IRS Proposes Nondiscrimination Testing Relief for Closed Pension Plans


To ensure that its participants to get favorable tax treatment, a “qualified” retirement plan must satisfy various needs, including making certain it benefits a nondiscriminatory mix-portion of employees instead of mainly benefitting highly compensated employees (HCEs). This is achieved by requiring certain testing be practiced concerning the quantity of employees qualified to have fun playing the plan, the amount of employees who really have fun playing the plan, and the quantity of contributions or benefits provided underneath the intend to HCEs versus non-HCEs.

In suggested rules issued recently (Suggested Rules), the Irs (IRS) addressed the use of these testing needs to certain kinds of qualified plans. Particularly, the Suggested Rules connect with the use of the testing needs when a company keeps a “closed” plan or aggregates multiple qualified plans for nondiscrimination testing purposes. As defined within the Suggested Rules, a shut plan’s a precise benefit (DB) type of pension that’s been amended to:

  • cease accruals within benefit formula supplied by the program for many or all participants whose benefits were formerly determined under that benefit formula or
  • limit participation within the intend to several employees that includes some or all the plan participants who took part in the program by the closure date.


In the last fifteen years, many employers have moved from offering retirement benefits within DB plan and, consequently, an growing quantity of such plans happen to be or will quickly be closed. As the amount of closed plans has elevated, the nondiscrimination testing needs have produced some unintended effects.

Although a DB plan may satisfy the testing needs by the closure date, when the participant human population is frozen, ordinary demographic changes frequently increase the risk for proportion of participants who’re HCEs growing with time. These demographic changes include (i) the pay of non-HCEs growing with time so that they become HCEs and (ii) the departure more non-HCEs because of their elevated probability of turnover. The Suggested Rules give a special testing rule for closed plans that meet certain needs to be able to take into account this inevitable demographic shift.

If your closed plan cannot fulfill the testing needs alone or by using the brand new special testing rule, an alternative choice for employers to think about when testing issues arise would be to test the program with an aggregated basis having a defined contribution (Electricity) plan also maintained through the employer. To be able to switch the benefits that formerly were offered within closed plan, a company frequently will adopt a Electricity intend to cover all employees who don’t still accrue benefits underneath the closed plan.

To be able to perform testing with an aggregated basis, accruals underneath the closed plan should be transformed into equivalent contribution amounts or contributions underneath the Electricity plan should be transformed into equivalent accruals so that the 2 plans are tested utilizing the same way of measuring benefits. Generally, it is normally simpler to fulfill the nondiscrimination needs when the employer converts contributions underneath the Electricity intend to equivalent accruals and also the aggregated plan’s tested in line with the quantity of accruals or equivalent accruals presented to employees. The Suggested Rules address how you can use the nondiscrimination tests by having an aggregated plan that includes both a DB along with a Electricity plan.

Special Testing Rule for several Benefits, Legal rights featuring of Closed Plans

As part of the nondiscrimination testing, an agenda must satisfy certain needs to make sure that not just are contribution allocations and/or benefit accrual amounts nondiscriminatory, but additionally that other benefits, legal rights featuring from the plan (including optional distribution alternatives, ancillary health or existence insurance benefits, accessibility to plan loans, the authority to direct investments and the authority to make rollover contributions) don’t discriminatorily favor HCEs. The Suggested Rules provide that for any plan that’s been closed for 5 years or even more, an advantage, right or feature is recognized as nondiscriminatory if:

  • it’s available simply to the participants that ongoing to accrue benefits underneath the plan following the closure and
  • no plan amendment that affects the supply from the benefit, right or feature has been created effective because the closure date (aside from certain allowed amendments).

Additionally, an agenda must meet certain needs concerning the accessibility to the advantage, right or feature within DB plan, and also the rate of matching contributions within Electricity plan, to benefit from the special testing rule for closed plans.

Testing a Electricity Plan based on Benefit Accruals

To be able to test a Electricity plan based on benefit accruals (instead of contribution allocations), an agenda must:

  • have broadly available allocation rates for any plan year
  • possess a gradual age or service agenda for an agenda year or
  • fulfill the “minimum aggregate allocation gateway” (Gateway) requirement underneath the IRS nondiscrimination rules for any plan year.

When figuring out if your plan has broadly available allocation rates or perhaps a gradual age or service agenda for an agenda year, “defined benefit substitute allocations” (DBRAs) really are a special kind of employer contribution which may be disregarded. The Suggested Rules expand the phrase DBRAs to permit more allocations to become qualified as DBRAs.

Underneath the Suggested Rules, DBRAs are understood to be allocations made within Electricity plan that can replace some or all the benefits that could have been presented to an worker within closed plan. To become qualified as DBRAs, the allocations should be provided inside a consistent manner to any or all similarly situated employees and also the number of employees who get a DBRA should be a nondiscriminatory number of employees for that first 5 years following the plan closes. Additionally, the DB plan whose benefit accruals the DBRAs are made to replace must have been established not less than 5 years before it closed and should have experienced no substantial amendments adopted in that time (aside from certain allowed amendments). With limited exceptions, the calculation way of a DBRA might not be amended once adopted.

Use of Testing Needs for an Aggregated Plan

To be able to aggregate a DB plan along with a Electricity plan and test them out based on benefit accruals, the aggregated plan must fulfill the Gateway requirement or be eligible for a the best. The Suggested Rules give a new exception in the Gateway requirement of an aggregated plan that incorporated a DB plan that’s been closed not less than 5 years. The exception applies only when the closed plan is at effect not less than 5 years just before its closure with no significant amendments happen to be designed to the program because the date that’s 5 years just before its closure (aside from certain allowed amendments). Additionally, the closed plan should have satisfied specific nondiscrimination testing needs throughout the first 5 years after its closure.

The Suggested Rules also expand an employer’s capability to fulfill the Gateway requirement by permitting using average allocation rates for non-HCEs underneath the Electricity plan. The modification is supposed to accommodate plans that offer for service- or age-based allocation formulas by permitting employees with less service to possess a lower allocation rate as lengthy because the employees with increased service are supplied a higher-enough allocation rate to keep a suitable Gateway rate. Also, the Suggested Rules give a “cap” to which any equivalent normal allocation rate more than a specific amount is treated as comparable to such amount. This cover serves to reduce the outcome of outliers.

Effective Date Reliance by Plan Sponsors

The Suggested Rules will require effect for plan years beginning on or following the date they’re printed in final form within the Federal Register. Before that date, for plan years beginning on or after Jan. 1, 2014, and before the final rules work, plan sponsors can depend upon various provisions from the Suggested Rules, including:

  • the disregard of certain DBRAs in nondiscrimination testing
  • the exception in the Gateway regarding certain closed plans and
  • the special testing rule for benefits, legal rights featuring regarding certain closed plans.


The Suggested Rules address highly technical nondiscrimination testing rules and therefore are largely relevant simply to employers that sponsor a shut plan or wish to aggregate a DB plan along with a Electricity arrange for testing purposes. Such employers should discuss the outcome of those Suggested Rules on their own nondiscrimination testing methods using their a lawyer and/or actuarial advisors.


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