This Issue Snapshot focuses on underfunded single-employer defined benefit plans that are subject to IRC Section 430, are covered by Title IV of ERISA, and have been terminated in a standard termination under ERISA Section 4041(b). IRC Sections, ERISA Sections, Treas. Regulations, and PBGC Regulations IRC Section 412 IRC Section 430 IRC Section 4971 29 USCS Section 1301 through 1310 29 USCS Section 1082 29 USCS Section 1083 29 USCS 1202(b) 26 CFR 1.430(a)-1 29 CFR 4041.21 through 4041.31 Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources) Rev. Rul. 79-237 Rev. Rul. 89-87 Rev. Proc. 2000-17PDF IRM Section 18.104.22.168.1 IRM Section 4.72.16 IRM Section 22.214.171.124.2 Analysis Defined benefit plans that are qualified, have ever been qualified, or have ever been determined by the IRS to be qualified are subject to the minimum funding standards of IRC Section 412. The minimum required contribution for a single-employer defined benefit plan (other than a CSEC plan) is determined under IRC Section 430. IRC Section 4971 imposes excise taxes on unpaid minimum required contributions. Title I of the Employee Retirement Income Security Act of 1974 (ERISA) also contains minimum funding standards. Title IV of ERISA describes the plan termination insurance program for defined benefit plans. The Pension Benefit Guarantee Corporation (PBGC) is responsible for administering Title IV of ERISA, which guarantees the payment of certain benefits under terminated defined benefit plans. Rev. Rul. 79-237 provides that the minimum funding standards (including the obligation to make payments to amortize a funding waiver) under IRC Section 412 apply through and including the plan year of plan termination, but not for later plan years. Treas. Reg. Section 1.430(a)-1(d)(5)(i) defines the termination date for plans covered by the PBGC as the termination date under ERISA section 4048. If the plan's assets are not sufficient to satisfy all benefit liabilities, the plan sponsor may generally terminate the plan under a standard termination using one or a combination of two options (otherwise the plan will have to terminate under a distress or involuntary termination): Make a supplemental employer contribution to make the plan's assets sufficient to satisfy all benefit liabilities. The majority owner may forego all or a portion of his or her distribution. Pursuant to 29 CFR 4041.21(b)(2), a plan participant who is a majority owner (a participant with an interest in the employer greater of at least 50%) may agree, with spousal consent (if spousal consent would be required for a distribution in a form other than a QJSA), to forego receipt of all or part of his or her benefit until the plan satisfies the benefit liabilities of all other plan participants. IRM Section 126.96.36.199.2. See ERISA Section 4041.2 for the definition of "majority owner". Foregoing receipt is intended to facilitate termination of a plan covered under Title IV of ERISA. Foregoing receipt isn't considered a forfeiture under IRC Section 411, as long as it isn't done as a plan amendment. Note that while the IRS permits a majority owner to forego receipt, as outlined above, the IRS does not permit a waiver of a participant's benefit by amendment or otherwise. The IRS maintains that a waiver or other reduction of a benefit upon plan termination violates IRC Sections 411(d)(6), 411(a), and 401(a)(13). Although Treas. Reg. Section 1.430(a)-1(f)(5)(i) generally specifies the termination date of a plan that is subject to Title IV of ERISA, such a plan is not considered to be terminated on the termination date established by PBGC if it continues to hold assets for a substantial period after that date. Rev. Rul. 89-87 provides that a plan that is amended to terminate and to cease benefit accruals has not, in fact, been terminated under the IRC if the assets are not distributed as soon as administratively feasible after the stated date of plan termination, regardless of whether the plan is treated as terminated under other federal law, including Title IV of ERISA. Thus, for example, a plan that is terminated for purposes of Title IV, but under which plan assets have not been distributed after a substantial period of time after distribution of plan assets has become administratively feasible, will not be terminated for purposes of determining the applicability of the minimum funding standard to the plan under Rev. Rul. 79-237. Whether a distribution is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case. IRC Section 4971(a) imposes an excise tax of 10 percent of the aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year ending with or within the taxable year. IRC Section 4971(b) imposes an additional excise tax of 100 percent of any unpaid minimum required contribution on which an initial tax is imposed under IRC Section 4971(a). Rev. Proc. 2000-17, section 3, allows a waiver of the 100 percent tax imposed under IRC Section 4971(b) if specific conditions are satisfied. The Secretary of the Treasury may waive the tax imposed under IRC Section 4971(b) in certain cases. See ERISA 3002(b) and 29 USCS 1202(b). Delegation Order 7-7-1 allows the delegated official to waive the excise tax imposed under IRC Section 4971(b) on a case by case basis and when circumstances warrant. Issue Indicators or Audit Tips Form 5310 Determination Letter applications: Compare the amount of assets shown on the application with the amount of Present Value of Accrued Benefit (PVAB) shown on Form 6088. If the plan is underfunded, determine how the benefit liabilities under the plan will be satisfied. A majority owner may agree to forego receipt of all or part of his or her distribution. The majority owner can't use a plan amendment to forego all or part of his or her distribution and can't use "waiver" in the agreement. The majority owner must obtain spousal consent in order to forego receipt of all or part of a distribution in connection with plan termination, if spousal consent would be required for a distribution other than a QJSA. Determine if the plan has an unpaid minimum required contribution for any plan year that is subject to an IRC Section 4971(a) excise tax. Review IRM Section 7.12 for guidance on referring excise tax issues to EP Examination if the excise tax has not been paid. Examinations: Compute the Present Value of Accrued Benefits (PVABs) at plan termination. Verify that the trust balance sheet accurately reflects the fair market value of all assets and liabilities. Review the Form 5500, Schedule SBs, to determine if there is a funding deficiency. If there is a funding deficiency, determine if the IRC Section 4971(a) tax has been paid. Determine if the plan qualifies for a waiver of the IRC Section 4971(b) tax. See Rev. Proc. 2000-17 and IRM Section 188.8.131.52.1. A majority owner may agree to forego receipt of all or part of his or her distribution. The majority owner can't use a plan amendment to forego all or part of his or her distribution and can't use "waiver" in the agreement. The majority owner must obtain spousal consent in order to forego receipt of all or part of a distribution in connection with plan termination, if spousal consent would be required for a distribution other than a QJSA. Verify that all assets have been distributed from the plan's trust as soon as administratively feasible after the stated date of plan termination.