IRS Directs Staff to Watch for Questionable Discrimination-Testing Practices

November 12, 2004 ( - The IRS Director of Employee Plans has alerted employee plan staff that certain retirement plans schemes may violate the discrimination code of qualified plan requirements despite ostensibly satisfying certain provisions of the nondiscriminatory code, according to EBIA.

>The issue at hand revolves around the practice of including all or some of the highly-compensated employees (HCE) in retirement plans, but limiting non-HCEs that accrue plan benefits mostly to employees with very low compensation who often have very short periods of employment. Plans that do this may satisfy discrimination requirements even though the non-HCEs may receive only nominal dollar amounts of which they often never become fully vested.

>The memorandum asserts that section 401(a)(4) of the code, which provides the rules for determining whether a plan meets nondiscrimination requirements, must be interpreted in a manner that is reasonably consistent with the purpose of the rule, and not just the exact wording of it. The staff is being directed to issue adverse determination letter to those plans that seem to utilize this practice, as well as to address other possible practices that may violate the spirit of discrimination rules, according to EBIA.

>For a copy of the memorandum, please visit .