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December 13, 1996

FROM: Cindie Moore, National Council on Teacher Retirement

RE: IRS Notice 96-64 Addressing Issues Regarding the Nondiscrimination Rules for Qualified Plans Maintained by Governments and Tax-Exempt Organizations, Issued 12/3/96

You may have heard that IRS issued this notice and we wanted to let you know what it concerns. It covers two main topics: 1) application of the nondiscrimination rules to 401(k) plans administered by governments ("governmental 401(k) plans"); and 2) allowing governments until the 2001 plan year to apply, for nondiscrimination purposes, a reasonable, good faith interpretation of existing law in determining which entities must be aggregated, with any further guidance from IRS applying prospectively for plan years beginning in or after 2001 ("reasonable, good faith test").

401(k) Issues. Among other things, the notice extends the deadline of the application of the nondiscrimination rules to governmental 401(k) plans to plan years beginning on or after the later of October 1, 1997, or 90 days after the opening of the first legislative session beginning on or after October 1, 1997, of the governing body with authority to amend the plan, if that body does not meet continuously ("the 90 day rule"). For plan years before then, such plans are deemed to satisfy the rules. The previous deadline was the later of January 1, 1997 or the 90 day rule. Any NCTR members with 401(k) plans who have not seen the notice should contact me for a copy right away.

Aggregating Entities. The nondiscrimination rules include provisions about how to aggregate related entities/employers for purposes of applying the tests. In the private sector, the rules deal with employees of a controlled group of corporations or employees of partnerships, proprietorships, etc., that are under common control. IRS has also looked at this control issue in the context of 403(b) TSAs in Notice 89-23. It is now grappling with how to deal with the issue for other types of governmental plans and apparently decided that governments may apply the reasonable, good faith test explained above. Notwithstanding IRS' concern on this aggregation issue, the notice says that the temporary moratorium of the application of the rules to governmental plans until 1999 continues to apply.