MODIFICATIONS TO DISCRIMINATION RULES APPLICABLE TO CERTAIN EMPLOYEE BENEFIT PLANS.

SEC. 3021. MODIFICATIONS TO DISCRIMINATION RULES APPLICABLE TO CERTAIN EMPLOYEE BENEFIT PLANS. (a) Modifications to Section 89.— (1) Determinations based on testing year.— (A) Section 89 of the 1986 Code (as amended by title I) is amended by striking out “plan year” each place it appears and inserting in lieu thereof “testing year”. (B) Subsection (j) of section 89 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(13) Testing year.— The term ‘testing year’ means— “(A) any 12-month period beginning with the calendar month designated in the plan for purposes of this section, or 102 STAT. 3626 “(B) if there is no such designation, the calendar year. No period may be designated under subparagraph (A) unless the same period is designated with respect to all other plans of the employer of the same type. Any designation under subparagraph (A) may be changed only with the consent of the Secretary.” (C) Subsection (c) of section 4976 of the 1986 Code (as added by title I) is amended— (i) by striking out “any plan year” in paragraph (1) and inserting in lieu thereof “any testing year (as defined in section 89(j)(13))”; and (ii) by striking out “such plan year” each place it appears in paragraph (2)(A) and inserting in lieu thereof “such testing year”. (2) Time for testing.— (A) In general.— Subsection (g) of section 89 is amended by adding at the end thereof the following new paragraph: “(6) Time for testing.— “(A) In general.— Except as otherwise provided in this paragraph, the determination of whether any plan is a discriminatory employee benefit plan for any testing year shall be made on the basis of the facts as of the testing day. “(B) Adjustment where benefit of highly compensated employee changes.— If the employer-provided benefit (actually provided or made available) of a highly compensated employee changes during the testing year by reason of any change in the terms of the plan or the making of an election by such employee, the amount taken into account as such employee’s employer-provided benefit shall be adjusted to take into account such change and the portion of the testing year during which the changed benefit is provided (or made available). “(C) Treatment of non-highly compensated employees where change in plan.— Rules similar to the rules of subparagraph (B) shall apply in the case of employees who are not highly compensated employees and who are affected by any change in the terms of the plan, except that the determination of such employees’ employer-provided benefits (actually provided or made available) shall be determined as of the date after such change selected by the employer and permitted under regulations prescribed by the Secretary. “(D) Testing day.— For purposes of this paragraph, the term ‘testing day’ means— “(i) the day designated in the plan as the testing day for purposes of this paragraph, or “(ii) if there is no day so designated, the last day of the testing year. “(E) Limitations.— “(i) Designation must be consistent for all plans of same type.— No day may be designated under subparagraph (D)(i) with respect to any plan unless the same day is so designated with respect to all other plans of the employer of the same type. “(ii) Designation binding.— Any designation under subparagraph (D)(i) shall apply to the testing year for102 STAT. 3627 which made and all subsequent years unless revoked with the consent of the Secretary. “(F) Special rule for multiple employer plan.— In the case of a multiemployer plan or any other plan maintained by more than 1 employer, each employer may, subject to such rules as the Secretary may prescribe, elect its own testing year under paragraph (13) of subsection (j) and its own testing date under this paragraph.” (B) Designations for 1989 not binding.— Any designation of a testing day for a year beginning in 1989 shall be disregarded in determining the day which may be designated as the testing day for years beginning after 1989. (3) Sampling.— Subsection (g) of section 89 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(7) Sampling.— For purposes of determining whether a plan is a discriminatory employee benefit plan (but not for purposes of identifying the highly compensated employees who have a discriminatory excess or the amount of any such excess), determinations under this section may be made on the basis of a statistically valid random sample. The preceding sentence shall apply only if— “(A) the sampling is conducted by an independent person in a manner not inconsistent with regulations prescribed by the Secretary, and “(B) the statistical method and sample size result in a 95 percent probability that the results will have a margin of error not greater than 3 percent.” (4) Special valuation rule for multiemployer plans.— Paragraph (3) of section 89(g) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(E) Special rule for multiemployer plans.— “(i) In general.— Except as provided in regulations and clause (ii), an employer may treat the contribution such employer makes to a multiemployer plan on behalf of an employee as the employer-provided benefit of such employee under such plan. “(ii) Adjustment.— If— “(I) the allocation of plan benefits between highly compensated employees and other employees under a multiemployer plan (or within either of such groups) varies materially from the allocation of employer contributions to such plan, or “(II) the employer contributions relate to benefits of different types, the employer-provided benefit determined under clause (i) shall be appropriately adjusted to take into account such material variation or such employer contribution. “(iii) Exception for professionals.