The SECURE 2.0 Act of 2022 (SECURE 2.0) provides welcome relief to private sector single employer sponsors of defined benefit pension plans (Pension Plan(s)). Effective for plan years beginning on and after January 1, 2024, SECURE 2.0 caps the variable rate premium paid by Pension Plan sponsors to the Pension Benefit Guaranty Corporation (PBGC) at $52 per $1,000 or 5.2% of a Pension Plan’s unfunded, vested benefit liability. SECURE 2.0 does not change the flat rate premium also paid by Pension Plan sponsors and charged on a per participant basis.

The purpose of the PBGC is to protect the vested benefit of Pension Plan participants if the Pension Plan in which they participate fails. The PBGC collects premiums from employers that sponsor Pension Plans to fund its responsibility. Because the PBGC is not funded by general tax revenue, it must heavily rely on the premiums paid by Pension Plan sponsors.

Single employer sponsors of Pension Plans must pay two types of premiums to the PBGC: (i) a per participant flat rate premium ($96 for 2023) and (ii) a variable rate premium based on a percentage of a given Pension Plan’s unfunded, vested benefit liability. In addition, under the Bipartisan Budget Act of 2013, both the flat rate and variable rate premium became subject to inflation indexing tied to increases in wage growth.

The change to index premiums has been widely criticized because the increased expense further discourages Pension Plan formation and encourages Pension Plan sponsors to terminate, freeze, or “de-risk” their Pension Plans partly to manage such ever increasing costs. In response to these criticisms and likely because the funded status of the single employer PBGC “insurance” fund has improved, Congress seized the opportunity to end the indexing of variable rate premiums. Note, however, Congress may increase the variable rate premium again, but to do so, it must amend SECURE 2.0.