Employers sponsoring single-employer defined benefit pension plans have long faced the pressure of meeting required minimum funding contributions, especially during periods of market volatility or economic disruption. When those contributions create financial hardship, federal law provides mechanisms for relief, but navigating those mechanisms requires a clear understanding of both the applicable requirements and the procedures for requesting exceptions.
The employee benefits and ERISA attorneys at Mandelbaum Barrett PC advise plan sponsors and employers on pension funding requirements, plan compliance, and the strategies available when meeting required contributions creates operational or financial strain.
What Required Contributions Are
Under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, sponsors of single-employer defined benefit pension plans must make minimum required contributions each plan year. The amount is based on the plan’s funded status, actuarial assumptions, and the applicable rules for calculating the plan’s funding shortfall.
Failure to meet required contributions can trigger penalties, automatic benefit restrictions, and required disclosures to participants. Plans that fall below certain funding thresholds face restrictions on benefit increases, lump-sum payments, and certain plan amendments. The stakes for compliance are therefore high for both the employer and participants.
When Relief May Be Available
The Pension Protection Act of 2006, the American Rescue Plan Act of 2021, and other legislation have created various relief mechanisms for plan sponsors struggling with minimum funding requirements. The American Rescue Plan Act provided significant relief for multiemployer pension plans in critical or declining status, as well as extended amortization periods for single-employer plans.
According to the Internal Revenue Service, plan sponsors can request funding waivers in cases of substantial business hardship, subject to specific statutory criteria and IRS review. These waivers allow a plan sponsor to skip or defer a required minimum contribution for one or more plan years, though interest on the waived amounts continues to accrue.
The Funding Waiver Process
Obtaining a funding waiver from the IRS is a formal process that requires demonstrating that the contributing sponsor is unable to make the minimum required contribution without incurring substantial business hardship. The IRS considers factors such as:
- Whether the employer is operating at an economic loss
- Whether there has been a substantial decrease in the employer’s workforce
- Whether it is reasonable to expect the level of plan funding to improve over time
- Whether the waiver is in the best interests of plan participants
A waiver application must be filed before the deadline for the contribution being waived and must include detailed financial information and actuarial data supporting the hardship claim.
Plan Amendment Restrictions and Benefit Limitations
Plans that have received funding waivers, or that fall below applicable funded status thresholds, face restrictions on their ability to increase benefits or make certain distributions. These restrictions are designed to protect the solvency of the plan and the security of participant benefits.
Employers who receive a funding waiver must also provide notice to participants and beneficiaries, as well as to the Pension Benefit Guaranty Corporation (PBGC). Transparency requirements are part of the federal framework intended to keep participants informed about the financial health of their pension plan.
Coordinating Relief with Broader Plan Strategy
Required contribution relief is one tool in a broader set of options available to employers managing pension plan obligations. Plan amendments, benefit freezes, and ultimately plan termination are additional options that may be appropriate in different circumstances. Each of these actions has its own procedural requirements, participant notice obligations, and regulatory approvals. Working with counsel who can evaluate the full range of options helps employers make informed decisions that balance fiduciary responsibility with business realities.
Contact Mandelbaum Barrett PC for Employee Benefits Guidance
Navigating pension funding requirements, waiver applications, and plan compliance requires legal counsel with specific experience in ERISA and employee benefits law. The attorneys at Mandelbaum Barrett PC work with employers across New Jersey and New York on the full range of defined benefit plan issues.
Reach out through our contact page to speak with our employee benefits team. We are here to help you understand your obligations and identify available relief options.