3724 / How are the required annual and quarterly payments to single employer defined benefit plans determined?

Editor’s Note: The CARES Act gave sponsors the option of using the adjusted funding target attainment percentage for the last plan year ending before January 1, 2020.

Contributions to certain defined benefit plans (other than multiemployer or CSEC plans) subject to the minimum funding standard ( Q 3742 to Q 3748) must be made, on an estimated basis, at least quarterly, and the new mortality tables released by the IRS on October 3, 2017 will impact these calculations. The quarterly contribution requirement is imposed on plans with a funding shortfall in the prior year.¹

The required amount for each quarterly installment is 25 percent of the Required Annual Payment (“RAP”).² The RAP is the lesser of the following:

(1)  90 percent of the minimum required contribution amount the employer is required to contribute for the plan year under the minimum funding requirements; and

(2)  100 percent of the minimum required contribution for the preceding plan year (determined without regard to a Section 412(c) waiver), but only if the preceding plan year consisted of 12 months.³

Quarterly contributions are determined without regard to increased contributions.

Defined benefit plans subject to the quarterly contributions requirement also must meet a liquidity requirement⁴ and generally must maintain liquid plan assets. A plan will be deemed to have a liquidity shortfall if, with respect to a quarter, the plan does not have liquid assets in an amount approximately equal to three times the total adjusted disbursements from the plan trust during the 12 month period ending on the last day of each quarter for which the plan must pay a required quarterly installment.⁵ A special rule permits this amount to be determined without regard to nonrecurring circumstances, under certain conditions.⁶

The minimum funding requirement for a plan year generally is determined without regard to any credit balance or prefunding balance as of the beginning of the plan year. A credit balance in the plan’s funding standard account may not be treated as a contribution to satisfy the liquidity requirement.

If a required installment is not paid to the plan by its due date, the funding standard account is charged with interest on the amount by which the required installment exceeds the amount, if any, paid on or before such due date. This interest is charged for the period from the due date until the date when the installment actually is paid.⁷ The installment due dates are April 15, July 15, October 15, and January 15 of the following year,⁸ or, if the plan year is not a calendar year, the 15th of each corresponding month in the plan year.⁹ The rate of interest charged is the rate of interest used to determine liability plus 5 percent.¹⁰ Additional payments necessary to satisfy the minimum funding requirement are due within 8.5 months after the end of the plan
year.

A statutory lien may be imposed on an employer, determined on a controlled group basis ( Q 3933), for failure to make a required installment or any other payment required by the minimum funding rules if the aggregate unpaid balance of the contributions or payments (including interest) exceeds $1,000,000.¹¹