Closed Defined Benefit Plans Guidance


The IRS recently issued Notice 2014-5 giving limited, temporary relief for closed defined benefit plans that are having difficulty meeting the nondiscrimination requirements under Internal Revenue Code Sections 401(a)(4) and 410(b).

During recent years, many employers have moved away from providing retirement benefits in a traditional DB plan. To ease the transition, many of these employers allowed the employees who were already in the plan to continue to earn pension benefits but closed the plan to all other employees.

These plans are still required to meet the nondiscrimination rules, including:

  • coverage rules under IRC Section 410(b), and
  • nondiscrimination in amounts of benefits rules under IRC Section 401(a)(4).

Closed plans find it more difficult to meet these requirements after a period of time, because the group of employees still earning benefits under the plan tends to become more highly compensated. This is because they usually continue to receive pay raises, and new employees (who are generally lower-paid) are not covered by the plan.

When a closed DB plan can’t meet these requirements on a stand-alone basis, the regulations allow the plan to be tested by combining it with the employer’s defined contribution (DC) plan. Plan sponsors generally find that it’s easier to meet the nondiscrimination requirements if they test the combined DB/DC plan based on the benefits provided to the employees (as opposed to the contributions going into the plan). However, under current regulations, a DB/DC plan can’t use this approach unless it meets one of three conditions. Typically, the practical result of those three conditions is that, after a closed DB plan has been closed for a while, the employer must provide employer contributions of at least 5% to all participants in the DC plan.

Several employers and industry groups approached the IRS and Treasury to ask for relief. They say they’re finding it difficult to meet the nondiscrimination requirements and that the minimum DC contributions are too high to keep wage and benefit costs competitive. They warned that if the plans can’t meet the nondiscrimination requirements, employers will tend to freeze or terminate the plans altogether, leaving more people without the protection of lifetime income available through a DB plan.

However, the IRS and Treasury were concerned that making changes in one area of the nondiscrimination regulations could have unintended consequences for other plans. We noted that some ongoing plans could encounter similar challenges in meeting the nondiscrimination rules, and we didn’t want to create an incentive for these employers to close their DB plans so they could use this relief.

Instead, the IRS and Treasury agreed to provide limited, temporary relief so that we can continue to consider whether (and if so, how) to provide permanent relief. The notice asks for comments by February 28, 2014, on specific issues to help us determine how best to proceed.

Notice 2014-5 allows sponsors to test a combined DB/DC plan on a benefits basis for plan years beginning before January 1, 2016, if:

  • The DB/DC plan includes a DB plan that was closed by an amendment that was adopted before December 13, 2013 (even if the effective date of the closure is after that date), and each DB plan in the DB/DC plan satisfies one of the following two conditions:
    1. For the plan year beginning in 2013, the DB plan was part of a DB/DC plan that either was primarily defined benefit in character or consisted of broadly available separate plans (that is, the DB plan was part of a DB/DC plan that was eligible for testing on a benefits basis, without being required to make a minimum employer contribution to all DC plan participants), or
    2. For DB plans that were amended before December 13, 2013, to provide that only employees who participated in the DB plan on a specified date continue to accrue benefits under the plan, the DB plan was not tested as part of a DB/DC plan for the plan year beginning in 2013, because the plan was able to meet the coverage and nondiscrimination requirements on a stand-alone basis.

(This is a summary of the rules – please see Notice 2014-5 for the specific requirements that plans must meet to qualify for the relief.)

This temporary relief doesn’t affect any other statutory or regulatory requirements. It doesn’t grant any relief for minimum participation under IRC Section 401(a)(26) or failure to provide benefits, rights, and features on a nondiscriminatory basis. For more information on testing for nondiscriminatory amounts and availability while considering practical situations, see Webcast: Nondiscrimination Rules for Closed Pension Plans.

Notice 2017-45

Closed defined benefit plans that are having difficulty meeting the nondiscrimination requirements under 401(a)(4) and 410(b) now have extended relief through 2018.

Proposed Regulations

Proposed regulations, published 1/29/2016 in the Federal Register (81 FR 4976), modify the nondiscrimination requirements applicable to certain retirement plans that provide additional benefits to a grandfathered group of employees following certain changes in the coverage of a defined benefit plan or a defined benefit plan formula. The proposed regulations also make certain other changes to the nondiscrimination rules that are not limited to these plans. These regulations would affect participants in, beneficiaries of, employers maintaining, and administrators of tax-qualified retirement plans.