26 USC 420 - Transfers of excess pension assets to retiree health accounts

Collapse to view only § 420. Transfers of excess pension assets to retiree health accounts

§ 420. Transfers of excess pension assets to retiree health accounts

§ 420. Transfers of excess pension assets to retiree health accounts

(a) General ruleIf there is a qualified transfer of any excess pension assets of a defined benefit plan to a health benefits account, or an applicable life insurance account, which is part of such plan—

(1) a trust which is part of such plan shall not be treated as failing to meet the requirements of subsection (a) or (h) of section 401 solely by reason of such transfer (or any other action authorized under this section),

(2) no amount shall be includible in the gross income of the employer maintaining the plan solely by reason of such transfer,

(3) such transfer shall not be treated—

(A) as an employer reversion for purposes of section 4980, or

(B) as a prohibited transaction for purposes of section 4975, and

(4) the limitations of subsection (d) shall apply to such employer.

(b) Qualified transferFor purposes of this section—

(1) In generalThe term “qualified transfer” means a transfer—

(A) of excess pension assets of a defined benefit plan to a health benefits account, or an applicable life insurance account, which is part of such plan,

(B) which does not contravene any other provision of law, and

(i) the use requirements of subsection (c)(1),

(ii) the vesting requirements of subsection (c)(2), and

(iii) the minimum cost requirements of subsection (c)(3).

(2) Only 1 transfer per year

(3) Limitation on amount transferred

(4) Expiration

(1) Use of transferred assets

(A) In general

(B) Amounts not used to pay for health benefits or life insurance

(i) In general

(ii) Tax treatment of amountsAny amount transferred out of an account under clause (i)—(I) shall not be includible in the gross income of the employer for such taxable year, but(II) shall be treated as an employer reversion for purposes of section 4980 (without regard to subsection (d) thereof).

(2) Requirements relating to pension benefits accruing before transfer

(3) Minimum cost requirements

(A) In general

(B) Applicable employer costFor purposes of this paragraph, the term “applicable employer cost” means, with respect to any taxable year, the amount determined by dividing—

(i) the qualified current retiree liabilities of the employer for such taxable year determined—(I) separately with respect to applicable health benefits and applicable life insurance benefits,(II) without regard to any reduction under subsection (e)(1)(B), and(III) in the case of a taxable year in which there was no qualified transfer, in the same manner as if there had been such a transfer at the end of the taxable year, by

(ii) the number of individuals to whom coverage was provided during such taxable year for the benefits with respect to which the determination under clause (i) is made.

(D) Cost maintenance period

(E) Regulations

(i) In general

(ii) Insignificant cost reductions for retiree health coverage permitted(I) In general(II) Eligible employer

(d) Limitations on employerFor purposes of this title—

(1) Deduction limitationsNo deduction shall be allowed—

(A) for the transfer of any amount to a health benefits account, or an applicable life insurance account, in a qualified transfer (or any retransfer to the plan under subsection (c)(1)(B)),

(B) for qualified current retiree liabilities paid out of the assets (and income) described in subsection (c)(1), or

(C) for any amounts to which subparagraph (B) does not apply and which are paid for qualified current retiree liabilities for the taxable year to the extent such amounts are not greater than the excess (if any) of—

(i) the amount determined under subparagraph (A) (and income allocable thereto), over

(ii) the amount determined under subparagraph (B).

(2) No contributions allowed

(e) Definition and special rulesFor purposes of this section—

(1) Qualified current retiree liabilitiesFor purposes of this section—

(A) In generalThe term “qualified current retiree liabilities” means, with respect to any taxable year, the aggregate amounts (including administrative expenses) which would have been allowable as a deduction to the employer for such taxable year with respect to applicable health benefits and applicable life insurance benefits provided during such taxable year if—

(i) such benefits were provided directly by the employer, and

(ii) the employer used the cash receipts and disbursements method of accounting.

For purposes of the preceding sentence, the rule of section 419(c)(3)(B) shall apply.

(B) Reductions for amounts previously set asideThe amount determined under subparagraph (A) shall be reduced by the amount (determined separately for applicable health benefits and applicable life insurance benefits) which bears the same ratio to such amount as—

(i) the value (as of the close of the plan year preceding the year of the qualified transfer) of the assets in all health benefits accounts or applicable life insurance accounts or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the qualified current retiree liability, bears to

(ii) the present value of the qualified current retiree liabilities for all plan years (determined without regard to this subparagraph).

(C) Applicable health benefitsThe term “applicable health benefits” means health benefits or coverage which are provided to—

(i) retired employees who, immediately before the qualified transfer, are entitled to receive such benefits by reason of retirement and who are entitled to pension benefits under the plan, and

(ii) their spouses and dependents.

(D) Applicable life insurance benefits

(E) Key employees excluded

(2) Excess pension assetsThe term “excess pension assets” means the excess (if any) of—

(A) the lesser of—

(i) the fair market value of the plan’s assets (reduced by the prefunding balance and funding standard carryover balance determined under section 430(f)), or

(ii) the value of plan assets as determined under section 430(g)(3) after reduction under section 430(f), over

(B) 125 percent of the sum of the funding target and the target normal cost determined under section 430 for such plan year.

