[Federal Register Volume 65, Number 232 (Friday, December 1, 2000)]
[Rules and Regulations]
[Pages 75160-75164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30322]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4006 and 4007

RIN 1212-AA58


Premium Rates; Payment of Premiums

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule.

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SUMMARY: This final rule makes three amendments to the PBGC's premium 
regulations. One amendment allows plan administrators to pay a prorated 
premium for a short plan year rather than paying a full year's premium 
and requesting a refund. A second amendment simplifies and narrows the 
definition of ``participant'' for PBGC premium purposes. A third 
amendment simplifies the standard for claiming the variable-rate 
premium exemption for plans that are fully insured under section 412(i) 
of the Internal Revenue Code.

DATES: Effective January 1, 2001. The amendments made by this rule 
apply to plan years beginning after 2000.

FOR FURTHER INFORMATION CONTACT: Harold J. Ashner, Assistant General 
Counsel, or Deborah C. Murphy, Attorney, Office of the General Counsel, 
PBGC, 1200 K Street, NW., Washington, DC 20005-4026; 202-326-4024. (For 
TTY/TDD users, call the Federal relay service toll-free at 1-800-877-
8339 and ask to be connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION:

Background

    Section 4007 of the Employee Retirement Income Security Act of 1974 
(ERISA) requires the payment of annual premiums to the PBGC for pension 
plans that Title IV of ERISA covers. ERISA section 4006 establishes the 
amount of the annual premium. For single-employer plans, there is a 
flat-rate premium of $19 per participant and a variable-rate premium of 
$9 per $1,000 of unfunded vested benefits. For multiemployer plans, 
there is only a flat-rate premium of $2.60 per participant.
    Under the PBGC's premium regulations (29 CFR Parts 4006 and 4007), 
plan administrators count participants and calculate unfunded

[[Page 75161]]

vested benefits as of a ``snapshot date,'' which in most cases is the 
last day of the plan year preceding the premium payment year. However, 
for certain plans involved in mergers or spinoffs and (in general) for 
new and newly-covered plans, the snapshot date is the first day of the 
premium payment year.
    On April 10, 1992, the PBGC published in the Federal Register (at 
57 FR 12666) a proposed amendment to its premium regulation. Among 
other things, the proposal would have revised the rules on prorating 
premiums for short plan years; would have redefined the term 
``participant'' for premium purposes; and would have simplified the 
requirement for exemption from the variable-rate premium for fully 
insured plans. The PBGC is now making changes to its premium 
regulations in these three areas. (The PBGC is also eliminating an 
obsolete provision governing the 1998 plan years of certain public 
utility company plans.)

