Return of premium refunds to plan sponsor was not employer reversion

 The return of refunds of premiums paid by a sponsor of a single-employer defined benefit plan for a group annuity contract did not constitute an employer reversion that would be subject to an excise tax under Code Sec. 4980, according to an IRS letter ruling.


Following the sale and merger of the company sponsoring the plan, the survivor of the merger, and successor of the original sponsor, decided to terminate the plan. In order to satisfy the plan’s obligations to employees, the successor sponsor purchased a single-premium group annuity contract under which the insurer would pay all benefits accrued under the plan. Based on the participant census data provided to the insurer at the time the insurer agreed to issue the group annuity contract, the insurer calculated the premium that the plan would have to pay. The plan assets were insufficient to pay the premium, and, therefore, the successor sponsor made an additional contribution to the plan and later an extra premium was paid to the insurer. However, after these additional payments were made, the plan received refunds from the insurer due to factual errors and changes in the plan participant census data. With issuance of the group annuity contract, all of the liabilities of the plan were satisfied and the sole remaining asset in the plan was the premium refunds and earnings on the refunds. The plan’s trustee wanted to return the remaining refunds and earnings to the employer in accordance with the plan provisions.


After determining that the refunds and earnings were due to a “mistake in fact,” the IRS ruled that the amounts could not be returned to the successor sponsor in accordance with the plan provisions and ERISA §403(c)(2)(A). The amounts stemmed from contributions made more than a year before the date of this letter ruling.


However, the IRS concluded that the amounts were the result of an “erroneous actuarial computation” pursuant to IRS Reg. §1.401-2 (which arose due to a mistake of fact) and, thus, could be returned to the successor sponsor in accordance with Reg. §1.401-2 and the plan provisions. In addition, the IRS ruled that the amounts were described in Code Sec. 4980(c)(2)(B)(ii)(II), and the return of the amounts would not constitute an employer reversion under Code Sec. 4980. Code Sec. 4980(c)(2)(B)(ii)(II) provides that the term “employer reversion” does not include an amount distributed to an employer, which is allowable under Code Sec. 401(a)(2), by reason of mistake of fact.


Source: IRS Letter Ruling 201228055.