On November 13, 2019, the U.S. Internal Revenue Service (IRS) published Notice 2019-60, which provides temporary nondiscrimination relief for “closed” defined benefit plans through the end of 2020.
Background
Closed defined benefit plans provide ongoing accruals only to certain employees who participated in the plan on a specified date, and do not allow any new participants into the plan after such date. While closed defined benefit plans are still subject to certain nondiscrimination rules, closed plans typically find it more difficult to meet these requirements over time because the grandfathered employees who are still accruing benefits tend to become more highly compensated.
To help closed pension plans avoid nondiscrimination testing failures, the IRS first issued temporary nondiscrimination relief in 2014 for certain closed defined benefit plans, and such relief was extended multiple times. In addition, proposed regulations were published on January 29, 2016, setting forth nondiscrimination relief for closed defined benefit plans following certain changes in the coverage of a defined benefit plan or a defined benefit plan formula. But restrictions applicable to this relief generally made it difficult for plans that provided for benefits, rights, or features that are not available to participants in other plans of the employer to qualify for such relief.
New Additional Relief
In a departure from prior nondiscrimination relief and the proposed regulations, the new IRS notice provides relief with respect to the requirement that all of a plan’s benefits, rights and features must be available to all participants. The new relief (1) applies to a defined benefit plan that was amended to be a closed defined benefit plan before December 13, 2013, and (2) provides that for plan years ending after November 13, 2019 and beginning before January 1, 2021, an applicable closed defined benefit plan is treated as satisfying the nondiscrimination requirements for the plan year with respect to a benefit, right, or feature provided under the plan at the time the plan was amended to be a closed defined benefit plan if either:
- No amendment adopted after January 29, 2016 expands or restricts the eligibility for the benefit, right, or feature; or
- if any such amendment has been adopted, then, as of the later of the effective date of the amendment and the date the amendment is adopted, the post-amendment “ratio percentage” (i.e., the percentage of the non-highly compensated employees who benefit under the plan divided by the percentage of highly-compensated employees who benefit under the plan) of the group of employees eligible for the benefit, right, or feature is not less than the pre-amendment ratio percentage of the group of employees eligible for the benefit, right, or feature.
Looking Ahead
The new notice provides only temporary nondiscrimination relief, and the IRS has indicated that it still intends to issue final regulations to address this issue. In addition, Congress is considering legislation that would provide permanent nondiscrimination testing relief for closed defined benefit plans.
