The IRS has withdrawn certain proposed changes to the Code § 401(a)(4) retirement plan nondiscrimination regulations that were released earlier this year (see our Checkpoint article). The withdrawn provisions were intended to address qualified retirement plan designs that take advantage of the mathematical nature of the “general test,” an alternative method of nondiscrimination testing for profit-sharing contributions that do not satisfy a safe harbor. (Similar proposed changes relating to defined benefit plan testing are also being withdrawn.) Other proposed changes are not affected.
The general test applies the coverage testing rules to rate groups based on the allocation rate for each highly compensated employee (HCE). The withdrawn provision would have required an allocation formula with a ratio percentage minimum lower than 70% to apply to a group of employees that was reasonable and was established under objective business criteria. This would have made it more difficult for some plan designs—such as qualified supplemental executive retirement plans (QSERPs)—to take advantage of low ratio percentage minimums to provide individualized benefits for HCEs. According to the announcement, the IRS has decided that further consideration is needed regarding the withdrawn provisions.
EBIA Comment: Plan sponsors maintaining plans with a QSERP design will no doubt be relieved that the proposed change is being withdrawn and reconsidered. But it remains to be seen whether the IRS is dropping this issue or considering another modification of the general test, so interested parties should stay tuned. For more information, see EBIA’s 401(k) Plans manual at Sections XX.B (“Code § 401(a)(4): Basics”) and XX.F.1.b (“The General Test”).
Contributing Editors: EBIA Staff.