Short-Year Premiums

    Section 4006.5(f) of the PBGC's regulation on Premium Rates (29 CFR 
Part 4006) currently provides for premium refunds for certain types of 
short plan years, with the annual premium prorated by months. The rule 
covers (1) a short first year of a new or newly-covered plan; (2) a 
short year created by a change in plan year; (3) a short year created 
by distribution of plan assets pursuant to a plan termination; and (4) 
a short year created by the appointment of a trustee for a single-
employer plan under ERISA section 4042. The regulation requires the 
plan administrator to pay the full 12-month premium and then file for a 
refund (or claim a credit against a future premium payment).
    The amendment adopted in this final rule gives the plan 
administrator of a plan that has a short plan year the option to pay a 
prorated premium for the short year (instead of paying a non-prorated 
premium and then requesting a refund or claiming a credit against a 
future premium payment). In most cases, the short plan year will have 
ended well before the premium due date, and the plan administrator will 
therefore know the length of the short plan year when filing. However, 
this is not required, and the plan administrator may anticipate that 
the plan will have a short plan year, estimate its length, and pay a 
prorated premium accordingly. For example, the plan administrator may 
anticipate the adoption of a plan amendment shortening the plan year or 
the distribution of plan assets in connection with the plan's 
termination. In such circumstances, if it turns out--for whatever 
reason--that the plan year is longer than anticipated, the plan 
administrator must make up any premium underpayment (which is subject 
to interest and penalties from the due date forward).
    The risk of error in anticipating the length of a plan year is 
clearly greater where the plan administrator of a plan with 500 or more 
participants is paying the flat-rate premium early in the plan year 
(typically with Form 1-ES). To address this, the amendment provides 
``safe harbor'' penalty relief in certain cases for an underpayment of 
the flat-rate premium that is due by the early filing due date (the end 
of February for calendar-year plans). The safe harbor applies where a 
plan amendment that changes the plan year has been adopted, but the 
short year has not ended, by the early filing due date, and later 
events result in a plan year longer than anticipated because the 
expected change in plan year does not take place. This may happen, for 
example, if the amendment changing the plan year is rescinded before 
the end of the short year provided for in the amendment. In a situation 
of this kind, the new safe harbor rule waives any underpayment penalty 
accruing between the flat-rate payment due date (the end of February 
for calendar-year plans) and the due date for the reconciliation filing 
(October 15 for calendar-year plans) where the penalty arises from 
reliance on the short-year amendment.
    The amendment clarifies that if a plan is amended to provide for a 
change in the plan year, the plan does not have a short plan year for 
PBGC premium purposes if the plan disappears in a multiple-plan 
transaction (such as a plan merger, consolidation, or spinoff) at or 
before the time the new plan year cycle begins.
    The short-year proration amendment adopted in this final rule will 
provide broader relief than the PBGC's 1992 short-year proposal. As an 
alternative to refunds, that proposal would have allowed (1) payment of 
a prorated premium only for a short first year of a new or newly 
covered plan, and (2) a credit against the following year's premium for 
a short plan year created by a change in plan year. The three comments 
that addressed the proposal all favored the revision of the short-year 
rules.

Examples

    The following examples illustrate the operation of the new short-
year rules.

    Example 1. Suppose that calendar-year Plan A, a small plan whose 
flat-rate and variable-rate premiums are both due on October 15, is 
amended on January 15, 2001, to change to a plan year beginning 
March 15 and to provide for a short plan year beginning January 1, 
2001, and ending March 14, 2001. Plan A's plan administrator may pay 
a prorated premium for the short plan year equal to \3/12\ of the 
premium otherwise payable for all of 2001 (i.e., a premium for the 
months of January, February, and March). A full year's premium will 
be paid for the new, full plan year beginning March 15, 2001, and 
ending March 14, 2002. However, if Plan A merges into or 
consolidates with Plan B effective March 15, 2001, it is not 
eligible for payment of a prorated premium for the plan year 
beginning January 1, 2001.
    Example 2. Suppose that Plan A in Example 1 is a large plan 
whose estimated flat-rate premium must be paid by February 28, 2001, 
and that the plan administrator pays a prorated estimated flat-rate 
premium based on the assumption that the new plan year cycle will 
begin in accordance with the amendment (i.e., 3\1/12\ of 90 percent 
of the final flat-rate premium that would be due for 2001 in the 
absence of proration, or 3\1/12\ of 100 percent of the flat-rate 
premium that would be due for 2001 in the absence of proration if 
the 2001 participant count were the same as in 2000). If Plan A then 
merges into Plan B effective March 15, 2001, Plan A will not be 
eligible for payment of a prorated premium, and the estimate paid 
will in retrospect be insufficient. However, under the new safe 
harbor test, the PBGC will not assess a penalty if the estimated 
premium paid would have been at least enough to satisfy the safe 
harbor rules if the new plan year cycle had begun as contemplated by 
the plan year amendment.

