Plan Reversions and Transfers

Under certain limited conditions, employers can reclaim excess assets from defined-benefit (DB) retirement plans. There are 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 of 20 percent on reversions if the employer replaces the pension with a different retirement plan. The new plan must also meet certain standards as to assets and promised benefits. The tax is 50 percent if they do not do so. 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. The reverted funds must be devoted entirely to paying for current employer-provided health benefits, such as maintaining employer health benefits for five years.

Through transfers, employers may reclaim excess assets in DB retirement plans 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’s requirement that plan fiduciaries act solely in the interest of plan participants and solely for the purpose of providing retirement benefits.