American Benefits Council proposal would free DB surplus assets 

March 31, 2025

A proposal from the American Benefits Council (ABC) would give defined benefit (DB) plan sponsors two new options for using “trapped” surplus plan assets to provide other benefits. Under the first option, sponsors could use their DB surplus to fund nonelective contributions under a defined contribution (DC) plan, without terminating the DB plan. Under the second option, sponsors could use surplus assets previously set aside to fund retiree medical benefits for certain other benefit purposes. The proposals are part of an ABC effort to enhance retirement security in the US by strengthening single-employer DB plans. Some congressional Republicans are interested in the proposal to help pay for a party-line budget reconciliation bill aimed at passing much of their agenda this year, but the outlook is unclear. A number of employers are actively advocating for this change, which could improve its chances in a GOP budget bill or another measure.

ABC proposes to let employers transfer surplus assets from ongoing DB plans to DC plans, similar to the already permissible transfer of a terminating DB plan’s surplus to a qualified replacement plan (QRP). Under the current QRP rules, if a taxable employer terminates a DB plan, any reversion of surplus assets to the employer (i.e., amounts remaining after all liabilities have been satisfied) is subject to a 50% excise tax, in addition to regular income tax. However, if the employer transfers at least 25% of the surplus to a QRP, the employer pays no excise or income tax on the transferred amounts and a reduced 20% excise tax on any remaining reversion (in addition to regular income tax). If the employer transfers the entire surplus to the QRP, the employer pays no excise or income tax.

ABC believes that employers with significant surplus DB assets and ongoing DC plans may be motivated to terminate their DB plans and use the surplus to fund DC plan benefits. To forestall “a wave of very large plan terminations in the next few years,” ABC’s proposal would allow sponsors to transfer surplus DB assets to a DC plan in the same manner as under the rules for QRPs, but without terminating the DB plan. Under the proposal, transfers from ongoing DB plans would be subject to many of the same rules that apply to QRPs, including that the QRP benefit at least 95% of the active DB plan participants, the transferred surplus is allocated at least as rapidly as ratably over seven years, and the transferred assets generally can’t be used to fund matching contributions.

The following additional conditions would also apply:

• All DB plan benefits would have to vest fully on the transfer (since all benefits fully vest on plan termination).
• The sponsor could not reduce the level of DC plan benefits during the allocation period or the next four years.
• Surplus assets would be defined as the excess of assets over 110% of the value of the plan’s liabilities as measured for paying premiums to the Pension Benefit Guaranty Corp.

The proposal would also give DB sponsors access to surplus assets trapped in Section 401(h) accounts. Section 401(h) accounts are subaccounts within the DB plan trust, with assets reserved for paying health benefits to retired participants, their spouses and dependents. The assets in these accounts are subject to strict requirements on their use. Notably, current rules only allow use of the assets for retiree health benefits, and the assets generally cannot revert to the plan sponsor — even on plan termination — before satisfaction of all retiree health liabilities. (A full discussion of these rules is beyond the scope of this article.)

The ABC proposal would permit employers to use surplus Section 401(h) assets for two purposes:

• To pay pension benefits under the DB plan. Transferred assets would have to be earmarked for pension benefits until those assets brought the DB plan’s funded status to at least 110% on the plan’s minimum funding basis.
• To pay welfare benefits for nonkey employees. Assets exceeding 125% of the value of retiree health benefits could be used to pay for other welfare benefits to active and retired participants, such as active healthcare or life insurance. Pension benefits would have to be fully vested, and any welfare benefit plan funded with these assets would be subject to a five-year cost (or benefit)-maintenance requirement. Certain restrictions would prohibit the sponsor from creating additional surplus in the 401(h) account.

By funding these benefits with previously paid contributions, employers would avoid having to pay additional costs out of pocket. ABC notes that because current contributions for welfare benefits would be deductible, the proposal “is expected to raise a material amount of revenue” for the federal government.

• Proposals for enhancing retirement security by strengthening the single-employer defined benefit plan system (American Benefits Council, Oct. 31, 2023)

• SECURE 2.0’s auto-enrollment mandate revs up with IRS proposal (Feb. 12, 2025)