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 89(k).

Notice 89-65, which is attached, will appear in Internal Revenue Bulletin 1989-24, dated June 12, 1989.

NOTICE 89-65

PURPOSE

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 testing day.

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 regulation.

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 testing year.

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.

RELIANCE

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.

DRAFTING INFORMATION

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 number).

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