What Impact Will the Budget Bill Have on Your DB Plan?

While most would agree it is good to see progress towards a budget bill (The Ryan-Murray Bipartisan Budget Act) that will avoid another government shutdown, reduce the deficit and relieve some of the sequestration spending cuts, there is always a flip side to every coin. For single employer defined benefit (DB) plan sponsors, the flip side is the bill also includes the second significant increase in two years to Pension Benefit Guaranty Corporation (PBGC) premiums.

It is anticipated that this bill will be signed into law with the new premium increases taking effect in plan years beginning with 2015. Depending on a plan’s participant count and how well funded the plan is, plan sponsors could see an increase of 155% or more in total PBGC premiums. Consider the case for this hypothetical DB plan. The plan has 250 participants, $10 million in assets, and an 85% funded ratio.  Assuming everything else stays the same, total PBGC premiums would increase from $26,385 in 2013 to $67,185 in 2016 – a 155% increase.

The chart below includes details about the rate increases included in the bill.

Flat rate per plan participant

Variable Premium – per $1000 of unfunded vested benefits

Plan Year

Budget Bill

Current Law

Budget
Bill

Current
Law

2013

$42

$42

$9

$9

2014

49

49

14

14

2015*

57

49

24

18

2016*

64

49

29

18

*Prior year rate increased with wage inflation before adding rate increase; table assumes zero wage inflation.

What is the silver lining for DB plan sponsors? They have time to react to this change. There are steps plan sponsors can take to reduce the impact of the increases and budget for them. Plan sponsors should work with their financial professional and actuary to begin planning now for the increases.

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Affiliation Disclosures

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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