IRS Proposes Nondiscrimination Amendments

March 16, 2004 ( - The US Internal Revenue Service (IRS) has proposed changes to the nondiscrimination rules for employees of tax-exempt organizations.

>The proposed amendments to the regulations under section 410(b) of the Internal Revenue Code (IRC) would permit, in certain circumstances, employees of a tax-exempt organization – as described in section 501(c)(3) – to be excluded for the purpose of testing whether a 401(k) plan or a section 401(m) meets the requirements for minimum coverage specified in section 410(b) regarding nondiscrimination testing, according to the IRS.

>Specifically, the IRS’ proposal recognizes that many tax-exempt organizations maintained section 403(b) plans prior to the enactment of Small Business Job Protection Act of 1996 (SBJPA), due to prohibits on tax exempt organizations from providing 401(k) plans.   However, the rules have changed, allowing tax-exempt firms to provide 401(k) plans, and that in order to offer 401(k) plans to their employee base as a whole, these organizations need to maintain the 403(b) offerings to the same employees not covered under a 401(k) plan and the 403(b) plan.  

The proposed rules would implement a directive by Congress, contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), to amend Section 1.410(b)-6(g) of the regulations. By allowing Section 403(b) plan participants to remain excludable employees for the purpose of the nondiscrimination test, tax-exempt employers would not be forced to switch their employees over to a Section 401(k) or Section 401(m) plan, the IRS said.

Written or electronic comments and requests for a public hearing must be received by June 14, 2004.   Comments can be submitted to : CC:PA:LPD:PR, room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.