Aug 10, 2009

MINIMUM FUNDING STANDARDS

The minimum funding standards of Code Section 412 and corresponding ERISA provisions provide the legal structure for enforcing the advance funding requirement that applies to qualified pension plans. A plan to which the minimum funding standard applies must maintain a funding standard account. The funding standard account is annually charged with the plan's normal cost and certain other costs and credited with certain items that benefit the plan. At the end of the year, if the charges exceed the credits, there may be an accumulated funding deficiency. In that case, there is a penalty tax and other enforcement provisions. The penalty tax consists of an initial tax of 5 percent of the deficiency, with an additional 100 percent tax if the deficiency is not corrected after notification by the IRS.

Obviously, the employer's objective is to balance the funding standard account for each year. If the employer is unable to make sufficient contributions to do this, the employer can request a waiver from the IRS of the minimum funding standard for the plan year or request an extended amortization period for certain plan liabilities.

The employer is not required to contribute annually any more to the plan than an amount referred to as the full funding limitation, even if the funding standard account would then be left with a deficit for the plan year. This important limitation is generally defined as the difference between the accrued actuarial liability of the plan computed under the plan's funding method (or if this is not possible, under the entry-age normal method) and the value of the plan assets. Finally, certain plans are allowed to establish an alternative minimum funding standard account and can then avoid a funding deficiency by avoiding a deficit in either the funding standard account or the alternative minimum funding standard account, whichever is lesser. The alternative minimum funding standard account is somewhat simpler than the funding standard account and it is usually possible to avoid a deficit with a lower employer contribution.

Exemptions from the Minimum Funding Standard
The minimum funding standard rules basically apply to all qualified pension plans. However, government plans, church plans that have not elected to be treated as qualified plans, and various types of plans having no employer contributions are exempted in Code Section 412.

More significantly, the minimum funding standards do not apply to profit-sharing or stock bonus plans. Technically, the standards apply to defined-contribution pension plans as well as defined-benefit pension plans. However, for defined-contribution pension plans (money-purchase and target plans), the minimum funding standard will be met so long as the employer contributes the amount required under the plan's contribution formula each year.

Fully insured plans—those funded exclusively by the purchase of individual insurance or annuity contracts—are specifically exempted from the minimum funding standards, as long as the following requirements are met:

  • The contracts provide for the payment of premiums in equal annual amounts over a period no longer than the preretirement period of employment.

  • The plan benefits are equal to those guaranteed by the insurance carrier under the contracts.

  • The premiums on the contracts have been paid when due or, if there has been a lapse, the policy has been reinstated.

  • No rights under the insurance contract have been subject to a security interest at any time during the plan year.

  • No policy loans are outstanding at any time during the plan year.

Plans that are fully insured under group contracts are also exempt from the minimum funding standard, as long as the contracts meet conditions similar to those previously listed. These would ordinarily have to be group contracts providing fully allocated funding.

1 comments:

R W Employee Benefits said...

Life insurance is very important and it is the best way to save money. If you are busy person and have no any time to go insurance company and you can easily get insurance in the internet.
Employee Benefits

Related Posts with Thumbnails