IRS Again Extends Closed DB Plan Nondiscrimination Relief

The Internal Revenue Service (IRS) has published an additional extension of temporary nondiscrimination relief for closed defined benefit (DB) plans through 2019.

As stipulated in IRS Notice 2018-69, the temporary nondiscrimination relief for closed defined benefit being extended here stems from the previous Notice 2014-5. The new extension makes nondiscrimination relief available for plan years beginning before 2020, assuming 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 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.

Notice 2014-5 provides temporary nondiscrimination relief for “certain closed defined benefit pension plans (i.e., 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, Section III.B of Notice 2014-5 “permits a DB/DC plan that includes a closed defined benefit plan (that was closed before December 13, 2013) and that satisfies certain conditions set forth in the notice to demonstrate satisfaction of the nondiscrimination in amount requirement of § 1.401(a)(4)-1(b)(2) 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 under 401(a)(4)-9(b)(2)(v).”

Also relevant here is Notice 2015-28, which further provides that, during the period for which the extension applies, the remaining provisions of the nondiscrimination regulations under 401(a)(4) continue to apply.

The IRS also reminds stakeholders in Notice 2018-69 that proposed regulations relating to nondiscrimination requirements for closed plans were published in the Federal Register on January 29, 2016 (81 FR 4976). The proposed regulations set forth relief for closed plans and contain other proposed nondiscrimination rules.

“The regulations are proposed to apply generally to plan years beginning on or after the date of publication of the final regulations. The proposed regulations provide that taxpayers are permitted to apply certain provisions of the proposed regulations (including all of the provisions that apply specifically to closed plans) for certain plan years beginning before the proposed applicability date,” IRS explains. “Many comments have been submitted on the proposed regulations, including oral comments at a public hearing held on May 19, 2016. The Internal Revenue Service and the Treasury Department expect that the final regulations will include a number of significant changes in response to those comments.”

According to IRS, it is anticipated that the final 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 provided under Notice 2014-5 (as last extended by Notice 2017-45).

“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,” the latest Notice explains. “The temporary nondiscrimination relief for closed plans that is provided in Notice 2014-5 is hereby extended to plan years beginning before 2020 if the conditions of Notice 2014-5 are satisfied. This extension is provided in anticipation of the issuance of final amendments to the § 401(a)(4) regulations.”

In addition, IRS says it is expected that the final regulations “will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2020.”

With the publication of Notice 2018-69, IRS says that Notice 2014-5, Notice 2015-28, Notice 2016-57, and Notice 2017-45 are all accordingly modified.