The IRS recently issued guidance (PLR 202305001) providing that a separate account maintained under a qualified pension plan to pay medical benefits only for retired employees could be used to provide medical benefits to active employees who are eligible to commence in-service retirement benefits under the plan.
These retiree medical accounts are known as Section 401(h) accounts, as Section 401(h) expressly authorizes the accounts and imposes specific conditions and limitations on such accounts. One of the conditions generally allows Section 401(h) accounts to only be used to provide medical benefits to retired employees, their spouses and dependents.
The regulations provide that to be considered “retired,” an employee generally must be eligible to receive retirement benefits under the pension plan. The regulations provide further that an employee is not considered eligible for retirement benefits if the employee is still employed by the employer and a separation from employment is a condition to receiving retirement benefits.
Prior to the enactment of Section 401(a)(36) by the Pension Protection Act of 2006 (P.L. 109-280), a qualified pension plan generally could not commence retirement benefits until a participant experienced a separation from employment. Thus, in-service distributions to active employees — even those with a reduced work schedule to phase into retirement — could not be made.
Section 401(a)(36) allowed plan sponsors to make in-service distributions to active employees who attained age 62. This age was subsequently reduced to 59-and-a-half by the Bipartisan American Miners Act.
The IRS concluded in the PLR that the conditions to be considered “retired” were met by active employees who were eligible to commence “in-service Section 401(a)(36) distributions” because their eligibility to commence retirement benefits under the terms of the plan was not conditioned on their separation from employment.
The IRS noted in the PLR that the particular Section 401(h) account involved in the ruling had significantly more assets than needed to satisfy liabilities for post-retirement medical benefits — meaning the Section 401(h) account was significantly overfunded. It is not clear whether the IRS would reach the same conclusion if a particular Section 401(h) account was not significantly overfunded. Nevertheless, in this ruling, the plan sponsor can now use the “retiree” Section 401(h) account to provide medical benefits to certain active employees.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “§,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share