[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



                    26


          Part 1 (Secs. 1.401 to 1.440)

                         Revised as of April 1, 2003

Internal Revenue





          Containing a codification of documents of general 
          applicability and future effect
          As of April 1, 2003
          With Ancillaries
          Published by
          the Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register



[[Page ii]]

                                      




                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003



  For sale by the Superintendent of Documents, U.S. Government Printing 
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[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     907
      Alphabetical List of Agencies Appearing in the CFR......     925
      Table of OMB Control Numbers............................     935
      List of CFR Sections Affected...........................     953



[[Page iv]]


      


                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  26 CFR 1.401-0 
                       refers to title 26, part 
                       1, section 401-0.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
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    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2003), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
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inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
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or write to the Director, Office of the Federal Register, National 
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ELECTRONIC SERVICES

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free). E-mail, gpoaccess@gpo.gov.

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
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register. The NARA site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 2003.



[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2003. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60; 
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850; 
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400; 
Secs. 1.1401-1.1503-2A; and Sec. 1.1551-1 to end. The fourteenth volume 
containing parts 2-29, includes the remainder of subchapter A and all of 
Subchapter B--Estate and Gift Taxes. The last six volumes contain parts 
30-39 (Subchapter C--Employment Taxes and Collection of Income Tax at 
Source); parts 40-49; parts 50-299 (Subchapter D--Miscellaneous Excise 
Taxes); parts 300-499 (Subchapter F--Procedure and Administration); 
parts 500-599 (Subchapter G--Regulations under Tax Conventions); and 
part 600 to end (Subchapter H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec. 602.101 of this 
chapter. For the convenience of the user, Sec. 602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

[[Page x]]





[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




            (This book contains part 1, Secs. 1.401 to 1.440)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980, 
deleting statutory sections from their regulations. In Chapter I cross 
references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, Mar. 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes................................           5

Supplementary Publication: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                  SUBCHAPTER A--INCOME TAX (CONTINUED)





PART 1--INCOME TAXES--Table of Contents




                  Normal Taxes and Surtaxes (Continued)

                       DEFERRED COMPENSATION, ETC.

            Pension, Profit-Sharing, Stock Bonus Plans, etc.

Sec.
1.401-0  Scope and definitions.
1.401-1  Qualified pension, profit-sharing, and stock bonus plans.
1.401-2  Impossibility of diversion under the trust instrument.
1.401-3  Requirements as to coverage.
1.401-4  Discrimination as to contributions or benefits (before 1994).
1.401-5  Period for which requirements of section 401(a) (3), (4), (5), 
          and (6) are applicable with respect to plans put into effect 
          before September 2, 1974.
1.401-6  Termination of a qualified plan.
1.401-7  Forfeitures under a qualified pension plan.
1.401-8  Custodial accounts prior to January 1, 1974.
1.401-9  Face-amount certificates--nontransferable annuity contracts.
1.401-10  Definitions relating to plans covering self-employed 
          individuals.
1.401-11  General rules relating to plans covering self-employed 
          individuals.
1.401-12  Requirements for qualification of trusts and plans benefiting 
          owner-employees.
1.401-13  Excess contributions on behalf of owner-employees.
1.401-14  Inclusion of medical benefits for retired employees in 
          qualified pension or annuity plans.
1.401(a)-1  Post-ERISA qualified plans and qualified trusts; in general.
1.401(a)-2  Impossibility of diversion under qualified plan or trust.
1.401(a)-4  Optional forms of benefit (before 1994).
1.401(a)-11  Qualified joint and survivor annuities.
1.401(a)-12  Mergers and consolidations of plans and transfers of plan 
          assets.
1.401(a)-13  Assignment or alienation of benefits.
1.401(a)-14  Commencement of benefits under qualified trusts.
1.401(a)-15  Requirement that plan benefits are not decreased on account 
          of certain Social Security increases.
1.401(a)-16  Limitations on benefits and contributions under qualified 
          plans.
1.401(a)-19  Nonforfeitability in case of certain withdrawals.
1.401(a)-20  Requirements of qualified joint and survivor annuity and 
          qualified preretirement survivor annuity.
1.401(a)-30  Limit on elective deferrals.
1.401(a)-50  Puerto Rican trusts; election to be treated as a domestic 
          trust.
1.401(a)(2)-1  Refund of mistaken employer contributions and withdrawal 
          liability payments to multiemployer plans.
1.401(a)(4)-0  Table of contents.
1.401(a)(4)-1  Nondiscrimination requirements of section 401(a)(4).
1.401(a)(4)-2  Nondiscrimination in amount of employer contributions 
          under a defined contribution plan.
1.401(a)(4)-3  Nondiscrimination in amount of employer-provided benefits 
          under a defined benefit plan.
1.401(a)(4)-4  Nondiscriminatory availability of benefits, rights, and 
          features.
1.401(a)(4)-5  Plan amendments and plan terminations.
1.401(a)(4)-6  Contributory defined benefit plans.
1.401(a)(4)-7  Imputation of permitted disparity.
1.401(a)(4)-8  Cross-testing.
1.401(a)(4)-9  Plan aggregation and restructuring.
1.401(a)(4)-10  Testing of former employees.
1.401(a)(4)-11  Additional rules.
1.401(a)(4)-12  Definitions.
1.401(a)(4)-13  Effective dates and fresh-start rules.
1.401(a)(5)-1  Special rules relating to nondiscrimination requirements.
1.401(a)(9)-0  Required minimum distributions; table of contents.
1.401(a)(9)-1  Minimum distribution requirement in general.
1.401(a)(9)-2  Distributions commencing during an employee's lifetime.
1.401(a)(9)-3  Death before required beginning date.
1.401(a)(9)-4  Determination of the designated beneficiary.
1.401(a)(9)-5  Required minimum distributions from defined contribution 
          plans.
1.401(a)(9)-6T  Required minimum distributions for defined benefit plans 
          and annuity contracts (temporary).
1.401(a)(9)-7  Rollovers and transfers.
1.401(a)(9)-8  Special rules.
1.401(a)(9)-9  Life expectancy and distribution period tables.
1.401(a)(17)-1  Limitation on annual compensation.
1.401(a)(26)-0  Table of contents.
1.401(a)(26)-1  Minimum participation requirements.
1.401(a)(26)-2  Minimum participation rule.
1.401(a)(26)-3  Rules applicable to a defined benefit plan's prior 
          benefit structure.

[[Page 6]]

1.401(a)(26)-4  Testing former employees.
1.401(a)(26)-5  Employees who benefit under a plan.
1.401(a)(26)-6  Excludable employees.
1.401(a)(26)-7  Testing methods.
1.401(a)(26)-8  Definitions.
1.401(a)(26)-9  Effective dates and transition rules.
1.401(a)(31)-1  Requirement to offer direct rollover of eligible 
          rollover distributions; questions and answers.
1.401(b)-1  Certain retroactive changes in plan.
1.401(e)-1  Definitions relating to plans covering self-employed 
          individuals.
1.401(e)-2  General rules relating to plans covering self-employed 
          individuals.
1.401(e)-3  Requirements for qualification of trusts and plans 
          benefiting owner-employees.
1.401(e)-4  Contributions for premiums on annuity, etc., contracts and 
          transitional rule for certain excess contributions.
1.401(e)-5  Limitation of contribution and benefit bases to first 
          $100,000 of annual compensation in case of plans covering 
          self-employed individuals.
1.401(e)-6  Special rules for shareholder-employers.
1.401(f)-1  Certain custodial accounts and annuity contracts.
1.401(k)-0  Certain cash or deferred arrangements, table of contents.
1.401(k)-1  Certain cash or deferred arrangements.
1.401(l)-0  Table of contents.
1.401(l)-1  Permitted disparity in employer-provided contributions or 
          benefits.
1.401(l)-2  Permitted disparity for defined contribution plans.
1.401(l)-3  Permitted disparity for defined benefit plans.
1.401(l)-4  Special rules for railroad plans.
1.401(l)-5  Overall permitted disparity limits.
1.401(l)-6  Effective dates and transition rules.
1.401(m)-0  Employee and matching contributions, table of contents.
1.401(m)-1  Employee and matching contributions.
1.401(m)-2  Multiple use of alternative limitation.
1.402(a)-1  Taxability of beneficiary under a trust which meets the 
          requirements of section 401(a).
1.402(a)(5)-1T  Rollovers of partial distributions from qualified trusts 
          and annuities. (Temporary)
1.402(b)-1  Treatment of beneficiary of a trust not exempt under section 
          501(a).
1.402(c)-1  Taxability of beneficiary of certain foreign situs trusts.
1.402(c)-2  Eligible rollover distributions; questions and answers.
1.402(d)-1  Effect of section 402(d).
1.402(e)-1  Certain plan terminations.
1.402(f)-1  Required explanation of eligible rollover distributions; 
          questions and answers.
1.402(g)-0  Limitation on exclusion for elective deferrals, table of 
          contents.
1.402(g)-1  Limitation on exclusion for elective deferrals.
1.403(a)-1  Taxability of beneficiary under a qualified annuity plan.
1.403(a)-2  Capital gains treatment for certain distributions.
1.403(b)-1  Taxability of beneficiary under annuity purchased by a 
          section 501(c)(3) organization or public school.
1.403(b)-2  Eligible rollover distributions; questions and answers.
1.403(b)-3  Required minimum distributions from annuity contracts 
          purchased, or custodial accounts or retirement income accounts 
          established, by a section 501(c)(3) organization or a public 
          school.
1.403(c)-1  Taxability of beneficiary under a nonqualified annuity.
1.403(d)-1  Taxability of employee when rights under contracts purchased 
          by exempt organizations change from forfeitable to 
          nonforfeitable.
1.404(a)-1  Contributions of an employer to an employees' trust or 
          annuity plan and compensation under a deferred payment plan; 
          general rule.
1.404(a)-1T  Questions and answers relating to deductibility of deferred 
          compensation and deferred benefits for employees. (Temporary)
1.404(a)-2  Information to be furnished by employer claiming deductions; 
          taxable years ending before December 31, 1971.
1.404(a)-2A  Information to be furnished by employer; taxable years 
          ending on or after December 31, 1971, and before December 31, 
          1975.
1.404(a)-3  Contributions of an employer to or under an employees' 
          pension trust or annuity plan that meets the requirements of 
          section 401(a); application of section 404(a)(1).
1.404(a)-4  Pension and annuity plans; limitations under section 
          404(a)(1)(A).
1.404(a)-5  Pension and annuity plans; limitations under section 
          404(a)(1)(B).
1.404(a)-6  Pension and annuity plans; limitations under section 
          404(a)(1)(C).
1.404(a)-7  Pension and annuity plans; contributions in excess of 
          limitations under section 404(a)(1); application of section 
          404(a)(1)(D).
1.404(a)-8  Contributions of an employer under an employees' annuity 
          plan which meets the requirements of section 401(a); 
          application of section 404(a)(2).
1.404(a)(8)-1T  Deductions for plan contributions on behalf of self-
          employed individuals. (Temporary)
1.404(a)-9  Contributions of an employer to an employees' profit-sharing 
          or stock bonus trust that meets the requirements

[[Page 7]]

          of section 401(a); application of section 404(a)(3)(A).
1.404(a)-10  Profit-sharing plan of an affiliated group; application of 
          section 404(a)(3)(B).
1.404(a)-11  Trusts created or organized outside the United States; 
          application of section 404(a)(4).
1.404(a)-12  Contributions of an employer under a plan that does not 
          meet the requirements of section 401(a); application of 
          section 404(a)(5).
1.404(a)-13  Contributions of an employer where deductions are allowable 
          under section 404(a) (1) or (2) and also under section 
          404(a)(3); application of section 404(a)(7).
1.404(a)-14  Special rules in connection with the Employee Retirement 
          Income Security Act of 1974.
1.404(b)-1  Method of contribution, etc., having the effect of a plan; 
          effect of section 404(b).
1.404(b)-1T  Method or arrangement of contributions, etc., deferring the 
          receipt of compensation or providing for deferred benefits. 
          (Temporary)
1.404(c)-1  Certain negotiated plans; effect of section 404(c).
1.404(d)-1T  Questions and answers relating to deductibility of deferred 
          compensation and deferred benefits for independent 
          contractors. (Temporary)
1.404(e)-1  Contributions on behalf of a self-employed individual to or 
          under a pension, annuity, or profit-sharing plan meeting the 
          requirements of section 401; application of section 404(a) 
          (8), (9), and (10) and section 404 (e) and (f).
1.404(e)-1A  Contributions on behalf of a self-employed individual to or 
          under a qualified pension, annuity, or profit-sharing plan.
1.404(g)-1  Deduction of employer liability payments.
1.404(k)-1T  Questions and answers relating to the deductibility of 
          certain dividend distributions. (Temporary)
1.405-1  Qualified bond purchase plans.
1.405-2  Deduction of contributions to qualified bond purchase plans.
1.405-3  Taxation of retirement bonds.
1.406-1  Treatment of certain employees of foreign subsidiaries as 
          employees of the domestic corporation.
1.407-1  Treatment of certain employees of domestic subsidiaries engaged 
          in business outside the United States as employees of the 
          domestic parent corporation.
1.408-1  General rules.
1.408-2  Individual retirement accounts.
1.408-3  Individual retirement annuities.
1.408-4  Treatment of distributions from individual retirement 
          arrangements.
1.408-5  Annual reports by trustees or issuers.
1.408-6  Disclosure statements for individual retirement arrangements.
1.408-7  Reports on distributions from individual retirement plans.
1.408-8  Distribution requirements for individual retirement plans.
1.408A-0  Roth IRAs; table of contents.
1.408A-1  Roth IRAs in general.
1.408A-2  Establishing Roth IRAs.
1.408A-3  Contributions to Roth IRAs.
1.408A-4  Converting amounts to Roth IRAs.
1.408A-5  Recharacterized contributions.
1.408A-6  Distributions.
1.408A-7  Reporting.
1.408A-8  Definitions.
1.408A-9  Effective date.
1.409-1  Retirement bonds.
1.410(a)-1  Minimum participation standards; general rules.
1.410(a)-2  Effective dates.
1.410(a)-3  Minimum age and service conditions.
1.410(a)-3T  Minimum age and service conditions (temporary).
1.410(a)-4  Maximum age conditions and time of participation.
1.410(a)-5  Year of service; break in service.
1.410(a)-6  Amendment of break in service rules; transition period.
1.410(a)-7  Elapsed time.
1.410(a)-8  Five consecutive 1-year breaks in service, transitional 
          rules under the Retirement Equity Act of 1984.
1.410(a)-8T  Year of service; break in service (temporary).
1.410(a)-9  Maternity and paternity absence.
1.410(a)-9T  Elapsed time (temporary).
1.410(b)-0  Table of contents.
1.410(b)-1  Minimum coverage requirements (before 1994).
1.410(b)-2  Minimum coverage requirements (after 1993).
1.410(b)-3  Employees and former employees who benefit under a plan.
1.410(b)-4  Nondiscriminatory classification test.
1.410(b)-5  Average benefit percentage test.
1.410(b)-6  Excludable employees.
1.410(b)-7  Definition of plan and rules governing plan disaggregation 
          and aggregation.
1.410(b)-8  Additional rules.
1.410(b)-9  Definitions.
1.410(b)-10  Effective dates and transition rules.
1.410(d)-1  Election by church to have participation, vesting, funding, 
          etc. provisions apply.
1.411(a)-1  Minimum vesting standards; general rules.
1.411(a)-2  Effective dates.
1.411(a)-3  Vesting in employer-derived benefits.
1.411(a)-3T  Vesting in employer-derived benefits (temporary).
1.411(a)-4  Forfeitures, suspensions, etc.

[[Page 8]]

1.411(a)-4T  Forfeitures, suspensions, etc. (temporary).
1.411(a)-5  Service included in determination of nonforfeitable 
          percentage.
1.411(a)-6  Year of service; hours of service; breaks in service.
1.411(a)-7  Definitions and special rules.
1.411(a)-8  Changes in vesting schedule.
1.411(a)-8T  Changes in vesting schedule (temporary).
1.411(a)-9  Amendment of break in service rules; transitional period.
1.411(a)-11  Restriction and valuation of distributions.
1.411(b)-1  Accrued benefit requirements.
1.411(c)-1  Allocation of accrued benefits between employer and employee 
          contributions.
1.411(d)-1  Coordination of vesting and discrimination requirements. 
          [Reserved]
1.411(d)-2  Termination or partial termination; discontinuance of 
          contributions.
1.411(d)-3  Other special rules.
1.411(d)-4  Section 411(d)(6) protected benefits.
1.411(d)-5  Class year plans; plan years beginning after October 22, 
          1986.
1.411(d)-6  Section 204(h) notice.
1.412(b)-2  Amortization of experience gains in connection with certain 
          group deferred annuity contracts.
1.412(b)-5  Election of the alternative amortization method of funding.
1.412(c)(1)-1  Determinations to be made under funding method--terms 
          defined.
1.412(c)(1)-2  Shortfall method.
1.412(c)(1)-3  Applying the minimum funding requirements to restored 
          plans.
1.412(c)(1)-3T  Applying the minimum funding requirements to restored 
          plans (temporary).
1.412(c)(2)-1  Valuation of plan assets; reasonable actuarial valuation 
          methods.
1.412(c)(3)-1  Reasonable funding methods.
1.412(c)(3)-2  Effective dates and transitional rules relating to 
          reasonable funding methods.
1.412(i)-1  Certain insurance contract plans.
1.413-1  Special rules for collectively bargained plans.
1.413-2  Special rules for plans maintained by more than one employer.
1.414(b)-1  Controlled group of corporations.
1.414(c)-1  Commonly controlled trades or businesses.
1.414(c)-2  Two or more trades or businesses under common control.
1.414(c)-3  Exclusion of certain interests or stock in determining 
          control.
1.414(c)-4  Rules for determining ownership.
1.414(c)-5  Effective date.
1.414(e)-1  Definition of church plan.
1.414(f)-1  Definition of multiemployer plan.
1.414(g)-1  Definition of plan administrator.
1.414(l)-1  Mergers and consolidations of plans or transfers of plan 
          assets.
1.414(q)-1  Highly compensated employee.
1.414(q)-1T  Highly compensated employee (temporary).
1.414(r)-0  Table of contents.
1.414(r)-1  Requirements applicable to qualified separate lines of 
          business.
1.414(r)-2  Line of business.
1.414(r)-3  Separate line of business.
1.414(r)-4  Qualified separate line of business--fifty-employee and 
          notice requirements.
1.414(r)-5  Qualified separate line of business--administrative scrutiny 
          requirement--safe harbors.
1.414(r)-6  Qualified separate line of business--administrative scrutiny 
          requirement--individual determinations.
1.414(r)-7  Determination of the employees of an employer's qualified 
          separate lines of business.
1.414(r)-8  Separate application of section 410(b).
1.414(r)-9  Separate application of section 401(a)(26).
1.414(r)-10  Separate application of section 129(d)(8). [Reserved]
1.414(r)-11  Definitions and special rules.
1.414(s)-1  Definition of compensation.
1.415-1  General rules with respect to limitations on benefits and 
          contributions under qualified plans.
1.415-2  Definitions and special rules.
1.415-3  Limitations for defined benefit plans.
1.415-4  Transitional rule for defined benefit plans.
1.415-5  Cost of living adjustments for defined benefit plans.
1.415-6  Limitation for defined contribution plans.
1.415-7  Limitation in case of defined benefit and defined contribution 
          plan for same employee.
1.415-8  Combining and aggregating plans.
1.415-9  Disqualification of plans and trusts.
1.415-10  Special aggregation rules.
1.416-1  Questions and answers on top-heavy plans.
1.417(e)-1  Restrictions and valuations of distributions from plans 
          subject to sections 401(a)(11) and 417.
1.417(e)-1T  Restrictions and valuations of distributions from plans 
          subject to sections 401(a)(11) and 417. (Temporary)
1.419-1T  Treatment of welfare benefit funds. (Temporary)
1.419A-1T  Qualified asset account limitation of additions to account. 
          (Temporary)
1.419A-2T  Qualified asset account limitation for collectively bargained 
          funds. (Temporary)
1.420-1  Significant reduction in retiree health coverage during the 
          cost maintenance period.

[[Page 9]]

                          Certain Stock Options

1.421-1  Effective dates and meaning and use of certain terms.
1.421-2  Restricted stock option.
1.421-3  Exercise of restricted stock option.
1.421-4  Modification, extension, or renewal.
1.421-5  Operation of section 421.
1.421-6  Options to which section 421 does not apply.
1.421-7  Meaning and use of certain terms.
1.421-8  General rules.
1.422-4  Qualified stock options (prior law).
1.422-5  Stockholder approval of incentive stock option plans.
1.423-1  Applicability of section 421(a).
1.423-2  Employee stock purchase plan defined.
1.425-1  Definitions and special rules applicable to statutory options.

    Authority: 26 U.S.C. 7805.
    Sec. 1.401-12 also issued under 26 U.S.C. 401(d)(1).
    Sec. 1.401(a)(2)-1 also issued under Multiemployer Pension Plan 
Amendments Act, Public Law 96-364, 410, (94 Stat. 1208, 1308)(1980).
    Sec. 1.401(a)(5)-1 also issued under 26 U.S.C. 401(a)(5).
    Sec. 1.401(a)(9)-1 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-2 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-3 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-4 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-5 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-6T is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-7 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-8 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(9)-9 is also issued under 26 U.S.C. 401(a)(9).
    Sec. 1.401(a)(17)-1 also issued under 26 U.S.C. 401(a)(17).
    Secs. 1.401(a)(26)-1 through (a)(26)-9 also issued under 26 U.S.C. 
401(a)(26).
    Sec. 1.401(b)-1 also issued under 26 U.S.C. 401(b).
    Sec. 1.401(l)-0 through 1.401(l)-6 also issued under 26 U.S.C. 
401(l).
    Sec. 1.403(b)-3 is also issued under 26 U.S.C. 403(b)(10).
    Sec. 1.408-8 is also issued under 26 U.S.C. 408(a)(6) and (b)(3).
    Sec. 1.408A-1 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-2 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-3 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-4 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-5 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-6 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-7 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-8 also issued under 26 U.S.C. 408A.
    Sec. 1.408A-9 also issued under 26 U.S.C. 408A.
    Secs. 1.410(b)-2 through 1.410(b)-10 also issued under 26 U.S.C. 
410(b)(6).
    Sec. 1.411(a)-7 also issued under 26 U.S.C. 411(a)(7)(B)(i).
    Sec. 1.411(d)-4 also issued under 26 U.S.C. 411(d)(6).
    Sec. 1.411(d)-6 is issued under Reorganization Plan No. 4 of 1978, 
29 U.S.C. 1001nt.
    Secs. 1.414(c)-1 through 1.414(c)-5 also issued under 26 U.S.C. 
414(c).
    Sec. 1.414(q)-1T is also issued under 26 U.S.C. 414(q).
    Secs. 1.414(r)-0 through 1.414(r)-7 also issued under 26 U.S.C. 
414(r).
    Sec. 1.414(r)-8 also issued under 26 U.S.C. 410(b) and 414(r).
    Sec. 1.414(r)-9 also issued under 26 U.S.C. 401(a)(26) and 414(r).
    Sec. 1.414(r)-10 also issued under 26 U.S.C. 129 and 414(r).
    Sec. 1.414(r)-1 also issued under 26 U.S.C. 414(r).
    Sec. 1.414(s)-1 also issued under 26 U.S.C. 414(s).
    Sec. 1.417(e)-1 also issued under 26 U.S.C. 417(e)(3)(A)(ii)(II).
    Sec. 1.417(e)-1T also issued under 26 U.S.C. 417(e)(3)(A)(ii)(II).
    Sec. 1.420-1 also issued under 26 U.S.C. 420(c)(3)(E).

                       DEFERRED COMPENSATION, ETC.

            Pension, Profit-Sharing, Stock Bonus Plans, etc.



Sec. 1.401-0  Scope and definitions.

    (a) In general. Sections 1.401 through 1.401-14 (inclusive) reflect 
the provisions of section 401 prior to amendment by the Employee 
Retirement Income Security Act of 1974. The sections following 
Sec. 1.401-14 and preceding Sec. 1.402(a)-1 (hereafter referred to in 
this section as the ``Post-ERISA Regulations'') reflect the provisions 
of section 401 after amendment by such Act.
    (b) Definitions. For purposes of the Post-ERISA regulations--
    (1) Qualified plan. The term ``qualified plan'' means a plan which 
satisfies the requirements of section 401(a).
    (2) Qualified trust. The term ``qualified trust'' means a trust 
which satisfies the requirements of section 401(a).

(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42320, Aug. 23, 1977]



Sec. 1.401-1  Qualified pension, profit-sharing, and stock bonus plans.

    (a) Introduction. (1) Sections 401 through 405 relate to pension, 
profit- sharing, stock bonus, and annuity

[[Page 10]]

plans, compensation paid under a deferred-payment plan, and bond 
purchase plans. Section 401(a) prescribes the requirements which must be 
met for qualification of a trust forming part of a pension, profit-
sharing, or stock bonus plan.
    (2) A qualified pension, profit-sharing, or stock bonus plan is a 
definite written program and arrangement which is communicated to the 
employees and which is established and maintained by an employer--
    (i) In the case of a pension plan, to provide for the livelihood of 
the employees or their beneficiaries after the retirement of such 
employees through the payment of benefits determined without regard to 
profits (see paragraph (b)(1)(i) of this section);
    (ii) In the case of a profit-sharing plan, to enable employees or 
their beneficiaries to participate in the profits of the employer's 
trade or business, or in the profits of an affiliated employer who is 
entitled to deduct his contributions to the plan under section 
404(a)(3)(B), pursuant to a definite formula for allocating the 
contributions and for distributing the funds accumulated under the plan 
(see paragraph (b)(1)(ii) of this section); and
    (iii) In the case of a stock bonus plan, to provide employees or 
their beneficiaries benefits similar to those of profit-sharing plans, 
except that such benefits are distributable in stock of the employer, 
and that the contributions by the employer are not necessarily dependent 
upon profits. If the employer's contributions are dependent upon 
profits, the plan may enable employees or their beneficiaries to 
participate not only in the profits of the employer, but also in the 
profits of an affiliated employer who is entitled to deduct his 
contributions to the plan under section 404(a)(3)(B) (see paragraph 
(b)(1)(iii) of this section).
    (3) In order for a trust forming part of a pension, profit-sharing, 
or stock bonus plan to constitute a qualified trust under section 
401(a), the following tests must be met:
    (i) It must be created or organized in the United States, as defined 
in section 7701(a)(9), and it must be maintained at all times as a 
domestic trust in the United States;
    (ii) It must be part of a pension, profit-sharing, or stock bonus 
plan established by an employer for the exclusive benefit of his 
employees or their beneficiaries (see paragraph (b)(2) through (5) of 
this section);
    (iii) It must be formed or availed of for the purpose of 
distributing to the employees or their beneficiaries the corpus and 
income of the fund accumulated by the trust in accordance with the plan, 
and, in the case of a plan which covers (as defined in paragraph (a)(2) 
of Sec. 1.401-10) any self-employed individual, the time and method of 
such distribution must satisfy the requirements of section 401(a)(9) 
with respect to each employee covered by the plan (see paragraph (e) of 
Sec. 1.401-11);
    (iv) It must be impossible under the trust instrument at any time 
before the satisfaction of all liabilities with respect to employees and 
their beneficiaries under the trust, for any part of the corpus or 
income to be used for, or diverted to, purposes other than for the 
exclusive benefit of the employees or their beneficiaries (see 
Sec. 1.401-2);
    (v) It must be part of a plan which benefits prescribed percentages 
of the employees, or which benefits such employees as qualify under a 
classification set up by the employer and found by the Commissioner not 
to be discriminatory in favor of certain specified classes of employees 
(see Sec. 1.401-3 and, in addition, see Sec. 1.401-12 for special rules 
as to plans covering owner-employees);
    (vi) It must be part of a plan under which contributions or benefits 
do not discriminate in favor of certain specified classes of employees 
(see Sec. 1.401-4);
    (vii) It must be part of a plan which provides the nonforfeitable 
rights described in section 401(a)(7) (see Sec. 1.401-6);
    (viii) If the trust forms part of a pension plan, the plan must 
provide that forfeitures must not be applied to increase the benefits 
any employee would receive under such plan (see Sec. 1.401-7);
    (ix) It must, if the plan benefits any self-employed individual who 
is an owner-employee, satisfy the additional requirements for 
qualification contained in section 401(a)(10) and (d).

[[Page 11]]

    (4) For taxable years beginning after December 31, 1962, self-
employed individuals may be included in qualified plans. See 
Secs. 1.401-10 through 1.401-13.
    (b) General rules. (1)(i) A pension plan within the meaning of 
section 401(a) is a plan established and maintained by an employer 
primarily to provide systematically for the payment of definitely 
determinable benefits to his employees over a period of years, usually 
for life, after retirement. Retirement benefits generally are measured 
by, and based on, such factors as years of service and compensation 
received by the employees. The determination of the amount of retirement 
benefits and the contributions to provide such benefits are not 
dependent upon profits. Benefits are not definitely determinable if 
funds arising from forfeitures on termination of service, or other 
reason, may be used to provide increased benefits for the remaining 
participants (see Sec. 1.401-7, relating to the treatment of forfeitures 
under a qualified pension plan). A plan designed to provide benefits for 
employees or their beneficiaries to be paid upon retirement or over a 
period of years after retirement will, for the purposes of section 
401(a), be considered a pension plan if the employer contributions under 
the plan can be determined actuarially on the basis of definitely 
determinable benefits, or, as in the case of money purchase pension 
plans, such contributions are fixed without being geared to profits. A 
pension plan may provide for the payment of a pension due to disability 
and may also provide for the payment of incidental death benefits 
through insurance or otherwise. However, a plan is not a pension plan if 
it provides for the payment of benefits not customarily included in a 
pension plan such as layoff benefits or benefits for sickness, accident, 
hospitalization, or medical expenses (except medical benefits described 
in section 401(h) as defined in paragraph (a) of Sec. 1.401-14).
    (ii) A profit-sharing plan is a plan established and maintained by 
an employer to provide for the participation in his profits by his 
employees or their beneficiaries. The plan must provide a definite 
predetermined formula for allocating the contributions made to the plan 
among the participants and for distributing the funds accumulated under 
the plan after a fixed number of years, the attainment of a stated age, 
or upon the prior occurrence of some event such as layoff, illness, 
disability, retirement, death, or severance of employment. A formula for 
allocating the contributions among the participants is definite if, for 
example, it provides for an allocation in proportion to the basic 
compensation of each participant. A plan (whether or not it contains a 
definite predetermined formula for determining the profits to be shared 
with the employees) does not qualify under section 401(a) if the 
contributions to the plan are made at such times or in such amounts that 
the plan in operation discriminates in favor of officers, shareholders, 
persons whose principal duties consist in supervising the work of other 
employees, or highly compensated employees. For the rules with respect 
to discrimination, see Secs. 1.401-3 and 1.401-4. A profit-sharing plan 
within the meaning of section 401 is primarily a plan of deferred 
compensation, but the amounts allocated to the account of a participant 
may be used to provide for him or his family incidental life or accident 
or health insurance.
    (iii) A stock bonus plan is a plan established and maintained by an 
employer to provide benefits similar to those of a profit-sharing plan, 
except that the contributions by the employer are not necessarily 
dependent upon profits and the benefits are distributable in stock of 
the employer company. For the purpose of allocating and distributing the 
stock of the employer which is to be shared among his employees or their 
beneficiaries, such a plan is subject to the same requirements as a 
profit-sharing plan.
    (iv) As to inclusion of full-time life insurance salesmen within the 
class of persons considered to be employees, see section 7701(a)(20).
    (2) The term ``plan'' implies a permanent as distinguished from a 
temporary program. Thus, although the employer may reserve the right to 
change or terminate the plan, and to discontinue contributions 
thereunder, the abandonment of the plan for any reason other than 
business necessity within a few

[[Page 12]]

years after it has taken effect will be evidence that the plan from its 
inception was not a bona fide program for the exclusive benefit of 
employees in general. Especially will this be true if, for example, a 
pension plan is abandoned soon after pensions have been fully funded for 
persons in favor of whom discrimination is prohibited under section 
401(a). The permanency of the plan will be indicated by all of the 
surrounding facts and circumstances, including the likelihood of the 
employer's ability to continue contributions as provided under the plan. 
In the case of a profit-sharing plan, other than a profit-sharing plan 
which covers employees and owner-employees (see section 401(d)(2)(B)), 
it is not necessary that the employer contribute every year or that he 
contribute the same amount or contribute in accordance with the same 
ratio every year. However, merely making a single or occasional 
contribution out of profits for employees does not establish a plan of 
profit-sharing. To be a profit-sharing plan, there must be recurring and 
substantial contributions out of profits for the employees. In the event 
a plan is abandoned, the employer should promptly notify the district 
director, stating the circumstances which led to the discontinuance of 
the plan.
    (3) If the plan is so designed as to amount to a subterfuge for the 
distribution of profits to shareholders, it will not qualify as a plan 
for the exclusive benefit of employees even though other employees who 
are not shareholders are also included under the plan. The plan must 
benefit the employees in general, although it need not provide benefits 
for all of the employees. Among the employees to be benefited may be 
persons who are officers and shareholders. However, a plan is not for 
the exclusive benefit of employees in general if, by any device 
whatever, it discriminates either in eligibility requirements, 
contributions, or benefits in favor of employees who are officers, 
shareholders, persons whose principal duties consist in supervising the 
work of other employees, or the highly compensated employees. See 
section 401(a) (3), (4), and (5). Similarly, a stock bonus or profit-
sharing plan is not a plan for the exclusive benefit of employees in 
general if the funds therein may be used to relieve the employer from 
contributing to a pension plan operating concurrently and covering the 
same employees. All of the surrounding and attendant circumstances and 
the details of the plan will be indicative of whether it is a bona fide 
stock bonus, pension, or profit-sharing plan for the exclusive benefit 
of employees in general. The law is concerned not only with the form of 
a plan but also with its effects in operation. For example, section 
401(a)(5) specifies certain provisions which of themselves are not 
discriminatory. However, this does not mean that a plan containing these 
provisions may not be discriminatory in actual operation.
    (4) A plan is for the exclusive benefit of employees or their 
beneficiaries even though it may cover former employees as well as 
present employees and employees who are temporarily on leave, as, for 
example, in the Armed Forces of the United States. A plan covering only 
former employees may qualify under section 401(a) if it complies with 
the provisions of section 401(a)(3)(B), with respect to coverage, and 
section 401(a)(4), with respect to contributions and benefits, as 
applied to all of the former employees. The term ``beneficiaries'' of an 
employee within the meaning of section 401 includes the estate of the 
employee, dependents of the employee, persons who are the natural 
objects of the employee's bounty, and any persons designated by the 
employee to share in the benefits of the plan after the death of the 
employee.
    (5)(i) No specific limitations are provided in section 401(a) with 
respect to investments which may be made by the trustees of a trust 
qualifying under section 401(a). Generally, the contributions may be 
used by the trustees to purchase any investments permitted by the trust 
agreement to the extent allowed by local law. However, such a trust will 
be subject to tax under section 511 with respect to any ``unrelated 
business taxable income'' (as defined in section 512) realized by it 
from its investments.
    (ii) Where the trust funds are invested in stock or securities of, 
or

[[Page 13]]

loaned to, the employer or other person described in section 503(b), 
full disclosure must be made of the reasons for such arrangement and the 
conditions under which such investments are made in order that a 
determination may be made whether the trust serves any purpose other 
than constituting part of a plan for the exclusive benefit of employees. 
The trustee shall report any of such investments on the return which 
under section 6033 it is required to file and shall with respect to any 
such investment furnish the information required by such return. See 
Sec. 1.6033-1.
    (c) Portions of years. A qualified status must be maintained 
throughout the entire taxable year of the trust in order for the trust 
to obtain any exemption for such year. But see section 401(a)(6) and 
Sec. 1.401-3.
    (d) Plan of several employers. A trust forming part of a plan of 
several employers for their employees will be qualified if all the 
requirements are otherwise satisfied.
    (e) Determination of exemptions and returns. (1) An employees' trust 
may request a determination letter as to its qualification under section 
401 and exemption under section 501. For the procedure for obtaining 
such a determination letter see paragraph (l) of Sec. 601.201 of this 
chapter (Statement of Procedural Rules).
    (2) A trust which qualifies under section 401(a) and which is exempt 
under section 501(a) must file a return in accordance with section 6033 
and the regulations thereunder. See Secs. 1.6033-1 and 1.6033-2(a)(3). 
In case such a trust realizes any unrelated business taxable income, as 
defined in section 512, such trust is also required to file a return 
with respect to such income. See paragraph (e) of Sec. 1.6012-2 and 
paragraph (a)(5) of Sec. 1.6012-3 for requirements with respect to such 
returns. For information required to be furnished periodically by an 
employer with respect to the qualification of a plan, see 
Secs. 1.404(a)-2, 1.404(a)-2A, and 1.6033-2(a)(2)(ii)(i).

[T.D. 6500, 25 FR 11670, Nov. 26, 1960, as amended by T.D. 6675, 28 FR 
10118, Sept. 17, 1963; T.D. 6722, 29 FR 5071, Apr. 14, 1964; T.D. 7168, 
37 FR 5024, Mar. 9, 1972; T.D. 7428, 41 FR 34619, Aug. 16, 1976]



Sec. 1.401-2  Impossibility of diversion under the trust instrument.

    (a) In general. (1) Under section 401(a)(2) a trust is not qualified 
unless under the trust instrument it is impossible (in the taxable year 
and at any time thereafter before the satisfaction of all liabilities to 
employees or their beneficiaries covered by the trust) for any part of 
the trust corpus or income to be used for, or diverted to, purposes 
other than for the exclusive benefit of such employees or their 
beneficiaries. This section does not apply to funds of the trust which 
are allocated to provide medical benefits described in section 401(h) as 
defined in paragraph (a) of Sec. 1.401-14. For the rules prohibiting 
diversion of such funds and the requirement of reversion to the employer 
after satisfaction of all liabilities under the medical benefits 
account, see paragraph (c) (4) and (5) of Sec. 1.401-14. For rules 
permitting reversion to the employer of amounts held in a section 415 
suspense acount, see Sec. 1.401(a)-2(b).
    (2) As used in section 401(a)(2), the phrase ``if under the trust 
instrument it is impossible'' means that the trust instrument must 
definitely and affirmatively make it impossible for the nonexempt 
diversion or use to occur, whether by operation or natural termination 
of the trust, by power of revocation or amendment, by the happening of a 
contingency, by collateral arrangement, or by any other means. Although 
it is not essential that the employer relinquish all power to modify or 
terminate the rights of certain employees covered by the trust, it must 
be impossible for the trust funds to be used or diverted for purposes 
other than for the exclusive benefit of his employees or their 
beneficiaries.
    (3) As used in section 401(a)(2), the phrase ``purposes other than 
for the exclusive benefit of his employees or their beneficiaries'' 
includes all objects or aims not solely designed for the proper 
satisfaction of all liabilities to employees or their beneficiaries 
covered by the trust.
    (b) Meaning of ``liabilities''. (1) The intent and purpose in 
section 401(a)(2) of the phrase ``prior to the satisfaction of all 
liabilities with respect to employees and their beneficiaries under the

[[Page 14]]

trust'' is to permit the employer to reserve the right to recover at the 
termination of the trust, and only at such termination, any balance 
remaining in the trust which is due to erroneous actuarial computations 
during the previous life of the trust. A balance due to an ``erroneous 
actuarial computation'' is the surplus arising because actual 
requirements differ from the expected requirements even though the 
latter were based upon previous actuarial valuations of liabilities or 
determinations of costs of providing pension benefits under the plan and 
were made by a person competent to make such determinations in 
accordance with reasonable assumptions as to mortality, interest, etc., 
and correct procedures relating to the method of funding. For example, a 
trust has accumulated assets of $1,000,000 at the time of liquidation, 
determined by acceptable actuarial procedures using reasonable 
assumptions as to interest, mortality, etc., as being necessary to 
provide the benefits in accordance with the provisions of the plan. Upon 
such liquidation it is found that $950,000 will satisfy all of the 
liabilities under the plan. The surplus of $50,000 arises, therefore, 
because of the difference between the amounts actuarially determined and 
the amounts actually required to satisfy the liabilities. This $50,000, 
therefore, is the amount which may be returned to the employer as the 
result of an erroneous actuarial computation. If, however, the surplus 
of $50,000 had been accumulated as a result of a change in the benefit 
provisions or in the eligibility requirements of the plan, the $50,000 
could not revert to the employer because such surplus would not be the 
result of an erroneous actuarial computation.
    (2) The term ``liabilities'' as used in section 401(a)(2) includes 
both fixed and contingent obligations to employees. For example, if 
1,000 employees are covered by a trust forming part of a pension plan, 
300 of whom have satisfied all the requirements for a monthly pension, 
while the remaining 700 employees have not yet completed the required 
period of service, contingent obligations to such 700 employees have 
nevertheless arisen which constitute ``liabilities'' within the meaning 
of that term. It must be impossible for the employer (or other non 
employee) to recover any amounts other than such amounts as remain in 
the trust because of ``erroneous actuarial computations'' after the 
satisfaction of all fixed and contingent obligations. Furthermore, the 
trust instrument must contain a definite affirmative provision to this 
effect, irrespective of whether the obligations to employees have their 
source in the trust instrument itself, in the plan of which the trust 
forms a part, or in some collateral instrument or arrangement forming a 
part of such plan, and regardless of whether such obligations are, 
technically speaking, liabilities of the employer, of the trust, or of 
some other person forming a part of the plan or connected with it.

[T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5072, Apr. 14, 1964; T.D. 7748, 46 FR 1695, Jan. 7, 1981]



Sec. 1.401-3  Requirements as to coverage.

    (a)(1) In order to insure that stock bonus, pension, and profit-
sharing plans are utilized for the welfare of employees in general, and 
to prevent the trust device from being used for the principal benefit of 
shareholders, officers, persons whose principal duties consist in 
supervising the work of other employees, or highly paid employees, or as 
a means of tax avoidance, a trust will not be qualified unless it is 
part of a plan which satisfies the coverage requirements of section 
401(a)(3). However, if the plan covers any individual who is an owner- 
employee, as defined in section 401(c)(3), the requirements of section 
401(a)(3) and this section are not applicable to such plan, but the plan 
must satisfy the requirements of section 401(d) (see Sec. 1.401-12).
    (2) The percentage requirements in section 401(a)(3)(A) refer to a 
percentage of all the active employees, including employees temporarily 
on leave, such as those in the Armed Forces of the United States, if 
such employees are eligible under the plan.
    (3) The application of section 401(a)(3)(A) may be illustrated by 
the following example:

    Example. A corporation adopts a plan at a time when it has 1,000 
employees. The plan provides that all full-time employees who

[[Page 15]]

have been employed for a period of two years and have reached the age of 
30 shall be eligible to participate. The plan also requires 
participating employees to contribute 3 percent of their monthly pay. At 
the time the plan is made effective 100 of the 1,000 employees had not 
been employed for a period of two years. Fifty of the employees were 
seasonal employees whose customary employment did not exceed five months 
in any calendar year. Twenty-five of the employees were part-time 
employees whose customary employment did not exceed 20 hours in any one 
week. One hundred and fifty of the full-time employees who had been 
employed for two years or more had not yet reached age 30. The 
requirements of section 401(a)(3)(A) will be met if 540 employees are 
covered by the plan, as shown by the following computation:

(i) Total employees with respect to whom the percentage              825
 requirements are applicable (1,000 minus 175 (100 plus 50
 plus 25) )..................................................
(ii) Employees not eligible to participate because of age            150
 requirements................................................
                                                              ----------
(iii) Total employees eligible to participate................        675
(iv) Percentage of employees in item (i) eligible to                81+%
 participate.................................................
(v) Minimum number of participating employees to qualify the         540
 plan (80 percent of 675)....................................
 



If only 70 percent, or 578, of the 825 employees satisfied the age and 
service requirements, then 462 (80 percent of 578) participating 
employees would satisfy the percentage requirements.

    (b) If a plan fails to qualify under the percentage requirements of 
section 401(a)(3)(A), it may still qualify under section 401(a)(3)(B) 
provided always that (as required by section 401(a) (3) and (4)) the 
plan's eligibility conditions, benefits, and contributions do not 
discriminate in favor of employees who are officers, shareholders, 
persons whose principal duties consist in supervising the work of other 
employees, or the highly compensated employees.
    (c) Since, for the purpose of section 401, a profit-sharing plan is 
a plan which provides for distributing the funds accumulated under the 
plan after a fixed number of years, the attainment of a stated age, or 
upon the prior occurrence of some event such as illness, disability, 
retirement, death, layoff, or severance of employment, employees who 
receive the amounts allocated to their accounts before the expiration of 
such a period of time or the occurrence of such a contingency shall not 
be considered covered by a profit-sharing plan in determining whether 
the plan meets the coverage requirements of section 401(a)(3) (A) and 
(B). Thus, in case a plan permits employees to receive immediately the 
amounts allocated to their accounts, or to have such amounts paid to a 
profit- sharing plan for them, the employees who receive the shares 
immediately shall not, for the purpose of section 401, be considered 
covered by a profit-sharing plan.
    (d) Section 401(a)(5) sets out certain classifications that will not 
in themselves be considered discriminatory. However, those so designated 
are not intended to be exclusive. Thus, plans may qualify under section 
401(a)(3)(B) even though coverage thereunder is limited to employees who 
have either reached a designated age or have been employed for a 
designated number of years, or who are employed in certain designated 
departments or are in other classifications, provided the effect of 
covering only such employees does not discriminate in favor of officers, 
shareholders, employees whose principal duties consist in supervising 
the work of other employees, or highly compensated employees. For 
example, if there are 1,000 employees, and the plan is written for only 
salaried employees, and consequently only 500 employees are covered, 
that fact alone will not justify the conclusion that the plan does not 
meet the coverage requirements of section 401(a)(3)(B). Conversely, if a 
contributory plan is offered to all of the employees but the 
contributions required of the employee participants are so burdensome as 
to make the plan acceptable only to the highly paid employees, the 
classification will be considered discriminatory in favor of such highly 
paid employees.
    (e)(1) Section 401(a)(5) contains a provision to the effect that a 
classification shall not be considered discriminatory within the meaning 
of section 401(a)(3)(B) merely because all employees whose entire annual 
remuneration constitutes ``wages'' under section 3121(a)(1) (for 
purposes of the Federal Insurance Contributions Act, chapter 21 of the 
Code) are excluded from the plan. A reference to section 3121(a)(1) for 
years after 1954 shall be deemed a reference to section 1426(a)(1) of 
the Internal Revenue Code of 1939 for years

[[Page 16]]

before 1955. This provision, in conjunction with section 401(a)(3)(B), 
is intended to permit the qualification of plans which supplement the 
old-age, survivors, and disability insurance benefits under the Social 
Security Act (42 U.S.C. ch. 7). Thus, a classification which excludes 
all employees whose entire remuneration constitutes ``wages'' under 
section 3121(a)(1), will not be considered discriminatory merely because 
of such exclusion. Similarly, a plan which includes all employees will 
not be considered discriminatory solely because the contributions or 
benefits based on that part of their remuneration which is excluded from 
wages under section 3121(a)(1) differ from the contributions or benefits 
based on that part of their remuneration which is not so excluded. 
However, in making his determination with respect to discrimination in 
classification under section 401(a)(3)(B), the Commissioner will 
consider whether the total benefits resulting to each employee under the 
plan and under the Social Security Act, or under the Social Security Act 
only, establish an integrated and correlated retirement system 
satisfying the tests of section 401(a). If, therefore, a classification 
of employees under a plan results in relatively or proportionately 
greater benefits for employees earning above any specified salary amount 
or rate than for those below any such salary amount or rate, it may be 
found to be discriminatory within the meaning of section 401(a)(3)(B). 
If, however, the relative or proportionate differences in benefits which 
result from such classification are approximately offset by the old-age, 
survivors, and disability insurance benefits which are provided by the 
Social Security Act and which are not attributable to employee 
contributions under the Federal Insurance Contributions Act, the plan 
will be considered to be properly integrated with the Social Security 
Act and will, therefore, not be considered discriminatory.
    (2)(i) For purposes of determining whether a plan is properly 
integrated with the Social Security Act, the amount of old-age, 
survivors, and disability insurance benefits which may be considered as 
attributable to employer contributions under the Federal Insurance 
Contributions Act is computed on the basis of the following:
    (A) The rate at which the maximum monthly old-age insurance benefit 
is provided under the Social Security Act is considered to be the 
average of (1) the rate at which the maximum benefit currently payable 
under the Act (i.e., in 1971) is provided to an employee retiring at age 
65, and (2) the rate at which the maximum benefit ultimately payable 
under the Act (i.e., in 2010) is provided to an employee retiring at age 
65. The resulting figure is 43 percent of the average monthly wage on 
which such benefit is computed.
    (B) The total old-age, survivors, and disability insurance benefits 
with respect to an employee is considered to be 162 percent of the 
employee's old-age insurance benefits. The resulting figure is 70 
percent of the average monthly wage on which it is computed.
    (C) In view of the fact that social security benefits are funded 
through equal contributions by the employer and employee, 50 percent of 
such benefits is considered attributable to employer contributions. The 
resulting figure is 35 percent of the average monthly wage on which the 
benefit is computed.

Under these assumptions, the maximum old-age, survivors, and disability 
insurance benefits which may be attributed to employer contributions 
under the Federal Insurance Contributions Act is an amount equal to 35 
percent of the earnings on which they are computed. These computations 
take into account all amendments to the Society Security Act through the 
Social Security Amendments of 1971 (85 Stat. 6). It is recognized, 
however, that subsequent amendments to this Act may increase the 
percentages described in (A) or (B) of this subdivision (i), or both. If 
this occurs, the method used in this subparagraph for determining the 
integration formula may result in a figure under (C) of this subdivision 
(i) which is greater than 35 percent and a plan could be amended to 
adopt such greater figure in its benefit formula. In order to minimize 
future plan amendments of this nature, an employer may anticipate future 
changes in the Social Security Act by immediately utilizing such a 
higher figure, but not in excess

[[Page 17]]

of 37\1/2\ percent, in developing its benefit formula.
    (ii) Under the rules provided in this subparagraph, a classification 
of employees under a noncontributory pension or annuity plan which 
limits coverage to employees whose compensation exceeds the applicable 
integration level under the plan will not be considered discriminatory 
within the meaning of section 401(a)(3)(B), where:
    (A) The integration level applicable to an employee is his covered 
compensation, or is (1) in the case of an active employee, a stated 
dollar amount uniformly applicable to all active employees which is not 
greater than the covered compensation of any active employee, and (2) in 
the case of a retired employee an amount which is not greater than his 
covered compensation. (For rules relating to determination of an 
employee's covered compensation, see subdivision (iv) of this 
subparagraph.)
    (B) The rate at which normal annual retirement benefits are provided 
for any employee with respect to his average annual compensation in 
excess of the plan's integration level applicable to him does not exceed 
37\1/2\ percent.
    (C) Average annual compensation is defined to mean the average 
annual compensation over the highest 5 consecutive years.
    (D) There are no benefits payable in case of death before 
retirement.
    (E) The normal form of retirement benefits is a straight life 
annuity, and if there are optional forms, the benefit payments under 
each optional form are actuarially equivalent to benefit payments under 
the normal form.
    (F) In the case of any employee who reaches normal retirement age 
before completion of 15 years of service with the employer, the rate at 
which normal annual retirement benefits are provided for him with 
respect to his average annual compensation in excess of the plan's 
integration level applicable to him does not exceed 2\1/2\ percent for 
each year of service.
    (G) Normal retirement age is not lower than age 65.
    (H) Benefits payable in case of retirement or any other severance of 
employment before normal retirement age cannot exceed the actuarial 
equivalent of the maximum normal retirement benefits, which might be 
provided in accordance with (A) through (G) of this subdivision (ii), 
multiplied by a fraction, the numerator of which is the actual number of 
years of service of the employee at retirement or severance, and the 
denominator of which is the total number of years of service he would 
have had if he had remained in service until normal retirement age. A 
special disabled life mortality table shall not be used in determining 
the actuarial equivalent in the case of severance due to disability.
    (iii) (A) If a plan was properly integrated with old-age and 
survivors insurance benefits on July 5, 1968 (hereinafter referred to as 
an ``existing plan''), then, notwithstanding the fact that such plan 
does not satisfy the requirements of subdivision (ii) of this 
subparagraph, it will continue to be considered properly integrated with 
such benefits until January 1, 1972. Such plan will be considered 
properly integrated after December 31, 1971, so long as the benefits 
provided under the plan for each employee equal the sum of--
    (1) The benefits to which he would be entitled under a plan which, 
on July 5, 1968, would have been considered properly integrated with 
old-age and survivors insurance benefits, and under which benefits are 
provided at the same (or a lesser) rate with respect to the same portion 
of compensation with respect to which benefits are provided under the 
existing plan, multiplied by the percentage of his total service with 
the employer performed before a specified date not later than January 1, 
1972; and
    (2) The benefits to which he would be entitled under a plan 
satisfying the requirements of subdivision (ii) of this subparagraph, 
multiplied by the percentage of his total service with the employer 
performed on and after such specified date.
    (B) A plan which, on July 5, 1968, was properly integrated with old-
age and survivors insurance benefits will not be considered not to be 
properly integrated with such benefits thereafter merely because such 
plan provides a minimum benefit for each employee (other than an 
employee who owns, directly or indirectly, stock possessing

[[Page 18]]

more than 10 percent of the total combined voting power or value of all 
classes of stock of the employer corporation) equal to the benefit to 
which he would be entitled under the plan as in effect on July 5, 1968, 
if he continued to earn annually until retirement the same amount of 
compensation as he earned in 1967.
    (C) If a plan was properly integrated with old-age and survivors 
insurance benefits on May 17, 1971, notwithstanding the fact that such 
plan does not satisfy the requirements of subdivision (ii) of this 
subparagraph, it will continue to be considered properly integrated with 
such benefits until January 1, 1972.
    (iv) For purposes of this subparagraph, an employee's covered 
compensation is the amount of compensation with respect to which old-age 
insurance benefits would be provided for him under the Social Security 
Act (as in effect at any uniformly applicable date occurring before the 
employee's separation from the service) if for each year until he 
attains age 65 his annual compensation is at least equal to the maximum 
amount of earnings subject to tax in each such year under the Federal 
Insurance Contributions Act. A plan may provide that an employee's 
covered compensation is the amount determined under the preceding 
sentence rounded to the nearest whole multiple of a stated dollar amount 
which does not exceed $600.
    (v) In the case of an integrated plan providing benefits different 
from those described in subdivision (ii) or (iii) (whichever is 
applicable) of this subparagraph, or providing benefits related to years 
of service, or providing benefits purchasable by stated employer 
contributions, or under the terms of which the employees contribute, or 
providing a combination of any of the foregoing variations, the plan 
will be considered to be properly integrated only if, as determined by 
the Commissioner, the benefits provided thereunder by employer 
contributions cannot exceed in value the benefits described in 
subdivision (ii) or (iii) (whichever is applicable) of this 
subparagraph. Similar principles will govern in determining whether a 
plan is properly integrated if participation therein is limited to 
employees earning in excess of amounts other than those specified in 
subdivision (iv) of this subparagraph, or if it bases benefits or 
contributions on compensation in excess of such amounts, or if it 
provides for an offset of benefits otherwise payable under the plan on 
account of old-age, survivors, and disability insurance benefits. 
Similar principles will govern in determining whether a profit-sharing 
or stock bonus plan is properly integrated with the Social Security Act.
    (3) A plan supplementing the Social Security Act and excluding all 
employees whose entire annual remuneration constitutes ``wages'' under 
section 3121(a)(1) will not, however, be deemed discriminatory merely 
because, for administrative convenience, it provides a reasonable 
minimum benefit not to exceed $20 a month.
    (4) Similar considerations, to the extent applicable in any case, 
will govern classifications under a plan supplementing the benefits 
provided by other Federal or State laws. See section 401(a)(5).
    (5) If a plan provides contributions or benefits for a self-employed 
individual, the rules relating to the integration of such a plan with 
the contributions or benefits under the Social Security Act are set 
forth in paragraph (c) of Sec. 1.401-11 and paragraph (h) of Sec. 1.401-
12.
    (6) This paragraph (e) does not apply to plan years beginning on or 
after January 1, 1989.
    (f) An employer may designate several trusts or a trust or trusts 
and an annuity plan or plans as constituting one plan which is intended 
to qualify under section 401(a)(3), in which case all of such trusts and 
plans taken as a whole may meet the requirements of such section. The 
fact that such combination of trusts and plans fails to qualify as one 
plan does not prevent such of the trusts and plans as qualify from 
meeting the requirements of section 401(a).
    (g) It is provided in section 401(a)(6) that a plan will satisfy the 
requirements of section 401(a)(3), if on at least one day in each 
quarter of the taxable year of the plan it satisfies such requirements. 
This makes it possible for a new plan requiring contributions from 
employees to qualify if by the end

[[Page 19]]

of the quarter-year in which the plan is adopted it secures sufficient 
contributing participants to meet the requirements of section 401(a)(3). 
It also affords a period of time in which new participants may be 
secured to replace former participants, so as to meet the requirements 
of either subparagraph (A) or (B) of section 401(a)(3).

[T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6675, 28 FR 
10119, Sept. 17, 1963; T.D. 6982, 33 FR 16499, Nov. 13, 1968; T.D. 7134, 
36 FR 13592, July 22, 1971; 36 FR 13990, July 29, 1971; T.D. 8359, 56 FR 
47614, Sept. 19, 1991]



Sec. 1.401-4  Discrimination as to contributions or benefits (before 1994).

    (a)(1)(i) In order to qualify under section 401(a), a trust must not 
only meet the coverage requirements of section 401(a)(3), but, as 
provided in section 401(a)(4), it must also be part of a plan under 
which there is no discrimination in contributions or benefits in favor 
of officers, shareholders, employees whose principal duties consist in 
supervising the work of other employees, or highly compensated employees 
as against other employees whether within or without the plan.
    (ii) Since, for the purpose of section 401, a profit-sharing plan is 
a plan which provides for distributing the funds accumulated under the 
plan after a fixed number of years, the attainment of a stated age, or 
upon the prior occurrence of some event such as illness, disability, 
retirement, death, layoff, or severance of employment, any amount 
allocated to an employee which is withdrawn before the expiration of 
such a period of time or the occurrence of such a contingency shall not 
be considered in determining whether the contributions under the plan 
discriminate in favor of officers, shareholders, employees whose 
principal duties consist in supervising the work of other employees, or 
highly compensated employees. Thus, in case a plan permits employees to 
receive immediately the whole or any part of the amounts allocated to 
their accounts, or to have the whole or any part of such amounts paid to 
a profit-sharing plan for them, any amounts which are received 
immediately shall not, for the purpose of section 401, be considered 
contributed to a profit-sharing plan.
    (iii) Funds in a stock bonus or profit-sharing plan arising from 
forfeitures on termination of service, or other reason, must not be 
allocated to the remaining participants in such a manner as will effect 
the prohibited discrimination. With respect to forfeitures in a pension 
plan, see Sec. 1.401-7.
    (2)(i) Section 401(a)(5) sets out certain provisions which will not 
in and of themselves be discriminatory within the meaning of section 401 
a) (3) or (4). See Sec. 1.401-3. Thus, a plan will not be considered 
discriminatory merely because the contributions or benefits bear a 
uniform relationship to total compensation or to the basic or regular 
rate of compensation, or merely because the contributions or benefits 
based on that part of the annual compensation of employees which is 
subject to the Federal Insurance Contributions Act (chapter 21 of the 
Code) differ from the contributions or benefits based on any excess of 
such annual compensation over such part. With regard to the application 
of the rules of section 401(a)(5) in the case of a plan which benefits a 
self-employed individual, see paragraph (c) of Sec. 1.401-11.
    (ii) The exceptions specified in section 401(a)(5) are not an 
exclusive enumeration, but are merely a recital of provisions frequently 
encountered which will not of themselves constitute forbidden 
discrimination in contributions or benefits.
    (iii) Variations in contributions or benefits may be provided so 
long as the plan, viewed as a whole for the benefit of employees in 
general, with all its attendant circumstances, does not discriminate in 
favor of employees within the enumerations with respect to which 
discrimination is prohibited. Thus, benefits in a stock bonus or profit-
sharing plan which vary by reason of an allocation formula which takes 
into consideration years of service, or other factors, are not 
prohibited unless they discriminate in favor of such employees.
    (b) A plan which excludes all employees whose entire remuneration 
constitutes wages under section 3121(a)(1) (relating to the Federal 
Insurance Contributions Act), or a plan under which

[[Page 20]]

the contributions or benefits based on that part of an employee's 
remuneration which is excluded from ``wages'' under such act differs 
from the contributions or benefits based on that part of the employee's 
remuneration which is not so excluded, or a plan under which the 
contributions or benefits differ because of any retirement benefit 
created under State or Federal law, will not be discriminatory because 
of such exclusion or difference, provided the total benefits resulting 
under the plan and under such law establish an integrated and correlated 
retirement system satisfying the tests of section 401(a).
    (c)(1) Although a qualified plan may provide for termination at will 
by the employer or discontinuance of contributions thereunder, this will 
not of itself prevent a trust from being a qualified trust. However, a 
qualified pension plan must expressly incorporate provisions which 
comply with the restrictions contained in subparagraph (2) of this 
paragraph at the time the plan is established, unless (i) it is 
reasonably certain at the inception of the plan that such restrictions 
would not affect the amount of contributions which may be used for the 
benefit of any employee, or (ii) the Commissioner determines that such 
provisions are not necessary to prevent the prohibited discrimination 
that may occur in the event of any early termination of the plan. 
Although these provisions are the only provisions required to be 
incorporated in the plan to prevent the discrimination that may arise 
because of an early termination of the plan, the plan may in operation 
result in the discrimination prohibited by section 401(a)(4), unless 
other provisions are later incorporated in the plan. Any pension plan 
containing a provision described in this paragraph shall not fail to 
satisfy section 411(a), (d)(2) and (d)(3) merely by reason of such a 
plan provision. Paragraph (c)(7) of this section sets forth special 
early termination rules applicable to certain qualified defined benefit 
plans for plan years affected by the Employee Retirement Income Security 
Act of 1974 (``ERISA''). Paragraph (c)(7) of this section does not 
contain all the rules required by the enactment of ERISA.
    (2)(i) If employer contributions under a qualified pension plan may 
be used for the benefit of an employee who is among the 25 highest paid 
employees of the employer at the time the plan is established and whose 
anticipated annual pension under the plan exceeds $1,500, such plan must 
provide that upon the occurrence of the conditions described in 
subdivision (ii) of this subparagraph, the employer contributions which 
are used for the benefit of any such employee are restricted in 
accordance with subdivision (iii) of this subparagraph.
    (ii) The restrictions described in subdivision (iii) of this 
subparagraph become applicable if--
    (A) The plan is terminated within 10 years after its establishment,
    (B) The benefits of an employee described in subdivision (i) of this 
subparagraph become payable within 10 years after the establishment of 
the plan, or
    (C) The benefits of an employee described in subdivision (i) of this 
subparagraph become payable after the plan has been in effect for 10 
years, and the full current costs of the plan for the first 10 years 
have not been funded. In the case of an employee described in (B) of 
this subdivision, the restrictions will remain applicable until the plan 
has been in effect for 10 years, but if at that time the full current 
costs have been funded the restrictions will no longer apply to the 
benefits payable to such an employee. In the case of an employee 
described in (B) or (C) of this subdivision, if at the end of the first 
10 years the full current costs are not met, the restrictions will 
continue to apply until the full current costs are funded for the first 
time.
    (iii) The restrictions required under subdivision (i) of this 
subparagraph must provide that the employer contributions which may be 
used for the benefit of an employee described in such subdivision shall 
not exceed the greater of $20,000, or 20 percent of the first $50,000 of 
the annual compensation of such employee multiplied by the number of 
years between the date of the establishment of the plan and--
    (A) The date of the termination of the plan,

[[Page 21]]

    (B) In the case of an employee described in subdivision (ii)(B) of 
this subparagraph, the date the benefit of the employee becomes payable, 
if before the date of the termination of the plan, or
    (C) In the case of an employee described in subdivision (ii)(C) of 
this subparagraph, the date of the failure to meet the full current 
costs of the plan. However, if the full current costs of the plan have 
not been met on the date described in (A) or (B) of this subdivision, 
whichever is applicable, then the date of the failure to meet such full 
current costs shall be substituted for the date referred to in (A) or 
(B) of this subdivision. For purposes of determining the contributions 
which may be used for the benefit of an employee when (b) of this 
subdivision applies, the number of years taken into account may be 
recomputed for each year if the full current costs of the plan are met 
for such year.
    (iv) For purposes of this subparagraph, the employer contributions 
which, at a given time, may be used for the benefits of an employee 
include any unallocated funds which would be used for his benefits if 
the plan were then terminated or the employee were then to withdraw from 
the plan, as well as all contributions allocated up to that time 
exclusively for his benefits.
    (v) The provisions of this subparagraph apply to a former or retired 
employee of the employer, as well as to an employee still in the 
employer's service.
    (vi) The following terms are defined for purposes of this 
subparagraph--
    (A) The term ``benefits'' includes any periodic income, any 
withdrawal values payable to a living employee, and the cost of any 
death benefits which may be payable after retirement on behalf of an 
employee, but does not include the cost of any death benefits with 
respect to an employee before retirement nor the amount of any death 
benefits actually payable after the death of an employee whether such 
death occurs before or after retirement.
    (B) The term full current costs means the normal cost, as defined in 
Sec. 1.404(a)-6, for all years since the effective date of the plan, 
plus interest on any unfunded liability during such period.
    (C) The term annual compensation of an employee means either such 
employee's average regular annual compensation, or such average 
compensation over the last five years, or such employee's last annual 
compensation if such compensation is reasonably similar to his average 
regular annual compensation for the five preceding years.
    (3) The amount of the employer contributions which can be used for 
the benefit of a restricted employee may be limited either by limiting 
the annual amount of the employer contributions for the designated 
employee during the period affected by the limitation, or by limiting 
the amount of funds under the plan which can be used for the benefit of 
such employee, regardless of the amount of employer contributions.
    (4) The restrictions contained in subparagraph (2) of this paragraph 
may be exceeded for the purpose of making current retirement income 
benefit payments to retired employees who would otherwise be subject to 
such restrictions, if--
    (i) The employer contributions which may be used for any such 
employee in accordance with the restrictions contained in subparagraph 
(2) of this paragraph are applied either (A) to provide level amounts of 
annuity in the basic form of benefit provided for under the plan for 
such employee at retirement (or, if he has already retired, beginning 
immediately), or (B) to provide level amounts of annuity in an optional 
form of benefit provided under the plan if the level amount of annuity 
under such optional form of benefit is not greater than the level amount 
of annuity under the basic form of benefit provided under the plan;
    (ii) The annuity thus provided is supplemented, to the extent 
necessary to provide the full retirement income benefits in the basic 
form called for under the plan, by current payments to such employee as 
such benefits come due; and
    (iii) Such supplemental payments are made at any time only if the 
full current costs of the plan have then been met, or the aggregate of 
such supplemental payments for all such employees does not exceed the 
aggregate employer contributions already made

[[Page 22]]

under the plan in the year then current.


If disability income benefits are provided under the plan, the plan may 
contain like provisions with respect to the current payment of such 
benefits.
    (5) If a plan has been changed so as to increase substantially the 
extent of possible discrimination as to contributions and as to benefits 
actually payable in event of the subsequent termination of the plan or 
the subsequent discontinuance of contributions thereunder, then the 
provisions of this paragraph shall be applied to the plan as so changed 
as if it were a new plan established on the date of such change. 
However, the provision in subparagraph (2)(iii) of this paragraph that 
the unrestricted amount of employer contributions on behalf of any 
employee is at least $20,000 is applicable to the aggregate amount 
contributed by the employer on behalf of such employee from the date of 
establishment of the original plan, and, for purposes of determining if 
the employee's anticipated annual pension exceeds $1,500, both the 
employer contributions on the employee's behalf prior to the date of the 
change in the plan and those expected to be made on his behalf 
subsequent to the date of the change (based on the employee's rate of 
compensation on the date of the change) are to be taken into account.
    (6) This paragraph shall apply to taxable years of a qualified plan 
commencing after September 30, 1963. In the case of an early termination 
of a qualified pension plan during any such taxable year, the employer 
contributions which may be used for the benefit of any employee must 
conform to the requirements of this paragraph. However, any pension plan 
which is qualified on September 30, 1963, will not be disqualified 
merely because it does not expressly include the provisions prescribed 
in this paragraph.
    (7)(i) A qualified defined benefit plan subject to section 412 
(without regard to section 412(h)(2)) shall not be required to contain 
the restriction described in paragraph (c)(2)(ii)(c) of this section 
applicable to an employee in a plan whose full current costs for the 
first 10 years have not been funded.
    (ii) A qualified defined benefit plan covered by section 4021(a) of 
ERISA (``qualified Title IV plan'') shall satisfy the restrictions in 
paragraph (c)(2) of this section only if the plan satisfies this 
paragraph (c)(7). A plan satisfies this paragraph (c)(7) by providing 
that employer contributions which may be used for the benefit of an 
employee described in paragraph (c)(2) of this section who is a 
substantial owner, as defined in section 4022(b)(5) of ERISA, shall not 
exceed the greater of the dollar amount described in paragraph 
(c)(2)(iii) of this section or a dollar amount which equals the present 
value of the benefit guaranteed for such employee under section 4022 of 
ERISA, or if the plan has not terminated, the present value of the 
benefit that would be guaranteed if the plan terminated on the date the 
benefit commences, determined in accordance with regulations of the 
Pension Benefit Guaranty Corporation (``PBGC'').
    (iii) A plan satisfies this paragraph (c)(7) by providing that 
employer contributions which may be used for the benefit of all 
employees described in paragraph (c)(2) of this section (other than an 
employee who is a substantial owner as defined in section 4022(b)(5) of 
ERISA) shall not exceed the greater of the dollar amount described in 
paragraph (c)(2)(iii) of this section or a dollar amount which equals 
the present value of the maximum benefit described in section 
4022(b)(3)(B) of ERISA (determined on the date the plan terminates or on 
the date benefits commence, whichever is earlier and determined in 
accordance with regulations of PBGC) without regard to any other 
limitations in section 4022 of ERISA.
    (iv) A plan provision satisfying this paragraph (c)(7) may be 
adopted by amendment or by incorporation at the time of establishment. 
Any allocation of assets attributable to employer contributions to an 
employee which exceeds the dollar limitation in this paragraph (c)(7) 
may be reallocated to prevent prohibited discrimination.
    (v) The early termination rules in the preceding subparagraphs (1) 
through (6) apply to a qualified Title IV plan except where such rules 
are determined by the Commissioner to be inconsistent

[[Page 23]]

with the rules of this paragraph (c)(7), Sec. 1.411(d)-2, and section 
4044(b)(4) of ERISA. The early termination rules of this paragraph 
(c)(7) contain some of the rules under section 401(a)(4) and (a)(7), as 
in effect on September 2, 1974, and section 411(d) (2) and (3). Section 
1.411(d)-2 also contains certain discrimination and vesting rules which 
are applicable to plan terminations.
    (vi) Paragraph (c)(7) of this section applies to plan terminations 
occurring on or after March 12, 1984. For distributions not on account 
of plan terminations, paragraph (c)(7) applies to distributions in plan 
years beginning after December 31, 1983. However, a plan may elect to 
apply that paragraph to distributions not on account of plan termination 
on or after January 10, 1984.
    (d)(1) Except as provided in paragraph (d)(2) of this section, the 
provisions of this section do not apply to plan years beginning on or 
after January 1, 1994. For rules applicable to plan years beginning on 
or after January 1, 1994, see Secs. 1.401(a)(4)-1 through 1.401(a)(4)-
13.
    (2) In the case of plans maintained by organizations exempt from 
income taxation under section 501(a), including plans subject to section 
403(b)(12)(A)(i) (nonelective plans), the provisions of this section do 
not apply to plan years beginning on or after January 1, 1996. For rules 
applicable to plan years beginning on or after January 1, 1996, see 
Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.

(Secs. 411 (d)(2) and (3) and 7805 of the Internal Revenue Code of 1954 
(68A Stat. 917, 88 Stat. 912; 26 U.S.C. 411(d)(2) and (3) and 7805))

[T.D. 6500, 25 FR 11674, Nov. 26, 1960, as amended by T.D. 6675, 28 FR 
10119, Sept. 17, 1963; T.D. 7934, 49 FR 1183, Jan. 10, 1984; 49 FR 2104, 
Jan. 18, 1984; T.D. 8360, 56 FR 47536, Sept. 19, 1991; T.D. 8485, 58 FR 
46778, Sept. 3, 1993]



Sec. 1.401-5  Period for which requirements of section 401(a) (3), (4), (5), and (6) are applicable with respect to plans put into effect before September 2, 
          1974.

    A pension, profit-sharing, stock bonus, or annuity plan shall be 
considered as satisfying the requirements of section 401(a) (3), (4), 
(5), and (6) for the period beginning with the date on which it was put 
into effect and ending with the 15th day of the third month following 
the close of the taxable year of the employer in which the plan was put 
into effect, if all the provisions of the plan which are necessary to 
satisfy such requirements are in effect by the end of such period and 
have been made effective for all purposes with respect to the whole of 
such period. Thus, if an employer in 1954 adopts such a plan as of 
January 1, 1954, and makes a return on the basis of the calendar year, 
he will have until March 15, 1955, to amend his plan so as to make it 
satisfy the requirements of section 401(a) (3), (4), (5), and (6) for 
the calendar year 1954 provided that by March 15, 1955, all provisions 
of such plan necessary to satisfy such requirements are in effect and 
have been made retroactive for all purposes to January 1, 1954, the 
effective date of the plan. If an employer is on a fiscal year basis, 
for example, April 1 to March 31, and in 1954 adopts such a plan 
effective as of April 1, 1954, he will have until June 15, 1955, to 
amend his plan so as to make it satisfy the requirements of section 
401(a) (3), (4), (5), and (6) for the fiscal year beginning April 1, 
1954, provided that by June 15, 1955, all provisions of such plan 
necessary to satisfy such requirements are in effect and have been made 
retroactive for all purposes to April 1, 1954, the effective date of the 
plan. It should be noted that under section 401(b) the period in which a 
plan may be amended to qualify under section 401(a) ends before the date 
on which taxpayers other than corporations are required to file income 
tax returns. See section 6072. This section shall not apply to any 
pension, profit-sharing, stock bonus, or annuity plan put into effect 
after September 1, 1974, and shall not apply with respect to any 
disqualifying provision to which Sec. 1.401(b)-1 applies.

[T.D. 6500, 25 FR 11674, Nov. 26, 1960; as amended by T.D. 7436, 41 FR 
42653, Sept. 28, 1976]



Sec. 1.401-6  Termination of a qualified plan.

    (a) General rules. (1) In order for a pension, profit-sharing, or 
stock bonus trust to satisfy the requirements of section 401, the plan 
of which such trust forms a part must expressly provide that, upon the 
termination of the

[[Page 24]]

plan or upon the complete discontinuance of contributions under the 
plan, the rights of each employee to benefits accrued to the date of 
such termination or discontinuance, to the extent then funded, or the 
rights of each employee to the amounts credited to his account at such 
time, are nonforfeitable. As to what constitutes nonforfeitable rights 
of an employee, see paragraph (a)(2) of Sec. 1.402(b)-1.
    (2)(i) A qualified plan must also provide for the allocation of any 
previously unallocated funds to the employees covered by the plan upon 
the termination of the plan or the complete discontinuance of 
contributions under the plan. Such provision may be incorporated in the 
plan at its inception or by an amendment made prior to the termination 
of the plan or the discontinuance of contributions thereunder.
    (ii) Any provision for the allocation of unallocated funds is 
acceptable if it specifies the method to be used and does not conflict 
with the provisions of section 401(a)(4) and the regulations thereunder. 
The allocation of unallocated funds may be in cash or in the form of 
other benefits provided under the plan. However, the allocation of the 
funds contributed by the employer among the employees need not 
necessarily benefit all the employees covered by the plan. For example, 
an allocation may be satisfactory if priority is given to benefits for 
employees over the age of 50 at the time of the termination of the plan, 
or those who then have at least 10 years of service, if there is no 
possibility of discrimination in favor of employees who are officers, 
shareholders, employees whose principal duties consist in supervising 
the work of other employees, or highly compensated employees.
    (iii) Subdivisions (i) and (ii) of this subparagraph do not require 
the allocation of amounts to the account of any employee if such amounts 
are not required to be used to satisfy the liabilities with respect to 
employees and their beneficiaries under the plan (see section 
401(a)(2)).
    (b) Termination defined. (1) Whether a plan is terminated is 
generally a question to be determined with regard to all the facts and 
circumstances in a particular case. For example, a plan is terminated 
when, in connection with the winding up of the employer's trade or 
business, the employer begins to discharge his employees. However, a 
plan is not terminated, for example, merely because an employer 
consolidates or replaces that plan with a comparable plan. Similarly, a 
plan is not terminated merely because the employer sells or otherwise 
disposes of his trade or business if the acquiring employer continues 
the plan as a separate and distinct plan of its own, or consolidates or 
replaces that plan with a comparable plan. See paragraph (d)(4) of 
Sec. 1.381(c)(11)-1 for the definition of comparable plan. In addition, 
the Commissioner may determine that other plans are comparable for 
purposes of this section.
    (2) For purposes of this section, the term termination includes both 
a partial termination and a complete termination of a plan. Whether or 
not a partial termination of a qualified plan occurs when a group of 
employees who have been covered by the plan are subsequently excluded 
from such coverage either by reason of an amendment to the plan, or by 
reason of being discharged by the employer, will be determined on the 
basis of all the facts and circumstances. Similarly, whether or not a 
partial termination occurs when benefits or employer contributions are 
reduced, or the eligibility or vesting requirements under the plan are 
made less liberal, will be determined on the basis of all the facts and 
circumstances. However, if a partial termination of a qualified plan 
occurs, the provisions of section 401(a)(7) and this section apply only 
to the part of the plan that is terminated.
    (c) Complete discontinuance defined. (1) For purposes of this 
section, a complete discontinuance of contributions under the plan is 
contrasted with a suspension of contributions under the plan, which is 
merely a temporary cessation of contributions by the employer. A 
complete discontinuance of contributions may occur although some amounts 
are contributed by the employer under the plan if such amounts are not 
substantial enough to reflect the intent on the part of the employer to 
continue to maintain the

[[Page 25]]

plan. The determination of whether a complete discontinuance of 
contributions under the plan has occurred will be made with regard to 
all the facts and circumstances in the particular case, and without 
regard to the amount of any contributions made under the plan by 
employees.
    (2) In the case of a pension plan, a suspension of contributions 
will not constitute a discontinuance if--
    (i) The benefits to be paid or made available under the plan are not 
affected at any time by the suspension, and
    (ii) The unfunded past service cost at any time (which includes the 
unfunded prior normal cost and unfunded interest on any unfunded cost) 
does not exceed the unfunded past service cost as of the date of 
establishment of the plan, plus any additional past service or 
supplemental costs added by amendment.
    (3) In any case in which a suspension of a profit-sharing plan is 
considered a discontinuance, the discontinuance becomes effective not 
later than the last day of the taxable year of the employer following 
the last taxable year of such employer for which a substantial 
contribution was made under the profit-sharing plan.
    (d) Contributions or benefits which remain forfeitable. The 
provisions of this section do not apply to amounts which are reallocated 
to prevent the discrimination prohibited by section 401(a)(4) (see 
paragraph (c) of Sec. 1.401-4).
    (e) Effective date. This section shall apply to taxable years of a 
qualified plan commencing after September 30, 1963. In the case of the 
termination or complete discontinuance (as defined in this section) of 
any qualified plan during any such taxable year, the rights accorded to 
each employee covered under the plan must conform to the requirements of 
this section. However, a plan which is qualified on September 30, 1963, 
will not be disqualified merely because it does not expressly include 
the provisions prescribed by this section.

