Reversion Tax for DB termination by not for profit

[Guest Lonnie Tomlin]

We have university looking to terminate their overfunded defined benefit plan and take back the excess assets. The school is concerned with reversion penalty, 50% if no benefit improvement or 20% if some of the excess provides additional benefits. It was my understanding that these taxes did not apply to not for profit organizations unless there had been some tax advantage in the past, such as reducing unrelated business income tax by pension contributions as a business expense. I'm looking for any information, references that would tell me it's ok to do this reversion and not worry about the reversion penalty. If there is a problem, I need to know that as well obviously.

[david rigby]

Relevant IRC section is 4980. It is my understanding that there are no regs under this section.

I thinkyour summary is correct, that the excise tax does not apply as long as the ER has always been a non-profit entity. See sec. 4980©(1)(A).

I don't have a cite but I have been told that a non-profit that has a for-profit subsidiary (imagine a hospital with a wholly owned collection agency, for example) does not meet the test above. However, this interpretation has an exception, where the for-profit never made any contibutions to a qualified plan. That could be an accounting trick, so be very careful.

You might need to search PLRs. Also try a search on the entire BenefitsLink website.

Let us know if you get a definitive answer.