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Friday, November 15, 2013

Earlier this month, the Pension Benefit Guaranty Corporation (“PBGC”) announced the flat and variable premium rates that defined benefit pension plans must pay in 2014.

  • Single-employer plans. The flat rate premium for 2014 is $49 per participant. This is a $7 per participant increase from 2013. The variable premium rate will increase in 2014 to $14 per every $1,000 in unfunded vested benefits, with a cap of $412 per participant, which is an increase in the variable premium rate of $9 in 2013. Note that smaller plans may be subject to a lower per participant cap on the variable premium rate.
  • Multiemployer plans. The flat rate premium rate for these plans is $12 a participant in 2014, which remains unchanged from 2013. Multiemployer plans do not pay a variable rate premium.

With these premium increases on the horizon for single-employer plans, this may be a good time to crunch the numbers to determine if cashing out deferred vested participants makes sense. For example, does the potential reduction in PBGC premiums based on a lower participant count support offering a lump sum cash out for deferred vested participants with a lump sum amount less than a certain threshold (i.e., $10,000 or $20,000)? If interest rates continue to rise, the case may be more compelling to reduce the number of deferred vested participants in the plan since a rise in interest rates correlates to lower present value calculations. Spousal consent rules, requirements as to actuarial assumptions used to determine present value amounts, and nondiscrimination rules must be followed if this type of strategy is implemented. Also, lump sum payments may be restricted if the AFTAP for the plan is below 80%. Even with the compliance efforts involved to implement this type of plan change, taking steps to reduce the plan’s PBGC premium liability may be a financially-sound endeavor.

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