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Legislation Would Amend Section 401 Nondiscrimination Rules

Legislation that would amend the nondiscrimination rules applicable to retirement plans to protect older plan participants and those with longer-term service whose employers have closed or frozen their pension plans is now before both chambers of Congress.

H.R. 6335, the Retirement Security Preservation Act of 2016 (RSPA), was introduced by Rep. Patrick Tiberi (R-Ohio) on Nov. 16; Sen. Ben Cardin (D-Md.) introduced the Senate version, S. 5, on the same day. The House bill is before the House Ways and Means Committee; the Senate companion is before that chamber’s Finance Committee. Sen. Orrin Hatch (R-Utah) introduced a related measure, S. 3471, the Retirement Enhancement and Savings Act of 2016 (RESA), on the same day as the other bills; RESA is now on the Senate’s legislative calendar.

The RSPA would add a new subsection to Internal Revenue Code Section 401 that creates special rules for applying nondiscrimination rules to protect older, longer-service and grandfathered plan participants. It says that a defined benefit plan which provides benefits, rights or features to a closed class of participants shall not fail to satisfy the requirements of Section 401(a)(4) because of the composition of such a closed class or the benefits, rights or features provided to such a closed class, if:

  1. 1. for the plan year as of which the class closes and the two succeeding plan years, such benefits, rights, and features satisfy the requirements of Section 401(a)(4);

  1. 2. after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits, rights, and features provided to such closed class does not discriminate significantly in favor of highly compensated employees (HCEs); and

  1. 3. the class was closed before Sept. 21, 2016, or the plan is described in subparagraph (C).


The legislation also says that for purposes of determining compliance with Sections 401(a)(4) and 410(b), a DB plan whose class was closed before Sept. 21, 2016, or that is described in subparagraph (C) may be aggregated and tested on a benefits basis with one or more defined contribution plans, including with the portion of one or more DC plans which:

  1. 1. provides matching contributions (as defined in Section 401(m)(4)(A));

  1. 2. provides annuity contracts described in Section 403(b) which are purchased with matching contributions or nonelective contributions; or

  1. 3. consists of an employee stock ownership plan as defined by Section 4975(e)(7) or a tax credit employee stock ownership plan as defined by Section 409(a).


Regarding matching contributions as defined in Section 401(m)(4)(A), the RSPA says that if a DB plan is aggregated with a portion of a DC plan providing matching contributions:

1. the DB plan must also be aggregated with any portion of the DC plan which provides elective deferrals described in subparagraph (A) or (C) of Section 402(g)(3); and
2. such matching contributions shall be treated in the same manner as nonelective contributions, including for purposes of applying the rules of subsection (l).

The RPSA also addresses nondiscrimination testing of DC plans. It contains provisions concerning:

  • the circumstances under which a DC plan may be tested on a benefits basis;

  • aggregation with plans that include matching contributions;

  • special rules for testing DC plan features providing matching contributions to certain older, longer-service plan participants; and

  • spun-off plans.

The legislation also contains provisions that amend the Internal Revenue Code regarding:

  • determination of substantial increases in coverage or benefits for purposes of aggregate testing on benefits basis;

  • increases in coverage or value or in coverage or benefits, whichever is applicable, and which are attributable to such coverage and value or coverage and benefits provided to employees;

  • average benefits provided to participants under the plan;

  • when a plan described in Section 413(c) shall be treated as a single plan rather than as separate plans maintained by each participating employer; and

  • what happens when certain DB plans are spun off to another employer and the spun-off plan continues to satisfy the certain Internal Revenue Code requirements.