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 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 § 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
(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 § 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 percentage | Safe harbor percentage | Unsafe harbor 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 |
| 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 |