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February 23, 2009

Employer reversion

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Definition

In general, employer reversion means the amount of cash and the fair market value of other property (directly or indirectly) by an employer from the qualified plan, as a result of the amount being reverted to the employer.

For this purpose, an employer reversion does not include:

  1. except as provided in regulations, any amount distributed to or on behalf of any employee (or his beneficiaries) if the amount could have been so distributed before termination of the without violating any qualified plan rules, or
  2. any distribution to the employer which is allowable under the following circumstances:  
    • in the case of a multiemployer plan, by reason of mistakes of law or fact or the return of any withdrawal liability payment,
    • in the case of a plan other than a multiemployer plan, by reason of mistake of fact, or
    • in the case of any plan, by reason of the failure of the plan to initially qualify or the failure of contributions to be deductible.

A 20 percent excise tax applies to the amounts of any reversion from a qualified plan. However, this is increased to 50 percent with respect to any employer reversion from a qualified plan unless the employer establishes or maintains a qualified replacement plan or the plan provides pro rata benefit increases described in § 4980(d)(3).

Referring Cite

IRC § 4980 , Revenue Ruling 2003-85

Additional Helpful Information

  • Under § 4980(d)(2), a plan is a “qualified replacement plan” if it is established or maintained by the employer in connection with a qualified plan termination (replacement plan) and certain additional requirements are met. Under § 4980(d)(2)(A), in order for the replacement plan to be a qualified replacement plan, at least 95 percent of the active participants in the terminated plan who remain as employees of the employer after the termination are active participants in the replacement plan. Section 4980(d)(2)(C) provides rules for the allocation of the amount transferred.
  • Under § 4980(d)(2)(B), in order for the replacement plan to be a qualified replacement plan, a direct transfer must be made from the terminated plan to the replacement plan before any employer reversion, and the transfer must be in an amount equal to the excess (if any) of (I) 25 percent of the maximum amount the employer could receive as an employer reversion (determined without regard to § 4980(d)) over (II) the present value of the aggregate increases in the accrued benefits under the terminated plan of any participants or beneficiaries under a plan amendment which is adopted within 60 days before the plan termination and which takes effect immediately upon plan termination.
  • Section 4980(d)(2)(B)(iii) provides that, in the case of any amount transferred under § 4980(d)(2)(B)(i) from a terminated plan to a qualified replacement plan, such amount
      • (I) shall not be includible in the gross income of the employer,
      • (II) no deduction shall be allowable with respect to such transfer, and
      • (III) such transfer shall not be treated as an employer reversion for purposes of § 4980.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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