Returning an overfunded pension contribution to the employer is not a taxable reversion where the overpayment came from a mistake of fact

Plain-English summary

A company terminated its defined benefit pension plan and, to fully fund the
promised benefits, contributed enough money to buy a group annuity contract
covering the participants. It later turned out the plan had overpaid, because a
number of annuitants the contract covered were actually no longer living, so an
excess amount came back to the plan and was to be returned to the company. The
company asked whether returning that excess would violate the rule that plan
assets must be used exclusively for participants (§ 401(a)(2)) and whether it
would be a taxable "employer reversion" subject to the § 4980 excise tax. The IRS
ruled favorably on both: the overpayment arose from a "mistake of fact" (the
wrong headcount of living annuitants) producing an erroneous actuarial
computation, so returning it neither violates § 401(a)(2) nor counts as an
employer reversion under § 4980(c)(2)(B). Practically, this lets the employer
recover the excess without the 20% reversion excise tax.

Ruling snapshot

• Question: Does returning an excess pension contribution (caused by a mistaken annuitant headcount) to the employer violate § 401(a)(2) or trigger the § 4980 reversion excise tax?
• Outcome: Approved (favorable on both rulings; not a reversion)
• Key authorities: IRC §§ 401(a)(2), 4980(c)(2)(B); Treas. Reg. § 1.401-2(b)(1); ERISA § 403(c)(2)(A); Rev. Rul. 91-4

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201839010                                              Third Party Communication: None
Release Date: 9/28/2018                                        Date of Communication: Not Applicable
Index Number: 401.03-00, 4980.02-00
                                                               Person To Contact:
------------------------                                       -----------------------, ID No. -------------------
--------------------------------------------                   ---------------------------------------------------
----------------------------------                             Telephone Number:
---------------                                                ----------------------
-----------------------------                                  Refer Reply To:
                                                               CC:TEGE:EB:QP2
                                                               PLR-107094-18
                                                               Date:
                                                               June 28, 2018



Legend

  Sponsor                 =     ---------------------------------------------
  Plan                    =     ---------------------------------------------------
  Amount                  =     ------------------
  Excess Amount           =     --------------------

Dear -------------:

This letter is in response to your request, submitted by your authorized representative,
for rulings that the return of the Excess Amount to the Sponsor will not violate section
401(a)(2) of the Internal Revenue Code and will not constitute an employer reversion
under section 4980.

The following facts and representations have been submitted:

The Sponsor established and maintained the Plan for certain of its employees. The
Plan is a single-employer tax-qualified defined benefit pension plan that is subject to
the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).

In 2017, the Sponsor terminated the Plan, filed a Form 5310, Application for
Determination for Terminating Plan, with the Internal Revenue Service (“IRS”), and
filed a Form 500, Standard Termination Notice, with the Pension Benefit Guarantee
Corporation (“PBGC”). The Sponsor subsequently received a favorable determination
letter for the Plan and filed Form 501 and Schedule MP with PBGC.

In order to fully fund the Plan’s estimated liabilities upon termination, the Sponsor

contributed Amount to cover the unfunded cost of a group annuity contract (the
Contract) for the Plan participants and beneficiaries. After the Contract was
purchased, it was determined that the Plan had overpaid because a number of
annuitants covered by the Contract were no longer living. The amount of this
overpayment (the Excess Amount) was returned to the Plan and will be returned to the
Sponsor.

Section 7.2 of the Plan permits the Sponsor to request the return of “a contribution
which was made by mistake of fact . . . within one (1) year after the payment of the
contribution . . .”

Section 12.1(b) of the Plan provides that, “if all liabilities with respect to Participants and
Beneficiaries under the Plan have been satisfied and there remains a balance in the
Trust due to erroneous actuarial computation, such balance, if any, shall be returned to
the Employer.”

Based on the above facts and representations, you, through your authorized
representative, requested the following rulings:

      (1) That the return of the Excess Amount to the Sponsor will not violate
          section 401(a)(2); and

      (2) That the return of the Excess Amount to the Sponsor will not constitute
          an employer reversion under section 4980.

Law

Section 1.401-2(b)(1) of the Income Tax Regulations provides that the intent and
purpose of the phrase “prior to the satisfaction of all liabilities with respect to employees
and their beneficiaries under the trust” in section 401(a)(2) is to permit an employer to
reserve the right to recover at the termination of the trust, and only at such termination,
any balance remaining in the trust which is due to erroneous actuarial computations
during the previous life of the trust. A balance due to an erroneous actuarial
computation is the surplus arising because actual requirements differ from the expected
requirements even though the latter were based upon previous actuarial valuations of
liabilities or determinations of costs of providing pension benefits under the plan and
were made by a person competent to make such determinations in accordance with
reasonable assumptions and correct procedures related to the method of funding.

Section 4980(a) provides for a tax of 20 percent on the amount of any employer
reversion from a qualified plan. Section 4980(d) provides for an increase in that tax for
failure to establish a replacement plan or increase benefits.

Section 4980(c)(2)(A) defines the term employer reversion to mean the amount of cash

and the fair market value of other property received (directly or indirectly) by an
employer from the qualified plan.

In relevant part and with respect to plans that are not multiemployer plans, section
4980(c)(2)(B) provides that the term employer reversion shall not include any
distribution to the employer allowable under section 401(a)(2) by reason of mistake of
fact.

Section 403(c)(2)(A) of ERISA, for which there is no parallel provision in the Code,
provides that a contribution which is made by an employer by a mistake of fact may be
returned to the employer within one year after payment of the contribution.

Revenue Ruling 91-4, 1991-1 CB 57, provides that a qualified plan may contain a
provision authorizing return of employer contributions made because of a mistake of
fact as provided in section 403(c)(2)(A) of ERISA.

Analysis

Because of the mistaken belief about the number of participants and beneficiaries that
remained alive at the time, the Sponsor contributed an amount to the Plan that was in
excess of what should have been necessary to fund the purchase of the Contract.
This mistaken belief was a mistake of fact as contemplated in section
4980(c)(2)(B)(ii)(II) and section 403(c)(2)(A) of ERISA, and resulted in erroneous
actuarial calculations under section 1.401-2(b)(1). Accordingly, the return of the
Excess Amount will not violate section 401(a)(2) or constitute an employer reversion
under section 4980(c)(2)(B).

Rulings

Thus, with respect to your ruling requests, we conclude as follows:

1. That the return of the Excess Amount to the Sponsor will not violate section
401(a)(2); and

2. That the return of the Excess Amount to the Sponsor will not constitute an
employer reversion under section 4980.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2018-1, 2018-1 I.R.B. 1,
section 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination. The Associate office will revoke or modify a letter ruling and apply the
revocation retroactively if there has been a misstatement or omission of controlling

facts; the facts at the time of the transaction are materially different from the controlling
facts on which the ruling was based; or, in the case of a transaction involving a
continuing action or series of actions, the controlling facts change during the course of
the transaction. See Rev. Proc. 2018-1, section 11.05.

These rulings are directed only to the taxpayer that requested them. Section
6110(k)(3) provides that this this letter may not be used or cited by others as
precedent.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.



                                         Sincerely,



                                         Keith R. Kost
                                         Senior Technician Reviewer
                                         Qualified Plans Branch 2
                                         Office of Associate Chief Counsel
                                         (Tax Exempt and Government Entities)




cc: