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Publications
| Dec 1989 & Jan/Feb 1990 |
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Qualified Plans Still Offer Benefits, but Rules Governing Them Are Increasingly Complex
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| By Sheldon M. Geller, Esq, CPA |
Recent tax legislation has made comprehensive changes to the rules governing plan qualification and imposed new penalties and restrictions to ensure that tax-deferred amounts are used for retirement and not as tax shelters. For instance, changes in TRA '86 affect minimum coverage and vesting rules, Social Security integration, and distributions from qualified plans. TAMRA includes nondiscrimination rules for integrated plans, minimum coverage requirements, and minimum participation rules, as well as rules respecting the taxation of pension plan distributions.
Coverage rules
Effective for plan years beginning after 1988, a pension plan must meet one of three coverage tests. Under Section 410(b)(1), a qualified pension plan must:
1. Cover at least 70% of all nonhighly compensated employees.
2. Cover a percentage of nonhighly compensated employees which is at least 70% of the percentage of highly compensated employees covered.
3. Satisfy the average benefit test, which requires that benefits be provided employer-wide (or in the line of business, if applicable) such that the average benefit percentage for nonhighly compensated employees is at least 70% of the average benefit percentage for highly compensated employees.
Example. An employer has 50 employees, of which ten are highly compensated employees (HCE) and 40 are nonhighly compensated employees (non-HCE). Eight of the ten HCEs are benefiting (80%) and 30 of the 40 non-HCEs are benefiting (75%). Under the second of the above tests, at least 56% of the non-HCEs must benefit (70% X 80%). Since 75% of the nonHCEs are benefiting, the plan passes.
Note: Download the complete article (6 pages) in Acrobat PDF format:
