Late Quarterly Interest Penalty

[Guest lilliand]

Now that the 175% Federal mid-term rate (7.29% at November 2001) is lower than my plan's funding rate (8.00%), how do I calculate late quarterly interest penalty for the 2001 funding standard account?

[david rigby]

See Q&A-2 from IRS Notice 89-52:

"Q-2: What are the consequences of a late payment of a quarterly installment?

A-2: Section 412(B)(5) requires that the funding standard account ("FSA") be charged with interest at the appropriate rate, consistent with the rate or rates of interest used under the plan to determine costs (the "applicable interest rate for the FSA"). However, if there is a late payment of a quarterly installment, a portion of the interest charged to the FSA is based on the rate required under section 412(m)(1). The amount of interest charged to the FSA attributable to the late amount is based on 175% of the Federal mid-term rate (as in effect under section 1274 for the first month of the plan year) or if greater, the otherwise applicable interest rate for the FSA. The interest is charged from the due date to the date the late amount is actually contributed (regardless of the date such contribution is deemed to have been contributed under section 412©(10)). However, with respect to the first quarterly installment for the 1989 plan year, the interest rate under section 412(m)(1)(A) (i.e., 175% of the Federal mid-term rate) will not apply until 30 days after the publication of this notice in the Internal Revenue Bulletin.

Furthermore, for a nonmultiemployer defined benefit plan, if the aggregate amount of all underpayments of quarterly installments and other payments required under section 412 exceeds $1,000,000, a lien in favor of the plan may arise under section 412(n) on the property of the person who failed to make the payment to the plan.

[Mike Preston]

Summary: Use 8%. Remember that the interest gets charged until actually paid, unlike regular FSA interest which is only charged through the end of the plan year.

[Guest lilliand]

Thanks for the responses. Just to clarify, the formula that I have always used to calculate this is as follows:

Underpayment*[(1+175% Fed Mid Term Rate) ^ (#months from due date to date made) - (1+val rate) ^ (#months from due date to date made but not past end of plan year)].

So since my val rate is greater than 175% Fed Mid Term Rate, is the first part of the formula gone and the interest penalty is then:

Underpayment*[(1+val rate) ^ (#months from due date to date made but not past end of plan year)]?

[Guest lilliand]

Sorry, what I meant to say was is the following the correct formula:

Underpayment*[(1+val rate) ^ (#months from due date to date made)]

[Mike Preston]

No, just use 8% in both pieces.

[Guest lilliand]

In this specific case the payment was only a month late and is during the plan year, so in effect there is no penalty since the terms are equal when you set the FMR to the val rate?

[Mike Preston]

Unless I am misunderstanding you, that is correct.

[MGB]

Although no "penalty" to the FSA, there is the "penalty" of notices to the participants and possibly notice to the PBGC.

[Mike Preston]

One final thought. OBRA'89 changed the plan interest rate for determining the quarterly charge to include an adjustment to bring the rate into compliance with the OBRA Current Liability Rate. If I'm understanding the OP's situation, this means the 8% rate is modified to something like 6.28% (if we are talking about 2002). Hence, the 175% rate of 7.92% will be the resulting rate to use, not 8%. See the notes regarding changes to 412(m)(1)(B).

[mwyatt]

Actually the reference to RPA '94 in 412(m)(1)(B) is the interest for the penalty portion is the greater of 175% of Mid-Term and the rate used for RPA '94. So in this situation RPA '94 rate is less than 7.92% so can be ignored.

[Blinky the 3-eyed Fish]

Okay, I am doing a 1/1/03 valuation. The 175% rate is 6.04%, the rate for funding is 7.50%, the RPA rate is 6.65% and the OBRA rate is 6.09%. Which rates will be used in calculating the late quarterly interest charges? This is my first situation where the 175% rates are so low, so I am going round and round a bit.

[WDIK]

The instructions for Line 9e of the Schedule B say that the applicable interest rate for this purpose is the greater of:

1. 175% of the Federal mid-term rate at the beginning of the plan year, or

2. The rate used to determine the 'RPA '94" current liability.

[Blinky the 3-eyed Fish]

I can see how that answers calculating the first portion of the calculation, but how about the reduction for the FSA interest credit? If I still use the 7.5% rate, I could conceivably have a negative late quarterly amount, an obvious nonsensical result.

[WDIK]

I remembered reading the following thread:

The opinion of FrankPrager was that the numbers must be floored at zero. I don't know of any source for this, but it made sense to me.

P.S. I am not an actuary, so don't place much confidence in my conculsions.

(See, I can't even get the link to work right.) The title of the thread was EA Meeting - anything of importance so far?, started by mwyatt on 3/18/03.