As part of the Obama administration’s mandate that government agencies review existing regulations in an effort to make them more effective or less burdensome, the Pension Benefit Guaranty Corporation (PBGC) recently announced that it will provide a limited opportunity for administrators of defined benefit pension plans that have never paid required PBGC termination-insurance premiums to make up those payment deficiencies without penalty. This opportunity is available only to plans for which premiums were never paid and not to plans for which PBGC has received some, but not all, premiums. Late payment of PBGC premiums can result in penalty and interest charges, as described below.
Under ERISA, the administrator of a covered plan and the contributing sponsor of such plan (and all members of such sponsor’s controlled group) are liable for premium payments. The PBGC regulations impose upon the administrator of a covered plan the responsibility to file prescribed premium information.
The temporary penalty relief is available through a special voluntary compliance program. To participate in the program, which is open until July 31, 2012, the administrator of an eligible plan (or the administrator’s representative) must contact the PBGC and disclose the nature and extent of premium nonpayment. The administrator must then file premium information and pay the missed premiums by Aug. 31, 2012.
Participation in the compliance program relieves plan administrators of the penalty for the late payments. Unless waived by the PBGC after a showing of hardship or reasonable cause, the penalty is 1 percent of the late payment per month if the underpayment or late payment is “self-corrected” by the plan administrator (i.e, if the payment is made on or before the date the PBGC issues a written notification that there is a premium delinquency, a past-due filing notice or a letter initiating an audit). A penalty rate of 5 percent per month applies to payments made after PBGC notification.
The compliance program does not, however, provide relief from interest charges for the late premium payments. Interest charges, which may not be waived by the PBGC, accrue based on IRS tax underpayment rates. The interest rate for the current quarter is 3 percent.
Late premiums for the 2006 plan year and thereafter will need to be paid using the PBGC’s electronic filing system. The PBGC will make other arrangements for late premiums attributable to earlier plan years. In addition, the PBGC has stated that it is “willing to discuss” allowing a plan administrator to pay less than the full amount of missed premiums in certain circumstances (such as for plan years in the distant past for which, presumably, records needed to calculate premiums may no longer be available or may be materially incomplete). Finally, the PBGC has indicated that once the compliance program closes, it will step up its efforts to enforce premium payment requirements for covered plans that have not paid any premiums, and will assess applicable penalties.
Given the limited amount of time the PBGC is offering relief, employers should take affirmative steps to determine whether they maintain plans covered by the PBGC premium requirements for which premiums have never been paid. Potential situations in which relief under the compliance program may be used include the following:
- A plan that was formerly exempt from paying PBGC premiums becomes covered, such as a plan initially maintained only for an owner-employee that later includes a nonowner participant.
- A plan that was incorrectly assumed to be exempt, such as a plan that was assumed to be a “governmental plan” when adopted but which did not meet all the applicable requirements fAor exemption.
- Plans assumed in acquisitions.
- A supplemental executive retirement plan that inadvertently covers more than a “select group of management or highly compensated employees” and is therefore not exempt.
If required PBGC premiums were never paid for a plan, it is also possible that annual Form 5500s were not filed for that plan. If so, the administrator should take advantage of the Department of Labor’s Delinquent Filer Voluntary Compliance Program to file all required past-year Form 5500s.
For more information regarding the compliance program, please contact the authors or any other members of McGuireWoods’ Employee Benefits team.