Excise tax on reversion where overfunding due to anticipated demutuali

[Guest Paul C. Morrison]

This is my first posting, so excuse me if I mess it up. My client has an old DB plan funded by a group annuity through MetLife. The plan was frozen in the early 90's and finally officially terminated on 7/16/01. There are still 2 participants to be paid out, since, as it turned out, the plan was slightly underfunded, and the client was going to contribute the difference of about $15,000. In January, the client learned from MetLife that it is going to receive 5000+ shares of MetLife...about $160,000. Although the client just learned of this, Met's actual demutualization date was 9/28/99. I don't think there is any question that these are plan assets, although the shares will be issued in the name of the client, as it owned the annuity. In fact, DOL has already told the client that it needs to get them into the plan name ( DOL subpoenaed Met's records). Since I represent the client (not IRS), does anyone know of any way I can avoid the excise tax? It strikes me that this type of situation falls outside the original purpose of the statute, which, if I recall correctly, was to stop plan sponsers from terminating plans to get at the reversion. At the time of termination, the client didn't know there was a reversion. However, I don't believe IRS will buy into this. Does anyone have any ideas?

[mbozek]

This is a very complex issue becuase of various conflicting laws. Avoiding the reversion tax is complex-- The first tier tax ( 20%) only applies to plans terminated after 1986(?) The second tier tax (50%) is not. The client could always choose to transfer the reversion to an ongoing plan to avoid the reversion. Another option would be to continue the plan with the surplus and gradually add particpants to eat up the surplus. There is also an argument that the excise tax only applies on account of a reversion--but the distribution from Met LIfe is the result of a demutualization, so it is a taxable dividend which is not subject to the reversionary tax. There is no stock answer- you need expert/creative tax counsel.

[Mike Preston]

Paul, mbozek's conclusion is correct, you need to hire somebody to review everything as soon as possible. Let me add two additional possibility: 1) you might be able to use the excess to provide additional benefits to those that have recently (in the last few years) been paid out from the plan, and 2) you might be able to use the excess to provide benefits to those who might have earned a benefit had the plan not been frozen.

You haven't indicated whether the plan was a PBGC plan. If it wasn't, it is somewhat easier to rescind the termination and use the funds to provide additional benefits to those who never accrued a benefit.