[Federal Register Volume 81, Number 185 (Friday, September 23, 2016)]
[Rules and Regulations]
[Pages 65542-65545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22901]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Part 4007
RIN 1212-AB32
Payment of Premiums; Late Payment Penalty Relief
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Final rule.
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SUMMARY: The Pension Benefit Guaranty Corporation (PBGC) is lowering
the rates of penalty charged for late payment of premiums by all plans,
and providing a waiver of most of the penalty for plans with a
demonstrated commitment to premium compliance.
DATES: Effective date: This rule is effective on October 24, 2016.
Applicability date: The changes made by this rule apply to late
premium payments for plan years beginning after 2015.
FOR FURTHER INFORMATION CONTACT: Deborah C. Murphy, Assistant General
Counsel for Regulatory Affairs ([email protected]), Office of the
General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street
NW., Washington DC 20005-4026; 202-326-4400 extension 3451. (TTY and
TDD users may call the Federal relay service toll-free at 800-877-8339
and ask to be connected to 202-326-4400 extension 3451.)
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of the Regulatory Action
This final rule is needed to reduce the financial burden of PBGC's
late premium penalties. The rulemaking reduces penalty rates for all
plans and waives most of the penalty for plans that meet a standard for
good compliance with premium requirements.
PBGC's legal authority for this action comes from section
4002(b)(3) of the Employee Retirement Income Security Act of 1974
(ERISA), which authorizes PBGC to issue regulations to carry out the
purposes of title IV of ERISA, and section 4007 of ERISA, which gives
PBGC authority to assess late payment penalties.
Major Provisions of the Regulatory Action
The penalty for late payment of a premium is a percentage of the
amount paid late multiplied by the number of full or partial months the
amount is late, subject to a floor of $25 (or the amount of premium
paid late, if less). There are two levels of penalty, which heretofore
have been 1 percent per month (with a 50 percent cap) and 5 percent per
month (capped at 100 percent). The lower rate applies to ``self-
correction''--that is, where the premium underpayment is corrected
before PBGC gives notice that there is or may be an underpayment. This
final rule cuts the rates and caps in half (to \1/2\ percent with a 25
percent cap and 2\1/2\ percent with a 50 percent cap, respectively) and
eliminates the floor.
The rulemaking also creates a new penalty waiver that applies to
underpayments by plans with good compliance histories if corrected
promptly after notice from PBGC. PBGC will waive 80 percent of the
penalty assessed for such a plan.
Background
PBGC administers the pension plan termination insurance program
under title IV of the Employee Retirement Income Security Act of 1974
(ERISA). Under ERISA sections 4006 and 4007, plans covered by title IV
must pay premiums to PBGC. PBGC's premium regulations--on Premium Rates
(29 CFR part 4006) and on Payment of Premiums (29 CFR part 4007)--
implement ERISA sections 4006 and 4007.
ERISA section 4007(b)(1) provides that if a premium is not paid
when due, PBGC is authorized to assess a penalty up to 100 percent of
the overdue amount. The statute does not condition exercise of this
authority on a finding of
[[Page 65543]]
bad faith or lack of due care; it is solely based on the failure to
pay.\1\ However, the fact that assessment is authorized (rather than
mandated)--and thus that PBGC could choose not to exercise the
authority at all--indicates that PBGC has the flexibility to assess
less than the full amount of penalty authorized and to reduce or
eliminate a penalty.\2\
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\1\ The statute provides a waiver of penalty for 60 days if PBGC
finds that timely payment would cause substantial hardship, but PBGC
may not grant the waiver if it appears that the plan will be unable
to pay the premium within 60 days. PBGC has found no record that
such a waiver has ever been granted during the agency's 40+ years of
existence.
\2\ In contrast, the statute requires that interest on late
premiums ``shall be paid'' at a specified rate for the overdue
period.
