On December 1, 2000, the PBGC published final rules designed to simplify premium payment and calculation rules. The changes to the plan termination insurance premium regulations fall into three areas. The areas involve (a) the payment of prorated premiums for short plan years, (b) the definition of participant for purposes of determining the amount of premiums, and (c) a simplified way to determine if a plan is exempt from the premium requirement due to meeting the requirements of Section 412(I). The changes are effective January 1, 2001.

Prior to the change, if a plan had a short plan year, a Plan Administrator had to pay a full 12-month premium and then file for a refund. It would also be possible to use the overpayment as a credit to be applied against future premium payments. For plan years beginning after December 31, 2000, the amended regulations give Plan Administrators the option to pay a prorated premium for a short plan year.

In addition, Plan Administrators may pay a prorated premium even if the short plan year has not ended before the premium due date. The preamble to the changes states that a Plan Administrator may anticipate that the plan will have a short plan year, estimate its length, and pay a prorated premium accordingly. If it turns out, for whatever reason, that the plan year is longer than anticipated, the Plan Administrator must make up any premium underpayment (which is subject to interest and penalties from the due date forward).

The amended regulations also provide that there is no short plan year for PBGC premium purposes if a plan is amended to provide a change in the plan year, if the plan disappears in a multiple-plan transaction (such as a plan merger, consolidation, or spin-off) at or before the time the new plan year begins. In those cases, proration is not available.

Large plans having 500 or more participants must pay estimated premiums early in the year. If a Plan Administrator of such a plan incorrectly anticipates an amended plan year to be shorter than it turns out to be, the amended regulations provide "safe harbor" penalty relief, which applies for an underpayment of the flat-rate premium that is due by the early filing due date (the end of February for calendar-year plans) where a plan adopts an amendment that changes the plan year, and the resulting short year has not ended by the early filing due date. The regulation waives any underpayment penalty accruing between the estimated payment due date and the due date for the final filing where the penalty arises from reliance on the short-year amendment.

Participant definition

A plan's flat-rate premium is based on the number of participants in the plan on the premium snapshot date. A "participant" is defined in the regulations solely for the purpose for making the premium calculation and is not used for other applications of ERISA or the Internal Revenue Code. Under the old regulations, a person who was earning or retaining credited service under the plan was counted as a participant without regard to whether the plan was obligated to provide benefits for that person. Under the amended regulations, an individual is excluded from the definition of a "participant" if the person has no accrued benefit on the date of determination and the plan has no other benefit liabilities with respect to that individual.

One result of this change is that newly created plans that do not grant past service credits will typically owe no flat-rate premium for their first year. This is because the premium snapshot date for a new plan comes at the beginning of the premium payment year when participants have not yet earned future service credits (on which accrued benefits are based).

In addition, the new definition of participant will typically exclude:

1. plan participants in permanent part-time jobs who work too few hours to meet their plans' minimum service requirements for accrual of benefits; and
2. plan participants in a plan that is frozen for benefit accruals before those participants have had a chance to accrue benefits.

Finally, under the amended regulations, a non-vested individual is considered to no longer be a "participant" after the individual incurs a one-year break in service, as defined in the plan -- regardless of whether the individual has been absent from employment until the first anniversary of separation. A non-vested participant will also no longer be a participant upon death or receipt of a cashout distribution under the terms of the plan. The amended regulations also make it clear that a person is no longer a participant when all benefit liabilities with respect to that person have been provided for, either through payment or the purchase of an irrevocable commitment from an insurer to provide the benefit.

Code Sec. 412(h)(2) exempts certain fully insured plans from plan funding requirements. To be exempt, a plan must meet the requirements of Code Sec. 412(i). Under the old regulation, the exemption applied if the plan was described in Code Sec. 412(i) throughout the plan year preceding the premium payment year.

The amended regulations provide that the exemption applies to a plan if it is described in Section 412(i) on the premium snapshot date.