[T.D. 6675, 28 FR 10120, Sept. 17, 1963]



Sec. 1.401-7  Forfeitures under a qualified pension plan.

    (a) General rules. In the case of a trust forming a part of a 
qualified pension plan, the plan must expressly provide that forfeitures 
arising from severance of employment, death, or for any other reason, 
must not be applied to increase the benefits any employee would 
otherwise receive under the plan at any time prior to the termination of 
the plan or the complete discontinuance of employer contributions 
thereunder. The amounts so forfeited must be used as soon as possible to 
reduce the employer's contributions under the plan. However, a qualified 
pension plan may anticipate the effect of forfeitures in determining the 
costs under the plan. Furthermore, a qualified plan will not be 
disqualified merely because a determination of the amount of forfeitures 
under the plan is made only once during each taxable year of the 
employer.
    (b) Examples. The rules of paragraph (a) of this section may be 
illustrated by the following examples:

    Example (1). The B Company Pension Trust forms a part of a pension 
plan which is funded by individual level annual premium annuity 
contracts. The plan requires ten years of service prior to obtaining a 
vested right to benefits under the plan. One of the company's employees 
resigns his position after two years of service. The insurance company 
paid to the trustees the cash surrender value of the contract--$750. The 
B Company must reduce its next contribution to the pension trust by this 
amount.
    Example (2). The C Corporation's trusteed pension plan has been in 
existence for 20 years. It is funded by individual contracts issued by 
an insurance company, and the premiums thereunder are paid annually. 
Under such plan, the annual premium accrued for the year 1966 is due and 
is paid on January 2, 1966, and on July 1 of the same year the plan is 
terminated due to the liquidation of the employer. Some forfeitures were 
incurred and collected by the trustee with respect to those participants 
whose employment terminated between January 2 and July 1. The plan 
provides that the amount of such forfeitures is to be applied to provide 
additional annuity benefits for the remaining employees covered by the 
plan. The pension plan of the C Corporation satisfies the provisions of 
section 401(a)(8). Although forfeitures are used to increase benefits in 
this case, this use of forfeitures is permissible since no further 
contributions will be made under the plan.


[[Page 26]]


    (c) Effective date. This section applies to taxable years of a 
qualified plan commencing after September 30, 1963. However, a plan 
which is qualified on September 30, 1963, will not be disqualified 
merely because it does not expressly include the provisions prescribed 
by this section.

[T.D. 6675, 28 FR 10121, Sept. 17, 1963]



Sec. 1.401-8  Custodial accounts prior to January 1, 1974.

    (a) Treatment of a custodial account as a qualified trust. For 
taxable years of a plan beginning after December 31, 1962, a custodial 
account may be used, in lieu of a trust, under any pension, profit-
sharing, or stock bonus plan, described in section 401 if the 
requirements of paragraph (b) of this section are met. A custodial 
account may be used under such a plan, whether the plan covers common-
law employees, self-employed individuals who are treated as employees by 
reason of section 401(c), or both. The use of a custodial account as 
part of a plan does not preclude the use of a trust or another custodial 
account as part of the same plan. A plan under which a custodial account 
is used may be considered in connection with other plans of the employer 
in determining whether the requirements of section 401 are satisfied. 
For regulations relating to the period after December 31, 1973, see 
Sec. 1.401(f)-11.
    (b) Rules applicable to custodial accounts. (1) A custodial account 
shall be treated for taxable years beginning after December 31, 1962, as 
a qualified trust under section 401 if such account meets the following 
requirements described in subdivisions (i) through (iii) of this 
subparagraph:
    (i) The custodial account must satisfy all the requirements of 
section 401 that are applicable to qualified trusts. See subparagraph 
(2) of this paragraph.
    (ii) The custodian of the custodial account must be a bank.
    (iii) The custodial agreement provides that the investment of the 
funds in the account is to be made--
    (A) Solely in stock of one or more regulated investment companies 
which is registered in the name of the custodian or its nominee and with 
respect to which an employee who is covered by the plan is the 
beneficial owner, or
    (B) Solely in annuity, endowment, or life insurance contracts, 
issued by an insurance company and held by the custodian until 
distributed pursuant to the terms of the plan. For purposes of the 
preceding sentence, a face-amount certificate described in section 
401(g) and Sec. 1.401-9 is treated as an annuity issued by an insurance 
company.

See subparagraphs (3) and (4) of this paragraph.
    (2) As a result of the requirement described in subparagraph (1)(i) 
of this paragraph (relating to the requirements applicable to qualified 
trusts), the custodial account must, for example, be created pursuant to 
a written agreement which constitutes a valid contract under local law. 
In addition, the terms of the contract must make it impossible, prior to 
the satisfaction of all liabilities with respect to the employees and 
their beneficiaries covered by the plan, for any part of the funds of 
the custodial account to be used for, or diverted to, purposes other 
than for the exclusive benefit of the employees or their beneficiaries 
as provided for in the plan (see paragraph (a) of Sec. 1.401-2).
    (3) The requirement described in subparagraph (1)(iii) of this 
paragraph, relating to the investment of the funds of the plan, applies, 
for example, to the employer contributions under the plan, any employee 
contributions under the plan, and any earnings on such contributions. 
Such requirement also applies to capital gains realized upon the sale of 
stock described in (A) of such subdivision, to any capital gain 
dividends received in connection with such stock, and to any refunds 
described in section 852(b)(3)(D)(ii) (relating to undistributed capital 
gains of a regulated investment company) which is received in connection 
with such stock. However, since such requirement relates only to the 
investment of the funds of the plan, the custodian may deposit funds 
with a bank, in either a checking or savings account, while accumulating 
sufficient funds to make additional investments or while awaiting an 
appropriate time to make additional investments.
    (4) The requirement in subparagraph (1)(iii)(A) of this paragraph 
that an employee covered by the plan be the beneficial owner of the 
stock does not mean

[[Page 27]]

that the employee who is the beneficial owner must have a nonforfeitable 
interest in the stock. Thus, a plan may provide for forfeitures of an 
employee's interest in such stock in the same manner as plans which use 
a trust. In the event of a forfeiture of an employee's beneficial 
ownership in the stock of a regulated investment company, the beneficial 
ownership of such stock must pass to another employee covered by the 
plan.
    (c) Effects of qualification. (1) Any custodial account which 
satisfies the requirements of section 401(f) shall be treated as a 
qualified trust for all purposes of the Internal Revenue Code of 1954. 
Accordingly, such a custodial account shall be treated as a separate 
legal person which is exempt from the income tax by section 501(a). On 
the other hand, such a custodial account is required to file the returns 
described in sections 6033 and 6047 and to supply any other information 
which a qualified trust is required to furnish.
    (2) In determining whether the funds of a custodial account are 
distributed or made available to an employee or his beneficiary, the 
rules which under section 402(a) are applicable to trusts will also 
apply to the custodial account as though it were a separate legal person 
and not an agent of the employee.
    (d) Effect of loss of qualification. If a custodial account which 
has qualified under section 401 fails to qualify under such section for 
any taxable year, such custodial account will not thereafter be treated 
as a separate legal person, and the funds in such account shall be 
treated as made available within the meaning of section 402(a)(1) to the 
employees for whom they are held.
    (e) Definitions. For purposes of this section--
    (1) The term bank means a bank as defined in section 401(d)(1).
    (2) The term regulated investment company means any domestic 
corporation which issues only redeemable stock and is a regulated 
investment company within the meaning of section 851(a) (but without 
regard to whether such corporation meets the limitations of section 
851(b)).

(Secs. 401(f)(2), 7805, Internal Revenue Code of 1954 (88 Stat. 939 and 
68A Stat. 917; 26 U.S.C. 401(f)(2), 7805))

[T.D. 6675, 28 FR 10121, Sept. 17, 1963, as amended by T.D. 7565, 43 FR 
41204, Sept. 15, 1978. Redesignated and amended by T.D. 7748, 46 FR 
1695, Jan. 7, 1981]



Sec. 1.401-9  Face-amount certificates--nontransferable annuity contracts.

    (a) Face-amount certificates treated as annuity contracts. Section 
401(g) provides that a face-amount certificate (as defined in section 
2(a)(15) of the Investment Company Act of 1940 (15 U.S.C. sec. 80a-2) ) 
which is not transferable within the meaning of paragraph (b)(3) of this 
section shall be treated as an annuity contract for purposes of sections 
401 through 404 for any taxable year of a plan subject to such sections 
beginning after December 31, 1962. Accordingly, there may be established 
for any such taxable year a qualified plan under which such face-amount 
certificates are purchased for the participating employees without the 
creation of a trust or custodial account. However, for such a plan to 
qualify, the plan must satisfy all the requirements applicable to a 
qualified annuity plan (see section 403(a) and the regulations 
thereunder).
    (b) Nontransferability of face-amount certificates and annuity 
contracts. (1)(i) Section 401(g) provides that, in order for any face-
amount certificate, or any other contract issued after December 31, 
1962, to be subject to any provision under sections 401 through 404 
which is applicable to annuity contracts, as compared to other forms of 
investment, such certificate or contract must be nontransferable at any 
time when it is held by any person other than the trustee of a trust 
described in section 401(a) and exempt under section 501(a). Thus, for 
example, in order for a group or individual retirement income contract 
to be treated as an annuity contract, if such contract is not held by 
the trustee of an exempt employees' trust, it must satisfy the 
requirements of this section. Furthermore, a face-

[[Page 28]]

amount certificate or an annuity contract will be subject to the tax 
treatment under section 403(b) only if it satisfies the requirements of 
section 401(g) and this section. Any certificate or contract in order to 
satisfy the provisions of this section must expressly contain the 
provisions that are necessary to make such certificate or contract not 
transferable within the meaning of this paragraph.
    (ii) In the case of any group contract purchased by an employer 
under a plan to which sections 401 through 404 apply, the restriction on 
transferability required by section 401(g) and this section applies to 
the interest of the employee participants under such group contract but 
not to the interest of the employer under such contract.
    (2) If a trust described in section 401(a) which is exempt from tax 
under section 501(a) distributes any annuity, endowment, retirement 
income, or life insurance contract, then the rules relating to the 
taxability of the distributee of any such contract are set forth in 
paragraph (a)(2) of Sec. 1.402(a)-1.
    (3) A face-amount certificate or an annuity contract is transferable 
if the owner can transfer any portion of his interest in the certificate 
or contract to any person other than the issuer thereof. Accordingly, 
such a certificate or contract is transferable if the owner can sell, 
assign, discount, or pledge as collateral for a loan or as security for 
the performance of an obligation or for any other purpose his interest 
in the certificate or contract to any person other than the issuer 
thereof. On the other hand, for purposes of section 401(g), a face-
amount certificate or annuity contract is not considered to be 
transferable merely because such certificate or contract, or the plan of 
which it is a part, contains a provision permitting the employee to 
designate a beneficiary to receive the proceeds of the certificate or 
contract in the event of his death, or contains a provision permitting 
the employee to elect to receive a joint and survivor annuity, or 
contains other similar provisions.
    (4) A material modification in the terms of an annuity contract 
constitutes the issuance of a new contract regardless of the manner in 
which it is made.
    (c) Examples. The rules of this section may be illustrated by the 
following examples:

    Example (1). The P Employees' Annuity Plan is a nontrusteed plan 
which is funded by individual annuity contracts issued by the Y 
Insurance Company. Each annuity contract issued by such company after 
December 31, 1962, provides, on its face, that it is ``not 
transferable''. The terms of each such contract further provide that, 
``This contract may not be sold, assigned, discounted, or pledged as 
collateral for a loan or as security for the performance of an 
obligation or for any other purpose, to any person other than this 
company.'' The annuity contracts of the P Employees' Annuity Plan 
satisfy the requirements of section 401(g) and this section.
    Example (2). The R Company Pension Trust forms a part of a pension 
plan which is funded by individual level premium annuity contracts. Such 
contracts are purchased by the trustee of the R Company Pension Trust 
from the Y Insurance Company. The trustee of the R Company Pension Trust 
is the legal owner of each such contract at all times prior to the 
distribution of such contract to a qualifying annuitant. The trustee 
purchases such a contract on January 3, 1963, in the name of an employee 
who qualifies on that date for coverage under the plan. At the time such 
contract is purchased, and while the contract is held by the trustee of 
the R Company Pension Trust, the contract does not contain any 
restrictions with respect to its transferability. The annuity contract 
purchased by the trustee of the R Company Pension Trust satisfies the 
requirements of section 401(g) and this section while it is held by the 
trustee.
    Example (3). A is the trustee of the X Corporation's Employees' 
Pension Trust. The trust forms a part of a pension plan which is funded 
by individual level premium annuity contracts. The trustee is the legal 
owner of such contracts, but the employees covered under the plan obtain 
beneficial interests in such contracts after ten years of service with 
the X Corporation. On January 15, 1980, A distributes to D an annuity 
contract issued to A in D's name on June 25, 1959, and distributes to E 
an annuity contract issued to A in E's name on September 30, 1963. The 
contract issued to D need not be nontransferable, but the contract 
issued to E must be nontransferable in order to satisfy the requirements 
of section 401(g) and this section.
    Example (4). The corpus of the Y Corporation's Employees' Pension 
Plan consists of individual insurance contracts in the names of the 
covered employees and an auxiliary fund which is used to convert such 
policies to annuity contracts at the time a beneficiary of such trust 
retires. F retires on

[[Page 29]]

June 15, 1963, and the trustee converts the individual insurance 
contract on F's life to a life annuity which is distributed to him. The 
life annuity issued on F's life must be nontransferable in order to 
satisfy the requirements of section 401(g) and this section.

[T.D. 6675, 28 FR 10122, Sept. 17, 1963]



Sec. 1.401-10  Definitions relating to plans covering self-employed individuals.

    (a) In general. (1) Certain self-employed individuals may be covered 
by a qualified pension, annuity, or profit- sharing plan for taxable 
years beginning after December 31, 1962. This section contains 
definitions relating to plans covering self-employed individuals. The 
provisions of Secs. 1.401-1 through 1.401-9, relating to requirements 
which are applicable to all qualified plans, are also generally 
applicable to any plan covering a self-employed individual. However, in 
addition to such requirements, any plan covering a self-employed 
individual is subject to the rules contained in Secs. 1.401-11 through 
1.401-13. Section 1.401-11 contains general rules which are applicable 
to any plan covering a self-employed individual who is an employee 
within the meaning of paragraph (b) of this section. Section 1.401-12 
contains special rules which are applicable to plans covering self-
employed individuals when one or more of such individuals is an owner-
employee within the meaning of paragraph (d) of this section. Section 
1.401-13 contains rules relating to excess contributions by, or for, an 
owner-employee. The provisions of this section and of Secs. 1.401-11 
through 1.401-13 are applicable to taxable years beginning after 
December 31, 1962.
    (2) A self-employed individual is covered under a qualified plan 
during the period beginning with the date a contribution is first made 
by, or for, him under the qualified plan and ending when there are no 
longer funds under the plan which can be used to provide him or his 
beneficiaries with benefits.
    (b) Treatment of a self-employed individual as an employee. (1) For 
purposes of section 401, a self-employed individual who receives earned 
income from an employer during a taxable year of such employer beginning 
after December 31, 1962, shall be considered an employee of such 
employer for such taxable year. Moreover, such an individual will be 
considered an employee for a taxable year if he would otherwise be 
treated as an employee but for the fact that the employer did not have 
net profits for that taxable year. Accordingly, the employer may cover 
such an individual under a qualified plan during years of the plan 
beginning with or within a taxable year of the employer beginning after 
December 31, 1962.
    (2) If a self-employed individual is engaged in more than one trade 
or business, each such trade or business shall be considered a separate 
employer for purposes of applying the provisions of sections 401 through 
404 to such individual. Thus, if a qualified plan is established for one 
trade or business but not the others, the individual will be considered 
an employee only if he received earned income with respect to such trade 
or business and only the amount of such earned income derived from that 
trade or business shall be taken into account for purposes of the 
qualified plan.
    (3)(i) The term employee, for purposes of section 401, does not 
include a self-employed individual when the term ``common-law'' employee 
is used or when the context otherwise requires that the term 
``employee'' does not include a self-employed individual. The term 
``common- law'' employee also includes an individual who is treated as 
an employee for purposes of section 401 by reason of the provisions of 
section 7701(a)(20), relating to the treatment of certain full-time life 
insurance salesmen as employees. Furthermore, an individual who is a 
common-law employee is not a self-employed individual with respect to 
income attributable to such employment, even though such income 
constitutes net earnings from self-employment as defined in section 
1402(a). Thus, for example, a minister who is a common-law employee is 
not a self-employed individual with respect to income attributable to 
such employment, even though such income constitutes net earnings from 
self-employment as defined in section 1402(a).
    (ii) An individual may be treated as an employee within the meaning 
of section 401(c)(1) of one employer even

[[Page 30]]

though such individual is also a common-law employee of another 
employer. For example, an attorney who is a common-law employee of a 
corporation and who, in the evenings maintains an office in which he 
practices law as a self-employed individual is an employee within the 
meaning of section 401(c)(1) with respect to the law practice. This 
example would not be altered by the fact that the corporation maintained 
a qualified plan under which the attorney is benefited as a common-law 
employee.
    (4) For the purpose of determining whether an employee within the 
meaning of section 401(c)(1) satisfies the requirements for eligibility 
under a qualified plan established by an employer, such an employer may 
take into account past services rendered by such an employee both as a 
self-employed individual and as a common-law employee if past services 
rendered by other employees, including common-law employees, are 
similarly taken into account. However, an employer cannot take into 
account only past services rendered by employees within the meaning of 
section 401(c)(1) if past services rendered to such employer by 
individuals who are, or were, common-law employees are not taken into 
account. Past service as described in this subparagraph may be taken 
into account for the purpose of determining whether an individual who 
is, or was, an employee within the meaning of section 401(c)(1) 
satisfies the requirements for eligibility even if such service was 
rendered prior to January 1, 1963. On the other hand, past service 
cannot be taken into account for purposes of determining the 
contributions which may be made on such an individual's behalf under a 
qualified plan.
    (c) Definition of earned income--(1) General rule. For purposes of 
section 401 and the regulations thereunder, ``earned income'' means, in 
general, net earnings from self-employment (as defined in section 
1402(a)) to the extent such net earnings constitute compensation for 
personal services actually rendered within the meaning of section 
911(b).
    (2) Net earnings from self-employment. (i) The computation of the 
net earnings from self-employment shall be made in accordance with the 
provisions of section 1402(a) and the regulations thereunder, with the 
modifications and exceptions described in subdivisions (ii) through (iv) 
of this subparagraph. Thus, an individual may have net earnings from 
self-employment, as defined in section 1402(a), even though such 
individual does not have self-employment income, as defined in section 
1402(b), and, therefore, is not subject to the tax on self-employment 
income imposed by section 1401.
    (ii) Items which are not included in gross income for purposes of 
chapter 1 of the Code and the deductions properly attributable to such 
items must be excluded from the computation of net earnings from self-
employment even though the provisions of section 1402(a) specifically 
require the inclusion of such items. For example, if an individual is a 
resident of Puerto Rico, so much of his net earnings from self-
employment as are excluded from gross income under section 933 must not 
be taken into account in computing his net earnings from self-employment 
which are earned income for purposes of section 401.
    (iii) In computing net earnings from self-employment for the purpose 
of determining earned income, a self-employed individual may disregard 
only deductions for contributions made on his own behalf under a 
qualified plan. However, such computation must take into account the 
deduction allowed by section 404 or 405 for contributions under a 
qualified plan on behalf of the common-law employees of the trade or 
business.
    (iv) For purposes of determining whether an individual has net 
earnings from self-employment and, thus, whether he is an employee 
within the meaning of section 401(c)(1), the exceptions in section 
1402(c) (4) and (5) shall not apply. Thus, certain ministers, certain 
members of religious orders, doctors of medicine, and Christian Science 
practitioners are treated for purposes of section 401 as being engaged 
in a trade or business from which net earnings from self-employment are 
derived. In addition, the exceptions in section 1402(c)(2) shall not 
apply in the case of any individual who is treated as an employee under 
section 3121(d)(3) (A), (C),

[[Page 31]]

or (D). Therefore, such individuals are treated, for purposes of section 
401, as being engaged in a trade or business from which net earnings 
from self-employment may be derived.
    (3) Compensation for personal services actually rendered. (i) For 
purposes of section 401, the term ``earned income'' includes only that 
portion of an individual's net earnings from self-employment which 
constitutes earned income as defined in section 911(b) and the 
regulations thereunder. Thus, such term includes only professional fees 
and other amounts received as compensation for personal services 
actually rendered by the individual. There is excluded from ``earned 
income'' the amount of any item of income, and any deduction properly 
attributable to such item, if such amount is not received as 
compensation for personal services actually rendered. Therefore, an 
individual who renders no personal services has no ``earned income'' 
even though such an individual may have net earnings from self-
employment from a trade or business.
    (ii) If a self-employed individual is engaged in a trade or business 
in which capital is a material income-producing factor, then, under 
section 911(b), his earned income is only that portion of the net 
profits from the trade or business which constitutes a reasonable 
allowance as compensation for personal services actually rendered. 
However, such individual's earned income cannot exceed 30 percent of the 
net profits of such trade or business. The net profits of the trade or 
business is not necessarily the same as the net earnings from self-
employment derived from such trade or business.
    (4) Minimum earned income when both personal services and capital 
are material income-producing factors. (i) If a self-employed individual 
renders personal services on a full-time, or substantially full-time, 
basis to only one trade or business, and if with respect to such trade 
or business capital is a material income-producing factor, then the 
amount of such individual's earned income from the trade or business is 
considered to be not less than so much of his share in the net profits 
of such trade or business as does not exceed $2,500.
    (ii) If a self-employed individual renders substantial personal 
services to more than one trade or business, and if with respect to all 
such trades or businesses such self-employed individual actually renders 
personal services on a full-time, or substantially full-time, basis, 
then the earned income of the self-employed individual from trades or 
businesses for which he renders substantial personal services and in 
which both personal services and capital are material income-producing 
factors is considered to be not less than--
    (A) So much of such individual's share of the net profits from all 
trades or businesses in which he renders substantial personal services 
as does not exceed $2,500, reduced by.
    (B) Such individual's share of the net profits of any trade or 
business in which only personal services is a material income-producing 
factor.

However, in no event shall the share of the net profits of any trade or 
business in which capital is a material income-producing factor be 
reduced below the amount which would, without regard to the provisions 
of this subdivision, be treated as the earned income derived from such 
trade or business under section 911(b). In making the computation 
required by this subdivision, any trade or business with respect to 
which the individual renders substantial personal services shall be 
taken into account irrespective of whether a qualified plan has been 
established by such trade or business.
    (iii) If the provisions of subdivision (ii) of this subparagraph 
apply in determining the earned income of a self-employed individual, 
and such individual is engaged in two or more trades or businesses in 
which capital and personal services are material income-producing 
factors, then the total amount treated as the earned income shall be 
allocated to each such trade or business for which he performs 
substantial personal services in the same proportion as his share of net 
profits from each such trade or business bears to his share of the total 
net profits from all such trades or businesses. Thus, in such case, the 
amount of earned income attributable to any such trade or business is 
computed by multiplying the total earned income as determined

[[Page 32]]

under subdivision (ii) of this subparagraph by the individual's net 
profits from such trade or business and dividing that product by the 
individual's total net profits from all such trades or businesses.
    (iv) For purposes of this subparagraph, the determination of whether 
an individual renders personal services on a full-time, or substantially 
full-time, basis is to be made with regard to the aggregate of the 
trades and businesses with respect to which the employee renders 
substantial personal services as a common-law employee or as a self-
employed individual. However, for all other purposes in applying the 
rules of this subparagraph, a trade or business with respect to which an 
individual is a common-law employee shall be disregarded.
    (d) Definition of owner-employee. For purposes of section 401 and 
the regulations thereunder, the term ``owner-employee'' means a 
proprietor of a proprietorship, or, in the case of a partnership, a 
partner who owns either more than 10 percent of the capital interest, or 
more than 10 percent of the profits interest, of the partnership. Thus, 
an individual who owns only 2 percent of the profits interest but 11 
percent of the capital interest of a partnership is an owner-employee. A 
partner's interest in the profits and the capital of the partnership 
shall be determined by the partnership agreement. In the absence of any 
provision regarding the sharing of profits, the interest in profits of 
the partners will be determined in the same manner as their distributive 
shares of partnership taxable income. However, a guaranteed payment (as 
described in section 707(c)) is not considered a distributive share of 
partnership income for such purpose. See section 704(b), relating to the 
determination of the distributive share by the income or loss ratio, and 
the regulations thereunder. In the absence of a provision in the 
partnership agreement, a partner's capital interest in a partnership 
shall be determined on the basis of his interest in the assets of the 
partnership which would be distributable to such partner upon his 
withdrawal from the partnership, or upon liquidation of the partnership, 
whichever is the greater.
    (e) Definition of employer. (1) For purposes of section 401, a sole 
proprietor is considered to be his own employer, and the partnership is 
considered to be the employer of each of the partners. Thus, an 
individual partner is not an employer who may establish a qualified plan 
with respect to his services to the partnership.
    (2) Regardless of the provision of local law, a partnership is 
deemed, for purposes of section 401, to be continuing until such time as 
it is terminated within the meaning of section 708, relating to the 
continuation of a partnership.

[T.D. 6675, 28 FR 10123, Sept. 17, 1963]



Sec. 1.401-11  General rules relating to plans covering self-employed individuals.

    (a) Introduction. This section provides certain rules which 
supplement, and modify, the rules of Secs. 1.401-1 through 1.401-9 in 
the case of a qualified pension, annuity, or profit-sharing plan which 
covers a self-employed individual who is an employee within the meaning 
of section 401(c)(1). The provisions of this section apply to taxable 
years beginning after December 31, 1962. Except as otherwise provided, 
paragraphs (b) through (m) of this section apply to taxable years 
beginning after December 31, 1962. Paragraph (n) of this section applies 
to plan years determined in accordance with paragraph (n)(1) of this 
section.
    (b) General rules. (1) If the amount of employer contributions for 
common-law employees covered under a qualified plan is related to the 
earned income (as defined in section 401(c)(2)) of a self-employed 
individual, or group of self-employed individuals, such a plan is a 
profit-sharing plan (as described in paragraph (b)(1)(ii) of Sec. 1.401-
1) since earned income is dependent upon the profits of the trade or 
business with respect to which the plan is established. Thus, for 
example, a plan, which provides that the employer will contribute 10 
percent of the earned income of a self-employed individual but no more 
than $2,500, and that the employer contribution on behalf of common-law 
employees shall be the same percentage of their salaries as the 
contribution on behalf of the self-employed individual

[[Page 33]]

bears to his earned income, is a profit-sharing plan, since the amount 
of the employer's contribution for common-law employees covered under 
the plan is related to the earned income of a self-employed individual 
and thereby to the profits of the trade or business. On the other hand, 
for example, a plan which defines the compensation of any self-employed 
individual as his earned income and which provides that the employer 
will contribute 10 percent of the compensation of each employee covered 
under the plan is a pension plan since the contribution on behalf of 
common-law employees is fixed without regard to whether the self-
employed individual has earned income or the amount thereof.
    (2) The Self-Employed Individuals Tax Retirement Act of 1962 (76 
Stat. 809) permits self-employed individuals to be treated as employees 
and therefore included in qualified plans, but it is clear that such law 
requires such self-employed individuals to provide benefits for their 
employees on a nondiscriminatory basis. Self-employed individuals will 
not be considered as providing contributions or benefits for an employee 
to the extent that the wages or salary of the employee covered under the 
plan are reduced at or about the time the plan is adopted.
    (3) In addition to permitting self-employed individuals to 
participate in qualified plans, the Self-Employed Individuals Tax 
Retirement Act of 1962 extends to such individuals some of the tax 
benefits allowed common-law employee-participants in such plans. 
However, the tax benefits allowed a self-employed individual are 
restricted by the limits which are placed on the deductions allowed for 
contributions on such an individual's behalf. In view of these 
restrictions on the tax benefits extended to any self-employed 
individual, a self-employed individual participating in a qualified plan 
may not participate in any forfeitures. Therefore, in the case of a 
qualified plan which covers any self-employed individual, a separate 
account must be established for each self-employed individual to which 
no forfeitures can be allocated.
    (c) Requirements as to coverage. (1) In general, section 401(a)(3) 
and the regulations thereunder prescribe the coverage requirements which 
a qualified plan must satisfy. However, if such a plan covers self-
employed individuals who are not owner-employees, it must, in addition 
to satisfying such requirements, satisfy the requirements of this 
paragraph. If any owner-employee is covered under a qualified plan, the 
provisions of this paragraph do not apply, but the provisions of section 
401(d), including section 401(d)(3), do apply (see Sec. 1.401-12).
    (2)(i) Section 401(a)(3)(B) provides that a plan may satisfy the 
coverage requirements for qualification if it covers such employees as 
qualify under a classification which is found not to discriminate in 
favor of employees who are officers, shareholders, persons whose 
principal duties consist in supervising the work of other employees, or 
highly compensated employees. Section 401(a)(5) sets forth certain 
classifications that will not in themselves be considered 
discriminatory. Under such section, a classification which excludes all 
employees whose entire remuneration constitutes ``wages'' under section 
3121(a)(1), will not be considered discriminatory merely because of such 
exclusion. Similarly, a plan which includes all employees will not be 
considered discriminatory solely because the contributions or benefits 
based on that part of their remuneration which is excluded from 
``wages'' under section 3121(a)(1) differ from the contributions or 
benefits based on that part of their remuneration which is not so 
excluded. However, in determining if a classification is discriminatory 
under section 401(a)(3)(B), consideration will be given to whether the 
total benefits resulting to each employee under the plan and under the 
Social Security Act, or under the Social Security Act only, establish an 
integrated and correlated retirement system satisfying the tests of 
section 401(a). A plan which covers self-employed individuals, none of 
whom is an owner-employee, may also be integrated with the contributions 
or benefits under the Social Security Act. In such a case, the portion 
of the earned income (as defined in section 401(c)(2)) of such an 
individual which does not exceed the maximum amount which

[[Page 34]]

may be treated as self-employment income under section 1402(b)(1), and 
which is derived from the trade or business with respect to which the 
plan is established, shall be treated as ``wages'' under section 
3121(a)(1) subject to the tax imposed by section 3111 (relating to the 
tax on employers) for purposes of applying the rules of paragraph (e)(2) 
of Sec. 1.401-3, relating to the determination of whether a plan is 
properly integrated. However, if the plan covers an owner-employee, the 
rules relating to the integration of the plan with the contributions or 
benefits under the Social Security Act contained in paragraph (b) of 
Sec. 1.401-12 apply.
    (ii) Certain of the classifications enumerated in section 401(a)(5) 
do not apply to plans which provide contributions or benefits for any 
self-employed individual. Since self-employed individuals are not 
salaried or clerical employees, the provision in section 401(a)(5) 
permitting a plan, in certain cases to cover only this type of employee 
is inapplicable to plans which cover any self-employed individual.
    (iii) The classifications enumerated in section 401(a)(5) are not 
exclusive, and it is not necessary that a qualified plan cover all 
employees or all full-time employees. Plans may qualify even though 
coverage is limited in accordance with a particular classification 
incorporated in the plan, provided the effect of covering only such 
employees as satisfy such eligibility requirement does not result in the 
prohibited discrimination.
    (d) Discrimination as to contributions or benefits--(1) In general. 
In order for a plan to be qualified, there must be no discrimination in 
contributions or benefits in favor of employees who are officers, 
shareholders, supervisors, or highly compensated, as against other 
employees whether within or without the plan. A self-employed 
individual, by reason of the contingent nature of his compensation, is 
considered to be a highly-compensated employee, and thus is a member of 
the group in whose favor discrimination is prohibited. In determining 
whether the prohibited discrimination exists, the total employer 
contribution on behalf of a self-employed individual shall be taken into 
account regardless of the fact that only a portion of such contribution 
is allowed as a deduction. For additional rules relating to 
discrimination as to contributions or benefits with regard to plans 
covering any owner-employee, see Sec. 1.401-12.
    (2) Base for computing contributions or benefits. (i) A plan which 
is otherwise qualified is not considered discriminatory merely because 
the contributions or benefits provided under the plan bear a uniform 
relationship to the total compensation, basic compensation, or regular 
rate of compensation of the employees, including self-employed 
individuals, covered under the plan.
    (ii) In the case of a self-employed individual who is covered under 
a qualified plan, the total compensation of such individual is the 
earned income (as defined in section 401(c)(2)) which such individual 
derives from the employer's trade or business, or trades or businesses, 
with respect to which the qualified plan is established. Thus, for 
example, in the case of a partner, his total compensation includes both 
his distributive share of partnership income, whether or not 
distributed, and guaranteed payments described in section 707(c) made to 
him by the partnership establishing the plan, to the extent that such 
income constitutes earned income as defined in section 401(c)(2).
    (iii)(A) The basic or regular rate of compensation of any self-
employed individual is that portion of his earned income which bears the 
same ratio to his total earned income derived from the trade or 
business, or trades or businesses, with respect to which the qualified 
plan is established as the aggregate basic or regular compensation of 
all common-law employees covered under the plan bears to the aggregate 
total compensation of such employees derived from such trade or 
business, or trades or businesses.
    (B) If an employer establishes two or more plans which satisfy the 
requirements of section 401(a) separately, and only one such plan covers 
a self-employed individual, the determination of the basic or regular 
rate of compensation of such self-employed individual is made with 
regard to the compensation of common-law employees covered

[[Page 35]]

under the plan which provides contributions or benefits for such self-
employed individual. On the other hand, if two or more plans must be 
considered together in order to satisfy the requirements of section 
401(a), the computation of the basic or regular rate of compensation of 
a self-employed individual must be made with regard to the compensation 
of the common-law employees covered by so many of such plans as are 
required to be taken together in order to satisfy the qualification 
requirements of section 401(a).
    (3) Discriminatory contributions. If a discriminatory contribution 
is made by, or for, a self-employed individual who is an employee within 
the meaning of section 401(c)(1) because of an erroneous assumption as 
to the earned income of such individual, the plan will not be considered 
discriminatory if adequate adjustment is made to remove such 
discrimination. In the case of any self-employed individual who is an 
owner-employee, the amount of any excess contribution to be returned and 
the manner in which it is to be repaid are determined by the provisions 
of section 401(d)(8) and (e). However, if any self-employed individual, 
including any owner-employee, has not made the full contribution 
permitted to be made on his behalf as an employee, then, if the plan 
expressly provides, so much of any excess contribution by such self-
employed individual's employer as may, under the provisions of the plan, 
be treated as a contribution made by such individual as an employee can 
be so treated.
    (e) Distribution of entire interest. (1) If a trust forms part of a 
plan which covers a self-employed individual, such trust shall 
constitute a qualified trust under section 401 only if the plan of which 
such trust is a part expressly provides that the entire interest of each 
employee, including any common-law employee, will be distributed in 
accordance with the provisions of subparagraph (2) or (3) of this 
paragraph.
    (2) Unless the provisions of subparagraph (3) of this paragraph 
apply, the entire interest of each employee (including contributions he 
has made on his own behalf, contributions made on his behalf by his 
employer, and interest thereon) must be actually distributed to such 
employee--
    (i) In the case of an employee, other than an individual who is, or 
has been, an owner-employee under the plan, not later than the last day 
of the taxable year of such employee in which he attains the age of 
70\1/2\, or not later than the last day of the taxable year in which 
such employee retires, whichever is later, and
    (ii) In the case of an employee who is, or has been, an owner-
employee under the plan, not later than the last day of the taxable year 
in which he attains the age of 70\1/2\.
    (3) In lieu of distributing an employee's entire interest in a 
qualified plan as provided in subparagraph (2) of this paragraph, such 
interest may be distributed commencing no later than the last taxable 
year described in such subparagraph (2). In such case, the plan must 
expressly provide that the entire interest of such an employee shall be 
distributed to him and his beneficiaries, in a manner which satisfies 
the requirements of subparagraph (5) of this paragraph, over any of the 
following periods (or any combination thereof)--
    (i) The life of the employee, or
    (ii) The lives of the employee and his spouse, or
    (iii) A period certain not longer than the life expectancy of the 
employee, or
    (iv) A period certain not longer than the joint life and last 
survivor expectancy of the employee and his spouse.
    (4) For purposes of subparagraphs (3) and (5) of this paragraph, the 
determination of the life expectancy of the employee or the joint life 
and last survivor expectancy of the employee and his spouse is to be 
made either (i) only once, at the time the employee receives the first 
distribution of his entire interest under the plan, or (ii) 
periodically, in a consistent manner. Such life expectancy or joint life 
and last survivor expectancy cannot exceed the period computed by the 
use of the expected return multiples in Sec. 1.72-9, or, in the case of 
payments under a contract issued by an insurance company, the period 
computed by use of the life expectancy tables of such company.

[[Page 36]]

    (5) If an employee's entire interest is to be distributed over a 
period described in subparagraph (3) of this paragraph, then the amount 
to be distributed each year must be at least an amount equal to the 
quotient obtained by dividing the entire interest of the employee under 
the plan at the time the distribution is made (expressed in either 
dollars or units) by the life expectancy of the employee, or joint life 
and last survivor expectancy of the employee and his spouse (whichever 
is applicable), determined in accordance with the provisions of 
subparagraph (4) of this paragraph. However, no distribution need be 
made in any year, or a lesser amount may be distributed, if the 
aggregate amounts distributed by the end of that year are at least equal 
to the aggregate of the minimum amounts required by this subparagraph to 
have been distributed by the end of such year.
    (6) If an employee's entire interest is distributed in the form of 
an annuity contract, then the requirements of section 401(a)(9) are 
satisfied if the distribution of such contract takes place before the 
end of the latest taxable year described in subparagraph (2) of this 
paragraph, and if the employee's interest will be paid over a period 
described in subparagraph (3) of this paragraph and at a rate which 
satisfies the requirements of subparagraph (5) of this paragraph.
    (7) The requirements of section 401(a)(9) do not preclude 
contributions from being made on behalf of an owner-employee under a 
qualified plan subsequent to the taxable year in which the distribution 
of his entire interest is required to commence. Thus, if all other 
requirements for qualification are satisfied, a qualified plan may 
provide contributions for an owner-employee who has already attained age 
70\1/2\. However, a distribution of benefits attributable to 
contributions made on behalf of an owner-employee in a taxable year 
beginning after the taxable year in which he attains the age of 70\1/2\ 
must satisfy the requirements of subparagraph (3) of this paragraph. 
Thus, if an owner-employee has already attained the age of 70\1/2\ at 
the time the first contribution is made on his behalf, the distribution 
of his entire interest must commence in the year in which such 
contribution is first made on his behalf.
    (8) This paragraph shall not apply and an otherwise qualified trust 
will not be disqualified if the method of distribution under the plan is 
one which was designated by a common-law employee prior to October 10, 
1962, and such method of distribution is not in accordance with the 
provisions of section 401(a)(9). Such exception applies regardless of 
whether the actual distribution of the entire interest of an employee 
making such a designation, or any portion of such interest, has 
commenced prior to October 10, 1962.

[T.D. 6675, 28 FR 10124, Sept. 17, 1963, as amended by T.D. 6982, 33 FR 
16500, Nov. 13, 1968]



Sec. 1.401-12  Requirements for qualification of trusts and plans benefiting owner-employees.

    (a) Introduction. This section prescribes the additional 
requirements which must be met for qualification of a trust forming part 
of a pension or profit-sharing plan, or of an annuity plan, which covers 
any self-employed individual who is an owner-employee as defined in 
section 401(c)(3). However, to the extent that the provisions of 
Sec. 1.401-11 are not modified by the provisions of this section, such 
provisions are also applicable to a plan which covers an owner-employee. 
The provisions of this section apply to taxable years beginning after 
December 31, 1962. Except as otherwise provided, paragraphs (b) through 
(m) of this section apply to taxable years beginning after December 31, 
1962. Paragraph (n) of this section applies to plan years determined in 
accordance with paragraph (n)(1) of the section.
    (b) General rules. (1) The qualified plan and trust of an 
unincorporated trade or business does not have to satisfy the additional 
requirements for qualification merely because an owner-employee derives 
earned income (as defined in section 401(c)(2)) from the trade or 
business with respect to which the plan is established. Such additional 
requirements need be satisfied only if an owner-employee is actually 
covered under the plan of the employer. An owner-employee may only be 
covered

[[Page 37]]

under a plan of an employer if such owner-employee has so consented. 
However, the consent of the owner-employee may be either expressed or 
implied. Thus, for example, if contributions are, in fact, made on 
behalf of an owner-employee, such owner-employee is considered to have 
impliedly consented to being covered under the plan.
    (2) A qualified plan covering an owner-employee must be a definite 
written program and arrangement setting forth all provisions essential 
for qualification at the time such plan is established. Therefore, for 
example, even though the owner-employee is the only employee covered 
under the plan at the time the plan is established, the plan must 
incorporate all the provisions relating to the eligibility and benefits 
of future employees.
    (c) Bank trustee. (1)(i) If a trust created after October 9, 1962, 
is to form a part of a qualified pension or profit-sharing plan covering 
an owner-employee, or if a trust created before October 10, 1962, but 
not exempt from tax on October 9, 1962, is to form part of such a plan, 
the trustee of such trust must be a bank as defined in paragraph (c)(2) 
of this section, unless an exception contained in paragraph (c)(4) of 
this section applies, or paragraph (n) of this section applies.
    (ii) The provisions of this paragraph do not apply to an employees' 
trust created prior to October 10, 1962, if such trust was exempt from 
tax on October 9, 1962, even though the plan of which such trust forms a 
part is amended after December 31, 1962, to cover any owner-employee. 
Although the trustee of a trust described in the preceding sentence need 
not be a bank, all other requirements for the qualification of such a 
trust must be satisfied at the time an owner-employee is first covered 
under such plan.
    (2) The term bank as used in this paragraph means--
    (i) A bank as defined in section 581;
    (ii) A corporation which, under the laws of the State of its 
incorporation or under the laws of the District of Columbia, is subject 
to both the supervision of, and examination by, the authority in such 
jurisdiction in charge of the administration of the banking laws;
    (iii) In the case of a trust created or organized outside of the 
United States, that is, outside the States and the District of Columbia, 
a bank or trust company, wherever incorporated, exercising fiduciary 
powers and subject to both supervision and examination by governmental 
authority;
    (iv) Beginning on January 1, 1974, an insured credit union (within 
the meaning of section 101 (6) of the Federal Credit Union Act, 12 
U.S.C. 1752 (6)).
    (3) Although a bank is required to be the trustee of a qualified 
trust, another person, including the employer, may be granted the power 
in the trust instrument to control the investment of the trust funds 
either by directing investments, including reinvestments, disposals, and 
exchanges, or by disapproving proposed investments, including 
reinvestments, disposals, or exchanges.
    (4)(i) This paragraph does not apply to a trust created or organized 
outside the States and the District of Columbia before October 10, 1962, 
if, on October 9, 1962, such trust is described in section 402(c) as an 
organization treated as if it was a trust exempt from tax under section 
501(a).
    (ii) In addition, the requirement that the trustee must be a bank 
does not apply to a qualified trust forming a part of a pension or 
profit-sharing plan if--
    (A) The investments of all the funds in such trust are in annuity, 
endowment, or life insurance contracts, issued by a company which is a 
life insurance company as defined in section 801(a) during the taxable 
year immediately preceding the year that such contracts are originally 
purchased;
    (B) All the proceeds which are, or may become, payable under the 
contract are payable directly to the employee or his beneficiary;
    (C) The plan contains a provision to the effect that the employer is 
to substitute a bank as a trustee or custodian of the contracts if the 
employer is notified by the district director that such substitution is 
required because the trustee is not keeping such records, or making such 
returns, or rendering such statements, as are required by forms or 
regulations.

[[Page 38]]


However, a qualified trust may only purchase insurance protection to the 
extent permitted under a qualified plan (see paragraph (b)(1) (i) and 
(ii) of Sec. 1.401-1).
    (5) An employer may designate several trusts (or custodial accounts) 
or a trust or trusts and an annuity plan or plans as constituting parts 
of a single plan which is intended to satisfy the requirements for 
qualification. However, each trust (or custodial account) so designated 
which is part of a plan covering an owner-employee must satisfy the 
requirements of this paragraph. Thus, for example, if all other 
requirements for qualification are satisfied by the plan, a qualified 
profit-sharing plan may provide that a portion of the contributions 
under the plan will be paid to a custodial account, the custodian of 
which is a bank, for investment in stock of a regulated investment 
company, and the remainder of such contributions will be paid to a 
trust, the trustee of which is not a bank, for investment in annuity 
contracts.
    (d) Profit-sharing plan. (1) A profit-sharing plan, as defined in 
paragraph (b)(1)(ii) of Sec. 1.401-1, which covers any owner-employee 
must contain a definite formula for determining the contributions to be 
made by the employer on behalf of employees, other than owner-employees. 
A formula to be definite must specify the portion of profits to be 
contributed to the trust and must also define profits for plan purposes. 
A definite formula may contain a variable factor, if the value of such 
factor may not vary at the discretion of the employer. For example, the 
percentage of profits to be contributed each year may differ depending 
on the amount of profits. On the other hand, a formula which, for 
example, specifies that profits for plan purposes are not to exceed the 
cash on hand at the time the employer contribution is made is not a 
definite formula. The requirement that the plan formula be definite is 
satisfied if such formula limits the amount to be contributed on behalf 
of all employees covered under the plan to the amount which permits 
self-employed individuals to obtain the maximum deduction under section 
404(a). However, even though the plan formula is definite, the plan must 
satisfy all the other requirements for qualification, including the 
requirement that the contributions under the plan not discriminate in 
favor of any self-employed individual, and the requirement that the plan 
be for the exclusive benefit of the employees in general.
    (2) A definite contribution formula constitutes an integral part of 
a qualified profit-sharing plan and may not be amended except for a 
valid business reason.
    (3) The requirement that a profit-sharing plan contain a definite 
formula for determining the amount of contributions to be made on behalf 
of employees does not apply to contributions which are made on behalf of 
owner-employees. However, such contributions are subject to the 
requirement that they be nondiscriminatory with respect to other 
employees and must not exceed the limitations on allowable and 
deductible contributions which may be made by owner-employees.
    (e) Requirements as to coverage--(1) Coverage of all employees. The 
coverage requirements contained in section 401(a)(3) do not apply to a 
plan which covers any owner-employee. However, such a plan must satisfy 
the coverage requirements of section 401(d), including section 
401(d)(3). Accordingly, a plan which covers an owner-employee must 
benefit each employee of the trade or business (other than any owner-
employee who does not consent to be covered under the plan) whose 
customary period of employment has been for more than 20 hours a week 
for more than five months during each of three consecutive periods of 
twelve calendar months. Therefore, a plan may not provide, for example, 
that an employee, other than an owner-employee, is ineligible to 
participate because he does not consent to be a participant or because 
he does not consent to make reasonable contributions under the plan.
    (2) Period of service. (i) In determining whether an employee 
renders service to the same employer, and, therefore, must be covered 
under the plan of such employer, a partnership is considered to be one 
employer during the entire

[[Page 39]]

period prior to the time it is terminated within the meaning of section 
708 (see paragraph (e)(2) of Sec. 1.401-10).
    (ii) In the case of a common-law employee who becomes an employee 
within the meaning of section 401(c)(1) with respect to the same trade 
or business, his period of employment is the aggregate of his service as 
a common-law employee and an employee within the meaning of section 
401(c)(1).
    (iii) In determining whether any employee, including any owner-
employee, has three years of service, past service of any such employee 
may be taken into account as provided in paragraph (b) of Sec. 1.401-10. 
Thus, if an employer takes into account past service for any owner-
employee, he must take into account the past service of all his other 
employees to the same extent. However, a plan may provide for coverage 
after a period of service which is shorter than three years, but in no 
case may the plan require a waiting period for employees which is longer 
than that required for the owner-employees.
    (f) Discrimination in contributions or benefits. (1) Variations in 
contributions or benefits may be provided under the plan so long as the 
plan does not discriminate, either as to contributions or benefits, in 
favor of officers, employees whose principal duties consist in 
supervising the work of other employees, or highly compensated 
employees, as against other employees (see Sec. 1.401-4). For the 
purpose of determining whether the provisions of a plan which provide 
contributions or benefits for an owner-employee result in the prohibited 
discrimination, an owner-employee, like other self-employed individuals, 
is considered a highly compensated employee (see paragraph (d) of 
Sec. 1.401-11). Whether or not a plan is discriminatory is determined by 
the actual operation of the plan as well as by its formal provisions.
    (2) The provisions of section 401(a)(5), relating to certain plan 
provisions which will not in and of themselves be considered 
discriminatory, are not applicable to any plan which covers any owner-
employee. Such a plan must, instead, satisfy the requirements of section 
401(a)(10) and section 401(d)(6). Accordingly, a plan is not 
discriminatory within the meaning of section 401(a)(4) merely because 
the contributions or benefits provided for the employees covered under 
the plan bear a uniform relationship to the total compensation, or to 
the basic or regular rate of compensation, of such employees. The total 
compensation or the basic or regular rate of compensation of an owner-
employee is computed in accordance with the provisions of paragraph 
(d)(2) of Sec. 1.401-11.
    (3) Even though the contributions under the plan do not bear a 
uniform relationship to the total compensation, or the basic or regular 
rate of compensation, of the employees covered thereunder and the plan 
would otherwise be considered discriminatory within the meaning of 
section 401(a)(4), the plan shall not be considered discriminatory if 
such variation is due to employer contributions on behalf of any owner-
employee which are required, under the plan, to be applied to pay 
premiums or other consideration on one or more level premium contracts 
described in section 401(e)(3)(A). In a taxable year to which the 
foregoing exception applies and, therefore, one in which the 
contributions under the plan would otherwise be discriminatory, the 
employer contributions to pay such premiums or other consideration must 
be the only employer contributions made for the owner-employee, and the 
contributions for such taxable year under such plan must not be in 
excess of the amount permitted to be paid toward the purchase of such a 
contract under the provisions of section 401(e)(3). Furthermore, the 
exception described in this subparagraph only applies to contributions 
made under a plan which otherwise satisfies the requirements of section 
401(a)(4) and the regulations thereunder. Thus, if a plan provides for 
the purchase, in accordance with section 401(e)(3), of a level premium 
contract for an owner-employee, then such plan must provide either that 
the benefits for all employees are nondiscriminatory or, in the case of 
a money-purchase type of plan, that the contributions for all employees 
are based on compensation determined in a non-discriminatory manner. For 
example, since the contributions on behalf of the owner-employee are 
based on his earned income during the

[[Page 40]]

period preceding the purchase of the contract, the contributions for 
other employees must be based on their compensation during the same 
period if this will result in larger contributions on their behalf.
    (4) In the case of a plan which covers any owner-employee, the 
contributions or benefits provided under the plan cannot vary with 
respect to years of service except as provided in subparagraph (5) of 
this paragraph.
    (5) The provisions of section 401(d)(3) do not preclude the coverage 
of employees with less than three years of service if such coverage is 
provided on a nondiscriminatory basis. However, a plan will not be 
disqualified merely because the contributions or benefits for employees 
who have less than three years of service are not as favorable as the 
contributions or benefits for employees having more than three years of 
service.
    (g) Nonforfeitable rights. (1)(i) Except as provided in subparagraph 
(2) of this paragraph, if an owner-employee is covered under the plan of 
his employer, each employee's rights to the contributions, or to the 
benefits derived from the contributions, of such employer must be 
nonforfeitable at the time such contributions are paid to, or under, the 
plan. The employees who must obtain such nonforfeitable rights include 
the self-employed individuals who are covered under the plan. As to what 
constitutes nonforfeitable rights of an employee, see paragraph (a)(2) 
of Sec. 1.402(b)-1.
    (ii) Under section 401(d)(2), it is necessary that each employee 
obtain nonforfeitable rights to the employer contributions under the 
plan on his behalf from the time such contributions are paid. Thus, each 
employee must have a nonforfeitable interest to the portion of the funds 
under the plan which is allocable to the employer contributions made 
under the plan on his behalf.
    (2) The provisions of subparagraph (1) of this paragraph do not 
apply to the extent that employer contributions on behalf of any 
employee must remain forfeitable in order to satisfy the requirements of 
paragraph (c) of Sec. 1.401-4. However, employer contributions on behalf 
of employees whose rights are required to remain forfeitable to satisfy 
such requirements must be nonforfeitable except for such contingency.
    (h) Integration with social security. (1) If a qualified plan covers 
any owner-employee, then the rules relating to the integration of such 
plan with the contributions or benefits under the Social Security Act 
are provided in this paragraph. Accordingly, the provisions of paragraph 
(e) of Sec. 1.401-3 and paragraph (c) of Sec. 1.401-11 do not apply to 
such a plan. In the case of a plan which provides contributions or 
benefits for any owner-employee, integration of the plan with the Social 
Security Act for any taxable year of the employer can take place only if 
not more than one-third of the employer contributions under the plan 
which are deductible under section 404 for that year are made on behalf 
of the owner-employees. If such requirement is satisfied, then the plan 
may be integrated with the contributions or benefits under the Social 
Security Act in accordance with the rules of subparagraph (3) of this 
paragraph.
    (2)(i) For purposes of subparagraph (1) of this paragraph, in 
determining the total amount of employer contributions which are 
deductible under section 404, the provisions of section 404(a), 
including the provisions of section 404(a)(9) (relating to plans 
benefiting self-employed individuals), and section 404(e) (relating to 
the special limitations for self-employed individuals) are taken into 
account, but the provisions of section 404(a)(10) (relating to the 
special limitation on the amount allowed as a deduction for self-
employed individuals) are not taken into account.
    (ii) The amount of deductible employer contributions which are made 
on behalf of all owner-employees for the year is compared with the 
amount of deductible employer contributions for the year made on behalf 
of all employees covered under the plan (including self-employed 
individuals who are not owner-employees and owner-employees) for the 
purpose of determining whether the deductible contributions by the 
employer on behalf of owner-employees are not more than one-third of the 
total deductible contributions.

[[Page 41]]

    (3) If a plan covering an owner-employee satisfies the requirement 
of subparagraph (1) of this paragraph, and if the employer wishes to 
integrate such plan with the contributions or benefits under the Social 
Security Act, then--
    (i) The employer contributions under the plan on behalf of any 
owner-employee shall be reduced by an amount determined by multiplying 
the earned income of such owner-employee which is derived from the trade 
or business with respect to which the plan is established and which does 
not exceed the maximum amount which may be treated as self-employment 
income under section 1402(b)(1), by the rate of tax imposed under 
section 1401(a); and
    (ii) The employer contributions under the plan on behalf of any 
employee other than an owner-employee may be reduced by an amount not in 
excess of the amount determined by multiplying the employee's wages 
under section 3121(a)(1) by the rate of tax imposed under section 
3111(a). For purposes of this subdivision, the earned income of a self-
employed individual which is derived from the trade or business with 
respect to which the plan is established and which is treated as self-
employment income under section 1402(b)(1), shall be treated as 
``wages'' under section 3121(a)(1).
    (4) A money purchase pension plan or a profit-sharing plan may 
provide that such plan will be integrated with the Social Security Act 
only for such taxable years of the employer in which the requirements 
for integration are satisfied. However, a qualified plan cannot provide 
that employer contributions are only to be made for taxable years in 
which the integration requirements are satisfied.
    (i) Limit on contributions on behalf of an owner-employee. (1) 
Section 401(d)(5) requires that a plan which covers any owner-employee 
must contain provisions which restrict the employer contributions that 
may be made on behalf of any owner-employee for each taxable year to an 
amount no greater than that which is deductible under section 404. In 
computing the amount deductible under section 404 for purposes of 
section 401(d)(5) and this paragraph, the limitations contained in 
section 404(a)(9) and (e), relating to special limitations for self-
employed individuals, are taken into account, but such amount is 
determined without regard to section 404(a)(10), relating to the special 
limitation on the amount allowed as a deduction for self-employed 
individuals. Accordingly, a qualified plan which covers any owner-
employee cannot permit employer contributions to be made on behalf of 
such owner-employee in excess of 10 percent of the earned income which 
is derived by such owner-employee from the trade or business with 
respect to which the plan is established, or permit the employer to 
contribute more than $2,500 on behalf of any such owner-employee for any 
taxable year.
    (2)(i) In determining whether the plan permits contributions to be 
made in excess of the limitations of subparagraph (1) of this paragraph, 
employer contributions under the plan which are allocable to the 
purchase of life, accident, health, or other insurance are not to be 
taken into account. To determine the amount of employer contributions 
under the plan which are allocable to the purchase of life, accident, 
health, or other insurance, see paragraph (f) of Sec. 1.404(e)-1 and 
paragraph (b) of Sec. 1.72-16. However, contributions for such insurance 
can be made only to the extent otherwise permitted under sections 401 
through 404 and the regulations thereunder.
    (ii) A further exception to the limit on the amount of contributions 
which an employer may make under the plan on behalf of an owner-employee 
is made in the case of contributions which are required, under the plan, 
to be applied to pay premiums or other consideration for one or more 
annuity, endowment, or life insurance contracts described in section 
401(e)(3) (see section 401(e)(3) and the regulations thereunder).
    (j) Excess contributions. The provisions of section 401(e) define 
the term ``excess contribution'' and indicate the consequences of making 
such a contribution (see Sec. 1.401-13). However, section 401(d)(8) 
provides that a qualified plan which provides contributions or benefits 
for any owner-employee must contain certain provisions which complement 
the rules contained in section

[[Page 42]]

401(e). Under section 401(d)(8), a qualified plan must provide that--
    (1) The net amount of any excess contribution (determined in 
accordance with the provisions of Sec. 1.401-13) must be returned to the 
owner-employee on whose behalf it is made, together with the net income 
earned on such excess contribution;
    (2) For each taxable year for which the trust is considered to be a 
nonqualified trust with respect to an owner-employee under section 
401(e)(2) because the net amount of an excess contribution and the 
earnings thereon have not been returned to such owner-employee, the 
income of the trust for that taxable year attributable to the interest 
of such owner-employee is to be paid to him.
    (3) If an excess contribution is determined to be willfully made 
(within the meaning of section 401(e)(2)(E)), the entire interest of the 
owner-employee on whose behalf such contribution was made is required to 
be distributed to such owner-employee. Furthermore, the plan must 
require the distribution of an owner-employee's entire interest under 
the plan if a willful excess contribution is determined to have been 
made under any other plan in which the owner-employee is covered as an 
owner-employee.
    (k) Contributions of property under a qualified plan. (1) The 
contribution of property, other than money, prior to January 1, 1975, by 
the person who is the employer (within the meaning of section 401(c)(4)) 
to a qualified trust forming a part of a plan which covers employees 
some or all of whom are owner-employees who control (within the meaning 
of section 401(d)(9)(B) and the regulations thereunder) the trade or 
business with respect to which the plan is established is a prohibited 
transaction between such trust and the employer-grantor of such trust 
(see section 503(g) prior to its repeal by sec. 2003(b)(5) of the 
Employee Retirement Income Security Act of 1974 (88 Stat. 978)).
    (2) A contribution of property, other than money, prior to January 
1, 1975, to a qualified trust by an owner-employee who controls, or a 
member of a group of owner-employees who together control, the trade or 
business with respect to which the plan is established, or a 
contribution of property, other than money, to a qualified trust by a 
member of such an owner-employee's family (as defined in section 
267(c)(4)), is a prohibited transaction. (See section 503(g) prior to 
its repeal by section 2003(b)(5) of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 978)).
    (3) See section 4975 and the regulations thereunder with respect to 
rules relating to the contribution of property, other than money, made 
after December 31, 1974.
    (l) Controlled trades or businesses-- (1) Plans covering an owner-
employee who controls another trade or business. (i) A plan must not 
cover any owner-employee, or group of two or more owner-employees, if 
such owner-employee, or group of owner-employees, control (within the 
meaning of subparagraph (3) of this paragraph) any other trade or 
business, unless the employees of such other trade or business 
controlled by such owner-employee, or such group of owner-employees, are 
included in a plan which satisfies the requirements of section 401(a), 
including the qualification requirements of section 401(d). The 
employees who must be covered under the plan of the trade or business 
which is controlled include the self-employed individuals who are not 
owner-employees and the owner-employees who consent to be covered by 
such plan. Accordingly, the employer must determine whether any owner-
employee, or group of owner-employees, who may participate in the plan 
which is established by such employer controls any other trade or 
business, and whether the requirements of this subparagraph are 
satisfied with respect to the plan established in such other trade or 
business. The plan of an employer may exclude an owner-employee who 
controls another trade or business from coverage under the plan even 
though such owner-employee consents to be covered, if a plan which 
satisfies the requirements of subdivision (ii) of this subparagraph has 
not been established in the trade or business which such owner-employee 
controls.
    (ii) The qualified plan which the owner-employee, or owner-
employees,

[[Page 43]]

are required to provide for the employees of the trade or business which 
they control must provide contributions and benefits which are not less 
favorable than the contributions and benefits provided for the owner-
employee, or owner-employees, under the plan of any trade or business 
which they do not control. Thus, for example, if the contributions or 
benefits for the owner-employee under the plan of the trade or business 
which he does not control are computed on the basis of his total (as 
compared to basic or regular rate) of compensation, then the 
contributions or benefits for employees covered under the plan of the 
trade or business which the owner controls must be computed on the basis 
of their total compensation. However, the requirements of this 
subdivision cannot be satisfied if the benefits and contributions 
provided under the plan for the employees of the trade or business which 
is controlled are not comparable to those provided under the plan 
covering the owner-employee, or group of owner-employees, in the trade 
or business which they do not control. Thus, for example, if the owner-
employee is covered by a pension plan in the trade or business which he 
does not control, he may not satisfy the requirements of this 
subdivision by establishing a profit-sharing plan in the trade or 
business which he does control.
    (iii) If an individual is covered as an owner-employee under the 
plans of two or more trades or businesses which he does not control and 
such individual controls a trade or business, then the contributions or 
benefits of the employees under the plan of the trade or business which 
he does control must be as favorable as those provided for him under the 
most favorable plan of the trade or business which he does not control.
    (2) Owner-employees who control more than one trade or business. If 
the plan provides contributions or benefits for an owner-employee who 
controls, or group of owner-employees who together control, the trade or 
business with respect to which the plan is established, and such owner-
employee, or group of owner-employees, also control as owner-employees 
one or more other trades or businesses, plans must be established with 
respect to such controlled trades or businesses so that when taken 
together they form a single plan which satisfies the requirements of 
section 401 (a) and (d) with respect to the employees of all the 
controlled trades or businesses.
    (3) Control defined. (i) For purposes of this paragraph, an owner-
employee, or a group of two or more owner-employees, shall be considered 
to control a trade or business if such owner-employee, or such group of 
two or more owner-employees together--
    (A) Own the entire interest in an unincorporated trade or business, 
or
    (B) In the case of a partnership, own more than 50 percent of either 
the capital interest or the profits interest in such partnership.

In determining whether an owner-employee, or group of owner-employees, 
control a trade or business within the meaning of the preceding 
sentence, it is immaterial whether or not such individuals could be 
covered under a plan established with respect to the trade or business. 
For example, if an individual who is an owner-employee has a 60-percent 
capital interest in another trade or business, such individual controls 
such trade or business and the provisions of this paragraph apply even 
though the individual derives no earned income, as defined in section 
401(c)(2), from the controlled trade or business. For purposes of 
determining the ownership interest of an owner-employee, or group of 
owner-employees, an owner-employee, or group of owner-employees, is 
treated as owning any interest in a partnership which is owned, directly 
or indirectly, by a partnership controlled by such owner-employee, or 
group of owner-employees.
    (ii) The provisions of subparagraphs (1) and (2) of this paragraph 
apply only if the owner-employee who controls, or the group of owner-
employees who control, a trade or business, or trades or businesses, 
within the meaning of subdivision (i) of this subparagraph is the same 
owner-employee, or group of owner-employees, covered under the plan 
intended to satisfy the requirements for qualification. Thus, for 
example, if A is a 50-percent partner in both the AB and AC partnership, 
and if the AB partnership wishes to establish

[[Page 44]]

a plan covering A and B, the provisions of subparagraphs (1) and (2) of 
this paragraph do not apply, since A does not control either 
partnership, and since B has no interest in the AC partnership.
    (m) Distribution of benefits. (1)(i) Section 401(d)(4)(B) requires 
that a qualified plan which provides contributions or benefits for any 
owner-employee must not provide for the payment of benefits to such 
owner-employee at any time before he has attained age 59\1/2\. An 
exception to the foregoing rule permits a qualified plan to provide for 
the distribution of benefits to an owner-employee prior to the time he 
attains age 59\1/2\ if he is disabled. For taxable years beginning after 
December 31, 1966, see section 72(m)(7) and paragraph (f) of Sec. 1.72-
17 for the meaning of disabled. For taxable years beginning before 
January 1, 1967, see section 213(g)(3) for the meaning of disabled. In 
general, both sections 72(m)(7) and 213(g)(3) provide that an individual 
is considered disabled if he is unable to engage in any substantial 
gainful activity because of a medically determinable physical or mental 
impairment which can be expected to result in death or to be of long-
continued and indefinite duration. In addition, section 401(d)(4)(B) 
does not preclude the distribution of benefits to the estate or other 
beneficiary of a deceased owner-employee prior to the time the owner-
employee would have attained age 59\1/2\ if he had lived.
    (ii) A qualified plan must provide that if, despite the restrictions 
in the plan to the contrary, an amount is prematurely distributed, or 
made available, to a participant in such plan who is, or has been, an 
owner-employee, then no contribution shall be made under the plan by, or 
for, such individual during any of the 5 taxable years of the plan 
beginning after the distribution is made.
    (2)(i) The provisions of subparagraph (1) of this paragraph preclude 
an owner-employee who is a participant in a qualified pension or profit-
sharing plan of his employer from withdrawing any part of the funds 
accumulated on his behalf except as provided in such subparagraph (1). 
However, the distribution of an owner-employee's interest, or any 
portion of such interest, after he attains age 59\1/2\ is determined by 
the provisions of the plan. Thus, for example, if a qualified pension 
plan provides that the normal retirement age under the plan is age 65, 
an owner-employee would not be entitled to a distribution of an amount 
under the plan merely because he attained age 59\1/2\.
    (ii) The provisions of subparagraph (1) of this paragraph do not 
preclude the establishment of a profit-sharing plan which provides for 
the distribution of all, or part, of participants' accounts after a 
fixed number of years. However, such a plan must not permit a 
distribution of any amount to any owner-employee prior to the time the 
owner-employee has attained age 59\1/2\ or becomes disabled within the 
meaning of section 72(m)(7) or section 213(g)(3), whichever is 
applicable. On the other hand, if a distribution would have been made 
under the plan to an owner-employee but for the fact that he had not 
attained age 59\1/2\, then the amount of such distribution (including 
any increment earned on such amount) must be distributed to such owner-
employee at such time as he attains age 59\1/2\.
    (3) A qualified pension, annuity, or profit-sharing plan which 
covers an owner-employee must provide that the distribution of an owner-
employee's entire interest under the plan must begin prior to the end of 
the taxable year in which he attains the age of 70\1/2\, and such 
distribution must satisfy the requirements of section 401(a)(9) and 
paragraph (e) of Sec. 1.401-11. Furthermore, section 401(d)(7) provides 
that, if an owner-employee dies prior to the time his entire interest 
has been distributed to him, such owner-employee's entire remaining 
interest under the plan must, in general, either be distributed to his 
beneficiary, or beneficiaries, within 5 years, or be used within that 
period to purchase an immediate annuity for his beneficiary, or 
beneficiaries. However, a distribution within 5 years of the death of 
the owner-employee is not required if the distribution of his interest 
has commenced and such distribution is for a term certain over a period 
not extending beyond the joint life and survivor

[[Page 45]]

expectancy of the owner-employee and his spouse. Thus, for example, an 
annuity for the joint life and survivor expectancy of an owner-employee 
and his spouse which guarantees payments for 10 years is a distribution 
which is payable over a period which does not exceed the joint life and 
survivor expectancy of the owner-employee and his spouse if such 
expectancy is at least 10 years at the time the distribution first 
commences.

[T.D. 6675, 28 FR 10126, Sept. 17, 1963, as amended by T.D. 6982, 33 FR 
16500, Nov. 13, 1968; T.D. 6985, 33 FR 19815, Dec. 27, 1968; T.D. 7428, 
41 FR 34619, Aug. 16, 1976; T.D. 7611, 44 FR 23520, Apr. 20, 1979; T.D. 
8635, 60 FR 65549, Dec. 20, 1995]



Sec. 1.401-13  Excess contributions on behalf of owner-employees.

    (a) Introduction. (1) The provisions of this section prescribe the 
rules relating to the treatment of excess contributions made under a 
qualified pension, annuity, or profit-sharing plan on behalf of a self-
employed individual who is an owner-employee (as defined in paragraph 
(d) of Sec. 1.401-10). Paragraph (b) of this section defines the term 
``excess contribution''. Paragraph (c) of this section describes an 
exception to the definition of an excess contribution in the case of 
contributions which are applied to pay premiums on certain annuity, 
endowment, or life insurance contracts. Paragraph (d) of this section 
describes the effect of making an excess contribution which is not 
determined to have been willfully made, and paragraph (e) of this 
section describes the effect of making an excess contribution which is 
determined to have been willfully made.
    (2) Under section 401(c)(1), certain self-employed individuals are 
treated as employees for purposes of section 401. In addition, under 
section 401(c)(4), a proprietor is treated as his own employer, and the 
partnership is treated as the employer of the partners. Under section 
404, certain contributions on behalf of a self-employed individual are 
treated as deductible and taken into consideration in determining the 
amount allowed as a deduction under section 404(a). Such contributions 
are treated under section 401 and the regulations thereunder as employer 
contributions on behalf of the self-employed individual. However, in 
some cases, additional contributions may be made on behalf of a self-
employed individual. Such contributions are not taken into consideration 
in determining the amount deductible under section 404 and are not taken 
into consideration in computing the amount allowed as a deduction under 
section 404(a). For purposes of section 401 and the regulations 
thereunder, such contributions are treated as employee contributions by 
the self-employed individual. If a self-employed individual is an owner-
employee within the meaning of section 401(c)(3) and paragraph (d) of 
Sec. 1.401-10, then this section prescribes the rules applicable if 
contributions are made in excess of those permitted to be made under 
section 401.
    (b) Excess contributions defined. (1)(i) Except as provided in 
paragraph (c) relating to contributions which are applied to pay 
premiums on certain annuity, endowment, or life insurance contracts, an 
excess contribution is any amount described in subparagraphs (2) through 
(4) of this paragraph.
    (ii) For purposes of determining if the amount of any contribution 
made under the plan on behalf of an owner-employee is an excess 
contribution, the amount of any contribution made under the plan which 
is allocable to the purchase of life, accident, health, or other 
insurance is not taken into account. The amount of any contribution 
which is allocable to the cost of insurance protection is determined in 
accordance with the provisions of paragraph (f) of Sec. 1.404 (e)-1 and 
paragraph (b) of Sec. 1.72-16.
    (2)(i) In the case of a taxable year of the plan for which employer 
contributions are made on behalf of only owner-employees, an excess 
contribution is the amount of any contribution for such taxable year on 
behalf of such owner-employee which is not deductible under section 404 
(determined without regard to section 404(a)(10)). This rule applies 
irrespective of whether the plan provides for contributions on behalf of 
common-law employees, or self-employed individuals who are not owner-
employees, when such employees or individuals become eligible for

[[Page 46]]

coverage under the plan, and irrespective of whether contributions are 
in fact made for such employees or such individuals for other taxable 
years of the plan.
    (ii) In the case of a taxable year of the plan for which employer 
contributions are made on behalf of both owner-employees and either 
common-law employees or self-employed individuals who are not owner-
employees, an excess contribution is the amount of any employer 
contribution on behalf of any owner-employee for such taxable year which 
exceeds the amount deductible under section 404 (determined without 
regard to section 404(a)(10)) unless such amount may be treated as an 
employee contribution under the plan in accordance with the rules of 
paragraph (d)(3) of Sec. 1.401-11 and is a permissible employee 
contribution under subparagraph (3) of this paragraph.
    (3)(i) In the case of a taxable year of the plan for which employer 
contributions are made on behalf of both an owner-employee and either 
common-law employees or self-employed individuals who are not owner-
employees, employee contributions on behalf of an owner-employee may be 
made for such taxable year of the plan. How-ever, the amount of such 
contributions, if any, which is described in subdivisions (ii), (iii), 
or (iv) of this subparagraph is an excess contribution.
    (ii) An excess contribution is the amount of any employee 
contribution made on behalf of any owner-employee during a taxable year 
of the plan at a rate in excess of the rate of contributions which may 
be made as employee contributions by common-law employees, or by self-
employed individuals who are not owner-employees, during such taxable 
year of the plan.
    (iii) An excess contribution is the amount of any employee 
contribution made on behalf of an owner-employee which exceeds the 
lesser of $2,500 or 10 percent of the earned income (as defined in 
paragraph (c) of Sec. 1.401-10) of such owner-employee for his taxable 
year in which such contributions are made.
    (iv) In the case of a taxable year of an owner-employee in which 
contributions are made on behalf of such owner-employee under more than 
one plan, an excess contribution is the amount of any employee 
contribution made on behalf of such owner-employee under all such plans 
during such taxable year which exceeds $2,500. If such an excess 
contribution is made, the amount of the excess contribution made on 
behalf of the owner-employee with respect to any one of such plans is 
the amount by which the employee contribution on his behalf under such 
plan for the year exceeds an amount which bears the same ratio to $2,500 
as the earned income of the owner-employee derived from the trade or 
business with respect to which the plan is established bears to his 
earned income derived from the trades or businesses with respect to 
which all such plans are established.
    (4) An excess contribution is the amount of any contribution on 
behalf of an owner-employee for any taxable year of the plan with 
respect to which the plan is treated, under section 401(e)(2), as not 
meeting the requirements of section 401(d) with respect to such owner-
employee.
    (c) Contributions for premiums on certain annuity, endowment, or 
life insurance contracts. (1) The term ``excess contribution'' does not 
include the amount of any employer contributions on behalf of an owner-
employee which, under the provisions of the plan, is expressly required 
to be applied (either directly or through a trustee) to pay the premiums 
or other consideration for one or more annuity, endowment, or life 
insurance contracts, if--
    (i) The employer contributions so applied meet the requirements of 
subparagraphs (2) through (4) of this paragraph, and
    (ii) The total employer contributions required to be applied 
annually to pay premiums on behalf of any owner-employee for contracts 
described in this paragraph do not exceed $2,500. For purposes of 
computing such $2,500 limit, the total employer contributions includes 
amounts which are allocable to the purchase of life, accident, health, 
or other insurance.
    (2)(i) The employer contributions must be paid under a plan which 
satisfies all the requirements for qualification. Accordingly, for 
example, contributions can be paid under the plan for life insurance 
protection only to

[[Page 47]]

the extent otherwise permitted under sections 401 through 404 and the 
regulations thereunder. However, certain of the requirements for 
qualification are modified with respect to a plan described in this 
paragraph (see section 401(a)(10)(A)(ii) and (d)(5)).
    (ii) A plan described in this paragraph is not disqualified merely 
because a contribution is made on behalf of an owner-employee by his 
employer during a taxable year of the employer for which the owner-
employee has no earned income. On the other hand, a plan will fail to 
qualify if a contribution is made on behalf of an owner-employee which 
results in the discrimination prohibited by section 401(a)(4) as 
modified by section 401(a)(10)(A)(ii) (see paragraph (f)(3) of 
Sec. 1.401-12).
    (3) The employer contributions must be applied to pay premiums or 
other consideration for a contract issued on the life of the owner-
employee. For purposes of this subparagraph, a contract is not issued on 
the life of an owner-employee unless all the proceeds which are, or may 
become, payable under the contract are payable directly, or through a 
trustee of a trust described in section 401(a) and exempt from tax under 
section 501(a), to the owner-employee or to the beneficiary named in the 
contract or under the plan. Accordingly, for example, a nontransferable 
face-amount certificate (as defined in section 401(g) and the 
regulations thereunder) is considered an annuity on the life of the 
owner-employee if the proceeds of such contract are payable only to the 
owner-employee or his beneficiary.
    (4)(i) For any taxable year of the employer, the amount of 
contributions by the employer on behalf of the owner-employee which is 
applied to pay premiums under the contracts described in this paragraph 
must not exceed the average of the amounts deductible under section 404 
(determined without regard to section 404(a)(10)) by such employer on 
behalf of such owner-employee for the most recent three taxable years of 
the employer (ending prior to the date the latest contract was entered 
into or modified to provide additional benefits), in which the owner-
employee derived earned income from the trade or business with respect 
to which the plan is established. However, if such owner-employee has 
not derived earned income for at least three taxable years preceding 
such date, then, in determining the ``average of the amounts 
deductible'', only so many of such taxable years as such owner-employee 
was engaged in such trade or business and derived earned income 
therefrom are taken into account.
    (ii) For the purpose of making the computation described in 
subdivision (i) of this subparagraph, the taxable years taken into 
account include those years in which the individual derived earned 
income from the trade or business but was not an owner-employee with 
respect to such trade or business. Furthermore, taxable years of the 
employer preceding the taxable year in which a qualified plan is 
established are taken into account. If such taxable years began prior to 
January 1, 1963, the amount deductible is determined as if section 404 
included section 404(a) (8), (9), (10), and (e).
    (5) The amount of any employer contribution which is not deductible 
but which is not treated as an excess contribution because of the 
provisions of this paragraph shall be taken into account as an employee 
contribution made on behalf of the owner-employee during the owner-
employee's taxable year with, or within which, the taxable year of the 
person treated as his employer under section 401(c)(4) ends. However, 
such contribution is only treated as an employee contribution made on 
behalf of the owner-employee for the purpose of determining whether any 
other employee contribution made on behalf of the owner-employee during 
such period is an excess contribution described in paragraph (b)(3) of 
this section.
    (d) Effect of an excess contribution which is not willfully made. 
(1) If an excess contribution (as defined in paragraph (b) of this 
section) is made on behalf of an owner-employee, and if such 
contribution is not willfully made, then the provisions of this 
paragraph describe the effect of such an excess contribution. However, 
if the excess contribution made on behalf of an owner-employee is 
determined to have

[[Page 48]]

been willfully made, then the provisions of paragraph (e) of this 
section are applicable to such contribution.
    (2)(i) This paragraph does not apply to an excess contribution if 
the net amount of such excess contribution (as defined in subparagraph 
(4) of this paragraph) and the net income attributable to such amount 
are repaid to the owner-employee on whose behalf the excess contribution 
was made at any time before the end of six months beginning on the day 
on which the district director sends notice (by certified or registered 
mail) of the amount of the excess contribution to the trust, insurance 
company, or other person to whom such excess contribution was paid. The 
net income attributable to the net amount of the excess contribution is 
the aggregate of the amounts of net income attributable to the net 
amount of the excess contribution for each year of the plan beginning 
with the taxable year of the plan within which the excess contribution 
is made and ending with the close of the taxable year of the plan 
immediately preceding the taxable year of the plan in which the net 
amount of the excess contribution is repaid. The amount of net income 
attributable to the net amount of the excess contribution for each year 
is the amount of net income earned under the plan during the year which 
is allocated in a reasonable manner to the net amount of the excess 
contribution. For example, the amount of net income earned under the 
plan for the year which is attributable to the net amount of an excess 
contribution can be computed as the amount which bears the same ratio to 
the amount of the ``net income attributable to the interest of the 
owner-employee under the plan'' for such taxable year (determined in 
accordance with the provisions of subparagraph (5)(ii) of this 
paragraph) as the net amount of the excess contribution bears to the 
aggregate amount standing to the account of the owner-employee at the 
end of that year (including the net amount of any excess contribution).
    (ii) The notice described in subdivision (i) of this subparagraph 
shall not be mailed prior to the time that the amount of the tax under 
chapter 1 of the Code of the owner-employee to whom the excess 
contribution is to be repaid has been finally determined for his taxable 
year in which such excess contribution was made. For purposes of this 
subdivision, a final determination of the amount of tax liability of the 
owner-employee includes--
    (A)1 A decision by the Tax Court of the United States, or a 
judgment, decree, or other order by any court of competent jurisdiction, 
which has become final;
    (B) A closing agreement authorized by section 7121; or
    (C) The expiration of the period of limitation on suits by the 
taxpayer for refund, unless suit is instituted prior to the expiration 
of such period.
    (iii) For purposes of this subparagraph, an amount is treated as 
repaid to an owner-employee if an adequate adjustment is made to the 
account of the owner-employee. An adequate adjustment is made to the 
account of an owner-employee, for example, if the amount of the excess 
contribution (without any reduction for any loading or other 
administrative charge) and the net income attributable to such amount is 
taken into account as a contribution under the plan for the current 
year. In such a case, the gross income of the owner-employee for his 
taxable year in which such adjustment is made includes the amount of the 
net income attributable to the excess contribution.
    (iv) If the net amount of the excess contribution and the net income 
attributable thereto is repaid, within the period described in 
subdivision (i) of this subparagraph, to the owner-employee on whose 
behalf such contribution was made, then the net income attributable to 
the excess contribution is, pursuant to section 61(a), includible in the 
gross income of the owner-employee for his taxable year in which such 
amount is distributed, or made available, to him. However, such amount 
is not a distribution to which section 402 or 403 and section 72 apply 
(see subparagraph (6) of this paragraph).
    (3)(i) If the net amount of any excess contribution (as defined in 
subparagraph (4) of this paragraph) and the net income attributable to 
that excess contribution are not repaid to the owner-

[[Page 49]]

employee on whose behalf the excess contribution was made before the end 
of the six-month period described in subparagraph (2)(i) of this 
paragraph, the plan under which the excess contribution has been made is 
considered, for purposes of section 404, as not satisfying the 
requirements for qualification with respect to such owner-employee for 
all taxable years of the plan described in subdivision (ii) of this 
subparagraph. However, such disqualification only applies to the 
interest of the owner-employee on whose behalf an excess contribution 
has been made and does not disqualify the plan with respect to the other 
participants thereunder.
    (ii) The taxable years referred to in subdivision (i) of this 
subparagraph include the taxable year of the plan within which the 
excess contribution is made and each succeeding taxable year of the plan 
until the beginning of the taxable year of the plan in which the trust, 
insurance company, or other person to whom such excess contribution was 
paid repays to such owner-employee--
    (A) The net amount of the excess contribution, and
    (B) The amount of income attributable to his interest under the plan 
which is includible in his gross income for any taxable year by reason 
of the provisions of subparagraph (5) of this paragraph.
    (4) For purposes of this paragraph, the net amount of an excess 
contribution is the amount of such excess contribution, as defined in 
paragraph (b) of this section, reduced by the amount of any loading 
charge or other administrative charge ratably allocable to such excess 
contribution.
    (5)(i) If a plan is considered as not meeting the requirements for 
qualification with respect to an owner-employee by reason of the 
provisions of subparagraph (3) of this paragraph for any taxable year of 
the plan, such owner-employee's gross income for any of his taxable 
years with or within which such taxable year of the plan ends shall, for 
purposes of chapter 1 of the Code, include the portion of the net income 
earned under the plan for such taxable year of the plan which is 
attributable to the interest of the owner-employee under the plan.
    (ii) For purposes of this subparagraph, the term ``net income'' 
means the net income earned under the plan determined in accordance with 
generally accepted accounting principles consistently applied, and the 
``net income attributable to the interest of the owner-employee under 
the plan'' is the amount which bears the same ratio to the aggregate 
amount of net income earned under the plan for the taxable year of the 
plan as the amount standing to the account of the owner-employee at the 
end of that year (including the amount of any excess contribution which 
is credited to his account) bears to the aggregate amount of all funds 
under the plan for all employees at the end of that year (including the 
aggregate amount of excess contributions credited to the accounts of all 
owner-employees for that year).
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. A is an owner-employee covered under the X Employees' 
Pension Trust who files his return on the basis of a calendar year. An 
excess contribution was made on behalf of A during the plan year 
beginning on January 1, 1966. The net amount of the excess contribution 
and the net income attributable thereto was not repaid to A before the 
end of the six-month period described in subparagraph (2)(i) of this 
paragraph. Accordingly, the net income earned under the plan during 1966 
which is attributable to A's interest is to be included in his gross 
income for 1966. Assume that the trust which forms a part of the pension 
plan of the X Company also files its returns on a calendar year basis, 
and that during 1966 the trust had a gross income of $4,000 (including a 
long-term capital gain of $2,500) and expenses of $500. Assume, further, 
that the amount standing to A's account on December 31, 1966 (including 
the amount of the excess contribution), was $20,000, and that on that 
date the amount funded under the plan for all employees (including A) is 
$140,000. Then the net income of the trust for 1966 is $3,500 ($4,000-
$500). The net income attributable to the interest of A under the plan 
is $500 (the amount which bears the same ratio to $3,500 as $20,000 
bears to $140,000). Accordingly, $500 is included in A's gross income in 
accordance with the provisions of section 401(e)(2)(B) as the ``net 
income attributable to the interest of the owner-employee under the 
plan''.


