Read the latest news from our shop so you can be informed if you happen to receive a letter from us. The EPCU addresses pension compliance by using questionnaire studies designed to pinpoint troublesome areas while creating minimal burden to taxpayers.
The goal of the Employee Plans Compliance Unit’s Funding Deficiencies Project is to ensure that plan sponsors who have reported funding deficiencies correct them. When a plan sponsor reports a funding deficiency on a filed Form 5500 return, the EPCU will determine whether a funding deficiency exists. If it appears one does exist, we will send a compliance check. We will determine whether the plan sponsor corrected the funding deficiency, filed the required excise tax return(s) and paid the appropriate taxes. Both defined benefit and defined contribution plans are included in this project. If you receive a letter, please provide the answers to the questions within the time frame allowed. Non-responders could be later audited.
Responses to our project have shown the main reasons for funding deficiencies are:
- sharply increased funding requirements caused by plan investment losses, and
- inability to meet funding requirements because of reduced plan sponsor income.
Category of Responses
The responses to the compliance checks can generally be divided into the following:
- Excise tax return issues
- Contribution issues (not made, amounts, timeliness)
- Taxpayer has filed for bankruptcy
- Plan sponsor issues (sponsor no longer exists, has been merged or incorporated into another business)
- No funding deficiency existed (contribution made within 8 ½ months after close of plan year)
- Taxpayer is engaged in discussions with IRS Rulings & Agreements for funding waivers and/or termination letters
- Taxpayer is or has engaged in discussions with DOL and/or PBGC
- Incorrect completion of the Schedule R or Schedule B filed with the Form 5500 return
Excise taxes – When a plan has a funding deficiency, Code §4971(a) imposes an excise tax of 10% (5% for multiemployer plans) of the unmet funding requirements at the end of the plan year regardless of mitigating circumstances. This tax cannot be waived. Code §4971(b) imposes a 100% tax on the funding deficiency that is not corrected within the taxable period. Code §4971 taxes are reported on Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for the sponsor’s tax year end and are due the later of:
- 7 months after the end of the employer’s tax year, or
- 8 ½ months after the last day of the plan year that ends with or within the sponsor’s tax year.
Time period for funding – The period to make timely deposits to a plan is within 8 ½ months after the end of a plan year. For a calendar year plan, a plan sponsor can contribute until September 15 of the following year, which for defined contribution plans is often after the Form 5500 series return has been filed.
Funding waiver – A funding waiver allows additional time to fund the plan and avoid Code §§4971(a) and 4971(b) excise taxes. A single-employer plan sponsor must file a request for a funding waiver within 2 ½ months after the close of the plan year. For a calendar year plan, a plan sponsor can file a waiver until March 15 of the following year. Plans must meet certain requirements to qualify for a funding waiver. Plan sponsors should work closely with the plan actuary to timely file for a waiver.
Pension Relief Act 2010 – This Act allows plan sponsors to pay their unfunded liabilities over a longer period of time.
Freezing the plan – Freezing a plan will not eliminate an existing funding deficiency, but it can stop the plan from accruing additional liabilities.
Communication – Communication among the plan sponsor, actuary, benefits practitioner and participants is essential to ensure proper funding of employee plans. Plan sponsors should provide complete information about their business so that the actuary can set appropriate assumptions. The actuary should notify plan sponsors of their funding obligations, help them develop funding policies and inform them of the implications of their intended contributions.