The ERISA Industry Committee (ERIC) contends that because both the temporary relief and the proposals for permanent relief are narrowly construed, the relief will apply only to a limited number of plans.

In December 2013, in Notice 2014-5 (see “IRS Provides Nondiscrimination Relief for Closed DBs”), the Internal Revenue Service (IRS) provides temporary nondiscrimination relief for certain plans that provide ongoing accruals but have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date. It permits certain employers that sponsor a closed DB plan and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of § 401(a)(4) of the Employee Retirement Income Security Act (ERISA) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis. In addition, the notice requests comments about possible permanent changes to the nondiscrimination rules under § 401(a)(4).

Generally, in its comment letter, ERIC recommends:

• The agencies should issue guidance to provide plans with permanent relief as soon as possible;
• Additional relief should be provided with respect to benefits, rights and features (BRF);
• The agencies should provide soft frozen DB plans with additional options to satisfy the nondiscrimination requirements;
• DC plans that provide enhanced benefits to former defined benefit plan participants should be provided with additional options for satisfying the nondiscrimination requirements; and
• Contributory plans that otherwise satisfy the nondiscrimination requirements should not be considered discriminatory merely because some highly compensated employees (HCEs) contribute more than some non-highly compensated employees (NHCEs).

To satisfy nondiscrimination testing for soft frozen DB plans, ERIC suggests matching contributions should be included for more types of nondiscrimination testing for DB plans. Additionally, the agencies should provide an alternative for certain plans that have been in existence for a number of years. Under this proposed alternative, a soft frozen plan would be deemed to satisfy the coverage and nondiscrimination rules if it:

• was in existence for at least five years before it was closed to new participants (the “closure date”);
• continued to satisfy minimum coverage and nondiscrimination tests for at least five years after the closure date;
• covers a closed group of participants that continues to accrue benefits under a preexisting benefit formula;
• did not have any changes made to the plan’s benefit formula, accrual method, or benefits, rights, and features after the closure date, other than with respect to (1) adverse changes that are made solely to HCEs, (2) beneficial changes that are made solely to NHCEs, and (3) changes required to comply with the law; and

demonstrates that it is nondiscriminatory by satisfying the average benefits percentage test for every year the plan does not otherwise satisfy the Code § 410(b) minimum coverage and Code § 401(a)(4) nondiscrimination rules.The ERISA Industry Committee (ERIC) contends that because both the temporary relief and the proposals for permanent relief are narrowly construed, the relief will apply only to a limited number of plans.

In December 2013, in Notice 2014-5 (see “IRS Provides Nondiscrimination Relief for Closed DBs”), the Internal Revenue Service (IRS) provides temporary nondiscrimination relief for certain plans that provide ongoing accruals but have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date. It permits certain employers that sponsor a closed DB plan and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of § 401(a)(4) of the Employee Retirement Income Security Act (ERISA) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis. In addition, the notice requests comments about possible permanent changes to the nondiscrimination rules under § 401(a)(4).

Generally, in its comment letter, ERIC recommends:

• The agencies should issue guidance to provide plans with permanent relief as soon as possible;
• Additional relief should be provided with respect to benefits, rights and features (BRF);
• The agencies should provide soft frozen DB plans with additional options to satisfy the nondiscrimination requirements;
• DC plans that provide enhanced benefits to former defined benefit plan participants should be provided with additional options for satisfying the nondiscrimination requirements; and
• Contributory plans that otherwise satisfy the nondiscrimination requirements should not be considered discriminatory merely because some highly compensated employees (HCEs) contribute more than some non-highly compensated employees (NHCEs).

