Discriminatory Plan Feature

[Guest Texas_Acty]

A client of mine wants to amend their DB plan to allow in-service distributions to participants who are working beyond the normal retirement age. (The CEO/5% owner, who is age 69 and still actively-employed, wants to start receiving his benefits and continue to work.)

Of course, the plan would be amended to allow any beyond-normal retirement age participant to elect to receive in-service distributions. However, my contact at the client company tells me that they considered amending the plan a few years ago to allow this, but that they were told that it would be discriminatory if only HCEs took advantage of it.

Question: Is this accurate? i.e., Could a non-discriminatory plan feature be deemed to be discriminatory merely because HCEs take advantage of the feature disproportionately more than non-HCEs who have access to the same feature?

[WDIK]

Are there any nonhighly compensated employees that are currently working beyond normal retirement age?

[Guest Texas_Acty]

There is one who is about to reach age 65. But does it matter, as long as the amendment would cover anyone?

[Effen]

You probably should read the entire section, but this little snippett should give you the general idea. I think you would be ok, as long as everyone else is eligible.

§1.401(a)(4)-5. Plan amendments and plan terminations

(a) Introduction

(1) Overview. --This paragraph (a) provides rules for determining whether the timing of a plan amendment or series of amendments has the effect of discriminating significantly in favor of HCEs or former HCEs. For purposes of this section, a plan amendment includes, for example, the establishment or termination of the plan, and any change in the benefits, rights, or features, benefit formulas, or allocation formulas under the plan. Paragraph (b) of this section sets forth additional requirements that must be satisfied in the case of a plan termination.

(2) Facts-and-circumstances determination. --Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances. These include, for example, the relative numbers of current and former HCEs and NHCEs affected by the plan amendment, the relative length of service of current and former HCEs and NHCEs, the length of time the plan or plan provision being amended has been in effect, and the turnover of employees prior to the plan amendment. In addition, the relevant facts and circumstances include the relative accrued benefits of current and former HCEs and NHCEs before and after the plan amendment and any additional benefits provided to current and former HCEs and NHCEs under other plans (including plans of other employers, if relevant). In the case of a plan amendment that provides additional benefits based on an employee's service prior to the amendment, the relevant facts and circumstances also include the benefits that employees and former employees who do not benefit under the amendment would have received had the plan, as amended, been in effect throughout the period on which the additional benefits are based.

[WDIK]

There is one who is about to reach age 65. But does it matter, as long as the amendment would cover anyone?

From a theoretical standpoint, I agree with Effen that you would probably be ok.

From a practical standpoint, having a NHCE over NRA helps make the case that the amendment is not discriminatory.