One confusing aspect of pension plan terminations is when the plan sponsor’s reporting obligation for the plan ends. Often there is the perception that a short plan year occurs during the year of plan termination, even if benefits are not distributed at that time. This post will clarify a few items with regard to short plan years and how they relate to terminating pension plans.
General Rule: In the case of a terminating pension plan, a short plan year does not occur until all assets have been distributed.
Example: Consider a calendar-year pension plan. If the plan is terminated on 6/30/2010 but assets are not fully distributed until 9/30/2011, then a short plan year does not occur until 2011. The 2010 plan year still ends on 12/31/2010 and the minimum funding requirements are still in effect for the 2010 plan year (see below).
5500 Implications: The due date for filing the annual IRS Form 5500 depends upon the end date of a short plan year. In a regular plan year, the Form 5500 would be due by the last day of the 7th calendar month after the plan year ends (or 9 ½ months with extension). The same methodology is true when there is a short plan year: the 7 and 9 ½ month due dates are based on the end of the short plan year, not on the regular plan year-end date. Care must be taken that Form 5500 due dates are not missed.
Example: Consider a calendar-year plan year beginning 1/1/2010. In a regular plan year, the latest filing deadline for the Form 5500 would be 10/15/2011. However, if the plan terminated in 2009 and paid out assets on 6/30/2010 then the latest filing deadline for the Form 5500 would be 4/15/2011 (i.e., 9 ½ months after the end of the short plan year).
Minimum Funding Requirements: Revenue Ruling 79-237 states that minimum funding standards under ERISA continue to apply until the end of the plan year containing the plan termination date. For short plan years, the minimum required contribution amount should also be adjusted. The shortfall amortization installment component is prorated for the short plan year, but the normal cost does not need to be prorated since it should be calculated to directly reflect only those benefits which will accrue during the short plan year.
For plans terminating mid-year, the minimum funding requirements are also calculated as if it is a short plan year. However, it is not truly a short plan year until assets are distributed. Therefore, the plan year-end date remains the same and all filing and contribution due dates remain unchanged.
Example: Assume that a calendar-year plan terminates on 6/30/2010. Then the minimum funding components consist of 1) a normal cost that reflects 6 months of benefit accruals and 2) a shortfall amortization component that has been prorated for half of a plan year. However, the plan year still ends on 12/31/2010 so the minimum required contribution is due no later than 9/15/2011 and the Form 5500 is due no later than 10/15/2011.
Schedule SB: Since minimum funding requirements continue to apply through the year of plan termination, a Schedule SB must also be filed through the year of plan termination (but not thereafter, unless the plan becomes un-terminated).