DB termination, reversion, and replacement DB plan-where's the catch?

[AndyH]

What prevents the sponsor of an overfunded DB plan from terminating a plan, taking a partial reversion, transferring a portion of the surplus to a qualified replacement plan, paying the reduced excise tax, and then re-establishing a DB plan covering the same people and providing comparable benefits?

There must be something preventing this (other than a permanency issue), perhaps the exclusive benefit rule. Is that it, or is there something else?

[david rigby]

I don't think anything prohibits it. Happened to a client of ours that was about 700% funded.

But the primary discouragement is the tax, both income and excise. In addition to the 20% excise tax, the plan sponsor must include the reversion in current year income (federal and state purposes) so the total tax bill could be pretty steep.

[AndyH]

Pax, are you sure this went though without a hitch? I get the impression this wasn't your idea. I understand the tax issues, but my situation is a large manufacturing company, which could be in a loss position, so the 20% might be all that is due. And the transfer could be used to reduce current company cost of funding a 401(k) match, so that is a clear savings.

I have to wonder if the exclusive benefit rule is a problem. I assumed there were other clearcut problems, but we haven't found any yet. I remember when the termination application used to ask whether or not another db plan would be established within one year. Why did they ask that?

[AndyH]

Someone in my office just asked Jim Holland if this is permitted and he said yes. There was a 1984 ruling or release of some type which is still "operational". So I guess my suspicions were unfounded.