— This subparagraph shall not apply to any employer maintaining a multiemployer plan if such employer makes contributions to such plan on behalf of any individual performing services in the field of health, law, engineering, architecture, accounting, actuarial science, financial services, or consulting or in such other field as the Secretary may prescribe.” (5) Excluded employee requirements.— 102 STAT. 3628 (A) Multiemployer plans.— Subsection (h) of section 89 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(6) Special rule for multiemployer plan.— Except as provided in regulations, any multiemployer plan shall not be taken into account in applying subparagraph (A), (B), (C), or (D) of paragraph (1) with respect to other plans of the employer. For purposes of this paragraph, a rule similar to the rule of subsection (g)(3)(E)(iii) shall apply.” (B) Students.— Paragraph (1) of section 89(h) of the 1986 Code is amended by adding after subparagraph (F) the following new subparagraph: “(G) Employees who are students if— “(i) such students are performing services described in section 3121(b)(10), and “(ii) core health coverage is made available to such students by such employer.” (6) Comparability rules.— Paragraph (1) of section 89(g) of the 1986 Code, as amended by section UlB(a)(3), is amended by adding at the end thereof the following new subparagraphs: “(D) Special rules for applying subsection (f).— “(i) In general.— For purposes of applying subsection (f)— “(I) except as provided in clause (ii), subparagraph (B) shall be applied by substituting ‘90 percent’ for ‘95 percent’, and “(II) a group of plans of the same type shall be treated as comparable plans if the requirements of subparagraph (E) are met. “(ii) Election to use lower percentage in determining comparability.— If an election by the employer under this clause applies for the testing year— “(I) subclause (I) of clause (i) shall not apply, “(II) for purposes of applying subsection (f), subparagraph (B) of this paragraph shall be applied by substituting ‘80 percent’ for ‘95 percent’, and “(III) subsection (f) shall be applied with respect to all health plans maintained by the employer by substituting ‘90 percent’ for ‘80 percent’. “(E) Plans treated as comparable if employee cost difference is $100 or less.— “(i) In general.— A group of plans of the same type shall be treated as comparable with respect to a group of employees if— “(I) such plans are available to all employees in the group on the same terms, and “(II) the difference in annual cost to employees between the plans with the lowest and highest annual employee cost is not greater than $100. “(ii) Coordination with subparagraph (b) .— A plan not in the group of plans described in clause (i) shall be treated as part of such group if, under subparagraph (B) (without regard to clause (iii) of this subparagraph), such plan is comparable to the plan in such group with the largest employer-provided benefit. 102 STAT. 3629 “(iii) Other plans providing comparable benefits.— A plan not in the group of plans described in clause (i) shall be treated as part of such group with respect to an employee if— “(I) in the case of an employee who is not a highly compensated employee, such employee is eligible to participate in the plan in such group with the largest employer-provided benefit (without regard to clause (ii)), “(II) in the case of an employee who is not a highly compensated employee, the annual cost to such employee under such plan is not lower than the lowest cost permitted within such group, and “(III) the employer-provided benefit under such plan is less than the employer-provided benefit under the plan in such group with the largest such benefit (without regard to clause (ii)). “(iv) Separate application of requirements.— If an employer elects the application of paragraph (2)(A)(ii), the amount under clause (i) shall be allocated among plans covering spouses and dependents and plans covering employees in such manner as the employer specifies. “(v) Cost-of-living adjustment.— In the case of testing years beginning after 1989, the $100 amount under clause (i) shall be increased by the percentage (if any) by which— “(I) the CPI for the calendar year preceding the year in which the testing year begins, exceeds “(II) the CPI for 1988. For purposes of this clause, the CPI for any calendar year shall be determined under section 1(f).”. (7) Other coverage.— (A) Subparagraph (A) of section 89(g)(2) of the 1986 Code is amended— (i) by striking out “subsection (e)” each place it appears and inserting in lieu thereof “subsection (e) or (D”, and (ii) by adding at the end thereof the following new sentence: “The provisions of the preceding sentence shall not apply for purposes of applying subsection (f) unless the requirements of subsection (D would be met if such subsection were applied without regard to the preceding sentence and on the basis of eligibility to participate rather than coverage.” (B) Subparagraph (D) of section 89(g)(2) of the 1986 Code is amended by adding at the end thereof the following sentence: “The Secretary shall make such adjustments as are necessary in applying the rules of the preceding sentence to subsection (f).” (8) Sworn statements.— Paragraph (2) of section 89(g) of the 1986 Code is amended— (A) by adding at the end thereof the following new subparagraph: “(E) Special rule.