PBGC “Alternative Method” Premium Election Problems

We’ve been following the recent saga where the PBGC is not allowing some employers to correct their 2009 PBGC filings for apparently innocent mistakes. Now some congressional heavyweights are adding their voice to the mix.

Under the new post-PPA PBGC filing rules, an employer may make an election to use either the “Standard Method” or an “Alternative Method” to calculate their annual pension insurance premiums. Many employers chose to use the Alternative Method during 2009 because it resulted in lower premiums. However, the Standard Method is the default election so there are two steps a plan sponsor must complete in order to make a valid election to use the Alternative Method.

1. Check box on Line 5 of the PBGC Comprehensive Premium Filing form. This box is only selected the first year that the Alternative Method is used. It essentially alerts the PBGC that the plan sponsor has committed to using the Alternative Method for the next five years.

2. Check box on Line 7(d)(1) to indicate that the Alternative Method is being used for the current premium filing. This box must be check each year that the Alternative Method is being used to calculate premiums.

The problem is that many plan sponsors elected to use the Alternative Method for the first time in 2009 and correctly filled out Line 7(d)(1), but they forgot to check the box on Line 5. The PBGC has taken the hard-line position that this is an erroneous premium filing and therefore the default Standard Method is still in effect (and it’s now too late to switch to the Alternative Method for 2009), so plan sponsors are face with many unpleasant consequences, including:

• Higher pension insurance premiums for 2009, since they must now be calculated using the Standard method.

• Late-payment penalties on the premiums. However, PBGC representatives have indicated that they will be lenient in assessing these penalties so plan sponsors should appeal if they receive a penalty notice. I guess it never hurts to ask?

The American Benefits Council sent a letter to the PBGC protesting their hard-line interpretation of the filing instructions, but the PBGC has resisted any leniency so far. Now, several prominent congressional leaders have written a letter to the director of the PBGC asking him to reconsider given the circumstances. We’ll see what the outcome is, but this issue highlights the importance of reading government filings and their instructions VERY carefully in order to avoid unintended and costly mistakes.