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Guest Article

(From the December 4, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Final Regulations on Premium Penalty Waivers

The Pension Benefit Guaranty Corporation (PBGC) on November 17, 2006, issued final guidance on its policies for waiving premium payment penalties. 71 FR 66867 (November 17, 2006). The purpose of the guidance, which will be added as an appendix to the PBGC's Payment of Premiums regulation (29 CFR Part 4007), is to provide "a thorough and detailed treatment of reasonable cause and other bases for premium penalty waivers." The final regulations apply to PBGC actions taken on or after December 18, 2006.

Background

Single-employer defined benefit plans covered by the PBGC's Single-Employer Program ("Program") must pay annual premiums to the PBGC. For 2007, all covered plans must pay a $31 per participant premium, and certain underfunded plans must pay an additional variable-rate premium of $9 per $1,000 of unfunded vested benefits. ERISA authorizes, but does not require, the PBGC to assess substantial penalties if premiums are not paid in full and on time, subject to an exception for cases of "substantial hardship." ERISA § 4007(b). By regulation, the PBGC also may waive all or part of late premium penalty for "reasonable cause" or for other reasons in the PBGC's discretion. PBGC Reg. § 4007.8(c) and (d).

The PBGC's Premium Payment regulations do not define "reasonable cause" or otherwise explain the PBGC's criteria for determining when late premium penalty waivers are appropriate. In 2001 the PBGC issued proposed regulations to fill this gap, as well as to provide guidance on determining premium penalty amounts and procedures for assessing and reviewing premium penalties. The final regulations do not address these latter two issues. With respect to waivers, the final regulations are generally the same as the 2001 proposed regulations.

Summary of Final Regulations

According to the preamble to the final regulations, the PBGC can waive a premium penalty for a number of reasons, based on the "facts and circumstances." But the most common reason for granting a waiver is a showing of "reasonable cause" for failing to pay a premium in full and on time. There are two basic criteria for a finding of "reasonable cause":

The premium payment violation arises from circumstances beyond the control of the person whose action or inaction may be the basis for a penalty assessment, and
The failure could not be avoided by exercising ordinary business care and prudence.

According to the guidance, the PBGC will take into account the size of the plan sponsor and the premium involved when making "reasonable cause" determinations. In other words, larger plan sponsors generally will be held to higher standards.

The facts PBGC will take into account when determining if there is "reasonable cause" for failing to pay a premium include the following:

the event or circumstance that caused the underpayment and when the event happened or the circumstance arose;
how the event or circumstance prevented paying the premium in full or on time;
whether the event or circumstance could have been anticipated;
the response to the event or circumstance, including the steps taken -- and how quickly those steps were taken -- to pay the premium, and how other business affairs were conducted.

However, the PBGC will not consider the likelihood or cost of collecting the premium penalty or the costs and risks or enforcing the premium penalty by litigation when making this determination.

The guidance includes the following examples of situations that may constitute "reasonable cause."

An individual with responsibility for taking action was suddenly and unexpectedly absent or unable to act. We consider such factors as the following: The nature of the event that caused the individual's absence or inability to act, for example, the resignation of the individual or the death or serious illness of the individual or a member of the individual's immediate family; the size of the organization and what kind of backup procedures it had to cope with such events; how close the event was to the deadline that was missed; how abrupt and unanticipated the event was; how the individual's absence or inability to act prevented compliance; how expensive it would have been to comply without the absent individual; whether and how other business operations and obligations were affected; how quickly and prudently a replacement for the absent individual was selected or other arrangements for compliance were made; and how quickly a replacement for the absent individual took appropriate action.
A fire or other casualty or natural disaster destroyed relevant records or prevented compliance in some other way. We consider such factors as the following: The nature of the event; how close the event was to the deadline that was missed; how the event caused the failure to pay the premium; whether other efforts were made to get needed information; how expensive it would have been to comply; and how you responded to the event.
You reasonably relied on erroneous oral or written advice given by a PBGC employee. We consider such factors as the following: Whether there was a clear relationship between your situation and the advice sought; whether you provided the PBGC employee with adequate and accurate information; and whether the surrounding circumstances should have led you to question the correctness of the advice or information provided.
You were unable to obtain information, including records and calculations, needed to comply. We consider such factors as the following: What information was needed; why the information was unavailable; when and how you discovered that the information was not available; what attempts you made to get the information or reconstruct it through other means; and how much it would have cost to comply.

Additionally, the guidance provides the following examples of situations that might justify a partial "reasonable cause" waiver:

Assume that a fire destroyed the records needed to compute a premium payment. If in the exercise of ordinary business care and prudence it should take you one month to reconstruct the records and pay the premium, but the payment was made two months late, it might be appropriate to waive that part of the premium penalty attributable to the first month the payment was late, but not the part attributable to the second month.
Assume that a plan administrator underpaid the plan's flat-rate premium because of reasonable reliance on erroneous advice from a PBGC employee, and also underpaid the plan's variable-rate premium because the plan's actuary used the wrong interest rate. A PBGC audit revealed both errors. PBGC billed the plan for a premium penalty of $5,000 -- $1,000 for underpayment of the flat-rate premium and $4,000 for underpayment of the variable-rate premium. The plan administrator requested a waiver of the premium penalty. While the erroneous PBGC advice constituted reasonable cause for underpaying the flat-rate premium, there was no showing of reasonable cause for the error in the variable-rate premium. Therefore, we would waive only the part of the premium penalty based on underpayment of the flat-rate portion of the premium ($1,000).

Other Types of Waivers

The PBGC also might waive a premium penalty in certain other situations, even without a "reasonable cause" determination. These are:

Statutory or regulatory requirement. Premium penalties will be waived if required by statute or by regulation. For example, ERISA § 4007(b) and PBGC Reg. § 4007.8 provide for a waiver in certain circumstances involving business hardship. Additionally, the regulation provides for waivers if certain "safe harbor" tests are met, and for a waiver of a premium penalty that accrues after the date of a bill for a premium underpayment if the premium owed is paid within 30 days after the bill's date.
Legal error. A penalty may be waived if the violation arises from reliance on an erroneous interpretation of the law -- with different standards depending on whether the interpretation is or is not disclosed to PBGC -- or, in appropriate circumstances, from a recent change in the law.
Pendency of PBGC procedures. In some cases the PBGC may waive all or part of a premium penalty attributable to the pendency of PBGC review or other procedures.
Other circumstances. The PBGC may waive a premium penalty in other appropriate circumstances. This catch-all provision falls within the PBGC's discretion, and will be exercised "only in narrow circumstances."

Role of Outside Parties Such as Actuaries and Pension Consultants

Many pension plan administrators rely on "outside" actuaries, pension consultants, and lawyers for help complying with the PBGC's requirements. In some cases these outside advisors may cause or contribute to the plan administrator's failure to pay a PBGC premium in full and on time. The guidance makes clear the PBGC will not take this into consideration when determining if a waiver is appropriate.

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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

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