By Hazel Bradford, Crain News Service
WASHINGTON (Feb. 4, 2016) — Sponsors of defined benefit plans closed to new employees were cautiously encouraged by proposed rules Jan. 28 from the IRS that would make it easier to comply with non-discrimination testing.
The testing rules have been modified numerous times, most recently in January 2014 when the IRS allowed plans to be considered in compliance if they were at the time the plan closed, known as the snapshot rule, but that modification was temporary and applied only to 2014 and 2015. Defined benefit plan executives prefer permanent relief from the rules, which were written to apply to ongoing plans.
Without relief, closed plans come closer to violating the IRS non-discrimination rules as participants' income grows, and some sponsors were freezing their plans as a precaution, to avoid running afoul of the rules, which were designed to ensure that plans do not discriminate in favor of higher-paid employees. The test becomes harder to pass as salaries of people in the closed plan continue to rise, while other employees are enrolled in a defined contribution plan.
As proposed, the new rules, which keep the snapshot rule and allow closed plans to satisfy non-discrimination rules in certain other situations, would apply only for five years after a plan was closed, and plans must have been in effect at least five years before closing, with no major changes. What would happen after five years was not addressed in the proposed rules.
“While we are still reviewing the proposed regulations, the new rules appear to provide the relief needed for most closed plans,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, which represents 100 large plan sponsors, roughly 30 percent of which have at least one plan closed to new participants.
“It's really important that they issued guidance,” said Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council. “Many employers were waiting for this. They moved much more toward what employers were saying should be the rule. We do think there's some more work to be done. We're looking to see that inadvertent legitimate situations don't get thrown out.”
The newly proposed rules, scheduled to be published in the Federal Register, include a 90-day comment period and a public hearing May 19.
This report appeared on the website of Crain's Pensions & Investments magazine, a Chicago-based sister publication of Tire Business.