IRS Proposes Regs on Excess Pension Transfers to Health Plans

January 5, 2001 ( - The IRS has proposed regulations that would impose conditions on health coverage reductions once excess pension assets have been transferred to a health benefits account.

The regulations, released January 4, say that the minimum cost requirement of Section 420(c)(3) is not met if the employer “significantly” reduces health coverage during the cost maintenance period after a transfer of excess pension assets under Section 420, according to BNA.

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The provision to transfer assets was scheduled to expire in 1999, but was renewed with the addition of Section 420(c)(3)(E) to the Internal Revenue Code.  That section required the Treasury secretary to develop regulations that would prevent an employer who reduced health coverage during the cost maintenance period from meeting the minimum cost requirement – and getting the tax benefit. 

Completion of regulations implementing Section 420(c)(3)(E) was on the IRS’s 2000 Priority List.

The Proposal

The proposed regulations state that the number of individuals who lose coverage during the cost maintenance period as a result of employer actions will be measured both on an annual and cumulative basis.

Essentially a decrease of 10% in the number of individuals covered in any year or a 20% decrease over the five-year cost maintenance period would fail the minimum cost requirement.  The change would take effect February 5.

Employer actions include:

  • plan amendments
  • the sale of all or part of the employer’s business
  • any action that indirectly ends an individual’s coverage


Employers were allowed to make transfers to health benefits accounts (a 401(h) account) following passage of the 1990 Revenue Reconciliation Act, subject to certain limitations, including the amount transferred could not be more than the amount reasonably estimated to be paid out during the year of transfer. 

Another key restriction in order to receive tax benefits, was the requirement that health expenditures for covered retirees and dependents be maintained at a minimum dollar level for five years following the qualified transfer. 

However, the minimum cost requirement was originally defined in terms of a per person cost, which meant that employers could meet the requirement simply by reducing the number of covered workers.

Comments Requested

The IRS is requesting comments on the proposed regulations, which must be received by March 6.  IRS will hold a public hearing on the proposal in Washington, DC on March 15.

– Nevin Adams

Comments should be sent to CC:M&SP:RU (REG-116468-00), Room 5226, Internal revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. For further information, call Vernon Carter or Janet Laufer at (202) 622-6060.

The proposal