Excess Asset reversion

[QNPG]

Let's say that the total excess asset is $100,000 and that all of it was transferred to a qualified replacement plan. I understand that 25% is exempt from the 20% excise tax. How is the other 75% reported and treated?

Any guidance would be greatly appreciated.

[QNPG]

Let's say that the total excess asset is $100,000 and that all of it was transferred to a qualified replacement plan. I understand that 25% is exempt from the 20% excise tax. How is the other 75% reported and treated?

Any guidance would be greatly appreciated.

Found the answer but thanks any way.

[Effen]

For the benefit of the group, could you share the answer.

Thanks

[Andy the Actuary]

Let us just say the service has gone back and forth on this. At one point, they indicated that none of the excess transferred was subject to excise tax. Then, they reversed themselves and said only the first 25% was exempt. Now, I believe the entire 100% would be exempt.

[QNPG]

For the benefit of the group, could you share the answer.

Thanks

Effen, you are right. I should have posted my findings.

According to IRS Letter Ruling 200836034, June 11, 2008, ruling #1 and #2, if 100% of the surplus assets will be transferred to Plan Y and being an amount that is at least 25% of the amximum amount that Company A could receive as an pmployer reversion, the amount transferred will not be includible in Company A's gross income, no deduction willb e allowable with respect to thaat amount transferred, the amount will not be treated as an employer revision for purposes of Code Section 4980 and the amount transferred will not be subject to the excise tax under Code Section 4980. Please also see Rev Ruling 2003-85.

Now, according to Private Letter Ruling 9839030, 9/25/1998, IRC Sec(s). 4980, and Private Letter Ruling 200227041, 7/05/2002, IRC Sec(s). 4980

- the rulings here are the exact opposite.

I am very confused! Can someone please explain?

[QNPG]

Let us just say the service has gone back and forth on this. At one point, they indicated that none of the excess transferred was subject to excise tax. Then, they reversed themselves and said only the first 25% was exempt. Now, I believe the entire 100% would be exempt.

Andy, the EOB agrees with you. Rev. Rul. 2003-85 reverses that ruling. (PLR 200212035 actually had reversed an earlier ruling, PLR 9839030, so Rev. Rul. 2003-85 apparently resolved an internal conflict at the IRS.) see below...

Excerpt from EOB:

"May the transfer to the replacement plan exceed 25% of the surplus and, if so, what are the tax consequences? IRC §4980(d)(2)(B)(i) "refers to 25% of the surplus being transferred to the replacement plan. Compare this to the benefit increase provision in §4980(d)(3)(A), which refers to at least 20% of the surplus being used to increase benefits. Does this mean the employer may transfer only 25% of the surplus to the replacement plan? In Rev. Rul. 2003-85, the IRS answers this question in the affirmative, thus allowing more than 25% of the surplus to be transferred under the conditions specified in IRC §4980(d). If IRC §4980(d) is satisfied, then only amounts actually reverted to the employer are subject to a 20% excise tax, rather than the normal 50% excise tax.

5.g.1) Statutory language had suggested a narrower rule; IRS private letter ruling position reversed by Rev. Rul. 2003-85. Note that IRC §4980(d)(2)(B)(i) refers to an amount “equal to” 25% of the surplus being transferred to the qualified replacement plan. In PLR 200212035, the IRS had ruled that if more than 25% of the surplus is transferred to a qualified replacement plan, the portion of the transfer that exceeds 25% of the total surplus is a reversion for income tax purposes, which is subject to the 20% excise tax under IRC §4980(d). "