Advanced Underwriting Consultants

Question of the Day – July 5

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Congress and the President recently passed a bill having to do with using pension money to pay for life insurance.  Can you explain that?

Answer: Yes.  The Surface Transportation Extension Act of 2012 became law on July 2.  The new law, among other changes, allows money from an overfunded defined benefit pension plan to help pay for certain retiree life insurance costs.

If an employer has overfunded its aggregate defined benefit pension obligation by more than an extra 20%, it can use the excess money from the pension plan to fund any obligation it might have to provide group term life insurance coverage for retirees.  It appears that the most pension money it can use for that purpose is enough to fund a maximum of $50,000 of group term coverage for each employee.

Here’s a complete excerpt of the relevant portion of the law:

SEC. 40242. TRANSFER OF EXCESS PENSION ASSETS TO RETIREE GROUP TERM LIFE INSURANCE ACCOUNTS.

(a) In General- Subsection (a) of section 420 of the Internal Revenue Code of 1986 is amended by inserting ‘, or an applicable life insurance account,’ after ‘health benefits account’.

(b) Applicable Life Insurance Account Defined-

(1) IN GENERAL- Subsection (e) of section 420 of the Internal Revenue Code of 1986 is amended by redesignating paragraphs (4) and (5) as paragraphs (5) and (6), respectively, and by inserting after paragraph (3) the following new paragraph:

‘(4) APPLICABLE LIFE INSURANCE ACCOUNT- The term ‘applicable life insurance account’ means a separate account established and maintained for amounts transferred under this section for qualified current retiree liabilities based on premiums for applicable life insurance benefits.’.

(2) APPLICABLE LIFE INSURANCE BENEFITS DEFINED- Paragraph (1) of section 420(e) of such Code is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

‘(D) APPLICABLE LIFE INSURANCE BENEFITS- The term ‘applicable life insurance benefits’ means group-term life insurance coverage provided to retired employees who, immediately before the qualified transfer, are entitled to receive such coverage by reason of retirement and who are entitled to pension benefits under the plan, but only to the extent that such coverage is provided under a policy for retired employees and the cost of such coverage is excludable from the retired employee’s gross income under section 79.’.

(3) COLLECTIVELY BARGAINED LIFE INSURANCE BENEFITS DEFINED-

(A) IN GENERAL- Paragraph (6) of section 420(f) of such Code is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

‘(D) COLLECTIVELY BARGAINED LIFE INSURANCE BENEFITS- The term ‘collectively bargained life insurance benefits’ means, with respect to any collectively bargained transfer–

‘(i) applicable life insurance benefits which are provided to retired employees who, immediately before the transfer, are entitled to receive such benefits by reason of retirement, and

‘(ii) if specified by the provisions of the collective bargaining agreement governing the transfer, applicable life insurance benefits which will be provided at retirement to employees who are not retired employees at the time of the transfer.’.

(B) CONFORMING AMENDMENTS-

(i) Clause (i) of section 420(e)(1)(C) of such Code is amended by striking ‘upon retirement’ and inserting ‘by reason of retirement’.

(ii) Subparagraph (C) of section 420(f)(6) of such Code is amended–

(I) by striking ‘which are provided to’ in the matter preceding clause (i),

(II) by inserting ‘which are provided to’ before ‘retired employees’ in clause (i),

(III) by striking ‘upon retirement’ in clause (i) and inserting ‘by reason of retirement’, and

(IV) by striking ‘active employees who, following their retirement,’ and inserting ‘which will be provided at retirement to employees who are not retired employees at the time of the transfer and who’.

(c) Maintenance of Effort-

(1) IN GENERAL- Subparagraph (A) of section 420(c)(3) of the Internal Revenue Code of 1986 is amended by inserting ‘, and each group-term life insurance plan under which applicable life insurance benefits are provided,’ after ‘health benefits are provided’.

(2) CONFORMING AMENDMENTS-

(A) Subparagraph (B) of section 420(c)(3) of such Code is amended–

(i) by redesignating subclauses (I) and (II) of clause (i) as subclauses (II) and (III) of such clause, respectively, and by inserting before subclause (II) of such clause, as so redesignated, the following new subclause:

‘(I) separately with respect to applicable health benefits and applicable life insurance benefits,’, and

(ii) by striking ‘for applicable health benefits’ and all that follows in clause (ii) and inserting ‘was provided during such taxable year for the benefits with respect to which the determination under clause (i) is made.’.

