Elimination of the alternative method (Notice 89-23) for determining highly compensated employees
Notice 89-23, issued by the IRS in 1989, was intended to provide transitional guidance regarding good faith compliance with the retirement plan nondiscrimination rules for 403(b) plans of certain employers that were contending with retirement plan nondiscrimination testing for the first time. Notice 89-23 was never intended to be a long-term method of nondiscrimination testing for 403(b) plans; rather it was intended to fill a gap until “further guidance is published.” However, it is now 2007 and that “further guidance” (i.e., the final 403(b) regulations) still has not been published — although it looks to be much closer to being finalized.

Remember that 403(b) plans of churches and organizations considered “qualified church-controlled organizations” are still not subject to retirement plan nondiscrimination testing. However, 403(b) plans of organizations such as colleges, universities and hospitals are subject to retirement plan nondiscrimination testing.

Notice 89-23 method of determining highly compensated employees eliminated
Under Notice 89-23, employers are allowed to determine who highly compensated employees are by looking at compensation for the current year and basing that determination on the IRS dollar amount in effect for the current year. Under the Internal Revenue Code, the definition of who is a highly compensated employee is based on compensation for the prior year and the IRS dollar amount in effect for the prior year. Currently, employers can choose whether to use the Notice 89-23 definition of a highly compensated employee or the Internal Revenue Code definition of a highly compensated employee in processing the employer’s 403(b) plan’s nondiscrimination tests or in determining highly compensated employees for purposes of excluding highly compensated employees from participation in the 403(b) retirement plan. Depending upon an employer’s demographics, there may be fewer or no highly compensated employees using the Notice 89-23 definition.

When the Code section 403(b) regulations are finalized and effective, Notice 89-23 will be outdated. Presumably, the 403(b) plan of employers subject to nondiscrimination testing will be required to use the Internal Revenue Code definition of who is a highly compensated employee.

Steps to take now
You may consider talking with the persons who are responsible for remitting the employer’s 403(b)(9) Retirement Plan nondiscrimination testing data to GuideStone and making them aware of this possible new development. While the elimination of the Notice 89-23 definition of highly compensated employee will not go into effect until testing the 2008 plan year, employers who have relied on the Notice 89-23 definition to avoid nondiscrimination testing may want to review their demographics to see whether to begin thinking about how data will be gathered in 2009 to test the 2008 plan year. In addition, employers that exclude highly compensated employees from participation and have used the Notice 89-23 definition will need to know that for the 2008 plan year, they will need to look at compensation for 2007 in determining who is highly compensated for 2008.