[[Page 50]]


    (6) The provisions of section 402 or 403 and section 72 do not apply 
to any amount distributed, or made available, to an owner-employee which 
is described in this paragraph. Accordingly, for example, the provisions 
of section 72(m)(5)(A)(i), relating to amounts subject to the penalty 
tax imposed by section 72(m), do not apply to the amount of the net 
income attributable to the interest of an owner-employee (as defined in 
subparagraph (5)(ii) of this paragraph) which is includible in his gross 
income. Furthermore, in such a case, the provisions of section 
401(d)(5)(C) do not apply to such amount.
    (7) Certain adjustments will be required with respect to the 
interest of an owner-employee after any amount previously allocated to 
his account has been returned to him pursuant to the provisions of this 
paragraph. For example, if the determination of whether life insurance 
benefits provided under the plan are incidental is made, in part, with 
regard to the contributions allocated to the accounts of the 
participants covered under the plan, an adjustment may have to be made 
with respect to the life insurance purchased under the plan for any 
owner-employee after any amount previously allocated to his account has 
been repaid to him. Furthermore, if, for example, an owner-employee has 
received annuity payments which were taxable under the exclusion ratio 
rule of section 72, and if such exclusion ratio took into account any 
amount credited to the account of the owner-employee which is 
subsequently repaid to him, then such exclusion ratio must be recomputed 
after the adjustment in such owner-employee's account has taken place.
    (8) Notwithstanding any other provision of law, in any case in which 
the plan is treated as not satisfying the requirements for qualification 
with respect to any owner-employee by reason of the provisions of 
section 401(e), the period for assessing, with respect to such owner-
employee, any deficiency arising by reason of--
    (i) The disallowance of any deduction under section 404 by reason of 
the provisions of subparagraph (3) of this paragraph, or
    (ii) The inclusion of amounts in the gross income of the owner-
employee by reason of the provisions of subparagraph (5) of this 
paragraph,

shall not expire prior to 18 months after the day the district director 
mails the notice with respect to the excess contribution (described in 
subparagraph (2)(i) of this paragraph) which gives rise to such 
disallowance or inclusion. Thus, for example, notwithstanding the 
provisions of section 6212(c) (relating to the restriction on the 
determination of additional deficiencies), if, after a final 
determination by the Tax Court of the income tax liability of an owner-
employee for a taxable year in which an excess contribution was made, 
the amount of such excess contribution and the net income attributable 
thereto is not paid to the owner-employee before the end of the six-
month period described in subparagraph (2)(i) of this paragraph, an 
additional deficiency assessment may be made for such taxable year with 
respect to such excess contribution.
    (e) Effect of an excess contribution which is determined to have 
been willfully made. If an excess contribution (as defined in paragraph 
(b) of this section) on behalf of an owner-employee is determined to 
have been willful ly made, then--
    (1) Only the provisions of this paragraph apply to such 
contribution;
    (2) There shall be distributed to the owner-employee on whose behalf 
such contribution was willfully made his entire interest in all plans in 
which he is a participant as an owner-employee;
    (3) The amount distributed under each such plan is an amount to 
which section 72 does apply (see section 72(m)(5)(A)(iii)); and
    (4) For purposes of section 404, no plan in which such individual is 
covered as an owner-employee shall be considered as meeting the 
requirements for qualification with respect to such owner-employee for 
any taxable year of the plan beginning with or within the calendar year 
in which it is determined that the excess contribution has been 
willfully made and with or within the five calendar years following such 
year.
    (f) Years to which this section applies. This section applies to 
contributions

[[Page 51]]

made in taxable years of employers beginning before January 1, 1976. 
Thus, for example, in the case of willful contributions made in taxable 
years of employers beginning before January 1, 1976, paragraphs (e) (1), 
(2), and (3) of this section apply to such taxable years beginning on or 
after such date. However, in such a case, because the application of 
paragraph (e)(4) of this section affects contributions made in taxable 
years of employers beginning on or after January 1, 1976, paragraph 
(e)(4) of this section does not apply to such taxable years; see 
paragraph (c) of Sec. 1.401(e)-4 (relating to transitional rules for 
excess contributions).

[T.D. 6676, 28 FR 10139, Sept. 17, 1963; as amended by T.D. 7636, 44 FR 
47053, Aug. 10, 1979]



Sec. 1.401-14  Inclusion of medical benefits for retired employees in qualified pension or annuity plans.

    (a) Introduction. Under section 401(h) a qualified pension or 
annuity plan may make provision for the payment of sickness, accident, 
hospitalization, and medical expenses for retired employees, their 
spouses, and their dependents. The term ``medical benefits described in 
section 401(h)'' is used in this section to describe such payments.
    (b) In general--(1) Coverage. Under section 401(h), a qualified 
pension or annuity plan may provide for the payment of medical benefits 
described in section 401(h) only for retired employees, their spouses, 
or their dependents. To be ``retired'' for purposes of eligibility to 
receive medical benefits described in section 401(h), an employee must 
be eligible to receive retirement benefits provided under the pension 
plan, or else be retired by an employer providing such medical benefits 
by reason of permanent disability. For purposes of the preceding 
sentence, an employee is not considered to be eligible to receive 
retirement benefits provided under the plan if he is still employed by 
the employer and a separation from employment is a condition to 
receiving the retirement benefits.
    (2) Discrimination. A plan which provides medical benefits described 
in section 401(h) must not discriminate in favor of officers, 
shareholders, supervisory employees, or highly compensated employees 
with respect to coverage and with respect to the contributions or 
benefits under the plan. The determination of whether such a plan so 
discriminates is made with reference to the retirement portion of the 
plan as well as the portion providing the medical benefits described in 
section 401(h). Thus, for example, a plan will not be qualified under 
section 401 if it discriminates in favor of employees who are officers 
or shareholders with respect to either portion of the plan.
    (3) Funding medical benefits. Contributions to provide the medical 
benefits described in section 401(h) may be made either on a 
contributory or noncontributory basis, without regard to whether the 
contributions to fund the retirement benefits are made on a similar 
basis. Thus, for example, the contributions to fund the medical benefits 
described in section 401(h) may be provided for entirely out of employer 
contributions even though the retirement benefits under the plan are 
determined on the basis of both employer and employee contributions.
    (4) Definitions. For purposes of section 401(h) and this section:
    (i) The term dependent shall have the same meaning as that assigned 
to it by section 152, and
    (ii) The term medical expense means expenses for medical care as 
defined in section 213(e)(1).
    (c) Requirements. The requirements which must be met for a qualified 
pension or annuity plan to provide medical benefits described in section 
401(h) are set forth in subparagraphs (1) through (5) of this paragraph.
    (1) Benefits. (i) The plan must specify the medical benefits 
described in section 401(h) which will be available and must contain 
provisions for determining the amount which will be paid. Such benefits, 
when added to any life insurance protection provided for under the plan, 
must be subordinate to the retirement benefits provided by such plan. 
For purposes of this section, life insurance protection includes any 
benefit paid under the plan on behalf of an employee-participant as a 
result of the employee-participant's death to the extent such payment 
exceeds the amount of the reserve to provide the

[[Page 52]]

retirement benefits for the employee-participant existing at his death. 
The medical benefits described in section 401(h) are considered 
subordinate to the retirement benefits if at all times the aggregate of 
contributions (made after the date on which the plan first includes such 
medical benefits) to provide such medical benefits and any life 
insurance protection does not exceed 25 percent of the aggregate 
contributions (made after such date) other than contributions to fund 
past service credits.
    (ii) The meaning of the term subordinate may be illustrated by the 
following example:

    Example. The X Corporation amends its qualified pension plan to 
provide medical benefits described in section 401(h) effective for the 
taxable year 1964. The total contributions under the plan (excluding 
those for past service credits) for the taxable year 1964 are $125,000, 
allocated as follows: $100,000 for retirement benefits, $10,000 for life 
insurance protection, and $15,000 for medical benefits described in 
section 401(h). The medical benefits described in section 401(h) are 
considered subordinate to the retirement benefits since the portion of 
the contributions allocated to the medical benefits described in section 
401(h) ($15,000) and to life insurance protection after such medical 
benefits were included in the plan ($10,000), or $25,000, does not 
exceed 25 percent of $125,000. For the taxable year 1965, the X 
Corporation contributes $140,000 (exclusive of contributions for past 
service credits) allocated as follows: $100,000 for retirement benefits, 
$10,000 for life insurance protection, and $30,000 for medical benefits 
described in section 401(h). The medical benefits described in section 
401(h) are considered subordinate to the retirement benefits since the 
aggregate contributions allocated to the medical benefits described in 
section 401(h) ($45,000) and to life insurance protection after such 
medical benefits were included in the plan ($20,000) or $65,000 does not 
exceed 25 percent of $265,000, the aggregate of the contributions made 
in 1964 and 1965.

    (2) Separate accounts. Where medical benefits described in section 
401(h) are provided for under a qualified pension or annuity plan, a 
separate account must be maintained with respect to contributions to 
fund such benefits. The separation required by this section is for 
recordkeeping purposes only. Consequently, the funds in the medical 
benefits account need not be separately invested. They may be invested 
with funds set aside for retirement purposes without identification of 
which investment properties are allocable to each account. However, 
where the investment properties are not allocated to each account, the 
earnings on such properties must be allocated to each account in a 
reasonable manner.
    (3) Reasonable and ascertainable. Section 401(h) further requires 
that amounts contributed to fund medical benefits therein described must 
be reasonable and ascertainable. For the rules relating to the deduction 
of such contributions, see paragraph (f) of Sec. 1.404(a)-3. The 
employer must, at the time he makes a contribution, designate that 
portion of such contribution allocable to the funding of medical 
benefits.
    (4) Impossibility of diversion prior to satisfaction of all 
liabilities. Section 401(h) further requires that it must be impossible, 
at any time prior to the satisfaction of all liabilities under the plan 
to provide for the payment of medical benefits described in section 
401(h), for any part of the corpus or income of the medical benefits 
account to be (within the taxable year or thereafter) used for, or 
diverted to, any purpose other than the providing of such benefits. 
Consequently, a plan which, for example, under its terms, permits funds 
in the medical benefits account to be used for any retirement benefit 
provided under the plan does not satisfy the requirements of section 
401(h) and will not qualify under section 401(a). However, the payment 
of any necessary or appropriate expenses attributable to the 
administration of the medical benefits account does not affect the 
qualification of the plan.
    (5) Reversion upon satisfaction of all liabilities. The plan must 
provide that any amounts which are contributed to fund medical benefits 
described in section 401(h) and which remain in the medical benefits 
account upon the satisfaction of all liabilities arising out of the 
operation of the medical benefits portion of the plan are to be returned 
to the employer.
    (6) Forfeitures. The plan must expressly provide that in the event 
an individual's interest in the medical benefits account is forfeited 
prior to termination of the plan an amount equal to the amount of the 
forfeiture must be

[[Page 53]]

applied as soon as possible to reduce employer contributions to fund the 
medical benefits described in section 401(h).
    (d) Effective date. This section applies to taxable years of a 
qualified pension or annuity plan beginning after October 23, 1962.

[T.D. 6722, 29 FR 5072, Apr. 14, 1964]



Sec. 1.401(a)-1  Post-ERISA qualified plans and qualified trusts; in general.

    (a) Introduction--(1) In general. This section and the following 
regulation sections under section 401 reflect the provisions of section 
401 after amendment by the Employee Retirement Income Security Act of 
1974 (Pub. L. 93-406) (``ERISA'').
    (2) [Reserved]
    (b) Requirements for pension plans--(1) Definitely determinable 
benefits. (i) In order for a pension plan to be a qualified plan under 
section 401(a), the plan must be established and maintained by an 
employer primarily to provide systematically for the payment of 
definitely determinable benefits to its employees over a period of 
years, usually for life, after retirement.
    (ii) Section 1.401-1(b)(1)(i), a pre-ERISA regulation, provides 
rules applicable to this requirement, and that regulation is applicable 
except as otherwise provided.
    (iii) The use of the type of plan provision described in Sec. 1.415-
1(d)(1) which automatically freezes or reduces the rate of benefit 
accrual or the annual addition to insure that the limitations of section 
415 will not be exceeded, will not be considered to violate the 
requirements of this subparagraph provided that the operation of such 
provision precludes discretion by the employer.

[T.D. 7748, 46 FR 1695, Jan. 7, 1981]



Sec. 1.401(a)-2  Impossibility of diversion under qualified plan or trust.

    (a) General rule. Section 401(a)(2) requires that in order for a 
trust to be qualified, it must be impossible under the trust instrument 
(in the taxable year and at any time thereafter before the satisfaction 
of all liabilities to employees or their beneficiaries covered by the 
trust) for any part of the trust corpus or income to be used for, or 
diverted to, purposes other than for the exclusive benefit of those 
employees or their beneficiaries. Section 1.401-2, a pre-ERISA 
regulation, provides rules under section 401(a)(2) and that regulation 
is applicable except as otherwise provided.
    (b) Section 415 suspense account. Paragraph (a) of this section does 
not apply to amounts properly allocated to a suspense account pursuant 
to Sec. 1.415-6(b)(6). The plan, or the trust forming part of the plan, 
may provide for the reversion to the employer, upon termination of the 
plan, of amounts held in the suspense account.

[T.D. 7748, 46 FR 1696, Jan. 7, 1981]



Sec. 1.401(a)-4  Optional forms of benefit (before 1994).

    Q-1: How does section 401(a)(4) apply to optional forms of benefits?
    A-1: (a) In general--(1) Scope. The nondiscrimination requirements 
of section 401(a)(4) apply to the amount of contributions or benefits, 
optional forms of benefit, and other benefits, rights and features 
(e.g., actuarial assumptions, methods of benefit calculation, loans, 
social security supplements, and disability benefits) under a plan. This 
section addresses the application of section 401(a)(4) only to optional 
forms of benefit under a plan. Generally, the determination of whether 
an optional form is nondiscriminatory under section 401(a)(4) is made by 
reference to the availability of such optional form, and not by 
reference to the utilization or actual receipt of such optional form. 
See Q&A-2 of this section. Even though an optional form of benefit under 
a plan may be nondiscriminatory under section 401(a)(4) and this 
Sec. 1.401(a)-4 because the availability of such optional form does not 
impermissibly favor employees in the highly compensated group, such plan 
may fail to satisfy section 401(a)(4) with respect to the amount of 
contributions or benefits or with respect to other benefits, rights and 
features if, for example, the method of calculation or the amount or 
value of benefits payable under such optional form impermissibly favors 
the highly compensated group. See Sec. 1.411(d)-4, Q&A-1

[[Page 54]]

for the definition of ``optional form of benefit.''
    (2) Nondiscrimination requirements. Each optional form of benefit 
provided under a plan is subject to the nondiscrimination requirement of 
section 401(a)(4) and thus the availability of each optional form of 
benefit must not discriminate in favor of the employees described in 
section 401(a)(4) in whose favor discrimination is prohibited (the 
``highly compensated group''). See paragraph (b) of this Q&A-1 for a 
description of the employees included in such group. This is true 
without regard to whether a particular optional form of benefit is the 
actuarial equivalent of any other optional form of benefit under the 
plan. Thus, for example, a plan may not condition, or otherwise limit, 
the availability of a single sum distribution of an employee's benefit 
in a manner that impermissibly favors the highly compensated group.
    (b) Highly compensated group. For plan years commencing prior to the 
applicable effective date for the amendment made to section 401(a)(4) by 
section 1114 of the Tax Reform Act of 1986 (TRA '86), the highly 
compensated group consists of those employees who are officers, 
shareholders, or highly compensated. For plan years beginning on or 
after the applicable effective date of the amendments to section 
401(a)(4) made by TRA '86, the highly compensated group consists of 
those employees who are highly compensated within the meaning of section 
414(q). The amendment to section 401(a)(4) made by section 1114 of TRA 
'86 is generally effective for plan years commencing after December 31, 
1988. See section 1114(a) of TRA '86.
    Q-2: How is it determined whether an optional form of benefit 
satisfies the nondiscrimination requirements of section 401(a)(4)?
    A-2: (a) Nondiscrimination requirement.--(1) In general. An optional 
form of benefit under a plan is nondiscriminatory under section 
401(a)(4) only if the requirements of paragraphs (a)(2) and (a)(3) of 
this Q&A-2 are satisfied with respect to such optional form. The 
determination of whether an optional form of benefit satisfies these 
requirements is made by reference to the availability of the optional 
form, and not by reference to the utilization or actual receipt of such 
optional form. Thus, an optional form of benefit that satisfies the 
requirements of paragraphs (a)(2) and (a)(3) of this Q&A-2 is 
nondiscriminatory under section 401(a)(2) even though the highly 
compensated group disproportionately utilizes such optional form. 
However, the composition of the group of employees who actually receive 
benefits in an optional form may be relevant in determining whether such 
optional form satisfies the requirement of paragraph (a)(3) of this Q&A-
2 with respect to effective availability.
    (2) Current availability--(i) Plan years prior to TRA '86 effective 
date. Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for 
plan years prior to the effective date of the amendments made to section 
401(b) by section 1112(a) of TRA '86, the requirement of this paragraph 
(a)(2) is satisfied only if the group of employees to whom the optional 
form is currently available satisfies either the seventy percent test of 
section 410(b)(1)(A) or the nondiscriminatory classification test of 
section 410(b)(1)(B).
    (ii) Plan years commencing on or after TRA '86 effective date. 
Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for plan 
years commencing on or after the effective date on which the amendments 
made to section 410(b) by section 1112(a) of TRA '86 first apply to a 
plan, the requirement of this paragraph (a)(2) is satisfied only if the 
group of employees to whom the optional form is currently available 
satisfies either the percentage test set forth in section 410(b)(1)(A), 
the ratio test set forth in section 410(b)(1)(B), or the 
nondiscriminatory classification test set forth in section 
410(b)(2)(A)(i). The employer need not satisfy the average benefit 
percentage test in section 410(b)(2)(A)(ii) in order for the optional 
form to be currently available to a nondiscriminatory group of 
employees.
    (iii) Special rule for certain governmental or church plans. Plans 
described in section 410(c) will be treated as satisfying the current 
availability test of this paragraph (a)(2) if the group of employees 
with respect to whom the optional form is currently available satisfies 
the requirements of section

[[Page 55]]

401(a)(3) as in effect on September 1, 1974.
    (iv) Effective data for TRA '86 amendments to section 410(b). The 
amendments to section 410(b) made by section 1112(a) of TRA '86 are 
generally effective for plan years commencing after December 31, 1988. 
See section 1112(e)(1) of TRA '86.
    (v) Elimination of optional forms--(A) In general. Notwithstanding 
paragraphs (a)(2)(i) and (a)(2)(ii) of this Q&A-2, in the case of an 
optional form of benefit that has been eliminated under a plan with 
respect to specified employees for benefits accrued after the later of 
the eliminating amendment's adoption date or effective date, the 
determination of whether such optional form satisfies this paragraph 
(a)(2) with respect to such employees is to be made immediately prior to 
the elimination. Accordingly, if, as of the later of the adoption date 
or effective date of an amendment eliminating an optional form with 
respect to future benefit accruals, the current availability of such 
optional form immediately prior to such amendment satisfies this 
paragraph (a)(2), then the optional form will be treated as satisfying 
this paragraph (a)(2) for all subsequent years.

    (B) Example. A profit-sharing plan that provides for a single sum 
distribution available to all employees on termination of employment is 
amended January 1, 1990, to eliminate such single sum optional form of 
benefit with respect to benefits accrued after January 1, 1991. As of 
January 1, 1991, the single sum optional form of benefit is available to 
a group of employees that satisfies the percentage test of section 
410(b)(1)(A). As of January 1, 1995, all nonhighly compensated employees 
who were entitled to the single sum optional form of benefit have 
terminated from employment with the employer and taken a distribution of 
their benefits. The only remaining employees who have a right to take a 
portion of their benefits in the form of a single sum distribution on 
termination of employment are highly compensated employees. Because the 
availability of the single sum optional form of benefit satisfied the 
current availability test as of January 1, 1991, the availability of 
such optional form of benefit is deemed to continue to satisfy the 
current availability test of this paragraph (a)(2).

    (3) Effective availability--(i) In general. The requirement of this 
paragraph (a)(3) is satisfied only if, based on the facts and 
circumstances, the group of employees to whom the optional form is 
effectively available does not substantially favor the highly 
compensated group. This is the case even if the optional form is, or has 
been, currently available to a group of employees that satisfies the 
applicable requirements in paragraph (a)(2) (i) or (ii) of this Q&A-2.
    (ii) Examples. The provisions of paragraph (a)(3)(i) of this Q&A-2 
can be illustrated by the following examples:

    Example 1. Employer X maintains a defined benefit plan that covers 
both of the 2 highly compensated employees of the employer and 8 of the 
twelve nonhighly compensated employees of the employer. Plan X provides 
for a normal retirement benefit payable as an annuity and based on a 
normal retirement age of 65, and an early retirement benefit payable 
upon termination in the form of an annuity to employees who terminate 
from service with the employer on or after age 55 with 30 or more years 
of service. Each of the 2 employees of employer X who are in the highly 
compensated group currently meet the age and service requirement, or 
will have 30 years of service by the time they reach age 55. All but 2 
of the 8 nonhighly compensated employees of employer X who are covered 
by the plan were hired on or after age 35 and thus, cannot qualify for 
the early retirement benefit provision. Even though the group of 
employees to whom the early retirement benefit is currently available 
does not impermissibly favor the highly compensated group by reason of 
disregarding age and service, these facts and circumstances indicate 
that the effective availability of the early retirement benefit in plan 
X substantially favors the highly compensated group.
    Example 2. Assume the same facts as in Example 1 except that the 
early retirement benefit is added by a plan amendment first adopted, 
announced and effective December 1, 1991, and is available only to 
employees who terminate from employment with the employer prior to 
December 15, 1991. Further assume that all employees were hired prior to 
attaining age 25, and that the group of employees who have, or will have 
attained age 55 with 30 years of service, by December 15, 1991, 
satisfies the ratio test of section 410(b)(1)(B). Finally, assume that 
the only employees who terminate from employment with the employer 
during the two week period in which the early retirement benefit is 
available are employees in the highly compensated group. These facts and 
circumstances indicate that the effective availability of the early 
retirement benefit substantially favors the highly compensated

[[Page 56]]

group. This is the case even though the limitation of the early 
retirement benefit to a specified period satisfies section 411(d)(6).
    Example 3. Employer Y amends plan Y on June 30, 1990, to provide for 
a single sum distribution for employees who terminate from employment 
with the employer after June 30, 1990, and prior to January 1, 1991. The 
availability of this single sum distribution is conditioned on the 
employee having a particular disability at the time of termination of 
employment. The only employee of the employer who meets this disability 
requirement at the time of the amendment and thereafter through December 
31, 1990, is a highly compensated employee. Generally, a disability 
condition with respect to the availability of a single sum distribution 
may be disregarded in determining whether the current availability of 
such optional form of benefit is discriminatory. However, these facts 
and circumstances indicate that the effective availability of the 
optional form of benefit substantially favors the highly compensated 
group.
    Example 4. Employer Z maintains a money purchase pension plan that 
covers all employees of the employer. The plan provides for distribution 
in the form of a joint and survivor annuity, a life annuity, or equal 
installments over 10 years. During the 1992 calendar year the employer 
winds up his business. In December of 1992, only two employees remain in 
the employment of the employer, both of whom are highly compensated. 
Employer Z then amends the plan to provide for a single sum distribution 
to employees who terminate from employment on or after the date of the 
amendment. Both highly compensated employees terminate from employment 
on December 31, 1992, taking a single sum distribution of their 
benefits. These facts and circumstances indicate that the effective 
availability of the single sum optional form of benefit substantially 
favors the highly compensated group.

    (b) Application of tests--(1) Current availability--(i) In general. 
Except as otherwise provided in this paragraph (b), in determining 
whether an optional form of benefit that is subject to specified 
eligibility conditions is currently available to an employee for 
purposes of paragraph (a) of this Q&A-2, the determination of current 
availability generally is to be based on the current facts and 
circumstances with respect to the employee (e.g., the employee's current 
compensation or the employee's current net worth). Thus, for example, 
the fact that an employee may, in the future, satisfy an eligibility 
condition generally does not cause an optional form of benefit to be 
treated as currently available to such employee.
    (ii) Exceptions for age, service, employment termination and certain 
other conditions--(A) Age and service conditions. For purposes of 
applying paragraph (a)(2) of this Q&A-2, except as provided in paragraph 
(b)(1)(ii)(B) of this Q&A-2, an age condition, a service condition, or 
both are to be disregarded. For example, an employer that maintains a 
plan that provides for an early retirement benefit payable as an annuity 
for employees in division A, subject to a requirement that the employee 
has attained his or her 55th birthday and has at least twenty years of 
service with the employer, is to disregard the age and service 
conditions in determining the group of employees to whom the early 
retirement annuity benefit is currently available. Thus, the early 
retirement annuity benefit is treated as currently available to all 
employees of division A, without regard to their ages or years of 
service and without regard to whether they could potentially meet the 
age and service conditions prior to attaining the plan's normal 
retirement age.
    (B) Exception for certain age and service conditions. Age and 
service conditions that must be satisfied within a specified period of 
time may not be disregarded pursuant to paragraph (b)(1)(ii)(A) of this 
Q&A-2. However, in determining the current availability of an optional 
form of benefit subject to such an age condition, service condition, or 
both, an employer may project the age and service of employees to the 
last date on which the optional form of benefit subject to the age 
condition or service condition (or both) is available under the plan. An 
employer's ability to protect age and service to the last date on which 
the optional form of benefit is available under the plan is not cut off 
by a plan termination occurring prior to that date. Thus, for example, 
assume that an employer maintaining a plan that permits employees 
terminating from employment on or after age 55 between June 1, 1991 to 
May 31, 1992, to elect a single sum distribution, decides to terminate 
the plan on December 31, 1991. In determining the group of employees to 
whom the single

[[Page 57]]

sum optional form of benefit is currently available, this employer may 
project employees' ages through May 31, 1992.
    (C) Certain other conditions disregarded. Conditions on the 
availability of optional forms of benefit requiring termination of 
employment, death, satisfaction of a specified health condition (or 
failure to meet such condition), disability, hardship, marital status, 
default on a plan loan secured by a participant's account balance, or 
execution of a covenant not to compete may be disregarded in determining 
the group of employees to whom an optional form of benefit is currently 
available.
    (2) Employees taken into account. For purposes of applying paragraph 
(a) of this Q&A-2, the tests are to be applied on the basis of the 
employer's nonexcludable employees (whether or not they are participants 
in the plan) in the same manner as such tests would be applied in 
determining whether the plan providing the optional form of benefit 
satisfies the tests under section 410(b).
    (3) Definition of ``plan''. For purposes of applying paragraph (a) 
of this Q&A-2, the term ``plan'' has the meaning that such term has for 
purposes of determining whether the amount of contributions or benefits 
and whether other benefits, rights, and features are nondiscriminatory 
under section 401(a)(4).
    (4) Restructuring optional forms of benefit--(i) In general. For 
purposes of applying paragraph (a) of this Q&A-2, the availability of 
two or more optional forms of benefit under a plan may be tested by 
restructuring such benefits into two or more restructured optional forms 
of benefit and testing the availability of such restructured optional 
forms of benefit. If two or more optional forms of benefit under a plan 
contain both common and distinct components, such optional forms of 
benefit may be restructured as a single optional form of benefit 
comprising the common component, and one or more optional forms of 
benefit comprising each distinct component. Components of optional forms 
of benefit may be treated as common only if they are identical with 
respect to all characteristics taken into account under Q&A-1(b) of 
Sec. 1.411(d)-4. The availability of each restructured optional form of 
benefit must satisfy the applicable nondiscrimination requirements of 
paragraph (a) of this Q&A-2.

    (ii) Example. A profit-sharing plan covering all the employees of an 
employer provides a single sum distribution option upon termination from 
employment for all employees earning less than $50,000 and a single sum 
distribution option upon termination from employment after the 
attainment of age 55 for all employees earning $50,000 or more. These 
distribution options are identical in all other respects. For purposes 
of applying section 401(a)(4), such optional forms of benefit may be 
restructured into two different optional forms of benefit: (A) a single 
sum distribution option upon termination from employment after the 
attainment of age 55 for all employees (i.e., the common component), and 
(B) a single sum distribution option upon termination from employment 
before the attainment of age 55 for all employees earning less than 
$50,000. The availability of each of these restructured optional forms 
of benefit must satisfy section 401(a)(4).

    (c) Commissioner may provide additional tests. The Commissioner may 
provide such additional factors, tests, and safe harbors as are 
necessary or appropriate for purposes of determining whether the 
availability of an optional form of benefit is discriminatory under 
section 401(a)(4). In addition, the Commissioner may provide that 
additional eligibility conditions not related directly or indirectly to 
compensation or wealth may be disregarded under paragraph (b)(1)(ii)(C) 
of this Q&A-2 in determining the current availability of an optional 
form of benefit. The Commissioner may provide such additional guidance 
only through the publication of revenue rulings, notices or other 
documents of general applicability.
    Q-3: May a plan condition the availability of an optional form of 
benefit on employer discretion?
    A-3: No. Even if the availability of an optional form of benefit 
that is conditioned on employer discretion satisfies the 
nondiscrimination requirements of section 401(a)(4), the plan providing 
the optional form of benefit will fail to satisfy certain other 
requirements of section 401(a), including, in applicable circumstances, 
the definitely determinable requirement of section 401(a) and the 
requirements of section

[[Page 58]]

401(a)(25) and section 411(d)(6). See Sec. 1.411(d)-4.
    Q-4: Will a plan provision violate section 401(a)(4) merely because 
it requires that an employee who terminates from service with the 
employer receive a single sum distribution in the event that the present 
value of the employee's benefit is not more than $3,500, as permitted by 
sections 411(a)(11) and 417(e)?
    A-4: No. A plan will not be treated as discriminatory under section 
401(a)(4) merely because the plan mandates a single sum distribution 
when the present value of an employee's benefit is not more than $3,500, 
as permitted by sections 411(a)(11) and 417(e). This is an exception to 
the general principles of this section. (No similar provision exists 
excepting such single sum distributions from the limits on employer 
discretion under section 411(d)(6). See Sec. 1.411(d)-4 Q&A-4.)
    Q-5: If the availability of an optional form of benefit 
discriminates, or may reasonably be expected to discriminate, in favor 
of the highly compensated group, what acceptable alternatives exist for 
amending the plan without violating section 411(d)(6)?
    A-5: (a) Transitional rules--(1) In general. The following rules 
apply for purposes of making necessary amendments to existing plans (as 
defined in Q&A-6 of this section) under which the availability of an 
optional form of benefit violates the nondiscrimination requirements of 
section 401(a)(4) or may reasonably be expected to violate such 
requirements. These transitional rules are provided under the authority 
of section 411(d)(6), which allows the elimination of certain optional 
forms of benefit if permitted by regulations, and section 7805(b).
    (2) Nondiscrimination--(i) In general. The determination of whether 
the availability of an optional form of benefit violates section 
401(a)(4) is to be made in accordance with Q&A-2 of this section. In 
addition, the availability of a particular optional form of benefit may 
reasonably be expected to violate the nondiscrimination requirements of 
section 401(a)(4) if, under the applicable facts and circumstances, 
there is a significant possibility that the current availability of such 
optional form of benefit will impermissibly favor the highly compensated 
group. This determination must be made on the basis of the seventy 
percent test of section 410(b)(1)(A) or the nondiscriminatory 
classification test of section 410(b)(1)(B) as such tests existed prior 
to the effective date of the amendments made to section 410(b) by 
section 1112(a) of TRA '86. Thus, a condition may not reasonably be 
expected to discriminate for purposes of these rules merely because it 
results in a significant possibility that discrimination will result 
because of the amendments made to section 410(b) by section 1112(a) of 
TRA '86. In addition, the availability of an optional form of benefit 
may not reasonably be expected to discriminate merely because of an age 
or service condition that may be disregarded in determining the current 
availability of such optional form of benefit under paragraph 
(b)(1)(ii)(A) of Q&A-2 of this section. Similarly, the availability of 
an optional form of benefit may not reasonably be expected to 
discriminate merely because of an age or service condition that, after 
permitted projection, does not cause such optional form to fail to 
satisfy the requirement of this paragraph (a)(2).
    (ii) Examples. The provisions of paragraph (a)(2)(i) of this Q&A-5 
can be illustrated by the following examples:

    Example (1). A plan provides that a single sum distribution option 
is available only to (A) employees earning $50,000 or more in the final 
year of employment, (B) employees who furnish evidence that they have a 
net worth above a certain specified amount, and (C) employees who 
present a letter from an accountant or attorney declaring that it is in 
the employee's best interest to receive a single sum distribution. 
Whether the availability of such optional form of benefit discriminates 
depends on whether it meets the requirements of Q&A-2 of this 
Sec. 1.401(a)-4. However, each of the specified conditions limiting the 
availability of the optional form of benefit may reasonably be expected 
to discriminate in favor of the highly compensated group in operation 
because of the likelihood of a significant positive correlation between 
the ability to meet any of the specified conditions and membership in 
the highly compensated group.
    Example (2). A plan limits the availability of a single sum 
distribution option to employees employed in one particular division of 
the employer's company. All the employees of the company are 
participants in the

[[Page 59]]

plan. During the 1988 plan year, the division employs individuals who 
represent a nondiscriminatory classification of that company's employees 
(under section 410(b)(1)(B) prior to the effective date of the 
amendments made to section 410(b) by section 1112(a) of TRA '86) and is 
unlikely to cease employing such a nondiscriminatory classification in 
the future. The availability of a single sum distribution under this 
plan does not result in discrimination during the 1988 plan year and may 
not reasonably be expected to do so.

    (b) Transitional alternatives. If the availability of an optional 
form of benefit under an existing plan is discriminatory under section 
401(a)(4), the plan must be amended either to eliminate the optional 
form of benefit or to make the availability of the optional form of 
benefit nondiscriminatory. For example, the availability of an optional 
form of benefit may be made nondiscriminatory by making such benefit 
available to sufficient additional employees who are not in the highly 
compensated group or by imposing nondiscriminatory objective criteria on 
its availability such that the group of employees to whom the benefit is 
available is nondiscriminatory. See Q&A-6 of Sec. 1.411(d)-4 for 
requirements with respect to such objective criteria. If, under an 
exisitng plan, the availability of an optional form of benefit may 
reasonably be expected to discriminate, the plan may be amended in the 
same manner permitted where the availability of an optional form of 
benefit is discriminatory. See paragraph (d) of this Q&A-5 for rules 
limiting the period during which the availability of optional forms of 
benefit may be eliminated or reduced under this paragraph.
    (c) Compliance and amendment date provisions--(1) Operational 
compliance requirement. On or before the applicable effective date for 
the plan (see Q&A-6 of this section), the plan sponsor must select one 
of the alternatives permitted under paragraph (b) of this Q&A-5 with 
respect to each affected optional form of benefit and the plan must be 
operated in accordance with this selection. This is an operational 
requirement and does not require a plan amendment prior to the period 
set forth in paragraph (c)(2) of this Q&A-5. There is no special 
reporting requirement under the Code or this section with respect to 
this selection.
    (2) Deferred amendment date. If paragraph (c)(1) of this Q&A-5 is 
satisfied, a plan amendment conforming the plan to the particular 
alternative selected under paragraph (b) of this Q&A-5 must be adopted 
within the time period permitted for amending plans in order to meet the 
requirements of section 410(b) as amended by TRA '86. Such conforming 
amendment must be consistent with the sponsor's selection as reflected 
by plan practice during the period from the effective date to the date 
the amendment is adopted. Thus, for example, if an existing calendar 
year noncollectively bargained defined benefit plan has a single sum 
distribution form subject to a discriminatory condition, that was 
available as of January 30, 1986 (subject to such condition), and such 
employer makes one or more single sum distributions available on or 
after the first day of the first plan year commencing on or after 
January 1, 1989, and before the plan amendment, then such employer may 
not adopt a plan amendment eliminating the single sum distribution form. 
Instead, such employer must adopt an amendment making the distribution 
form available to a nondiscriminatory group of employees while retaining 
the availability of such distribution form with respect to the group of 
employees to whom the benefit is already available. Similarly, any 
objective criteria that are adopted as part of such amendment must be 
consistent with the plan practice for the applicable period prior to the 
amendment. A conforming amendment under this paragraph (c)(2) must be 
made with respect to each optional form of benefit for which such 
amendment is required and must be retroactive to the applicable 
effective date.
    (d) Limitation on transitional alternatives. The transitional 
alternatives permitting the elimination or reduction of optional forms 
of benefit will not violate section 411(d)(6) during the period prior to 
the applicable effective date for the plan (see Q&A-6 of this section). 
After the applicable effective date, any amendment (other than one 
described in paragraph (c)(2) of this Q&A-5) that eliminates or reduces 
an

[[Page 60]]

optional form of benefit or imposes new objective criteria restricting 
the availability of such optional form of benefit will fail to qualify 
for the exception to section 411(d)(6) provided in this Q&A-5. This is 
the case without regard to whether the availability of the optional form 
of benefit is discriminatory or may reasonably be expected to be 
discriminatory.
    Q-6: For what period are the rules of this section effective?
    A-6: (a) General effective date--(1) In general. Except as otherwise 
provided in this section, the provisions of this section are effective 
January 30, 1986, and do not apply to plan years beginning on or after 
January 1, 1994. For rules applicable to plan years beginning on or 
after January 1, 1994, see Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
    (2) Plans of tax-exempt organizations. In the case of plans 
maintained by organizations exempt from income taxation under section 
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective 
plans), except as otherwise provided in this section, the provisions of 
this section are effective January 30, 1986, and do not apply to plan 
years beginning on or after January 1, 1996. For rules applicable to 
plan years beginning on or after January 1, 1996, see Secs. 1.401(a)(4)-
1 through 1.401(a)(4)-13.
    (b) New plans--(1) In general. Unless otherwise provided in 
paragraph (b)(2) of this Q&A-6, plans that are either adopted or made 
effective on or after January 30, 1986, are ``new plans''. With respect 
to such new plans, this section is effective January 30, 1986. This 
effective date is applicable to such plans whether or not they are 
collectively bargained.
    (2) Exception with respect to certain new plans. Plans that are new 
plans as defined in paragraph (b)(1) of this Q&A-6, under which the 
availability of an optional form of benefit is discriminatory or may 
reasonably be expected to be discriminatory, and that receive a 
favorable determination letter that covered such plan provisions with 
respect to an application submitted prior to July 11, 1988, will be 
treated as existing plans with respect to such optional form of benefit 
for purposes of the transitional rules of this section. Thus, such plans 
are eligible for the compliance and amendment alternatives set forth in 
the transitional rule in Q&A-5 of this section.
    (c) Existing plans--(1) In general. Plans that are both adopted and 
in effect prior to January 30, 1986, are ``existing plans''. In 
addition, new plans described in paragraph (b)(2) of this Q&A-6 are 
treated as existing plans with respect to certain forms of benefit. 
Subject to the limitations in paragraph (d) of this Q&A-6, the effective 
dates set forth in paragraphs (c)(2) and (c)(3) of this Q&A-6 apply to 
these existing plans for purposes of this section.
    (2) Existing noncollectively bargained plans. With respect to 
existing noncollectively bargained plans, this section is effective for 
the first day of the first plan year commencing on or after January 1, 
1989.
    (3) Existing collectively bargained plans. With respect to existing 
collectively bargained plans, this section is effective for the later of 
the first day of the first plan year commencing on or after January 1, 
1989, or the first day of the first plan year that the requirements of 
section 410(b) as amended by TRA '86 apply to such plan.
    (d) Delayed effective dates not applicable to new optional forms of 
benefit or conditions--(1) In general. The delayed effective dates in 
paragraph (c) (2) and (3) of this Q&A-6 for existing plans are 
applicable with respect to an optional form of benefit only if both the 
optional form of benefit and any applicable condition either causing the 
availability of such optional form of benefit to be discriminatory or 
making it reasonable to expect that the availability of such optional 
form will be discriminatory were both adopted and in effect prior to 
January 30, 1986. If the preceding sentence is not satisfied with 
respect to an optional form of benefit, this section is effective with 
respect to such optional form of benefit as if the plan were a new plan.
    (2) Exception for certain amendments covered by a favorable 
determination letter. If a condition causing the availability of an 
optional form of benefit to be discriminatory, or to be reasonably 
expected to discriminate, was adopted or made effective on or after 
January 30, 1986, and a favorable determination

[[Page 61]]

letter that covered such plan provision is or was received with respect 
to an application submitted before July 11, 1988, the effective date of 
this section with respect to such provision is the applicable effective 
date determined under the rules with respect to existing plans, as 
though such provision had been adopted and in effect prior to January 
30, 1986.
    (e) Transitional rule effective date. The transitional rule provided 
in Q&A-5 of this section is effective January 30, 1986.

[53 FR 26054, July 11, 1988, as amended by T.D. 8360, 56 FR 47536, Sept. 
19, 1991; T.D. 8485, 58 FR 46778, Sept. 3, 1993; T.D. 8212, 61 FR 14247, 
Apr. 1, 1996]



Sec. 1.401(a)-11  Qualified joint and survivor annuities.

    (a) General rule--(1) Required provisions. A trust, to which section 
411 (relating to minimum vesting standards) applies without regard to 
section 411(e)(2), which is a part of a plan providing for the payment 
of benefits in any form of a life annuity (as defined in paragraph 
(b)(1) of this section), shall not constitute a qualified trust under 
section 401(a)(11) and this section unless such plan provides that:
    (i) Unless the election provided in paragraph (c)(1) of this section 
has been made, life annuity benefits will be paid in a form having the 
effect of a qualified joint and survivor annuity (as defined in 
paragraph (b)(2) of this section) with respect to any participant who--
    (A) Begins to receive payments under such plan on or after the date 
the normal retirement age is attained, or
    (B) Dies (on or after the date the normal retirement age is 
attained) while in active service of the employer maintaining the plan, 
or
    (C) In the case of a plan which provides for the payment of benefits 
before the normal retirement age, begins to receive payments under such 
plan on or after the date the qualified early retirement age (as defined 
in paragraph (b)(4) of this section) is attained, or
    (D) Separates from service on or after the date the normal 
retirement age (or the qualified early retirement age) is attained and 
after satisfaction of eligibility requirements for the payment of 
benefits under the plan (except for any plan requirement that there be 
filed a claim for benefits) and thereafter dies before beginning to 
receive life annuity benefits;
    (ii) Any participant may elect, as provided in paragraph (c)(1) of 
this section, not to receive life annuity benefits in the form of a 
qualified joint and survivor annuity; and
    (iii) If the plan provides for the payment of benefits before the 
normal retirement age, any participant may elect, as provided in 
paragraph (c)(2) of this section, that life annuity benefits be payable 
as an early survivor annuity (as defined in paragraph (b)(3) of this 
section) upon his death in the event that he--
    (A) Attains the qualified early retirement age (as defined in 
paragraph (b)(4) of this section), and
    (B) Dies on or before the day normal retirement age is attained 
while employed by an employer maintaining the plan.
    (2) Certain cash-outs. A plan will not fail to satisfy the 
requirements of section 401(a)(11) and this section merely because it 
provides that if the present value of the entire nonforfeitable benefit 
derived from employer contributions of a participant at the time of his 
separation from service does not exceed $1,750 (or such smaller amount 
as the plan may specify), such benefit will be paid to him in a lump 
sum.
    (3) Illustrations. The provisions of subparagraph (1) of this 
paragraph may be illustrated by the following examples:

    Example (1). The X Corporation Defined Contribution Plan was 
established in 1960. As in effect on January 1, 1974, the plan provided 
that, upon the participant's retirement, the participant may elect to 
receive the balance of his account in the form of (1) a single-sum cash 
payment, (2) a single-sum distribution consisting of X Corporation 
stock, (3) five equal annual cash payments, (4) a life annuity, or (5) a 
combination of options (1) through (4). The plan also provided that, if 
a participant did not elect another form of distribution, the balance of 
his account would be distributed to him in the form of a single-sum cash 
payment upon his retirement. Assume that section 401(a)(11) and this 
section became applicable to the plan as of its plan year beginning 
January 1, 1976, with respect to persons who were active participants in 
the plan as of such date (see

[[Page 62]]

paragraph (f) of this section). If X Corporation Defined Contribution 
Plan continues to allow the life annuity payment option after December 
31, 1975, it must be amended to provide that if a participant elects a 
life annuity option the life annuity benefit will be paid in a form 
having the effect of a qualified joint and survivor annuity, except to 
the extent that the participant elects another form of benefit payment. 
However, the plan can continue to provide that, if no election is made, 
the balance will be paid as a single-sum cash payment. If the trust is 
not so amended, it will fail to qualify under section 401(a).
    Example (2). The Corporation Retirement Plan provides that plan 
benefits are payable only in the form of a life annuity and also 
provides that a participant may retire before the normal retirement age 
of 65 and receive a benefit if he has completed 30 years of service. 
Under this plan, an employee who begins employment at the age of 18 will 
be eligible to receive retirement benefits at the age of 48 if he then 
has 30 years of service. This plan must allow a participant to elect in 
the time and manner prescribed in paragraph (c)(2) of this section an 
early survivor annuity (defined in paragraph (b)(3) of this section) to 
be payable on the death of the participant if death occurs while the 
participant is in active service for the employer maintaining the plan 
and on or after the date the participant reaches the qualified early 
retirement age of 55 (the later of the date the participant reaches the 
earliest retirement age (age 48) or 10 years before normal retirement 
age (age 55)) but before the day after the day the participant reaches 
normal retirement age (age 65).
    Example (3). Assume the same facts as in Example (2). A, B, and C 
began employment with Y Corporation when they each attained age 18. A 
retires and begins to receive benefit payments at age 48 after 
completing 30 years of service. The plan is not required to pay a 
qualified joint and survivor annuity to A and his spouse at any time. B 
does not elect an early survivor annuity at age 55, but retires at age 
57 after completing 39 years of service. Unless B makes an election 
under subparagraph (1)(ii) of this paragraph, the plan is required to 
pay a qualified joint and survivor annuity to B and his spouse. C makes 
no elections described in subparagraph (1) of this paragraph, and dies 
while in active service at age 66 after completing 48 years of service. 
The plan is required to pay a qualified survivor annuity to C's spouse.

    (b) Definitions. As used in this section--(1) Life annuity. (i) The 
term ``life annuity'' means an annuity that provides retirement payments 
and requires the survival of the participant or his spouse as one of the 
conditions for any payment or possible payment under the annuity. For 
example, annuities that make payments for 10 years or until death, 
whichever occurs first or whichever occurs last, are life annuities.
    (ii) However, the term ``life annuity'' does not include an annuity, 
or that portion of an annuity, that provides those benefits which, under 
section 411(a)(9), would not be taken into account in the determination 
of the normal retirement benefit or early retirement benefit. For 
example, ``social security supplements'' described in the fourth 
sentence of section 411(a)(9) are not considered to be life annuities 
for the purposes of this section, whether or not an early retirement 
benefit is provided under the plan.
    (2) Qualified joint and survivor annuity. The term ``qualified joint 
and survivor annuity'' means an annuity for the life of the participant 
with a survivor annuity for the life of his spouse which is neither (i) 
less than one-half of, nor (ii) greater than, the amount of the annuity 
payable during the joint lives of the participant and his spouse. For 
purposes of the preceding sentence, amounts described in Sec. 1.401(a)-
11(b)(1)(ii) may be disregarded. A qualified joint and survivor annuity 
must be at least the actuarial equivalent of the normal form of life 
annuity or, if greater, of any optional form of life annuity offered 
under the plan. Equivalence may be determined, on the basis of 
consistently applied reasonable actuarial factors, for each participant 
or for all participants or reasonable groupings of participants, if such 
determination does not result in discrimination in favor of employees 
who are officers, shareholders, or highly compensated. An annuity is not 
a qualified joint and survivor annuity if payments to the spouse of a 
deceased participant are terminated, or reduced, because of such 
spouse's remarriage.
    (3) Early survivor annuity. The term ``early survivor annuity'' 
means an annuity for the life of the participant's spouse the payments 
under which must not be less than the payments which would have been 
made to the spouse under the joint and survivor annuity if the 
participant had made the election described in paragraph (c)(2) of this

[[Page 63]]

section immediately prior to his retirement and if his retirement had 
occurred on the day before his death and within the period during which 
an election can be made under such paragraph (c)(2). For example, if a 
participant would be entitled to a single life annuity of $100 per month 
or a reduced amount under a qualified joint and survivor annuity of $80 
per month, his spouse is entitled to a payment of at least $40 per 
month. However, the payments may be reduced to reflect the number of 
months of coverage under the survivor annuity pursuant to paragraph (e) 
of this section.
    (4) Qualified early retirement age. The term ``qualified early 
retirement age'' means the latest of--
    (i) The earliest date, under the plan, on which the participant 
could elect (without regard to any requirement that approval of early 
retirement be obtained) to receive retirement benefits (other than 
disability benefits).
    (ii) The first day of the 120th month beginning before the 
participant reaches normal retirement age, or
    (iii) The date on which the participant begins participation.
    (5) Normal retirement age. The term ``normal retirement age'' has 
the meaning set forth in section 411(a)(8).
    (6) Annuity starting date. The term ``annuity starting date'' means 
the first day of the first period with respect to which an amount is 
received as a life annuity, whether by reason of retirement or by reason 
of disability.
    (7) Day. The term ``day'' means a calendar day.
    (c) Elections--(1) Election not to take joint and survivor annuity 
form--(i) In general. (A) A plan shall not be treated as satisfying the 
requirements of this section unless it provides that each participant 
may elect, during the election period described in subdivision (ii) of 
this subparagraph, not to receive a qualified joint and survivor 
annuity. However, if a plan provides that a qualified joint and survivor 
annuity is the only form of benefit payable under the plan with respect 
to a married participant, no election need be provided.
    (B) The election shall be in writing and clearly indicate that the 
participant is electing to receive all or, if permitted by the plan, 
part of his benefits under the plan in a form other than that of a 
qualified joint and survivor annuity. A plan will not fail to meet the 
requirements of this section merely because the plan requires the 
participant to obtain the written approval of his spouse in order for 
the participant to make this election or if the plan provides that such 
approval is not required.
    (ii) Election period. (A) For purposes of the election described in 
paragraph (c)(1)(i) of this section, the plan shall provide an election 
period which shall include a period of at least 90 days following the 
furnishing of all of the applicable information required by subparagraph 
(3)(i) of this paragraph and ending prior to commencement of benefits. 
In no event may the election period end earlier than the 90th day before 
the commencement of benefits. Thus, for example, the commencement of 
benefits may be delayed until the end of such election period because 
the amount of payments to be made to a participant cannot be ascertained 
before the end of such period; see Sec. 1.401(a)-14(d).

If a participant makes a request for additional information as provided 
in subparagraph (3)(iii) of this paragraph on or before the last day of 
the election period, the election period shall be extended to the extent 
necessary to include at least the 90 calendar days immediately following 
the day the requested additional information is personally delivered or 
mailed to the participant. Notwithstanding the immediately preceding 
sentence, a plan may provide in cases in which the participant has been 
furnished by mail or personal delivery all of the applicable information 
required by subparagraph (3)(i) of this paragraph, that a request for 
such additional information must be made on or before a date which is 
not less than 60 days from the date of such mailing or delivery; and if 
the plan does so provide, the election period shall be extended to the 
extent necessary to include at least the 60 calendar days following the 
day the requested additional information is personally delivered or 
mailed to the participant.

[[Page 64]]

    (B) In the case of a participant in a plan to which this 
subparagraph applies who separated from service after section 401(a)(11) 
and this section became applicable to such plan with respect to such 
participant, and to whom an election required by this subparagraph has 
not been previously made available (and will not become available in 
normal course), the plan must provide an election to receive the balance 
of his benefits (properly adjusted, if applicable, for payments 
received, prior to the exercise of such election, in the form of a 
qualified joint and survivor annuity) in a form other than that of a 
qualified joint and survivor annuity. The provisions of paragraph 
(c)(1)(ii)(A) shall apply except that in no event shall the election 
period end before the 90th day after the date on which notice of the 
availability of such election and the applicable information required by 
subparagraph (3)(i) of this paragraph is given directly to the 
participant. If such notice and information is given by mail, it shall 
be treated as given on the date of mailing. If such participant has 
died, such election shall be made available to such participant's 
personal representative.
    (2) Election of early survivor annuity--(i) In general. (A) A plan 
described in subparagraph (a)(1)(iii) of this section shall not be 
treated as satisfying the requirements of this section unless it 
provides that each participant may elect, during the period described in 
subdivision (ii) of this subparagraph, an early survivor annuity as 
described in paragraph (a)(1)(iii) of this section. Breaks in service 
after the participant has attained the qualified early retirement age 
neither invalidate a previous election or revocation nor prevent an 
election from being made or revoked during the election period.
    (B) The election shall be in writing and clearly indicate that the 
participant is electing the early survivor annuity form.
    (C) A plan is not required to provide an election under this 
subparagraph if--
    (1) The plan provides that an early survivor annuity is the only 
form of benefit payable under the plan with respect to a married 
participant who dies while employed by an employer maintaining the plan,
    (2) In the case of a defined contribution plan, the plan provides a 
survivor benefit at least equal in value to the vested portion of the 
participant's account balance, if the participant dies while in active 
service with an employer maintaining the plan, or
    (3) In the case of a defined benefit plan, the plan provides a 
survivor benefit at least equal in value to the present value of the 
vested portion of the participant's normal form of the accrued benefit 
payable at normal retirement age (determined immediately prior to 
death), if the participant dies while in active service with an employer 
maintaining the plan. Any present values must be determined in 
accordance with either the actuarial assumptions or factors specified in 
the plan, or a variable standard independent of employer discretion for 
converting optional benefits specified in the plan.
    (ii) Election period. (A) For purposes of the election described in 
paragraph (c)(2)(i) of this section the plan shall provide an election 
period which, except as provided in the following sentence, shall begin 
not later than the later of either the 90th day before a participant 
attains the qualified early retirement age or the date on which his 
participation begins, and shall end on the date the participant 
terminates his employment. If such a plan contains a provision that any 
election made under this subparagraph does not become effective or 
ceases to be effective if the participant dies within a certain period 
beginning on the date of such election, the election period prescribed 
in this subdivision (ii) shall begin not later than the later of (1) a 
date which is 90 days plus such certain period before the participant 
attains the qualified early retirement age or (2) the date on which his 
participation begins. For example, if a plan provides that an election 
made under this subparagraph does not become effective if the 
participant dies less than 2 years after the date of such election, the 
period for making an election under this subparagraph must begin not 
later than the later of (1) 2 years and 90 days before the participant 
attains the qualified

[[Page 65]]

early retirement age, or (2) the date on which his participation begins. 
However, the election period for an individual who was an active 
participant on the date this section became effective with regard to the 
plan need not begin earlier than such effective date.
    (B) In the case of a participant in a plan to which this 
subparagraph applies who dies after section 401(a)(11) and this section 
became applicable to such plan with respect to such participant and to 
whom an election required by this subparagraph has not been previously 
made available, the plan must give the participant's surviving spouse 
or, if dead, such spouse's personal representative the option of 
electing an early survivor annuity. The plan may reduce the surviving 
spouse's annuity to take into account any benefits already received. The 
period for making such election shall not end before the 90th day after 
the date on which written notice of the availability of such election 
and applicable information required by subparagraph (3)(i) of this 
paragraph is given directly to such surviving spouse or personal 
representative. If such notice and information is given by mail, if 
shall be treated as given on the date of mailing.
    (3) Information to be provided by plan administrator. (i) A plan 
which is required to provide either or both of the elections described 
in paragraph (c) (1) or (2) of this section must provide to the 
participants, at the time and in the manner specified in subdivision 
(ii) of this subparagraph, the following information, as applicable to 
the plan, in written nontechnical language:
    (A) In the case of the election described in paragraph (c)(1) of 
this section, a general description or explanation of the qualified 
joint and survivor annuity, the circumstances in which it will be 
provided unless the participant has elected not to have benefits 
provided in that form, and the availability of such election;
    (B) In the case of the election described in paragraph (c)(2) of 
this section, a general description of the early survivor annuity, the 
circumstances under which it will be paid if elected, and the 
availability of such election; and
    (C) A general explanation of the relative financial effect on a 
participant's annuity of either or both elections, as the case may be.

Various methods may be used to explain such relative financial effect. 
With regard to a qualified joint and survivor annuity, they include: 
information as to the benefits the participant would receive under the 
qualified joint and survivor annuity stated as an arithmetic or 
percentage reduction from a single life annuity; a table showing the 
difference between a straight life annuity and a qualified joint and 
survivor annuity in terms of a reduction in dollar amounts; a table 
showing a percentage reduction from the straight life annuity or, in the 
case of a profit-sharing plan, an approximate dollar amount reduction. 
The notice and explanation required by this subdivision (i) must also 
inform the participants of the availability of the additional 
information specified in subdivision (iii) of this subparagraph and how 
they may obtain such information.
    (ii) The method or methods used to provide the information described 
in subdivision (i) of this subparagraph may vary. Posting which meets 
the requirements of Sec. 1.7476-2(c)(1) may be used; see Sec. 1.7476-
2(c)(1) for examples of other methods which may be used. One or more 
methods may be used to provide the required information provided that 
all of the required information is provided by one method or a 
combination of methods by or within the time period specified in this 
subdivision (ii). If mail or personal delivery is used, then, whether or 
not the information has been previously provided, there must be a 
mailing or personal delivery of the information by such time as to 
reasonably assure that it will be received on or about: (1) In the case 
of a plan which does not provide for the payment of benefits before the 
normal retirement age, the date which is 9 months before the participant 
attains normal retirement age; (2) in the case of a plan which provides 
for the payment of benefits before the normal retirement age and which 
is required to provide the election described in paragraph (c)(2) of 
this section (whether or not it is also required to provide the election 
described in paragraph (c)(1) of

[[Page 66]]

this section), the date which is 90 days before the latest date 
prescribed by paragraph (c)(2)(ii)(A) for the beginning of the election 
period for the early survivor annuity; or (3) in the case of a plan 
which provides for the payment of benefits before the normal retirement 
age and which is required to provide only the election described in 
paragraph (c)(1) of this section, the date which is nine months before 
the participant attains the qualified early retirement age; except that 
in the case of a plan described in (2) or (3), if the qualified early 
retirement age is the date the participant begins participation in the 
plan, the information may be provided on or about such date. If a method 
other than mail or personal delivery is used to provide participants 
with some or all of such information, if must be a method which is 
reasonably calculated to reach the attention of a participant on or 
about the date prescribed in the immediately preceding sentence and to 
continue to reach the attention of such participant during the election 
period applicable to him for which the information is being provide (as, 
for example, by permanent posting, repeated publication, etc.).
    (iii) The plan administrator must furnish to a particular 
participant, upon a timely written request, a written explanation in 
nontechnical language of the terms and conditions of the qualified joint 
and survivor annuity and the financial effect upon the particular 
participant's annuity of making any election under this paragraph. Such 
financial effect shall be given in terms of dollars per annuity payment; 
and in the case of a defined contribution plan, the projected annuity 
for a particular participant may be based on his account balance as of 
the most recent valuation date. The plan administrator need not comply 
with more than one such request made by a particular participant. This 
explanation must be personally delivered or mailed (first class mail, 
postage prepaid) to the participant within 30 days from the date of the 
participant's written request.
    (4) Election is revocable. A plan to which this section applies must 
provide that any election made under this paragraph may be revoked in 
writing during the specified election period, and that after such 
election has been revoked, another election under this paragraph may be 
made during the specified election period.
    (5) Election by surviving spouse. A plan will not fail to meet the 
requirements of section 401(a)(11) and this section merely because it 
provides that the spouse of a deceased participant may elect to have 
benefits paid in a form other than a survivor annuity. If the plan 
provides that such a spouse may make such an election, the plan 
administrator must furnish to this spouse, within a reasonable amount of 
time after a written request has been made by this spouse, a written 
explanation in non-technical language of the survivor annuity and any 
other form of payment which may be selected. This explanation must state 
the financial effect (in terms of dollars) of each form of payment. A 
plan need not respond to more than one such request.
    (d) Permissible additional plan provisions--(1) In general. A plan 
will not fail to meet the requirements of section 401(a)(11) and this 
section merely because it contains one or more of the provisions 
described in paragraphs (d)(2) through (5) of this section.
    (2) Claim for benefits. A plan may provide that as a condition 
precedent to the payment of benefits, a participant must express in 
writing to the plan administrator the form in which he prefers benefits 
to be paid and provide all the information reasonably necessary for the 
payment of such benefits. However, if a participant files a claim for 
benefits with the plan administrator and provides the plan administrator 
with all the information necessary for the payment of benefits but does 
not indicate a preference as to the form for the payment of benefits, 
benefits must be paid in the form of a qualified joint and survivor 
annuity if the participant has attained the qualified early retirement 
age unless such participant has made an effective election not to 
receive benefits in such form. For rules relating to provisions in a 
plan to the effect that a claim for benefits must be filed before the 
payment of benefits will commence, see Sec. 1.401(a)-14.
    (3) Marriage requirements. A plan may provide that a joint and 
survivor annuity will be paid only if--

[[Page 67]]

    (i) The participant and his spouse have been married to each other 
throughout a period (not exceeding one year) ending on the annuity 
starting date.
    (ii) The spouse of the participant is not entitled to receive a 
survivor annuity (whether or not the election described in paragraph 
(c)(2) of this section has been made) unless the participant and his 
spouse have been married to each other throughout a period (not 
exceeding one year) ending on the date of such participant's death.
    (iii) The same spouse must satisfy the requirements of subdivisions 
(i) and (ii) of this subparagraph.
    (iv) The participant must notify the plan administrator (as defined 
by section 414(g)) of his marital status within any reasonable time 
period specified in the plan.
    (4) Effect of participant's death on an election or revocation of an 
election under paragraph (c). A plan may provide that any election 
described in paragraph (c) of this section or any revocation of any such 
election does not become effective or ceases to be effective if the 
participant dies within a period, not in excess of 2 years, beginning on 
the date of such election or revocation. However, a plan containing a 
provision described in the preceding sentence shall not satisfy the 
requirements of this section unless it also provides that any such 
election or any revocation of any such election will be given effect in 
any case in which--
    (i) The participant dies from accidental causes,
    (ii) A failure to give effect to the election or revocation would 
deprive the participant's survivor of a survivor annuity, and
    (iii) Such election or revocation is made before such accident 
occurred.
    (5) Benefit option approval by third party. (i) A plan may provide 
that an optional form of benefit elected by a participant is subject to 
the approval of an administrative committee or similar third party. 
However, the administrative committee cannot deny a participant any of 
the benefits required by section 401(a)(11). For example, if a plan 
offers a life annuity option, the committee may deny the participant a 
qualified joint and survivor annuity only by denying the participant 
access to all life annuity options without knowledge of whether the 
participant wishes to receive a qualified joint and survivor annuity. 
Alternatively, if the committee knows which form of life annuity the 
participant has chosen before the committee makes its decision, the 
committee cannot withhold its consent for payment of a qualified joint 
and survivor annuity event though it denies all other life annuity 
options. This subparagraph (5) only applies before the effective date of 
the amendment made to section 411(d)(6) by section 301 of the Retirement 
Equity Act of 1984. See section 411(d)(6) and the regulations thereunder 
for rules limiting employer discretion.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. In 1980 plan M provides that the automatic form of benefit 
is a single sum distribution. The plan also permits, subject to approval 
by the administrative committee, the election of several optional forms 
of life annuity. On the election form that is reviewed by the 
administrative committee the participant indicates whether any life 
annuity option is preferred, without indicating the particular life 
annuity chosen. Thus, the committee approves or disapproves the election 
without knowledge of whether a qualified joint and survivor annuity will 
be elected. The administrative committee approval provision in Plan M 
does not cause the plan to fail to satisfy this section. On the other 
hand, if the form indicates which form of life annuity is preferred, 
committee disapproval of any election of the qualified joint and 
survivor annuity would cause the plan to fail to satisfy this section.

    (e) Costs of providing qualified joint and survivor annuity form or 
early survivor annuity form. A plan may take into account in any 
equitable manner consistent with generally accepted actuarial principles 
applied on a consistent basis any increased costs resulting from 
providing qualified joint and survivor annuity and early survivor 
annuity benefits. A plan may give a participant the option of paying 
premiums only if it provides another option under which an out-of-pocket 
expense by the participant is not required.
    (f) Application and effective date. Section 401(a)(11) and this 
section shall apply to a plan only with respect to

[[Page 68]]

plan years beginning after December 31, 1975, and shall apply only if--
    (1) The participant's annuity starting date did not fall within a 
plan year beginning before January 1, 1976, and
    (2) The participant was an active participant in the plan on or 
after the first day of the first plan year beginning after December 31, 
1975.
    For purposes of this paragraph, the term ``active participant'' 
means a participant for whom benefits are being accrued under the plan 
on his behalf (in the case of a defined benefit plan), the employer is 
obligated to contribute to or under the plan on his behalf (in the case 
of a defined contribution plan other than a profit-sharing plan), or the 
employer either is obligated to contribute to or under the plan on his 
behalf or would have been obligated to contribute to or under the plan 
on his behalf if any contribution were made to or under the plan (in the 
case of a profit-sharing plan).

If benefits under a plan are provided by the distribution to the 
participants of individual annuity contracts, the annuity starting date 
will be considered for purposes of this paragraph to fall within a plan 
year beginning before January 1, 1976, with respect to any such 
individual contract that was distributed to the participant during a 
plan year beginning before January 1, 1976, if no premiums are paid with 
respect to such contract during a plan year beginning after December 31, 
1975. In the case of individual annuity contracts that are distributed 
to participants before January 1, 1978, and which contain an option to 
provide a qualified joint and survivor annuity, the requirements of this 
section will be considered to have been satisfied if, not later than 
January 1, 1978, holders of individual annuity contracts who are 
participants described in the first sentence of this paragraph are given 
an opportunity to have such contracts amended, so as to provide for a 
qualified joint and survivor annuity in the absence of a contrary 
election, within a period of not less than one year from the date such 
opportunity was offered. In no event, however, shall the preceding 
sentence apply with respect to benefits attributable to premiums paid 
after December 31, 1977.
    (g) Effect of REA 1984--(1) In general. The Retirement Equity Act of 
1984 (REA 1984) significantly changed the qualified joint and survivor 
annuity rules generally effective for plan years beginning after 
December 31, 1984. The new survivor annuity rules are primarily in 
sections 401(a)(11) and 417 as revised by REA 1984 and Secs. 1.401(a)-20 
and 417(e)-1.
    (2) Regulations after REA 1984. (i) REA and the regulations 
thereunder to the extent inconsistent with pre-REA 1984 section 
401(a)(11) and this section are controlling for years to which REA 1984 
applies. See e.g., paragraphs (a)(1) and (2) of this section, relating 
to required provisions and certain cash-outs, respectively and (e), 
relating to costs of providing annuities, for rules that are 
inconsistent with REA 1984 and, therefore, are not applicable to REA 
1984 years.
    (ii) To the extent that the pre-REA 1984 law either is the same as 
or consistent with REA 1984 and the new regulations hereunder, the rules 
in this section shall continue to apply for years to which REA 1984 
applies. (See, e.g., paragraph (c) (relating to how information is 
furnished participants and spouses) and paragraph (b) (defining a life 
annuity) for some of the rules that apply to REA 1984 years.) The rules 
in this section shall not apply for such years to the extent that they 
are inconsistent with REA 1984 and the regulations thereunder.
    (iii) The Commissioner may provide additional guidance as to the 
continuing effect of the various rules in this section for years to 
which REA 1984 applies.

(Secs. 401(a)(11), 7805 Internal Revenue Code of 1954, (88 Stat. 935, 
68A Stat. 917; (26 U.S.C. 401(a)(11), 7805)))

[T.D. 7458, 42 FR 1466, Jan. 7, 1977; 42 FR 6367, Feb. 2, 1977; T.D. 
7510, 42 FR 53956, Oct. 4, 1977; T.D. 8219, 53 FR 31841, Aug. 22, 1988; 
53 FR 48534, Dec. 1, 1988]



Sec. 1.401(a)-12  Mergers and consolidations of plans and transfers of plan assets.

    A trust will not be qualified under section 401 unless the plan of 
which the trust is a part provides that in the case of any merger or 
consolidation with, or

[[Page 69]]

transfer of assets or liabilities to, another plan after September 2, 
1974, each participant in the plan would receive a minimum benefit if 
the plan terminated immediately after the merger, consolidation, or 
transfer. This benefit must be equal to or greater than the benefit the 
participant would have been entitled to receive immediately before the 
merger, consolidation, or transfer if the plan in which he was a 
participant had then terminated. This section applies to a multiemployer 
plan only to the extent determined by the Pension Benefit Guaranty 
Corporation. For additional rules concerning mergers or consolidations 
of plans and transfers of plan assets, see section 414(l) and 
Sec. 1.414(l)-1.

[T.D. 7638, 44 FR 48195, Aug. 17, 1979]



Sec. 1.401(a)-13  Assignment or alienation of benefits.

    (a) Scope of the regulations. This section applies only to plans to 
which section 411 applies without regard to section 411(e)(2). Thus, for 
example, it does not apply to a governmental plan, within the meaning of 
section 414(d); a church plan, within the meaning of section 414(e), for 
which there has not been made the election under section 410(a) to have 
the participation, vesting, funding, etc. requirements apply; or a plan 
which at no time after September 2, 1974, provided for employer 
contributions.
    (b) No assignment or alienation--(1) General rule. Under section 
401(a)(13), a trust will not be qualified unless the plan of which the 
trust is a part provides that benefits provided under the plan may not 
be anticipated, assigned (either at law or in equity), alienated or 
subject to attachment, garnishment, levy, execution or other legal or 
equitable process.
    (2) Federal tax levies and judgments. A plan provision satisfying 
the requirements of subparagraph (1) of this paragraph shall not 
preclude the following:
    (i) The enforcement of a Federal tax levy made pursuant to section 
6331.
    (ii) The collection by the United States on a judgment resulting 
from an unpaid tax assessment.
    (c) Definition of assignment and alienation--(1) In general. For 
purposes of this section, the terms ``assignment'' and ``alienation'' 
include--
    (i) Any arrangement providing for the payment to the employer of 
plan benefits which otherwise would be due the participant under the 
plan, and
    (ii) Any direct or indirect arrangement (whether revocable or 
irrevocable) whereby a party acquires from a participant or beneficiary 
a right or interest enforceable against the plan in, or to, all or any 
part of a plan benefit payment which is, or may become, payable to the 
participant or beneficiary.
    (2) Specific arrangements not considered an assignment or 
alienation. The terms ``assignment'' and ``alienation'' do not include, 
and paragraph (e) of this section does not apply to, the following 
arrangements:
    (i) Any arrangement for the recovery of amounts described in section 
4045(b) of the Employee Retirement Income Security Act of 1974, 88 Stat. 
1027 (relating to the recapture of certain payments),
    (ii) Any arrangement for the withholding of Federal, State or local 
tax from plan benefit payments,
    (iii) Any arrangement for the recovery by the plan of overpayments 
of benefits previously made to a participant,
    (iv) Any arrangement for the transfer of benefit rights from the 
plan to another plan, or
    (v) Any arrangement for the direct deposit of benefit payments to an 
account in a bank, savings and loan association or credit union, 
provided such arrangement is not part of an arrangement constituting an 
assignment or alienation. Thus, for example, such an arrangement could 
provide for the direct deposit of a participant's benefit payments to a 
bank account held by the participant and the participant's spouse as 
joint tenants.
    (d) Exceptions to general rule prohibiting assignments or 
alienations--(1) Certain voluntary and revocable assignments or 
alienations. Not withstanding paragraph (b)(1) of this section, a plan 
may provide that once a participant or beneficiary begins receiving 
benefits under the plan, the participant or beneficiary may assign or 
alienate the right to future benefit payments provided that

[[Page 70]]

the provision is limited to assignments or alienations which--
    (i) Are voluntary and revocable;
    (ii) Do not in the aggregate exceed 10 percent of any benefit 
payment; and
    (iii) Are neither for the purpose, nor have the effect, of defraying 
plan administration costs.

