PBGC Announces Voluntary Correction Program For Failure to Issue 2002 And 2003 Participant Notices of Underfunded Pension Plans And Proposes New Penalties For Future Notice Deficiencies

The Employee Retirement Income Security Act of 1974, as amended (ERISA) requires pension plan administrators to provide participants in an underfunded defined benefit retirement plan with notice of the funded status of the plan and the limits on the Pension Benefit Guaranty Corporation’s (PBGC’s) guaranty should the plan terminate while it is underfunded. Except for companies in certain industries (e.g. airlines, steel), underfunding had been relatively rare during the 1990’s bull markets, but in the last several years record low interest rates and poor investment returns have made it more common. Meanwhile, audits by the PBGC reveal that many plan administrators are not in compliance with the ERISA section 4011 Participant Notice requirements for underfunding, finding that many of the notification failures for plan years 2002 and 2003 were attributed to a sincere, but mistaken, belief that different notification requirements applied for those years. In response, the PBGC has:

• Implemented a Voluntary Correction Program (VCP), which gives amnesty to plan administrators who voluntarily correct reporting deficiencies for plan years 2002 and 2003.

• Proposed a new set of penalties for failure to issue Participant Notices. These penalties are primarily based on the number of participants in a retirement plan instead of the number of days of delinquency. The new penalties would be part of a larger scheme for more active compliance auditing and penalty assessment.

The VCP and proposed penalty structure are mutually supporting incentives for plan administrators to keep participants informed of pension underfunding. The VCP encourages plan administrators to correct past notice deficiencies and facilitate future compliance by providing for a consolidated procedure that minimizes the administrative burden, without increasing concerns over audits. At the same time, the proposed penalties give plan administrators a stronger financial incentive to fulfill its obligation to provide the required notices.

Section 4011 of ERISA requires plan administrators of certain underfunded plans to send a notice to participants of the plan’s funding status to help ensure they understand the consequences of underfunding for their promised benefits. In general, Participant Notices are required for a plan year if a variable rate premium is payable unless the plan meets the Deficit Reduction Contribution (DRC) Test. In general, the DRC Exception Test requires a plan to be at least 90% funded, although a plan that is at least 80% funded also qualifies if it was 90% funded for two of the last three years.

A Participant Notice for a plan year must be issued two months after the plan’s due date for filing the Form 5500 for the prior plan year. Because this is the same due date for distributing the Summary Annual Report for the prior plan year, the two documents may be issued together. As an example, the most common due dates for 2004 Participant Notices are:

The PBGC is authorized to levy fines against the plan administrator of up to $1,100 per day for failure to issue Participant Notices regarding underfunding, but has kept the penalties much lower. Currently, the penalties are:

• $25 per day for the first 90 days of delinquency, and

• $50 per day after the first 90 days.

Penalties are capped at $100 per plan participant. That is, a plan administrator of a plan with 1,000 participants would be assessed no more than $100,000 in total penalties. The PBGC may further reduce penalties as facts and circumstances justify, or waive penalties for reasonable cause.

In general, plan administrators must issue Participant Notices if a variable rate premium is payable for a plan year. However, the Job Creation and Worker Assistance Act of 2002 (JCWAA) created some confusion regarding these Participant Notices. The JCWAA temporarily changed the premium interest rate for calculation of variable rate premium for plan years 2002 and 2003, but did not change the rate used to determine whether a Participant Notice is required. A plan administrator may have been required to provide a Participant Notice for 2002 or 2003 even if a variable rate premium was not payable.

The VCP is designed to encourage plan administrators to provide delinquent Participant Notices, without penalty and without an increase in the likelihood of a PBGC audit, for plan years 2002 and 2003. There are two advantages in meeting the guidelines of the VCP:

• Plan administrators will avoid all penalties for failure to provide the Participant Notices required for 2002 and 2003 plan years.

• The PBGC will not pursue failures to provide pre-2002 notices unless there is a 2002 or 2003 notification failure that is covered by the VCP, but fails to meet the requirements for relief.

The VCP covers any Participant Notice for a plan’s 2002 or 2003 plan year that was due before May 7, 2004 and was not subject of a PBGC audit as of May 7, 2004. For this purpose, deadline extensions resulting from a disaster relief notice are disregarded; the original due date is used. If the Participant Notice meets these eligibility criteria, plan administrators should:

• Issue a VCP corrective notice by the due date for the plan’s 2004 Participant Notice, and

• Inform the PBGC that they are participating in the VCP. This requires providing the PBGC, by mail, email or in person, a copy of the corrective notice, along with the name and telephone number of a person the PBGC can contact, no later than 30 days after the due date for the corrective notice.

Since the PBGC suspects that many plans that are eligible to participate in the VCP will also need to issue Participant Notices for 2004, and since multiple notices could confuse plan participants, a plan participant may use a consolidated notice for the 2002, 2003 and 2004 plan years. When using a consolidated notice:

• The VCP corrective notice must meet all requirements for the 2004 notice (e.g. current information on funding waivers, missed contributions, and limitations on the PBGC’s guaranty), and it must include the funded current liability percentages for the 2002 and 2003 plan years. Both plan years must be included, even if the Participant Notice was only required for one of those years.

• There is no need to issue the VCP corrective notice to persons who were entitled to receive a 2002 or 2003 Participant Notice, but are not entitled to receive a 2004 Participant Notice (e.g., a participant whose entire benefit has been annuitized or paid out in a lump sum).

If a corrective notice is required but a Participant Notice is not required for 2004, the corrective notice must still be given.

The Pension Funding Equity Act of 2004, signed into law on April 10, 2004, changed the rules for determining the required interest rate for premium payment beginning in 2004 or 2005. A plan administrator may use the same rate to determine whether a Participant Notice is required. Therefore, for plan years 2004 and 2005, Participant Notices will be required only if a variable rate premium is payable that year.

The PBGC intends to strengthen its enforcement program by more actively auditing and assessing penalties for noncompliance. On May 7, 2004, the PBGC published a proposed statement of policy that would assess penalties based on the number of plan participants rather than the number of days of delinquency. This is in line with the PBGC’s belief that the significance of a failure to inform participants of underfunded pensions varies by the number of plan participants. There would still be reductions in penalties as facts and circumstances warrant.

The PBGC’s new penalty scheme would multiply the number of participants in the plan by a set information penalty rate. The penalty rate would vary depending on whether the failure is a repeat violation and the timing of the correction relative to a PBGC audit, as follows:

Two key terms for calculating the new penalties are the number of participants and whether there is a repeat violation:

• The number of participants. This will normally be the number of participants in the plan on the last day of the prior plan year, however the PBGC reserves the right to adjust the count.

• Repeat violations. These are determined by whether the plan administrator knew or should have known about a non-de minimus violation. Participant Notice failures for plan years six years before the year in question would not count toward repeat offenses, nor would deficiencies for years 2002 or 2003.

Failure to cooperate with the PBGC could result in significantly greater penalties.

Regardless of whether the correction was made post-audit or pre-audit, the PBGC will prorate the penalty if a Participant Notice is provided within one year of when it was originally due. The calculation is based on the number of days of delinquency. For example, if the plan administrator corrects the deficiency within 90 days, the total penalty assessed would be multiplied by the number of days late and then divided by 365 (i.e. multiplied by 90/365). Thus a penalty of $100,000 corrected ninety days after the Participant Notice was required would automatically be reduced to $24,657.50.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.