U.S. Code, Title 26, Internal Revenue Code

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Author: "U.S. Congress, Office of the Law Revision Counsel"

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§ 420. Transfers of Excess Pension Assets to Retiree Health Accounts

(a) General rule

     If there is a qualified transfer of any excess pension assets of a defined benefit plan (other than a multiemployer plan) to a health benefits account which is part of such plan—

     (1) a trust which is part of such plan shall not be treated as failing to meet the requirements of subsection (a) or (h) of section 401 solely by reason of such transfer (or any other action authorized under this section),

     (2) no amount shall be includible in the gross income of the employer maintaining the plan solely by reason of such transfer,

     (3) such transfer shall not be treated—

     (A) as an employer reversion for purposes of section 4980, or

     (B) as a prohibited transaction for purposes of section 4975, and

     (4) the limitations of subsection (d) shall apply to such employer.

(b) Qualified transfer

     For purposes of this section—

(1) In general

     The term "qualified transfer" means a transfer—

     (A) of excess pension assets of a defined benefit plan to a health benefits account which is part of such plan in a taxable year beginning after December 31, 1990,

     (B) which does not contravene any other provision of law, and

     (C) with respect to which the following requirements are met in connection with the plan—

     (i) the use requirements of subsection (c)(1),

     (ii) the vesting requirements of subsection (c)(2), and

     (iii) the minimum cost requirements of subsection (c)(3).

(2) Only 1 transfer per year

(A) In general

     No more than 1 transfer with respect to any plan during a taxable year may be treated as a qualified transfer for purposes of this section.

(B) Exception

     A transfer described in paragraph (4) shall not be taken into account for purposes of subparagraph (A).

(3) Limitation on amount transferred

     The amount of excess pension assets which may be transferred in a qualified transfer shall not exceed the amount which is reasonably estimated to be the amount the employer maintaining the plan will pay (whether directly or through reimbursement) out of such account during the taxable year of the transfer for qualified current retiree health liabilities.

(4) Special rule for 1990

(A) In general

     Subject to the provisions of subsection (c), a transfer shall be treated as a qualified transfer if such transfer—

     (i) is made after the close of the taxable year preceding the employer’s first taxable year beginning after December 31, 1990, and before the earlier of—

(I) the due date (including extensions) for the filing of the return of tax for such preceding taxable year, or

(II) the date such return is filed, and

     (ii) does not exceed the expenditures of the employer for qualified current retiree health liabilities for such preceding taxable year.

(B) Deduction reduced

     The amount of the deductions otherwise allowable under this chapter to an employer for the taxable year preceding the employer’s first taxable year beginning after December 31, 1990, shall be reduced by the amount of any qualified transfer to which this paragraph applies.

(C) Coordination with reduction rule

     Subsection (e)(1)(B) shall not apply to a transfer described in subparagraph (A).

(5) Expiration

     No transfer made after December 31, 2005, shall be treated as a qualified transfer.

(c) Requirements of plans transferring assets

(1) Use of transferred assets

(A) In general

     Any assets transferred to a health benefits account in a qualified transfer (and any income allocable thereto) shall be used only to pay qualified current retiree health liabilities (other than liabilities of key employees not taken into account under subsection (e)(1)(D)) for the taxable year of the transfer (whether directly or through reimbursement).

(B) Amounts not used to pay for health benefits

(i) In general

     Any assets transferred to a health benefits account in a qualified transfer (and any income allocable thereto) which are not used as provided in subparagraph (A) shall be transferred out of the account to the transferor plan.

(ii) Tax treatment of amounts

     Any amount transferred out of an account under clause (i)—

(I) shall not be includible in the gross income of the employer for such taxable year, but

(II) shall be treated as an employer reversion for purposes of section 4980 (without regard to subsection (d) thereof).

(C) Ordering rule

     For purposes of this section, any amount paid out of a health benefits account shall be treated as paid first out of the assets and income described in subparagraph (A).

