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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The Pension Benefit Guaranty Corporation (PBGC) has issued proposed regulations that streamline and make consistent measurement dates and definitions for calculating variable rate premiums (VRPs) to comply with the Pension Protection Act of 2006 (PPA; P.L. 109-280).
The PPA changed the funding rules in Title I of ERISA and in the Code on which the variable rate premium is based. Section 401(a) of the PPA amends the variable rate premium provisions of ERISA §4006 to conform to changes in the funding rules and to eliminate the full-funding limit exemption from the variable rate premium. The proposed rules would also revise the regulations under ERISA §4007 (Payment of Premiums) to alter due dates of variable rate premiums (in some cases) to better coincide with the new definitions of “unfunded vested benefits” (UVB) and “premium funding target.” Overall, the regulations would be streamlined to provide single applicable valuation dates or determination dates for given calculations. In addition, the rules applicable to “small plans,” defined as less than 100 participants, have been altered to more closely mirror the availability of plan data and provide for calculations based on similar data rather than data at different points in time.
In the proposed regulations, the PBGC would resolve an ambiguity concerning the date as of which UVBs are to be measured. ERISA §4006(a)(3)(E)(ii) , which was not changed by the PPA, refers to two plan years—the “plan year” for which the VRP is being paid (the premium payment year) and the “preceding plan year,” at the close of which UVBs are to be measured. New ERISA §4006(a)(3)(E)(iii) refers only to the “plan year” in defining UVBs. A plan’s funding target and assets—the elements of UVBs—are to be measured as of the valuation date, which need not be the close of the plan year and which for many plans (those not small enough to elect otherwise) must be the beginning of the plan year. The PBGC proposes to require that UVBs be measured as of the valuation date in the premium payment year rather than a date in the prior plan year.
Because the proposed rules require that UVBs be measured as of the valuation date for the premium payment year (referred to as the “UVB valuation date”), the premium due dates and penalty rules would be adjusted to accommodate the fact that this UVB valuation date is later (by at least a day and in some cases perhaps as much as a year) than “the close of the preceding plan year,” used under pre-PPA ERISA §4006(a)(3)(E).
Under new ERISA §303(d)(1), “the funding target of a plan for a plan year is the present value of all benefits accrued or earned under the plan as of the beginning of the plan year.” New ERISA §303(g) , however, makes clear that the funding target is to be determined as of the valuation date, which for small plans may not be the beginning of the plan year. The proposed rules reflect a decision that ERISA §303(d)(1) requires that the benefits to be valued as of the valuation date are those accrued as of the beginning of the plan year. If the valuation date is later than the first day of the plan year, accruals after the beginning of the plan year are to be ignored.
Similarly, the proposed regulations resolve language in ERISA concerning the valuation date of plan assets. In order to distinguish the funding target used for premium purposes from that used for funding purposes, the proposed regulations introduce the term “premium funding target.” In general, this means the funding target determined by taking only vested benefits into account and by using the special segment rates described in new ERISA §4006(a)(3)(E)(iv) (the “standard premium funding target”).
The proposed regulations also permit filers to use an “alternative premium funding target” that may be less burdensome to use than the standard premium funding target, if certain conditions apply. The alternative premium funding target, once elected by the plan, would be irrevocable for a period of five years. As financial markets fluctuate, the averaged rates used for the alternative premium funding target will fluctuate above and below the spot rates used for the standard premium funding target. Locking in the election for five years will keep plans from calculating the premium funding target both ways each year and using the smaller number. The reason for permitting use of the alternative premium funding target is not to reduce premiums, but to reduce the burden of computing premiums.
The proposed rules do not include an “alternative calculation method” for rolling forward prior year values to the current year because it would be both unnecessary and impracticable under the segment rate methodology under the PPA.The PBGC anticipates that most plans that are required (or choose) to perform funding valuations as of the beginning of the plan year (and whose UVB valuation date is thus the first day of the premium payment year) will be able to determine their UVBs by the VRP due date currently provided for in PBGC’s premium payment regulations (generally, ten and a half months after the beginning of the plan year). The PBGC proposes to revise its due date and penalty structure to give smaller plans more time to file and larger plans the ability to make estimated VRP filings and then correct them without penalty.
The PBGC’s current due date structure for fl at- and variable-rate premiums is based on two categories of plans: those that owed premiums for 500 or more participants for the plan year preceding the premium payment year (“large” plans) and those that did not. The new structure is based on three categories. The large-plan category remains the same. A new “mid-size” category will consist of plans that owed premiums for 100 or more, but fewer than 500, participants for the plan year preceding the premium payment year. A category of “small” plans will include all other plans. The participant count for this purpose will continue to be the prior year’s count; the proposed rules provide uniform language for determining both single- and multiemployer plans’ participant counts for determining due dates, eliminating a slight language difference in the existing regulations. The 100-participant break-point between the small and mid-size categories approximates the break-point in the PPA funding rules between plans that are required to use beginning-of-the-year valuation dates under ERISA §303(g)(2)(A) and those permitted to use another date under ERISA §303(g)(2)(B).
For plans in the “small” category, the PBGC proposes to make all premiums due on the last day of the sixteenth month that begins on or after the first day of the premium payment year (for calendar-year plans, April 30 of the year following the premium payment year). This will give any small plan at least four months to determine UVBs. The same due date will apply to both variable- and fl at-rate premiums. While there is no reason these small plans cannot determine the flat-rate premium by the current due date (the 15th day of the tenth month that begins on or after the first day of the premium payment year), the PBGC wants to avoid requiring them to make two filings per year.
For mid-size plans, the PBGC proposes to retain the current premium due date—the 15th day of the tenth month that begins on or after the first day of the premium payment year (October 15th for calendar-year plans)—for both flat- and variable-rate premiums. In recognition of the possibility that circumstances might make a final UVB determination by the due date difficult or impossible, however, the PBGC proposes to permit estimated VRP filings and to provide a penalty-free “trueup” period to correct an erroneous VRP estimate. Under this provision, the VRP penalty would be waived for a period of time after the VRP due date if, by the VRP due date, the plan administrator submits an estimate of the VRP that meets certain requirements and pays the estimated amount. The waiver of the penalty would cover the period from the VRP due date until the small-plan due date or, if earlier, the filing of the final VRP. Interest would not be suspended, however, if the VRP estimate fell short of the correct amount. In that case, interest would accrue on the amount of the underpayment from the date when the payment was due to the date the shortfall was paid.
The due date and penalty structure for “large” plans would be the same as for “mid-size” plans except that the early due date for the flat-rate premium under the existing regulation would be retained, along with the related “safe harbor” penalty rules.
The proposed rules also include a clarification of the meaning of “vested” benefits, specialized rules for recordkeeping and audits, rules applicable to new and newly covered plans, and a mandatory electronic filing requirement, among other items.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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