Return of surplus retiree medical assets did not disqualify pension plan

Plain-English summary

An employer terminated a frozen pension plan that included a separate IRC § 401(h) account for retiree medical benefits. After all pension and medical liabilities were satisfied, assets remained in the medical account. The plan required that any such surplus be returned to the employer, and the employer represented that it would pay the applicable IRC § 4980 excise tax. The IRS explained that IRC § 401(h)(5) and its regulations require remaining medical-account assets to revert to the employer after all liabilities are satisfied. It ruled that the return would not violate IRC § 401(h) or jeopardize the pension plan's qualified status under IRC § 401(a).

Ruling snapshot

• Question: Would returning surplus section 401(h) retiree medical assets to the employer after plan termination disqualify the pension plan?
• Outcome: Approved
• Key authorities: IRC §§ 401(a), 401(h), and 4980; Treas. Reg. § 1.401-14

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202528003 [Third Party Communication:
Release Date: 7/11/2025 Date of Communication: Month DD, YYYY]
Index Number: 401.00-00, 401.27-00,
4980.00-00 Person To Contact:
----------------, ID No. -----------------
----------------------------- Telephone Number:
------------------------------------ ---------------------
----------------------- Refer Reply To:
----------------------- CC:EEE:EB:QP3
PLR-115320-24
Date:
March 12, 2025

LEGEND

Taxpayer = -------
Retirement Plan A = ---------------------------------------------------------
Retirement Plan A’s = ------------------------------------------------------------------------

401(h) Account -----------
Retiree Medical Plan = ------------------------------------------------------------------------

                                         -----------------

Amount 1 = ---------------
Date 1 = ------------------
Date 2 = ----------------------
Date 3 = -----------------
Date 4 = ---------------------------

Dear ---------------:

This is in response to your letter dated August 22, 2024, as supplemented by
information dated January 14, 2025 and February 13, 2025, submitted on your behalf by
your authorized representatives, in which you request a private letter ruling regarding
whether the return of assets from an account maintained under section 401(h) of the
Internal Revenue Code to the employer impacts the tax-qualified status of a pension
plan under section 401(a).

Facts

The following facts and representations have been submitted under penalty of perjury in
support of the requested ruling:

PLR-115320-24 2

Taxpayer maintains a pension plan (Retirement Plan A). Retirement Plan A is frozen.
Retirement Plan A received its most recent determination letter on Date 1.

Retirement Plan A has a retiree medical account in accordance with section 401(h)
(Retirement Plan A’s 401(h) Account). Retirement Plan A’s 401(h) Account funds a
retiree medical plan (Retiree Medical Plan). The Retiree Medical Plan is available to a
closed group of retirees who retired before Date 2, were eligible to retire on Date 2, or
were part of a reduction in force announced on Date 3.

Retirement Plan A requires that any Retirement Plan A 401(h) Account assets
remaining following the satisfaction of medical benefit liabilities under Retirement Plan A
must be returned to the Taxpayer.

Taxpayer terminated Retirement Plan A as of Date 4. When Retirement Plan A was
terminated, all of its liabilities and liabilities under the Retiree Medical Plan were
satisfied. However, even after all of the liabilities were satisfied, assets in the amount of
Amount 1 remained in Retirement Plan A’s 401(h) Account. Taxpayer represents that
Amount 1 will be returned to Taxpayer in accordance with the terms of Retirement Plan
A, and Taxpayer will pay an excise tax on Amount 1 in accordance with section 4980.

Ruling Requested

Taxpayer requests a ruling that the return of Amount 1 to Taxpayer following the
termination of Retirement Plan A (including Retirement Plan A’s 401(h) Account) does
not violate section 401(h) or § 1.401-14, or otherwise jeopardize Retirement Plan A’s
tax-qualified status under section 401(a).

Law

Section 401(a) describes requirements for a qualified trust that is created or organized
in the United States and forms part of a pension plan of an employer that is for the
exclusive benefit of the employer’s employees or their beneficiaries. Section 501(a)
provides in pertinent part that an organization described in section 401(a) is generally
exempt from income tax.

