[Federal Register Volume 71, Number 222 (Friday, November 17, 2006)]
[Rules and Regulations]
[Pages 66867-66871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19436]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Part 4007

RIN 1212-AA95


Payment of Premiums; Assessment of and Relief From Penalties

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule.

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SUMMARY: This final rule adopts policy guidance on premium penalty 
waivers, including guidance on the meaning of ``reasonable cause'' for 
premium penalty waivers. For the convenience of the public, this 
guidance is being codified as an appendix to PBGC's premium payment 
regulation.

DATES: Effective date: December 18, 2006. The amendments made by this 
rule apply to PBGC actions taken on or after December 18, 2006.

FOR FURTHER INFORMATION CONTACT: John H. Hanley, Director, Legislative 
& Regulatory Department, or Deborah C. Murphy, Attorney, Legislative & 
Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K 
Street, NW., Washington, DC 20005-4026; 202-326-4024. (TTY/TDD users 
may call the Federal relay service toll-free at 1-800-877-8339 and ask 
to be connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION:

Background

    Pension Benefit Guaranty Corporation (PBGC) administers the pension 
plan termination insurance program under Title IV of the Employee 
Retirement Income Security Act of 1974 (ERISA). When a single-employer 
plan terminates without sufficient assets to provide all benefits, PBGC 
steps in to ensure that participants and beneficiaries receive their 
plan benefits, subject to certain legal limits. PBGC also provides 
financial assistance to multiemployer plans that become unable to pay 
benefits.
    ERISA and PBGC's regulations require that premiums be paid to PBGC. 
To promote the effective operation of the insurance program under Title 
IV, ERISA section 4007 authorizes PBGC to assess penalties for not 
paying premiums in full and on time (``premium penalties''). See PBGC's 
regulation on Payment of Premiums (29 CFR Part 4007).
    A premium penalty is owed by any person that was liable for the 
premium--generally the plan administrator and, in the case of a single-
employer plan, the contributing sponsor(s) and any controlled group 
members. (Under ERISA section 4006(a)(7)(D)(i)(II), as added by section 
8101 of the Deficit Reduction Act of 2005, Pub. L. 109-171, February 8, 
2006, the plan administrator is not liable for the $1,250 per-
participant premium that applies to certain distress and involuntary 
plan terminations under that section.) Thus, a premium penalty (other 
than a penalty for failure to timely pay the $1,250 per-participant 
premium under ERISA section 4006(a)(7)), may generally be paid out of 
plan assets; see PBGC Opinion Letter 94-6 and the legislative history 
cited in that letter.
    PBGC's premium payment regulation includes provisions for 
determining the amount of premium penalties and provides for the waiver 
of those penalties upon demonstration of reasonable cause and in other 
specified circumstances. Reconsideration of premium penalty assessments 
is covered by PBGC's regulation on Rules for Administrative Review of 
Agency Decisions (29 CFR Part 4003). However, neither the premium 
payment regulation nor the administrative review regulation currently 
provides a thorough and detailed treatment of reasonable cause and 
other bases for premium penalty waivers.

[[Page 66868]]

    On January 12, 2001, PBGC published in the Federal Register, at 66 
FR 2856, a proposed rule to expand and codify its previously published 
penalty policies. The 2001 proposed rule dealt both with premium 
penalties under ERISA section 4007 and with penalties for failures to 
provide certain information in a timely manner under ERISA section 
4071. In particular, the proposed rule set forth detailed guidance on 
determining whether there is ``reasonable cause'' that would justify a 
waiver of premium penalties. The PBGC received no comments on the 2001 
proposed rule.

