IRS waives the 10% excise tax on a pension plan's liquidity shortfall caused by an annuity buyout

Plain-English summary

A cooperative sponsors a single-employer defined benefit pension plan. When a plan large enough to owe accelerated quarterly contributions runs short of liquid assets to cover benefit payments, IRC § 4971(f) hits the employer with a 10% excise tax on that "liquidity shortfall." This plan had shortfalls for the first two quarters of 2024. The employer asked the IRS to waive the 10% tax. The IRS granted the waiver under § 4971(f)(4), which allows relief when the shortfall was due to reasonable cause and not willful neglect and the employer took reasonable steps to fix it. The shortfall traced back to a November 2023 annuity purchase that settled about 42% of the plan's liabilities, the sponsor did not learn of the quarterly liquidity rules until its actuary flagged them, and it made large catch-up contributions (including $30 million in February 2024) that improved the plan's funded status. The IRS stressed it was ruling only on the waiver, not vouching for any of the taxpayer's calculations.

Ruling snapshot

• Question: Should the 10% excise tax under IRC § 4971(f) on the plan's liquidity shortfalls for the quarters ended March 31 and June 30, 2024 be waived?
• Outcome: Approved (waiver granted)
• Key authorities: IRC § 4971(f)(1), (f)(4); IRC § 430(j)(4); Treas. Reg. § 1.430(j)-1(d)

Full text (IRS public release)

Significant Index No. 4971.08-00

AUG 14 2025

Release Number: 202552039
Release Date: 12/26/2025

Re: Request for a waiver of the IRC §4971(f) Excise Tax

Taxpayer =
EIN
Plan =
EIN - / PN:

Dear

This letter constitutes notice that a waiver of the 10% excise tax due under section 4971(f)(1) of the Internal Revenue Code ("Code") has been granted with respect to the liquidity shortfall experienced by the Plan for the quarters ended March 31, 2024, and June 30, 2024 (the "Impacted Quarters").

The waiver of the 10 percent taxes has been granted in accordance with section 4971(f)(4) of the Code. For the Impacted Quarters for which this waiver has been granted, the amount of the waiver is equal to 10 percent of the amount of the excess of:

1) the liquidity shortfall of the Plan (as determined under section 430(j)(4)(E) of the Code and section 1.430(j)-1(d) of the Treasury Regulations ("Regulations") for each quarter, over

2) the aggregate amount of any contributions paid in the form of liquid assets which served to reduce the liquidity shortfall for such quarter, and which was paid to the Plan between the last day of the quarter and the due date of the required installment under section 430(j) of the Code for such quarter

The following facts and representations have been submitted under penalties of perjury in support of the rulings requested.

Taxpayer is a cooperative

The Plan is a single employer defined benefit plan. The Plan has a January 1st to December 31st plan year

Taxpayer represents that the liquidity shortfall the Plan experienced was largely due to an annuity purchase. Taxpayer completed an annuity purchase in November 2023 which settled approximately 42% of the Plan's liabilities. The transaction also reduced the future payout requirements by a comparable percentage.

Taxpayer determined that there was no liquidity shortfall for the quarter ending September 30, 2024. Therefore, Taxpayer concluded that the 100% excise tax described in section 4971(f)(2) of the Code does not apply because the liquidity shortfall persisted for only 2 quarters.

Section 430(j)(4)(A) of the Code provides that an employer maintaining a plan that is subject to the accelerated quarterly installment payment requirement described in section 430(j)(3) of the Code with 100 or more participants shall be treated as failing to have made a required quarterly installment payment to the extent that the value of the liquid assets, as defined in section 430(j)(4)(E)(v) of the Code, is less than the liquidity shortfall for the quarter.

Section 430(j)(4)(E) of the Code provides the calculation methodology and definitions for the liquidity shortfall, base amount, disbursements, liquid assets and quarter.

Section 4971(f)(1) of the Code provides that in the case of a plan to which section 430(j)(4) of the Code applies, the employer maintaining such plan shall be subject to an excise tax equal to 10 percent of the excess, if any of: A) The amount of the liquidity shortfall for any quarter, over B) The amount of such shortfall which is paid by the required installment under section 430(j) of the Code for such quarter (but only if such installment is paid on or before the due date for such installment).

Section 4971(f)(4) of the Code provides all or part of the excise tax imposed under section 4971(f) of the Code may be waived by the Secretary if the taxpayer establishes to the satisfaction of the Secretary that: A) the liquidity shortfall described in paragraph 4971(f)(1) was due to reasonable cause and not willful neglect, and B) reasonable steps have been taken to remedy such liquidity shortfall.

Section 1.430(j)-1(d)(3)(i) of the Regulations provides that if an employer fails to satisfy the additional requirement with respect to a required installment for a quarter under paragraph (d)(1) of this section, the portion of that required installment that is treated as not paid by reason of paragraph (d)(1) of this section (the unpaid liquidity amount for that quarter) is treated as an underpayment of the required installment.

