They have run afoul of nondiscrimination rules because employees who are in them at the point they are closed—called “grandfathered” employees—continue to get raises, making that population in some senses “wealthier” than a company’s general pension population. That’s a particular problem when the defined benefit plan is combined with a defined contribution plan, known as DB/DC. The Treasury proposal is quite complicated. But one of its major benefits to business is that it makes changes to a set of regulations the department approved in 2001 concerning when defined benefit replacement allocations (DBRAs) may be disregarded when determining whether a defined contribution plan has broadly available allocation rates.
“It was imperative that the new rules recognize that the current law nondiscrimination testing regime encourages employers that have closed their defined benefit plans to new participants to stop accruing benefits for those grandfathered in the closed plan,” said Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee (ERIC). “Upon initial review, the proposed rules take important steps to relieve closed plan sponsors from some of the nondiscrimination requirements, while still protecting the employees’ ability to save for retirement.”