With a potential government shutdown as early as October 1, plan sponsors and fiduciaries should be aware of how a lapse in federal funding could affect both retirement and health and welfare plan operations, IRS filings, and regulatory oversight of plans. While some government functions are expected to continue during a shutdown, others may be delayed or disrupted. Below is a summary of what to expect—and how to prepare.

Background

Government shutdowns have occurred somewhat frequently since the beginning of this century, with at least three multi-day shutdowns during the past 13 years. Historically, government shutdowns have meant certain government work and services considered “nonessential” stop with those “nonessential” employees furloughed, other government work and services considered “essential” continue with those “essential” employees continuing to work without pay.  Any government employee paid through Congressionally appropriated funds, whether considered essential or nonessential, will not be paid during a government shutdown, with the typical practice being that all employees who were either furloughed or required to work ultimately receive back pay for the period of the shutdown. 

Following the longest shutdown in history in 2018–2019 (35 days), the Government Employee Fair Treatment Act of 2019 was enacted, which guarantees back pay for furloughed federal employees once funding resumes. Because federal employees are now guaranteed pay regardless of whether they are furloughed or continue to work, agencies now classify more employees as “essential,” meaning those employees must continue to work through a shutdown. Additionally, the 2017 Tax Cuts and Jobs Act (TCJA) provided non-discretionary funding for certain IRS functions, allowing some operations to proceed unaffected by the appropriations process.  During the Biden administration, the Inflation Reduction Act of 2022 added additional funding for certain IRS activities which are not subject to the appropriations process. This means that many government functions that impact employee benefit plans may continue, even if the government shuts down.

However, no two shutdowns are alike, and just because certain operations continued during previous shutdowns does not mean they will continue if there is a shutdown this week.  And, adding to the uncertainty, the Office of Management and Budget has directed agencies to terminate – not just furlough – employees that work in programs, projects, or activities (1) for which discretionary funding lapses, (2) there is not another source of funding, and (3) such programs, policies, or activities are not consistent with the President’s priorities.  The direction to terminate employees, if followed, could make them ineligible for the back pay guaranteed by the Government Employee Fair Treatment Act of 2019 even if those employees are subsequently rehired and return to work immediately after any shutdown that may occur.

For employees who are simply furloughed, it is important to note that the list of furloughed employees can and will likely change over the course of a lengthy shutdown.

On top of the standard confusion associated with any shutdown, the IRS has indicated that, for the first 5 days after a lapse in funding, the IRS will continue normal operations, utilizing funds from the Inflation Reduction Act of 2022.

Despite the uncertainty, plan sponsors and administrators should continue to comply with legal and regulatory requirements, including those described below.

Filing Requirements

Deadlines for required filings, such as Form 5500 and Form 5300, remain unchanged during a shutdown. Plan administrators should continue to file forms on time. However, processing may be delayed, especially for paper filings. Forms such as Forms 1040 and 1120 are typically prioritized, while employee benefit plan filings may be processed more slowly or reassigned to other teams.

Plans that file on paper should note that there is a heightened risk of receiving a late-filer penalty because forms that were submitted timely on paper are not entered into IRS systems as quickly, an issue that may be exacerbated during a shutdown. In other words, IRS systems, not seeing a required form, assess a penalty for filing late without realizing that the form has been filed but is sitting waiting for processing. These penalties generally are waived, but resolution may require additional correspondence with the IRS at a time when IRS appears to be severely understaffed.

IRS Audits and DOL Investigations

Audit and investigations personnel and activities are generally not funded under TCJA funds and audit personnel are likely to be furloughed during a shutdown. As a result, IRS audits and DOL investigations may be paused. IRS staff may request statute of limitations extensions either in anticipation of a shutdown or during the shutdown. While granting an extension is often advisable, we strongly advise that any such request from the IRS or DOL be evaluated together with legal counsel based on the specific facts of the case.

IRS Letter Rulings, VCP, and Determination Letters

Applications for letter rulings, Voluntary Correction Program (VCP) submissions, and determination letters may be delayed, as most processing staff are furloughed during a shutdown. In some cases, employees deemed “essential” may continue working, but these designations are made on a case-by-case basis and may evolve over time. This means that determinations of who is “essential” can change over the course of a shutdown as well as the activities that the agencies prioritize. It is important to monitor what the IRS is doing over the course of the shutdown, not just at the outset.

DOL Compliance Letters, VFCP and Other Submissions

Historically, during a shutdown the DOL operates with essential employees who may continue to work on ongoing civil and criminal matters, which are often decided on a case-by-case basis, but it is usually a limited number. Generally, essential employees will include the directors of each respective DOL office and DOL executives.

There will likely be delays in any compliance letters detailing investigations’ findings, delays on Voluntary Fiduciary Correction Program (VFCP) submissions, Abandoned Plan Program submissions, delays and pauses on most DOL subpoenas and investigations, and a delay or complete absence of response to any communications.

IRS, DOL, and Tri-Agency Guidance

Guidance development is generally paused during a shutdown. However, guidance subject to statutory deadlines may be classified as essential, allowing it to move forward. Items already in the clearance process may continue progressing, particularly if overseen by executives who remain active during the lapse.

PBGC Operations

The Pension Benefit Guaranty Corporation (PBGC) is not funded through the appropriations process and continues operating during a shutdown. Regulatory filings such as premium payments, reportable events, and standard terminations will be processed as usual. However, PBGC activities that rely on coordination with IRS or Treasury may experience delays.

Thompson Hine Takeaways

While many plan-related deadlines remain unchanged during a shutdown, delays in processing, audits, and guidance are likely. Plan sponsors and administrators should continue filing required forms on time and be prepared to respond to late-filing notices or statute extension requests.

With decades of combined experience at the IRS, DOL, PBGC, Treasury and on Capitol Hill, our team understands how agency leadership approaches shutdowns—from executive-level decisions to frontline communications. We maintain active contacts within IRS, DOL, PBGC and Treasury as well as with influential leaders on the Hill and can provide real-time updates on developments affecting your plan or business. If you have questions about how a shutdown may impact your audits, filings, or regulatory requests, please contact any of the authors or your regular Thompson Hine attorney.