The Pension Protection Act of 2006 (the "PPA," the "Act") was signed by President Bush on August 17, 2006. The Employee Benefits practice group of Thelen Reid & Priest LLP has issued a series of reports that summarize selected provisions of the Act. The following is the fourth in the series and discusses provisions affecting health and welfare benefits.
Qualified Tuition Programs
The PPA permanently extends the qualified tuition program provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001.
Funding Retiree Health Benefits
The PPA provides some new opportunities to fund health benefits. Under existing law, excess assets from overfunded defined benefit plans may be transferred to an account within the plan, to be used to pay retiree health benefits -- an IRC § 420 transfer into an IRC § 401(h) health account. The transfer is limited to assets in excess of 125% of the plan’s current liability minus the lesser of the market or actuarial value of the assets and is further limited to the cost of the retiree health benefits for the year of the transfer.
Effective upon enactment, the PPA allows the transfer of assets in excess of 120% of the plan’s current liability. The transfer must pay for at least two years of estimated retiree medical costs and cannot pay for more than ten years of estimated retiree costs. Two cost maintenance rules apply. First, the plan must maintain the 120% funding levels for all years where estimated retiree medical costs were used to determine the transfer limits (either by contribution or by transferring the assets out of the health account). Second, the retiree health costs must be maintained for each year of transfer and for the next four years, which is similar to the existing rule that requires cost maintenance for a five year period beginning with the year of transfer.
The PPA also expands the transfer rules to apply to some multiemployer plans in taxable years beginning after December 31, 2006. Special rules apply to some multiemployer plans for multiyear transfers made pursuant to a collective bargaining agreement.
Other Health Plan Funding
Three additional provisions provide funding opportunities for narrowly identified groups, effective for taxable years after December 31, 2006:
- The PPA allows public safety officers to elect to use up to use $3,000 of their retirement income from a qualified retirement plan or annuity plan, an IRC § 403(b) annuity, or an IRC § 457 plan to pay for insurance premiums for long-term care benefits on a pre-tax basis.
- The PPA allows a plan maintained by a bona fide association (as defined by § 2791(a) of the Public Health Services Act) to accumulate additional reserves of up to 35% of annual costs for medical benefits (other than post-retirement medical benefits) under IRC § 419A.
- The Tax Court may pay increases in employee premiums under the Federal Employee Group Life Insurance program for Tax Court judges over age 65.
Additionally, effective on enactment, the PPA allows coal employers to make larger deductible contributions to tax-exempt black lung trusts to pay accident and health benefits, or premiums related to accident and health benefits, by eliminating an aggregate cap limit.
Other Long-Term Care Provisions
Long-term care insurance may be provided as a rider on an annuity contract or life insurance contract, but may still be treated as a separate contract for certain purposes under IRC § 7702, and the long-term care component of the contract may be paid for by reducing the cash value of the contract, effective in taxable years beginning after 2009 for contracts issued after 1996. Additionally, long-term care contracts (including annuity contracts and life insurance contracts with long-term care riders) may qualify for tax-free exchanges, effective for exchanges after 2009.
Corporate-Owned Life Insurance and Taxation Changes
The PPA is not all good news for employers. Effective for contracts issued after enactment, the PPA imposes an income tax on proceeds from corporate owned life insurance unless the insured was an employee within 12 months of death, a director, a more-than-5% owner, or one of the top 35% of employees ranked by pay at the time of purchase, or the proceeds were used to buy back from the insured’s family or beneficiary an equity interest owned by the insured at the time of death.
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