The Strengthening Benefit Plans Act of 2025 lets employers transfer certain overfunded retiree‑health and surplus defined‑benefit assets into funding for active employees. Title I adds a new section 420(h) to the Internal Revenue Code allowing transfers of "excess health assets" from 401(h) accounts and VEBAs into the employer’s pension plan or into a VEBA subject to use and protection rules; Title II adds a new 401(p) permitting transfers of surplus defined‑benefit assets into a qualified replacement defined‑contribution plan while the defined‑benefit plan remains in place.
Those transfers escape immediate employer income inclusion and are not treated as employer reversions or prohibited transactions, but the bill disallows deductions for the transfers and for certain benefits paid from the moved assets. The Act layers statutory valuation thresholds, one‑transfer‑per‑year limits, minimum employer cost and benefit protections over multiyear windows, and participant and agency notice requirements.
At a Glance
What It Does
Title I authorizes transfers of retiree health assets that exceed a 125% funding threshold (as measured by applicable accounting standards) into pension plans or VEBAs, with one permissible transfer per taxable year and five‑year cost/benefit guardrails. Title II permits transfers of defined‑benefit surplus (assets above 110% of PBGC‑measure liabilities) into a qualified replacement defined‑contribution plan if the DB plan’s benefits vest as they would on termination and the replacement plan maintains benefits for four plan years.
Who It Affects
Employers that sponsor retiree health accounts (401(h)) or maintain VEBAs, sponsors of overfunded defined‑benefit plans, plan administrators, actuaries, and PBGC‑insurable plans. Plan service providers and ERISA counsel will face new compliance and documentation tasks.
Why It Matters
The bill creates a legal pathway to redeploy overfunded legacy assets toward current workforce compensation and retirement accounts, potentially reducing stranded balances and altering funding calculations and PBGC premium bases. It changes tax treatment and ERISA status of moved assets while imposing minimum protections intended to shield benefit levels and employer cost flows.
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What This Bill Actually Does
The Act creates two distinct mechanisms for converting legacy plan surpluses into resources for active employees. For retiree health assets (Title I), it defines “excess health assets” as assets in a 401(h) account or a VEBA that exceed 125% of the employer’s retiree‑health liability under applicable accounting standards.
Employers may transfer those excess assets in the taxable year immediately following the year the excess is measured, generally into the pension plan that holds the 401(h) account. Under limited circumstances—principally where a transfer into the pension plan would create or increase a funding excess or where the pension plan is not a defined‑benefit plan—transfers may instead go to a VEBA, but use of those assets must conform to what the VEBA may legally pay.
The bill places operational constraints on any transfer. A plan may make no more than one such transfer per taxable year; transferred amounts are treated as plan assets for funding and ERISA purposes; and transfers are not treated as employer reversions or prohibited transactions nor are they includible in employer gross income.
At the same time, the employer cannot take a tax deduction for the transfer or for benefits paid from the transferred funds, and the plan must meet minimum cost and benefit protections over a five‑year period after the transfer: the employer’s applicable cost in each year may not be materially less than the higher of the prior two years, and benefits cannot be materially reduced during the five‑year window.For defined‑benefit plans (Title II), the Act allows sponsors to move “surplus assets”—assets exceeding 110% of the liability measure used to calculate PBGC premiums—into a qualified replacement defined‑contribution plan even if the DB plan is not terminated. To do so, the plan must make all affected benefits nonforfeitable in the same way a termination would (so participants vest as if the plan terminated), and the replacement plan may not reduce benefits for four plan years after the last transfer funding it.
Both titles add ERISA conforming language and require participant notices: plans must notify affected participants and beneficiaries at least 60 days before a retiree‑health transfer and provide government notices similar to existing ERISA rules. Title I’s tax changes apply to taxable years beginning after December 31, 2024; Title II applies to plan years beginning after December 31, 2025.
The Five Things You Need to Know
Title I defines “excess health assets” as 401(h)/VEBA assets exceeding 125% of retiree‑health liabilities (measured under applicable accounting standards).
Amounts attributable to contributions made after Dec. 31, 2023, or benefit cuts adopted after Dec. 31, 2023, do not count toward excess health assets.
A plan may make only one transfer of excess health assets per taxable year, and transferred assets are treated as plan assets for funding and ERISA testing.
The bill bars employer income inclusion and treats transfers as not being employer reversions or prohibited transactions, but it also disallows tax deductions for transfers and for benefits paid from the moved assets.
Title II measures DB surplus as assets above 110% of PBGC‑liability measures and requires DB benefits to vest as on termination and replacement‑plan benefit continuity for at least four plan years.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Permits transfer of excess retiree‑health assets into pension plans or VEBAs
This is the core new code provision. It authorizes transfers of ‘‘excess health assets’’ (defined in paragraph (2)) in the fiscal year after the excess is determined and provides that such transfers do not create taxable income, employer reversions, or prohibited transactions. Practically, the clause allows sponsors sitting on overfunded retiree‑health accounts to move money into the sponsoring pension plan to fund active benefits, but only under a strict one‑transfer‑per‑year rule, subject to the separate use, vesting, and minimum benefit/cost requirements spelled out elsewhere in the subsection.
