Subject: Aon Hewitt Comments on Temporary Nondiscrimination Relief for Closed Defined Benefit Plans (Notice )

Transcription

1 Submitted via to CC:PA:LPD:PR (Notice ) Room 5203 Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC Dear Sir or Madam, Subject: Aon Hewitt Comments on Temporary Nondiscrimination Relief for Closed Defined Benefit Plans (Notice ) Aon Hewitt appreciates the opportunity to submit comments to the Internal Revenue Service (IRS) regarding the proposed long-term solutions set forth in Notice (the Notice proposals) regarding: The ability of a defined benefit (DB) plan and a defined contribution (DC) plan to satisfy nondiscrimination testing requirements on a benefits basis; and Other possible related modifications to other nondiscrimination testing requirements. We applaud the attention the IRS is placing on the nondiscrimination issues preventing plan sponsors from being able to keep their DB formulas and plans open for grandfathered groups of employees, and from alternatively, providing any meaningful replacement benefit in a DC plan for those participants who were previously in the pension plan. Who We Are Aon plc is the leading global provider of risk management, insurance and reinsurance brokerage, and human resource solutions and outsourcing services. We have 65,000 colleagues in 120 countries around the world. Aon has been named repeatedly as the world s best broker, intermediary, reinsurance intermediary, captives manager, and best employee benefits consulting firm by multiple industry sources. As the global leader in talent, retirement, and health solutions, Aon Hewitt is the largest independent provider of administration services for retirement plans, serving 13.5 million retirement plan participants in the U.S. We have more than 7,500 retirement professionals dedicated to helping plan sponsors maximize retirement outcomes for their employees, manage risk, and control total plan costs. Overview Aon Hewitt s research indicates that while the temporary relief in Notice addresses the gateway testing issues for most closed plans providing non-elective contributions, the proposed relief provides insignificant gateway testing relief and does not provide the full range of relief needed for: DB only and DC only approaches which include closed grandfathered groups; DB/DC and DC only approaches which provide only matching contributions; and Other sections of the nondiscrimination testing regulations.

2 Page 2 To address the relief needed for all affected plans, and to address the relief needed with respect to all applicable aspects of nondiscrimination testing (since partial relief is no relief), we offer our experience and expertise serving many clients with these issues. This letter provides Aon Hewitt s comments on the Notice proposals and focuses on three key areas: 1. The nondiscrimination testing issues that plan sponsors currently face, as well as the prevalence of these issues; 2. An analysis of how the Notice proposals would apply to plan sponsors based on Aon Hewitt s experience with our clients; and 3. Recommended relief provisions for the IRS s consideration. Challenges Facing Our Clients In recent years, Aon Hewitt has heard from many clients that the volatility in pension costs created by market conditions and by current funding and accounting rules makes DB plans no longer viable for their organizations. In response to this volatility, plan sponsors have moved away from DB plans and replaced them with DC plans. The choice these plan sponsors are faced with is not whether to keep the DB plan. Rather, the choice is whether to freeze all accruals in the DB plan immediately or allow a grandfathered group to continue accruals. In order to prevent the significant loss in benefits caused by an employee changing from DB plan accruals to DC plan allocations, many companies choose to maintain DB plan accruals for a closed group, often all current active participants. The Choices The choices employers make fall into three major categories: Group 1 Close the DB plan to new entrants and provide continuing DB accruals to a closed group. All other employees receive only DC plan allocations which may not be available, or may not be available at the same level, to those in the DB plan. Allocations provided may be either through a match only, nonelective nonmatching employer contributions only, or both. Group 2 Freeze the DB plan and provide all benefits in a DC plan for all participants. Additional match or nonelective nonmatching employer allocations may be provided to a closed group from the DB plan (to make up some of the lost benefits for employees changing from DB to DC plans). In some cases, the nonelective nonmatching employer contribution is only available to the closed group from the frozen DB plan. Group 3 Keep an ongoing DB plan, but convert from one or more traditional formulas to a hybrid or other single formula going forward for all participants other than a closed group that continues to accrue under the traditional formula. Group 3 also includes plans transitioning to DC by providing continuing DB plan accruals for a closed group, and providing a smaller DB plan accrual combined with a DC allocation for all other participants.

