From the Executive Director: More than Closed Plans

By Judy Miller • February 17, 2016 • 0 Comments
By now you have heard that the proposed IRS regulation on “Nondiscrimination Relief for Closed Defined Benefit Plans and Additional Changes to the Retirement Plan Nondiscrimination Requirements” is more about the “Additional Changes” than “Closed Defined Benefit Plans.” 

The IRS had made it clear in Notice 2014-5 that they were contemplating broader changes to the rules, not just changes for closed plans. Comments were requested on averaging, using the match to offset some or all of a gateway, and permitting use of a lower interest rate in lieu of a gateway. In fact, some of the comments submitted by ASPPA and ACOPA in response to that notice are reflected in the proposed rule. 

But Notice 2014-5 said absolutely nothing about imposing a reasonable classification requirement on formulas for HCEs, and never hinted that something that draconian was in the works. Guess they didn’t feel a need to ask for advance input, or didn’t want to hear it. 

When I first read Derrin Watson’s ASPPA asap on this proposed change to the rules, I thought surely “business owner” is a reasonable business classification, even if there is only one owner — maybe it isn’t as bad as it looks. But I am now convinced that unless we can stop the train, a classification with one HCE will never be considered “reasonable.” A partner in a large law firm could be reasonably classified as an owner, but the sole owner of an implement dealership, or a small law practice, could not. 

This proposal is of tremendous interest to ASPPA and ACOPA members, and we have established a special task force with equal representation from ACOPA and ASPPA to make strategic decisions on fashioning our response and to allow for a quick response to any issues we encounter in developing comments on the non-closed plan aspects of the proposed rule. 

ACOPA is represented by President-Elect Kurt Piper, Kevin Donovan and Tom Finnegan; the ASPPA reps on the task force are Sal Tripodi, Robert Richter and Jim Nolan. The comment deadline is not until April 28, so we have time not just to develop our comments, but also to get the word out to policymakers on the Hill. 

There are some changes to current nondiscrimination rules that could be helpful. For example, the proposal would extend the ability to average equivalent normal allocation rates for NHCEs to defined contribution plans (the proposal also would cap the amount included in the average for a single individual at 15% — 25% for larger allocations resulting from age or service-based formulas). Also, average NHCE matching contributions could be applied toward up to 3% of the gateway, and the gateway could be avoided altogether by using a 6% interest rate for to normalize benefits instead of a rate in the 7.5% to 8.5% corridor. (Note that our comment letter on 2014-5 did not support totally eliminating the gateway in exchange for a lower interest rate.) Look for Tom Finnegan’s ASPPA asap on these aspects of the proposal for more details. 

We will be commenting on all aspects of the proposal, not just the “reasonable classification” piece. Look for an update on our progress next month.