On October 6, 2000, the IRS issued proposed regulations for New Comparability (Cross-Tests) plans. The regulations are proposed to be applicable for plan years beginning on, or after January 1, 2002 regardless of when the plan was adopted.

The proposed regulations would require that New Comparability plans satisfy a gateway in order to be eligible to use the cross-testing rules to meet the nondiscrimination requirements of section 401(a)(4).

A plan would satisfy this minimum allocation gateway if;

1. each NHCE (Non-highly Compensated Employee) in the plan has an allocation rate that is at least one third of the allocation rate of the HCE (Highly Compensated Employee) with the highest allocation rate.

2. a plan would be deemed to satisfy this minimum allocation gateway if each NHCE received an allocation of at least 5% of the NHCE's compensation (within the meaning of section 415(c)(3).

In a typical new comparability plan, HCEs receive high allocation rates, while NHCEs, regardless of their age or years of service, receive comparatively low allocation rates. For example; HCEs in such a plan, might receive allocations of 18 or 20% of compensation, while NHCEs might receive allocations of 3% of compensation.

The proposed regulations would not change the general rule prohibiting aggregation of a 401(k) plan or 401(m) plan with a plan providing non-elective contributions. Accordingly, elective contributions and matching contributions would not be taken into account for purposes of the gateway.

If an employer also provides a 401(k) plan, however, then to the extent the HCEs are electing contributions under that plan, the highest HCE allocation rate may be lower than it otherwise would be, which, in turn would lower the minimum required allocation for the NHCEs under the gateway.

Furthermore, if the employer sponsors a safe harbor 401(k) plan that provides for 3% non-elective contributions, then, as noted in Notice 98-52, those non-elective contributions may be taken into account in determining the allocation rates for the NHCEs under section 401(a)(4), including the minimum allocation gateway.

A plan that has broadly available allocation rates would not need to satisfy the minimum allocation gateway and may continue to be tested for nondiscrimination on the basis of benefits.

In order to be broadly available, each allocation rate under the plan must be currently available to a group of employees that satisfies section 410(b) (without regard to the average benefit percentage test).

Thus, for example, if within one plan an employer provides different allocation rates for nondiscriminatory groups of employees at different locations or different profit centers, the plan would not need to satisfy the minimum allocation gateway in order to use cross testing.

In addition, a plan that provides allocation rates that increase as an employee ages or accumulates additional service would be treated as having broadly available allocation rates, if the schedule of allocation rates satisfies certain conditions that permit participants to ``grow into" higher allocation rates.

The proposed regulation would provide that in order for a schedule of allocation rates to increase smoothly, the allocation rate for each age or service band cannot be more than 5 percentage points higher than the allocation rate for the immediately preceding band and cannot be more than twice that allocation rate. For example, if the allocation rate for an age or service band were 6%, the allocation rate for the next higher age or service band could not exceed 11% (i.e., the lesser of 11% (6% plus 5%) and 12% (2 times 6%)).

With proper planning, Administrative Retirement Services, Inc. believes that plan sponsors of New Comparability plans can still accomplish their contribution objectives.

© Administrative Retirement Services, Inc.  2000
Published by Administrative Retirement Services, Inc., E-mail address:  arsinc@prodigy.net.  Copyright 2001 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved.  Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, Administrative Retirement Services, Inc. does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information.  Readers should seek specific advice before acting with regard to the subjects mentioned here.

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