420 Transfers

[Guest EBW]

Background - One of my plans was been amended to allow 401(h) accounts and 420 transfers to pay post-retirement medical premiums from the pension trust. The plan year is 7/1 through 6/30. The client only wants to do the 420 transfer part, that is, transfer some of the assets to a separte fund and use the money for the retirees medical premiums. They want to make the transfer in June, 2001. As of 7/1/2000, the plan had assets in excess of 125% of current liability.

Questions - (1) Can the money be used to reimburse the company for premiums paid during the 2000/2001 plan year? (2) What has to be included in the participant notice or where can I find a sample notice?

Thank you for your response.

[Guest songlaw]

The first of my questions concerns whether the trustees of a governmental plan (specifically, the DB plan of the municipality's Police Officers and Firefighters) can use part of the plan's overfunded surplus to make a COLA increase to the retirees' health insurance allotment without also having to give the same stipend to the current participants. At least one other municipality in GA has authorized annual, automatic COLA's for its policemen, but those COLA's are part and parcel of that city's pension, and they do not necessarily owe their source of funding to that plan's overfunded surplus. We may also want to add such a provision to our workers' plan, but we would like to use the surplus as the means to the funding end.

Next, we are concerned about the State Constitution's anti-impairment of contracts provision. For example, if we were to authorize a 1.5% COLA, would we ever be able to scale it back (or undo it)? We do not suppose that the application of the aforementioned State Constitution provision would cause us much of a headache in regard to current employees, who are exchanging services for their pay (whether in cash or benefits), but the potential headaches Re: the retirees could be bad ones. The ERISA anti-cut back provisions come to mind (even if our governmental plan is not subject to ERISA per se), and the immediate, funding impact, on the actuarial bottom line also gives us pause.

We would welcome any input from your subscribers. Please suggest if and how ERISA Sections 420 and 401(h) may apply even though our plan is not subject to ERISA per se.

[Ron Snyder]

The first of my questions concerns whether the trustees of a governmental plan (specifically, the DB plan of the municipality's Police Officers and Firefighters) can use part of the plan's overfunded surplus to make a COLA increase to the retirees' health insurance allotment without also having to give the same stipend to the current participants.

There are multiple ways of accomplishing your goal. And nondiscrimination is not a problem. The problems are: the existence and language of applicable collective bargaining agreement(s), and drafting of the desired provision.

At least one other municipality in GA has authorized annual, automatic COLA's for its policemen, but those COLA's are part and parcel of that city's pension, and they do not necessarily owe their source of funding to that plan's overfunded surplus. We may also want to add such a provision to our workers' plan, but we would like to use the surplus as the means to the funding end.

I worked with a fire district that terminated their overfunded DB plan and replaced it with a new DB plan providing the same benefits. After transfer of the PVABs, the excess funds that reverted to the employer were used to fund retiree medical benefits through a welfare benefit plan. This approach permitted the retiree medical benefits to be paid and received tax-free. The welfare benefit plan was done as a DC plan with individual accounts rather than a guarantee of a COLA.

Next, we are concerned about the State Constitution's anti-impairment of contracts provision. For example, if we were to authorize a 1.5% COLA, would we ever be able to scale it back (or undo it)? We do not suppose that the application of the aforementioned State Constitution provision would cause us much of a headache in regard to current employees, who are exchanging services for their pay (whether in cash or benefits), but the potential headaches Re: the retirees could be bad ones. The ERISA anti-cut back provisions come to mind (even if our governmental plan is not subject to ERISA per se), and the immediate, funding impact, on the actuarial bottom line also gives us pause.

I'm willing to bet that even an Alabama benefits attorney would have a hard time answering regarding the "anti-impairment provision". This provision means what the State Supreme Court says it means if and when they rule. In my view, the facts of the case that comes before them will determine whether the anti-impairment provisions were intended to stop governments from taking away a benefit that has been promised. As they say, "bad facts make bad law."

I suggest that you seriously consider a DC approach rather than a DB approach so that your case is not the test case that gets to the Ala Sup Ct.

We would welcome any input from your subscribers. Please suggest if and how ERISA Sections 420 and 401(h) may apply even though our plan is not subject to ERISA per se.

ERISA Section 420 would not be necessary and 401(h) would truly be a pain in this case. They do not apply!

[Guest Brian4]

Compliance with requirements can be inconvenient.

The sections 401(h) and 420 referred to are Internal Rrevenue Code sections. Goverment plans are subject to some tax requirements in the Internal Revenue Code.

I believe that goverment plans are subject to 401(h).