3 Page 3 Prevalence The table below shows the results of a 2013 survey of Aon Hewitt clients, which provided data on the prevalence of each of these groups. The survey included responses for 151 plans. Aon Hewitt Survey of DC Benefits For DB Plans Ceasing Accruals for Some or All and Replacing with DC, Hybrid DB, or Other DB Group/Method DC Provided % of Group % of Total DB Plan Closed to New Entrants DC Varies 83% 43% DC Same 17% 9% Total 100% 52% * DB Frozen Accruals and No New Entrants DC Varies 37% 12% DC Same 63% 21% Total 100% 32% DB Closed Formula(s), Alternate Formula(s) DC Varies 25% 4% for Others (includes hybrids, consolidated DC Same 75% 12% group formulas, lesser DB but with DC, etc.) Total 100% 16% Total 100% * 40% of Closed DB Plans provided DC only through match and 54% through match plus nonelective employer contribution Sections of Regulations Affecting Each Group Each of these groups has its own set of unresolvable testing challenges. Solutions available to ongoing plans facing testing challenges are not an option for closed groups. A nondiscriminatory classification test failure can only be corrected by adding non-highly compensated employees (NHCEs) or removing highly compensated employees (HCEs). Clients moving away from DB plans cannot make a good business case for adding NHCEs to the plan when the plan fails (and margins worsen over time). Removing HCEs must occur more than a year before it is known which HCEs will end up causing the various failures. This opens plans to the possibility of removing the wrong HCEs and failing anyway. The only alternative for these plans to remain compliant with the coverage and benefits testing requirements is to freeze their DB plans without making up lost benefits equitably in the DC plan. Group 1 Testing challenges for Group 1 are due to the closed DB plan group becoming more proportionally highly-paid over time. Half of these companies are expected to fail within 10 years. Companies in industries with high turnover, such as retail or fast food, and companies making acquisitions, will fail sooner than others. Additionally, companies providing DC allocations only through a match will be unable to extend the lifetime of the closed DB plan.

4 Page 4 Group 1 410(b) Closed DB plans tested alone will eventually fail the nondiscriminatory classification test, with the margin of failing increasing each year. Closed DB plans are not allowed to aggregate with a match for coverage and benefits testing purposes, even if a match is the only employer contribution provided. Group 1 401(a)(4) A general test always has one rate group with the same percentage as the plan s nondiscriminatory classification test percentage. So if the closed DB plan tested alone fails coverage, it will also fail the general test. Group 1 401(a)(4) DB/DC Gateways An aggregated DB/DC general test is not available to DB plans combined with a match. There are no aggregation options for the closed DB plan if only a match is provided in the DC plan. Even if the DC plan provides a nonelective nonmatching employer contribution, the DB/DC gateway tests often fail, so cross-testing is not available. Group 1 401(a)(4) Benefits, Rights, and Features A closed group DB plan will eventually fail the nondiscriminatory classification test, so even if benefits, rights, and features are provided uniformly to everyone in the closed group, it will also fail the current availability test. Group 1 401(a)(26) Regardless of ability to aggregate with any other plan, the closed DB plan will eventually fall below 50 participants and fail 401(a)(26). Group 2 There are no testing issues other than 401(a)(26) for companies freezing participants and accruals in their DB plans that choose to provide uniform DC benefits to all participants. However, this results in lower ultimate retirement benefits for employees caught in the switch than for fellow employees who receive(d) full benefits in either the DB or DC plans. Companies trying to create equity by providing additional DC plan benefits to make up for lost DB accruals experience the following testing challenges. Group 2 410(b) DC plans that provide nonelective nonmatching employer contributions to make up lost ultimate retirement benefits applicable only to a closed group of frozen DB plan participants: Will eventually fail the nondiscriminatory classification test, with the margin of failing increasing each year; and Are not allowed to aggregate with a match for coverage and benefits testing purposes. Group 2 401(a)(4) A general test always has one rate group with the same percentage as the plan s nondiscriminatory classification test percentage. So, if the closed group nonelective nonmatching employer contribution component plan fails coverage when tested alone, it will also fail the general test.

