Transferring excess pension assets to three defined-contribution plans as one qualified replacement plan avoids the 4980 reversion tax

Plain-English summary

An employer was terminating an overfunded defined benefit pension plan that would leave excess assets after paying all participant benefits. Normally, when excess assets revert to the employer they are hit with an excise tax under section 4980 (20%, rising to 50% if the employer does not set up a "qualified replacement plan"). The employer planned to transfer more than 25% of the excess assets into three ongoing defined contribution plans (one covering Puerto Rico employees), place the money in suspense accounts, and allocate it to participants ratably over seven years. The IRS ruled favorably on all four requests: the three receiving plans may be treated together as a single qualified replacement plan under section 4980(d)(5)(D); the transferred amount over 25% is not included in the employer's income, is not deductible, and is not treated as a reversion (so no section 4980 excise tax applies to it); the method of allocating the assets among the three plans is consistent with single-replacement-plan treatment; and the seven-year suspense-account allocation method satisfies section 4980(d)(2)(C).

Ruling snapshot

• Question: Will transferring more than 25% of a terminating pension plan's excess assets to three ongoing defined contribution plans (treated as one qualified replacement plan) avoid the section 4980 reversion excise tax?
• Outcome: approved (favorable ruling on all four requests)
• Key authorities: IRC § 4980(a), (c)(2), (d)(1), (d)(2), (d)(5)(D); IRC § 401(a); Rev. Rul. 2003-85

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202230006                                            Third Party Communication: None
 Release Date: 7/29/2022                                      Date of Communication: Not Applicable
 Index Number: 4980.00-00
                                                              Person To Contact:
 ----------------------------------------                     -----------------, ID No. -----------------
 ----------------------------------                           Telephone Number:
 -----------------------------------------                    --------------------
 -------------------------------                              Refer Reply To:
 ---------------------------------------                      CC:EEE:EB:QP1
 In Re: -----------------------------------------             PLR-123575-21
                                                              Date:
                                                              May 04, 2022




 Taxpayer           =   ------------------------------------------
 Pension Plan       =   ------------------------------------------------------------
 Plan 1             =   ------------------------------------------------
 Plan 2             =   ----------------------------
 Plan 3             =   ------------------------------------


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

This is in response to a request dated November 11, 2021, as supplemented by
correspondence dated March 22, 2022, in which your authorized representatives
request a private letter ruling on your behalf concerning the proper treatment under
section 4980 of the Internal Revenue Code (Code) of a transfer of a portion of excess
assets from a terminating defined benefit pension plan to three ongoing defined
contribution plans.

The following facts and representations have been submitted under penalties of perjury:

Facts

Pension Plan is a defined benefit pension plan that is designed to be a tax-qualified plan
under section 401(a). It was established in 1987 via the merger of several defined
benefit pension plans. Effective in 2004, all newly hired employees of Taxpayer
generally were excluded from participating in Pension Plan. Taxpayer has adopted a
resolution to terminate Pension Plan effective September 30, 2021, and it expects the
termination process to be completed during 2022.

Pension Plan will have excess assets remaining in its trust after it satisfies all of its
liabilities to its participants and their beneficiaries. The resolution terminating Pension
PLR-123575-21                                  2

Plan has authorized the transfer of all or a portion of these excess assets of Pension
Plan to a qualified replacement plan under section 4980(d)(2).

Taxpayer sponsors Plan 1, Plan 2, and Plan 3 (collectively, the receiving plans). The
receiving plans are defined contribution plans designed to be tax-qualified under section
401(a). Plan 3 is also intended to be a tax-qualified plan under section 1081.01(a) of the
Puerto Rico Internal Revenue Code of 2011 (PR Code). The active participants in
Pension Plan who are residents of Puerto Rico also are participants in Plan 3. All
participants in Plan 3 are residents of Puerto Rico.

Taxpayer proposes to transfer a portion of the excess assets from Pension Plan to the
receiving plans. The amount to be transferred to each of the receiving plans will be
based upon the projected future funding obligations for nonelective employer
contributions (or other types of permissible employer contributions under section
4980(d)(2) of the Code) in each of the receiving plans. Taxpayer will place the entire
amount of excess assets transferred to each receiving plan in a suspense account, and
then allocate assets from the suspense account to the participants’ accounts no less
rapidly than ratably over the seven-plan year period beginning with the plan year of the
transfer. The total amount of excess Pension Plan assets that will be transferred to the
receiving plans will exceed 25 percent of the total amount of excess assets under
Pension Plan. Each active participant of Pension Plan is an active participant in one of
the receiving plans. Plan 1, Plan 2, and Plan 3 each has less than 95 percent of the
active participants of Pension Plan, but collectively they have at least 95 percent of the
active participants of Pension Plan.

