the plan administrator does not have to track down individuals that would have been entitled to receive the 2002 or 2003 Participant Notice but would not be eligible for a 2004 Notice because, for example, their benefits already have been annuitized or cashed out.

Also of note, plan administrators that take advantage of the VCP do not have to amend any erroneous Form 1 (or Form 1-EZ) certifications filed on or before May 7, 2004, with respect to a 2002 or 2003 Participant Notice, and the PBGC will not take any enforcement action based on the erroneous prior certification.

Proposed Participant Notice Penalty Policy

Picking up where the VCP leaves off, the PBGC's proposed penalty policy would apply to:

Rather than continuing to assess penalties based primarily on the number of days a Participant Notice is late, the proposed penalty policy would tie the penalty amount to the number of plan participants (ordinarily determined as of the last day of the previous plan year). Specifically, the guideline penalty amount would equal the number of plan participants multiplied by the applicable per participant information penalty rate. The penalty rate would vary depending on whether the failure is a repeat violation and on whether it is corrected before a PBGC audit.

If the plan administrator corrects the failure on or before the date the PBGC issues a written notice to the plan that it is or may be auditing compliance with the Participant Notice requirements, the penalty rate would be $5 for a first offense and $20 for a repeat violation. If the plan administrator corrects the failure after the PBGC issues its audit notice, the penalty rate would be $40 for a first offense and $100 for a repeat violation. But if the plan administrator corrects the failure within one year after the original due date-- regardless of whether the correction was pre- or post-audit-- the penalty would be prorated based on the number of days before correction. The penalty policy would specify procedures for determining whether a failure is a repeat violation, and whether the plan administrator has completed a valid correction.

In cases where the plan administrator issued a Participant Notice on time but failed to issue it to everyone entitled to receive it, or failed to include some of the required information, the PBGC would "make an appropriate downward adjustment to the penalty amount." However, if the Participant Notice is late and PBGC determines on audit that the plan administrator failed to "promptly issue" an appropriate corrective notice, the PBGC would "significantly" increase the penalty amount.

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 questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Tom Brisendine 202.879.5365, Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955. Copyright 2004, Deloitte.