Reducing PBGC Plan Premiums?



All employer sponsored defined benefit plans pay insurance, with premiums set by Congress to the Pension Benefit Guaranty Corporation, which is an agency of the U.S. Government. Read on for insights about how PBGC premiums may be reduced. 

Focus on Participant Count

PBGC premium rates are paid per participant, therefore, the total paid could be reduced by decreasing the participant count in a plan, as experts note: Depending on the circumstances of the plan, there may be ways for defined benefit plan sponsors to reduce their PBGC premiums, including utilizing enhanced cash-out provisions and lift-out strategies. Of course, one must ensure the language of the governing plan document allows for such actions.” Hypothetically, for example, a company with “many former employees with small benefit amounts and a number of retirees taking benefits,” could leverage these two strategies, which would result in lowering the PBGC premiums paid:

1.SECURE 2.0 Act has increased the cash-out amount limit from $5,000 to $7,000, and this feature would allow the plan sponsor to require separated participants with benefits under this threshold to take distributions….This tactic removes the former participants from the plan and, consequently, the number of participants for which PBGC premiums are due. To illustrate how this is applied, reducing the participant count by 10 could reflect $1,010 in savings (10 x $101) in premiums. The PBGC premium rates are also indexed each year, so savings for future years would be higher.  

  1. For participants currently taking benefits, a “lift out” strategy could be used whereby an insurance carrier essentially buys these participants out of the plan and the carrier takes on the obligation to pay benefits. Once the transaction is completed the participants are no longer in the plan and PBGC premium savings are realized.

Plan sponsors need to remember that utilization of these strategies for lowering PBGC premiums is only viable if they are in sync with the governing plan document. Indeed,  successfully fulfilling the ERISA fiduciary obligations associated with plan sponsorship requires deep knowledge of the plan document, which serves as “the master guide for how the plan works, and it’s important because it’s the final word for making sure a plan is operating correctly.” Failure to follow a company sponsored retirement plan’s own governing documents can–and does–lead to DOL investigation and litigation.

Plan sponsors can learn more about the Pension Benefit Guaranty Corporation, including how premiums are established, via this Fact Sheet. With increasingly strict fiduciary standards anticipated, it is also wise for plan sponsors to protect themselves against allegations of breaches: as fiduciaries, we “can be held personally liable for damages, even decades into the future.” Armed with Colonial’s liability coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to further protect you, your business and the retirement plan.

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