IRS permits specified pension medical benefits for eligible active employees

The ruling addresses an employer with a qualified pension plan and a substantially overfunded retiree medical account. Its plan permits participants aged 59½ or over to elect in-service retirement distributions. The employer amends the plan so surplus medical-account assets can also fund active medical-plan benefits for those eligible participants and their spouses and dependents.^[1]

The critical point is eligibility to receive retirement benefits, rather than employment ending. Treasury Regulation 1.401-14(b)(1), as set out and interpreted in the ruling, excludes a still-employed person where separation is a condition of receiving retirement benefits. Here it is not: the plan permits the relevant distributions under section 401(a)(36), so the participants satisfy that regulation’s retirement test for medical-benefit eligibility.^[1]

The facts remain important. The medical account does not fund benefits for key employees, no section 420 transfers have been made to it, and the employer has no contractual obligation to fund the medical benefits described. The ruling also sets out continuing section 401(h) and regulatory requirements, including a separate account, reasonable and ascertainable contributions and restrictions on diversion of account assets.^[1]

The holding preserves the plan’s tax-qualified status for the stated use of account assets; it does not classify the participants as retired for every other Internal Revenue Code purpose. Multinational employers with US pension arrangements should compare their actual plan terms, participant eligibility, account history and benefit funding before relying on the conclusion. The ruling does not establish a new filing deadline or a general entitlement to transfer pension assets to active-employee healthcare.^[1]