For some pension plans, the cost of compliance just got more expensive.
Background
In 1974, the Pension Benefit Guaranty Corporation was created as a quasi-public organization as part of ERISA. Since that time it has provided a safety net for many people in terminating plans, albeit an expensive one. Certain types of plans are exempt, but the rest pay annual premiums for PBGC coverage. 412(i) and 412(e) plans are required to pay part of the premiums as well, but are ineligible for coverage.
Premiums are made up of two pieces – (a) a cost per participant, and (b) a cost per $1000 of unfunded vested plan benefits. The premiums apply to active and frozen plans, alike. The chart to the right summarizes the rate history for small, single employer plans.
Abrupt Change
The most recent change to the premium structure was triggered by the Bipartisan Budget Act of 2013 (the Ryan-Murray budget negotiation), signed into law on December 26, 2013. Rate increases continue to be pushed by underfunded plan terminations and by falling discount rates used to measure plan benefits. Regardless, the fact is that premiums are scheduled to rise to unprecedented levels during the next few years.
In practice the new rates for plan years beginning in 2015 and 2016 will be (a) the prior year rate (b) increased with wage inflation, plus (c) the scheduled rate increase. Since future wage inflation is unknown at this point, the table assumes a wage inflation rate of zero for the next two years.
Exception: 412(e) plans pay only the Per Person cost. For the rest, the Per $1,000 component is subject to a ceiling for severely underfunded plans. For example, the Per $1000 cost is capped in 2013 at $400 per participant, $412 in 2014, and growing to $500 in 2016. For years after 2016, the rates automatically are indexed for inflation.
For example, a traditional pension plan with 10 participants, assets of $1 million, and a 90% funded ratio paid $1,320 in premium in 2013. That same plan in 2015 would pay $3,540 according to the chart, above – a premium nearly tripling in three years.
Action Steps
These new rates are significant. Plan sponsors will want to cash out vested ex-employees for whom they are paying premiums. They also may wish to accelerate funding in order to decrease unfunded vested benefits. If you are concerned about the cost of compliance and wish to discuss strategies with us, we would be pleased to hear from you.
| Year | Per Person | Per $1,000 |
|---|---|---|
| 2016 | $64.00 | $29.00 |
| 2015 | $57.00 | $24.00 |
| 2014 | $49.00 | $14.00 |
| 2013 | $42.00 | $9.00 |
| 2012 | $35.00 | $9.00 |
| 2011 | $35.00 | $9.00 |
| 2010 | $35.00 | $9.00 |
| 2009 | $34.00 | $9.00 |
| 2008 | $33.00 | $9.00 |
| 2007 | $31.00 | $9.00 |
| 2006 | $30.00 | $9.00 |
| 2005 | $19.00 | $9.00 |
| 2004 | $19.00 | $9.00 |
| 2003 | $19.00 | $9.00 |
| 2002 | $19.00 | $9.00 |
| 2001 | $19.00 | $9.00 |
| 2000 | $19.00 | $9.00 |
| 1999 | $19.00 | $9.00 |
| 1998 | $19.00 | $9.00 |
| 1997 | $19.00 | $9.00 |
| 1996 | $19.00 | $9.00 |
| 1995 | $19.00 | $9.00 |
| 1994 | $19.00 | $9.00 |
| 1993 | $19.00 | $9.00 |
| 1992 | $19.00 | $9.00 |
| 1991 | $19.00 | $9.00 |
| 1990 | $19.00 | $6.00 |
| 1989 | $19.00 | $6.00 |
| 1988 | $19.00 | $6.00 |
| 1987 | $8.50 | $0.00 |
| 1986 | $8.50 | $0.00 |
| 1985 | $2.60 | $0.00 |
| 1984 | $2.60 | $0.00 |
| 1983 | $2.60 | $0.00 |
| 1982 | $2.60 | $0.00 |
| 1981 | $2.60 | $0.00 |
| 1980 | $2.60 | $0.00 |
| 1979 | $2.60 | $0.00 |
| 1978 | $2.60 | $0.00 |
| 1977 | $1.00 | $0.00 |
| 1976 | $1.00 | $0.00 |
| 1975 | $1.00 | $0.00 |
| 1974 | $1.00 | $0.00 |
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