IRC 4980: Excise Tax on Qualified Plan Reversions, 20% vs 50% Rate

Under Internal Revenue Code Section 4980, the excise tax on a qualified plan reversion is 20% of the surplus the employer receives from a terminated retirement plan, and it climbs automatically to 50% unless the employer either sets up a qualified replacement plan or grants pro rata benefit increases to participants in the terminated plan. The reversion is also included in the employer’s gross income, so combined federal taxes can eat well over half the surplus when nothing is done to mitigate.

When the Tax Applies

An employer reversion happens when a terminated retirement plan still holds assets after every obligation to participants and beneficiaries has been paid. In practice this is almost always a defined benefit pension plan. Defined contribution plans like 401(k)s don’t produce the pooled surplus that can revert, because each participant already owns their account balance.

Before any money reaches the employer, the plan has to satisfy all accrued benefits as of the termination date, usually by buying annuities or paying lump sums. Whatever is left is the employer reversion, and it’s the amount the excise tax attaches to. A final actuarial valuation submitted during the termination confirms the figure.

The 20% Rate and the 50% Default

Section 4980(a) sets the tax at 20% of the reversion. Section 4980(d)(1) then raises it to 50% unless the employer takes one of two affirmative steps described below. The increase is automatic, so an employer that simply takes the surplus and does nothing else pays 50%. The employer receiving the reversion owes the tax, and the excise tax itself is not deductible.

The dollars make the incentive obvious. On a $10 million reversion, the 50% rate costs $5 million in excise tax; the 20% rate costs $2 million. That $3 million gap is what Congress built into the statute to push surplus back toward employees.

How to Keep the Rate at 20%

Two routes qualify for the lower rate. Each requires the employer to commit a meaningful share of the surplus to employee benefits before pulling the reversion.

Qualified Replacement Plan

The employer establishes or maintains a replacement plan that receives a direct transfer from the terminated plan. It must cover at least 95% of the active participants in the terminated plan who remain employed after termination. The transferred amount must equal at least 25% of the maximum reversion the employer could have received, reduced by any benefit increases adopted in the 60 days before termination.¹

The replacement plan can be defined benefit or defined contribution. If it’s a defined contribution plan, the transferred assets must be allocated to participant accounts in the year of the transfer, or credited to a suspense account and allocated ratably over no more than seven plan years.¹

The amount transferred to the replacement plan is not included in the employer’s gross income, no deduction is allowed for the transfer, and the transfer itself is not treated as a reversion, so no excise tax applies to those dollars.¹

Pro Rata Benefit Increases

Instead of a replacement plan, the employer can amend the terminated plan to give pro rata increases in accrued benefits to all qualified participants. The aggregate present value of those increases must be at least 20% of the maximum reversion the employer could have received. The amendment has to be adopted in connection with the termination and take effect on the termination date.¹

The 20% threshold for benefit increases is lower than the 25% transfer requirement, but the benefit increase directly shrinks the surplus available for reversion by enlarging what participants receive from the terminated plan.

Chapter 7 Bankruptcy

An employer in Chapter 7 liquidation, or a similar state-law proceeding, as of the plan termination date is exempt from the increase to 50%. The 20% rate applies automatically, with no need for a replacement plan or benefit increases.¹

Income Tax on Top of the Excise Tax

The reversion is included in the employer’s gross income under Section 61 and is subject to regular corporate income tax in addition to the excise tax. At the current 21% corporate rate, an employer facing the 50% excise tax plus income tax on the reversion can lose more than 60 cents on the dollar in combined federal taxes. Even at the 20% excise rate, the combined bite exceeds 35%. Amounts transferred to a qualified replacement plan avoid both the excise tax and the income tax inclusion.²

Employers and Plans Outside Section 4980

Certain plans are carved out of the definition of “qualified plan” for Section 4980 purposes, so no excise tax applies at all:

Governmental plans, as defined in Section 414(d), maintained by state or local governments.¹
Plans of employers that have been exempt from income tax under Subtitle A for the entire period the plan was maintained.¹

Section 420 offers a separate route: a “qualified transfer” of excess pension assets from an overfunded defined benefit plan to a retiree health benefit account or retiree life insurance account is not treated as a reversion, so no Section 4980 tax applies. That provision is available for transfers through December 31, 2032, and the funds must be used exclusively for retiree health or life insurance costs under specific funding and maintenance-of-effort rules.

Filing Form 5330 and the Deadline

An employer that receives a reversion reports the excise tax on IRS Form 5330.³ The return is due by the last day of the month following the month in which the reversion occurred.⁴ A reversion in June means Form 5330 and payment are due by July 31.

Late filing and late payment penalties are separate:

Failure to file: 5% of the unpaid tax per month or partial month, capped at 25%.⁵
Failure to pay: 0.5% of the unpaid tax per month or partial month, also capped at 25%.⁵

Interest also runs on unpaid excise tax at the quarterly underpayment rate, set at the federal short-term rate plus three percentage points. For the first quarter of 2026, that rate is 7% for most taxpayers and 9% for large corporate underpayments.⁶ On a multimillion-dollar liability, a few months of combined penalties and interest add up quickly, so nailing down the reversion amount and the applicable rate before filing is worth the effort.

1
Office of the Law Revision Counsel. 26 U.S. Code 4980 – Tax on Reversion of Qualified Plan Assets to Employer
2
Internal Revenue Service. Revenue Ruling 2003-85
3
eCFR. 26 CFR 54.6011-1T – General Requirement of Return, Statement, or List
4
Internal Revenue Service. Instructions for Form 5330 – Return of Excise Taxes Related to Employee Benefit Plans
5
Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax
6
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026