On December 29, 2022, bipartisan legislation was signed into law, which is designed to strengthen retirement security. The new law, which was contained in the Consolidated Appropriations Act, 2023, is the SECURE 2.0 Act of 2022. It’s commonly referred to as SECURE 2.0 because it comes on the heels of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
While there are many provisions included in SECURE 2.0 Act of 2022, this Special Commentary whitepaper focuses on the extension of the provision that allows money from an overfunded defined benefit (DB) plan to be used to fund retiree medical and retiree life insurance liabilities.
Transferring Excess Pension Assets to Retiree Health / Life Accounts
In addition to a company’s DB pension plan, post-retirement benefits (e.g., retiree medical obligations, retiree life insurance obligations, etc.) also may receive significant attention from corporate management because of the financial effects and risks that these obligations place on corporate balance sheets and income statements. While employers are not required to fund these benefits, there are strong reasons for doing so.
Over the last several years, significant numbers of plan sponsors have transferred or allocated money from an overfunded DB plan to fund retiree medical/retiree life insurance obligations as allowed under Internal Revenue Code 420 (Transfers of Excess Pension Assets to Retiree Health / Life Accounts) and/or COVID Tax Relief Act of 2020 Section 285.
Section 420 permits “qualified future transfers,” allowing for up to 10 years of retiree health and life insurance costs to be transferred from a company’s defined benefit (DB) pension plan to a retiree health benefits account and/or a retiree life insurance account. Such transfers must meet several requirements: (1) the plan must be 120% funded at the outset, (2) it must be 120% funded through the transfer period, (3) all unused money must be transferred back, and (4) the plan is subject to a maintenance of effort requirements. Applying the requirements of Section 420 during the economic downturn related to the coronavirus pandemic led to plans, many of which had historically been over 120% funded, to drop below that level.
To address this, Section 285 of the COVID Tax Relief Act of 2020 permitted employers to make a one-time election in 2020 and 2021 to end any existing transfer period and lowered the minimum funding requirement to 100%.
Impact of Secure 2.0
In a recent MetLife survey, 87% of plan sponsors said they were closely following SECURE 2.0 and related legislation, and 84% believe that it was important for SECURE 2.0 to extend the provision allowing the transfer of assets from an overfunded DB plan to fund retiree medical/retiree life obligations.
Secure 2.0 paves the way for overfunded pension plans – those over 110% funded – to transfer up to 1.75% of plan assets to a program used to pay for retiree health and retiree life benefits. This expanded relief, which was originally set to sunset at the end of 2025, has now been extended until December 31, 2032.
By 2030, all baby boomers in the United States will be at least 65 years old1 – resulting in increasing costs for employer-paid, post-retirement benefits. Withthe passage of Secure 2.0, it may be prudent for employers to assess how best to fund these obligations with the knowledge that the financial requirements for transferring excess pension assets to retiree health and/or life insurance accounts are less burdensome and have been extended. With the inclusion of this provision, plan sponsors will be able to consider funding these other post retirement liabilities and perhaps develop long-term solutions to buyout or transfer these obligations to a highly rated insurance company, which would settle or remove these liabilities from the corporate balance sheet.
A retiree medical buyout, for example, fully settles obligation for annuitized retirees, eliminates exposure related to future longevity and discount rate fluctuations, reduces operational and administrative burden of managing plan, and mitigates ongoing balance sheet and P&L cost and volatility, to name a few. Similarly, a retiree life insurance buyout reduces or eliminates these long-term liabilities, lowers lifetime corporate expenses for premiums, increases current year tax deductions, reduces administrative recordkeeping costs, and helps mitigate risk, among other potential advantages.
Importantly, both retiree medical and retiree life insurance buyouts improve benefit security for retirees. By taking steps to manage these liabilities in partnership with a highly rated and experienced insurance partner, employers can keep their retiree benefit commitments, particularly for legacy retirees and employees, who were promised or earned these benefits during their working years.
MetLife does not give legal or tax advice upon which any other party may rely. Therefore, the information contained herein is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Moreover, tax results and the appropriateness of any product for any specific taxpayer may vary depending on facts and circumstances. Employers and plan sponsors should consider consulting with their own independent legal and tax advisers regarding your particular set of facts and circumstances.
1. Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Number of people 75 and older in the labor force is expected to grow 96.5 percent by 2030 at https://www.bls.gov/opub/ted/2021/number-of-people-75-and-older-in-the-labor-force-is-expected-to-grow-96-5-percent-by-2030.htm (visited November 30, 2022).