The terms of the receiving plans will be amended to provide for the creation of a
suspense account and a minimum allocation of assets from the suspense account for
each plan year over a seven-plan year allocation period in an amount equal to a ratable
portion of the assets in the suspense account at the beginning of the plan year.
However, for the plan year that includes the initial transfer of excess assets from
Pension Plan, the ratable portion allocation will be based on the amount of the excess
assets transferred to the receiving plan as of the date of the transfer.

The ratable portion to be allocated from the suspense account for each plan year will be
a fraction, the numerator of which is one, and denominator of which is the number of
plan years remaining in the seven-plan year allocation period (including the then current
plan year). Thus, the ratable portion allocation will be 1/7 for the plan year of the
transfer. Thereafter, it will be 1/6, 1/5, etc. for each succeeding plan year, until all assets
in the suspense account are fully allocated. These allocations are considered the
required minimum allocations.

The required minimum allocations for each plan year will be used to provide nonelective
and other permissible employer contributions under each receiving plan for each plan
year in the seven-plan year allocation period. However, for the plan year that includes
PLR-123575-21                                3

the initial transfer of excess assets from Pension Plan, the amount of nonelective and
other permissible employer contributions that will be funded from the suspense account
will be limited to the difference between (1) the receiving plan’s obligations to provide
nonelective and other permissible employer contributions for the entire plan year, and
(2) any amount of that funding obligation that was paid by Taxpayer to the receiving
plan prior to the date of the transfer of the excess assets. Nevertheless, in the initial
plan year that includes the transfer of the excess assets from Pension Plan, an
allocation will be made to the participants’ accounts in each of the receiving plans that is
not less than the amount necessary to satisfy the required minimum allocation for that
plan year.

Based on the current designs of the receiving plans and the current levels of
nonelective and other permissible employer contributions under the receiving plans, if
an amount is transferred to each of the receiving plans that is approximately seven
times the current level of nonelective and other permissible employer contributions, it
can be reasonably be expected that the required minimum allocations from the
suspense account in each of the receiving plans will be used to fund nonelective and
other permissible employer contributions for each plan year over the seven-plan year
allocation period. However, if any additional allocations will be required because of the
required minimum allocation requirement, those additional allocations will be provided to
employees as a nonelective employer contribution, using an allocation method that is
intended to satisfy the requirements of section 401(a), including sections 401(a)(4) and

415. The terms of each of the receiving plans will also address the limitations of section
415, as is required under section 4980(d)(2)(C). It also may become necessary to
modify or limit the allocations of employer contributions to satisfy nondiscrimination
testing requirements under either section 401(a)(4) or 410(b). Plan 3 also will need to
consider the requirements of section 1081.01(a) of the PR Code.

Taxpayer also will reserve the right to amend the terms of each of the receiving plans,
including the terms that relate to the employer contribution formulas for all employees
covered by the receiving plans. However, in each plan year, no less than the amount of
the required minimum allocation will be allocated from the suspense account to
participants as a nonelective or other permissible employer contribution.

In order to treat the receiving plans as one qualified replacement plan, the aggregate
amount of excess pension plan assets that will be transferred to the receiving plans will
need to be allocated among the receiving plans. The allocation to each of the receiving
plans will be based on the projected future funding obligations for nonelective or other
permissible employer contributions for each of the receiving plans, over the seven-plan
year allocation period.

Rulings Requested
PLR-123575-21                               4

1. The receiving plans may be treated as one plan for purposes of section 4980 of the
Code pursuant to section 4980(d)(5)(D), and together constitute a single qualified
replacement plan for purposes of section 4980(d)(2).

2. The direct transfers from Pension Plan to the receiving plans of a selected transfer
amount that is in excess of 25 percent of the maximum amount that Taxpayer could
receive as an employer reversion from Pension Plan will be treated as follows:
       a. The aggregate amount transferred will not be included in the gross income of
       Taxpayer;
       b. No deduction will be allowable with respect to the aggregate amount
       transferred; and
       c. The aggregate amount transferred will not be treated as an employer reversion
       for purposes of section 4980, and Taxpayer will not be subject to excise tax
       under section 4980 with respect to the amount transferred.

3. An allocation of the excess assets that is made to each of the receiving plans that is
based on the projected future funding obligations of each of the receiving plans for
nonelective or other permissible employer contributions over the seven-plan year
allocation period, is consistent with the treatment of the receiving plans as a single
qualified replacement plan for purposes of satisfying the requirements of section
4980(d)(2).

