The Consulting Actuary

Session 303 - PBGC Premiums after PPA
Presenters: Amy C. Viener, Patrick A. Ward
Recorder: Mitzi E. McLean

As a result of the Pension Protection Act of 2006, the Pension Benefit Guaranty Corporation has made significant changes concerning the annual premiums it collects from the pension plans it insures. These changes affect the filing deadlines for some plans, the format of what is actually filed with the agency, and both flat rate and variable rate premium (VRP) calculations.

Filing deadlines are dictated by plan size, and the PBGC has developed three plan size classifications based on the number of participants as of the last day of the prior plan year: small plans had fewer than 100, mid-size plans had at least 100, but fewer than 500, and large plans had at least 500 participants. The due date for flat and variable rate premiums for small plans has been extended to the last day of the 16^th month after the plan year end (April 30^th for calendar year plans). For mid-size and large plans; the variable rate premium is still due the 15^th day of the 10^th month of the plan year (October 15^th for calendar year plans). The flat rate premium is due the same day for mid-size plans; however, this premium is due the last day of the 2^nd month of the plan year (February 28^th for calendar year plans) for large plans.

Electronic premium filing is still mandatory for all plans. However, there are no longer any actual forms since everything is electronic; Form 1/Schedule A and Form 1-EZ are now things of the past. All large plans must submit estimated flat-rate filings by the last day of the 2^nd month of the plan year, and plans of all sizes have to submit their comprehensive filings by the applicable due dates listed in the preceding paragraph. Large plans can continue to reconcile estimated flat rate premiums at the VRP due date, and they now have the option to reconcile estimated VRP’s at a later date, the small plan due date.

The 2008 flat rate premium has increased slightly for single employer plans to $33 per participant, and multiemployer plans are still subject to a $9 per participant rate. The computation of the VRP calculation has changed, although the underlying premium rate remains at $9 for every $1,000 of unfunded vested benefits (UVB). UVB are measured as of the funding valuation date for the current plan year and equal the excess of the premium funding target over the fair market value of plan assets. The premium funding target is extremely similar to the funding target used for minimum funding purposes, using most of the same assumptions, including mortality. However, it only includes vested benefits and may be calculated under a different discount rate.

Plan sponsors have an initial choice in the discount rate to use to calculate the premium funding target. For the standard premium funding target, the three segment rates for the month preceding the month in which the plan year begins are used (December spot rates are used for a calendar year plan). These standard rates will be posted on the Practitioners Page of the PBGC website. Alternatively, a plan sponsor may elect to use the discount rates which were used for the minimum funding calculation to compute the alternative premium funding target. This election, once made, is irrevocable for five years.

The fair market value of assets reported is the same as the value reported on the Schedule SB. For the 2008 plan year, prior year contributions made after the UVB valuation date can be included in this asset value without adjustment. For plan years beginning after 2008, these contributions are discounted back to the UVB valuation date using the plan’s effective interest rate, as is done for minimum funding purposes.

Starting in 2008, there will be no alternative calculation method or full funding limit exemption for plans; only plans with no vested participants, section 412(e)(3) plans, and plans terminating in standard terminations will be exempt from the VRP. All other single employer plans will be subject to calculating and reporting a VRP. Certain small employer plans are subject to a maximum VRP of $5 times the square of the plan’s participant count. A plan is considered to be a small employer plan if the total number of employees of all contributing sponsors of the plan and all members of their controlled groups is no more than twenty-five. For these plans, the VRP due is the lesser of the amount determined under the UVB formula or the maximum formula. If the comparison is done, the components of the UVB formula need to be disclosed and certified by an enrolled actuary. Small employer plans also have the option of just paying the amount derived from the maximum formula rather than doing the comparison.

Mid-size and large plans now have the option to file and pay an estimated VRP if they are unable to calculate the final premium funding target by the due date. The estimate must use actual assets, as well as a reasonable estimate of the premium funding target certified by an Enrolled Actuary and determined using generally accepted actuarial principles. The filing must indicate that the value is an estimate, and a reconciliation must be completed so that an amended comprehensive filing can be submitted by the small plan due date. Plans which use this option will be able to claim the original amount paid as a credit, but they will also be assessed late payment interest charges based on the ERISA imposed rate (Federal short term rate plus 300 basis points). The PBGC will automatically waive its late payment penalty for these trued-up variable rate premiums if the plan sponsor correctly follows the payment and filing rules.