In order for a defined benefit plan to maintain its qualified tax-deferred status, one of the things that the Internal Revenue Service (“IRS”) requires is that the plan satisfy nondiscrimination testing rules, showing that it does not discriminate in favor of highly-compensated employees (“HCE’s”). Plans typically become “frozen” or “closed” when HCE’s, prior to a certain date, are still participating in and benefiting from the plan, while remaining closed to new entrants. When a plan is “closed”, it becomes more difficult to meet the nondiscrimination requirements. A major concern for these plans is the continuing funding obligations that are still necessary in order to meet the non-discrimination testing requirements.
In response to this concern, the IRS granted temporary relief in Notice 2014-5 with the aim to make entrant permanent rule changes in the future. However, the IRS has not yet made the change permanent, so they have, instead, repeatedly extended the temporary relief and recently stated that it will continue for plan years beginning prior to 2020. It is important to note that the conditions of Notice 2014-5 must still be met, which are discussed here.
If you have questions about the rule and how it might affect you, please contact your Nyhart consultant.