Regulation is often perceived negatively within the business community, but it sometimes brings welcome changes.

Non-discrimination regulations for pension and profit-sharing plans, for example, have actually enhanced the ability of employers to meet business and personal objectives on a cost-effective basis.

Recently passed regulations in the same areas modify and simplify the earlier versions released in September 1991. The updates have produced a plan called the Age-Based Contribution Plus (ABC Plus)–designed to offer selective benefits for key employees.

What Makes The ABC Plus Possible? Pension and profit sharing plans may not discriminate in favor of highly paid employees. To ensure this, the IRS drafted regulations establishing standards that all plans must satisfy.

These regulations permit a plan to satisfy the non-discrimination requirement by providing employees with either nondiscriminatory contributions (input) or non- discriminatory benefits (output).Historically, defined benefit plans have satisfied the non-discrimination requirement by providing all employees with equivalent benefits (output), and defined contribution plans have provided employees with equivalent contributions (input). The non-discrimination regulations provide standards that permit “cross testing.” This means defined benefit plans may satisfy the non-discrimination standards based on contributions (input), and defined contribution plans may test based on benefits (output).

Enhanced Cross Testing Options The regulations proposed provide two alternative testing methods. A plan may prove compliance at the individual participant level, or a plan may group participants and base the test on the average benefits provided to each group. Testing at the group level using average benefits creates a unique plan sometimes referred to as “new comparability.”

By applying this technique, a plan can provide one contribution rate to a select group of employees, with a different and much lower rate (or rates) for employees who aren’t part of the select group. As long as the plan demonstrates the average benefits of the highly paid employees are equivalent to those of the non-highly paid group, the plan will be non-discriminatory.

The beauty of ABC Plus is that employers completely decide which employees are included in the select group. For example, the select group could include:

• Highly compensated employees
• Owners and key executives
• Salaried employees
• Long service employees
• Officers and managers

In this respect, ABC Plus offers advantages similar to executive benefit plans, yet it retains the tax advantages of pension and profit sharing plans.

Who Should Consider ABC Plus? ABC Plus will be attractive in a variety of situations where key employees are older. This includes:

• Businesses with existing defined contribution plans where there is a desire to increase amounts allocated to select personnel.
  
  
• Businesses with defined benefit plans that need to increase contribution flexibility or minimize administrative costs. • Businesses that have never established or terminated a plan because costs of covering non-key employees was too great compared to benefits provided to the select group.
  
  
• Businesses looking for tax-deductible methods to pay for a second-to-die policy to meet estate planning needs. It’s now possible to design a plan with the power of a pension, the simplicity and flexibility of profit-sharing and desired selectivity. This is no doubt welcome news, even if it does come from more regulation.

Troy Tummond is president of Florida
Pension Group, Inc. He can be reached at
(904) 281-9010 or flpensiongrp@aol.com.