Bill Offers Closed Pension Plans Nondiscrimination Testing Relief

Proposed Senate legislation (S 2352) would ease nondiscrimination testing for closed defined benefit (DB) pension plans. Introduced by Sens. Rob Portman, R-OH and Ben Cardin, D-MD, the Retirement Security Preservation Act mirrors the testing relief provided in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (HR 1994), a broad reform package that sailed through the House in May and is now awaiting Senate action. Broad bipartisan Senate support for the SECURE Act could push it to the president’s desk later this year, but if the bill falters, advocates for closed plan testing relief will likely try to advance this measure separately.

Closed Plan Testing Relief

Using data provided by actuarial firms, the American Benefits Council estimates at least 450,000 plan participants could see their benefits frozen by 2020, absent testing relief. The Senate measure offers broader relief than proposed IRS regulations would provide, while incorporating some of the same anti-abuse protections. The bill includes permanent nondiscrimination testing relief for closed DB plans and significantly broadens the temporary relief provided in IRS Notice 2014-5, which applies through the 2019 plan year-end under Notice 2018-69.

Among other changes, the bill would:

  • Allow employers to test closed DB plans with a defined contribution (DC) plan on a benefits basis (cross-testing), even though the plans don't satisfy the regular conditions for doing so.
  • Permit sponsors to aggregate closed DB plans and cross-test them with the portion of a DC plan that provides matching contributions (as long as elective deferrals are included in the test) or with an employee stock ownership plan.
  • Eliminate the requirement that plans must have the same plan year to be aggregated.
  • Let sponsors test certain DC plans on a benefits basis if a closed class of participants whose DB plan accruals have been reduced or eliminated receive make-whole contributions (formerly called DB replacement allocations or DBRAs).
  • Provide closed DB plans with relief from certain benefits, rights and features testing, as well as the minimum participation rule under Internal Revenue Code Section 401(a)(26), which generally requires a plan to have at least 50 participants.

If elected by a plan sponsor, the relief could apply to plan years beginning after Dec. 31, 2013.

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Geoff Manville
by Geoff Manville

Partner, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

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