Minimum funding waiver request

[Guest Philip2]

I'm helping a very small charity with an underfunded db plan. They can't afford to make their final contribution for 2013 (due 9/15). As far as I can see, the user fee for a waiver request is $14,500--which is more than the contribution. In other words, they can't afford the user fee.

Is there any ability to request a hardship waiver of the fee? I'm also thinking it may be too late to request a funding waiver for the 2013 contribution....True?

Thanks for any help.

[david rigby]

Yes, it's expensive. Not sure about the exact fee amount, but there might be two different fees: small plan vs. large plan. Not long ago, I found a small plan fee of $4,000.

Yes, it's too late. The filing deadline for a waiver request is 2-1/2 months after the end of the PY. For example, no later than 02/15/14 for the 2013 plan year. IRC 412©(5).

[Effen]

I don't think so, that is a significant problem with the program.

They could consider terminating the plan and just not making the contribution. You would still report it as a deficiency, and they would owe a 10% excise tax, but that is much better than the entire amount. Then again, if you haven't terminated the plan yet, you probably owe a contribution for 2014 as well, which means another 10% for 2013, plus 10% for 2014. Once the plan has been terminated, I think the popular opinion is the excise tax clock stops running.

There isn't much relief for small plans, charity or otherwise.

[Andy the Actuary]

When all else fails, reconsider the assumptions. Is the retirement age assumption in line with the Plan Sponsors intended retirement age? This might buy some time, in particular, if the Plan does not grant post-nra accruals (i.e., issues a suspension notice).

[My 2 cents]

As I understand these things:

1. It is too late to file for a waiver for 2013. Applications must be submitted no later than 2 1/2 months after the end of the plan year. Not to be combative, but that would have made the deadline March 15, 2014 (not February 15, 2014 as indicated by an earlier poster).

2. In order to obtain a funding waiver, I believe that it is necessary to show, not just financial hardship, but also a demonstration that the sponsor is expected to be recover. Inherent in asking for and receiving the waiver is the promise that it will be repaid in the next five years. If the sponsor is not expected to be able to support the plan going forwards, what good would obtaining a waiver do anyone?

3. Watch out for terminating a plan while there is an outstanding deficiency. Such a situation (involving a majority owner waiving benefits) is the only time I have ever seen the 100% excise tax assessed. I thiink that threat is still out there.

[Guest Philip2]

Thanks everyone--you've confirmed what I feared.

[david rigby]

Yep, My 2 Cents is correct.

Thanks for correcting my date. (I can do actuarial math, but apparently can't count to 3.)

[KJohnson]

My 2 Cents, can you give more detail regarding the instance that you saw the 100% excise tax with the majority owner waiver. Did the IRS take the position that you can't take the waiver into consideration for minimum funding so even though the Plan was sufficient on a termination basis they imposed the excise tax for funding in the year of termination?

[My 2 cents]

It was a long, long time ago, so some of the details are a bit hazy. I think what you are supposed to do is meet the minimum funding requirement in the last plan year (so there would be no unresolved funding deficiency) and distribute what you can to the owner, with the owner foregoing the rest of his or her benefit being more or less accepted by the IRS (grudgingly, at best). Attempting to let the sponsor off the hook for the minimum funding requirements with the idea that the owner will just waive that much more of his or her benefit was not received well by the IRS. They may have even treated the extra amount foregone as taxable income to the owner since the owner's distribution should have been that much higher.

It bumped over to the 100% excise tax because, the plan having terminated, the assets having been distributed and the period for making contributions to the plan for its last plan year having expired, there was no mechanism available to eliminate the deficiency.

Not contributing enough to eliminate the deficiency in the last plan year was contrary to the advice provided to that sponsor.