[Federal Register Volume 81, Number 82 (Thursday, April 28, 2016)]
[Proposed Rules]
[Pages 25363-25366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09960]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4007
RIN 1212-AB32
Payment of Premiums; Late Payment Penalty Relief
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Proposed rule.
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SUMMARY: The Pension Benefit Guaranty Corporation (PBGC) proposes to
lower the rates of penalty charged for late payment of premiums by all
plans, and to provide a waiver of most of the penalty for plans with a
demonstrated commitment to premium compliance. PBGC seeks public
comment on its proposal.
DATES: Comments must be submitted on or before June 27, 2016.
ADDRESSES: Comments, identified by Regulation Identifier Number (RIN)
1212-AB32, may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the Web site instructions for submitting comments.
Email: reg.comments@pbgc.gov.
Fax: 202-326-4112.
Mail or Hand Delivery: Regulatory Affairs Group, Office of
the General Counsel, Pension Benefit Guaranty Corporation, 1200 K
Street NW., Washington, DC 20005-4026.
All submissions must include the Regulation Identifier Number for
this rulemaking (RIN 1212-AB32). Comments received, including personal
information provided, will be posted to www.pbgc.gov. Copies of
comments may also be obtained by writing to Disclosure Division, Office
of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K
Street NW., Washington, DC 20005-4026, or calling 202-326-4040 during
normal business hours. (TTY and TDD users may call the Federal relay
service toll-free at 1-800-877-8339 and ask to be connected to 202-326-
4040.)
FOR FURTHER INFORMATION CONTACT: Deborah C. Murphy, Deputy Assistant
General Counsel for Regulatory Affairs (murphy.deborah@pbgc.gov),
Office of the General Counsel, Pension Benefit Guaranty Corporation,
1200 K Street NW., Washington, DC 20005-4026; 202-326-4024. (TTY and
TDD users may call the Federal relay service toll-free at 800-877-8339
and ask to be connected to 202-326-4024.)
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of the Regulatory Action
This proposed rule is needed to reduce the financial burden of
PBGC's late premium penalties. The rulemaking would reduce penalty
rates for all plans and waive most of the penalty for plans that meet a
standard for good compliance with premium requirements.
PBGC's legal authority for this action comes from section
4002(b)(3) of the Employee Retirement Income Security Act of 1974
(ERISA), which authorizes PBGC to issue regulations to carry out the
purposes of title IV of ERISA, and section 4007 of ERISA, which gives
PBGC authority to assess late payment penalties.
Major Provisions of the Regulatory Action
The penalty for late payment of a premium is a percentage of the
amount paid late multiplied by the number of full or partial months the
amount is late, subject to a floor of $25 (or the amount of premium
paid late, if less). There are currently two levels of penalty: 1
Percent per month (with a 50 percent cap) and 5 percent per month
(capped at 100 percent). The lower rate applies to ``self-
correction''--that is, where the premium underpayment is corrected
before PBGC gives notice that there is or may be an underpayment. This
proposed rule would cut the rates and caps in half (to \1/2\ percent
with a 25 percent cap and 2\1/2\ percent with a 50 percent cap,
respectively) and eliminate the floor.
The rulemaking would also create a new penalty waiver that would
apply to underpayments by plans with good compliance histories if
corrected promptly after notice from PBGC. Under the proposal, PBGC
would waive 80 percent of the penalty otherwise applicable to such a
plan. Thus, the penalty would be reduced from 2\1/2\ percent per month
(with a 50 percent cap) to \1/2\ percent per month (with a 25 percent
cap)--the same result as if the plan had self-corrected.
Background
PBGC administers the pension plan termination insurance program
under title IV of the Employee Retirement Income Security Act of 1974
(ERISA). Under ERISA sections 4006 and 4007, plans covered by title IV
must pay premiums to PBGC. PBGC's premium regulations--on Premium Rates
(29 CFR part 4006) and on Payment of Premiums (29 CFR part 4007)--
implement ERISA sections 4006 and 4007.
ERISA section 4007(b)(1) provides that if a premium is not paid
when due, PBGC is authorized to assess a penalty up to 100 percent of
the overdue amount. The statute does not condition exercise of this
authority on a finding of bad faith or lack of due care; it is solely
based on the failure to pay.\1\ However, the fact that assessment is
authorized (rather than mandated)--and thus that PBGC could choose not
to exercise the authority at all--indicates that PBGC has the
flexibility to assess less than the full amount of penalty authorized
and to reduce or eliminate a penalty.\2\
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\1\ The statute provides a waiver of penalty for 60 days if PBGC
finds that timely payment would cause substantial hardship, but PBGC
may not grant the waiver if it appears that the plan will be unable
to pay the premium within 60 days. PBGC has found no record that
such a waiver has ever been granted during the agency's 40+ years of
existence.
