What prevents the sponsor of an overfunded DB plan from terminating a plan, taking a partial reversion, transferring a portion of the surplus to a qualified replacement plan, paying the reduced excise tax, and then re-establishing a DB plan covering the same people and providing comparable benefits?

There must be something preventing this (other than a permanency issue), perhaps the exclusive benefit rule. Is that it, or is there something else?

I don't think anything prohibits it. Happened to a client of ours that was about 700% funded.

But the primary discouragement is the tax, both income and excise. In addition to the 20% excise tax, the plan sponsor must include the reversion in current year income (federal and state purposes) so the total tax bill could be pretty steep.

Pax, are you sure this went though without a hitch? I get the impression this wasn't your idea. I understand the tax issues, but my situation is a large manufacturing company, which could be in a loss position, so the 20% might be all that is due. And the transfer could be used to reduce current company cost of funding a 401(k) match, so that is a clear savings.

I have to wonder if the exclusive benefit rule is a problem. I assumed there were other clearcut problems, but we haven't found any yet. I remember when the termination application used to ask whether or not another db plan would be established within one year. Why did they ask that?

Someone in my office just asked Jim Holland if this is permitted and he said yes. There was a 1984 ruling or release of some type which is still "operational". So I guess my suspicions were unfounded.