Transfers of excess pension assets to retiree health accounts

# (a) General rule

If 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 transfer

For purposes of this section— (1) In general The 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 (C) with respect to which the following requirements are met in connection with the plan— (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 No more than 1 transfer with respect to any plan during a taxable year may be treated as a qualified transfer for purposes of this section. If there is a transfer from a defined benefit plan to both a health benefits account and an applicable life insurance account during any taxable year, such transfers shall be treated as 1 transfer for purposes of this paragraph.

(3) Limitation on amount transferred The amount of excess pension assets which may be transferred to an account in a qualified transfer shall not exceed the amount which is reasonably estimated to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the taxable year of the transfer for qualified current retiree liabilities.

(4) Expiration No transfer made after December 31, 2032, shall be treated as a qualified transfer.

# (c) Requirements of plans transferring assets

(1) Use of transferred assets (A) In general Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified transfer (and any income allocable thereto) shall be used only to pay qualified current retiree liabilities (other than liabilities of key employees not taken into account under subsection (e)(1)(E)) for the taxable year of the transfer (whether directly or through reimbursement). In the case of a qualified future transfer or collectively bargained transfer to which subsection (f) applies, any assets so transferred may also be used to pay liabilities described in subsection (f)(2)(C). (B) Amounts not used to pay for health benefits or life insurance (i) In general Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified transfer (and any income allocable thereto) which are not used as provided in subparagraph (A) shall be transferred out of the account to the transferor plan. (ii) Tax treatment of amounts Any 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). (C) Ordering rule For purposes of this section, any amount paid out of a health benefits account, or an applicable life insurance account, shall be treated as paid first out of the assets and income described in subparagraph (A).

(2) Requirements relating to pension benefits accruing before transfer The requirements of this paragraph are met if the plan provides that the accrued pension benefits of any participant or beneficiary under the plan become nonforfeitable in the same manner which would be required if the plan had terminated immediately before the qualified transfer (or in the case of a participant who separated during the 1-year period ending on the date of the transfer, immediately before such separation).

(3) Minimum cost requirements (A) In general The requirements of this paragraph are met if each group health plan or arrangement under which applicable health benefits are provided, and each group-term life insurance plan under which applicable life insurance benefits are provided, provides that the applicable employer cost for each taxable year during the cost maintenance period shall not be less than the higher of the applicable employer costs for each of the 2 taxable years immediately preceding the taxable year of the qualified transfer or, in the case of a transfer which involves a plan maintained by an employer described in subsection (f)(2)(E)(i)(III), if the plan meets the requirements of subsection (f)(2)(D)(i)(II).

(B) Applicable employer cost For 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.

(C) Election to compute cost separately An employer may elect to have this paragraph applied separately for applicable health benefits with respect to individuals eligible for benefits under title XVIII of the Social Security Act at any time during the taxable year and with respect to individuals not so eligible, and separately for applicable life insurance benefits with respect to individuals age 65 or older at any time during the taxable year and with respect to individuals under age 65 during the taxable year.

(D) Cost maintenance period For purposes of this paragraph, the term "cost maintenance period" means the period of 5 taxable years (7 taxable years in the case of a transfer to which subsection (e)(7) applies) beginning with the taxable year in which the qualified transfer occurs. If a taxable year is in two or more overlapping cost maintenance periods, this paragraph shall be applied by taking into account the highest applicable employer cost required to be provided under subparagraph (A) for such taxable year.

(E) Regulations (i) In general The Secretary shall prescribe such regulations as may be necessary to prevent an employer who significantly reduces retiree health coverage or retiree life insurance coverage, as the case may be, during the cost maintenance period from being treated as satisfying the minimum cost requirement of this subsection. (ii) Insignificant cost reductions for retiree health coverage permitted (I) In general An eligible employer shall not be treated as failing to meet the requirements of this paragraph for any taxable year if, in lieu of any reduction of retiree health coverage permitted under the regulations prescribed under clause (i), the employer reduces applicable employer cost by an amount not in excess of the reduction in costs which would have occurred if the employer had made the maximum permissible reduction in retiree health coverage under such regulations. In applying such regulations to any subsequent taxable year, any reduction in applicable employer cost under this clause shall be treated as if it were an equivalent reduction in retiree health coverage. (II) Eligible employer For purposes of subclause (I), an employer shall be treated as an eligible employer for any taxable year if, for the preceding taxable year, the qualified current retiree liabilities of the employer with respect to applicable health benefits were at least 5 percent of the gross receipts of the employer. For purposes of this subclause, the rules of paragraphs (2), (3)(B), and (3)(C) of section 448(c) shall apply in determining the amount of an employer's gross receipts.