``Participant'' Definition

    A plan's flat-rate premium is based on the number of participants 
in the plan on the premium snapshot date. The definition of 
``participant'' in the premium rates regulation applies only for 
premium purposes. Whether an individual is a participant in a plan for 
premium purposes has no bearing on whether the individual is a 
participant in the plan for any other purpose under Title IV of ERISA, 
or for any purpose under Title I of ERISA or the Internal Revenue Code. 
Similarly, an individual is not considered to be a participant in a 
plan for premium purposes simply because the individual is a 
participant in the plan for other purposes.
    The existing definition of ``participant'' in Sec. 4006.2 of the 
premium rates regulation breaks participants down into three broad 
categories: active, inactive, and deceased (with surviving 
beneficiaries). A person is counted as an active participant if the 
person is ``earning or retaining credited service under the plan,'' 
without reference to whether the plan is obligated to provide benefits 
with respect to the person. In contrast, a person is counted as an 
inactive participant if the person is entitled to

[[Page 75162]]

receive benefits from the plan and as a deceased participant if a 
beneficiary of the deceased person is entitled to receive benefits from 
the plan. Thus, the test for including a person in either the 
``inactive'' or the ``deceased'' category is whether the plan has an 
obligation to provide benefits with respect to the person.

Amended Definition--In General

    The amended definition counts as participants those individuals 
with respect to whom a plan has benefit liabilities. The amendment 
represents no substantive change regarding the ``inactive'' and 
``deceased'' categories. However, the amendment excludes from the 
participant count--and thus eliminates premiums for--individuals who 
are earning or retaining credited service (and thus would be included 
as participants under the old definition) if, on the snapshot date, 
they have no accrued benefits (and the plan does not have any other 
benefit liabilities with respect to them). (An ongoing plan's liability 
for a benefit is not disregarded solely because the plan provides that 
the conditions for the benefit must be satisfied before the plan 
terminates or that the benefit will not be paid after the plan 
terminates.)
    For example, suppose a plan requires an individual to perform 1,000 
hours of service in a service computation period to earn any portion of 
an accrued benefit for that period. If, on the snapshot date, a new 
plan entrant has only 900 hours of service in the current service 
computation period, the PBGC would treat the individual as not having 
an accrued benefit under the plan for purposes of the amended 
``participant'' definition. If the plan has no other benefit 
liabilities with respect to the individual, the individual would not be 
considered a participant.
    Much of the discussion in this preamble focuses on accrued benefits 
rather than benefit liabilities because a plan necessarily has benefit 
liabilities for any individual who has an accrued benefit. However, in 
rare cases, a plan may have benefit liabilities for an individual who 
has no accrued benefit (e.g., because the individual has only an 
ancillary death benefit). In circumstances of that kind, the individual 
would count as a participant for PBGC premium purposes.
    Under the new definition, the participant count for premiums will 
typically exclude plan participants in a plan that is frozen for 
benefit accruals either before their participation begins or so soon 
thereafter that they have not had time to accrue a benefit. It will 
also typically exclude plan participants in permanent part-time jobs 
who work too few hours to meet their plans' minimum service 
requirements for accrual.
    One result of this change is that newly created plans that do not 
grant past service credits will typically owe no flat-rate premium for 
their first year. This is because the premium snapshot date for a new 
plan comes at the beginning of the premium payment year, when 
participants have not yet earned ``future service'' credits (on which 
accrued benefits would be based).

