IRS Lists Issues Found in Audited DB Plans

June 11, 2012 ( - The Pension Protection Act of 2006 (PPA) made significant changes to funding requirements and administrative practices for defined benefit (DB) plans, including cash balance plans.

By Rebecca Moore | June 11, 2012

The Internal Revenue Service (IRS) said a team of agents received training in the new law and subsequently conducted a number of DB plan audits. Although the project is still ongoing, many of the cases have been completed.  

Issues identified to date include: 

  • Annual funding notices made late or not dated in accordance with PPA section 501(a); Employee Retirement Income Security Act (ERISA) section 101(f); 
  • Elections to use or reduce prefunding and/or carryover balances made late/not dated (Treas. Regs. sections 1.430(f)-1(e) and (f)); 
  • Elections to use prefunding and carryover balance to meet quarterly contributions made late or elections not specifying the dollar amount(s); 
  • Late Adjusted Funding Target Attainment Percentage certification (Treas. Regs. sections 1.436-1(f) and -1(h)); 
  • Actuarial increase for late retirement benefits not made; 
  • Assets valued differently for IRC section 430 versus IRC section 436 -- Internal Revenue Code (IRC) section 430 describes the new funding requirements under PPA. The new law imposes restrictions via IRC section 436 on benefit payments, benefit increases and accruals when a plan is underfunded beyond certain thresholds; 
  • Relative value disclosure notices didn’t satisfy Treas. Regs. section 1.417(a)(3)-1(c)(1)(iv); 
  • Late contribution payments resulting in liquidity shortfalls; 
  • Late quarterly contributions - IRC section 430(j)(3); 
  • Inappropriate inclusion of premiums for life insurance policies in target normal cost as plan expenses; 
  • Funding in excess of the IRC section 404(o) limitation; 
  • Compensation for purposes of determining the accrued benefit in the valuation doesn’t match the definition per plan terms; 
  • Compensation for benefit purposes not defined in the plan; 
  • Service incorrectly calculated for benefit purposes; and 
  • Incorrect interest rates used for calculating benefits distributions for payment options that are subject to IRC 417(e)(3). 


The IRS noted many of the identified issues are failures to comply with the funding rules and consequently, do not threaten the qualified status of the plan, but may result in assessment of excise tax or penalties. However, some of the issues do result in qualification failures, such as a plan not operating in accordance with its specific written terms or in compliance with the requirements of IRC section 401(a)(29).   

Resolution of the qualification failures have been addressed using the appropriate correction program, and applying the basic correction principles discussed in Revenue Procedure 2008-50.