MPM Publications
Introducing ABC Plus
While regulation is often perceived negatively by the business community, sometimes it can welcome news. The nondiscrimination regulations for pension and profit-sharing plans are an example of rules that have actually enhanced the ability of employers to meet business and personal objectives on a cost-effective basis.
The new regulations modify and simplify earlier regulations released in September 1991. They have produced a new plan design offering selective benefits for key employees,
Age-Based Contribution Plus (ABC Plus).
What Makes These New Plans Possible? Pension and profit-sharing plans may not discriminate in favor of highly paid employees. To ensure this, the Internal Revenue Service (IRS) has drafted regulations establishing objective standards and tests 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 nondiscriminatory 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 that defined benefit plans must 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 be designed that provides one contribution to a select group of employees, with different and much lower rate (or rates) for employees not 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 nondiscriminatory.
The beauty of ABC Plus is that employers have complete control over which employees are included in the select group. For example, the select group could be designed to cover: highly compensated employees, owners and key executives, salaried employees, long-service employees and/or officers and managers. In this respect, ABC Plus offers many of the advantages usually associated with executive benefits plans, yet it retains all 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 an existing defined contribution plan where a desire to increase amounts allocated to select personnel exists.
- Businesses with defined benefit plans where there is a need to increase contribution flexibility or minimize administrative costs.
- Businesses that have never established or have previously terminated a plan because the cost of covering non-key employees was too great compared to the benefits that could be provided to the select group.
- Businesses looking for a tax-deductible method to pay for a second-to-die policy to meet estate planning needs.
Today, it is possible to design a plan that offers the power of a pension, the simplicity and flexibility of profit-sharing, and the selectivity desired by many business owners. This is welcome news, even if it does come from more regulation.
Certain aspects of this article may require the advice of your attorney or tax professional, please consult accordingly. For more information on the topics discussed in this article, please call Sam at 804-272-1400, ext 226.
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