Provisions of This Rule

    This final rule provides policy guidance on premium penalty 
waivers, including guidance on the meaning of ``reasonable cause'' for 
premium penalty waivers. As discussed below, guidance is not being 
issued at this time on the determination of the amount of premium 
penalties nor on procedures for the assessment and review of premium 
penalties. Otherwise, the provisions in this final rule are generally 
the same as the premium penalty provisions in the 2001 proposed rule 
with only minor changes. As in the 2001 proposed rule, the premium 
penalty policy guidance in this final rule takes the form of an 
appendix to PBGC's regulation on Payment of Premiums (29 CFR part 
4007).
    This rule does not affect the use of any other remedies available 
to PBGC and does not address the settlement of legal disputes involving 
penalties, either alone or in the context of other legal issues. This 
rule does not address penalties under ERISA section 4302, which applies 
to certain failures to provide multiemployer plan notices required 
under subtitle E of title IV of ERISA and implementing regulations, or 
under ERISA section 4071, which applies to failures to provide 
information on time.

Premium Penalty Assessment

    The 2001 proposed rule summarized the rules on determining the 
amount of premium penalties in the premium payment regulation. That 
summary provided no new guidance and is not being included in the 
premium penalty policy appendix at this time.

Premium Penalty Waivers

    As described in the premium penalty policy appendix, a premium 
penalty may be waived, in whole or in part, for a number of reasons, 
based on the facts and circumstances. The most common reason for 
waiving a penalty is ``reasonable cause.'' Reasonable cause is 
generally found if--
     Circumstances beyond control. The violation arises from 
circumstances beyond the control of the person whose action or inaction 
may be the basis for a penalty assessment, and
     Ordinary business care and prudence. The failure could not 
be avoided by exercising ordinary business care and prudence. The size 
of the organization and of the premium involved may affect the ordinary 
business care and prudence that is expected in order to find reasonable 
cause.
    The premium penalty policy appendix includes examples of situations 
where reasonable cause might be found, such as the sudden and 
unexpected absence or inability to act of an individual with 
responsibility to act, the destruction of relevant records or inability 
to comply resulting from a fire or other casualty or natural disaster, 
and reasonable reliance on erroneous oral or written communication by a 
PBGC employee.
    The appendix also describes other types of waivers:
     Statutory or regulatory requirement. The appendix notes 
for completeness that a penalty is waived if a statute or regulation so 
requires.
     Legal error. The appendix provides that a penalty may be 
waived if the violation arises from reliance on an erroneous 
interpretation of law--with different standards depending on whether 
the interpretation is or is not disclosed to PBGC--or, in appropriate 
circumstances, from a recent change in the law.
     Pendency of PBGC procedures. The appendix provides for 
waiver in some cases of all or a part of a premium penalty that is 
attributable to the pendency of PBGC review or other procedures.
     Other circumstances. The appendix also notes that, in 
other narrow circumstances, we may waive a penalty where appropriate.
    This part of the appendix has been reorganized to group the 
material differently (placing all the provisions about legal errors 
under one heading), eliminate an example about an insignificant math 
error, and add an example of PBGC procedures (other than review 
procedures) whose pendency could be the basis for a waiver.
    The explanation of the ``other circumstances'' waiver category has 
also been revised. In the 2001 proposed rule, this provision was said 
to be aimed primarily at cases where a premium penalty assessment would 
be ``inconsistent with the purposes of title IV.'' That language 
conveys a standard more restrictive than PBGC now considers appropriate 
and has been eliminated.
    In exercising premium penalty waiver authority and determining 
whether reasonable cause exists, the premium penalty policy appendix 
provides that an organization's outside advisors, such as lawyers or 
actuaries, are treated as if they were part of the organization. Thus, 
organizations with in-house advisors are treated the same in this 
respect as those that choose to retain outside advisors. Exercising 
care in selecting and monitoring advisors is not a basis for a 
reasonable cause waiver when the advisors are in-house; similarly, it 
is not considered a basis for a reasonable cause waiver where outside 
advisors are involved. Because it is so common for premium payers to 
use advisors in determining premiums, the payment of premiums could not 
adequately be enforced if premium penalties were waived in such 
circumstances. Nothing in this final rule is intended to limit any 
recourse that an organization may have against its outside advisors.

Premium Penalty Procedures

    The 2001 proposed rule set forth procedures for assessing and 
reviewing premium penalties. The procedural provisions are not included 
in the premium penalty policy appendix at this time. Procedural 
implications of the new $1,250 per-participant premium may affect 
further premium penalty procedural guidance.

