Senators Introduce Closed DB Nondiscrimination Legislation

U.S. Senators Ben Cardin (D-Maryland) and Rob Portman (R-Ohio), both members of the Senate Finance Committee, have introduced the Retirement Security Preservation Act (S. 2855), designed to remove possible incentives for companies to hard-freeze the DB plans of long-time employees or otherwise refrain from providing compensating benefits for employees whose plans have been frozen.

In a letter sent to the Secretary of Treasury last year, Cardin and Portman pointed out that nondiscrimination testing required to qualify a DB plan for tax-deferred status under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) makes it difficult for companies to enact soft freezes on pension plans—even though soft freezes can result in better retirement outcomes for employees than simply closing a pension plan outright. The problem is that, over time, grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering into a company’s defined contribution (DC) plan. This widens the income gap between the two groups and inadvertently increases the likelihood that the DB plan will fail to meet nondiscrimination standards.

In response, the Internal Revenue Service (IRS) provided 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 (see “IRS Provides Nondiscrimination Relief for Closed DBs”).

S.2855 would provide that a pension plan does not fail the section 401(a)(4) nondiscrimination rules, or the minimum participation requirement outlined in section 401(a)(26), provided the composition of the closed class of participants in the plan meets certain requirements, including:

• The closed class satisfied the rules as of the date the class was closed (including the nondiscrimination rules for benefits, rights, and features offered to the closed class); and

• After the closing date, any plan amendments that modify the closed class (or benefits, rights and features provided to the class) satisfy the nondiscrimination rules.

A plan is a qualified plan only if the contributions or benefits provided do not discriminate in favor of highly compensated employees. The bill would provide special rules in the case of an amendment that does not satisfy the second requirement and for defined contribution plans that are tested with the closed plan.