Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal

Sponsors and administrators of defined benefit pension plans (DBPPs) have a legal obligation to fund their plans in accordance with minimum contribution requirements under the Internal Revenue Code (IRC). A failure to make these contributions can result in significant penalties and endanger plan qualification. However, in certain cases, for single-employer DBPPs, relief may be available under IRC § 412(c).

This blog post discusses educational insights for plan administrators and sponsors on understanding this relief, preparing effective applications and navigating Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) procedures. It should be noted that the agency roles in these procedures vary. The IRS reviews applications for completeness and merit as well as issues waiver determination with amortization terms (Rev. Proc. 2004-15). On the other hand, the PBGC receives copies of applications and may comment (ERISA § 303(k)) and also may file a lien if cumulative missed contributions exceed $1 million (liens remain until contributions and interest fall below the $1 million threshold).

What Is IRC § 412(c)?

IRC § 412(c) provides a potential avenue for plan sponsors of single-employer DBPPs to obtain a waiver of the minimum funding standard when making a required contribution is financially burdensome. The IRS, in coordination with the PBGC, may grant a waiver if strict criteria are met.

Relief Eligibility Under § 412(c)

Relief may be granted through a waiver of the minimum funding requirement when a plan sponsor demonstrates a temporary substantial business hardship. The relief is time-limited and subject to IRS approval.

• Application Deadline: Must be submitted by the 15th day of the third month after the end of the plan year.
• Scope of Relief: Waiver may be granted for all or part of the contribution due and is typically amortized over future years.

To that end, the following tips for success should be noted:

• Timeliness is critical – late applications may be denied.
• Substantiate hardship with clear data and industry comparisons.
• Communicate with stakeholders, including PBGC and participants.
• Review cumulative deficiency carefully to assess PBGC lien risk.

Key Criteria for Relief

To qualify for a funding waiver under IRC § 412(c), a plan sponsor must demonstrate that:

• The failure to meet the minimum funding standard is due to temporary substantial business hardship;
• Granting the waiver would be in the best interest of the plan participants and beneficiaries;
• The plan sponsor is reasonably likely to be able to make all future contributions under the funding standard.

What Constitutes a "Temporary Substantial Business Hardship"?

While there is no rigid definition, factors the IRS considers include:

• Losses incurred in recent years;
• Declining sales or cash flow;
• Industry-wide downturns;
• Other significant economic disruptions (e.g., natural disasters, supply chain interruptions).

General Steps to Apply for a Waiver & Timeline Summary (approximation)

1. File Form 8941 – “Request for Waiver of Minimum Funding Standard.”
2. Include detailed financial documentation showing hardship.
3. Demonstrate the plan's ongoing viability and a plan for future compliance.
4. Submit within 2½ months after the close of the plan year for which the waiver is requested (unless extended).

7 Tips for Structuring an Effective Relief Application

A comprehensive application should include:

1. Cover Letter & Statement of Hardship

• Detail the events causing financial difficulty.
• Include quantitative data: revenue decline, losses, projections.

2. Legal Justification

• Reference IRC § 412(c)(1) and hardship criteria.
• Explain the temporary nature of the hardship.

3. Financial Documentation

• Recent audited financial statements.
• Cash flow projections with and without relief

4. Plan Funding Impact

• Current funding status and anticipated effects of waiver.

5. Security Proposal (if applicable)

• Suggest collateral if deficiency exceeds $1 million.

6. Participant Notification

• Provide evidence of timely and compliant notice.

7. Filing Details

• Ensure timely filing and include required IRS user fee.

Best Practices for Employers/Plan Sponsors

To avoid funding shortfalls—or mitigate their impact— plan sponsors should:

• Monitor cash flow projections against upcoming contribution deadlines.
• Maintain regular communication with actuaries and plan administrators.
• Engage legal counsel early if a hardship seems likely.
• Document financial conditions thoroughly to support a waiver request.
• Consider alternative funding options such as installment payments or asset reallocations.

Best Practices for Plan Administrators

Plan administrators play a critical role in ensuring compliance. Key practices include:

• Track and report contribution deadlines to sponsors well in advance.
• Conduct periodic funding level reviews to assess plan health.
• Coordinate with actuaries and accountants to anticipate shortfalls.
• Stay current on IRS and PBGC guidance regarding funding waivers.
• Prepare documentation and calculations to support a waiver filing if applicable.

Final Thoughts

While a funding shortfall can be a serious challenge, plan sponsors facing a temporary financial hardship may have options. Relief under IRC § 412(c) is not automatic, but with proper documentation and timely action, a waiver may help protect both the plan sponsor and plan participants from longer-term harm.

If you believe your company may need relief from the minimum funding requirements or you are navigating complex ERISA compliance matters, our firm can help assess your options and guide you through the process.

ERISA compliance is complex, but our experienced attorneys can help you navigate these regulations and avoid costly penalties. Contact Schechter Benefits Law Group today to ensure your employee benefit plans meet all legal requirements.

*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.