Qualified retirement plans, such as defined benefit pension plans and defined contribution profit sharing plans, are subject to special nondiscrimination rules under which plan benefits cannot discriminate in favor of highly compensated employees. For defined contribution plans, discrimination is measured, generally, based on the contributions for the year to the highly compensated employees compared to the contributions for the year to the nonhighly compensated employees. For defined benefit plans, the benefits accrued for nonhighly compensated and highly compensated are completed using actuarial calculations or applying safe harbor benefit formula tests.
If a qualified retirement plan was amended to close the eligibility after a stated date, and the plan is winding down but continuing to accrue benefits, eventually there may not be enough nonhighly compensated employees in the eligible group of employees. For a defined contribution plan, the employer might have to amend the plan to halt contributions to the highly compensated employees to satisfy the nondiscrimination rules. For a defined benefit pension plan, the employer might have to halt benefit accruals.
Because shutting down the benefits for the closed group of employees may not be in line with the employer’s original promise to those employees, IRS Notice 2014-5 provided relief for such closed plans, treating them as continuing to be nondiscriminatory if the plan was nondiscriminatory when it was closed before Dec. 13, 2013 or if an aggregate of the pension plan and a new defined contribution plan satisfies certain rules provided in Notice 2014-5.
The Notice gave temporary protection to these plans. The IRS has extended this special nondiscrimination protection each year since Notice 2014-5 was issued. In Notice 2018-69, the IRS has further extended the protection until plan years beginning before 2020.