Two U.S. senators sent a letter to U.S. Secretary of the Treasury Jacob Lew this past week expressing concern over a regulation that they believe could weaken retirement security for many American workers.
The regulation has to do with not allowing new employees to enroll in defined benefit pension plans and, instead, enrolling them in defined contribution plans. Unfortunately, by doing this, companies may violate a Treasury rule that requires qualified plans to meet nondiscrimination tests.
These tests are intended to enforce a degree of pension benefit parity between higher and lower earning employees. By having most highly compensated employees remain in the DB plan and moving new or lower compensated employees to the DC plan it may trigger these nondiscrimination rules.
Sen. Rob Portman, R-Ohio, and Sen. Ben Cardin, D-Md., asked the secretary to change the rule regarding nondiscrimination testing.
They said in their letter that they fear that companies that fail their nondiscrimination tests “risk losing their pensions’ qualified status, resulting in immediate taxation of their employees’ pension benefits. To avoid this expensive outcome, many companies feel compelled to instead implement a hard freeze that completely closes the defined benefit plan and forces all employees into the new plan.”
They added that, “This is clearly not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into new pension plans that may not provide enough time to accumulate sufficient benefits before retirement.”
The problem came to light recently because many companies have been looking for ways to alleviate some of the liability associated with their defined benefit plans. Many have done what is called a “soft freeze” of their plans, allowing those already in them to stay in them, but closing them to new employees. Of course the people who stay usually make more money than new employees who just started with a company.