U.S. Senators Ben Cardin (D-Md.) 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-Mass.), both members of the House Ways & Means Committee, introduced updated legislation Wednesday designed to protect the retirement security of many American workers. The Retirement Security Preservation Act of 2016 (RSPA) amends the nondiscrimination rules that apply to qualified retirement plans to protect older, longer-service participants whose defined benefit plans have been closed or frozen. The bill builds on previous legislation and regulatory work to address this issue, and was approved unanimously by the Senate Finance Committee as part of a retirement-related legislative package in September.
“Older workers who have been saving for their retirement should not be penalized playing by the rules and planning ahead,” said Senator Cardin. “We need to get back to the original intent of the regulations, which was to encourage greater participation in retirement savings programs.”
“This measure will help safeguard the retirement security of hundreds of thousands of working families who are counting on their pension benefits in their retirement,” Senator Portman said. “There is strong bipartisan support for this measure in both the House and Senate, and both chambers should pass it quickly so it can be signed into law.”
“This common sense fix will go a long way to protect retirement and pension plans for older Americans,” said Congressman Tiberi. “The Retirement Security Preservation Act would give certainty to employers and prevent their longer-service employees from unfairly losing their pension benefits due to the IRS’s nondiscrimination rules.”
“I have always believed that helping Americans achieve retirement security in their golden years should not be a partisan issue. And this common sense legislation that enjoys support on both sides of the aisle would immediately protect the retirement nest eggs for millions of households. The Congress should vote on this important retirement savings measure at the earliest opportunity,” said Congressman Neal.
Over the past several years, many companies have transitioned from “traditional” defined benefit (DB) plans to other retirement plan models, such as defined contribution (DC) plans. In doing so, a large number of these companies have elected to grandfather existing employees by closing their traditional DB plans (also known as “soft freezing”); other companies have “hard frozen” their traditional DB plans but assisted existing employees in other ways, such as through enhanced DC plan contributions. When a plan closes, existing participants or a subset of participants continue to earn benefits under the traditional 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. This clearly is not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into different types of plans that may not provide enough time to accumulate sufficient benefits before retirement.
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. The legislation is based on H.R. 5381 and S. 2855, which were introduced in the 113th Congress. Since the introduction of those bills, Treasury has proposed regulations that partially address these issues, but only for a certain subset of affected plans. The RSPA incorporates elements of the Treasury regulations and provides targeted relief to plans who are not be able to take advantage of the Treasury regulations.
A summary of the bill can be found here. Bill text can be downloaded here.