proposed regs

[Tom Poje]

one of the possible changes:

Under the current regulations a cross-tested plan can pass nondiscrimination testing using either the ratio percentage test or the average benefit test without requiring that each rate group be considered a “reasonable classification”. Under the proposed regulations, this will still apply to the ratio percentage test. However, in order to use the average benefit test, the rate groups will need to satisfy the reasonable classification test. Of greatest concern are plans where one or more of their rate groups are set by naming the individuals as traditionally this has not been considered a reasonable classification. If these proposed regulations become final, new comparability or cross tested DB/DC plans will need to review their plans to determine if (1) they can pass testing using the ratio percentage test or (2) their rate groups meet the requirements to be a reasonable classification so that the average benefit test can be used. Plans that cannot would need t o be amended to ensure that nondiscrimination testing could be passed.

..............

so while the reasonable classification test used to only apply to coverage, it would now apply to nondiscrim testing as well if the proposed regs go through.

I did submit a comment for clarification if 'one group per participant' is considered reasonable or interpreted as being 'by name'

proposed reg.doc

[Belgarath]

Aargh! IF that change/interpretation is taken by the IRS, it will shoot down about a gazillion plans (give or take a half a dozen.)

[Tom Poje]

Thinking about this some more: if these regs go through this year and are applicable for plan years beginning 1/1/2017. (and assuming things work like they do, not until late in 2016.

lets say your plan has no hours requirement or last day rule or whatever, but because you have a group by name

you can no longer can use the avg ben test to pass testing. I guess you would need to amend by the end of 2016 to change something because once 2017 starts someone has 'accrued a benefit' under the old formula.

one has until the end of April to make comments. and then we will see how fast things move from there.

I certainly understand the IRS attempt to curtail some of the things I have seen - the formulas in which the owner gets 'a gazillion %' in a DB/DC combo plan just because of the mathematics of the way things work out and the NHCEs get the gateway only.

[Mike Preston]

Tom, where did you get that write-up? Before I comment on it publicly, I'd like to know.

[Tom Poje]

I made it up and cleverly typed it up to look in the same format as the Treasury would, what else. but you caught me!

see if the following link will work, though I simply copied what was there. (or also see Irene Ferenzy's article that has just been posted under 401(k) plans)

https://www.federalregister.gov/articles/2016/01/29/2016-01675/nondiscrimination-relief-for-closed-defined-benefit-pension-plans-and-additional-changes-to-the

[Belgarath]

I would hope that ASPPA, etc. would be all over this. There are all kinds of IRS pre-approved documents out there that specifically permit each employee to constitute a separate classification, so IF they take the approach that each employee in a separate classification is tantamount to enumerating by name and therefore impermissible, that puts a lot of employers in a tough spot.

[Tom Poje]

they wouldn't say it is impermissible, just that you give up your rights to the avg ben test when performing nondiscrim testing.

[Belgarath]

A valid splitting of hairs, but the net result is that currently allowable methodology (using the average benefits test when each employee is a separate classification) will not be allowable, and given that many plans are designed to use this methodology, it whacks a lot of employers. After all, the IRS instituted gateway to make sure acceptable minimum levels of benefits were being provided. Changing now when everyone has just restated/redesigned plans is just plain rotten!

Granted that these are only proposed regs at this point, it bodes poorly for the not-so-distant future.

[Tom Poje]

on the other hand, the db/dc combo plans have resulted in some extremely large percents to HCE and at the most 7.5% to NHCEs, arguably an abuse of how the things should work.

one of the problems is when the regs were written they fixed the DC interest between 7.5 and 8.5%, which at the time was probably understating things.

so, can you imagine if instead they tied the testing % to the current interest rate?

[Mike Preston]

I couldn't find the text of your post in any link.

[Tom Poje]

The text itself (somewhat similar to Ferenzy article) was from FT Williams commentary, but it is still all based on what is in the Fed Register of the proposed regs

sorry to be so confusing

[Bird]

on the other hand, the db/dc combo plans have resulted in some extremely large percents to HCE and at the most 7.5% to NHCEs, arguably an abuse of how the things should work.

one of the problems is when the regs were written they fixed the DC interest between 7.5 and 8.5%, which at the time was probably understating things.

so, can you imagine if instead they tied the testing % to the current interest rate?

I agree Tom, you saved me from some typing. I can see being threatened, but certainly not indignant about the proposal.

[My 2 cents]

In my non-professional capacity as a taxpayer, I have a lot of difficulty getting upset at testing changes aimed at limiting the ability of HCE business owners to set up significant tax-favored savings for themselves while providing only pittances to their non-HCE employees. If they want to set up something truly non-discriminatory, by all means they should be able to do so, but if they are only interested in establishing plans that are essentially only for their own benefit, too bad if the rules are tightened up limiting such choices. As noted in one of the earlier posts, "I certainly understand the IRS attempt to curtail some of the things I have seen - the formulas in which the owner gets 'a gazillion %' in a DB/DC combo plan just because of the mathematics of the way things work out and the NHCEs get the gateway only." If it winds up forcing the termination of "a gazillion" plans (as observed by another poster above) that are only really helping the business owner and doing virtually nothing for anyone else, nothing much is lost. Let the sponsors either boost the amounts being contributed for the NHCEs so the plan(s) will pass a reasonably tight non-discrimination test or save for retirement on an after-tax basis. After all, the tax-favored treatment is intended to foster the creation of retirement security for rank-and-file employees.

