Date of this Version
This study quantifies the possible consequences to stakeholders of reforms to the excise tax on reversions of excess pension assets. Under the Pension Protection Act of 2006 (PPA), funding in defined benefit plans is likely to improve significantly. Many plans may become overfunded over time, owing to the shortfall amortizations mandated by the PPA, as well as to precautionary contributions by sponsors and to plan investment returns. This analysis shows that a more moderate excise tax rate together with a reasonable funding threshold for asset reversions would not only enable sponsors to spend the excess funds on other corporate needs, thereby lowering the cost of sponsorship of defined benefit plans, but also would open a considerable revenue source for the government, with only a small increase in bankruptcy cost for the PBGC. Plan participants could also gain in an alternative reform, which would require a partial transfer of excess assets to them along with a still-lower reversion tax rate.
excess asset reversion, excise tax, defined benefit pensions, Pension Protection Act
G23, H21, H23, H32, J32, J38
Working Paper Number
Opinions expressed in this paper are the authors’ own, and not necessarily those of Watson Wyatt Worldwide. All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2007 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
We thank Kyle Brown, Eric Friedman, Alan Glickstein, Carl Hess, Evan Inglis, Robert Lerman, Nadine Orloff, Michael Orszag, Ken Steiner, Eric Toder, and participants at an Urban Institute seminar for helpful comments.
Date Posted: 17 December 2019