5330/Funding deficiency penalties-how to minimize

[AndyH]

Takeover plan has a series of funding deficiencies being reported and corrected in 2007. Deficiencies being newly reported-prior errant Schedule B's being amended.

The 5330s will be filed in 2007 for 4 years-the deficiency will be corrected by 9/15/07. We're expecting upon filing of 5330s that interest and penalties will be automatically be assessed (beyond the intiial 10%).

Any suggestions for proactive action in anticipation of this?

I don't think that the initial 10% can be avoided but what about interest and further non-filing penalties?

Unique situation (I hope). Regular board members may remember prior discussion of this situation. The cleanup is now in it's final stages.

Thanks for any suggestions.

[Guest Carol the Writer]

We just had two similar situations - both of the "errant" DB plans were one-life groups. In both instances, I was able to convince the IRS to waive any interest and/or penalty over and above the 10% excise tax. The reason that I gave was that this would not benefit the sole participant, and there were no other participants to be protected by such harsh, strict enforcement of the IRS's power to assess interest and/or penalty.

You might try the same approach, arguing that it is not in the best interests of the non-owner employees - if there are any - and that it could become so onerous on the plan sponsor that it would serve as a disincentive to continue the plan.

As I remarked above, this worked for me and my two clients. Wish you the best!

[AndyH]

Thanks for the comments. It sounds like your situation you had a real person to talk to, maybe in the context of an audit?

In this case we have a mailing address for 5330; not a person to discuss it with.

[david rigby]

File the 5330 as soon as possible. The 10% cannot be waived, and you probably cannot "pre-pay" any interest and/or penalty. If there is any possibility to "advance" some other contributions (made for a later plan year), that is worthy of consideration. You cannot change the funding method on the amended Schedule B, but you can consider whether any assumptions should be changed.

[AndyH]

I don't think we should file Form 5330 until the deficiency is about to be corrected, otherwise we'll be faced with one of those "100% penalty unless paid within 30 days" letters. Actually, 4 of them.

There is a substantial cash flow issue. The money tree ain't growing fast enough. This is a frozen plan-none of this was expected. There are substantial dollars involved.

To be clear, this is essentially a self correction; a deficiency will not exist until we amend the Schedule B's. That will be done at the same time. Otherwise, I would agree that the 5330 should be filed right away. I'd rather pay a little interest than risk a 100% penalty assessment.

We're aware of the issues surrounding methods and assumptions and amending B's. The corrections are to fix statutory requirements that were not met.

[Blinky the 3-eyed Fish]

The corrections are to fix statutory requirements that were not met.

Care to elaborate? I am curious.

[AndyH]

The first problem is that current liability was computed using 83 Blended for several years and the population is heavily female. And the plan is underfunded and well over 150 participants so 412(l), quarterlies, notices, etc. are impacted. And that was just the tip of the iceberg. But it was a glaring, undisclosed deviation that was confirmed by the prior actuary.

This is just one area where cleanup was needed. All the other major areas (FAS, PBGC) were similarly or more problematic.

[david rigby]

Andy, possibly an ABCD issue as well?

[AndyH]

Yes, that is on the agenda. Client wants nobody else to have to go through this. Effen was kind enough to help me last year get a list of cases this guy signed. Very short list, thankfully.

[Blinky the 3-eyed Fish]

Just be kind when you find me.

[AndyH]

You weren't on the recent EA Washington attendee list. He was (to my amazement). I guess it's never too late to start learnin.

[Effen]

We had a very similar situation. They corrected the deficiency and paid the 10%. We haven't heard a word from the IRS since (about 15 months has past now).

What did come to bite us was the PBGC. If they have deficiencies, then they have Reportable Events. Also, keep in mind that the missed quarterlies are also Reportable. Make sure you file the Form 10 and 200 if appropriate. The PBGC can/will impose a lien if the missed contributions exceed $1m even though they may be current under funding standards.

[AndyH]

Did the PBGC assess penalties for late reportable event filings?

In my case, before the revisions, we identified numerous unfiled reportable events, and filed all of them without incurring any penalties. The PBGC did assess some $25,000 or so in penalties (they waived about 40%) for failure to file PBGC Form 1 for several years (and pay premiums). But that was after some hefty premiums were paid. Did I mention the actuary apparently thought Form 1 filing requirements ended upon plan freeze?

When we amend the filings we will create more of these technical reportable event issues.

[Effen]

I don't think the PBGC gave them any fines. We argued that the client filed the Reportable Event ASAP from the time they became aware of the problem. They did asses a lien on the company and they have been very interested ever since. They call each quarter to confirm if the quarterlies have been made. Sounds like my numbers were bigger than yours. They were deficient by a few million $.

[AndyH]

Got it. Yeah, the $1 million threshold seems to set off a different level of activity with Form 200 and the lien stuff. Mine was under, thankfully.