# (d) Limitations on employer

For purposes of this title— (1) Deduction limitations No 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 An employer may not contribute any amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to qualified current retiree liabilities for which transferred assets are required to be used under subsection (c)(1).

# (e) Definition and special rules

For purposes of this section— (1) Qualified current retiree liabilities For purposes of this section— (A) In general The 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 aside The 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 benefits The 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 The term "applicable life insurance benefits" means group-term life insurance coverage provided to retired employees who, immediately before the qualified transfer, are entitled to receive such coverage by reason of retirement and who are entitled to pension benefits under the plan, but only to the extent that such coverage is provided under a policy for retired employees and the cost of such coverage is excludable from the retired employee's gross income under section 79.

(E) Key employees excluded If an employee is a key employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing qualified current retiree liabilities for such taxable year or in calculating applicable employer cost under subsection (c)(3)(B).

(2) Excess pension assets The 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 The term "health benefits account" means an account established and maintained under section 401(h).

(4) Applicable life insurance account The term "applicable life insurance account" means a separate account established and maintained for amounts transferred under this section for qualified current retiree liabilities based on premiums for applicable life insurance benefits.

(5) Coordination with sections 430 and 433 In the case of a qualified transfer, any assets so transferred shall not, for purposes of this section and sections 430 and 433, be treated as assets in the plan.

(6) Application to multiemployer plans In 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 In the case of a transfer of an amount which is not more than 1.75 percent of the amount determined under paragraph (2)(A) by a plan which meets the requirements of subparagraph (B), paragraph (2)(B) shall be applied by substituting "110 percent" for "125 percent". (B) Two-year lookback requirement A plan is described in this subparagraph if, as of any valuation date in each of the 2 plan years immediately preceding the plan year in which the transfer occurs, the amount determined under paragraph (2)(A) exceeded 110 percent of the sum of the funding target and the target normal cost determined under section 430 for each such plan year.

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

(1) In general An 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 transfers For purposes of this subsection— (A) In general The 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 In determining excess pension assets for purposes of this subsection, subsection (e)(2)(B) shall be applied by substituting "120 percent" for "125 percent". (II) Special rule for collectively bargained transfers In determining excess pension assets for purposes of a collectively bargained transfer, subsection (e)(7) shall not apply. (ii) Requirement to maintain funded status If, 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 transferred Notwithstanding 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 general The 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 An employer may elect, in lieu of the requirements of clause (i)(I), to meet the requirements of subsection (c)(3) with respect to applicable health benefits or applicable life insurance benefits by meeting the requirements of such subsection (as in effect before the amendments made by section 535 of the Tax Relief Extension Act of 1999) for each of the years described in the period under clause (i)(I). Such election may be made separately with respect to applicable health benefits and applicable life insurance benefits. In the case of an election with respect to applicable life insurance benefits, the first sentence of this clause shall be applied as if subsection (c)(3) as in effect before the amendments made by such Act applied to such benefits. (iii) Collectively bargained employer cost For purposes of this subparagraph, the term "collectively bargained employer cost" means the average cost per covered individual of providing collectively bargained health benefits, collectively bargained life insurance benefits, or both, as the case may be, as determined in accordance with the applicable collective bargaining agreement. Such agreement may provide for an appropriate reduction in the collectively bargained employer cost to take into account any portion of the collectively bargained health benefits, collectively bargained life insurance benefits, or both, as the case may be, that is provided or financed by a government program or other source.

(E) Special rules for collectively bargained transfers (i) In general A 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 Any assets transferred to a health benefits account, or an applicable life insurance account, in a collectively bargained transfer (and any income allocable thereto) shall be used only to pay collectively bargained retiree liabilities (other than liabilities of key employees not taken into account under paragraph (6)(B)(iii)) for the taxable year of the transfer or for any subsequent taxable year during the collectively bargained cost maintenance period (whether directly or through reimbursement).

