Funding Deficiency

[david rigby]

Plan year is 10/1 thru 9/30. On 6/15/2000, plan sponsor failed to make accrued contribution, resulting in a funding deficiency retroactive to 9/30/99. Sponsor paid the 10% excise tax (under IRC 4971). I think the IRS has stated they do not have authority to waive that tax.

Assume the deficiency is 100K. The contribution for the 1999/2000 plan year is due 6/15/2001. Assume that contrbution is 300K, including the prior funding deficiency.

1. If the sponsor cannot make the 300K by 6/15/2001, but does make 100K (plus interest), then does that correct the prior funding deficiency?

2. If less than 100K plus interest is contributed by 6/15/2001, then clearly the prior funding deficiency is not corrected. Section 4971(B) imposes a second excise tax of 100%. My understanding of 4971(d) is that the IRS might waive this second excise tax. Does the sponsor have to apply for such waiver in advance? If the sponsor knows it will not make the 6/15/2001 contribution, any other action necessary in advance?

[jaemmons]

The waiver must be applied for within 2 1/2 mos following the plan year end. In addition, there is a limit on these waivers to 3 out of every 15 consecutive years.

In general, the waiver is amortized over 5 years, but may be extended to 10 if the IRS permits the application of extension (IRC 412(e)). I would have the ER file for a waiver now for the next plan year. It doesn't eliminate the necessity to satisfy 412, but it does spread out the time period for the contributing the prior funding deficiencies. However, given the way that the market has been lately, I don't believe trust earnings are going to help.

Also, maybe the actuary should consider using an alternative funding method, for prospective plan years, which may lessen the burden.

[david rigby]

Sorry, perhaps my question was not clear. I was focusing on the waiver of the 100% excise tax, not the waiver of the contribution itself.

[AndyH]

I can help with that. My understanding of the process is that the 10% penalty is automatic, but that the 100% penalty is assessed after the client first gets a "Notice of Deficiency" or something to that effect from the IRS.

Obviously that would be generated as a result of a triggering event which could be an audit or a response generated from a filed Schedule B or 5500 filing.

Upon receipt of the letter, you have a certain number of days to correct the deficiency, or the 100% tax is assessed.

I can find the details of the timing if nobody recalls off hand.

[Guest sdolce]

Take a look at 4963(e). Your client has 90 days from the he/she is notified of the deficiency.In my experience the deficiency will probably trigger an audit,and the agent will require correction and payment of the first tier (10%) penalty in order to close the audit.Unless your client refuses to pay up at that time he'll never get to the notice/second tier penalty stage

[AndyH]

I agree. Every deficiency I've seen has resulted in an audit.