Many single employer defined benefit plan sponsors have seen their plans’ Pension Benefit Guaranty Corporation (PBGC) insurance premiums rise like a hot air balloon in recent years. The PBGC provides benefits to participants in plans where the sponsor is unable to continue the plan and where liabilities exceed assets.
The Consolidated Appropriations Act of 2023, signed into law on December 29, 2022, may help keep PBGC premiums from reaching stratospheric levels, and recognizes that the PBGC single-employer insurance program is well funded. This legislation ran to over 1,500 pages, but among those pages are retirement plan provisions, collectively known as SECURE 2.0. One provision changes the calculation of PBGC premiums beginning in 2024.
Background
Each year, single employer defined benefit plans pay premiums to the PBGC based on participant headcount and plan funding level.
- The headcount portion is known as the flat-rate premium and plan sponsors calculate it by multiplying the number of plan participants for the year by that year’s flat-rate premium per participant rate.
- The plan funding level portion of the total PBGC premium is called the variable-rate premium. This premium covers the risk that the PBGC will have to assume participant benefit payments for a plan sponsor in a distressed situation. Using PBGC rules, the plan determines its unfunded vested benefits (UVBs) for the premium payment year. For each $1,000 of underfunding, a year-specific rate applies. When underfunding is significant, variable-rate premiums are capped at an amount equal to the participant count multiplied by that year’s per participant cap.
The chart below shows how the per $1,000 rate and the per participant cap increased since 2013 from legislated ad hoc adjustments and indexing. Recent changes have been based on national average wage inflation. (Special rates apply to cooperative and small-employer charity plans, and very small employers may be eligible for a special cap.) Flat-rate premium rates, while not shown on the chart, have steadily increased as well, and rose from $88 per person in 2022 to $96 for 2023.
These increasing variable-rate premium caps and per $1,000 rates, coupled with a low interest rate environment that boosted vested liabilities, caused variable-rate premiums to become a substantial expense for many plans. PBGC premium levels helped drive the popularity of de-risking through annuity purchases and lump sum windows in recent years. De-risking also reduced the headcount portion of overall premiums.
Secure 2.0 Changes
After 2023, increases based on wage inflation no longer apply to the per $1,000 rates. They will remain at the $52 level. The legislation did not affect per participant cap provisions, so it will continue to increase under the rules already in effect, as will the flat-rate premium rates per participant.
Implications
Assuming unfunded vested benefit levels remain stable from year to year, plans not subject to the per participant cap will have lower premiums than previously anticipated. Plans with considerable underfunding that received some premium relief through the application of the per participant cap will begin to see that wear away.
Plans with higher funding levels and not subject to the cap will be able to project their premium exposure more easily from year to year. Of course, the future economic environment, including recent interest rate increases and market turmoil, will affect the calculation of the unfunded vested benefits in such projections.
Note that de-risking measures that reduce the participant count can still reduce the per participant variable-rate cap, as well as the flat-rate premium, and remain a relevant cost-saving strategy.