There’s no question that traditional defined benefit (DB) pension plans that guarantee retired employees a set benefit each month are becoming a thing of the past. Data from Towers Watson shows that less than one third of Fortune 100 companies offer any DB plan to new salaried hires, down from 90% offering some sort of DB plan in 1998. There are a number of reasons for this shift, from the rise in popularity of 401(k) and other defined contribution (DC) plans, to the costs and risk associated with maintaining DB plans. Now, regulations on nondiscrimination testing promise to accelerate the demise of traditional pension plans for some companies.
As companies began moving from traditional pension plans to 401(k)-type plans, many implemented a “soft freeze” where the pension plan was closed to new hires, but existing employees were still able to participate in the plan. Over time, as the group of eligible employees becomes more highly compensated and rise up the ranks, many companies are coming dangerously close to inadvertently tripping IRS nondiscrimination testing rules designed to prevent plans from discriminating in favor of highly compensated employees. While arguably employers can engage in complex methods to delay the tipping point, the unfortunate truth is that the simplest and surest way to avoid the nondiscrimination problem permanently is to freeze the plan completely for all employees.
Manufacturers know their employees count on their pension for financial security in their retirement years, which is why the NAM is fighting for a solution. Earlier this year, the NAM submitted comments to the Ways & Means Tax Reform Working Group on Pensions/Retirement asking for a fix to clarify that if a plan passes the nondiscrimination test at the time of the freeze, the plan would be deemed “passed” thereafter. This solution would give companies adequate time to transition between traditional pensions and defined contribution plans, allowing long-serving employees who are close to retirement to maintain their current benefits.
Just this week, Congressmen Pat Tiberi (R-OH), Richard Neal (D-MA), and 26 other members of the House Ways and Means Committee sent a letter to the Treasury Department asking them to review the nondiscrimination testing rule and to address the issue affecting companies as soon as possible. The NAM thanks the Members of Congress who signed on to the letter for their leadership and urges Treasury to address this problem before this regulation forces companies to completely close their pension plans.
Before joining the NAM, Crooks served as senior manager of government affairs for Financial Executives International, where she advocated on behalf of the association’s membership of senior-level business executives on tax, corporate treasury, pension and benefit issues. Previously, she worked as a legislative assistant to Rep. Michael Castle (R-DE), a senior member of the House Committee on Financial Services. Christina handled financial services issues for the Congressman during consideration of the Dodd-Frank Act, and also worked on small business and judiciary issues. Christina earned a B.A. in Political Science from the University of Delaware and a M.A. in Political Science from American University.
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