Nondiscrimination Relief – A Step in the Right Direction

The IRS recently released Notice 2014-5, Temporary Nondiscrimination Relief for Closed Defined Benefit Plans and Request for Comments. The temporary relief provided in the Notice is nice, but not applicable for most of our small or mid-sized business owner clients. What’s more interesting are the possible regulatory changes listed in Part IV of the Notice.

The Notice makes clear that the IRS is contemplating a relaxation of certain nondiscrimination testing requirements. While nondiscrimination requirements serve an important and useful purpose (namely, preventing business owners from unfairly benefitting themselves at the expense of their employees), some of the rules are needlessly complex at best, and counterproductive at worst.

An example pertains to employer matching contributions in a 401k plan (i.e. – employer contributions that are based on employee salary deferrals). Currently, such matching contributions are given much less “credit” in nondiscrimination testing than are other types of employer contributions. As a result, employers are dis-incented from providing matching contributions, which is generally a bad thing; matching contributions are tremendously useful in increasing employee participation in their 401k plan and accumulating retirement assets.

Independent Actuaries, Inc. recently submitted a letter to the IRS commenting on the Notice. We encourage other practitioners and plan sponsors to submit comments as well, to let the IRS know that they’re on the right track.

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