Recently introduced legislation addressing frozen defined benefit plans could face some obstacles before it has any hope of enactment, an American Benefits Council policy analyst said in a webinar.
H.R. 5381, introduced July 31 by Rep. Pat Tiberi (R-Ohio), would provide that “when the plan is frozen to new entrants, if it passes the nondiscrimination rules, then it would continue to pass the nondiscrimination rules for the future,” Lynn D. Dudley, senior vice president for global retirement and compensation policy at ABC in Washington, said during an Aug. 6 webinar sponsored by the Worldwide Employee Benefits Network.
Dudley said one of the biggest challenges the legislation would face is concern from the Treasury Department.
“There is concern from Treasury that it creates an opportunity for loopholes, or lack of good faith by allowing people to create plans and then close them off to new entrants and then get better discrimination rules than would otherwise apply,” Dudley said.
Dudley said there is some concern that giving relief to plans that have put a “soft freeze” on benefits would slant the tax benefits in favor of higher-paid employees.
“That's the original problem, you violate the nondiscrimination rules because after attrition, the only people that are left in the plan are higher-paid employees,” she said.
Some retirement and business groups have pushed the federal government to change the nondiscrimination rules, saying that presently, sponsors that have closed, or put a “soft freeze,” on their plans, often end up choosing to cease benefit accruals down the line—or putting a “hard freeze” on their plans—to avoid running afoul of the rules. This tends to hurt older, longer-term participants more, they say.
In December, the Internal Revenue Service issued Notice 2014-5, which provided temporary relief for certain closed defined benefit plans. The retirement community praised the notice, but said broader guidance was needed to fix the larger issues that defined benefit plans face.
Excerpted from a story that ran in Pension & Benefits Daily (8/6/2014).
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