Making the Most of your Defined Benefit Contribution in a Post PPA World
Under the Pension Protection Act (PPA) of 2006, employer contributions are no longer dollar to dollar when applied to the minimum required contribution calculated to cover plan liabilities. The minimum contribution is calculated by the actuary as of the valuation date of the plan year.
The required contribution accrues interest each day past the valuation date. The later you deposit the minimum funding, the higher your required plan contribution will be. Though the deadline for the employer contribution is eight and a half months after the plan year, with company tax filing extension, making the employer contribution as soon as possible will reduce the total required contribution. With interest rates starting to trend upward, the cost of postponing employer contributions to a pension plan will increase for each day past the valuation date.
The cost of waiting is increased for plans who experienced a funding shortfall in the prior plan year. If a plan had a funding shortfall in the prior plan year, they are expected to pay at least one quarter of the minimum required contribution on a quarterly basis, starting three and a half months after the start of the new plan year, and the fourth expected payment being fifteen days after the plan year. For a calendar year plan, these due dates would be April 15, 2014, July 15, 2014, October 15, 2014, and January 15, 2015 for the 2014 minimum required contribution.
How can you tell if your plan experienced a funding shortfall in the prior year? Look at the Schedule SB provided by your actuary for that year. If line 3d column (2) is greater than line 2b, there was a funding shortfall for that plan year. There are no penalty fees, however there will be added interest to the required contribution for each day past the expected contribution dates. For example, if the minimum required contribution is $100,000, quarterly contributions of $25,000 will be required. Otherwise the contributions will discounted at a higher rate than if they had been made on time.
With the regulations discounting the value of employer contributions for defined benefit plans under the Pension Protection Act of 2006 and rising interest rates, it is very beneficial for employers to make their contributions to their pension plans in a timely manner to optimize their effect on their plan’s liability.