Transcript Nondiscrimination Requirements

Nondiscrimination Requirements:
Part One
Fundamentals I of Retirement Plan Issues
Chapter Eight, Part One/Week 9
Nondiscrimination Requirements
• Three tests under IRC §401(a)(4)
• Test 1: Allocations or Benefit Accruals must be
nondiscriminatory
• For DC plans, safe harbor = same % of
allocation x Total PY compensation
• For DB plans, safe harbor = AB provides same
% of Total PY compensation for each year of
svc
Example of Discrimination
• Safe Harbor: uniform allocation based on total
pay
• DC allocation: pro rata allocation using base pay
instead of total pay and ER contribution ÷ Total
base pay = 10% for the PY
• EE Base Pay Total Pay Allocation % of Total
Pay
A
$50,000 $50,000 $5,000 10%
B
20,000 40,000 2,000
5%
Nondiscrimination Requirements
• Test 2: Benefits, Rights and Features
• Current availability & Effective availability
• Test 3: Amendments & Terminations
• Facts & circumstances determination
Top Heavy Determination
• Determination of key employee, not HCE
• Determination of top heavy status of plan
• Accelerated vesting schedules
• Mandated allocations for DC plans and
accruals for DB plans
Safe harbor rules for Test 1 – DC Plans
• Criteria that must exist to use the safe harbors under the IRS
regulations:
– Plan’s definition of compensation for allocation purposes must satisfy
the definition in IRC §414(s)
– Same allocation formula must apply to all participants
• Safe harbor: Uniform allocation formula
– Same percentage of compensation or same dollar amount or same
amount per year of service applies to all participants
• Safe harbor: Uniform points formula
Safe harbor rules for Test 1 – DB Plans
• Criteria that must exist to use the safe harbors under the IRS
regulations:
– Plan’s definition of compensation for allocation purposes must satisfy
the definition in IRC §414(s)
– Same allocation formula must apply to all participants
– Plan’s NRA is uniform
– Post-NRA accruals must be uniform and each subsidized optional form
of payment must be available to substantially all partiicpants
– No employee contribuitions
• Safe harbor unit credit AB formula
Safe harbor rules for Test 1 – DB Plans
• Fractional rule safe harbor: Plan’s AB = fractional rule applied
to the NRB, however, no employee’s accrual rate can exceed
133⅓% of another employee’s accrual rate
– E.g., NRB = 1.6% × CAE × yrs (cap 25)/65/life only or J&S and AB =
fractional rule
• Flat benefit plan (with 25 year minimum) using the fractional
rule:
General Test for DC Plans
• General Test: if the highest allocation rate for any HCE exceeds
the lowest allocation rate for any NHCE, the regulations
“restructure” the plan into various rate groups
• Restructuring is done according to each different allocation
rate for all HCEs; the group includes the allocation rate for the
HCE and all NHCEs & HCEs with that or a higher allocation rate
• Each restructured group must be tested under the IRC §410(b)
coverage tests