You might be aware that if the due date for a tax return occurs on a weekend or holiday, that due date is moved to the next business day. This has happened a couple of times in recent years with the dreaded April 15 due date for personal tax returns (Form 1040). In fact, one year the 1040s weren’t due until April 18. April 15 and 16 were on a weekend, and April 17 was Emancipation Day, thus pushing the due date to April 18.
Does the same thing happen with the minimum contribution deadline for defined benefit pension plans? September 15 is the usual deadline for contributing for the prior plan year for calendar year DB plans. In 2018, September 15 is a Saturday. It is not clear whether a minimum funding deadline that falls on a weekend or a holiday is moved to the next business day. Therefore, the safe approach is to contribute by September 15.
Excise Tax Applies if Minimum Contribution Made Late
DB plans and money purchase plans are subject to the minimum funding rules. Profit sharing plans and 401(k) plans are not subject to the minimum funding rules, even though 401(k) plans may have safe harbor contributions that are required by the plan and certain profit sharing plans have fixed contribution formulas.
For a plan subject to the minimum funding rules, the deadline for any minimum required contribution is 8½ months after the close of the plan year. Conventionally, this means the 15th day of the ninth month after the plan year ends. Contributions for the plan year ending December 31, 2017 must be made by September 15, 2018. Contributions for the plan year ending June 30, 2018 must be made by March 15, 2019, and so on. For the remainder of this article, we will assume a DB plan operating on a calendar year basis with a minimum funding deadline of September 15.
The penalty for not making a required DB plan contribution by September 15 is an excise tax equal to 10% of the amount not timely contributed. If the required contribution for 2017 is $100,000, but only $80,000 is contributed by September 15, 2018, an excise tax of $2,000 applies (10% of the $20,000 not timely contributed). This is the case even if the final $20,000 is deposited just one day late.
Although the underlying math is not precise, an unpaid minimum contribution for one plan year gets added to required contribution for the next plan year. Continuing the example above, suppose there is another required contribution of $100,000 for 2018. That $100,000 plus the unpaid $20,000 from 2017, or $120,000 total, must be deposited by September 15, 2019. If none of this is deposited by September 15, 2019, a $12,000 excise tax would apply (10% × $120,000). If a portion is contributed, the excise tax is 10% of whatever is not paid on time.
Missing a minimum funding deadline is serious business. If an unpaid minimum contribution persists long enough, the IRS has the right to assess a 100% excise tax. We have not ever seen the 100% tax assessed. When it is, it can be abated if the unpaid minimum contribution is made to the plan within 90 days of notification of the 100% tax. The 10% tax cannot be abated by contributing the unpaid amount. You are stuck with it.
Simply depositing less than you intended doesn’t give rise to a penalty tax if the minimum funding requirements were met. Suppose the minimum funding requirement is $100,000. You contribute $150,000 well in advance of the funding deadline and intend to contribute $50,000 more, but for some reason you don’t get that last deposit in until September 30. There is no excise tax for not making the final $50,000 deposit by September 15 because the minimum funding requirement had already been met with the $150,000 contribution. However, the $50,000 may need to be applied to a different plan year or tax year than you originally intended.
Minimum Funding Deadline vs. Deadline for Tax Deduction
Different deadlines apply for determining whether a contribution has been made in time to be taken as a tax deduction. Generally, contributions made during a taxable year are deductible for that taxable year. Any contribution made by the due date of the tax return (including extensions) is deemed to have been made on the last day of a taxable year.
A corporation’s 2018 tax return is due April 15, 2019. If the return is filed without extension, a 2018 pension contribution would need to be made by April 15, 2019 to be deductible for 2018. If the contribution is not made until April 30, 2019, the minimum funding deadline of September 15, 2019 has been met, but the contribution has not been made in time to be deductible for 2018 because the tax return was due April 15, 2018.
Now assume the corporation received a six-month extension to October 15, 2019 for filing its tax return. It makes a pension contribution on October 8, 2019. The contribution has been made in time to be deductible for 2018. The September 15 minimum funding deadline has been missed, though, so a 10% excise tax would apply to the extent the October 8 contribution was needed to meet the funding requirements.
Mailing Contribution by September 15 May Not Be Sufficient
If the monthly, quarterly, or annual statement from the financial institution holding plan assets shows a contribution date on or before September 15, one can be certain that the minimum funding deadline has been met. It could be that the contribution arrives at the financial institution on or before September 15 but doesn’t appear on the statement until after September 15. Perhaps the plan sponsor delivered the check in person late in the day on September 15. In that case, it would be wise to obtain a receipt from the financial institution showing the contribution arrived by September 15.
With respect to mail or private delivery service, it is believed by many that the minimum funding requirement is met if the contribution is postmarked by September 15, even though it arrives at the financial institution after September 15. Because the rules on this point are not clear, we would advise not waiting that late to mail a contribution. Rather, the contribution should be delivered by a means that will ensure its arrival at the financial institution by September 15 (preferably before).
In cases where the plan sponsor is also the trustee, some have argued that simply writing the contribution check on September 15 is sufficient if the trustee intends to deposit the check immediately. The reasoning is that the check is being handed from the plan sponsor to the trustee (who happen to be one and the same!) by the deadline. We do not find this argument compelling and would not recommend that any of our clients hang their hat on it.
So Do You Have Until the Next Business Day or Not?
Getting back to the issue of whether a contribution deadline that falls on a weekend or holiday moves to the next business day, there has been conflicting guidance from the IRS. A private letter ruling from decades ago indicates that the minimum funding deadline is indeed extended when the date falls on a weekend or holiday. However, there has been other guidance since then suggesting that the minimum funding deadline stays where it is on a weekend or holiday.
Our best advice is to be safe. Make your payments and file your forms well in advance of the deadline. If that will be hard to do, then do the appropriate research to find out whether the deadline is in fact moved to the next business day. There is no use taking a chance by waiting until the last minute.
This article does not constitute tax advice. An employer will wish to verify deductibility of any retirement plan contributions with its CPA or other tax return preparer.