Guest Article

(From the January 28, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Updates Premium Rules for DRA and PPA Changes

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations to implement certain changes to the flat- and variable-rate premiums made by the Deficit Reduction Act (DRA) of 2005 (P.L. 109-171) and the Pension Protection Act (PPA) of 2006 (P.L. 109-280), and to add provisions for the new termination premium established by the DRA and modified by the PPA. 72 FR 71222 (December 17, 2007). The final regulations closely follow proposed rules the PBGC released early in 2007.

Flat-Rate Premium

Effective for plan years beginning in 2006, the DRA increased the PBGC flat-rate premium from $19 to $30 per participant for single-employer plans, and from $2.60 to $8 per participant for multiemployer plans. The DRA also provides for automatic annual inflation adjustments to the single-employer and multiemployer flat-rate premiums for plan years beginning in 2007 and later. The 2008 inflation-adjusted flat-rate premium is $33 per participant for single-employer plans, and $9 per participant for multiemployer plans.

The preamble to the final regulations reiterates the PBGC's position that the DRA did not change the single-employer flat-rate premium rate for plan years beginning before 2006. The PBGC offered this clarification because ERISA § 4006(a)(3)(A), as amended, can be read to establish the $30 per participant flat-rate premium effective for all plan years beginning after 1990.

With respect to the flat-rate premium for multiemployer plans, the final regulations explain how to count participants. Basically, ERISA § 4006(a)(3)(A) provides the flat-rate premium is "$8.00 for each individual who is a participant in such plan during the applicable plan year." According to the preamble to the final regulations, the "participant count is to be taken as of the premium snapshot date described in the premium rates regulation and PBGC's premium instructions (generally the last day of the plan year preceding the premium payment year.)"

Finally, the regulations address certain issues relating to the annual inflation adjustment of flatrate premiums. The preamble states the flat-rate premium rates can never go down due to an inflation adjustment. So if the national wage index is negative for a year, the flat-rate premiums will not change. Also, flat-rate premium adjustments always must be rounded to the nearest whole dollar. According to the preamble, "PBGC interprets this to mean that if the adjustment formula would produce an unrounded premium rate of some number of dollars plus 50 cents, the premium rate will be rounded up."

Variable-Rate Premium

Neither the DRA nor the PPA changed the variable-rate premium rate for single-employer plans; it still stands at $9 per $1,000 of unfunded vested benefits. However, the PPA did make changes designed to conform the variable-rate premium to the new minimum funding rules, and also added a variable-rate premium cap for employers with "25 or fewer employees on the first day of the plan year."

The cap amount is "$5 multiplied by the number of participants in the plan as of the close of the preceding plan year." According to the preamble, the participant count is to be taken as of the premium snapshot date -- generally the last day of the plan year preceding the premium payment year. This is the same participant count as the count used as a multiplier under ERISA § 4006(a)(3)(A)(i). Thus, the preamble specifies, "an eligible plan's total variable-rate premium is capped at an amount equal to $5 multiplied by the square of the participant count." For example, the variable-rate premium cap for a plan with 20 participants as of the last day of the preceding plan year would be $2,000 ($5 x 20^2 = $5 x 400 = $2,000).

The preamble to the final regulations points out that the 25 employee test is applied on a controlled group basis. Also, according to the preamble, "Since a plan maintained by one contributing sponsor may or may not also be maintained by one or more other contributing sponsors that are not in the first sponsor's controlled group, the applicability of the cap must be determined plan by plan, not employer by employer." Also, the final regulations adopt a modified version of the "employee" definition used in the IRC § 410(b) minimum coverage rules. The purpose is to "prevent an employer from qualifying for the cap by artificially lowering its employee count through the use of sophisticated business structuring devices."

Termination Premium

The DRA established a new $1,250 per participant "termination premium" for certain distress and involuntary terminations. According to the final regulations, the termination premium is based on the number of participants in the plan as of the day before the ERISA § 4048 termination date. The definition of "participant" for this purpose is the same as the one used for calculating the flat-rate premium.

A distress termination is possible only when each of a plan's contributing sponsors, and each member of any contributing sponsor's controlled group, meets one of the following three specific "distress tests":

The termination premium applies in the case of distress terminations occurring because the plan sponsor is the subject of a bankruptcy reorganization proceeding or is suffering a business hardship, but does not apply to distress terminations occurring because the plan sponsor is the subject of a bankruptcy liquidation proceeding. So what happens vis-à-vis the termination premium if one or more of the contributing sponsors or controlled group members is the subject of a bankruptcy liquidation proceeding? The final regulations clarify that the termination premium applies as long as at least one contributing sponsor or controlled group member is the subject of a bankruptcy reorganization proceeding or suffering a business hardship.

When required, the termination premium is to be paid by "the person who is the contributing sponsor as of immediately before the termination date." As is generally the case throughout the regulations relating to the termination premium, the "termination date" refers to the ERISA § 4048 termination date. Thus, under the final regulations the contributing sponsor -- as well as members of the contributing sponsor's controlled group -- is identified as of the day before the ERISA § 4048 termination date.

The termination premium due date is within 30 days after the beginning of each of three "applicable 12-month periods." The first applicable 12-month period generally begins with "the first month following the month" of the ERISA § 4048 termination. The second and third applicable 12-month periods are simply the two 12-month periods immediately following the first applicable 12-month period.

The beginning of the first applicable 12-month period is deferred in certain bankruptcy reorganization cases. The deferral is available only when at least one contributing sponsor or controlled group member is the subject of a bankruptcy reorganization proceeding. If the deferral applies, the first applicable 12-month period begins with the month following the month in which "such person" is discharged or dismissed from the bankruptcy reorganization proceeding. According to the final regulations, the relevant date of discharge or dismissal is the last date any contributing sponsor or controlled group member involved in bankruptcy reorganization proceedings on the termination date is discharged or dismissed from the proceedings, or ceases to exist.

Effective Date

The final regulations are effective as of January 16, 2008.

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.