Nondiscrimination (Part 4): Time for employers to brush up again on nondiscrimination testing?

Many employers have modified their traditional defined benefit (DB) plans by moving to a “soft frozen” plan (or “closed” plan), where the existing participants continue to accrue benefits, but plan participation is closed to new employees. One common design is to maintain the DB plan for a closed group of employees and to establish or enhance a defined contribution (DC) plan for newer (and future) employees. In Part 2 of our earlier series on nondiscrimination testing, we explored the issues faced by a typical plan sponsor electing this route.

As an example of how circumstances change, many years ago Employer F permitted a “grandfathered” group of longer-service employees to continue accruals under its DB plan, and established a profit-sharing plan for all of the remaining employees. New employees joined the profit-sharing plan when eligible. At the time of the program change, the plans met the three main nondiscrimination tests, which are:

• Participation (only applicable to the DB plan)
• Coverage
• Benefits

A number of years have passed since the change, and the DB plan population has now declined and become more heavily weighted toward highly compensated employees (HCEs). The DB plan is no longer passing the 70% ratio percentage test, and is currently meeting the coverage requirement via the more complex average benefits test. Employer F is concerned that the average benefits test is in danger of failing in the near future, and is now looking for alternative ways to ensure that the DB plan continues to meet the coverage requirements.

In many circumstances, the nondiscrimination rules will currently allow plan sponsors to consider two or more plans to be a single combined (or “aggregated”) plan for purposes of meeting the coverage and benefit requirements (but not the participation requirements). If this is done for a DB plan and a DC plan, the combined plan is known as a “DB/DC” plan.

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Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Compliance questions on the 2015 and 2016 Form 5500-series returns
The Internal Revenue Service (IRS) added compliance questions to Forms 5500, 5500-SF, 5500-EZ as well as Schedules H, I and R. The IRS has decided that filers should not answer these questions for the 2015 and the 2016 plan years when completing the forms.

For more information, click here.

Proposed Form 5500 revisions seek new retirement plan details

ERISA-covered retirement plan sponsors would be required to provide significantly detailed information about their plans when filing the Form 5500 (Annual Return/Report of Employee Benefit Plan), under a proposed rule from the Department of Labor (DoL), along with a separate proposed rule issued jointly by the DoL, Treasury/IRS, and the Pension Benefit Guaranty Corporation. (For simplicity, this Client Action Bulletin refers to both sets of rules as the DoL’s proposed rule.)

The DoL’s proposal, which affects only ERISA-covered plans, would amend the reporting and disclosure requirements applicable to all employee benefits, but this CAB focuses on the key revisions applicable to defined contribution (DC) and defined benefit (DB) retirement plans, including certain small plans (with fewer than 100 participants) that newly would be required to file certain information. (See CAB 16-5 for the proposed rule’s effects on group health plans.)

The DoL seeks comments on the proposed rule by Dec. 5, 2016; if adopted, the DoL anticipates applying the new requirements to plan years starting in 2019 (i.e., forms filed in 2020). The IRS, however, proposes that retirement plan sponsors answer certain compliance-related questions about the plans for the 2016 plan year when filing the Form 5500 in 2017.

Corporate pension funded status improved by $19 billion in September

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced a $19 billion improvement in funded status primarily due a $24 billion decrease in pension liabilities. The funded status for these pensions inched upward from 75.6% to 76.3%.


It had been a lousy quarter for pension funding but this month made up for it. These plans are still down by $130 billion for the year, largely due to ballooning liabilities, but at least September ended with discount rates rising by 10 basis points, in a year where we’ve otherwise seen discount rates mostly decline.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.57% by the end of 2016 and 4.17% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 79% by the end of 2016 and 91% by the end of 2017. Under a pessimistic forecast (3.27% discount rate at the end of 2016 and 2.67% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2016 and 68% by the end of 2017.

Fifth annual Milliman Public Pension Funding Study finds funded status for 100 largest public pension plans drops below 70%

Sielman-BeckyMilliman today released its fifth annual Public Pension Funding Study, which consists of the nation’s 100 largest public defined benefit pension plans and analyzes these plans from both a market value and an actuarial value perspective. A year with returns of just 1.31% and increasing liabilities pushed the funded status for these 100 plans below 70%. We estimate that between the plan sponsors’ most recent measurement dates and June 30, 2016 total plan assets decreased from $3.24 trillion to $3.20 trillion, while the liability grew from $4.43 trillion to $4.58 trillion, resulting in a deficit of $1.38 trillion at June 30th.

For the last few years we’ve noticed public pensions hunkering down and lowering assumed rates of return. That trend continued this year, and it’s not about to abate any time soon. The gap between sponsor-reported assumptions and our independently-determined assumptions is the biggest we’ve seen, which indicates that rates still have a ways to go down and plan sponsors will face continuing pressure to reduce their interest rate assumptions.


Historically, assumptions of 8.50% were commonplace, but as of this year more than half of these plans have assumptions that are 7.50% or lower. Twenty-five of these 100 plans lowered their assumptions in the last year, and 58 have lowered their assumptions since Milliman began publishing this study in 2012.

To view the complete study, click here. To receive regular updates of Milliman’s pension funding analysis, email us.

IRS adds flexibility to rollover timing

Moen-AlexOn August 24, 2016, the Internal Revenue Service (IRS) released Rev. Proc. 2016-47, allowing quicker and easier relief of the existing 60-day rollover rule for retirement plans, including 403(b) and governmental 457 plans and IRAs. In the past, under Rev. Proc. 2003-16, an individual had to submit for a private letter ruling requesting a waiver of the 60-day rule and await a response before proceeding with the rollover. The request for waiver via private letter ruling from the IRS is not free; in 2016, an individual may be required to pay up to $10,000 for the waiver. Under Rev. Proc. 2016-47, an individual can proceed with the rollover, at no cost, as long as he or she self-certifies the reason for the delay.

The revenue procedure provides a sample letter that can be supplied to the plan administrator or financial institution, and allows an individual to submit a request for waiver as long as the IRS has not already issued a denial. There are 11 acceptable reasons for waiver of the 60-day rule, including:

• The financial institution made mistakes or did not supply needed information when requested
• A lost check or postal service errors
• An IRS levy
• The check was deposited into an account incorrectly believed to be a retirement plan or IRA
• Personal reasons: family death or illness/disability, natural disaster, incarceration, or foreign country restrictions

If none of the above situations apply, a person can still use the old private letter ruling process to request relief.

As expected, there are timing conditions associated with the self-certification. An individual must complete the rollover contribution “as soon as practicable” after the reasons that caused the delay in the first place are no longer present. The revenue procedure refers to this as the 30-day safe harbor.

What happens if it is discovered during an IRS audit that the waiver is not accepted? The individual would receive additional income and be required to pay the taxes and, potentially, penalties.

This new rule reduces the burden on plan administrators, trustees, and custodians to verify the legality of the rollover. In addition, the ruling simplifies procedures for the individual because the rollover can be processed efficiently, without having to wait for an IRS review of the situation and response letter.

Plan sponsors, you may be wondering if there is any action you need to take, or if this is even relevant to you. The answer is no. This is simply for your reference in case a participant asks whether the 60-day rollover rule has any exceptions. I’ve found that with some of our smaller clients, plan sponsors receive a variety of questions and become more involved in assisting participants with the distribution process. You may get a question about this new Rev. Proc. from a participant and after reading this, hopefully, you are more equipped to assist them.