{"id":3338,"date":"2016-03-10T20:48:51","date_gmt":"2016-03-10T20:48:51","guid":{"rendered":"http:\/\/63.247.133.14\/~vaniwaar\/?p=3338"},"modified":"2016-03-10T20:48:51","modified_gmt":"2016-03-10T20:48:51","slug":"surprises-proposed-cross-testing-regulations","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2016\/03\/10\/surprises-proposed-cross-testing-regulations\/","title":{"rendered":"Surprises in the proposed cross-testing regulations"},"content":{"rendered":"

\"surprised<\/a><\/p>\n

On January 29th<\/sup>, the IRS proposed revisions to the nondiscrimination testing regulations of \u00a71.401(a)(4).\u00a0 The title of proposed regulations (and most of the attention\u00a0generated by them) is focused on the relief\u00a0for closed defined benefit (DB) plans.\u00a0 This post summarizes the proposed changes that would affect more than just closed DB plans.\u00a0 Most of them are beneficial to plan sponsors, but one is not.<\/p>\n

The bad news \u2013 benefit formula restrictions<\/u><\/p>\n

The biggest surprise is a proposed restriction in setting different benefit levels for different participant groups.<\/p>\n

Currently, plans can generally separate the participant population into groups with different benefit levels\/formulas as desired, so long the plan is doesn\u2019t disproportionately favor Highly Compensation Employees (HCEs) relative to non-HCES.\u00a0 Plans can even go so far as to separate each plan participant into his or her own \u201cgroup\u201d.<\/p>\n

The proposed regulations would require HCEs\u2019 benefit formulas to apply to a \u201cReasonable Classification\u201d of employees*.\u00a0 This is a \u201cfacts and circumstances\u201d determination. \u00a0\u00a71.410(b)-4(b) states that \u201creasonable classifications generally include specified job categories, nature of compensation (i.e. salaried or hourly), geographic location, and similar business criteria\u201d.\u00a0 Picking participants by name (or in a way that effectively does that) is not considered a reasonable classification.<\/p>\n

This is an important issue for plans that allow each participant to have a separate benefit level and rely of the Average Benefit Test to satisfy \u00a71.401(a)(4).\u00a0 Other plans may need to consider if their benefit groups are a reasonable classification.<\/p>\n

*Unless the rate group satisfies the Ratio Percentage Test.<\/p>\n

The good news \u2013 cross-testing gateways for aggregated DB\/DC plans<\/u><\/p>\n

The favorable part of the proposed regulations is more flexibility in combining DB and DC plans for nondiscrimination testing.\u00a0 These proposed changes were suggested by the IRS in Notice 2014-5<\/a>, so they aren\u2019t a surprise to those that have kept up with the IRS\u2019s previous relief efforts for closed DB plans.\u00a0 However, those suggestions haven\u2019t got much attention so they are good news for many.<\/p>\n

Plans must pass through a \u201cgateway\u201d before aggregating DC and DB plans in a cross-test.\u00a0 A cross-test is generally much more favorable than testing each plan separately.\u00a0 The currently available gateways are:<\/p>\n

    \n
  1. The DB\/DC plan is \u201cprimarily defined benefit in character\u201d<\/li>\n
  2. The DB\/DC plans consist of broadly available separate plans<\/li>\n
  3. The DB\/DC plan provides a minimum allocation to all benefitting non-HCEs<\/li>\n<\/ol>\n

    The proposed regulations would expand the DB\/DC gateway options in three ways:<\/p>\n

    1.\u00a0 New gateway<\/em>: The proposed regulations would add another gateway \u2013 passing the cross-test test with a 6% interest rate (rather than the standard 7\u00bd% to 8\u00bd%). While the DB\/DC would technically still need to pass the cross-test with a standard interest rate, this option could practically eliminate the gateway requirement for DB\/DC plans that can pass with 6% interest.<\/p>\n

    2. \u00a0Matching contributions use<\/em>: The proposed regulations would allow the average matching contribution for non-HCEs (up to 3% of pay) to count toward the DB\/DC minimum allocation gateway. Matching contributions would still not be included in the cross-test.<\/p>\n

    3. \u00a0Option to average DC allocation rates<\/em>: Current rules allow DB allocation rates for non-HCEs to be averaged for satisfying the minimum allocation gateway. The proposed regulations would allow the same treatment for DC allocation rates.\u00a0 The purpose of this change is to allow plans to provide lower allocation rates for those with less service by providing higher rates to those with more service.<\/p>\n

    The IRS notes that they\u2019re considering if restrictions on this option are needed to ensure it is used as intended, and not as another technique for minimizing non-HCE benefits.\u00a0 The proposed regulations would also limit averaging of DB and DC rates to reduce the impact of outliers.<\/p>\n

    Many plans that satisfy the \u00a71.401(a)(4) requirements with a general test will need or want to revisit their benefit formula design if these proposed regulations become final.\u00a0 There is sure to be a lot of resistance to the benefit formula restrictions, so the regulations may not be finalized as proposed.\u00a0 If you would like to send comments on the proposed regulations<\/a> you can do so until April 28, 2016.<\/p>\n

    Plan sponsors may apply the proposed regulations specific to closed DB plans right away, but may not use the flexibility of the other proposed cross-testing rules until they are finalized.\u00a0 We encourage you to contact your actuary if you have questions about how these proposed rules would affect your plan.<\/p>\n","protected":false},"excerpt":{"rendered":"

    On January 29th, the IRS proposed revisions to the nondiscrimination testing regulations of \u00a71.401(a)(4).\u00a0 The title of proposed regulations (and most of the attention\u00a0generated by them) is focused on the relief\u00a0for closed defined benefit (DB) plans.\u00a0 This post summarizes the proposed changes that would affect more than just closed DB plans.\u00a0 Most of them are […]Read More… from Surprises in the proposed cross-testing regulations<\/span><\/a><\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3,4,5,6,26],"tags":[],"acf":[],"yoast_head":"\nSurprises in the proposed cross-testing regulations - Via Actuarial Solutions<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/viaactuarial.com\/2016\/03\/10\/surprises-proposed-cross-testing-regulations\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Surprises in the proposed cross-testing regulations - 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