IRS PLR: Surplus Pension Assets Can Cover Certain Health Benefits

The IRS in a recently released private letter ruling (PLR) said that transfers of surplus pension assets can be used to cover health benefits funded under a Code Section 401(h) account. The IRS issued PLR 201511044 on Dec. 19, 2014 to the company that requested it, but only recently made it public.

The PLR was requested by a company that sponsors two defined benefit plans. One allows qualified transfers of excess pension assets to an account that meets the requirements of Section 401(h). The other allows qualified transfers, as well as qualified future transfers and collectively bargained transfers under Code Section 420.

The company intends to amend the plans to make an opportunity to select a lump sum distribution available, during a limited window, to three types of participants:

• those who elected a lump sum rather than annuity payments;

• those whose annuity benefits are settled; and

• those whose liabilities were transferred to another DB plan.

At issue was whether individuals who took advantage of that opportunity are among those:

• who may receive qualified transfers, qualified future transfers and collectively bargained transfers; and

• for whom health benefits and life insurance benefits under Section 420 may be paid from the pension plans’ Section 401(h) accounts and retiree life insurance accounts.

The IRS noted that the provisions and language of Section 420(e)(1)(C) allow such arrangements, and that there is no indication that the way pension benefits are paid is relevant for purposes of determining eligibility for benefits under Section 401(h). It also said that as long as an individual has earned pension benefits under the plan and retired, his or her health benefits can be funded through a Section 401(h) account, even if the pension benefit has been paid out through a lump sum or otherwise settled before payments are made under the Section 401(h) account; that principle applies to retiree life insurance benefits as well.

The IRS said that in this circumstance, those who took advantage of the opportunity the company wanted to offer — as well as their spouses and dependents — were among those to whom those kinds of transfers may be made under Section 420 and for whom transferred assets may be paid from a Section 401(h) account or a life insurance account.

Note that this PLR has very limited application. PLRs are not formal guidance, nor are they precedent for guidance and rulings. They do, however, provide a look at the IRS’ position on a specific matter and provide an indication of how the IRS may treat similar matters.