Nondiscrimination Relief for Closed DBs

Notice 2014-5 provides temporary nondiscrimination relief for certain plans that provide ongoing accruals but have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date. It permits certain employers that sponsor a closed DB plan and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of § 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis. In addition, the notice requests comments about possible permanent changes to the nondiscrimination rules under § 401(a)(4).

The agency explains that a number of DB plans have been closed to new entrants, and the plan sponsor of a closed DB plan typically provides a DC plan for its new hires. Under these arrangements, in the early years after the DB plan has been closed to new entrants, the plan may be able to satisfy the coverage requirement of § 410(b) without being aggregated with the DC plan. However, the § 410(b) minimum coverage test typically becomes more difficult for the closed DB plan to satisfy over time, as grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering the DC plan.

If the closed DB plan cannot satisfy the coverage requirement of § 410(b) on its own, it will need to be aggregated with another plan in order to satisfy that coverage requirement, the IRS continued. If the DB plan is aggregated with a DC plan that covers the employer’s new hires to satisfy the coverage requirement, then it is also required to be aggregated with the DC plan for purposes of satisfying the nondiscrimination requirements of § 401(a)(4). In the typical case, the aggregated plans will fail the requirements of § 401(a)(4) unless they are permitted to demonstrate compliance with the nondiscrimination requirements on the basis of equivalent benefits.

Earlier this month, in an open letter sent to Jacob Lew, Secretary of the Treasury, Senators Rob Portman (R-Ohio) and Benjamin Cardin (D-Maryland) warned nondiscrimination testing requirements designed to ensure retirement benefit parity between higher- and lower-compensated participants can actually hurt retirement readiness figures in certain pension freeze cases (see “Senators Call for Discrimination Test Fix”).

Notice 2014-5 is here.