Minimum Participation Rule Puts Pension Benefits at Risk

Almost all pension plans are subject to certain compliance tests that are outlined by the IRS. The compliance requirements are in place to make sure that if a plan sponsor’s contributions to a pension plan are deductible for tax purposes, then the pension plan’s benefits must not be designed too heavily in favor of the highest paid employees. One set of compliance rules for most pension plans are the minimum participation requirements. As some defined benefit pension plans continue operating, these rules are causing compliance concerns.

Minimum Participation Rule Details

Under Internal Revenue Code (IRC) Section 401(a)(26), a defined benefit pension plan must benefit a minimum of

  • 50 employees or
  • 40% of the employees of the employer.

If the pension plan is not benefiting any highly compensated employees (HCEs), it automatically satisfies the rule.

HCE is generally determined as an individual earning more than a specified dollar threshold established by the IRS for the prior year. This dollar limit is $125,000 based on 2019 earnings to determine HCEs for the 2020 year. All others are considered non-highly compensated employees (NHCEs).

Unintended Consequences

Today, many pension plans have been “partially frozen” for years, which means they have benefits accruing only for a specified group of employees. As time passes and ordinary turnover and retirement occur, the number of employees that accrue benefits in these defined benefit pension plans is decreasing.

Although the original purpose was to provide “meaningful” benefits to employees across the plan sponsor’s organization, these requirements are now causing accruals to be shut off as some plans approach and fall below the minimum threshold of employees accruing benefits.

For the affected employees, it comes at a time close to retirement age when their promised pensions, by design, would be accumulating at the highest rates, and defined contribution style benefits, like 401k plans, can’t realistically replace all lost future accruals.

Potential Strategies

Do Nothing and Wait

  • We can hope that legislative relief will be passed to eliminate the participation issues. However, Congress has considered addressing these issues over the last 5 to 7 years, and no movement towards enacting relief rules has been seen yet.

Merge Pension Plans

  • This provides immediate relief to minimum participation issues.
  • It could be a temporary solution if the benefits are also partially frozen across the combined defined benefit pension plan. Review the demographics to project how long this solution will last when weighing the advantages of this strategy for your situation.

Open the Pension Plan

  • Reopen the pension plan to additional participants. (Yes, this could make sense!)
  • More employees will be benefiting and eliminate minimum participation rule issues.
  • New plan participants can receive a different formula (something similar to the current plan formula but reduced, cash balance formula, variable annuity formula, etc.)
  • Consider if recruiting or employee retention issues can be reduced or alleviated by designing new pension benefits for targeted employee groups.
  • This can be designed to help bridge the time until the potentially affected employees reach retirement age.
  • Watch the mix of HCEs and NHCEs because the additional pension benefit design still needs to satisfy other IRS coverage, nondiscrimination, and design-based compliance rules.

Freeze Remaining Pension Benefits

  • The freeze can be for all participants or only for current and future HCEs.
  • Replacement benefits can be provided to address employee retention and retirement readiness issues.
    • Provide projected lost benefits as cash payment(s).
    • Executive employees can have some or all lost benefits replaced in a nonqualified deferred compensation plan or other executive compensation arrangement.
    • Design partial replacement benefits in a 401k plan.
  • Consider the impact of the pension plan freeze on other sponsored benefit plans. For example, are there benefits that are automatically available, or not available, based upon whether an employee is accruing benefits in the pension plan?
  • Curtailment accounting rules are triggered which may require an additional one-time expense to be recognized through income in the year of the benefit freeze.

In Perspective

There are many valid business reasons that explain why a plan sponsor would want to stop pension accruals for everyone except a specified group. We know the IRS rules were not intended to cause the loss of benefits for employees late in their careers. Regardless, several pension plan sponsors are at the point where their partially frozen pension plans are close to becoming noncompliant. While we continue to wait for legislative relief for this issue (that may never come), if you sponsor a partially frozen pension plan, you should determine when this will become an issue for you. Begin discussing possible strategies, and have an approach in place well ahead of time to minimize the disruption to your organization as much as possible.

Questions? Contact the Findley consultant you normally work with, or contact Colleen Lowmiller at, 216.875.1913.

Published October 28, 2019

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DOL Proposes $35K as New Overtime Rule Threshold


A long-awaited announcement was made yesterday from the US Department of Labor (DOL). It published a proposal raising the salary level requirements to $35,308 per year ($679 per week) for white collar exemptions. The proposed threshold, up from the current $23,660 ($455 per week), is estimated to provide overtime eligibility to more than a million additional US workers if passed.

Other proposed changes from the announcement include:

  • The new salary level requirement can be met by using annual or more frequent nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level test. This is a change from the 2016 proposal which required nondiscretionary bonuses to be paid at least quarterly to be included.
  • The proposed Highly Compensated Employees (HCE) threshold is $147,414, up from the current level of $100,000. The Obama administration proposed $134,004 in 2016. 
  • No changes to the duties requirements – meaning job reclassification, if any, will be based only on salary.
  • No automatic increases, as proposed in 2016, however, the DOL is proposing a required review every four years to ensure the threshold keeps up with inflation.

As a reminder, the Fair Labor Standards Act does not preempt stricter state standards. The public has 60 days to respond to the announcement. A final ruling is expected by January 2020.

We will continue to inform you of any advances in the proposed overtime rules as they become available.

Questions? Please contact the Findley consultant you regularly work with, Jen Givens at, 216-875-1944.

Posted on March 8, 2019

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