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PBGC has provided for the exercise of its authority to impose
penalties in the premium payment regulation. Under Sec. 4007.8 of the
regulation, late payment penalties accrue at the rate of 1 percent or 5
percent per month (or portion of a month) of the unpaid amount, except
that the smallest penalty assessed is the lesser of $25 or the amount
of unpaid premium. Whether the 1-percent or 5-percent rate applies
depends on whether the underpayment is ``self-corrected'' or not. Self-
correction refers to payment of the delinquent amount before PBGC gives
written notice of a possible delinquency. One-percent penalties are
capped by the regulation at 50 percent and 5-percent penalties at 100
percent of the unpaid amount. Although penalties can be significant in
some cases, they are generally assessed in amounts far less than the
statutory maximum.
This two-tiered structure provides an incentive to self-correct and
reflects PBGC's judgment that those that come forward voluntarily to
correct underpayments deserve more forbearance than those that PBGC
identifies through its premium enforcement programs.
The premium payment regulation and its appendix also authorize
waivers of late premium payment penalties. For example, Sec. 4007.8(f)
provides an automatic waiver for cases where premiums are not more than
seven days late. The regulation and appendix also provide for waivers
based on facts and circumstances and give detailed guidance about some
specific grounds for waivers, such as where there is reasonable cause
for the late payment.\3\ PBGC may also waive penalties where it finds
that there are other appropriate circumstances.\4\
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\3\ Section 22(a) of the appendix to the premium payment
regulation says that there is reasonable cause for failure to pay a
premium timely if the failure arises from circumstances beyond the
payer's control and the payer could not avoid the failure by the
exercise of ordinary business care and prudence. Examples are
provided in sections 24 and 25 of the appendix: Sudden and
unexpected absence of a responsible individual, loss of records in a
casualty or disaster, erroneous PBGC advice, and inability to get
necessary information.
\4\ See section 21(b)(5) of the appendix to the premium payment
regulation.
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On April 28, 2016 (at 81 FR 25363), PBGC published a proposed rule
to reduce penalty rates for late payment of annual (flat- and variable-
rate) premiums and create a new automatic waiver of 80 percent of
penalties at the higher rate for plans that demonstrate good
compliance.\5\ PBGC sought public comment on its proposal. Four
comments were received. Three commenters supported the proposal. The
other commenter expressed opposition, citing the importance of plan
funding and payment of premiums. PBGC believes, as discussed below,
that the reduction of premium late-payment penalties it is implementing
will not adversely affect premium payments; and by reducing the cost of
maintaining a plan, the penalty reduction appears more likely to
improve than impair plan funding.
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\5\ The proposal would not affect penalties for late payment of
the termination premium under Sec. 4007.13 of the premium payment
regulation.
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One commenter that supported the proposal urged PBGC to go further
and apply the new penalty rules to all unresolved premium penalty
cases. PBGC is adhering to its proposal to apply the new rules to
premiums for plan years beginning after 2015. Future applicability is a
reasonable approach for all kinds of new rules, whether more lenient
(as here) or stricter. And to apply the new rules to some but not all
late premium payments for pre-2016 years could be seen as an
inequitable approach. A plan that corrected promptly--and whose case
was therefore closed--would not get the benefit of the new, lower
penalties; whereas one that delayed would be subject to lower penalties
if its case was still open.
However, PBGC has concluded that--in pending requests for
reconsideration for pre-2016 years--it is appropriate to use its pre-
existing discretionary authority to take account of good compliance and
prompt correction, among other facts and circumstances. While such
exercises of discretion cannot be expected to turn on the same factual
analysis or provide the same result as this final rule, they represent
a similar quality of consideration as that provision.
The same commenter also urged PBGC to consider similar relief on a
case-by-case basis for cases that have already been resolved under pre-
amendment rules. The comment focused particularly on penalties that
were large and ``disproportionate'' (under the circumstances) and arose
from ``inadvertence.'' PBGC is not persuaded to take this course.
