Section 420 Transfers by Multiemployer Plans

 A little-noted feature of the Pension Protection Act is its provision extending to multiemployer pension plans the opportunity to transfer "excess" assets to fund retiree health benefits.  Until now, only single employer pension plan sponsors were permitted to make such transfers. 

     The fact that the effort was made to include such a provision in the PPA suggests that there are at least some well-funded multiemployer pension plans that are in a position to transfer such "excess" assets to a more financially stressed affiliated health benefits plan.  The question arises, however, as to whether this provision will really prove workable or attractive for multiemployer plans.

     The amendment to Section 420 of the Code takes account of the fact that this section was originally written for single employer plans, by stating that it shall be applied to multiemployer plans in accordance with such modifications as Treasury determines appropriate to reflect the fact that the plan is not maintained by a single employer. 

     Presumably, regulations to implement this directive will not have a claim on Treasury's most immediate attention.  Yet they would seem essential.  For example, Section 420's definition of "excess" assets is now cast in terms of funding rules that apply only to single employer plans.  (Here there is a further problem for all plans - - single or multiemployer - - that might wish to utilize Section 420.  BNA, on September 13, quoted Nell Hennessy as pointing to "an incredible typo" in the amended Section 420, which mistakenly defines "excess" in terms of assets that exceed the "funding shortfall" rather than assets that exceed the "funding target."  In all likelihood this will require an eventual legislative fix.)

     In addition, there are other existing provisions of Section 420 that may prove particularly difficult for multiemployer plans to work with.  Section 420(b)(2) states that only one transfer a year may be made to pay for retiree health benefits that are provided during that year, which seemingly imposes an impossibly tricky forecasting problem.  If more assets are transferred than are necessary to pay for the retiree health benefits that are provided during that year, then the excess must be returned to the pension plan, subject to a 20% excise tax.  If, on the other hand, the single transfer turns out to be insufficient there may be no practical way to precisely adjust employer contributions to make up the shortfall, as Section 420(d)(2) states that an employer may not contribute any amount to a welfare benefit fund with respect to health liabilities for which transferred assets are required to be used.

     Other rules that must be taken into account are Section 420(c)(3)'s requirement that if there is a transfer of pension assets, health benefits may not be significantly reduced for a period of five years - - which may limit a health benefit plan's options in searching for ways to cut costs, such as by increasing deductibles and co-payments.  And Section 420(c)(2)(A) requires that for a transfer to be "qualified," all accrued benefits under the pension plan must be fully vested - - thereby imposing an additional cost that some multiemployer plan sponsors may be reluctant to incur. 

     All in all, I strongly suspect that without modifications that Treasury is unlikely to adopt, Section 420 transfers will probably not prove sufficiently attractive for multiemployer plan sponsors to pursue.  Does anyone have a different assessment?