Tag Archives: Lynn Yu

Key nondiscrimination provisions of SECURE

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%
35%+ 7.5%
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. 

Administration preparation for lump-sum cashout windows

Yu-LynnMany plan sponsors have offered lump-sum cashout options to vested terminated participants (VTs) for a specified period of time, or window. While this strategy provides pension risk management opportunities, it is important to note that a large number of administrative tasks are necessary before offering such a window. Some of the key steps include:

• Create a timeline that lists target mailing dates, intermediate due dates, and responsibilities of each party involved in the window project. Set up biweekly or monthly calls to update status of each task.
• Estimate the total lump-sum value for all VTs and select a threshold for the lump-sum cap, if any.
• Identify which VTs are eligible for the window. The plan sponsor may want to exclude VTs with a qualified domestic relations order (QDRO) and alternate payees under a QDRO.
• Amend the plan. The amendment should include definitions for the window period, eligible VTs for the window, lump sum and corresponding annuity calculation basis. The treatment of early retirement subsidies, if any should also be addressed.
• Perform death and address searches.
• Find copies of benefit calculations for eligible VTs. This task will take a lot of effort if the eligible VT population is large. Some calculations may need to be revised or newly prepared and will require the rapid availability of data from the plan administrator.
• Prepare communication package including announcement letter, election packages, reminder postcard, etc.

The plan sponsor should coordinate all tasks with the human resources department, the actuary of the plan, and legal counsel before offering the lump-sum cashout window. Advanced planning along with a flexible timeline will allow for a successful window campaign.





Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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HATFA-14 and discount rates: The latest in “pension smoothing” provisions

Yu-LynnOn July 15, 2014, the U.S. House of Representatives voted 367-55 to approve H.R.5021, the Highway and Transportation Funding Act (HATFA-14), which provides funding for the Highway Trust Fund on a short-term basis (through May 2015). HATFA-14 also includes an extension of the “pension smoothing” provisions that had been adopted in the Moving Ahead for Progress in the 21st Century (MAP-21) Act. The bill would extend the MAP-21 funding stabilization provisions for five years (through 2020).

MAP-21 was enacted in July 2012. MAP-21 uses a 25-year average of a bond yield curve, which produces significantly higher rates than the 24-month average used before MAP-21. MAP-21 then imposes the minimum and maximum rate using a 10% corridor around these average rates. The corridor for determining the minimum and maximum rate expands 5% each year, ultimately reaching 30% by 2016.

HATFA-14 revises the minimum and maximum percentage ranges for a plan year as follows:

• 90% to 110% for 2012 through 2017
• 85% to 115% for 2018
• 80% to 120% for 2019
• 75% to 125% for 2020
• 70% to 130% for 2021 or later

The proposals relating to the applicable minimum and maximum rates are generally effective for plan years beginning after December 31, 2012. Under a special rule, an employer may elect, for any plan year beginning before January 1, 2014, not to have these proposals apply either (1) for all purposes for which the proposals would otherwise apply, or (2) solely for purposes of determining the plan’s adjusted funding target attainment percentage in applying the benefit restrictions for that year. A plan will not be treated as failing to meet the requirements of the anti-cutback rules solely by reason of an election under the special rule. By electing out in 2013, plans that have already prepared the 2013 Form 5500 will not be disrupted.

This is great news for plan sponsors who have short-term cash flow issues. Even though the Pension Benefit Guaranty Corporation (PBGC) variable rate premium calculation does not use rates under HATFA-14 relief, there was no PBGC premium increase in this bill, unlike MAP-21. Upon HATFA-14 being enacted, our first course of action will be to revisit 2013 plan year valuations. This should make for more exciting times in the world of pension funding!