Rules that Could Adversely Affect Non-discrimination Testing

A Mercer news release warns that non-profit plan sponsors affected by the IRS’ adoption of new controlled-group rules or repeal of long-standing safe harbor rules (under IRS Notice 89-23) may be adversely affected in coverage and non-discrimination testing.

Beverly Orth, JD, FSA, Principal at Mercer, points out that under the new 403(b) regulations, a number of employers not before part of a controlled group may now be part of controlled group, and will have to consider the plans of all employers within the controlled group for non-discrimination testing purposes. Under controlled group rules, certain organizations which are under common control are required to be treated as a single employer, and a primary provision defines common control to include the fact that at least 80% of the directors of an organization are representatives of, or directly or indirectly controlled by, another organization.

As an example, Orth says a university and hospital that prior to the regulations did not consider themselves part of controlled group, under new regulations, due to overlapping boards of directors, are now considered one employer for testing purposes. “Or it could be more nebulous than that,” Orth warns. She recalls a non-profit employer that had an associated credit union, and the directors of the credit union were employees of the non-profit.

Plans that on their own would pass non-discrimination testing may now be part of a controlled group that does not pass.

Sponsors that find themselves part of a controlled group will now have to share data, and to add to the administrative burden, Orth notes, sponsors could be part of a controlled group one year and not the next if directors or director/employees change.

Other plans that may be adversely affected in non-discrimination testing are those that once were covered under IRS safe harbor rules and did not need to perform non-discrimination testing. The safe harbor rules under IRS Notice 89-23 were repealed by the new 403(b) regulations (see (b)lines Series: 403(b) Regulations: Nondiscrimination Rules). Sponsors that did not modify their contribution formulas after the safe harbor was repealed may fail non-discrimination testing.

Affected plan sponsors should consider performing projected tests before December 31 to determine whether any remedial action would be advisable before year-end, Orth suggests. A projected test is definitely warranted for plans that have a borderline result for the 2009 plan year, she says.

Remedial actions include adjusting contributions for highly compensated employees or making additional contributions to non-highly compensated employees. Sponsors may need to amend their plans to allow for this, Orth says.