(2) Requirements relating to pension benefits accruing before transfer

(A) In general

     The requirements of this paragraph are met if the plan provides that the accrued pension benefits of any participant or beneficiary under the plan become nonforfeitable in the same manner which would be required if the plan had terminated immediately before the qualified transfer (or in the case of a participant who separated during the 1-year period ending on the date of the transfer, immediately before such separation).

(B) Special rule for 1990

     In the case of a qualified transfer described in subsection (b)(4), the requirements of this paragraph are met with respect to any participant who separated from service during the taxable year to which such transfer relates by recomputing such participant’s benefits as if subparagraph (A) had applied immediately before such separation.

(3) Minimum cost requirements

(A) In general

     The requirements of this paragraph are met if each group health plan or arrangement under which applicable health benefits are provided provides that the applicable employer cost for each taxable year during the cost maintenance period shall not be less than the higher of the applicable employer costs for each of the 2 taxable years immediately preceding the taxable year of the qualified transfer.

(B) Applicable employer cost

     For purposes of this paragraph, the term "applicable employer cost" means, with respect to any taxable year, the amount determined by dividing—

     (i) the qualified current retiree health liabilities of the employer for such taxable year determined—

(I) without regard to any reduction under subsection (e)(1)(B), and

(II) in the case of a taxable year in which there was no qualified transfer, in the same manner as if there had been such a transfer at the end of the taxable year, by

     (ii) the number of individuals to whom coverage for applicable health benefits was provided during such taxable year.

(C) Election to compute cost separately

     An employer may elect to have this paragraph applied separately with respect to individuals eligible for benefits under title XVIII of the Social Security Act at any time during the taxable year and with respect to individuals not so eligible.

(D) Cost maintenance period

     For purposes of this paragraph, the term "cost maintenance period" means the period of 5 taxable years beginning with the taxable year in which the qualified transfer occurs. If a taxable year is in two or more overlapping cost maintenance periods, this paragraph shall be applied by taking into account the highest applicable employer cost required to be provided under subparagraph (A) for such taxable year.

(E) Regulations

     The Secretary shall prescribe such regulations as may be necessary to prevent an employer who significantly reduces retiree health coverage during the cost maintenance period from being treated as satisfying the minimum cost requirement of this subsection.

(d) Limitations on employer

     For purposes of this title—

(1) Deduction limitations

     No deduction shall be allowed—

     (A) for the transfer of any amount to a health benefits account in a qualified transfer (or any retransfer to the plan under subsection (c)(1)(B)),

     (B) for qualified current retiree health liabilities paid out of the assets (and income) described in subsection (c)(1), or

     (C) for any amounts to which subparagraph (B) does not apply and which are paid for qualified current retiree health liabilities for the taxable year to the extent such amounts are not greater than the excess (if any) of—

     (i) the amount determined under subparagraph (A) (and income allocable thereto), over

     (ii) the amount determined under subparagraph (B).

(2) No contributions allowed

     An employer may not contribute after December 31, 1990, any amount to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) with respect to qualified current retiree health liabilities for which transferred assets are required to be used under subsection (c)(1).

(e) Definition and special rules

     For purposes of this section—

(1) Qualified current retiree health liabilities

     For purposes of this section—

(A) In general

     The term "qualified current retiree health liabilities" means, with respect to any taxable year, the aggregate amounts (including administrative expenses) which would have been allowable as a deduction to the employer for such taxable year with respect to applicable health benefits provided during such taxable year if—

     (i) such benefits were provided directly by the employer, and

     (ii) the employer used the cash receipts and disbursements method of accounting.

For purposes of the preceding sentence, the rule of section 419(c)(3)(B) shall apply.

(B) Reductions for amounts previously set aside

     The amount determined under subparagraph (A) shall be reduced by the amount which bears the same ratio to such amount as—

     (i) the value (as of the close of the plan year preceding the year of the qualified transfer) of the assets in all health benefits accounts or welfare benefit funds (as defined in section 419(e)(1)) set aside to pay for the qualified current retiree health liability, bears to

     (ii) the present value of the qualified current retiree health liabilities for all plan years (determined without regard to this subparagraph).

(C) Applicable health benefits

     The term "applicable health benefits" means health benefits or coverage which are provided to—

     (i) retired employees who, immediately before the qualified transfer, are entitled to receive such benefits upon retirement and who are entitled to pension benefits under the plan, and

     (ii) their spouses and dependents.

(D) Key employees excluded

     If an employee is a key employee (within the meaning of section 416(i)(1)) with respect to any plan year ending in a taxable year, such employee shall not be taken into account in computing qualified current retiree health liabilities for such taxable year or in calculating applicable employer cost under subsection (c)(3)(B).

(2) Excess pension assets

     The term "excess pension assets" means the excess (if any) of—

     (A) the amount determined under section 412(c)(7)(A)(ii), over

     (B) the greater of—

     (i) the amount determined under section 412(c)(7)(A)(i), or

     (ii) 125 percent of current liability (as defined in section 412(c)(7)(B)).

The determination under this paragraph shall be made as of the most recent valuation date of the plan preceding the qualified transfer.

(3) Health benefits account

     The term "health benefits account" means an account established and maintained under section 401(h).

(4) Coordination with section 412

     In the case of a qualified transfer to a health benefits account—

     (A) any assets transferred in a plan year on or before the valuation date for such year (and any income allocable thereto) shall, for purposes of section 412, be treated as assets in the plan as of the valuation date for such year, and

     (B) the plan shall be treated as having a net experience loss under section 412(b)(2)(B)(iv) in an amount equal to the amount of such transfer (reduced by any amounts transferred back to the pension plan under subsection (c)(1)(B)) and for which amortization charges begin for the first plan year after the plan year in which such transfer occurs, except that such section shall be applied to such amount by substituting "10 plan years" for "5 plan years".

(Added Pub. L. 101–508, title XII, § 12011(a), Nov. 5, 1990, 104 Stat. 1388–567; amended Pub. L. 103–465, title VII, § 731(a)–(c)(3), Dec. 8, 1994, 108 Stat. 5003, 5004; Pub. L. 104–188, title I, § 1704(a), (t)(32), Aug. 20, 1996, 110 Stat. 1878, 1889; Pub. L. 106–170, title V, § 535(a)(1), (b), Dec. 17, 1999, 113 Stat. 1934.)

References in Text

     The Social Security Act, referred to in subsec. (c)(3)(C), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title XVIII of the Act is classified generally to subchapter XVIII (§ 1395 et seq.) of chapter 7 of Title 42, The Public Health and Welfare. For complete classification of this Act to the Code, see section 1305 of Title 42 and Tables.

Amendments

     1999—Subsec. (b)(1)(C)(iii). Pub. L. 106–170, § 535(b)(2)(A), substituted "cost" for "benefits".

     Subsec. (b)(5). Pub. L. 106–170, § 535(a)(1), substituted "made after December 31, 2005" for "in any taxable year beginning after December 31, 2000".

     Subsec. (c)(3). Pub. L. 106–170, § 535(b)(1), amended heading and text of par. (3) generally, substituting present provisions for provisions relating to maintenance of benefit requirements.

     Subsec. (e)(1)(D). Pub. L. 106–170, § 535(b)(2)(B), substituted "or in calculating applicable employer cost under subsection (c)(3)(B)" for "and shall not be subject to the minimum benefit requirements of subsection (c)(3)".

     1996—Pub. L. 104–188, § 1704(a), provided that, except as otherwise expressly provided, whenever in title XII of Pub. L. 101–508 an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. Section 12011(a) of title XII of Pub. L. 101–508 directed the amendment of part I of subchapter D of chapter 1 by adding this subpart, including this section, without specifying that amendment was to the Internal Revenue Code of 1986.

     Subsec. (e)(1)(C). Pub. L. 104–188, § 1704(t)(32), substituted "means" for "mean".

     1994—Subsec. (b)(1)(C)(iii). Pub. L. 103–465, § 731(c)(1), substituted "benefits" for "cost".

