Bill would let defined benefit plan sponsors free trapped assets 

Candid office worker listening in meeting   
July 11, 2025
Senate legislation ­— the Strengthening Benefit Plans Act of 2025 (S. 2003) — contains two proposals to give defined benefit (DB) plan sponsors more flexibility to use some “trapped” surplus plan assets for other purposes. One provision of the bill would allow sponsors to transfer DB surplus assets to a defined contribution (DC) plan to fund nonelective contributions. The second would let sponsors use assets previously set aside in retiree health accounts to pay DB plan pension benefits or transfer the amounts to a voluntary employees’ benefit association (VEBA) to pay health benefits to non-key employees. This latter proposal was strongly considered for inclusion in the recently enacted One Big Beautiful Bill Act but was dropped because of procedural rules. Lawmakers and the employer community will try to move the entire bill forward this year.

Transferring surplus DB assets to DC plans

Current law already allows sponsors of terminating DB plans to transfer surplus assets to a “qualified replacement plan” (QRP) to fund nonelective contributions if certain conditions are met (employers might also be able to use transferred surplus to fund matching contributions earned before the transfer, but IRS regulations prohibit prefunding matching contributions). The bill would allow sponsors to transfer surplus assets from a DB plan that’s not terminating to a new or existing DC plan that would be a QRP if the DB plan were terminating.
  • Conditions

    Apparently, a transfer from an ongoing DB plan to a DC plan would be subject to many of the conditions that apply to transfers to a QRP. For example, at least 95% of active participants in the DB plan would have to be active participants in the DC plan. (For a detailed discussion of the rules for QRPs, see Using a qualified replacement plan to reduce excise tax on DB plan surplus, July 19, 2022.) The following additional conditions would also apply:

    • Surplus assets would be defined for this purpose as amounts exceeding 110% of the value of the plan’s liabilities as measured for paying premiums to the Pension Benefit Guaranty Corp.
    • All benefits under the DB plan, including benefits for participants who terminated employment during the one-year period before the transfer, would have to become immediately 100% vested in the same manner as if the plan had terminated.
    • The sponsor couldn’t reduce benefits under the DC plan during the year of the transfer or the following four plan years.
  • Tax and ERISA treatment

    The following treatment would apply to transfers that satisfy the bill’s rules:

    • Transferred amounts wouldn’t be included in the sponsor’s gross income.
    • The sponsor couldn’t take a tax deduction for transferred amounts.
    • Transferred amounts wouldn’t be considered asset reversions subject to an excise tax.
    • The transfer would receive statutory prohibited transaction exemption relief.

Options for surplus retiree health assets

The bill also aims to ease long-standing challenges faced by plan sponsors related to surplus assets in Internal Revenue Code (IRC) Section 401(h) retiree health accounts and VEBAs. Those assets are reserved for health benefits and generally can’t be diverted to other uses, even when no health benefit liabilities remain. The bill would amend IRC Section 420 to let sponsors use trapped assets to pay for other benefits. That section already permits sponsors to transfer assets from an overfunded DB plan to a 401(h) account, subject to several requirements.
  • Section 401(h) accounts and VEBAs

    Section 401(h) accounts are subaccounts within a DB plan trust whose assets are reserved for paying health benefits to retired participants, their spouses, and dependents. The assets in these accounts are subject to strict usage requirements. Crucially, under current rules the assets can only be used for retiree health benefits and generally cannot revert to the plan sponsor, even upon plan termination, before satisfaction of all retiree health liabilities.

    A VEBA is a stand-alone trust specifically established to provide health and welfare benefits. Assets in these plans generally cannot revert to the employer, even on plan termination. Excess funds in these accounts may be trapped indefinitely, even after all obligations are met.

  • Use of freed assets
    The bill would let employers transfer “excess health assets” to the DB plan to fund pension benefits. If the transfer would result in a “funding excess” (or increase an already existing funding excess) under the DB plan, sponsors could instead transfer the assets to a VEBA. For this purpose, the plan would have a funding excess if the DB assets exceeded 110% of its liabilities as measured for purposes of benefit restrictions under IRC Section 436. Sponsors could also transfer excess health assets to a VEBA if the DB plan was terminating and transferring the Section 401(h) assets would exceed the amount necessary to satisfy the terminating plan’s pension liabilities. Any assets transferred to a VEBA could only be used to pay benefits to non-key employees covered under the VEBA.
  • Excess assets
    A sponsor could transfer only those assets exceeding 125% of the value of all retiree health benefits in the DB plan’s 401(h) accounts and the VEBA. The value of benefits is determined under “applicable accounting standards,” although the bill doesn’t specify which accounting standards would apply. In a terminating DB plan, all assets in a Section 401(h) account would count as excess assets.
  • Restriction on creating extra surplus

    To prevent sponsors from intentionally creating additional surplus to take advantage of the extra flexibility, the calculation of excess assets would omit:

    • Contributions made after Dec. 31, 2023 (except for those made in accordance with a legally binding commitment entered into on or before that date)
    • Reductions in the value of retiree health benefits due to a plan amendment adopted after Dec. 31, 2024.
  • Additional requirements and restrictions

    The bill would impose restrictions similar to those currently applicable to Section 420 transfers:

    • The sponsor would be subject to a five-year cost and benefit maintenance period
    • Only one transfer would be permitted per plan year
    • All pension benefits in the DB plan would need to vest immediately, including benefits for participants who terminated within one year prior to the transfer
  • Tax and ERISA treatment
    Transfers that satisfy the bill’s rules would receive similar tax and ERISA treatment as discussed above for transfers of DB surplus assets to DC plans.

Next steps

Sponsored by Sens. Tim Scott, R-SC, Bill Cassidy, R-LA, Roger Marshall, R-KS and Thom Tillis, R-NC, the bill closely tracks a proposal from the American Benefits Council (ABC). With respect to the 401(h) account proposal that nearly made it into Republicans’ One Big Beautiful Bill Act, the idea is attractive to lawmakers partly because it’s projected to raise revenue for the federal government by letting employers fund health care benefits with previously paid contributions that employers would otherwise be deducting from taxation. Allowing transfers of DB surplus assets to fund DC plan nonelective contributions is also expected to raise revenue, but the policy change is more contentious. Still, bill sponsors, other key legislators, and the plan sponsor community will be looking for opportunities to move the bill forward this year.

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