The Pension Protection Act of 2006 (“PPA”) created certain funding classifications for multiemployer pension plans. Seriously underfunded plans are classified as either “critical” (“red zone”) or endangered (“yellow zone”). Plans that fall in between these two levels are considered “seriously endangered” (“orange zone”) plans. Such plans must send participating employers a notice about the plan’s underfunded status and provide any bargaining parties with a funding bail-out plan (which consists of one or more schedules providing for increased contributions, and/or decreased future benefit accruals) to incorporate into the parties’ next CBA. Such a plan is called a “rehabilitation plan” for plans in critical status, and a “funding improvement plan” for plans in endangered status.
Once a funding improvement or rehabilitation plan is in effect, an employer’s failure to make the required contribution within the plan’s contribution deadlines triggers an excise tax equal to 100% of the contributions due. The tax applies in addition to the usual remedies available under the CBA and ERISA for delinquent contributions (e.g.., liquidated damages, interest, etc.) An employer subject to the excise tax must report it on IRS Form 5330 by the last day of the 7th month after the end of the employer’s tax year or 8½ months after the last day of the plan year that ends with or within the filer’s tax year.
Under IRC §4971, however, the IRS may waive the tax in whole or part if it determines the failure to make timely contributions was due to reasonable cause and not willful neglect. “Reasonable cause” includes factors indicating that the tax would be an excessive or otherwise inequitable burden relative to the size and nature of the violation.
Employers that are assessed the 100% tax, therefore, should present to the IRS any mitigating factors. Such factors can include unanticipated changes in business or liquidity conditions, the devastating effect that paying the tax would have on the employer’s ability to continue its business and make future contributions, and, if applicable, the fact that the contribution was made shortly after the due date, was not large relative to the plan’s overall size, did not damage participants and the fact that the employer has a good track record of making timely contributions. Evidence that the plan has been meeting the goals of its funding rehabilitation plan also could help persuade IRS to mitigate the tax. It should be remembered that the primary interest of both the IRS and the PBGC is to restore underfunded multiemployer plans to good financial health and that forcing an employer that has been making contributions in good faith to pay a 100% excise tax can impede a plan’s ability to restore its financial health.