     Subsec. (b)(5). Pub. L. 103–465, § 731(a), substituted "2000" for "1995".

     Subsec. (c)(3). Pub. L. 103–465, § 731(b), amended par. (3) generally, substituting present provisions for provisions outlining minimum cost requirements for plans, providing for elections to compute costs separately, and defining "applicable employer cost" and "cost maintenance period".

     Subsec. (e)(1)(B). Pub. L. 103–465, § 731(c)(2), reenacted subpar. (B) heading without change and amended text generally. Prior to amendment, text read as follows: "The amount determined under subparagraph (A) shall be reduced by any amount previously contributed to a health benefits account or welfare benefit fund (as defined in section 419(e)(1)) to pay for the qualified current retiree health liabilities. The portion of any reserves remaining as of the close of December 31, 1990, shall be allocated on a pro rata basis to qualified current retiree health liabilities."

     Subsec. (e)(1)(D). Pub. L. 103–465, § 731(c)(3), substituted "and shall not be subject to the minimum benefit requirements of subsection (c)(3)" for "or in calculating applicable employer cost under subsection (c)(3)(B)".

Effective Date of 1999 Amendment

     Pub. L. 106–170, title V, § 535(c), Dec. 17, 1999, 113 Stat. 1935, provided that:

     "(1) In general.—The amendments made by this section [amending this section and sections 1021, 1103, and 1108 of Title 29, Labor] shall apply to qualified transfers occurring after the date of the enactment of this Act [Dec. 17, 1999].

     "(2) Transition rule.—If the cost maintenance period for any qualified transfer after the date of the enactment of this Act [Dec. 17, 1999] includes any portion of a benefit maintenance period for any qualified transfer on or before such date, the amendments made by subsection (b) [amending this section] shall not apply to such portion of the cost maintenance period (and such portion shall be treated as a benefit maintenance period)."

Effective Date of 1994 Amendment

     Section 731(d) of Pub. L. 103–465 provided that:

     "(1) Extension.—The amendments made by subsections (a) and (c)(3) [amending this section] shall apply to taxable years beginning after December 31, 1995.

     "(2) Benefits.—The amendments made by subsections (b) and (c)(1) and (2) [amending this section] shall apply to qualified transfers occurring after the date of the enactment of this Act [Dec. 8, 1994]."

Effective Date

     Section 12011(c) of Pub. L. 101–508 provided that:

     "(1) In general.—The amendments made by this section [enacting this section and amending section 401 of this title] shall apply to transfers in taxable years beginning after December 31, 1990.

     "(2) Waiver of estimated tax penalties.—No addition to tax shall be made under section 6654 or section 6655 of the Internal Revenue Code of 1986 for the taxable year preceding the taxpayer’s 1st taxable year beginning after December 31, 1990, with respect to any underpayment to the extent such underpayment was created or increased by reason of section 420(b)(4)(B) of such Code (as added by subsection (a))."

Section Referred to in Other Sections

     This section is referred to in section 401 of this title; title 29 sections 1021, 1082, 1103, 1108.

PART II—CERTAIN STOCK OPTIONS

Sec.

421.     General rules.

422.     Incentive stock options.

423.     Employee stock purchase plans.

424.     Definitions and special rules.

Amendments

     1990—Pub. L. 101–508, title XI, § 11801(b)(6), (c)(9)(A)(ii), Nov. 5, 1990, 104 Stat. 1388–522, 1388–524, struck out items 422 "Qualified stock options" and 424 "Restricted stock options" and redesignated items 422A and 425 as 422 and 424, respectively.

     1981—Pub. L. 97–34, title II, § 251(b)(6), Aug. 13, 1981, 95 Stat. 259, added item 422A.

     1964—Pub. L. 88–272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 63, substituted "CERTAIN STOCK OPTIONS" for "MISCELLANEOUS PROVISIONS" in part II heading, and "General rules" for "Employee stock options" in item 421, and added items 422–425.

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