For purposes of this subparagraph, an attachment, garnishment, levy, 
execution, or other legal or equitable process is not considered a 
voluntary assignment or alienation.
    (2) Benefits assigned or alienated as security for loans. (i) 
Notwithstanding paragraph (b)(1) of this section, a plan may provide for 
loans from the plan to a participant or a beneficiary to be secured (by 
whatever means) by the participant's accrued nonforfeitable benefit 
provided that the following conditions are met.
    (ii) The plan provision providing for the loans must be limited to 
loans from the plan. A plan may not provide for the use of benefits 
accrued or to be accrued under the plan as security for a loan from a 
party other than the plan, regardless of whether these benefits are 
nonforfeitable within the meaning of section 411 and the regulations 
thereunder.
    (iii) The loan, if made to a participant or beneficiary who is a 
disqualified person (within the meaning of section 4975(e)(2)), must be 
exempt from the tax imposed by section 4975 (relating to the tax imposed 
on prohibited transactions) by reason of section 4975(d)(1). If the loan 
is made to a participant or beneficiary who is not a disqualified 
person, the loan must be one which would the exempt from the tax imposed 
by section 4975 by reason of section 4975(d)(1) if the loan were made to 
a disqualified person.
    (e) Special rule for certain arrangements--(1) In general. For 
purposes of this section and notwithstanding paragraph (c)(1) of this 
section, an arrangement whereby a participant or beneficiary directs the 
plan to pay all, or any portion, of a plan benefit payment to a third 
party (which includes the participant's employer) will not constitute an 
``assignment or alienation'' if--
    (i) It is revocable at any time by the participant or beneficiary; 
and
    (ii) The third party files a written acknowledgement with the plan 
administrator pursuant to subparagraph (2) of this paragraph.
    (2) Acknowledgement requirement for third party arrangements. In 
accordance with paragraph (e)(1)(ii) of this section, the third party is 
required to file a written acknowledgement with the plan administrator. 
This acknowledgement must state that the third party has no enforceable 
right in, or to, any plan benefit payment or portion thereof (except to 
the extent of payments actually received pursuant to the terms of the 
arrangement). A blanket written acknowledgement for all participants and 
beneficiaries who are covered under the arrangement with the third party 
is sufficient. The written acknowledgement must be filed with the plan 
administrator no later than the later of--
    (i) August 18, 1978; or
    (ii) 90 days after the arrangement is entered into.
    (f) Effective date. Section 401(a)(13) is applicable as of January 
1, 1976, and the plan provision required by this section must be 
effective as of that date. However, regardless of when the provision is 
adopted, it will not affect--
    (1) Attachments, garnishments, levies, or other legal or equitable 
process permitted under the plan that are made before January 1, 1976;
    (2) Assignments permitted under the plan that are irrevocable on 
December 31, 1975, including assignments made before January 1, 1976, as 
security for loans to a participant or beneficiary from a party other 
than the plan; and
    (3) Renewals or extensions of loans described in subparagraph (2) of 
this paragraph, if--
    (i) The principal amount of the obligation outstanding on December 
31, 1975 (or, if less, the principal amount outstanding on the date of 
renewal or extension), is not increased;
    (ii) The loan, as renewed or extended, does not bear a rate of 
interest in excess of the rate prevailing for similar loans at the time 
of the renewal or extensions; and
    (iii) With respect to loans that are renewed or extended to bear a 
variable

[[Page 71]]

interest rate, the formula for determining the applicable rate is 
consistent with the formula for formulae prevailing for similar loans at 
the time of the renewal or extension. For purposes of subparagraphs (2) 
and (3) of this paragraph, a loan from a party other than the plan made 
after December 31, 1975, will be treated as a new loan. This is so even 
if the lender's security interest for the loan arises from an assignment 
of the participant's accrued nonforfeitable benefit made before that 
date.
    (g) Special rules for qualified domestic relations orders--(1) 
Definition. The term ``qualified domestic relations order'' (QDRO) has 
the meaning set forth in section 414(p). For purposes of the Internal 
Revenue Code, a QDRO also includes any domestic relations order 
described in section 303(d) of the Retirement Equity Act of 1984.
    (2) Plan amendments. A plan will not fail to satisfy the 
qualification requirements of section 401(a) or 403(a) merely because it 
does not include provisions with regard to a QDRO.
    (3) Waiver of distribution requirements. A plan shall not be treated 
as failing to satisfy the requirements of sections 401 (a) and (k) and 
409(d) solely because of a payment to an alternate payee pursuant to a 
QDRO. This is the case even if the plan provides for payments pursuant 
to a QDRO to an alternate payee prior to the time it may make payments 
to a participant. Thus, for example, a pension plan may pay an alternate 
payee even though the participant may not receive a distribution because 
he continues to be employed by the employer.
    (4) Coordination with section 417--(i) Former spouse. (A) In 
general. Under section 414(p)(5), a QDRO may provide that a former 
spouse shall be treated as the current spouse of a participant for all 
or some purposes under sections 401(a)(11) and 417.
    (B) Consent. (1) To the extent a former spouse is treated as the 
current spouse of the participant by reason of a QDRO, any current 
spouse shall not be treated as the current spouse. For example, assume H 
is divorced from W, but a QDRO provides that H shall be treated as W's 
current spouse with respect to all of W's benefits under a plan. H will 
be treated as the surviving spouse under the QPSA and QJSA unless W 
obtains H's consent to waive the QPSA or QJSA or both. The fact that W 
married S after W's divorce from H is disregarded. If, however, the QDRO 
had provided that H shall be treated as W's current spouse only with 
respect to benefits that accrued prior to the divorce, then H's consent 
would be needed by W to waive the QPSA or QJSA with respect to benefits 
accrued before the divorce. S's consent would be required with respect 
to the remainder of the benefits.
    (2) In the preceding examples, if the QDRO ordered that a portion of 
W's benefit (either through separate accounts or a percentage of the 
benefit) must be distributed to H rather than ordering that H be treated 
as W's spouse, the survivor annuity requirements of sections 401(a)(11) 
and 417 would not apply to the part of W's benefit awarded H. Instead, 
the terms of the QDRO would determine how H's portion of W's accrued 
benefit is paid. W is required to obtain S's consent if W elects to 
waive either the QJSA or QPSA with respect to the remaining portion of 
W's benefit.
    (C) Amount of the QPSA or QJSA. (1) Where, because of a QDRO, more 
than one individual is to be treated as the surviving spouse, a plan may 
provide that the total amount to be paid in the form of a QPSA or 
survivor portion of a QJSA may not exceed the amount that would be paid 
if there were only one surviving spouse. The QPSA or survivor portion of 
the QJSA, as the case may be, payable to each surviving spouse must be 
paid as an annuity based on the life of each such spouse.
    (2) Where the QDRO splits the participant's accrued benefit between 
the participant and a former spouse (either through separate accounts or 
percentage of the benefit), the surviving spouse of the participant is 
entitled to a QPSA or QJSA based on the participant's accrued benefit as 
of the date of death or the annuity starting date, less the separate 
account or percentage that is payable to the former spouse. The 
calculation is made as if the separate account or percentage had been 
distributed to the participant prior to the relevant date.

[[Page 72]]

    (ii) Current spouse. Under section 414(p)(5), even if the applicable 
election periods (i.e., the first day of the year in which the 
participant attains age 35 and 90 days before the annuity starting date) 
have not begun, a QDRO may provide that a current spouse shall not be 
treated as the current spouse of the participant for all or some 
purposes under sections 401(a)(11) and 417. A QDRO may provide that the 
current spouse waives all future rights to a QPSA or QJSA.
    (iii) Effects on benefits. (A) A plan is not required to provide 
additional vesting or benefits because of a QDRO.
    (B) If an alternate payee is treated pursuant to a QDRO as having an 
interest in the plan benefit, including a separate account or percentage 
of the participant's account, then the QDRO cannot provide the alternate 
payee with a greater right to designate a beneficiary for the alternate 
payee's benefit amount than the participant's right. The QJSA or QPSA 
provisions of section 417 do not apply to the spouse of an alternate 
payee.
    (C) If the former spouse who is treated as a current spouse dies 
prior to the participant's annuity starting date, then any actual 
current spouse of the participant is treated as the current spouse, 
except as otherwise provided in a QDRO.
    (iv) Section 415 requirements. Even though a participant's benefits 
are awarded to an alternate payee pursuant to a QDRO, the benefits are 
benefits of the participant for purposes of applying the limitations of 
section 415 to the participant's benefits.

[T.D. 7534, 43 FR 6943, Feb. 17, 1978, as amended by T.D. 8219, 53 FR 
31850, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]



Sec. 1.401(a)-14  Commencement of benefits under qualified trusts.

    (a) In general. Under section 401(a)(14), a trust to which section 
411 applies (without regard to section 411(e)(2) is not qualified under 
section 401 unless the plan of which such trust is a part provides that 
the payment of benefits under the plan to the participant will begin not 
later than the 60th day after the close of the plan year in which the 
latest of the following events occurs--
    (1) The attainment by the participant of age 65, or, if earlier, the 
normal retirement age specified under the plan,
    (2) The 10th anniversary of the date on which the participant 
commenced participation in the plan,
    (3) The termination of the participant's service with the employer, 
or
    (4) The date specified in an election made pursuant to paragraph (b) 
of this section.

Notwithstanding the preceding sentence, a plan may require that a 
participant file a claim for benefits before payment of benefits will 
commence.
    (b) Election of later date--(1) General rule. A plan may permit a 
participant to elect that the payment to him of any benefit under a plan 
will commence at a date later than the dates specified under paragraphs 
(a)(1), (2), and (3) of this section.
    (2) Manner of election. A plan permitting an election under this 
paragraph shall require that such election must be made by submitting to 
the plan administrator a written statement, signed by the participant, 
which describes the benefit and the date on which the payment of such 
benefit shall commence.
    (3) Restriction. An election may not be made pursuant to a plan 
provision permitted by this paragraph if the exercise of such election 
will cause benefits payable under the plan with respect to the 
participant in the event of his death to be more than ``incidental'' 
within the meaning of paragraph (b)(1)(i) of Sec. 1.401-1.
    (c) Special early retirement rule--(1) Separation prior to early 
retirement age. A trust forming part of a plan which provides for the 
payment of an early retirement benefit is not qualified under section 
401 unless, upon satisfaction of the age requirement for such early 
retirement benefit, a participant who--
    (i) Satisfied the service requirements for such early retirement 
benefit, but
    (ii) Separated from service (with any nonforfeitable right to an 
accrued benefit) before satisfying such age requirement,

is entitled to receive not less than the reduced normal retirement 
benefit described in paragraph (c)(2) of this section. A plan may 
establish reasonable

[[Page 73]]

conditions for payments of early retirement benefits (including for 
example, a requirement that a claim for benefits be made) if the 
conditions are equally applicable to participants who separate from 
service when eligible for an early retirement benefit and participants 
who separate from service earlier.
    (2) Reduced normal retirement benefit. For purposes of this section, 
the reduced normal retirement benefit is the benefit to which the 
participant would have been entitled under the plan at normal retirement 
age, reduced in accordance with reasonable actuarial assumptions.
    (3) Separation prior to effective date of this section. The 
provisions of this paragraph shall not apply in the case of a plan 
participant who separates from service before attainment of early 
retirement age and prior to the effective date of this section set forth 
in paragraph (e) of this section.
    (4) Illustration. The provisions of this paragraph may be 
illustrated by the following example:

    Example. The X Corporation Defined Benefit Plan provides that a 
normal retirement benefit will be payable to a participant upon 
attainment of age 65. The plan also provides that an actuarially reduced 
retirement benefit will be payable, upon application, to any participant 
who has completed 10 years of service with the X Corporation and 
attained age 60. When he is 55 years of age and has completed 10 years 
of service with X Corporation, A, a participant in the plan, leaves the 
service of X Corporation and does not return. The plan will not be 
qualified under section 401 unless, upon attainment of age 60 and 
application for benefits, A is entitled to receive a reduced normal 
retirement benefit described in subparagraph (2) of this paragraph.

    (d) Retroactive payment rule. If the amount of the payment required 
to commence on the date determined under this section cannot be 
ascertained by such date, or if it is not possible to make such payment 
on such date because the plan administrator has been unable to locate 
the participant after making reasonable efforts to do so, a payment 
retroactive to such date may be made no later than 60 days after the 
earliest date on which the amount of such payment can be ascertained 
under the plan or the date on which the participant is located 
(whichever is applicable).
    (e) Effective date. This section shall apply to a plan for those 
plan years to which section 411 of the Code applies without regard to 
section 411(e)(2).

(Secs. 401(a)(14), 7805, Internal Revenue Code of 1954 (88 Stat. 937, 
68A Stat. 917; 26 U.S.C. 401(a)(14), 7805))

[T.D. 7436, 41 FR 42651, Sept. 28, 1976; 41 FR 44690, Oct. 12, 1976]



Sec. 1.401(a)-15  Requirement that plan benefits are not decreased on account of certain Social Security increases.

    (a) In general. Under section 401(a)(15), a trust which is part of a 
plan to which section 411 applies (without regard to section 411(e)(2)) 
is not qualified under section 401 unless, under the plan of which such 
trust is a part:
    (1) Benefit being received by participant or beneficiary. A benefit 
(including a death or disability benefit) being received under the plan 
by a participant or beneficiary (other than a participant to whom 
subparagraph (2)(ii) of this paragraph applies, or a beneficiary of such 
a participant) is not decreased by reason of any post-separation social 
security benefit increase effective after the later of--
    (i) September 2, 1974, or
    (ii) The date of first receipt of any retirement benefit, death 
benefit, or disability benefit under the plan by the participant or by a 
beneficiary of the participant (whichever receipt occurs first).
    (2) Benefit to which participant separated from service has 
nonforfeitable right. In the case of a benefit to which a participant 
has a nonforfeitable right under such plan--
    (i) If such participant is separated from service and does not 
subsequently return to service and resume participation in the plan, 
such benefit is not decreased by reason of any post-separation social 
security benefit increase effective after the later of September 2, 
1974, or separation from service, or
    (ii) If such participant is separated from service and subsequently 
returns to service and resumes participation in the plan, such benefit 
is not decreased by reason of any post-separation social

[[Page 74]]

security benefit increase effective after September 2, 1974, which 
occurs during separation from service and which would decrease such 
benefit to a level below the level of benefits to which he would have 
been entitled had he not returned to service after his separation.
    (b) Post-separation social security benefit increase. For purposes 
of this section, the term ``post-separation social security benefit 
increase'' means, with respect to a participant or a beneficiary of the 
participant, an increase in a benefit level or wage base under title II 
of the Social Security Act (whether such increase is a result of an 
amendment of such title II or is a result of the application of the 
provisions of such title II) occurring after the earlier of such 
participant's separation from service or commencement of benefits under 
the plan.
    (c) Illustrations. The provisions of paragraphs (a) and (b) of this 
section may be illustrated by the following examples:

    Example (1). A plan to which section 401(a)(15) applies provides an 
annual benefit at the normal retirement age, 65, in the form of a stated 
benefit formula amount less a specified percentage of the primary 
insurance amount payable under title II of the Social Security Act. The 
plan provides no early retirement benefits. In the case of a participant 
who separates from service before age 65 with a nonforfeitable right to 
a benefit under the plan, the plan defines the primary insurance amount 
as the amount which the participant is entitled to receive under title 
II of the Social Security Act at age 65, multiplied by the ratio of the 
number of years of service with the employer to the number of years of 
service the participant would have had if he had worked for the employer 
until age 65. The plan does not satisfy the requirements of section 
401(a)(15), because social security increases that occur after a 
participant's separation from service will reduce the benefit the 
participant will receive under the plan.
    Example (2). A plan to which section 401(a)(15) applies provides an 
annual benefit at the normal retirement age, 65, in the form of a stated 
benefit formula amount less a specified percentage of the primary 
insurance amount payable under title II of the Social Security Act. The 
plan provides no early retirement benefits. In the case of a participant 
who separates from service before age 65 with a nonforfeitable right to 
a benefit under the plan, the plan defines the primary insurance amount 
as the amount which the participant is entitled to receive under title 
II of the Social Security Act at age 65 based upon the assumption that 
he will continue to receive until reaching age 65 compensation which 
would be treated as wages for purposes of the Social Security Act at the 
same rate as he received such compensation at the time he separated from 
service, but determined without regard to any post-separation social 
security benefit increase, multiplied by the ratio of the number of 
years of service with the employer to the number of years of service the 
participant would have had if he had worked for the employer until age 
65. The plan satisfies the requirements of section 401(a)(15), because 
social security increases that occur after a participant's separation 
from service will not reduce the benefit the participant will receive 
under the plan.

    (d) Other Federal or State laws. To the extent applicable, the rules 
discussed in this section will govern classifications under a plan 
supplementing the benefits provided by other Federal or State laws, such 
as the Railroad Retirement Act of 1937. See section 206(b) of the 
Employee Retirement Income Security Act of 1974 (Public Law 93-406, 88 
Stat. 864).
    (e) Effect on prior law. Nothing in this section shall be construed 
as amending or modifying the rules applicable to post-separation social 
security increases prior to September 2, 1974. See paragraph (e) of 
Sec. 1.401-3.
    (f) Effective date. Section 401(a)(15) and this section shall apply 
to a plan only with respect to plan years to which section 411 (relating 
to minimum vesting standards) is applicable to the plan without regard 
to section 411(e)(2).


[T.D. 7434, 41 FR 42650, Sept. 28, 1976]



Sec. 1.401(a)-16  Limitations on benefits and contributions under qualified plans.

    A trust will not be a qualified trust and a plan will not be a 
qualified plan if the plan provides for benefits or contributions which 
exceed the limitations of section 415. Section 415 and the regulations 
thereunder provide rules concerning these limitations on benefits and 
contributions.


[T.D. 7748, 46 FR 1696, Jan. 7, 1981]



Sec. 1.401(a)-19  Nonforfeitability in case of certain withdrawals.

    (a) Application of section. Section 401(a)(19) and this section 
apply to a

[[Page 75]]

plan to which section 411(a) applies. (See section 411(e) and 
Sec. 1.411(a)-2 for applicability of section 411).
    (b) Prohibited forfeitures--(1) General rule. A plan to which this 
section applies is not a qualified plan (and a trust forming a part of 
such plan is not a qualified trust) if, under such plan, any part of a 
participant's accrued benefit derived from employer contributions is 
forfeitable solely because a benefit derived from the participant's 
contributions under the plan is voluntarily withdrawn by him after he 
has become a 50 percent vested participant.
    (2) 50 percent vested participant. For purposes of subparagraph (1) 
of this paragraph, a participant is a 50 percent vested participant when 
he has a nonforfeitable right (within the meaning of section 411 and the 
regulations thereunder) to at least 50 percent of his accrued benefit 
derived from employer contributions. Whether or not a participant is 50 
percent vested shall be determined by the ratio of the participant's 
total nonforfeitable employer-derived accrued benefit under the plan to 
his total employer-derived accrued benefit under the plan.
    (3) Certain forfeitures. Paragraph (b)(1) of this section does not 
apply in the case of a forfeiture permitted by section 411(a)(3)(D)(iii) 
and Sec. 1.411(a)-7(d)(3) (relating to forfeitures of certain benefits 
accrued before September 2, 1974).
    (c) Supersession. Section 11.401(a)-(19) of the Temporary Income Tax 
Regulations under the Employee Retirement Income Security Act of 1974 is 
superseded by this section.

(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42320, Aug. 23, 1977]



Sec. 1.401(a)-20  Requirements of qualified joint and survivor annuity and qualified preretirement survivor annuity.

    Q-1: What are the survivor annuity requirements added to the Code by 
the Retirement Equity Act of 1984 (REA 1984)?
    A-1: REA 1984 replaced section 401(a)(11) with a new section 
401(a)(11) and added section 417. Plans to which new section 401(a)(11) 
applies must comply with the requirements of sections 401(a)(11) and 417 
in order to remain qualified under sections 401(a) or 403(a). In 
general, these plans must provide both a qualified joint and survivor 
annuity (QJSA) and a qualified preretirement survivor annuity (QPSA) to 
remain qualified. These survivor annuity requirements are applicable to 
any benefit payable under a plan, including a benefit payable to a 
participant under a contract purchased by the plan and paid by a third 
party.
    Q-2: Must annuity contracts purchased and distributed to a 
participant or spouse by a plan subject to the survivor annuity 
requirements of sections 401(a)(11) and 417 satisfy the requirements of 
those sections?
    A-2: Yes. Rights and benefits under section 401(a)(11) or 417 may 
not be eliminated or reduced because the plan uses annuity contracts to 
provide benefits merely because (a) such a contract is held by a 
participant or spouse instead of a plan trustee, or (b) such contracts 
are distributed upon plan termination. Thus, the requirements of 
sections 401(a)(11) and 417 apply to payments under the annuity 
contracts, not to the distributions of the contracts.
    Q-3: What plans are subject to the survivor annuity requirements of 
section 401(a)(11)?
    A-3: (a) Section 401(a)(11) applies to any defined benefit plan and 
to any defined contribution plan that is subject to the minimum funding 
standards of section 412. This section also applies to any participant 
under any other defined contribution plan unless all of the following 
conditions are satisfied--
    (1) The plan provides that the participant's nonforfeitable accrued 
benefit is payable in full, upon the participant's death, to the 
participant's surviving spouse (unless the participant elects, with 
spousal consent that satisfies the requirements of section 417(a)(2), 
that such benefit be provided instead to a designated beneficiary);
    (2) The participant does not elect the payment of benefits in the 
form of a life annuity; and
    (3) With respect to the participant, the plan is not a transferee or 
an offset plan. (See Q&A 5 of this section.)
    (b) A defined contribution plan not subject to the minimum funding 
standards of section 412 will not be treated

[[Page 76]]

as satisfying the requirement of paragraph (a)(1) unless both of the 
following conditions are satisfied--
    (1) The benefit is available to the surviving spouse within a 
reasonable time after the participant's death. For this purpose, 
availability within the 90-day period following the date of death is 
deemed to be reasonable and the reasonableness of longer periods shall 
be determined based on the particular facts and circumstances. A time 
period longer than 90 days, however, is deemed unreasonable if it is 
less favorable to the surviving spouse than any time period under the 
plan that is applicable to other distributions. Thus, for example, the 
availability of a benefit to the surviving spouse would be unreasonable 
if the distribution was required to be made by the close of the plan 
year including the participant's death while distributions to employees 
who separate from service were required to be made within 90 days of 
separation.
    (2) The benefit payable to the surviving spouse is adjusted for 
gains or losses occurring after the participant's death in accordance 
with plan rules governing the adjustment of account balances for other 
plan distributions. Thus, for example, the plan may not provide for 
distributions of an account balance to a surviving spouse determined as 
of the last day of the quarter in which the participant's death occurred 
with no adjustments of an account balance for gains or losses after 
death if the plan provides for such adjustments for a participant who 
separates from service within a quarter.
    (c) For purposes of determining the extent to which section 
401(a)(11) applies to benefits under an employee stock ownership plan 
(as defined in section 4975(e)(7)), the portion of a participant's 
accrued benefit that is subject to section 409(h) is to be treated as 
though such benefit were provided under a defined contribution plan not 
subject to section 412.
    (d) The requirements set forth in section 401(a)(11) apply to other 
employee benefit plans that are covered by applicable provisions under 
Title I of the Employee Retirement Income Security Act of 1974. For 
purposes of applying the regulations under sections 401(a)(11) and 417, 
plans subject to ERISA section 205 are treated as if they were described 
in section 401(a). For example, to the extent that section 205 covers 
section 403(b) contracts and custodial accounts they are treated as 
section 401(a) plans. Individual retirement plans (IRAs), including IRAs 
to which contributions are made under simplified employee pensions 
described in section 408(k) and IRAs that are treated as plans subject 
to Title I, are not subject to these requirements.
    Q-4: What rules apply to a participant who elects a life annuity 
option under a defined contribution plan not subject to section 412?
    A-4: If a participant elects at any time (irrespective of the 
applicable election period defined in section 417(a)(6)) a life annuity 
option under a defined contribution plan not subject to section 412, the 
survivor annuity requirements of sections 401(a)(11) and 417 will always 
thereafter apply to all of the participant's benefits under such plan 
unless there is a separate accounting of the account balance subject to 
the election. A plan may allow a participant to elect an annuity option 
prior to the applicable election period described in section 417(a)(6). 
If a participant elects an annuity option, the plan must satisfy the 
applicable written explanation, consent, election, and withdrawal rules 
of section 417, including waiver of the QJSA within 90 days of the 
annuity starting date. If a participant selecting such an option dies, 
the surviving spouse must be able to receive the QPSA benefit described 
in section 417(c)(2) which is a life annuity, the actuarial equivalent 
of which is not less than 50 percent of the nonforfeitable account 
balance (adjusted for loans as described in Q&A 24(d) of this section). 
The remaining account balance may be paid to a designated nonspouse 
beneficiary.
    Q-5: How do sections 401(a)(11) and 417 apply to transferee plans 
which are defined contribution plans not subject to section 412?
    A-5: (a) Transferee plans. Although the survivor annuity 
requirements of sections 401(a)(11) and 417 generally do not apply to 
defined contribution plans not subject to section 412, such plans

[[Page 77]]

are subject to the survivor annuity requirements to the extent that they 
are transferee plans with respect to any participant. A defined 
contribution plan is a transferee plan with respect to any participant 
if the plan is a direct or indirect transferee of such participant's 
benefits held on or after January 1, 1985, by:
    (1) A defined benefit plan,
    (2) A defined contribution plan subject to section 412 or
    (3) A defined contribution plan that is subject to the survivor 
annuity requirements of sections 401(a)(11) and 417 with respect to that 
participant.

If through a merger, spinoff, or other transaction having the effect of 
a transfer, benefits subject to the survivor annuity requirements of 
sections 401(a)(11) and 417 are held under a plan that is not otherwise 
subject to such requirements, such benefits will be subject to the 
survivor annuity requirements even though they are held under such plan. 
Even if a plan satisfies the survivor annuity requirements, other rules 
apply to these transactions. See, e.g., section 411(d)(6) and the 
regulations thereunder. A transfer made before January 1, 1985, and any 
rollover contribution made at any time, are not transactions that 
subject the transferee plan to the survivor annuity requirements with 
respect to a participant. If a plan is a transferee plan with respect to 
a participant, the survivor annuity requirements do not apply with 
respect to other plan participants solely because of the transfer. Any 
plan that would not otherwise be subject to the survivor annuity 
requirements of sections 401(a)(11) and 417 whose benefits are used to 
offset benefits in a plan subject to such requirements is subject to the 
survivor annuity requirements with respect to those participants whose 
benefits are offset. Thus, if a stock bonus or profit-sharing plan 
offsets benefits under a defined benefit plan, such a plan is subject to 
the survivor annuity requirements.
    (b) Benefits covered. The survivor annuity requirements apply to all 
accrued benefits held for a participant with respect to whom the plan is 
a transferee plan unless there is an acceptable separate accounting 
between the transferred benefits and all other benefits under the plan. 
A separate accounting is not acceptable unless gains, losses, 
withdrawals, contributions, forfeitures, and other credits or charges 
are allocated on a reasonable and consistent basis between the accrued 
benefits subject to the survivor annuity requirements and other 
benefits. If there is an acceptable separate accounting between 
transferred benefits and any other benefits under the plan, only the 
transferred benefits are subject to the survivor annuity requirements.
    Q-6: Is a frozen or terminated plan required to satisfy the survivor 
annuity requirements of sections 401(a)(11) and 417?
    A-6: In general, benefits provided under a plan that is subject to 
the survivor annuity requirements of sections 401(a)(11) and 417 must be 
provided in accordance with those requirements even if the plan is 
frozen or terminated. However, any plan that has a termination date 
prior to September 17, 1985, and that distributed all remaining assets 
as soon as administratively feasible after the termination date, is not 
subject to the survivor annuity requirements. The date of termination is 
determined under section 411(d)(3) and Sec. 1.411(d)-2(c).
    Q-7: If the Pension Benefit Guaranty Corporation (PBGC) is 
administering a plan, are benefits payable in the form of a QPSA or 
QJSA-
    A-7: Yes, the PBGC will pay benefits in such forms.
    Q-8: How do the survivor annuity requirements of sections 401(a)(11) 
and 417 apply to participants?
    A-8: (a) If a participant dies before the annuity starting date with 
vested benefits attributable to employer or employee contributions (or 
both), benefits must be paid to the surviving spouse in the form of a 
QPSA. If a participant survives until the annuity starting date with 
vested benefits attributable to employer or employee contributions (or 
both), benefits must be provided to the participant in the form of a 
QJSA.
    (b) A participant may waive the QPSA or the QJSA (or both) if the 
applicable notice, election, and spousal consent requirements of section 
417 are satisfied.

[[Page 78]]

    (c) Benefits are not required to be paid in the form of a QPSA or 
QJSA if at the time of death or distribution the participant was vested 
only in employee contributions and such death occurred, or distribution 
commenced, before October 22, 1986.
    (d) Certain mandatory distributions. A distribution may occur 
without satisfying the spousal consent requirements of section 417 (a) 
and (e) if the present value of the nonforfeitable benefit does not 
exceed the cash-out limit in effect underSec. 1.411(a)-11(c)(3)(ii). See 
Sec. 1.417(e)-1.
    Q-9: May separate portions of a participant's accrued benefit be 
subject to QPSA and QJSA requirements at any particular point in time?
    A-9: (a) Dual QPSA and QJSA rights. One portion of a participant's 
benefit may be subject to the QPSA and another portion to the QJSA 
requirements at the same time. For example, in order for a money 
purchase pension plan to distribute any portion of a married 
participant's benefit to the participant, the plan must distribute such 
portion in the form of a QJSA (unless the plan satisfies the applicable 
consent requirements of section 417 (a) and (e) with respect to such 
portion of the participant's benefit). This rule applies even if the 
distribution is merely an in-service distribution attributable to 
voluntary employee contributions and regardless of whether the 
participant has attained the normal retirement age under the plan. The 
QJSA requirements apply to such a distribution because the annuity 
starting date has occurred with respect to this portion of the 
participant's benefit. In the event of a participant's death following 
the commencement of a distribution in the form of a QJSA, the remaining 
payments must be made to the surviving spouse under the QJSA. In 
addition, the plan must satisfy the QPSA requirements with respect to 
any portion of the participant's benefits for which the annuity starting 
date had not yet occurred.

    (b) Example. Assume that participant A has a $100,000 account 
balance in a money purchase pension plan. A makes an in-service 
withdrawal of $20,000 attributable to voluntary employee contributions. 
The QJSA requirements apply to A's withdrawal of the $20,000. 
Accordingly, unless the QJSA form is properly waived such amount must be 
distributed in the form of a QJSA. A's remaining account balance 
($80,000) remains subject to the QPSA requirements because the annuity 
starting date has not occurred with respect to the $80,000. (If A 
survives until the annuity starting date, the $80,000 would be subject 
to the QJSA requirements.) If A died on the day following the annuity 
starting date for the withdrawal, A's spouse would be entitled to a QPSA 
with a value equal to at least $40,000 with respect to the $80,000 
account balance, in addition to any survivor benefit without respect to 
the $20,000. If the $20,000 payment to A had been the first payment of 
an annuity purchased with the entire $100,000 account balance rather 
than an in-service distribution, then the QJSA requirements would apply 
to the entire account balance at the time of the annuity starting date. 
In such event, the plan would have no obligation to provide A's spouse 
with a QPSA benefit upon A's death. Of course, A's spouse would receive 
the QJSA benefit (if the QJSA had not been waived) based on the full 
$100,000.

    Q-10: What is the relevance of the annuity starting date with 
respect to the survivor benefit requirements?
    A-10: (a) Relevance. The annuity starting date is relevant to 
whether benefits are payable as either a QJSA or QPSA, or other selected 
optional form of benefit. If a participant is alive on the annuity 
starting date, the benefits must be payable as a QJSA. If the 
participant is not alive on the annuity starting date, the surviving 
spouse must receive a QPSA. The annuity starting date is also used to 
determine when a spouse may consent to and a participant may waive a 
QJSA. A waiver is only effective if it is made 90 days before the 
annuity starting date. Thus, a deferred annuity cannot be selected and a 
QJSA waived until 90 days before payments commence under the deferred 
annuity. In some cases, the annuity starting date will have occurred 
with respect to a portion of the participant's accrued benefit and will 
not have occurred with respect to the remaining portion. (See Q&A-9.)
    (b) Annuity starting date--(1) General rule. For purposes of 
sections 401(a)(11), 411(a)(11) and 417, the annuity starting date is 
the first day of the first period for which an amount is paid as an 
annuity or any other form.
    (2) Annuity payments. The annuity starting date is the first date 
for which

[[Page 79]]

an amount is paid, not the actual date of payment. Thus, if participant 
A is to receive annuity payments as of the first day of the first month 
after retirement but does not receive any payments until three months 
later, the annuity starting date is the first day of the first month. 
For example, if an annuity is to commence on January 1, January 1 is the 
annuity starting date even though the payment for January is not 
actually made until a later date. In the case of a deferred annuity, the 
annuity starting date is the date for which the annuity payments are to 
commence, not the date that the deferred annuity is elected or the date 
the deferred annuity contract is distributed.
    (3) Administrative delay. A payment shall not be considered to occur 
after the annuity starting date merely because actual payment is 
reasonably delayed for calculation of the benefit amount if all payments 
are actually made.
    (4) Forfeitures on death. Prior to the annuity starting date, 
section 411(a)(3)(A) allows a plan to provide for a forfeiture of a 
participant's benefit, except in the case of a QPSA or a spousal benefit 
described in section 401(a)(11)(B)(iii)(I). Once the annuity starting 
date has occurred, even if actual payment has not yet been made, a plan 
must pay the benefit in the distribution form elected.
    (5) Surviving spouses, alternate payees, etc. The definition of 
``annuity starting date'' for surviving spouses, other beneficiaries and 
alternate payees under section 414(p) is the same as it is for 
participants.
    (c) Disability auxiliary benefit--(1) General rule. The annuity 
starting date for a disability benefit is the first day of the first 
period for which the benefit becomes payable unless the disability 
benefit is an auxiliary benefit. The payment of any auxiliary disability 
benefits is disregarded in determining the annuity starting date. A 
disability benefit is an auxiliary benefit if upon attainment of early 
or normal retirement age, a participant receives a benefit that 
satisfies the accrual and vesting rules of section 411 without taking 
into account the disability benefit payments up to that date.

    Example. (i) Assume that participant A at age 45 is entitled to a 
vested accrued benefit of $100 per month commencing at age 65 in the 
form of a joint and survivor annuity under Plan X. If prior to age 65 A 
receives a disability benefit under Plan X and the payment of such 
benefit does not reduce the amount of A's retirement benefit of $100 per 
month commencing at age 65, any disability benefit payments made to A 
between ages 45 and 65 are auxiliary benefits. Thus, A's annuity 
starting date does not occur until A attains age 65. A's surviving 
spouse B would be entitled to receive a QPSA if A died before age 65. B 
would be entitled to receive the survivor portion of a QJSA (unless 
waived) if A died after age 65. The QPSA payable to B upon A's death 
prior to age 65 would be computed by reference to the QJSA that would 
have been payable to A and B had A survived to age 65.
    (ii) If in the above example A's benefit payable at age 65 is 
reduced to $99 per month because a disability benefit is provided to A 
prior to age 65, the disability benefit would not be an auxiliary 
benefit. The benefit of $99 per month payable to A at age 65 would not, 
without taking into account the disability benefit payments to A prior 
to age 65, satisfy the minimum vesting and accrual rules of section 411. 
Accordingly, the first day of the first period for which the disability 
payments are to be made to A would constitute A's annuity starting date, 
and any benefit paid to A would be required to be paid in the form of a 
QJSA (unless waived by A with the consent of B).

    (d) Other rules--(1) Suspension of benefits. If benefit payments are 
suspended after the annuity starting date pursuant to a suspension of 
benefits described in section 411(a)(3)(B) after an employee separates 
from service, the recommencement of benefit payments after the 
suspension is not treated as a new annuity starting date unless the plan 
provides otherwise. In such case, the plan administrator is not required 
to provide new notices nor to obtain new waivers for the recommenced 
distributions if the form of distribution is the same as the form that 
was appropriately selected prior to the suspension. If benefits are 
suspended for an employee who continues in service without a separation 
and who never receives payments, the commencement of payments after the 
period of suspension is treated as the annuity starting date unless the 
plan provides otherwise.
    (2) Additional accruals. In the case of an annuity starting date 
that occurs on

[[Page 80]]

or after normal retirement age, such date applies to any additional 
accruals after the annuity starting date, unless the plan provides 
otherwise. For example, if a participant who continues to accrue 
benefits elects to have benefits paid in an optional form at normal 
retirement age, the additional accruals must be paid in the optional 
form selected unless the plan provides otherwise. In the case of an 
annuity starting date that occurs prior to normal retirement age, such 
date does not apply to any additional accruals after such date.
    Q-11: Do the survivor annuity requirements apply to benefits derived 
from both employer and employee contributions?
    A-11: Yes. The survivor annuity benefit requirements apply to 
benefits derived from both employer and employee contributions. Benefits 
are not required to be paid in the form of a QPSA or a QJSA if the 
participant was vested only in employee contributions at the time of 
death or distribution and such death or distribution occurred before 
October 22, 1986. All benefits provided under a plan, including benefits 
attributable to rollover contributions, are subject to the survivor 
annuity requirements.
    Q-12: To what benefits do the survivor annuity requirements of 
sections 401(a)(11) and 417 apply?
    A-12: (a) Defined benefit plans. Under a defined benefit plan, 
sections 401(a)(11) and 417 apply only to benefits in which a 
participant was vested immediately prior to death. They do not apply to 
benefits to which a participant's beneficiary becomes entitled by reason 
of death or to the proceeds of a life insurance contract to the extent 
such proceeds exceed the present value of the participant's 
nonforfeitable benefits that existed immediately prior to death.
    (b) Defined contribution plans. Sections 401(a)(11) and 417 apply to 
all nonforfeitable benefits which are payable under a defined 
contribution plan, whether nonforfeitable before or upon death, 
including the proceeds of insurance contracts.
    Q-13: Does the rule of section 411(a)(3)(A) which permits 
forfeitures on account of death apply to a QPSA or the spousal benefit 
described in section 401(a)(11)(B)(iii)?
    A-13: No. Section 411(a)(3)(A) permits forfeiture on account of 
death prior to the time all the events fixing payment occur. However, 
this provision does not operate to deprive a surviving spouse of a QPSA 
or the spousal benefit described in section 401(a)(11)(B)(iii). 
Therefore, sections 401(a)(11) and 417 apply to benefits that were 
nonforfeitable immediately prior to death (determined without regard to 
section 411(a)(3)(A)). Thus, in the case of the death of a married 
participant in a defined contribution plan not subject to section 412 
which provides that, upon a participant's death, the entire 
nonforfeitable accrued benefit is payable to the participant's spouse, 
the nonforfeitable benefit is determined without regard to the 
provisions of section 411(a)(3)(A).
    Q-14: Do sections 411(a)(11), 401(a)(11) and 417 apply to 
accumulated deductible employee contributions, as defined in section 
72(o)(5)(B) (Accumulated DECs)?
    A-14: (a) Employee consent, section 411. The requirements of section 
411(a)(11) apply to Accumulated DECs. Thus, Accumulated DECs may not be 
distributed without participant consent unless the applicable exemptions 
apply.
    (b) Survior requirements. Accumulated DECs are treated as though 
held under a separate defined contribution plan that is not subject to 
section 412. Thus, section 401(a)(11) applies to Accumulated DECs only 
as provided in section 401(a)(11)(B)(iii). All Accumulated DECs are 
treated in this manner, including Accumulated DECs that are the only 
benefit held under a plan and Accumulated DECs that are part of a 
defined benefit or a defined contribution plan.
    (c) Effective date. Sections 401(a)(11) and 411(a)(11) shall not 
apply to distributions of accumulated DECs until the first plan year 
beginning after December 31, 1988.
    Q-15: How do the survivor annuity requirements of sections 
401(a)(11) and 417 apply to a defined benefit plan that includes an 
accrued benefit based upon a contribution to a separate account or 
mandatory employee contributions?

[[Page 81]]

    A-15: (a) 414(k) plans. In the case of a section 414(k) plan that 
includes both a defined benefit plan and a separate account, the rules 
of sections 401(a)(11) and 417 apply separately to the defined benefit 
portion and the separate account portion of the plan. The separate 
account portion is subject to the survivor annuity requirements of 
sections 401(a)(11) and 417 and the special QPSA rules in section 
417(c)(2).
    (b) Employee contributions--(1) Voluntary. In the case of voluntary 
employee contributions to a defined benefit plan, the plan must maintain 
a separate account with respect to the voluntary employee contributions. 
This separate account is subject to the survivor annuity requirements of 
sections 401(a)(11) and 417 and the special QPSA rules in section 
417(c)(2).
    (2) Mandatory. In the case of a defined benefit plan providing for 
mandatory employee contributions, the entire accrued benefit is subject 
to the survivor annuity requirements of sections 401(a)(11) and 417 as a 
defined benefit plan.
    (c) Accumulated DECs. See Q&A 14 of this section for the rule 
applicable to accumulated deductible employee contributions.
    Q-16: Can a plan provide a benefit form more valuable than the QJSA 
and if a plan offers more than one annuity option satisfying the 
requirements of a QJSA, is spousal consent required when the participant 
chooses among the various forms?
    A-16: In the case of an unmarried participant, the QJSA may be less 
valuable than other optional forms of benefit payable under the plan. In 
the case of a married participant, the QJSA must be at least as valuable 
as any other optional form of benefit payable under the plan at the same 
time. Thus, if a plan has two joint and survivor annuities that would 
satisfy the requirements for a QJSA, but one has a greater actuarial 
value than the other, the more valuable joint and survivor annuity is 
the QJSA. If there are two or more actuarially equivalent joint and 
survivor annuities that satisfy the requirements for a QJSA, the plan 
must designate which one is the QJSA and, therefore, the automatic form 
of benefit payment. A plan, however, may allow a participant to elect 
out of such a QJSA, without spousal consent, in favor of another 
actuarially equivalent joint and survivor annuity that satisfies the 
QJSA conditions. Such an election is not subject to the requirement that 
it be made within the 90-day period before the annuity starting date. 
For example, if a plan designates a joint and 100% survivor annuity as 
the QJSA and also offers an actuarially equivalent joint and 50% 
survivor annuity that would satisfy the requirements of a QJSA, the 
participant may elect the joint and 50% survivor annuity without spousal 
consent. The participant, however, does need spousal consent to elect a 
joint and survivor annuity that was not actuarially equivalent to the 
automatic QJSA.
    Q-17: When must distributions to a participant under a QJSA 
commence?
    A-17: (a) QJSA benefits upon earliest retirement. A plan must permit 
a participant to receive a distribution in the form of a QJSA when the 
participant attains the earliest retirement age under the plan. Written 
consent of the participant is required. However, the consent of the 
participant's spouse is not required. Any payment not in the form of a 
QJSA is subject to spousal consent. For example, if the participant 
separates from service under a plan that allows for distributions on 
separation from service or if a plan allows for in-service 
distributions, the participant may receive a QJSA without spousal 
consent in such events. Payments in any other form, including a single 
sum, would require waiver of the QJSA by the participant's spouse.
    (b) Earliest retirement age. (1) This paragraph (b) defines the term 
``earliest retirement age'' for purposes of sections 401(a)(11), 
411(a)(11) and 417.
    (2) In the case of a plan that provides for voluntary distributions 
that commence upon the participant's separation from service, earliest 
retirement age is the earliest age at which a participant could separate 
from service and receive a distribution. Death of a participant is 
treated as a separation from service.
    (3) In the case of a plan that provides for in-service 
distributions, earliest retirement age is the earliest age at which such 
distributions may be made.

[[Page 82]]

    (4) In the case of a plan not described in subparagraph (2) or (3) 
of this paragraph, the rule below applies. Earliest retirement age is 
the early retirement age determined under the plan, or if no early 
retirement age, the normal retirement age determined under the plan. If 
the participant dies or separates from service before such age, then 
only the participant's actual years of service at the time of the 
participant's separation from service or death are taken into account. 
Thus, in the case of a plan under which benefits are not payable until 
the attainment of age 65, or upon attainment of age 55 and completion of 
10 years of service, the earliest retirement age of a participant who 
died or separated from service with 8 years of service is when the 
participant would have attained age 65 (if the participant had 
survived). On the other hand, if a participant died or separated from 
service after 10 years of service, the earliest retirement age is when 
the participant would have attained age 55 (if the participant had 
survived).
    Q-18: What is a qualified preretirement survivor annuity (QPSA) in a 
defined benefit plan?
    A-18: A QPSA is an immediate annuity for the life of the surviving 
spouse of a participant. Each payment under a QPSA under a defined 
benefit plan is not to be less than the payment that would have been 
made to the survivor under the QJSA payable under the plan if (a) in the 
case of a participant who dies after attaining the earliest retirement 
age under the plan, the participant had retired with a QJSA on the day 
before the participant's death, and (b) in the case of a participant who 
dies on or before the participant's earliest retirement age under the 
plan, the participant had separated from service at the earlier of the 
actual time of separation or death, survived until the earliest 
retirement age, retired at that time with a QJSA, and died on the day 
thereafter. If the participant elects before the annuity starting date a 
form of joint and survivor annuity that satisfies the requirements for a 
QJSA and dies before the annuity starting date, the elected form is 
treated as the QJSA and the QPSA must be based on such form.
    Q-19: What rules apply in determining the amount and forfeitability 
of a QPSA?
    A-19: The QPSA is calculated as of the earliest retirement age if 
the participant dies before such time, or at death if the participant 
dies after the earliest retirement age. The plan must make reasonable 
actuarial adjustments to reflect a payment earlier or later than the 
earliest retirement age. A defined benefit plan may provide that the 
QPSA is forfeited if the spouse does not survive until the date 
prescribed under the plan for commencement of the QPSA (i.e., the 
earliest retirement age). Similarly, if the spouse survives past the 
participant's earliest retirement age (or other earlier QPSA 
distribution date under the plan) and elects after the death of the 
participant to defer the commencement of the QPSA to a later date, a 
defined benefit plan may provide for a forfeiture of the QPSA benefit if 
the spouse does not survive until the deferred commencement date. The 
account balance in a defined contribution plan may not be forfeited even 
though the spouse does not survive until the time the account balance is 
used to purchase the QPSA. See   Q&A-17 of this section for the meaning 
of earliest retirement age.
    Q-20: What preretirement survivor annuity benefits must a defined 
contibution plan subject to the survivor annuity requirements of 
sections 401(a)(11) and 417 provide?
    A-20: A defined contribution plan that is subject to the survivor 
annuity requirements of sections 401(a)(11) and 417 must provide a 
preretirement survivor annuity with a value which is not less than 50 
percent of the nonforfeitable account balance of the participant as of 
the date of the participant's death. If a contributory defined 
contribution plan has a forfeiture provision permitted by section 
411(a)(3)(A), not more than a proportional percent of the account 
balance attributable to contributions that may not be forfeited at death 
(for example, employee and section 401(k) contributions) may be used to 
satisfy the QPSA benefit. Thus, for example, if the QPSA benefit is to

[[Page 83]]

be provided from 50 percent of the account balance, not more than 50 
percent of the nonforfeitable contributions may be used for the QPSA.
    Q-21: May a defined benefit plan charge the participant for the cost 
of the QPSA benefit?
    A-21: Prior to the later of the time the plan allows the participant 
to waive the QPSA or provides notice of the ability to waive the QPSA, a 
defined benefit plan may not charge the participant for the cost of the 
QPSA by reducing the participant's plan benefits or by any other method. 
The preceding sentence does not apply to any charges prior to the first 
plan year beginning after December 31, 1988. Once the participant is 
given the opportunity to waive the QPSA or the notice of the QPSA is 
later, the plan may charge the participant for the cost of the QPSA. A 
charge for the QPSA that reasonably reflects the cost of providing the 
QPSA will not fail to satisfy section 411 even if it reduces the accrued 
benefit.
    Q-22: When must distributions to a surviving spouse under a QPSA 
commence?
    A-22: (a) In the case of a defined benefit plan, the plan must 
permit the surviving spouse to direct the commencement of payments under 
QPSA no later than the month in which the participant would have 
attained the earliest retirement age. However, a plan may permit the 
commencement of payments at an earlier date.
    (b) In the case of a defined contribution plan, the plan must permit 
the surviving spouse to direct the commencement of payments under the 
QPSA within a reasonable time after the participant's death.
    Q-23: Must a defined benefit plan obtain the consent of a 
participant and the participant's spouse to commence payments in the 
form of a QJSA in order to avoid violating section 415 or 411(b)?
    A-23: No. A defined benefit plan may commence distributions in the 
form of a QJSA without the consent of the participant and spouse, even 
if consent would otherwise be required (see Sec. 1.417(e)-1(b)), to the 
extent necessary to avoid a violation of section 415 or 411(b). For 
example, assume a plan has a normal retirement age of 55. A is a married 
participant, age 55, and has accrued a $75,000 joint and 100 percent 
survivor annuity that satisfies section 415. If an actuarial increase 
would be required under section 411 because of deferred commencement and 
the increase would cause the benefit to exceed the applicable limit 
under section 415, the plan may commence payment of a QJSA at age 55 
without the participant's election or consent and without the spouse's 
concent.
    Q-24: What are the rules under sections 401(a)(11) and 417 
applicable to plan loans?
    A-24: (a) Consent rules. (1) A plan does not satisfy the survivor 
annuity requirements of sections 401(a)(11) and 417 unless the plan 
provides that, at the time the participant's accrued benefit is used as 
security for a loan, spousal consent to such use is obtained. Consent is 
required even if the accrued benefit is not the primary security for the 
loan. No spousal consent is necessary if, at the time the loan is 
secured, no consent would be required for a distribution under section 
417(a)(2)(B). Spousal consent is not required if the plan or the 
participant is not subject to section 401(a)(11) at the time the accrued 
benefit is used as security, or if the total accrued benefit subject to 
the security is not in excess of the cash-out limit in effect under 
Sec. 1.411(a)-11(c)(3)(ii). The spousal consent must be obtained no 
earlier than the beginning of the 90-day period that ends on the date on 
which the loan is to be so secured. The consent is subject to the 
requirements of section 417(a)(2). Therefore, the consent must be in 
writing, must acknowledge the effect of the loan and must be witnessed 
by a plan representative or a notary public.
    (2) Participant consent is deemed obtained at the time the 
participant agrees to use his accrued benefit as security for a loan for 
purposes of satisfying the requirements for participant consent under 
sections 401(a)(11), 411(a)(11) and 417.
    (b) Change in status. If spousal consent is obtained or is not 
required under paragraph (a) of this Q&A 24 at the time the benefits are 
used as security, spousal consent is not required at the time of any 
setoff of the loan against the accrued benefit resulting

[[Page 84]]

from a default, even if the participant is married to a different spouse 
at the time of the setoff. Similarly, in the case of a participant who 
secured a loan while unmarried, no consent is required at the time of a 
setoff of the loan against the accrued benefit even if the participant 
is married at the time of the setoff.
    (c) Renegotiation. For purposes of obtaining any required spousal 
consent, any renegotiation, extension, renewal, or other revision of a 
loan shall be treated as a new loan made on the date of the 
renegotiation, extension, renewal, or other revision.
    (d) Effect on benefits. For purposes of determining the amount of a 
QPSA or QJSA, the accrued benefit of a participant shall be reduced by 
any security interest held by the plan by reason of a loan outstanding 
to the participant at the time of death or payment, if the security 
interest is treated as payment in satisfaction of the loan under the 
plan. A plan may offset any loan outstanding at the participant's death 
which is secured by the participant's account balance against the 
spousal benefit required to be paid under section 401(a)(11)(B)(iii).
    (e) Effective date. Loans made prior to August 19, 1985, are deemed 
to satisfy the consent requirements of paragraph (a) of this Q&A 24.
    Q-25: How do the survivor annuity requirements of sections 
401(a)(11) and 417 apply with respect to participants who are not 
married or to surviving spouses and participants who have a change in 
marital status?
    A-25: (a) Unmarried participant rule. Plans subject to the survivor 
annuity requirements of sections 401(a)(11) and 417 must satisfy those 
requirements applicable to QJSAs with respect to participants who are 
not married. A QJSA for a participant who is not married is an annuity 
for the life of the participant. Thus, an unmarried participant must be 
provided the written explanation described in section 417(a)(3)(A) and a 
single life annuity unless another form of benefit is elected by the 
participant. An unmarried participant is deemed to have waived the QPSA 
requirements. This deemed waiver is null and void if the participant 
later marries.
    (b) Marital status change.--(1) Remarriage. If a participant is 
married on the date of death, payments to a surviving spouse under a 
QPSA or QJSA must continue even if the surviving spouse remarries.
    (2) One-year rule. (i) A plan is not required to treat a participant 
as married unless the participant and the participant's spouse have been 
married throughout the one-year period ending on the earlier of (A) the 
participant's annuity starting date or (B) the date of the participant's 
death. Nevertheless, for purposes of the preceding sentence, a 
participant and the participant's spouse must be treated as married 
throughout the one-year period ending on the participant's annuity 
starting date even though they are married to each other for less than 
one year before the annuity starting date if they remain married to each 
other for at least one year. See section 417(d)(2). If a plan adopts the 
one-year rule provided in section 417(d), the plan must treat the 
participant and spouse who are married on the annuity starting date as 
married and must provide benefits which are to commence on the annuity 
starting date in the form of a QJSA unless the participant (with spousal 
consent) elects another form of benefit. The plan is not required to 
provide the participant with a new or retroactive election or the spouse 
with a new consent when the one-year period is satisfied. If the 
participant and the spouse do not remain married for at least one year, 
the plan may treat the participant as having not been married on the 
annuity starting date. In such event, the plan may provide that the 
spouse loses any survivor benefit right; further, no retroactive 
correction of the amount paid the participant is required.

    (ii) Example. Plan X provides that participants who are married on 
the annuity starting date for less than one year are treated as 
unmarried participants. Plan X provides benefits in the form of a QJSA 
or an optional single sum distribution. Participant A was married 6 
months prior to the annuity starting date. Plan X must treat A as 
married and must commence payments to A in the form of a QJSA unless 
another form of benefit is elected by A with spousal consent. If a QJSA 
is paid and A is divorced from his spouse S, within the first year of 
the marriage, S will no longer have any survivor rights under the

[[Page 85]]

annuity (unless a QDRO provides otherwise). If A continues to be married 
to S, and A dies within the one-year period, Plan X may treat A as 
unmarried and forfeit the OJSA benefit payable to S.

    (3) Divorce. If a participant divorces his spouse prior to the 
annuity starting date, any elections made while the participant was 
married to his former spouse remain valid, unless otherwise provided in 
a QDRO, or unless the participant changes them or is remarried. If a 
participant dies after the annuity starting date, the spouse to whom the 
participant was married on the annuity starting date is entitled to the 
QJSA protection under the plan. The spouse is entitled to this 
protection (unless waived and consented to by such spouse) even if the 
participant and spouse are not married on the date of the participant's 
death, except as provided in a QDRO.
    Q-26: In the case of a defined contribution plan not subject to 
section 412, does the requirement that a participant's nonforfeitable 
accrued benefit be payable in full to a surviving spouse apply to a 
spouse who has been married to the participant for less than one year?
    A-26: A plan may provide that a spouse who has not been married to a 
participant throughout the one-year period ending on the earlier of (a) 
the participant's annuity starting date or (b) the date of the 
participant's death is not treated as a surviving spouse and is not 
required to receive the participant's account balance. The special 
exception described in section 417(d)(2) and Q&A 25 of this section does 
not apply.
    Q-27: Are there circumstances when spousal consent to a 
participant's election to waive the QJSA or the QPSA is not required?
    A-27: Yes. If it is established to the satisfaction of a plan 
representative that there is no spouse or that the spouse cannot be 
located, spousal consent to waive the QJSA or the QPSA is not required. 
If the spouse is legally incompetnent to give consent, the spouse's 
legal guardian, even if the guardian is the participant, may give 
consent. Also, if the participant is legally separated or the 
participant has been abandoned (within the meaning of local law) and the 
participant has a court order to such effect, spousal consent is not 
required unless a QDRO provides otherwise. Similar rules apply to a plan 
subject to the requirements of section 401(a)(11)(B)(iii)(I).
    Q-28: Does consent contained in an antenuptial agreement or similar 
contract entered into prior to marriage satisfy the consent requirements 
of sections 401(a)(11) and 417?
    A-28: No. An agreement entered into prior to marriage does not 
satisfy the applicable consent requirements, even if the agreement is 
executed within the applicable election period.
    Q-29: If a participant's spouse consents under section 417(a)(2)(A) 
to the participant's waiver of a survivor annuity form of benefit, is a 
subsequent spouse of the same participant bound by the consent?
    A-29: No. A consent under section 417(a)(2)(A) by one spouse is 
binding only with respect to the consenting spouse. See Q&A-24 of this 
section for an exception in the case of plan benefits securing plan 
loans.
    Q-30: Does the spousal consent requirement of section 417(a)(2)(A) 
require that a spouse's consent be revocable?
    A-30: No. A plan may preclude a spouse from revoking consent once it 
has been given. Alternatively, a plan may also permit a spouse to revoke 
a consent after it has been given, and thereby to render ineffective the 
participant's prior election not to receive a QPSA or QJSA. A 
participant must always be allowed to change his election during the 
applicable election period. Spousal consent is required in such cases to 
the extent provided in Q&A 31, except that spousal consent is never 
required for a QJSA or QPSA.
    Q-31: What rules govern a participant's waiver of a QPSA or QJSA 
under section 417(a)(2)?
    A-31: (a) Specific beneficiary. Both the participant's waivers of a 
QPSA and QJSA and the spouse's consents thereto must state the specific 
nonspouse beneficiary (including any class of beneficiaries or any 
contingent beneficiaries) who will receive the benefit. Thus, for 
example, if spouse B consents to participant A's election to waive a

[[Page 86]]

QPSA, and to have any benefits payable upon A's death before the annuity 
starting date paid to A's children, A may not subsequently change 
beneficiaries without the consent of B (except if the change is back to 
a QPSA). If the designated beneficiary is a trust, A's spouse need only 
consent to the designation of the trust and need not consent to the 
designation of trust beneficiaries or any changes of trust 
beneficiaries.
    (b) Optional form of benefit--(1) QJSA. Both the participant's 
waiver of a QJSA (and any required spouse's consent thereto) must 
specify the particular optional form of benefit. The participant who has 
waived a QJSA with the spouse's consent in favor of another form of 
benefit may not subsequently change the optional form of benefit without 
obtaining the spouse's consent (except back to a QJSA). Of course, the 
participant may change the form of benefit if the plan so provides after 
the spouse's death or a divorce (other than as provided in a QDRO). A 
participant's waiver of a QJSA (and any required spouse's consent 
thereto) made prior to the first plan year beginning after December 31, 
1986, is not required to specify the optional form of benefit.
    (2) QPSA. A participant's waiver of a QPSA and the spouse's consent 
thereto are not required to specify the optional form of any 
preretirement benefit. Thus, a participant who waives the QPSA with 
spousal consent may subsequently change the form of the preretirement 
benefit, but not the nonspouse beneficiary, without obtaining the 
spouse's consent.
    (3) Change in form. After the participant's death, a beneficiary may 
change the optional form of survivor benefit as permitted by the plan.
    (c) General consent. In lieu of satisfying paragraphs (a) and (b) of 
this Q&A 31, a plan may permit a spouse to execute a general consent 
that satisfies the requirements of this paragraph (c). A general consent 
permits the participant to waive a QPSA or QJSA, and change the 
designated beneficary or the optional form of benefit payment without 
any requirement of further consent by such spouse. No general consent is 
valid unless the general consent acknowledges that the spouse has the 
right to limit consent to a specific beneficiary and a specific optional 
form of benefit, where applicable, and that the spouse voluntarily 
elects to relinquish both of such rights. Notwithstanding the previous 
sentence, a spouse may execute a general consent that is limited to 
certain beneficiaries or forms of benefit payment. In such case, 
paragraphs (a) and (b) of this Q&A 31 shall apply to the extent that the 
limited general consent is not applicable and this paragraph (c) shall 
apply to the extent that the limited general consent is applicable. A 
general consent, including a limited general consent, is not effective 
unless it is made during the applicable election period. A general 
consent executed prior to October 22, 1986 does not have to satisfy the 
specificity requirements of this Q&A 31.
    Q-32: What rules govern a participant's waiver of the spousal 
benefit under section 401(a)(11)(B)?
    A-32: (a) Application. In the case of a defined contribution plan 
that is not subject to the survivor annuity requirements of sections 
401(a)(11) and 417, a participant may waive the spousal benefit of 
section 401(a)(11)(B)(iii) if the conditions of paragraph (b) are 
satisfied. In general, a spousal benefit is the nonforfeitable account 
balance on the participant's date of death.
    (b) Conditions. In general, the same conditions, other than the age 
35 requirement, that apply to the participant's waiver of a QPSA and the 
spouse's consent thereto apply to the participant's waiver of the 
spousal benefit and the spouse's consent thereto. See Q&A-31. Thus, the 
participant's waiver of the spousal benefit must state the specific 
nonspouse beneficiary who will receive such benefit. The waiver is not 
required to specify the optional form of benefit. The participant may 
change the optional form of benefit, but not the nonspouse beneficiary, 
without obtaining the spouse's consent.
    Q-33: When and in what manner, may a participant waive a spousal 
benefit or a QPSA?
    A-33: (a) Plans not subject to section 401(a)(11). A participant in 
a plan that is not subject to the survivor annuity

[[Page 87]]

requirements of section 401(a)(11) (because of subparagraph (B)(iii) 
thereof) may waive the spousal benefit at any time, provided that no 
such waiver shall be effective unless the spouse has consented to the 
waiver. The spouse may consent to a waiver of the spousal benefit at any 
time, even prior to the participant's attaining age 35. No spousal 
consent is required for a payment to the participant or the use of the 
accrued benefit as security for a plan loan to the participant.
    (b) Plans subject to section 401(a)(11). A participant in a plan 
subject to the survivor annuity requirements of section 401(a)(11) 
generally may waive the QPSA benefit (with spousal consent) only on or 
after the first day of the plan year in which the participant attains 
age 35. However, a plan may provide for an earlier waiver (with spousal 
consent), provided that a written explanation of the QPSA is given to 
the participant and such waiver becomes invalid upon the beginning of 
the plan year in which the participant's 35th birthday occurs. If there 
is no new waiver after such date, the participant's spouse must receive 
the QPSA benefit upon the participant's death.
    Q-34: Must the written explanations required by section 417(a)(3) be 
provided to nonvested participants?
    A-34: Such written explantions must be provided to nonvested 
participants who are employed by an employer maintaining the plan. Thus, 
they are not required to be provided to those nonvested participants who 
are no longer employed by such an employer.
    Q-35: When must a plan provide the written explanation, required by 
section 417(a)(3)(B), of the QPSA to a participant?
    A-35: (a) General rule. A plan must provide the written explanation 
of the QPSA to a participant within the applicable period. Except as 
provided in paragraph (b), the applicable period means, with respect to 
a participant, whichever of the following periods ends last:
    (1) The period beginning with the first day of the plan year in 
which the participant attains age 32 and ending with the close of the 
plan year preceding the plan year in which the participant attains age 
35.
    (2) A reasonable period ending after the individual becomes a 
participant.
    (3) A reasonable period ending after the QPSA is no longer fully 
subsidized.
    (4) A reasonable period ending after section 401(a)(11) first 
applies to the participant. Section 401(a)(11) would first apply when a 
benefit is transferred from a plan not subject to the survivor annuity 
requirements of section 401(a)(11) to a plan subject to such section or 
at the time of an election of an annuity under a defined contribution 
plan described in section 401(a)(11)(B)(iii).
    (b) Pre-35 separations. In the case of a participant who separates 
from service before attaining age 35, the applicable period means the 
period beginning one year before the separation from service and ending 
one year after such separation. If such a participant returns to 
service, the plan must also comply with pragraph (a).
    (c) Reasonable period. For purposes of applying paragraph (a), a 
reasonable period ending after the enumerated events described in 
paragraphs (a) (2), (3) and (4) is the end of the one-year period 
beginning with the date the applicable event occurs. The applicable 
period for such events begins one year prior to the occurrence of the 
enumerated events.
    (d) Transition rule. In the case of an individual who was a 
participant in the plan on August 23, 1984, and, as of that date had 
attained age 34, the plan will satisfy the requriement of section 
417(a)(3)(B) if it provided the explanation not later than December 31, 
1985.
    Q-36: How do plans satisfy the requirements of providing 
participants explanations of QPSAs and QJSAs?
    A-36: Section 417(a)(3) sets forth the requirements for providing 
plan participants written explanations of QPSAs and QJSAs. The 
requirement that the terms and conditions of the QJSA or QPSA, as the 
case may be, be furnished to participants is not satisfied unless the 
written explanation complies with the requirements set forth in 
Sec. 1.401(a)-11(c)(3). Also, for plan years beginning after December 
31, 1988, participants must be furnished a general description of the 
eligibility conditions and other material features

[[Page 88]]

of the optional forms of benefit and sufficient additional information 
to explain the relative values of the optional forms of benefit 
available under the plan (e.g., the extent to which optional forms are 
subsidized relative to the normal form of benefit or the interest rates 
used to calculate the optional forms).
    Q-37: What are the consequences of fully subsidizing the cost of 
either a QJSA or a QPSA in accordance with section 417(a)(5)?
    A-37: If a plan fully subsidizes a QJSA or QPSA in accordance with 
section 417(a)(5) and does not allow a participant to waive such QJSA or 
QPSA or to select a nonspouse beneficiary, the plan is not required to 
provide the written explanation required by section 417(a)(3). However, 
if the plan offers an election to waive the benefit or designate a 
beneficiary, it must satisfy the election, consent, and notice 
requirements of section 417(a) (1), (2), and (3), with respect to such 
subsidized QJSA or QPSA, in accordance with section 417(a)(5).
    Q-38: What is a fully subsidized benefit?
    A-38: (a) QJSA--(1) General rule. A fully subsidized QJSA is one 
under which no increase in cost to, or decrease in actual amounts 
received by, the participant may result from the participant's failure 
to elect another form of benefit.
    (2) Examples.

    Example (1) . If a plan provides a joint and survivor annuity and a 
single sum option, the plan does not fully subsidize the joint and 
survivor annuity, regardless of the actuarial value of the joint and 
survivor annuity because, in the event of the participant's early death, 
the participant would have received less under the annuity than he would 
have received under the single sum option.
    Example (2) . If a plan provides for a life annuity of $100 per 
month and a joint and 100% survivor benefit of $99 per month, the plan 
does not fully subsidize the joint and survivor benefit.

    (b) QPSA. A QPSA is fully subsidized if the amount of the 
participant's benefit is not reduced because of the QPSA coverage and if 
no charge to the participant under the plan is made for the coverage. 
Thus, a QPSA is fully subsidized in a defined contribution plan.
    Q-39: When do the survivor annuity requirements of sections 
401(a)(11) and 417 apply to plans?
    A-39: Sections 401(a)(11) and 417 generally apply to plan years 
beginning after December 31, 1984. Sections 302 and 303 of REA 1984 
provide specific effective dates and transitional rules under which the 
QJSA or QPSA (or pre-REA 1984 section 401(a)(11)) requirements may be 
applicable to particular plans or with respect to benefits provided to 
(as amended by REA 1984) particular participants. In general, the 
section 401(a)(11) (as amended by REA 1984) survivor annuity 
requirements do not apply with respect to a participant who does not 
have at least one hour of service or one hour of paid leave under the 
plan after August 22, 1984.
    Q-40: Are there special effective dates for plans maintained 
pursuant to collective bargaining agreements?
    A-40: Yes. Section 302(b) of REA 1984 as amended by section 1898(g) 
of the Tax Reform Act of 1986 provides a special deferred effective date 
for such plans. Whether a plan is described in section 302(b) of REA 
1984 is determined under the principles applied under section 1017(c) of 
the Employee Retirement Income Security Act of 1974. See H.R. Rep. No. 
1280, 93d Cong., 2d Sess. 266 (1974). In addition, a plan will not be 
treated as maintained under a collective bargaining agreement unless the 
employee representatives satisfy section 7701(a)(46) of the Internal 
Revenue Code after March 31, 1984. See Sec. 301.7701-17T for other 
requirements for a plan to be considered to be collectively bargained. 
Nothing in section 302(b) of REA 1984 denies a participant or spouse the 
rights set forth in sections 303(c)(2), 303(c)(3), 303(e)(1), and 
303(e)(2) of REA 1984.
    Q-41: What is one hour of service or paid leave under the plan for 
purposes of the transition rules in section 303 of REA 1984?
    A-41: One hour of service or paid leave under the plan is one hour 
of service or paid leave recognized or required to be recognized under 
the plan for any purpose, e.g., participation, vesting percentage, or 
benefit accrual purposes. For plans that do not compute hours of 
service, one hour of service or paid leave means any service or

[[Page 89]]

paid leave recognized or required to be recognized under the plan for 
any purpose.
    Q-42: Must a plan be amended to provide for the QPSA required by 
section 303(c)(2) of REA 1984, or for the survivor annuities required by 
section 303(e) of REA 1984?
    A-42: A plan will not fail to satisfy the qualification requirements 
of section 401(a) or 403(a) merely because it is not amended to provide 
the QPSA required by section 303(c)(2) or the survivor annuities 
required by section 303(e). The plan must, however, satisfy those 
requirements in operation.
    Q-43: Is a participant's election, or a spouse's consent to an 
election, with respect to a QPSA, made before August 23, 1984, valid?
    A-43: No.
    Q-44: Is spousal consent required for certain survivor annuity 
elections made by the participant after December 31, 1984, and before 
the first plan year to which new sections 401(a)(11) and 417 apply?
    A-44: Yes. Section 303(c)(3) of REA 1984 provides that any election 
not to take a QJSA made after December 31, 1984, and before the date 
sections 401(a)(11) and 417 apply to the plan by a participant who has 1 
hour of service or leave under the plan after August 23, 1984, is not 
effective unless the spousal consent requirements of section 417 are met 
with respect to such election. Unless the participant's annuity starting 
date occurred before January 1, 1985, the spousal consent required by 
section 417 (a)(2) and (e) must be obtained even though the participant 
elected the benefit prior to January 1, 1985. The plan is not required 
to be amended to comply with section 303(c)(3) of REA 1984, but the plan 
must satisfy this requirement in operation.
    Q-45: Are there special rules for certain participants who separated 
from service prior to August 23, 1984?
    A-45: Yes. Section 303(e) of REA 1984 provides special rules for 
certain participants who separated from service before August 23, 1984. 
Section 303(e)(1), which applies only to plans subject to section 
401(a)(11) of the Code (as in effect on August 22, 1984), provides that 
participants whose annuity starting date did not occur before August 24, 
1984, and who had one hour of service on or after September 2, 1974, but 
not in a plan year beginning after December 31, 1975, may elect to 
receive the benefits required to be provided under section 401(a)(11) of 
the Code (as in effect on August 22, 1984). Section 303(e)(2) provides 
that certain participants who had one hour of service in a plan year 
beginning on or after January 1, 1976, but not after August 22, 1984, 
may elect QPSA coverage under new sections 401(a)(11) and 417 in plans 
subject to these provisions. Section 303(e)(4)(A) requires plans or plan 
administrators to notify those participants of the provisions of section 
303(e).
    Q-46: When must a plan provide the notice required by section 
303(e)(4)(A) of REA 1984?
    A-46: The notice required by section 303(e)(4)(A) must be provided 
no later than the earlier of:
    (a) The date the first summary annual report provided after 
September 17, 1985, is distributed to participants; or
    (b) September 30, 1985.

A plan will not fail to satisfy the preceding sentence if the plan 
provides a fully subsidized QPSA with respect to any participant 
described in section 303(e) who dies on or after July 19, 1985, and 
before the notice is received. If the plan ceases to fully subsidize the 
QPSA, the cessation must not be effective until the notice is given. For 
this purpose, an annuity payable to a nonspouse beneficiary elected by 
the participant, in lieu of a spouse, shall satisfy the QPSA 
requirement, so long as the survivor benefit is fully subsidized. The 
notice required by this paragraph must be in writing and sent to the 
participant's last known address.
    Q-47: Is there another time when plans must provide notice of the 
right, described in section 303(e)(1) of REA '84, to elect a pre-REA 
1984 qualified joint and survivor annuity?
    A-47: Yes. Notice of this right must also be provided to a 
participant at the time the participant applies for benefit payments.

[53 FR 31842, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as amended by 
T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891, 65 FR 44682, July 19, 
2000]

[[Page 90]]



Sec. 1.401(a)-30  Limit on elective deferrals.

    (a) General Rule. A trust that is part of a plan under which 
elective deferrals may be made during a calendar year is not qualified 
under section 401(a) unless the plan provides that the elective 
deferrals on behalf of an individual under the plan and all other plans, 
contracts, or arrangements of the employer maintaining the plan may not 
exceed the applicable limit for the individual's taxable year beginning 
in the calendar year. A plan may incorporate the applicable limit by 
reference. In the case of a plan maintained by more than one employer to 
which section 413 (b) or (c) applies, section 401(a)(30) and this 
section are applied as if each employer maintained a separate plan. See 
Sec. 1.402(g)-1(e) for rules permitting the distribution of excess 
deferrals to prevent disqualification of a plan or trust for failure to 
comply in operation with section 401(a)(30).
    (b) Definitions. For purposes of this section:
    (1) Applicable limit. The term ``applicable limit'' has the meaning 
provided in Sec. 1.402(g)-1(d).
    (2) Elective deferrals. The term ``elective deferrals'' has the 
meaning provided in Sec. 1.402(g)-1(b).
    (c) Effective date--(1) In general. Except as otherwise provided in 
this paragraph (c), this section is effective for plan years beginning 
after December 31, 1987.
    (2) Transition rule. For plan years beginning in l988, a plan may 
rely on a reasonable interpretation of the law as in effect on December 
31, 1987.
    (3) Deferrals under collective bargaining agreements. In the case of 
a plan maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified before March 1, 1986, this section does not apply to 
contributions made pursuant to a collective bargaining agreement for 
plan years beginning before the earlier of:
    (i) The later of January 1, 1988, or the date on which the last 
collective bargaining agreement terminates (determined without regard to 
any extension thereof after February 28, 1986), or
    (ii) January 1, 1989.

[T.D. 8357, 56 FR 40516, Aug. 15, 1991]



Sec. 1.401(a)-50  Puerto Rican trusts; election to be treated as a domestic trust.

    (a) In general. Section 401(a) requires, among other things, that a 
trust forming part of a pension, profit-sharing, or stock bonus plan 
must be created or organized in the United States to be a qualified 
trust. Section 1022(i)(2) of the Employee Retirement Income Security Act 
of 1974 (ERISA) (88 Stat. 942) provides that trusts under certain 
pension, etc., plans created or organized in Puerto Rico whose 
administrators have made the election referred to in section 1022(i)(2) 
are to be treated as trusts created or organized in the United States 
for purposes of section 401(a). Thus, if a plan otherwise satisfies the 
qualification requirements of section 401(a), any trust forming part of 
the plan for which an election is made will be treated as a qualified 
trust under that section.
    (b) Manner and effect of election. A plan administrator may make an 
election under ERISA section 1022(i)(2) by filing a statement making the 
election, along with a copy of the plan, with the Director's 
Representative of the Internal Revenue Service in Puerto Rico. The 
statement making the election must indicate that it is being made under 
ERISA section 1022(i)(2). The statement may also be filed in conjunction 
with a written request for a determination letter. If the election is 
made with a written request for a determination letter, the election may 
be conditioned upon issuance of a favorable determination letter and 
will be irrevocable upon issuance of such letter. Otherwise, once made, 
an election is irrevocable. It is generally effective for plan years 
beginning after the date it has been made. However, an election made 
before March 3, 1983 may, at the option of the plan administrator at the 
time he or she makes the election, be considered to have been made on 
any date between September 2, 1974, and the actual date of the election. 
The election will then be effective for plan years beginning on or after 
the date chosen by the plan administrator.

[[Page 91]]

    (c) Annuities, custodial accounts, etc. See section 401 (f) for 
rules relating to the treatment of certain annuities, custodial accounts 
or other contracts, as trusts for purposes of section 401(a).
    (d) Source of plan distributions to participants and beneficiaries 
residing outside the United States. Except as provided under section 
871(f) (relating to amounts received as an annuity by nonresident 
aliens), the amount of a distribution from an electing plan that is to 
be treated as income from sources within the United States is determined 
as described below. The portion of the distribution considered to be a 
return of employer contributions is to be treated as income from sources 
within the United States in an amount equal to the portion of the 
distribution considered to be a return of employer contributions 
multiplied by the following fraction:

Days of performance of labor or services within the United States for 
the employer.
________________________________________________________________________
Total days of performance of labor or services for the employer.


The days of performance of labor or services within the United States 
shall not include the time period for which the employee's compensation 
is deemed not to be income from sources within the United States under 
subtitle A of the Code. Thus, for example, if an employee's compensation 
was not deemed to be income from sources within the United States under 
section 861(a)(3), then the time the emloyee was present in the United 
States while such compensation was earned would not be included in 
determining the days of performance of labor or services within the 
United States in the numerator of the above fraction. In addition, days 
of performance of labor or services for the employer in both the 
numerator and denominator of the above fraction are limited to days of 
plan participation by the employee and any service used for determining 
an employee's accrued benefit under the plan. The remaining portion of 
the distribution, that is, any amount other than the portion of the 
distribution considered to be a return of employer contributions, is not 
to be treated as income from sources within the United States. For 
example, if a distribution consists of amounts representing employer 
contributions, employee contributions, and earnings on employer and 
employee contributions, no part of the portion of the distribution 
attributable to employee contributions, or earnings on employer and 
employee contributions, will be treated as income from sources within 
the United States.

[T.D. 7859, 47 FR 54297, Dec. 2, 1982]



Sec. 1.401(a)(2)-1  Refund of mistaken employer contributions and withdrawal liability payments to multiemployer plans.

