IRS Finds Discriminatory Plan Designs

The IRS has found discriminatory plan designs among some defined benefit and defined contribution plans, as well as DB/DC combination plans. The IRS made the report on a portion of its Retirement Plans website, which it updated on April 1.

The discriminatory plan designs the IRS identified are among plans that:

• provide significant benefits to the highly compensated employees (HCEs) and a specified group of non-highly compensated employees (NHCEs) who work very few hours or receive very little compensation; and

• exclude other NHCEs from plan participation.

The allocation to NHCEs is designed so this group receives the minimum to satisfy the mathematical portion of the Internal Revenue Code Section 401(a)(4) nondiscrimination requirements. For example, a plan may use a group of NHCEs who have at least one hour of service and received the least amount of compensation for the plan year. The actual number of NHCEs included in such a plan isn’t a set group, but instead is defined as the minimum number required to satisfy the requirements of Code Sections 401(a)(4) and 410(b).

The IRS says that it has found that more plans using such a plan design, or using variations that produce the same result.