5 Page 5 Group 2 401(a)(4) DC Only Gateways Cross-testing is not available for arrangements providing different levels of nonelective nonmatching employer contributions for the ongoing participants and for the closed group with frozen DB plan benefits, because they cannot pass any of the DC only gateway tests. This is true especially when clients wish to provide DC plan allocations as close as possible to lost DB plan accruals. For example, consider an integrated graded schedule ranging from 2% to 5% for new hires and 3% to 15% for the closed group. The total benefits the closed group participants receive at retirement from the DB and DC plans combined may still actually be less than for either: 1) New participants receiving only the DC allocations over their career; or 2) Participants who received DB plan accruals throughout their career; yet the plan itself appears discriminatory. Group 2 401(a)(4) Benefits, Rights, and Features Arrangements that include a higher match as a make-up for the frozen DB plan closed group will eventually fail benefits, rights, and features tests. A closed group DC plan will eventually fail the nondiscriminatory classification test and thus will fail the current availability test, even if benefits, rights, and features are uniformly provided. Group 2 401(a)(26) Regardless of ability to aggregate with any other plan, the frozen DB plan will eventually fall below 50 participants with meaningful benefits and fail 401(a)(26). Group 3 Although still open to new entrants, Group 3 plans have closed groups with grandfathered benefit accruals with the following challenges. Group 3 410(b) None Group 3 401(a)(4) A DB only general test for an ongoing DB plan may fail for plans providing a lesser benefit formula to those other than the closed group (where the lesser benefit is provided along with DC plan allocations). An aggregated DB/DC general test is not available to DB plans combined with a match. There are no aggregation options for the DB plan if the DC plan only provides a match. Group 3 401(a)(4) DB/DC Gateways The DB/DC gateway tests may fail, so cross-testing is not available. For DB plans providing lesser DB along with DC, the DB/DC gateway issues are the same as those for Group 1 Closed Plans. Group 3 401(a)(4) Benefits, Rights, and Features Benefits, rights, and features tests for closed group traditional formulas, such as early retirement factors and supplements, are incompatible for aggregation with hybrid formula benefits. Group 3 401(a)(26) None

6 Page 6 Review of Notice Proposals The table below summarizes our observations on the degree of relief provided by the Notice proposals to plans in each of the three groups, based on a 2014 survey of Aon Hewitt clients. The survey included responses for 151 plans. Aon Hewitt Survey of Notice Proposals For DB Plans Ceasing Accruals for Some or All and Replacing with DC, Hybrid DB, or Other DB Plans Helped by DB/DC Gateway Proposals Safety Valve: Group % of Total % of Group Avg NEC Match in DB/DC Gtwy if PS>0 Alone With 1--Plan Closed 52% All Match 40% 0% 0% 0% 0% 0% To New Entrants Match+PS 54% 0% 7% 11% 11% 39% 2--Frozen Accruals 32% All Match 0% 0% 0% 0% 0% and No New Entrants Match+PS 0% 0% 0% 0% 0% 3--Closed Formulas, 16% All Match 0% 0% 0% 0% 0% Avg NEC With Match in DB/DC Gtwy if PS>0 Onging DB Match+PS 0% Small% Small% Small%? Small% Total 100% 0% 2% 3% 3% 11% Notes: % of Closed Plan employees helped: 0.00% 0.09% 0.35% 0.35% 16.49% 53% of Closed Plans have the potential to benefit from the Notice Temporary Relief. Remaining Closed Plans were ineligible either due to: -- already failing for 2013 or -- providing DC benefits all as match. 10 plans were reviewed for passing the general test at lower interest rates. 3 could not pass with any lower interest rates, 2 could not pass using below 6% breakpoint and the remaining 5 (all currently still pass just with the DB plan) were able to pass using lower interest.

