PBGC variable-rate premium vs. borrow-and-fund
For defined benefit plans that (1) are underfunded (using market interest rates and asset values) and (2) are not at the Pension Benefit Guaranty Corporation variable-rate premium (VRP) headcount cap, the “go to” strategy for reducing VRPs is to make current contributions to increase the plan’s funded status.
After the passage of SECURE 2.0, which froze the VRP rate at 5.2% of unfunded vested benefits (UVBs), determining when it is economically more efficient to borrow-and-fund vs. funding the plan over time (at ERISA minimums) and paying the 5.2% VRP “tax” is, in some respects, relatively straightforward. In this article, we review this calculation. We conclude with some observations about future interest rate risk and how it might affect borrow-and-fund decision-making.