[13699]
July 3, 2001
TO: PENSION COMMITTEE No. 44-01
RE: IRS ISSUES FINAL REGULATIONS AND REVENUE RULING ON "NEW
COMPARABILITY" PLANS
The Internal Revenue Service has issued final regulations providing conditions under
which “new comparability” plans may be eligible for “cross-testing” to satisfy the Code’s
nondiscrimination requirements.1 In conjunction with the final regulations, the IRS also
published Revenue Ruling 2001-30, which sets forth additional guidance on a particular
component of the final regulations.2
The final regulations generally follow the guidance provided in the proposed
regulations issued in October 2000.3 Like the proposed regulations, the final regulations permit
application of cross-testing to a plan if it (1) provides for “broadly available allocation rates”4;
(2) provides for certain age-based allocation rates5; or (3) satisfies a “minimum allocation
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 testing on a “benefits basis” (i.e., “cross-testing”), under which participant benefits are actuarially projected
to normal retirement age.
2 The revenue ruling sets forth “specific conditions” for determining whether an allocation is a “defined benefit
replacement allocation” under the “broadly available allocation rate” requirement. The final regulations, which
provide “basic conditions” for defined benefit replacement allocations (under the topic of “transition allocations”),
explain that guidance separate from the final regulations was issued to provide “ongoing flexibility to the IRS and
Treasury to respond to changing circumstances, or additional information relating to defined benefit replacement
allocations.”
3 See Institute Memorandum to Pension Committee No. 77-00, dated October 12, 2000. The proposed regulations
followed Notice 2000-14, which had invited public comments on new comparability plans. See Institute
Memorandum to Pension Committee No. 18-00, dated February 28, 2000.
4 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).
5 A plan with an “age-based allocation rate” must have the same schedule of allocation rates available to all
employees in the plan, and a schedule that “smoothly” increases at regular intervals of age or service.
2gateway” test that prescribes minimum allocation rates for non-highly compensated
employees (NHCEs).6
Notable differences between the final and proposed regulations include the following:
• The final regulations expand the circumstances under which a plan is viewed as
having “broadly available allocation rates.” Specifically, for purposes of
determining whether a plan provides broadly available allocation rates, the final
regulations (1) permit two allocation rates to be aggregated in a manner similar to
the aggregation of certain benefits, rights or features, thereby permitting “excess
NHCEs” with a higher allocation rate to be used to support a lower allocation rate,
and (2) provide that differences in allocation rates resulting from any method of
permitted disparity provided for under the Code section 401(l) regulations are
disregarded.
• The final regulations create a separate category of plans that qualify for cross-testing
— plans using an “age-based allocation rate.”7 The final regulations also expand this
group of plans to include those that provide for allocation rates based on a “uniform
target benefit allocation.”
• The final regulations clarify the scope of “NHCE” for purposes of determining
which employees receive a “minimum allocation” under the “gateway” requirement.
The application of various “minimum coverage” requirements of Code section
410(b) under the minimum allocation gateway also is clarified.
• The final regulations provide that certain “transition allocations” — “defined benefit
replacement allocations,”8 “pre-existing replacement allocations,” or “pre-existing
merger and acquisition allocations” — may be disregarded for purposes of the
“broadly available allocation rate” requirement. Each of these transition allocations
is described in the final regulations.
• As under the proposed regulations, the final regulations permit defined contribution
and defined benefit plans that are tested together as a single “combined” plan to be
tested under a similar “minimum allocation gateway”; however, for this purpose,
the allocation rate for each NHCE need not exceed 7.5 percent of pay.
Consistent with the effective date set forth in the proposed regulations, the final
regulations apply for plan years beginning on or after January 1, 2002. For further details
6 A plan satisfies 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.
7 Under the proposed regulations, plans with qualifying age-based allocation designs had been permitted under the
“broadly available allocation rate” prong of the regulation.
8 As noted above, Revenue Ruling 2001-30 provides specific conditions under which an allocation qualifies as a
“defined benefit replacement allocation.”
3regarding the IRS guidance on new comparability plans, please refer to the final regulations and
the revenue ruling, which are attached, and the Institute’s memorandum on the proposed
regulations cited above.
Thomas T. Kim
Assistant Counsel
Attachments
Attachment (in .pdf format)