7 Minimum Aggregate Allocation Gateway Results by Group Notice Page 7 Group 1 Using the Minimum Aggregate Allocation Gateway Proposals Companies in Group 1 providing only match in their DC plans are ineligible for any of the proposed relief. Thus, 40% of this group would be left to fail both coverage and benefits tests. The group providing a combination of match and employer contributions is able to solve coverage testing issues by aggregating with the nonmatching nonelective employer contributions, but that introduces benefits testing issues. The focus of the proposed relief is targeted at DB/DC gateway testing relief needed for this one subgroup. Aon Hewitt s analysis indicates that the minimum aggregate allocation gateway proposals have the potential to help up to 11% of closed plans (representing less than 1% of the employees) in our survey to pass the gateway. Even combining the minimum aggregate allocation gateway proposals only has potential to help up to 39% of closed plans and 16% of the employees to pass the gateway. The proposed minimum aggregate allocation gateway solutions are all reasonable and would help the gateway to become more useful than it is based on current testing rules. However, Aon Hewitt believes they provide so little relief for the issue at hand because they are focused on solving the wrong problem. Following are some of the reasons we believe that the proposed solutions for closed plans do not provide the intended relief: The 7.5% minimum benefit for NHCEs in aggregating DB and DC plans was instituted as a deterrent to abusive DC plans hoping to aggregate with DB plans in order to provide excessive DC allocations to DC plan HCEs. It is an effective deterrent, as there are very few companies providing DB, DC, or combined DB/DC plans meeting these criteria, even with the ability to average the DB NHCE equivalent allocation rates (EARs). Such DC plan abuses are not the concern for closed plans trying to preserve existing pension benefits for plan participants. Testing failures do not occur because of the amount of benefits provided or by companies trying to provide excessive benefits to HCEs, but merely because the headcounts and demographics of an aging closed group will eventually become discriminatory. Thus a minimum benefit requirement would actually require increases in the closed DB plan formula as well as any DC plan allocations when being aggregated. Such increases for the DB plans seem counter to a goal of preserving the existing DB benefits. Final average pay formulas are the most common grandfathered formulas. A typical final average pay DB plan will provide on average between 1.0% and 1.5% of final average pay. Converting these typical formulas to EARs as required for the minimum aggregate allocation cross-testing gateways, using the standard interest and mortality set forth in the regulations, we see that a 7.5% equivalent allocation rate does not occur until approximately age 58 for a 1.0% of pay formula, and age 52 for a 1.5% of pay formula. The fraction of the NHCE population older than these ages could easily fall in the 4.0% to 20.0% range. This is far below a level needed to create an average equivalent allocation rate for all NHCEs anywhere close to 7.5% (or even 5.0%). Requiring an average equivalent allocation rate of even 3.0% would exclude many plans from relief, merely because the pension benefit formula (they had been providing as something reasonable within their industry) is a bit lower than another plan.

8 Page 8 Analysis of EARs for a Final Average Pay Pension Plan Typical Highest HCE DB EAR At Service = 10, Sample Plan of 7,500 ees Assuming No Outliers Average FAP Plan Accrual Approximate Age EAR Reaches 7.5% % of ees with EAR%>=7.5% Average EAR% Without Integration Adding 0.6%>CC 1.00% 58 12% 3.4% 21.1% 29.3% 1.25% 55 17% 4.3% 27.7% 34.8% 1.50% 52 22% 5.1% 33.2% 40.4% The primary factor affecting EARs is age. A 21 year-old in a 1.5% of pay plan would have an EAR of around one half of one percent, even using the most favorable standard interest and mortality. The EAR would remain less than 1.0% until age 28 and less than 2.0% until age 38. Thus, nearly half of the employees in many DB plans would have percentages which would significantly decrease the average NHCE EARs. One possible result of imposing a minimum benefit for relief in aggregating closed DB plans with a DC plan is that plans may choose to preserve the DB benefits only for a smaller, older group likely to satisfy the minimum benefit requirement, rather than preserve the pension for a larger, more nondiscriminatory group. Imposing a minimum benefit requirement, therefore, seems likely to create an impact contradictory to that intended by providing relief. The purpose of the gateways is to prevent HCEs from getting better benefits than NHCEs. However, the highest HCE equivalent allocation rate in a DB plan is merely a function of that DB participant's age, service, and pay increases in the current year, rather than any inherent discrimination in the benefit formula itself. In general, each HCE or NHCE will age through increasing DB EARs and has the potential to accrue a range of lower to higher rates at some point in their career. In many of the typical DB/DC aggregation situations, employees are either receiving only DB or only DC, and not receiving both DB and DC. Without DB and DC benefits being added together to provide total aggregated allocations, there is less chance of meeting any minimums imposed. Thus any minimum would have to be reasonable in both a DC plan allocation context alone and in a DB equivalent allocation context alone. Among our surveyed plans providing nonelective nonmatching employer allocations, we estimate the average allocation to be around 3.5%. Although the allocation rates and EARs for Group 1 plans are generally significantly lower than the threshold for the minimum aggregate allocation gateway, the plans are generally providing benefit levels which are relatively comparable between the DB and DC plans, and which remain competitive within their respective industries. None of the plans in the survey were providing special or higher benefits only to the highest HCEs. Thus, there should be no need for these plans to provide sufficiently high benefits to NHCEs as if they were providing an excessive benefit formula to HCEs. Group 2 Using the Minimum Aggregate Allocation Gateway Proposals Since the Notice proposals do not provide DC only gateway relief, no closed groups with frozen DB now accruing only in DC plans would benefit. Relief needed for this group would be to allow aggregation of the match and nonelective nonmatching employer contribution plan components.