(B) Subparagraph (C) of section 420(c)(3) of such Code is amended–

(i) by inserting ‘for applicable health benefits’ after ‘applied separately’, and

(ii) by inserting ‘, and separately for applicable life insurance benefits with respect to individuals age 65 or older at any time during the taxable year and with respect to individuals under age 65 during the taxable year’ before the period.

(C) Subparagraph (E) of section 420(c)(3) of such Code is amended–

(i) in clause (i), by inserting ‘or retiree life insurance coverage, as the case may be,’ after ‘retiree health coverage’,

(ii) in clause (ii), by inserting ‘FOR RETIREE HEALTH COVERAGE’ after ‘COST REDUCTIONS’ in the heading thereof, and

(iii) in clause (ii)(II), by inserting ‘with respect to applicable health benefits’ after ‘liabilities of the employer’.

(D) Paragraph (2) of section 420(f) of such Code is amended by striking ‘collectively bargained retiree health liabilities’ each place it occurs and inserting ‘collectively bargained retiree liabilities’.

(E) Clause (i) of section 420(f)(2)(D) of such Code is amended–

(i) by inserting ‘, and each group-term life insurance plan or arrangement under which applicable life insurance benefits are provided,’ in subclause (I) after ‘applicable health benefits are provided’,

(ii) by inserting ‘or applicable life insurance benefits, as the case may be,’ in subclause (I) after ‘provides applicable health benefits’,

(iii) by striking ‘group health’ in subclause (II), and

(iv) by inserting ‘or collectively bargained life insurance benefits’ in subclause (II) after ‘collectively bargained health benefits’.

(F) Clause (ii) of section 420(f)(2)(D) of such Code is amended–

(i) by inserting ‘with respect to applicable health benefits or applicable life insurance benefits’ after ‘requirements of subsection (c)(3)’, and

(ii) by adding at the end the following: ‘Such election may be made separately with respect to applicable health benefits and applicable life insurance benefits. In the case of an election with respect to applicable life insurance benefits, the first sentence of this clause shall be applied as if subsection (c)(3) as in effect before the amendments made by such Act applied to such benefits.’.

(G) Clause (iii) of section 420(f)(2)(D) of such Code is amended–

(i) by striking ‘retiree’ each place it occurs, and

(ii) by inserting ‘, collectively bargained life insurance benefits, or both, as the case may be,’ after ‘health benefits’ each place it occurs.

(d) Coordination With Section 79- Section 79 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

‘(f) Exception for Life Insurance Purchased in Connection With Qualified Transfer of Excess Pension Assets- Subsection (b)(3) and section 72(m)(3) shall not apply in the case of any cost paid (whether directly or indirectly) with assets held in an applicable life insurance account (as defined in section 420(e)(4)) under a defined benefit plan.’.

(e) Conforming Amendments-

(1) Section 420 of the Internal Revenue Code of 1986 is amended by striking ‘qualified current retiree health liabilities’ each place it appears and inserting ‘qualified current retiree liabilities’.

(2) Section 420 of such Code is amended by inserting ‘, or an applicable life insurance account,’ after ‘a health benefits account’ each place it appears in subsection (b)(1)(A), subparagraphs (A), (B)(i), and (C) of subsection (c)(1), subsection (d)(1)(A), and subsection (f)(2)(E)(ii).

(3) Section 420(b) of such Code is amended–

(A) by adding the following at the end of paragraph (2)(A): ‘If there is a transfer from a defined benefit plan to both a health benefits account and an applicable life insurance account during any taxable year, such transfers shall be treated as 1 transfer for purposes of this paragraph.’, and

(B) by inserting ‘to an account’ after ‘may be transferred’ in paragraph (3).

(4) The heading for section 420(c)(1)(B) of such Code is amended by inserting ‘OR LIFE INSURANCE’ after ‘HEALTH BENEFITS’.

(5) Paragraph (1) of section 420(e) of such Code is amended–

(A) by inserting ‘and applicable life insurance benefits’ in subparagraph (A) after ‘applicable health benefits’, and

(B) by striking ‘HEALTH’ in the heading thereof.