When Individuals Are No Longer Counted as Participants

    The amendment also makes a change in the rule governing when a non-
vested individual is considered to no longer be a participant for 
premium purposes. The existing definition requires that a terminated 
non-vested participant who has not received a deemed cashout (or died) 
be included in the participant count until the first anniversary of 
separation from employment, even if under plan terms the participant 
incurs a one-year break in service before then. (See the preamble to 
the PBGC's 1989 final rule on premiums, 54 FR 28943, 28946 (July 10, 
1989), where this is discussed.)
    Thus, under the existing definition, a participant could incur a 
break in service for plan purposes, but not be considered to have 
incurred a break in service for premium purposes, in a situation where 
the participant's service computation period did not coincide with the 
plan year. For example, under the terms of a calendar-year plan, an 
individual might incur a one-year break in service before December 31, 
2001 (the premium snapshot date for the 2002 premium) if the individual 
left employment on February 1, 2001, and did not perform 500 hours of 
service during a computation period ending on November 30, 2001, even 
though December 31, 2001, comes before the first anniversary of the 
individual's separation from employment.
    Under the amended definition, a non-vested individual is considered 
to no longer be a participant after the individual incurs a one-year 
break in service as defined in the plan, regardless of whether the 
individual has been absent from employment until the first anniversary 
of separation. (The equivalent of a ``one-year break in service'' for 
an elapsed time plan would be a one-year period of severance, which 
typically coincides with the PBGC's existing rule; thus, the change 
would typically have no impact on elapsed time plans.)
    The amended definition also makes clear that the PBGC treats a non-
vested individual as no longer being a participant when the individual 
dies or receives a deemed cashout under the terms of the plan. Finally, 
the amended definition explicitly provides that a vested individual (or 
a deceased individual who was vested at death) ceases to be a 
participant in a plan when all benefit liabilities with respect to the 
individual have been provided for, either by payment from the plan or 
through purchase of an irrevocable commitment by an insurer to provide 
the benefits.
    This amendment takes a different approach than the 1992 proposal, 
but addresses the concerns expressed in comments on that proposal. 
Under the 1992 proposal, the entire definition of ``participant'' would 
have been replaced by a cross-reference to the definition used for 
purposes of filing the Form 5500 annual report. Most commenters 
objected to this proposed change because some non-vested individuals 
who had incurred a one-year break in service (and thus would not be 
considered participants for PBGC premium purposes under the PBGC's 
existing definition) would have to be counted as participants under the 
Form 5500 definition.
    Some commenters also argued that premiums should not be charged for 
a terminated non-vested individual who had a break in service because 
neither the plan nor the PBGC would ordinarily have any liability to 
pay benefits to the individual upon plan termination. The commenters 
believed such individuals would be included in the Form 5500 definition 
of ``participant.'' The amendment that the PBGC is adopting is 
responsive to these comments by excluding from the definition of 
``participant'' an individual with respect to whom a plan does not have 
benefit liablities.

Fully Insured Plans

    Section 412(h)(2) of the Internal Revenue Code exempts certain 
fully insured plans from plan funding requirements. To be exempt, a 
plan must meet the requirements of Code section 412(i). Section 
4006.5(a)(3) of the premium rates regulation currently exempts a plan 
from the variable-rate premium if the plan is described in Code section 
412(i) throughout the plan year preceding the premium payment year (or, 
in the case of a new or newly covered plan, throughout the premium 
payment year up to the premium due date).
    Under the amendment that the PBGC is adopting in this final rule, 
the

[[Page 75163]]

exemption for section 412(i) plans applies to a plan if it is described 
in section 412(i) of the Code on the premium snapshot date. This change 
makes it simpler to determine whether the exemption applies. The change 
is identical to that proposed in 1992, which generated no public 
comments.

Compliance With Rulemaking Guidelines and Paperwork Reduction Act

    The PBGC has determined that this action is not a ``significant 
regulatory action'' under the criteria set forth in Executive Order 
12866.
    The changes made by this rule will have a modest positive economic 
impact on plans that are affected by it. For the vast majority of small 
plans, there will be little or no impact. The greatest effect will come 
from the change in the ``participant'' definition, which eliminates 
premiums for the first year of newly created plans that do not grant 
past service credits. There are very few small plans of this kind. 
Payment of a prorated premium under the new short plan year rules will 
save the interest on the excess amount that would otherwise have been 
paid and refunded, but for small plans this amount will typically be 
insignificant.
    The PBGC therefore certifies under section 605(b) of the Regulatory 
Flexibility Act that this rule will not have a significant economic 
impact on a substantial number of small entities. Accordingly, sections 
603 and 604 of the Regulatory Flexibility Act do not apply.
    This rule affects information collection requirements under the 
PBGC's regulation on Payment of Premiums (29 CFR Part 4007). A notice 
regarding those information collection requirements appears elsewhere 
in today's Federal Register.

