The American Benefits Council has proposed changes that would reshape how employers use otherwise unusable surplus assets in retirement plans, offering a win for employees and a revenue boost for the federal government.
Citing the rise in interest rates since the end of the COVID-19 pandemic, a rise which resulted in increased funded levels for the 100 largest corporate pension plans and a surplus of at least $62 billion in pension assets in the U.S. as of December 2024, according to data from Milliman, the ABC’s plans would avoid “a material incentive to terminate” pension funds.
The ABC’s first proposal would permit surplus assets in a defined benefit pension fund to be transferred to provide contributions to participants in the employer’s defined contribution retirement plan without terminating the defined benefit plan. Such a use of plan assets is currently permitted only if the defined benefit plan is being terminated.
The second proposal would enable surplus assets in a plan sponsor’s retiree health account to be transferred and used to pay for other benefits, such as active employee health benefits.
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Both proposals include the current-law protections for participants, including protections against reductions in health benefits for active employees or retirees and against reductions in contributions to defined contribution plans, according to information from the council.
The proposals were outlined in letters sent to the chairs of the House Committee on Ways and Means and the Senate Committee on Finance, Jason Smith, R-Missouri, and Mike Crapo, R-Idaho, respectively, on May 8.
Under current law, companies may use surplus pension assets for other benefits if they terminate the pension plan. The proposed framework, however, would allow the plan to continue operating while excess assets could be used toward employee 401(k) contributions or active employee health benefits. According to the council, these changes could unlock more than $100 billion in otherwise idle surplus assets.
“These proposals are a win-win approach for employees, employers, and taxpayers,” said Lynn Dudley, the 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 federal revenue would come as a result of the fact that companies that have collected the surplus assets have already received a tax deduction. Therefore, using that money for other benefits forgoes a second deduction, creating a cost-saving mechanism for the federal budget. The council argued that this mirrors the effect of similar rules under Internal Revenue Code Section 420, which governs the use of surplus pension funds for retiree health care.
The proposals include protections to ensure employee benefits are not reduced as a result of surplus transfers. The protections would also include protections against reductions in health benefits for active employees or retirees and against reductions in contributions to defined contribution plans. These safeguards aim to preserve the integrity of both retirement and health plans while expanding flexibility for employers, according to the council’s materials.
The American Benefits Council has urged Congress to consider the proposals as part of broader fiscal policy efforts.
Tags: American Benefits Council, benefits, corporate defined benefit plans
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