    (a) Introduction--(1) In general. Section 401(a)(2) provides that a 
contribution or payment of withdrawal liability made to a multiemployer 
plan due to a mistake of fact or mistake of law can be returned to the 
employer under certain conditions. This section specifies the conditions 
under which an employer's contribution or payment may be returned.
    (2) Effective dates. This section applies to refunds made after July 
22, 2002.
    (b) Conditions for return of contribution--(1) In general. In the 
case of a contribution or a withdrawal liability payment to a 
multiemployer plan which was made because of a mistake of fact or a 
mistake of law, the plan will not violate section 401(a)(2) merely 
because the contribution or payment is returned within six months after 
the date on which the plan administrator determines that the 
contribution or payment was the result of a mistake of fact or law. The 
contribution or payment is considered as returned within the required 
period if the employer establishes a right to a refund of the amount 
mistakenly contributed or paid by filing a claim with the plan 
administrator within six months after the date on which the plan 
administrator determines that a mistake did occur. For purposes of this 
section, plan administrator is defined in section 414(g) and the 
regulations thereunder.
    (2) Applicable conditions--(i) In general. The employer making the 
contribution or withdrawal liability payment to a multiemployer plan 
must

[[Page 92]]

demonstrate that an excessive contribution or overpayment has been made 
due to a mistake of fact or law. A mistake of fact or law relating to 
plan qualification under section 401 or to trust exemption under section 
501 is not considered to be a mistake of fact or law which entitles an 
employer to a refund under this section. For purposes of this section, a 
multiemployer plan is defined in section 414(f) and the regulations 
thereunder.
    (ii) Amount to be returned--(A) General rule. The amount to be 
returned to the employer is the excess of the amount contributed or paid 
over the amount that would have been contributed or paid had no mistake 
been made. This amount is the excess contribution or overpayment. Except 
as provided in paragraph (b)(2)(ii)(B) of this section, interest or 
earnings attributable to an excess contribution shall not be returned to 
the employer, and any losses attributable to an excess contribution must 
reduce the amount returned to the employer. For purposes of the previous 
sentence, the application of plan-wide investment experience to the 
excess contribution would be an acceptable method of calculating losses. 
A refund of a mistaken contribution must in no event reduce a 
participant's account balance in a defined contribution plan to an 
amount less than that amount which would properly have been in that 
participant's account had no mistake occurred. Thus, to the extent that 
the refund of an excess contribution would reduce a participant's 
account balance in a defined contribution plan to an amount less than 
the amount which would properly be in the participant's account had no 
mistake occurred, the return of the excess contribution would be 
prohibited by this section.
    (B) Overpayment of withdrawal liability. In the case of an 
overpayment of withdrawal liability established by the plan sponsor 
under section 4219(c)(2) of ERISA, the plan will not fail to satisfy 
section 401(a)(2) if, in accordance with Pension Benefit Guaranty 
Corporation regulations regarding the overpayments of withdrawal 
liability (29 CFR 4219.31(d)), the overpayment, with interest, is 
returned to the employer.
    (c) Amount refunded includible in employer's income. In general, the 
amount of the excess contribution or overpayment must be included in 
gross income by the employer if the excess contribution or overpayment 
resulted in a tax benefit in a prior year. Any interest credited or paid 
on the refund of mistaken withdrawal liability payments must also be 
included in gross income by the employer.
    (d) Application of section 412. An amount returned under paragraph 
(b)(2)(ii) of this section is charged to the funding standard account 
under section 412 in the year in which the amount is returned.

[T.D. 9005, 67 FR 47693, July 22, 2002]



Sec. 1.401(a)(4)-0  Table of contents.

    This section contains a listing of the major headings of 
Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.

 Sec. 1.401(a)(4)-1  Nondiscrimination requirements of section 401(a)(4)

(a) In general.
(b) Requirements a plan must satisfy.
    (1) In general.
    (2) Nondiscriminatory amount of contributions or benefits.
    (3) Nondiscriminatory availability of benefits, rights, and 
features.
    (4) Nondiscriminatory effect of plan amendments and terminations.
(c) Application of requirements.
    (1) In general.
    (2) Interpretation.
    (3) Plan-year basis of testing.
    (4) Application of section 410(b) rules.
    (5) Collectively-bargained plans.
    (6) Former employees.
    (7) Employee-provided contributions and benefits.
    (8) Allocation of earnings.
    (9) Rollovers, transfers, and buybacks.
    (10) Vesting.
    (11) Crediting service.
    (12) Governmental plans.
    (13) Employee stock ownership plans.
    (14) Section 401(h) benefits.
    (15) Definitions.
    (16) Effective dates and fresh-start rules.
(d) Additional guidance.

      Sec. 1.401(a)(4)-2  Nondiscrimination in amount of employer 
             contributions under a defined contribution plan

(a) Introduction.
    (1) Overview.
    (2) Alternative methods of satisfying nondiscriminatory amount 
requirement.
(b) Safe harbors.

[[Page 93]]

    (1) In general.
    (2) Safe harbor for plans with uniform allocation formula.
    (3) Safe harbor for plans with uniform points allocation formula.
    (4) Use of safe harbors not precluded by certain plan provisions.
(c) General test for nondiscrimination in amount of contributions.
    (1) General rule.
    (2) Determination of allocation rates.
    (3) Satisfaction of section 410(b) by a rate group.
    (4) Examples.

  Sec. 1.401(a)(4)-3  Nondiscrimination in amount of employer-provided 
                  benefits under a defined benefit plan

(a) Introduction.
    (1) Overview.
    (2) Alternative methods of satisfying nondiscriminatory amount 
requirement.
(b) Safe harbors.
    (1) In general.
    (2) Uniformity requirements.
    (3) Safe harbor for unit credit plans.
    (4) Safe harbor for plans using fractional accrual rule.
    (5) Safe harbor for insurance contract plans.
    (6) Use of safe harbors not precluded by certain plan provisions.
(c) General test for nondiscrimination in amount of benefits.
    (1) General rule.
    (2) Satisfaction of section 410(b) by a rate group.
    (3) Certain violations disregarded.
    (4) Examples.
(d) Determination of accrual rates.
    (1) Definitions.
    (2) Rules of application.
    (3) Optional rules.
    (4) Examples.
(e) Compensation rules.
    (1) In general.
    (2) Average annual compensation.
    (3) Examples.
(f) Special rules.
    (1) In general.
    (2) Certain qualified disability benefits.
    (3) Accruals after normal retirement age.
    (4) Early retirement window benefits.
    (5) Unpredictable contingent event benefits.
    (6) Determination of benefits on other than plan-year basis.
    (7) Adjustments for certain plan distributions.
    (8) Adjustment for certain QPSA charges.
    (9) Disregard of certain offsets.
    (10) Special rule for multiemployer plans.

Sec. 1.401(a)(4)-4  Nondiscriminatory availability of benefits, rights, 
                              and features

(a) Introduction.
(b) Current availability.
    (1) General rule.
    (2) Determination of current availability.
    (3) Benefits, rights, and features that are eliminated 
prospectively.
(c) Effective availability.
    (1) General rule.
    (2) Examples.
(d) Special rules.
    (1) Mergers and acquisitions.
    (2) Frozen participants.
    (3) Early retirement window benefits.
    (4) Permissive aggregation of certain benefits, rights, or features.
    (5) Certain spousal benefits.
    (6) Special ESOP rules.
    (7) Special testing rule for unpredictable contingent event 
benefits.
(e) Definitions.
    (1) Optional form of benefit.
    (2) Ancillary benefit.
    (3) Other right or feature.

        Sec. 1.401(a)(4)-5  Plan amendments and plan terminations

    (a) Introduction.
    (1) Overview.
    (2) Facts-and-circumstances determination.
    (3) Safe harbor for certain grants of benefits for past periods.
    (4) Examples.
(b) Pre-termination restrictions.
    (1) Required provisions in defined benefit plans.
    (2) Restriction of benefits upon plan termination.
    (3) Restrictions on distributions.
    (4) Operational restrictions on certain money purchase pension 
plans.

         Sec. 1.401(a)(4)-6  Contributory defined benefit plans

(a) Introduction.
(b) Determination of employer-provided benefit.
    (1) General rule.
    (2) Composition-of-work-force method.
    (3) Minimum-benefit method.
    (4) Grandfather rules for plans in existence on May 14, 1990.
    (5) Government-plan method.
    (6) Cessation of employee contributions.
(c) Rules applicable in determining whether employee-provided benefits 
          are nondiscriminatory in amount.
    (1) In general.
    (2) Same rate of contributions.
    (3) Total-benefits method.
    (4) Grandfather rule for plans in existence on May 14, 1990.

          Sec. 1.401(a)(4)-7  Imputation of permitted disparity

(a) Introduction.
(b) Adjusting allocation rates.

[[Page 94]]

    (1) In general.
    (2) Employees whose plan year compensation does not exceed taxable 
wage base.
    (3) Employees whose plan year compensation exceeds taxable wage 
base.
    (4) Definitions.
    (5) Example.
(c) Adjusting accrual rates.
    (1) In general.
    (2) Employees whose average annual compensation does not exceed 
covered compensation.
    (3) Employees whose average annual compensation exceeds covered 
compensation.
    (4) Definitions.
    (5) Employees with negative unadjusted accrual rates.
    (6) Example.
(d) Rules of general application.
    (1) Eligible plans.
    (2) Exceptions from consistency requirements.
    (3) Overall permitted disparity.

                    Sec. 1.401(a)(4)-8  Cross-testing

(a) Introduction.
(b) Nondiscrimination in amount of benefits provided under a defined 
          contribution plan.
    (1) General rule and gateway.
    (2) Determination of equivalent accrual rates.
    (3) Safe-harbor testing method for target benefit plans.
(c) Nondiscrimination in amount of contributions under a defined benefit 
          plan.
    (1) General rule.
    (2) Determination of equivalent allocation rates.
    (3) Safe harbor testing method for cash balance plans.
(d) Safe-harbor testing method for defined benefit plans that are part 
          of a floor-offset arrangement.
    (1) General rule.
    (2) Application of safe-harbor testing method to qualified offset 
arrangements.

         Sec. 1.401(a)(4)-9  Plan aggregation and restructuring

(a) Introduction.
(b) Application of nondiscrimination requirements to DB/DC plans.
    (1) General rule.
    (2) Special rules for demonstrating nondiscrimination in amount of 
contributions or benefits.
    (3) Optional rules for demonstrating nondiscrimination in 
availability of certain benefits, rights, and features.
(c) Plan restructuring.
    (1) General rule.
    (2) Identification of component plans.
    (3) Satisfaction of section 401(a)(4) by a component plan.
    (4) Satisfaction of section 410(b) by a component plan.
    (5) Effect of restructuring under other sections.
    (6) Examples.

            Sec. 1.401(a)(4)-10  Testing of former employees

(a) Introduction.
(b) Nondiscrimination in amount of contributions or benefits.
    (1) General rule.
    (2) Permitted disparity.
    (3) Examples.
(c) Nondiscrimination in availability of benefits, rights, or features.

                  Sec. 1.401(a)(4)-11  Additional rules

(a) Introduction.
(b) Rollovers, transfers, and buybacks.
    (1) Rollovers and elective transfers.
    (2) Other transfers. [Reserved]
    (3) Employee buybacks.
(c) Vesting.
    (1) General rule.
    (2) Deemed equivalence of statutory vesting schedules.
    (3) Safe harbor for vesting schedules.
    (4) Examples.
(d) Service-crediting rules.
    (1) Overview.
    (2) Manner of crediting service.
    (3) Service-crediting period.
(e) Family aggregation rules. [Reserved]
(f) Governmental plans. [Reserved]
(g) Corrective amendments.
    (1) In general.
    (2) Scope of corrective amendments.
    (3) Conditions for corrective amendments.
    (4) Corrective amendments must have substance.
    (5) Effect under other statutory requirements.
    (6) Examples.

                    Sec. 1.401(a)(4)-12  Definitions

       Sec. 1.401(a)(4)-13  Effective dates and fresh-start rules

(a) General effective dates.
    (1) In general.
    (2) Plans of tax-exempt organizations.
    (3) Compliance during transition period.
(b) Effective date for governmental plans.
(c) Fresh-start rules for defined benefit plans.
    (1) Introduction.
    (2) General rule.
    (3) Definition of frozen.
    (4) Fresh-start formulas.
    (5) Rules of application.
    (6) Examples.
(d) Compensation adjustments to frozen accrued benefits.
    (1) Introduction.
    (2) In general.
    (3) Plan requirements.
    (4) Meaningful coverage as of fresh-start date.

[[Page 95]]

    (5) Meaningful ongoing coverage.
    (6) Meaningful current benefit accruals.
    (7) Minimum benefit adjustment.
    (8) Adjusted accrued benefit.
    (9) Examples.
(e) Determination of initial theoretical reserve for target benefit 
          plans.
    (1) General rule.
    (2) Example.
(f) Special fresh-start rules for cash balance plans.
    (1) In general.
    (2) Alternative formula.
    (3) Limitations on formulas.

[T.D. 8485, 58 FR 46778, Sept. 3, 1993, as amended by T.D. 8954, 66 FR 
34540, June 29, 2001]



Sec. 1.401(a)(4)-1  Nondiscrimination requirements of section 401(a)(4).

    (a) In general. Section 401(a)(4) provides that a plan is a 
qualified plan only if the contributions or the benefits provided under 
the plan do not discriminate in favor of HCEs. Whether a plan satisfies 
this requirement depends on the form of the plan and on its effect in 
operation. In making this determination, intent is irrelevant. This 
section sets forth the exclusive rules for determining whether a plan 
satisfies section 401(a)(4). A plan that complies in form and operation 
with the rules in this section therefore satisfies section 401(a)(4).
    (b) Requirements a plan must satisfy--(1) In general. In order to 
satisfy section 401(a)(4), a plan must satisfy each of the requirements 
of this paragraph (b).
    (2) Nondiscriminatory amount of contributions or benefits--(i) 
General rule. Either the contributions or the benefits provided under 
the plan must be nondiscriminatory in amount. It need not be shown that 
both the contributions and the benefits provided are nondiscriminatory 
in amount, but only that either the contributions alone or the benefits 
alone are nondiscriminatory in amount.
    (ii) Defined contribution plans--(A) General rule. A defined 
contribution plan satisfies this paragraph (b)(2) if the contributions 
allocated under the plan (including forfeitures) are nondiscriminatory 
in amount under Sec. 1.401(a)(4)-2. Alternatively, a defined 
contribution plan (other than an ESOP) satisfies this paragraph (b)(2) 
if the equivalent benefits provided under the plan are nondiscriminatory 
in amount under Sec. 1.401(a)(4)-8(b). Section 1.401(a)(4)-8(b) includes 
a safe-harbor testing method for contributions provided under a target 
benefit plan.
    (B) Section 401(k) plans and section 401(m) plans. A section 401(k) 
plan is deemed to satisfy this paragraph (b)(2) because Sec. 1.410(b)-9 
defines a section 401(k) plan as a plan consisting of elective 
contributions under a qualified cash or deferred arrangement (i.e., one 
that satisfies section 401(k)(3), the nondiscriminatory amount 
requirement applicable to qualified cash or deferred arrangements). A 
section 401(m) plan satisfies this paragraph (b)(2) only if the plan 
satisfies Secs. 1.401(m)-1(b) and 1.401(m)-2. Contributions under a 
nonqualified cash or deferred arrangement, elective contributions 
described in Sec. 1.401(k)-1(b)(4)(iv) that fail to satisfy the 
allocation and compensation requirements of Sec. 1.401(k)-1(b)(4)(i), 
matching contributions that fail to satisfy Sec. 1.401(m)-
1(b)(4)(ii)(A), and qualified nonelective contributions treated as 
elective or matching contributions for certain purposes under 
Secs. 1.401(k)-1(b)(5) and 1.401(m)-1(b)(5), respectively, are not 
subject to the special rule in this paragraph (b)(2)(ii)(B), because 
they are not treated as part of a section 401(k) plan or section 401(m) 
plan as those terms are defined in Sec. 1.410(b)-9. The contributions 
described in the preceding sentence must satisfy paragraph (b)(2)(ii)(A) 
of this section.
    (iii) Defined benefit plans. A defined benefit plan satisfies this 
paragraph (b)(2) if the benefits provided under the plan are 
nondiscriminatory in amount under Sec. 1.401(a)(4)-3. Alternatively, a 
defined benefit plan satisfies this paragraph (b)(2) if the equivalent 
allocations provided under the plan are nondiscriminatory in amount 
under Sec. 1.401(a)(4)-8(c). Section 1.401(a)(4)-8(c) includes a safe-
harbor testing method for benefits provided under a cash balance plan. 
In addition, Sec. 1.401(a)(4)-8(d) provides a safe-harbor testing method 
for benefits provided under a defined benefit plan that is part of a 
floor-offset arrangement.
    (3) Nondiscriminatory availability of benefits, rights, and 
features. All benefits, rights, and features provided under the plan 
must be made available

[[Page 96]]

in the plan in a nondiscriminatory manner. Rules for determining whether 
this requirement is satisfied are set forth in Sec. 1.401(a)(4)-4.
    (4) Nondiscriminatory effect of plan amendments and terminations. 
The timing of plan amendments must not have the effect of discriminating 
significantly in favor of HCEs. Rules for determining whether this 
requirement is satisfied are set forth in Sec. 1.401(a)(4)-5(a). Section 
1.401(a)(4)-5(b) provides additional requirements regarding plan 
terminations.
    (c) Application of requirements--(1) In general. The requirements of 
paragraph (b) of this section must be applied in accordance with the 
rules set forth in this paragraph (c).
    (2) Interpretation. The provisions of Secs. 1.401(a)(4)-1 through 
1.401(a)(4)-13 must be interpreted in a reasonable manner consistent 
with the purpose of preventing discrimination in favor of HCEs.
    (3) Plan-year basis of testing. The requirements of paragraph (b) of 
this section are generally applied on the basis of the plan year and on 
the basis of the terms of the plan in effect during the plan year. Thus, 
unless otherwise provided, the compensation, contributions, benefit 
accruals, and other items used to apply these requirements must be 
determined with respect to the plan year being tested. However, 
Sec. 1.401(a)(4)-11(g) provides rules allowing for corrective amendments 
made after the close of the plan year to be taken into account in 
satisfying certain requirements under paragraph (b) of this section.
    (4) Application of section 410(b) rules--(i) Relationship between 
sections 401(a)(4) and 410(b). To be a qualified plan, a plan must 
satisfy both sections 410(b) and 401(a)(4). Section 410(b) requires that 
a plan benefit a nondiscriminatory group of employees, and section 
401(a)(4) requires that the contributions or benefits provided to 
employees benefiting under the plan not discriminate in favor of HCEs. 
Consistent with this requirement, the definition of a plan subject to 
testing under section 401(a)(4) is the same as the definition of a plan 
subject to testing under section 410(b), i.e., the plan determined after 
applying the mandatory disaggregation rules of Sec. 1.410(b)-7(c) and 
the permissive aggregation rules of Sec. 1.410(b)-7(d). In addition, 
whichever testing option is used for the plan year under Sec. 1.410(b)-
8(a) (e.g., quarterly testing) must also be used for purposes of 
determining whether the plan satisfies section 401(a)(4) for the plan 
year.
    (ii) Special rules for certain aggregated plans. Special rules are 
set forth in Sec. 1.401(a)(4)-9(b) for applying the nondiscriminatory 
amount and availability requirements of paragraphs (b)(2) and (b)(3) of 
this section to a plan that includes one or more defined benefit plans 
and one or more defined contribution plans that have been permissively 
aggregated under Sec. 1.410(b)-7(d).
    (iii) Restructuring. In certain circumstances, a plan may be 
restructured on the basis of employee groups and treated as comprising 
two or more plans, each of which is treated as a separate plan that must 
independently satisfy sections 401(a)(4) and 410(b). Rules relating to 
restructuring plans for purposes of applying the requirements of 
paragraph (b) of this section are set forth in Sec. 1.401(a)(4)-9(c).
    (iv) References to section 410(b). Except as otherwise specifically 
provided, references to satisfying section 410(b) in Secs. 1.401(a)(4)-1 
through 1.401(a)(4)-13 mean satisfying Sec. 1.410(b)-2 (taking into 
account any special rules available in satisfying that section, other 
than the permissive aggregation rules of Sec. 1.410(b)-7(d)). In the 
case of a plan described in section 410(c)(1) that has not made the 
election described in section 410(d) and is not subject to section 
403(b)(12)(A)(i), references in Secs. 1.401(a)(4)-1 through 1.401(a)(4)-
13 to satisfying section 410(b) mean satisfying section 410(c)(2).
    (5) Collectively-bargained plans. The requirements of paragraph (b) 
of this section are treated as satisfied by a collectively-bargained 
plan that automatically satisfies section 410(b) under Sec. 1.410(b)-
2(b)(7).
    (6) Former employees. In applying the nondiscriminatory amount and 
availability requirements of paragraphs (b)(2) and (b)(3) of this 
section, former employees are tested separately from active employees, 
unless otherwise provided. Rules for applying paragraphs

[[Page 97]]

(b)(2) and (b)(3) of this section to former employees are set forth in 
Sec. 1.401(a)(4)-10.
    (7) Employee-provided contributions and benefits. In applying the 
nondiscriminatory amount requirement of paragraph (b)(2) of this 
section, employee-provided contributions and benefits are tested 
separately from employer-provided contributions and benefits, unless 
otherwise provided. Rules for determining the amount of employer-
provided benefits under a defined benefit plan that include employee 
contributions not allocated to separate accounts are set forth in 
Sec. 1.401(a)(4)-6(b), and rules for applying paragraph (b)(2) of this 
section to employee contributions under such a plan are set forth in 
Sec. 1.401(a)(4)-6(c). See paragraph (b)(2)(ii)(B) of this section for 
rules applicable to employee contributions allocated to separate 
accounts.
    (8) Allocation of earnings. Notwithstanding any other provision in 
Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13, a defined contribution plan 
does not satisfy paragraph (b)(2) of this section if the manner in which 
income, expenses, gains, or losses are allocated to accounts under the 
plan discriminates in favor of HCEs or former HCEs.
    (9) Rollovers, transfers, and buybacks. In applying the requirements 
of paragraph (b) of this section, rollover (including direct rollover) 
contributions described in section 402(c), 402(e)(6), 403(a)(4), 
403(a)(5), or 408(d)(3), elective transfers described in Sec. 1.411(d)-
4, Q&A-3(b), transfers of assets and liabilities described in section 
414(l), and employee buybacks are treated in accordance with the rules 
set forth in Sec. 1.401(a)(4)-11(b).
    (10) Vesting. A plan does not satisfy the nondiscriminatory amount 
requirement of paragraph (b)(2) of this section unless it satisfies 
Sec. 1.401(a)(4)-11(c) with respect to the manner in which employees 
vest in their accrued benefits.
    (11) Crediting service. A plan does not satisfy paragraphs (b)(2) 
and (b)(3) of this section unless it satisfies Sec. 1.401(a)(4)-11(d) 
with respect to the manner in which employees' service is credited under 
the plan. Service other than actual service with the employer may not be 
taken into account in determining whether the plan satisfies paragraphs 
(b)(2) and (b)(3) of this section except as provided in 
Sec. 1.401(a)(4)-11(d).
    (12) Governmental plans. The rules of this section apply to a 
governmental plan within the meaning of section 414(d), except as 
provided in Secs. 1.401(a)(4)-11(f) and 1.401(a)(4)-13(b).
    (13) Employee stock ownership plans. [Reserved]
    (14) Section 401(h) benefits. In applying the requirements of 
paragraph (b) of this section, the portion of a plan providing benefits 
described in section 401(h) is tested separately from the portion of the 
same plan providing retirement benefits, and thus is not required to 
satisfy this section. Rules applicable to section 401(h) benefits are 
set forth in Sec. 1.401-14(b)(2).
    (15) Definitions. In applying the requirements of this section, the 
definitions in Sec. 1.401(a)(4)-12 govern.
    (16) Effective dates and fresh-start rules. In applying the 
requirements of this section, the effective dates set forth in 
Sec. 1.401(a)(4)-13 govern. Section 1.401(a)(4)-13 also provides certain 
transition and fresh-start rules that apply for purposes of this 
section.
    (d) Additional guidance. The Commissioner may, in revenue rulings, 
notices, and other guidance, published in the Internal Revenue Bulletin, 
provide any additional guidance that may be necessary or appropriate in 
applying the nondiscrimination requirements of section 401(a)(4), 
including additional safe harbors and alternative methods and procedures 
for satisfying those requirements. See Sec. 601.601(d)(2)(ii)(b) of this 
chapter.

[T.D. 8485, 58 FR 46780, Sept. 3, 1993]



Sec. 1.401(a)(4)-2  Nondiscrimination in amount of employer contributions under a defined contribution plan.

    (a) Introduction--(1) Overview. This section provides rules for 
determining whether the employer contributions allocated under a defined 
contribution plan are nondiscriminatory in amount as required by 
Sec. 1.401(a)(4)-1(b)(2)(ii)(A). Certain defined contribution plans that 
provide uniform allocations are permitted to satisfy this requirement by 
meeting one of the safe harbors in paragraph (b) of this section. Plans

[[Page 98]]

that do not provide uniform allocations may satisfy this requirement by 
satisfying the general test in paragraph (c) of this section. See 
Sec. 1.401(a)(4)-1(b)(2)(ii)(B) for the exclusive tests applicable to 
section 401(k) plans and section 401(m) plans.
    (2) Alternative methods of satisfying nondiscriminatory amount 
requirement. A defined contribution plan is permitted to satisfy 
paragraph (b)(2) or (c) of this section on a restructured basis pursuant 
to Sec. 1.401(a)(4)-9(c). Alternatively, a defined contribution plan 
(other than an ESOP) is permitted to satisfy the nondiscriminatory 
amount requirement of Sec. 1.401(a)(4)-1(b)(2)(ii)(A) on the basis of 
equivalent benefits pursuant to Sec. 1.401(a)(4)-8(b).
    (b) Safe harbors--(1) In general. The employer contributions 
allocated under a defined contribution plan are nondiscriminatory in 
amount for a plan year if the plan satisfies either of the safe harbors 
in paragraph (b)(2) or (b)(3) of this section. Paragraph (b)(4) of this 
section provides exceptions for certain plan provisions that do not 
cause a plan to fail to satisfy this paragraph (b).
    (2) Safe harbor for plans with uniform allocation formula--(i) 
General rule. A defined contribution plan satisfies the safe harbor in 
this paragraph (b)(2) for a plan year if the plan allocates all amounts 
taken into account under paragraph (c)(2)(ii) of this section for the 
plan year under an allocation formula that allocates to each employee 
the same percentage of plan year compensation, the same dollar amount, 
or the same dollar amount for each uniform unit of service (not to 
exceed one week) performed by the employee during the plan year.
    (ii) Permitted disparity. If a plan satisfies section 401(l) in 
form, differences in employees' allocations under the plan attributable 
to uniform disparities permitted under Sec. 1.401(l)-2 (including 
differences in disparities that are deemed uniform under Sec. 1.401(l)-
2(c)(2)) do not cause the plan to fail to satisfy this paragraph (b)(2).
    (3) Safe harbor for plans with uniform points allocation formula--
(i) General rule. A defined contribution plan (other than an ESOP) 
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it 
satisfies both of the following requirements:
    (A) The plan must allocate amounts under a uniform points allocation 
formula. A uniform points allocation formula defines each employee's 
allocation for the plan year as the product of the total of all amounts 
taken into account under paragraph (c)(2)(ii) of this section and a 
fraction, the numerator of which is the employee's points for the plan 
year and the denominator of which is the sum of the points of all 
employees in the plan for the plan year. For this purpose, an employee's 
points for a plan year equal the sum of the employee's points for age, 
service, and units of plan year compensation for the plan year. Under a 
uniform points allocation formula, each employee must receive the same 
number of points for each year of age, the same number of points for 
each year of service, and the same number of points for each unit of 
plan year compensation. (See Sec. 1.401(a)(4)-11(d)(3) regarding service 
that may be taken into account as years of service.) A uniform points 
allocation formula need not grant points for both age and service, but 
it must grant points for at least one of them. If the allocation formula 
grants points for years of service, the plan is permitted to limit the 
number of years of service taken into account to a single maximum number 
of years of service. A uniform points allocation formula need not grant 
points for units of plan year compensation, but if it does, the unit 
used must be a single dollar amount for all employees that does not 
exceed $200.
    (B) For the plan year, the average of the allocation rates for the 
HCEs in the plan must not exceed the average of the allocation rates for 
the NHCEs in the plan. For this purpose, allocation rates are determined 
in accordance with paragraph (c)(2) of this section, without imputing 
permitted disparity and without grouping allocation rates under 
paragraphs (c)(2) (iv) and (v) of this section, respectively.
    (ii) Example. The following example illustrates the safe harbor in 
this paragraph (b)(3):

    Example. (a) Plan A has a single allocation formula that applies to 
all employees, under which each employee's allocation for the

[[Page 99]]

plan year equals the product of the total of all amounts taken into 
account for all employees for the plan year under paragraph (c)(2)(ii) 
of this section and a fraction, the numerator of which is the employee's 
points for the plan year and the denominator of which is the sum of the 
points of all employees for the plan year. Plan A grants each employee 
10 points for each year of service (including pre-participation service 
and imputed service credited under Plan A that satisfies 
Sec. 1.401(a)(4)-11(d)(3)) and one point for each $100 of plan year 
compensation. For the 1994 plan year, the total allocations are $71,200, 
and the total points for all employees are 7,120. Each employee's 
allocation for the 1994 plan year is set forth in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                                                      Allocation
                   Employee                       Years of     Plan year      Points     Amount of       rate
                                                  service    compensation                allocation   (percent)
----------------------------------------------------------------------------------------------------------------
H1............................................           20      $150,000        1,700      $17,000         11.3
H2............................................           10       150,000        1,600       16,000         10.7
H3............................................           30       100,000        1,300       13,000         13.0
H4............................................            3       100,000        1,030       10,300         10.3
N1............................................           10        40,000          500        5,000         12.5
N2............................................            5        35,000          400        4,000         11.4
N3............................................            3        30,000          330        3,300         11.0
N4............................................            1        25,000          260        2,600         10.4
                                               -----------------------------------------------------------------
    Total.....................................  ...........  ............        7,120       71,200  ...........
----------------------------------------------------------------------------------------------------------------

    (b) Under these facts, for the 1994 plan year, Plan A allocates 
amounts under a uniform points allocation formula within the meaning of 
paragraph (b)(3)(i)(A) of this section.
    (c) For the 1994 plan year, the average allocation rate for the HCEs 
(H1 through H4) is 11.3 percent, and the average allocation rate for 
NHCEs (N1 through N4) is 11.3 percent. Because the average of the 
allocation rates for the HCEs does not exceed the average of the 
allocation rates for the NHCEs, Plan A satisfies paragraph (b)(3)(i)(B) 
of this section and, thus, the safe harbor in this paragraph (b)(3) for 
the 1994 plan year.

    (4) Use of safe harbors not precluded by certain plan provisions--
(i) In general. A plan does not fail to satisfy this paragraph (b) 
merely because the plan contains one or more of the provisions described 
in this paragraph (b)(4). Unless otherwise provided, any such provision 
must apply uniformly to all employees.
    (ii) Entry dates. The plan provides one or more entry dates during 
the plan year as permitted by section 410(a)(4).
    (iii) Certain conditions on allocations. The plan provides that an 
employee's allocation for the plan year is conditioned on either the 
employee's employment on the last day of the plan year or the employee's 
completion of a minimum number of hours of service during the plan year 
(not to exceed 1,000), or both. Such a provision may include an 
exception from this condition for all employees whose employment 
terminates during the plan year or only for those employees whose 
employment terminates during the plan year on account of one or more of 
the following circumstances: retirement, disability, death, or military 
service.
    (iv) Certain limits on allocations. The plan limits allocations 
otherwise provided under the allocation formula to a maximum dollar 
amount or a maximum percentage of plan year compensation, limits the 
dollar amount of plan year compensation taken into account in 
determining the amount of allocations, or applies the restrictions of 
section 409(n) or the limits of section 415.
    (v) Lower allocations for HCEs. The allocations provided to one or 
more HCEs under the plan are less than the allocations that would 
otherwise be provided to those employees if the plan satisfied this 
paragraph (b) (without regard to this paragraph (b)(4)(v)).
    (vi) Multiple formulas--(A) General rule. The plan provides that an 
employee's allocation under the plan is the greater of the allocations 
determined under two or more formulas, or is the sum of the allocations 
determined under two or more formulas. This paragraph (b)(4)(vi) does 
not apply to a plan unless each of the formulas under the plan satisfies 
the requirements of paragraph (b)(4)(vi) (B) through (D) of this 
section.
    (B) Sole formulas. The formulas must be the only formulas under the 
plan.

[[Page 100]]

    (C) Separate testing. Each of the formulas must separately satisfy 
this paragraph (b). A formula that is available solely to some or all 
NHCEs is deemed to satisfy this paragraph (b)(4)(vi)(C).
    (D) Availability--(1) General rule. All of the formulas must be 
available on the same terms to all employees.
    (2) Formulas for NHCEs. A formula does not fail to be available on 
the same terms to all employees merely because the formula is not 
available to any HCEs, but is available to some or all NHCEs on the same 
terms as all of the other formulas in the plan.
    (3) Top-heavy formulas. In the case of a plan that provides the 
greater of the allocations under two or more formulas, one of which is a 
top-heavy formula, the top-heavy formula does not fail to be available 
on the same terms to all employees merely because it is available solely 
to all non-key employees on the same terms as all the other formulas 
under the plan. Furthermore, the top-heavy formula does not fail to be 
available on the same terms as the other formulas under the plan merely 
because it is conditioned on the plan's being top-heavy within the 
meaning of section 416(g). Finally, the top-heavy formula does not fail 
to be available on the same terms as the other formulas under the plan 
merely because it is available to all employees described in Sec. 1.416-
1, Q&A M-10 (i.e., all non-key employees who have not separated from 
service as of the last day of the plan year). The preceding sentence 
does not apply, however, unless the plan would satisfy section 410(b) if 
all employees who are benefiting under the plan solely as a result of 
receiving allocations under the top-heavy formula were treated as not 
currently benefiting under the plan. For purposes of this paragraph 
(b)(4)(vi)(D)(3), a top-heavy formula is a formula that provides the 
minimum benefit described in section 416(c)(2) (taking into account, if 
applicable, the modification in section 416(h)(2)(A)(ii)(II)).
    (E) Provisions may be applied more than once. The provisions of this 
paragraph (b)(4)(vi) may be applied more than once. For example, a plan 
satisfies this paragraph (b) if an employee's allocation under the plan 
is the greater of the allocations under two or more formulas, and one or 
more of those formulas is the sum of the allocations under two or more 
other formulas, provided that each of the formulas under the plan 
satisfies the requirements of paragraph (b)(4)(vi) (B) through (D) of 
this section.
    (F) Examples. The following examples illustrate the rules in this 
paragraph (b)(4)(vi):

    Example 1. Under Plan A, each employee's allocation equals the sum 
of the allocations determined under two formulas. The first formula 
provides an allocation of five percent of plan year compensation. The 
second formula provides an allocation of $100. Plan A satisfies this 
paragraph (b)(4)(vi).
    Example 2. Under Plan B, each employee's allocation equals the 
greater of the allocations determined under two formulas. The first 
formula provides an allocation of seven percent of plan year 
compensation and is available to all employees who complete at least 
1,000 hours of service during the plan year and who have not separated 
from service as of the last day of the plan year. The second formula is 
a top-heavy formula that provides an allocation of three percent of plan 
year compensation and that is available to all employees described in 
Sec. 1.416-1, Q&A M-10. Plan B does not satisfy the general rule in 
paragraph (b)(4)(vi)(D)(1) of this section because the two formulas are 
not available on the same terms to all employees (i.e., an employee is 
required to complete 1,000 hours of service during the plan year to 
receive an allocation under the first formula, but not under the second 
formula). Nonetheless, because the second formula is a top-heavy 
formula, the special availability rules for top-heavy formulas in 
paragraph (b)(4)(vi)(D)(3) of this section apply. Thus, the second 
formula does not fail to be available on the same terms as the first 
formula merely because the second formula is available to all employees 
described in Sec. 1.416-1, Q&A M-10, as long as the plan would satisfy 
section 410(b) if all employees who are benefiting under the plan solely 
as a result of receiving allocations under the top-heavy formula were 
treated as not currently benefiting under the plan. This is true even if 
the plan conditions the availability of the second formula on the plan's 
being top-heavy for the plan year.
    Example 3. The facts are the same as in Example 2, except that the 
first formula is available to all employees who have not separated from 
service as of the last day of the plan year, regardless of whether they 
complete at least 1,000 hours of service during the plan year. Plan B 
still does not satisfy the general rule in paragraph (b)(4)(vi)(D)(1) of 
this section because the two formulas are

[[Page 101]]

not available on the same terms to all employees (i.e., the second 
formula is only available to all non-key employees). Nonetheless, 
because the second formula is a top-heavy formula, the special 
availability rules for top-heavy formulas in paragraph (b)(4)(vi)(D)(3) 
of this section apply. Thus, the second formula does not fail to be 
available on the same terms as the first formula merely because the 
second formula is available solely to all non-key employees.

    (c) General test for nondiscrimination in amount of contributions--
(1) General rule. The employer contributions allocated under a defined 
contribution plan are nondiscriminatory in amount for a plan year if 
each rate group under the plan satisfies section 410(b). For purposes of 
this paragraph (c), a rate group exists under a plan for each HCE and 
consists of the HCE and all other employees in the plan (both HCEs and 
NHCEs) who have an allocation rate greater than or equal to the HCE's 
allocation rate. Thus, an employee is in the rate group for each HCE who 
has an allocation rate less than or equal to the employee's allocation 
rate.
    (2) Determination of allocation rates--(i) General rule. The 
allocation rate for an employee for a plan year equals the sum of the 
allocations to the employee's account for the plan year, expressed 
either as a percentage of plan year compensation or as a dollar amount.
    (ii) Allocations taken into account. The amounts taken into account 
in determining allocation rates for a plan year include all employer 
contributions and forfeitures that are allocated or treated as allocated 
to the account of an employee under the plan for the plan year, other 
than amounts described in paragraph (c)(2)(iii) of this section. For 
this purpose, employer contributions include annual additions described 
in Sec. 1.415-6(b)(2)(i) (regarding amounts arising from certain 
transactions between the plan and the employer). In the case of a 
defined contribution plan subject to section 412, an employer 
contribution is taken into account in the plan year for which it is 
required to be contributed and allocated to employees' accounts under 
the plan, even if all or part of the required contribution is not 
actually made.
    (iii) Allocations not taken into account. Allocations of income, 
expenses, gains, and losses attributable to the balance in an employee's 
account are not taken into account in determining allocation rates.
    (iv) Imputation of permitted disparity. The disparity permitted 
under section 401(l) may be imputed in accordance with the rules of 
Sec. 1.401(a)(4)-7.
    (v) Grouping of allocation rates--(A) General rule. An employer may 
treat all employees who have allocation rates within a specified range 
above and below a midpoint rate chosen by the employer as having an 
allocation rate equal to the midpoint rate within that range. Allocation 
rates within a given range may not be grouped under this paragraph 
(c)(2)(v) if the allocation rates of HCEs within the range generally are 
significantly higher than the allocation rates of NHCEs in the range. 
The specified ranges within which all employees are treated as having 
the same allocation rate may not overlap and may be no larger than 
provided in paragraph (c)(2)(v)(B) of this section. Allocation rates of 
employees that are not within any of these specified ranges are 
determined without regard to this paragraph (c)(2)(v).
    (B) Size of specified ranges. The lowest and highest allocation 
rates in the range must be within five percent (not five percentage 
points) of the midpoint rate. If allocation rates are determined as a 
percentage of plan year compensation, the lowest and highest allocation 
rates need not be within five percent of the midpoint rate, if they are 
no more than one quarter of a percentage point above or below the 
midpoint rate.
    (vi) Consistency requirement. Allocation rates must be determined in 
a consistent manner for all employees for the plan year.
    (3) Satisfaction of section 410(b) by a rate group--(i) General 
rule. For purposes of determining whether a rate group satisfies section 
410(b), the rate group is treated as if it were a separate plan that 
benefits only the employees included in the rate group for the plan 
year. Thus, for example, under Sec. 1.401(a)(4)-1(c)(4)(iv), the ratio 
percentage of the rate group is determined taking into account all 
nonexcludable employees regardless of whether they benefit under the 
plan. Paragraph (c)(3)

[[Page 102]]

(ii) and (iii) of this section provide additional special rules for 
determining whether a rate group satisfies section 410(b).
    (ii) Application of nondiscriminatory classification test. A rate 
group satisfies the nondiscriminatory classification test of 
Sec. 1.410(b)-4 (including the reasonable classification requirement of 
Sec. 1.410(b)-4(b)) if and only if the ratio percentage of the rate 
group is greater than or equal to the lesser of--
    (A) The midpoint between the safe and the unsafe harbor percentages 
applicable to the plan; and
    (B) The ratio percentage of the plan.
    (iii) Application of average benefit percentage test. A rate group 
satisfies the average benefit percentage test of Sec. 1.410(b)-5 if the 
plan of which it is a part satisfies Sec. 1.410(b)-5 (without regard to 
Sec. 1.410(b)-5(f)). In the case of a plan that relies on Sec. 1.410(b)-
5(f) to satisfy the average benefit percentage test, each rate group 
under the plan satisfies the average benefit percentage test (if 
applicable) only if the rate group separately satisfies Sec. 1.410(b)-
5(f).
    (4) Examples. The following examples illustrate the general test in 
this paragraph (c):

    Example 1. Employer X maintains two defined contribution plans, Plan 
A and Plan B, that are aggregated and treated as a single plan for 
purposes of sections 410(b) and 401(a)(4) pursuant to Sec. 1.410(b)-
7(d). For the 1994 plan year, Employee M has plan year compensation of 
$10,000 and receives an allocation of $200 under Plan A and an 
allocation of $800 under Plan B. Employee M's allocation rate under the 
aggregated plan for the 1994 plan year is 10 percent (i.e., $1,000 
divided by $10,000).
    Example 2. The employees in Plan C have the following allocation 
rates (expressed as a percentage of plan year compensation): 2.75 
percent, 2.80 percent, 2.85 percent, 3.25 percent, 6.65 percent, 7.33 
percent, 7.34 percent, and 7.35 percent. Because the first four rates 
are within a range of no more than one quarter of a percentage point 
above and below 3.0 percent (a midpoint rate chosen by the employer), 
under paragraph (c)(2)(v) of this section the employer may treat the 
employees who have those rates as having an allocation rate of 3.0 
percent (provided that the allocation rates of HCEs within the range 
generally are not significantly higher than the allocation rates of 
NHCEs within the range). Because the last four rates are within a range 
of no more than five percent above and below 7.0 percent (a midpoint 
rate chosen by the employer), the employer may treat the employees who 
have those rates as having an allocation rate of 7.0 percent (provided 
that the allocation rates of HCEs within the range generally are not 
significantly higher than the allocation rates of NHCEs within the 
range).
    Example 3. (a) Employer Y has only six nonexcludable employees, all 
of whom benefit under Plan D. The HCEs are H1 and H2, and the NHCEs are 
N1 through N4. For the 1994 plan year, H1 and N1 through N4 have an 
allocation rate of 5.0 percent of plan year compensation. For the same 
plan year, H2 has an allocation rate of 7.5 percent of plan year 
compensation.
    (b) There are two rate groups under Plan D. Rate group 1 consists of 
H1 and all those employees who have an allocation rate greater than or 
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists 
of H1, H2, and N1 through N4. Rate group 2 consists only of H2 because 
no other employee has an allocation rate greater than or equal to H2's 
allocation rate (7.5 percent).
    (c) The ratio percentage for rate group 2 is zero percent--i.e., 
zero percent (the percentage of all nonhighly compensated nonexcludable 
employees who are in the rate group) divided by 50 percent (the 
percentage of all highly compensated nonexcludable employees who are in 
the rate group). Therefore rate group 2 does not satisfy the ratio 
percentage test under Sec. 1.410(b)-2(b)(2). Rate group 2 also does not 
satisfy the nondiscriminatory classification test of Sec. 1.410(b)-4 (as 
modified by paragraph (c)(3) of this section). Rate group 2 therefore 
does not satisfy section 410(b) and, as a result, Plan D does not 
satisfy the general test in paragraph (c)(1) of this section. This is 
true regardless of whether rate group 1 satisfies Sec. 1.410(b)-2(b)(2).
    Example 4. (a) The facts are the same as in Example 3, except that 
N4 has an allocation rate of 8.0 percent.
    (b) There are two rate groups in Plan D. Rate group 1 consists of H1 
and all those employees who have an allocation rate greater than or 
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists 
of H1, H2 and N1 through N4. Rate group 2 consists of H2, and all those 
employees who have an allocation rate greater than or equal to H2's 
allocation rate (7.5 percent). Thus, rate group 2 consists of H2 and N4.
    (c) Rate group 1 satisfies the ratio percentage test under 
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is 
100 percent--i.e., 100 percent (the percentage of all nonhighly 
compensated nonexcludable employees who are in the rate group) divided 
by 100 percent (the percentage of all highly compensated nonexcludable 
employees who are in the rate group).
    (d) Rate group 2 does not satisfy the ratio percentage test of 
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is 
50

[[Page 103]]

percent--i.e., 25 percent (the percentage of all nonhighly compensated 
nonexcludable employees who are in the rate group) divided by 50 percent 
(the percentage of all highly compensated nonexcludable employees who 
are in the rate group).
    (e) However, rate group 2 does satisfy the nondiscriminatory 
classification test of Sec. 1.410(b)-4 because the ratio percentage of 
the rate group (50 percent) is greater than the safe harbor percentage 
applicable to the plan under Sec. 1.410(b)-4(c)(4) (45.5 percent).
    (f) Under paragraph (c)(3)(iii) of this section, rate group 2 
satisfies the average benefit percentage test, if Plan D satisfies the 
average benefit percentage test. (The requirement that Plan D satisfy 
the average benefit percentage test applies even though Plan D satisfies 
the ratio percentage test and would ordinarily not need to run the 
average benefit percentage test.) If Plan D satisfies the average 
benefit percentage test, then rate group 2 satisfies section 410(b) and 
thus, Plan D satisfies the general test in paragraph (c)(1) of this 
section, because each rate group under the plan satisfies section 
410(b).
    Example 5. (a) Plan E satisfies section 410(b) by satisfying the 
nondiscriminatory classification test of Sec. 1.410(b)-4 and the average 
benefit percentage test of Sec. 1.410(b)-5 (without regard to 
Sec. 1.410(b)-5(f)). See Sec. 1.410(b)-2(b)(3). Plan E uses the facts-
and-circumstances requirements of Sec. 1.410(b)-4(c)(3) to satisfy the 
nondiscriminatory classification test of Sec. 1.410(b)-4. The safe and 
unsafe harbor percentages applicable to the plan under Sec. 1.410(b)-
4(c)(4) are 29 and 20 percent, respectively. Plan E has a ratio 
percentage of 22 percent.
    (b) Rate group 1 under Plan E has a ratio percentage of 23 percent. 
Under paragraph (c)(3)(ii) of this section, the rate group satisfies the 
nondiscriminatory classification requirement of Sec. 1.410(b)-4, because 
the ratio percentage of the rate group (23 percent) is greater than the 
lesser of--
    (1) The ratio percentage for the plan as a whole (22 percent); and
    (2) The midpoint between the safe and unsafe harbor percentages 
(24.5 percent).
    (c) Under paragraph (c)(3)(iii) of this section, the rate group 
satisfies section 410(b) because the plan satisfies the average benefit 
percentage test of Sec. 1.410(b)-5.

[T.D. 8485, 58 FR 46781, Sept. 3, 1993]



Sec. 1.401(a)(4)-3  Nondiscrimination in amount of employer-provided benefits under a defined benefit plan.

    (a) Introduction--(1) Overview. This section provides rules for 
determining whether the employer-provided benefits under a defined 
benefit plan are nondiscriminatory in amount as required by 
Sec. 1.401(a)(4)-1(b)(2)(iii). Certain defined benefit plans that 
provide uniform benefits are permitted to satisfy this requirement by 
meeting one of the safe harbors in paragraph (b) of this section. Plans 
that do not provide uniform benefits may satisfy this requirement by 
satisfying the general test in paragraph (c) of this section. Paragraph 
(d) of this section provides rules for determining the individual 
benefit accrual rates needed for the general test. Paragraph (e) of this 
section provides rules for determining compensation for purposes of 
applying the requirements of this section. Paragraph (f) of this section 
provides additional rules that apply generally for purposes of both the 
safe harbors in paragraph (b) of this section and the general test in 
paragraph (c) of this section. See Sec. 1.401(a)(4)-6 for rules for 
determining the amount of employer-provided benefits under a 
contributory DB plan, and for determining whether the employee-provided 
benefits under such a plan are nondiscriminatory in amount.
    (2) Alternative methods of satisfying nondiscriminatory amount 
requirement. A defined benefit plan is permitted to satisfy paragraph 
(b) or (c) of this section on a restructured basis pursuant to 
Sec. 1.401(a)(4)-9(c). Alternatively, a defined benefit plan is 
permitted to satisfy the nondiscriminatory amount requirement of 
Sec. 1.401(a)(4)-1(b)(2)(iii) on the basis of equivalent allocations 
pursuant to Sec. 1.401(a)(4)-8(c). In addition, a defined benefit plan 
that is part of a floor-offset arrangement is permitted to satisfy this 
section pursuant to Sec. 1.401(a)(4)-8(d).
    (b) Safe harbors--(1) In general. The employer-provided benefits 
under a defined benefit plan are nondiscriminatory in amount for a plan 
year if the plan satisfies each of the uniformity requirements of 
paragraph (b)(2) of this section and any one of the safe harbors in 
paragraphs (b)(3) (unit credit plans), (b)(4) (fractional accrual 
plans), and (b)(5) (insurance contract plans) of this section. Paragraph 
(b)(6) of this section provides exceptions for certain plan provisions 
that do not cause a plan to fail to satisfy this paragraph (b). 
Paragraph (f) of this section provides additional rules that apply in

[[Page 104]]

determining whether a plan satisfies this paragraph (b).
    (2) Uniformity requirements--(i) Uniform normal retirement benefit. 
The same benefit formula must apply to all employees. The benefit 
formula must provide all employees with an annual benefit payable in the 
same form commencing at the same uniform normal retirement age. The 
annual benefit must be the same percentage of average annual 
compensation or the same dollar amount for all employees who will have 
the same number of years of service at normal retirement age. (See 
Sec. 1.401(a)(4)-11(d)(3) regarding service that may be taken into 
account as years of service.) The annual benefit must equal the 
employee's accrued benefit at normal retirement age (within the meaning 
of section 411(a)(7)(A)(i)) and must be the normal retirement benefit 
under the plan (within the meaning of section 411(a)(9)).
    (ii) Uniform post-normal retirement benefit. With respect to an 
employee with a given number of years of service at any age after normal 
retirement age, the annual benefit commencing at that employee's age 
must be the same percentage of average annual compensation or the same 
dollar amount that would be payable commencing at normal retirement age 
to an employee who had that same number of years of service at normal 
retirement age.
    (iii) Uniform subsidies. Each subsidized optional form of benefit 
available under the plan must be currently available (within the meaning 
of Sec. 1.401(a)(4)-4(b)(2)) to substantially all employees. Whether an 
optional form of benefit is considered subsidized for this purpose may 
be determined using any reasonable actuarial assumptions.
    (iv) No employee contributions. The plan must not be a contributory 
DB plan.
    (v) Period of accrual. Each employee's benefit must be accrued over 
the same years of service that are taken into account in applying the 
benefit formula under the plan to that employee. For this purpose, any 
year in which the employee benefits under the plan (within the meaning 
of Sec. 1.410(b)-3(a)) is included as a year of service in which a 
benefit accrues. Thus, for example, a plan does not satisfy the safe 
harbor in paragraph (b)(4) of this section unless the plan uses the same 
years of service to determine both the normal retirement benefit under 
the plan's benefit formula and the fraction by which an employee's 
fractional rule benefit is multiplied to derive the employee's accrued 
benefit as of any plan year.
    (vi) Examples. The following examples illustrate the rules in this 
paragraph (b)(2):

    Example 1. Plan A provides a normal retirement benefit equal to two 
percent of average annual compensation times each year of service 
commencing at age 65 for all employees. Plan A provides that employees 
of Division S receive their benefit in the form of a straight life 
annuity and that employees of Division T receive their benefit in the 
form of a life annuity with an automatic cost-of-living increase. Plan A 
does not provide a uniform normal retirement benefit within the meaning 
of paragraph (b)(2)(i) of this section because the annual benefit is not 
payable in the same form to all employees.
    Example 2. Plan B provides a normal retirement benefit equal to 1.5 
percent of average annual compensation times each year of service at 
normal retirement age for all employees. The normal retirement age under 
the plan is the earlier of age 65 or the age at which the employee 
completes 10 years of service, but in no event earlier than age 62. Plan 
B does not provide a uniform normal retirement benefit within the 
meaning of paragraph (b)(2)(i) of this section because the same uniform 
normal retirement age does not apply to all employees.
    Example 3. Plan C is an accumulation plan under which the benefit 
for each year of service equals one percent of plan year compensation 
payable in the same form to all employees commencing at the same uniform 
normal retirement age. Under paragraph (e)(2) of this section, an 
accumulation plan may substitute plan year compensation for average 
annual compensation. Plan C provides a uniform normal retirement benefit 
within the meaning of paragraph (b)(2)(i) of this section, because all 
employees with the same number of years of service at normal retirement 
age will receive an annual benefit that is treated as the same 
percentage of average annual compensation.
    Example 4. The facts are the same as in Example 3, except that the 
benefit for each year of service equals one percent of plan year 
compensation increased by reference to the increase in the cost of 
living from the year of service to normal retirement age. Plan C does 
not provide a uniform normal retirement benefit, because the annual 
benefit defined by the benefit formula can vary for employees with the 
same number of years of

[[Page 105]]

service at normal retirement age, depending on the age at which those 
years of service were credited to the employee under the plan.
    Example 5. Plan D provides a normal retirement benefit of 50 percent 
of average annual compensation at normal retirement age (age 65) for 
employees with 30 years of service at normal retirement age. Plan D 
provides that, in the case of an employee with less than 30 years of 
service at normal retirement age, the normal retirement benefit is 
reduced on a pro rata basis for each year of service less than 30. 
However, if an employee with less than 30 years of service at normal 
retirement age continues to work past normal retirement age, Plan D 
provides that the additional years of service worked past normal 
retirement age are taken into account for purposes of the 30 years of 
service requirement. Thus, an employee who has 26 years of service at 
age 65 but who does not retire until age 69 with 30 years of service 
will receive a benefit of 50 percent of average annual compensation. 
Plan D provides uniform post-normal retirement benefits within the 
meaning of paragraph (b)(2)(ii) of this section.
    Example 6. (a) Plan E is amended on February 14, 1994, to provide an 
early retirement window benefit that consists of an unreduced early 
retirement benefit to employees who terminate employment after 
attainment of age 55 with 10 years of service and between June 1, 1994, 
and November 30, 1994. The early retirement window benefit is a single 
subsidized optional form of benefit. Paragraph (b)(2)(iii) of this 
section requires that the subsidized optional form of benefit be 
currently available (within the meaning of Sec. 1.401(a)(4)-4(b)(2)) to 
substantially all employees. Section 1.401(a)(4)-4(b)(2)(ii)(A)(2) 
provides that age and service requirements are not disregarded in 
determining the current availability of an optional form of benefit if 
those requirements must be satisfied within a specified period of time. 
Thus, the early retirement window benefit is not currently available to 
an employee unless the employee will satisfy the eligibility 
requirements for the early retirement window benefit by the close of the 
early retirement window benefit period. Plan E will fail to satisfy 
paragraph (b)(2)(iii) of this section unless substantially all of the 
employees satisfy the eligibility requirements for the early retirement 
window benefit by November 30, 1994. However, see Sec. 1.401(a)(4)-
9(c)(6), Example 2, for an example of how a plan with an early 
retirement window benefit may be restructured into two component plans, 
each of which satisfies the safe harbors of this paragraph (b).
    (b) A similar analysis would apply if, instead of an unreduced early 
retirement benefit, the early retirement window benefit consisted of a 
special schedule of early retirement factors, defined by starting with 
the plan's usual schedule and then treating each employee eligible for 
the early retirement window benefit as being five years older than the 
employee actually is, but not older than the employee's normal 
retirement age.
    Example 7. Plan F generally provides a normal retirement benefit of 
1.5 percent of an employee's average annual compensation multiplied by 
the employee's years of service with the employer. For employees 
transferred outside of the group of employees covered by the plan, the 
plan's benefit formula takes into account only years of service prior to 
the transfer, but determines average annual compensation taking into 
account section 414(s) compensation both before and after the transfer. 
Plan F does not satisfy the requirements of paragraph (b)(2)(v) of this 
section with respect to transferred employees, because their benefits 
are accrued over years of service (i.e., after transfer) that are not 
taken into account in applying the plan's benefit formula to them. 
However, see Example 2 of paragraph (b)(6)(x)(B) of this section for an 
example of how a plan that continues to take transferred employees' 
section 414(s) compensation into account after their transfer may still 
satisfy this paragraph (b).

    (3) Safe harbor for unit credit plans--(i) General rule. A plan 
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it 
satisfies both of the following requirements:
    (A) The plan must satisfy the 133\1/3\ percent accrual rule of 
section 411(b)(1)(B).
    (B) Each employee's accrued benefit under the plan as of any plan 
year must be determined by applying the plan's benefit formula to the 
employee's years of service and (if applicable) average annual 
compensation, both determined as of that plan year.
    (ii) Example. The following example illustrates the rules in this 
paragraph (b)(3):

    Example. Plan A provides that the accrued benefit of each employee 
as of any plan year equals the employee's average annual compensation 
times a percentage that depends on the employee's years of service 
determined as of that plan year. The percentage is 2 percent for each of 
the first 10 years of service, plus 1.5 percent for each of the next 10 
years of service, plus 2 percent for all additional years of service. 
Plan A satisfies this paragraph (b)(3).

    (4) Safe harbor for plans using fractional accrual rule--(i) General 
rule. A

[[Page 106]]

plan satisfies the safe harbor in this paragraph (b)(4) for a plan year 
if it satisfies each of the following requirements:
    (A) The plan must satisfy the fractional accrual rule of section 
411(b)(1)(C).
    (B) Each employee's accrued benefit under the plan as of any plan 
year before the employee reaches normal retirement age must be 
determined by multiplying the employee's fractional rule benefit (within 
the meaning of Sec. 1.411(b)-1(b)(3)(ii)(A)) by a fraction, the 
numerator of which is the employee's years of service determined as of 
the plan year, and the denominator of which is the employee's projected 
years of service as of normal retirement age.
    (C) The plan must satisfy one of the following requirements:
    (1) Under the plan, it must be impossible for any employee to accrue 
in a plan year a portion of the normal retirement benefit described in 
paragraph (b)(2)(i) of this section that is more than one-third larger 
than the portion of the same benefit accrued in that or any other plan 
year by any other employee, when each portion of the benefit is 
expressed as a percentage of each employee's average annual compensation 
or as a dollar amount. In making this determination, actual and 
potential employees in the plan with any amount of service at normal 
retirement must be taken into account (other than employees with more 
than 33 years of service at normal retirement age). In addition, in the 
case of a plan that satisfies section 401(l) in form, an employee is 
treated as accruing benefits at a rate equal to the excess benefit 
percentage in the case of a defined benefit excess plan or at a rate 
equal to the gross benefit percentage in the case of an offset plan.
    (2) The normal retirement benefit under the plan must be a flat 
benefit that requires a minimum of 25 years of service at normal 
retirement age for an employee to receive the unreduced flat benefit, 
determined without regard to section 415. For this purpose, a flat 
benefit is a benefit that is the same percentage of average annual 
compensation or the same dollar amount for all employees who have a 
minimum number of years of service at normal retirement age (e.g., 50 
percent of average annual compensation), with a pro rata reduction in 
the flat benefit for employees who have less than the minimum number of 
years of service at normal retirement age. An employee is permitted to 
accrue the maximum benefit permitted under section 415 over a period of 
less than 25 years, provided that the flat benefit under the plan, 
determined without regard to section 415, can accrue over no less than 
25 years.
    (3) The plan must satisfy the requirements of paragraph 
(b)(4)(i)(C)(2) of this section (other than the requirement that the 
minimum number of years of service for receiving the unreduced flat 
benefit is at least 25 years), and, for the plan year, the average of 
the normal accrual rates for all nonhighly compensated nonexcludable 
employees must be at least 70 percent of the average of the normal 
accrual rates for all highly compensated nonexcludable employees. The 
averages in the preceding sentence are determined taking into account 
all nonexcludable employees (regardless of whether they benefit under 
the plan). In addition, contributions and benefits under other plans of 
the employer are disregarded. For purposes of this paragraph 
(b)(4)(i)(C)(3), normal accrual rates are determined under paragraph (d) 
of this section.
    (ii) Examples. The following examples illustrate the rules in this 
paragraph (b)(4). In each example, it is assumed that the plan has never 
permitted employee contributions.

    Example 1. Plan A provides a normal retirement benefit equal to 1.6 
percent of average annual compensation times each year of service up to 
25. Plan A further provides that an employee's accrued benefit as of any 
plan year equals the employee's fractional rule benefit multiplied by a 
fraction, the numerator of which is the employee's years of service as 
of the plan year, and the denominator of which is the employee's 
projected years of service as of normal retirement age. The greatest 
benefit that an employee could accrue in any plan year is 1.6 percent of 
average annual compensation (this is the case for an employee with 25 or 
fewer years of projected service at normal retirement age). Among 
potential employees with 33 or fewer years of projected service at 
normal retirement age, the lowest benefit that an employee could accrue 
in any plan year is 1.212 percent of average annual compensation

[[Page 107]]

(this is the case for an employee with 33 years of projected service at 
normal retirement age). Plan A satisfies paragraph (b)(4)(i)(C)(1) of 
this section because 1.6 percent is not more than one third larger than 
1.212 percent.
    Example 2. Plan B provides a normal retirement benefit equal to 1.0 
percent of average annual compensation up to the integration level, and 
1.6 percent of average annual compensation above the integration level, 
times each year of service up to 35. Plan B further provides that an 
employee's accrued benefit as of any plan year equals the employee's 
fractional rule benefit multiplied by a fraction, the numerator of which 
is the employee's years of service as of the plan year and the 
denominator of which is the employee's projected years of service as of 
normal retirement age. For purposes of satisfying the one third larger 
rule in paragraph (b)(4)(i)(C)(1) of this section, because Plan B 
satisfies section 401(l) in form, all employees with less than 35 
projected years of service are assumed to accrue benefits at the rate of 
1.6 percent of average annual compensation (the excess benefit 
percentage under the plan). Plan B satisfies paragraph (b)(4)(i)(C) of 
this section because all employees with 33 or fewer years of projected 
service at normal retirement age accrue in each plan year a benefit of 
1.6 percent of average annual compensation.
    Example 3. Plan C provides a normal retirement benefit equal to four 
percent of average annual compensation times each year of service up to 
10 and one percent of average annual compensation times each year of 
service in excess of 10 and not in excess of 30. Plan C further provides 
that an employee's accrued benefit as of any plan year equals the 
employee's fractional rule benefit multiplied by a fraction, the 
numerator of which is the employee's years of service as of the plan 
year, and the denominator of which is the employee's projected years of 
service as of normal retirement age. The greatest benefit that an 
employee could accrue in any plan year is four percent of average annual 
compensation (this is the case for an employee with 10 or fewer years of 
projected service at normal retirement age). Among employees with 33 or 
fewer years of projected service at normal retirement age, the lowest 
benefit that an employee could accrue in a plan year is 1.82 percent of 
average annual compensation (this is the case of an employee with 33 
years of projected service at normal retirement age). Plan C fails to 
satisfy this paragraph (b)(4) because four percent is more than one 
third larger than 1.82 percent. See also Sec. 1.401(a)(4)-9(c)(6), 
Example 3.
    Example 4. Plan D provides a normal retirement benefit of 100 
percent of average annual compensation, reduced by four percentage 
points for each year of service below 25 the employee has at normal 
retirement age. Plan D further provides that an employee's accrued 
benefit as of any plan year is equal to the employee's fractional rule 
benefit multiplied by a fraction, the numerator of which is the 
employee's years of service as of the plan year, and the denominator of 
which is the employee's projected years of service at normal retirement 
age. In the case of an employee who has five years of service as of the 
current plan year, and who is projected to have 10 years of service at 
normal retirement age, the employee's fractional rule benefit would be 
40 percent of average annual compensation, and the employee's accrued 
benefit as of the current plan year would be 20 percent of average 
annual compensation (the fractional rule benefit multiplied by a 
fraction of five years over 10 years). Plan D satisfies this paragraph 
(b)(4).
    Example 5. The facts are the same as in Example 4, except that the 
normal retirement benefit is 125 percent of average annual compensation, 
reduced by five percentage points for each year of service below 25 that 
the employee has at normal retirement age. Plan D satisfies this 
paragraph (b)(4), even though an employee may accrue the maximum benefit 
allowed under section 415 (i.e., 100 percent of the participant's 
average compensation for the high three years of service) in less than 
25 years.
    Example 6. The facts are the same as in Example 1, except that the 
plan determines each employee's accrued benefit by multiplying the 
employee's projected normal retirement benefit (rather than the 
fractional rule benefit) by the fraction described in Example 1. In 
determining an employee's projected normal retirement benefit, the plan 
defines each employee's average annual compensation as the average 
annual compensation the employee would have at normal retirement age if 
the employee's annual section 414(s) compensation in future plan years 
equaled the employee's plan year compensation for the prior plan year. 
Under these facts, Plan A does not satisfy paragraph (b)(4)(i)(B) of 
this section because the employee's accrued benefit is determined on the 
basis of a projected normal retirement benefit that is not the same as 
the employee's fractional rule benefit determined in accordance with 
Sec. 1.411(b)-1(b)(3)(ii)(A).
    Example 7. Plan E provides a normal retirement benefit of 50 percent 
of average annual compensation, with a pro rata reduction for employees 
with less than 30 years of service at normal retirement age. Plan E 
further provides that an employee's accrued benefit as of any plan year 
is equal to the employee's fractional rule benefit multiplied by a 
fraction, the numerator of which is the employee's years of service as 
of the plan year, and the denominator of which is the employee's 
projected years of service at normal retirement age. For purposes of 
determining

[[Page 108]]

this fraction, the plan limits the years of service taken into account 
for an employee to the number of years the employee has participated in 
the plan. However, all years of service (including years of service 
before the employee commenced participation in the plan) are taken into 
account in determining an employee's normal retirement benefit under the 
plan's benefit formula. Plan E fails to satisfy this paragraph (b)(4) 
because the years of service over which benefits accrue differ from the 
years of service used in applying the benefit formula under the plan. 
See paragraph (b)(2)(v) of this section.
    Example 8. (a) Plan F provides a normal retirement benefit equal to 
2.0 percent of average annual compensation, plus 0.65 percent of average 
annual compensation above covered compensation, for each year of service 
up to 25. Plan F further provides that an employee's accrued benefit as 
of any plan year equals the sum of--
    (1) The employee's fractional rule benefit (determined as if the 
normal retirement benefit under the plan equaled 2.0 percent of average 
annual compensation for each year of service up to 25) multiplied by a 
fraction, the numerator of which is the employee's years of service as 
of the plan year and the denominator of which is the employee's 
projected years of service as of normal retirement age; plus
    (2) 0.65 percent of the employee's average annual compensation above 
covered compensation multiplied by the employee's years of service (up 
to 25) as of the current plan year.
    (b) Although Plan F satisfies the fractional accrual rule of section 
411(b)(1)(C), the plan fails to satisfy this paragraph (b)(4) because 
the plan does not determine employees' accrued benefits in accordance 
with paragraph (b)(4)(i)(B) of this section.

    (5) Safe harbor for insurance contract plans. A plan satisfies the 
safe harbor in this paragraph (b)(5) if it satisfies each of the 
following requirements:
    (i) The plan must satisfy the accrual rule of section 411(b)(1)(F).
    (ii) The plan must be an insurance contract plan within the meaning 
of section 412(i).
    (iii) The benefit formula under the plan must be one that would 
satisfy the requirements of paragraph (b)(4) of this section if the 
stated normal retirement benefit under the formula accrued ratably over 
each employee's period of plan participation through normal retirement 
age in accordance with paragraph (b)(4)(i)(B) of this section. Thus, the 
benefit formula may not recognize years of service before an employee 
commenced participation in the plan because, otherwise, the definition 
of years of service for determining the normal retirement benefit would 
differ from the definition of years of service for determining the 
accrued benefit under paragraph (b)(4)(i)(B) of this section. See 
paragraph (b)(4)(ii), Example 7, of this section. Notwithstanding the 
foregoing, an insurance contract plan adopted and in effect on September 
19, 1991, may continue to recognize years of service prior to an 
employee's participation in the plan for an employee who is a 
participant in the plan on that date to the extent provided by the 
benefit formula in the plan on such date.
    (iv) The scheduled premium payments under an individual or group 
insurance contract used to fund an employee's normal retirement benefit 
must be level annual payments to normal retirement age. Thus, payments 
may not be scheduled to cease before normal retirement age.
    (v) The premium payments for an employee who continues benefiting 
after normal retirement age must be equal to the amount necessary to 
fund additional benefits that accrue under the plan's benefit formula 
for the plan year.
    (vi) Experience gains, dividends, forfeitures, and similar items 
must be used solely to reduce future premiums.
    (vii) All benefits must be funded through contracts of the same 
series. Among other requirements, contracts of the same series must have 
cash values based on the same terms (including interest and mortality 
assumptions) and the same conversion rights. A plan does not fail to 
satisfy this requirement, however, if any change in the contract series 
or insurer applies on the same terms to all employees. But see 
Sec. 1.401(a)(4)-5(a)(4), Example 12 (change in insurer considered a 
plan amendment subject to Sec. 1.401(a)(4)-5(a)).
    (viii) If permitted disparity is taken into account, the normal 
retirement benefit stated under the plan's benefit formula must satisfy 
Sec. 1.401(l)-3. For this purpose, the 0.75-percent factor in the 
maximum excess or offset allowance in Sec. 1.401(l)-3(b)(2)(i) or 
(b)(3)(i), respectively, adjusted in accordance with Sec. 1.401(l)-
3(d)(9) and (e), is reduced by multiplying the factor by 0.80.

[[Page 109]]

    (6) Use of safe harbors not precluded by certain plan provisions--
(i) In general. A plan does not fail to satisfy this paragraph (b) 
merely because the plan contains one or more of the provisions described 
in this paragraph (b)(6). Unless otherwise provided, any such provision 
must apply uniformly to all employees.
    (ii) Section 401(l) permitted disparity. The plan takes permitted 
disparity into account in a manner that satisfies section 401(l) in 
form. Thus, differences in employees' benefits under the plan 
attributable to uniform disparities permitted under Sec. 1.401(l)-3 
(including differences in disparities that are deemed uniform under 
Sec. 1.401(l)-3(c)(2)) do not cause a plan to fail to satisfy this 
paragraph (b).
    (iii) Different entry dates. The plan provides one or more entry 
dates during the plan year as permitted by section 410(a)(4).
    (iv) Certain conditions on accruals. The plan provides that an 
employee's accrual for the plan year is less than a full accrual 
(including a zero accrual) because of a plan provision permitted by the 
year-of-participation rules of section 411(b)(4).
    (v) Certain limits on accruals. The plan limits benefits otherwise 
provided under the benefit formula or accrual method to a maximum dollar 
amount or to a maximum percentage of average annual compensation (e.g., 
by limiting service taken into account in the benefit formula) or in 
accordance with section 401(a)(5)(D), applies the limits of section 415, 
or limits the dollar amount of compensation taken into account in 
determining benefits.
    (vi) Dollar accrual per uniform unit of service. The plan determines 
accruals based on the same dollar amount for each uniform unit of 
service (not to exceed one week) performed by each employee with the 
same number of years of service under the plan during the plan year. The 
preceding sentence applies solely for purposes of the unit credit safe 
harbor in paragraph (b)(3) of this section.
    (vii) Prior benefits accrued under a different formula. The plan 
determines benefits for years of service after a fresh-start date for 
all employees under a benefit formula and accrual method that differ 
from the benefit formula and accrual method previously used to determine 
benefit accruals for employees in a fresh-start group for years of 
service before the fresh-start date. This paragraph (b)(6)(vii) applies 
solely to plans that satisfy Sec. 1.401(a)(4)-13(c) with respect to the 
fresh start.
    (viii) Employee contributions. The plan is a contributory DB plan 
that would satisfy the requirements of paragraph (b) of this section if 
the plan's benefit formula provided benefits at employees' employer-
provided benefit rates determined under Sec. 1.401(a)(4)-6(b). This 
paragraph (b)(6)(viii) does not apply to a plan tested under paragraph 
(b)(4) or (b)(5) of this section unless the plan satisfies one of the 
methods in Sec. 1.401(a)(4)-6 (b)(4) through (b)(6). A minimum benefit 
added to the plan solely to satisfy Sec. 1.401(a)(4)-6(b)(3) is not 
taken into account in determining whether this paragraph (b)(6)(viii) is 
satisfied.
    (ix) Certain subsidized optional forms. The plan provides a 
subsidized optional form of benefit that is available to fewer than 
substantially all employees because the optional form of benefit has 
been eliminated prospectively as provided in Sec. 1.401(a)(4)-4(b)(3).
    (x) Lower benefits for HCEs--(A) General rule. The benefits 
(including any subsidized optional form of benefit) provided to one or 
more HCEs under the plan are inherently less valuable to those HCEs 
(determined by applying the principles of Sec. 1.401(a)(4)-4(d)(4)) than 
the benefits that would otherwise be provided to those HCEs if the plan 
satisfied this paragraph (b) (determined without regard to this 
paragraph (b)(6)(x)). These inherently less valuable benefits are deemed 
to satisfy this paragraph (b).
    (B) Examples. The following examples illustrate the rules in this 
paragraph (b)(6)(x):

    Example 1. Plan A would satisfy this paragraph (b) (determined 
without regard to this paragraph (b)(6)(x)), except for the fact that it 
fails to satisfy the requirement of paragraph (b)(2)(iii) of this 
section (i.e., a subsidized optional form must be available to 
substantially all employees on similar terms). Each subsidized optional 
form in the plan is available to all the NHCEs on similar terms, but one 
of the subsidized optional forms of benefit is not available to any of 
the

[[Page 110]]

HCEs. Plan A satisfies this paragraph (b), because Plan A is a safe 
harbor plan with respect to the NHCEs and provides inherently less 
valuable benefits to the HCEs.
    Example 2. (a) Plan B would satisfy this paragraph (b) (determined 
without regard to this paragraph (b)(6)(x)), except for the fact that 
some employees are not being credited with years of service under the 
plan, but are continuing to accrue benefits as a result of compensation 
increases. These are employees who have been transferred from the 
employer that sponsors Plan B to another member of the controlled group 
whose employees are not covered by Plan B. For these employees, Plan B 
fails to satisfy the requirement of paragraph (b)(2)(v) of this section 
(i.e., each employee's benefit must accrue over the same years of 
service used in applying the benefit formula).
    (b) Plan B is restructured into two component plans under the 
provisions of Sec. 1.401(a)(4)-9(c). One component plan (Component Plan 
B1) consists of all NHCEs who are not being credited with years of 
service under the plan's benefit formula but are continuing to accrue 
benefits as a result of compensation increases, and the other component 
plan (Component Plan B2) consists of the balance of the employees.
    (c) Component Plan B1 satisfies this section and section 410(b), 
because it benefits only NHCEs.
    (d) Component Plan B2 is treated as satisfying this paragraph (b), 
because Plan B would satisfy this paragraph (b) (determined without 
regard to this paragraph (b)(6)(x)) with respect to the employees in 
Component Plan B2 but for the fact that it provides inherently less 
valuable benefits to some HCEs in that component plan (i.e., the 
employees who are credited only with compensation increases rather than 
both years of service and compensation increases).
    (e) Under Sec. 1.401(a)(4)-9(c), if Component Plan B2 satisfies 
section 410(b), then Plan B satisfies this section.

    (xi) Multiple formulas--(A) General rule. The plan provides that an 
employee's benefit under the plan is the greater of the benefits 
determined under two or more formulas, or is the sum of the benefits 
determined under two or more formulas. This paragraph (b)(6)(xi) does 
not apply to a plan unless each of the formulas under the plan satisfies 
the requirements of paragraph (b)(6)(xi) (B) through (D) of this 
section.
    (B) Sole formulas. The formulas must be the only formulas under the 
plan.
    (C) Separate testing. Each of the formulas must separately satisfy 
the uniformity requirements of paragraph (b)(2) of this section and also 
separately satisfy one of the safe harbors in paragraphs (b)(3) through 
(b)(5) of this section. A formula that is available solely to some or 
all NHCEs is deemed to satisfy this paragraph (b)(6)(xi)(C).
    (D) Availability--(1) General rule. All of the formulas must be 
available on the same terms to all employees.
    (2) Formulas for NHCEs. A formula does not fail to be available on 
the same terms to all employees merely because the formula is not 
available to any HCEs, but is available to some or all NHCEs on the same 
terms as all of the other formulas in the plan.
    (3) Top-heavy formulas. Rules parallel to those in Sec. 1.401(a)(4)-
2(b)(4)(vi)(D)(3) apply in the case of a plan that provides the greater 
of the benefits under two or more formulas, one of which is a top-heavy 
formula. For purposes of this paragraph (b)(6)(xi)(D)(3), a top-heavy 
formula is a formula that provides a benefit equal to the minimum 
benefit described in section 416(c)(1) (taking into account, if 
applicable, the modification in section 416(h)(2)(A)(ii)(I)).
    (E) Provisions may be applied more than once. The provisions of this 
paragraph (b)(6)(xi) may be applied more than once. See 
Sec. 1.401(a)(4)-2(b)(4)(vi)(E) for an example of the application of 
these provisions more than once.
    (F) Examples. The following examples illustrate the rules in this 
paragraph (b)(6)(xi):

    Example 1. Under Plan A, each employee's benefit equals the sum of 
the benefits determined under two formulas. The first formula provides 
one percent of average annual compensation per year of service. The 
second formula provides $10 per year of service. Plan A is eligible to 
apply the rules in this paragraph (b)(6)(xi).
    Example 2. Under Plan B, each employee's benefit equals the greater 
of the benefits determined under two formulas. The first formula 
provides $15 per year of service and is available to all employees who 
complete at least 500 hours of service during the plan year. The second 
formula provides 1.5 percent of average annual compensation per year of 
service and is available to all employees who complete at least 1,000 
hours of service during the plan year. Plan B does not satisfy this 
paragraph (b)(6)(xi) because the two formulas are not available on the 
same terms to all employees.

