March 6, 2019
In this article, we will answer common questions regarding quarterly contributions. For example, in what situations are they required? When are they due? Are there penalties for late quarterly contributions?
Quarterly deposits are required when the Plan is not “fully funded” in the prior year.
The Plan’s funded status compares available assets against the expected “cost” of Plan benefits. If assets are sufficient to cover expected Plan benefits, then the Plan is fully funded. Quarterly contributions would be not required in the following year. Note that Plan assets are reduced by any credit balances in this calculation.
For a calendar year Plan, the first three quarterly contributions are due on April 15th, July 15th and October 15th of the current year. The final quarterly contribution is due on January 15th of the following year. If the four quarterly contributions do not satisfy the Plan’s contribution requirement, the remaining contribution is due on September 15th, eight months after the final quarterly contribution. This final contribution is sometimes called a “wrap-up contribution”.
Quarterly contributions equal one-fourth of the lesser of 1) the prior year’s required contribution or 2) 90% of the current year’s contribution requirement. Both prior and current year contribution requirements ignore reduction for credit balance applied.
For example, if the prior year’s required contribution was $100 and the current year’s contribution requirement is $80, the quarterly requirement would be $18. This is calculated as the lesser of: 1) one-fourth of the prior year’s required contribution ($100 / 4 = $25) and 2) one-fourth of 90% of the current year’s contribution requirement (90% x $80 / 4 = $18).
In some instances, a Plan may not be technically exempt from quarterly contributions. However, it may be effectively exempt, because the required quarterly is zero. This may occur when the current year’s contribution requirement is zero.
Quarterly deposits may be satisfied by making a contribution to the Plan’s trust or by electing to use the Plan’s credit balance in lieu of a cash deposit. A combination of the two alternatives is also permitted.
If quarterly contributions are late, the “value” of the late contributions is discounted. This results in a required wrap-up contribution that is higher compared to when quarterly contributions are timely.
In addition, certain government filings and participant disclosures may be triggered. For Defined Benefit Plans where there are 100 or fewer participants, the government filing for late quarterlies generally is waived, but the participant disclosure is required.
Note, however, that small plans are not exempt from penalties and filings related to late wrap-up contributions.
The quarterly contribution requirement can be onerous to the small business owner because it diverts their attention from their business.
However, in general, business owners tend to overfund their Plans, so that quarterly deposits are not required.
In cases where they are required, the business owner may still choose to pay the contribution in one installment. This results in a higher required wrap-up contribution, as described above, but the additional amount is still deductible. In addition, the participant disclosure related to the late contributions can be included with other required disclosures. This approach helps ease the administrative burden on small business owners.