Closed DB Plan Nondiscrimination Issues Focus of Bipartisan Bill

U.S. Senators Ben Cardin (D-Maryland) and Rob Portman (R-Ohio), both members of the Senate Finance Committee, and U.S. Representatives Pat Tiberi (R-Ohio) and Richard E. Neal (D-Massachusetts), both members of the House Ways & Means Committee, introduced updated legislation designed to protect the retirement security of many American workers. 

The Retirement Security Preservation Act of 2016 (RSPA) amends the nondiscrimination rules that apply to qualified retirement plans to protect older, longer-service participants whose defined benefit (DB) plans have been closed or frozen. The bill builds on previous legislation and regulatory work to address this issue, and was approved unanimously by the Senate Finance Committee as part of a retirement-related legislative package in September.

The legislators explain that over time, existing employees in the closed plan typically build seniority and become more highly compensated than younger, newer employees entering a defined contribution (DC) plan. Because the grandfathered group in the closed plan generally becomes more highly compensated, closed plans almost always end up inadvertently violating the Internal Revenue Internal Revenue Service (IRS) nondiscrimination testing rules.

This clearly is not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into different types of plans that may not provide enough time to accumulate sufficient benefits before retirement, the legislators say.

The RSPA addresses the problem by amending the nondiscrimination rules to protect older workers in plans that have been closed or frozen. The bill also contains anti-abuse rules related to closed and frozen plans. Treasury has proposed regulations that partially address these issues, but only for a certain subset of affected plans. The RSPA incorporates elements of the Treasury regulations and provides targeted relief to plans who are not be able to take advantage of the Treasury regulations. 

“This measure will help safeguard the retirement security of hundreds of thousands of working families who are counting on their pension benefits in their retirement,” Portman says. “There is strong bipartisan support for this measure in both the House and Senate, and both chambers should pass it quickly so it can be signed into law.”

“This common sense fix will go a long way to protect retirement and pension plans for older Americans,” says Tiberi. “The Retirement Security Preservation Act would give certainty to employers and prevent their longer-service employees from unfairly losing their pension benefits due to the IRS’s nondiscrimination rules.”

A summary of the bill can be found here.  Bill text can be downloaded here.