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Nondiscrimination Testing and Permitted Disparity in Qualified Retirement Plans (Portfolio 356)

Tax Management Portfolio, Nondiscrimination Testing and Permitted Disparity in Qualified Retirement Plans, No. 356-4th, discusses the rules governing the nondiscrimination in benefits and contributions requirement for qualified plans. The nondiscrimination rules analyzed include the safe harbors for plans with certain benefit or allocation formulas, including permitted disparity, and the general nondiscrimination test for other plans.

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Tax Management Portfolio, Nondiscrimination Testing and Permitted Disparity in Qualified Retirement Plans, No. 356-4th, discusses the rules governing the nondiscrimination in benefits and contributions requirement for qualified plans. The nondiscrimination rules analyzed include the safe harbors for plans with certain benefit or allocation formulas, including permitted disparity, and the general nondiscrimination test for other plans.


The treatment of the various special rules for testing a plan's benefits and contributions for nondiscrimination are examined. The special rules examined include the conversion of benefits or contributions for testing on an alternative basis, the treatment of employee contributions, the nondiscrimination standards for former employees, determining the plan to be tested under the aggregation, disaggregation and restructuring rules, determining the compensation to be used for various nondiscrimination tests, and the various effective dates, transition rules, and other compliance considerations under the nondiscrimination regulations.


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AUTHORS

KYLE N. BROWN
Kyle N. Brown, University of North Carolina at Chapel Hill (B.A.); Campbell University School of Law (J.D.); National Law Center at George Washington University (LL.M. in Taxation); formerly with Internal Revenue Service, Employee Plans Technical and Actuarial Division, and Watson Wyatt Worldwide, Research and Innovation Center, Washington, D.C.; member, District of Columbia Bar, North Carolina Bar, Tax Court Bar, and United States Supreme Court Bar.

