District Court says indirect transfer to new plan results in reversion under pre-RRA rules.A U.S. district court has rejected a magistrate's finding that, under rules issued prior to the Revenue Reconciliation Act of 1990 (RRA RRA Registered Record Administrator. ), an employer was entitled to a partial refund of Sec. 4980 reversion excise taxes excise taxes, governmental levies on specific goods produced and consumed inside a country. They differ from tariffs, which usually apply only to foreign-made goods, and from sales taxes, which typically apply to all commodities other than those specifically exempted. when, after receiving a distribution from a terminated pension plan, the employer contributed part of the proceeds to a new profit-sharing plan Profit-Sharing Plan A plan that gives employees a share in the profits of the company. Each employee receives into an account, a percentage of those profits based on their earnings. Also known as "deferred profit-sharing plan" or "DPSP". (Southern Aluminum Castings Co., DC Ala., 1991). After terminating its pension plan in June 1988, Southern Aluminum Castings Co. discovered that it had overfunded the plan by approximately $225,000. The company accepted a check refunding its overpayment o·ver·pay v. o·ver·paid , o·ver·pay·ing, o·ver·pays v.tr. 1. To pay (a party) too much. 2. To pay an amount in excess of (a sum due). v.intr. To pay too much. , filed a reversion excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. return and paid a 10% excise tax of $22,500. Two months later, the company transferred $100,000 to a qualified profit-sharing plan it had established to replace the pension plan - and then filed for a $10,000 refund of the excise taxes it had paid, claiming that the $100,000 transfer should reduce the reversion by $100,000. A magistrate for the U.S. District Court in Alabama found that the $100,000 transferred indirectly to the replacement plan was not an employer reversion, citing Sec. 4980(c)(2)(B)(i), which provides that a reversion does not include any amount distributed to or on behalf of any employee if that amount could have been so distributed before plan termination without violating Sec. 401. According to the magistrate, it was clear that the $100,000 had been distributed on behalf of the company's employees, and the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. had failed to show how this distribution would have violated Sec. 401 had it occurred before the termination of the plan. On subsequent review, the district court rejected the magistrate's recommendation, and instead found for the Service. According to the district court, the magistrate had improperly placed the burden on the IRS to show that the distribution would have violated Sec. 401. To fall within the Sec. 4980(c)(2)(b)(i) exception, the employer must be able to show that the distribution would have been permissible under Sec. 401 had the plan not been terminated - and there is nothing in Sec. 401 to support an indirect transfer of assets The conveyance of something of value from one person, place, or situation to another. The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. from a terminated plan to a new plan. In fact, in the RRA, Congress provided that only direct transfers of assets from the terminated plan to the replacement plan can qualify for a 20%, rather than a 50%, excise tax rate (Sec. 4980(d)(2)(B)(i)). |
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