Call it robbing Peter to pay Paul. The White House has repeatedly hyped President Obama’s efforts to expand 401(k)-style retirement coverage. Offering defined contribution plans at the state level and a 2017 budget proposal to make it easier for small businesses to offer 401(k)s were recently mentioned.
However, the administration’s promotion of greater 401(k) plan coverage appears to conflict with recent a recent Treasury Department proposal, according to National Association of Plan Advisors (NAPA) president Brian Graff. Graff calls attention to a provision “that will make it harder for small businesses to form new retirement plans or maintain their current ones.”
The overall Treasury Department proposal is meant to make it easier for large corporations to close their 401(k) plans to new participants, but it also imposes a new “reasonable classification” requirement on highly-compensated employee rate groups that, according to Graff, will make it significantly harder for plans to pass the general nondiscrimination test.
As Graff notes, determining “reasonable classification” is inherently a subjective process based on the facts and circumstances of each business in question.
“This subjective test removes the objective purely numerical nondiscrimination testing regime that has been in place for more than two decades. The result is to increase the uncertainty and complexity of an already complicated process.”
Second, the new requirement unfairly burdens small businesses because, he argues, they will likely have very small rate groups.
“So Treasury is in essence forcing small businesses to test on a ratio percentage basis rather than an average benefits basis, which would impose new costs on the small businesses that have these plans and scare away small businesses that are considering adopting these plans.”
He adds that these cross-tested plans are some of the most popular 401(k)-style plan designs being used today in the small plan market, and “needlessly damaging this effective plan design ultimately hurts the rank-and-file employees that have access to these plans.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
