Amending Section 420 Surplus Transfer Rules to Protect Welfare Benefits

Retirees worry about losing unprotected welfare benefits, such as, health care and/or life insurance benefits. In many cases their pension plans are comfortably funded and hold surplus assets that plan participants and companies would like to use to help sustain these benefits. Unfortunately, Internal Revenue Code (IRC) Section 420 prohibits the use of plan asset surplus unless a plan is funded at 125% or higher.

Pension plans funded above 110% but under 125% are well protected but companies may need plan assets to extend or virtually save welfare benefits, that IRC Section 420 was created to protect. The Section 420 outdated threshold of 125% indirectly places welfare benefits at risk.

In Senate bill S.1770, Retirement Security and Saving Act is an AREF/NRLN proposed amendment that would amend the Employee Retirement Income Security Act (ERISA) and IRC Section 420 to reduce the Section 420 surplus transfer limits from 125% to 110%, subject to the requirement that annual plan surplus transfers may not exceed the combined annual life insurance and health insurance benefits or 1.75% of plan assets whichever is lower.