4. The crediting of the amounts transferred from Pension Plan to suspense accounts in
the receiving plans, and the allocation of the assets in the suspense accounts to fund all
or a portion of the nonelective or other permissible employer contributions due in
accordance with the terms of each of the receiving plans, will satisfy the allocation
requirement of section 4980(d)(2)(C). More specifically, the minimum ratable portion
drawdown of the suspense account for each of the receiving plans over the seven-plan
year allocation period as a nonelective or other permissible employer contribution for
each interval (for example, for each plan year) will be no less than the amount
determined by multiplying the amount in the respective suspense account as of the first
day of the interval by a fraction, the numerator of which is one and the denominator of
which is the number of the intervals remaining in the allocation period for each of the
receiving plans, and will be calculated at least annually. The allocation of any income
earned by the suspense accounts will be allocated at least as rapidly as ratably on the
same periodic basis over the remainder of the allocation period under the same
procedure.

Applicable Law

Section 4980(a) provides for a 20 percent excise tax on the amount of any reversion
from a qualified plan.
PLR-123575-21                                5

Section 4980(c)(2) generally defines the term “employer reversion” as the amount of
cash and the fair market value of other property received (directly or indirectly) by an
employer from the qualified plan.

Section 4980(d)(1) provides, in pertinent part, that the excise tax under section 4980(a)
shall be increased to 50 percent with respect to any employer reversion from a qualified
plan unless the employer either establishes or maintains a qualified replacement plan,
or the plan provides for certain benefit increases which take effect immediately on the
termination date.

Section 4980(d)(2) provides that a qualified replacement plan is a qualified plan
established or maintained by the employer in connection with a qualified plan
termination, which satisfies the participation, asset transfer, and allocation requirements
of section 4980(d)(2)(A), (B), and (C).

Section 4980(d)(2)(A) requires that at least 95 percent of the active participants in the
terminated plan who remain as employees of the employer after the termination be
active participants in the replacement plan.

Section 4980(d)(2)(B) requires that a direct transfer from the terminated plan to the
replacement plan be made before any employer reversion, and that the transfer be an
amount equal to the excess (if any) of (i) 25 percent of the maximum amount which the
employer could receive as an employer reversion without regard to section 4980(d),
over (ii) the amount equal to the present value of the aggregate increases in the
accrued benefits under the terminated plan of any participants or beneficiaries pursuant
to a plan amendment adopted during the 60-day period ending on the date of
termination of the qualified plan, and which takes effect immediately on the termination
date.

Section 4980(d)(2)(B)(iii) provides that in the case of the transfer of any amount under
section 4980(d)(2)(B)(i) from a terminated plan, such amount is not includible in the
gross income of the employer, no deduction is allowable with respect to such transfer,
and the transfer is not treated as an employer reversion for purposes of section 4980.

Section 4980(d)(2)(C)(i) provides that, if the replacement plan is a defined contribution
plan, the amount transferred to the replacement plan must be (I) allocated under the
plan to the accounts of participants in the plan year in which the transfer occurs, or (II)
credited to a suspense account and allocated from such account to accounts of
participants no less rapidly than ratably over the seven-plan-year period beginning with
the year of the transfer.

Section 4980(d)(2)(C)(ii) provides that if, by reason of any limitation under section 415,
any amount credited to a suspense account under clause (i)(II) may not be allocated to
a participant before the close of the seven-plan-year period, such amount shall be
PLR-123575-21                                6

allocated to the accounts of other participants, and if any portion of such amount may
not be allocated to other participants by reason of any such limitation, it shall be
allocated to the participant as provided in section 415.

Section 4980(d)(2)(C)(iii) provides that any income on any amount credited to a
suspense account under clause (i)(II) shall be allocated to accounts of participants no
less rapidly than ratably over the remainder of the period determined under such clause
(after application of clause (ii)).

Section 4980(d)(2)(C)(iv) provides that if any amount credited to a suspense account
under clause (i)(II) is not allocated as of the termination date of the replacement plan, (I)
such amount shall be allocated to the accounts of the participants as of such date,
except that any amount which may not be allocated by reason of any limitation under
section 415 shall be allocated to the accounts of other participants, and (II) if any portion
of such amount may not be allocated to other participants under subclause (I) by reason
of such limitation, such portion shall be treated as an employer reversion to which
section 4980 applies.

Section 4980(d)(5)(D)(i) authorizes the Secretary of the Treasury to treat two or more
plans as one plan for purposes of determining whether there is a qualified replacement
plan.