[[Page 111]]

    Example 3. Under Plan C, each employee's benefit equals the greater 
of the benefits determined under two formulas. The first formula 
provides $15 per year of service and is available to all employees who 
complete at least 1,000 hours of service during the plan year. The 
second formula provides the minimum benefit described in section 
416(c)(1) and is available to all non-key employees who complete at 
least 1,000 hours of service during the plan year. Plan C does not 
satisfy the general rule in paragraph (b)(6)(xi)(D)(1) of this section 
because the two formulas are not available on the same terms to all 
employees (i.e., the second formula is only available to all non-key 
employees). Nonetheless, because the second formula is a top-heavy 
formula, the special availability rules for top-heavy formulas in 
paragraph (b)(6)(xi)(D)(3) of this section apply. Thus, the second 
formula does not fail to be available on the same terms as the first 
formula merely because the second formula is available solely to all 
non-key employees on the same terms. This is true even if the plan 
conditions the availability of the second formula on the plan's being 
top-heavy for the plan year.
    Example 4. Under Plan D, each employee's benefit equals the greater 
of the benefits determined under two formulas. The first formula is 
available to all employees and provides a benefit equal to 1.5 percent 
of average annual compensation per year of service. The second formula 
is only available to NHCEs and provides a benefit equal to two percent 
of average annual compensation per year of service, minus two percent of 
the primary insurance amount per year of service. The amount of the 
offset is not limited to the maximum permitted offset under 
Sec. 1.401(l)-3(b). Under paragraph (b)(6)(xi)(D)(2) of this section, 
both formulas are treated as available to all employees on the same 
terms. Furthermore, even though the second formula does not satisfy any 
of the safe harbors in this paragraph (b), the formula is deemed to 
satisfy the separate testing requirement under paragraph (b)(6)(xi)(C) 
of this section, because the formula is available solely to some or all 
NHCEs.
    Example 5. Plan E is a unit credit plan that provides a benefit of 
one percent of average annual compensation per year of service to all 
employees. In 1994, the plan is amended to provide a benefit of two 
percent of average annual compensation per year of service after 1993, 
while continuing to provide a benefit of one percent of average annual 
compensation per year of service for all years of service before 1994. 
Thus, the plan's amended benefit formula provides a benefit equal to the 
sum of the benefits determined under two benefit formulas: one percent 
of average annual compensation per year of service, plus one percent of 
average annual compensation per year of service after 1993. Plan E 
satisfies this paragraph (b)(6)(xi).
    Example 6. The facts are the same as in Example 5, except that the 
plan amendment in 1994 decreases the benefit to 0.75 percent of average 
annual compensation per year of service after 1993, while retaining the 
one-percent formula for all years of service before 1994. Thus, the 
plan's amended benefit formula provides a benefit equal to the sum of 
the benefits determined under two benefit formulas: 0.75 percent of 
average annual compensation per year of service, plus 0.25 percent of 
average annual compensation per year of service before 1994. Under these 
facts, the second formula does not separately satisfy any of the safe 
harbors in this paragraph (b) because the years of service over which 
each employee's benefit accrues under the second formula (i.e., all 
years of service) are not the same years of service that are taken into 
account in applying the benefit formula under the plan to that employee 
(i.e., years of service before 1994). See paragraph (b)(2)(v) of this 
section. But see paragraph (b)(6)(vii) of this section and 
Sec. 1.401(a)(4)-13, which provide rules under which Plan E, as amended, 
may be able to satisfy this paragraph (b).
    Example 7. Plan F provides a benefit to all employees of one percent 
of average annual compensation per year of service. Employee M was hired 
as the president of the employer in December 1994 and was not a HCE 
under section 414(q) during the 1994 calendar plan year. In 1994, Plan F 
is amended to provide a benefit that is the greater of the benefit 
determined under the pre-existing formula in the plan and a new formula 
that is available solely to some NHCEs (including Employee M). The new 
formula does not satisfy the uniformity requirements of paragraph (b)(2) 
of this section, because it provides a different benefit for some NHCEs 
than for other NHCEs. As a result of this change, Employee M receives a 
higher accrual in 1994 than the NHCEs who are not eligible for the new 
formula. In 1995, when Employee M first becomes a HCE, the second 
formula no longer applies to Employee M. It would be inconsistent with 
the purpose of preventing discrimination in favor of HCEs for Plan F to 
use the special rule for a formula that is available solely to some or 
all NHCEs to satisfy the separate testing requirement of paragraph 
(b)(6)(xi)(C) of this section for the 1994 calendar plan year. See 
Sec. 1.401(a)(4)-1(c)(2).

    (c) General test for nondiscrimination in amount of benefits--(1) 
General rule. The employer-provided benefits under a defined benefit 
plan are nondiscriminatory in amount for a plan year if each rate group 
under the plan satisfies section 410(b). For purposes of this paragraph 
(c)(1), a rate group exists

[[Page 112]]

under a plan for each HCE and consists of the HCE and all other 
employees (both HCEs and NHCEs) who have a normal accrual rate greater 
than or equal to the HCE's normal accrual rate, and who also have a most 
valuable accrual rate greater than or equal to the HCE's most valuable 
accrual rate. Thus, an employee is in the rate group for each HCE who 
has a normal accrual rate less than or equal to the employee's normal 
accrual rate, and who also has a most valuable accrual rate less than or 
equal to the employee's most valuable accrual rate.
    (2) Satisfaction of section 410(b) by a rate group. For purposes of 
determining whether a rate group satisfies section 410(b), the same 
rules apply as in Sec. 1.401(a)(4)-2(c)(3). See paragraph (c)(4) of this 
section and Sec. 1.401(a)(4)-2(c)(4), Example 3 through Example 5, for 
examples of this rule.
    (3) Certain violations disregarded. A plan is deemed to satisfy 
paragraph (c)(1) of this section if the plan would satisfy that 
paragraph by treating as not benefiting no more than five percent of the 
HCEs in the plan, and the Commissioner determines that, on the basis of 
all of the relevant facts and circumstances, the plan does not 
discriminate with respect to the amount of employer-provided benefits. 
For this purpose, five percent of the number of HCEs may be determined 
by rounding to the nearest whole number (e.g., 1.4 rounds to 1 and 1.5 
rounds to 2). Among the relevant factors that the Commissioner may 
consider in making this determination are--
    (i) The extent to which the plan has failed the test in paragraph 
(c)(1) of this section;
    (ii) The extent to which the failure is for reasons other than the 
design of the plan;
    (iii) Whether the HCEs causing the failure are five-percent owners 
or are among the highest paid nonexcludable employees;
    (iv) Whether the failure is attributable to an event that is not 
expected to recur (e.g., a plant closing); and
    (v) The extent to which the failure is attributable to benefits 
accrued under a prior benefit structure or to benefits accrued when a 
participant was not a HCE.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. (a) Employer X has 1100 nonexcludable employees, N1 
through N1000, who are NHCEs, and H1 through H100, who are HCEs. 
Employer X maintains Plan A, a defined benefit plan that benefits all of 
these nonexcludable employees. The normal and most valuable accrual 
rates (determined as a percentage of average annual compensation) for 
the employees in Plan A for the 1994 plan year are listed in the 
following table.

------------------------------------------------------------------------
                                                                 Most
                                                     Normal    valuable
                     Employee                       accrual     accrual
                                                      rate       rate
------------------------------------------------------------------------
N1 through N100..................................        1.0        1.4
N101 through N500................................        1.5        3.0
N501 through N750................................        2.0        2.65
N751 through N1000...............................        2.3        2.8
H1 through H50...................................        1.5        2.0
H51 through H100.................................        2.0        2.65
------------------------------------------------------------------------

    (b) There are 100 rate groups in Plan A because there are 100 HCEs 
in Plan A.
    (c) Rate group 1 consists of H1 and all those employees who have a 
normal accrual rate greater than or equal to H1's normal accrual rate 
(1.5 percent) and who also have a most valuable accrual rate greater 
than or equal to H1's most valuable accrual rate (2.0 percent). Thus, 
rate group 1 consists of H1 through H100 and N101 through N1000.
    (d) Rate group 1 satisfies the ratio percentage test of 
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is 
90 percent, i.e., 90 percent (the percentage of all nonhighly 
compensated nonexcludable employees who are in the rate group) divided 
by 100 percent (the percentage of all highly compensated nonexcludable 
employees who are in the rate group).
    (e) Because H1 through H50 have the same normal accrual rates and 
the same most valuable accrual rates, the rate group with respect to 
each of them is identical. Thus, because rate group 1 satisfies section 
410(b), rate groups 2 through 50 also satisfy section 410(b).
    (f) Rate group 51 consists of H51 and all those employees who have a 
normal accrual rate greater than or equal to H51's normal accrual rate 
(2.0 percent) and who also have a most valuable accrual rate greater 
than or equal to H51's most valuable accrual rate (2.65 percent). Thus, 
rate group 51 consists of H51 through H100 and N501 through N1000. (Even 
though N101 through N500 have a most valuable accrual rate (3.0 percent) 
greater than H51's most valuable accrual rate (2.65 percent), they are 
not included in this rate group because their normal accrual rate (1.5 
percent) is less than H51's normal accrual rate (2.0 percent).)

[[Page 113]]

    (g) Rate group 51 satisfies the ratio percentage test of 
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is 
100 percent, i.e., 50 percent (the percentage of all nonhighly 
compensated nonexcludable employees who are in the rate group) divided 
by 50 percent (the percentage of all highly compensated nonexcludable 
employees who are in the rate group).
    (h) Because H51 through H100 have the same normal accrual rates and 
the same most valuable accrual rates, the rate group with respect to 
each of them is identical. Thus, because rate group 51 satisfies section 
410(b), rate groups 52 through 100 also satisfy section 410(b).
    (i) The employer-provided benefits under Plan A are 
nondiscriminatory in amount because each rate group under the plan 
satisfies section 410(b).
    Example 2. The facts are the same as in Example 1, except that H96 
has a most valuable accrual rate of 3.5. Each of the rate groups is the 
same as in Example 1, except that rate group 96 consists solely of H96 
because no other employee has a most valuable accrual rate greater than 
3.5. Because the plan would satisfy the test in paragraph (c)(1) of this 
section by treating H96 (who constitutes less than five percent of the 
HCEs in the plan) as not benefiting, the Commissioner may determine 
under paragraph (c)(3) of this section that, on the basis of all of the 
relevant facts and circumstances, the plan does not discriminate with 
respect to the amount of benefits.

    (d) Determination of accrual rates--(1) Definitions--(i) Normal 
accrual rate. The normal accrual rate for an employee for a plan year is 
the increase in the employee's accrued benefit (within the meaning of 
section 411(a)(7)(A)(i)) during the measurement period, divided by the 
employee's testing service during the measurement period, and expressed 
either as a dollar amount or as a percentage of the employee's average 
annual compensation.
    (ii) Most valuable accrual rate. The most valuable accrual rate for 
an employee for a plan year is the increase in the employee's most 
valuable optional form of payment of the accrued benefit during the 
measurement period, divided by the employee's testing service during the 
measurement period, and expressed either as a dollar amount or as a 
percentage of the employee's average annual compensation. The employee's 
most valuable optional form of payment of the accrued benefit is 
determined by calculating for the employee the normalized QJSA 
associated with the accrued benefit that is potentially payable in the 
current or any future plan year at any age under the plan and selecting 
the largest (per year of testing service). If the plan provides a QSUPP, 
the most valuable accrual rate also takes into account the QSUPP payable 
in conjunction with the QJSA at each age under the plan. Thus, the most 
valuable accrual rate reflects the value of all benefits accrued or 
treated as accrued under section 411(d)(6) that are payable in any form 
and at any time under the plan, including early retirement benefits, 
retirement-type subsidies, early retirement window benefits, and QSUPPs. 
In addition, the most valuable accrual rate must take into account any 
such benefits that are available during a plan year, even if the 
benefits cease to be available before the end of the current or any 
future plan year.
    (iii) Measurement period. The measurement period can be--
    (A) The current plan year;
    (B) The current plan year and all prior years; or
    (C) The current plan year and all prior and future years.
    (iv) Testing service--(A) General rule. Testing service means an 
employee's years of service as defined in the plan for purposes of 
applying the benefit formula under the plan, subject to the requirements 
of paragraph (d)(1)(iv)(B) of this section. Alternatively, testing 
service means service determined for all employees in a reasonable 
manner that satisfies the requirements of paragraph (d)(1)(iv)(B) of 
this section. For example, the number of plan years that an employee has 
benefited under the plan within the meaning of Sec. 1.410(b)-3(a) is an 
acceptable definition of testing service because it determines service 
in a reasonable manner and satisfies paragraph (d)(1)(iv)(B) of this 
section. See also Sec. 1.401(a)(4)-11(d)(3) (additional limits on 
service that may be taken into account as testing service).
    (B) Requirements for testing service--(1) Employees not credited 
with years of service under the benefit formula. An employee must be 
credited with testing service for any year in which the employee 
benefits under the plan (within the meaning of Sec. 1.410(b)-3(a)), 
unless that year is part of a period of service

[[Page 114]]

that may not be taken into account under Sec. 1.401(a)(4)-11(d)(3). This 
rule applies even if the employee does not receive service credit under 
the benefit formula for that year (e.g., because of a service cap in the 
benefit formula or because of a transfer out of the group of employees 
covered by the plan).
    (2) Current year testing service. In the case of a measurement 
period that is the current plan year, testing service for the plan year 
equals one (1).
    (2) Rules of application--(i) Consistency requirement. Both normal 
and most valuable accrual rates must be determined in a consistent 
manner for all employees for the plan year. Thus, for example, the same 
measurement periods must be used, and the rules of this paragraph (d)(2) 
and any available options described in paragraph (d)(3) of this section 
must be applied consistently. If plan benefits are not expressed as 
straight life annuities beginning at employees' testing ages, they must 
be normalized.
    (ii) Determining plan benefits, service and compensation--(A) In 
general. Potential plan benefits, testing service, and average annual 
compensation must be determined in a reasonable manner, reflecting 
actual or projected service and compensation only through the end of the 
measurement period. The determination of potential plan benefits is not 
reasonable if it incorporates an assumption that, in future years, an 
employee's compensation will increase or the employee will terminate 
employment before the employee's testing age (other than the assumptions 
under paragraph (d)(1)(ii) of this section that the employee's service 
will end in connection with the payment of each potential QJSA in future 
years).
    (B) Section 415 limits. For purposes of determining accrual rates 
under this paragraph (d), plan benefits are generally determined without 
regard to whether those benefits are permitted to be paid under section 
415. However, plan provisions implementing any of the limits of section 
415 may be taken into account in applying this paragraph (d) if the plan 
does not provide for benefit increases resulting from section 415(d)(1) 
adjustments for former employees who were employees in a plan year in 
which such plan provisions were taken into account in applying this 
paragraph (d). If the limits of section 415 are taken into account under 
this paragraph (d)(2)(ii)(B) as of the end of the measurement period, 
they must also be taken into account as of the beginning of the 
measurement period. If the limits of section 415 are not taken into 
account in testing the plan for the current plan year, but were taken 
into account in testing the plan for the preceding plan year, any 
resulting increase in the accrued benefits taken into account in testing 
the plan is treated as an increase in accrued benefits during the 
current plan year.
    (iii) Requirements for measurement period that includes future 
years--(A) Discriminatory pattern of accruals. A measurement period that 
includes future years (as described in paragraph (d)(1)(iii)(C) of this 
section) may not be used if the pattern of accruals under the plan 
discriminates in favor of HCEs (i.e., if projected benefits for HCEs are 
relatively frontloaded when compared to the degree of front loading or 
backloading for NHCEs). This determination is made based on all of the 
relevant facts and circumstances.
    (B) Future-period limitation. Future years beginning after an 
employee's attainment of the employee's testing age (or after the 
employee's assumed termination in the case of most valuable accrual 
rates) may not be included in the measurement period.
    (3) Optional rules--(i) Imputation of permitted disparity. The 
disparity permitted under section 401(l) may be imputed in accordance 
with the rules of Sec. 1.401(a)(4)-7.
    (ii) Grouping of accrual rates--(A) General rule. An employer may 
treat all employees who have accrual rates within a specified range 
above and below a midpoint rate chosen by the employer as having an 
accrual rate equal to the midpoint rate within that range. Accrual rates 
within a given range may not be grouped under this paragraph (d)(3)(ii) 
if the accrual rates of HCEs within the range generally are 
significantly higher than the accrual rates of NHCEs in the range. The 
specified ranges within which all employees are treated as having the 
same accrual rate may not overlap and may be no larger than provided in 
paragraph

[[Page 115]]

(d)(3)(ii)(B) of this section. Accrual rates of employees that are not 
within any of these specified ranges are determined without regard to 
this paragraph (d)(3)(ii).
    (B) Size of specified ranges. In the case of normal accrual rates, 
the lowest and highest accrual rates in the range must be within five 
percent (not five percentage points) of the midpoint rate. In the case 
of most valuable accrual rates, the lowest and highest accrual rates in 
the range must be within 15 percent (not 15 percentage points) of the 
midpoint rate. If accrual rates are determined as a percentage of 
average annual compensation, the lowest and highest accrual rates need 
not be within five percent (or 15 percent) of the midpoint rate, if they 
are no more than one twentieth of a percentage point above or below the 
midpoint rate.
    (iii) Fresh-start alternative--(A) General rule. Notwithstanding the 
definition of measurement period provided in paragraph (d)(1)(iii) of 
this section, a measurement period for a fresh-start group is permitted 
to be limited to the period beginning after the fresh-start date with 
respect to that group if the plan makes a fresh start that satisfies 
Sec. 1.401(a)(4)-13(c) (without regard to Sec. 1.401(a)(4)-13(c)(2)(i) 
and (ii)). If the measurement period is so limited or the measurement 
period is the plan year (whether or not so limited), any compensation 
adjustments during the measurement period to the frozen accrued benefit 
as of the fresh-start date that are permitted under the rules of 
Sec. 1.401(a)(4)-13(d) may be disregarded in determining the increase in 
accrued benefits during the measurement period, but only if--
    (1) The plan makes a fresh start as of the fresh-start date that 
satisfies Sec. 1.401(a)(4)-13(c) (without regard to Sec. 1.401(a)(4)-
13(c)(2)(ii)) in conjunction with a bona fide amendment to the benefit 
formula or accrual method under the plan; and
    (2) The amendment provides for adjustments to employees' frozen 
accrued benefits as of the fresh-start date in accordance with the rules 
of Sec. 1.401(a)(4)-13(d).
    (B) Application of consistency requirements. Limiting the 
application of the fresh-start alternative in this paragraph (d)(3)(iii) 
to a fresh-start group that consists of fewer than all employees does 
not violate the consistency requirement of paragraph (d)(2)(i) of this 
section.
    (iv) Floor on most valuable accrual rate. In lieu of determining an 
employee's most valuable accrual rate in accordance with the definition 
in paragraph (d)(1)(ii) of this section, an employer may determine an 
employee's most valuable accrual rate for the current plan year as the 
employee's highest most valuable accrual rate determined for any prior 
plan year. This option may be used only if the employee's normal accrual 
rate has not changed significantly from the normal accrual rate for the 
relevant prior plan year and, there have been no plan amendments in the 
interim period since that prior plan year that affect the determination 
of most valuable accrual rates.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (d):

    Example 1. The employees in Plan A have the following normal accrual 
rates (expressed as percentage of average annual compensation): 0.8 
percent, 0.83 percent, 0.9 percent, 1.9 percent, 2.0 percent, and 2.1 
percent. Because the first three rates are within a range of no more 
than one twentieth of a percentage point above or below 0.85 percent (a 
midpoint rate chosen by the employer), the employer may treat the 
employees who have those rates as having an accrual rate of 0.85 percent 
(provided that the accrual rates of HCEs within the range are not 
significantly higher than the accrual rates for NHCEs within the range). 
Because the last three rates are within a range of no more than five 
percent above or below 2.0 percent (a midpoint rate chosen by the 
employer), the employer may treat the employees who have those rates as 
having an accrual rate of 2.0 percent (provided that the accrual rates 
of HCEs within the range are not significantly higher than the accrual 
rates for NHCEs within the range).
    Example 2. Employer X maintains a plan under which headquarters 
employees accrue a benefit of 1.25 percent of average compensation for 
the first 10 years of service and 0.75 percent of average compensation 
for subsequent years of service, while all other employees accrue a 
benefit of one percent of compensation for all years of service. Assume 
that the group of headquarters employees does not satisfy section 
410(b). Under these facts, the pattern of accruals under the plan 
discriminates in favor of HCEs, and,

[[Page 116]]

therefore, under paragraph (d)(2)(iii)(A) of this section, the 
measurement period for determining accrual rates under the plan may not 
include future service.

    (e) Compensation rules--(1) In general. This paragraph (e) provides 
rules for determining average annual compensation. Safe harbor plans 
that satisfy paragraph (b) of this section must determine benefits 
either as a dollar amount unrelated to employees' compensation or as a 
percentage of each employee's average annual compensation. In contrast, 
plans that must satisfy the general test of paragraph (c) of this 
section are not required under this section to determine benefits under 
any particular definition of compensation or in any particular manner, 
but the accrual rates used in testing these plans must be expressed 
either as a dollar amount or determined as a percentage of each 
employee's average annual compensation.
    (2) Average annual compensation--(i) General rule. An employee's 
average annual compensation is the average of the employee's annual 
section 414(s) compensation determined over the averaging period in the 
employee's compensation history during which the average of the 
employee's annual section 414(s) compensation is the highest. For this 
purpose, an averaging period must consist of three or more consecutive 
12-month periods, but need not be longer than the employee's period of 
employment. An employee's compensation history may begin at any time, 
but must be continuous, be no shorter than the averaging period, and end 
in the current plan year.
    (ii) Certain permitted modifications to average annual compensation-
-(A) Use of plan year compensation. If the measurement period for 
determination of accrual rates is the current plan year, or the plan is 
an accumulation plan that satisfies paragraph (b) of this section, then 
plan year compensation may be substituted for average annual 
compensation.
    (B) Drop-out years. Any of the following types of 12-month periods 
in an employee's compensation history may be disregarded in determining 
the employee's average annual compensation (including for purposes of 
the requirement to average section 414(s) compensation over consecutive 
12-month periods), but only if the plan disregards the employee's 
compensation for those periods in determining benefits--
    (1) The 12-month period in which the employee terminates employment;
    (2) All 12-month periods in which the employee performs no services; 
or
    (3) All 12-month periods in which the employee performs services for 
less than a specified number of hours or specified period of time in the 
12-month period. The specified number of hours or specified period of 
time may be selected by the employer, but may not exceed three quarters 
of the time that an employee in the same job category working on a full-
time basis would perform services during that 12-month period.
    (C) Drop-out months within 12-month periods. If a plan determines an 
employee's average annual compensation using 12-month periods that do 
not end on a fixed date (e.g., average annual compensation as of a date 
is defined as the average of the employee's section 414(s) compensation 
for the 60 consecutive months within the compensation history in which 
the average is highest), then, for purposes of determining a 12-month 
period, any of the following type of months may be disregarded 
(including for purposes of the requirement to average section 414(s) 
compensation over consecutive 12-month periods), but only if the plan 
disregards the employee's compensation for those months in determining 
benefits--
    (1) The month in which the employee terminates employment;
    (2) All months in which the employee performs no services; or
    (3) All months in which the employee performs services for less than 
a specified number of hours or specified period of time in the month. 
The specified number of hours or specified period of time may be 
selected by the employer, but may not exceed three quarters of the time 
that an employee in the same job category working on a full-time basis 
would perform services during that month.
    (D) Employees working less than full-time. In the case of an 
employee who normally works less than full-time, the rules in paragraphs 
(e)(2)(ii)(B)(3) and

[[Page 117]]

(e)(2)(ii)(C)(3) of this section may be applied in relation to that 
employee's normal work schedule (instead of a full- time employee's work 
schedule) by prorating the specified number of hours or specified period 
of time, based on the employee's normal work schedule as a fraction of a 
full-time schedule.
    (E) Exception from consecutive-periods requirement for certain 
plans. The requirement that the periods taken into account under 
paragraph (e)(2)(i) of this section be consecutive does not apply in the 
case of a plan that is not a section 401(l) plan, provided that it does 
not take permitted disparity into account under Sec. 1.401(a)(4)-7. This 
paragraph (e)(2)(ii)(E) applies only if the plan does not take into 
account whether 12-month periods of compensation are consecutive in 
determining average compensation for purposes of calculating benefits.
    (iii) Consistency requirements. Average annual compensation must be 
determined in a consistent manner for all employees.
    (3) Examples. The following examples illustrate the rules in this 
paragraph (e):

    Example 1. Plan A is a defined benefit plan. Plan A determines 
benefits on the basis of the average of each employee's annual 
compensation for the five consecutive plan years (or the employee's 
period of employment, if shorter) during the employee's compensation 
history in which the average of the employee's annual compensation is 
the highest. The compensation history used for this purpose is the last 
10 plan years, plus the current plan year. In determining compensation 
for each plan year in the compensation history, Plan A defines 
compensation using a single definition that satisfies section 414(s) as 
a safe harbor definition under Sec. 1.414(s)-1(c). Plan A determines 
benefits on the basis of average annual compensation.
    Example 2. Plan B is a defined benefit plan. Plan B determines 
benefits on the basis of the average of each employee's compensation for 
the five consecutive 12-month periods (or the employee's period of 
employment, if shorter) during the employee's compensation history in 
which the average of the employee's annual compensation is the highest. 
The compensation history used for this purpose is the 10 consecutive 12-
month periods ending on the employee's termination date. In determining 
the average, Plan B disregards all months in which the employee performs 
services for less than 100 hours (60 percent of a full-time work 
schedule of 173 hours). In the case of an employee whose normal work 
schedule is less than a full-time schedule, Plan B disregards all months 
in which that employee performs services for less than 60 percent of the 
employee's normal work schedule. Plan B defines compensation for each 
12-month period using a single definition that satisfies Sec. 1.414(s)-
1. Plan B determines benefits on the basis of average annual 
compensation.
    Example 3. (a) The facts are the same as in Example 1, except that, 
for plan years prior to 1996, the compensation for a plan year was 
determined under a rate of pay definition of compensation that satisfies 
section 414(s), while, for plan years after 1995, the compensation for a 
plan year is determined using a definition that satisfies section 414(s) 
as a safe harbor definition under Sec. 1.414(s)-1(c).
    (b) The underlying definition of compensation for each plan year in 
the employee's compensation history is section 414(s) compensation, 
because for each plan year the definition satisfies the requirements for 
section 414(s) compensation under Sec. 1.401(a)(4)-12. Therefore, Plan A 
determines benefits on the basis of average annual compensation, even 
though the underlying definition used to measure the amount of 
compensation for each plan year in an employee's compensation history is 
not the same for all plan years.
    Example 4. The facts are the same as in Example 1, except that Plan 
A determines benefits on the basis of the average of the employee's 
annual section 414(s) compensation for the five consecutive 12-month 
periods ending on June 30 during the employee's compensation history in 
which the average is highest. An employee's compensation history begins 
when the employee commences participation in the plan and ends in the 
current plan year. In the case of an employee with less than five 
consecutive years of plan participation as of June 30, the compensation 
history is extended prior to the employee's commencement of 
participation to include the five consecutive 12-month periods ending on 
June 30 of the current plan year (or the employee's total period of 
employment, if shorter). Plan A determines benefits on the basis of 
average annual compensation.
    Example 5. The facts are the same as in Example 4, except that Plan 
A determines benefits on the basis of the average of each employee's 
compensation for the employee's entire compensation history. Plan A 
determines benefits on the basis of average annual compensation.

    (f) Special rules--(1) In general. The special rules in this 
paragraph (f) apply for purposes of applying the provisions of this 
section to a defined benefit plan. Any special rule provided in this

[[Page 118]]

paragraph (f) that is optional must, if used, apply uniformly to all 
employees.
    (2) Certain qualified disability benefits. In general, qualified 
disability benefits (within the meaning of section 411(a)(9)) are not 
taken into account under this section. However, a qualified disability 
benefit that results from the crediting of compensation or service for a 
period of disability in the same manner as actual compensation or 
service is credited under a plan's benefit formula is permitted to be 
taken into account under this section as an accrued benefit upon the 
employee's return to service with the employer following the period of 
disability, provided that the qualified disability benefit is then 
treated in the same manner as an accrued benefit for all purposes under 
the plan.
    (3) Accruals after normal retirement age--(i) General rule. An 
employee's accruals for any plan year after the plan year in which the 
employee attains normal retirement age are taken into account for 
purposes of this section. However, any plan provision that provides for 
increases in an employee's accrued benefit solely because the employee 
has delayed commencing benefits beyond the normal retirement age 
applicable to the employee under the plan may be disregarded, but only 
if--
    (A) The same uniform normal retirement age applies to all employees; 
and
    (B) The percentage factor used to increase the employee's accrued 
benefit is no greater than the largest percentage factor that could be 
applied to increase actuarially the employee's accrued benefit using any 
standard mortality table and any standard interest rate.
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (f)(3). In each example, it is assumed that the plan satisfies 
the requirements of paragraph (f)(3)(i)(A) and (B) of this section.

    Example 1. Plan A provides a benefit of two percent of average 
annual compensation per year of service for all employees. In addition, 
Plan A provides an actuarial increase in an employee's accrued benefit 
of six percent for each year that an employee defers commencement of 
benefits beyond normal retirement age. For employees who continue in 
service beyond normal retirement age, the employee's two-percent accrual 
for the current plan year is offset by the six-percent actuarial 
increase, as permitted under section 411(b)(1)(H)(iii)(II). For purposes 
of this section, the actuarial increase (and hence the offset) may be 
disregarded, and thus all employees may be treated as if they were 
accruing at the rate of two percent of average annual compensation per 
year.
    Example 2. The facts are the same as in Example 1, except that the 
employee's two- percent accrual for the current plan year is not offset 
by the six-percent actuarial increase. The employer may disregard the 
actuarial increase and thus may treat all employees as if they were 
accruing at the rate of two percent of average annual compensation per 
year.

    (4) Early retirement window benefits--(i) General rule. In applying 
the requirements of this section, all early retirement benefits, 
retirement-type subsidies, QSUPPs, and other optional forms of benefit 
under a plan, and changes in the plan's benefit formula, are taken into 
account regardless of whether they are permanent features of the plan or 
are offered only to employees whose employment terminates within a 
limited period of time. Additional rules and examples relevant to the 
testing of early retirement window benefits are found in Example 6 of 
paragraph (b)(2)(vi) of this section; paragraph (b)(2)(ii)(A)(2), 
Example 2 of paragraph (c)(2), paragraph (d)(3), and Example 3 of 
paragraph (e)(1)(iii) of Sec. 1.401(a)(4)-4; paragraph (c)(4)(i) and 
Example 2 of paragraph (c)(6) of Sec. 1.401(a)(4)-9; and the definition 
of benefit formula in Sec. 1.401(a)(4)-12.
    (ii) Special rules--(A) Year in which early retirement window 
benefit taken into account. Notwithstanding paragraph (f)(4)(i) of this 
section, an early retirement window benefit is disregarded for purposes 
of determining whether a plan satisfies this section with respect to an 
employee for all plan years other than the first plan year in which the 
benefit is currently available (within the meaning of Sec. 1.401(a)(4)-
4(b)(2)) to the employee. For purposes of this paragraph (f)(4)(ii)(A), 
in determining which plan years the benefit is currently available, an 
early retirement window benefit that consists of a temporary change in 
the plan's benefit formula is treated as an optional form of benefit.
    (B) Treatment of early retirement window benefit that consists of 
temporary

[[Page 119]]

change in benefit formula. An early retirement window benefit is 
disregarded for purposes of determining an employee's normal accrual 
rate, even if the early retirement window benefit consists of a 
temporary change in a plan's benefit formula. However, if an early 
retirement window benefit consists of a temporary change in a plan's 
benefit formula, the plan does not satisfy paragraph (b) of this section 
during the period for which the change is effective unless the plan 
satisfies paragraph (b) of this section both reflecting the temporary 
change in the benefit formula and disregarding that change.
    (C) Effect of early retirement window benefit on most valuable 
accrual rate. In determining an employee's most valuable optional form 
of payment of the accrued benefit (which is used in determining the 
employee's most valuable accrual rate under paragraphs (d)(1)(ii) and 
(f)(4)(i) of this section), an early retirement window benefit that is 
currently available to the employee (within the meaning of paragraph 
(f)(4)(ii)(A) of this section) and that is not disregarded for a plan 
year under paragraph (f)(4)(ii)(A) of this section is taken into account 
in that plan year with respect to the employee's accrued benefit as of 
the earliest of the employee's date of termination, the close of the 
early retirement window, or the last day of that plan year.
    (D) Effect of early retirement window benefit on average benefit 
percentage test. Notwithstanding paragraph (c)(2) of this section, a 
rate group under a plan that provides an early retirement window benefit 
is deemed to satisfy the average benefit percentage test of 
Sec. 1.410(b)-5 if--
    (1) All rate groups under the plan would satisfy the ratio 
percentage test of Sec. 1.410(b)-2(b)(2) if the early retirement window 
benefit were disregarded; and
    (2) The group of employees to whom the early retirement window 
benefit is currently available (within the meaning of paragraph 
(f)(4)(ii)(A) of this section) satisfies section 410(b) without regard 
to the average benefit percentage test of Sec. 1.410(b)-5.
    (iii) Early retirement window benefit defined. For purposes of this 
paragraph (f)(4), an early retirement window benefit is an early 
retirement benefit, retirement-type subsidy, QSUPP, or other optional 
form of benefit under a plan that is available, or a change in the 
plan's benefit formula that is applicable, only to employees who 
terminate employment within a limited period specified by the plan (not 
to exceed one year) under circumstances specified by the plan. A benefit 
does not fail to be described in the preceding sentence merely because 
the plan contains provisions under which certain employees may receive 
the benefit even though, for bona fide business reasons, they terminate 
employment within a reasonable period after the end of the limited 
period. An amendment to an early retirement window benefit that merely 
extends the periods in the preceding sentences is not treated as a 
separate early retirement window benefit, provided that the periods, as 
extended, satisfy the preceding sentences. However, any other amendment 
to an early retirement window benefit creates a separate early 
retirement window benefit.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (f)(4):

    Example 1. (a) Plan A provides a benefit of one percent of average 
annual compensation per year of service and satisfies the requirements 
of paragraph (b)(2) of this section. Thus, the plan provides the same 
benefit to all employees with the same years of service under the Plan. 
Plan A is amended to treat all employees with ten or more years of 
service who terminate employment after attainment of age 55 and between 
March 1, 1999, and January 31, 2000, as if they had an additional five 
years of service under the benefit formula. However, in order to ensure 
the orderly implementation of the early retirement window, the plan 
amendment provides that designated employees in the human resources 
department who would otherwise be eligible for the early retirement 
window benefit are eligible to be treated as having the additional five 
years of service only if they terminate between January 1, 2000, and 
April 30, 2000.
    (b) The additional benefits provided under this amendment are tested 
as benefits provided to employees rather than former employees. The 
effect of this amendment is temporarily to change the benefit formula 
for employees who are eligible for the early retirement window benefit 
because the amendment changes (albeit temporarily) the

[[Page 120]]

amount of the benefit payable to those employees at normal retirement 
age. See the definition of benefit formula in Sec. 1.401(a)(4)-12. 
Assume that the additional years of service credited to employees 
eligible for the window benefit do not represent past service (within 
the meaning of Sec. 1.401(a)(4)-11(d)(3)(i)(B)) or pre-participation or 
imputed service (within the meaning of Sec. 1.401(a)(4)-11(d)(3)(ii)(A) 
or (B), respectively) and thus may not be taken into account as years of 
service. See Sec. 1.401(a)(4)-11(d)(3)(i)(A) (regarding years of service 
that may not be taken into account under Sec. 1.401(a)(4)-1(b)(2)). 
Thus, the window-eligible employees are entitled to a larger benefit (as 
a percentage of average annual compensation) than other employees with 
the same number of years of service, and the plan does not satisfy the 
uniform normal retirement benefit requirement of paragraph (b)(2)(i) of 
this section.
    (c) Plan A is restructured under the provisions of Sec. 1.401(a)(4)-
9(c) into two component plans: Component Plan A1, consisting of all 
employees who are not eligible for the early retirement window benefit 
and all of their accruals and benefits, rights, and features under the 
plan, and Component Plan A2, consisting of all employees who are 
eligible for the early retirement window benefit (including the 
designated employees in the human resource department) and all of their 
accruals and benefits, rights, and features under the plan.
    (d) Component Plan A1 still satisfies paragraph (b) of this section, 
because there has been no change for the employees in that component 
plan. Similarly, Component Plan A2 satisfies paragraph (b) of this 
section disregarding the change in the benefit formula.
    (e) Because the early retirement window benefit consists of a 
temporary change in the benefit formula, paragraph (f)(4)(ii)(B) of this 
section requires that the plan satisfy the requirements of paragraph (b) 
of this section reflecting the change in order to remain a safe harbor 
plan. After reflecting the change, Component Plan A2 still provides the 
same benefit (albeit higher than under the regular benefit formula) to 
all employees with the same years of service that may be taken into 
account in testing the plan, and thus the benefit formula (as 
temporarily amended) satisfies the requirements of paragraphs (b)(2) (i) 
and (ii) of this section.
    (f) Since Component Plan A2 also satisfies all of the other 
requirements of paragraph (b)(2) of this section and the safe harbor of 
paragraph (b)(3) of this section reflecting the change in the benefit 
formula, Component Plan A2 satisfies this paragraph (b) both reflecting 
and disregarding the change in the benefit formula. Thus, Component Plan 
A2 satisfies paragraph (b) of this section.
    Example 2. The facts are the same as in Example 1, except that Plan 
A's benefit formula used the maximum amount of permitted disparity under 
section 401(l) prior to the amendment. The analysis is the same as in 
paragraphs (a) through the first sentence of paragraph (e) of Example 1. 
In order to satisfy the requirements of paragraph (b)(2) of this 
section, a plan that uses permitted disparity must satisfy the 
requirements of section 401(l) after reflecting the change in the 
benefit formula. Because, as stated in Example 1, the additional five 
years of service may not be taken into account for purposes of 
satisfying paragraph (b) of this section, the disparity that results 
from crediting that service exceeds the maximum permitted disparity 
under section 401(l). Thus, Component Plan A2 does not satisfy the 
requirements of paragraph (b) of this section.
    Example 3. The facts are the same as in Example 1, except that Plan 
A is tested under the general test in paragraph (c) of this section. The 
early retirement window benefit is disregarded for purposes of 
determining the normal accrual rates, but is taken into account in 1999 
for purposes of determining the most valuable accrual rates, of 
employees who were eligible for the early retirement window benefit 
(regardless of whether they elected to receive it). As stated in Example 
1, the additional five years of service do not represent past service, 
pre-participation service, or imputed service, and thus under 
Sec. 1.401(a)(4)-11(d)(3)(i)(A) may not be taken into account as testing 
service.

    (5) Unpredictable contingent event benefits--(i) General rule. In 
general, an unpredictable contingent event benefit (within the meaning 
of section 412(l)(7)(B)(ii)) is not taken into account under this 
section until the occurrence of the contingent event. Thus, the special 
rule in Sec. 1.401(a)(4)-4(d)(7) (treating the contingent event as 
having occurred) does not apply for purposes of this section. In the 
case of an unpredictable contingent event that is expected to result in 
the termination from employment of certain employees within a period of 
time consistent with the rules for defining an early retirement window 
benefit in paragraph (f)(4)(iii) of this section, the unpredictable 
contingent event benefit available to those employees is permitted to be 
treated as an early retirement window benefit, thus permitting the rules 
of paragraph (f)(4) of this section to be applied to it.
    (ii) Example. The following example illustrates the rules of this 
paragraph (f)(5):

    Example. (a) Employer X operates various manufacturing plants and 
maintains Plan A,

[[Page 121]]

a defined benefit plan that covers all of its nonexcludable employees. 
Plan A provides an early retirement benefit under which employees who 
retire after age 55 but before normal retirement age and who have at 
least 10 years of service receive a benefit equal to their normal 
retirement benefit reduced by four percent per year for each year prior 
to normal retirement age. Plan A also provides a plant-closing benefit 
under which employees who satisfy the conditions for receiving the early 
retirement benefit and who work at a plant where operations have ceased 
and whose employment has been terminated will receive an unreduced 
normal retirement benefit. The plant-closing benefit is an unpredictable 
contingent event benefit.
    (b) During the 1997 plan year, Employer X had no plant closings. 
Therefore, the plant-closing benefit is not taken into account for the 
1997 plan year in determining accrual rates or in applying the safe 
harbors in paragraph (b) of this section.
    (c) During the 1998 plan year, Employer X begins to close one plant. 
Employees M through Z, who are employees at the plant that is closing, 
are expected to terminate employment with Employer X during the plan 
year and will satisfy the conditions for the plant-closing benefit. 
Therefore, in testing Plan A under this section for the 1998 plan year, 
the availability of the plant-closing benefit to Employees M through Z 
must be taken into account in determining their accrual rates or in 
determining whether the plan satisfies one of the safe harbors under 
paragraph (b) of this section.
    (d) Because the employees eligible for the unpredictable contingent 
event benefit are expected to terminate employment with Employer X 
during a period consistent with the rules for defining an early 
retirement window benefit, in testing Plan A under this section for the 
1998 plan year, the special rules in paragraph (f)(4)(ii) of this 
section may be applied. Thus, for example, normal accrual rates may be 
determined without reference to the unpredictable contingent event 
benefit.
    (e) Despite the closing of the plant, Employee Q remains an employee 
into the 1999 plan year. Under paragraph (f)(4)(ii)(A) of this section, 
the availability of the plant-closing benefit to Employee Q may be 
disregarded in the 1999 plan year.

    (6) Determination of benefits on other than plan-year basis. For 
purposes of this section, accruals are generally determined based on the 
plan year. Nevertheless, an employer may determine accruals on the basis 
of any period ending within the plan year as long as the period is at 
least 12 months in duration. For example, accruals for all employees may 
be determined based on accrual computation periods ending within the 
plan year.
    (7) Adjustments for certain plan distributions. For purposes of this 
section, an employee's accrued benefit includes the actuarial equivalent 
of prior distributions of accrued benefits from the plan to the employee 
if the years of service taken into account in determining the accrued 
benefits that were distributed continue to be taken into account under 
the plan for purposes of determining the employee's current accrued 
benefit. For purposes of this paragraph (f)(7), actuarial equivalence 
must be determined in a uniform manner for all employees using 
reasonable actuarial assumptions. A standard interest rate and a 
standard mortality table are among the assumptions considered reasonable 
for this purpose. Thus, for example, if an employee has commenced 
receipt of benefits in accordance with the minimum distribution 
requirements of section 401(a)(9), and the plan reduces the employee's 
accrued benefit to take into account the amount of the distributions, 
the employee's accrued benefit for purposes of this section is restored 
to the value it would have had if the distributions had not occurred.
    (8) Adjustment for certain QPSA charges. For purposes of this 
section, an employee's accrued benefit includes the cost of a qualified 
preretirement survivor annuity (QPSA) that reduces the employee's 
accrued benefit otherwise determined under the plan, as permitted under 
Sec. 1.401(a)-20, Q&A-21. Thus, an employee's accrued benefit for 
purposes of this section is determined as if the cost of the QPSA had 
not been charged against the accrued benefit. This paragraph (f)(8) 
applies only if the QPSA charges apply uniformly to all employees.
    (9) Disregard of certain offsets--(i) General rule. For purposes of 
this section, an employee's accrued benefit under a plan includes that 
portion of the benefit that is offset under an offset provision 
described in Sec. 1.401(a)(4)-11(d)(3)(i)(D). The rule in the preceding 
sentence applies only to the extent that the benefit by which the 
benefit under the plan being tested is offset is attributable to periods 
for which the

[[Page 122]]

plan being tested credits pre-participation service (within the meaning 
of Sec. 1.401(a)(4)-11(d)(3)(ii)(A)) that satisfies Sec. 1.401(a)(4)-
11(d)(3)(iii) or past service (within the meaning of Sec. 1.401(a)(4)-
11(d)(3)(i)(B)), and only if--
    (A) The benefit under the plan being tested is offset by either--
    (1) Benefits under a qualified defined benefit plan or defined 
contribution plan (whether or not terminated); or
    (2) Benefits under a foreign plan that are reasonably expected to be 
paid; and,
    (B) If any portion of the benefit that is offset is nonforfeitable 
(within the meaning of section 411), that portion is offset by a benefit 
(or portion of a benefit) that is also nonforfeitable (or vested, in the 
case of a foreign plan).
    (ii) Examples. The following examples illustrate the rules in this 
paragraph (f)(9):

    Example 1. (a) Employer X maintains two qualified defined benefit 
plans, Plan A and Plan B. Plan B provides that, whenever an employee 
transfers to Plan B from Plan A, the service that was credited under 
Plan A is credited in determining benefits under Plan B. The Plan A 
service credited under Plan B is pre-participation service that 
satisfies Sec. 1.401(a)(4)-11(d)(3)(iii). Plan B offsets the benefits 
determined under Plan B by the employee's vested benefits under Plan A. 
Plan A does not credit additional benefit service or accrual service 
after employees transfer to Plan B.
    (b) The Plan B provision providing for an offset of benefits under 
Plan A satisfies Sec. 1.401(a)(4)-11(d)(3)(i)(D). This is because the 
provision applies to similarly-situated employees and the benefits under 
Plan A that are offset against the Plan B benefits are attributable to 
pre-participation service taken into account under Plan B.
    (c) This paragraph (f)(9) applies in determining the benefits that 
are taken into account under this section for employees in Plan B who 
are transferred from Plan A. This is because the offset provision is 
described in Sec. 1.401(a)(4)-11(d)(3)(i)(D), the benefits under the 
other plan by which the benefits under the plan being tested are offset 
are attributable solely to pre-participation service that satisfies 
Sec. 1.401(a)(4)-11(d)(3)(iii), and the benefits are offset solely by 
vested benefits under another qualified plan. Thus, for example, the 
accrual rates of employees in Plan B are determined as if there were no 
offset, i.e., by adding back the benefits that are offset to the net 
benefits under Plan B.
    (d) The result would be the same even if Plan A continued to 
recognize compensation paid after the transfer in the determination of 
benefits under Plan A. However, if Plan A continued to credit benefit or 
accrual service after the transfer, then, to the extent that Plan B's 
offset of benefits under Plan A increased as a result, the additional 
benefits offset under Plan B would not be added back in determining the 
benefits under Plan B that are taken into account under this section.
    Example 2. The facts are the same as in Example 1, except that Plan 
A is not a plan described in paragraph (f)(9)(i)(A) of this section. 
None of the benefits under Plan B that are offset by benefits under Plan 
A may be added back in determining the benefits under Plan B that are 
taken into account under this section. Thus, benefits under Plan B are 
tested on a net basis.

    (10) Special rule for multiemployer plans. For purposes of this 
section, if a multiemployer plan increases benefits for service prior to 
a specific date subject to a plan provision requiring employees to 
complete a specified amount of service (not to exceed five years) after 
that date, then benefits are permitted to be determined disregarding the 
service condition, provided that the condition is applicable to all 
employees in the multiemployer plan (including collectively bargained 
employees).

[T.D. 8485, 58 FR 46785, Sept. 3, 1993]



Sec. 1.401(a)(4)-4  Nondiscriminatory availability of benefits, rights, and features.

    (a) Introduction. This section provides rules for determining 
whether the benefits, rights, and features provided under a plan (i.e., 
all optional forms of benefit, ancillary benefits, and other rights and 
features available to any employee under the plan) are made available in 
a nondiscriminatory manner. Benefits, rights, and features provided 
under a plan are made available to employees in a nondiscriminatory 
manner only if each benefit, right, or feature satisfies the current 
availability requirement of paragraph (b) of this section and the 
effective availability requirement of paragraph (c) of this section. 
Paragraph (d) of this section provides special rules for applying these 
requirements. Paragraph (e) of this section defines optional form of 
benefit, ancillary benefit, and other right or feature.

[[Page 123]]

    (b) Current availability--(1) General rule. The current availability 
requirement of this paragraph (b) is satisfied if the group of employees 
to whom a benefit, right, or feature is currently available during the 
plan year satisfies section 410(b) (without regard to the average 
benefit percentage test of Sec. 1.410(b)-5). In determining whether the 
group of employees satisfies section 410(b), an employee is treated as 
benefiting only if the benefit, right, or feature is currently available 
to the employee.
    (2) Determination of current availability--(i) General rule. Whether 
a benefit, right, or feature that is subject to specified eligibility 
conditions is currently available to an employee generally is determined 
based on the current facts and circumstances with respect to the 
employee (e.g., current compensation, accrued benefit, position, or net 
worth).
    (ii) Certain conditions disregarded--(A) Certain age and service 
conditions--(1) General rule. Notwithstanding paragraph (b)(2)(i) of 
this section, any specified age or service condition with respect to an 
optional form of benefit or a social security supplement is disregarded 
in determining whether the optional form of benefit or the social 
security supplement is currently available to an employee. Thus, for 
example, an optional form of benefit that is available to all employees 
who terminate employment on or after age 55 with at least 10 years of 
service is treated as currently available to an employee, without regard 
to the employee's current age or years of service, and without regard to 
whether the employee could potentially meet the age and service 
conditions prior to attaining the plan's normal retirement age.
    (2) Time-limited age or service conditions not disregarded. 
Notwithstanding paragraph (b)(2)(ii)(A)(1) of this section, an age or 
service condition is not disregarded in determining the current 
availability of an optional form of benefit or social security 
supplement if the condition must be satisfied within a limited period of 
time. However, in determining the current availability of an optional 
form of benefit or a social security supplement subject to such an age 
or service condition, the age and service of employees may be projected 
to the last date by which the age condition or service condition must be 
satisfied in order to be eligible for the optional form of benefit or 
social security supplement under the plan. Thus, for example, an 
optional form of benefit that is available only to employees who 
terminate employment between July 1, 1995, and December 31, 1995, after 
attainment of age 55 with at least 10 years of service is treated as 
currently available to an employee only if the employee could satisfy 
those age and service conditions by December 31, 1995.
    (B) Certain other conditions. Specified conditions on the 
availability of a benefit, right, or feature requiring a specified 
percentage of the employee's accrued benefit to be nonforfeitable, 
termination of employment, death, satisfaction of a specified health 
condition (or failure to meet such condition), disability, hardship, 
family status, default on a plan loan secured by a participant's account 
balance, execution of a covenant not to compete, application for 
benefits or similar ministerial or mechanical acts, election of a 
benefit form, execution of a waiver of rights under the Age 
Discrimination in Employment Act or other federal or state law, or 
absence from service, are disregarded in determining the employees to 
whom the benefit, right, or feature is currently available. In addition, 
if a multiemployer plan includes a reasonable condition that limits 
eligibility for an ancillary benefit, or other right or feature, to 
those employees who have recent service under the plan (e.g., a 
condition on a death benefit that requires an employee to have a minimum 
number of hours credited during the last two years) and the condition 
applies to all employees in the multiemployer plan (including the 
collectively bargained employees) to whom the ancillary benefit, or 
other right or feature, is otherwise currently available, then the 
condition is disregarded in determining the employees to whom the 
ancillary benefit, or other right or feature, is currently available.
    (C) Certain conditions relating to mandatory cash-outs. In the case 
of a plan that provides for mandatory cash-outs of all terminated 
employees who have

[[Page 124]]

a vested accrued benefit with an actuarial present value less than or 
equal to a specified dollar amount (not to exceed the cash-out limit in 
effect under Sec. 1.411(a)-11(c)(3)(ii)) as permitted by sections 
411(a)(11) and 417(e), the implicit condition on any benefit, right, or 
feature (other than the mandatory cash-out) that requires the employee 
to have a vested accrued benefit with an actuarial present value in 
excess of the specified dollar amount is disregarded in determining the 
employees to whom the benefit, right, or feature is currently available.
    (D) Other dollar limits. A condition that the amount of an 
employee's vested accrued benefit or the actuarial present value of that 
benefit be less than or equal to a specified dollar amount is 
disregarded in determining the employees to whom the benefit, right, or 
feature is currently available.
    (E) Certain conditions on plan loans. In the case of an employee's 
right to a loan from the plan, the condition that an employee must have 
an account balance sufficient to be eligible to receive a minimum loan 
amount specified in the plan (not to exceed $1,000) is disregarded in 
determining the employees to whom the right is currently available.
    (3) Benefits, rights, and features that are eliminated 
prospectively--(i) Special testing rule. Notwithstanding paragraph 
(b)(1) of this section, a benefit, right, or feature that is eliminated 
with respect to benefits accrued after the later of the eliminating 
amendment's adoption or effective date (the elimination date), but is 
retained with respect to benefits accrued as of the elimination date, 
and that satisfies this paragraph (b) as of the elimination date, is 
treated as satisfying this paragraph (b) for all subsequent periods. 
This rule does not apply if the terms of the benefit, right, or feature 
(including the employees to whom it is available) are changed after the 
elimination date.
    (ii) Elimination of a benefit, right, or feature--(A) General rule. 
For purposes of this paragraph (b)(3), a benefit, right, or feature 
provided to an employee is eliminated with respect to benefits accrued 
after the elimination date if the amount or value of the benefit, right, 
or feature depends solely on the amount of the employee's accrued 
benefit (within the meaning of section 411(a)(7)) as of the elimination 
date, including subsequent income, expenses, gains, and losses with 
respect to that benefit in the case of a defined contribution plan.
    (B) Special rule for benefits, rights, and features that are not 
section 411(d)(6)-protected benefits. Notwithstanding paragraph 
(b)(3)(ii)(A) of this section, in the case of a benefit, right, or 
feature under a defined contribution plan that is not a section 
411(d)(6)-protected benefit (within the meaning of Sec. 1.411(d)-4, Q&A-
1), e.g., the availability of plan loans, for purposes of this paragraph 
(b)(3)(ii) each employee's accrued benefit as of the elimination date 
may be treated, on a uniform basis, as consisting exclusively of the 
dollar amount of the employee's account balance as of the elimination 
date.
    (C) Special rule for benefits, rights, and features that depend on 
adjusted accrued benefits. For purposes of this paragraph (b)(3), a 
benefit, right, or feature provided to an employee under a plan that has 
made a fresh start does not fail to be eliminated as of an elimination 
date that is the fresh-start date merely because it depends solely on 
the amount of the employee's adjusted accrued benefit (within the 
meaning of Sec. 1.401(a)(4)-13(d)(8)).
    (c) Effective availability--(1) General rule. Based on all of the 
relevant facts and circumstances, the group of employees to whom a 
benefit, right, or feature is effectively available must not 
substantially favor HCEs.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. Employer X maintains Plan A, a defined benefit plan that 
covers both of its highly compensated nonexcludable employees and nine 
of its 12 nonhighly compensated nonexcludable employees. Plan A provides 
for a normal retirement benefit payable as an annuity and based on a 
normal retirement age of 65, and an early retirement benefit payable 
upon termination in the form of an annuity to employees who terminate 
from service with the employer on or after age 55 with 30 or more years 
of service. Both HCEs of Employer X currently meet the age and service 
requirement, or will have 30 years of service by the time they reach age 
55. All but two of the nine NHCEs of Employer X who are covered by Plan 
A were hired on or after

[[Page 125]]

age 35 and, thus, cannot qualify for the early retirement benefit. Even 
though the group of employees to whom the early retirement benefit is 
currently available satisfies the ratio percentage test of 
Sec. 1.410(b)-2(b)(2) when age and service are disregarded pursuant to 
paragraph (b)(2)(ii)(A) of this section, absent other facts, the group 
of employees to whom the early retirement benefit is effectively 
available substantially favors HCEs.
    Example 2. Employer Y maintains Plan B, a defined benefit plan that 
provides for a normal retirement benefit payable as an annuity and based 
on a normal retirement age of 65. By a plan amendment first adopted and 
effective December 1, 1998, Employer Y amends Plan B to provide an early 
retirement benefit that is available only to employees who terminate 
employment by December 15, 1998, and who are at least age 55 with 30 or 
more years of service. Assume that all employees were hired prior to 
attaining age 25 and that the group of employees who have, or will have, 
attained age 55 with 30 years of service by December 15, 1998, satisfies 
the ratio percentage test of Sec. 1.410(b)-2(b)(2). Assume, further, 
that the employer takes no steps to inform all eligible employees of the 
early retirement option on a timely basis and that the only employees 
who terminate from employment with the employer during the two-week 
period in which the early retirement benefit is available are HCEs. 
Under these facts, the group of employees to whom this early retirement 
window benefit is effectively available substantially favors HCEs.
    Example 3. Employer Z amends Plan C on June 30, 1999, to provide for 
a single sum optional form of benefit for employees who terminate from 
employment with Employer Z after June 30, 1999, and before January 1, 
2000. The availability of this single sum optional form of benefit is 
conditioned on the employee's having a particular disability at the time 
of termination of employment. The only employee of the employer who 
meets this disability requirement at the time of the amendment and 
thereafter through December 31, 1999, is a HCE. Under paragraph 
(b)(2)(ii)(B) of this section, the disability condition is disregarded 
in determining the current availability of the single sum optional form 
of benefit. Nevertheless, under these facts, the group of employees to 
whom the single sum optional form of benefit is effectively available 
substantially favors HCEs.

    (d) Special rules--(1) Mergers and acquisitions--(i) Special testing 
rule. A benefit, right, or feature available under a plan solely to an 
acquired group of employees is treated as satisfying paragraphs (b) and 
(c) of this section during the period that each of the following 
requirements is satisfied:
    (A) The benefit, right, or feature must satisfy paragraphs (b) and 
(c) of this section (determined without regard to the special rule in 
section 410(b)(6)(C)) on the date that is selected by the employer as 
the latest date by which an employee must be hired or transferred into 
the acquired trade or business for an employee to be included in the 
acquired group of employees. This determination is made with reference 
to the plan of the current employer and its nonexcludable employees.
    (B) The benefit, right, or feature must be available under the plan 
of the current employer after the transaction on the same terms as it 
was available under the plan of the prior employer before the 
transaction. This requirement is not violated merely because of a change 
made to the benefit, right, or feature that is permitted by section 
411(d)(6), provided that--
    (1) The change is a replacement of the benefit, right, or feature 
with another benefit, right, or feature that is available to the same 
employees as the original benefit, right, or feature, and the original 
benefit, right, or feature is of inherently equal or greater value 
(within the meaning of paragraph (d)(4)(i)(A) of this section) than the 
benefit, right, or feature that replaces it; or
    (2) The change is made before January 12, 1993.
    (ii) Scope of special testing rule. This paragraph (d)(1) applies 
only to benefits, rights, and features with respect to benefits accruing 
under the plan of the current employer, and not to benefits, rights, and 
features with respect to benefits accrued under the plan of the prior 
employer (unless, pursuant to the transaction, the plan of the prior 
employer becomes the plan of the current employer, or the assets and 
liabilities with respect to the acquired group of employees under the 
plan of the prior employer are transferred to the plan of the current 
employer in a plan merger, consolidation, or other transfer described in 
section 414(l)).
    (iii) Example. The following example illustrates the rules of this 
paragraph (d)(1):


[[Page 126]]


    Example. Employer X maintains Plan A, a defined benefit plan with a 
single sum optional form of benefit for all employees. Employer Y 
acquires Employer X and merges Plan A into Plan B, a defined benefit 
plan maintained by Employer Y that does not otherwise provide a single 
sum optional form of benefit. Employer Y continues to provide the single 
sum optional form of benefit under Plan B on the same terms as it was 
offered under Plan A to all employees who were acquired in the 
transaction with Employer X (and to no other employees). The optional 
form of benefit satisfies paragraphs (b) and (c) of this section 
immediately following the transaction (determined without taking into 
account section 410(b)(6)(C)) when tested with reference to Plan B and 
Employer Y's nonexcludable employees. Under these facts, Plan B is 
treated as satisfying this section with respect to the single sum 
optional form of benefit for the plan year of the transaction and all 
subsequent plan years.

    (2) Frozen participants. A plan must satisfy the nondiscriminatory 
availability requirement of this section not only with respect to 
benefits, rights, and features provided to employees who are currently 
benefiting under the plan, but also separately with respect to benefits, 
rights, and features provided to nonexcludable employees with accrued 
benefits who are not currently benefiting under the plan (frozen 
participants). Thus, each benefit, right, and feature available to any 
frozen participant under the plan is separately subject to the 
requirements of this section. A plan satisfies paragraphs (b) and (c) of 
this section with respect to a benefit, right, or feature available to 
any frozen participant under the plan only if one or more of the 
following requirements is satisfied:
    (i) The benefit, right, or feature must be one that would satisfy 
paragraphs (b) and (c) of this section if it were not available to any 
employee currently benefiting under the plan.
    (ii) The benefit, right, or feature must be one that would satisfy 
paragraphs (b) and (c) of this section if all frozen participants were 
treated as employees currently benefiting under the plan.
    (iii) No change in the availability of the benefit, right, or 
feature may have been made that is first effective in the current plan 
year with respect to a frozen participant.
    (iv) Any change in the availability of the benefit, right, or 
feature that is first effective in the current plan year with respect to 
a frozen participant must be made in a nondiscriminatory manner. Thus, 
any expansion in the availability of the benefit, right, or feature to 
any highly compensated frozen participant must be applied on a 
consistent basis to all nonhighly compensated frozen participants. 
Similarly, any contraction in the availability of the benefit, right, or 
feature that affects any nonhighly compensated frozen participant must 
be applied on a consistent basis to all highly compensated frozen 
participants.
    (3) Early retirement window benefits. If a benefit, right, or 
feature meets the definition of an early retirement window benefit in 
Sec. 1.401(a)(4)-3(f)(4)(iii) (or would meet that definition if the 
definition applied to all benefits, rights, and features), the benefit, 
right, or feature is disregarded for purposes of applying this section 
with respect to an employee for all plan years other than the first plan 
year in which the benefit is currently available to the employee.
    (4) Permissive aggregation of certain benefits, rights, or features-
-(i) General rule. An optional form of benefit, ancillary benefit, or 
other right or feature may be aggregated with another optional form of 
benefit, ancillary benefit, or other right or feature, respectively, and 
the two may be treated as a single optional form of benefit, ancillary 
benefit, or other right or feature, if both of the following 
requirements are satisfied:
    (A) One of the two optional forms of benefit, ancillary benefit, or 
other rights or features must in all cases be of inherently equal or 
greater value than the other. For this purpose, one benefit, right, or 
feature is of inherently equal or greater value than another benefit, 
right, or feature only if, at any time and under any conditions, it is 
impossible for any employee to receive a smaller amount or a less 
valuable right under the first benefit, right, or feature than under the 
second benefit, right, or feature.
    (B) The optional form of benefit, ancillary benefit, or other right 
or feature of inherently equal or greater

[[Page 127]]

value must separately satisfy paragraphs (b) and (c) of this section 
(without regard to this paragraph (d)(4)).
    (ii) Aggregation may be applied more than once. The aggregation rule 
in this paragraph (d)(4) may be applied more than once. Thus, for 
example, an optional form of benefit may be aggregated with another 
optional form of benefit that itself constitutes two separate optional 
forms of benefit that are aggregated and treated as a single optional 
form of benefit under this paragraph (d)(4).
    (iii) Examples. The following examples illustrate the rules in this 
paragraph (d)(4):

    Example 1. Plan A is a defined benefit plan that provides a single 
sum optional form of benefit to all employees. The single sum optional 
form of benefit is available on the same terms to all employees, except 
that, for employees in Division S, a five-percent discount factor is 
applied and, for employees of Division T, a seven-percent discount 
factor is applied. Under paragraph (e)(1) of this section, the single 
sum optional form of benefit constitutes two separate optional forms of 
benefit. Assume that the single sum optional form of benefit available 
to employees of Division S separately satisfies paragraphs (b) and (c) 
of this section without taking into account this paragraph (d)(4). 
Because a lower discount factor is applied in determining the single sum 
optional form of benefit available to employees of Division S than is 
applied in determining the single sum optional form of benefit available 
to employees of Division T, the first single sum optional form of 
benefit is of inherently greater value than the second single sum 
optional form of benefit. Under these facts, these two single sum 
optional forms of benefit may be aggregated and treated as a single 
optional form of benefit for purposes of this section.
    Example 2. The facts are the same as in Example 1, except that, in 
order to receive the single sum optional form of benefit, employees of 
Division S (but not employees of Division T) must have completed at 
least 20 years of service. The single sum optional form of benefit 
available to employees of Division S is not of inherently equal or 
greater value than the single sum optional form of benefit available to 
employees of Division T, because an employee of Division S who 
terminates employment with less than 20 years of service would receive a 
smaller single sum amount (i.e., zero) than a similarly-situated 
employee of Division T who terminates employment with less than 20 years 
of service. Under these facts, the two single sum optional forms of 
benefit may not be aggregated and treated as a single optional form of 
benefit for purposes of this section.

    (5) Certain spousal benefits. In the case of a plan that includes 
two or more plans that have been permissively aggregated under 
Sec. 1.410(b)-7(d), the aggregated plan satisfies this section with 
respect to the availability of any nonsubsidized qualified joint and 
survivor annuities, qualified preretirement survivor annuities, or 
spousal death benefits described in section 401(a)(11), if each plan 
that is part of the aggregated plan satisfies section 401(a)(11). 
Whether a benefit is considered subsidized for this purpose may be 
determined using any reasonable actuarial assumptions. For purposes of 
this paragraph (d)(5), a qualified joint and survivor annuity, qualified 
preretirement survivor annuity, or spousal death benefit is deemed to be 
nonsubsidized if it is provided under a defined contribution plan.
    (6) Special ESOP rules. An ESOP does not fail to satisfy paragraphs 
(b) and (c) of this section merely because it makes an investment 
diversification right or feature or a distribution option available 
solely to all qualified participants (within the meaning of section 
401(a)(28)(B)(iii)), or merely because the restrictions of section 
409(n) apply to certain individuals.
    (7) Special testing rule for unpredictable contingent event 
benefits. A benefit, right, or feature that is contingent on the 
occurrence of an unpredictable contingent event (within the meaning of 
section 412(l)(7)(B)(ii)) is tested under this section as if the event 
had occurred. Thus, the current availability of a benefit that becomes 
an optional form of benefit upon the occurrence of an unpredictable 
contingent event is tested by deeming the event to have occurred and by 
disregarding age and service conditions on the eligibility for that 
benefit to the extent permitted for optional forms of benefit under 
paragraph (b)(2) of this section.
    (e) Definitions--(1) Optional form of benefit--(i) General rule. The 
term optional form of benefit means a distribution alternative 
(including the normal form of benefit) that is available under a plan 
with respect to benefits described in section 411(d)(6)(A) or a 
distribution alternative that is an early

[[Page 128]]

retirement benefit or retirement-type subsidy described in section 
411(d)(6)(B)(i), including a QSUPP. Except as provided in paragraph 
(e)(1)(ii) of this section, different optional forms of benefit exist if 
a distribution alternative is not payable on substantially the same 
terms as another distribution alternative. The relevant terms include 
all terms affecting the value of the optional form, such as the method 
of benefit calculation and the actuarial assumptions used to determine 
the amount distributed. Thus, for example, different optional forms of 
benefit may result from differences in terms relating to the payment 
schedule, timing, commencement, medium of distribution (e.g., in cash or 
in kind), election rights, differences in eligibility requirements, or 
the portion of the benefit to which the distribution alternative 
applies.
    (ii) Exceptions--(A) Differences in benefit formula or accrual 
method. A distribution alternative available under a defined benefit 
plan does not fail to be a single optional form of benefit merely 
because the benefit formulas, accrual methods, or other factors 
(including service-computation methods and definitions of compensation) 
underlying, or the manner in which employees vest in, the accrued 
benefit that is paid in the form of the distribution alternative are 
different for different employees to whom the distribution alternative 
is available. Notwithstanding the foregoing, differences in the normal 
retirement ages of employees or in the form in which the accrued benefit 
of employees is payable at normal retirement age under a plan are taken 
into account in determining whether a distribution alternative 
constitutes one or more optional forms of benefit.
    (B) Differences in allocation formula. A distribution alternative 
available under a defined contribution plan does not fail to be a single 
optional form of benefit merely because the allocation formula or other 
factors (including service-computation methods, definitions of 
compensation, and the manner in which amounts described in 
Sec. 1.401(a)(4)-2(c)(2)(iii) are allocated) underlying, or the manner 
in which employees vest in, the accrued benefit that is paid in the form 
of the distribution alternative are different for different employees to 
whom the distribution alternative is available.
    (C) Distributions subject to section 417(e). A distribution 
alternative available under a defined benefit plan does not fail to be a 
single optional form of benefit merely because, in determining the 
amount of a distribution, the plan applies a lower interest rate to 
determine the distribution for employees with a vested accrued benefit 
having an actuarial present value not in excess of $25,000, as required 
by section 417(e)(3) and Sec. 1.417(e)-1.
    (D) Differences attributable to uniform normal retirement age. A 
distribution alternative available under a defined benefit plan does not 
fail to be a single optional form of benefit, to the extent that the 
differences are attributable to differences in normal retirement dates 
among employees, provided that the differences do not prevent the 
employees from having the same uniform normal retirement age under the 
definition of uniform normal retirement age in Sec. 1.401(a)(4)-12.
    (iii) Examples. The following examples illustrate the rules in this 
paragraph (e)(1):

    Example 1. Plan A is a defined benefit plan that benefits all 
employees of Divisions S and T. The plan offers a qualified joint and 
50-percent survivor annuity at normal retirement age, calculated by 
multiplying an employee's single life annuity payment by a factor. For 
an employee of Division S whose benefit commences at age 65, the plan 
provides a factor of 0.90, but for a similarly-situated employee of 
Division T the plan provides a factor of 0.85. The qualified joint and 
survivor annuity is not available to employees of Divisions S and T on 
substantially the same terms, and thus it constitutes two separate 
optional forms of benefit.
    Example 2. Plan B is a defined benefit plan that benefits all 
employees of Divisions U and V. The plan offers a single sum 
distribution alternative available on the same terms and determined 
using the same actuarial assumptions, to all employees. However, 
different benefit formulas apply to employees of each division. Under 
the exception provided in paragraph (e)(1)(ii)(A) of this section, the 
single sum optional form of benefit available to employees of Division U 
is not a separate optional form of benefit from the single sum optional 
form of benefit available to employees of Division V.

[[Page 129]]

    Example 3. Defined benefit Plan C provides an early retirement 
benefit based on a schedule of early retirement factors that is a single 
optional form of benefit. Plan C is amended to provide an early 
retirement window benefit that consists of a temporary change in the 
plan's benefit formula (e.g., the addition of five years of service to 
an employee's actual service under the benefit formula) applicable in 
determining the benefits for certain employees who terminate employment 
within a limited period of time. Under the exception provided in 
paragraph (e)(1)(ii)(A) of this section, the early retirement optional 
form of benefit available to window-eligible employees is not a separate 
optional form of benefit from the early retirement optional form of 
benefit available to the other employees.

    (2) Ancillary benefit. The term ancillary benefit means social 
security supplements (other than QSUPPs), disability benefits not in 
excess of a qualified disability benefit described in section 411(a)(9), 
ancillary life insurance and health insurance benefits, death benefits 
under a defined contribution plan, preretirement death benefits under a 
defined benefit plan, shut-down benefits not protected under section 
411(d)(6), and other similar benefits. Different ancillary benefits 
exist if an ancillary benefit is not available on substantially the same 
terms as another ancillary benefit. Principles similar to those in 
paragraph (e)(1)(ii) of this section apply in making this determination.
    (3) Other right or feature--(i) General rule. The term other right 
or feature generally means any right or feature applicable to employees 
under the plan. Different rights or features exist if a right or feature 
is not available on substantially the same terms as another right or 
feature.
    (ii) Exceptions to definition of other right or feature. 
Notwithstanding paragraph (e)(3)(i) of this section, a right or feature 
is not considered an other right or feature if it--
    (A) Is an optional form of benefit or an ancillary benefit under the 
plan;
    (B) Is one of the terms that are taken into account in determining 
whether separate optional forms of benefit or ancillary benefits exist, 
or that would be taken into account but for paragraph (e)(1)(ii) of this 
section (e.g., benefit formulas or the manner in which benefits vest); 
or
    (C) Cannot reasonably be expected to be of meaningful value to an 
employee (e.g., administrative details).
    (iii) Examples. Other rights and features include, but are not 
limited to--
    (A) Plan loan provisions (other than those relating to a 
distribution of an employee's accrued benefit upon default under a 
loan);
    (B) The right to direct investments;
    (C) The right to a particular form of investment, including, for 
example, a particular class or type of employer securities (taking into 
account, in determining whether different forms of investment exist, any 
differences in conversion, dividend, voting, liquidation preference, or 
other rights conferred under the security);
    (D) The right to make each rate of elective contributions described 
in Sec. 1.401(k)-1(g)(3) (determining the rate based on the plan's 
definition of the compensation out of which the elective contributions 
are made (regardless of whether that definition satisfies section 
414(s)), but also treating different rates as existing if they are based 
on definitions of compensation or other requirements or formulas that 
are not substantially the same);
    (E) The right to make after-tax employee contributions to a defined 
benefit plan that are not allocated to separate accounts;
    (F) The right to make each rate of after-tax employee contributions 
described in Sec. 1.401(m)-1(f)(6) (determining the rate based on the 
plan's definition of the compensation out of which the after-tax 
employee contributions are made (regardless of whether that definition 
satisfies section 414(s)), but also treating different rates as existing 
if they are based on definitions of compensation or other requirements 
or formulas that are not substantially the same);
    (G) The right to each rate of allocation of matching contributions 
described in Sec. 1.401(m)-1(f)(12) (determining the rate using the 
amount of matching, elective, and after-tax employee contributions 
determined after any corrections under Secs. 1.401(k)-1(f)(1)(i), 
1.401(m)-1(e)(1)(i), and 1.401(m)-2(c), but also treating different 
rates as existing if they are based on definitions of compensation or 
other

[[Page 130]]

requirements or formulas that are not substantially the same);
    (H) The right to purchase additional retirement or ancillary 
benefits under the plan; and
    (I) The right to make rollover contributions and transfers to and 
from the plan.

[T.D. 8485, 58 FR 46796, Sept. 3, 1993, as amended by T.D. 8794, 63 FR 
70338, Dec. 21, 1998; T.D. 8891, 65 FR 44682, July 19, 2000]



Sec. 1.401(a)(4)-5  Plan amendments and plan terminations.

    (a) Introduction--(1) Overview. This paragraph (a) provides rules 
for determining whether the timing of a plan amendment or series of 
amendments has the effect of discriminating significantly in favor of 
HCEs or former HCEs. For purposes of this section, a plan amendment 
includes, for example, the establishment or termination of the plan, and 
any change in the benefits, rights, or features, benefit formulas, or 
allocation formulas under the plan. Paragraph (b) of this section sets 
forth additional requirements that must be satisfied in the case of a 
plan termination.
    (2) Facts-and-circumstances determination. Whether the timing of a 
plan amendment or series of plan amendments has the effect of 
discriminating significantly in favor of HCEs or former HCEs is 
determined at the time the plan amendment first becomes effective for 
purposes of section 401(a), based on all of the relevant facts and 
circumstances. These include, for example, the relative numbers of 
current and former HCEs and NHCEs affected by the plan amendment, the 
relative length of service of current and former HCEs and NHCEs, the 
length of time the plan or plan provision being amended has been in 
effect, and the turnover of employees prior to the plan amendment. In 
addition, the relevant facts and circumstances include the relative 
accrued benefits of current and former HCEs and NHCEs before and after 
the plan amendment and any additional benefits provided to current and 
former HCEs and NHCEs under other plans (including plans of other 
employers, if relevant). In the case of a plan amendment that provides 
additional benefits based on an employee's service prior to the 
amendment, the relevant facts and circumstances also include the 
benefits that employees and former employees who do not benefit under 
the amendment would have received had the plan, as amended, been in 
effect throughout the period on which the additional benefits are based.
    (3) Safe harbor for certain grants of benefits for past periods. The 
timing of a plan amendment that credits (or increases benefits 
attributable to) years of service for a period in the past is deemed not 
to have the effect of discriminating significantly in favor of HCEs or 
former HCEs if the period for which the service credit (or benefit 
increase) is granted does not exceed the five years immediately 
preceding the year in which the amendment first becomes effective, the 
service credit (or benefit increase) is granted on a reasonably uniform 
basis to all employees, benefits attributable to the period are 
determined by applying the current plan formula, and the service 
credited is service (including pre-participation or imputed service) 
with the employer or a previous employer that may be taken into account 
under Sec. 1.401(a)(4)-11(d)(3) (without regard to Sec. 1.401(a)(4)-
11(d)(3)(i)(B)). However, this safe harbor is not available if the plan 
amendment granting the service credit (or increasing benefits) is part 
of a pattern of amendments that has the effect of discriminating 
significantly in favor of HCEs or former HCEs.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (a):

    Example 1. Plan A is a defined benefit plan that covered both HCEs 
and NHCEs for most of its existence. The employer decides to wind up its 
business. In the process of ceasing operations, but at a time when the 
plan covers only HCEs, Plan A is amended to increase benefits and 
thereafter is terminated. The timing of this plan amendment has the 
effect of discriminating significantly in favor of HCEs.
    Example 2. Plan B is a defined benefit plan that provides a social 
security supplement that is not a QSUPP. After substantially all of the 
HCEs of the employer have benefited from the supplement, but before a 
substantial number of NHCEs have become eligible for the supplement, 
Plan B is amended to reduce significantly the amount of the supplement. 
The timing of this plan amendment

[[Page 131]]

has the effect of discriminating significantly in favor of HCEs.
    Example 3. Plan C is a defined benefit plan that contains an 
ancillary life insurance benefit available to all employees. The plan is 
amended to eliminate this benefit at a time when life insurance payments 
have been made only to beneficiaries of HCEs. Because all employees 
received the benefit of life insurance coverage before Plan C was 
amended, the timing of this plan amendment does not have the effect of 
discriminating significantly in favor of HCEs or former HCEs.
    Example 4. Plan D provides for a benefit of one percent of average 
annual compensation per year of service. Ten years after Plan D is 
adopted, it is amended to provide a benefit of two percent of average 
annual compensation per year of service, including years of service 
prior to the amendment. The amendment is effective only for employees 
currently employed at the time of the amendment. The ratio of HCEs to 
former HCEs is significantly higher than the ratio of NHCEs to former 
NHCEs. In the absence of any additional factors, the timing of this plan 
amendment has the effect of discriminating significantly in favor of 
HCEs.
    Example 5. The facts are the same as in Example 4, except that, in 
addition, the years of prior service are equivalent between HCEs and 
NHCEs who are current employees, and the group of current employees with 
prior service would satisfy the nondiscriminatory classification test of 
Sec. 1.410(b)-4 in the current and all prior plan years for which past 
service credit is granted. The timing of this plan amendment does not 
have the effect of discriminating significantly in favor of HCEs or 
former HCEs.
    Example 6. Employer V maintains Plan E, an accumulation plan. In 
1994, Employer V amends Plan E to provide that the compensation used to 
determine an employee's benefit for all preceding plan years shall not 
be less than the employee's average annual compensation as of the close 
of the 1994 plan year. The years of service and percentage increases in 
compensation for HCEs are reasonably comparable to those of NHCEs. In 
addition, the ratio of HCEs to former HCEs is reasonably comparable to 
the ratio of NHCEs to former NHCEs. The timing of this plan amendment 
does not have the effect of discriminating significantly in favor of 
HCEs or former HCEs.
    Example 7. Employer W currently has six nonexcludable employees, two 
of whom, H1 and H2, are HCEs, and the remaining four of whom, N1 through 
N4, are NHCEs. The ratio of HCEs to former HCEs is significantly higher 
than the ratio of NHCEs to former NHCEs. Employer W establishes Plan F, 
a defined benefit plan providing a benefit of one percent of average 
annual compensation per year of service, including years of service 
prior to the establishment of the plan. H1 and H2 each have 15 years of 
prior service, N1 has nine years of past service, N2 has five years, N3 
has three years, and N4 has one year. The timing of this plan 
establishment has the effect of discriminating significantly in favor of 
HCEs.
    Example 8. Assume the same facts as in Example 7, except that N1 
through N4 were hired in the current year, and Employer W never employed 
any NHCEs prior to the current year. Thus, no NHCEs would have received 
additional benefits had Plan F been in existence during the preceding 15 
years. The timing of this plan establishment does not have the effect of 
discriminating significantly in favor of HCEs or former HCEs.
    Example 9. The facts are the same as in Example 7, except that Plan 
F limits the grant of past service credit to five years, and the grant 
of past service otherwise satisfies the safe harbor in paragraph (a)(3) 
of this section. The timing of this plan establishment is deemed not to 
have the effect of discriminating significantly in favor of HCEs or 
former HCEs.
    Example 10. The facts are the same as in Example 9, except that, 
five years after the establishment of Plan F, Employer W amends the plan 
to provide a benefit equal to two percent of average annual compensation 
per year of service, taking into account all years of service since the 
establishment of the plan. The ratio of HCEs to former HCEs who 
terminated employment during the five-year period since the 
establishment of the plan is significantly higher than the ratio of 
NHCEs to former NHCEs who terminated employment during the five-year 
period since the establishment of the plan. Although the amendment 
described in this example might separately satisfy the safe harbor in 
paragraph (a)(3) of this section, the safe harbor is not available with 
respect to the amendment because, under these facts, the amendment is 
part of a pattern of amendments that has the effect of discriminating 
significantly in favor of HCEs.
    Example 11. Employer Y maintains Plan G, a defined benefit plan, 
covering all its employees. In 1995, Employer Y acquires Division S from 
Employer Z. Some of the employees of Division S had been covered under a 
defined benefit plan maintained by Employer Z. Soon after the 
acquisition, Employer Y amends Plan G to cover all employees of Division 
S and to credit those who were in Division S's defined benefit plan with 
years of service for years of employment with Employer Z. Because the 
timing of the plan amendment was determined by the timing of the 
transaction, the timing of this plan amendment does not have the effect 
of discriminating significantly in favor of HCEs or former HCEs. See 
also Sec. 1.401(a)(4)-11(d)(3) for other rules regarding the crediting 
of pre-participation service.

