The ERISA Industry Committee has come out in support of proposed legislation that would provide relief from ongoing nondiscrimination testing for frozen defined benefit plans.
The proposed legislation was introduced this summer by Pat Tiberi, R-Ohio, chairman of the House Ways and Means Subcommittee on Select Revenue Measures.
Nondiscrimination tests are intended to assure that companies that claim the tax credits for sponsoring defined benefit plans do so in an equitable way, so that benefits are evenly distributed between higher earners and lower earners in the plan.
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But as plans freeze, and new, lower-earning hires are moved to defined contribution plans, frozen plans become susceptible to failing nondiscrimination tests.
That's because participants that remain in the plan tend to move up the corporate ladder, earning more in salary, and consequently, more in pension benefits.
With fewer lower earners enrolled, and as many of the remaining participants in a frozen DB plan earn more benefits, plans appear to be designed in favor of higher-earning employees.
That can place limitations on how frozen plans are funded, or can even result in a plan losing its qualified status, potentially creating a massive tax liability.
According to a news release from ERIC, Tiberi's legislation would protect older, longer-serving employee participants by allowing new standards of nondiscrimination testing for frozen plans.
"It is critical that the funding rules associated with defined benefit plans be reasonable, consistent and provide flexibility while maintaining high fiduciary standards and responsible financial commitments," said Kathryn Ricard, ERIC's vice president for retirement policy.
"Common-sense funding rules are imperative to address the pressures of changing economic conditions and the growing competition by international companies," she added.
Recently, Judy Diamond Associates, a retirement plan data publisher and a division of BenefitPro's parent company, Summit Professional Networks, found that 57,277 401(k) plans failed their most recent nondiscrimination tests.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
