May 05, 1989
Employers Have Until October 1
to Assure That Their Employees Plans
Meet the Requirements
The Internal Revenue Service today issued a notice providing
employers with additional transitional relief for testing their
employee benefit plans under Internal Revenue Code Section 89.
Employers will now have until Oct. 1, 1989, to assure that
their employee plans meet the non-discrimination requirements of
Section 89(a), as was announced by Treasury Secretary Nicholas Brady
on Monday, May 1, 1989. In addition, today's notice provides that
employers have until Oct. 1, 1989, to meet the requirement to make a
reasonable notification of benefits to their employees under Section
Notice 89-65, which is attached, will appear in Internal
Revenue Bulletin 1989-24, dated June 12, 1989.
The purpose of this Notice is to provide employers
additional transitional relief to October 1, 1989, for testing
their plans for compliance with the nondiscrimination rules of
section 89(a) and the reasonable notice requirement of section
89(k). With respect to the testing requirements, the Notice
permits employers to use a partial testing year beginning on
October 1, 1989, eliminates certain restrictions on the
availability of this delayed partial testing year for health
plans, and expands the availability of the October 1, 1989,
partial testing year from health plans to all statutory employee
benefit plans covered by section 89(a). This relief is provided
to reduce taxpayer compliance burdens under current section 89.
REVISIONS TO TRANSITIONAL RULES
Section 89(a) nondiscrimination rules Commencement of partial testing year.
Under section 89 and the proposed regulations, an employer
generally applies the section 89 nondiscrimination rules to its
statutory employee benefit plans based on applicable facts as of
any testing day that occurs during a testing year selected by the
employer. However, adjustments to the facts in existence on the
testing day must be made for certain changes in plan terms and
certain election changes by highly compensated employees
occurring during the testing year both before and after the
Paragraph (b)(5) of Q&A-5 of the proposed regulations
provides a special transition rule for 1989 that may be used by
employers in testing their health plans under section 89 of the
Code. Under the transition rule, for any testing year beginning
before July 1, 1989, an employer may apply the nondiscrimination
rules of section 89 with respect to its health plans based on a
partial testing year. The facts with respect to all employees of
the employer as of the testing day for the testing year are to be
treated as in existence for the partial testing year. The
partial testing year begins on the earliest of July 1, 1989, the
testing day for such testing year, or the first day of the
calendar month beginning three months before the end of the
testing year. The last day of the partial testing year is the
last day of such testing year.
Under the provisions of paragraph (b)(5) of Q&A-5, the
employer-provided benefit (received or made available) of an
employee determined as of the testing day is to be adjusted for
elections and plan design changes occurring during the partial
testing year as if the partial testing year were the entire
testing year. The employer-provided benefit of an employee for
the partial testing year, determined after application of the
other rules in paragraph (b)(5) of Q&A-5, is then annualized for
the entire testing year. Thus, an employer may limit most of the
data collection and testing efforts to the partial testing year
period and disregard changes in plan terms or election changes by
highly compensated employees that occurred prior to the
commencement of the partial testing year.
The final regulations under section 89 will amend Q&A-5 of
section 1.89(a)-1 of the proposed regulations published March 7,
1989 (54 FR 9460) to substitute "October 1, 1989" for "July 1,
1989", in the first sentence of paragraph (b)(5)(i) and the
second sentence of paragraph (b)(5)(ii). Therefore, an employer
may apply the nondiscrimination rules of section 89 based on a
partial testing year starting as late as October 1, 1989 and may
disregard facts in existence prior to that date.
Waiver of restrictions on availability of partial testing year.
Under paragraph (b)(5)(v) of Q&A-5, the use of the partial
testing year rule is not available in the following
circumstances: (1) if a health plan provides an employer-
provided benefit that for the partial testing year is less, by
more than a de minimis amount, than the plan's employer-provided
benefit for the portion of the testing year that precedes the
partial testing year; (2) if a health plan that is first
established, or coverage under a health plan that is first
provided, on or after January 1, 1989, terminates or ceases to be
provided before the end of the partial testing year; or (3) if
less than 25 percent of the employees eligible for a health plan
are nonhighly compensated employees and the plan does not satisfy
the alternative eligibility percentage test of section 89(d)(2)
of the Code and paragraph (d)(3)(iii) of Q&A-1 of the proposed
The final regulations under section 89 will amend Q&A-5, to
delete paragraph (b)(5)(v) in its entirety, thereby eliminating
these restrictions on the availability of the delayed partial
Availability of partial testing year extended to statutory benefit plans other than health plans.
The availability of the partial testing year provision in
Q&A-5 of the proposed regulations is limited to health plans.
The final regulations will amend Q&A-5 to substitute the term
"statutory employee benefit plans" for "health plans" in
paragraph (b)(5)(i). Thus, for example, employers may also apply
the nondiscrimination rules of section 89(a) to group-term life
insurance plans on the basis of a partial testing year beginning
October 1, 1989.
Section 89(k) notice requirement.
Under section 89 and the proposed regulations, employees
must be provided with reasonable notification of benefits
available under plans subject to the requirements of section
89(k). Under section 1151 of the Tax Reform Act of 1986, this
requirement became effective for years beginning after December
31, 1988. However, the proposed regulations, in paragraph (g)(4)
of Q&A-5 of Treas. Reg. Sec. 1.89(k)-1, delayed the compliance
date for the notice requirement to no earlier than July 1, 1989.
The final regulations under section 89 will amend paragraph
(g)(4) of Q&A-5 to substitute "October 1, 1989" for "July 1,
1989". therefore, a plan will not be required to comply with the
notice requirement of section 89(k)(1)(C) until October 1, 1989.
ADDITIONAL REVISIONS FOR CONSISTENCY
To the extent other provisions, including examples, provided
in Treas. Reg. SS.1.89(a)-1 and 1.89(k)-1 are inconsistent with
these changes, they will be modified in the final regulations.
This document serves as an "administrative pronouncement" as
that term is described in section 1.6661-3(b)(2) of the Income
Tax Regulations and may be relied upon to the same extent as a
revenue ruling or revenue procedure. Taxpayers may rely on this
notice until the final regulations are published. No inference
should be drawn, however, regarding any issue not specifically
addressed in this notice.
This Notice was drafted by the Office of the Assistant Chief
Counsel (Employee Benefits and Exempt Organizations). For
further information regarding this notice contact Mr. David
Munroe or Ms. Nancy J. Marks at (202) 535-3818 (not a toll-free
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