Miscellaneous Changes

    There are a number of organizational and editorial changes from the 
2001 proposed rule. Principal among these is the placement of 
provisions on assessment and waiver toward the beginning of the 
appendix, with a place reserved for procedural provisions at the end of 
the appendix. In addition, a new Sec.  4 has been added to the 
appendix, briefly summarizing the information in the appendix and 
indicating where it is located.

Compliance With Rulemaking Guidelines

    The PBGC has determined that this action is not a ``significant 
regulatory action'' under the criteria set forth in Executive Order 
12866.
    This rule is not subject to notice and comment rulemaking 
requirements under section 553 of the Administrative Procedure Act 
because it deals only with general statements of PBGC policy. The PBGC 
nonetheless invited comment on the 2001 proposed rule. Because no 
general notice of proposed rulemaking is required, the Regulatory 
Flexibility

[[Page 66869]]

Act does not apply. See 5 U.S.C. 601(2), 603, 604.

List of Subjects in 29 CFR Part 4007

    Employee benefit plans, Penalties, Pension insurance, Reporting and 
recordkeeping requirements.

0
For the reasons given above, 29 CFR part 4007 is amended 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, the introductory text of paragraph (a) is amended 
by removing the words ``The charge will be based on'' and adding in 
their place the words ``The amount determined under this paragraph (a) 
will be based on''; and paragraphs (c) and (d) are revised to read as 
follows:


Sec.  4007.8  Late payment penalty charges.

* * * * *
    (c) Reasonable cause waivers. PBGC will waive all or part of a late 
payment penalty charge if PBGC determines that there is reasonable 
cause for the late payment. Policy guidelines for applying the 
``reasonable cause'' standard are in Sec. Sec.  22 through 25 of the 
Appendix to this part.
    (d) Other waivers. PBGC may waive all or part of a late payment 
penalty charge in other circumstances without regard to whether there 
is reasonable cause. Policy guidelines for waivers without reasonable 
cause are in Sec.  21(b)(1), (b)(3), (b)(4), and (b)(5) of the Appendix 
to this part.
* * * * *

0
3. An appendix is added to part 4007 to read as follows:

APPENDIX TO PART 4007--POLICY GUIDELINES ON PREMIUM PENALTIES

Sec.

General Provisions

1 What is the purpose of this Appendix?
2 What defined terms are used in this Appendix?
3 What is the purpose of a premium penalty?
4 What information is in this Appendix and how is it organized?

Premium Penalty Assessment

[Reserved.]

Waiver Standards

21 What are the standards for waiving a premium penalty?
22 What is ``reasonable cause''?
23 What kinds of facts does PBGC consider in determining whether 
there is reasonable cause for a failure to pay a premium?
24 What are some situations that might justify a ``reasonable 
cause'' waiver?
25 What are some situations that might justify a partial 
``reasonable cause'' waiver?

Procedures

[Reserved.]

General Provisions


Sec.  1  What is the purpose of this Appendix?

    This appendix sets forth principles and guidelines that we intend 
to follow in assessing, reviewing, and waiving premium penalties. 
However, this is only general policy guidance. Our action in each case 
is guided by the facts and circumstances of the case.


Sec.  2  What defined terms are used in this Appendix?

    The following terms are defined in part 4001 of this chapter: 
contributing sponsor, ERISA, PBGC, person, plan, and plan 
administrator. In addition, in this appendix:
    (a) Premium penalty means a penalty under ERISA section 4007 and 
under this part for failing to pay a premium in full and on time.
    (b) Waiver means reduction or elimination of a premium penalty that 
is being or has been assessed.
    (c) We means PBGC.
    (d) You means, according to the context,--
    (1) A plan administrator, contributing sponsor, or other person, 
if--
    (i) The person's action or inaction may be the basis for a premium 
penalty assessment,
    (ii) The person may be required to pay the premium penalty, or
    (iii) The person is requesting review of the premium penalty; or
    (2) An employee or agent of, or advisor to, any of these persons.


