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Pension plan premium rates tripled over past 5 years, which is all the more reason not to overpay them
Sponsors of defined benefit pension plans are paying too much to insure their plans with the federal Pension Benefit Guaranty Corp. (PBGC), new research reveals.
Federal law requires pension plan sponsors to pay annual premiums to the PBGC, and in turn the agency guarantees that plan participants will receive vested payouts during retirement (albeit at a reduced dollar amount) if the plan sponsor goes bankrupt or otherwise is unable to maintain the plan.
"In 2015, there were 100 plans overpaying premiums by at least $160,000 apiece," said Brian Donohue, partner and actuary at October Three, a Chicago-based pension plan advisory firm. "Clearly there is room for wider adoption of best practices."
Sharply Rising Premiums
"In the past five years, PBGC premiums paid by single-employer pension plans have more than tripled, and premium rates will increase another 25 percent to 50 percent by 2019," Donohue said.
PBGC insurance is financed mostly by premiums collected from pension sponsors. When the program was established in 1974, the annual premium rate was $1 per participant. But in 2017, flat-rate premiums hit $69 per participant, and they are expected to reach $80 in 2019. In 2013, a variable-rate option was introduced.
"As premium rates continue to increase in the years ahead, greater attention to effectively managing these premiums will be crucial to successful pension financial management," Donohue noted.
[SHRM members-only toolkit:
Designing and Administering Defined Contribution Retirement Plans]
The firm's April report,
The PBGC Premium Burden, analyzed publically available information found in IRS Form 5500s, which employers filed with the Department of Labor from 2009 to 2016, and data in PBGC's historical premium database.
There were roughly 23,000 single-employer plans available for analysis, but the researchers focused on a subset of approximately 5,000 plans with at least 250 participants. These plans paid more than 96 percent of the premiums in the PBGC single-employer program.
Among the findings:
"Understanding and optimizing rules for timing and recording of plan contributions can yield significant premium reductions for plan sponsors," Donohue said.
'Grace Period' Opportunities
Minimizing PBGC premiums often depends on maximizing the use of "grace period" contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year—Donohue noted.
"Failure to adopt best practices around quarterly contribution requirements and applying funding balance has caused plan sponsors to overpay PBGC premiums due to not getting full credit for grace period contributions," he explained. "In many cases, all or part of contributions made to satisfy quarterly contribution requirements could have been characterized as grace period contributions but weren't. So, plans often report lower asset values than they could have and, as a result, pay higher premiums than they need to."
Donohue provided the following example of a grace period opportunity that, if missed, could lead to higher than necessary premium payments:
A company that makes a $10 million contribution on April 15, 2017, which is recorded on the 2017 Schedule SB attachment to the Form 5500. However, a contribution made as late as Sept. 15, 2017, can, in many circumstances, be considered a "grace period" contribution for the 2016 plan year. If the $10 million contribution is treated as a "grace period" contribution, it is recorded on the 2016 Schedule SB attachment to form 5500, and this reduces the 2017 PBGC premium by about $340,000 ($10 million x 3.4 percent).
Donohue called this an "easy" contribution timing mistake, while noting that others are more complex.
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