Proposes Changes to Participant Notice Penalties
Peter S. Alwardt and Alan Jacobs
AUGUST 2005 - The
Pension Benefit Guaranty Corporation (PBGC) has proposed an
expanded enforcement program that includes a new penalty structure
for administrators of underfunded pension plans that fail
to inform participants of their plan’s funded status
and the PBGC’s guarantee limits.
ERISA section 4011, certain underfunded defined benefit
plans are required to issue a notice to participants regarding
the plan’s funding status and the limits on the PBGC’s
guarantee. The participant notice is designed to ensure
that participants understand the financial status of their
plans and the potential consequences of underfunding on
their promised benefits.
ERISA section 4071 and the related regulations, the PBGC
may assess a penalty of up to $1,100 per day for certain
failures to provide notices or other material information
in a timely manner, including failure to provide a participant
notice. The penalty is assessed against the plan sponsor,
and may not be paid from plan assets.
1995, the PBGC established a penalty policy with guidelines
on penalty amounts, facts-and-circumstances adjustments
on those amounts, and penalty waivers for reasonable cause.
The PBGC issued a proposed rule in 2001 to codify the 1995
penalty policy. The proposal maintained the 1995 guidelines
and provided additional guidance on whether there is “reasonable
cause” that would justify a waiver of penalties.
on its experience in enforcing the participant notice requirements,
the PBGC has reconsidered the 2001 proposal. The PBGC has
concluded that penalties should be tied primarily to the
number of plan participants rather than to the number of
days a notice is delinquent, because the significance of
a delinquent notice increases with the number of plan participants
affected. Accordingly, the PBGC has issued a supplemental
proposal regarding the delinquency of participant notices
that still allows for facts-and-circumstances analyses to
ensure that the penalty fits the violation.
the proposed policy, the penalty equals the number of participants
in the plan multiplied by the applicable per-participant
information penalty rate. The per-participant rate depends
upon whether the failure is a repeat violation and whether
the correction is related to a PBGC audit.
the correction is made on or before the date that the PBGC
issues written notice that it is or may be auditing compliance
with the participant notice requirements, the per-participant
information penalty rate would be $5 ($20 for repeat violations).
If the correction is made afterwards, the per-participant
information penalty rate would be $40 ($100 for repeat violations).
the plan administrator corrects the violation within one
year after the participant notice was originally due, the
PBGC would prorate the penalty based on the number of days
before correction, regardless of whether the correction
was pre- or post-audit. Thus, the formulas would be as follows:
One year or more: Number of participants x per-participant
Less than one year: (Number of participants x per-participant
penalty rate) x (Number of days late/365).
the PBGC provides for a reduction in the penalty for failures
of less than one year, it will not increase the penalties
for corrections made after a year.
count. The PBGC generally uses the number
of plan participants that is used for premium payment purposes
for the plan year for which the participant notice is required.
Accordingly, participant count is normally the number of
participants on the last day of the prior plan year. The
PBGC may make an appropriate adjustment if this participant
count is significantly higher or lower than the number of
persons entitled to receive the participant notice.
violations of notice requirement. A repeat
violation occurs when failure to issue a participant notice
for a plan year occurs after the date the plan administrator
knows, or should have known, that there was notice failure
for a previous plan year that was not de minimus. The PBGC
would disregard a failure for any of the following:
A plan year more than six years before the one in question;
A 2002 or 2003 plan year, provided the 2002 or 2003 participant
notice failure meets the requirements for penalty relief
under the PBGC’s voluntary compliance program (VCP);
pre-2002 plan year, except where there is a 2002 or 2003
participant notice failure covered by the VCP that does
not meet the requirements for penalty relief under that
corrective notice. Corrections prior to a
PBGC audit would be valid if the PBGC determines that the
notice serves the statutory purposes of the notice requirement.
The PBGC proposes a correction safe harbor under which the
notice would be valid if it included, in addition to the
information required in the delinquent notice, all information
required in all later notices that were due on or before
the corrective notice is issued, and if it was issued to
the persons entitled to receive the most recent notice that
was due on or before the date the corrective notice was
the plan was not required to issue a notice for a particular
plan year, the safe harbor would apply just as if the plan
had been required to issue the notice for that year. Although
the PBGC would like corrections to be made as soon as possible,
it recognizes that plan administrators may choose to combine
a “safe harbor” corrective notice and a required
participant notice in the same document. The PBGC would
not treat such a document as violating the notice requirement
in ERISA regulations section 4011.10(d), which states that
additional information may be included only if it is in
a separate document.
corrections made in conjunction with a PBGC audit, the corrective
participant notice would be valid only if the PBGC approves
adjustments. The PBGC would
decrease the penalty when there is a partial failure to
comply with the participant notice requirements, other than
the late issuance of an otherwise valid notice. The penalty
would be increased when the PBGC determines upon audit that
there was a failure to comply with the notice requirements
and the plan administrator does not promptly issue a corrective
notice approved by the PBGC. This “upward adjustment”
is expected to be significantly higher than the regular
participant notice penalty policy would apply to participant
notices for 2004; 2002–2003 notices that do not meet
the penalty relief requirements under the PBGC’s VCP;
and pre-2002 notices when there is a 2002 or 2003 notice
failure that is covered by the VCP but that does not meet
the program’s requirements for penalty relief.
PBGC will not enforce the new policy until the final version
becomes effective (at least 30 days after it is published
in the Federal Register). The PBGC intends to apply a transition
rule for failures that start before the effective date of
the new policy that are corrected no later than one year
after that effective date, including delinquencies corrected
before the new penalty policy becomes effective. For these
delinquencies, the guideline penalty amount would be the
lesser of the amount calculated under the current policy
and that calculated under the new policy.
an economic environment that has recently seen defined benefit
plan funding issues, this new enforcement initiative underscores
the PBGC’s efforts to ensure that plan participants
are apprised of any funding problems. Plan sponsors that
fail to provide the requisite participant notices should
be aware of this new enforcement policy and the availability
of the PBGC’s VCP.
S. Alwardt, CPA, is the president of Eisner Retirement
Solutions LLC, and Alan Jacobs is the chief
actuary of Eisner Actuarial Services LLC, New York, N.Y.
Note: For more information on the VCP, please see
“The New PGBC Voluntary Correction Program” on