Republican Senators introduce surplus transfer bill

On June 13, 2025, Senators Cassidy, M.D. (R-LA), chair of the Senate Health, Education, Labor and Pensions (HELP) Committee, Scott (R-SC), Marshall, M.D. (R-KS), and Tillis (R-NC) introduced the Strengthening Benefit Plans Act of 2025, legislation that would allow (1) the transfer of some surplus in a defined benefit plan 401(h) account to medical plan for active employees and (2) the transfer of some surplus in a defined benefit plan to a defined contribution plan (to fund, e.g., qualified nonelective contributions under a 401(k) plan) without terminating the DB plan.

Because it would raise significant revenue (some estimate as much as $20 Billion over 10 years), there is considerable interest in including the first proposal – allowing transfers from a 401(h) account – in budget reconciliation legislation (AKA the “Big Beautiful Bill” (BBB)) passed by the House and currently being considered by the Senate. Because of an agreement not to include retirement-related proposals in the BBB, the second proposal – allowing transfers to a DC plan of a DB funding surplus – cannot be included.

This legislation is something of a moving target, and the Joint Committee on Taxation has (as discussed below) raised an issue with scoring it for budget purposes. In this note we provide a brief description of the 401(h) proposal and discuss some of the political “moving parts.”

Background

Under Tax Code section 401(h), the sponsor of a DB plan may establish a separate account under the plan to pay for the “sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents.” For a variety of reasons, the 401(h) accounts of some plans have built up assets that vastly exceed the liabilities for any amount of benefits that would ever be paid to the retirees covered by the plan.

Under the proposal, sponsors of those plans would be able to use these surplus 401(h) assets to pay benefits of active participants. And, DB surplus could, in some circumstances, be used to “create” a 401(h) account surplus that would, in turn, be available to be used to provide current medical benefits for active employees.

What is a surplus?

Under the bill, the amount of 401(h) surplus funding is determined as:

The value of “all assets with respect to a retiree health benefits plan of an employer,” including both those in the 401(h) and those in any voluntary employees’ beneficiary association (VEBA), minus

The amount of retiree medical liabilities under the sponsor’s retiree health plan, “determined in accordance with applicable accounting standards.”

Presumably, although the bill does not specify, the accounting standard being referenced is Accounting Standards Codification (ASC) 715.

What can a sponsor do with the surplus?

The transferred surplus must first be used to bring the DB plan’s (over)-funded percentage up to 110%. Any surplus above that amount may then be transferred to a VEBA to pay/fund medical benefits for active employees. For purposes of this transaction, if the sponsor does not currently maintain such a VEBA, it may create one.

Anti-abuse/maintenance of benefit rules

In determining the amount of surplus, amendments and contributions made after 2023 are ignored.

All employees in the DB plan must be vested.

Either the cost or the benefits provided under the transferee VEBA/actives plan generally may not be materially reduced for five years.

A DB surplus may be used to create a 401(h) surplus and then transferred

While the provision allowing the transfer of a “regular” (that is, non-401(h)) surplus to a DC plan cannot be included in the BBB, it is possible under the 401(h) proposal to transfer a DB surplus to the plan’s 401(h) account (and if there is no 401(h) account, one may be created for this purpose), and then use the resulting 401(h) account surplus to fund active employee benefits.

As we understand, this “finesse” of the prohibition against inclusion of any retirement-related provision in the BBB is understood to be a device, but is fully intended to be legal under the proposal, and indeed is understood to be part of the proposal’s “value proposition” as a revenue raiser.

Foot-dragging by the Joint Committee on Taxation

In that regard, the Joint Committee on Taxation is currently saying that it cannot score this proposal for “policy reasons.” Without a score, the utility of this proposal as a revenue raiser is lost, and it won’t be included in the BBB.

It’s unclear whether the JCT can be convinced to change its position on this issue. In this regard time may be critical – if the BBB is passed by July 4, it is unlikely that there will be time enough to include this proposal. If the legislative sausage-making process continues into August or beyond, there is at least a chance of a change.

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To repeat – this legislation is something of a moving target – provisions may change in the coming days or weeks.

We will continue to follow this issue.