S. 2003 — Strengthening Benefit Plans Act of 2025

This section establishes a new provision in IRC §420(h) permitting the transfer of excess health assets from a retiree health benefits account—defined as assets in a §401(h) account or held by a voluntary employees' beneficiary association (VEBA, §501(c)(9)) exceeding 125% of the employer's total retiree health liabilities (per applicable accounting standards)—to a pension plan or VEBA to fund benefits for active employees. (As background, §401(h) accounts permit qualified pension trusts to hold segregated assets for retiree medical benefits.) Excess assets exclude contributions or transfers to such accounts after December 31, 2023 (except certain prior commitments), and liability reductions from post-2023 plan amendments; terminating plans treat all such assets as excess, and transfers (limited to one per taxable year in the succeeding fiscal year) are exempt from gross income inclusion, employer reversion excise taxes (§4980), and prohibited transactions (§4975), with no deduction allowed for the transfer or benefits paid therefrom. Transfers to VEBAs are permitted only for defined benefit plans if they would cause or increase a funding excess (fair market value of non-health assets exceeding 110% of liabilities per §436(j)) or for the termination of such a plan beyond satisfaction of liabilities, or for non-defined benefit plans, subject to minimum cost and benefit requirements and vesting rules.

This section permits the transfer of surplus assets from a defined benefit plan to a defined contribution plan that would qualify as a replacement plan (but for the defined benefit plan not being terminated), effective for plan years beginning after December 31, 2025. Surplus assets equal the excess of plan assets over 110% of the value of liabilities used for Pension Benefit Guaranty Corporation (PBGC) premiums; transfers are excluded from gross income, nondeductible, and not treated as employer reversions, provided (1) all defined benefit plan benefits vest fully as if the plan terminated before the transfer and (2) no defined contribution plan benefits are reduced for four plan years after the last year funded by the transfer. (Thus, employers may shift surplus from overfunded defined benefit plans—i.e., those promising fixed retirement benefits—to participant-directed defined contribution plans like 401(k)s without terminating the defined benefit plan.) The section makes conforming amendments to ERISA to (1) exempt such transfers from coverage requirements (§4(e)), (2) exempt them from prohibited transaction rules (§408(b)(13)), and (3) impose related notice requirements (§101(e)(5)).