—No employee who is not a highly compensated employee may be disregarded under subparagraph (A)(i) with respect to any health plan of the employer102 STAT. 3630 unless under such plan such employee is entitled, when the coverage under the other health plan referred to in subparagraph (A)(i) ceases, to elect coverage under the plan of the employer (whether or not an election is otherwise available). Such election is to be on the same terms as if such employee was making such election during a subsequent open season. Rules similar to the rules of the preceding sentences of this subparagraph shall apply in the case of an employee treated as not having a spouse or dependents or having a spouse or dependents covered by a health plan of another employer providing core benefits.”; and (B) by striking out “and” at the end of subparagraph (B)(i), by striking out the period at the end of subparagraph (B)(ii) and inserting in lieu thereof “, and”, and by adding at t he end thereof the following new clause: “(iii) the health coverage (if any) received by the employee from the employer.” (9) Definition of plan.— Paragraph (II) of section 89(j) of the 1986 Code is amended by striking out “Each option” and inserting in lieu thereof “Except as provided in subsection (g)(1), each option”. (10) Modification of penalty.— Subparagraph (B) of section 6652(k)(2) of the 1986 Code is amended to read as follows: “(B) the amount which bears the same ratio to the employer-provided benefit (within the meaning of section 89 without regard to subsection (g)(3)(C)(i) thereof) with respect to the employee to whom such failure relates as the amount of such benefit required to be but not shown on timely statements under sections 6051(a) and 6051(d) bears to the amount required to be shown.”. (11) Cafeteria plans.— Subparagraph (D) of section 89(g)(3) of the 1986 Code is amended to read as follows: “(D) Salary reductions.— “(i) In general.— Except for purposes of subsections (d)(1)(A)(ii) and (j)(5), any salary reduction shall be treated as an employer-provided benefit. “(ii) Special rule for subsection (d)(1)(a)(ii).— Notwithstanding clause (i), any salary reduction under a cafeteria plan (within the meaning of section 125) shall treated as an employer-provided benefit for purposes of subsection (d)(1)(A)(ii) if— “(I) the percentage of employees who are not highly compensated employees eligible to participate in the plan is not greater than the percentage of highly compensated employees so eligible, “(II) all employees eligible to participate in the plan are eligible under the same terms and conditions, and “(III) no highly compensated employee eligible under the plan is eligible to participate in any other plan maintained by the employer for any benefit of the same type unless the benefit is available on the same terms and conditions to every employee who is not a highly compensated employee eligible to participate in the plan. “(iii) Regulations.— Notwithstanding clause (i) or (ii), the Secretary may by regulations provide that any102 STAT. 3631 salary reduction shall or shall not be treated as an employer-provided benefit to prevent avoidance of the purposes of this section.” (12) Part-time employees.— Paragraph (5) of section 89(j) of the 1986 Code is amended by striking out the last sentence thereof. (13) Acquisitions and dispositions.— (A) Clause (ii) of section 89(j)(8)(A) of the 1986 Code is amended to read as follows: “(ii) either— “(I) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members in such group), or “(II) such plan meets such other requirements as the Secretary may prescribe by regulation.”. (B) Subclause (II) of section 410(b)(6)(C)(i) of the 1986 Code is amended by inserting “or such plan meets such other requirements as the Secretary may prescribe by regulation” before the end period. (14) Dependent care assistance.— Subparagraph (B) of section 129(d)(7) of the 1986 Code (as redesignated and amended by section 111B of this Act) is amended— (A) by striking out “(within the meaning of section 414(q)(7))”, and (B) by adding at the end thereof the following new sentence: “For purposes of this subparagraph, the term ‘compensation’ has the meaning given such term by section 414(q)(7), except that, under rules prescribed by the Secretary, an employer may elect to determine compensation on any other basis which does not discriminate in favor of highly compensated employees.”. (15) Reporting requirements.— (A) Section 6039D(d) of the 1986 Code is amended— (i) by adding at the end thereof the following new paragraph: “(3) Special rule for multiemployer plans.— In the case of a multiemployer plan, the plan shall be required to provide any information required by this section which the Secretary determines, on the basis of the agreement between the plan and employer, is held by the plan (and not the employer)”, and (ii) by inserting “and Special Rules” after “Definitions” in the heading thereof. (B) The amendments made by this paragraph shall apply to years beginning after 1984. (b) Modification to Definitions of Highly Compensated and Compensation and to Separate Line of Business Rules.— (1) Definition of highly compensated.— Subsection (q) of section 414 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(12) Simplified method for determining highly compensated employees.— “(A) In general.— If an election by the employer under this paragraph applies to any year, in determining whether an employee is a highly compensated employee for such year— 102 STAT. 3632 “(i) subparagraph (B) of paragraph (1) shall be applied by substituting ‘$50,000’ for ‘$75,000’, and “(ii) subparagraph (C) of paragraph (1) shall not apply. “(B) Requirement for election.— An election under this paragraph shall not apply to any year unless— “(i) at all times during such year, the employer maintained significant business activities (and employed employees) in at least 2 significantly separate geographic areas, and “(ii) the employer satisfies such other conditions as the Secretary may prescribe.” (2) Line of business requirements.