Senators urge action on discrimination testing rules for defined benefit plans

Sens. Ben Cardin, D-Md., and Rob Portman, R-Ohio, are urging Treasury officials to help defined benefit plan sponsors deal with nondiscrimination rules that could prompt more plans that are already closed to new participants to be frozen.

As the earnings of employees in the closed plans grow, so does the disparity between the richness of their benefits and those offered to other employees, typically through defined contribution plans. When that gap gets wide enough, plan sponsors can fail the Internal Revenue Service's non-discrimination testing rules. Legislative remedies have stalled on Capitol Hill.

In a letter sent to Treasury Secretary Jacob Lew on Nov. 22, Sens. Cardin and Portman urged him to produce a “practical” solution to avoid having companies opt instead to freeze their plans, “which is clearly not the intended effect” of the rules,” they wrote. With many plans getting close to that point, said Mercer L.L.C. senior partner Paul Strella, the letter “helps focus the regulators on the importance of this issue.”

IRS officials have listed guidance for defined benefit plans closed to new participants as a regulatory priority, but discussions at the staff level have been inconclusive. Calls to the Treasury Department were not returned by press time.

Hazel Bradford writes for Pensions & Investments, a sister publication of Business Insurance.