What Are the Minimum Pension Contribution Requirements?

Federal law establishes minimum contribution requirements for certain private-sector pension plans to ensure employers set aside enough money to honor the retirement benefits promised to employees. These rules dictate how much an employer must contribute each year, creating a framework for responsible funding. This system is intended to prevent a plan from being unable to meet its obligations to retirees due to insufficient assets.

Differentiating Plan Types and Funding Rules

Pension plans are divided into two main categories, and the funding rules depend on the plan’s type. The first is a Defined Benefit (DB) plan, where an employer promises a specific retirement benefit to an employee. This benefit is calculated using a formula based on factors like salary history and years of service. For these plans, the employer bears the investment risk and must make contributions sufficient to fund the promised future payouts.

The second category is the Defined Contribution (DC) plan, which includes options like 401(k)s. In a DC plan, the employer’s obligation is to make a specified contribution to an individual account for each employee, but it does not guarantee a specific benefit amount at retirement. The final retirement benefit depends on the contributions made and the investment performance of the assets in the account. The funding rules for DC plans are tied to the contribution amount promised in the plan documents.

Calculating Contributions for Defined Benefit Plans

Determining the minimum required contribution for a Defined Benefit (DB) plan is a complex process governed by Internal Revenue Code Section 430. This calculation is not a simple percentage of payroll; instead, it must be performed annually by an enrolled actuary. The actuary assesses the plan’s financial health to determine the amount the employer needs to contribute to keep the plan on a stable path toward meeting its future obligations.

A central component of this calculation is the “target normal cost,” which represents the value of benefits employees are projected to earn during the current plan year. The actuary calculates this by considering employee demographics, such as age, salary, and turnover rates, alongside economic assumptions about future interest rates. These assumptions directly influence the present-day value of those future benefit payments.

Another element is the “shortfall amortization” payment. This comes into play if the plan’s assets are less than its funding target, creating a funding shortfall. This shortfall, which can result from poor investment performance or other factors, must be paid off over a seven-year period through annual installments in addition to the target normal cost.

The combination of the target normal cost and any shortfall amortization installments establishes the plan’s minimum required contribution for the year. This figure is reported annually on Schedule SB of the Form 5500 filing.

Contribution Rules for Defined Contribution Plans

Unlike DB plans, most Defined Contribution (DC) plans do not have a federally mandated minimum funding requirement. For a standard 401(k) or profit-sharing plan, an employer may have the discretion to contribute nothing in a given year. The “minimum” contribution is instead dictated by the specific promises made within the official plan document, which makes any specified contribution a binding requirement.

A required minimum contribution most commonly arises in DC plans that adopt a “safe harbor” design to avoid complex annual nondiscrimination testing. A safe harbor 401(k) plan requires the employer to make a mandatory contribution. This can be a matching contribution, such as a 100% match on the first 3% of an employee’s compensation plus a 50% match on the next 2%, or a non-elective contribution of at least 3% of compensation for all eligible employees.

Another type of DC plan with required contributions is a money purchase pension plan. In these plans, the document specifies a fixed percentage of compensation that the employer must contribute for each participant every year. This contribution is not optional and must be made to satisfy the minimum funding standards under IRC Section 412, and failure to do so can lead to penalties.

Consequences of Funding Shortfalls

When an employer fails to make the minimum required contribution to a Defined Benefit plan, the Internal Revenue Service (IRS) imposes financial penalties. The consequences are structured in a two-tier system under IRC Section 4971. The initial penalty is an excise tax of 10% on the amount of the accumulated funding deficiency, levied for each plan year the deficiency remains unpaid.

If the funding shortfall is not corrected within a specified “taxable period,” a much more severe penalty is applied. This second-tier tax is 100% of the remaining unpaid minimum required contribution. The taxable period generally ends on the earlier of the date a notice of deficiency for the initial tax is mailed or the date the initial tax is assessed by the IRS.

Beyond IRS penalties, failing to meet funding requirements triggers other obligations. The employer must notify plan participants, beneficiaries, and any alternate payees in writing about the failure within 60 days of the missed payment due date. A notice must also be filed with the Pension Benefit Guaranty Corporation (PBGC). If the missed contributions exceed $1 million, a lien may be imposed on the employer’s assets in favor of the plan.

Contribution Deadlines and Waivers

The final deadline to make minimum required contributions is 8.5 months after the close of the plan year. For a calendar-year plan, this means the final contribution for 2024 must be made by September 15, 2025. For larger plans that had a funding shortfall in the preceding year, contributions are due more frequently through quarterly installments, often on April 15, July 15, October 15, and January 15.

In situations of financial distress, an employer can apply to the IRS for a funding waiver. The employer must demonstrate that making the contribution would cause a “temporary substantial business hardship” and that applying the funding standard would be adverse to the interests of plan participants. The IRS evaluates factors like whether the employer is operating at an economic loss and if the plan will likely continue only if the waiver is granted.

If a waiver is granted, the missed contribution is not forgiven but is instead deferred. The waived amount must be amortized and paid back to the plan over the following five years, in addition to regular contributions. An employer can receive a waiver for up to three of any 15 consecutive plan years. The process involves notifying participants and the PBGC.