Interesting notes from the IRS website on nondiscrim

[Tom Poje]

just a portion of the notes found at

https://www.irs.gov/Retirement-Plans/Discriminatory-Plan-Designs-Using-Short-Service

Plans may discriminate even though they allocate a larger percentage of compensation to NHCEs. With this design, NHCEs, on average, may seem to receive a misleadingly large accrual or allocation level. For example, an NHCE participant with $200 of annual compensation may receive a profit sharing allocation of $200 (a benefit equal to 100% of compensation), while an HCE with compensation of $200,000 may receive a benefit of only 25% of compensation or $50,000.

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they dont satisfy Treas. Reg. Section 1.401(a)(4)-1©(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

...........

In other words, yes you can get the plan to pass mathematically but that it is quite possible the formula won't pass a reasonable interpretation of the intent of the regs.

[ESOP Guy]

The odd part of that is if you gave the person who made $200 a $50 contribution (25% of $200 in case it isn't obvious) you would have plan that meets the discrimination rules and no one would ever say otherwise. Everyone got 25% of compensation after all. .

Yet this person is $150 worse off then the allocation that supposedly violates the rules.

Hello we are from the government and we are here to help you-- strikes again!

[GMK]

After further review, I'm pretty sure this isn't about plan designs where Everybody, including every NHCE, gets the 100% or 25%.

It's about plan designs where only the lowest paid of the NHCE's (and all of the HCE's) are eligible for a contribution, and the higher paid NHCE's get 0%, in order to maximize the benefit to the HCE's. This may explain how the design could favor HCE's.

(Kinda like the income tax breaks at the ends of the income scale, no? ... except the IRS isn't required to worry about that sort of discrimination against higher-paid NHCE's.)

[Kevin C]

That web page looks a lot like a condensed version of the 2004 Carol Gold memo on the subject.

https://www.irs.gov/pub/irs-tege/directive.pdf