The IRS has conducted a series of audits of single-employer defined benefit pension plans relating to changes to funding requirements and administrative practices required under the Pension Protection Act of 2006 (PPA). As reported by the IRS in a recent Employee Plans News, the purpose of the examination project was to train its agents, identify potential areas of noncompliance, outline consistent correction methods and report the findings. Although the project is still ongoing, the IRS noted that the following issues have been identified to date:

  • Notices. Annual funding notices were late or undated. Relative value notices did not satisfy the requirements in the regulations. • Contributions. Late quarterly contributions. Late contribution payments resulting in liquidity shortfalls. Funding in excess of the deduction limit.
  • Elections/Certifications. Elections to use or reduce prefunding and/or carryover balances were late or undated. Elections to use balances to meet quarterly contributions were late or did not specify the dollar amount. Certification of the adjusted funding target attainment percentage was late.
  • Errors in Calculating Benefits. No actuarial increase for late retirement benefits. Compensation used to calculate benefits did not match plan definition. Service calculated incorrectly. Incorrect interest rate used for payment options subject to Code section 417(e)(3).
  • Miscellaneous. No definition of compensation under the plan for calculating benefits. Assets valued differently for minimum funding purposes and for fundingbased restrictions. Life insurance premiums incorrectly included as plan expenses for the target normal costs.  

The IRS noted that many of the failures relate to the funding rules and do not affect the qualified status of a plan. These failures, however, may result in the assessment of excise taxes or penalties. Qualification failures would need to be corrected in accordance with the Employee Plans Compliance Resolution System under Revenue Procedure 2008-50.

REINHART COMMENT: The information discovered by the IRS during its initial PPA audits can be useful to both plan sponsors and service providers. Sponsors of a defined benefit pension plan may wish to provide a copy of these results to the plan's actuary and recordkeeper to verify compliance with PPA requirements.