Because larger penalties correlate with larger premiums, larger
plans, and larger employers, relief focused on larger penalties would
be focused away from smaller plans and employers--at odds with PBGC's
goal of reducing burden for small entities. And since virtually every
failure to pay premiums timely is inadvertent, inadvertence is neither
a useful nor an appropriate criterion for granting penalty relief.
Further, ``disproportionality'' is a subtle and subjective standard
that could take time to apply consistently to a large number of cases.
And significantly, the principle of finality is important in avoiding
perpetual uncertainty about the outcomes of disputes. PBGC considers it
inappropriate to reopen cases properly closed.
PBGC's Action
PBGC is adopting the penalty relief it proposed but is clarifying
the operation of the 80-percent waiver for compliant plans, as
discussed below.
Reduced Penalty Rates
Over the years--especially in recent years--Congress has
significantly increased PBGC premium rates. Since late payment
penalties are a percentage of unpaid premium, the penalties have gone
up in proportion to the increase in premiums. While it is not unfair to
impose larger penalties for late payment of larger amounts, PBGC is
sensitive to the fact that a penalty assessed today may be several
times what would have been assessed years ago for the same acts or
omissions involving a plan with the same number of participants and the
same unfunded vested benefits.
PBGC has good reason to believe that smaller penalties will provide
an adequate incentive for compliance by premium payers. PBGC's
experience has been that compliance with the premium payment
requirements is influenced primarily by the consistency of PBGC's
penalty assessment activities, and only secondarily by the size of
penalties assessed. PBGC observes that in most cases, a late payment is
inadvertent and that assessment of a penalty sparks improvement of a
plan's compliance systems whether the penalty is large or small. This
experience supports the conclusion that if PBGC continues its current
consistent enforcement efforts, assessing significantly lower penalties
will yield a satisfactory level of compliance.
[[Page 65544]]
Accordingly, PBGC is cutting penalty rates and caps in half, so
that the lower (self-correction) rate will be \1/2\ percent with a 25
percent cap, and the higher rate will be 2\1/2\ percent with a 50
percent cap. PBGC is also eliminating the floor on penalty assessments,
so that if the penalty assessment formula generates a penalty less than
$25, it will not be automatically inflated to the floor amount.
Recognition of Good Premium Compliance
Applying a lower penalty rate to self-correction recognizes that it
is desirable for a plan to catch and fix its own mistakes, whatever its
compliance history may be. PBGC has given this matter further thought
and concluded that a demonstrated commitment to premium compliance is
also worthy of recognition, even if a plan corrects an underpayment (of
which it is likely unaware) only after notice from PBGC. PBGC believes
such a commitment is evidenced where a plan has a history of consistent
compliance and acts promptly to correct an underpayment when notified
by PBGC. PBGC will therefore automatically waive 80 percent of
penalties assessed at the higher (2\1/2\-percent) rate where the
following two conditions are satisfied.
The first condition is that the plan have a five-year record of
premium compliance. Generally, this means timely payment of all
premiums for the five plan years preceding the year of the delinquency,
as shown by the plan's premium filings. However, a late payment will
not count against a plan if PBGC did not require payment of a penalty,
such as where there was a waiver of the entire penalty. A plan that was
not in existence as a covered plan for the full five years will be
judged on its coverage years.
The second condition is prompt correction. Prompt correction, for
this purpose, means that the premium shortfall for which a penalty is
being assessed is made good no later than 30 days after PBGC notifies
the plan in writing that there is or might be a problem. In other
words, a plan that meets the first condition, and is assessed penalty
at the 2\1/2\-percent rate, will qualify for an automatic 80-percent
reduction if the premium shortfall is paid within 30 days.
PBGC has made two clarifying changes to the proposed regulatory
text describing the 80-percent waiver. The amount waived is now
described as 80 percent of the amount ``assessed,'' rather than the
amount ``otherwise applicable.'' And the amount that must have been
paid by the end of the 30-day period is now described as the ``total
amount of premium'' for the year, rather than the ``amount of unpaid
premium.'' PBGC feels that the new formulations are clearer and more
definite.