[Tom Poje]

sort of:

we gave you folks a chance to do something a little extra

you have carried it to such an extreme that it is an abuse

so time to reign it in somewhat.

[jpod]

But, there's the rub. Many business owners have the following attitude, and whether it is the right way of looking at it or not it exists: I am not going to set up a plan and make contributions for my employees unless over time the benefit of the tax-deferral for me on the money which I would otherwise just pay myself as I earn it outweighs the cost of putting money away for my employees. Consequently, the flexibility/disparity permitted by the 401(a)(4) regulations is designed to encourage meaningful contributions for employees by juicing the pot for the owners. Is it too juiced? I don't think so.

[My 2 cents]

"I am not going to set up a plan and make contributions for my employees unless over time the benefit of the tax-deferral for me on the money which I would otherwise just pay myself as I earn it outweighs the cost of putting money away for my employees." My suspicion is that this attitude is not what Congress had in mind when they decided to encourage the establishment and maintenance of retirement plans through favorable tax treatment (which is considered to be a large tax expenditure).

[Kevin C]

So, how many of your new comparability plans are using average benefits to pass some of the rate groups? For ours, it's less than half. We even have a couple of new comp plans with the owner's spouses contributing 90% of pay that don't pass average benefits, so their rate groups have always had to pass ratio percentage.

I can see this change being significant for some plans, but for the 60 yr old doctor/dentist/lawyer with a young office staff, will this really change anything? I'm not convinced yet that the sky is falling.

[Mike Preston]

I don't have access to the FtWilliam write up that you quoted. I hope nobody reads that write-up too closely because the references to rate groups are misguided. Instead, those references should be to allocation (or benefit) formulas.

But as a warning that things are potentially changing I guess it serves its purpose and doesn't need to dot every i and cross every t.

[Tom Poje]

Someone needs to tell the IRS that people should not read their example 7 too closely because it refers to the rate groups not satisfying things rather than the formula.

Example 7
The facts are the same as in Example 6, except that the classification of employees who are entitled to benefit under the formula that applies to H1 includes N1 and N2, who are identified by name. Under paragraph ©(3)(ii) of this section, the rate group with respect to H1 does not satisfy the nondiscriminatory classification test under § 1.410(b)-4 because the classification of H1, N1 and N2 by name does not satisfy the reasonable classification requirement of § 1.410(b)-4(b). Therefore, the rate group with respect to H1 will satisfy paragraph ©(3) of this section only if the ratio percentage of the rate group is greater than or equal to 70 percent.

[My 2 cents]

Someone needs to tell the IRS that people should not read their example 7 too closely because it refers to the rate groups not satisfying things rather than the formula.

Example 7

The facts are the same as in Example 6, except that the classification of employees who are entitled to benefit under the formula that applies to H1 includes N1 and N2, who are identified by name. Under paragraph ©(3)(ii) of this section, the rate group with respect to H1 does not satisfy the nondiscriminatory classification test under § 1.410(b)-4 because the classification of H1, N1 and N2 by name does not satisfy the reasonable classification requirement of § 1.410(b)-4(b). Therefore, the rate group with respect to H1 will satisfy paragraph ©(3) of this section only if the ratio percentage of the rate group is greater than or equal to 70 percent.

I thought that the focus of the proposed regulations was to require such a rate group to pass the 70% ratio test, that the easier-to-pass coverage rates applicable to plans where the average benefits test was met were not available when the formula applicable to the HCE is not available to everyone who meets a truly nondiscriminatory classification, just specific, named individuals.

If there are 18 other non-HCEs who are otherwise indistinguishable from N1 and N2, to pass 401(a)(4), shouldn't the other 16 also get the same (presumably more generous) formula as N1 and N2? Correcting by just giving the more generous formula to enough individuals to pass the easier average benefit test percentages is contrary to the goal of the benefit plans being non-discriminatory. At the very least, limiting the people dragged along to allow H1 to get the intended benefit is not in the spirit of the law.

[Mike Preston]

Tom, I don't see what you are talking about. The wording of #7 is precisely what it should be to mimic the reg.

[Mike Preston]

.02: I guess you are entitled to your opinion. It is so difficult to argue, point by point, with posts when the language used doesn't communicate precisely. Care to re-word the last two lines of your first paragraph?

As far as your second paragraph, I think I'll pass on commenting other than to say that "spirit of the law" is pretty hard to pin down so I'm glad you have convinced yourself as to what that is.

[My 2 cents]

My paragraph had read:

"I thought that the focus of the proposed regulations was to require such a rate group to pass the 70% ratio test, that the easier-to-pass coverage rates applicable to plans where the average benefits test was met were not available when the formula applicable to the HCE is not available to everyone who meets a truly nondiscriminatory classification, just specific, named individuals."

Attempted clarifying rephrase:

I thought that the focus of the proposed regulations was that if your plan specified people eligible for a given formula by name rather than by specifying an acceptable non-discriminatory classification, then you will not be permitted to demonstrate compliance with 401(a)(4) based on the more favorable percentages available to plans passing the average benefits test.

In thinking about my opinions, please bear in mind that in this matter, I am primarily concerned about the tax expenditure associated with tax-favored treatment being given to plans whose primary purpose is to accumulate wealth on a tax-favored basis for the highly compensated owners. They don't need my tax dollars to provide themselves a comfortable retirement.

[jpod]

No, but depending upon the facts they may "need" your tax dollars in order for it to make sense, to them, to make a 5-7.5% contribution for their employees.