Options Available when a CB Plan misses its Minimum Funding

[CharlesLeggette]

Facts

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A CB Plan effective 1/1/2011, failed to meet its 2012 funding due on 9/15/2013.

The Plan was frozen early enough in 2013 that no accruals occurred in 2013.

The client paid a penalty for the 9/15/2013 under funding.

95% of the cash balance contribution will go to the two owners.

The would like to pay it to avoid any more penalties but intend to continue the freeze.

They believe they can pay it over two years starting 1/1/2014.They understand that interest is due on the contribution.

Questions

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What options do they have in paying the underfunding?

Is it due in its entirety by 9/15/2014.

If not paid by then will another penalty accrue?

Can they "pay it out" over a couple or three years without additional penalty.

[My 2 cents]

The following is my understanding of how the funding rules work with respect to cash balance plans:

Contributions to cash balance plans are not accruals. They do not go into individual accounts (which arealways hypothetical in nature, however the plan is structured). Cash balance plans are defined benefit plans and, as such, the assets are unallocated at all times prior to actual benefit payments.

Funding liabilities of cash balance plans are not equal to the hypothetical account balances unless one is assuming 100% immediate severance and payment. The hypothetical balances are projected to assumed severance/payment dates (without regard to anticipated pay credits for future years), creating an anticipated future cash flow which must be (for funding purposes) discounted at the applicable segment rates (or full yield curve if that method was elected). Under a frozen cash balance plan, the projected cash flow does not factor in the current year's pay credit because there won't be one.

The extent to which the 2013 minimum funding requirement will reflect a Target Normal Cost is a matter for the enrolled actuary and the applicable methods. Would it be appropriate to take into account the plan amendment during the year that froze accruals when performing the 2013 actuarial valuation?

Normal rules for defined benefit minimum funding apply. If the 2013 plan year minimum funding requirement is not satisfied by September 15, 2014 (taking into account quarterly requirements, if applicable), then there will be an excise tax due for 2013.

[Rball4]

Excise tax is due for each year there is an funding deficiency. There is no way to pay it off over several years without paying excise taxes each year. I would recommend terminating the DB Plan (have owners waive benefits as needed), then start up a 401(k) profit sharing plan. Contributions shift from mandatory to discretionary, so no more excise tax issues.