Many employers have closed their defined benefit (DB) plans to new participants. This has been done to reduce costs and lower future funding duties. These closures are often called “soft-frozen” or “closed” plans, where participants prior to a certain date are still active. Now employers are finding they cannot afford to meet any of the nondiscrimination testing alternatives and fund the DB plans within budget. A complete freeze of the DB plan is often the only option for some employers.
Employers have appealed to the IRS and Treasury for a change in the rules.
The IRS responded with temporary relief in Notice 2014-5. The IRS plans to make permanent rule changes to address these difficult situations. But the IRS does not think the permanent rule changes will be ready before decisions need to be made by employers for the next plan year. So, the IRS announced in Notice 2016-57 that relief has been extended and is available for plan years beginning before 2018. However, the conditions of Notice 2014-5 must still be met.
Under IRS nondiscrimination rules, a plan keeps its tax-preferred status and is qualified if the money or benefits paid do not discriminate in favor of highly-compensated employees. When a plan is closed, it gets harder to meet the requirements. This is because, generally, the number of highly-compensated employees grows. If you have questions about the rule and how it might affect you, please contact your Nyhart consultant. Additionally, you can read more about the condition for the testing relief here.