IRS Extends Temporary Coverage/Nondiscrimination Testing Relief for Closed Defined Benefit Plans

Franczek P.C.

Under guidance issued in Notice 2015-28, the IRS extended relief from certain coverage/nondiscrimination testing requirements for defined benefit plans that have been closed to new participants but provide ongoing accruals for some or all employees who participated in the plan as of a specified date (often referred to as a “soft freeze”). When defined benefit plans are closed to new participants in this way, nondiscrimination testing issues typically do not show up for at least a few years after the freeze. As time passes and the plan becomes more concentrated with highly compensated employees (typically due to longer-service employees earning more than new employees on average), it becomes more difficult for these plans to satisfy their coverage/nondiscrimination testing requirements under the Internal Revenue Code.

The IRS had previously issued relief from certain testing requirements for closed plans in Notice 2014-5, and Notice 2015-28 simply extends this relief for an additional year. The relief now applies for all plan years that begin before 2017. The IRS is eventually expected to issue regulations under Code Section 401(a)(4) to permanently address this issue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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