Compliance January 28, 2016

IRS Proposes Nondiscrimination Relief for Closed DBs

The proposed rule will help closed DB plans continue to satisfy minimum coverage and other testing requirements.
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The Internal Revenue Service (IRS) has proposed nondiscrimination relief for closed defined benefit (DB) plans and additional changes to the retirement plan nondiscrimination requirements.

Last year, the IRS extended temporary relief 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.

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The IRS explained that 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. 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.

NEXT: Elements of the proposed rule

Under its proposal, the IRS modifies the rules applicable to defined benefit replacement allocations (DBRAs), which allow certain DC plan allocations to be disregarded when determining whether a DC plan has broadly available allocation rates. The rules applicable to DBRAs allow employers to provide, in a nondiscriminatory manner, certain allocations to replace DB plan retirement benefits without having to satisfy the minimum aggregate allocation gateway.

The IRS says the group of employees who receive a DBRA must be a nondiscriminatory group of employees under the minimum coverage requirements of section 410(b) for the first five years after the closure date.

The proposed regulation adds a new exception to the requirement that a DB/DC plan must satisfy the minimum aggregate allocation gateway once the other conditions under §1.401(a)(4)-9 are not met, called the "closed plan rule." This closed plan rule, which applies to a DB/DC plan that includes a closed plan, provides an exception to the minimum aggregate allocation gateway that would otherwise apply, but only if the closed plan was in effect for five years before the closure date and no significant change was made to the closed plan during or since that time (except for certain permitted amendments).

There is also a special testing rule for the nondiscriminatory availability of a benefit, right, or feature provided to a grandfathered group of employees. The special testing rule applies to plan years beginning on or after the fifth anniversary of the closure date and applies on a plan-year by plan-year basis. To be eligible for the special testing rule, the benefit, right or feature must be currently available to a group of employees that satisfies the minimum coverage requirements of section 410(b) for the plan years that begin within five years after the closure date.

The proposal also includes a modification of testing options for DB/DC plans, including DB/DC plans that do not include a closed plan. The proposed regulations expand the ability to use the average of the equivalent allocation rates under the defined benefit plan for purposes of satisfying the minimum aggregate allocation gateway by permitting the averaging of allocation rates for non-highly compensated employees under the defined contribution plan for this purpose.

The proposed rule will be published in the Federal Register January 29, and comments will be received for 90 days. Text of the proposed rule is here.

Compliance January 28, 2016

Another Senator Suggests National Retirement Savings Plan

The proposal is modeled after the Federal government Thrift Savings Plan.
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On a call Thursday afternoon, Sen. Jeff Merkley (D-Oregon) introduced a proposal to strengthen what he said is the country’s increasingly strained retirement system. A constellation of factors—the number of jobs the average American holds over a lifetime; fewer pension plans; and growing dependence on Social Security benefits—mean more Americans are facing a serious retirement savings shortfall, he said.

Merkley has introduced The American Savings Act, which would establish a new universal savings account that would give all working Americans without a workplace-based plan access to a retirement account modeled on the Thrift Savings Plan (TSP). The government program is a retirement savings and investment plan for Federal employees and members of the uniformed services.

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Workers would be given personal automated saving plans, Merkley explains, with an auto enrollment at 3% of salary. Contributions would be defaulted into a low-fee, lifecycle fund that automatically adjusts investments based on a worker’s age. At retirement, savings would be converted into a stream of income that could not be outlived. The plan could be used for rollovers from myRAs, the federal government’s new starter retirement savings account.  

Workers would have options to raise or lower the initial contribution rate, or opt out altogether. “Auto works,” Merkley noted, adding that his program would enable many more people, whether full-time or part-time workers, in small companies or large, to participate in a retirement savings plan. “Under this legislation, every employee would have access to a retirement account,” he said. Employees who change jobs would be able to save consistently, and those who are self-employed would also have access to a universal, simple and portable retirement savings option.

NEXT: An affordable, easy option for small businesses

The program would be positive for small businesses, Merkley said, because it would allow them to offer their workforce an affordable savings plan without any assuming the administrative or financial responsibilities associated with a 401(k) plan.

David Madland, senior fellow of the Center for American Progress Action Fund, cited the country’s looming retirement crisis. “The employer-based system has always had some holes, but now they are gaping,” he said. More people than ever before have less traditional employment situations, he said, mentioning what some call the “gig economy.” Coverage for retirement has dipped over the last decade because of the transition from defined benefit (DB) to defined contribution (DC) plans, and the median retirement account balance is a wholly inadequate $14,000.

The American Savings Account would use what are clearly best practices based on research and behavioral economics: auto enrollment; low fees; sensible investment choices (primarily index funds); and options for lifetime payouts. The account would be modeled on the TSP, though would not be part of that program. “The vision is to lay out and utilize the vision of TSP,” Merkley said. “We would mirror the structure and build on what has been done, making it as simple as possible an undertaking.”

The Center for American Progress Action Fund also released a report Thursday that outlines how this universal savings option would affect workers.

Merkley’s proposal has the support of AARP; Main Street Alliance, a small-business advocacy group; and Center for American Progress Action Fund, a progressive research and policy group.

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