[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]



29 CFR Part 4007

RIN 1212-AB32

Payment of Premiums; Late Payment Penalty Relief

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Proposed rule.


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-

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.)


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.


    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\

    \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 
    \2\ In contrast, the statute requires that interest on late 
premiums ``shall be paid'' at a specified rate for the overdue 

    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\

    \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 


    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.

    \5\ The proposal would not affect penalties for late payment of 
the termination premium under Sec.  4007.13 of the premium payment 

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' 
    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 

                                                    Monthly penalty rate if shortfall is corrected--
       Good compliance history?          At or before date of     Within 30 days after   More than 30 days after
                                             PBGC notice              PBGC notice              PBGC notice
No...................................  \1/2\ percent..........  2\1/2\ percent.........  2\1/2\ percent.
Yes..................................  \1/2\ percent..........  \1/2\ percent (after     2\1/2\ percent.

[[Page 25365]]


    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 
    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\

    \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.

    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:


1. The authority citation for part 4007 continues to read as follows:

    Authority:  29 U.S.C. 1302(b)(3), 1303(A), 1306, 1307.

2. In Sec.  4007.8:

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 
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''.
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 
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 
    (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]