Advertise
Resources
Member, Beacon International Group, Ltd.
President Obama Friday signed legislation that extends by four years a federal law that allows employers to remove surplus assets from overfunded pension plans to pay for retiree health care benefits.
Under Section 420 of that 1990 law, an employer can transfer surplus pension plan assets to special retiree health care accounts. Such transfers are allowed as long as several conditions are met: The pension plan remains at least 125% funded; plan participants’ accrued benefits are immediately and fully vested; and employers, through a “maintenance of cost” requirement, do not reduce their expenditures for retiree health care coverage for five years after the transfer occurs. Failure to meet those conditions after a transfer results in substantial penalties.
The measure, H.R. 3236, earlier approved by Congress, extends the scheduled expiration date from the end of 2021 to year-end 2025. The broader bill to which the pension plan asset transfer provision is included, extends federal funding of highway projects through the end of October.
It isn’t known how many employers currently utilize Section 420 transfers, but experts estimated more than a decade ago that roughly 50 to 100 employers a year used Section 420 transfers.
The congressional Joint Committee on Taxation estimated in a report released earlier this month that the Section 420 extension provision would raise a total of $172 million in federal revenues from 2022 through 2025.
That revenue would be the result of smaller tax-deductible employer expenses to pay for retiree health care expenses, since part of that tab would be paid for through the pension assets shifted into Section 420 accounts.
The pension benefits earned by Connecticut residents whose employers transfer those liabilities to insurers under corporate pension derisking — programs will be protected from creditors under a new state law.