Working with the new permitted disparity rules under TRA 86; social security integration revised. (Tax Reform Act of 1986)

Working with the New Permitted Disparity Rules Under TRA 86

Social Security Integration Revised

Significant changes in the laws impacting qualified retirement plans were made by the Tax Reform Act of 1986.[1] Additional charges affecting qualified plans resulted from the adoption of the Omnibus Budget Reconciliation Act of 1986,[2] the Omnibus Budget Reconciliation Act of 1987,[3] the Technical and Miscellaneous Revenue Act of 1988,[4] the Omnibus Budget Reconciliation Act of 1989,[5] and related regulatory changes. These laws will collectively be referred to as TRA 86.

Required Amendments to Qualified Plans

In order to retain their qualified status, all qualified retirement plans must be amended to comply with TRA 86. The majority of the TRA 86 changes were effective January 1, 1989 for a calendar-year plan and the first day of the plan year beginning in 1989 for a fiscal-year plan (1989 plan year), although many of the changes have even earlier effective dates. Plan amendments must be reflected in an amended and restated plan document with an effective date as of the first day of the 1989 plan year.

Despite a 1989 plan year effective date for plan restatements, the Internal Revenue Service delayed the acceptance of applications for determination letters under TRA 86 until April 30, 1990. The procedure for plan submissions on or after April 30, 1990 was announced on April 9, 1990.[6] This delay in the determination letter process and in the preparation of restated plan documents (which in most instances will not be prepared until after the end of the 1989 plan year) will require that special attention be given to operational matters for 1989 and subsequent plan years (including plan coverage, the determination of contributions, and contribution allocations) so that plans will comply in operation for the 1989 plan year with the provisions of restated plan documents. [7]

TRA 86 Permitted Disparity Rules -- Social Security Integration Revised

TRA 86 adopted new permitted disparity (integration with social security) rules which are effective for 1989 and subsequent plan years. As a result, integration formulas in existing plan documents (i.e., plans not yet amended for TRA 86) may not be used for 1989 plan years.

This article addresses the permitted disparity rules applicable to defined contribution plans (other than target benefit plans). Accordingly, the permitted disparity rules discussed herein apply only to profit sharing plans and money purchase pension plans and not defined benefit plans.

Under the pre-TRA 86 rules, the integration level was generally fixed at the compensation level of the highest paid rank and file participant and a contribution allocation of 5.7 …