To satisfy nondiscrimination testing for soft frozen DB plans, ERIC suggests matching contributions should be included for more types of nondiscrimination testing for DB plans. Additionally, the agencies should provide an alternative for certain plans that have been in existence for a number of years. Under this proposed alternative, a soft frozen plan would be deemed to satisfy the coverage and nondiscrimination rules if it:

• was in existence for at least five years before it was closed to new participants (the “closure date”);
• continued to satisfy minimum coverage and nondiscrimination tests for at least five years after the closure date;
• covers a closed group of participants that continues to accrue benefits under a preexisting benefit formula;
• did not have any changes made to the plan’s benefit formula, accrual method, or benefits, rights, and features after the closure date, other than with respect to (1) adverse changes that are made solely to HCEs, (2) beneficial changes that are made solely to NHCEs, and (3) changes required to comply with the law; and
• demonstrates that it is nondiscriminatory by satisfying the average benefits percentage test for every year the plan does not otherwise satisfy the Code § 410(b) minimum coverage and Code § 401(a)(4) nondiscrimination rules.

ERIC contends plans that have been in existence for several years and provided meaningful benefits to workers for all those years would clearly not have been created to take advantage of these special rules. Additionally, the conditions proposed above would discourage companies from freezing plans. Alternatively, the agencies should provide special testing for aggregated mature plans.

ERIC also lays out recommendations for testing alternatives for DC plans with companies that also sponsor a hard frozen DB plan, and DC plans that include nonelective contributions allocated to a closed group of participants who previously participated in a DB plan that is now hard frozen.

In its comment letter, the American Academy of Actuaries asks regulators to make any changes to nondiscrimination rules retroactive and offers suggestions for protections against abuse.

The academy says it generally supports the averaging of allocation rates for DC plan benefits in the minimum aggregate allocation gateway provided for cross-testing. However, it believes that by itself, this change would help only a limited number of situations due to the high equivalent allocation rates for older, long-service employees in DB plans. The academy offers additional ideas about how to make this approach more useful.

The academy says it observes when a DB plan is closed to new entrants, the plan administrator almost always resorts to using the minimum aggregate allocation gateway in order to attempt to satisfy the cross-testing rules when the “primarily DB in character” gateway becomes inapplicable. This particular gateway requires every NHCE benefiting under the plan to have a minimum allocation rate based on the highest HCE rate. In practice, the academy has found when there is a grandfathered final average pay formula, the required NHCE allocation rate will almost always be 7.5% of IRC § 415(c) compensation due to the high accrual rate produced by an older, longer service HCE who receives even a modest pay increase.

It suggests:

• Easing the criteria for the minimum aggregate allocation gateway so that every NHCE need not receive a 7.5% allocation when a final average pay DB plan is closed. Easing of this gateway could be accomplished through some combination of reducing the maximum required allocation for NHCEs below 7.5% or permitting non-elective employer contributions to § 403(b) and employee stock ownership plans (ESOPs) to be reflected in the test.
• Allowing cross-testing of aggregated DB/DC plans for a DB plan that satisfied the gateways at the time the plan was closed, even if the plan would no longer satisfy the gateway. The logic is that if the DB plan is closed, there may very well be a long service, older grandfathered employee with a very large equivalent allocation rate. The presence of this employee requires the 7.5% minimum aggregate allocation for all NHCEs. New entrants will have the benefit of being covered by a DC plan their entire careers, and thus will have significant opportunity to accumulate retirement savings. Pegging the allocation to the gateway required by the equivalent allocation rate for a 65-year-old HCE with 40 years of service is inordinately generous and typically untenable.

The academy says the alternative for aggregated DB/DC plans that could satisfy nondiscrimination using a lower interest rate would be helpful, but it will further increase the complexity of an already difficult set of regulations. It discusses other, more direct alternatives.

Regarding the safety valve alternative under which plans can request permission to disregard outliers suggested by regulators, the academy contends historically these types of requests are often impractical. Many plan sponsors find the current Internal Revenue Service user fees to be cost prohibitive and the time necessary to obtain a ruling to be problematic. Although situational rulings may be a viable option for larger plan sponsors, the vast majority would not view this as a practical option unless costs were significantly reduced and additional time was granted to retroactively correct a situation if the ruling was unfavorable.