New HRMS challenge: section 89 in 1989 - human resource management system - IRS Section 89 - includes related articles on 'how the government created HR systems' and 'testing for section 89 compliance'

Software Magazine, Jan, 1989 by John E. Spirig

NEW HRMS CHALLENGE: SECTION 89 IN 1989

The federal government hands yet another challenge to corporate human resource professionals--the now-famous IRS Section 89, effective this month--and the software industry has been scrambling to code a response.

The tax reform measure, passed to make sure employers spread certain benefits equitably, will have major impacts on the use of computers in human resource management in 1989. Under the Tax Reform Act of 1986 and Internal Revenue Code Section 89 non-discrimination rules, every public and private employer in America with pretax welfare benefit plans is required to "prove" that each plan does not discriminate in favor of owners or highly compensated employees.

Most employers will need both new data collection capabilities and new testing procedures to determine compliance--and many will need data systems to help figure out how much taxes employees will need to pay for benefits that will no longer be tax-free.

"There's no way on earth a company can meet the requirements of Section 89 without an automated system," says Jim Spoor, president of Spectrum Resource Systems, a Denver-based vendor of microcomputer-based human resource management systems.

"The law is just too darn complex for manual record keeping and calculations, even for small employers with three or four basic plans," Spoor said. Companies with computerized personnel and payroll data will require new data collection and testing processes that are not part of today's systems, he said.

Spectrum plans to meet the requirements through enhancements covered by client maintenance contracts. Other established makers of HRMS and payroll systems, including vendors of minibased and mainframe software, are going the same route--with variations. And a number of companies specializing in benefits administration software have already issued "standalone" Section 89 software, data collection, and testing systems that still require a source of data.

And "getting the data" is just the start. Benefits plan administrators will not only need new information and new calculating power to test each plan for compliance, but they (or their benefits consultant) will also need the ability to decide what to do if they are not in compliance in any area.

Section 89 requires that all welfare benefit plans are written, that employees are notified of benefits, and that several private pension fund discrimination safeguards, such as those required under the Employee Retirement Income Security Act of 1974, are met regarding fiduciary responsibility and employee rights. If these provisions are not met, the gross income of each employee is increased by the total value of the employer-provided benefit for that year.

Next--and here is the need for computers--data collection for required non-discrimination tests begins. This data includes:

* the number of highly compensated employees, defined as 5% owners, those paid over $75,000, those over $50,000 and in the top 20% of employees, and company officers; as well as regularly compensated employees, further broken down by:

* the number of separate lines of business, units of at least 50 employees;

* the number of excludable employees, such as those covered in collective bargaining agreements (tested separately), new employees, and part-timers;

* the number of separate plans, which are considered "separate" if they have different levels of coverage, contributions, or employees/dependents;

* the number and status of part-timers and former employees;

* the names of employees and family members covered for core benefits by other employers; and

* where employees were not eligible for the entire year, the proportion of the year they participated in each plan. With this data, employers are required to "test" each plan for discrimination.

A first test, the 80% coverage test, can be passed if 80% of all non-highly compensated employees are covered by the plan during the plan year. Eligibility is not enough; the individual must participate to be counted. If this test is passed, pretax benefits under the plan will be allowed to continue.

Failure to pass the 80% test means that employers must undertake a complex series of eligibility and benefits tests, all of which must be passed for each plan to remain an untaxed benefit.

And when a plan fails all the tests, but employers wish to continue the plan and have employees pay taxes on benefits values, the real computational fun begins. Highly compensated employees who are participants in discriminatory plans will have their gross salaries increased through imputed income--by an amount equal to the employee's "excess benefit" under the plan for the year.

To determine this excess benefit for a highly compensated employee, one has to figure out the value of the benefit if the plan passes the tests.

Further complicating matters, the requirements for passing the post-80% series of tests are more detailed than the initial test: certain part-time employees must be covered, for example.