List of Subjects

29 CFR Part 4006

    Employee benefit plans, Pension insurance.

29 CFR Part 4007

    Employee benefit plans, Penalties, Pension insurance, Reporting and 
recordkeeping requirements.
    For the foregoing reasons, 29 CFR Parts 4006 and 4007 are amended 
as follows:

PART 4006--PREMIUM RATES

    1. The authority citation for part 4006 continues to read as 
follows:

    Authority: 29 U.S.C. 1302(b)(3), 1306, 1307.

    2. In Sec. 4006.2, the definition of ``Participant'' is revised to 
read as follows:


Sec. 4006.2  Definitions.

* * * * *
    Participant has the meaning described in Sec. 4006.6.
* * * * *

    3. In Sec. 4006.5, paragraph (a)(3) is amended by removing the 
words ``at all times during'' in the first sentence and adding in their 
place the words ``on the last day of'' and by removing the last 
sentence; paragraph (g) is removed; and paragraph (f) is revised to 
read as follows:


Sec. 4006.5  Exemptions and special rules.

* * * * *
    (f) Proration for certain short plan years. The premium for a plan 
that has a short plan year as described in this paragraph (f) is 
prorated by the number of months in the short plan year (treating a 
part of a month as a month). The proration applies whether or not the 
short plan year ends by the premium due date for the short plan year. 
For purposes of this paragraph (f), there is a short plan year in the 
following circumstances:
    (1) New plan. A new or newly-covered plan becomes effective for 
premium purposes on a date other than the first day of its first plan 
year.
    (2) Change in plan year. A plan amendment changes the plan year, 
but only if the plan does not merge into or consolidate with another 
plan or otherwise cease its independent existence either during the 
short plan year or at the beginning of the full plan year following the 
short plan year.
    (3) Distribution of assets. The plan's assets (other than any 
excess assets) are distributed pursuant to the plan's termination.
    (4) Appointment of trustee. The plan is a single-employer plan, and 
a plan trustee is appointed pursuant to section 4042 of ERISA.

    4. Section 4006.6 is added to read as follows:


Sec. 4006.6  Definition of ``participant.''

    (a) General rule. For purposes of this part and part 4007 of this 
chapter, an individual is considered to be a participant in a plan on 
any date if the plan has benefit liabilities with respect to the 
individual on that date.
    (b) Loss or distribution of benefit. For purposes of this section, 
an individual is treated as no longer being a participant--
    (1) In the case of an individual with no vested accrued benefit, 
after--
    (i) The individual incurs a one-year break in service under the 
terms of the plan,
    (ii) The individual's entire ``zero-dollar'' vested accrued benefit 
is deemed distributed under the terms of the plan, or
    (iii) The individual dies; and
    (2) In the case of a living individual whose accrued benefit is 
fully or partially vested, or a deceased individual whose accrued 
benefit was fully or partially vested at the time of death, after--
    (i) An insurer makes an irrevocable commitment to pay all benefit 
liabilities with respect to the individual, or
    (ii) All benefit liabilities with respect to the individual are 
otherwise distributed.
    (c) Examples. The operation of this section is illustrated by the 
following examples:

