§ 54.4971(c)-1 — Taxes on failure to meet minimum funding standards; definitions.

§ 54.4971(c)-1 Taxes on failure to meet minimum funding standards; definitions.

(a) In general. This section sets forth definitions that apply for purposes of applying the rules of section 4971.

(b) Accumulated funding deficiency—(1) Multiemployer plans. With respect to a multiemployer plan defined in section 414(f), the term accumulated funding deficiency has the meaning given to that term by section 431. A plan's accumulated funding deficiency for a plan year takes into account all charges and credits to the funding standard account under section 412 for plan years before the first plan year for which section 431 applies to the plan.

(2) CSEC plans. With respect to a CSEC plan (that is, a plan that fits within the definition of a CSEC plan in section 414(y) for plan years beginning on or after January 1, 2014 and for which the election under section 414(y)(3)(A) has not been made), the term accumulated funding deficiency means the CSEC accumulated funding deficiency determined under section 433. A plan's CSEC accumulated funding deficiency for a plan year takes into account all charges and credits to the funding standard account under section 412 for plan years before the first plan year for which section 433 applies to the plan.

(c) Unpaid minimum required contribution—(1) In general. The term unpaid minimum required contribution means, with respect to any plan year, the portion of the minimum required contribution under section 430 for the plan year for which contributions have not been made on or before the due date for the plan year under section 430(j)(1). The unpaid minimum required contribution is determined after taking into account the interest adjustment to contributions under § 1.430(j)-1(b)(4) and any offsets from use of the funding balances under § 1.430(f)-1(d).

(2) Accumulated funding deficiency for pre-effective plan year. For purposes of this section, a plan's accumulated funding deficiency under section 412 for the pre-effective plan year is treated as an unpaid minimum required contribution for that plan year until correction is made under the rules of paragraph (d)(2) of this section.

(d) Correct—(1) Accumulated funding deficiency. With respect to an accumulated funding deficiency for a plan year that is described in paragraph (b) of this section, the term correct means to contribute, to or under the plan, the amount necessary to reduce the accumulated funding deficiency as of the end of that plan year to zero. To reduce the deficiency to zero, the contribution must include interest at the plan's valuation interest rate for the period between the end of that plan year and the date of the contribution (determined taking into account the rules of section 431(c)(8) or section 433(c)(9), as applicable).

(2) Unpaid minimum required contribution—(i) In general. With respect to an unpaid minimum required contribution for a plan year, the term correct means to contribute, to or under the plan, an amount that, when discounted to the valuation date for the plan year for which the unpaid minimum required contribution is due at the appropriate rate of interest, equals or exceeds the unpaid minimum required contribution. For this purpose, the appropriate rate of interest is the plan's effective interest rate for the plan year for which the unpaid minimum required contribution is due except to the extent that the payments are subject to additional interest as provided under section 430(j)(3) or (4).

(ii) Pre-PPA accumulated funding deficiency. With respect to the accumulated funding deficiency under section 412 for the pre-effective plan year that is described in paragraph (c)(2) of this section, the term correct means to contribute, to or under the plan, the amount of that accumulated funding deficiency increased with interest from the end of the pre-effective plan year to the date of the contribution at the plan's valuation interest rate for the pre-effective plan year.

(iii) Ordering rule. For purposes of section 4971 and this section, a contribution is attributable first to the earliest plan year of any unpaid minimum required contribution for which correction has not yet been made.

(3) Corrective action of certain retroactive plan amendments. Certain retroactive plan amendments that meet the requirements of section 412(d)(2) may reduce the minimum required contribution for a plan year, which would reduce the accumulated funding deficiency or the amount of the unpaid minimum required contribution for a plan year.

(e) Taxable period—(1) In general. The term taxable period means the period beginning with the end of the plan year in which there is an accumulated funding deficiency or unpaid minimum required contribution, whichever is applicable, and ending on the earlier of:

(i) The date of mailing of a notice of deficiency under section 6212 with respect to the tax imposed by section 4971(a); or

(ii) The date on which the tax imposed by section 4971(a) is assessed.

(2) Special rule. Where a notice of deficiency referred to in paragraph (e)(1)(i) of this section is not mailed because a waiver of the restrictions on assessment and collection of a deficiency has been accepted or because the deficiency is paid, the date of filing of the waiver or the date of such payment, respectively, is treated as the end of the taxable period.

(f) Single-employer plan. The term single-employer plan means a plan to which the minimum funding requirements of section 412 apply that is not a multiemployer plan as described in section 414(f). The term single-employer plan includes a multiple employer plan to which section 413(c) applies, other than a CSEC plan as described in paragraph (b)(2) of this section.

(g) Examples. The following examples illustrate the rules of this section.

