Plan Reversions and Transfers

Background

Under certain limited conditions, employers can reclaim excess assets from retirement plans using two methods: reversions and transfers. In a reversion, the employer terminates the pension plan in order to recover the amount by which the plan is overfunded. Employers must pay a tax on reversions. The tax equals 20 percent if the employer replaces the pension with a different retirement plan that meets certain standards as to assets and promised benefits or a 50 percent tax if they do not. The Omnibus Budget Reconciliation Act of 1990 limited the amount of the funds that may revert, subject to an excise tax, from a retirement plan to the employer’s own accounts and permits, and required that the reverted funds be devoted entirely to paying for current employer-provided health benefits. The payments must be made for specified reasons, such as maintaining employer health benefits for five years.

Employers may also reclaim excess assets by transferring them to pay for the costs of providing retiree health insurance. The Pension Protection Act of 2006 permitted the transfer of excess plan assets to pay retiree health liabilities for not less than two and not more than ten years.

Plan reversions and transfers can be problematic. Notably, plan reversions eliminate the protections provided by the Pension Benefit Guaranty Corporation. Both reversions and transfers may jeopardize a plan’s financial soundness, opening the door to further and less meritorious fund transfer proposals. Furthermore, transfers undermine the Employee Retirement Income Security Act The Employee Retirement Income Security Act sets minimum standards for pension and welfare plans in the private sector and requires private employers to meet these standards for their plans to be eligible for tax-favored status. ’s requirement that plan fiduciaries act solely in the interest of plan participants and solely for the purpose of providing retirement benefits.

PLAN REVERSIONS AND TRANSFERS: Policy

Curtailing reversions and transfers

In this policy: Federal

Current limits and penalty taxes on employer reversions should continue.

Policymakers should prohibit the transfer of retirement plan funds for other purposes.