Portman, Cardin urge Treasury action on nondiscrimination regs for DB plans

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have sent a letter to U.S. Secretary of the Treasury Jacob Lew expressing concern with nondiscrimination testing rules that they contend “could unintentionally weaken the retirement security of many American workers.”

The letter, sent on November 22, 2013, notes that over the past several years, many companies have transitioned from defined benefit to defined contribution retirement plans. In doing so, many have elected to grandfather existing employees into the defined benefit plans in order to avoid disruptions and save them from having to build retirement savings in a new pension model mid-career. After “soft freezing” the existing pension plan, the company places new hires within a new defined contribution pension system.

“Unfortunately,” the letter states, “soft freezes may cause plans to inadvertently violate a Treasury rule that requires qualified plans to meet certain nondiscrimination testing requirements … The split between having mostly higher-compensated employees in a defined benefit plan and mostly lower-paid employees in a defined contribution plan may trigger the nondiscrimination rules even if the level of pension benefits between the two groups is comparable. This is because current nondiscrimination rules do not adequately allow for the comparison between defined benefit and defined contribution benefits in these circumstances.”

Companies failing their nondiscrimination tests risk losing their pensions’ qualified status, resulting in immediate taxation of their employees’ pension benefits. To avoid this expensive outcome, the Senators contend, many companies feel compelled to instead implement a “hard freeze” that completely closes the defined benefit plan and forces all employees into the new plan. “This is clearly not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into new pension plans that may not provide enough time to accumulate sufficient benefits before retirement,” the letter states. The Senators urged the Treasury Department to implement “a practical, non-regulatory solution to this issue.”

News release, November 22, 2013.

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have sent a letter to U.S. Secretary of the Treasury Jacob Lew expressing concern with nondiscrimination testing rules that they contend “could unintentionally weaken the retirement security of many American workers.”

The letter, sent on November 22, 2013, notes that over the past several years, many companies have transitioned from defined benefit to defined contribution retirement plans. In doing so, many have elected to grandfather existing employees into the defined benefit plans in order to avoid disruptions and save them from having to build retirement savings in a new pension model mid-career. After “soft freezing” the existing pension plan, the company places new hires within a new defined contribution pension system.

“Unfortunately,” the letter states, “soft freezes may cause plans to inadvertently violate a Treasury rule that requires qualified plans to meet certain nondiscrimination testing requirements … The split between having mostly higher-compensated employees in a defined benefit plan and mostly lower-paid employees in a defined contribution plan may trigger the nondiscrimination rules even if the level of pension benefits between the two groups is comparable. This is because current nondiscrimination rules do not adequately allow for the comparison between defined benefit and defined contribution benefits in these circumstances.”

Companies failing their nondiscrimination tests risk losing their pensions’ qualified status, resulting in immediate taxation of their employees’ pension benefits. To avoid this expensive outcome, the Senators contend, many companies feel compelled to instead implement a “hard freeze” that completely closes the defined benefit plan and forces all employees into the new plan. “This is clearly not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into new pension plans that may not provide enough time to accumulate sufficient benefits before retirement,” the letter states. The Senators urged the Treasury Department to implement “a practical, non-regulatory solution to this issue.”

News release, November 22, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.