U.S. Senators Ben Cardin (D-Maryland) and Rob Portman (R-Ohio), both members of the Senate Finance Committee, and U.S. Representatives Pat Tiberi (R-Ohio) and Richard E. Neal (D-Massachusetts), both members of the House Ways & Means Committee, introduced updated legislation —The Retirement Security Preservation Act of 2017 (RSPA)—amending the nondiscrimination rules that apply to defined benefit (DB) plans that have been closed or frozen.
The bill builds on previous legislation and Internal Revenue Service (IRS) regulations to address this issue, and was approved unanimously by the Senate Finance Committee as part of a retirement-related legislative package in September 2016.
Over the past several years, many companies have transitioned from DB plans to other retirement plan models. When a plan is “soft closed,” existing participants or a subset of participants continue to earn benefits under the DB plan. When a plan is “hard frozen,” employees earn no new benefits under the plan.
Over time, existing employees in the closed plan typically build seniority and become more highly compensated than younger, newer employees, who are more likely to have greater job turnover. This widens the income gap between the employees in the closed plan and the new employees.
Because the grandfathered group in the closed plan generally becomes more highly compensated, closed plans almost always end up inadvertently violating the IRS nondiscrimination testing rules.
The RSPA addresses the problem by amending the nondiscrimination rules to protect older workers in plans that have been closed or frozen. The bill also contains anti-abuse rules related to closed and frozen plans.Text of the bill may be found here.