9 Page 9 Group 3 Using the Minimum Aggregate Allocation Gateway Proposals The Notice minimum aggregate allocation gateway proposals are not needed for most ongoing DB plans, as most can rely on the Primarily DB gateway in order to aggregate and cross-test if needed. The exception is the ongoing plans with lower DB benefits with added DC allocations for employees not in the grandfathered formula. They will have the same issues as discussed for Group 1 above. All Groups Using the Average Match Inclusion in Minimum Aggregate Allocation Gateway Limiting inclusion of average match to those with nonelective contributions excludes companies providing DC through only match from relief. Clarification is needed regarding the method of determining DC aggregate allocations when match is included. A DC plan often provides broader coverage for the match than just to those who are eligible for the DB plan and those who would have been if the plan had not closed. For example, suppose Division A has a closed DB Plan A with new hires receiving match and a profit sharing contribution in DC Plan X. Division B has a closed DB Plan B and new hires receive only match but no profit sharing in the same DC Plan X. Division C has no DB plan and all employees receive only a match in the same DC Plan X. When aggregating DB Plan A with DC Plan X, does the average match from DC Plan X to be used in the minimum aggregate allocation gateway include the DC Plan X match for Division A; for Divisions A and B; or for Divisions A, B, and C? When aggregating DB Plan B with DC Plan X, does the average match from DC Plan X to be used in the minimum aggregate allocation gateway include the DC Plan X match for Division B; for Divisions A and B; or for Divisions A, B, and C? Although neither Division B nor C provides profit sharing, Division B is replacing DB accruals with an enhanced match. Thus, it would be essential to include the match for Division B when testing the closed DB Plan B. If the average match for the minimum aggregate allocation gateway is based on Divisions A, B, and C: Is the same average match used for the gateway for separate testing if aggregating DB Plan A with DC Plan X as for aggregating DB Plan B with DC Plan X? Would the answer change if new hires from Division B also receive profit sharing from DC Plan X? When adding the average match to the DC Plan X profit sharing included in an aggregation for DB Plan A, does that mean that the lowest NHCE combined DC allocation will be from those in Division C with no profit sharing and whose allocations will equal the average match? This would seem to defeat the purpose of including the match. If able to combine the proposed relief provisions of averaging the nonelective nonmatching contribution and adding the average match in the aggregation of DB Plan A and DC Plan X, and the average match includes Divisions A, B, and C, we assume that the average profit sharing would only include nonzero profit sharing amounts in accordance with current regulations.

