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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3861
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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How to determine if a defined benefit pension plan is subject

Resolved Question:

How to determine if a defined benefit pension plan is subject to minimal funding requirements (Form 550EZ) ? Only CPAs or Actuaries are requested to respond please, thanks.
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

Hi, ALL defined benefit plans that do not satisfy minimum funding requirements are subject to excise taxes.

Lane :

Ad since 2007 this is true for single member plans as well

Lane :

This is a distinguishing element of DB plans, that the plan, as an obligation to it's participants, and the sponsoring employer as a creditor the the plan must meet minimum funding requirements ... only in DC (Defined Contribution plans) is this risk borne by the participants

Lane :

The IRS has also provided guidance for single-employer, multiple employer and multiemployer plans regarding


interest and excise taxes on late payments. See this: http://www.law.cornell.edu/uscode/text/26/430

Lane :

Because the plan is defined by it's promised future benefit, DB plans must provide for a minimum funding level as defined by the design and type of plan

Lane :

Note: The IRS has a system of correction programs for sponsors of retirement plans, including defined benefit plans, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.

Lane :

From the IRS FAQ on retirement plans:


If your plan is a money purchase pension plan or a defined benefit plan, has it complied with the minimum funding requirements of section 412? Check that appropriate contributions were made to the plan.


If your plan is a defined benefit plan, an enrolled actuary will have to compute the funding required for the plan and sign Schedule B of Form 5500 setting out the plan's funding status. If your plan is a money purchase pension plan, the contributions required by the plan document must be made in order to satisfy the minimum funding requirements of section 412.

Lane :

I am a CFP and A CRPS (Chartered Retirement Plans Specialist). The only reduction that can be used for funding can be found in subsection (f), where prefunding is used. See this:

Lane :

(f) Reduction of minimum required contribution by prefunding balance and funding standard carryover balance


(1) Election to maintain balances
(A) Prefunding balance
The plan sponsor of a defined benefit plan which is not a multiemployer plan may elect to maintain a prefunding balance.


(B) Funding standard carryover balance
(i) In general In the case of a defined benefit plan (other than a multiemployer plan) described in clause (ii), the plan sponsor may elect to maintain a funding standard carryover balance, until such balance is reduced to zero.

(ii) Plans maintaining funding standard account in 2007 A plan is described in this clause if the plan—
(I) was in effect for a plan year beginning in 2007, and

(II) had a positive balance in the funding standard account under section 412 (b) as in effect for such plan year and determined as of the end of such plan year.



Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

Please let me know if you have any questions at all

Lane :

But, the short answer to your question is that if it is a true DB plan, it has minimum funding requirements

Lane :

Let me knos

Lane :

Lane

Expert:  Lane replied 9 months ago.

Hi,

 

.. just checking back in here, as I never saw you come into the chat.

 

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.

 

Again let me know here, if you have any questions at all.

 

Lane

 

Customer: replied 9 months ago.

If it is a true defined benefit plan, than Schedule SB have to be completed even if single member plan, regardless of account dollar value ? Is this correct ? Thanks

Expert:  Lane replied 9 months ago.

That's exactly right.

From instructions for schedule SB:

As the first step, the plan administrator of any single-employer
defined benefit plan (including a multiple-employer defined
benefit plan) that is subject to the minimum funding standards
(see Code section 412 and Part 3 of Title I of ERISA) must
obtain a completed Schedule SB that is prepared and signed
by the plan’s enrolled actuary as discussed below in the
Statement by Enrolled Actuary section. The plan administrator
must retain with the plan records the Schedule SB that is
prepared and signed by the plan’s actuary.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3861
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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