The headlines about the Bipartisan Budget Act of 2015 were generally focused on how the legislation raises the debt ceiling through 2017, sets federal spending through the 2016 and 2017 fiscal years, and eases strict caps on spending. But, more importantly for many employers, the act also includes a number of changes related to defined benefit pension plans.
Changes in the Pension Benefit Guaranty Corporation (PBGC) premium rates
Single-employer defined benefit pension plans that are covered by the termination insurance program under the Employee Retirement Income Security Act of 1974 (ERISA) must pay the PBGC annual flat-rate premiums. In addition, variable-rate premiums may be required if single-employer plans have unfunded vested benefits (UVBs). The 2015 budget act increases these rates for single-employer plans as follows:
Increase in flat premium rates
Single-employer plans must pay the PBGC a flat-rate premium for each individual who is a participant in the plan during the year. The premium is for the PBGC’s guarantee of basic benefits under Title IV of ERISA.
The flat-rate premium for a plan is equal to the applicable rate multiplied by the plan’s participant count. The flat-rate premium for plan years beginning in 2015 was $57 per participant. This rate rises to $64 per participant for plans beginning in 2016.
Under the 2015 budget act, the single-employer flat-rate premium will be raised to $69 for 2017, $74 for 2018 and $80 for 2019, and then re-indexed for inflation thereafter.
Increase in variable premium rates
In addition to the flat rates, a single-employer defined benefit plan must pay a variable-rate premium if it has unfunded vested benefits as of the close of the preceding plan year. The variable premium is subject to an annual per-participant cap.
The variable-rate premium is the applicable dollar amount for each $1,000 (or fraction thereof) of the plan’s unfunded vested benefits for the premium payment year, divided by the number of participants in the plan as of the close of the preceding plan year. The variable-rate premium, which is indexed for inflation, will equal $30 per $1,000 of underfunding in 2016, up from the 2015 rate of $24.
Under the budget act, for plan years beginning after Dec. 31, 2016, the variable rate premium will continue to be indexed for inflation, but will be increased by an additional $3 in 2017 and an additional $4 each year for 2018 and 2019. The annual per-participant cap, which is $500 in 2016 is not increased by the new budget act, but the act indexes it for inflation beginning in 2017.
The table below summarizes the new rates, prior to indexing, for 2017 through 2019:
Single-Employer Plans
| Plan years beginning in | Per participant rate for flat-rate premium | Variable-rate premium Rate per $1,000 UVBs |
Variable-rate premium Per participant cap |
| 2017 | $69 | $33* | $500* |
| 2018 | $74 | $37* | $500* |
| 2019 | $80 | $41* | $500* |
Rates shown with an asterick (*) are subject to indexing and therefore might be higher than the amount shown above. After 2019, all rates are subject to indexing. There are no scheduled increases (other than indexing) for years after 2019.
Pension premiums due one month earlier beginning in 2025
Currently, the flat-rate and variable-rate PBGC premium filing due date is the 15th day of the 10th full calendar month that begins on or after the first day of the premium payment year. Thus, for calendar-year plans, the due date is October 15.
Under the budget act, for plan years beginning in 2025, the premium due date will be the 15th day of the ninth calendar month beginning on or after the first day of the premium payment year. Thus, for calendar-year plans, the due date will be September 15. It should be noted the due date for paying the premiums under the new budget act will no longer coincide with the extended due date of filing the plan’s Form 5500.
Mortality table flexibility
Private sector defined benefit pension plans generally must use mortality tables prescribed by the U.S. Treasury for purposes of calculating pension liabilities. Plans may, however, use a separate mortality table under certain circumstances.
Under the budget act, for plan years beginning after Dec. 31, 2015, the determination of whether the plan has credible information will be made in accordance with established actuarial credibility theory, which is materially different from the current rules. In addition, the plan may use tables that are adjusted from the Treasury tables if such adjustments are based on a plan’s specific experience.
Extension of current funding stabilization percentages
Single-employer defined benefit pension plan liabilities previously could be valued by taking into account the interest rates on investment-grade corporate bonds during the prior two years. With the decline in interest rates and in investment performance, the Moving Ahead for Progress in the 21st Century Act of 2012 and the Highway and Transportation Funding Act of 2014 were enacted. These acts provided for pension funding relief by establishing rules for adjusting interest rates for valuing liabilities through 2021.
The Bipartisan Budget Act extends these stabilization efforts with increased interest rates through 2023. Increased interest rates will continue to provide lower required minimum contributions.
Time to review your plan
If your organization offers a defined benefit pension plan, you will want to be sure that your plan is in compliance with the new rules enacted under the budget act. Give us a call if you have questions or need assistance. A member of our employee benefits team will be happy to help.