3861 / What nondiscrimination requirements must a plan meet with respect to plan amendments and terminations?

The timing of plan amendments must not have the effect of discriminating significantly in favor of highly compensated employees.¹ For this purpose, a plan amendment includes the establishment or termination of the plan, as well as any change in the benefits, rights, or features, benefit formulas, or allocation formulas under the plan.²

Regulations provide a facts and circumstances test for determining whether a plan amendment or series of amendments has the effect of discriminating significantly in favor of current or former highly compensated employees.³

The timing of a plan amendment that grants past service credit or increases benefits attributable to years of service for a period in the past will be deemed to be nondiscriminatory if the following four safe harbor requirements are met:

(1)  the period for which the credit is granted does not exceed the five years preceding the current year,

(2)  the past service credit is granted on a reasonably uniform basis to all employees,

(3)  benefits attributable to the period are determined by applying the current plan formula, and

(4)  the service credited is service, including pre-participation or imputed service
( Q 3848), with the employer or a previous employer.⁴

Guidelines for nondiscriminatory allocation of assets on termination of a defined benefit plan are set forth in Revenue Ruling 80-229.⁵