Cardin-Portman Act to Protect Retirement Security
WASHINGTON – U.S. Senators Ben Cardin (D-Md.) and Rob Portman (R-Ohio), both members of the Senate Finance Committee, have teamed up to protect the retirement security of many American workers. Their new legislation, the Retirement Security Preservation Act (S. 2855), creates a permanent fix for an unintentional flaw in the way nondiscrimination regulations apply to certain defined benefit pension plans. The legislation would remove possible incentives for companies to hard-freeze the defined benefit pension plans of long-time employees or otherwise refrain from providing compensating benefits for employees whose plans have been frozen.
“Older workers who have been saving for their retirement should not be penalized playing by the rules and planning ahead,” said Senator Cardin. “We need to get back to the original intent of the regulations, which was to encourage greater participation in retirement savings programs.”
“Pension nondiscrimination rules are intended to ensure fairness in company pension plans,” said Senator Portman. “This bill will fix a glitch in the law that inadvertently encourages companies to limit pension opportunities.”
In November 2013, Senators Cardin and Portman wrote to Treasury Secretary Jack Lew expressing concern with the regulation that unfairly penalizes employers that engaged in “soft freezes” of their defined benefit pension plans. “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 senators wrote.
In response, the IRS released guidance, IRS Notice 2014-5, which provides temporary nondiscrimination relief for employers that have undertaken “soft freezes.” The notice permits certain employers that have “soft frozen” their defined benefit plans and who also have a defined contribution plan in place to demonstrate that the aggregated defined benefit and defined contribution plans comply with the nondiscrimination requirements on the basis of equivalent benefits, even if the plan does not meet any of the existing eligibility conditions for testing on that basis.
“Soft freezes” allow existing employees to continue to accrue benefits in a company’s defined benefit plans, while newer employees are placed in a defined contribution plan. “Soft freezes” have the potential to cause plans to inadvertently violate the regulation mentioned above, which requires plans to comply with certain nondiscrimination testing requirements. This is because, when a defined benefit plan is “soft frozen,” the number of highly-compensated employees grandfathered into that plan impermissibly rises over time, as no new employees join the defined benefit plan.
S. 2855 would provide that a pension plan does not fail the section 401(a)(4) nondiscrimination rules, or the minimum participation requirement in section 401(a)(26), provided the composition of the closed class of participants in the plan meets certain requirements. Those requirements include:
- The closed class satisfied the rules as of the date the class was closed (including the nondiscrimination rules for benefits, rights, and features offered to the closed class).
- After the closing date, any plan amendments that modify the closed class (or benefits, rights and features provided to the class) satisfy the nondiscrimination rules.
A plan is a qualified plan only if the contributions or benefits provided do not discriminate in favor of highly compensated employees. The bill would provide special rules in the case of an amendment that does not satisfy the second requirement and for defined contribution plans that are tested with the closed plan.
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