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Frozen 2: IRS Expands Nondiscrimination Relief for Frozen Defined Benefit Pension Plans

The Internal Revenue Service (IRS) expanded the temporary relief for frozen defined benefit plans to include nondiscrimination requirements relating to benefits, rights and features, available for plan years beginning before 2021. The expanded relief enables frozen pension plans to satisfy the nondiscrimination requirements that apply to benefits, rights or features.

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The Internal Revenue Service (IRS) expanded the temporary relief for frozen defined benefit plans to include welcome relief from nondiscrimination requirements relating to benefits, rights and features. “Frozen” (or “closed”) pension plans are plans that have been closed to new participants but continue to provide benefit accruals for certain participants. Under the recently issued IRS Notice 2019-60, this new temporary relief is available for plan years beginning before 2021.

The expanded relief enables pension plans to satisfy the nondiscrimination requirements that apply to benefits, rights or features. Generally, benefits, rights and features must be available to a group of employees that satisfies minimum coverage requirements and does not substantially favor highly compensated employees. Frozen pension plans often struggle to meet these nondiscrimination requirements if the frozen plan offers benefits, rights and features not provided under the other pension formulas or under other retirement plans of the employer.

In most cases, the expanded relief provides that a pension plan frozen prior to December 13, 2013, will be deemed to satisfy the nondiscrimination rules for benefits, rights and features, provided that either: (a) the employer did not amend the plan after January 29, 2016, to expand or restrict the eligibility for the benefit, right or feature; or (b) if the employer did adopt such an amendment, the amendment did not favor highly compensated employees.

The IRS originally provided temporary nondiscrimination testing relief for frozen pension plans in Notice 2014-5. The IRS repeatedly extended this relief, most recently in Notice 2019-49 as covered in our earlier blog post, and has now expanded the relief to apply to nondiscrimination requirements for benefits, rights and features. Many are advocating for legislation to permanently fix this issue by shielding frozen defined benefit pension plans from unintended nondiscrimination rule violations. The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), which includes nondiscrimination reform provisions, passed the US House of Representatives on May 21, 2019, but it is still pending in the US Senate. The IRS issued proposed regulations on this topic in 2016, but those regulations have not been finalized.

© 2020 McDermott Will & Emery

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About this Author

Diane M. Morgenthaler, Corporate Tax Planning Attorney, Retirement Plans for Companies, McDermott Will Emery, Chicago Law Firm
Partner

Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation.

Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in...

312-984-7676
Partner

Alan D. Nesburg is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  He focuses his practice on a wide range of employee benefit matters, including qualified pension and profit-sharing plans, deferred compensation, and group benefits programs.  His clients include both public and private businesses.

312 984 7642
stepanovic, chicago, associate
Associate

Rick Stepanovic focuses his practice on employee benefits and executive compensation matters. He has experience working on matters related to tax-qualified pension plans, health and welfare plans, and deferred compensation arrangements. He also has experience handling correction and administrative matters before the Internal Revenue Service and the Department of Labor.

While in law school, Rick was the Managing Editor of the Michigan Journal of Environmental and Administrative Law. He previously worked as a law clerk in the US Attorney’...

312-984-2054