Word pension on folder.
As a way to redirect otherwise unusable assets from pension funds without terminating retirement plans, the American Benefits Council (ABC) sent two proposals to the chairs of the House Committee on Ways and Means and the Senate Committee on Finance on May 8.
Citing the rise in interest rates since the end of the COVID-19 pandemic, which resulted in increased funded levels for the 100 largest corporate pension plans and a surplus of at least $100 billion in pension assets in the U.S., the employee benefits public policy organization sent the new proposals in letters to House Committee chair Jason Smith (R-MO) and Senate Chair Mike Crapo (R-ID). These proposals would avoid “a material incentive to terminate” pension funds and could unlock otherwise idle surplus assets, according to the ABC.
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Proposal No. 1 would permit plan sponsors to use their defined benefit (DB) plan surplus to fund non-elective contributions to participants in the employer’s 401(k) plan, without terminating the DB plan.
Proposal No. 2 would allow surplus assets previously set aside to fund retiree medical benefits for certain other benefit purposes, such as active employee health benefits. “Because employers would otherwise be deducting the out-of-pocket costs of providing such other benefits, the proposal is expected to raise a material amount of revenue,” according to ABC, which works closely with lawmakers to champion legislation, regulation and legal rulings favorable to employers.
Under current law, employers may only use surplus pension assets for other benefits only if they terminate the pension plan. If a DB plan is terminated, surplus assets need to be contributed to a “’replacement plan,’” including a defined contribution plan,” according to ABC. “In order to be a replacement plan, at least 95% of the active participants in the terminated plan who are still employed by the employer must be active participants in the replacement plan. The surplus may be allocated to participants as non-elective contributions to the defined contribution replacement plan over seven years.”
“These proposals are a win-win approach for employees, employers, and taxpayers,” said Lynn Dudley, the American Benefits Council’s senior vice president for global retirement and compensation policy, in a statement. “They provide immediate benefits to workers while also raising billions in federal revenue.”
The proposals include protections to ensure employee benefits are not reduced as a result of surplus transfers. If the defined benefit plan were terminated, all benefits must be 100% vested. If the surplus assets are used to fund a replacement plan under this proposal, benefits under the defined benefit plan must be vested to the same extent as if the plan had been terminated.
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These proposals would also include protections against reductions in health benefits for active employees or retirees and against reductions in contributions to DC plans. These safeguards aim to preserve the integrity of both retirement and health plans while expanding flexibility for employers, according to the ABC.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
