February 3, 2016

Proposed Regulations on DB Plan Nondiscrimination Testing and QSERPs

On January 29, the Internal Revenue Service (IRS) issued proposed regulations to revise the pension nondiscrimination rules.

Most of the proposed changes provide relief for “closed” defined benefit (DB) plans. Many plan sponsors have closed their DB pension plans to new entrants. In some cases, accruals continue for existing participants and in others all accruals are stopped. In both situations, the plan may have difficulty passing nondiscrimination testing because the percentage of highly compensated employees (HCEs) in the closed group will tend to increase over time, with no new non-HCEs entering the group. Testing failure can be delayed by various methods including making additional contributions for non-HCEs under a defined contribution plan, but those methods can be costly and may not solve the underlying problem. The IRS had previously issued only temporary and limited relief for closed plans (in Notice 2014-5 and Notice 2015-28). The new proposed regulations offer several permanent alternatives to address the issue.

The proposed regulations also eliminate the ability of plan sponsors to provide additional benefits to highly compensated employees (HCEs) by individually identifying them in the plan under arrangements known as “QSERPs.” 

Comments on the proposed regulations are due April 28, 2016, and the proposed regulations will be discussed at the public hearing scheduled for May 19, 2016.

Although the regulations are only proposed, the portion of the regulations addressing closed plans generally may be applied retroactively to plan years beginning on or after January 1, 2014. Plan sponsors with closed plans should discuss with their actuaries whether the new rules can help with nondiscrimination testing issues.

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