Temporary Nondiscrimination Relief for Closed DB Plans

Comments on permanent relief due by Feb. 28, 2014

By Stephen Miller, CEBS December 16, 2013

The Internal Revenue Service is providing temporary nondiscrimination relief for certain "closed" defined benefit (DB) pension plans through Notice 2014-05, issued Dec. 13, 2013. Closed or partially frozen DB plans, as opposed to fully frozen or terminated plans, still provide ongoing accruals to employees who participated in the plan on a specified date but exclude new hires from the plan. Often, when plan sponsors close a DB plan, they provide new or greater contributions under a 401(k)-type defined contribution (DC) plan.

According to a report by consultancy Towers Watson, only seven of the Fortune 100 companies offered a traditional DB plan to new hires in November 2013, compared with 66 in 1998.

This IRS notice permits certain employers that sponsor a closed DB plan as well as a DC plan to demonstrate that both plans aggregated together comply with the nondiscrimination requirements under Section 401(a)(4) of Internal Revenue Code, based on equivalent benefits.

The IRS noted that in the first years after a DB plan is closed, the plan may be able to satisfy nondiscrimination requirements without being aggregated with the DC plan. However, the Section 410(b) minimum-coverage test typically becomes more difficult for the closed DB plan to satisfy over time, as the proportion of participants who are highly compensated employees (HCEs) increases. This may be for several reasons, including the tendency of non-HCEs to have higher rates of turnover, as well as the potential for some of the non-HCEs in the closed plan to become HCEs as they continue with a company and their pay increases.

Comments on possible permanent changes to the nondiscrimination rules, including whether additional ways of determining whether an aggregation of plans satisfies the nondiscrimination test should be considered or made available, may be submitted to the IRS by Feb. 28, 2014.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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