\2\ In contrast, the statute requires that interest on late
premiums ``shall be paid'' at a specified rate for the overdue
period.
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PBGC has provided for the exercise of its authority to impose
penalties in the premium payment regulation. Under Sec. 4007.8 of the
regulation, late payment penalties accrue at the rate of 1 percent or 5
percent per month (or portion of a month) of the unpaid amount, except
that the smallest penalty assessed is the lesser of $25 or the amount
of unpaid premium. Whether the 1-percent or 5-percent rate applies
depends on whether the underpayment is ``self-corrected'' or not. Self-
correction refers to payment of the delinquent amount before PBGC gives
written notice of a possible delinquency. One-percent penalties are
capped by the regulation at 50 percent and 5-percent penalties at 100
percent of the unpaid amount. Thus, although penalties can be
significant in some cases, they are generally assessed in amounts far
less than the statutory maximum.
This two-tiered structure provides an incentive to self-correct and
reflects PBGC's judgment that those that come forward voluntarily to
correct underpayments deserve more forbearance than those that PBGC
identifies through its premium enforcement programs.
[[Page 25364]]
The premium payment regulation and its appendix also authorize
waivers of late premium payment penalties. For example, Sec. 4007.8(f)
provides an automatic waiver for cases where premiums are not more than
seven days late. The regulation and appendix also provide for waivers
based on facts and circumstances and give detailed guidance about some
specific grounds for waivers, such as where there is reasonable cause
for the late payment.\3\ PBGC may also waive penalties where it finds
that there are other appropriate circumstances.\4\
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\3\ Section 22(a) of the appendix to the premium payment
regulation says that there is reasonable cause for failure to pay a
premium timely if the failure arises from circumstances beyond the
payer's control and the payer could not avoid the failure by the
exercise of ordinary business care and prudence. Examples are
provided in sections 24 and 25 of the appendix: Sudden and
unexpected absence of a responsible individual, loss of records in a
casualty or disaster, erroneous PBGC advice, and inability to get
necessary information.
\4\ See section 21(b)(5) of the appendix to the premium payment
regulation.
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Proposal
PBGC proposes to reduce penalty rates for late payment of annual
(flat- and variable-rate) premiums and create a new automatic waiver of
80 percent of the higher penalty rate for plans that demonstrate good
compliance.\5\ These changes would in effect make the penalty rate for
these compliant plans the same as the lower ``self-correction'' penalty
rate. (PBGC also proposes to make two minor wording changes in the
premium payment regulation.) PBGC seeks public comment on its proposal.
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\5\ The proposal would not affect penalties for late payment of
the termination premium under Sec. 4007.13 of the premium payment
regulation.
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Penalty Rates
Over the years--especially in recent years--Congress has
significantly increased PBGC premium rates. Since late payment
penalties are a percentage of unpaid premium, the penalties have gone
up in proportion to the increase in premiums. While it is not unfair to
impose larger penalties for late payment of larger amounts, PBGC is
sensitive to the fact that a penalty assessed today may be several
times what would have been assessed years ago for the same acts or
omissions involving a plan with the same number of participants and the
same unfunded vested benefits.
PBGC has good reason to believe that smaller penalties will provide
an adequate incentive for compliance by premium payers. PBGC's
experience has been that compliance with the premium payment
requirements is influenced primarily by the consistency of PBGC's
penalty assessment activities, and only secondarily by the size of
penalties assessed. PBGC observes that in most cases, a late payment is
inadvertent and that assessment of a penalty sparks improvement of a
plan's compliance systems whether the penalty is large or small. This
experience supports the conclusion that if PBGC continues its current
consistent enforcement efforts, assessing significantly lower penalties
will yield a satisfactory level of compliance.
Accordingly, PBGC is proposing to cut penalty rates and caps in
half, so that the lower (self-correction) rate would be \1/2\ percent
with a 25 percent cap, and the higher rate would be 2\1/2\ percent with
a 50 percent cap. PBGC also proposes to eliminate the floor on penalty
assessments, so that if the penalty assessment formula generates a
penalty less than $25, it will not be automatically inflated to the
floor amount.
