January 7, 2014
On December 26, 2013, President Barack Obama signed into law the Bipartisan Budget Act of 2013 (Budget Act).1 Included in this two-year budget agreement is a significant increase in the Pension Benefit Guaranty Corporation (PBGC) single-employer plan premiums beginning in 2015. Both the flat rate and variable-rate premiums will increase, as discussed in this Compliance Alert.
Following the government shutdown in October of 2013, consensus developed in Congress to pass a budget bill that would provide respite from, if not an end to, the contentious deadline-driven budget process and also reduce the coming round of automatic across-the-board spending cuts (the sequester).2 In the current political climate, however, that legislation could not be passed unless the proposed spending cut reductions were offset by other spending cuts or increased revenues. Because increasing premiums paid to the PBGC is viewed in Congress as increasing fees (not taxes), and because increases are treated as revenue, PBGC premium increases are an attractive option whenever Congress needs revenue. The Budget Act is the second time in two years that Congress has looked to premium increases for that purpose. In 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) significantly increased both the flat-rate premium and the variable-rate premium beginning in 2013 but also provided a variable-rate premium cap.3
The Budget Act increases the PBGC single-employer plan premiums as follows:
The table below shows the single-employer premiums for the 2013-2017 plan years, including the changes introduced by both MAP-21 and the Budget Act.
|Summary of PBGC Single-Employer Premium Amounts after MAP-21 and the Budget Act: 2013-2017 Plan Years|
* All indexing is based on wage growth.
** The variable-rate premium is based on each $1,000 of unfunded vested benefits.
*** The stated dollar amount is the total of the prior year’s premium plus the set dollar increase for the year in question ($10 for 2015; $5 for 2016). Under both MAP-21 and the Budget Act, the prior year premium is indexed before the flat dollar amount is added. “Or more” reflects the fact that the increase due to indexing is not yet known.
Notwithstanding the MAP-21 and Budget Act premium increases, it is possible that plan sponsors will see additional increases in the next several years. The Administration continues to seek further premium increases for the PBGC, including giving the PBGC the ability to adjust premiums itself based on risk, and PBGC deficits under both the single-employer and multiemployer plan programs continue to be a concern of the Administration and Congress. The likely consideration of multiemployer plan legislation this year could provide a vehicle for additional premium increases for either or both single-employer and multiemployer plans.
These recent and anticipated increases make the cost of the PBGC premiums an increasingly important factor for employers to consider. There are various steps sponsors can take now to reduce the flat-rate premium, including the “de-risking” option of offering a lump sum buy-out. Sponsors also can reduce the variable-rate premium by either increasing plan contributions or accelerating them.6
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As with all issues involving the interpretation or application of laws and regulations, sponsors of staff plans should rely on their attorneys for authoritative advice on the interpretation and application of the Bipartisan Budget Act of 2013. Sibson Consulting can be retained to work with employers and their attorneys to comply with the new law and to discuss and analyze the tradeoffs and short- and long-term strategies involved in minimizing PBGC premium payments.
2 The cuts were required under the Budget Control Act of 2011. (Return to the Compliance Alert.)
3 See the table in this Compliance Alert for the 2014 amounts. MAP-21 also increased the flat-rate premium for multiemployer plans to $12 for 2013 with indexing thereafter. The 2014 premium remains $12. There is no variable rate premium for multiemployer plans. For more information on these MAP-21 provisions, see Sibson's August 2012 Bulletin, “New Law Provides Pension Funding Stabilization and PBGC Premium Increases.” (Return to the Compliance Alert.)
4 All premium indexing discussed in this Compliance Alert is for wage growth. (Return to the Compliance Alert.)
5 The Budget Act does not increase the PBGC flat-rate premium for multiemployer plans. (Return to the Compliance Alert.)
6 See Sibson's January 2014 Spotlight, “PBGC Premium Rates Increase Again: What Plan Sponsors Can Do to Minimize PBGC Premium Payments.” (Return to the Compliance Alert.)