(3) Health benefits account

(4) Applicable life insurance account

(5) Coordination with sections 430 and 433

(6) Application to multiemployer plansIn the case of a multiemployer plan, this section shall be applied to any such plan—

(A) by treating any reference in this section to an employer as a reference to all employers maintaining the plan (or, if appropriate, the plan sponsor), and

(B) in accordance with such modifications of this section (and the provisions of this title relating to this section) as the Secretary determines appropriate to reflect the fact the plan is not maintained by a single employer.

(7) Special rule for de minimis transfers

(A) In general

(B) Two-year lookback requirement

(f) Qualified transfers to cover future retiree costs and collectively bargained retiree benefits

(1) In generalAn employer maintaining a defined benefit plan (other than a multiemployer plan) may, in lieu of a qualified transfer, elect for any taxable year to have the plan make—

(A) a qualified future transfer, or

(B) a collectively bargained transfer.

Except as provided in this subsection, a qualified future transfer and a collectively bargained transfer shall be treated for purposes of this title and the Employee Retirement Income Security Act of 1974 as if it were a qualified transfer.

(2) Qualified future and collectively bargained transfersFor purposes of this subsection—

(A) In generalThe terms “qualified future transfer” and “collectively bargained transfer” mean a transfer which meets all of the requirements for a qualified transfer, except that—

(i) the determination of excess pension assets shall be made under subparagraph (B),

(ii) the limitation on the amount transferred shall be determined under subparagraph (C),

(iii) the minimum cost requirements of subsection (c)(3) shall be modified as provided under subparagraph (D), and

(iv) in the case of a collectively bargained transfer, the requirements of subparagraph (E) shall be met with respect to the transfer.

(B) Excess pension assets

(i) In general(I) Determination(II) Special rule for collectively bargained transfers

(ii) Requirement to maintain funded statusIf, as of any valuation date of any plan year in the transfer period, the amount determined under subsection (e)(2)(B) (after application of clause (i)) exceeds the amount determined under subsection (e)(2)(A), either—(I) the employer maintaining the plan shall make contributions to the plan in an amount not less than the amount required to reduce such excess to zero as of such date, or(II) there is transferred from the health benefits account or applicable life insurance account, as the case may be, to the plan an amount not less than the amount required to reduce such excess to zero as of such date.

(C) Limitation on amount transferredNotwithstanding subsection (b)(3), the amount of the excess pension assets which may be transferred—

(i) in the case of a qualified future transfer shall be equal to the sum of—(I) if the transfer period includes the taxable year of the transfer, the amount determined under subsection (b)(3) for such taxable year, plus(II) in the case of all other taxable years in the transfer period, the sum of the qualified current retiree liabilities which the plan reasonably estimates, in accordance with guidance issued by the Secretary, will be incurred for each of such years, and

(ii) in the case of a collectively bargained transfer, shall not exceed the amount which is reasonably estimated, in accordance with the provisions of the collective bargaining agreement and generally accepted accounting principles, to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the collectively bargained cost maintenance period for collectively bargained retiree liabilities.

(D) Minimum cost requirements

(i) In generalThe requirements of subsection (c)(3) shall be treated as met if—(I) in the case of a qualified future transfer, each group health plan or arrangement under which applicable health benefits are provided, and each group-term life insurance plan or arrangement under which applicable life insurance benefits are provided, provides applicable health benefits or applicable life insurance benefits, as the case may be, during the period beginning with the first year of the transfer period and ending with the last day of the 4th year (the 6th year in the case of a transfer to which subsection (e)(7) applies) following the transfer period such that the annual average amount of the applicable employer cost during such period is not less than the applicable employer cost determined under subsection (c)(3)(A) with respect to the transfer, and(II) in the case of a collectively bargained transfer, each collectively bargained plan under which collectively bargained health benefits or collectively bargained life insurance benefits are provided provides that the collectively bargained employer cost for each taxable year during the collectively bargained cost maintenance period shall not be less than the amount specified by the collective bargaining agreement.

(ii) Election to maintain benefits for future transfers

(iii) Collectively bargained employer cost

(E) Special rules for collectively bargained transfers

(i) In generalA collectively bargained transfer shall only include a transfer which—(I) is made in accordance with a collective bargaining agreement,(II) before the transfer, the employer designates, in a written notice delivered to each employee organization that is a party to the collective bargaining agreement, as a collectively bargained transfer in accordance with this section, and(III) involves a defined benefit plan maintained by an employer which, in its taxable year ending in 2005, provided health benefits or coverage to retirees and their spouses and dependents under all of the health benefit plans maintained by the employer, but only if the aggregate cost (including administrative expenses) of such benefits or coverage which would have been allowable as a deduction to the employer (if such benefits or coverage had been provided directly by the employer and the employer used the cash receipts and disbursements method of accounting) is at least 5 percent of the gross receipts of the employer (determined in accordance with the last sentence of subsection (c)(3)(E)(ii)(II)) for such taxable year, or a plan maintained by a successor to such employer.