    Example 1. Participation under a calendar-year plan begins upon 
commencement of employment, and the only benefit provided by the 
plan is an accrued benefit (expressed as a life annuity beginning at 
age 65) of $30 per month times full years of service. The plan 
credits a ratable portion of a full year of service for service of 
at least 1,000 hours but less than 2,000 hours in a service 
computation period that begins on the date when the participant 
commences employment and each anniversary of that date. John and 
Mary both commence employment on July 1, 2000. On December 31, 2000 
(the snapshot date for the plan's 2001 premium), John has credit for 
988 hours of service and Mary has credit for 1,006 hours of service. 
For purposes of this section, Mary is considered to have an accrued 
benefit, and John is considered not to have an accrued benefit. 
Thus, the plan is considered to have benefit liabilities with 
respect to Mary, but not John, on December 31, 2000; and Mary, but 
not John, must be counted as a participant for purposes of computing 
the plan's 2001 premium.
    Example 2. The plan also provides that a participant becomes 
vested five years after commencing employment and defines a one-year 
break in service as a service computation period in which less than 
500 hours of service is performed. On February 1, 2002, John has an 
accrued benefit of $18 per month beginning at age 65 based on credit 
for 1,200 hours of service in the service computation period that 
began July 1, 2000. However, John has credit for only 492 hours of 
service in the service computation period that began July 1, 2001. 
On February 1, 2002, John terminates his employment. On December 31, 
2002 (the snapshot date for the 2003 premium), John has incurred a 
one-year break in service, and thus is not counted as a participant 
for purposes of computing the plan's 2003 premium.
    Example 3. On January 1, 2004, the plan is amended to provide 
that if a vested participant whose accrued benefit has a present 
value of $5,000 or less leaves employment, the benefit will be 
immediately

[[Page 75164]]

cashed out. On December 30, 2005, Jane, who has a vested benefit 
with a present value of less than $5,000, leaves employment. Because 
of reasonable administrative delay in determining the amount of the 
benefit to be paid, the plan does not pay Jane the value of her 
benefit until January 9, 2006. Under the provisions of this section, 
Jane is treated as not having an accrued benefit on December 31, 
2005 (the snapshot date for the 2006 premium), because Jane's 
benefit is treated as having been paid on December 30, 2005. Thus, 
Jane is not counted as a participant for purposes of computing the 
plan's 2006 premium.
    Example 4. If the plan amendment had instead provided for 
cashouts as of the first of the month following termination of 
employment, and the plan paid Jane the value of her benefit on 
January 1, 2006, Jane would be treated under the provisions of this 
section as having an accrued benefit on December 31, 2005, and would 
thus be counted as a participant for purposes of computing the 
plan's 2006 premium.

PART 4007--PAYMENT OF PREMIUMS

    5. The authority citation for part 4007 continues to read as 
follows:

    Authority: 29 U.S.C. 1302(b)(3), 1303(a), 1306, 1307.

    6. In section 4007.8, a new paragraph (i) is added to read as 
follows:


Sec. 4007.8  Late payment penalty charges.

* * * * *
    (i) Safe harbor relief for certain plan amendments prospectively 
changing plan year. This waiver applies in the case of a plan for which 
a reconciliation filing is required under Sec. 4007.11(a)(2)(iii). The 
PBGC will waive the penalty on any underpayment of the flat-rate 
premium for the period that ends on the date the reconciliation filing 
is due if, by the date the flat-rate premium for the premium payment 
year is due under Sec. 4007.11(a)(2)(i),--
    (1) The plan has been amended to change its plan year and the 
amendment as in effect on that date makes the premium payment year a 
short year that will end after that date; and
    (2) The plan administrator pays at least the lesser of--
    (i) The amount determined under Sec. 4007.8(g) based on the actual 
length of the premium payment year, or
    (ii) The amount determined under Sec. 4007.8(g) based on the length 
that the premium payment year would have if the new plan year cycle 
began as anticipated by the amendment.

    Issued in Washington, DC, this 22nd day of November, 2000.
Alexis M. Herman,
Chairman, Board of Directors, Pension Benefit Guaranty Corporation.
    Issued on the date set forth above pursuant to a resolution of 
the Board of Directors authorizing its Chairman to issue this final 
rule.
James J. Keightley,
Secretary, Board of Directors, Pension Benefit Guaranty Corporation.
[FR Doc. 00-30322 Filed 11-30-00; 8:45 am]
BILLING CODE 7708-01-P