Comments With Respect to Prop. Treas. Reg. §§ 1.401(A)(4)-8(B)(1) and 9(B)(2)(V)
Governing So-Called “New Comparability Plans”
March 23, 2001

Contents | Introduction | Summary | I | II | III | IV | V

Analysis

IV. Target Benefit Plans

The proposed regulations would permit a defined contribution plan to be cross-tested only if the plan either provides broadly available allocation rates or satisfies a minimum allocation gateway (i.e., generally each nonhighly-compensated employee must receive an allocation of at least 5% of compensation). We believe that target benefit plans will find it impossible to satisfy the broadly available allocation rates requirement and difficult in many cases to satisfy the minimum allocation gateway. Thus, the regulations effectively would force target benefit plans to fit within the safe-harbor testing method for target benefit plans in Treas. Reg. § 1.401(a)(4)-8(b)(3).

We see no compelling reason to restrict the testing options available to target benefit plans. In our experience, target benefit plan designs are generally not prone to abuse. Target benefit plans are by their nature age-weighted, and therefore provide an opportunity for participants to "grow into" higher allocation rates as they age or accumulate additional service. Allocation rates are based on amounts actuarially determined to be needed to fund benefits under a defined benefit formula.³

The safe harbor for target benefit plans was provided — like all bona fide safe harbors — as a simpler alternative to the rules that otherwise would apply to such plans, namely the general test for nondiscrimination using cross-testing, and not as the only set of rules. In their own practices the drafters of these Comments have encountered numerous target benefit plans that do not fit within the safe harbor, generally, but not always, because of technical violations of the uniformity requirement that the safe harbor imposes on the target benefit formula or differences in the way that allocations are calculated based on the benefit formula. Whether this represents an accurate cross-section of existing target benefit plans is beside the point. We believe that the nondiscrimination regulations should be made flexible enough, consistent with policy, to permit further evolution in plan designs, including among target benefit plans.

If the IRS and Treasury are concerned about the possibility that plan sponsors will adopt unusual target benefit plan designs to take advantage of the exception that we are proposing, we suggest that it would be enough to require that the same targeted benefit formula apply to all participants.

Contents | Introduction | Summary | I | II | III | IV | V