(3) Coordination with other transfers In applying subsection (b)(3) to any subsequent transfer during a taxable year in a transfer period or collectively bargained cost maintenance period, qualified current retiree liabilities shall be reduced by any such liabilities taken into account with respect to the qualified future transfer or collectively bargained transfer to which such period relates.

(4) Special deduction rules for collectively bargained transfers In 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 For purposes of this subsection, the term "transfer period" means, with respect to any transfer, a period of consecutive taxable years (not less than 2) specified in the election under paragraph (1) which begins and ends during the 10-taxable-year period beginning with the taxable year of the transfer.

(6) Terms relating to collectively bargained transfers For purposes of this subsection— (A) Collectively bargained cost maintenance period The 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 The term "collectively bargained retiree liabilities" means the present value, as of the beginning of a taxable year and determined in accordance with the applicable collective bargaining agreement, of all collectively bargained health benefits, and collectively bargained life insurance benefits, (including administrative expenses) for such taxable year and all subsequent taxable years during the collectively bargained cost maintenance period. (ii) Reduction for amounts previously set aside The amount determined under clause (i) shall be reduced by the value (as of the close of the plan year preceding the year of the collectively bargained transfer) of the assets in all health benefits accounts, applicable life insurance accounts, or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the collectively bargained retiree liabilities. The preceding sentence shall be applied separately for collectively bargained health benefits and collectively bargained life insurance benefits. (iii) Key employees excluded If an employee is a key employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing collectively bargained retiree liabilities for such taxable year or in calculating collectively bargained employer cost under subsection (c)(3)(C).

(C) Collectively bargained health benefits The 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 benefits The 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 The term "collectively bargained plan" means a group health plan or arrangement for retired employees and their spouses and dependents, or a group-term life insurance plan or arrangement for retired employees, that is maintained pursuant to 1 or more collective bargaining agreements.

(7) Election to end transfer period (A) In general In the case of an employer maintaining a plan which has made a qualified future transfer under this subsection, such employer may, not later than December 31, 2021, elect to terminate the transfer period with respect to such transfer effective as of any taxable year specified by the taxpayer that begins after the date of such election.

(B) Amounts transferred to plan on termination Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified future transfer (and any income allocable thereto) which are not used as of the effective date of the election to terminate the transfer period with respect to such transfer under subparagraph (A), shall be transferred out of the account to the transferor plan within a reasonable period of time. The transfer required by this subparagraph shall be treated as an employer reversion for purposes of section 4980 (other than subsection (d) thereof), unless before the end of the 5-year period beginning after the original transfer period an equivalent amount is transferred back to such health benefits account, or applicable life insurance account, as the case may be. Any such transfer back pursuant to the preceding sentence may be made without regard to section 401(h)(1).

(C) Minimum cost requirements continue The requirements of subsection (c)(3) and paragraph (2)(D) shall apply with respect to a qualified future transfer without regard to any election under subparagraph (A) with respect to such transfer.

(D) Modified maintenance of funded status during original transfer period The requirements of paragraph (2)(B) shall apply without regard to any such election, and clause (i) thereof shall be applied by substituting "100 percent" for "120 percent" during the original transfer period.

(E) Continued maintenance of funding status after original transfer period (i) In general In the case of a plan with respect to which there is an excess described in paragraph (2)(B)(ii) as of the valuation date of the plan year in the last year of the original transfer period, paragraph (2)(B) shall apply for 5 years after the original transfer period in the same manner as during a transfer period by substituting the applicable percentage for "120 percent" in clause (i) thereof. (ii) Applicable percentage For purposes of this subparagraph, the applicable percentage shall be determined under the following table: For the valuation date of the plan year in the following year after the original transfer period: The applicable percentage is: 1st 104 percent 2nd 108 percent 3rd 112 percent 4th 116 percent 5th 120 percent (iii) Early termination of continued maintenance period when 120 percent funding reached If, as of the valuation date of any plan year in the first 4 years after the original transfer period with respect to a qualified future transfer, there would be no excess determined under this subparagraph were the applicable percentage 120 percent, then this subparagraph shall cease to apply with respect to the plan.

(F) Original transfer period For purposes of this paragraph, the term "original transfer period" means the transfer period under this subsection with respect to a qualified future transfer determined without regard to the election under subparagraph (A).

# (g) Segment rates determined without pension stabilization

For purposes of this section, section 430 shall be applied without regard to subsection (h)(2)(C)(iv) thereof.