March 11, 2020

The SECURE Act: Long- Awaited Relief for Defined Benefit Plans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law on Dec. 20, 2019 by President Trump, is the most expansive piece of retirement legislation to be passed in over a decade. While there are many provisions related to retirement plan design, incentives for business owners and support for participants, the Act also importantly brings welcome relief to closed and frozen defined benefit plans.


Understanding Nondiscrimination Testing and Historic Relief


On an annual basis, defined benefit plans must demonstrate that they do not discriminate in favor of Highly Compensated Employees (HCEs) at the expense of lower paid or Non-Highly Compensated Employees (NCHEs). To ensure this, plans are required to meet minimum participation, coverage and nondiscrimination testing requirements on an annual basis. Economic factors and dire financial conditions have caused many employers to freeze benefit accruals or close their defined benefit plans altogether, restricting their plan’s coverage or participation. This can create challenges in meeting these minimum requirements.

Frozen and closed plans tend to diminish over time due to employee turnover and changes to compensation levels and retirement program offerings. NHCEs often leave their employers more frequently or transition into HCEs as they move through their careers. Many employers have changed the retirement plan options for their newest employees while continuing to retain the original defined benefit plans for existing employees. So as closed plans age, the grandfathered group becomes more and more discriminatory, eventually causing the plans to fail.

In an effort to tackle this issue, the IRS published limited relief for defined benefit plans closed prior to Dec. 13, 2013, which allowed closed defined benefit plans to combine with the employer’s defined contribution plan(s) and still be treated as a defined benefit plan for nondiscrimination testing purposes. With these parameters, the closed plans didn’t need to meet the Gateway conditions that otherwise apply. The relief was intended to be an interim solution while the IRS considered more permanent options. Despite this, it has been reissued every year since passing in 2014 – most recently extending through 2020. It also fails to provide relief from some of the other testing requirements, such as coverage of benefits rights and features (BRFs) and minimum participation, and was not extended to defined benefit plans that closed after the Dec. 13, 2013 cut off despite the fact that those plans face the same challenges as their forerunners. This is what makes the SECURE Act such a welcome piece of legislation; it lays out new methods for defined benefit plans to pass nondiscrimination and BRF testing and meeting minimum participation requirements.


Modifications to Key Requirements


When an employer elects to close a defined benefit plan, they generally will offer a defined contribution plan to their employees. These situations can be favorable for nondiscrimination testing because employers can combine the plans and cross-test them on a benefits basis to help them meet requirements. This method, however, comes with its share of complex criteria and thresholds, such as Gateway conditions, and this has historically prevented some closed plans from taking advantage, depending on their population and benefit structure. Under the SECURE Act employers will have increased flexibility to help avoid compliance-related issues and corrective actions and protect the benefits of the plan participants.


Testing Relief for Closed Defined Benefit plans


Under the Act closed defined benefit plans may still be combined with an employer-sponsored defined contribution plan for testing purposes, but now additional components may be included. In addition to the employer non-elective contributions to a qualified defined contribution plan, the combined plan may also include employer matching contributions, employee stock options (ESOPs) and matching or non-elective contributions under a 403(b) plan without being subject to mandatory disaggregation. 

To take advantage, the closed defined benefit plan must:

  • Pass nondiscrimination and coverage testing for three years as of its closure
  • Avoid any plan amendments that favor HCEs after its closure
  • Report no substantial increase in coverage or value of benefits for five years prior to closure

Employers who meet these requirements can perform cross-testing using the more favorable conditions described above without meeting any of the Gateway conditions under current regulations. This provides welcome relief to eligible employers who are currently being compelled to consider freezing all accruals under the closed defined benefit plan in order to avoid compliance testing failures.  

Testing Relief for Frozen Defined Benefit Plans with Defined Contribution Replacement Schemes


Under the Act frozen defined benefit plans with defined contribution replacement schemes can test the defined contribution plan on a benefits basis without regard to current regulations. Similar to the relief for closed defined benefit plans, the defined contribution plan can include employer matching contributions, ESOPs and matching or non-elective contributions under a 403(b) plan without being subject to mandatory disaggregation. 

To receive testing relief, the defined contribution replacement scheme must:

  • Pass the nondiscriminatory classification test for three years as of its closure
  • Provide “Make-Whole” contributions to a closed group affected by the plan freeze
  • Avoid any plan amendments that favor HCEs after defined benefit plan closure
  • Report no substantial increase in coverage or value of benefits for five years prior to closure

These important changes offer employers more flexibility to satisfy the requirements and provide additional defined contribution retirement benefits to participants to make up for the lost accruals from the frozen defined benefit plan.


New Relief Provisions for BRF and Minimum Participation Testing


As the size of a closed defined benefit plan diminishes over time, employers face difficulties meeting minimum participation rules and coverage requirements. Additionally, they may encounter problems if the features offered to the closed group of participants do not extend to other employees not covered by the defined benefit plan.

For closed and frozen plans, the SECURE Act provides permanent relief for employers to satisfy these rules and requirements without requiring substantial changes. It introduces provisions that deem closed defined benefit plans to have passed BRF testing permanently. It also provides permanent relief from minimum participation testing if they satisfy current participation requirements on the date of the freeze or closure without any substantial increase in coverage or value of benefits for five years prior.


For More Information


The SECURE Act will have some impact on nearly every retirement plan and participant, but whether the Act ends up being a game changer is yet to be seen. Armed with the knowledge of its key components, employers can be prepared to make adjustments for what lies ahead. If you sponsor a defined benefit plan, it is important to understand how these provisions may affect your plan. If you have or are considering freezing or closing your plan, you may be eligible to benefit from the long overdue testing relief and plan design flexibility offered by the SECURE Act. Contact CBIZ Retirement Plan Services to learn more.


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