Plan sponsors of defined benefit pension plans who are subject to PBGC coverage receive an email each year from the PBGC requiring input (and payment). What’s also required is a deep breath and a strong heart. Although the purpose of the PBGC is meaningful and well-intended, it doesn’t make the escalating premiums any easier to pay.
Starting after the 2012 filing year, the flat rate (per participant) premium began an upward climb, and after the 2013 filing year, the variable rate portion (per $1,000 of unfunded vested benefits) joined the hike. Here’s a snapshot of the premium schedule:
2015 and 2016 are also subject to indexing and could be higher than what’s shown above. After 2016, all rates are subject to indexed increases, following an inflation factor.
The flat rate premium is based on the number of participants in your plan and there’s no flexibility, but it’s often the lesser portion of the premium. The only real opportunity to decrease the flat rate premium is by decreasing the number of participants in the plan (by paying lump sums to terminated employees if your plan allows for that, or purchasing annuities for retirees).
There are some options available in calculating the variable rate premium, but very limited, and there are measures in place to prohibit plans from jumping methods each year in order to create the lowest premium. The one sure way to limit the increase in the variable portion of the PBGC premium is to strengthen the funded status by making additional contributions to the plan. In essence, by paying more contributions to the plan, you pay less premium to the PBGC. As an estimate of how much you could decrease the premium with an additional contribution, multiply the amount of additional contribution by the applicable variable rate in the table, and divide by 1000. It may be worth consideration.
As your actuaries calculating the PBGC premium, Watkins Ross will assess and communicate with you each year if there are any viable opportunities to lessen the premium. Feel free to contact us if you have questions about how you can better protect yourself from these future premium increases.
Blog authored by Cheryl Gabriel, CPC.