IRS extends temporary nondiscrimination relief for closed DB plans through 2017

The IRS has extended for an additional year the temporary relief provided in IRS Notice 2014-5 for certain closed defined benefit (DB) pension plans (i.e., plans that are closed to new entrants as of a specified date, but continue to provide ongoing accruals for existing participants). Thus, the temporary relief is available for plan years beginning before 2018, if the conditions of Notice 2014-5 are satisfied.

Closing a DB plan can often coincide with an amendment that provides new or greater contributions under a defined contribution (DC) plan that is intended to replace accruals under the DB plan for new hires or other employees to whom the DB plan is closed. In Notice 2014-5, the IRS provided that, while possible regulatory changes to the nondiscrimination rules were considered, the IRS would permit certain employers that sponsor a closed DB plan and a DC plan to demonstrate that the aggregated plans complied with the nondiscrimination requirements of Code Sec. 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans did not satisfy the current conditions for testing on that basis, if certain conditions were met. Specifically, for plan years beginning before 2016, Notice 2014-5 permitted a DB/DC plan that included a closed DB plan that was closed before December 13, 2013 and that satisfied certain conditions, to demonstrate satisfaction of the nondiscrimination-in-amount requirement of IRS Reg. §1.401(a)(4)-1(b)(2) on the basis of equivalent benefits, even if the plan did not meet any of the existing eligibility conditions for testing on that basis under IRS Reg. §1.401(a)(4)-9(b)(2)(b).

IRS Notice 2015-28 extended the temporary nondiscrimination relief for an additional year by applying that relief to plan years beginning before 2017, if the conditions of Notice 2014-5 were satisfied. During the period that this extension applied, the remaining provisions of the nondiscrimination regulations under Code Sec. 401(a)(4) continued to apply. The IRS issued proposed regulations under Code Sec. 401(a)(4) relating to nondiscrimination requirements for closed plans on January 29, 2016, that will apply to plan years beginning on or after the publication of final regulations. The IRS does not expect final regulations to be issued in time for plan sponsors to make plan design decisions based on the final regulations, before expiration of the existing relief as currently extended. Therefore, the relief provided in Notice 2014-5 is being extended for another year, to plan years beginning before 2018, provided that the conditions of Notice 2014-5 are satisfied.

Source: IRS Notice 2016-57.

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