3853 / Can a plan satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and nonhighly compensated employees with very short periods of service?

The IRS released guidance expressing disapproval of plans that attempt to satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and to rank and file employees with very short periods of service. The IRS noted that sponsors of such plans use “plan designs and hiring practices that limit who receives a benefit to the nonhighly compensated employees and to other employees with very small amounts of compensation” and whose tenure with the company never results in their benefits being vested. These plans are targeted for adverse rulings, possible disqualification, or other actions.¹

1. Memorandum dated October 22, 2004, Carol D. Gold, Director Employee Plans.