From the Executive Director: ‘Reasonable Classification’ Redux

By Judy Miller • March 15, 2016 • 0 Comments
Last month I promised an update on the proposed IRS regulation on “Nondiscrimination Relief for Closed Defined Benefit Plans and Additional Changes to the Retirement Plan Nondiscrimination Requirements.” In a nutshell, a rate group would not have access to the average benefits/nondiscriminatory classification test unless the formula used to determine the contribution or benefit for the HCE applies to a “reasonable classification” of employees. And a one-person classification is per se unreasonable. Many plans that now rely on the average benefits/nondiscriminatory classification test for one or more rate groups would have to pass the ratio test. As you well know, in many cases this will be very expensive. 

We have been busy. The ACOPA/ASPPA task force has had several calls to discuss the approach we will take in our comment letter. (Kevin Donovan, Tom Finnegan and Kurt Piper are the ACOPA representatives.) Andy Remo and I have had a number of meetings on the Hill already – with more scheduled – to explain how this proposal is tremendously unfair to small business. And Brian Graff, Craig Hoffman, Tom Finnegan and I have had a couple of meetings with Treasury. We will be continuing these efforts at least until the comment period closes on April 28. I have a feeling it will be a lot longer than that.

So what is the reaction thus far? Hill staffers have understood the issue, and so far all seem to agree that it is not fair to small business and should not be in the rule. Understanding is important, but in this situation we also need action. The next step is to get constituents – you and your clients – to weigh in with members of Congress, and urge them to tell IRS this should not be in a final rule. 

To make this easy to do, we’ve created a mini-website,, featuring a petition that will be submitted to the Treasury Department and a letter to an individual’s elected representatives in Congress. Please send the letters and sign the petition. Then urge others in your office to do the same, and ask your plan sponsor clients who use cross-testing to take action as well. Members of Congress need to know that this affects people who vote in their district, and there is no better way to make that real.

Some years ago, Rep. Lloyd Doggett (D-Texas) introduced legislation that would have prohibited cross-testing altogether. We showed members of Congress that cross-testing provides great benefits, got literally thousands of letters sent to the Hill telling that story, and the bill went nowhere. This is a little different situation. This is a regulation that doesn’t need congressional approval, and appears to be a little tweak to the rules. It is up to us to show that this is more than a little tweak – for some small businesses it is tens of thousands of dollars. Real life situations are needed to engage Congress. Many thanks to those of you who have submitted examples of the cost increase using our web form. I know it is insanely busy now, and hope that after March 15 – or April 1 – you can help me with more examples of how this change would affect small businesses. 

Tell Congress and Treasury how the proposed rule would hurt small businesses! Click here

Now I need to ask for even more. IRS and Treasury do not want anecdotes – they want more comprehensive data, and I can only get that from you. What would “comprehensive data” look like? Look at all of your clients that have cross-tested arrangements, tell me how many you have in total and how many NHCEs benefit, how many of these arrangements rely on the average benefits/nondiscriminatory classification test, how much is currently contributed to these arrangements for NHCEs, and how much additional would be required to pass the ratio test – both in dollars and as a percentage of the current NHCE contribution. We know it’s a big ask, but it is the only way to have impact in our discussions. We are not asking you to redesign the plans to find the most effective individual allocation to pass the ratio percentage test. Instead, for most plans, the NHCE allocation is a flat percentage of pay; how high would you have to raise that percentage to make each rate group pass the ratio percentage test?

We do not need client names for this data set. In fact, aggregate numbers will do. For example, send me an email identifying your firm and tell me “our firm has 50 cross-tested arrangements. 45 of them rely on average benefits for 1 or more rate groups to pass testing. Those businesses currently contribute a total of $1.5 million for NHCEs. It will cost them an additional $850,000 to maintain current HCE benefits and pass the ratio test. The average of the % increase in NHCE costs for these businesses is 65%.” That would be awesome. Please consider taking the time to do it. 

I know this will be a lot of work, but the IRS wants data, and I can only get that data from you.

So, a huge thank you to those who are already supplying us with information. And thank you in advance for sending letters, and accumulating even more data. This is a very big deal, and we are determined to get the right outcome.