Employer groups support legislation to provide relief from nondiscrimination testing for frozen DB plans

 

The ERISA Industry Committee (ERIC) and the American Benefits Council have expressed support for H.R. 5381, legislation that would provide nondiscrimination relief to frozen pension plans. The bill is sponsored by Rep. Pat Tiberi (R-OH), chairman of the Subcommittee on Select Revenue Measures of the House Ways and Means Committee, and is co-sponsored by Rep. Richard Neal (D-MA), a member of the Committee.

In an October 6, 2014 letter, Council president James A. Klein noted that, as many companies have transitioned away from traditional defined benefit plans, a number of them have been changed so that new employees hired after a certain date are not eligible to participate in the plans. However, employees who already participate continue to accrue additional benefits under the plan. This is known as a “soft freeze.” Even where such a plan passed all nondiscrimination tests at the time it was frozen, over time it can run afoul of nondiscrimination rules notwithstanding that the plan itself is not changed in any material way, or may not have changed at all, Klein explained. This happens simply because newly hired non-highly compensated employees are not participating in that particular plan, while those employees remaining in the plan become more highly compensated over time. This includes non-highly compensated employees who become highly compensated by reason of tenure and experience.

Bill aims to protect older, longer-serving participants

If a plan cannot pass the nondiscrimination tests, and therefore would become tax disqualified, the sponsors have few options but to “hard freeze” the plan – that is, discontinue additional benefit accruals for plan participants who continue to work for the employer, said Klein. A hard freeze can disadvantage long-service workers, many of whom may be close to retirement. H.R. 5381 “wisely would clarify that a plan that passed the nondiscrimination tests at the time it was soft frozen, will be deemed to pass the tests as long as it is not amended in any discriminatory manner. This is the correct approach to solving the problem,” said Klein.

Support for the legislation was echoed by ERIC. In a news release, Kathryn Ricard, ERIC senior vice-president for retirement policy, said that “ERIC supports Congressman Tiberi’s bill and encourages Congress to pass legislation that supports the maintenance of frozen defined benefit plans.” Tiberi’s legislation would protect older, longer-serving participants by providing an exception to nondiscrimination testing and allowing frozen defined benefit plans to apply the nondiscrimination rules to the closed class of participants as of the freeze date and beyond, ERIC said.
ERIC also recommended, among other things, that Congress refrain from further increasing the premiums that companies must pay to the Pension Benefit Guaranty Corporation for their defined benefit plans.

Source: American Benefits Council letter, October 6, 2014.

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