IRS adds Section 420 transfers of DB surplus to ‘no-rule list’
Overview of Section 420 transfers
Under Internal Revenue Code (IRC) Section 420, a DB plan can transfer surplus assets to a Section 401(h) retiree health account or to a life insurance benefits account without causing a reversion to the DB plan’s sponsor if certain conditions are met. Under IRC Section 4980, sponsors pay an excise tax of up to 50% (in addition to regular income tax) on reversions from qualified plans.
At a very high level, a DB plan must be at least 125% funded (including the cost of benefits accruing for the year) to transfer surplus assets to fund current-year retiree health or life insurance benefits, or at least 120% funded to make a qualified future transfer to prefund future benefits over a period up to 10 years. The overfunding threshold for both current and future transfers is lowered to 110% for plans making de minimis transfers. All DB plan participants and beneficiaries must become fully vested in their benefits when a plan makes a Section 420 transfer.
Transferred assets may be used only to fund retiree health or life insurance benefits, and the employer must maintain those benefits at a minimum level for a specified period after the transfer. Plans can make only one Section 420 transfer per year to fund retiree health benefits and one for life insurance benefits. Transferred amounts are not tax-deductible by the employer.
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Extension of Section 420 transfer optionThe law allowing Section 420 transfers was set to expire at the end of 2025. However, the SECURE 2.0 Act of 2022 extended the provision until Dec. 31, 2032 (one of multiple extensions of the law since its enactment in 1990). Any further extension beyond 2032 will require additional action by Congress.
Impact of addition to no-rule list
Rev. Proc. 2026-3 says IRS will not issue rulings on the tax consequences of a Section 420 transfer to a 401(h) account, including the use of the assets after the transfer. Prior to 2026, DB plan sponsors could request PLRs on various aspects of Section 420 transfers — for example, on whether a transfer can be used to fund retiree health benefits for former participants in the DB plan whose benefits had been annuitized or paid in full in a lump sum distribution. Obtaining a PLR, while not required, gave sponsors comfort that IRS would not later challenge the specific aspects of the transactions on which the rulings were sought.
Sponsors still might feel comfortable pursuing a Section 420 transfer without a PLR (not all sponsors requested PLRs even when they were available) but should seek advice from their consultant team and legal counsel.
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Are transfers to life insurance accounts on the no-rule list?Rev. Proc. 2026-3 says specifically that IRS will no longer issue PLRs on Section 420 transfers to a Section 401(h) retiree health account. However, the revenue procedure doesn’t say IRS won’t issue rulings on Section 420 transfers to a life insurance account. It’s unclear whether IRS intended to limit its no-rule decision to transfers to a 401(h) account, and if so, what the agency’s reason for doing so might be.
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Rulings still available on plan languageIRS still will issue determination letters on DB plan language regarding Section 420 transfers. Determination letters are usually available only upon initial qualification or plan termination or following a plan merger. However, if a sponsor is unable to obtain a determination through the ordinary process (e.g., because the sponsor is ineligible to request one), IRS may nevertheless issue a ruling if the agency concludes the sponsor has raised a tax-qualification issue that is unique and requires immediate guidance.
Other uses for DB plan surplus
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PLRs still available for these transactionsIRS generally still accepts PLR requests on both the pro rata benefit increase option and the QRP option, with one exception: IRS will not rule on whether a reversion has occurred when a DB plan terminates within “a short period of time” after being spun off from another DB plan sponsored by the same employer. Again, sponsors might still be comfortable pursuing either option in connection with a spinoff/termination but should seek advice from their consultants and legal counsel.
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Congress considering more options for surplus assetsCongress is currently considering a bill that would allow sponsors of ongoing DB plans to transfer trapped surplus assets to a defined contribution plan to fund nonelective contributions. The same bill would also 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’ beneficiary association (VEBA) to pay health benefits to non-key employees. The outlook for the bill is uncertain.
Related resources
Non-Mercer resource
- Rev. Proc. 2026-3 (IRS, Dec. 26, 2025)
Mercer Law & Policy resources
- Bill would let defined benefit plan sponsors free trapped assets (July 11, 2025)
- Taking a look at SECURE 2.0’s defined benefit plan provisions (February 21, 2023)
- Using a qualified replacement plan to reduce excise tax on DB plan surplus (July 19, 2022)