WASHINGTON - The Pension Benefit Guaranty Corporation is proposing to cut penalties for late payment of premiums in an effort to reduce costs and make it easier for plan sponsors to maintain traditional pension plans.
As PBGC premiums have risen, so have the penalties.
"We think penalties should be no more than necessary to encourage timely payments," said PBGC Director Tom Reeder. "I'm committed to doing everything I can to help companies keep their pension plans."
Currently, PBGC uses a two-tiered penalty structure that rewards self-correction: A lower rate of 1 percent of the late payment per month late applies when a delinquency is corrected before PBGC notifies the sponsor. A higher rate of 5 percent applies if the correction is made following PBGC notification. Penalties in the first category are capped at 50 percent of the late amount, and 100 percent in the second instance.
The proposed rule, slated for publication in the Federal Register on Thursday, would reduce penalties for late payers by half. Additionally, for sponsors with good payment histories that pay promptly following notification of late payment, PBGC will reduce the penalty by 80 percent.
The proposed changes will apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later.
Under the Employee Retirement Income Security Act of 1974 (ERISA), plans covered by PBGC pay premiums each year. Premium rates are set by Congress. A summary of past, current, and future rates is available on PBGC's website.
How the Proposed Rule Reduces Penalties
The following example illustrates how the proposal differs from the current rules.
Example - Consider a situation where a $100,000 premium is paid two months late.
- Scenario 1 - The plan discovered the underpayment and corrected it before PBGC sent notice.
Under the current regulation, PBGC would assess a $2,000 penalty (1 percent x $100,000 x 2 months).
Under the proposed regulation, the penalty would be half that amount, or $1,000 (½ percent x $100,000 x 2 months).
- Scenario 2 - The payment was made after PBGC notified the plan that a premium amount was past due.
Under the current regulation, PBGC would assess a $10,000 penalty (5 percent x $100,000 x 2 months).
Under the proposed regulation, PBGC would assess a $5,000 penalty (2½ percent x $100,000 x 2 months).
In addition, if the sponsor qualified for the good payment history waiver, PBGC would automatically waive 80 percent of that amount reducing the penalty from $5,000 to $1,000 (the amount that would have been assessed due if the plan had "self-corrected" - see above).