How Pension Plan Shortfall and Waiver Amortization Charges Work

Pension plan shortfall and waiver amortization charges are the two scheduled repayment streams a single-employer defined benefit plan uses to close an underfunding gap. A shortfall amortization charge pays down the difference between what the plan owes participants and what it holds in assets, spread over 15 plan years in level annual installments. A waiver amortization charge covers a contribution the IRS has permitted the employer to skip under a hardship waiver, repaid over just 5 plan years. Both charges roll into the plan’s minimum required contribution for the year, and missing that contribution triggers an excise tax that starts at 10% and climbs to 100% of the unpaid amount.¹

How the Shortfall Is Measured

The calculation runs as of the first day of the plan year, which is the valuation date for single-employer plans. The actuary compares the funding target — the present value of all benefits participants have earned through that date — against the value of plan assets. If assets fall short, a funding shortfall exists.²

Plans don’t have to use the raw market value of their investments. An averaging method can smooth asset values over time, but the smoothed figure can’t fall below 90% or rise above 110% of fair market value on the valuation date.³ That corridor keeps the shortfall figure anchored to reality.

Assets are then reduced by any prefunding balance or funding standard carryover balance the sponsor maintains. These credits come from prior years when the employer contributed more than the minimum, and they can offset future contributions — but only if the plan’s funding ratio for the prior year was at least 80%. A plan that’s already struggling can’t lean on old credits to shrink the shortfall on paper. The sponsor must also exhaust any funding standard carryover balance before touching a prefunding balance.⁴

Shortfall Amortization Charges

Once a shortfall exists, the employer establishes a shortfall amortization base and pays it down in level annual installments. The American Rescue Plan Act of 2021 extended the amortization period from 7 to 15 years for plan years beginning after December 31, 2021, and zeroed out all prior shortfall amortization bases, giving sponsors a clean slate.² Annual payments dropped substantially under the longer schedule, though underfunding also takes longer to resolve.

Each year a new shortfall appears, a new amortization base is created and runs alongside any existing ones. Three bad investment years in a row produce three separate payment streams. Installment amounts are calculated using three segment interest rates reflecting short-, mid-, and long-term corporate bond yields, which Treasury publishes monthly.⁵

If the plan reaches full funding in a later year, all outstanding shortfall amortization bases drop to zero. The employer stops making catch-up payments until a new shortfall appears. The reset keeps sponsors from paying off phantom debt when the plan is healthy.

At-Risk Status Raises the Target

Plans in poor financial shape face a stiffer funding target. A plan enters at-risk status when its funding target attainment percentage for the prior year was below 80% and its at-risk funding target attainment percentage was below 70%. Plans with 500 or fewer participants are exempt from at-risk classification.⁶

When at-risk status applies, the funding target is recalculated using more conservative assumptions, then increased by a loading charge of $700 per participant plus 4% of the standard funding target.⁶ A larger target produces a larger shortfall and steeper amortization charges — pressure the rule is designed to create.

Waiver Amortization Charges

An employer that genuinely cannot afford the minimum required contribution may ask the IRS for permission to skip all or part of it. This is not forgiveness. The waived amount becomes a waiver amortization charge, repaid in level annual installments over 5 plan years beginning the year after the waiver.² The compressed timeline, compared with the 15-year shortfall schedule, reflects the urgency of putting waived money back into the trust.

The IRS won’t grant a waiver because the employer would rather spend the cash elsewhere. Waivers are limited to situations involving substantial business hardship, evaluated against factors including whether the employer is operating at an economic loss, whether significant unemployment or underemployment exists in the industry, whether industry sales and profits are declining, and whether the plan would likely terminate without relief.⁷ The employer must show the hardship is temporary and that recovery is credible.

Even with real hardship, waivers are rationed. An employer cannot receive a waiver for more than 3 out of any 15 consecutive plan years.⁷ Hit the third waiver inside that window and full contributions resume regardless of financial condition, or excise taxes follow.

Collateral for Large Waivers

When unpaid contributions plus outstanding waiver installments reach $1,000,000 or more, the Treasury Secretary can require the employer to post security as a condition of the waiver.⁸ The collateral protects the plan if the employer later defaults. Below that threshold no security is required, but the 5-year repayment obligation and close IRS monitoring still apply.

