When a defined benefit plan or other qualified plan is terminated and residual assets revert to the employer, those assets are subject to income tax and a hefty excise tax under IRC § 4980. The § 4980 excise tax must be reported on Form 5330, Schedule I.
What Is a Plan Asset Reversion?
A reversion occurs when, after satisfying all plan liabilities (i.e., all participant benefits have been distributed or transferred to insurance contracts), the remaining assets are returned to the employer. This can happen when a defined benefit plan's assets exceed the present value of all accrued benefits upon termination.
The Two Excise Tax Rates
The § 4980 excise tax rate depends on whether the employer establishes or contributes to a qualified replacement plan:
- 50% rate: The default rate — applies when the employer does not establish a qualified replacement plan or contribute at least 25% of the reversion amount to an employee stock ownership plan (ESOP).
- 20% rate: Applies when the employer either (a) establishes a qualified replacement plan and transfers at least 25% of the surplus to it, or (b) contributes at least 25% of the reversion to a new or existing ESOP.
The Due Date
The Form 5330 for § 4980 is due on the last day of the month following the month in which the reversion occurred. This is the shortest window of any Form 5330 section — if a reversion occurs on October 15, the return is due November 30.
Income Tax + Excise Tax Stack
The reversion amount is also included in the employer's gross income for the year of reversion (IRC § 4980(a)). So the employer pays income tax (federal + state) plus the § 4980 excise tax on the same amount. In a 50% excise tax scenario with a 21% corporate income tax rate, the effective combined tax burden can exceed 70% of the reversion amount — making the economics of reversion rarely favorable.
Schedule I of Form 5330
Schedule I captures the reversion amount, the applicable rate, and an explanation of why the 20% rate applies (if claimed). Line 4 requires a written explanation attached to the return describing the qualified replacement plan contribution.
Alternative: Section 420 Transfer
For defined benefit plans with surplus assets, IRC § 420 allows a tax-free transfer of surplus assets to a retiree health benefits account under certain conditions, as an alternative to reversion. This is a complex planning option that requires coordination with ERISA counsel and is subject to specific limitations and requirements.
IRS Approval of Plan Termination
Plan sponsors typically request a determination letter from the IRS confirming the plan's qualified status upon termination before making distributions. The PBGC must also approve termination of covered defined benefit plans. These processes typically take 12–18 months, during which the plan assets remain in the trust.