Congress Boosts PBGC Premiums for Defined Benefit Plans by over 50%

The Deficit Reduction Act of 2005, which was signed on February 8, 2006, includes an increase in the annual flat-rate premium that sponsors of single-employer defined benefit pension plans pay to the PBGC. That premium is increasing from $19 to $30 per participant, effective for plan years beginning in 2006. Thus, those sponsors of calendar year plans who are required to pay estimated PBGC premiums by February 28, 2006 apparently will have to take the new rates into account in computing that payment.

This Act also increases the flat-rate premium for multiemployer pension plans from $2.60 to $8 per participant, but does not increase the variable rate premium paid with respect to under-funded single-employer pension plans. In addition, the law adds a new termination premium of $1,250 per participant per year payable by the employer for three years when an under-funded plan is taken over by the PBGC under certain circumstances.

You should also be aware that in the coming weeks, the House and Senate are likely to appoint conferees on broader pension legislation that has already passed both bodies. That legislation could change the PBGC premiums again (either up or down from the new rates), as well as increasing the variable rate premium. It may also require significantly faster funding of under-funded pension plans, and could rewrite the rules that govern the minimum and maximum funding requirements. At this point, it is difficult to predict when (or whether) that legislation will become law, or what provisions would be included in the final bill. However, that legislation, combined with changes being considered by the Financial Accounting Standards Board for how pension costs have to be reflected on the employer's balance sheet, is likely to have a dramatic effect on the cost of defined benefit plans for some employers who sponsor such plans.