Revenue Ruling 2003-85, 2003-32 IRB 291 (Rev. Rul. 2003-85), provides that in
accordance with section 4980(d)(2)(B)(iii), the direct transfer of an amount that is at
least 25 percent of the maximum amount that the employer could receive as an
employer reversion from a terminated plan and that was transferred to a qualified
replacement plan is not includible in the employer's gross income. In addition, the
Internal Revenue Service held that no deduction was allowable with respect to the
amount transferred, and the amount transferred was not treated as an employer
reversion. Further, the Internal Revenue Service concluded that the amount that the
employer received was subject to the 20 percent excise tax under section 4980(a) and
was includible in income under section 61.

Under section 501(a), an organization described in section 401(a) (that is, a trust which
is part of a qualified pension, profit-sharing or stock bonus plan) is generally exempt
from taxation.

Analysis

With regard to the first request, section 4980(d)(5)(D)(i) authorizes the Secretary of the
Treasury to treat two or more plans as one plan for purposes of determining whether
there is a qualified replacement plan. In this case, Taxpayer proposes to contribute
more than 25 percent of the excess Pension Plan assets to Plan 1, Plan 2, and Plan 3,
all of which are ongoing defined contribution plans that include all of the active Pension
PLR-123575-21                                7

Plan participants. Plan 1, Plan 2, and Plan 3 may be treated as one single qualified
replacement plan for purposes of section 4980(d)(2).

With regard to the second request, section 4980(d)(2)(B)(iii) provides that in the case of
the transfer of any amount under section 4980(d)(2)(B)(i) from a terminated plan, that
amount is not includible in the gross income of the employer, no deduction is allowable
with respect to the transfer, and the transfer is not treated as an employer reversion for
purposes of section 4980. In this case, Pension Plan will transfer more than 25 percent
of the excess Pension Plan assets that would otherwise be a reversion to Taxpayer to
Plan 1, Plan 2, and Plan 3, considered collectively to be a qualified replacement plan.
Therefore, the direct transfers from Pension Plan to the receiving plans of a selected
transfer amount that is in excess of 25 percent of the maximum amount that Taxpayer
could receive as an employer reversion from Pension Plan will not be included in the
gross income of Taxpayer, no deduction will be allowable with respect to the aggregate
amount transferred, and the aggregate amount transferred will not be treated as an
employer reversion for purposes of section 4980. As a result, Taxpayer will not be
subject to excise tax under section 4980 with respect to the amount transferred.

With regard to the third request, the allocation of the excess Pension Plan assets is
based on a determination of the amount of funding for nonelective and other permissible
employer contributions for participants of the receiving plans that include all of the
remaining active Pension Plan participants. In addition, Taxpayer has demonstrated that
its method of determining the allocated amount is reasonable, taking into account the
participants from Pension Plan in each of the receiving plans. This allocation of the
excess Pension Plan assets is consistent with the treatment of the receiving plans as a
single qualified replacement plan for the purposes of satisfying the requirements of
section 4980(d)(2).

With regard to the fourth request, Taxpayer states that the terms of the receiving plans
will be amended to provide for the creation of a suspense account and a minimum
allocation of assets from the suspense account for each plan year over a seven-plan
year allocation period in an amount equal to a ratable portion of the assets in the
suspense account at the beginning of the plan year. The ratable portion allocation will
be 1/7 of the suspense account’s assets for the plan year of the transfer. For each
succeeding plan year, the denominator in the ratable portion allocation fraction will
decrease by 1, until all assets in the suspense account are fully allocated in the 7 th year.
This method of allocation complies with the requirements of section 4980(d)(2)(C)(i).
Therefore, in this case, this method of crediting of the amounts transferred from Pension
Plan to suspense accounts in each of the receiving plans, and this method of allocation
of the assets in the suspense accounts to fund all or a portion of the nonelective or
other permissible employer contributions due in accordance with the terms of each of
the receiving plans, will satisfy the allocation requirement of section 4980(d)(2)(C).
PLR-123575-21                                 8

The rulings contained in this letter are based upon information and representations
submitted by your authorized representatives and accompanied by a penalties of
perjury statement executed by an appropriate party, as specified in Rev. Proc. 2022-1,
2022-1 IRB 1, section 7.01(16)(b). This office has not verified any of the material
submitted in support of the request for ruling, and that 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. 2022-1, section 11.05.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling letter is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of your authorized representatives.

                                        Sincerely,




                                        Ronald J. Rutherford-Triche
                                        Chief, Qualified Plans Branch 2
                                        Office of Associate Chief Counsel
                                        (Employee Benefits, Exempt Organizations, and
                                        Employment Taxes)




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