10 Lower Interest Rate General Test Results Notice Page 10 All Groups Using the Lower Interest Rate General Test Proposal Aon Hewitt does not have a large enough sampling to be indicative. Of the 10 DB/DC plans tested, three could not pass with interest rates below the current standard interest rates. Two could barely pass around a 6% interest rate level for this year. Also, the margins are so narrow and rate groups vary, such that the plans could not reasonably expect to pass consistently at a 6% interest rate level in future years. Five DB plans can still pass a DB only test, and they can also pass an aggregated DB/DC test using lower interest rates. Benefits, Rights, and Features Test Relief Analysis All Groups Using the Benefits, Rights, and Features Relief Proposal This proposal would be most welcomed across all of the groups, as long as the relief covers: Groups in closed DB plans; Groups with closed formulas within a DB plan; and DC plans with different allocations (such as varying match levels) for a closed group of employees based on prior (now frozen) DB plan participation. As currently described, the relief would exclude the first and third bullets above. Ideally, benefits, rights, and features relief would apply to any DB plan or DC plan that has a formula which is applicable to a closed group of participants, regardless of whether the plan has a single formula or multiple formulas. For example, in the case of a DB plan closed to new entrants with a single formula, benefits, rights, and features relief is necessary, even though the plan does not have two or more benefit formulas. Also, clarification would be needed to ensure that the use of the word plan refers to the DB or DC plan after any aggregation with another plan when used in the DB plan has two or more benefit formulas, one or more of which are applicable to a closed group A closed DB plan with a single formula that can aggregate with another open or closed plan would also require this relief in order to aggregate. Match in General Test Relief Analysis All Groups Using the Match in the General Test Again, this proposal would be most welcomed across all of the groups, as long as: The match can be included whether or not nonelective nonmatching contributions are available. Without this provision, 40% of the closed DB plans providing DC allocations only as match (for those other than the closed group) will be left without essential general test relief. The match can also be aggregated with the nonelective nonmatching employer allocations available only to a closed group frozen out of their DB plans in a DC only aggregation. Clarification is provided regarding the application of the match and the extent to which match may be included. Some companies have multiple closed DB plans, but the defined contributions for all of them are provided in a single DC plan. Would only one closed DB plan be able to include match in the general test? Would plans have the option to include match only for those who participate in or meet the plan eligibility requirements such that they would have participated in the closed DB plan if it had not been closed? Providing the latter flexibility, at least as an alternative, will be essential for companies with multiple DB plans.

11 Page 11 Clarification is provided regarding inclusion of match in a general test where the match in the DC plan also covers groups whose employees were never eligible for any DB plan. Are these employees and their matches to be included in the general test as well? Or similar to the option recommended above, would plans have the option of including match only for those who participate in or meet the plan eligibility requirements such that they would have participated in the closed DB plan if it had not been closed? While Aon Hewitt sees that the Notice minimum aggregate allocation gateway proposals are all helpful, they do not improve results sufficiently to the level needed to help many plans. Allowing plans to pass without a gateway if the aggregated general test can pass at a lower interest rate has the possibility of helping some, but not enough plans. Also, the number of plans it helps may decrease over time. Additional opportunities for relief are needed to supplement what has been proposed in order to truly offer relief to a broad group of employees. Suggested Relief Provisions Below, Aon Hewitt provides the elements of relief we see as needed to provide complete relief. Receiving one aspect of relief when three are needed, for example, is akin to receiving no relief at all, since all rules must be satisfied. The missing and alternate elements of relief still needed include the following: Groups 1 and 3 Allow Aggregation of Match and DB for 410(b) and 401(a)(4) Allow aggregation of match component plans with DB plans for 410(b) coverage testing and for 401(a)(4) DB/DC general test purposes. This would provide the missing coverage and general test relief needed for the Groups 1 and 3 plans which provide match without nonelective nonmatching employer contributions. Essential accompanying components of the aggregation with match include: Allowing application of the DB/DC aggregation benefits, rights, and features provisions currently in the regulations to include aggregations of DB plans with match component plans; This would be an aggregation allowed for purposes of testing the DB plan, but the match would still be required to pass all testing as a stand-alone DC plan component; and Modifying all DB/DC gateways and gateway exceptions to give the option of replacing the DC with match if there are no nonelective nonmatching employer contributions to aggregate with (see Gateway Test Alternatives and Additional Relief Needed subsection below). Provide 401(a)(26) Relief for Closed and Frozen Plans Modifying 401(a)(26) to provide relief for closed and frozen DB plans unable to merge with other DB plans is the last element of relief needed for all Groups 1 and 3 plans. Provide Gateway Test Relief See the Gateway Test Alternatives and Additional Relief Needed subsection for relief provisions to consider.

