missed contributions

[Guest Ray Goetz]

Please consider this scenario. The sponsor of a defined benefit pension plan fails to make the required minimum funding contributions. ERISA Section 302; IRC Section 412. A year or more goes by, and the plan assets increase in value, due to market gains.

Question: Is there any way the plan sponsor can recalculate the required contributions that are now due, to reduce or eliminate the required contributions in light of the fact that the actual plan underfunding has been reduced or eliminated?

[david rigby]

not that I know of.

The minimum funding standard is a snapshot. You have 8-1/2 months after the end of the plan year to make the IRC 412 contribution. If you don't make it, you don't make it.

The only "grace" I have come across was as follows:

Client had financial trouble and could not make the final contribution, but did not tell me (actuary) until last minute,

Between September 15 (due date) and October 15 (filing of the 5500 and Schedule b), I reviewed all aspects of the 412 amount, including actuarial assumptions and application of the transition rule for DRC and found that I had some room to "play" thus lowering the actual 412 contribution and the resulting excise tax for failure to pay.

Frankly, I lucked out, because the assets did well and by the first of the next year, the plan funding had caught up to liability. Those kind of "actuarial gymnastics", while legal, still bother me. But we can't all have perfect clients.

[Chester]

Ray, I do not know enough about your situation to know if you have any alternatives, but I will throw out a scenario where you could recalculate the costs to factor in the improved funding picture for the plan. Assume the valuation is done on the first day of the plan year, and the Schedule B has not yet been filed for the last plan year that has ended. You could change the cost method to value the plan as of the last day of the plan year, which would take into account the investment performance of the plan for the year (assuming the investment results were good). Then, as long as the necessary minimum contribution is made within 8 1/2 months of the end of the plan year, and the Schedule B is timely filed (perhaps using Form 5558 to extend the filing date another 2 1/2 months, if needed), the costs would reflect the investment performance of the plan, which it appears from your question that you would like to have happen. Hope this helps!

[Guest Ray Goetz]

Thank you to Pax and Chester for their very helpful comments.

[Lorraine Dorsa]

Remember that there is no automatic approval of a change in valuation date to the end of the plan year. To make this change, an application must be filed with the IRS and approval received.

(ASPA has commented to the IRS on the most recent change in funding method guidance and has suggested that automatic approval be extended to any change in valuation date.)