The IRS recently released a ruling (PLR 202230006) addressing the proper treatment of a transfer of a portion of excess assets from a defined benefit pension plan that is terminating to three ongoing defined contribution plans under Section 4980 (collectively, the “receiving plans”).
Section 4980(a) provides for a 20% excise tax on any reversion from a qualified retirement plan. An employer reversion is generally defined as the amount of cash and the fair market value of any other property received—directly or indirectly—by an employer from a qualified retirement plan. The excise tax is increased to 50% unless the employer either establishes or maintains a qualified replacement plan (QRP), or the terminating plan provides for certain benefit increases.
A QRP must meet certain conditions including, but not limited to:
- Maintaining at least 95% of the active participants in the terminating plan who remain as employees of the employer after the termination as active participants in the QRP
- Transferring at least 25% of the total excess assets from the terminating plan to the QRP
To the extent the excess assets are transferred to a QRP, including assets in excess of the 25% minimum amount, the excess assets:
- Are not includible in the taxable income of the employer
- Are not deductible by the employer
- Are not treated as an employer reversion subject to either the 20% or 50% excise tax under Section 4980
In contrast, any excess assets received by the employer (i.e., not transferred to the QRP) would be subject to the 20% excise tax and includible in the employer’s taxable income.
The IRS ruled, among other things, that the three receiving plans collectively met the conditions to be treated as a QRP even though they did not separately meet the conditions. For example, each of the receiving plans had less than 95% of the active participants in the terminating pension plan, but collectively had at least 95% of the active participants in the terminating plan. Similarly, the total amount transferred to the three receiving plans would exceed 25% of the total amount of the excess assets of the terminating plan.
The IRS also addressed the allocation of the excess assets among the three receiving plans. The IRS explained that the excess assets would be allocated to three receiving plans based upon the projected future obligations for nonelective employer contributions under each of the receiving plans. In the case of QRPs that are defined contribution plans, the excess assets transferred must be either fully allocated to the participants in the year of transfer, or credited to a suspense account and allocated from such account to accounts of the participants in the QRPs no less rapidly than ratably over the seven-plan-year period beginning with the year of transfer (this latter method was the approach proposed in the ruling). The IRS ruled that this method of allocating the excess assets to each of the receiving plans was reasonable and consistent with the treatment of the receiving plans as a single QRP.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “§,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share