(6) Subparagraph (B) of section 420(e)(1) of such Code is amended–

(A) in the matter preceding clause (i), by inserting ‘(determined separately for applicable health benefits and applicable life insurance benefits)’ after ‘shall be reduced by the amount’,

(B) in clause (i), by inserting ‘or applicable life insurance accounts’ after ‘health benefit accounts’, and

(C) in clause (i), by striking ‘qualified current retiree health liability’ and inserting ‘qualified current retiree liability’.

(7) The heading for subsection (f) of section 420 of such Code is amended by striking ‘health’ each place it occurs.

(8) Subclause (II) of section 420(f)(2)(B)(ii) of such Code is amended by inserting ‘or applicable life insurance account, as the case may be,’ after ‘health benefits account’.

(9) Subclause (III) of section 420(f)(2)(E)(i) of such Code is amended–

(A) by inserting ‘defined benefit’ before ‘plan maintained by an employer’, and

(B) by inserting ‘health’ before ‘benefit plans maintained by the employer’.

(10) Paragraphs (4) and (6) of section 420(f) of such Code are each amended by striking ‘collectively bargained retiree health liabilities’ each place it occurs and inserting ‘collectively bargained retiree liabilities’.

(11) Subparagraph (A) of section 420(f)(6) of such Code is amended–

(A) in clauses (i) and (ii), by inserting ‘, in the case of a transfer to a health benefits account,’ before ‘his covered spouse and dependents’, and

(B) in clause (ii), by striking ‘health plan’ and inserting ‘plan’.

(12) Subparagraph (B) of section 420(f)(6) of such Code is amended–

(A) in clause (i), by inserting ‘, and collectively bargained life insurance benefits,’ after ‘collectively bargained health benefits’,

(B) in clause (ii)–

(i) by adding at the end the following: ‘The preceding sentence shall be applied separately for collectively bargained health benefits and collectively bargained life insurance benefits.’, and

(ii) by inserting ‘, applicable life insurance accounts,’ after ‘health benefit accounts’, and

(C) by striking ‘HEALTH’ in the heading thereof.

(13) Subparagraph (E) of section 420(f)(6) of such Code, as redesignated by subsection (b), is amended–

(A) by striking ‘bargained health’ and inserting ‘bargained’,

(B) by inserting ‘, or a group-term life insurance plan or arrangement for retired employees,’ after ‘dependents’, and

(C) by striking ‘HEALTH’ in the heading thereof.

(14) Section 101(e) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1021(e)) is amended–

(A) in paragraphs (1) and (2), by inserting ‘or applicable life insurance account’ after ‘health benefits account’ each place it appears, and

(B) in paragraph (1), by inserting ‘or applicable life insurance benefit liabilities’ after ‘health benefits liabilities’.

(f) Technical Correction- Clause (iii) of section 420(f)(6)(B) of the Internal Revenue Code of 1986 is amended by striking ‘416(I)(1)’ and inserting ‘416(i)(1)’.

(g) Repeal of Deadwood-

(1) Subparagraph (A) of section 420(b)(1) of the Internal Revenue Code of 1986 is amended by striking ‘in a taxable year beginning after December 31, 1990’.

(2) Subsection (b) of section 420 of such Code is amended by striking paragraph (4) and by redesignating paragraph (5), as amended by this Act, as paragraph (4).

(3) Paragraph (2) of section 420(b) of such Code, as amended by this section, is amended–

(A) by striking subparagraph (B), and

(B) by striking ‘PER YEAR- ’ and all that follows through ‘No more than’ and inserting ‘PER YEAR- No more than’.

(4) Paragraph (2) of section 420(c) of such Code is amended–

(A) by striking subparagraph (B),

(B) by moving subparagraph (A) two ems to the left, and

(C) by striking ‘BEFORE TRANSFER- ’ and all that follows through ‘The requirements of this paragraph’ and inserting the following: ‘BEFORE TRANSFER- The requirements of this paragraph’.

(5) Paragraph (2) of section 420(d) of such Code is amended by striking ‘after December 31, 1990’.

(h) Effective Date-

(1) IN GENERAL- The amendments made by this section shall apply to transfers made after the date of the enactment of this Act.

(2) CONFORMING AMENDMENTS RELATING TO PENSION PROTECTION ACT- The amendments made by subsections (b)(3)(B) and (f) shall take effect as if included in the amendments made by section 841(a) of the Pension Protection Act of 2006.

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