In pertinent part, section 401(h) provides that, under regulations prescribed by the
Secretary, and subject to the provisions of section 420, a pension or annuity plan may
provide for the payment of benefits for sickness, accident, hospitalization, and medical
expenses of retired employees, their spouses and their dependents, but only if —

(1) such benefits are subordinate to the retirement benefits provided by the plan,

(2) a separate account is established and maintained for such benefits,

PLR-115320-24 3

(3) the employer’s contributions to such separate account are reasonable and
ascertainable,

(4) it is impossible, at any time prior to the satisfaction of all liabilities under the plan to
provide such benefits, for any part of the corpus or income of such separate account to
be (within the taxable year or thereafter) used for, or diverted to, any purpose other than
the providing of such benefits, and

(5) upon the satisfaction of all liabilities under the plan to provide such benefits, any
amount remaining in such separate account must, under the terms of the plan, be
returned to the employer.

Section 1.401-14(a) provides that, under section 401(h), a qualified pension or annuity
plan may provide for the payment of sickness, accident, hospitalization, and medical
expenses for retired employees, their spouses, and their dependents. The term
“medical benefits described in section 401(h)” is used in this section to describe such
payments.

Section 1.401-14(c)(5), entitled “[r]eversion upon satisfaction of all liabilities,” provides
that, under section 401(h), a qualified pension or annuity plan must provide that any
amounts which are contributed to fund medical benefits described in section 401(h) and
which remain in the medical benefits account upon satisfaction of all liabilities arising
out of the operation of the medical benefits portion of the plan are to be returned to the
employer.

Section 4980(a) provides for a 20% excise tax on the amount of any employer reversion
from a qualified plan. Section 4980(d) provides that section 4980(a) will be applied by
substituting “50 percent” for “20 percent” with respect to any employer reversion from a
qualified plan unless (A) the employer establishes or maintains a qualified replacement
plan under section 4980(d)(2), or (B) the plan provides benefit increases meeting the
requirements of section 4980(d)(3).

Section 4980(c)(2)(A) defines an employer reversion as the amount of cash and the fair
market value of other property received (directly or indirectly) by an employer from the
qualified plan.

Analysis

As stated above, section 401(h)(5) and § 1.401-14(c)(5) require that a qualified pension
or annuity plan must provide that any amounts which are contributed to fund medical
benefits under section 401(h), and which remain in the section 401(h) account after all
liabilities under the plan are satisfied, must be returned to the employer.

Here, Retirement Plan A is drafted in accordance with the requirements described in
section 401(h)(5) and § 1.401-14(c)(5) because it requires that any Retirement Plan A

PLR-115320-24 4

401(h) Account assets remaining following the satisfaction of medical benefit liabilities
funded by Retirement Plan A’s 401(h) Account must be returned to the Taxpayer.
Further, Taxpayer represents that following the termination of Retirement Plan A’s
401(h) Account, Amount 1 will be returned to Taxpayer in accordance with the terms of
Retirement Plan A, and that Taxpayer will pay the excise tax under section 4980.

Ruling

We conclude that the return of Amount 1 to Taxpayer following the termination of
Retirement Plan A (including the termination of Retirement Plan A’s 401(h) Account)
does not violate section 401(h) or § 1.401-14, or otherwise jeopardize Retirement Plan
A’s tax-qualified status under section 401(a).

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2024 1, 2024 1 IRB 1, § 7.01(16)(b).
This office has not verified any of the material submitted in support of the request for
ruling, and such material is subject to verification on examination. The Associate office
will revoke or modify a letter ruling and apply the revocation retroactively if there has
been a misstatement or omission of controlling facts; the facts at the time of the
transaction are materially different from the controlling facts on which the ruling was
based; or, in the case of a transaction involving a continuing action or series of actions,
the controlling facts change during the course of the transaction. See Rev. Proc. 2024
1, § 11.05.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

PLR-115320-24 5

                                                              Sincerely,



                                                              ______________________________
                                                              Jeremy Lamb
                                                              Senior Counsel
                                                              Qualified Plans Branch 2
                                                              Office of Associate Chief Counsel
                                                              (Employee Benefits, Exempt
                                                              Organizations, and Employment Taxes)

cc:

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