[[Page 132]]

    Example 12. Plan H is an insurance contract plan within the meaning 
of section 412(i). For all plan years before 1999, Plan H purchases 
insurance contracts from Insurance Company J. In 1999, Plan H shifts 
future purchases of insurance contracts to Insurance Company K. The 
shift in insurance companies is a plan amendment subject to this 
paragraph (a).

    (b) Pre-termination restrictions--(1) Required provisions in defined 
benefit plans. A defined benefit plan has the effect of discriminating 
significantly in favor of HCEs or former HCEs unless it incorporates 
provisions restricting benefits and distributions as described in 
paragraph (b)(2) and (3) of this section at the time the plan is 
established or, if later, as of the first plan year to which 
Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 apply to the plan under 
Sec. 1.401(a)(4)-13(a) or (b). This paragraph (b) does not apply if the 
Commissioner determines that such provisions are not necessary to 
prevent the prohibited discrimination that may occur in the event of an 
early termination of the plan. The restrictions in this paragraph (b) 
apply to a plan within the meaning of Sec. 1.410(b)-7(b) (i.e., a 
section 414(l) plan). Any plan containing a provision described in this 
paragraph (b) satisfies section 411(d)(2) and does not fail to satisfy 
section 411(a) or (d)(3) merely because of the provision.
    (2) Restriction of benefits upon plan termination. A plan must 
provide that, in the event of plan termination, the benefit of any HCE 
(and any former HCE) is limited to a benefit that is nondiscriminatory 
under section 401(a)(4).
    (3) Restrictions on distributions--(i) General rule. A plan must 
provide that, in any year, the payment of benefits to or on behalf of a 
restricted employee shall not exceed an amount equal to the payments 
that would be made to or on behalf of the restricted employee in that 
year under--
    (A) A straight life annuity that is the actuarial equivalent of the 
accrued benefit and other benefits to which the restricted employee is 
entitled under the plan (other than a social security supplement); and
    (B) A social security supplement, if any, that the restricted 
employee is entitled to receive.
    (ii) Restricted employee defined. For purposes of this paragraph 
(b), the term restricted employee generally means any HCE or former HCE. 
However, an HCE or former HCE need not be treated as a restricted 
employee in the current year if the HCE or former HCE is not one of the 
25 (or a larger number chosen by the employer) nonexcludable employees 
and former employees of the employer with the largest amount of 
compensation in the current or any prior year. Plan provisions defining 
or altering this group can be amended at any time without violating 
section 411(d)(6).
    (iii) Benefit defined. For purposes of this paragraph (b), the term 
benefit includes, among other benefits, loans in excess of the amounts 
set forth in section 72(p)(2)(A), any periodic income, any withdrawal 
values payable to a living employee or former employee, and any death 
benefits not provided for by insurance on the employee's or former 
employee's life.
    (iv) Nonapplicability in certain cases. The restrictions in this 
paragraph (b)(3) do not apply, however, if any one of the following 
requirements is satisfied:
    (A) After taking into account payment to or on behalf of the 
restricted employee of all benefits payable to or on behalf of that 
restricted employee under the plan, the value of plan assets must equal 
or exceed 110 percent of the value of current liabilities, as defined in 
section 412(l)(7).
    (B) The value of the benefits payable to or on behalf of the 
restricted employee must be less than one percent of the value of 
current liabilities before distribution.
    (C) The value of the benefits payable to or on behalf of the 
restricted employee must not exceed the amount described in section 
411(a)(11)(A) (restrictions on certain mandatory distributions).
    (v) Determination of current liabilities. For purposes of this 
paragraph (b), any reasonable and consistent method may be used for 
determining the value of current liabilities and the value of plan 
assets.
    (4) Operational restrictions on certain money purchase pension 
plans. A money purchase pension plan that has an accumulated funding 
deficiency, within the meaning of section 412(a), or an

[[Page 133]]

unamortized funding waiver, within the meaning of section 412(d), must 
comply in operation with the restrictions on benefits and distributions 
as described in paragraphs (b)(2) and (b)(3) of this section. Such a 
plan does not fail to satisfy section 411(d)(6) merely because of 
restrictions imposed by the requirements of this paragraph (b)(4).

[T.D. 8485, 58 FR 46800, Sept. 3, 1993]



Sec. 1.401(a)(4)-6  Contributory defined benefit plans.

    (a) Introduction. This section provides rules necessary for 
determining whether a contributory DB plan satisfies the 
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2). 
Paragraph (b) of this section provides rules for determining the amount 
of benefits derived from employer contributions (employer-provided 
benefits) under a contributory DB plan for purposes of determining 
whether the plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to such 
amounts. Paragraph (c) of this section provides the exclusive rules for 
determining whether a contributory DB plan satisfies Sec. 1.401(a)(4)-
1(b)(2) with respect to the amount of benefits derived from employee 
contributions not allocated to separate accounts (employee-provided 
benefits). See Sec. 1.401(a)(4)-1(b)(2)(ii)(B) for the exclusive tests 
applicable to employee contributions allocated to separate accounts 
under a section 401(m) plan.
    (b) Determination of employer-provided benefit--(1) General rule. An 
employee's employer-provided benefit under a contributory DB plan for 
purposes of section 401(a)(4) equals the difference between the 
employee's total benefit and the employee's employee-provided benefit 
under the plan. The rules of section 411(c) generally must be used to 
determine the employee's employer-provided benefit for this purpose. 
However, paragraphs (b)(2) through (b)(6) of this section provide 
alternative methods for determining the employee's employer-provided 
benefit.
    (2) Composition-of-workforce method--(i) General rule. A 
contributory DB plan that satisfies paragraph (b)(2)(ii) (A) and (B) of 
this section may determine employees' employer-provided benefit rates 
under the rules of paragraph (b)(2)(iii) of this section.
    (ii) Eligibility requirements--(A) Uniform rate of employee 
contributions. A contributory DB plan satisfies this paragraph 
(b)(2)(ii)(A) if all employees make employee contributions at the same 
rate, expressed as a percentage of plan year compensation (the employee 
contribution rate). A plan does not fail to satisfy this paragraph 
(b)(2)(ii)(A) merely because it eliminates employee contributions for 
all employees with plan year compensation below a specified contribution 
breakpoint that is either a stated dollar amount or a stated percentage 
of covered compensation (within the meaning of Sec. 1.401(l)-1(c)(7)); 
or merely because all employees make employee contributions at the same 
rate (expressed as a percentage of plan year compensation) with respect 
to plan year compensation up to the contribution breakpoint (base 
employee contribution rate) and at a higher rate (expressed as a 
percentage of plan year compensation) that is the same for all employees 
with respect to plan year compensation above the contribution breakpoint 
(excess employee contribution rate). A plan described in paragraph 
(c)(4)(i) of this section that satisfies paragraph (c)(4)(iii) of this 
section is deemed to satisfy this paragraph.
    (B) Demographic requirements--(1) In general. A contributory DB plan 
satisfies this paragraph (b)(2)(ii)(B) if it satisfies either of the 
demographic tests in paragraph (b)(2)(ii)(B) (2) or (3) of this section.
    (2) Minimum percentage test. This test is satisfied only if more 
than 40 percent of the NHCEs in the plan have attained ages at least 
equal to the plan's target age, and more than 20 percent of the NHCEs in 
the plan have attained ages at least equal to the average attained age 
of the HCEs in the plan. For this purpose, a plan's target age is the 
lower of age 50 or the average attained age of the HCEs in the plan 
minus X years, where X equals 20 minus the product of five times the 
employee contribution rate under the plan. In no case, however, may X 
years be fewer than zero (0) years. Thus, for example, if the average 
attained age of the HCEs in the plan is 53 and the employee contribution 
rate is two percent of plan year compensation, the plan's target age is 
43 years (i.e., 53-(20-(5x2))).

[[Page 134]]

    (3) Ratio test. This test is satisfied only if the percentage of all 
nonhighly compensated nonexcludable employees, who are in the plan and 
who have attained ages at least equal to the average attained age of the 
HCEs in the plan, is at least 70 percent of the percentage of all highly 
compensated nonexcludable employees, who are in the plan and who have 
attained ages at least equal to the average attained age of the HCEs in 
the plan. Attained ages must be determined as of the beginning of the 
plan year. In lieu of determining the actual distribution of the 
attained ages of the HCEs, an employer may assume that 50 percent of all 
HCEs have attained ages at least equal to the average attained age of 
the HCEs.
    (iii) Determination of employer-provided benefit--(A) Safe harbor 
plans other than section 401(l) plans. For purposes of applying the 
exception to the safe harbor in Sec. 1.401(a)(4)-3(b)(6)(viii) with 
respect to employer-provided benefits under a plan other than a section 
401(l) plan, the employee's entire accrued benefit is treated as 
employer-provided.
    (B) Section 401(l) plans--(1) General rule. For purposes of applying 
the exception to the safe harbor in Sec. 1.401(a)(4)-3(b)(6)(viii) with 
respect to employer-provided benefits under a section 401(l) plan, an 
employee's base benefit percentage and excess benefit percentage are 
reduced, or an employee's gross benefit percentage is reduced, by 
subtracting the product of the employee contribution rate and the factor 
determined under paragraph (b)(2)(iv) of this section from the 
respective percentages for the plan year. For this purpose, the employee 
contribution rate is the highest rate of employee contributions 
applicable to any potential level of plan year compensation for that 
plan year under the plan.
    (2) Excess plans with varying contribution rates. In the case of a 
defined benefit excess plan described in the second sentence of 
paragraph (b)(2)(ii)(A) of this section, solely for purposes of reducing 
an employee's base benefit percentage as required under paragraph 
(b)(2)(iii)(B)(1) of this section, it may be assumed that the employee's 
employee contribution rate equals the weighted average of the base 
employee contribution rate and the excess employee contribution rate. In 
determining this weighted average, the weight of the base employee 
contribution rate is equal to a fraction, the numerator of which is the 
lesser of the integration level and the contribution breakpoint and the 
denominator of which is the integration level. The weight of the excess 
employee contribution rate is equal to the difference between one and 
the weight of the base employee contribution rate.
    (3) Offset plans with varying contribution rates. In the case of an 
offset plan described in the second sentence of paragraph (b)(2)(ii)(A) 
of this section, an equivalent adjustment to the alternative method in 
paragraph (b)(2)(iii)(B)(2) of this section may be made to the offset 
percentage.
    (C) Employer-provided benefits under the general test. For purposes 
of applying the general test of Sec. 1.401(a)(4)-3(c) with respect to 
employer-provided benefits, an employee's normal and most valuable 
accrual rates otherwise determined under Sec. 1.401(a)(4)-3(d) (without 
applying any of the options under Sec. 1.401(a)(4)-3(d)(3) other than 
the fresh-start alternative of Sec. 1.401(a)(4)-3(d)(3)(iii)) are each 
reduced by subtracting the product of the employee's contributions 
(expressed as a percentage of plan year compensation) and the factor 
determined under paragraph (b)(2)(iv) of this section from the 
respective accrual rates. A plan may then apply the optional rules in 
Sec. 1.401(a)(4)-3(d)(3) (i) and (ii) to this resulting accrual rate.
    (D) Additional limitation. A plan may not use the composition-of-
workforce method provided in this paragraph (b)(2) to determine an 
employee's base benefit percentage, excess benefit percentage, gross 
benefit percentage, offset percentage, or accrual rates unless employee 
contributions have been made at the same rate (or rates) throughout the 
period after the fresh-start date or throughout the measurement period 
used to determine accrual rates.
    (iv) Determination of plan factor. The factor for a plan is 
determined under the following table based on the average entry age of 
the employees in the

[[Page 135]]

plan and on whether the plan determines benefits based on average 
compensation. For this purpose, average entry age equals the average 
attained age of all employees in the plan, minus the average years of 
participation of all employees in the plan. A plan is treated as 
determining benefits based on average compensation if it determines 
benefits based on compensation averaged over a specified period not 
exceeding five consecutive years (or the employee's entire period of 
employment with the employer, if shorter).

                            Table of Factors
------------------------------------------------------------------------
                                                        Factors
                                              --------------------------
                                                  Average
              Average entry age                compensation     Other
                                                  benefit      formulas
                                                  formula
------------------------------------------------------------------------
Less than 30.................................           0.5         0.75
30 to 40.....................................           0.4         0.6
Over 40......................................           0.2         0.3
------------------------------------------------------------------------


    (v) Examples. The following examples illustrate the rules of this 
paragraph (b)(2):

    Example 1. Plan A is a contributory DB plan that is a defined 
benefit excess plan providing a benefit equal to 2.0 percent of 
employees' average annual compensation at or below covered compensation, 
plus 2.5 percent of average annual compensation above covered 
compensation, times years of service up to 35. Under the plan, average 
annual compensation is determined using a five-consecutive-year period 
for purposes of Sec. 1.401(a)(4)-3(e)(2). The plan requires employee 
contributions at a rate of four percent of plan year compensation for 
all employees. Assume that the plan satisfies the demographic 
requirements of paragraph (b)(2)(ii)(B) of this section. Under these 
facts, the plan satisfies the eligibility requirements of paragraph 
(b)(2)(ii) of this section. Assume, further, that the average attained 
age for all employees in the plan is 55, and that the average years of 
participation of all employees in the plan is 10. The average entry age 
for the plan is therefore 45, and, accordingly, the appropriate factor 
under the table is 0.2. Thus, in applying the safe harbor requirements 
of Sec. 1.401(a)(4)-3(b) to this plan for the plan year (including the 
requirements of Sec. 1.401(l)-3), the employee's base benefit percentage 
and excess benefit percentage are each reduced by 0.8 percent (4 
percentx0.2) and equal 1.2 percent and 1.7 percent, respectively.
    Example 2. The facts are the same as in Example 1, except that the 
employee contribution rate is two percent of plan year compensation up 
to the covered compensation level, and four percent for plan year 
compensation at or above that contribution breakpoint. The employer 
elects to apply the alternative method in paragraph (b)(2)(iii)(B)(2) of 
this section to determine the reduction in the base benefit percentage. 
Because the contribution breakpoint is equal to the integration level, 
the weight of the employee contribution rate below the contribution 
breakpoint is 100 percent, and the weight of the employee contribution 
rate above the contribution breakpoint is zero. Thus, the weighted 
average of employee contribution rates is two percent. Under the 
alternative method in paragraph (b)(2)(iii)(B)(2) of this section, the 
reduction in the employee's base benefit percentage is 0.4. In applying 
the safe harbor requirements of Sec. 1.401(a)(4)-3(b) to this plan 
(including the requirements of Sec. 1.401(l)-3), the employee's base 
benefit percentage is 1.6 percent, and the employee's excess benefit 
percentage is 1.7.
    Example 3. The facts are the same as in Example 1, except that the 
employee contribution rate is two percent of plan year compensation up 
to 50 percent of the covered compensation level, and four percent for 
plan year compensation at or above that contribution breakpoint. Because 
the contribution breakpoint is equal to 50 percent of the integration 
level, the weight of the employee contribution rate below the 
contribution breakpoint is 50 percent, and the weight of the employee 
contribution rate above the contribution breakpoint is 50 percent. Thus, 
the weighted average of employee contribution rates is three percent. 
Under the alternative method in paragraph (b)(2)(iii)(B)(2) of this 
section, the reduction in the employee's base benefit percentage is 0.6. 
In applying the safe harbor requirements of Sec. 1.401(a)(4)-3(b) to 
this plan (including the requirements of Sec. 1.401(l)-3), the 
employee's base benefit percentage is 1.4 percent, and the employee's 
excess benefit percentage is 1.7.
    Example 4. The facts are the same as in Example 1, except that the 
plan is tested using the general test in Sec. 1.401(a)(4)-3(c). Assume 
Employee M benefits under Plan A and has a normal accrual rate for the 
plan year (calculated with respect to Employee M's total accrued 
benefit) of 2.2 percent of average annual compensation. In applying the 
general test in Sec. 1.401(a)(4)-3(c) with respect to employer-provided 
benefits, this rate is reduced by 0.8 to yield a normal accrual rate of 
1.4 percent. This rate may then be adjusted using either of the optional 
rules in Sec. 1.401(a)(4)-3(d)(3)(i) or (ii).

    (3) Minimum-benefit method--(i) Application of uniform factors. A 
contributory DB plan that satisfies the uniform rate requirement of 
paragraph (b)(2)(ii)(A)

[[Page 136]]

of this section and the minimum benefit requirement of paragraph 
(b)(3)(ii) of this section may apply the adjustments provided in 
paragraph (b)(2)(iii) of this section as if the average entry age of 
employees in the plan were within the range of 30 to 40, without regard 
to the actual demographics of the employees in the plan.
    (ii) Minimum benefit requirement. This requirement is satisfied if 
the plan provides that, in plan years beginning on or after the 
effective date of these regulations, as set forth in Sec. 1.401(a)(4)-
13(a) and (b), each employee will accrue a benefit that equals or 
exceeds the sum of--
    (A) The accrued benefit derived from employee contributions made for 
plan years beginning on or after the effective date of these 
regulations, determined in accordance with section 411(c); and
    (B) Fifty percent of the total benefit accrued in plan years 
beginning on or after the effective date of these regulations, as 
determined under the plan benefit formula without regard to that portion 
of the formula designed to satisfy the minimum benefit requirement of 
this paragraph (b)(3)(ii).
    (iii) Example. The following example illustrates the minimum-benefit 
method of this paragraph (b)(3):

    Example. Plan A is contributory DB plan. For the plan year beginning 
in 1994, Employee M participates in Plan A and accrues a benefit under 
the terms of the plan (without regard to the minimum benefit requirement 
of paragraph (b)(3)(ii) of this section) of $3,000. The portion of 
Employee M's benefit accrual for the plan year beginning in 1994 derived 
from employee contributions is $2,000, determined by applying the rules 
of section 411(c) to such contributions. The requirement of paragraph 
(b)(3)(ii) of this section is not satisfied for the plan year beginning 
in 1994 unless the plan provides that Employee M's benefit accrual for 
the plan year beginning in 1994 is equal to $3,500 ($2,000+(50 
percentx$3,000)).

    (4) Grandfather rule for plans in existence on May 14, 1990. A 
contributory DB plan that satisfies paragraph (c)(4) of this section may 
determine an employee's employer-provided benefit by subtracting from 
the employee's total benefit the employee-provided benefits determined 
using any reasonable method set forth in the plan, provided that it is 
the same method used in determining whether the plan satisfies paragraph 
(c)(4)(ii)(D) of this section.
    (5) Government-plan method. A contributory DB plan that is 
established and maintained for its employees by the government of any 
state or political subdivision or by any agency or instrumentality 
thereof may treat an employee's total benefit as entirely employer-
provided.
    (6) Cessation of employee contributions. If a contributory DB plan 
provides that no employee contributions may be made to the plan after 
the last day of the first plan year beginning on or after the effective 
date of these regulations, as set forth in Sec. 1.401(a)(4)-13 (a) and 
(b), the plan may treat an employee's total benefit as entirely 
employer-provided.
    (c) Rules applicable in determining whether employee-provided 
benefits are nondiscriminatory in amount--(1) In general. A contributory 
DB plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to the amount of 
employee-provided benefits for a plan year only if the plan satisfies 
the requirements of paragraph (c)(2), (c)(3), or (c)(4) of this section 
for the plan year. This requirement applies regardless of the method 
used to determine the amount of employer-provided benefits under 
paragraph (b) of this section.
    (2) Same rate of contributions. This requirement is satisfied for a 
plan year if the employee contribution rate (within the meaning of 
paragraph (b)(2)(ii)(A) of this section) is the same for all employees 
for the plan year.
    (3) Total-benefits method. This requirement is satisfied for a plan 
year if--
    (i) The total benefits (i.e., the sum of employer-provided and 
employee-provided benefits) under the plan would satisfy 
Sec. 1.401(a)(4)-3 if all benefits were treated as employer-provided 
benefits; and
    (ii) The plan's contribution requirements satisfy paragraph 
(b)(2)(ii)(A) of this section.
    (4) Grandfather rules for plans in existence on May 14, 1990--(i) In 
general. This requirement is satisfied for a plan year if the plan 
contained provisions as of May 14, 1990, that meet the requirements of 
paragraph (c)(4)(ii) or (c)(4)(iii) of this section.

[[Page 137]]

    (ii) Graded contribution rates. The plan's provisions meet the 
requirements of this paragraph (c)(4)(ii) if all the following 
requirements are met:
    (A) The provisions require employee contributions at a greater rate 
(expressed as a percentage of compensation) at higher levels of 
compensation than at lower levels of compensation.
    (B) The required rate of employee contributions is not increased 
after May 14, 1990, although the level of compensation at which employee 
contributions are required may be increased or decreased.
    (C) All employees are permitted to make employee contributions under 
the plan at a uniform rate with respect to all compensation, beginning 
no later than the last day of the first plan year to which these 
regulations apply, as set forth in Sec. 1.401(a)(4)-13 (a) and (b).
    (D) The benefits provided on account of employee contributions at 
lower levels of compensation are comparable to those provided on account 
of employee contributions at higher levels of compensation.
    (iii) Prior year compensation. The plan's provisions meet the 
requirements of this paragraph (c)(4)(iii) if they are part of a plan 
maintained by more than one employer that requires employee 
contributions and the rate of required employee contributions, expressed 
as a percentage of compensation for the last calendar year ending before 
the beginning of the plan year, is the same for all employees.

[T.D. 8485, 58 FR 46802, Sept. 3, 1993]



Sec. 1.401(a)(4)-7  Imputation of permitted disparity.

    (a) Introduction. In determining whether a plan satisfies section 
401(a)(4) with respect to the amount of contributions or benefits, 
section 401(a)(5)(C) allows the disparities permitted under section 
401(l) to be taken into account. For purposes of satisfying the safe 
harbors of Secs. 1.401(a)(4)-2(b)(2) and 1.401(a)(4)-3(b), permitted 
disparity may be taken into account only by satisfying section 401(l) in 
form in accordance with Sec. 1.401(l)-2 or 1.401(l)-3, respectively. For 
purposes of the general tests of Secs. 1.401(a)(4)-2(c) and 1.401(a)(4)-
3(c), permitted disparity may be taken into account only in accordance 
with the rules of this section. In general, this section allows 
permitted disparity to be arithmetically imputed with respect to 
employer-provided contributions or benefits by determining an adjusted 
allocation or accrual rate that appropriately accounts for the permitted 
disparity with respect to each employee. Paragraph (b) of this section 
provides rules for imputing permitted disparity with respect to 
employer-provided contributions by adjusting each employee's unadjusted 
allocation rate. Paragraph (c) of this section provides rules for 
imputing permitted disparity with respect to employer-provided benefits 
by adjusting each employee's unadjusted accrual rate. Paragraph (d) of 
this section provides rules of general application.
    (b) Adjusting allocation rates--(1) In general. The rules in this 
paragraph (b) produce an adjusted allocation rate for each employee by 
determining the excess contribution percentage under the hypothetical 
formula that would yield the allocation actually received by the 
employee, if the plan took into account the full disparity permitted 
under section 401(l)(2) and used the taxable wage base as the 
integration level. This adjusted allocation rate is used to determine 
whether the amount of contributions under the plan satisfies the general 
test of Sec. 1.401(a)(4)-2(c) and to apply the average benefit 
percentage test on the basis of contributions under Sec. 1.410(b)-5(d). 
Paragraphs (b)(2) and (b)(3) of this section apply to employees whose 
plan year compensation does not exceed and does exceed, respectively, 
the taxable wage base, and paragraph (b)(4) of this section provides 
definitions.
    (2) Employees whose plan year compensation does not exceed taxable 
wage base. If an employee's plan year compensation does not exceed the 
taxable wage base, the employee's adjusted allocation rate is the lesser 
of the A rate and the B rate determined under the formulas below, where 
the permitted disparity rate and the unadjusted allocation rate are 
determined under paragraph (b)(4) (ii) and (iv) of this section, 
respectively.

A Rate = 2xunadjusted allocation rate
B Rate = unadjusted allocation rate + permitted disparity rate


[[Page 138]]


    (3) Employees whose plan year compensation exceeds taxable wage 
base. If an employee's plan year compensation exceeds the taxable wage 
base, the employee's adjusted allocation rate is the lesser of the C 
rate and the D rate determined under the formulas below, where 
allocations and the permitted disparity rate are determined under 
paragraph (b)(4) (i) and (ii) of this section, respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.012

    (4) Definitions. In applying this paragraph (b), the following 
definitions govern--
    (i) Allocations. Allocations means the amount determined by 
multiplying the employee's plan year compensation by the employee's 
unadjusted allocation rate.
    (ii) Permitted disparity rate--(A) General rule. Permitted disparity 
rate means the rate in effect as of the beginning of the plan year under 
section 401(l)(2)(A)(ii) (e.g., 5.7 percent for plan years beginning in 
1990).
    (B) Cumulative permitted disparity limit. Notwithstanding paragraph 
(b)(4)(ii)(A) of this section, the permitted disparity rate is zero for 
an employee who has benefited under a defined benefit plan taken into 
account under Sec. 1.401(l)-5(a)(3) for a plan year that begins on or 
after one year from the first day of the first plan year to which these 
regulations apply, as set forth in Sec. 1.401(a)(4)-13 (a) and (b), if 
imputing permitted disparity would result in a cumulative disparity 
fraction for the employee, as defined in Sec. 1.401(l)-5(c)(2), that 
exceeds 35. See Sec. 1.401(l)-5(c)(1) for special rules for determining 
whether an employee has benefited under a defined benefit plan for this 
purpose.
    (iii) Taxable wage base. Taxable wage base means the taxable wage 
base, as defined in Sec. 1.401(l)-1(c)(32), in effect as of the 
beginning of the plan year.
    (iv) Unadjusted allocation rate. Unadjusted allocation rate means 
the employee's allocation rate determined under Sec. 1.401(a)(4)-
2(c)(2)(i) for the plan year (expressed as a percentage of plan year 
compensation), without imputing permitted disparity under this section.
    (5) Example. The following example illustrates the rules in this 
paragraph (b):

    Example. (a) Employees M and N participate in a defined contribution 
plan maintained by Employer X. Employee M has plan year compensation of 
$30,000 in the 1990 plan year and has an unadjusted allocation rate of 
five percent. Employee N has plan year compensation of $100,000 in the 
1990 plan year and has an unadjusted allocation rate of eight percent. 
The taxable wage base in 1990 is $51,300.
    (b) Because Employee M's plan year compensation does not exceed the 
taxable wage base, Employee M's A rate is 10 percent (2x5 percent), and 
Employee M's B rate is 10.7 percent (5 percent+5.7 percent). Thus, 
Employee M's adjusted allocation rate is 10 percent, the lesser of the A 
rate and the B rate.
    (c) Employee N's allocations are $8,000 (8 percentx$100,000). 
Because Employee N's plan year compensation exceeds the taxable wage 
base, Employee N's C rate is 10.76 percent ($8,000 divided by ($100,000-
(\1/2\x$51,300))), and Employee N's D rate is 10.92 percent (($8,000+ 
(5.7 percentx$51,300)) divided by $100,000). Thus, Employee N's adjusted 
allocation rate is 10.76 percent, the lesser of the C rate and the D 
rate.

    (c) Adjusting accrual rates--(1) In general. The rules in this 
paragraph (c) produce an adjusted accrual rate for each employee by 
determining the excess benefit percentage under the hypothetical plan 
formula that would yield the employer-provided accrual actually received 
by the employee, if the plan took into account the full permitted 
disparity under section 401(l)(3)(A) in

[[Page 139]]

each of the first 35 years of an employee's testing service under the 
plan and used the employee's covered compensation as the integration 
level. This adjusted accrual rate is used to determine whether the 
amount of employer-provided benefits under the plan satisfies the 
alternative safe harbor for flat benefit plans under Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(3) or the general test of Sec. 1.401(a)(4)-3(c), and to 
apply the average benefit percentage test on the basis of benefits under 
Sec. 1.410(b)-5. Paragraphs (c)(2) and (c)(3) of this section apply to 
employees whose average annual compensation does not exceed and does 
exceed, respectively, covered compensation, and paragraph (c)(4) of this 
section provides definitions. Paragraph (c)(5) of this section provides 
a special rule for employees with negative unadjusted accrual rates.
    (2) Employees whose average annual compensation does not exceed 
covered compensation. If an employee's average annual compensation does 
not exceed the employee's covered compensation, the employee's adjusted 
accrual rate is the lesser of the A rate and the B rate determined under 
the formulas below, where the permitted disparity factor and the 
unadjusted accrual rate are determined under paragraph (c)(4)(iii) and 
(v) of this section, respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.013

    (3) Employees whose average annual compensation exceeds covered 
compensation. If an employee's average annual compensation exceeds the 
employee's covered compensation, the employee's adjusted accrual rate is 
the lesser of the C rate and D rate determined under the formulas below, 
where the employer-provided accrual and the permitted disparity factor 
are determined under paragraph (c)(4)(ii) and (iii) of this section, 
respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.014

    (4) Definitions. For purposes of this paragraph (c), the following 
definitions apply.
    (i) Covered compensation. Covered compensation means covered 
compensation as defined in Sec. 1.401(l)-1(c)(7). Notwithstanding 
Sec. 1.401(l)-1(c)(7)(iii), an employee's covered compensation must be 
automatically adjusted each plan year for purposes of applying this 
paragraph (c).
    (ii) Employer-provided accrual. Employer-provided accrual means the 
amount determined by multiplying the employee's average annual 
compensation by the employee's unadjusted accrual rate.
    (iii) Permitted disparity factor--(A) General rule. Permitted 
disparity factor for an employee means the sum of the employee's annual 
permitted disparity factors determined under paragraph (c)(4)(iii)(B) of 
this section for each of the years in the measurement period used for 
determining the employee's accrual rate in Sec. 1.401(a)(4)-3(d)(1), 
divided by the employee's testing service during that measurement 
period.
    (B) Annual permitted disparity factor--(1) Definition. An employee's 
annual permitted disparity factor is generally 0.75 percent adjusted, 
pursuant to Sec. 1.401(l)-3(e), using as the age at which benefits 
commence the lesser of age 65

[[Page 140]]

or the employee's testing age. No adjustments are made in the annual 
permitted disparity factor unless an employee's testing age is different 
from the employee's social security retirement age. An annual permitted 
disparity factor that is less than the annual permitted disparity factor 
described in the first sentence of this paragraph (c)(4)(iii)(B)(1) may 
be used if it is a uniform percentage of that factor (e.g., 50 percent 
of the annual permitted disparity factor) or a fixed percentage (e.g., 
0.65 percent) for all employees.
    (2) Annual permitted disparity factor after 35 years. For purposes 
of determining the sum described in paragraph (c)(4)(iii)(A) of this 
section, the annual permitted disparity factor for each of the 
employee's first 35 years of testing service is the amount described in 
paragraph (c)(4)(iii)(B)(1) of this section, and the annual permitted 
disparity factor in any subsequent year equals zero. This rule applies 
regardless of whether the end of the measurement period extends beyond 
an employee's first 35 years of testing service. Thus, for example, if 
the measurement period is the current plan year and the employee 
completed 35 years of testing service prior to the beginning of the 
current plan year, under this paragraph (c)(4)(iii)(B)(2) the annual 
permitted disparity factor in the current plan year (and hence the sum 
of the annual permitted disparity factors for each year in the 
measurement period) is zero.
    (3) Cumulative permitted disparity limit. The 35 years used in 
paragraph (c)(4)(iii)(B)(2) of this section must be reduced by the 
employee's cumulative disparity fraction, as defined in Sec. 1.401(l)-
5(c)(2), but determined solely with respect to the employee's total 
years of service under all plans taken into account under Sec. 1.401(l)-
5(a)(3) during the measurement period, other than the plan being tested.
    (iv) Social security retirement age. Social security retirement age 
means social security retirement age as defined in section 415(b)(8).
    (v) Unadjusted accrual rate. Unadjusted accrual rate means the 
normal or most valuable accrual rate, whichever is being determined for 
the employee under Sec. 1.401(a)(4)-3(d), expressed as a percentage of 
average annual compensation, without imputing permitted disparity under 
this section.
    (5) Employees with negative unadjusted accrual rates. 
Notwithstanding the formulas in paragraph (c)(2) and (c)(3) of this 
section, if an employee's unadjusted accrual rate is less than zero, the 
employee's adjusted accrual rate is deemed to be the employee's 
unadjusted accrual rate.
    (6) Example. The following example illustrates the rules in this 
paragraph (c):

    Example. (a) Employees M and N participate in a defined benefit plan 
that uses a normal retirement age of 65. The plan is being tested for 
the plan year under Sec. 1.401(a)(4)-3(c), using unadjusted accrual 
rates determined using a plan year measurement period under 
Sec. 1.401(a)(4)-3(d)(1)(iii)(A). Employee M has an unadjusted normal 
accrual rate of 1.48 percent, average annual compensation of $21,000, 
and an employer-provided accrual of $311 (1.48 percentx$21,000). 
Employee N has an unadjusted normal accrual rate of 1.7 percent, average 
annual compensation of $106,000, and an employer-provided accrual of 
$1,802 (1.7 percentx$106,000). The covered compensation of both 
Employees M and N is $25,000, and social security retirement age for 
both employees is 65. Neither employee has testing service of more than 
35 years and neither has ever participated in another plan.
    (b) Because Employee M's average annual compensation does not exceed 
covered compensation, Employee M's A rate is 2.96 percent (2.0x1.48 
percent), and Employee M's B rate is 2.23 percent (1.48 percent+0.75 
percent). Thus, Employee M's adjusted accrual rate is 2.23 percent, the 
lesser of the A rate and the B rate.
    (c) Because Employee N's average annual compensation exceeds covered 
compensation, Employee N's C rate is 1.93 percent ($1,802/($106,000-
(0.5x$25,000))), and Employee N's D rate is 1.88 percent (($1,802+(0.75 
percentx$25,000))/$106,000). Thus, Employee N's adjusted accrual rate is 
1.88 percent, the lesser of the C rate and the D rate.

    (d) Rules of general application--(1) Eligible plans. The rules in 
this section may be used only for those plans to which the permitted 
disparity rules of section 401(l) are available. See Sec. 1.401(l)-
1(a)(3).
    (2) Exceptions from consistency requirements. A plan does not fail 
to satisfy the consistency requirements of Sec. 1.401(a)(4)-2(c)(2)(vi) 
or Sec. 1.401(a)(4)-

[[Page 141]]

3(d)(2)(i) merely because the plan does not impute disparity for some 
employees to the extent required to comply with paragraph (d)(3) of this 
section, or because the plan does not impute disparity for any employees 
(including self-employed individuals within the meaning of section 
401(c)(1)) who are not covered by any of the taxes under section 
3111(a), section 3221, or section 1401.
    (3) Overall permitted disparity. The annual overall permitted 
disparity limits of Sec. 1.401(l)-5(b) apply to the employer-provided 
contributions and benefits for an employee under all plans taken into 
account under Sec. 1.401(l)-5(a)(3). Thus, if an employee who benefits 
under the plan for the current plan year also benefits under a section 
401(l) plan for the plan year ending with or within the current plan 
year, permitted disparity may not be imputed for that employee for the 
plan year. See Sec. 1.401(l)-5(b)(9), Example 4. Similarly, if an 
employee who benefits under the plan for the current plan year also 
benefits under another plan of the employer for the plan year ending 
with or within the current plan year, disparity may be imputed for that 
employee under only one of the plans.

[T.D. 8485, 58 FR 46804, Sept. 3, 1993]



Sec. 1.401(a)(4)-8  Cross-testing.

    (a) Introduction. This section provides rules for testing defined 
benefit plans on the basis of equivalent employer-provided contributions 
and defined contribution plans on the basis of equivalent employer-
provided benefits under Sec. 1.401(a)(4)-1(b)(2). Paragraphs (b)(1) and 
(c)(1) of this section provide general tests for nondiscrimination based 
on individual equivalent accrual or allocation rates determined under 
paragraphs (b)(2) and (c)(2) of this section, respectively. Paragraphs 
(b)(3), (c)(3), and (d) of this section provide additional safe-harbor 
testing methods for target benefit plans, cash balance plans, and 
defined benefit plans that are part of floor-offset arrangements, 
respectively, that generally may be satisfied on a design basis.
    (b) Nondiscrimination in amount of benefits provided under a defined 
contribution plan--(1) General rule and gateway--(i) General rule. 
Equivalent benefits under a defined contribution plan (other than an 
ESOP) are nondiscriminatory in amount for a plan year if--
    (A) The plan would satisfy Sec. 1.401(a)(4)-2(c)(1) for the plan 
year if an equivalent accrual rate, as determined under paragraph (b)(2) 
of this section, were substituted for each employee's allocation rate in 
the determination of rate groups; and
    (B) For plan years beginning on or after January 1, 2002, the plan 
satisfies one of the following conditions--
    (1) The plan has broadly available allocation rates (within the 
meaning of paragraph (b)(1)(iii) of this section) for the plan year;
    (2) The plan has age-based allocation rates that are based on either 
a gradual age or service schedule (within the meaning of paragraph 
(b)(1)(iv) of this section) or a uniform target benefit allocation 
(within the meaning of paragraph (b)(1)(v) of this section) for the plan 
year; or
    (3) The plan satisfies the minimum allocation gateway of paragraph 
(b)(1)(vi) of this section for the plan year.
    (ii) Allocations after testing age. A plan does not fail to satisfy 
paragraph (b)(1)(i)(A) of this section merely because allocations are 
made at the same rate for employees who are older than their testing age 
(determined without regard to the current-age rule in paragraph (4) of 
the definition of testing age in Sec. 1.401(a)(4)-12) as they are made 
for employees who are at that age.
    (iii) Broadly available allocation rates--(A) In general. A plan has 
broadly available allocation rates for the plan year if each allocation 
rate under the plan is currently available during the plan year (within 
the meaning of Sec. 1.401(a)(4)-4(b)(2)), to a group of employees that 
satisfies section 410(b) (without regard to the average benefit 
percentage test of Sec. 1.410(b)-5). For this purpose, if two allocation 
rates could be permissively aggregated under Sec. 1.401(a)(4)-4(d)(4), 
assuming the allocation rates were treated as benefits, rights or 
features, they may be aggregated and treated as a single allocation 
rate. In addition, the disregard of age and service conditions described 
in Sec. 1.401(a)(4)-4(b)(2)(ii)(A) does not apply

[[Page 142]]

for purposes of this paragraph (b)(1)(iii)(A).
    (B) Certain transition allocations. In determining whether a plan 
has broadly available allocation rates for the plan year within the 
meaning of paragraph (b)(1)(iii)(A) of this section, an employee's 
allocation may be disregarded to the extent that the allocation is a 
transition allocation for the plan year. In order for an allocation to 
be a transition allocation, the allocation must comply with the 
requirements of paragraph (b)(1)(iii)(C) of this section and must be 
either--
    (1) A defined benefit replacement allocation within the meaning of 
paragraph (b)(1)(iii)(D) of this section; or
    (2) A pre-existing replacement allocation or pre-existing merger and 
acquisition allocation, within the meaning of paragraph (b)(1)(iii)(E) 
of this section.
    (C) Plan provisions relating to transition allocations--(1) In 
general. Plan provisions providing for transition allocations for the 
plan year must specify both the group of employees who are eligible for 
the transition allocations and the amount of the transition allocations.
    (2) Limited plan amendments. Allocations are not transition 
allocations within the meaning of paragraph (b)(1)(iii)(B) of this 
section for the plan year if the plan provisions relating to the 
allocations are amended after the date those plan provisions are both 
adopted and effective. The preceding sentence in this paragraph 
(b)(1)(iii)(C)(2) does not apply to a plan amendment that reduces 
transition allocations to HCEs, makes de minimis changes in the 
calculation of the transition allocations (such as a change in the 
definition of compensation to include section 132(f) elective 
reductions), or adds or removes a provision permitted under paragraph 
(b)(1)(iii)(C)(3) of this section.
    (3) Certain permitted plan provisions. An allocation does not fail 
to be a transition allocation within the meaning of paragraph 
(b)(1)(iii)(B) of this section merely because the plan provides that 
each employee who is eligible for a transition allocation receives the 
greater of such allocation and the allocation for which the employee 
would otherwise be eligible under the plan. In a plan that contains such 
a provision, for purposes of determining whether the plan has broadly 
available allocation rates within the meaning of paragraph 
(b)(1)(iii)(A) of this section, the allocation for which an employee 
would otherwise be eligible is considered currently available to the 
employee, even if the employee's transition allocation is greater.
    (D) Defined benefit replacement allocation. An allocation is a 
defined benefit replacement allocation for the plan year if it is 
provided in accordance with guidance prescribed by the Commissioner 
published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2)(ii)(b) of this chapter) and satisfies the following 
conditions--
    (1) The allocations are provided to a group of employees who 
formerly benefitted under an established nondiscriminatory defined 
benefit plan of the employer or of a prior employer that provided age-
based equivalent allocation rates;
    (2) The allocations for each employee in the group were reasonably 
calculated, in a consistent manner, to replace the retirement benefits 
that the employee would have been provided under the defined benefit 
plan if the employee had continued to benefit under the defined benefit 
plan;
    (3) Except as provided in paragraph (b)(1)(iii)(C) of this section, 
no employee who receives the allocation receives any other allocations 
under the plan for the plan year; and
    (4) The composition of the group of employees who receive the 
allocations is nondiscriminatory.
    (E) Pre-existing transition allocations--(1) Pre-existing 
replacement allocations. An allocation is a pre-existing replacement 
allocation for the plan year if the allocation satisfies the following 
conditions--
    (i) The allocations are provided pursuant to a plan provision 
adopted before June 29, 2001;
    (ii) The allocations are provided to employees who formerly 
benefitted under a defined benefit plan of the employer; and

[[Page 143]]

    (iii) The allocations for each employee in the group are reasonably 
calculated, in a consistent manner, to replace some or all of the 
retirement benefits that the employee would have received under the 
defined benefit plan and any other plan or arrangement of the employer 
if the employee had continued to benefit under such defined benefit plan 
and such other plan or arrangement.
    (2) Pre-existing merger and acquisition allocations. An allocation 
is a pre-existing merger and acquisition allocation for the plan year if 
the allocation satisfies the following conditions--
    (i) The allocations are provided solely to employees of a trade or 
business that has been acquired by the employer in a stock or asset 
acquisition, merger, or other similar transaction occurring prior to 
August 28, 2001, involving a change in the employer of the employees of 
the trade or business;
    (ii) The allocations are provided only to employees who were 
employed by the acquired trade or business before a specified date that 
is no later than two years after the transaction (or January 1, 2002, if 
earlier);
    (iii) The allocations are provided pursuant a plan provision adopted 
no later than the specified date; and
    (iv) The allocations for each employee in the group are reasonably 
calculated, in a consistent manner, to replace some or all of the 
retirement benefits that the employee would have received under any plan 
of the employer if the new employer had continued to provide the 
retirement benefits that the prior employer was providing for employees 
of the trade or business.
    (F) Successor employers. An employer that accepts a transfer of 
assets (within the meaning of section 414(l)) from the plan of a prior 
employer may continue to treat any transition allocations provided under 
that plan as transition allocations under paragraph (b)(1)(iii)(B) of 
this section, provided that the successor employer continues to satisfy 
the applicable requirements set forth in paragraphs (b)(1)(iii)(C) 
through (E) of this section for the plan year.
    (iv) Gradual age or service schedule--(A) In general. A plan has a 
gradual age or service schedule for the plan year if the allocation 
formula for all employees under the plan provides for a single schedule 
of allocation rates under which--
    (1) The schedule defines a series of bands based solely on age, 
years of service, or the number of points representing the sum of age 
and years of service (age and service points), under which the same 
allocation rate applies to all employees whose age, years of service, or 
age and service points are within each band; and
    (2) The allocation rates under the schedule increase smoothly at 
regular intervals, within the meaning of paragraphs (b)(1)(iv)(B) and 
(C) of this section.
    (B) Smoothly increasing schedule of allocation rates. A schedule of 
allocation rates increases smoothly if the allocation rate for each band 
within the schedule is greater than the allocation rate for the 
immediately preceding band (i.e., the band with the next lower number of 
years of age, years of service, or age and service points) but by no 
more than 5 percentage points. However, a schedule of allocation rates 
will not be treated as increasing smoothly if the ratio of the 
allocation rate for any band to the rate for the immediately preceding 
band is more than 2.0 or if it exceeds the ratio of allocation rates 
between the two immediately preceding bands.
    (C) Regular intervals. A schedule of allocation rates has regular 
intervals of age, years of service or age and service points, if each 
band, other than the band associated with the highest age, years of 
service, or age and service points, is the same length. For this 
purpose, if the schedule is based on age, the first band is deemed to be 
of the same length as the other bands if it ends at or before age 25. If 
the first age band ends after age 25, then, in determining whether the 
length of the first band is the same as the length of other bands, the 
starting age for the first age band is permitted to be treated as age 25 
or any age earlier than 25. For a schedule of allocation rates based on 
age and service points, the rules of the preceding two sentences are 
applied by substituting 25 age and service points for age 25. For a 
schedule of allocation rates based on service, the starting

[[Page 144]]

service for the first service band is permitted to be treated as one 
year of service or any lesser amount of service.
    (D) Minimum allocation rates permitted. A schedule of allocation 
rates under a plan does not fail to increase smoothly at regular 
intervals, within the meaning of paragraphs (b)(1)(iv)(B) and (C) of 
this section, merely because a minimum uniform allocation rate is 
provided for all employees or the minimum benefit described in section 
416(c)(2) is provided for all non-key employees (either because the plan 
is top heavy or without regard to whether the plan is top heavy) if the 
schedule satisfies one of the following conditions--
    (1) The allocation rates under the plan that are greater than the 
minimum allocation rate can be included in a hypothetical schedule of 
allocation rates that increases smoothly at regular intervals, within 
the meaning of paragraphs (b)(1)(iv)(B) and (C) of this section, where 
the hypothetical schedule has a lowest allocation rate no lower than 1% 
of plan year compensation; or
    (2) For a plan using a schedule of allocation rates based on age, 
for each age band in the schedule that provides an allocation rate 
greater than the minimum allocation rate, there could be an employee in 
that age band with an equivalent accrual rate that is less than or equal 
to the equivalent accrual rate that would apply to an employee whose age 
is the highest age for which the allocation rate equals the minimum 
allocation rate.
    (v) Uniform target benefit allocations. A plan has allocation rates 
that are based on a uniform target benefit allocation for the plan year 
if the plan fails to satisfy the requirements for the safe harbor 
testing method in paragraph (b)(3) of this section merely because the 
determination of the allocations under the plan differs from the 
allocations determined under that safe harbor testing method for any of 
the following reasons--
    (A) The interest rate used for determining the actuarial present 
value of the stated plan benefit and the theoretical reserve is lower 
than a standard interest rate;
    (B) The stated benefit is calculated assuming compensation increases 
at a specified rate; or
    (C) The plan computes the current year contribution using the actual 
account balance instead of the theoretical reserve.
    (vi) Minimum allocation gateway--(A) General rule. A plan satisfies 
the minimum allocation gateway of this paragraph (b)(1)(vi) if each NHCE 
has an allocation rate that is at least one third of the allocation rate 
of the HCE with the highest allocation rate.
    (B) Deemed satisfaction. A plan is deemed to satisfy the minimum 
allocation gateway of this paragraph (b)(1)(vi) if each NHCE receives an 
allocation of at least 5% of the NHCE's compensation within the meaning 
of section 415(c)(3), measured over a period of time permitted under the 
definition of plan year compensation.
    (vii) Determination of allocation rate. For purposes of paragraph 
(b)(1)(i)(B) of this section, allocations and allocation rates are 
determined under Sec. 1.401(a)(4)-2(c)(2), but without taking into 
account the imputation of permitted disparity under Sec. 1.401(a)(4)-7. 
However, in determining whether the plan has broadly available 
allocation rates as provided in paragraph (b)(1)(iii) of this section, 
differences in allocation rates attributable solely to the use of 
permitted disparity described in Sec. 1.401(l)-2 are disregarded.
    (viii) Examples. The following examples illustrate the rules in this 
paragraph (b)(1):

    Example 1. (i) Plan M, a defined contribution plan without a minimum 
service requirement, provides an allocation formula under which 
allocations are provided to all employees according to the following 
schedule:

------------------------------------------------------------------------
                                                               Ratio of
                                                              allocation
                                                               rate for
                                                 Allocation    band to
          Completed years of service             rate  (in    allocation
                                                  percent)     rate for
                                                             immediately
                                                              preceding
                                                                 band
------------------------------------------------------------------------
0-5...........................................          3.0        (\1\)
6-10..........................................          4.5         1.50
11-15.........................................          6.5         1.44
16-20.........................................          8.5         1.31
21-25.........................................         10.0         1.18
26 or more....................................         11.5        1.15
------------------------------------------------------------------------
\1\ Not applicable.


[[Page 145]]

    (ii) Plan M provides that allocation rates for all employees are 
determined using a single schedule based solely on service, as described 
in paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the 
allocation rates under the schedule increase smoothly at regular 
intervals as described in paragraph (b)(1)(iv)(A)(2) of this section, 
then the plan has a gradual age or service schedule described in 
paragraph (b)(1)(iv) of this section.
    (iii) The schedule of allocation rates under Plan M does not 
increase by more than 5 percentage points between adjacent bands and the 
ratio of the allocation rate for any band to the allocation rate for the 
immediately preceding band is never more than 2.0 and does not increase. 
Therefore, the allocation rates increase smoothly as described in 
paragraph (b)(1)(iv)(B) of this section. In addition, the bands (other 
than the highest band) are all 5 years long, so the increases occur at 
regular intervals as described in paragraph (b)(1)(iv)(C) of this 
section. Thus, the allocation rates under the plan's schedule increase 
smoothly at regular intervals as described in paragraph (b)(1)(iv)(A)(2) 
of this section. Accordingly, the plan has a gradual age or service 
schedule described in paragraph (b)(1)(iv) of this section.
    (iv) Under paragraph (b)(1)(i) of this section, Plan M satisfies the 
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on 
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this 
section, regardless of whether it satisfies the minimum allocation 
gateway of paragraph (b)(1)(vi) of this section.
    Example 2. (i) The facts are the same as in Example 1, except that 
the 4.5% allocation rate applies for all employees with 10 years of 
service or less.
    (ii) Plan M provides that allocation rates for all employees are 
determined using a single schedule based solely on service, as described 
in paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the 
allocation rates under the schedule increase smoothly at regular 
intervals as described in paragraph (b)(1)(iv)(A)(2) of this section, 
then the plan has a gradual age or service schedule described in 
paragraph (b)(1)(iv) of this section.
    (iii) The bands (other than the highest band) in the schedule are 
not all the same length, since the first band is 10 years long while 
other bands are 5 years long. Thus, the schedule does not have regular 
intervals as described in paragraph (b)(1)(iv)(C) of this section. 
However, under paragraph (b)(1)(iv)(D) of this section, the schedule of 
allocation rates does not fail to increase smoothly at regular intervals 
merely because the minimum allocation rate of 4.5% results in a first 
band that is longer than the other bands, if either of the conditions of 
paragraph (b)(1)(iv)(D)(1) or (2) of this section is satisfied.
    (iv) In this case, the schedule of allocation rates satisfies the 
condition in paragraph (b)(1)(iv)(D)(1) of this section because the 
allocation rates under the plan that are greater than the 4.5% minimum 
allocation rate can be included in the following hypothetical schedule 
of allocation rates that increases smoothly at regular intervals and has 
a lowest allocation rate of at least 1% of plan year compensation:

------------------------------------------------------------------------
                                                               Ratio of
                                                              allocation
                                                               rate for
                                                 Allocation    band to
          Completed years of service             rate  (in    allocation
                                                  percent)     rate for
                                                             immediately
                                                              preceding
                                                                 band
------------------------------------------------------------------------
0-5...........................................          2.5        (\1\)
6-10..........................................          4.5         1.80
11-15.........................................          6.5         1.44
16-20.........................................          8.5         1.31
21-25.........................................         10.0         1.18
26 or more....................................         11.5        1.15
------------------------------------------------------------------------
\1\ Not applicable.

    (v) Accordingly, the plan has a gradual age or service schedule 
described in paragraph (b)(1)(iv) of this section. Under paragraph 
(b)(1)(i) of this section, Plan M satisfies the nondiscrimination in 
amount requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits 
if it satisfies paragraph (b)(1)(i)(A) of this section, regardless of 
whether it satisfies the minimum allocation gateway of paragraph 
(b)(1)(vi) of this section.
    Example 3. (i) Plan N, a defined contribution plan, provides an 
allocation formula under which allocations are provided to all employees 
according to the following schedule:

------------------------------------------------------------------------
                                                               Ratio of
                                                              allocation
                                                               rate for
                                                 Allocation    band to
                      Age                        rate  (in    allocation
                                                  percent)     rate for
                                                             immediately
                                                              preceding
                                                                 band
------------------------------------------------------------------------
Under 25......................................          3.0        (\1\)
25-34.........................................          6.0         2.00
35-44.........................................          9.0         1.50
45-54.........................................         12.0         1.33
55-64.........................................         16.0         1.33
65 or older...................................         21.0        1.31
------------------------------------------------------------------------
\1\ Not applicable.

    (ii) Plan N provides that allocation rates for all employees are 
determined using a single schedule based solely on age, as described in 
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation 
rates under the schedule increase smoothly at regular intervals as 
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan 
has a gradual

[[Page 146]]

age or service schedule described in paragraph (b)(1)(iv) of this 
section.
    (iii) The schedule of allocation rates under Plan N does not 
increase by more than 5 percentage points between adjacent bands and the 
ratio of the allocation rate for any band to the allocation rate for the 
immediately preceding band is never more than 2.0 and does not increase. 
Therefore, the allocation rates increase smoothly as described in 
paragraph (b)(1)(iv)(B) of this section. In addition, the bands (other 
than the highest band and the first band, which is deemed to be the same 
length as the other bands because it ends prior to age 25) are all 5 
years long, so the increases occur at regular intervals as described in 
paragraph (b)(1)(iv)(C) of this section. Thus, the allocation rates 
under the plan's schedule increase smoothly at regular intervals as 
described in paragraph (b)(1)(iv)(A)(2) of this section. Accordingly, 
the plan has a gradual age or service schedule described in paragraph 
(b)(1)(iv) of this section.
    (iv) Under paragraph (b)(1)(i) of this section, Plan N satisfies the 
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on 
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this 
section, regardless of whether it satisfies the minimum allocation 
gateway of paragraph (b)(1)(vi) of this section.
    Example 4. (i) Plan O, a defined contribution plan, provides an 
allocation formula under which allocations are provided to all employees 
according to the following schedule:

------------------------------------------------------------------------
                                                               Ratio of
                                                              allocation
                                                               rate for
                                                 Allocation    band to
                      Age                        rate  (in    allocation
                                                  percent)     rate for
                                                             immediately
                                                              preceding
                                                                 band
------------------------------------------------------------------------
Under 40......................................            3        (\1\)
40-44.........................................            6         2.00
45-49.........................................            9         1.50
50-54.........................................           12         1.33
55-59.........................................           16         1.33
60-64.........................................           20         1.25
65 or older...................................           25        1.25
------------------------------------------------------------------------
\1\ Not applicable.

    (ii) Plan O provides that allocation rates for all employees are 
determined using a single schedule based solely on age, as described in 
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation 
rates under the schedule increase smoothly at regular intervals as 
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan 
has a gradual age or service schedule described in paragraph (b)(1)(iv) 
of this section.
    (iii) The bands (other than the highest band) in the schedule are 
not all the same length, since the first band is treated as 15 years 
long while other bands are 5 years long. Thus, the schedule does not 
have regular intervals as described in paragraph (b)(1)(iv)(C) of this 
section. However, under paragraph (b)(1)(iv)(D) of this section, the 
schedule of allocation rates does not fail to increase smoothly at 
regular intervals merely because the minimum allocation rate of 3% 
results in a first band that is longer than the other bands, if either 
of the conditions of paragraph (b)(1)(iv)(D)(1) or (2) of this section 
is satisfied.
    (iv) In this case, in order to define a hypothetical schedule that 
could include the allocation rates in the actual schedule of allocation 
rates, each of the bands below age 40 would have to be 5 years long (or 
be treated as 5 years long). Accordingly, the hypothetical schedule 
would have to provide for a band for employees under age 30, a band for 
employees in the range 30-34 and a band for employees age 35-39.
    (v) The ratio of the allocation rate for the age 40-44 band to the 
next lower band is 2.0. Accordingly, in order for the applicable 
allocations rates under this hypothetical schedule to increase smoothly, 
the ratio of the allocation rate for each band in the hypothetical 
schedule below age 40 to the allocation rate for the immediately 
preceding band would have to be 2.0. Thus, the allocation rate for the 
hypothetical band applicable for employees under age 30 would be .75%, 
the allocation rate for the hypothetical band for employees in the range 
30-34 would be 1.5% and the allocation rate for employees in the range 
35-39 would be 3%.
    (vi) Because the lowest allocation rate under any possible 
hypothetical schedule is less than 1% of plan year compensation, Plan O 
will be treated as satisfying the requirements of paragraphs 
(b)(1)(iv)(B) and (C) of this section only if the schedule of allocation 
rates satisfies the steepness condition described in paragraph 
(b)(1)(iv)(D)(2) of this section. In this case, the steepness condition 
is not satisfied because the equivalent accrual rate for an employee age 
39 is 2.81%, but there is no hypothetical employee in the band for ages 
40-44 with an equal or lower equivalent accrual rate (since the lowest 
equivalent accrual rate for hypothetical employees within this band is 
3.74% at age 44).
    (vii) Since the schedule of allocation rates under the plan does not 
increase smoothly at regular intervals, Plan O's schedule of allocation 
rates is not a gradual age or service schedule. Further, Plan O does not 
provide uniform target benefit allocations. Therefore, under paragraph 
(b)(1)(i) of this section, Plan O cannot satisfy the nondiscrimination 
in amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on 
the basis of benefits unless either Plan O provides for broadly 
available allocation rates for the plan year as described in paragraph 
(b)(1)(iii) of this section (i.e., the allocation rate at each age is 
provided to a group of employees that satisfies

[[Page 147]]

section 410(b) without regard to the average benefit percentage test), 
or Plan O satisfies the minimum allocation gateway of paragraph 
(b)(1)(vi) of this section for the plan year.
    Example 5. (i) Plan P is a profit-sharing plan maintained by 
Employer A that covers all of Employer A's employees, consisting of two 
HCEs, X and Y, and 7 NHCEs. Employee X's compensation is $170,000 and 
Employee Y's compensation is $150,000. The allocation for Employees X 
and Y is $30,000 each, resulting in an allocation rate of 17.65% for 
Employee X and 20% for Employee Y. Under Plan P, each NHCE receives an 
allocation of 5% of compensation within the meaning of section 
415(c)(3), measured over a period of time permitted under the definition 
of plan year compensation.
    (ii) Because the allocation rate for X is not currently available to 
any NHCE, Plan P does not have broadly available allocation rates within 
the meaning of paragraph (b)(1)(iii) of this section. Furthermore, Plan 
P does not provide for age based-allocation rates within the meaning of 
paragraph (b)(1)(iv) or (v) of this section. Thus, under paragraph 
(b)(1)(i) of this section, Plan P can satisfy the nondiscrimination in 
amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on the 
basis of benefits only if Plan P satisfies the minimum allocation 
gateway of paragraph (b)(1)(vi) of this section for the plan year.
    (iii) The highest allocation rate for any HCE under Plan P is 20%. 
Accordingly, Plan P would satisfy the minimum allocation gateway of 
paragraph (b)(1)(vi) of this section if all NHCEs have an allocation 
rate of at least 6.67%, or if all NHCEs receive an allocation of at 
least 5% of compensation within the meaning of section 415(c)(3) 
(measured over a period of time permitted under the definition of plan 
year compensation).
    (iv) Under Plan P, each NHCE receives an allocation of 5% of 
compensation within the meaning of section 415(c)(3) (measured over a 
period of time permitted under the definition of plan year 
compensation). Accordingly, Plan P satisfies the minimum allocation 
gateway of paragraph (b)(1)(vi) of this section.
    (v) Under paragraph (b)(1)(i) of this section, Plan P satisfies the 
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on 
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this 
section.
    (2) Determination of equivalent accrual rates--(i) Basic definition. 
An employee's equivalent accrual rate for a plan year is the annual 
benefit that is the result of normalizing the increase in the employee's 
account balance during the measurement period, divided by the number of 
years in which the employee benefited under the plan during the 
measurement period, and expressed either as a dollar amount or as a 
percentage of the employee's average annual compensation. A measurement 
period that includes future years may not be used for this purpose.
    (ii) Rules of application--(A) Determination of account balance. The 
increase in the account balance during the measurement period taken into 
account under paragraph (b)(2)(i) of this section does not include 
income, expenses, gains, or losses allocated during the measurement 
period that are attributable to the account balance as of the beginning 
of the measurement period, but does include any additional amounts that 
would have been included in the increase in the account balance but for 
the fact that they were previously distributed (including a reasonable 
adjustment for interest). In the case of a measurement period that is 
the current plan year, an employer may also elect to disregard the 
income, expenses, gains, and losses allocated during the current plan 
year that are attributable to the increase in account balance since the 
beginning of the year, and thus, determine the increase in account 
balance during the plan year taking into account only the allocations 
described in Sec. 1.401(a)(4)-2(c)(2)(ii). In addition, an employer may 
disregard distributions made to a NHCE as well as distributions made to 
any employee in plan years beginning before a selected date no later 
than January 1, 1986.
    (B) Normalization. The account balances determined under paragraph 
(b)(2)(ii)(A) of this section are normalized by treating them as single-
sum benefits that are immediately and unconditionally payable to the 
employee. A standard interest rate, and a straight life annuity factor 
that is based on the same or a different standard interest rate and on a 
standard mortality table, must be used in normalizing these benefits. In 
addition, no mortality may be assumed prior to the employee's testing 
age.
    (iii) Options. Any of the optional rules in Sec. 1.401(a)(4)-3(d)(3) 
(e.g., imputation of permitted disparity) may be applied in determining 
an employee's equivalent accrual rate by substituting the employee's 
equivalent accrual rate

[[Page 148]]

(determined without regard to the option) for the employee's normal 
accrual rate (i.e., not most valuable accrual rate) in that section 
where appropriate. For this purpose, however, the last sentence of the 
fresh-start alternative in Sec. 1.401(a)(4)-3(d)(3)(iii)(A) (dealing 
with compensation adjustments to the frozen accrued benefit) is not 
applicable. No other options are available in determining an employee's 
equivalent accrual rate except those (e.g., selection of alternative 
measurement periods) specifically provided in this paragraph (b)(2). 
Thus, for example, none of the optional special rules in 
Sec. 1.401(a)(4)-3(f) (e.g., determination of benefits on other than a 
plan year basis under Sec. 1.401(a)(4)-3(f)(6)) is available.
    (iv) Consistency rule. Equivalent accrual rates must be determined 
in a consistent manner for all employees for the plan year. Thus, for 
example, the same measurement periods and standard interest rates must 
be used, and any available options must be applied consistently if at 
all.
    (3) Safe-harbor testing method for target benefit plans--(i) General 
rule. A target benefit plan is a money purchase pension plan under which 
contributions to an employee's account are determined by reference to 
the amounts necessary to fund the employee's stated benefit under the 
plan. Whether a target benefit plan satisfies section 401(a)(4) with 
respect to an equivalent amount of benefits is generally determined 
under paragraphs (b)(1) and (b)(2) of this section. A target benefit 
plan is deemed to satisfy section 401(a)(4) with respect to an 
equivalent amount of benefits, however, if each of the following 
requirements is satisfied:
    (A) Stated benefit formula. Each employee's stated benefit must be 
determined as the straight life annuity commencing at the employee's 
normal retirement age under a formula that would satisfy the 
requirements of Sec. 1.401(a)(4)-3(b)(4)(i)(C) (1) or (2), and that 
would satisfy each of the uniformity requirements in Sec. 1.401(a)(4)-
3(b)(2) (taking into account the relevant exceptions provided in 
Sec. 1.401(a)(4)-3(b)(6)), if the plan were a defined benefit plan with 
the same benefit formula. In determining whether these requirements are 
satisfied, the rules of Sec. 1.401(a)(4)-3(f) do not apply, and, in 
addition, except as provided in paragraph (b)(3)(vii) of this section, 
an employee's stated benefit at normal retirement age under the stated 
benefit formula is deemed to accrue ratably over the period ending with 
the plan year in which the employee is projected to reach normal 
retirement age and beginning with the latest of: the first plan year in 
which the employee benefited under the plan, the first plan year taken 
into account in the stated benefit formula, and any plan year 
immediately following a plan year in which the plan did not satisfy this 
paragraph (b)(3). Thus, except as provided in paragraph (b)(3)(vii) of 
this section, under Sec. 1.401(a)(4)-3(b)(2)(v) an employee's stated 
benefit may not take into account service in years prior to the first 
plan year that the employee benefited under the plan, and an employee's 
stated benefit may not take into account service in plan years prior to 
the current plan year unless the plan satisfied this paragraph (b)(3) in 
all of those prior plan years.
    (B) Employer and employee contributions. Employer contributions with 
respect to each employee must be based exclusively on the employee's 
stated benefit using the method provided in paragraph (b)(3)(iv) of this 
section, and forfeitures and any other amounts under the plan taken into 
account under Sec. 1.401(a)(4)-2(c)(2)(ii) (other than employer 
contributions) are used exclusively to reduce employer contributions. 
Employee contributions (if any) may not be used to fund the stated 
benefit.
    (C) Permitted disparity. If permitted disparity is taken into 
account, the stated benefit formula must satisfy Sec. 1.401(l)-3. For 
this purpose, the 0.75-percent factor in the maximum excess or offset 
allowance in Sec. 1.401(l)-3(b)(2)(i) or (b)(3)(i), respectively, as 
adjusted in accordance with Sec. 1.401(l)-3(d)(9) (and, if the 
employee's normal retirement age is not the employee's social security 
retirement age, Sec. 1.401(l)-3(e)), is further reduced by multiplying 
the factor by 0.80.
    (ii) Changes in stated benefit formula. A plan does not fail to 
satisfy paragraph (b)(3)(i) of this section merely

[[Page 149]]

because the plan determines each employee's stated benefit in the 
current plan year under a stated benefit formula that differs from the 
stated benefit formula used to determine the employee's stated benefit 
in prior plan years.
    (iii) Stated benefits after normal retirement age. A target benefit 
plan may limit increases in the stated benefit after normal retirement 
age consistent with the requirements applicable to defined benefit plans 
under section 411(b)(1)(H) (without regard to section 
411(b)(1)(H)(iii)), provided that the limitation applies on the same 
terms to all employees. Thus, post-normal retirement benefits required 
under Sec. 1.401(a)(4)-3(b)(2)(ii) must be provided under the stated 
benefit formula, subject to any uniformly applicable service cap under 
the formula.
    (iv) Method for determining required employer contributions--(A) 
General rule. An employer's required contribution to the account of an 
employee for a plan year is determined based on the employee's stated 
benefit and the amount of the employee's theoretical reserve as of the 
date the employer's required contribution is determined for the plan 
year (the determination date). Paragraph (b)(3)(iv)(B) of this section 
provides rules for determining an employee's theoretical reserve. 
Paragraph (b)(3)(iv) (C) and (D) of this section provides rules for 
determining an employer's required contributions.
    (B) Theoretical reserve--(1) Initial theoretical reserve. An 
employee's theoretical reserve as of the determination date for the 
first plan year in which the employee benefits under the plan, the first 
plan year taken into account under the stated benefit formula (if that 
is the current plan year), or the first plan year immediately following 
any plan year in which the plan did not satisfy this paragraph (b)(3), 
is zero.
    (2) Theoretical reserve in subsequent plan years. An employee's 
theoretical reserve as of the determination date for a plan year (other 
than a plan year described in paragraph (b)(3)(iv)(B)(1) of this 
section) is the employee's theoretical reserve as of the determination 
date for the prior plan year, plus the employer's required contribution 
for the prior plan year (as limited by section 415, but without regard 
to the additional contributions described in paragraph (b)(3)(v) of this 
section) both increased by interest from the determination date for the 
prior plan year through the determination date for the current plan 
year, but not beyond the determination date for the plan year that 
includes the employee's normal retirement date. (Thus, an employee's 
theoretical reserve as of the determination date for a plan year does 
not include the amount of the employer's required contribution for the 
plan year.) The interest rate for determining employer contributions 
that was in effect on the determination date in the prior plan year must 
be applied to determine the required interest adjustment for this 
period. For plan years beginning after the effective date applicable to 
the plan under Sec. 1.401(a)(4)-13(a) or (b), a standard interest rate 
must be used, and may not be changed except on the determination date 
for a plan year.
    (C) Required contributions for employees under normal retirement 
age. The required employer contributions with respect to an employee 
whose attained age is less than the employee's normal retirement age 
must be determined for each plan year as follows:
    (1) Determine the employee's fractional rule benefit (within the 
meaning of Sec. 1.411(b)-1(b)(3)(ii)(A)) under the plan's stated benefit 
formula as if the plan were a defined benefit plan with the same benefit 
formula.
    (2) Determine the actuarial present value of the fractional rule 
benefit determined in paragraph (b)(3)(iv)(C)(1) of this section as of 
the determination date for the current plan year, using a standard 
interest rate and a standard mortality table that are set forth in the 
plan and that are the same for all employees, and assuming no mortality 
before the employee's normal retirement age.
    (3) Determine the excess, if any, of the amount determined in 
paragraph (b)(3)(iv)(C)(2) of this section over the employee's 
theoretical reserve for the current plan year determined under paragraph 
(b)(3)(iv)(B) of this section.
    (4) Determine the required employer contribution for the current 
plan year by amortizing on a level annual basis,

[[Page 150]]

using the same interest rate used for paragraph (b)(3)(iv)(C)(2) of this 
section, the result in paragraph (b)(3)(iv)(C)(3) of this section over 
the period beginning with the determination date for the current plan 
year and ending with the determination date for the plan year in which 
the employee is projected to reach normal retirement age.
    (D) Required contributions for employees over normal retirement age. 
The required employer contributions with respect to an employee whose 
attained age equals or exceeds the employee's normal retirement age is 
the excess, if any, of the actuarial present value, as of the 
determination date for the current plan year, of the employee's stated 
benefit for the current plan year (determined using an immediate 
straight life annuity factor based on a standard interest rate and a 
standard mortality table, for an employee whose attained age equals the 
employee's normal retirement age) over the employee's theoretical 
reserve as of the determination date.
    (v) Effect of section 415 and 416 requirements. A target benefit 
plan does not fail to satisfy this paragraph (b)(3) merely because 
required contributions under the plan are limited by section 415 in a 
plan year. Similarly, a target benefit plan does not fail to satisfy 
this paragraph (b)(3) merely because additional contributions are made 
consistent with the requirements of section 416(c)(2) (regardless of 
whether the plan is top-heavy).
    (vi) Certain conditions on allocations. A target benefit plan does 
not fail to satisfy this paragraph (b)(3) merely because required 
contributions under the plan are subject to the conditions on 
allocations permitted under Sec. 1.401(a)(4)-2(b)(4)(iii).
    (vii) Special rules for target benefit plans qualified under prior 
law--(A) Service taken into account prior to satisfaction of this 
paragraph. For purposes of determining whether the stated benefit 
formula satisfies paragraph (b)(3)(i)(A) of this section (e.g., whether 
the period over which an employee's stated benefit is deemed to accrue 
is the same as the period taken into account under the stated benefit 
formula as required by paragraph (b)(3)(i)(A) of this section), a target 
benefit plan that was adopted and in effect on September 19, 1991, is 
deemed to have satisfied this paragraph (b)(3), and an employee is 
treated as benefiting under the plan, in any year prior to the effective 
date applicable to the plan under Sec. 1.401(a)(4)-13 (a) or (b) that 
was taken into account in the stated benefit formula under the plan on 
September 19, 1991, if the plan satisfied the applicable 
nondiscrimination requirements for target benefit plans for that prior 
year.
    (B) Initial theoretical reserve. Notwithstanding paragraph 
(b)(3)(iv)(B)(1) of this section, a target benefit plan under which the 
stated benefit formula takes into account service for an employee for 
plan years prior to the first plan year in which the plan satisfied this 
paragraph (b)(3), as permitted under paragraph (b)(3)(vii)(A) of this 
section, must determine an initial theoretical reserve for the employee 
as of the determination date for the last plan year beginning before 
such plan year under the rules of Sec. 1.401(a)(4)-13(e).
    (C) Satisfaction of prior law. In determining whether a plan 
satisfied the applicable nondiscrimination requirements for target 
benefit plans for any period prior to the effective date applicable to 
the plan under Sec. 1.401(a)(4)-13 (a) or (b), no amendments after 
September 19, 1991, other than amendments necessary to satisfy section 
401(l), are taken into account.
    (viii) Examples. The following examples illustrate the rules in this 
paragraph (b)(3):

    Example 1. (a) Employer X maintains a target benefit plan with a 
calendar plan year that bases contributions on a stated benefit equal to 
40 percent of each employee's average annual compensation, reduced pro 
rata for years of participation less than 25, payable annually as a 
straight life annuity commencing at normal retirement age. The UP-84 
mortality table and an interest rate of 7.5 percent are used to 
calculate the contributions necessary to fund the stated benefit. 
Required contributions are determined on the last day of each plan year. 
The normal retirement age under the plan is 65. Employee M is 39 years 
old in 1994, has participated in the plan for six years, and has average 
annual compensation equal to $60,000 for the 1994 plan year. Assume that 
Employee M's theoretical reserve as of the last day of the 1993 plan 
year is $13,909, determined

[[Page 151]]

under Sec. 1.401(a)(4)-13(e), and that required employer contributions 
for 1993 were determined using an interest rate of six percent.
    (b) Under these facts, Employer X's 1994 required contribution to 
fund Employee M's stated benefit is $1,318, calculated as follows:
    (1) Employee M's fractional rule benefit is $24,000 (40 percent of 
Employee M's average annual compensation of $60,000).
    (2) The actuarial present value of Employee M's fractional rule 
benefit as of the last day of the 1994 plan year is $30,960 (Employee 
M's fractional rule benefit of $24,000 multiplied by 1.290, the 
actuarial present value factor for an annual straight life annuity 
commencing at age 65 applicable to a 39-year-old employee, determined 
using the stated interest rate of 7.5 percent and the UP-84 mortality 
table, and assuming no mortality before normal retirement age).
    (3) The actuarial present value of Employee M's fractional rule 
benefit ($30,960) is reduced by Employee M's theoretical reserve as of 
the last day of the 1994 plan year. The theoretical reserve on that day 
is $14,744--the $13,909 theoretical reserve as of the last day of the 
1993 plan year, increased by interest for one year at the rate of six 
percent. Because the required contribution for the 1993 plan year is 
taken into account under Sec. 1.401(a)(4)-13(e)(2) in determining the 
theoretical reserve as of the last day of the 1993 plan year, it is not 
added to the theoretical reserve again in this paragraph (b)(3) of this 
Example 1. The resulting difference is $16,216 ($30,960-$14,744).
    (4) The $16,216 excess of the actuarial present value of Employee 
M's fractional rule benefit over Employee M's theoretical reserve is 
multiplied by 0.0813, the amortization factor applicable to a 39-year-
old employee determined using the stated interest rate of 7.5 percent. 
The product of $1,318 is the amount of the required employer 
contribution for Employee M for the 1994 plan year.
    Example 2. (a) The facts are the same as in Example 1, except that 
as of January 1, 1995, the plan's stated benefit formula is amended to 
provide for a stated benefit equal to 45 percent of average annual 
compensation, reduced pro rata for years of participation less than 25, 
payable annually as a straight life annuity commencing at normal 
retirement age. For the 1995 plan year, Employee M's average annual 
compensation continues to be $60,000. The mortality table used for the 
calculation of the employer's required contributions remains the same as 
in the prior plan year, but the plan's stated interest rate is changed 
to 8.0 percent effective as of December 31, 1995.
    (b) Under these facts, Employer X's required contribution for 
Employee M is $1,290, calculated as follows:
    (1) Employee M's fractional rule benefit is $27,000 (45 percent of 
$60,000).
    (2) The actuarial present value of Employee M's fractional rule 
benefit as of the last day of the 1995 plan year is $32,319 ($27,000 
multiplied by 1.197, the actuarial present value factor for an annuity 
commencing at age 65 applicable to a 40-year-old employee, determined 
using the stated interest rate of 8.0 percent and the UP-84 mortality 
table, and assuming no mortality before normal retirement age).
    (3) The actuarial present value of Employee M's fractional rule 
benefit ($32,319) is reduced by Employee M's theoretical reserve as of 
the last day of the 1995 plan year. The theoretical reserve as of that 
day is $17,267--the $14,744 theoretical reserve as of the last day of 
the 1994 plan year plus the $1,318 required contribution for the 1994 
plan year, both increased by interest for one year at the rate of 7.5 
percent. The resulting difference is $15,052 ($32,319-$17,267).
    (4) The result in paragraph (b)(3) of this Example 2 is multiplied 
by 0.0857, the amortization factor applicable to a 40-year-old employee 
determined using the stated interest rate of 8.0 percent. The product, 
$1,290, is the amount of the required employer contribution for Employee 
M for the 1995 plan year.