Minimum Required Contribution and Payment Deadlines

The minimum required contribution for a plan year is the sum of three pieces: the target normal cost for benefits earned in the current year, all outstanding shortfall amortization charges, and any waiver amortization charges. Usable credit balances can offset part of the total if the plan meets the 80% funding ratio test.⁴

The final contribution for a plan year is due 8½ months after the plan year ends. For a calendar-year plan, that’s September 15 of the following year. Plans that had any funding shortfall in the preceding year can’t wait that long. They must make quarterly installments of 25% of the required annual payment, due April 15, July 15, October 15, and January 15. The required annual payment is the lesser of 90% of the current year’s minimum required contribution or 100% of the prior year’s minimum.⁹

The quarterly rule catches sponsors off guard. A plan that was fully funded for years and then dips into a shortfall for a single year will owe quarterly installments the next year. Missing a quarterly installment triggers interest charges on the late amount.

What a Missed Contribution Costs

Failing to pay the full minimum required contribution by the deadline brings excise taxes that make any interest savings look trivial. The IRS imposes an initial tax of 10% on the aggregate unpaid minimum required contributions remaining at the end of any plan year. If the shortfall isn’t corrected by the end of the taxable period, the tax jumps to 100% of the unpaid amount.¹

Excise taxes are paid to the government, not the plan. The employer still owes the missed contribution on top of the tax. An employer facing a 100% excise tax effectively pays twice. This is where a funding waiver earns its keep: the 5-year repayment schedule is demanding, but it’s far cheaper than letting a missed contribution compound into a punitive bill.

Benefit Restrictions Triggered by Underfunding

A funding shortfall doesn’t only pressure the employer. It directly limits what participants can receive, and the restrictions tighten as the funding percentage falls.¹⁰

Below 80% funded: the plan cannot pay lump sums or other accelerated distributions exceeding the lesser of 50% of the unrestricted amount or the present value of the PBGC maximum guarantee, and cannot adopt amendments that increase benefit liabilities.
Below 60% funded: no lump sums or accelerated distributions at all. Benefit accruals freeze entirely, so active employees stop earning additional pension benefits. Plant shutdown benefits and other unpredictable contingent event benefits are also blocked.
Sponsor in bankruptcy: no lump sums or accelerated distributions regardless of funding percentage.

An employer can lift the 60% restrictions by making an additional contribution large enough to bring the adjusted funding target attainment percentage back to 60%.¹⁰ That contribution sits on top of the minimum required contribution, so a deeply underfunded plan faces pressure from both the amortization charges and the cost of unlocking frozen benefits.

PBGC Premiums Add to the Bill

Underfunded plans also pay higher insurance premiums to the Pension Benefit Guaranty Corporation. Every single-employer plan pays a flat-rate premium of $111 per participant for 2026 plan years. Plans with unfunded vested benefits pay a variable-rate premium of $52 for every $1,000 of unfunded vested benefits, capped at $751 per participant.¹¹

The variable-rate premium is where underfunding gets expensive fast. A plan with $50 million in unfunded vested benefits and 1,000 participants would face a variable-rate charge of $2.6 million before the cap, reduced to $751,000 by the per-participant ceiling. That sits on top of the $111,000 flat-rate premium and the amortization charges themselves. These premiums create a financial incentive to close the shortfall faster than the 15-year schedule technically allows.

1
Office of the Law Revision Counsel. 26 USC 4971 – Taxes on Failure to Meet Minimum Funding Standards
2
Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans
3
Internal Revenue Service. Notice 2009-22 – Asset Valuation Under Section 430(g)(3)(B)
4
eCFR. 26 CFR 1.430(f)-1 – Effect of Prefunding Balance and Funding Standard Carryover Balance
5
Internal Revenue Service. Pension Plan Funding Segment Rates
6
GovInfo. 26 CFR 1.430(i)-1 – Special Rules for Plans in At-Risk Status
7
Office of the Law Revision Counsel. 26 USC 412 – Minimum Funding Standards
8
GovInfo. Employee Retirement Income Security Act of 1974
9
eCFR. 26 CFR 1.430(j)-1 – Payment of Minimum Required Contributions
10
Office of the Law Revision Counsel. 26 USC 436 – Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Plans
11
Pension Benefit Guaranty Corporation. Comprehensive Premium Filing Instructions for 2026 Plan Years