12 Group 2 Notice Page 12 Allow Aggregation of Match and Nonelective Contributions for 410(b) and 401(a)(4) Allow aggregation of match components with nonelective nonmatching employer allocation component plans for 410(b) coverage testing and for 401(a)(4) DC general test purposes. This would provide the missing coverage and general test relief needed for closed DC plan groups with frozen DB plan benefits in Group 2 which provide match to all employees and nonelective nonmatching employer contributions only to the closed group (to preserve comparable ultimate retirement plan benefits for those transitioning from DB to DC). Essential accompanying components of the aggregation with match include: This would be an aggregation allowed for purposes of testing the nonelective nonmatching employer allocation component plan, but the match would still be required to pass all testing as a stand-alone DC plan component; and Modifying all DC only gateways to give the option of combining match with nonelective nonmatching employer contributions (see Gateway Test Alternatives and Additional Relief Needed subsection below). Provide 401(a)(26) Relief for Frozen Plans Modifying 401(a)(26) to provide relief for frozen DB plans unable to merge with other DB plans is the last element of relief needed for all Group 2 plans. Gateway Test Alternatives and Additional Relief Needed Provide DB/DC Gateway Relief Providing a list of criteria which all must be met to receive a DB/DC gateway testing exemption, including the following: The DB plan formula(s) provide no additional benefits only available to HCEs or to small groups including the highest paid HCEs; The DB plan s eligibility provisions are uniformly applied to HCEs and NHCEs; The group receiving DC benefits can and will continue to pass all coverage and benefits requirements as a stand-alone plan; The controlled group passes an average benefit percentage test; and Optional additional criteria: DB plan is closed to a nondiscriminatory group with nondiscriminatory benefits as of the close; The combined plan DB/DC arrangement protects participants from lost ultimate retirement income resulting from converting from DB to DC accruals during their careers. Provide DC Gateway Relief Allowing optional inclusion of average match for DC only gateways as well as DB/DC gateways. Allowing separate gateway tests in a DC plan for those with frozen DB benefits and those without frozen DB benefits.

13 Page 13 Overall Gateway Relief If a safety valve is to be available in the determination of gateways, automatic approval criteria and examples should be included in order to be most useful. Any inclusion of match for DB/DC gateways should be optional, so as not to adversely impact plans relying on the primarily DB gateway. Benefits, Rights, and Features Apply Benefits, Rights, and Features Relief to DB Only and to DC Only Closed Groups In addition to the benefits, rights, and features mentioned above, modifying the current language in the Notice proposals to include: DB plans with at least one formula applicable only to a closed group, where plan is defined to mean the plan after any DB plan aggregations, or any DB/DC plan aggregations; and DC plans with at least one match applicable only to a closed group with frozen DB plan benefits, where plan is defined to mean the plan after any DC plan aggregations. Restructuring Relief for DC plans Permitting restructuring for 401(a)(4) safe harbor designs for a DB or DC plan if each group either: 1) Passes the nondiscriminatory classification test; or 2) Is a closed group which passed the nondiscriminatory classification test at the time of closure. For DC plans, this should also apply to closed groups with frozen DB benefits which passed the nondiscriminatory classification test at the time of the DB plan freeze. Corrections When plans fail in spite of all the relief, the following two provisions combined would prove very helpful to closed group failures: Permit Prospective Removal of Selected HCEs Allowing notice by the end of the correction period that an HCE s accruals will cease effective for the remainder of the year and all future years to a correct a current year failure (similar to the current provision available for BRFs to correct a nondiscriminatory classification test failure). Example: For a 2013 calendar plan year coverage or benefits test failure, the 2013 failure could be corrected by providing an HCE notice by October 15, 2014, that his accruals will cease for the remainder of the year and all future years effective December 1, Allow Nondiscrimination Testing Make-Up Benefits for All HCEs Allowing nonqualified plans to make up any benefits lost due to 410(b), 401(a)(4), and 401(a)(26) nondiscrimination testing failures for all HCEs, not just those currently eligible for nonqualified plans. Closing Providing all of the relief provisions offered above together as a whole would allow companies to protect benefits for closed groups and to continue compliance with all nondiscrimination regulations, regardless of the closed group approach which makes the most business sense for the company.

14 Page 14 Aon Hewitt appreciates the opportunity to submit these comments regarding potential changes to the nondiscrimination testing regulations. If you have any questions regarding these comments, please contact the undersigned at the telephone number or address provided below. Sincerely, Janice Harbold FSA, EA, MAAA Senior Consultant (847) Eric A. Keener FSA, EA, MAAA Partner and Chief Actuary (203)