By Jerry Geisel, Crain News Service
WASHINGTON (July 23, 2015) — Following the lead of the House of Representatives, the Senate's consideration of highway funding legislation includes a provision that would extend by four years a federal law allowing 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-percent 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 Senate highway measure, released July 21, would extend Section 420's scheduled expiration date from the end of 2021 to year-end 2025, like the highway bill approved earlier this month by the House.
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.
This report appeared on the website of Crain's Business Insurance magazine, a Chicago-based sister publication of Tire Business.