Effect of Changes
PBGC typically discovers the most common premium payment errors
fairly quickly--errors like failing to pay, sending payment that
doesn't match the information filed, and so forth--and generally
notifies plans of their delinquencies within a month or two after the
due date. Thus, a plan that corrects an underpayment before or promptly
after notice from PBGC typically owes no more than a few months'
penalty.
For example, if a plan paid a $1 million premium two months late
(after notice from PBGC), the penalty under the regulation as it
existed before this amendment would be $100,000 (two months times 5
percent times $1 million). Under the revised regulation, the penalty
would be $50,000 (two months times 2\1/2\ percent times $1 million). If
the plan qualified for the compliant plan partial waiver, the penalty
would be reduced by 80 percent, from $50,000 to $10,000.
In a typical case, the changes in this final rule will in effect
make the penalty rate for compliant plans the same as the ``self-
correction'' penalty rate. In clarification of the preamble to the
proposed rule, however, this will not be true in the unusual case where
a penalty cap comes into play. For while the penalty rates for self-
correctors and others are in the ratio of one to five, the caps are in
the ratio of one to two.
The effect of the changes is summarized in the following table on
the assumption that the penalty caps do not come into play.
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Monthly penalty rate if shortfall is corrected--
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Good compliance history? At or before date of Within 30 days after More than 30 days after
PBGC notice PBGC notice PBGC notice
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No................................... \1/2\ percent.......... 2\1/2\ percent......... 2\1/2\ percent.
Yes.................................. \1/2\ percent.......... \1/2\ percent (after 2\1/2\ percent.
waiver).
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Compliance With Regulatory Requirements
Executive Orders 12866 and 13563
PBGC has determined, in consultation with the Office of Management
and Budget, that this final rule is not a ``significant regulatory
action'' under Executive Order 12866.
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility.
PBGC does not expect this final rule to cause a significant change
in premium compliance patterns. As noted above, PBGC's experience is
that prompt assessment, rather than amount, is the key to using
penalties as a compliance tool. A reduction in the penalty cost of late
payment is unlikely to reduce the incidence of late payment, but is
also unlikely to encourage late payment: no penalty is better than a
low penalty. Thus, the primary effect of the rule will be to save money
for delinquent plans and reduce PBGC's penalty receipts. But PBGC
assesses penalties not to generate income but to encourage compliance
and sanction non-compliance. If PBGC can achieve the same level of
timely payment while assessing lower penalties, higher penalties are
inappropriate. And lower penalties may tend to encourage the
continuation and adoption of defined benefit plans, a favorable outcome
for plan participants.
PBGC estimates that this rule will reduce penalty assessments for
late payment of premiums by $2 million per year.
This final rule is associated with retrospective review and
analysis in PBGC's Plan for Regulatory Review issued in accordance with
Executive Order 13563.
Regulatory Flexibility Act
The Regulatory Flexibility Act imposes certain requirements with
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respect to rules that are subject to the notice and comment
requirements of section 553(b) of the Administrative Procedure Act and
that are likely to have a significant economic impact on a substantial
number of small entities. Unless an agency determines that a final rule
is not likely to have a significant economic impact on a substantial
number of small entities, section 604 of the Regulatory Flexibility Act
requires that the agency present a final regulatory flexibility
analysis at the time of the publication of the final rule describing
the impact of the rule on small entities and steps taken to minimize
the impact. Small entities include small businesses, organizations and
governmental jurisdictions.
For purposes of the Regulatory Flexibility Act requirements with
respect to this final rule, PBGC considers a small entity to be a plan
with fewer than 100 participants. This is substantially the same
criterion PBGC uses in other regulations \6\ and is consistent with
certain requirements in title I of ERISA \7\ and the Internal Revenue
Code,\8\ as well as the definition of a small entity that the
Department of Labor (DOL) has used for purposes of the Regulatory
Flexibility Act.\9\ Using this proposed definition, about 64 percent
(16,700 of 26,100) of plans covered by title IV of ERISA in 2010 were
small plans.\10\
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\6\ See e.g., special rules for small plans under part 4007
(Payment of Premiums).
