[Code of Federal Regulations] [Title 26, Volume 5] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.410(b)-4] [Page 559-561] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.410(b)-4 Nondiscriminatory classification test. (a) In general. A plan satisfies the nondiscriminatory classification test of this section for a plan year if and only if, for the plan year, the plan benefits the employees who qualify under a classification established by the employer in accordance with paragraph (b) of this section, and the classification of employees is nondiscriminatory under paragraph (c) of this section. (b) Reasonable classification established by the employer. A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification. (c) Nondiscriminatory classification--(1) General rule. A classification is nondiscriminatory under this paragraph (c) for a plan year if and only if the group of employees included in the [[Page 560]] classification benefiting under the plan satisfies the requirements of either paragraph (c)(2) or (c)(3) of this section for the plan year. (2) Safe harbor. A plan satisfies the requirement of this paragraph (c)(2) for a plan year if and only if the plan's ratio percentage is greater than or equal to the employer's safe harbor percentage, as defined in paragraph (c)(4)(i) of this section. See Sec. 1.410(b)-9 for the definition of a plan's ratio percentage. (3) Facts and circumstances--(i) General rule. A plan satisfies the requirements of this paragraph (c)(3) if and only if-- (A) The plan's ratio percentage is greater than or equal to the unsafe harbor percentage, as defined in paragraph (c)(4)(ii) of this section, and (B) The classification satisfies the factual determination of paragraph (c)(3)(ii) of this section. (ii) Factual determination. A classification satisfies this paragraph (c)(3)(ii) if and only if, based on all the relevant facts and circumstances, the Commissioner finds that the classification is nondiscriminatory. No one particular fact is determinative. Included among the facts and circumstances relevant in determining whether a classification is nondiscriminatory are the following-- (A) The underlying business reason for the classification. The greater the business reason for the classification, the more likely the classification is to be nondiscriminatory. Reducing the employer's cost of providing retirement benefits is not a relevant business reason. (B) The percentage of the employer's employees benefiting under the plan. The higher the percentage, the more likely the classification is to be nondiscriminatory. (C) Whether the number of employees benefiting under the plan in each salary range is representative of the number of employees in each salary range of the employer's workforce. In general, the more representative the percentages of employees benefiting under the plan in each salary range, the more likely the classification is to be nondiscriminatory. (D) The difference between the plan's ratio percentage and the employer's safe harbor percentage. The smaller the difference, the more likely the classification is to be nondiscriminatory. (E) The extent to which the plan's average benefit percentage (determined under Sec. 1.410(b)-5) exceeds 70 percent. (4) Definitions--(i) Safe harbor percentage. The safe harbor percentage of an employer is 50 percent, reduced by \3/4\ of a percentage point for each whole percentage point by which the nonhighly compensated employee concentration percentage exceeds 60 percent. See paragraph (c)(4)(iv) for a table that illustrates the safe harbor percentage and unsafe harbor percentage. (ii) Unsafe harbor percentage. The unsafe harbor percentage of an employer is 40 percent, reduced by \3/4\ of a percentage point for each whole percentage point by which the nonhighly compensated employee concentration percentage exceeds 60 percent. However, in no case is the unsafe harbor percentage less than 20 percent. (iii) Nonhighly compensated employee concentration percentage. The nonhighly compensated employee concentration percentage of an employer is the percentage of all the employees of the employer who are nonhighly compensated employees. Employees who are excludable employees for purposes of the average benefit test are not taken into account. (iv) Table. The following table sets forth the safe harbor and unsafe harbor percentages at each