— (A) Safe harbor rule.— Paragraph (3) of section 414(r) of the 1986 Code is amended to read as follows: “(3) Safe harbor rule.— “(A) In general— The requirements of subparagraph (C) of paragraph (2) shall not apply to any line of business if the highly compensated employee percentage with respect to such line of business is— “(i) not less than one-half, and “(ii) not more than twice, the percentage which highly compensated employees are of all employees of the employer. An employer shall be treated as meeting the requirements of clause (i) if at least 10 percent of all highly compensated employees of the employer perform services solely for such fine of business. “(B) Determination may be based on preceding year.— The requirements of subparagraph (A) shall be treated as met with respect to any line of business if such requirements were met with respect to such line of business for the preceding year and if— “(i) no more than a de minimis number of employees were shifted to or from the line of business after the close of the preceding year, or “(ii) the employees shifted to or from the line of business after the close of the preceding year contained a substantially proportional number of highly compensated employees.”. (B) Separate operating units.— Section 89(g)(5) of the 1986 Code is amended by adding at the end thereof the following new sentence: “In applying section 414(r)(7) for purposes of this section, an operating unit shall be treated as in a separate geographic area from another unit if such units are at least 35 miles apart.”. (3) Compensation for group-life insurance plans.— (A) Paragraph (4) of section 89(j) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(D) Compensation.— For purposes of applying this paragraph— “(i) In general.— Compensation shall be determined on any basis determined by the employer which does not discriminate in favor of highly compensated employees. “(ii) Special rules for 1989 and 1990.—In the case of testing years beginning in 1989 or 1990, the employer102 STAT. 3633 may elect to treat base compensation as compensation.” (B) Subparagraph (A) of section 89(j)(4) of the 1986 Code is amended by striking out “(within the meaning of section 414(s))”. (c) Transitional Provisions for Purposes of Section 89.— (1) Temporary valuation rules.— In the case of testing years beginning before the later of January 1, 1991, or the date 1 year after the Secretary of the Treasury or his delegate first issues such valuation rules as are necessary to apply the provisions of section 89 of the 1986 Code to health plans (or if later the effective date of such rules)— (A) Section 89(g)(3)(B) of the 1986 Code shall not apply. (B) (i) Except as provided in clause (ii), the value of coverage under a health plan for purposes of section 89 of the 1986 Code shall be determined in substantially the same manner as costs under a health plan are determined under section 4980B(f)(4) of the 1986 Code. (ii) For purposes of determining whether an employer meets the requirements of subsections (d), (e), and (f) of section 89 of the 1986 Code, value under clause (i) may be determined under any other reasonable method selected by the employer. (2) Former employees.— The amendments made by section 1151 of the Reform Act shall not apply to former employees who separated from service with the employer before January 1, 1989 (and were not reemployed on or after such date), and such former employees shall not be taken into account in determining whether the requirements of section 89 of the 1986 Code are met with respect to other former employees. The preceding sentence shall not apply to the extent that— (A) the value of employer-provided benefits provided to any such former employee exceeds the value of such benefits which were provided under the terms of the plan as in effect on December 31, 1988, or (B) the employer-provided benefits provided to such former employees are modified so as to discriminate in favor of such former employees who are highly compensated employees. Any excess value under the preceding sentence shall be determined without regard to any increase required by Federal law, regulation or rule or any increase which is the same for employees separating on or before December 31, 1988, and employees separating after such date and which does not discriminate in favor of highly compensated employees who separated from service after December 31, 1988. (3) Written plan requirement.— The requirements of section 89(k)(1)(A) of the 1986 Code shall be treated as met with respect to any testing year beginning in 1989, if— (A) the plan is in writing before the close of such year, (B) the employees had reasonable notice of the plan’s essential features on or before the beginning of such year, and (C) the provisions of the written plan apply for the entire year. (4) Rules to be prescribed before November 15, 1988.— Not later than November 15, 1988, the Secretary of the Treasury or102 STAT. 3634 his delegate shall issue such rules as may be necessary to carry out the provisions of section 89 of the 1986 Code. (d) Effective Dates.— (1) Subsection (a).— The amendments made by subsection (a) shall take effect as if included in the amendments made by section 1151 of the Tax Reform Act of 1986; except that the amendment made by subsection (a)(8) shall apply to testing years beginning after December 31, 1989. (2) Subsection (b).— The amendments made by subsection (b) shall apply to years beginning after December 31, 1986.