More closed corporate defined benefit plans may have been frozen this year because the IRS has not released guidance on how employers could avoid failing non-discrimination testing in closed plans.
While it is too soon to know how many employers have opted to do so, officials of Washington-based trade groups say in the absence of long-sought guidance, employers seeking to avoid failing the test have few options but to freeze their plans, halting any additional benefit accruals.
Information on the number of plans frozen in 2013 won't be available until companies file their 5500 forms sometime next year.
The issue is that the IRS' non-discrimination test is harder to pass when companies have closed DB plans to new entrants. That's because a salary gap occurs over time, as salaries of people in the closed plan continue to rise, while lower-paid and new employees are enrolled in a defined contribution plan. To avoid failing the test, some employers opt to freeze the DB plan.
For an employer to freeze a closed plan beginning Jan. 1, it would have had to provide plan participants notice of the move by Nov. 15.
Groups representing plan executives have stepped up the pressure on Treasury Department officials to figure out a solution before more plan sponsors run out of options.
“It's very difficult for employers to say, "let's take out our crystal ball.' Congress did a great job of making this very complicated,” said Rob Austin, director of retirement research with Aon Hewitt in Charlotte, N.C.
A Nov. 21 letter from Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md. tried to speed things along, urging Treasury Secretary Jacob Lew to take “a practical, non-regulatory action” before more companies are affected. Mr. Lew also heard from 28 bipartisan House members in a June letter warning the rule could “directly cause a substantial number of companies to no longer provide pension benefits.”
Now, Senate Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa “is confident that the Treasury Department is taking it seriously,” said his spokeswoman Allison Preiss.
With the added attention from Capitol Hill, “we're optimistic that the IRS will be responsive to these companies that are trying to do the right thing and not freeze their pensions,” agreed an aide to Mr. Portman, who declined to be identified.