We have a client that has terminated their DB plan. They have not yet received approval from the IRS but they have submitted the termination to the IRS. They have a $200,000 funding shortfall. They want to go ahead and fund this but Principal (their provider) is telling them they cannot accept the contribution. Is this correct? Can they not fund the shortfall until they receive approval of the termination from the IRS?

By funding shortfall are you talking about a funding deficiency or funding to make the plan whole to pay out its liabilities? I am just curious, as your answer really has nothing to do with the question.

But to your question, there is no reason why the contribution cannot be made. Even if it ended up being nondeductible that is not a concern of Principal. I am not sure of Principal's reasoning. Did anyone get an explanation from them?

I am not 100% sure now that you ask but I was led to believe that this is a funding deficiency.

There is no IRS requirement that the IRS pre-approve a plan termination, but there might be some requirement in whatever documents are between Principal and the plan/plan sponsor.

However, if there is a funding deficiency (or if part of the $200K is a funding deficiency), it seems very unlikely that a "provider" (trustee?) can or would exert any influence that might delay that payment. Careful analysis of the facts is needed.

If Principal does not want the money (which I really doubt), it may be possible for the sponsor to create another trust to receive the payment.