Pension Plan Terminations:

Effectiveness of Excise Tax in Recovering Tax Benefits in Asset Reversions

HRD-90-126: Published: Jul 13, 1990. Publicly Released: Jul 13, 1990.

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Pursuant to a congressional request, GAO evaluated the 15-percent excise tax levied on employers who recover excess pension assets by terminating overfunded pension plans, which is known as asset reversion.

GAO found that: (1) 15-percent excise taxes failed to fully recapture tax benefits from any asset reversions; (2) the excise tax rate sufficient to offset tax benefits ranged from 17 to 59 percent; (3) in 55 cases, the excise tax rate needed to recover pension tax benefits averaged about 37 percent, with a median rate of 39 percent; (4) corporate profit tax liability varied depending on income origin; (5) under the tax cost, pension plans that obtained much of their income from sources that received the least favorable treatment tended to have the highest offsetting excise tax rates, but plans that derived substantial portions of their income from sources that received the most favorable treatment tended to have the lowest offsetting excise tax rates; and (6) the rate of return excess assets earned and the amount of time excess assets were tax sheltered in the pension trust influenced the precise excise tax rates required to offset benefits.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: If Congress decides to change the excise tax rate with respect to offsetting the tax benefit portion of asset reversions, it should consider directing the Department of the Treasury to develop a schedule of reversion excise tax rates that considers: (1) rates of return; (2) how long the excess assets were maintained in the pension trust; and (3) plan asset allocation. Those underlying assumptions might require periodic adjustments to reflect changes in market conditions. Employers would have the choice of accepting the excise tax rate required under rough justice tables, or, by reconstructing their financial investment and tax history, demonstrating that a different rate is more appropriate.

    Status: Closed - Not Implemented

    Comments: Congress chose the alternative recommendation of raising the excise tax.

    Matter: If Congress decides to change the excise tax rate with respect to offsetting the tax benefit portion of asset reversions, it should consider raising the current fixed rate. For the GAO sample, an excise tax rate of 39 percent (the median rate) would fully offset or exceed tax benefits in the majority of cases.

    Status: Closed - Implemented

    Comments: Congress raised the excise tax on excess pension assets from a reversion from 15 percent to 20 percent in the Omnibus Budget Reconciliation Act of 1990.

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