As Congress headed out of town for the August recess, retirement’s “Dynamic Duo” have teamed up on legislation designed to help stave off nondiscrimination testing issues for frozen defined benefit plans.
U.S. Senators Rob Portman (R-OH) and Ben Cardin (D-MD), both members of the Senate Finance Committee, have introduced the Retirement Security Preservation Act of 2019 (RSPA). They note that the bill “amends and modernizes” the pension nondiscrimination rules that apply to these single-employer pension plans “to protect over 450,000 older, longer-serving workers from having their benefits frozen by the end of the year through no fault of their own.”
In announcing the legislation, the Senators note that when a defined benefit plan closes, existing participants or a subset of participants continue to earn benefits under the traditional DB plan. When a plan is “hard frozen,” employees earn no new benefits under the plan.
However, over time, existing employees in the closed plan typically build seniority and become more highly compensated than younger, newer employees, who are more likely to have greater job turnover. This widens the income gap between the employees in the closed plan and the new employees, and because the grandfathered group in the closed plan generally becomes more highly compensated, closed plans almost always end up inadvertently violating the IRS nondiscrimination testing rules.
“This clearly is not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into different types of plans that may not provide enough time to accumulate sufficient benefits before retirement,” they write.
The legislation addresses the problem by amending and updating the nondiscrimination rules to protect older workers in plans that have been closed or frozen. The bill protects the benefits, rights and features of employees in closed defined benefit plans, and contains anti-abuse rules related to closed and frozen plans.
The announcement notes that the legislation is based on H.R. 5381 and S. 2855, which were introduced in the 113th Congress, but that since the introduction of those bills, Treasury has proposed regulations that partially address these issues, but only for a certain subset of affected plans. Consequently, they note that the RSPA incorporates elements of the Treasury regulations and provides targeted relief to plans who are not be able to take advantage of the Treasury regulations (similar standalone legislation was introduced by Cardin and Portman in 2014, 2016 and 2017).
The bill not only builds on previous legislation and regulatory work to address this issue, but is included in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which passed the House by a 417-3 vote earlier this year – though it’s not yet been acted on in the U.S. Senate.