Often, when a defined benefit (DB) plan excludes new employees, those new employees will participate in a defined contribution (DC) plan. Over time, as the proportion of the DB plan participants who are highly compensated employees increases, the plan will no longer satisfy the coverage requirements.

To address this problem, the IRS issued Notice 2014-5 which temporarily provides an alternative method for aggregated DB/DC plans to demonstrate compliance. In order to qualify for such relief, which is only available for plan years beginning before January 1, 2016, the DB plan must have been amended to exclude new hires prior to December 13, 2013 and it must meet one of the following two conditions:

  1. For the plan year beginning in 2013, the aggregated plan must either be primarily DB in character or consist of broadly available separate plans; or
    • An aggregated plan is primarily DB in character if, for more than 50% of the non-highly compensated employees benefitting under the plan, the DB accrual rate is higher than the DC accrual rate.
    • An aggregated plan consists of broadly available separate plans if both the DB and DC plans each satisfy both the coverage and nondiscrimination requirements separately.
  2. The DB plan must have passed nondiscrimination testing on its own, without any aggregation, for the plan year beginning in 2013.

Please contact your Nyhart consultant for more information.