Guest Article

(From the June 18, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Issues Proposed Regulations on Post-PPA Variable-Rate Premium Rules

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed updates to its Payment of Premiums regulations to reflect changes the Pension Protection Act (PPA) of 2006 (P.L. 109-280) made to the variable-rate premium (VRP) rules for plan years beginning on or after January 1, 2008. 72 FR 30308 (May 31, 2007). The proposed rules 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 VRP rate: it continues to be $9.00 for each $1,000 (or fraction thereof) of unfunded vested benefits (UVB). However, the PPA repeals the "full-funding exemption" and makes certain other changes designed to conform the VRP to the new funding rules. These latter changes are the primary focus of the proposed 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. Current and proposed regulations measure this count as of a single determination date which is the last day of the prior year (participant count date in the proposed 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 proposed regulations would 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 proposed regulations would 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 proposed regulations refer to this date as the "UVB valuation date." According to the preamble to the proposed 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 will be calculated by only taking into account vested benefits and by using "spot rates" derived from the three-segment yield curve 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 proposed regulations introduce the term "premium funding target."

The proposed regulations would 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 would be the same as the funding target used for purposes of the funding rules, except it would be calculated by only taking vested benefits into account. According to the preamble to the proposed 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, would be 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."

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 proposed regulations would not permit or require any averaging of plan asset values, and would 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).

What Are Vested Benefits?

The proposed regulations would clarify that certain benefits are "vested" for premium purposes. First, the proposed regulations would 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.

Due Dates and Penalty Rules

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

The premium payment deadline for small plans would be the "last day of the sixteenth 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 month that begins on or after the first day of the premium payment year (October 15th for calendar-year plans)" -- would be retained for mid-size plans. These payment deadlines for small and mid-size plans would apply both to flat-rate premiums and to the VRP.

For large plans, the proposed regulations would apply the same "15th day of the tenth month that begins on or after the first day of the premium payment year" deadline as would apply to mid-size plans for purposes of the VRP. The deadline for large plans to pay the flat-rate premium would continue 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 would continue to apply, although additional guidance would be added for the unusual case when a plan goes from small plan status one year to large plan status the next.

Additionally, the proposed regulations would 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 would have to submit the estimated VRP by the VRP due date, and make any corrections by the small-plan due date. Interest would accrue on any underpayment amount from the VRP due date until the date the shortfall is paid.

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

Table omitted (The document can be viewed at: http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/E7-10412.htm.)

Elimination of Special VRP Relief Rules

In addition to the full funding limit exemption that the PPA eliminated, the proposed regulations would eliminate the following special VRP relief rules:

According to the preamble to the proposed regulations, the new alternative premium funding target option would provide relief for filers that might otherwise have used any of these three rules.

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, Taina Edlund 202.879.4956, Elizabeth Drigotas 202.879.4985, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.