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.
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.
You can help by visiting www.SaveMyPlan.org 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.