On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law as part of the Further Consolidated Appropriations Act, 2020. Most SECURE provisions are for defined contribution (DC) pension plans. However, the SECURE Act also provides relief for the nondiscrimination and minimum coverage requirements applicable to closed defined benefit (DB) pension plans. This is good news for plan sponsors who wish to continue providing accruals in closed DB plans. The relief generally falls into one of two categories: (1) deemed compliance, and (2) additional testing flexibility under the coverage and nondiscrimination regulations for those situations that will require continued testing.
Below are some key provisions related to the nondiscrimination testing requirements under Treasury Regulation 1.401(a)(4) that are modified by the SECURE Act:
- A closed DB plan can be aggregated with a DC plan for testing on a benefits basis without satisfying a gateway requirement.1 Prior to the enactment of the SECURE Act, the high cost to meet a gateway could lead to premature plan freezes. The closed group needs to meet the following requirements for testing relief:
- For the plan year in which the closed group closes and the two succeeding plan years, the plan meets the coverage and nondiscrimination requirements of 410(b) and 401(a)(4)
- After the date the closed group was closed, any plan amendment that modifies the closed group or the benefits does not significantly discriminate in favor of highly compensated employees (HCEs)
- The closed group was created before April 5, 2017, or the plan has been in effect for at least five years as of the date the closed group is created and there has not been a substantial increase in the coverage or value of the benefit, right, or features (BRFs)
- Matching and nonelective contributions in a 401(k) or a 403(b) plan can be used in the general test;2 further, matching contributions can be treated as if they are nonelective contributions.
- DC plans with different plan years are allowed to be aggregated with a DB plan.
- DC plans with different BRFs are allowed to be aggregated with a DB plan.
- A closed DB plan is deemed to satisfy the nondiscrimination requirements for BRFs under 1.401(a)(4)-4 if the plan meets the requirements as noted above.
- A closed DB plan is deemed to satisfy the requirements for minimum participation3 under §401(a)(26) if the plan amendment was adopted prior to April 5, 2017:
- To cease all benefit accruals
- To provide future benefit accruals only to a closed group
Prior to the SECURE Act, the Internal Revenue Service (IRS) had provided regulatory guidance that was meant to alleviate some of the difficulties in satisfying these technical tests. While plan sponsors appreciated the effort, the regulatory guidance was temporary and limited, which is why the SECURE Act addressed these issues. During the last few years, plan sponsors had implemented some or all of following changes to their DB plans to meet the nondiscrimination and minimum coverage requirements:
- Provided additional nonelective contributions under the DC plan at a potentially significant cost to employers in order to continue DB accruals
- Extended participation in the DB plan for some non-HCEs who were previously not eligible under the plan
- Froze accruals for participants who are HCEs
- Froze accruals for all participants under the plan
Plan sponsors can elect to apply the relief provisions of the Secure Act retroactively for plan years beginning after December 31, 2013. However, in certain situations, the plan document must be formally amended. Plan sponsors may amend their plans to provide previously eliminated BRFs or to provide benefit accruals to a closed group if a sponsor is forced to change a plan because of prior testing limitations that were relieved as a result of the SECURE Act.
1 The minimum aggregate allocation gateway, as described under Treasury Regulation §1.401(a)(4)-9(b)(2)(v)(D), requires each benefiting non- HCE to receive aggregate benefits from the combined DB/DC plan at a minimum level determined by the highest benefiting HCE as follows:
|Highest value of combined DB/DC benefits for a HCE||Minimum value provided to each non-HCE benefiting under the combined DB/DC plan|
|Less than 15%||1/3 of the value to the highest benefiting HCE|
|15% to 25%||5%|
|25% to 30%||6%|
|30% to 35%||7%|
A plan is permitted to treat each non-HCE who benefits under the DB plan as having the same value of benefits under the DB plan by replacing the individual DB benefit by the average of benefits for all non-HCEs. The individual DC benefit value (if any) is then added to the average DB value for non-HCEs to determine whether the gateway requirement above has been passed.
2 The nondiscrimination regulations outline “safe harbor” formulas for providing benefits in a DB plan, or participant allocations in a DC plan. If the benefits or allocations are not provided using a safe harbor approach, then the benefits or allocations are subject to the general test in order to demonstrate that the benefits do not discriminate in favor of HCEs.
3 Minimum participation rules under §401(a)(26) require a DB plan to benefit the lesser of 50 employees or 40% of all employees within a controlled group.