IRS Guidance on Closed Plans Welcome, but Issues Remain

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By Kristen Ricaurte Knebel

Feb. 3 — The Internal Revenue Service's recent proposed relief for closed defined benefit plans comes as welcome news for some, but practitioners said that they see some bumps in the road ahead of finalization of the rules.

On Jan. 28, the IRS and Treasury Department issued proposed guidance featuring changes to the nondiscrimination rules to provide relief for some closed plans and formulas. The rules also included other changes that aren't limited to such plans and formulas.

These complex proposed rules would apply primarily to closed defined benefit plans—plans that are still in operation but closed to new entrants, or apply a new kind of benefit formula to new entrants—and provide relief from nondiscrimination testing requirements if several conditions are met. The rules would allow large employers to continue closed defined benefit plans and maintain retirement expectations for employees in those plans without fear of plan disqualification because of nondiscrimination requirements.

“At a very high level, these regulations are responsive” to concerns that plan sponsors had regarding nondiscrimination testing and they “do provide some improvements in terms of being able to recognize the need to make those tests work better for closed plans,” Alan Glickstein, senior retirement consultant at Willis Towers Watson, told Bloomberg BNA on Feb. 3.

However, Glickstein said he doesn't think the rules are “as helpful as they could be” and that they provide some unnecessary hoops for plans to jump through to qualify for the relief.

Glickstein called the requirement for limited changes to a plan five years before and after closure an “arbitrary” one, in part because there are many amendments made to plans that could be reasonable, but would disqualify a plan from relief.

“It seems to us as there are too many strings and that they are too complicated and they could have been done in a much simpler way,” Glickstein said.

For More Information

For more information, see Compensation and Benefits Library’s Nondiscrimination Rules: Testing chapter.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com