Sec.  3  What is the purpose of a premium penalty?

    The basic purpose of a premium penalty is to encourage you to pay 
premiums in full and on time and to voluntarily self-correct any 
failure to do so.


Sec.  4  What information is in this Appendix and how is it organized?

    This Appendix has four divisions:
    (a) General provisions. The General Provisions division (Sec. Sec.  
1-4) tells you the purpose and organization of the Appendix, the 
purpose of a premium penalty, and the definitions of terms used in the 
Appendix.
    (b) Premium penalty assessment. The Premium Penalty Assessment 
division is reserved.
    (c) Waiver standards. The Waiver Standards division (Sec. Sec.  21-
25) explains the principles that PBGC follows in waiving premium 
penalties.
    (1) Reasonable cause. We waive premium penalties for reasonable 
cause, as explained in Sec. Sec.  22-25.
    (2) Other waivers. We also waive premium penalties in some other 
circumstances, such as mistake of law, as explained in Sec.  21.
    (d) Procedures. The Procedures division is reserved.

Premium Penalty Assessment

    [Reserved.]

Waiver Standards


Sec.  21  What are the standards for waiving a premium penalty?

    (a) Facts and circumstances. In deciding whether to waive a premium 
penalty in whole or in part under paragraph (b), we consider the facts 
and circumstances of each case.
    (b) Waivers.
    (1) Provisions of law. We waive all or part of a premium penalty if 
a statute or regulation requires that we do so. For example, ERISA 
section 4007(b) and Sec.  4007.8 of this part provide for a waiver in 
certain circumstances involving business hardship, and Sec.  4007.8 of 
this part also provides for waivers if certain ``safe harbor'' tests 
are met, and for a waiver of a premium penalty that accrues after the 
date of a bill for a premium underpayment if you pay the premium owed 
within 30 days after the date of the bill.
    (2) Reasonable cause. We waive a premium penalty if you show 
reasonable cause for a failure to pay a premium in full and on time. 
See Sec. Sec.  22 through 25 for guidelines on ``reasonable cause'' 
waivers. If there is reasonable cause for only part of a failure to pay 
a premium, we waive the premium penalty only for that part.
    (3) Legal errors. We may waive all or part of a premium penalty if 
the failure to pay a premium in full and on time that gives rise to the 
premium penalty results from certain kinds of legal errors.
    (i) Erroneous legal interpretation--disclosed. If a failure to pay 
a premium in full and on time results from your reliance on an 
erroneous interpretation of the law, we waive a premium penalty that 
arises from the failure if you promptly and adequately call our 
attention to the interpretation and the relevant facts, and the 
erroneous interpretation is not frivolous. If the interpretation 
affects a filing that you make with us, you should call our attention 
to the interpretation in writing with the filing. If you rely on the 
interpretation to justify not making a

[[Page 66870]]

filing with us, you should call our attention to the interpretation in 
writing by the time prescribed for the filing not made.
    (ii) Erroneous legal interpretation--undisclosed. If a failure to 
pay a premium in full and on time results from your reliance on an 
erroneous interpretation of the law, and you do not promptly and 
adequately call our attention to the interpretation and the relevant 
facts, we may nevertheless waive a premium penalty if the weight of 
authority supporting the interpretation is substantial in relation to 
the weight of opposing authority and it is reasonable for you to rely 
on the interpretation.
    (iii) Recent change in the law. We may waive all or part of a 
premium penalty if the law changes shortly before the date a premium 
payment is due and the premium payment that you make by the due date 
would have been correct under the law as in effect before the change. 
In determining whether and to what extent to grant a waiver in a case 
of this kind, we consider such factors as the length of time between 
the change in the law and the premium due date, the nature and timing 
of any publicity given to the change in the law, the complexity of the 
legal issues, and your general familiarity with those issues.
    (4) Pendency of PBGC procedures. We may waive all or a part of a 
premium penalty that is attributable to the pendency of PBGC review or 
other procedures. For example:
    (i) If you request review of a premium penalty, and you make a non-
frivolous argument in your request for review that you were not 
required to pay the premium or that you were, and still are, unable to 
obtain the information needed to determine the premium, we may waive 
the portion of the premium penalty that accrues during the review 
process. If you make such a non-frivolous argument with respect to a 
portion of the premium, we may apply this principle to that portion.
    (ii) We may waive all or a part of a premium penalty if we believe 
that the pendency of PBGC procedures for identifying a premium 
delinquency and notifying you of the delinquency contributed to your 
failure to correct the delinquency more promptly.
    (5) Other circumstances. We may waive all or part of a premium 
penalty in other circumstances if we determine that it is appropriate 
to do so. We intend to exercise this waiver authority only in narrow 
circumstances.
    (c) Action or inaction of outside parties. In some cases an 
accountant, actuary, lawyer, pension consultant, or other individual or 
firm that is not part of your organization may assist you in complying 
with PBGC requirements. If the outside individual's or firm's action, 
inaction, or advice causes or contributes to a failure to pay a premium 
in full and on time, we apply our waiver authority as if the outside 
individual or firm were part of your organization. In the case of an 
outside individual who is part of a firm, we generally consider both 
the individual and the firm to be part of your organization.


