Over the last ten years or so, many employers have implemented a “soft freeze” for their defined benefit pension plans by closing the pension plans to new participants while existing participants continue to accrue benefits. Often this soft freeze is accompanied by new or increased employer contributions to a defined contribution plan. Employers that close defined benefit plans in this manner can face difficulty passing certain IRS coverage and nondiscrimination tests, and employers sometimes consider ceasing accruals altogether in the defined benefit plan instead. In response to numerous requests for relief from the nondiscrimination rules, this week the IRS issued an advance copy of Notice 2014-5. The Notice provides temporary relief for sponsors of closed defined benefit plans who aggregate such plans with their defined contribution plans.
 
When a defined benefit plan undergoes a soft freeze, it can become increasingly difficult over time to satisfy IRS coverage requirements under Section 410(b) of the Internal Revenue Code. This issue occurs because the number of highly compensated employees in the closed group still accruing benefits tends to increase as nonhighly compensated employees become highly compensated with raises in compensation, while the number of nonhighly compensated employees tends to decrease with turnover and movement into the highly compensated group. In order to satisfy the coverage requirement, the defined benefit plan must be aggregated with the employer’s defined contribution plan for testing purposes. The defined benefit plan then also must be aggregated with the defined contribution plan for nondiscrimination requirements under Section 401(a)(4) of the Internal Revenue Code. However, it is typically difficult for the two plans to satisfy the nondiscrimination requirements on the basis of equivalent benefits.
 
Under the temporary relief offered by IRS Notice 2014-5, defined benefit plans that implemented a soft freeze before December 13, 2013 and meet certain other requirements can demonstrate compliance with the Section 401(a)(4) nondiscrimination requirements on the basis of equivalent benefits, even if they do not satisfy the existing eligibility conditions for testing on that basis. The IRS is requesting comments regarding permanent changes to the regulations and alternative approaches for meeting the nondiscrimination rules. Comments must be received by February 28, 2014.