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REGULATION/LEGISLATION

Closed DB plan sponsors get another year of testing relief from IRS

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Sponsors of closed defined benefit plans will get one more year of relief from IRS discrimination testing rules, extending it to January 2017 from January 2016, said an agency notice posted Monday.

The relief is still temporary, as the IRS works to finalize a proposed rule issued in January that is aimed at making it easier for closed DB plans to comply.

As the earnings of employees in closed plans grow, so does the disparity between the richness of their benefits and those offered to other employees, typically through defined contribution plans. When that gap gets wide enough, plan sponsors can fail the IRS non-discrimination testing rules.

While employer groups welcome the one-year extension, they caution that even if the permanent relief is finalized as proposed, it will not help all sponsors from having to stop accruing benefits for employees. “We hope that Treasury pays attention to our comments, which would allow more plans to utilize the new rules,” said Will Hansen, senior vice president of retirement policy for the ERISA Industry Committee in Washington, in an interview.

As proposed, the new rules allow some plans to satisfy non-discrimination rules in certain situations, but only after they've been closed for at least five years, with no significant changes made in that time, along with other tests. But because plan administrators often make routine amendments on early retirement factors or options such as lump sums, consultants say few plans can pass that hurdle. It also rules out companies with plans affected by any corporate mergers or acquisitions.

James A. Klein, president of the American Benefits Council, noted that while the temporary extension will help some employers, many others who closed their plans to new employees may have to stop benefits for current workers who become more highly compensated as their tenure grows. “This glitch in the non-discrimination rules effectively penalizes employers for trying to 'do the right thing' for their older workers. It is compelling some employers to 'hard freeze' their plans by ceasing accruals. This is something neither the employers, nor the workers of course, want to see happen,” Mr. Klein said in a statement.

Employer groups say they will continue to press the IRS for more flexible testing rules, and to support legislative changes.

A 2016 Aon Hewitt survey of 165 plans found that 85% of those closed to new entrants would need more relief under the IRS proposal to be compliant, and 39% of plans with frozen accruals would need more relief than the proposed rules related to contributions provided by employers.

The IRS notice is on the agency's website.