401(h) reversion

[Guest Steve C]

One of my clients added a 401(h) retiree medical feature to their DB plan two years ago. A separate account established for 401(h) benefits now holds about $120,000, and only one retiree is currently entitled to distributions (monthly payments of about $250 have not yet commenced).

The sponsor has now reconsidered, and would like to increase the DB formula in lieu of the 401(h) feature. The question is what can be done with the 401(h) account.

The Code and regs (1.401-14) provide that the 401(h) account can revert to the employer "upon satisfaction of all liabilities arising out of the medical benefits portion of the plan." The plan can be amended so that future retirees are not entitled to medical benefits, but what about the one current retiree? Can the plan be amended to terminate her medical benefits, which would allow an immediate reversion? The sponsor intends to continue paying her medical benefit from a corporate account.

Guidance on 401(h) is slim, but my guess is that her 401(h) benefit can be terminated by amendment, as the 401(h) feature is not a vested benefit.

Any thoughts on this one? I'll appreciate any & all input.

- Steve

[jpod]

It seems that nobody wants to take a crack at answering 401(h) questions. Here's another one. ERISA/PBGC-covered DB plan is terminating. There is $X in a 401(h) account which can't be used up fast enough under the terms of the retiree medical plan funded by that account. Under the IRC and Title I of ERISA, what must/can be done with the 401(h) money upon termination of the plan? Can it just revert to the employer (it so happens that in this case the employer is tax-exempt, so no income tax or reversion tax)? If it reverts to the employer must it be held in some type of trust for ERISA Title I compliance?

[Peter Gulia]

On your first question, would applying for the Internal Revenue Service's written determination that the plan, as amended, remains a 401(a)-qualified plan include by implication some finding that the plan does not violate anti-cutback rules?