4 6 17 hr1962 s852 support letter final 2

Published

April 06, 2017

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This joint letter was sent to all members of Congress supporting H.R. 1962 and S. 852, companion bills that would amend the nondiscrimination provisions of the Internal Revenue Code of 1986 to allow plan sponsors to protect current employees when transitioning from a defined benefit plan to a defined contribution plan.

April 6, 2017

Dear Members of the U.S. House of Representatives and the U.S. Senate:

The undersigned organizations support H.R. 1962/S. 852, companion bills introduced by Representative Pat

Tiberi (R-OH), Ranking Member Richie Neal (D-MA), Senators Rob Portman (R-OH) and Ben Cardin (D-MD),

to amend the nondiscrimination provisions of the Internal Revenue Code of 1986 to protect older, longer

service participants in employer-sponsored pension plans.

Many companies are transitioning from a defined benefit (DB) pension plan to a defined contribution (DC)

pension plan. In the context of such transitions, it is not unusual for companies to grandfather some or all of the

existing employees under the benefit formula in effect. A common example is to close a traditional pension

plan to new workers (who often receive an additional contribution under the company’s DC plan), while

allowing existing employees to continue to participate in the plan. This is typically known as a “soft freeze”.

This type of freeze can help those existing employees realize very significant benefits that are provided by a

DB formula late in an employee’s career.

Since many employers have implemented a “soft freeze” in recent years, but provide grandfathering

arrangements to protect longer service employees, these plans are confronted with the prospect of failing

nondiscrimination testing requirements over time. Such failure is primarily due to the fact that, with attrition, the

employees who remain covered under the DB plan become proportionately higher paid and, in general, have

longer tenure under the plan.

Unfortunately, as a practical matter, in the vast majority of cases, the most workable solution to the testing

problem described above is to (1) remove some or all of the highly compensated employees from the DB plan,

or (2) more likely, “hard freeze” the plan so that no further benefits are earned. This is an unfortunate result for

DB plan participants who will lose the most beneficial years for accruing benefits.

H.R. 1962 and S. 852 offer an alternative solution that would modify the nondiscrimination rules to allow plan

sponsors to protect current employees when transitioning from a DB to a DC plan structure.

Specifically, under certain circumstances, if a group of employees is grandfathered under a DB plan (i.e.,

allowed to continue to accrue a benefit after the plan is closed to new entrants) and that plan is permitted to be

tested together with the DC plan on a benefits basis either when the DB plan was closed to new hires or at a

later date, the DB plan would continue to be permitted to be tested in the same way permanently (unless the

group or the benefit formula applicable to the group is changed in a discriminatory manner). This would prevent

these frozen plans from unintentionally violating the nondiscrimination rules and thus effectively forcing the

employer to stop all pension benefits.

The undersigned organizations encourage your support of H.R. 1962/S. 852.

Sincerely,

American Benefits Council

ArcelorMittal USA LLC

Caterpillar Inc.

Financial Services Roundtable

Finance Executives International (FEI)

The ERISA Industry Committee

Owens-Illinois, Inc.

Ford Motor Company

National Association of Manufacturers

Principal

Raytheon Company

Society for Human Resource Management

U.S. Chamber of Commerce

4 6 17 hr1962 s852 support letter final 2