IRS Form 5330: How to Calculate Penalties for Underfunded Plans

Most people want to aggressively fund their defined benefit plan or cash balance plan to take advantage of the tax deduction. We know this is the #1 reason people set up these plans.

But what happens if you can’t fund the minimum amount? Are there IRS penalties? What forms have to be filed?

In this article, we’re going to discuss the penalties relating to underfunding of defined benefit plans. We’ll walk through the IRS Form and do a brief sample calculation. Let’s get started.

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Table of Contents:

Who must file IRS Form 5330?

Form 5330 should be filed by employers when their defined benefit plan is underfunded to ensure compliance with IRS regulations. Underfunding a defined benefit plan can have serious implications for both employees and the employer. If a plan does not have enough assets to meet its promised benefit, it may jeopardize the financial security of retirees and active employees who are counting on these funds. Filing Form 5330 is an important step in rectifying underfunding and helping to protect the long-term interests of plan participants.

If you are unable to meet the minimum contribution amount required in your defined benefit plan, please contact Emparion so that we can review your options and assist you with filing Form 5330.

How do I file Form 5330?

Emparion will work directly with the employer to file Form 5330 as well as any extensions required. According to the IRS website, Form 5330 can be filed electronically or by mail. Generally, Emparion will complete all the required information on the form, then send the form to the employer for signatures. Once signed, the employer will then mail the form to the address indicated in the form instructions. We recommend mailing the form through a guaranteed method that allows for tracking and confirmation of delivery.

Mail your return to the following address:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201

How do I pay the excise tax?

Emparion will assist you with calculating the amount due at the time of filing. When you mail Form 5330, make your check or money order payable to the ‘United States Treasury’ for the full amount due. Attach the payment to your return. Write your name, plan EIN, plan number, and ‘Form 5330, Section 4971’ on your payment.

What is the deadline to file Form 5330?

If you are completing Form 5330 due to a minimum funding deficiency, then Form 5330 is due by the 15th day of the 10th month after the last day of the plan year.

Extension: You may file Form 5558 to request an extension of time to file Form 5330. If approved, you may be granted an extension of up to 6 months from the normal due date.

What is the penalty for failure to meet the required minimum contribution?

For single employer defined benefit plans, the penalty for failing to make the required minimum contribution is typically 10% of the unpaid minimum required contribution amount remaining as of the plan year end.

For example, if ABC Inc.’s required minimum contribution for its defined benefit plan in 2023 is $100,000, and they only contribute $60,000, they would be subject to a 10% penalty on the underfunded amount of $40,000. The penalty would be $4,000.

Please note, additional penalties may apply such as late filing of a return and late payment of tax. In addition, the IRS is required by law to charge interest when you do not pay your liability on time.

How can I avoid the penalty in the future?

Our actuaries will calculate minimum, maximum and target funding each year. This is driven largely by annual compensation, prior plan funding and asset returns. We generally recommend funding the target amount to prevent the plan from being overfunded or underfunded. Be sure to also review your actuarial valuations.

These reports help determine the plan’s funding status and whether contributions meet the minimum requirements. Consider consulting with a financial advisor or CPA who specializes in defined benefit plans and be sure to include your defined benefit plan contribution in your financial planning. In some cases, you may request a plan amendment, subject to IRS approval and applicable fees.  

References:

Form 5330: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-pdf/f5330.pdf

Form 5330 Instructions: https://www.irs.gov/instructions/i5330#en_US_202212_publink100046887

IRS Tax Code: https://www.law.cornell.edu/uscode/text/26/4971

Paul Sundin

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