IRS Extends Closed DB Nondiscrimination Relief

The Internal Revenue Service (IRS) has extended temporary nondiscrimination relief for defined benefit (DB) plans that provide ongoing accruals but that have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date.

In December 2013, the IRS released Notice 2014-5, which permitted certain employers that sponsor closed DB plans and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of Internal Revenue Code Section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for individual testing on that basis. In the recently released Notice 2015-28, the IRS extends the relief for an additional year by applying that relief to plan years beginning before 2017 if the conditions of Notice 2014-5 are satisfied.

A significant 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, the IRS said. 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.

The IRS said the extension described Notice 2015-28 is provided in anticipation of the issuance of proposed permanent amendments to the § 401(a)(4) regulations.

Last fall, members of the U.S. Senate Committee on Finance introduced legislation that would make a permanent change in nondiscrimination rules for certain closed DB plans.