PBGC penalty structure comment letter

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July 1, 2004 VIA EMAIL Office of the General Counsel Pension Benefit Guaranty Corporation 1200 K Street NW Washington, DC 20005-4026 Re: Comment letter on proposed new penalty structure for failure to issue participant notices required under Section 4011 of ERISA Dear PBGC: The American Benefits Council (the Council) appreciates the opportunity to comment on the proposed new penalty structure for failure to issue participant notices required under Section 4011 of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and would like to commend the Pension Benefit Guaranty Corporation (PBGC) for its efforts to ensure that the penalty corresponds to the significance of the failure in order to be more effective. However, the Council is concerned that basing the penalty on the number of participants in a plan without any allowances for inadvertent errors (that do not qualify for a reasonable cause waiver) or comparisons to the variable rate premiums (VRP) actually owed by the plan would result in onerous penalties for many large plans. The Council is a public policy organization dedicated to the employee benefit plan system, representing sponsors of retirement and health plans and service providers to those plans. Collectively, the Council’s members help provide benefits to more than 100 million participants. Many of our members are sponsors of large plans and the Council appreciates the opportunity to make their ...

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July 1, 2004 VIA EMAIL Office of the General Counsel Pension Benefit Guaranty Corporation 1200 K Street NW Washington, DC200054026 Re: Commentletter on proposed new penalty structure for failure to issue participant notices required under Section 4011 of ERISA Dear PBGC: The American Benefits Council (the Council) appreciates the opportunity to comment on the proposed new penalty structure for failure to issue participant notices required under Section 4011 of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and would like to commend the Pension Benefit Guaranty Corporation (PBGC) for its efforts to ensure that the penalty corresponds to the significance of the failure in order to be more effective. However, the Council is concerned that basing the penalty on the number of participants in a plan without any allowances for inadvertent errors (that do not qualify for a reasonable cause waiver) or comparisons to the variable rate premiums (VRP) actually owed by the plan would result in onerous penalties for many large plans. The Council is a public policy organization dedicated to the employee benefit plan system, representing sponsors of retirement and health plans and service providers to those plans. Collectively, the Council’s members help provide benefits to more than 100 million participants. Many of our members are sponsors of large plans and the Council appreciates the opportunity to make their concerns known to the PBGC. A penalty based on the number of participants in a plan with no caps or other limitations could be particularly onerous for large plan sponsors.Under the proposed rule, a large plan sponsor could face a multimillion dollar penalty for failure to provide the notices when the VRP for the time period was only $1,000. Another inadvertent failure could be caused by a change in personnel that results in the responsibility falling on someone who is not aware of the problem until it is too late.In addition, a computer problem could result in notices not being sent to one of the company’s divisions.Many of these inadvertent errors may not qualify for the reasonable cause waiver, but could result in substantial fees for a large plan (especially if they are not discovered until the plan is audited).

The Council suggests that the PBGC consider several additions to the proposed rule: •A cap on the penalty equal to the lesser of the VRP or $500,000 (with no cap for willful violations) (this proposed cap borrows from the limitation on penalties for COBRA violations under Internal Revenue Code Section 4980B); •In lieu of a cap, a graduated scale of penalties that increases with the number of participants on a sliding scale but not in direct proportion to the number of participants (similar to the graded scale used by the IRS in Section 12.02(1) of its Voluntary Compliance Program, Rev. Proc. 200344); •If the failure is simply due to an error in calculation, a grace period (after discovery) during which the plan can provide the notices without facing a penalty (in many instances, the plan administrator would already face a penalty for late payment of premiums because of the error). The Council would also like to briefly comment on the participant notice Voluntary Correction Program issued simultaneously with the proposed new structure.While the Council appreciates the PBGC’s efforts through the VCP program to recognize the difficult VRP calculation and participant notice structure that plan sponsors grappled with in 2002 and 2003, we do not think the program goes far enough.As you know, a different interest rate was applied in those years to determine whether a VRP or participant notice was required. Although that issue was alleviated in 2004 by the Pension Funding Equity Act of 2004, plan sponsors should not be penalized for confusing inconsistency.The Council requests that the PBGC consider waiving the notice requirement for plans that, because of the interest rate difference, were required to provide participant notices even though no VRP was required. Finally, the Council requests that the PBGC reopen the penalty policy and provide further clarification on what constitutes “reasonable cause” for purposes of waiving the penalty and guidelines for waiving or reducing the penalties.The Council understands that the PBGC did not receive comments on this the last time the policy was revised in 2001.Unfortunately, this is probably an acknowledgement that the previous penalty structure was not significant enough for large plans to warrant that level of attention.With the new penalty structure and potential penalties in the hundreds of thousands if not millions of dollars for inadvertent errors, Council members would like the opportunity to provide input to the PBGC on these issues. Thank you again for the opportunity to provide comments on these new proposals.We believe the Council is uniquely situated to provide useful feedback to the PBGC.If we can assist further, please contact Jan Jacobson, director, retirement policy, of the American Benefits Council. Sincerel

James Klein

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