IRS EXTENDS EFFECTIVE DATES OF NONDISCRIMINATION RULES FOR GOVERNMENT AND TAX-EXEMPT EMPLOYERS.

Announcement 95-48

PURPOSE

The Internal Revenue Service announces that it is extending the effective date of certain nondiscrimination rules for qualified plans maintained by governments or by organizations exempt from income tax under section 501(a) of the Internal Revenue Code. These extensions are effective immediately and will be reflected in future guidance.

GOVERNMENTAL PLANS

Under current rules, in the case of governmental plans described in section 414(d), the nondiscrimination regulations apply to plan years beginning on or after the later of January 1, 1996, or 90 days after the opening of the first legislative session beginning on or after January 1, 1996, of the governing body with authority to amend the plan, if that body does not meet continuously (1996 legislative date). For plan years beginning before that effective date, governmental plans are deemed to satisfy the statutory nondiscrimination requirements.

Under the extension provided by this announcement, in the case of governmental plans, the regulations under sections 401(a)(4), 401(a)(26), 410(b), and 414(s) apply only to plan years beginning on or after the later of January 1, 1999, or 90 days after the opening of the first legislative session beginning on or after January 1, 1999, of the governing body with authority to amend the plan, if that body does not meet continuously (1999 legislative date). For plan years beginning before this extended effective date, governmental plans are deemed to satisfy those statutory requirements.

Under the extension provided by this announcement, in the case of governmental plans, the regulations under section 401(k) and 401(m) apply only to plan years beginning on or after the later of January 1, 1997, or 90 days after the opening of the first legislative session beginning on or after January 1, 1997, of the governing body with authority to amend the plan, if that body does not meet continuously. For plan years beginning before this extended effective date, governmental plans are deemed to satisfy those statutory requirements. In the case of governmental plans, the special rule in section 1.402(a)-1(d)(3)(v) of the Income Tax Regulations (providing an income tax deferral for certain elective contributions) is also extended for the same period.

PLANS MAINTAINED BY TAX-EXEMPT ORGANIZATIONS

Under current rules, in the case of plans maintained by organizations exempt from income tax under section 501(a) (tax-exempt organizations), the regulations under sections 401(a)(4), 401(a)(5), 401(l), 410(b), 414(r), and 414(s) apply to plan years beginning on or after January 1, 1996. For plan years beginning before that effective date, a plan maintained by a tax-exempt organization must be operated in accordance with a reasonable, good faith interpretation of those statutory provisions. (See section V of Notice 92-36, 1992-2 C.B. 364, and section IV of Rev. Proc. 94-13, 1994-1 C.B. 566, for the definition of "plan maintained by a tax- exempt organization.")

Under the extension provided by this announcement, in the case of plans maintained by tax-exempt organizations (other than nonelecting church plans), the regulations under sections 401(a)(4), 401(a)(5), 401(l), 410(b), 414(r), and 414(s) apply only to plan years beginning on or after January 1, 1997. For plan years beginning before this extended effective date, a plan maintained by a tax- exempt organization must be operated in accordance with a reasonable, good faith interpretation of those statutory provisions.

NONELECTING CHURCH PLANS

Under the extension provided by this announcement, in the case of church plans that are described in section 410(c)(1)(B) (nonelecting church plans), the regulations under sections 401(a)(4), 401(a)(5), 401(l), and 414(s) apply only to plan years beginning on or after January 1, 1999. For plan years beginning before this extended effective date, a nonelecting church plan must be operated in accordance with a reasonable, good faith interpretation of those statutory provisions.

SECTION 401(a)(17)

This announcement does not change the dates by which plans must comply with the regulations under section 401(a)(17) as amended by the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). Those regulations provide that they are effective for governmental plans for plan years beginning on or after the later of January 1, 1996, or the 1996 legislative date, and that they are effective for plans maintained by tax-exempt organizations for plan years beginning on or after January 1, 1996. In addition, section 13212(d)(3) of OBRA '93 contains a special transition rule relating to the application of the section 401(a)(17) compensation limit to certain participants in a governmental plan, provided that the plan is amended to incorporate the section 401(a)(17) compensation limit for plan years beginning after December 31, 1995.

SECTION 403(b) PLANS

Section 403(b)(12)(A)(i) provides that, with respect to nonelective contributions, a section 403(b) plan must meet the requirements of sections 401(a)(4), (5), (17) and (26), 401(m), and 410(b). Notice 89-23, 1989-1 C.B. 654, provides that section 403(b)(12) is satisfied if an employer operates its section 403(b) plan in accordance with a reasonable, good faith interpretation of section 403(b)(12). Until further guidance is issued in this area, sponsors of section 403(b) plans may continue to rely on Notice 89-23. However, under this announcement, sponsors of section 403(b) plans may not continue to rely on a reasonable, good faith interpretation of section 401(a)(17), as permitted under Notice 89-23, but must comply with the regulations under that section as of the applicable effective date for those regulations described above. Of course, for the period for which a governmental qualified plan is deemed to satisfy any particular statutory nondiscrimination requirement, the nonelective contributions under a governmental section 403(b) plan also are deemed to satisfy that requirement.

EXTENSION OF ADMINISTRATIVE RELIEF

Notice 92-36 sets forth the remedial amendment period described in section 401(b) applicable to governmental plans and plans maintained by tax-exempt organizations. Under this announcement, the remedial amendment period for governmental plans is extended to the last day of the first plan year beginning on or after the later of January 1, 1999, or the 1999 legislative date. The remedial amendment period for plans maintained by tax-exempt organizations (other than nonelecting church plans) is extended to the last day of the first plan year beginning on or after January 1, 1997. The remedial amendment period for nonelecting church plans is extended to the last day of the first plan year beginning on or after January 1, 1999. The transition relief provided under Notice 92-36 also applies through those extended remedial amendment periods.

SPECIAL ISSUES AND REQUEST FOR COMMENTS

The Treasury and the Service recognize that governmental plans have certain unique features relating to the sponsoring employer's status as a governmental entity. In addition, the application of the nondiscrimination rules to governmental plans and plans maintained by nonelecting churches raises certain unique issues, such as the interaction of sections 401(a)(4) and 410(c).

The Treasury and the Service recognize also that difficult issues arise for governmental and tax-exempt employers in determining which entities must be aggregated under section 414(b) and (c) (relating to the definition of employer). Until further guidance is issued, governmental and tax-exempt employers may apply a reasonable, good faith interpretation of section 414(b) and (c) in determining which entities must be aggregated.

The Treasury and the Service specifically solicit comments or suggestions relating to these topics as well as any other related nondiscrimination issues affecting governmental and tax-exempt employers (including any special nondiscrimination issues relating to section 403(b) plans). Comments or suggestions should be submitted by October 16, 1995, and should be addressed to: CC:DOM:CORP:T:R (Announcement 95-48), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand-delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (Announcement 95-48), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.

DRAFTING INFORMATION

The principal author of this announcement is Joyce Kahn of the Employee Plans Division. For further information regarding this announcement, please contact Employee Plans Division's taxpayer assistance telephone service or Ms. Kahn between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday by calling (202) 622-6074/6075 or (202) 622-6214. Alternatively, please contact Patricia McDermott of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations) at (202) 622-6030. (These telephone numbers are not toll-free numbers.)