Excise Tax On DB Plan Reversions

[Andy the Actuary]

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.

[chc93]

We had a DB plan terminated in 2010 and 100% of the excess assets were transferred to their 401k PS plan. The plan termination was audited by the PBGC (more than 500 participants), and the plan was also submitted to the IRS for a DL. The PBGC issued their closing letter and the IRS issued the favorable DL, both without any questions on the 100% excess asset transfer.

[KJohnson]

I also listened to the Webinarl. When I heard your question I went back and looked at the ERISA Outline. Sal reads 2003-85 like you to indicate that 100% can go over with no excise tax. He then states that he believes that the IRS' position is that the entire amount can then be allocated under the 7-year allocation rule. He cites PLR 201147032 but I didn't go back and look at this. Apparently there were prior positions in PLRs that anything in excess of the 25% had to be immediately allocated.

[david rigby]

Agree. The best reference is the last paragraph immediately prior to the heading "HOLDINGS", on page 9 of the IRB from August 11, 2003.
http://www.irs.gov/pub/irs-irbs/irb03-32.pdf

BTW, there is nothing recent in the Gray Book on point. IMHO, this is because Rev. Ruling 2003-85 is not ambiguous.
- There is an older Q&A (Gray Book, 98-33) that states amounts transferred above the 25% threshold will receive the 20% excise tax rate. The exact Answer is "Any transferred amount in excess of 25% would be taxed as a reversion at the 20% excise tax rate."
- My recollection (I attended the 1998 Enrolled Actuaries Meeting when the Gray Book was first discussed) is that this Q&A created significant controversy; i.e., "that's a ridiculous result". Such controversy (I think) was the impetus for the IRS to rethink its position, eventually leading to Rev. Rul. 2003-85.