SCOTUS Reports

Tag: Minimum Funding Standards

  • Lee Engineering Supply Co. v. Commissioner, 101 T.C. 189 (1993): Excise Taxes on Pension Plan Funding Deficiencies and Reversions

    Lee Engineering Supply Co. v. Commissioner, 101 T. C. 189 (1993)

    Employers are subject to excise taxes for failing to meet minimum funding standards for pension plans and for reversions of excess funds to the employer upon plan termination.

    Summary

    Lee Engineering Supply Co. faced excise tax liabilities due to its pension plan’s funding deficiency and subsequent reversion of excess funds. The company failed to make a required $6,800 contribution by the due date in 1985, resulting in a 5% excise tax under IRC section 4971. Additionally, when terminating the plan in 1987, Lee Engineering transferred $16,241 from the pension plan to its profit-sharing plan, which was deemed an employer reversion subject to a 10% excise tax under IRC section 4980. The court upheld these taxes, emphasizing the mandatory nature of the excise taxes and the statutory definition of an employer reversion.

    Facts

    Lee Engineering Supply Co. , Inc. adopted a defined benefit pension plan in 1975. In 1985, the company decided to terminate the plan but failed to make a required contribution of $6,853 by the due date of October 15, 1985. The plan was eventually terminated in February 1986, with the pension fund’s assets exceeding liabilities by $16,241. 08, which was transferred to the company’s profit-sharing plan. The company did not file Form 5330 for either the 1985 funding deficiency or the 1987 reversion.

    Procedural History

    The Commissioner determined deficiencies in Lee Engineering’s excise taxes for fiscal years ending 1985 and 1987, along with additions to tax for failure to file and pay. The case was assigned to a Special Trial Judge of the U. S. Tax Court, which adopted the opinion that upheld the deficiencies and additions to tax for 1985 but not for 1987.

    Issue(s)

    1. Whether Lee Engineering is liable for the 5% excise tax under IRC section 4971 for an accumulated funding deficiency in its pension plan for the fiscal year ending 1985?
    2. Whether Lee Engineering is liable for the 10% excise tax under IRC section 4980 for an employer reversion for the fiscal year ending 1987?
    3. Whether Lee Engineering is liable for additions to tax under IRC section 6651(a)(1) and (2) for failure to timely file Form 5330 and pay the tax due for the fiscal year ending 1985?

    Holding

    1. Yes, because Lee Engineering failed to make the required contribution by the due date, resulting in an accumulated funding deficiency subject to the excise tax.
    2. Yes, because the transfer of excess funds from the terminating pension plan to the profit-sharing plan constituted an employer reversion subject to the excise tax.
    3. Yes, because Lee Engineering did not file Form 5330 for the fiscal year ending 1985 and intentionally delayed the required contribution.

    Court’s Reasoning

    The court’s decision was based on the mandatory language of IRC sections 4971 and 4980. For the 1985 deficiency, the court followed precedent from D. J. Lee, M. D. , Inc. v. Commissioner, emphasizing that the excise tax is automatic upon a funding deficiency. Regarding the 1987 reversion, the court relied on the statutory definition of an employer reversion and legislative history indicating that transfers to defined contribution plans constitute reversions. The court rejected Lee Engineering’s equitable arguments, noting that the company did not seek a hardship waiver and failed to file required forms. The court also considered the legislative purpose of protecting employee retirement benefits and recapturing tax benefits on employer reversions.

    Practical Implications

    This decision reinforces the importance of timely compliance with pension plan funding requirements and the consequences of employer reversions. Employers must adhere to the minimum funding standards under IRC section 412 to avoid excise taxes under section 4971. When terminating a defined benefit plan, any transfer of excess assets to another plan of the same employer is treated as an employer reversion subject to the 10% excise tax under section 4980. This ruling impacts how employers manage pension plan terminations and highlights the need for careful planning and consultation with tax professionals to avoid unexpected tax liabilities. Subsequent cases have continued to apply these principles, emphasizing the broad scope of what constitutes an employer reversion.

