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
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The safe harbor rules under IRS Notice 89-23 were repealed by the new 403(b)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did not modify their contribution formulas after the safe harbor was repealed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.