IRS will withdraw portions of proposed regs affecting nondiscrimination requirements for qualified plans

The IRS has announced that it will withdraw certain provisions included in recently released proposed regulations relating to nondiscrimination requirements applicable to qualified retirement plans under Code Sec. 401(a)(4). In January 2016, the IRS issued proposed regulations modifying a number of provisions in the existing nondiscrimination regulations to address situations and plan designs, including benefit formulas for individual employees or groups without a reasonable business purpose.

The proposed changes to IRS Reg. §§1.401(a)(4)-2(c) and 1.401(a)(4)-3(c) were intended to address the designs of certain qualified retirement plans that took advantage of flexibility in current nondiscrimination rules to provide a special benefit formula for certain employees, while not extending the formula to a reasonable classification of employees, established under objective criteria. The proposed regulations would have limited the existing rule under which a rate group with respect to a highly compensated employee is treated as satisfying the average benefit percentage test to those situations in which the allocation formula (or benefit formula) that applies to the highly compensated employee also applies to a reasonable business classification. In an example provided by the IRS, if a benefit formula applied solely to a highly compensated employee who was identified by name, it did not apply to a reasonable business classification. In such a case, the proposed regulations would have required that the rate group with respect to that individual satisfy the ratio percentage test. The IRS stated that taxpayers could rely on these provisions in order to satisfy the nondiscrimination requirements of section 401(a)(4) for plan years beginning on or after January 1, 2014, and until the final regulations were issued and became applicable.

Since the publication of the proposed regulations, the IRS has given additional consideration to the potential effects of the provisions that would modify Reg. §§1.401(a)(4)-2(c) and 1.401(a)(4)-3(c) on the adoption and continued maintenance of qualified retirement plans with a variety of designs and has concluded that further consideration will be needed with respect to issues relating to those provisions. Thus, the IRS will withdraw the proposed regulation provisions that would modify Reg. §§1.401(a)(4)-2(c) and 1.401(a)(4)-3(c).

The IRS notes that other provisions in the proposed regulations, including those that would provide additional benefits to a grandfathered group of employees after certain coverage changes in a defined benefit plan, are not affected by this action.

Source: IRS Announcement 2016-16, I.R.B. 2016-18, May 2, 2016.

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