Compliance August 3, 2006

IRS Issues Final Coverage Testing Regs for Tax-Exempt ERs

August 3, 2006 (PLANSPONSOR.com) - The Internal Revenue Service has issued final regulations regarding Section 410 coverage requirements for 401(k) plans under the Employee Retirement Income Security Act (ERISA) for tax-exempt organizations that were previously unable to offer 401(k) plans.
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The final regulations provide that employees of governmental entities who are barred from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees in coverage testing if more than 95% of the employees of the employer who are not barred from being eligible employees benefit under the plan for the year.

Extending provisions of the Economic Growth Tax Relief and Recovery Act (EGTRRA) section 664, the final regulations also provide that employees of a section 501(c)(3) organization who are eligible to make contributions under a section 403(b) plan may be treated as excludable with respect to coverage testing for a section 401(k) plan, or a section 401(m) plan provided under the same general arrangement as a section 401(k) plan, if:

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  • No employee of a section 501(c)(3) organization is eligible to participate in such section 401(k) plan or section 401(m) plan; and
  • At least 95% of the employees who are neither employees of a section 501(c)(3) organization nor employees of a governmental entity who are precluded from being eligible employees under a section 401(k) plan are eligible to participate in such section 401(k) plan or section 401(m) plan.

This portion of the finalized regulations differs from the IRS proposed regulations in that section 664 of EGTRRA considers employees of any section 501(c)(3) organization, and the IRS proposed regulations had considered only employees of the particular organization performing coverage testing. The IRS and Treasury Department concluded that their simplification of the statutory language might not in all cases result in the same employees being excludible as would be excludible by applying the statutory language.

The regulations apply to plan years beginning after December 31, 1996. Prior to the enactment of the Small Business Job Protection Act of 1996 (SBJPA), both governmental and tax-exempt entities generally were precluded from maintaining section 401(k) plans. SBJPA allowed for non-governmental tax-exempt organizations (including organizations exempt under section 501(c)(3)) to maintain section 401(k) plans.

The final regulations, published July 21, 2006, can be read here .

Administration August 2, 2006

UK Pension Mediation Service Launched

February 8, 2006 (PLANSPONSOR.com) - The National Association of Pension Funds (NAPF) and the Centre for Effective Dispute Resolution have announced a new service to help pension fund trustees and employers resolve disputes over methods to reduce funding deficits.
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The Financial Times reports that t he Pensions Mediation Service will seek to resolve potential conflicts “between the interests of sponsoring employers and scheme members . . . before the Pension Regulator needs to become becomes involved.”

The Association of Consulting Actuaries said proposed guidance from the Pension Regulator suggesting most companies could pay off deficits within 10 years could increase annual contributions by £15billion to £27billion, on top of the £30billion they paid into pension schemes in 2004, according to the Financial Times.   Just this week the Confederation of British Industry (CBI) warned the Regulator’s proposals could put many companies in financial crisis (See  UK Group Calls for Flexibility in Regulator’s Funding Proposals).

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According to the news report, Christine Farnish, chief executive of the NAPF, said, “The new . . . regime places greater responsibility on scheme trustees to negotiate robustly with employers to ensure pensions are appropriately funded, and to monitor the financial strengths of the sponsoring employer . . . such a regime throws up possible areas of contention and this service will provide a cheaper, better way to resolve areas of dispute without . . . litigation.”

Unions have reacted angrily to plans by Rentokil Initial, the pest control and security company, to freeze its final salary pension scheme for existing employees. They also have threatened industrial action against plans by Co-op Group under which benefits would be based on career average rather than final salary at retirement.

In contrast, a deal this week between BAE Systems and its 40,000 UK employers over funding a £1.4billion deficit was praised by the union Amicus as a model of how employers should “seek to negotiate rather than try to impose terms.”   Under the deal to protect its final salary scheme for existing employees, the defense contractor has agreed to pay £800m, mostly in cash and property, while members will finance the remaining deficit through mechanisms including longer working or reduced benefits.   Also, the GMB union has welcomed plans by Corus, the steel group, to raise employer and employee contributions to protect its final salary schemes.

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