The New PBGC Voluntary Correction Program

By Peter S. Alwardt and Alan Jacobs

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Participant Notices

Under section 4011 of the Employee Retirement Income Security Act (ERISA), certain underfunded plans are required to issue a notice to participants of the plan’s funding status and limits on the PBGC’s benefit guarantee. Generally, a plan sponsor must issue a participant notice for a plan year if a variable rate premium is payable for that plan year, unless the plan meets the deficit reduction contribution exception test for that plan year or the prior plan year.

The Job Creation and Worker Assistance Act of 2002 (JCWAA) made a temporary change to the premium interest rate that did not apply for the purposes of determining whether a participant notice was required. Thus, a plan administrator may be required to provide a participant notice for 2002 or 2003 even though a variable-rate premium was not paid for that plan year.

The Pension Plan Funding Equity Act of 2004 (PPFEA) changed the rules for determining the required interest rate for premium payment years, which affects the 2004 and 2005 plan years. Under the PPFEA, plan administrators may use the premium interest rate for the purposes of determining whether a participant notice is required. Thus, a participant notice may be required for the 2004 or 2005 plan year only if a variable-rate premium is payable for that plan year.

Participant notices for a plan year are due within two months after the due date (including extensions) for the plan’s Form 5500 for the prior plan year. This due date is the same as the plan’s summary annual report, so both documents may be issued together.

Plan administrators are required to certify in the PBGC’s premium filing one of the following: a participant notice was not required, a participant notice was issued, or an explanation is attached (e.g., that the participant notice was issued late).

Participant notices have been required for large plans (generally more than 100 participants) since the 1995 plan year, and for small plans (generally 100 or fewer participants) since 1996. Initially, only a few plans had to provide participant notices, because most plans did not have funding problems. In the last several years, more plans have become underfunded because of low interest rates and poor investment returns, requiring more plan sponsors to issue participant notices.

PBGC surveys have found rising rates of noncompliance with the participant notice requirements. The PBGC attributes the noncompliance in part to lack of awareness or understanding of the rules. The VCP is designed to be a transition to the new enforcement program.

Voluntary Compliance Program

The VCP is intended to encourage administrators to correct participant notice compliance failures and to facilitate future compliance. Under the program, the PBGC will not assess penalties for failure to provide a 2002 or 2003 participant notice if the failure is corrected in accordance with the program. The PBGC will not pursue pre-2002 participant notice failures unless there is a failure in 2002 or 2003 that is covered under the VCP, but that failure does not qualify for penalty relief under the program.

The VCP covers any participant notice for a 2002 or 2003 plan year that was due before May 7, 2004, and that is not subject to a PBGC audit as of May 7, 2004. The date a participant notice is due is determined without regard to any deadline extension resulting from a disaster relief notice.

The PBGC will not assess a penalty for any notice that is covered under the VCP if the plan administrator issues a corrective notice and notifies the PBGC that it is participating in the VCP. A model VCP notice is included in the guidance. There is a special rule if the only failure is a late issuance that was corrected before May 7, 2004. The corrective notices must comply with the VCP requirements.

The requirements for the corrective notice allow a plan sponsor to issue one notice that serves as a corrective notice for the 2002 or 2003 plan years and a participant notice for the 2004 plan year. A 2004 notice must include the funded current liability percentage for the 2003 or 2004 plan year. Under the VCP, whether the plan administrator is correcting a failure for 2002, 2003, or both, the corrective notice must include the funded current liability percentage for the 2002 and 2003 plan years, and may also include it for 2004. The VCP corrective notice must contain the information required in a 2004 participant notice. The plan administrator is not required to inform participants if it had a participant notice failure for the 2002 or 2003 plan year, or if it is participating in the VCP, but may choose to include that information in the corrective notice.

Because the VCP corrective notice is tied to the requirements for the 2004 participant notice, rather than the requirements for the 2002 or 2003 notices, the corrective notice must be issued only to those individuals entitled to receive the 2004 participant notice.

The plan administrator must notify the PBGC of its participation in the VCP by the 30th day after the due date for issuing the corrective notice. The notification must include a copy of the corrective notice and a contact person’s name and telephone number. The notification can be made by mail, e-mail, delivery service, or by hand. In addition, beginning with the 2005 PBGC premium forms, plan administrators must indicate that the plan is participating in the VCP. Notification to the PBGC of participation in the VCP can amend any erroneous certification that may have been submitted on the plan’s PBGC premium filing, as long as the correction notice meets all of the program’s requirements.

Effect on Companies

Plan sponsors that have used the JCWAA interest rate to determine whether a participant notice was required should consider rerunning their calculations using the correct interest rate. If a participant notice should have been issued for 2002 or 2003, the plan administrator should consider entering the VCP, given the PBGC’s pending penalty policy. The PBGC has indicated that plans that participate in the VCP only as a precaution do not gain extra protection from possible audits for compliance with the participant notice, PBGC premium, or other PBGC requirements.

As an alternative, some plan sponsors will issue the notice automatically as part of their annual plan communication to participants to avoid the possibility of noncompliance.