On August 31, 2017, the IRS issued Notice 2017-45, which extends through 2018 the nondiscrimination relief for closed defined benefit plans provided in IRS Notice 2014-5 and extended by Notices 2015-28 and 2016-57.

A series of IRS Notices have provided nondiscrimination relief to closed defined benefit plans, which are also referred to as plans in a "soft freeze" (for more information, see Practice Note, Freezing Defined Benefit Plan: Types of Defined Benefit Plan Freezes).

In Notice 2014-5, the IRS permitted certain employers that sponsor a closed defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Section 401(a)(4) of the Internal Revenue Code (Code) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for nondiscrimination testing on that basis (see Legal Update, IRS Notice 2014-5 Provides Temporary Nondiscrimination Relief for Closed Defined Benefit Plans).

The IRS extended this relief for an additional year in Notice 2015-28, as long as a closed defined benefit plan meets the equivalent benefits requirements of Notice 2014-5 (see Legal Update, IRS Extends Temporary Nondiscrimination Relief for Closed Defined Benefit Plans).

In January 2016, the IRS released proposed regulations under Code Section 401(a)(4) providing nondiscrimination relief for closed defined benefit plans and making other changes to the nondiscrimination rules not limited to closed defined benefit plans (see Legal Update, Proposed Regulations Provide Nondiscrimination Relief for Closed Defined Benefit Plans and Other Changes to the Nondiscrimination Requirements).

In September 2016, the IRS issued Notice 2016-57, which extended the nondiscrimination relief provided in Notices 2014-5 and 2015-28 for an additional year (to plan years beginning before 2018) if the conditions of Notice 2014-5 are satisfied (see Legal Update, IRS Notice 2016-57 Extends Nondiscrimination Relief for Closed Defined Benefit Plans Through 2017). The IRS issued Notice 2016-57 because it anticipated that the final regulations providing nondiscrimination relief for closed defined benefit plans would not be published in time for plan sponsors to make plan design decisions based on the final regulations before expiration of the relief provided under Notice 2014-5, as extended by Notice 2015-28.

Notice 2017-45 extends the temporary nondiscrimination relief for closed defined benefit plans to plan years beginning before 2019 if the requirements of Notice 2014-5 are satisfied.

The IRS granted this extension because it anticipates that the final regulations providing nondiscrimination relief for closed defined benefit plans will not be published in time for plan sponsors to make plan design decisions before the expiration of the nondiscrimination relief provided under Notice 2014-5, as extended by Notice 2016-57. The IRS received many comments on the proposed regulations, and it expects that the final regulations will include numerous significant changes in response to those comments.

The IRS intends the final regulations to provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2019.

Employers that sponsor a closed defined benefit plan and a defined contribution plan should be aware of the extension of nondiscrimination relief provided in Notice 2017-45. Typically, aggregated plans will fail to meet the nondiscrimination requirements of Code Section 401(a)(4) unless plan sponsors are permitted to demonstrate compliance with the nondiscrimination rules on the basis of equivalent benefits. Notice 2017-45 provides an additional year for closed defined benefit plans to comply with the nondiscrimination requirements of Code Section 401(a)(4) on the basis of equivalent benefits, even if the plans do not satisfy the current conditions for testing on that basis. Sponsors of closed defined benefit plans should look for the forthcoming final regulations under Code Section 401(a)(4) that will provide similar relief.