nonhighly compensated employee concentration percentage: ------------------------------------------------------------------------ Nonhighly compensated employee concentration Safe harbor percentage Unsafe harbor percentage percentage ------------------------------------------------------------------------ 0-60 50.00 40.00 61 49.25 39.25 62 48.50 38.50 63 47.75 37.75 64 47.00 37.00 65 46.25 36.25 66 45.50 35.50 67 44.75 34.75 68 44.00 34.00 69 43.25 33.25 70 42.50 32.50 71 41.75 31.75 72 41.00 31.00 73 40.25 30.25 74 39.50 29.50 75 38.75 28.75 [[Page 561]] 76 38.00 28.00 77 37.25 27.25 78 36.50 26.50 79 35.75 25.75 80 35.00 25.00 81 34.25 24.25 82 33.50 23.50 83 32.75 22.75 84 32.00 22.00 85 31.25 21.25 86 30.50 20.50 87 29.75 20.00 88 29.00 20.00 89 28.25 20.00 90 27.50 20.00 91 26.75 20.00 92 26.00 20.00 93 25.25 20.00 94 24.50 20.00 95 23.75 20.00 96 23.00 20.00 97 22.25 20.00 98 21.50 20.00 99 20.75 20.00 ------------------------------------------------------------------------ (5) Examples. The following examples illustrate the rules in this paragraph (c). Example 1. Employer A has 200 nonexcludable employees, of whom 120 are nonhighly compensated employees and 80 are highly compensated employees. Employer A maintains a plan that benefits 60 nonhighly compensated employees and 72 highly compensated employees. Thus, the plan's ratio percentage is 55.56 percent ([60/120]/[72/80]=50%/ 90%=0.5556), which is below the percentage necessary to satisfy the ratio percentage test of Sec. 1.410(b)-2(b)(2). The employer's nonhighly compensated employee concentration percentage is 60 percent (120/200); thus, Employer A's safe harbor percentage is 50 percent and its unsafe harbor percentage is 40 percent. Because the plan's ratio percentage is greater than the safe harbor percentage, the plan's classification satisfies the safe harbor of paragraph (c)(2) of this section. Example 2. The facts are the same as in Example 1, except that the plan benefits only 40 nonhighly compensated employees. The plan's ratio percentage is thus 37.03 percent ([40/120]/[72/80]=33.33%/90%=0.3703). Under these facts, the plan's classification is below the unsafe harbor percentage and is thus considered discriminatory. Example 3. The facts are the same as in Example 1, except that the plan benefits 45 nonhighly compensated employees. The plan's ratio percentage is thus 41.67 percent ([45/120]/[72/80]=37.50%/90%=0.4167), above the unsafe harbor percentage (40 percent) and below the safe harbor percentage (50 percent). The Commissioner may determine that the classification is nondiscriminatory after considering all the relevant facts and circumstances. Example 4. Employer B has 10,000 nonexcludable employees, of whom 9,600 are nonhighly compensated employees and 400 are highly compensated employees. Employer B maintains a plan that benefits 600 nonhighly compensated employees and 100 highly compensated employees. Thus, the plan's ratio percentage is 25.00 percent ([600/9,600]/[100/400]=6.25%/ 25%=0.2500), which is below the percentage necessary to satisfy the ratio percentage test of Sec. 1.410(b)-2(b)(2). Employer B's nonhighly compensated employee concentration percentage is 96 percent (9,600/ 10,000); thus, Employer B's safe harbor percentage is 23 percent, and its unsafe harbor percentage is 20 percent. Because the plan's ratio percentage (25.00 percent) is greater than the safe harbor percentage (23.00 percent), the plan's classification satisfies the safe harbor of paragraph (c)(2) of this section. Example 5. The facts are the same as in Example 4, except that the plan benefits only 400 nonhighly compensated employees. The plan's ratio percentage is thus 16.67 percent ([400/9,600]/[100/400]=4.17%/ 25%=0.1667). The plan's ratio percentage is below the unsafe harbor percentage and thus the classification is considered discriminatory. Example 6. The facts are the same as in Example 4, except that the plan benefits 500 nonhighly compensated employees. The plan's ratio percentage is thus 20.83 percent ([500/9,600]/[100/400]=5.21%/ 25%=0.2083), above the unsafe harbor percentage (20 percent) and below the safe harbor percentage (23 percent). The Commissioner may determine that the classification is nondiscriminatory after considering all the facts and circumstances. [T.D. 8363, 56 FR 47645, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992]