Sec.  22  What is ``reasonable cause''?

    (a) General rule. In general, there is ``reasonable cause'' for a 
failure to pay a premium in full and on time to the extent that--
    (1) The failure arises from circumstances beyond your control, and
    (2) You could not avoid the failure by the exercise of ordinary 
business care and prudence.
    (b) Overlooking legal requirements. Overlooking legal requirements 
does not constitute reasonable cause.
    (c) Action or inaction of outside parties. If an accountant, 
actuary, lawyer, pension consultant, or other individual or firm that 
is not part of your organization assists you in complying with PBGC 
requirements, there is generally no reasonable cause for a failure to 
pay a premium in full and on time that arises from circumstances within 
the control of the outside individual or firm, or could be avoided by 
the exercise of ordinary business care and prudence by the outside 
individual or firm. The fact that you exercised care and prudence in 
selecting and monitoring the outside individual or firm is not a basis 
for a reasonable cause waiver.
    (d) Size of organization. If an organization or one or more of its 
employees is responsible for taking action, the size of the 
organization may affect what ordinary business care and prudence would 
require. For example, ordinary business care and prudence would 
typically require a larger organization to establish more comprehensive 
backup procedures than a smaller organization for dealing with 
situations such as computer failure, the loss of important records, and 
the inability of an individual to carry out assigned responsibilities. 
Thus, there may be reasonable cause for a small organization's failure 
to pay a premium in full and on time even though, if the organization 
were larger, the exercise of ordinary business care and prudence would 
have avoided the failure.
    (e) Size of premium underpayment. In general, the larger a premium, 
the more care and prudence you should use to make sure that you pay it 
in full and on time. Thus, there may be reasonable cause for a small 
underpayment even though, under the same circumstances, we would 
conclude that a larger underpayment could have been avoided by the 
exercise of ordinary business care and prudence.
    (f) Collection and enforcement. In determining whether reasonable 
cause exists, we do not consider either--
    (i) The likelihood or cost of collecting the premium penalty, or
    (ii) The costs and risks of enforcing the premium penalty by 
litigation.


Sec.  23  What kinds of facts does PBGC consider in determining whether 
there is reasonable cause for a failure to pay a premium?

    In determining the extent to which a failure to pay a premium in 
full and on time arose from circumstances beyond your control and the 
extent to which you could have avoided the failure by the exercise of 
ordinary business care and prudence--and thus the extent to which 
waiver of a premium penalty for reasonable cause is appropriate--we 
consider facts such as the following:
    (a) What event or circumstance caused the underpayment and when the 
event happened or the circumstance arose. The dates you give should 
clearly correspond with the underpayment upon which the premium penalty 
is based.
    (b) How that event or circumstance kept you from paying the premium 
in full and on time. The explanation you give should relate directly to 
the failure to pay a premium that is the subject of the premium 
penalty.
    (c) Whether you could have anticipated the event or circumstance.
    (d) How you responded to the event or circumstance, including what 
steps you took, and how quickly you took them, to pay the premium and 
how you conducted other business affairs. Knowing how you responded to 
the event or circumstance may help us determine what degree of business 
care and prudence you were capable of exercising during that period and 
thus whether the failure to pay the premium could or could not have 
been avoided by the exercise of ordinary business care and prudence.


