At a May 19 hearing before IRS and Treasury officials, practitioners representing the interests of benefits organizations or employers testified on proposed regulations that modify requirements for nondiscrimination relief for closed defined benefit pension plans (NPRM REG-125761-14, I.R.B. 2016-7, 322; TAXDAY, 2016/01/29, I.1). A similar theme was that the regulations should provide some relief from certain requirements for plans that have been in existence for decades and have consistently met the nondiscriminatory requirements. The witnesses all asked for relaxed restrictions in the final regulations.
In a closed defined benefit (DB) plan, benefits continue to accumulate for some or all existing participants, but no one else is allowed to join the plan on closure. Over time, the participants accruing benefits can become more highly paid as their experience increases, and there are higher attrition rates for lower-paid employees. These events may result in the plan’s failure to meet the nondiscrimination tests that ensure the retirement plans do not discriminate in favor of the more highly paid employees. Plan sponsors are forced to freeze their closed benefit plans and stop accruing additional benefits for participants to avoid failing the nondiscrimination tests. The proposed regulations are meant to prevent future freezes of such plans.
Regulations Do Not Solve the Problem
Kent Mason, representing the American Benefits Council, suggested that, although the regulations are “a step in the right direction,” they do not solve the problem that the IRS and Treasury are attempting to address. From surveys conducted by the American Benefits Council, Mason reported that 85 percent of the plans currently in existence will not have their problem solved by the regulations. Mason estimated that over 1-million plan participants will still experience a complete freeze to their plans as a result of the regulations.
Eliminate the Five-Year Restrictions
Mason was joined by Maria Sarli, representing Willis Towers Watson, in testimony that the five-year, pre- and post-closing restrictions on routine DB plan amendments are unnecessary. Mason said that if the abuse that the regulations were meant to address involves a plan sponsor who creates a plan, significantly enhances the plan, then closes it shortly thereafter, the Service already has what it needs.
“You have a rule in the 401(a) regulations that you rely on in the temporary relief that gets to exactly that—you can’t time your amendments in a discriminatory way. You used it in the temporary relief and it’s exactly the right answer here,” Mason said.
There are harmless amendments that may need to be made to plans, either before or after they have been closed, Sarli and Mason both pointed out. These amendments should not result in a freeze to the plan. Sarli said that there is a concern that requirements against plan amendments that increase accrued benefits during the five-year period before closure bar a number of deserving plans from proposed relief. Mason added that, if the closing occurred before the regulations are final, then there is no way there could have been abuse. “You can’t abuse a rule that didn’t exist when you took the action,” he said.
Sarli and Mason stressed that there were any number of business transactions that could occur within the five years after a plan closure, such as mergers, acquisitions and dispositions. These transactions may cause a closed plan to fail the nondiscrimination tests and result in a loss of the testing relief provided by the regulations. “There is no way to lock in five years because the world changes,” Mason stated.
Provisions Require Clarification
Larry Deutsch, of Larry Deutsch Enterprises, pointed out that the proposed regulations required clarification, particularly with regards to aggregating DB plans. He warned that unscrupulous plan sponsors may be able to structure transactions in a way that takes advantage of relief granted to closed plans. Deutsch stated that plan sponsors could potentially close a single DB plan for some or all of the participants, aggregate the closed plan with the remaining open plans, and then amend the open plans while still taking advantage of the relief provisions.
Limit Changes to Anti-Cross Testing Rules
The proposed nondiscrimination relief regulations also include changes to the cross-testing rule, which presents higher nondiscrimination testing requirements for formulas. However, Richard C. Shea, testifying on behalf of the ERISA Industry Committee, expressed concerns that the anti-cross testing rules are not limited in an appropriate way to address the abuses at which they are aimed. Shea stated that the rules bar cross-testing in circumstances where the plan sponsor continues to provide generous benefits, when it should not, to those non-highly compensated employees. Shea urged that the IRS and Treasury focus on solutions that “avoid tinkering with the already complex anti-cross testing gateway requirements.”
By Jalisa Mathis, Wolters Kluwer News Staff