(ii) Use of assets

(3) Coordination with other transfers

(4) Special deduction rules for collectively bargained transfersIn the case of a collectively bargained transfer—

(A) the limitation under subsection (d)(1)(C) shall not apply, and

(B) notwithstanding subsection (d)(2), an employer may contribute an amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to collectively bargained retiree liabilities for which transferred assets are required to be used under subsection (c)(1)(B), and the deductibility of any such contribution shall be governed by the limits applicable to the deductibility of contributions to a welfare benefit fund under a collective bargaining agreement (as determined under section 419A(f)(5)(A)) without regard to whether such contributions are made to a health benefits account or welfare benefit fund and without regard to the provisions of section 404 or the other provisions of this section.

The Secretary shall provide rules to ensure that the application of this paragraph does not result in a deduction being allowed more than once for the same contribution or for 2 or more contributions or expenditures relating to the same collectively bargained retiree liabilities.

(5) Transfer period

(6) Terms relating to collectively bargained transfersFor purposes of this subsection—

(A) Collectively bargained cost maintenance periodThe term “collectively bargained cost maintenance period” means, with respect to each covered retiree and his covered spouse and dependents, the shorter of—

(i) the remaining lifetime of such covered retiree and, in the case of a transfer to a health benefits account, his covered spouse and dependents, or

(ii) the period of coverage provided by the collectively bargained plan (determined as of the date of the collectively bargained transfer) with respect to such covered retiree and, in the case of a transfer to a health benefits account, his covered spouse and dependents.

(B) Collectively bargained retiree liabilities

(i) In general

(ii) Reduction for amounts previously set aside

(iii) Key employees excluded

(C) Collectively bargained health benefitsThe term “collectively bargained health benefits” means health benefits or coverage—

(i) which are provided to retired employees who, immediately before the collectively bargained transfer, are entitled to receive such benefits by reason of retirement and who are entitled to pension benefits under the plan, and their spouses and dependents, and

(ii) if specified by the provisions of the collective bargaining agreement governing the collectively bargained transfer, which will be provided at retirement to employees who are not retired employees at the time of the transfer and who are entitled to receive such benefits and who are entitled to pension benefits under the plan, and their spouses and dependents.

(D) Collectively bargained life insurance benefitsThe term “collectively bargained life insurance benefits” means, with respect to any collectively bargained transfer—

(i) applicable life insurance benefits which are provided to retired employees who, immediately before the transfer, are entitled to receive such benefits by reason of retirement, and

(ii) if specified by the provisions of the collective bargaining agreement governing the transfer, applicable life insurance benefits which will be provided at retirement to employees who are not retired employees at the time of the transfer.

(E) Collectively bargained plan

(7) Election to end transfer period

(A) In general

(B) Amounts transferred to plan on termination

(D) Modified maintenance of funded status during original transfer period

(E) Continued maintenance of funding status after original transfer period

(i) In general

(ii) Applicable percentage

(iii) Early termination of continued maintenance period when 120 percent funding reached

(F) Original transfer period

(g) Segment rates determined without pension stabilization

(Added Pub. L. 101–508, title XII, § 12011(a), Nov. 5, 1990, 104 Stat. 1388–567; amended Pub. L. 103–465, title VII, § 731(a)–(c)(3), Dec. 8, 1994, 108 Stat. 5003, 5004; Pub. L. 104–188, title I, § 1704(a), (t)(32), Aug. 20, 1996, 110 Stat. 1878, 1889; Pub. L. 106–170, title V, § 535(a)(1), (b), Dec. 17, 1999, 113 Stat. 1934; Pub. L. 108–218, title II, § 204(a), Apr. 10, 2004, 118 Stat. 609; Pub. L. 108–357, title VII, § 709(b)(1), (2), Oct. 22, 2004, 118 Stat. 1551, 1552; Pub. L. 109–280, title I, § 114(d), title VIII, §§ 841(a), 842(a), Aug. 17, 2006, 120 Stat. 854, 1005, 1009; Pub. L. 110–28, title VI, §§ 6612(a), (b), 6613(a), May 25, 2007, 121 Stat. 181; Pub. L. 110–458, title I, § 108(i)(1), (2), Dec. 23, 2008, 122 Stat. 5110; Pub. L. 112–141, div. D, title II, §§ 40211(a)(2)(D), 40241(a), 40242(a)–(c), (e)(1)–(13), (f), (g), July 6, 2012, 126 Stat. 847, 859, 860, 862, 863; Pub. L. 113–97, title II, § 202(c)(7), Apr. 7, 2014, 128 Stat. 1137; Pub. L. 114–41, title II, § 2007(a), July 31, 2015, 129 Stat. 459; Pub. L. 115–141, div. U, title IV, § 401(a)(97), Mar. 23, 2018, 132 Stat. 1188; Pub. L. 116–260, div. N, title II, § 285(a), Dec. 27, 2020, 134 Stat. 1988; Pub. L. 117–328, div. T, title VI, § 606(a), Dec. 29, 2022, 136 Stat. 5396.)