Although many employers have been struggling to keep their defined benefit pension plans adequately funded, other companies find that they now have a surplus of assets held in trust for retirement benefits. Assets held in trust for the pension plan are inaccessible for business needs under tax qualification rules. However, the tax code does permit employers to transfer excess pension assets to a separate account used to fund retiree health benefits. Under new legislation, employers may also use these assets to fund life insurance benefits for retirees.

The Moving Ahead for Progress in the 21st Century Act (MAP-21) allows transfers of excess pension assets to a life insurance account, under the same rules that apply to retiree health accounts. The life insurance account is used to cover current retiree liabilities based on life insurance premiums and must be separate from a retiree health account. The life insurance benefits paid from this account must be group-term life insurance coverage, not in excess of $50,000, that is provided to participants in the plan by reason of retirement.

Although only one transfer of excess pension assets may be made in any tax year of the employer, a transfer from a plan to both a health benefits account and a life insurance account in the same tax year is treated as a single transfer. MAP-21 also extended the time period for transferring excess pension assets into separate accounts to fund retiree welfare benefits. Prior law prohibited transfers after December 31, 2013, but MAP-21 allows the practice to continue through 2021.

Do employers see transfers to fund life insurance benefits as a good use for excess pension assets?

Bloomberg BNA will host its inaugural Tax Policy & Practice Summit on November 13-14, 2012, in Washington, DC. One week after the November election, the Summit will focus on the impact of the election on tax policy and the future of tax reform. For more information and to register, please visit our Summit microsite at the following link: http://www.bna.com/tax-policy-summit.

--Vanessa Walts
Compensation Planning Group