Proposed Regulation Could Be a Small Business Retirement Plan Killer
ARLINGTON, VA — Buried in a recent Treasury Department regulation is a provision that will make it harder for small businesses to form new retirement plans or maintain their current ones.
Not only would this proposal set aside an objective nondiscrimination testing process that has been in place for more than two decades, it would result in a dramatic increase in costs for many small business retirement plan sponsors — in many cases 75% or more.
The regulation, in proposed form, imposes a new “reasonable classification” requirement on what are commonly called cross-tested plans. To be considered “reasonable” under the proposed regulation, a classification has to be based on reasonable business criteria and has to include more than one person.
“Many small businesses have only one person who fills a role that would be considered a “reasonable classification” for a large company, but will not be “reasonable” for a small company,” explains Brian Graff, CEO of the American Retirement Association. “In other words, this new requirement un-reasonably targets small business retirement plans.”
These cross-tested plans already provide great benefits to non-highly compensated employees. A plan can only use cross-testing if minimum contribution requirements are met, a “minimum gateway allocation” that typically results in non-highly compensated employees receiving at least 5% of pay under a cross-tested defined contribution plan. This contribution is in addition to any matching contributions made under a plan. Additionally, if a company has a defined benefit plan in combination with a defined contribution plan, this minimum rate increases on a sliding scale up to 7.5% of pay, while the typical defined contribution plan provides non-matching contributions of less than 4% of pay.
“Discrimination tests should be employer size neutral,” said Graff. “This small employer plan killing proposal needs to be removed from the proposed regulation before it undermines the retirement security of tens of thousands of workers.”
In an effort to help employers, and those who help them administer these plans, voice their concerns, the American Retirement Association has developed a special website, www.savemyplan.org.
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