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On August 24, 2018, IRS published Notice 2018-69, extending through 2019 temporary relief from Internal Revenue Code nondiscrimination rules for closed groups.
We discuss the “closed group” issue, the temporary relief provided by IRS under prior Notices (extended under Notice 2018-69 through 2019), and IRS’s January 2016 proposed regulations providing permanent relief, in detail in our article Frozen Plan Update.
To summarize the issue: where an employer closes a defined benefit plan to new participants (sometimes called a “soft freeze”), Internal RevenueCode nondiscrimination issues may over time arise with respect to the grandfathered benefits of the closed class, even where that class of participants is nondiscriminatory at the time of the freeze. This happens when lower paid members of the closed class subsequently leave, are terminated or become higher paid. In addition, over time, the number of participants in the “old plan” may shrink below the minimum participant requirements of Internal RevenueCode section 401(a)(26) (the “50 participant rule”). Finally, where, e.g., in connection with a “hard freeze” of all DB plan benefits, the sponsor establishes or enhances a defined contribution plan, the sponsor may provide for “make whole” benefits for a closed class of some or all of the participants in the “old” DB plan, and nondiscrimination issues may over time arise with respect to that class.
There were a number of problems (discussed in detail in our prior article) with IRS’s proposal for permanent relief. In that regard, in Notice 2018-69 IRS states:
Many comments have been submitted on the proposed regulations, including oral comments at a public hearing held on May 19, 2016. [IRS] and the Treasury Department expect that the final regulations will include a number of significant changes in response to those comments. However, it is anticipated that the final regulations will not be published in time for plan sponsors to make plan design decisions based on the final regulations before expiration of [prior temporary relief].
We note that, in addition to IRS’s regulation project, there are proposals in Congress that would provide a legislative solution to the “closed group” problem – see, e.g., our discussion of the Retirement Enhancement and Savings Act of 2018.
We will continue to follow this issue.