Closed DB Plan Nondiscrimination Relief Extended Again

The IRS has issued Notice 2019-49, extending the temporary nondiscrimination relief for closed defined benefit (DB) plans that is provided in Notice 2014-5, by making that relief available for plan years beginning before 2021 if the conditions of Notice 2014-5 are satisfied.

Notice 2014-5 provides temporary nondiscrimination relief for certain closed defined benefit (DB) plans (that is, defined benefit 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).  Specifically, for plan years beginning before 2016, Notice 2014-5 permits a DB/defined contribution (DC) plan that includes a closed DB plan (that was closed before December 13, 2013) and that satisfies certain conditions set forth in the notice to demonstrate satisfaction of the nondiscrimination on the basis of equivalent benefits even if the DB/DC plan does not meet any of the existing eligibility conditions for testing on that basis.

A significant number of DB plans have been closed to new entrants, and the plan sponsor of a closed DB plan typically provides a defined contribution (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 Employee Retirement Income Security Act (ERISA) 410(b) 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 grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering the DC plan.

Proposed regulations relating to nondiscrimination requirements for closed plans were published in the Federal Register on January 29, 2016. The IRS and the Department of Labor (DOL) say they expect final regulations to include a number of significant changes in response to comments received. However, it is anticipated that these regulations will not be published in time for plan sponsors to make plan design decisions based on the final regulations before expiration of the relief last provided. Accordingly, the IRS and the Treasury Department have determined that it is appropriate to extend the relief provided under Notice 2014-5 for an additional year.

Legislation being considered in Congress would also make permanent nondiscrimination testing relief for closed DB plans.