How excess health assets are measured and what is excluded
The bill measures excess as assets over 125% of total retiree‑health liabilities, using applicable accounting standards—which imports actuarial judgment and potentially multiple GAAP or funding conventions. It explicitly excludes amounts attributable to contributions (except certain prior transfers) made after December 31, 2023, and excludes liability reductions resulting from plan amendments adopted after that date. For terminating plans, the entire 401(h) balance is treated as excess, which makes transfers common in termination contexts unless other constraints apply.
Permitted uses, VEBA rules, and minimum cost/benefit guardrails
By default transfers must fund the pension plan; transfers to a VEBA are tightly limited—permitted where a transfer into the pension plan would create or expand a funding excess or where the pension plan isn’t a defined‑benefit plan. The statute imposes multiyear protections: over the five taxable years starting in the transfer year the employer’s “applicable cost” cannot be materially less than the higher of the prior two years, and benefits cannot be materially reduced. These provisions are defensive: they attempt to prevent sponsors from moving assets off the books while simultaneously cutting contribution or benefit commitments to active workers.
ERISA coordination, notice rules, and administrative treatment
The bill modifies section 401(h) and several ERISA provisions to ensure a transfer under 420(h) does not by itself make a plan noncompliant with ERISA fiduciary rules or funding rules; it also adds a 60‑day participant notice requirement describing the amount to be transferred, destination, and immediate vesting effects. The transferred assets are explicitly treated as plan assets for purposes of sections 430 and 433, which governs funding, and ERISA sections are updated to prevent a transfer from being treated as a statutory violation on its face.
Allows surplus DB assets to fund a replacement DC plan without plan termination
This new subsection lets sponsors move ‘‘surplus assets’’—defined as assets exceeding 110% of the liability measure used for PBGC premiums—into a replacement defined‑contribution plan that would otherwise qualify as a ‘‘qualified replacement plan.’u00A0The key operational requirements are that benefits vest as they would on a termination (so participants get nonforfeitable entitlements) and that the replacement plan cannot reduce benefits for four plan years following the transfer period. The transfer is tax‑neutral for the employer (no income inclusion, no deduction) and not counted as an employer reversion.
Staggered effective dates for retiree‑health and DB‑surplus rules
Title I’s tax and transfer rules apply to taxable years beginning after December 31, 2024, while Title II’s DB‑to‑DC transfer regime applies to plan years beginning after December 31, 2025. The delay for Title II gives sponsors and administrators additional time to design qualified replacement DC plans and to run the vesting and valuation processes required before making transfers.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Employers with overfunded retiree‑health accounts — they can redeploy trapped assets to fund current employee benefits or to shore up pension funding without triggering immediate taxable income or being treated as taking an employer reversion.
- Active employees and current workers — may receive increased near‑term benefits or higher employer contributions if sponsors choose to redeploy surplus toward active compensation or DC retirement accounts.
- VEBAs and replacement DC plans — where eligible, these vehicles can receive additional funding that increases resources for permitted benefit payments or retirement accounts.
- Plan sponsors seeking balance‑sheet flexibility — the rules free up a statutory path to reduce the administrative burden of holding legacy assets for retirees that exceed liabilities and to better align benefit funding with current workforce needs.
Who Bears the Cost
- Retiree health beneficiaries — their 401(h)/VEBA balances can be reduced when assets are reallocated, and although the bill includes guardrails, enforcement and valuation disputes could leave retiree protections uncertain.
- Plan administrators and actuaries — face new valuation, documentation, and compliance responsibilities, from measuring excess under applicable accounting standards to meeting multi‑year minimum cost/benefit tests.
- PBGC and pension insurance structures — if sponsors convert DB surplus to DC assets, PBGC premium bases and the distribution of risk may shift, potentially impacting the federal backstop calculus.
- Employers that misapply rules — sponsors risk litigation, ERISA fiduciary challenges, or IRS/Department of Labor scrutiny if transfers are executed without clear valuation, notice, or if the ‘‘materially less’’ standard is contested.
Key Issues
The Core Tension
The central dilemma is balancing sponsor flexibility to repurpose legitimately excess legacy assets for current employees against protecting the security of retiree health obligations and the integrity of pension funding and PBGC protections; enabling redeployment increases immediate employer and worker flexibility but risks undermining actuarial safeguards and producing valuation, enforcement, and intergenerational fairness problems.
The law relies heavily on valuation choices and undefined standards. “Applicable accounting standards” determine the 125% retiree‑health threshold; different actuarial assumptions, discount rates, or asset measurement conventions will alter whether a plan has excess and by how much, creating litigation and administrative risk. The exclusion of contributions and plan amendments after December 31, 2023, reduces some manipulation risk but also creates a hard cutoff that could encourage timing strategies around that date.
Key operative phrases are vague: the statute requires that employer costs not be “materially less” and benefits not “materially reduced,” but it gives no numerical definition of “materially,” leaving agencies, courts, or plan fiduciaries to develop standards. The bill also treats transferred assets as plan assets for funding tests while simultaneously denying deductions and excluding transfers from employer reversion rules—an unusual tax/funding mismatch that could complicate sponsor accounting, PBGC premium calculations, and insolvency analyses.
Finally, the 60‑day participant notice may be short for retirees to assess impacts and litigate, and the one‑transfer‑per‑year rule creates perverse incentives to concentrate large transfers in a single taxable year rather than staging them over time for governance reasons.
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