TABLE OF CONTENTS

Detailed Analysis

I. Overview

II. Safe Harbors

Introductory Material

A. Defined Benefit Plans

1. Generally

2. Unit Credit Safe Harbor

3. Fractional Accrual Rule Safe Harbor

4. Insurance Contract Safe Harbor

5. Exceptions to Uniformity Requirements

B. Defined Contribution Plans

1. Uniform Allocation Safe Harbor

2. Uniform Points Safe Harbor

3. Uniform Formula Requirement for Safe Harbors

III. Permitted Disparity

A. Generally

1. Plans That May Not Use Permitted Disparity Rules

2. Relationship to Other Requirements

3. Definitions

B. Defined Benefit Plans

1. Excess Benefit Plans

2. Offset Benefit Plans

3. Uniform Disparity Limits

4. Integration or Offset Level

5. Early or Late Retirement

6. Benefits, Rights & Features

7. Overall Permitted Disparity Limits

8. Cash Balance Plans

9. Target Benefit Plans

10. Railroad Retirement Plans

C. PIA Offset Plans

1. PIA Replica Plans

2. PIA Offset Safe Harbor

3. Estimated Wage History

D. Defined Contribution Plans

1. Maximum Permitted Disparity

2. Integration Level

IV. General Test

Introductory Material

A. Generally

1. Normal and Most Valuable Accrual Rate

2. Allocation Rate

3. Normalizing Benefits

B. Determining Accrual Rates

1. Current Plan Year Measurement Period - Annual Method

2. Current Plan Year and All Prior Years Measurement Period - Accrued to Date Method

3. Current Plan Year and All Prior and Future Years Measurement Period - Projected Method

4. Grouping

5. Assumptions

C. Imputed Disparity

1. Testing on a Contribution Basis

2. Testing on a Benefits Basis

V. Conversion of Contributions and Benefits

Introductory Material

A. Testing a Defined Contribution Plan on a Benefits Basis

B. Testing a Defined Benefit Plan on a Contributions Basis

C. Target Benefit Plans

1. Generally

2. Stated Benefit Formula

3. Theoretical Reserve

D. Cash Balance Plans

E. Floor/Offset Plans

VI. Options and Special Rules

Introductory Material

A. Test on the Basis of Benefits or Contributions

1. In General

2. Safety Valve

B. Imputed Disparity

C. Section 415 Limits

D. Post NRA Accruals

E. Early Retirement Windows

F. Determination of Benefits on Other Than Plan Year Basis

G. Adjustment for Certain Benefits

1. Qualified Preretirement Survivor Annuities

2. Qualified Disability Benefits

3. Unpredictable Contingent Event Benefits

H. Adjustment for Certain Distributions

I. Qualified Social Security Supplemental Benefit

J. Testing Age

K. Testing Compensation

L. Testing Service

M. Duplication of Benefits and Service

VII. Employee Contributions

Introductory Material

A. Employee-Derived Benefit

B. Employer-Derived Benefit

1. Section 411(c) Rules

2. Composition of Workforce Method

3. Minimum-Benefit Method

4. Grandfathered Plans

5. Government Plans

6. Frozen Employee Contributions

VIII. Other Nondiscrimination Standards

A. Optional Benefits, Rights, and Features

1. General Rule

2. Current Availability

3. Effective Availability

4. Definitions

5. Mergers, Frozen Plans

6. Early Retirement Window Benefits

B. Plan Amendments

C. Early Termination Restrictions

1. Limit on Annual Payments

2. Security Arrangements

D. Former Employees

1. Former Highly Compensated Employees

2. Amount of Benefits or Contributions

3. Availability of Benefits, Rights, and Features

IX. Plan Aggregation and Restructuring

A. Plan Aggregation

1. Accrual or Allocation Rates

2. Benefits, Rights and Features

B. Restructuring

X. Compensation Issues

A. Generally

B. Section 415 Compensation

1. General Definition of Section 415 Compensation

2. Safe Harbor Alternative Definitions - Form W-2 Wages

3. Accrued Compensation

C. Section 414(s) Compensation

1. Safe Harbor Definitions

2. Alternate Definitions of Compensation

3. Prior-Employer Compensation and Imputed Compensation

4. Rate of Pay

5. Self-Employed Individuals

6. Application of Section 414(s) Definition of Compensation

D. Section 401(a)(4) Compensation

XI. Effective Dates, Transition Rules and Other Compliance Matters

A. Effective Dates

1. Generally

2. Governmental and Church Plans

3. Collectively Bargained Plans

B. Good Faith Transition Rule

1. Section 401(a)(4) - Benefits and Contributions Issues

2. Section 401(a)(4) - Benefits, Rights and Features Issues

3. Section 401(a)(4) - Past Service Credit Issues

4. Section 401(a)(4) - Employee Contributions Issues

5. Section 410(b) - Minimum Coverage Issues

6. PIA Offset Plans and Section 401(l) Integration Issues

7. Section 401(a)(17) Compensation Limit Issues

8. Section 414(s) Compensation Definition Issues

C. Fresh Start Transitions

1. Fresh Start without Wear-Away

2. Fresh Start with Wear-Away

3. Fresh Start with Extended Wear-Away

4. Frozen Accrued Benefit

5. Fresh Start Group

D. Failure to Comply

E. Compliance Substantiation

1. Quality Of Data

2. Single Day “Snapshot” Testing

3. Identification of Highly Compensated Employees

4. Three-Year Testing Cycle

5. Multiemployer Plans

F. Correction Mechanism


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Sample Fresh Start Plan Amendment Language

Worksheet 2 Sample Unintegrated Defined Benefit Plan Benefit Formula Language

Worksheet 3 Sample Excess Benefit Plan Benefit Formula Language

Worksheet 4 Sample Offset Benefit Plan Benefit Formula Language

Worksheet 5 Sample Defined Contribution Plan Allocation Formula Language

Worksheet 6 Preamble to Original Proposed Nondiscrimination Regulations, 55 Fed. Reg. 19897 (5/14/90)

Worksheet 7 Preamble to Original Proposed Permitted Disparity Regulations, 53 Fed. Reg. 45917 (11/15/88)

Worksheet 8 Preamble to Original Final Compensation Regulations, 56 Fed. Reg. 47659 (9/19/91)

Worksheet 9 Preamble to Original Final Nondiscrimination Regulations, 56 Fed. Reg. 47524 (9/19/91)

Worksheet 10 Preamble to Original Final Permitted Disparity Regulations, 56 Fed. Reg. 47610 (9/19/91)

Worksheet 11 Preamble to Proposed Nondiscrimination Regulations, 58 Fed. Reg. 3876 (1/12/93)

Worksheet 12 Preamble to Final Compensation Regulations, 58 Fed. Reg. 47061 (9/7/93)

Worksheet 13 Preamble to Final Nondiscrimination Regulations, 58 Fed. Reg. 46773 (9/7/93)

Worksheet 14 Preamble to Final Permitted Disparity Regulations, 58 Fed. Reg. 46828 (9/3/93).

Worksheet 15 Application of § 401(a)(26) to Former Employees Receiving Benefit Increases

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

DOL Opinion Letters:

Cases:

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