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.

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