A recent IRS private letter ruling (PLR 201511044) addressed whether a Section 420 transfer1 of surplus pension assets to a Section 401(h) account could be used to provide medical benefits to retirees following a settlement of their pension obligations. The benefits will be provided to three classes of retirees: (1) those who elected a lump sum rather than annuity payments, (2) those whose annuity benefits will be paid by an insurance company following an irrevocable annuity buyout, and (3) those whose liabilities were transferred to another defined benefit plan. 

According to the IRS, qualified 420 transfers may be made on behalf of such participants (and their spouses and dependents), and they remain eligible to receive retiree medical benefits from the 401(h) account. The IRS reached the same conclusion for retiree life insurance benefits funded through a 420 transfer. 

This result is consistent with a 1991 IRS information letter on surplus transfers, which indicated that surplus pension assets could be transferred for any employee who received a pension distribution, is receiving a distribution or is entitled to such a distribution in the future, including those who received a lump sum distribution many years earlier.

Defined benefit plan sponsors that are considering a bulk lump sum offer and/or an annuity buyout may take some comfort from this ruling, as the transaction should not rule out a later 420 transfer of surplus pension assets to provide retiree medical or life insurance benefits for affected participants. However, interested sponsors should note that their specific facts and circumstances must be analyzed carefully, given that PLRs are generally binding only for the requesting taxpayer, and the IRS information letter was issued before the Pension Protection Act of 2006 modified the 420 transfer provisions.


Endnote

1. Under Internal Revenue Code Section 420, pension plans with surplus assets that meet certain conditions may use some of the surplus to provide medical or life insurance benefits for retirees, spouses and dependents by transferring the surplus assets to a 401(h) account (or to an applicable life insurance account).