Example 1.(i) Plan A, a single-employer defined benefit plan, has a calendar year plan year and a January 1 valuation date. The sponsor of Plan A has a calendar taxable year. Plan A has no funding shortfall as of January 1, 2008, and Plan A has no unpaid minimum required contributions for 2008 or any earlier plan year. The minimum required contribution for the 2009 plan year is $250,000. The plan sponsor makes one contribution for 2009 on July 1, 2009 in the amount of $200,000, and the sponsor does not make an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for 2009. The effective interest rate for Plan A for the 2009 plan year is 5.90%.

(ii) The contribution paid July 1, 2009 is discounted for 6 months (to the valuation date) at the effective interest rate ($200,000 ÷ 1.0590(6/12) = $194,349). The unpaid minimum required contribution for the 2009 plan year is $250,000 minus $194,349, or $55,651. The excise tax due under section 4971(a) is 10% of the unpaid minimum required contribution, or $5,565.

Example 2.(i) The facts are the same as in Example 1. The plan sponsor makes an additional contribution of $175,000 on December 31, 2010.

(ii) Under the ordering rule in paragraph (d)(2)(iii) of this section, the contribution made on December 31, 2010 is applied first to correct the unpaid minimum required contribution for 2009. The portion of the contribution paid December 31, 2010 that is required to eliminate the unpaid minimum required contribution for 2009 (taking into account the 2009 effective interest rate for the 24 months between January 1, 2009 and the payment date of December 31, 2010), is $55,651 multiplied by 1.059(24/12) or $62,412. The remaining payment of $112,588 ($175,000 minus $62,412) is applied to the contribution required for the 2010 plan year.

Example 3.(i) Plan B, a single-employer defined benefit plan, has a calendar year plan year. The sponsor of Plan B has a calendar taxable year. Plan B has an accumulated funding deficiency of $100,000 as of December 31, 2007, including additional interest due to late required installments during 2007. The valuation interest rate for the 2007 plan year is 7.5%.

(ii) In accordance with paragraph (c)(2) of this section, the accumulated funding deficiency under section 412 as of December 31, 2007 is considered an unpaid minimum required contribution until it is corrected. Pursuant to paragraph (d)(2)(ii) of this section, the amount needed to correct that accumulated funding deficiency is $100,000 plus interest at the valuation interest rate of 7.5% for the period between December 31, 2007 and the date of payment of the contribution.

(iii) The funding shortfall as of January 1, 2008 is calculated as the difference between the funding target and the value of assets as of that date. The assets are not adjusted by the amount of the accumulated funding deficiency. The fact that the contribution was not made for the 2007 plan year means that the January 1, 2008 funding shortfall is larger than it would have been otherwise.

Example 4.(i) The facts are the same as in Example 3. The minimum required contribution for the 2008 plan year is $125,000, but the plan sponsor does not make any required contributions for 2008.

(ii) The total unpaid minimum required contribution as of December 31, 2008 is the sum of the $100,000 accumulated funding deficiency under section 412 from 2007 and the $125,000 unpaid minimum required contribution for 2008, or $225,000. The section 4971(a) excise tax applies to the aggregate unpaid minimum required contributions for all plan years that remain unpaid as of the end of 2008. In this case, there is an unpaid minimum required contribution of $100,000 for the 2007 plan year and an unpaid minimum required contribution of $125,000 for the 2008 plan year. The section 4971(a) excise tax is 10% of the aggregate of those unpaid amounts, $22,500.

Example 5.(i) The facts are the same as in Example 4, except that the plan sponsor makes a contribution of $150,000 on December 31, 2008. No additional contributions are paid through September 15, 2009. Required installments of $25,000 each are due April 15, 2008, July 15, 2008, October 15, 2008, and January 15, 2009. Plan B's effective interest rate for the 2008 plan year is 5.75%.

(ii) In accordance with paragraph (c)(2) of this section, the accumulated funding deficiency under section 412 as of December 31, 2007 is treated as an unpaid minimum required contribution until it is corrected.

(iii) The December 31, 2008 contribution is first applied to the 2007 accumulated funding deficiency under section 412 that is treated as an unpaid minimum required contribution. Accordingly, the amount needed to correct the 2007 unpaid required minimum contribution ($100,000 multiplied by 1.075, or $107,500) is applied to eliminate this unpaid minimum required contribution for the 2007 plan year.

