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Excise Tax On DB Plan Reversions


Andy the Actuary

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I submitted a question for an IRS Webnar on Plan Terminations on whether the IRS position was "exactly" 25% or "at least 25%" of the reversion being transferred to a DC.

IRS Rev. Rule 2003-85 indicated that 100% of a DB Plan reversion could get transferred to a DC Plan and no excise tax would apply. I.e., the requirement to transfer exactly 25% was relaxed.
It this position consistent with current policy, and if not, where has current policy been codified?

The IRS Field Actuary Larry Haberle actually read my question verbatim and then proceeded to indicate that the facts of my question were incorrect. Namely, IRS Rev. Ruling 2003-85 indicated that more than 25% (but not 100%) of the reversion was transferred to a DC plan. That was his response -- not even that the position was, or no longer was, the current IRS thinking.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Andy,

Have you seen PLR 200836034?

With respect to ruling request number 2, having ruled that Plan Y is a qualified replacement plan with respect to Plan X, we now rule that, in accordance with Rev. Rul. 2003-85, 100 percent of the surplus assets may be transferred to Plan Y, and, being an amount that is at least 25 percent of the maximum amount that Company A could receive as an employer reversion, the amount transferred will not be includible in Company A's gross income, no deduction will be allowable with respect to the amount transferred, the amount will not be treated as an employer reversion for purposes of Code section 4980, and the amount transferred will not be subject to the excise tax under Code section 4980.
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Just curious, but what prompted you to ask the question?

IRS gone back and forth on "exactly" versus "at least." I'm actuary for a plan that is terminating with substantial excess assets.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Is it not the case that if at least 25% of the possible reversion is transferred to a qualified replacement plan, then that which is transferred is not a reversion and is not subject to any current taxation? How could the rules state that if you send too much over then you don't get to use a 20% rate on what you do receive as a reversion? The only approach that would make any sense (assuming that making sense is an appropriate part of the process) would be to establish a minimum transfer (i.e. 25% of the possible reversion) that meets certain conditions to be a transfer to a qualified replacement plan, and if you meet that requirement, then whatever else remains that is returned to the employer is subject only to the 20% excise tax rate. Perhaps I am just confused.

Always check with your actuary first!

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