Section 206(e) of the Employee Retirement Income Security Act of 1974 ("ERISA") provides limitations on distributions other than life annuities paid by the plan. In general, it provides that a plan that is subject to the additional funding requirements of section 303(j)(4) of ERISA shall not permit a prohibited payment to be made during a period in which such plan has a liquidity shortfall.

Section 206(e)(2) of ERISA defines a prohibited payment as any payment made in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 204(b)(1)(G) of ERISA).

Taxpayer represents that excise taxes due under section 4971(f)(1) are as follows:

• $ for the quarter ending March 31, 2024
• $ for the quarter ending June 30, 2024

The Internal Revenue Service (the "Service") has reviewed the methods used to determine the liquidity shortfall and associated excise taxes and concluded that the calculations were performed in accordance with section 430(j)(4) of the Code and section 1.430(j)-1(d) of the Regulations.

Taxpayer asserts that they satisfy the conditions under section 4971(f)(4) for a waiver of the excise tax because the liquidity shortfall was due to reasonable cause and not due to Taxpayer's willful neglect. Taxpayer believes they satisfy the reasonable cause criteria because the liquidity shortfall was primarily a result of the annuity purchase transaction in November, 2023 which settled both assets and liabilities from the Plan. Taxpayer also represents that they were unaware of the liquidity shortfall requirements until they were advised of it by the Plan's actuary when the 2023 Form 5500 Schedule SB was being prepared.

The Service agrees with Taxpayer's conclusion that the liquidity shortfalls satisfy the criteria under section 4971(f)(4)(A) of the Code because the shortfalls were due to reasonable cause and not due to Taxpayer's willful neglect for the reasons stated above. Furthermore, the exhibits provided along with the waiver request show that the Plan's funded status as of January 1, 2024 (85.61%) improved from the funded status measured as of January 1, 2023 (80.25%) before the annuity purchase.

The Service also agrees with Taxpayer's conclusion that the liquidity shortfalls satisfy the criteria under section 4971(f)(4)(B) of the Code since reasonable steps have been taken to remedy the liquidity shortfalls. Supporting materials provided with the letter ruling request show that Taxpayer made several contributions to improve the funded status of the Plan, including a
$30 million contribution made on February 28, 2024. As noted earlier, the exhibits provided with the waiver request show that the Plan's funded status as of January 1, 2024 improved from the funded status measured as of January 1, 2023 before the annuity purchase.

Taxpayer also noted that more than 99% of plan assets are liquid assets and all benefits due have been able to be paid. The Plan's assets as of September 30, 2024 were over 9 times its ongoing annual disbursements. Taxpayer also represents that there is no liquidity shortfall as of the quarter ending September 30, 2024 and none is expected in the future.

Based on the information above, we conclude that the liquidity shortfalls experienced by the Plan for the Impacted Quarters were due to reasonable cause and not willful neglect and that reasonable steps were taken to remedy such liquidity shortfalls. Therefore, we conclude that the excise taxes imposed under section 4971(f) of the Code meet the criteria for a waiver under section 4971(f)(4) of the Code.

[Footnote: Measured by the Funding Target Attainment Percentage ("FTAP") determined under section 430(d)(2) of the Code and section 1.430(d)-1(b)(3) of the Regulations.]

Approval of the waiver of the excise taxes under section 4971(f) of the Code for the Impacted Quarters is granted.

In granting this approval, we have considered only the acceptability of the excise tax waiver under section 4971(f)(4) of the Code. Accordingly, we are not expressing any opinion as to the accuracy or acceptability of any calculations or other material submitted with your request. Specifically, we are not expressing any opinion with regard to the accuracy of the disbursements, liquid assets or the Funding Target Attainment Percentages that were used in the calculation of the liquidity shortfall. The Service is also not expressing an opinion regarding the determination of whether any accelerated forms of payments were prohibited under the off-Code section 206(e) of ERISA or section 436 of the Code.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

This letter ruling may be revoked or modified retroactively if there was a misstatement or omission of controlling facts, the facts at the time of the transaction are materially different from the controlling facts on which the letter ruling was based, or the transaction involves a continuing action or series of actions, and the controlling facts change during the course of the transaction.

We have sent a copy of this letter to your authorized representatives, pursuant to the Power of Attorney and Declaration of Representative (Form 2848) on file with the Internal Revenue Service. Additionally, a copy of this letter ruling is being sent to the Manager, Classification Group 4 in Houston, Texas

If you require further assistance in this matter, please contact Mr. [name redacted] (ID# [redacted]) at ([redacted]) [redacted].

Sincerely,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2

Enclosures
Notice 437, Notice of Intention to Disclose (Rulings)
A deleted copy of the ruling

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