Administrative, Procedural & Miscellaneous Review
of Issues Raised By "New Comparability"

Part III-Administrative, Procedural and Miscellaneous

Review of Issues Raised By "New Comparability" Plans

Notice 2000-14

I. PURPOSE

The Internal Revenue Service and the Treasury Department are
undertaking a review of issues posed by "new comparability" plans
and invite public comments. The Service and Treasury believe it is
appropriate at this time to review the effect of these rapidly
evolving plan designs with the benefit of comments from plan
sponsors, plan participants, and other interested parties.

New comparability plans (and similar plan designs such as "super-
integrated" plans) are defined contribution plans that generally
restrict higher rates of employer contributions to highly
compensated employees. The focus of this review is the
nondiscrimination requirements applicable to these plans.

Section 401(a)(4) of the Internal Revenue Code provides that a plan
is a qualified plan only if the contributions or the benefits
provided under the plan do not discriminate in favor of highly
compensated employees. For purposes of determining whether
nonelective employer contributions under a defined contribution plan
discriminate in favor of highly compensated employees, the
regulations under § 401(a)(4) permit such contributions either to be
tested on a present value basis or to be "cross-tested" on a future
value basis. Under this cross-testing method, contributions are
converted to and tested as equivalent benefits payable at normal
retirement age; the conversion is done by making an actuarial
projection of the benefits payable at normal retirement age that are
attributable to such contributions. Thus, this cross-testing method
effectively permits nonelective employer contributions under a
defined contribution plan to be tested as the equivalent of
employer-provided benefits under a defined benefit plan.

Notwithstanding the analytical underpinnings of cross-testing, the
Service and Treasury are concerned whether cross-tested plan designs
that provide for built-in disparities in contribution rates between
highly compensated and nonhighly compensated employees can be
reconciled with the basic purpose of the nondiscrimination rules as
applied to defined contribution plans. In this regard, the Service
and Treasury are reviewing whether it is appropriate in all cases,
without regard to the particular structure of a cross-tested defined
contribution plan, to allow the projected future value of employer
contributions to be tested as the equivalent of employer-provided
benefits under a defined benefit plan.

For example, in a typical new comparability plan, highly compensated
employees (who tend to be older than a majority of nonhighly
compensated employees) receive high allocation rates (often 18% to
20% of compensation), while nonhighly compensated employees,
regardless of their age or years of service, receive comparatively
low allocation rates (e.g., 3% of compensation). In the typical
case, there is a sufficient number of young nonhighly compensated
employees to enable the employer to demonstrate compliance with the
nondiscrimination standards by comparing the actuarially projected
value of the small allocations for those young nonhighly compensated
employees with the actuarially projected value of the substantially
larger allocations for older highly compensated employees. The
Service and Treasury are concerned that, by plan design, nonhighly
compensated employees never have an opportunity to earn the higher
allocation rates as they work additional years for the employer and
grow older. Further, when a sponsor replaces its existing defined
contribution plan with a new comparability plan, rank-and-file
employees may suffer significant reductions in their allocation
rates, while owners and executives may benefit from a significant
increase in their allocation rates.

II. POSSIBLE APPROACHES

In their review of new comparability plans, the Service and Treasury
are considering what modifications to the existing rules applicable
to these plans might be appropriate. It is anticipated that any such
modifications would be applied to plans, including existing plans,
on a prospective basis only.

One possible approach to address the issues raised by new
comparability plans would be to provide that, for purposes of
determining whether a defined contribution plan satisfies § 1.401(a)
(4)-8(b)(1) of the Income Tax Regulations (i.e., the rules governing
the cross-testing of defined contribution plans), the right to
receive each rate of nonelective employer contributions must be
currently and effectively available on a nondiscriminatory basis,
determined in a manner generally patterned after the approach under
§ 1.401(a)(4)-4 of the regulations. These regulations already
contain a requirement that rates of the other three basic types of
contributions -- elective contributions, after-tax employee
contributions, and employer matching contributions -- be made
currently and effectively available in a nondiscriminatory manner.

If such an approach were adopted, however, it is anticipated that,
subject to certain conditions, a plan would be permitted to
disregard differences in rates of nonelective contributions that
result from differences in attained age or service for purposes of
determining whether contribution rates are currently available in a
nondiscriminatory manner. Accordingly, under such an approach, the
Service and Treasury anticipate that cross-testing would continue to
be a permissible testing alternative for generic age-weighted or
service-based defined contribution plans (plans under which younger
and shorter-service participants become entitled to higher
allocation rates as they age and accumulate more service) and
certain other appropriate plan designs.

Comments are invited on this and other possible approaches
(including appropriate exceptions) to address the issues raised by
new comparability plans. It is requested that comments be submitted
by May 15, 2000, and that they refer to Notice 2000-14. Comments can
be addressed to CC:DOM:CORP:R (Notice 2000-14), room 5226, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC
20044. In the alternative, comments may be hand delivered between
the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (Notice 2000-14),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue
NW, Washington, DC. Alternatively, taxpayers may transmit comments
electronically via the IRS Internet site at:

http://www.irs.gov/tax_regs/regslist.html.

DRAFTING INFORMATION

The principal author of this notice is James Flannery of the Tax
Exempt and Government Entities Division. For further information
regarding this notice, please contact the Employee Plans' taxpayer
assistance telephone service at (202) 622-6074/6075 (not toll-free
numbers) between the hours of 1:30 and 3:30 p.m. Eastern Time,
Monday through Thursday.

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