3747 / What is the penalty for underfunding a qualified plan that is subject to the minimum funding standard?
If a plan subject to the minimum funding standard ( Q 3742 to Q 3746) fails to meet it, the employer sponsoring the plan is penalized by an excise tax, but the plan will not be disqualified.1 Imposition of the tax is automatic; there is no exception for unintentionally or inadvertently failing to meet the standard or for having intended to terminate the plan.2
For a single employer plan, the tax is 10 percent of the aggregate unpaid minimum required contributions for all plan years ( Q 3742 to Q 3746) remaining unpaid as of the end of any plan year ending with or within the taxable year.3 (In the case of a multiemployer plan, the tax is 5 percent of any accumulated funding deficiency; in the case of a CSEC plan, 10 percent of such deficiency.) In one case, an employer was liable for the 10 percent tax where a contribution was made on time according to the terms of the plan, but not within the period specified in IRC Section 412.4
If the 10 percent tax is imposed on any unpaid minimum required contributions and if it remains unpaid as of the close of the taxable period, or if the 10 percent tax is imposed on a multiemployer plan’s accumulated funding deficiency, an additional tax of 100 percent will be imposed on the employer to the extent that the minimum required contribution or accumulated funding deficiency is not corrected within the taxable period.5 This additional 100 percent tax will be abated if the deficiency is corrected within 90 days after the date when the notice of deficiency is mailed. This period may be extended by the Secretary of the Treasury.6