[12736]
October 12, 2000
TO: PENSION COMMITTEE No. 77-00
RE: IRS ISSUES PROPOSED REGULATIONS ON "NEW COMPARABILITY" PLANS
The Internal Revenue Service has issued proposed regulations providing conditions
under which “new comparability” plans may satisfy the Code’s nondiscrimination rules.1 The
proposed regulations follow Notice 2000-142 issued earlier this year, which invited public
comments on such plans. Written comments to the proposed regulations are due by January 5,
2001. A public hearing on the proposed regulations is scheduled for January 25, 2001.3
The proposed regulations would permit application of the current cross-testing rules to
defined contribution plans with “broadly available allocation rates.” Alternatively, defined
contribution plans that do not meet this requirement may be eligible for cross-testing if they
satisfy a “gateway” test that prescribes minimum allocation rates for non-highly compensated
employees (NHCEs).
Broadly Available Allocation Rates. To be broadly available, each allocation rate under
a plan must be currently available to a group of employees that satisfies section 410(b) (without
regard to the average benefit percentage test). Thus, for example, if within one plan, an
employer provides different allocation rates for nondiscriminatory groups of employees at
different locations or different profit centers, the plan would be eligible for cross-testing.
A plan that provides allocation rates based on an employee’s age or service would be
viewed as having broadly available allocation rates if the same schedule of allocation rates is
available to all employees in the plan, and if the schedule provides for “smoothly” increasing
allocation rates at regular intervals of age or service. The proposed regulations specifically
invite comments on whether there are plans using schedules of allocation rates (such as those
based on points or otherwise combining age and service) that would fall outside the definition
of broadly available allocation rates, but that do afford “sufficient opportunity” for NHCEs to
“grow into” higher allocation rates.
1 New comparability plans are defined contribution plans that generally provide higher rates of employer
contributions to highly compensated employees. Such plans may satisfy the Code’s nondiscrimination requirements
through “cross-testing,” under which participant benefits are actuarially projected to normal retirement age.
2 See Institute Memorandum to Pension Committee No. 18-00, dated February 28, 2000.
3 Requests to participate in the hearing must be submitted by the comment deadline.
2Minimum Allocation Gateway Alternative. Plans that do not provide broadly available
allocation rates must satisfy a minimum allocation gateway in order to be eligible for cross-
testing. A plan would satisfy the gateway if (i) each NHCE received an allocation of at least 5-
percent of the NHCE’s compensation, or (ii) each NHCE in the plan has an allocation rate that is
at least one-third of the allocation rate of the highly-compensated employee (HCE) with the
highest allocation rate.
The proposed regulations would not modify the general rule that prohibits aggregation
of a 401(k) plan or 401(m) plan with a plan providing nonelective contributions. Thus, elective
and matching contributions would not be considered for purposes of meeting the gateway
requirement. However, if an employer also provides a 401(k) plan, then to the extent the HCEs
are electing contributions under that plan, the highest HCE allocation rate may be lower for
purposes of determining the minimum allocation rate for NHCEs. Additionally, nonelective
401(k) safe harbor contributions may be taken into account in determining the NHCE allocation
rate.
Combined Defined Benefit/Defined Contribution Plans. The proposed regulations also
contain a set of rules under which nondiscrimination may be demonstrated by combining a
defined benefit plan and a defined contribution plan. In order to do so, the combined plan must
(i) be primarily defined benefit in character, (ii) consist of broadly available separate plans, or
(iii) satisfy a minimum aggregate allocation gateway (that differs from the test applicable to
non-combined plans). Detailed requirements with respect to each alternative are provided in
the regulations.
Component Plans and Permitted Disparity. “Component plans” may not be used to
determine whether a defined contribution plan provides broadly available allocation rates or
satisfies the minimum allocation gateway. Similarly, such plans may not be considered in
determining whether a combined defined benefit/defined contribution plan satisfies the rules
set forth in the proposed regulations. In addition, permitted disparity may not be used in
determining whether the minimum allocation gateways and the “defined benefit in character”
test are met. Permitted disparity may be used, however, to determine whether a combined
defined benefit/defined contribution plan consists of broadly available separate plans. In such
cases, permitted disparity may be applied to either the defined contribution plan or the defined
benefit plan, but not to both.
Effective Date. The regulations are proposed to be applicable for plan years beginning
on or after January 1, 2002.
Thomas T. Kim
Assistant Counsel
Attachment
Attachment (in .pdf format)