\7\ See, e.g., ERISA section 104(a)(2), which permits the
Secretary of Labor to prescribe simplified annual reports for
pension plans that cover fewer than 100 participants.
\8\ See, e.g., Code section 430(g)(2)(B), which permits plans
with 100 or fewer participants to use valuation dates other than the
first day of the plan year.
\9\ See, e.g., DOL's final rule on Prohibited Transaction
Exemption Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
\10\ See PBGC 2010 pension insurance data table S-31, http://www.pbgc.gov/Documents/pension-insurance-data-tables-2010.pdf.
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Further, while some large employers may have small plans, in
general most small plans are maintained by small employers. Thus, PBGC
believes that assessing the impact of the final rule on small plans is
an appropriate substitute for evaluating the effect on small entities.
The definition of small entity considered appropriate for this purpose
differs, however, from a definition of small business based on size
standards promulgated by the Small Business Administration (13 CFR
121.201) pursuant to the Small Business Act. PBGC therefore requested
comments on the appropriateness of the size standard used in evaluating
the impact of the proposed rule on small entities. PBGC received no
comments on this point.
PBGC certifies under section 605(b) of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.) that the amendments in this rule would not
have a significant economic impact on a substantial number of small
entities. Accordingly, as provided in section 605 of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), sections 603 and 604 do not
apply. This certification is based on the fact that small plans
generally pay small premiums and thus small penalties for late payment
of premiums. The average late premium penalty paid by a small plan for
the 2014 plan year was about $160. This proposed rule would cut penalty
payments in half, and thus create an average annual net economic
benefit for each small plan of about $80. This is not a significant
impact.
List of Subjects in 29 CFR Part 4007
Employee benefit plans, Penalties, Pension insurance, Reporting and
recordkeeping requirements.
In consideration of the foregoing, PBGC amends 29 CFR part 4007 as
follows:
PART 4007--PAYMENT OF PREMIUMS
0
1. The authority citation for part 4007 continues to read as follows:
Authority: 29 U.S.C. 1302(b)(3), 1303(A), 1306, 1307.
0
2. In Sec. 4007.8:
0
a. Paragraph (a) introductory text is amended by removing the words
``paragraphs (b) through (g)'' and adding in their place the words
``paragraphs (b) through (h)''; and by removing the words ``and is
subject to a floor of $25 (or, if less, the amount of the unpaid
premium)'';
0
b. Paragraph (a)(1) is amended by removing the words ``a written
notice'' and adding in their place the words ``the first written
notice''; by removing the words ``1 percent'' and adding in their place
the words ``\1/2\ percent''; and by removing the words ``50 percent''
and adding in their place the words ``25 percent''.
0
c. Paragraph (a)(2) is amended by removing the words ``5 percent'' and
adding in their place the words ``2\1/2\ percent''; and by removing the
words ``100 percent'' and adding in their place the words ``50
percent''.
0
d. Paragraph (h) is added.
The addition reads as follows:
Sec. 4007.8 Late payment penalty charges.
* * * * *
(h) Demonstrated compliance. PBGC will waive 80 percent of the
premium payment penalty assessed under paragraph (a)(2) of this section
if the criteria in paragraphs (h)(1) and (2) of this section are met.
(1) For each plan year within the last five plan years of coverage
preceding the plan year for which the penalty rate is being
determined,--
(i) Any required premium filing for the plan has been made; and
(ii) PBGC has not required payment of a penalty for the plan under
this section.
(2) For the plan year for which the penalty rate is being
determined, the total amount of premium is paid no later than 30 days
after PBGC issues the first written notice as described in paragraph
(a)(1) of this section.
Issued in Washington, DC, by
W. Thomas Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2016-22901 Filed 9-22-16; 8:45 am]
BILLING CODE 7709-02-P