For many sponsors of single-employer pension plans, the minimum cash funding requirement is no longer the most important number discussed with their actuaries every year. Instead, pension plan sponsors have shifted their focus to managing their PBGC premiums.
PBGC Premiums Defined
The PBGC premium is essentially a tax paid to a government agency to cover required insurance for the plan and the participant benefits in the event that the plan sponsor goes bankrupt. The annual premium is calculated in two parts – the flat-rate premium and the variable-rate premium – and is subject to a premium cap.
The flat-rate premium is calculated as a rate per person.
The PBGC variable-rate premium is an amount that each plan sponsor pays based on the underfunded status of its plan.
The variable-rate premium cap is a maximum amount that a plan sponsor of a significantly underfunded plan has to pay. It is calculated based on the number of participants in the plan. There are other caps that apply for small plans.
2020 Premiums Announced
For 2020, the flat-rate premium amount is $83 per person. This is 168% higher than the rate of $31 per person at the beginning of this decade.
For 2020, the variable-rate premium has jumped to $45 per $1,000 of the underfunded amount. Up until 2013, that rate was $9 per $1,000. That amounts to a 400% increase in just seven years.
The cap for 2020 is $561 per person; which means for a 10,000-life plan, the maximum PBGC variable premium is $5,610,000.
Therefore, the PBGC premium for a 10,000-life plan at the premium cap would total $6,440,000.
More information about various strategies to manage PBGC premiums can be found here: Managing PBGC Premiums: There is More Than One Lever.
More information regarding PBGC’s Current and Historical Premium Rates can be found on the PBGC’s website link above.
Questions? Contact the Findley consultant you normally work with, or contact Colleen Lowmiller at email@example.com, 216.875.1913.
Published October 29, 2019
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