Prudential Retirement has issued a compliance advisory regarding new proposed regulations from the IRS on nondiscrimination rules for closed retirement plans and ongoing plans providing grandfathered benefits to closed groups of employees.
While the rules were proposed in January, the advisory said that the IRS has made changes to them in response to comments from plan sponsors and trade associations.
Currently both defined contribution and defined benefit plans must satisfy nondiscrimination rules, but closed plans and grandfathered benefits in ongoing plans must continue to satisfy rules in nondiscrimination in amount and nondiscriminatory availability.
Demographic changes occurring over time in closed plans can result in changing populations of nonhighly compensated employees and highly compensated employees that can affect the results of cross-testing — the combination of a closed plan with an ongoing defined contribution plan with the resulting aggregate being cross-tested for its benefits — that’s currently allowed under special temporary rules.
Modifications to the proposed new cross-testing rules are applicable to defined benefit replacement ratios, which allow certain defined contribution plan allocations to be disregarded when determining whether a defined contribution plan has broadly available allocation rates.
The rules applicable to defined benefit replacement ratios allow employers to provide, in a nondiscriminatory manner, certain allocations to replace defined benefit plan retirement benefits without having to satisfy the minimum allocation gateway. The changes are intended to allow more allocations under the defined benefit replacement ratios rules, as long as the allocations are provided in a consistent manner to all similarly situated employees.
What the changes woud allow
The proposed rules expand the list of permitted amendments to a closed plan that do not prevent allocations under a plan from being defined benefit replacement ratios. For example, the proposed rules permit an amendment to a closed plan during the five-year period before it was closed, provided the amendment does not increase the accrued benefit or future accruals for any employee; expand coverage; and reduce the ratio-percentage under any applicable nondiscrimination test.
In addition, under the proposed rules, an amendment during this period could extend coverage to an acquired group of employees on condition that all similarly situated employees within that group are treated in a consistent manner.
For closed defined benefit plans, under certain conditions a permanent exception to nondiscriminatory availability testing for any type of closed defined benefit plan may be available, provided the plan can meet certain eligibility requirements.
The advisory suggests that sponsors that maintain closed or frozen plans should discuss the impact of the guidance on their plans with their enrolled actuary and their plan counsel, particularly since the regulations are not yet final and could still change.
Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.
Your access to unlimited BenefitsPRO content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.