Partial Waiver for Good Premium Compliance
Applying a lower penalty rate to self-correction recognizes that it
is desirable for a plan to catch and fix its own mistakes, whatever its
compliance history may be. PBGC has given this matter further thought
and concluded that a demonstrated commitment to premium compliance is
also worthy of recognition, even if a plan corrects an underpayment (of
which it is likely unaware) only after notice from PBGC. PBGC believes
such a commitment is evidenced where a plan has a history of consistent
compliance and acts promptly to correct an underpayment when notified
by PBGC. PBGC therefore proposes to automatically waive 80 percent of
penalties assessed at the higher (2\1/2\-percent) rate where the
following two conditions are satisfied.
The first condition would be that the plan have a five-year record
of premium compliance. Generally, this would mean timely payment of all
premiums for the five plan years preceding the year of the delinquency,
as shown by the plan's premium filings. However, a late payment would
not count against a plan if PBGC did not require payment of a penalty,
such as where there was a waiver of the entire penalty. A plan that was
not in existence as a covered plan for the full five years would be
judged on its coverage years.
The second condition would be prompt correction. This would mean
that the premium shortfall for which a penalty was being assessed was
made good within 30 days after PBGC notified the plan in writing that
there was or might be a problem. In other words, a plan that met the
first condition would be assessed penalty at the normally applicable
rate, but it could earn an 80-percent waiver (that is, a waiver of all
penalty above the lower ``self-correction'' rate) by paying the premium
shortfall within 30 days.
Effect of Proposed Changes
PBGC typically discovers the most common premium payment errors
fairly quickly--errors like failing to pay, sending payment that
doesn't match the information filed, and so forth--and generally
notifies plans of their delinquencies within a month or two after the
due date. Thus, a plan that corrects an underpayment before or promptly
after notice from PBGC typically owes no more than a few months'
penalty.
For example, if a plan paid a $1 million premium two months late
(after notice from PBGC), the penalty under the current regulation
would be $100,000 (two months times 5 percent times $1 million). Under
the proposed regulation, the penalty would be $50,000 (two months times
2\1/2\ percent times $1 million). If the plan qualified for the
compliant plan partial waiver, the penalty would be reduced by 80
percent, from $50,000 to $10,000.
The effect of the proposed changes is summarized in the following
table.
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Monthly penalty rate if shortfall is corrected--
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Good compliance history? At or before date of Within 30 days after More than 30 days after
PBGC notice PBGC notice PBGC notice
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No................................... \1/2\ percent.......... 2\1/2\ percent......... 2\1/2\ percent.
Yes.................................. \1/2\ percent.......... \1/2\ percent (after 2\1/2\ percent.
waiver).
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[[Page 25365]]
Applicability
PBGC proposes to apply the changes described above to late premium
payments for plan years beginning after 2015.
Compliance With Regulatory Requirements
Executive Orders 12866 and 13563
PBGC has determined, in consultation with the Office of Management
and Budget, that this proposed rule is not a ``significant regulatory
action'' under Executive Order 12866.
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility.
PBGC would not expect this proposed rule to cause a significant
change in premium compliance patterns. As noted above, PBGC's
experience is that prompt assessment, rather than amount, is the key to
using penalties as a compliance tool. A reduction in the penalty cost
of late payment is unlikely to reduce the incidence of late payment,
but is also unlikely to encourage late payment: No penalty is better
than a low penalty. Thus, the primary effect of the proposal would be
to save money for delinquent plans and reduce PBGC's penalty receipts.
But PBGC assesses penalties not to generate income but to encourage
compliance and sanction non-compliance. If PBGC can achieve the same
level of timely payment while assessing lower penalties, higher
penalties are inappropriate. And lower penalties may tend to encourage
the continuation and adoption of defined benefit plans, a favorable
outcome for plan participants.
PBGC estimates that this rule would reduce penalty assessments for
late payment of premiums by $2 million per year.
This proposed rule is associated with retrospective review and
analysis in PBGC's Plan for Regulatory Review issued in accordance with
Executive Order 13563.
Regulatory Flexibility Act
The Regulatory Flexibility Act imposes certain requirements with
respect to rules that are subject to the notice and comment
requirements of section 553(b) of the Administrative Procedure Act and
that are likely to have a significant economic impact on a substantial
number of small entities. Unless an agency determines that a proposed
rule is not likely to have a significant economic impact on a
substantial number of small entities, section 603 of the Regulatory
Flexibility Act requires that the agency present an initial regulatory
flexibility analysis at the time of the publication of the proposed
rule describing the impact of the rule on small entities and seeking
public comment on the impact. Small entities include small businesses,
organizations and governmental jurisdictions.