Sec.  24  What are some situations that might justify a ``reasonable 
cause'' waiver?

    The following examples illustrate some of the reasons often given 
for failures to pay premiums for which we may assess penalties. The 
situation described in each example may constitute reasonable cause, 
and each example lists factors we consider in determining whether to 
grant a

[[Page 66871]]

premium penalty waiver for reasonable cause in a case of that kind.
    (a) An individual with responsibility for taking action was 
suddenly and unexpectedly absent or unable to act. We consider such 
factors as the following: The nature of the event that caused the 
individual's absence or inability to act, for example, the resignation 
of the individual or the death or serious illness of the individual or 
a member of the individual's immediate family; the size of the 
organization and what kind of backup procedures it had to cope with 
such events; how close the event was to the deadline that was missed; 
how abrupt and unanticipated the event was; how the individual's 
absence or inability to act prevented compliance; how expensive it 
would have been to comply without the absent individual; whether and 
how other business operations and obligations were affected; how 
quickly and prudently a replacement for the absent individual was 
selected or other arrangements for compliance were made; and how 
quickly a replacement for the absent individual took appropriate 
action.
    (b) A fire or other casualty or natural disaster destroyed relevant 
records or prevented compliance in some other way. We consider such 
factors as the following: The nature of the event; how close the event 
was to the deadline that was missed; how the event caused the failure 
to pay the premium; whether other efforts were made to get needed 
information; how expensive it would have been to comply; and how you 
responded to the event.
    (c) You reasonably relied on erroneous oral or written advice given 
by a PBGC employee. We consider such factors as the following: Whether 
there was a clear relationship between your situation and the advice 
sought; whether you provided the PBGC employee with adequate and 
accurate information; and whether the surrounding circumstances should 
have led you to question the correctness of the advice or information 
provided.
    (d) You were unable to obtain information, including records and 
calculations, needed to comply. We consider such factors as the 
following: What information was needed; why the information was 
unavailable; when and how you discovered that the information was not 
available; what attempts you made to get the information or reconstruct 
it through other means; and how much it would have cost to comply.


Sec.  25  What are some situations that might justify a partial 
``reasonable cause'' waiver?

    (a) Assume that a fire destroyed the records needed to compute a 
premium payment. If in the exercise of ordinary business care and 
prudence it should take you one month to reconstruct the records and 
pay the premium, but the payment was made two months late, it might be 
appropriate to waive that part of the premium penalty attributable to 
the first month the payment was late, but not the part attributable to 
the second month.
    (b) Assume that a plan administrator underpaid the plan's flat-rate 
premium because of reasonable reliance on erroneous advice from a PBGC 
employee, and also underpaid the plan's variable-rate premium because 
the plan actuary used the wrong interest rate. A PBGC audit revealed 
both errors. PBGC billed the plan for a premium penalty of $5,000--
$1,000 for underpayment of the flat-rate premium and $4,000 for 
underpayment of the variable-rate premium. The plan administrator 
requested a waiver of the premium penalty. While the erroneous PBGC 
advice constituted reasonable cause for underpaying the flat-rate 
premium, there was no showing of reasonable cause for the error in the 
variable-rate premium. Therefore, we would waive only the part of the 
premium penalty based on underpayment of the flat-rate portion of the 
premium ($1,000).

Procedures

    [Reserved.]

    Issued in Washington, DC, this 13th day of November, 2006.
Elaine L. Chao,
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 
interim final rule.
Judith R. Starr,
Secretary, Board of Directors, Pension Benefit Guaranty Corporation.
 [FR Doc. E6-19436 Filed 11-16-06; 8:45 am]
BILLING CODE 7709-01-P