DWC Digest
Treasury Department Proposal Would Restrict Small Business Retirement Plans
 

Plan sponsors may no longer be able to cost-effectively use the long-standing new comparability (a/k/a cross-tested) profit sharing plan formula if the Treasury Department finalizes its proposed rule.
The Good 
 
In January of this year, the Treasury Department proposed a new rule that would ease some of the nondiscrimination rules that apply to certain defined benefit plans.  Sounds great, right? What could be wrong with easing the rules?  Well, nothing, but unfortunately, the proposal doesn't stop there. 

The Bad 

Almost as an "oh, by the way" they also threw in a provision that would make it more expensive for defined contribution plans sponsored by small businesses to pass annual nondiscrimination testing on their profit sharing contributions.  This provision restricts the use of so-called new comparability/cross-tested profit sharing formulas (described below).  Formulas that provide the same percentage of pay to all employees or are integrated with Social Security are not impacted by the proposal.

The Gory Details  
 
We won't go too far down the rabbit hole, but here is the gist.  The new comparability profit sharing design allows different contribution rates for different groups of employees.  Those contributions are projected to normal retirement age to show that future benefits are equivalent even though current contributions might not be.

In other words, this design allows those closer to retirement - usually the owners of the company - to maximize their contributions, while the other participants receive a still generous, but smaller contribution, often in the range of 3% to 5% of pay.  This design has been in use for more than 15 years, and the IRS has continued to approve prototype plan documents that include it as recently as 2014.

This new proposal would add a rule that calls for larger company contributions to all employees to pass the nondiscrimination test unless the contribution groupings are based on a "reasonable business classification."  The problem is that the proposal doesn't really define what "reasonable" means.

It does tell us it would be unreasonable to name a specific person, for example - Group A consists of John Doe.  But what if the plan says Group A consists of owners of the company and John Doe happens to be the only owner?  Reasonable or not?  If not, how many owners does it take for that grouping to be considered reasonable?  Three? Ten?  The proposal doesn't say, and it would be up to the IRS to decide on a case-by-case basis.

More expensive contributions or being subject to the whims of the IRS?  Neither one sounds especially positive. 

What You Can Do  

DWC is actively involved with industry organizations that work with the IRS, Department of Labor and Congress to encourage retirement plan policy that is beneficial to small business.  We are collectively fighting this ridiculous proposal, but there is strength in numbers.

You can help by visiting www.SaveMyPlan.org or using the buttons in the right sidebar of this message to ask both the Treasury Department and Congress to back off.  The letters are pre-written, so all you have to do is click the applicable button - either as a plan sponsor or as a service provider - and add your information to automatically send a message to Washington, D.C.

It takes less than 5 minutes but can make a huge difference.  And, please feel free to forward this message to any colleagues who might wish to make their voices heard.

       
 
March 2016

Let Your 
Voice 
Be Heard

Click the applicable button(s) below to let the Treasury Department and Congress know that you do not support this proposal.


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