For purposes of the Regulatory Flexibility Act requirements with
respect to this proposed rule, PBGC considers a small entity to be a
plan with fewer than 100 participants. This is consistent with certain
requirements in title I of ERISA \6\ and the Internal Revenue Code,\7\
as well as the definition of a small entity that the Department of
Labor (DOL) has used for purposes of the Regulatory Flexibility Act.\8\
Using this proposed definition, about 64 percent (16,700 of 26,100) of
plans covered by title IV of ERISA in 2010 were small plans.\9\
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\6\ See, e.g., ERISA section 104(a)(2), which permits the
Secretary of Labor to prescribe simplified annual reports for
pension plans that cover fewer than 100 participants.
\7\ See, e.g., Code section 430(g)(2)(B), which permits plans
with 100 or fewer participants to use valuation dates other than the
first day of the plan year.
\8\ See, e.g., DOL's final rule on Prohibited Transaction
Exemption Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
\9\ See PBGC 2010 pension insurance data table S-31, http://www.pbgc.gov/Documents/pension-insurance-data-tables-2010.pdf.
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Further, while some large employers may have small plans, in
general most small plans are maintained by small employers. Thus, PBGC
believes that assessing the impact of the proposal on small plans is an
appropriate substitute for evaluating the effect on small entities. The
definition of small entity considered appropriate for this purpose
differs, however, from a definition of small business based on size
standards promulgated by the Small Business Administration (13 CFR
121.201) pursuant to the Small Business Act. PBGC therefore requests
comments on the appropriateness of the size standard used in evaluating
the impact of the proposed rule on small entities.
On the basis of its proposed definition of small entity, PBGC
certifies under section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) that the amendments in this rule would not have a
significant economic impact on a substantial number of small entities.
Accordingly, as provided in section 605 of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.), sections 603 and 604 do not apply. This
certification is based on the fact that small plans generally pay small
premiums and thus small penalties for late payment of premiums. The
average late premium penalty paid by a small plan for the 2014 plan
year was about $160. This proposed rule would cut penalty payments in
half, and thus create an average annual net economic benefit for each
small plan of about $80. This is not a significant impact. PBGC invites
public comment on this assessment.
List of Subjects in 29 CFR Part 4007
Employee benefit plans, Penalties, Pension insurance, Reporting and
recordkeeping requirements.
In consideration of the foregoing, PBGC proposes to amend 29 CFR
part 4007 as follows:
PART 4007--PAYMENT OF PREMIUMS
0
1. The authority citation for part 4007 continues to read as follows:
Authority: 29 U.S.C. 1302(b)(3), 1303(A), 1306, 1307.
0
2. In Sec. 4007.8:
0
a. Paragraph (a) introductory text is amended by removing the words
``paragraphs (b) through (g)'' and adding in their place the words
``paragraphs (b) through (h)''; and by removing the words ``and is
subject to a floor of $25 (or, if less, the amount of the unpaid
premium)'';
0
b. Paragraph (a)(1) is amended by removing the words ``a written
notice'' and adding in their place the words ``the first written
notice''; by removing the words ``1 percent'' and adding in their place
the words ``\1/2\ percent''; and by removing the words ``50 percent''
and adding in their place the words ``25 percent''.
0
c. Paragraph (a)(2) is amended by removing the words ``5 percent'' and
adding in their place the words ``2\1/2\ percent''; and by removing the
words ``100 percent'' and adding in their place the words ``50
percent''.
0
d. Paragraph (h) is added to read as follows:
Sec. 4007.8 Late payment penalty charges.
* * * * *
(h) Demonstrated compliance. If paragraph (a)(1) of this section
does not apply, PBGC will waive 80 percent of the otherwise applicable
premium payment penalty under paragraph (a)(2) of this section if the
criteria in both
[[Page 25366]]
paragraphs (h)(1) and (2) of this section are met.
(1) For each plan year within the last five plan years of coverage
preceding the plan year for which the penalty rate is being
determined,--
(i) Any required premium filing for the plan has been made; and
(ii) PBGC has not required payment of a penalty for the plan under
this section.
(2) The amount of unpaid premium is paid within 30 days after PBGC
issues the first written notice as described in paragraph (a)(1) of
this section.
Issued in Washington DC this 21st day of April, 2016.
W. Thomas Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2016-09960 Filed 4-27-16; 8:45 am]
BILLING CODE 7709-02-P