Administration

Possible Plan Sponsor Reaction to PBGC Premium Increases

By Rebecca Moore editors@plansponsor.com | January 10, 2014
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January 10, 2014 (PLANSPONSOR.com) – The Bipartisan Budget Act of 2013, signed into law in December, increases both the flat- and variable-rate single-employer Pension Benefit Guaranty Corporation (PBGC) premiums.

A Sibson Consulting Compliance Alert notes that these increases are in addition to increases introduced by the 2012 Moving Ahead for Progress in the 21st Century Act (MAP-21). Since premiums do not fund plan benefits or increase a plan’s funded status, plans sponsors may take steps to minimize the premiums payable, similar to taking step to avoid taxes.

Stu Lawrence, senior vice president and national retirement practice leader at Sibson in New York, says the PBGC is walking a fine line. “The agency has, by its own calculation, raised premiums because it has an unfunded liability,” he tells PLANSPONSOR. “If it raises them too much, employers will start to take actions to reduce their premium base, for example, by taking actions to get folks out of the plan.” 

This seems counterintuitive to the PBGC’s goal to encourage and preserve DBs, Lawrence adds, and “if [the agency] continues to raise premiums, the premium becomes material, and if premiums become onerous, employers will end plans and there will be no premiums.”

Minimizing Variable-Rate Premiums

This year, the PBGC variable-rate premium is 1.4% of a plan’s unfunded vested liability, going up to at least 2.4% in 2015 and 2.9% in 2016, with indexing thereafter. For an underfunded plan, increasing pension plan contributions above amounts previously contemplated is the surest way to reduce the amount of the PBGC variable-rate premium payment, according to the Sibson Compliance Alert.

The company notes that making additional pension contributions generally provides a tax deduction and tax-free accumulation of investment earnings. “If an employer has cash lying around, why not put it into the plan; they will have to put cash in the plan eventually, so why not save on premiums?” Lawrence says.