Discrimination Testing Free Passes

Tip of the Day

By Stephanie Reagan


The general discrimination test of Sec. 410(b) does not have to be done under the following four circumstances:

1.  The plan has no includable Non-Highly Compensated Employees (NHCEs) during the year.

2.  The plan has no Highly Compensated Employees (HCEs) benefiting during the year.

3.  The employer had a merger or acquisition during the year or previous plan year.

Under the minimum coverage requirements, a special rule applies in situations where an employer that sponsors one or more qualified retirement plans is involved in a disposition (i.e., an asset or stock acquisition or sale, a merger, or other similar transaction). The government gives plan sponsors time to deal with the ramifications of such transactions through plan redesign or other techniques. Under these rules, the plan will continue to be considered in compliance with minimum coverage requirements during a “transition period.”

The transition period is the period beginning on the date of the transaction and ending on the last day of the first plan year beginning after the date of the transaction. To qualify for special treatment under the transition rule, two conditions must be met:

(1) The plan of the employer involved in the acquisition, merger, or similar transaction must have satisfied the minimum coverage rules immediately before the acquisition, merger, or similar transaction, and

(2)  Coverage under the plan must not significantly change during the transition period (other than by reason of the change in the members of a group). [ I.R.C. §410(b)(6)(C)]

4.  Section 410(b) discrimination testing has been performed within the past two years (3-Year Testing Cycle rule).

Rev. Proc. 93-42, Section 5 provides that:

"An employer may rely for the two succeeding plan years on the tests substantiating that a plan complies with the nondiscrimination requirements for a plan year if the employer reasonably concludes that there are no significant changes subsequent to the test (e.g., significant changes in plan provisions, the employer’s workforce, or compensation practices). For this purpose, whether a change is significant depends upon the relative margin by which the plan has satisfied the nondiscrimination requirements in the most recent year in which the plan was tested and the likelihood that the change would eliminate that margin. If there is a significant change in one plan provision, the effect of which can be isolated from the effect of other provisions, the employer may continue to rely on the prior test during the interim two years, provided that the employer can demonstrate that the effect of the amended plan provision is nondiscriminatory. Employers using the three-year testing cycle for purposes of substantiating compliance generally must treat the year in which the final regulations under sections 401(a)(4) and 410(b) of the Code become effective with regard to the plan as a year of significant change requiring actual testing. However, if a plan first complies with these regulations in a year prior to their effective date, then the employer may treat that year, rather than the year in which the regulations are first effective, as a year of significant change for purposes of beginning the three-year testing cycle."


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