On May 7, 2004, the Pension Benefit Guaranty Corporation (“PBGC”) announced its new Participant Notice Voluntary Correction Program (“VCP”). The program will allow plan administrators of underfunded defined benefit plans to correct a failure to provide required Participant Notices for the 2002 and 2003 plan years without penalty. It is also designed to promote future compliance. The PBGC will not pursue any failure to provide pre-2002 Participant Notices unless there is a 2002 or 2003 Participant Notice failure that does not meet the requirements for penalty relief under the VCP. In our opinion this is an important program, because it is our understanding that the PBGC has recently levied sizeable penalties on plan sponsors who have not timely distributed the required Participant Notices.
Section 4011 of the Employee Retirement Income Security Act of 1974 (“ERISA”) requires the administrator of an underfunded defined benefit plan to issue a Participant Notice to plan participants regarding the plan’s funding status and the limits on the PBGC’s guarantee of plan benefits. Plan administrators must generally provide the Participant Notice for a plan year if the plan is required to pay a variable rate PBGC insurance premium for the year. However, the Job Creation and Worker Assistance Act of 2002 made a temporary change to the premium interest rate that did not apply for purposes of determining whether a Participant Notice was required. Therefore, a plan administrator may be required to issue a Participant Notice for the 2002 or 2003 plan year even if a variable rate premium is not payable for that plan year. This issue was resolved with regard to the 2004 and 2005 plan years in the Pension Funding Act of 2004 (“PFA”). As a result of the PFA, a Participant Notice is only required for the 2004 and 2005 plan years if a variable rate premium is payable for the relevant plan year.
The Participant Notice for a plan year is due 2 months after the due date (including extensions) for the plan’s Form 5500 for the prior plan year. For calendar plan years, Participant Notices for the 2004 plan year are generally due by October 4, 2004, November 15, 2004 or December 15, 2004. In addition, plan administrators are required to certify on the annual PBGC premium filing (Form 1 or Form 1-EZ) that, for the prior plan year:
- a Participant Notice was not required to be issued;
- a Participant Notice was issued as required; or
- the Participant Notice was issued late or was otherwise deficient (including an explanation regarding the late or deficient Participant Notice).
Overview of the VCP
The main reason the PBGC developed the VCP is that recent PBGC audits of defined benefit plans have found increased rates of noncompliance with the Participant Notice requirement. According to the PBGC, much of the noncompliance appears to have resulted from a lack of awareness or understanding of the applicable Participant Notice requirements rather than from an attempt to avoid disclosure. As a result, the PBGC is expanding its Participant Notice enforcement program, including more actively auditing compliance and assessing penalties for noncompliance. (The PBGC is also proposing to change the penalty structure from being based on the number of days the Participant Notice is late to being based on the number of participants in the plan.)
As a transition to the expanded enforcement program, the PBGC is permitting plan administrators to correct Participant Notice failures for the 2002 and 2003 plan years through the VCP. The VCP only applies to 2002 and 2003 Participant Notices that were due prior to May 7, 2004 and that were not (as of May 7, 2004) the subject of a PBGC audit proceeding. If a plan administrator complies with the requirements of the VCP for the 2002 and 2003 plan years, the PBGC will not assess penalties for the 2002 and 2003 Participant Notice failures and, as noted above, will not pursue any pre-2002 Participant Notice failures. If the only failure for the 2002 and 2003 plan years is that the Participant Notice was issued late (and was issued prior to May 7, 2004) the plan will be treated as if it participated in the VCP without the need to issue a VCP corrective Participant Notice or notify the PBGC.
The PBGC urges Plan administrators to utilize the VCP as a precaution, even in the absence of a known Participant Notice failure. As an incentive, participation in the VCP will not affect the likelihood that a plan will be selected for an audit of compliance with the Participant Notice requirements, the PBGC premium requirements, or any other PBGC requirements. In order to take advantage of the VCP and not be subject to a PBGC penalty or audit, a plan administrator must:
- issue a VCP corrective Participant Notice, and
- notify the PBGC that it is participating in the VCP within 30 days of distributing the Participant Notice.
Notification to the PBGC must include a copy of the VCP corrective Participant Notice, as well as the name and telephone number of a person for the PBGC to contact with any questions. In addition to this notice requirement, all plan administrators that meet the requirements of the VCP must check a box on the 2005 PBGC Form 1 or Form 1ÐEZ notifying the PBGC of the plan’s participation in the VCP.
VCP Corrective Participant Notice
The PBGC believes it is highly likely that plans participating in the VCP to correct failures in 2002 and 2003 will also be required to distribute a Participant Notice for the 2004 plan year. Therefore, the PBGC has structured the VCP corrective Participant Notice requirements to permit plan administrators to issue a single VCP corrective Participant Notice that meets the requirements for a VCP corrective Participant Notice and the 2004 Participant Notice.
The VCP corrective Participant Notice generally must meet all of the requirements that apply to the 2004 Participant Notice (or, if the plan is not required to issue a 2004 Participant Notice, all of the requirements that would apply if it were required). As a general rule, the 2004 Participant Notice would include the funded current liability percentage for the 2003 plan year or for the 2004 plan year. Under the VCP, whether the plan administrator is correcting a 2002 Participant Notice failure, a 2003 Participant Notice failure, or both, the VCP corrective Participant Notice:
- must include the funded current liability percentage for the 2002 and 2003 plan years; and
- may include (but is not required to include) the funded current liability percentage for the 2004 plan year.
The VCP corrective Participant Notice must include all information required in the 2004 Participant Notice (e.g., current information on funding waivers, missed contributions, and limitations on the PBGC guarantee). Finally, the VCP corrective notice need only be provided to those persons entitled to receive a 2004 Participant Notice from the plan (or those persons who would have been entitled to receive a 2004 Participant Notice from the plan if it were required).
The PBGC has issued additional information regarding the VCP, including a fact sheet, frequently asked questions, and a model VCP corrective Participant Notice. The information can be found at the PBGC’s website:
In addition, plan administrators may obtain guidance regarding the VCP by submitting questions to the PBGC on its website or by telephone (1-800-736-2444). Plan administrators can also contact the PBGC to request modifications to the VCP requirements on a case by case basis.