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

As premiums have risen, so have the penalties for late payment because they are calculated as a percentage of the premiums.

The final rule  implementing the changes first proposed in April, is slated for publication in the Federal Register on September 23, 2016. Under the final rule, penalty rates and caps are both cut in half. For sponsors with good payment histories that pay promptly following notification of late payment, PBGC will reduce the penalty an additional 80%.

The changes apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later.

The PBGC explained that currently, it uses a two-tiered penalty structure that rewards self-correction:

• If a sponsor corrects a deficiency before PBGC notifies them, a lower rate of 1% of the late payment per month is incurred; and
• If a delinquency is corrected only after the company is notified, PBGC charges a higher rate of 5%.

Penalties in the first category are capped at 50% of the late amount, and in the second category, 100%.

The following example illustrates how the new rule differs from the old rule. Consider a situation in which a $100,000 premium is paid two months late.

• Scenario 1 (“self-correction”) – The plan discovered the underpayment and corrected it before PBGC sent notice. Under the old rule, PBGC would have assessed a $2,000 penalty (1% x $100,000 x 2 months). Under the new rule, the penalty is half that amount, or $1,000 (0.5% x $100,000 x 2 months).
• Scenario 2 – The payment was made after PBGC notified the plan that it was past due. Under the old rule, PBGC would have assessed a $10,000 penalty (5% x $100,000 x 2 months). Under the new rule, PBGC will assess a $5,000 penalty (2.5% x $100,000 x 2 months).

In addition, if the sponsor has a good payment history and pays promptly after being notified of the underpayment, PBGC will automatically waive 80% of that amount reducing the penalty from $5,000 to $1,000.

“We’re committed to reducing the regulatory burdens of sponsoring a pension plan,” says PBGC Director Tom Reeder. “This change is one of the ways we can help employers that are keeping their defined benefit pension plans and providing the security of lifetime income for workers and retirees.”