House Bill Would Change Non-Discrimination Testing Rules
December 23, 2009
(PLANSPONSOR.com) – A bill has been introduced in the U.S. House that would
change how qualified retirement plans perform non-discrimination testing.
The Retirement Fairness Act of 2009 (H.R. 4126) provides
that:
- Non-highly compensated employees who work part time or
don’t work a full year would be counted only as a fraction of a full time
employee for purposes of non-discrimination testing;
- The testing would take into account only vested benefits of
non-highly compensated employees, but all benefits of highly compensated
employees; and
- Cross testing would not be allowed, and for cash balance
plans, accrued benefits calculated as the balance of a hypothetical account (or
substantially similar accruals) shall be treated as contributions.
Generally, defined contribution (DC) plans are tested on the
amounts put into participants' accounts, while defined benefit (DB) plans are
tested on the annuity payable at normal retirement age for each participant.
However, the current nondiscrimination rules allow cross-testing – that is,
testing a DC plan based on the normal retirement benefit that the allocation
would support, or testing a DB plan based on the present value of the normal
retirement benefit.
With cross testing, a DC plan sponsor could provide
higher contributions for increased service or age.
The Retirement Fairness Act of 2009 would allow
the Treasury Department /Internal Revenue Service (IRS) to prescribe regulations allowing exceptions to the prohibition on
cross testing, with certain conditions.
The text of H.R. 4126 is here.
Rebecca Moore
editors@plansponsor.com