February 10, 1989
TO: PENSION MEMBERS NO. 8-89
RE: IRS PROVIDES SAFE HARBORS FOR SECTION 403(b)(12)
NONDISCRIMINATION RULES
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As you know, the 1986 Tax Reform Act added to the Internal
Revenue Code nondiscrimination rules with respect to plans
providing annuity contracts and custodial accounts qualifying for
favorable tax treatment under section 403(b). These rules are
effective for plan years beginning after December 31, 1988.
Under section 403(b)(12)(A)(ii), contributions pursuant to
a salary reduction agreement will satisfy the nondiscrimination
requirements only if each participant who elects to make salary
reduction contributions may elect to reduce his or her salary by
more than $200, and the opportunity to make such contributions is
available to all employees. Section 403(b)(12)(A)(i) provides
that with respect to all non-salary reduction contributions, a
section 403(b) annuity plan must satisfy the nondiscrimination
requirements of sections 401(a)(4), (5), (17), and (26), 401(m)
and 410(b) in the same manner as if the plan were described in
section 401(a). Each of these provisions permits certain
employees to be excluded from consideration.
Attached is a copy of IRS Notice 89-23, which describes
what the IRS will consider reasonable, good faith interpretations
of these rules pending further guidance. The notice also
contains specific guidelines that, although designated as
transitional safe harbors, prescribe the circumstances under
which the IRS will deem the requirements of section 403(b)(12)
satisfied for plan years beginning in the 1989 or 1990 calendar
year.
The safe harbor for salary reduction contributions under
section 403(b)(12)(A)(ii) allows the exclusion of certain
employees in addition to those exclusions described in the Code.
In addition, this safe harbor allows the employer to consider as
separate organizations geographically distinct units that the
employer historically has treated as separate for employee
benefit purposes and are operated independently on a day-to-day
basis.
The notice also contains three alternative safe harbors
with respect to non-salary reduction contributions. Each of
these safe harbors contains a different formula which examines:
(1) the disparity between the highest percentage of compensation
contributed on behalf of any highly compensated employee and the
lowest percentage contributed on behalf of any nonhighly
compensated employee; (2) the percentage of nonhighly compensated
employees accruing benefits under the plan; and (3) the
percentage of those accruing benefits under the plan who are
nonhighly compensated employees.
We will keep you informed of further developments.
Kathy D. Ireland
Assistant General Counsel
Attachment