  • Thompson v. Commissioner, 74 T.C. 873 (1980): Clarifying Minimum Funding Standards and Antidiscrimination Rules in Pension Plans

    Thompson v. Commissioner, 74 T. C. 873 (1980)

    The minimum funding standards of section 412 do not apply to plan qualification under section 401(a), and variations in pension contributions or benefits do not constitute discrimination under section 401(a)(4) unless they favor officers, shareholders, or highly compensated employees.

    Summary

    In Thompson v. Commissioner, the U. S. Tax Court upheld the IRS’s determination that a multiemployer pension plan qualified under section 401(a). The petitioner challenged the plan’s compliance with minimum funding standards under section 412 and alleged discrimination in contributions and benefits. The court clarified that section 412 does not apply to plan qualification under section 401(a) and that variations in contributions or benefits are not discriminatory under section 401(a)(4) unless they favor officers, shareholders, or highly compensated employees. The decision emphasizes the importance of understanding the specific statutory requirements for pension plan qualification and the narrow scope of the antidiscrimination rule.

    Facts

    In June 1976, the Central Pension Fund of the International Union of Operating Engineers and Participating Employers requested a determination from the IRS that its amended plan continued to qualify under section 401(a). Petitioner James E. Thompson, Jr. , an interested party, submitted a comment letter challenging the plan’s qualification. The letter cited issues with contributions by the city and county of Denver through payroll deductions, an agreement with Adolph Coors Co. allowing employees to elect pension contributions instead of vacation pay, and variations in contributions based on work hours under different collective bargaining agreements.

    Procedural History

    The IRS issued a favorable determination letter on May 25, 1977, concluding that the plan qualified under section 401(a). Thompson sought a declaratory judgment in the U. S. Tax Court, challenging the IRS’s determination. The case was submitted for decision on the administrative record, and the court ruled in favor of the respondents.

    Issue(s)

    1. Whether the plan fails to meet the minimum funding standards of section 412 because benefits were paid to or on behalf of employees of the city and county of Denver in excess of amounts contributed by those employees or because employees of Adolph Coors Co. not electing contributions may nonetheless receive retirement benefits based in part on the period of employment with that company.
    2. Whether the plan fails to meet the antidiscrimination requirement of section 401(a)(4) because employees whose benefits are based in part on periods of union membership may receive greater retirement benefits than those whose benefits are based largely on periods of work for an employer contributing on their behalf or because, under certain collective bargaining agreements, amounts may be contributed for only a limited number of hours that employees work.

    Holding

    1. No, because section 412 does not apply to plan qualification under section 401(a) and was not applicable to any completed plan year at the time of the IRS’s determination.
    2. No, because the variations in contributions or benefits do not constitute discrimination within the meaning of section 401(a)(4) as they do not favor officers, shareholders, or highly compensated employees.

    Court’s Reasoning

    The court reasoned that section 412 establishes minimum funding standards for plan years after a plan qualifies under section 401(a), not for plan qualification itself. The court noted that the effective date provisions of section 412 did not apply to any completed plan year when the IRS made its determination. Regarding the antidiscrimination issue, the court held that variations in contributions or benefits are not discriminatory under section 401(a)(4) unless they favor officers, shareholders, or highly compensated employees. The court emphasized that the petitioner failed to allege or provide facts showing such favoritism. The court’s decision was based on the statutory language and relevant regulations, highlighting the specific requirements for plan qualification and the narrow scope of the antidiscrimination rule.

    Practical Implications

    This decision clarifies that the minimum funding standards of section 412 are not relevant to the IRS’s determination of plan qualification under section 401(a). It also narrows the scope of the antidiscrimination rule under section 401(a)(4), requiring that variations in contributions or benefits must favor officers, shareholders, or highly compensated employees to constitute discrimination. Practitioners should carefully analyze the specific statutory requirements when assessing pension plan qualification and ensure that any variations in contributions or benefits do not favor the prohibited groups. This case may impact how pension plans are structured and administered, particularly in multiemployer contexts, and how the IRS evaluates plan qualification.