Legality of Asset Transfer

[Gary]

A large plan has surplus assets. Can they transfer part of the surplus out of plan to cover retiree healthcare costs? Where is this addressed in the law? What notfication or other requirements exist or where can they be found? Look forward to comments.

This plan is not being terminated, but they plan on vesting all participants at the time of transfer.

[Kirk Maldonado]

See Internal Revenue Code Section 420.

[Guest John Koresko]

Section 401(h) permits a portion of overfunded d.b. assets to be transferred. This usually does not completely cure the problem. I took a more aggressive strategy six years ago with a company which was emerging from Chapter 11. We MERGED the d.b. with a new ESOP. Employees were basically given the choice of investing in the new company or losing their jobs. They took the former. Of course, the Dept. of Labor argued that a technical termination occurred. However, they never quite got past the fact that Congress did not equate mergers and terminations. IRS never caused a problem. Eventually, the DOL went away. On July 30, 1999, Senator Santorum proposed S.1450, an amendment which would permit transfers of overfunded d.b. assets to ESOPs under certain conditions. The theory behind the proposal is that the excise and income taxes on reversions will not be triggered in the short run because the employer will not cause the event. Thus Joint Tax scored the provision revenue neutral. This provision is still pending and could be added in the next round of tax bill wars. Overfunded d.b. balances can also be cured by conversion to a sec. 412(i)fully insured plan. The actuarial assumption is 3.5% rather than 6%+. Thus, in many situations the overfunding will disappear and owners will receive valuable life insurance protection with pre-tax dollars. Finally, there is another rather aggressive technique. The overfunded d.b. plan can be split into two plans. One would be fully funded. The other (#2) would be overfunded with the excess. Plan 2 could then be amended to provide incidental benefits and also to act as a 401(m) account to fund the employer's share of contributions to, perhaps, a 401(k) plan. After all, on 12/31/99, section 415(e) expires and the dual plan limit is history.

This may be a bit presumptuous, but would you like us to help you on this?