(iv) The remaining $42,500 December 31, 2008 contribution ($150,000 minus $107,500) is then applied to the 2008 minimum required contribution. This amount is first allocated to the required installment due April 15, 2008. In accordance with § 1.430(j)-1(b)(4)(ii) of this chapter, the adjustment for interest on late required installments is increased by 5 percentage points for the period of underpayment. Therefore, $25,000 of the remaining December 31, 2008 contribution is discounted using an interest rate of 10.75% for the 8 1/2-month period between the payment date of December 31, 2008 and the required installment due date of April 15, 2008, and at the 5.75% effective interest rate for the 3 1/2 months between April 15, 2008 and January 1, 2008. This portion of the December 31, 2008 contribution results in an adjusted amount of $22,880 (that is, $25,000 ÷ 1.1075(8.5/12) ÷ 1.0575(3.5/12)) as of January 1, 2008.

(v) The remaining December 31, 2008 contribution is then applied to the required installment due July 15, 2008. The $17,500 balance of the December 31, 2008 contribution ($150,000 minus $107,500 minus $25,000) is paid after the due date for the second required installment. Accordingly, the remaining $17,500 contribution is adjusted using an interest rate of 10.75% for the 5 1/2-month period between the payment date of December 31, 2008 and the required installment due date of July 15, 2008, and at the 5.75% effective interest rate for the 6 1/2 months between July 15, 2008 and January 1, 2008. This portion of the December 31, 2008 contribution results in an adjusted amount of $16,202 (that is, $17,500 ÷ 1.1075(5.5/12) ÷ 1.0575(6.5/12)) as of January 1, 2008.

(vi) The remaining unpaid minimum required contribution for 2008 is $125,000 minus the interest-adjusted amounts of $22,880 and $16,202 applied towards the 2008 minimum required contribution as determined in paragraphs (iv) and (v) of this Example 5. This results in an unpaid minimum required contribution of $85,918 for 2008. The section 4971(a) excise tax is 10% of the unpaid minimum required contribution, or $8,592.

Example 6.(i) Plan C, a single-employer defined benefit plan, has a calendar year plan year and a January 1 valuation date, and has no funding standard carryover balance or prefunding balance as of January 1, 2008. Plan C's sponsor has a calendar taxable year. The minimum required contributions for Plan C are $100,000 for the 2008 plan year, $110,000 for the 2009 plan year, $125,000 for the 2010 plan year, and $135,000 for the 2011 plan year. No contributions for these plan years are made until September 15, 2012, at which time the plan sponsor contributes $273,000 (which is exactly enough to correct the unpaid minimum required contributions for the 2008 and 2009 plan years).

(ii) The excise tax under section 4971(a) for the 2008 taxable year is 10% of the aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year ending within the 2008 taxable year. Accordingly, the excise tax for the 2008 taxable year is $10,000 (that is, 10% of $100,000). The excise tax for the 2009 taxable year is $21,000 (that is, 10% of the sum of $100,000 and $110,000) and the excise tax for the 2010 taxable year is $33,500 (that is, 10% of the sum of $100,000, $110,000, and $125,000).

(iii) The contribution made on September 15, 2012 is applied to correct the unpaid minimum required contributions for the 2008 and 2009 plan years by the deadline for making contributions for the 2011 plan year. Therefore, the excise tax under section 4971(a) for the 2011 taxable year is based only on the remaining unpaid minimum required contributions for the 2010 and 2011 plan years, or $26,000 (that is, 10% of the sum of $125,000 and $135,000).

(iv) The plan sponsor may also be required to pay an excise tax of 100% under section 4971(b), if the unpaid minimum required contributions are not corrected by the end of the taxable period.

(h) Effective/applicability dates and transition rules—(1) Statutory effective date—(i) In general. In general, the amendments made to section 4971 by section 114 of the Pension Protection Act of 2006, Public Law 109-280, 120 Stat. 780 (2006), as amended (PPA '06), apply to taxable years beginning on or after January 1, 2008, but only with respect to a plan year that—

(A) Begins on or after January 1, 2008; and

(B) Ends with or within any such taxable year.

(ii) Plans with delayed PPA '06 effective dates. In the case of a plan for which the effective date of section 430 for purposes of determining the minimum required contribution is delayed in accordance with sections 104 through 106 of PPA '06, the amendments made to section 4971 by section 114 of PPA '06 apply to taxable years beginning on or after January 1, 2008, but only with respect to a plan year—

(A) To which section 430 applies to determine the minimum required contribution of the plan; and

(B) That ends with or within any such taxable year.

(2) Effective date of regulations. This section is effective for taxable years beginning on or after the statutory effective date described in paragraph (h)(1) of this section, but in no event does this section apply to taxable years ending before April 15, 2008.

(3) Pre-effective plan year. For purposes of this section, the pre-effective plan year for a plan is the plan year described in § 1.430(a)-1(h)(5) of this chapter. Thus, except for plans with a delayed effective date under paragraph (h)(1)(ii) of this section, the pre-effective plan year for a plan is the last plan year beginning before January 1, 2008.

[T.D. 9732, 80 FR 54400, Sept. 9, 2015]