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Issues Found in Defined Benefit Plans Audited for PPA 2006

The Pension Protection Act of 2006 (PPA) made significant changes to funding requirements and administrative practices for defined benefit plans, including cash balance plans. Internal Revenue Code (IRC) section 430 describes the new funding requirements under PPA. One of the goals of PPA was to strengthen defined benefit plan funding levels. Consequently, the new law imposes restrictions via IRC section 436 on benefit payments, benefit increases and accruals when a plan is underfunded beyond certain thresholds. In addition, IRC section 401(a)(29) was added to provide that plans not in compliance with the new restrictions under IRC section 436 may be disqualified.

In an effort to provide guidance to Employee Plans examination agents conducting audits under the new law, the Employee Plans Emerging Issues Team collaborated on an examination project, which was designed to provide PPA training to agents, identify potential areas of non-compliance, outline consistent correction methods and report the findings. A team of agents received training in the new law and subsequently conducted a number of defined benefit plan audits. Although the project is still on-going, many of the cases have been completed and the following is a list of issues identified to date:

  • Annual funding notices made late or not dated (PPA section 501(a); ERISA section 101(f))
  • Elections to use or reduce prefunding and/or carryover balances made late/not dated (Treas. Regs. sections 1.430(f)-1(e) and (f))
  • Elections to use prefunding and carryover balance to meet quarterly contributions made late or elections not specifying the dollar amount(s)
  • Late Adjusted Funding Target Attainment Percentage certification (Treas. Regs. sections 1.436-1(f) and -1(h))
  • Actuarial increase for late retirement benefits not made
  • Assets valued differently for IRC section 430 versus IRC section 436
  • Relative value disclosure notices didn’t satisfy Treas. Regs. section 1.417(a)(3)-1(c)(1)(iv)
  • Late contribution payments resulting in liquidity shortfalls
  • Late quarterly contributions - IRC section 430(j)(3)
  • Inappropriate inclusion of premiums for life insurance policies in target normal cost as plan expenses
  • Funding in excess of  IRC section 404(o) limitation
  • Compensation for purposes of determining the accrued benefit in the valuation doesn’t match the definition per plan terms
  • Compensation for benefit purposes not defined in the plan
  • Service incorrectly calculated for benefit purposes
  • Incorrect interest rates used for calculating benefits distributions for payment options that are subject to IRC 417(e)(3)

Many of the identified issues are failures to comply with the funding rules and consequently, do not threaten the qualified status of the plan, but may result in assessment of excise tax or penalties. However, some of the issues do result in qualification failures, such as a plan not operating in accordance with its specific written terms or in compliance with the requirements of IRC section 401(a)(29). Resolution of the qualification failures have been addressed using the appropriate correction program (i.e., SCP or Audit CAP), and applying the basic correction principles discussed in the EPCRS Revenue Procedure.

Page Last Reviewed or Updated: 03-Apr-2014