PBGC Hopes to Introduce Late Premium Penalty Reductions

The Pension Benefit Guaranty Corporation is proposing to cut penalties for late payment of premiums in an effort to reduce costs and make it easier for plan sponsors to maintain traditional pension plans.

The Pension Benefit Guaranty Corporation (PBGC) is proposing to cut its penalties for late premium payments amid increasing criticism that the cost of its mandatory insurance coverage stands among the chief causes driving private employers out of the defined benefit pension market.

“We think penalties should be no more than necessary to encourage timely payments,” explains PBGC Director Tom Reeder. “I’m committed to doing everything I can to help companies keep their pension plans.”

Under current laws and regulations, PBGC uses a two-tiered penalty structure that rewards self-correction. A lower rate of 1% of the late payment per month late applies when a delinquency is corrected before PBGC notifies the sponsor, while a higher rate of 5% applies if the correction is made following PBGC notification. Penalties in the first category are capped at 50% of the late amount, and 100% in the second instance, PBGC explains.

Under a new proposed rule released this week, PBGC would essentially reduce penalties for late payers by half. Additionally, for sponsors with “good payment histories that pay promptly following notification of late payment,” PBGC will reduce the penalty by 80%. The proposed changes will apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later. (A premium rate summary is available here.)

In an example case shared by PBGC in which a $100,000 premium is paid two months late by a plan sponsor who discovered the underpayment and corrected it before PBGC sent notice, the current regulations would lead to a $2,000 penalty. Under the proposed regulation, the penalty in this situation would be half that amount, or $1,000.

If the same plan sponsor did not discover the missed premium payments before PBGC sent notice, currently the payment would amount to $10,000 penalty, or 5% of $100,000 for two months. Under the proposed regulation, PBGC would therefore assess a $5,000 penalty. In addition, if the sponsor qualified for the good payment history waiver, PBGC would automatically waive 80% of that amount, reducing the penalty from $5,000 to $1,000—the amount that would have been assessed due if the plan had self-corrected.