3718 / How does the SECURE Act impact nondiscrimination testing rules for closed defined benefit plans?

The SECURE Act made changes that make it easier for certain sponsors of closed defined benefit plans to satisfy their nondiscrimination testing requirements.

Many employers who have closed defined benefit plans to new participants have continued to allow groups of “grandfathered” employees to earn benefits under the closed defined benefit plans. Because of this, many of these plans have had difficulties meeting the applicable nondiscrimination requirements as more of these grandfathered employees become “highly compensated” over time. For a number of years, the IRS has provided relief from the nondiscrimination rules for closed defined benefit plans. The SECURE Act essentially codifies a number of these relief provisions.

Generally, a defined benefit plan cannot discriminate in favor of highly compensated employees with respect to any plan benefit, right or feature. Under the SECURE Act, defined benefit plans will be treated as passing nondiscrimination testing with respect to benefits, rights and features if:

(1)     the plan passes nondiscrimination testing in the plan year during which the plan closure takes place, and the two subsequent plan years,

(2)     the plan was not amended after closure to discriminate in favor of highly compensated employees, either by modifying the closed class or the benefits, rights and features provided to that class and

(3)     the plan was closed before April 5, 2017 or there was no substantial increase in value of either coverage or value of the benefits, rights and features for the five-year period before the plan was closed.

A plan is treated as having had a “substantial increase” in coverage or value of the benefits, rights, or features during the applicable five-year period only if, during that period:

“(i) the number of participants covered by such benefits, rights, or features on the date the five-year period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which the period began, or

(ii) the benefits, rights, and features have been modified by plan amendments in such a way that, as of the date the class is closed, the value of the benefits, rights, and features to the closed class as a whole is substantially greater than the value as of the first day of such five-year period, solely as a result of the amendments.”

Additionally, closed defined benefit plans can be aggregated with the employer’s defined contribution plans for purposes of compliance testing if:

(1)     the defined benefit plan provides benefits to a closed group of participants,

(2)     the defined benefit plan passes nondiscrimination and coverage testing in the plan year during which the plan closure takes place, and the two subsequent
plan years,

(3)     no amendments that discriminate in favor of highly compensated employees were made after the plan closed, and

(4)     the plan was closed before April 5, 2017 or there was no “substantial increase” in value of either coverage or value of the benefits, rights and features for the five-year period before the plan was closed.

If the defined benefit plan is aggregated with a plan that provides matching contributions, the defined benefit plan must also be aggregated with the portion of the DC plan that provides elective deferrals and the matching contributions must be treated in the same way as nonelective contributions for purposes of nondiscrimination and coverage testing.

The nondiscrimination relief is effective immediately, but plans have the option of applying this relief retroactively to plan years beginning after December 31, 2013.