March 26, 2015

IRS Extends Frozen DB Plan Nondiscrimination Testing Relief

The IRS has issued Notice 2015-28, extending temporary nondiscrimination relief applicable to “closed” defined benefit (DB) plans for one year. A “closed” DB plan is a plan (or portion of a plan) in which the group of participants receiving ongoing DB accruals does not accept new participants after a certain date. In these circumstances, the participant population can become disproportionately highly compensated over time and eventually can fail to satisfy the nondiscrimination rules. In those cases, many employers sponsoring closed plans will consider freezing the closed plan or portion (i.e., eliminating all future accruals, or terminating the plan) because currently available options for satisfying the nondiscrimination rules are costly.

In order to prevent the loss of these plans while Treasury was developing a regulatory solution, the IRS issued Notice 2014-5 in late 2013, temporarily easing the application of the current nondiscrimination testing requirements for plans closed by December 13, 2013. That relief applied for plan years beginning before 2016. The new Notice extends the temporary relief through plan years beginning before 2017.

While helpful, the temporary relief now provided through the 2016 plan year is quite narrow and does not address many of the fact situations presented by existing closed plans. In the original guidance (Notice 2014-5), Treasury asked for comments as to possible regulations on specific alternative fixes and broader solutions, and it is currently working on those regulations.

If you have any questions about the Notice, please contact your Sibson consultant or send us a note.

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