    (c) Nondiscrimination in amount of contributions under a defined 
benefit plan--(1) General rule. Equivalent allocations under a defined 
benefit plan are nondiscriminatory in amount for a plan year if the plan 
would satisfy Sec. 1.401(a)(4)-3(c)(1) (taking into account 
Sec. 1.401(a)(4)-3(c)(3)) for the plan year if an equivalent normal and 
most valuable allocation rate, as determined under paragraph (c)(2) of 
this section, were substituted for each employee's normal and most 
valuable accrual rate, respectively, in the determination of rate 
groups.
    (2) Determination of equivalent allocation rates--(i) Basic 
definitions. An employee's equivalent normal and most valuable 
allocation rates for a plan year are, respectively, the actuarial 
present value of the increase over the plan year in the benefit that 
would be taken into account in determining the employee's normal and 
most valuable accrual rates for the plan year, expressed either as a 
dollar amount or as a percentage of the employee's plan year 
compensation. In the case of a contributory DB plan, the rules in 
Sec. 1.401(a)(4)-6(b)(1), (b)(5), or (b)(6) must be used to determine 
the amount of each employee's employer-provided benefit that would be 
taken into account for this purpose.

[[Page 152]]

    (ii) Rules for determining actuarial present value. The actuarial 
present value of the increase in an employee's benefit must be 
determined using a standard interest rate and a standard mortality 
table, and no mortality may be assumed prior to the employee's testing 
age.
    (iii) Options. The optional rules in Sec. 1.401(a)(4)-2(c)(2)(iv) 
(imputation of permitted disparity) and (v) (grouping of rates) may be 
applied to determine an employee's equivalent normal and most valuable 
allocation rates by substituting those rates (determined without regard 
to the option) for the employee's allocation rate in that section where 
appropriate. In addition, the limitations under section 415 may be taken 
into account under Sec. 1.401(a)(4)-3(d)(2)(ii)(B), and qualified 
disability benefits may be taken into account as accrued benefits under 
Sec. 1.401(a)(4)-3(f)(2), in determining the increase in an employee's 
accrued benefit during a plan year for purposes of paragraph (c)(2)(i) 
of this section, if those rules would otherwise be available. No other 
options are available in determining an employee's equivalent normal and 
most valuable allocations rate except those (e.g., selection of 
alternative standard interest rates) specifically provided in this 
paragraph (c)(2). Thus, while all of the mandatory rules in 
Sec. 1.401(a)(4)-3(d) and (f) for determining the amount of benefits 
used to determine an employee's normal and most valuable accrual rates 
(e.g., the treatment of early retirement window benefits in 
Sec. 1.401(a)(4)-3(f)(4)) are applicable in determining an employee's 
equivalent normal and most valuable allocation rates, none of the 
optional rules under Sec. 1.401(a)(4)-3 is available (except the options 
relating to the section 415 limits and qualified disability benefits 
noted above).
    (iv) Consistency rule. Equivalent allocation rates must be 
determined in a consistent manner for all employees for the plan year. 
Thus, for example, the same standard interest rates must be used, and 
any available options must be applied consistently if at all.
    (3) Safe harbor testing method for cash balance plans--(i) General 
rule. A cash balance plan is a defined benefit plan that defines 
benefits for each employee by reference to the employee's hypothetical 
account. An employee's hypothetical account is determined by reference 
to hypothetical allocations and interest adjustments that are analogous 
to actual allocations of contributions and earnings to an employee's 
account under a defined contribution plan. Because a cash balance plan 
is a defined benefit plan, whether it satisfies section 401(a)(4) with 
respect to the equivalent amount of contributions is generally 
determined under paragraphs (c)(1) and (c)(2) of this section. However, 
a cash balance plan that satisfies each of the requirements in 
paragraphs (c)(3)(ii) through (xi) of this section is deemed to satisfy 
section 401(a)(4) with respect to an equivalent amount of contributions.
    (ii) Plan requirements in general. The plan must be an accumulation 
plan. The benefit formula under the plan must provide for hypothetical 
allocations for each employee in the plan that satisfy paragraph 
(c)(3)(iii) of this section, and interest adjustments to these 
hypothetical allocations that satisfy paragraph (c)(3)(iv) of this 
section. The benefit formula under the plan must provide that these 
hypothetical allocations and interest adjustments are accumulated as a 
hypothetical account for each employee, determined in accordance with 
paragraph (c)(3)(v) of this section. The plan must provide that an 
employee's accrued benefit under the plan as of any date is an annuity 
that is the actuarial equivalent of the employee's projected 
hypothetical account as of normal retirement age, determined in 
accordance with paragraph (c)(3)(vi) of this section. In addition, the 
plan must satisfy paragraphs (c)(3)(vii) through (xi) of this section 
(to the extent applicable) regarding optional forms of benefit, past 
service credits, post-normal retirement age benefits, certain uniformity 
requirements, and changes in the plan's benefit formula, respectively.
    (iii) Hypothetical allocations--(A) In general. The hypothetical 
allocations provided under the plan's benefit formula must satisfy 
either paragraph (c)(3)(iii)(B) or (C) of this section. Paragraph 
(c)(3)(iii)(B) of this section provides a design-based safe harbor that

[[Page 153]]

does not require the annual comparison of hypothetical allocations under 
the plan. Paragraph (c)(3)(iii)(C) of this section requires the annual 
comparison of hypothetical allocations.
    (B) Uniform hypothetical allocation formula. To satisfy this 
paragraph (c)(3)(iii)(B), the plan's benefit formula must provide for 
hypothetical allocations for all employees in the plan for all plan 
years of amounts that would satisfy Sec. 1.401(a)(4)-2(b)(3) for each 
such plan year if the hypothetical allocations were the only allocations 
under a defined contribution plan for the employees for those plan 
years. Thus, the plan's benefit formula must provide for hypothetical 
allocations for all employees in the plan for all plan years that are 
the same percentage of plan year compensation or the same dollar amount. 
In determining whether the hypothetical allocations satisfy 
Sec. 1.401(a)(4)-2(b)(3), the only provisions of Sec. 1.401(a)(4)-
2(b)(5) that apply are Sec. 1.401(a)(4)-2(b)(5)(ii) (section 401(l) 
permitted disparity, (iii) (entry dates), (vi) (certain limits on 
allocations), and (vii) (dollar allocation per uniform unit of service). 
Thus, for example, the plan's benefit formula may take permitted 
disparity into account in a manner allowed under Sec. 1.401(l)-2 for 
defined contribution plans.
    (C) Modified general test. To satisfy this paragraph (c)(3)(iii)(C), 
the plan's benefit formula must provide for hypothetical allocations for 
all employees in the plan for the plan year that would satisfy the 
general test in Sec. 1.401(a)(4)-2(c) for the plan year, if the 
hypothetical allocations were the only allocations for the employees 
taken into account under Sec. 1.401(a)(4)-2(c)(2)(ii) under a defined 
contribution plan for the plan year. In determining whether the 
hypothetical allocations satisfy Sec. 1.401(a)(4)-2(c), the provisions 
of Sec. 1.401(a)(4)-2(c)(2)(iii) through (v) apply. Thus, for example, 
permitted disparity may be imputed under Sec. 1.401(a)(4)-2(c)(2)(iv) in 
accordance with the rules of Sec. 1.401(a)(4)-7(b) applicable to defined 
contribution plans.
    (iv) Interest adjustments to hypothetical allocations--(A) General 
rule. The plan benefit formula must provide that the dollar amount of 
the hypothetical allocation for each employee for a plan year is 
automatically adjusted using an interest rate that satisfies paragraph 
(c)(3)(iv)(B) of this section, compounded no less frequently than 
annually, for the period that begins with a date in the plan year and 
that ends at normal retirement age. This requirement is not satisfied if 
any portion of the interest adjustments to a hypothetical allocation are 
contingent on the employee's satisfaction of any requirement. Thus, for 
example, the interest adjustments to a hypothetical allocation must be 
provided through normal retirement age, even though the employee 
terminates employment or commences benefits before that age.
    (B) Requirements with respect to interest rates. The interest rate 
must be a single interest rate specified in the plan that is the same 
for all employees in the plan for all plan years. The interest rate must 
be either a standard interest rate or a variable interest rate. If the 
interest rate is a variable interest rate, it must satisfy paragraph 
(c)(3)(iv)(C) of this section.
    (C) Variable interest rates--(1) General rule. The plan must specify 
the variable interest rate, the method for determining the current value 
of the variable interest rate, and the period (not to exceed 1 year) for 
which the current value of the variable interest rate applies. 
Permissible variable interest rates are listed in paragraph 
(c)(3)(iv)(C)(2) of this section. Permissible methods for determining 
the current value of the variable interest rate are provided in 
paragraph (c)(3)(iv)(C)(3) of this section.
    (2) Permissible variable interest rates. The variable interest rate 
specified in the plan must be one of the following--
    (i) The rate on 3-month Treasury Bills,
    (ii) The rate on 6-month Treasury Bills,
    (iii) The rate on 1-year Treasury Bills,
    (iv) The yield on 1-year Treasury Constant Maturities,
    (v) The yield on 2-year Treasury Constant Maturities,
    (vi) The yield on 5-year Treasury Constant Maturities,
    (vii) The yield on 10-year Treasury Constant Maturities,

[[Page 154]]

    (viii) The yield on 30-year Treasury Constant Maturities, or
    (ix) The single interest rate such that, as of a single age 
specified in the plan, the actuarial present value of a deferred 
straight life annuity of an amount commencing at the normal retirement 
age under the plan, calculated using that interest rate and a standard 
mortality table but assuming no mortality before normal retirement age, 
is equal to the actuarial present value, as of the single age specified 
in the plan, of the same annuity calculated using the section 417(e) 
rates applicable to distributions in excess of $25,000 (determined under 
Sec. 1.417(e)-1(d)), and the same mortality assumptions.
    (3) Current value of variable interest rate. The current value of 
the variable interest rate that applies for a period must be either the 
value of the variable interest rate determined as of a specified date in 
the period or the immediately preceding period, or the average of the 
values of the variable interest rate as of two or more specified dates 
during the current period or the immediately preceding period. The value 
as of a date of the rate on a Treasury Bill is the average auction rate 
for the week or month in which the date falls, as reported in the 
Federal Reserve Bulletin. The value as of a date of the yield on a 
Treasury Constant Maturity is the average yield for the week, month, or 
year in which the date falls, as reported in the Federal Reserve 
Bulletin. (The Federal Reserve Bulletin is published by the Board of 
Governors of the Federal Reserve System and is available from 
Publication Services, Mail Stop 138, Board of Governors of the Federal 
Reserve System, Washington DC 20551.) The plan may limit the current 
value of the variable interest rate to a maximum (not less than the 
highest standard interest rate), or a minimum (not more than the lowest 
standard interest rate), or both.
    (v) Hypothetical account--(A) Current value of hypothetical account. 
As of any date, the current value of an employee's hypothetical account 
must equal the sum of all hypothetical allocations and the respective 
interest adjustments to each such hypothetical allocation provided 
through that date for the employee under the plan's benefit formula 
(without regard to any interest adjustments provided under the plan's 
benefit formula for periods after that date).
    (B) Value of hypothetical account as of normal retirement age. Under 
paragraph (c)(3)(vi) of this section, the value of an employee's 
hypothetical account must be determined as of normal retirement age in 
order to determine the employee's accrued benefit as of any date at or 
before normal retirement age. As of any date at or before normal 
retirement age, the value of an employee's hypothetical account as of 
normal retirement age must equal the sum of each hypothetical allocation 
provided through that date for the employee under the plan's benefit 
formula, plus the interest adjustments provided through normal 
retirement age on each of those hypothetical allocations for the 
employee under the plan's benefit formula (without regard to any 
hypothetical allocations that might be provided after that date under 
the plan's benefit formula). If the interest rate specified in the plan 
is a variable interest rate, the plan must specify that the 
determination in the preceding sentence is made by assuming that the 
current value of the variable interest rate for all future periods is 
either the current value of the variable interest rate for the current 
period or the average of the current values of the variable interest 
rate for the current period and one or more periods immediately 
preceding the current period (not to exceed 5 years in the aggregate).
    (vi) Determination of accrued benefit--(A) Definition of accrued 
benefit. The plan must provide that at any date at or before normal 
retirement age the accrued benefit (within the meaning of section 
411(a)(7)(A)(i)) of each employee in the plan is an annuity commencing 
at normal retirement age that is the actuarial equivalent of the 
employee's hypothetical account as of normal retirement age (as 
determined under paragraph (c)(3)(v)(B) of this section). The separate 
benefit that each employee accrues for a plan year is an annuity that is 
the actuarial equivalent of the employee's hypothetical allocation for 
that plan year, including the

[[Page 155]]

automatic adjustments for interest through normal retirement age 
required under paragraph (c)(3)(iv) of this section.
    (B) Normal form of benefit. The annuity specified in paragraph 
(c)(3)(vi)(A) of this section must provide an annual benefit payable in 
the same form at the same uniform normal retirement age for all 
employees in the plan. The annual benefit must be the normal retirement 
benefit under the plan (within the meaning of section 411(a)(9)) under 
the plan.
    (C) Determination of actuarial equivalence. For purposes of this 
paragraph (c)(3)(vi) and paragraph (c)(3)(ix) of this section, actuarial 
equivalence must be determined using a standard mortality table and 
either a standard interest rate or the interest rate specified in the 
plan for making interest adjustments to hypothetical allocations. If the 
interest rate used is the interest rate specified in the plan, and that 
rate is a variable interest rate, the assumed value of the variable 
interest rate for all future periods must be the same value that would 
be assumed for purposes of paragraph (c)(3)(v)(B) of this section. The 
same actuarial assumptions must be used for all employees in the plan.
    (D) Effect of section 415 and 416 requirements. A plan does not fail 
to satisfy this paragraph (c)(3)(vi) merely because the accrued benefits 
under the plan are limited by section 415, or merely because the accrued 
benefits under the plan are the greater of the accrued benefits 
otherwise determined under the plan and the minimum benefit described in 
section 416(c)(1) (regardless of whether the plan is top-heavy).
    (vii) Optional forms of benefit--(A) In general. The plan must 
satisfy the uniform subsidies requirement of Sec. 1.401(a)(4)-
3(b)(2)(iv) with respect to all subsidized optional forms of benefit.
    (B) Limitation on subsidies. Unless hypothetical allocations are 
determined under a uniform hypothetical allocation formula that 
satisfies paragraph (c)(3)(iii)(B) of this section, the actuarial 
present value of any QJSA provided under the plan must not be greater 
than the single sum distribution to the employee that would satisfy 
paragraph (c)(3)(vii)(C) of this section assuming that it was 
distributed to the employee on the date of commencement of the QJSA.
    (C) Distributions subject to section 417(e). Except as otherwise 
required under section 415(b), if the plan provides for a distribution 
alternative that is subject to the interest rate restrictions under 
section 417(e), the actuarial present value of the benefit paid to an 
employee under the distribution alternative must equal the 
nonforfeitable percentage (determined under the plan's vesting schedule) 
of the greater of the following two amounts--
    (1) The current value of the employee's hypothetical account as of 
the date the distribution commences, calculated in accordance with 
paragraph (c)(3)(v)(A) of this section.
    (2) The actuarial present value (calculated in accordance with 
Sec. 1.417(e)-1(d)) of the employee's accrued benefit.
    (D) Determination of actuarial present value. For purposes of this 
paragraph (c)(3)(vii), actuarial present value must be determined using 
a reasonable interest rate and mortality table. A standard interest rate 
and a standard mortality table are considered reasonable for this 
purpose.
    (viii) Past service credit. The benefit formula under the plan may 
not provide for hypothetical allocations in the curent plan year that 
are attributable to years of service before the current plan year, 
unless each of the following requirements is satisfied--
    (A) The years of past service credit are granted on a uniform basis 
to all current employees in the plan.
    (B) Hypothetical allocations for the current plan year are 
determined under a uniform hypothetical allocation formula that 
satisfies paragraph (c)(3)(iii)(B) of this section.
    (C) The hypothetical allocations attributable to the years of past 
service would have satisfied the uniform hypothetical allocation formula 
requirement of paragraph (c)(3)(iii)(B) of this section, and the 
interest adjustments to those hypothetical allocations would have 
satisfied paragraph (c)(3)(iv)(A) of this section, if the plan provision 
granting past service had been in effect for the entire period for which 
years of past service are granted

[[Page 156]]

to any employee. In order to satisfy this requirement, the hypothetical 
allocation attributable to a year of past service must be adjusted for 
interest in accordance with paragraph (c)(3)(iv) of this section for the 
period (including the retroactive period) beginning with the year of 
past service to which the hypothetical allocation is attributable and 
ending at normal retirement age. If the interest rate specified in the 
plan is a variable interest rate, the interest adjustments for the 
period prior to the current plan year either must be based on the 
current value of the variable interest rate for the period in which the 
grant of past service first becomes effective or must be reconstructed 
based on the then current value of the variable interest rate that would 
have applied during each prior period.
    (ix) Employees beyond normal retirement age. In the case of an 
employee who commences receipt of benefits after normal retirement age, 
the plan must provide that interest adjustments continue to be made to 
an employee's hypothetical account until the employee's benefit 
commencement date. In the case of an employee described in the previous 
sentence, the employee's accrued benefit is defined as an annuity that 
is the actuarial equivalent of the employee's hypothetical account 
determined in accordance with paragraph (c)(3)(v)(A) of this section as 
of the date of benefit commencement.
    (x) Additional uniformity requirements. In addition to any 
uniformity requirements provided elsewhere in this paragraph (c)(3), the 
plan must satisfy the uniformity requirements in Sec. 1.401(a)(4)-
3(b)(2)(v) (uniform vesting and service requirements) and (vi) (no 
employee contributions). A plan does not fail to satisfy the uniformity 
requirements of this paragraph (c)(3)(x) or any other uniformity 
requirement provided in this paragraph (c)(3) merely because the plan 
contains one or more of the provisions described in Sec. 1.401(a)(4)-
3(b)(8)(iv) (prior vesting schedules), (v) (certain conditions on 
accruals), or (xi) (multiple definitions of service).
    (xi) Changes in benefit formula, allocation formula, or interest 
rates. A plan does not fail to satisfy this paragraph (c)(3) merely 
because the plan is amended to change the benefit formula, hypothetical 
allocation formula, or the interest rate used to adjust hypothetical 
allocations for plan years after a fresh-start date, provided that the 
accrued benefits for plan years beginning after the fresh-start date are 
determined in accordance with Sec. 1.401(a)(4)-13(c), as modified by 
Sec. 1.401(a)(4)-13(f).
    (d) Safe-harbor testing method for defined benefit plans that are 
part of a floor-offset arrangement--(1) General rule. A defined benefit 
plan that is part of a floor-offset arrangement is deemed to satisfy the 
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2) if all 
of the following requirements are satisfied:
    (i) Under the floor-offset arrangement, the accrued benefit (as 
defined in section 411(a)(7)(A)(i)) that would otherwise be provided to 
an employee under the defined benefit plan must be reduced solely by the 
actuarial equivalent of all or part of the employee's account balance 
attributable to employer contributions under a defined contribution plan 
maintained by the same employer (plus the actuarial equivalent of all or 
part of any prior distributions from that portion of the account 
balance). If any portion of the benefit that is being offset is 
nonforfeitable, that portion may be offset only by a benefit (or portion 
of a benefit) that is also nonforfeitable. In determining the actuarial 
equivalent of amounts provided under the defined contribution plan, an 
interest rate no higher than the highest standard interest rate must be 
used, and no mortality may be assumed in determining the actuarial 
equivalent of any prior distributions from the defined contribution plan 
or for periods prior to the benefit commencement date under the defined 
benefit plan.
    (ii) The defined benefit plan may not be a contributory DB plan 
(unless it satisfies Sec. 1.401(a)(4)-6(b)(6)), and benefits under the 
defined benefit plan may not be reduced by any portion of the employee's 
account balance under the defined contribution plan (or prior 
distributions from that account) that are attributable to employee 
contributions.

[[Page 157]]

    (iii) The defined benefit plan and the defined contribution plan 
must benefit the same employees.
    (iv) The offset under the defined benefit plan must be applied to 
all employees on the same terms.
    (v) All employees must have available to them under the defined 
contribution plan the same investment options and the same options with 
respect to the timing of preretirement distributions.
    (vi) The defined benefit plan must satisfy the uniformity 
requirements of Sec. 1.401(a)(4)-3(b)(2) and the unit credit safe harbor 
in Sec. 1.401(a)(4)-3(b)(3) without taking into account the offset 
described in paragraph (d)(1)(i) of this section (i.e., on a gross-
benefit basis), and the defined contribution plan must satisfy any of 
the tests in Sec. 1.401(a)(4)-2(b) or (c). Alternatively, the defined 
benefit plan must satisfy any of the tests in Sec. 1.401(a)(4)-3(b) or 
(c) without taking into account the offset described in paragraph 
(d)(1)(i) of this section, and the defined contribution plan must 
satisfy the uniform allocation safe harbor in Sec. 1.401(a)(4)-2(b)(2).
    (vii) The defined contribution plan may not be a section 401(k) plan 
or a section 401(m) plan.
    (2) Application of safe-harbor testing method to qualified offset 
arrangements. A defined benefit plan that is part of a qualified offset 
arrangement as defined in section 1116(f)(5) of the Tax Reform Act of 
1986, Public Law No. 99-514, is deemed to satisfy the requirements of 
paragraph (d)(1)(vi) and (vii) of this section, if the only defined 
contribution plans included in the qualified offset arrangement are 
section 401(k) plans, section 401(m) plans, or both, and the defined 
benefit plan would satisfy the requirements of paragraph (d)(1)(vi) of 
this section assuming the elective contributions for each employee under 
the defined contribution plan were the same (either as a dollar amount 
or as a percentage of compensation) for all plan years since the 
establishment of the plan.

[T.D. 8360, 56 FR 47580, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992; 57 FR 
10952, 10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46807, Sept. 
3, 1993; T.D. 8954, 66 FR 34540, June 29, 2001]



Sec. 1.401(a)(4)-9  Plan aggregation and restructuring.

    (a) Introduction. Two or more plans that are permissively aggregated 
and treated as a single plan under Secs. 1.410(b)-7(d) must also be 
treated as a single plan for purposes of section 401(a)(4). See 
Sec. 1.401(a)(4)-12 (definition of plan). An aggregated plan is 
generally tested under the same rules applicable to single plans. 
Paragraph (b) of this section, however, provides special rules for 
determining whether a plan that consists of one or more defined 
contribution plans and one or more defined benefit plans (a DB/DC plan) 
satisfies section 401(a)(4) with respect to the amount of employer-
provided benefits and the availability of benefits, rights, and 
features. Paragraph (c) of this section provides rules allowing a plan 
to be treated as consisting of separate component plans and allowing the 
component plans to be tested separately under section 401(a)(4).
    (b) Application of nondiscrimination requirements to DB/DC plans--
(1) General rule. Except as provided in paragraph (b)(2) of this 
section, whether a DB/DC plan satisfies section 401(a)(4) is determined 
using the same rules applicable to a single plan. In addition, paragraph 
(b)(3) of this section provides an optional rule for demonstrating 
nondiscrimination in availability of benefits, rights, and features 
provided under a DB/DC plan.
    (2) Special rules for demonstrating nondiscrimination in amount of 
contributions or benefits--(i) Application of general tests. A DB/DC 
plan satisfies section 401(a)(4) with respect to the amount of 
contributions or benefits for a plan year if it would satisfy 
Sec. 1.401(a)(4)-3(c)(1) (without regard to the special rule in 
Sec. 1.401(a)(4)-3(c)(3)) for the plan year if an employee's aggregate 
normal and most valuable allocation rates, as determined under paragraph 
(b)(2)(ii)(A) of this section, or an employee's aggregate normal and 
most valuable accrual rates, as determined under paragraph (b)(2)(ii)(B) 
of this section, were substituted for each employee's normal and most 
valuable accrual rates, respectively, in the determination of rate 
groups.

[[Page 158]]

    (ii) Determination of aggregate rates--(A) Aggregate allocation 
rates. An employee's aggregate normal and most valuable allocation rates 
are determined by treating all defined contribution plans that are part 
of the DB/DC plan as a single plan, and all defined benefit plans that 
are part of the DB/DC plan as a separate single plan; and determining an 
allocation rate and equivalent normal and most valuable allocation rates 
for the employee under each plan under Secs. 1.401(a)(4)-2(c)(2) and 
1.401(a)(4)-8(c)(2), respectively. The employee's aggregate normal 
allocation rate is the sum of the employee's allocation rate and 
equivalent normal allocation rate determined in this manner, and the 
employee's aggregate most valuable allocation rate is the sum of the 
employee's allocation rate and equivalent most valuable allocation rate 
determined in this manner.
    (B) Aggregate accrual rates. An employee's aggregate normal and most 
valuable accrual rates are determined by treating all defined 
contribution plans that are part of the DB/DC plan as a single plan, and 
all defined benefit plans that are part of the DB/DC plan as a separate 
single plan; and determining an equivalent accrual rate and normal and 
most valuable accrual rates for the employee under each plan under 
Secs. 1.401(a)(4)-8(b)(2) and 1.401(a)(4)-3(d), respectively. The 
employee's aggregate normal accrual rate is the sum of the employee's 
equivalent accrual rate and the normal accrual rate determined in this 
manner, and the employee's aggregate most valuable accrual rate is the 
sum of the employee's equivalent accrual rate and most valuable accrual 
rate determined in this manner.
    (iii) Options applied on an aggregate basis. The optional rules in 
Sec. 1.401(a)(4)-2(c)(2)(iv) (imputation of permitted disparity) and (v) 
(grouping of rates) may not be used to determine an employee's 
allocation or equivalent allocation rate, but may be applied to 
determine an employee's aggregate normal and most valuable allocation 
rates by substituting those rates (determined without regard to the 
option) for the employee's allocation rate in that section where 
appropriate. The optional rules in Sec. 1.401(a)(4)-3(d)(3) (e.g., 
imputation of permitted disparity) may not be used to determine an 
employee's accrual or equivalent accrual rate, but may be applied to 
determine an employee's aggregate normal and most valuable accrual rate 
by substituting those rates (determined without regard to the option) 
for the employee's normal and most valuable accrual rates, respectively, 
in that section where appropriate.
    (iv) Consistency rule--(A) General rule. Aggregate normal and most 
valuable allocation rates and aggregate normal and most valuable accrual 
rates must be determined in a consistent manner for all employees for 
the plan year. Thus, for example, the same measurement periods and 
interest rates must be used, and any available options must be applied 
consistently, if at all, for the entire DB/DC plan. Consequently, 
options that are not permitted to be used under Sec. 1.401(a)(4)-8 in 
cross-testing a defined contribution plan or a defined benefit plan 
(such as measurement periods that include future periods, non-standard 
interest rates, the option to disregard compensation adjustments 
described in Sec. 1.401(a)(4)-13(d), or the option to disregard plan 
provisions providing for actuarial increases after normal retirement age 
under Sec. 1.401(a)(4)-3(f)(3)) may not be used in testing a DB/DC plan 
on either a benefits or contributions basis, because their use would 
inevitably result in inconsistent determinations under the defined 
contribution and defined benefit portions of the plan.
    (B) Exception for section 415 alternative. A DB/DC plan does not 
fail to satisfy the consistency rule in paragraph (b)(2)(iv)(A) of this 
section merely because the limitations under section 415 are not taken 
into account, or may not be taken into account, under Sec. 1.401(a)(4)-
3(d)(2)(ii)(B) in determining employees' accrual or equivalent 
allocation rates under the defined benefit portion of the plan, even 
though those limitations are applied in determining employees' 
allocation and equivalent accrual rates under the defined contribution 
portion of the plan.
    (v) Eligibility for testing on a benefits basis--(A) General rule. 
For plan years beginning on or after January 1, 2002, unless, for the 
plan year, a DB/DC plan

[[Page 159]]

is primarily defined benefit in character (within the meaning of 
paragraph (b)(2)(v)(B) of this section) or consists of broadly available 
separate plans (within the meaning of paragraph (b)(2)(v)(C) of this 
section), the DB/DC plan must satisfy the minimum aggregate allocation 
gateway of paragraph (b)(2)(v)(D) of this section for the plan year in 
order to be permitted to demonstrate satisfaction of the 
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on 
the basis of benefits.
    (B) Primarily defined benefit in character. A DB/DC plan is 
primarily defined benefit in character if, for more than 50% of the 
NHCEs benefitting under the plan, the normal accrual rate for the NHCE 
attributable to benefits provided under defined benefit plans that are 
part of the DB/DC plan exceeds the equivalent accrual rate for the NHCE 
attributable to contributions under defined contribution plans that are 
part of the DB/DC plan.
    (C) Broadly available separate plans. A DB/DC plan consists of 
broadly available separate plans if the defined contribution plan and 
the defined benefit plan that are part of the DB/DC plan each would 
satisfy the requirements of section 410(b) and the nondiscrimination in 
amount requirement of Sec. 1.401(a)(4)-1(b)(2) if each plan were tested 
separately and assuming that the average benefit percentage test of 
Sec. 1.410(b)-5 were satisfied. For this purpose, all defined 
contribution plans that are part of the DB/DC plan are treated as a 
single defined contribution plan and all defined benefit plans that are 
part of the DB/DC plan are treated as a single defined benefit plan. In 
addition, if permitted disparity is used for an employee for purposes of 
satisfying the separate testing requirement of this paragraph 
(b)(2)(v)(C) for plans of one type, it may not be used in satisfying the 
separate testing requirement for plans of the other type for the 
employee.
    (D) Minimum aggregate allocation gateway--(1) General rule. A DB/DC 
plan satisfies the minimum aggregate allocation gateway if each NHCE has 
an aggregate normal allocation rate that is at least one third of the 
aggregate normal allocation rate of the HCE with the highest such rate 
(HCE rate), or, if less, 5% of the NHCE's compensation, provided that 
the HCE rate does not exceed 25% of compensation. If the HCE rate 
exceeds 25% of compensation, then the aggregate normal allocation rate 
for each NHCE must be at least 5% increased by one percentage point for 
each 5-percentage-point increment (or portion thereof) by which the HCE 
rate exceeds 25% (e.g., the NHCE minimum is 6% for an HCE rate that 
exceeds 25% but not 30%, and 7% for an HCE rate that exceeds 30% but not 
35%).
    (2) Deemed satisfaction. A plan is deemed to satisfy the minimum 
aggregate allocation gateway of this paragraph (b)(2)(v)(D) if the 
aggregate normal allocation rate for each NHCE is at least 7\1/2\% of 
the NHCE's compensation within the meaning of section 415(c)(3), 
measured over a period of time permitted under the definition of plan 
year compensation.
    (3) Averaging of equivalent allocation rates for NHCEs. For purposes 
of this paragraph (b)(2)(v)(D), a plan is permitted to treat each NHCE 
who benefits under the defined benefit plan as having an equivalent 
normal allocation rate equal to the average of the equivalent normal 
allocation rates under the defined benefit plan for all NHCEs 
benefitting under that plan.
    (E) Determination of rates. For purposes of this paragraph 
(b)(2)(v), the normal accrual rate and the equivalent normal allocation 
rate attributable to defined benefit plans, the equivalent accrual rate 
attributable to defined contribution plans, and the aggregate normal 
allocation rate are determined under paragraph (b)(2)(ii) of this 
section, but without taking into account the imputation of permitted 
disparity under Sec. 1.401(a)(4)-7, except as otherwise permitted under 
paragraph (b)(2)(v)(C) of this section.
    (F) Examples. The following examples illustrate the application of 
this paragraph (b)(2)(v):

    Example 1. (i) Employer A maintains Plan M, a defined benefit plan, 
and Plan N, a defined contribution plan. All HCEs of Employer A are 
covered by Plan M (at a 1% accrual rate), but are not covered by Plan N. 
All NHCEs of Employer A are covered by Plan N (at a 3% allocation rate), 
but are not covered by Plan M. Because Plan M does not satisfy section 
410(b) standing alone, Plans M

[[Page 160]]

and N are aggregated for purposes of satisfying sections 410(b) and 
401(a)(4).
    (ii) Because none of the NHCEs participate in the defined benefit 
plan, the aggregated DB/DC plan is not primarily defined benefit in 
character within the meaning of paragraph (b)(2)(v)(B) of this section 
nor does it consist of broadly available separate plans within the 
meaning of paragraph (b)(2)(v)(C) of this section. Accordingly, the 
aggregated Plan M and Plan N must satisfy the minimum aggregate 
allocation gateway of paragraph (b)(2)(v)(D) of this section in order be 
permitted to demonstrate satisfaction of the nondiscrimination in amount 
requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits.
    Example 2. (i) Employer B maintains Plan O, a defined benefit plan, 
and Plan P, a defined contribution plan. All of the six employees of 
Employer B are covered under both Plan O and Plan P. Under Plan O, all 
employees have a uniform normal accrual rate of 1% of compensation. 
Under Plan P, Employees A and B, who are HCEs, receive an allocation 
rate of 15%, and participants C, D, E and F, who are NHCEs, receive an 
allocation rate of 3%. Employer B aggregates Plans O and P for purposes 
of satisfying sections 410(b) and 401(a)(4). The equivalent normal 
allocation and normal accrual rates under Plans O and P are as follows:

------------------------------------------------------------------------
                                                Equivalent   Equivalent
                                                  normal       normal
                                                allocation     accural
                                                rates for     rates for
                                                  the 1%     the 15%/3%
                   Employee                      accural     allocation
                                                under plan  under plan P
                                                O (defined    (defined
                                                 benefit    contribution
                                                plan)  (in   plan)  (in
                                                 percent)     percent)
------------------------------------------------------------------------
HCE A (age 55)...............................         3.93          3.82
HCE B (age 50)...............................         2.61          5.74
C (age 60)...................................         5.91           .51
D (age 45)...................................         1.74          1.73
E (age 35)...................................          .77          3.90
F (age 25)...................................          .34          8.82
------------------------------------------------------------------------

    (ii) Although all of the NHCEs benefit under Plan O (the defined 
benefit plan), the aggregated DB/DC plan is not primarily defined 
benefit in character because the normal accrual rate attributable to 
defined benefit plans (which is 1% for each of the NHCEs) is greater 
than the equivalent accrual rate under defined contribution plans only 
for Employee C. In addition, because the 15% allocation rate is 
available only to HCEs, the defined contribution plan cannot satisfy the 
requirements of Sec. 1.401(a)(4)-2 and does not have broadly available 
allocation rates within the meaning of Sec. 1.401(a)(4)-8(b)(1)(iii). 
Further, the defined contribution plan does not satisfy the minimum 
allocation gateway of Sec. 1.401(a)(4)-8(b)(1)(vi) (3% is less than 1/3 
of the 15% HCE rate). Therefore, the defined contribution plan within 
the DB/DC plan cannot separately satisfy Sec. 1.401(a)(4)-1(b)(2) and 
does not constitute a broadly available separate plan within the meaning 
of paragraph (b)(2)(v)(C) of this section. Accordingly, the aggregated 
plans are permitted to demonstrate satisfaction of the nondiscrimination 
in amounts requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of 
benefits only if the aggregated plans satisfy the minimum aggregate 
allocation gateway of paragraph (b)(2)(v)(D) of this section.
    (iii) Employee A has an aggregate normal allocation rate of 18.93% 
under the aggregated plans (3.93% from Plan O plus 15% from Plan P), 
which is the highest aggregate normal allocation rate for any HCE under 
the plans. Employee F has an aggregate normal allocation rate of 3.34% 
under the aggregated plans (.34% from Plan O plus 3% from Plan P) which 
is less than the 5% aggregate normal allocation rate that Employee F 
would be required to have to satisfy the minimum aggregate allocation 
gateway of paragraph (b)(2)(v)(D) of this section.
    (iv) However, for purposes of satisfying the minimum aggregate 
allocation gateway of paragraph (b)(2)(v)(D) of this section, Employer B 
is permitted to treat each NHCE who benefits under Plan O (the defined 
benefit plan) as having an equivalent allocation rate equal to the 
average of the equivalent allocation rates under Plan O for all NHCEs 
benefitting under that plan. The average of the equivalent allocation 
rates for all of the NHCEs under Plan O is 2.19% (the sum of 5.91%, 
1.74%, .77%, and .34%, divided by 4). Accordingly, Employer B is 
permitted to treat all of the NHCEs as having an equivalent allocation 
rate attributable to Plan O equal to 2.19%. Thus, all of the NHCEs can 
be treated as having an aggregate normal allocation rate of 5.19% for 
this purpose (3% from the defined contribution plan and 2.19% from the 
defined benefit plan) and the aggregated DB/DC plan satisfies the 
minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this 
section.
    (3) Optional rules for demonstrating nondiscrimination in 
availability of certain benefits, rights, and features--(i) Current 
availability. A DB/DC plan is deemed to satisfy Sec. 1.401(a)(4)-4(b)(1) 
with respect to the current availability of a benefit, right, or feature 
other than a single sum benefit, loan, ancillary benefit, or benefit 
commencement date (including the availability of in-service 
withdrawals), that is provided under only one type of plan (defined 
benefit or defined contribution) included in the DB/DC plan, if the 
benefit, right, or feature is currently available to all NHCEs in all 
plans of

[[Page 161]]

the same type as the plan under which it is provided.
    (ii) Effective availability. The fact that it may be difficult or 
impossible to provide a benefit, right, or feature described in 
paragraph (b)(3)(i) of this section under a plan of a different type 
than the plan or plans under which it is provided is one of the factors 
taken into account in determining whether the plan satisfies the 
effective availability requirement of Sec. 1.401(a)(4)-4(c)(1).
    (c) Plan restructuring--(1) General rule. A plan may be treated, in 
accordance with this paragraph (c), as consisting of two or more 
component plans for purposes of determining whether the plan satisfies 
section 401(a)(4). If each of the component plans of a plan satisfies 
all of the requirements of sections 401(a)(4) and 410(b) as if it were a 
separate plan, then the plan is treated as satisfying section 401(a)(4).
    (2) Identification of component plans. A plan may be restructured 
into component plans, each consisting of all the allocations, accruals, 
and other benefits, rights, and features provided to a selected group of 
employees. The employer may select the group of employees used for this 
purpose in any manner, and the composition of the groups may be changed 
from plan year to plan year. Every employee must be included in one and 
only one component plan under the same plan for a plan year.
    (3) Satisfaction of section 401(a)(4) by a component plan--(i) 
General rule. The rules applicable in determining whether a component 
plan satisfies section 401(a)(4) are the same as those applicable to a 
plan. Thus, for this purpose, any reference to a plan in section 
401(a)(4) and the regulations thereunder (other than this paragraph (c)) 
is interpreted as a reference to a component plan. As is true for a 
plan, whether a component plan satisfies the uniformity and other 
requirements applicable to safe harbor plans under Secs. 1.401(a)(4)-
2(b) and 1.401(a)(4)-3(b) is determined on a design basis. Thus, for 
example, plan provisions are not disregarded merely because they do not 
currently apply to employees in the component plan if they will apply to 
those employees as a result of the mere passage of time.
    (ii) Restructuring not available for certain testing purposes. The 
safe harbor in Sec. 1.401(a)(4)-2(b)(3) for plans with uniform points 
allocation formulas is not available in testing (and thus cannot be 
satisfied by) contributions under a component plan. Similarly, component 
plans cannot be used for purposes of determining whether a plan provides 
broadly available allocation rates (as defined in Sec. 1.401(a)(4)-
8(b)(1)(iii)), determining whether a plan has a gradual age or service 
schedule (as defined in Sec. 1.401(a)(4)-8(b)(1)(iv)), determining 
whether a plan has allocation rates that are based on a uniform target 
benefit allocation (as defined in Sec. 1.401(a)(4)-8(b)(1)(v)), or 
determining whether a plan is primarily defined benefit in character or 
consists of broadly available separate plans (as defined in paragraphs 
(b)(2)(v)(B) and (C) of this section). In addition, the minimum 
allocation gateway of Sec. 1.401(a)(4)-8(b)(1)(vi) and the minimum 
aggregate allocation gateway of paragraph (b)(2)(v)(D) of this section 
cannot be satisfied on the basis of component plans. See Secs. 1.401(k)-
1(b)(3)(iii) and 1.401(m)-1(b)(3)(iii) for rules regarding the 
inapplicability of restructuring to section 401(k) plans and section 
401(m) plans.
    (4) Satisfaction of section 410(b) by a component plan--(i) General 
rule. The rules applicable in determining whether a component plan 
satisfies section 410(b) are generally the same as those applicable to a 
plan. However, a component plan is deemed to satisfy the average benefit 
percentage test of Sec. 1.410(b)-5 if the plan of which it is a part 
satisfies Sec. 1.410(b)-5 (without regard to Sec. 1.410(b)-5(f)). In the 
case of a component plan that is part of a plan that relies on 
Sec. 1.410(b)-5(f) to satisfy the average benefit percentage test, the 
component plan is deemed to satisfy the average benefit percentage test 
only if the component plan separately satisfies Sec. 1.410(b)-5(f). In 
addition, all component plans of a plan are deemed to satisfy the 
average benefit percentage test if the plan makes an early retirement 
window benefit (within the meaning of Sec. 1.401(a)(4)-3(f)(4)(iii)) 
currently available (within the meaning of Sec. 1.401(a)(4)-
3(f)(4)(ii)(A)) to a group of employees that satisfies section 410(b)

[[Page 162]]

(without regard to the average benefit percentage test), and if it would 
not be necessary for the plan or any rate group or component plan of the 
plan to satisfy that test in order for the plan to satisfy sections 
401(a)(4) and 410(b) in the absence of the early retirement window 
benefit.
    (ii) Relationship to satisfaction of section 410(b) by the plan. 
Satisfaction of section 410(b) by a component plan is relevant solely 
for purposes of determining whether the plan of which it is a part 
satisfies section 401(a)(4), and not for purposes of determining whether 
the plan satisfies section 410(b) itself. The plan must still 
independently satisfy section 410(b) in order to be a qualified plan. 
Similarly, satisfaction of section 410(b) by a plan is relevant solely 
for purposes of determining whether the plan, and not the component 
plan, satisfies section 410(b). Thus, for example, a component plan that 
does not satisfy the ratio percentage test of Sec. 1.410(b)-2(b)(2) must 
still satisfy the average benefit test of Sec. 1.410(b)-2(b)(3), even 
though the plan of which it is a part satisfies the ratio percentage 
test.
    (5) Effect of restructuring under other sections. The restructuring 
rules provided in this paragraph (c) apply solely for purposes of 
sections 401(a)(4) and 401(l), and those portions of sections 410(b), 
414(s), and any other provisions that are specifically applicable in 
determining whether the requirements of section 401(a)(4) are satisfied. 
Thus, for example, a component plan is not treated as a separate plan 
under section 401(a)(26).
    (6) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. Employer X maintains a defined benefit plan. The plan 
provides a normal retirement benefit equal to 1.0 percent of average 
annual compensation times years of service to employees at Plant S, and 
1.5 percent of average annual compensation times years of service to 
employees at Plant T. Under paragraph (c)(2) of this section, the plan 
may be treated as consisting of two component defined benefit plans, one 
providing retirement benefits equal to 1.0 percent of average annual 
compensation times years of service to the employees at Plant S, and 
another providing benefits equal to 1.5 percent of average annual 
compensation times years of service to employees at Plant T. If each 
component plan satisfies sections 401(a)(4) and 410(b) as if it were a 
separate plan under the rules of this paragraph (c), then the entire 
plan satisfies section 401(a)(4).
    Example 2. (a) Employer Y maintains Plan A, a defined benefit plan, 
for its Employees M, N, O, P, Q, and R. Plan A provides benefits under a 
uniform formula that satisfies the requirements of Sec. 1.401(a)(4)-3 
(b)(2) and (b)(3) before it is amended on February 14, 1994. The 
amendment provides an early retirement window benefit that is a 
subsidized optional form of benefit under Sec. 1.401(a)(4)-3(b)(2)(iii) 
and that is available on the same terms to all employees who satisfy the 
eligibility requirements for the window. The early retirement window 
benefit is available only to employees who retire between June 1, 1994, 
and November 30, 1994.
    (b) Assume that Employees M, N, and O will be eligible to receive 
the window benefit by the end of the window period and Employees P, Q, 
and R will not. Because substantially all employees will not satisfy the 
eligibility requirements for the early retirement window benefit by the 
close of the early retirement window benefit period, Plan A fails to 
satisfy the uniform subsidies requirement of Sec. 1.401(a)(4)-
3(b)(2)(iii). See Sec. 1.401(a)(4)-3(b)(2)(vi), Example 6.
    (c) Under paragraph (c)(2) of this section, Employees M, N, O, P, Q, 
and R may be grouped into two component plans, one consisting of 
Employees M, N, and O, and all their accruals and other benefits, 
rights, and features under the plan (including the early retirement 
window benefit), and another consisting of Employees P, Q, and R, and 
all their accruals and other benefits, rights, and features under the 
plan. Each of the component plans identified in this manner satisfies 
the uniform subsidies requirement of Sec. 1.401(a)(4)-3(b)(2)(iii), and 
thus satisfies Sec. 1.401(a)(4)-3(b). The entire plan satisfies section 
401(a)(4) under the rules of this paragraph (c), if each of these 
component plans also satisfies section 410(b) as if it were a separate 
plan (including, if applicable, the reasonable classification 
requirement of Sec. 1.410(b)-4(b), and taking into account the special 
rule of paragraph (c)(4)(i) of this section that forgives the average 
benefit percentage test in certain situations in which the average 
benefit percentage test would be required solely as a result of the 
early retirement window benefit).
    Example 3. (a) Employer Z maintains Plan B, a defined benefit plan 
with a benefit formula that provides two percent of average annual 
compensation for each year of service up to 20 to each employee. Assume 
that Plan B would satisfy the fractional accrual rule safe harbor in 
Sec. 1.401(a)(4)-3(b)(4), except that some employees accrue a portion of 
their normal retirement benefit in the current

[[Page 163]]

plan year that is more than one-third larger than the portion of the 
same benefit accrued by other employees for the current plan year, and 
the plan therefore fails to satisfy the one-third-larger requirement of 
Sec. 1.401(a)(4)-3(b)(4)(i)(C)(1).
    (b) Employer Z restructures Plan B into two plans, one covering 
employees with 30 years or less of service at normal retirement age, and 
the other covering all other employees. Each component plan would 
separately satisfy the one-third-larger requirement of Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(1) if the only employees taken into account were those 
employees included in the component plan in the current plan year. Under 
paragraph (c)(3)(i) of this section and Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(1), however, the component plans do not satisfy the one-
third-larger requirement because the safe harbor determination is made 
taking into account the effect of the plan benefit formula on any 
potential employee in the component plan (other than employees with more 
than 33 years of service at normal retirement age), and not just those 
employees included in the component plan in the current plan year.

[T.D. 8485, 58 FR 46810, Sept. 3, 1993, as amended by T.D. 8954, 66 FR 
34544, June 29, 2001]



Sec. 1.401(a)(4)-10  Testing of former employees.

    (a) Introduction. This section provides rules for determining 
whether a plan satisfies the nondiscriminatory amount and 
nondiscriminatory availability requirements of Sec. 1.401(a)(4)-1(b)(2) 
and (3), respectively, with respect to former employees. Generally, this 
section is relevant only in the case of benefits provided through an 
amendment to the plan effective in the current plan year. See the 
definitions of employee and former employee in Sec. 1.401(a)(4)-12.
    (b) Nondiscrimination in amount of contributions or benefits--(1) 
General rule. A plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to 
the amount of contributions or benefits provided to former employees if, 
under all of the relevant facts and circumstances, the amount of 
contributions or benefits provided to former employees does not 
discriminate significantly in favor of former HCEs. For this purpose, 
contributions or benefits provided to former employees includes all 
contributions or benefits provided to former employees or, at the 
employer's option, only those contributions or benefits arising out of 
the amendment providing the contributions or benefits. A plan under 
which no former employee currently benefits (within the meaning of 
Sec. 1.410(b)-3(b)) is deemed to satisfy this paragraph (b).
    (2) Permitted disparity. Section 401(l) and Sec. 1.401(a)(4)-7 
generally apply to benefits provided to former employees in the same 
manner as those provisions apply to employees. Thus, for example, for 
purposes of determining a former employee's cumulative permitted 
disparity limit, the sum of the former employee's total annual disparity 
fractions (within the meaning of Sec. 1.401(l)-5) as an employee 
continues to be taken into account. However, the permitted disparity 
rate applicable to a former employee is determined under Sec. 1.401(l)-
3(e) as of the age the former employee commenced receipt of benefits, 
not as of the date the employee receives the accrual for the current 
plan year.
    (3) Examples. The following examples illustrate the rules in this 
paragraph (b):

    Example 1. Employer X maintains a section 401(l) plan, Plan A, that 
uses maximum permitted disparity. Plan A is amended to increase the 
benefits of all former employees in pay status. The percentage increase 
for each former employee is reasonably comparable to the adjustment in 
social security benefits under section 215(i)(2)(A) of the Social 
Security Act since the former employee commenced receipt of benefits. 
Plan A does not fail to satisfy this paragraph (b) merely because of the 
amendment.
    Example 2. The facts are the same as in Example 1, except that the 
amendment provides an across-the-board 20 percent increase in benefits 
for all former employees in pay status. The cost of living has increased 
at an average rate of three percent in the two years preceding the 
amendment, and some HCEs have retired and become former HCEs during that 
period. Because this amendment increases the disparity in the plan 
formula beyond the maximum permitted disparity adjusted for any 
reasonable approximation of the increase in the cost of living since the 
HCEs retired, Plan A discriminates significantly in favor of former 
HCEs, and thus does not satisfy this paragraph (b).
    Example 3. The facts are the same as in Example 1, except that Plan 
A is only amended to increase the benefits of former employees in pay 
status who terminated employment with Employer X after attaining early 
retirement age. The determination of whether the amendment causes Plan A 
to fail to satisfy this paragraph (b) must take into account the 
relative numbers of former HCEs

[[Page 164]]

and former NHCEs who have terminated employment with Employer X after 
attaining early retirement age.

    (c) Nondiscrimination in availability of benefits, rights, or 
features. A plan satisfies section 401(a)(4) with respect to the 
availability of benefits, rights, and features provided to former 
employees if any change in the availability of any benefit, right, or 
feature to any former employee is applied in a manner that, under all of 
the relevant facts and circumstances, does not discriminate 
significantly in favor of former HCEs. For purposes of demonstrating 
that a plan satisfies section 401(a)(4) with respect to the availability 
of loans provided to former employees, an employer may treat former 
employees who are parties in interest within the meaning of section 
3(14) of the Employee Retirement Income Security Act of 1974 as 
employees.

[T.D. 8485, 58 FR 46812, Sept. 3, 1993]



Sec. 1.401(a)(4)-11  Additional rules.

    (a) Introduction. This section provides additional rules for 
determining whether a plan satisfies section 401(a)(4). Paragraph (b) of 
this section provides rules for the treatment of the portion of an 
employee's accrued benefit or account balance that is attributable to 
rollovers, transfers between plans, and employee buybacks. Paragraph (c) 
of this section provides rules regarding vesting. Paragraph (d) of this 
section provides rules regarding service crediting. Paragraph (e) of 
this section, regarding family aggregation, and paragraph (f) of this 
section, regarding governmental plans, are reserved. Paragraph (g) of 
this section provides rules regarding the extent to which corrective 
amendments may be made for purposes of section 401(a).
    (b) Rollovers, transfers, and buybacks--(1) Rollovers and elective 
transfers. The portion of an employee's accrued benefit or account 
balance under a plan that is attributable to rollover (including direct 
rollover) contributions to the plan that are described in section 
402(c), 402(e)(6), 403(a)(4), 403(a)(5), or 408(d)(3), or elective 
transfers to the plan that are described in Sec. 1.411(d)-4, Q&A-3(b), 
is not taken into account in determining whether the plan satisfies the 
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2).
    (2) Other transfers. [Reserved]
    (3) Employee buybacks--(i) Rehired employee buyback of previous 
service. An employee's repayment to a plan of a prior distribution from 
the plan (including reasonable interest from the time of the 
distribution) that results in the restoration of the employee's accrued 
benefit under the plan (or the service associated with that accrued 
benefit) that would otherwise be disregarded in determining the 
employee's accrued benefit in accordance with section 411 on account of 
the distribution is not treated as an employee contribution for purposes 
of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
    (ii) Make-up of missed employee contributions. If a contributory DB 
plan gives all employees who did not make employee contributions for a 
prior period the right to make the missed contributions at a later date 
(including reasonable interest from the time of the missed 
contributions) and, once the contributions have been made, determines 
benefits under the plan by treating the employee contributions 
(excluding the interest) as if they were actually made during that prior 
period, then those contributions must satisfy Sec. 1.401(a)(4)-6(c) as 
if they were employee contributions actually made during that prior 
period. Thus, for example, Sec. 1.401(a)(4)-6(c)(2) is not satisfied for 
the current plan year if the employee contribution rate (within the 
meaning of Sec. 1.401(a)(4)-6(b)(2)(ii)(A) but determined without regard 
to the interest) for the employees making up missed contributions is 
different than the employee contribution rate applicable to other 
employees during the prior period. The rule in this paragraph (b)(3)(ii) 
may be extended to employees who did not make employee contributions for 
a period of service that is or would otherwise have been credited under 
the plan and that preceded their participation in the plan.
    (c) Vesting--(1) General rule. A plan satisfies this paragraph (c) 
if the manner in which employees vest in their accrued benefits under 
the plan does not discriminate in favor of HCEs. Whether the manner in 
which employees vest in their accrued benefits under

[[Page 165]]

a plan discriminates in favor of HCEs is determined under this paragraph 
(c) based on all of the relevant facts and circumstances, taking into 
account any relevant provisions of sections 401(a)(5)(E), 411(a)(10), 
411(d)(1), 411(d)(2), 411(d)(3), 411(e), and 420(c)(2), and taking into 
account any plan provisions that affect the nonforfeitability of 
employees' accrued benefits (e.g., plan provisions regarding suspension 
of benefits permitted under section 411(a)(3)(B)), other than the method 
of crediting years of service for purposes of applying the vesting 
schedule provided in the plan.
    (2) Deemed equivalence of statutory vesting schedules. For purposes 
of this paragraph (c), the manner in which employees vest in their 
accrued benefits under the vesting schedules in section 411(a)(2) (A) 
and (B) are treated as equivalent to one another, and the manner in 
which employees vest in their accrued benefits under the vesting 
schedules in section 416(b)(1) (A) and (B) are treated as equivalent to 
one another.
    (3) Safe harbor for vesting schedules. The manner in which employees 
vest in their accrued benefits under a plan is deemed not to 
discriminate in favor of HCEs if each combination of plan provisions 
that affect the nonforfeitability of any employee's accrued benefit 
would satisfy the nondiscriminatory availability requirements of 
Sec. 1.401(a)(4)-4 if that combination were an other right or feature.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. Plan A provides the six-year graded vesting schedule 
described in section 416(b)(1)(B). In 1996, Plan A is amended to provide 
the five-year vesting schedule described in section 411(a)(2)(A). To 
comply with section 411(a)(10)(B), the plan amendment also provides that 
all employees with at least three years of service may elect to retain 
the prior vesting schedule. The manner in which employees vest in their 
accrued benefits under Plan A does not discriminate in favor of HCEs 
merely because the prior vesting schedule continues to apply to the 
accrued benefits of electing employees, even if, at the time of the 
election or in future years, the prior vesting schedule applies only to 
a group of employees that does not satisfy section 410(b).
    Example 2. The facts are the same as in Example 1, except that, for 
administrative convenience in complying with section 411(a)(10)(B), the 
plan amendment automatically provides all employees employed on the date 
of the amendment with the higher of the nonforfeitable percentages 
determined under either schedule. The manner in which employees vest in 
their accrued benefits under Plan A does not discriminate in favor of 
HCEs merely because, for administrative convenience in complying with 
section 411(a)(10), the amendment exceeds the requirements of section 
411(a)(10). The result would be the same if the plan amendment 
automatically provided the higher of the nonforfeitable percentages only 
to those employees with at least three years of service.
    Example 3. (a) Employer Y maintains Plan B covering all of its 
employees. On January 1, 1996, Employer Y sells Division M to Employer 
Z, and all of the employees in Division M become employees of Employer 
Z. Employer Y obtains a determination letter that the resulting 
cessation of participation by these employees in Plan B constitutes a 
partial termination. Therefore, in order to satisfy section 411(d)(3), 
Plan B fully vests the accrued benefit of each of the employees of 
Division M whose participation in Plan B ceased as a result of the sale 
on January 1, 1996.
    (b) The manner in which employees vest in their accrued benefits 
under Plan B does not discriminate in favor of HCEs merely because, in 
order to satisfy section 411(d)(3), the accrued benefits of all 
employees affected by the partial termination become fully vested. This 
is true even if the affected group of employees does not satisfy section 
410(b).
    Example 4. (a) The facts are the same as in Example 3, except that 
Employer Y does not obtain a determination letter that the sale of 
Division M to Employer Z will cause a partial termination. Instead, 
based on its reasonable belief that the sale will cause a partial 
termination, and in order to ensure that Plan B will satisfy section 
411(d)(3), Employer Y amends Plan B to vest fully the accrued benefit on 
January 1, 1996 of each of the employees it reasonably believes to be an 
affected employee.
    (b) The manner in which employees vest in their accrued benefits 
under Plan B does not discriminate in favor of HCEs merely because, 
based on Employer Y's reasonable belief that the sale will cause a 
partial termination, Plan B is amended to vest fully the accrued 
benefits of each of the employees it reasonably believes to be an 
affected employee.

    (d) Service-crediting rules--(1) Overview--(i) In general. A defined 
benefit plan or a defined contribution plan does not satisfy this 
paragraph (d) with

[[Page 166]]

respect to the manner in which service is credited under the plan unless 
the plan satisfies paragraph (d)(2) of this section. Paragraph (d)(3) of 
this section provides rules for determining whether service other than 
actual service with the employer may be taken into account in 
determining whether a defined benefit plan or a defined contribution 
plan satisfies Sec. 1.401(a)(4)-1 (b)(2) or (b)(3). (However, for 
purposes of cross-testing a defined contribution plan, only years in 
which the employee benefited under the plan may be taken into account in 
determining equivalent accrual rates. See Sec. 1.401(a)(4)-8(b)(2)(i).) 
The rules of this paragraph (d) apply separately to service credited 
under a plan for each different purpose under the plan, including, but 
not limited to: application of the benefit formula (benefit service), 
application of the accrual method (accrual service), application of the 
vesting schedule (vesting service), entitlement to benefits, rights, and 
features (entitlement service), application of the requirements for 
eligibility to participate in the plan (eligibility service).
    (ii) Special rule for pre-effective date service. A plan is deemed 
to satisfy this paragraph (d) with respect to service credited for 
periods prior to the effective date applicable to the plan under 
Sec. 1.401(a)(4)-13 (a) or (b) under a plan provision adopted and in 
effect as of February 11, 1993 (and any such service may be taken into 
account for purposes of satisfying Sec. 1.401(a)(4)-1 (b)(2) or (b)(3)), 
if the plan satisfied the applicable nondiscrimination requirements with 
respect to the service that were in effect for all relevant periods 
prior to the applicable effective date.
    (2) Manner of crediting service--(i) General rule. A plan satisfies 
this paragraph (d)(2) if, on the basis of all of the relevant facts and 
circumstances, the manner in which employees' service is credited for 
all purposes under the plan does not discriminate in favor of HCEs.
    (ii) Equivalent service-crediting methods. For purposes of this 
paragraph (d)(2), a service-crediting method used for a specified 
purpose that is based on hours of service, as provided in 29 CFR 
2530.200b-2, and a service-crediting method used for the same purpose 
that is based on one of the equivalencies set forth in 29 CFR 2530.200b-
3, are treated as equivalent if the service-crediting methods are 
otherwise the same.
    (iii) Safe harbor for service-crediting. The manner in which service 
is credited under a plan for a specified purpose is deemed to satisfy 
this paragraph (d)(2) if each combination of service-crediting 
provisions applied for that purpose would satisfy the nondiscriminatory 
availability requirements of Sec. 1.401(a)(4)-4 if that combination were 
an other right or feature.
    (iv) Examples. The following examples illustrate the rules in this 
paragraph (d)(2):

    Example 1. (a) Plan A covers both salaried employees and hourly 
employees. All of the HCEs in Plan A are salaried employees. For 
administrative convenience, salaried employees in Plan A (none of whom 
are part-time) have their years of service calculated in accordance with 
the elapsed time provisions in Sec. 1.410(a)-7. Hourly employees in Plan 
A (most of whom are scheduled to work 2,000 hours in a year) have their 
hours of service calculated in accordance with 29 CFR 2530.200b-2 and 
are credited with a year of service for each plan year in which they 
complete 1,000 hours of service.
    (b) Plan A does not fail to satisfy this paragraph (d)(2) merely 
because different service-crediting provisions are applied to salaried 
and hourly employees for administrative convenience. The service-
crediting provisions for hourly employees in Plan A are reasonably 
comparable to the service-crediting provisions for salaried employees. 
This is because the amount of service credited to hourly employees who 
complete fewer than 1,000 hours of service before termination of 
employment (i.e., quit, retirement, discharge, or death) during the plan 
year (and are treated less favorably than the salaried employees with 
the same period of employment during the plan year) is balanced by the 
amount of service credited to hourly employees who complete more than 
1,000 hours of service before termination of employment during the plan 
year (who are treated more favorably than the salaried employees with 
the same period of employment during the plan year).
    Example 2. (a) The facts are the same as in Example 1, except Plan A 
requires hourly employees to complete 2,000 hours of service in order to 
be credited with a full year of service, with a pro rata reduction for 
hourly employees who complete fewer than 2,000 hours of service.
    (b) Plan A does not fail to satisfy this paragraph (d)(2) merely 
because different service-crediting provisions are applied to

[[Page 167]]

salaried and hourly employees for administrative convenience. The 
service-crediting provisions for hourly employees in Plan A are 
reasonably comparable to the service-crediting provisions for salaried 
employees. This is because the amount of service credited to hourly 
employees whose employment terminates (i.e., quit, retire, are 
discharged, or die) during the plan year is reasonably comparable to the 
amount of service credited to salaried employees whose employment is 
terminated during the plan year with the same period of employment 
during the plan year.


    (3) Service-crediting period--(i) Limitation on service taken into 
account--(A) General rule. Except as otherwise provided in this 
paragraph (d)(3), service for periods in which an employee does not 
perform services as an employee of the employer or in which the employee 
did not participate in the plan may not be taken into account in 
determining whether the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and 
(b)(3). In addition, in determining whether a plan satisfies 
Sec. 1.401(a)(4)-1 (b)(2) and (b)(3), no more than one year of service 
may be taken into account with respect to any 12-consecutive-month 
period (with adjustments for shorter periods, if appropriate) unless the 
additional service is required to be credited under section 410 or 411, 
whichever is applicable.
    (B) Past service. Notwithstanding paragraph (d)(3)(i)(A) of this 
section, service for periods in which an employee performed services as 
an employee of the employer and did not participate in a plan, but in 
which the employee would have participated in the plan but for the fact 
that the plan (or the plan amendment extending coverage to the employee) 
was not in existence during that period, may be taken into account in 
determining whether the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and 
(b)(3). This is because service for such periods generally would have 
been credited for the employee but for the timing of the plan 
establishment or amendment, and the timing of the plan establishment or 
amendment must satisfy Sec. 1.401(a)(4)-5(a).
    (C) Pre-participation and imputed service. Notwithstanding paragraph 
(d)(3)(i)(A) of this section, to the extent that a plan treats pre-
participation service and imputed service as actual service with the 
employer, such service may be taken into account in determining whether 
the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and (b)(3) if the service 
satisfies each of the requirements in paragraph (d)(3)(iii) of this 
section taking into account, in the case of imputed service, the 
additional rules in paragraph (d)(3)(iv) of this section.
    (D) Additional limitations on service-crediting in the case of 
certain offsets. Notwithstanding paragraphs (d)(3)(i) (B) and (C) of 
this section, if a plan credits benefit service or accrual service under 
paragraph (d)(3)(i) (B) or (C) of this section for a period before an 
employee becomes a participant in the plan, but offsets the benefits 
determined under the plan by benefits under another plan (whether or not 
qualified or terminated) that are attributable to the same period for 
which that service is credited, then that service may not be taken into 
account for purposes of determining whether the first plan satisfies 
Sec. 1.401(a)(4)-1 (b)(2) or (b)(3) unless the offset provision applies 
on the same basis to all similarly-situated employees (within the 
meaning of paragraph (d)(3)(iii)(A) of this section).
    (ii) Definitions--(A) Pre-participation service. For purposes of 
this section, pre-participation service includes all years of service 
credited under a plan for years of service with the employer or a prior 
employer for periods before the employee commenced or recommenced 
participation in the plan (other than past service described in 
paragraph (d)(3)(i)(B) of this section).
    (B) Imputed service. For purposes of this section, imputed service 
includes any service credited for periods after an employee has 
commenced participation in a plan while the employee is not performing 
services as an employee for the employer (including a period in which 
the employee performs services for another employer, e.g., a joint 
venture), or while the employee has a reduced work schedule and would 
not otherwise be credited with service at the level being credited under 
the general terms of the plan.
    (iii) Requirements for pre-participation and imputed service--(A) 
Provision applied to all similarly-situated employees--

[[Page 168]]

(1) General rule. A plan provision crediting pre-participation service 
or imputed service to any HCE must apply on the same terms to all 
similarly-situated NHCEs. Whether two employees are similarly situated 
for this purpose must be determined based on reasonable business 
criteria, generally taking into account only the circumstances resulting 
in the employees being covered under the plan or being granted imputed 
service and on the situation of the employees (e.g., the plan in which 
the employees benefit or the employer by which they are employed) during 
the period for which the pre-participation service or imputed service is 
credited. For example, employees who enter a plan as a result of a 
particular merger and who participated in the same plan of a prior 
employer are generally similarly situated. As another example, employees 
who are transferred to different joint ventures or different spun-off 
divisions are generally not similarly situated.
    (2) Examples. The following examples illustrate the rules in this 
paragraph (d)(3)(iii)(A):

    Example 1. Employer X maintains defined benefit Plans A and B and 
defined contribution Plan C. Plan A covers all employees who work at the 
headquarters of Employer X. Plan B covers some employees in Division M 
of Employer X, and Plan C covers the other employees of Division M. 
Plans B and C have not been aggregated for purposes of satisfying 
section 401(a)(4) or 410(b) for the period for which service is being 
credited. Plan A provides that, whenever an employee covered by Plan B 
transfers from Division M to the headquarters, the employee's service 
credited under Plan B is credited under Plan A, and the employee's 
benefit under Plan A is offset by the employee's benefit under Plan B. 
However, Plan A provides for no similar recognition of service or offset 
for employees covered by Plan C who transfer from Division M to the 
headquarters. Plan A does not fail to satisfy this paragraph 
(d)(3)(iii)(A) merely because it credits service for employees 
transferring from Plan B but not from Plan C, because it is reasonable 
to treat employees participating in different plans that have not been 
aggregated as not being similarly situated.
    Example 2. The facts are the same as in Example 1, except that 
Employer X acquires two trades or businesses from different employers. 
Employees of the acquired trades or businesses become employees of 
Division M and become covered by Plan B. In addition, Plan B is amended 
to credit service with one of the trades or businesses but not the 
other. Plan B does not fail to satisfy this paragraph (d)(3)(iii)(A) 
merely because it credits service for one acquired trade or business but 
not another, because it is reasonable to treat employees of one acquired 
trade or business as not similarly situated to employees of another 
acquired trade or business.

    (B) Legitimate business reason--(1) General rule. There must be a 
legitimate business reason, based on all of the relevant facts and 
circumstances, for a plan to credit imputed service or for a plan to 
credit pre-participation service for a period of service with another 
employer.
    (2) Relevant facts and circumstances when crediting service with 
another employer. The following are examples of relevant facts and 
circumstances for determining whether a legitimate business reason 
exists for a plan to credit pre-participation or imputed service for a 
period of service with another employer as service with the employer: 
whether one employer has a significant ownership, control, or similar 
interest in, or relationship with, the other employer (though not enough 
to cause the two employers to be treated as a single employer under 
section 414); whether the two employers share interrelated business 
operations; whether the employers maintain the same multiple-employer 
plan; whether the employers share similar attributes, such as operation 
in the same industry or the same geographic area; and whether the 
employees are an acquired group of employees or the employees became 
employed by the other employer in a transaction between the two 
employers that was a stock or asset acquisition, merger, or other 
similar transaction involving a change in the employer of the employees 
of a trade or business. Other factors may also be relevant for this 
purpose, such as the plan's treatment of service with other employers 
with which the employer has a similar relationship and the type of 
service being credited (e.g., vesting service as compared to benefit 
service or accrual service). A legitimate business reason is deemed to 
exist for a plan to credit military service as service with the 
employer.

[[Page 169]]

    (3) Examples. The following examples illustrate the rules in this 
paragraph (d)(3)(iii)(B):

    Example 1. Twenty unrelated employers jointly sponsor a multiple-
employer plan that covers all employees of the employers. From time to 
time, employees transfer employment among the employers. There is a 
legitimate business reason for a disaggregated portion of the plan that 
benefits the employees of one of the employers to treat service with any 
of the other employers as service with the employer.
    Example 2. Employer X owns 20 percent of the outstanding stock of 
Employer Y. From time to time, employees transfer from Employer X to 
Employer Y at the request of Employer X. Employer X maintains defined 
benefit Plan A. Plan A provides that years of service include an 
employee's years of service with Employer Y. There is a legitimate 
business reason for Plan A to credit service with Employer Y because 
Employer X, through its 20-percent ownership interest, benefits from the 
service that the transferred employees provide to Employer Y.
    Example 3. Employer Z manufactures widgets and belongs to the 
National Widget Manufacturers' Association. From time to time, Employer 
Z hires employees from other widget manufacturers. Employer Z maintains 
a defined benefit plan, Plan B, which credits pre-participation service 
for periods of service with all other members of the Association located 
in the western half of the United States as service with Employer Z. 
There is a legitimate business reason for Plan B to treat service with 
other members of the Association as service with Employer Z.

    (C) No significant discrimination--(1) General rule. Based on all of 
the relevant facts and circumstances, a plan provision crediting pre-
participation or imputed service must not by design or in operation 
discriminate significantly in favor of HCEs.
    (2) Relevant facts and circumstances. The following are examples of 
relevant facts and circumstances for determining whether a plan 
provision crediting pre-participation service or imputed service 
discriminates significantly in favor of HCEs: whether the service credit 
does not duplicate benefits but merely makes an employee whole (i.e., 
prevents the employee from being disadvantaged with respect to benefits 
by a change in job or employer or provides the employee with benefits 
comparable to those of other employees); the degree of business ties 
between the current employer and the prior employer, such as the degree 
of ownership interest or other affiliation; the degree of excess 
coverage under section 410(b) of NHCEs for the plan crediting the 
service, taking into account employees who are credited with pre-
participation service; whether the other employer maintains a qualified 
plan for its employees; the existence of reciprocal service credit under 
other plans of the employer or the prior employer; the circumstances 
underlying the employee's transfer into the group of employees covered 
by the plan; the type of service being credited; and the relative number 
of employees other than five-percent owners or the most highly-paid HCEs 
of the employer (determined without regard to the one officer rule of 
section 414(q)(5)(B)) who are being credited with pre-participation 
service or imputed service. The relative number referred to in the last 
factor is determined taking into account all employees who have been 
over time, or are reasonably expected to be in the future, credited with 
such service.
    (3) Examples. The following examples illustrate the rules in this 
paragraph (d)(3)(iii)(C). It is assumed that facts not described in an 
example do not, in the aggregate, suggest that the relevant plan 
provision either does or does not discriminate significantly in favor of 
HCEs.

    Example 1. (a) Employer U maintains defined benefit Plans A and B. 
Plan A covers all employees who work at the headquarters of Employer U. 
Plan B covers all employees of Division M of Employer U. Plan A provides 
that, whenever an employee transfers from Division M to the 
headquarters, the employee's service credited under Plan B is credited 
under Plan A, and the employee's benefit under Plan A is offset by the 
employee's benefit under Plan B. Employees, including a meaningful 
number of NHCEs, are periodically transferred from Division M to the 
headquarters of Employer U for bona fide business reasons.
    (b) The Plan A provision crediting service under Plan B does not 
discriminate significantly in favor of HCEs. The provision is designed 
only to prevent employees from being disadvantaged by being transferred 
from Division M to the headquarters, and a meaningful number of NHCEs 
can be expected to benefit from it.

[[Page 170]]

    Example 2. (a) The facts are the same as in Example 1, except that 
the only employees transferred from Division M to the headquarters of 
Employer U are HCEs (but not the most highly-paid HCEs of Employer U).
    (b) Employer U determines that Plan A would have satisfied sections 
401(a)(4) and 410(b) for the period for which the transferred employees 
are being credited with pre-participation service had the employees 
participated in Plan A during that period. This determination is based 
on test results under sections 401(a)(4) and 410(b) for the current 
year, taking into account significant demographic changes over this 
period.
    (c) The Plan A provision crediting service under Plan B does not 
significantly discriminate in favor of HCEs in the current year. This 
conclusion is based on the fact that the circumstances underlying the 
transfers indicate that they were made for bona fide business reasons, 
that Plan A would have satisfied sections 401(a)(4) and 410(b) had the 
transferred employees participated in Plan A during the period for which 
the pre-participation service is credited, and that the transferred 
employees are not the most highly-paid HCEs of Employer U.
    Example 3. (a) The facts are the same as in Example 1, except that 
the only employee who is transferred from Division M to the headquarters 
of Employer U is Employee P, who is among the most highly-paid HCEs of 
Employer U. Plan A provides an unreduced early retirement benefit at age 
55 for employees with 20 years of service, but Plan B's early retirement 
benefits are not subsidized. Employee P is transferred to the 
headquarters with 20 years of service credited under Plan B and shortly 
before attainment of age 55. Employee P is expected to retire upon 
reaching age 55.
    (b) The Plan A provision crediting service under Plan B 
discriminates significantly in favor of HCEs in the year of the 
transfer. This is because the circumstances underlying this transfer 
(i.e., its occurrence shortly before Employee P's expected retirement 
and the fact that the transfer significantly increased Employee P's 
early retirement benefits) indicate that Employee P was transferred to 
the headquarters primarily to obtain the higher pension benefits 
provided under Plan A.
    (c) Because of this conclusion, the pre-participation service 
credited to Employee P cannot be taken into account in determining 
whether Plan A satisfies Sec. 1.401(a)(4)-1 (b)(2) and (b)(3). Thus, if 
Plan A credits the service, it cannot be a safe harbor plan because the 
benefit formula will take into account service that may not be taken 
into account under this paragraph (d)(3). In addition, Employee P's 
accrual rates under the general test in Sec. 1.401(a)(4)-3(c) are likely 
to be higher than those of other employees because, while the pre-
participation service may be used to determine Employee P's benefits 
under Plan A, the service must be disregarded in determining Employee 
P's testing service. Also, if Employee P's pre-participation service is 
used in determining Employee P's entitlement to a benefit, right, or 
feature under Plan A, the fact that the service must be disregarded in 
determining Employee P's entitlement service for purposes of 
Sec. 1.401(a)(4)-4 may cause the benefit, right, or feature to be 
treated as a separate benefit, right, or feature that is currently 
available only to Employee P.
    Example 4. (a) Employer V manufactures widgets and belongs to the 
National Widget Manufacturers' Association. Each member of the 
Association maintains a defined benefit plan that credits pre-
participation service for periods of service with other members and 
offsets benefits under the plan by benefits under the plans of the other 
members. Employer V maintains defined benefit Plan C. Employer V 
periodically hires employees from other widget manufacturers who are not 
among its most highly-paid HCEs. In 1997, however, the only employee 
hired by Employer V from another member of the Association is Employee 
Q, who is among Employer V's most highly-paid HCEs. Employee Q receives 
pre-participation service credit in accordance with the terms of Plan C. 
Some of the plans maintained by other members of the Association 
credited pre-participation service to NHCEs for the same period for 
which the pre-participation service is credited to Employee Q.
    (b) The provision of Plan C crediting pre-participation service with 
other members of the Association does not discriminate significantly in 
1997, despite the fact that the only employee who received pre-
participation service credit under the provision in that year was among 
the most highly-paid HCEs of Employer V. This conclusion is based on the 
relative number of employees other than Employer V's most highly-paid 
HCEs who have been credited in the past, or are reasonably expected to 
be credited in the future, with pre-participation service for periods of 
service with other members of the Association, and the fact that other 
employees who are NHCEs are being credited with pre-participation 
service under a reciprocal agreement.
    Example 5. Employer W owns 79 percent of the outstanding stock of 
Employer X. From time to time, employees transfer from Employer W to 
Employer X at the request of Employer W. The only employees who have 
ever been transferred are HCEs. Employer W maintains a defined benefit 
plan, Plan D, which credits employees transferred to Employer X with 
imputed benefit and accrual service while employed by Employer X. 
Employer X maintains no qualified plan. Plan D would fail either section 
401(a)(4) or section

[[Page 171]]

410(b) in the current plan year if the individuals employed by Employer 
X were treated as employed by Employer W. In addition, Plan D would fail 
either section 401(a)(4) or section 410(b) in the current plan year if 
the portion of Plan D covering the transferred employees were treated as 
maintained by Employer X. The Plan D provision crediting imputed benefit 
and accrual service to employees transferred to Employer X significantly 
discriminates in favor of HCEs in the current plan year.
    Example 6. The facts are the same as in Example 5, except that Plan 
D credits the individuals who transfer to Employer X only with imputed 
vesting and entitlement service. The Plan D provision crediting imputed 
vesting and entitlement service to individuals transferred to Employer X 
does not significantly discriminate in favor of HCEs in the current plan 
year, because there is less potential for discrimination when the only 
types of service being imputed are vesting and entitlement service.

    (iv) Additional rules for imputed service--(A) Legitimate business 
reasons for crediting imputed service--(1) General rule. A legitimate 
business reason does not exist for a plan to impute service after an 
individual has permanently ceased to perform services as an employee 
(within the meaning of Sec. 1.410(b)-9) for the employer maintaining the 
plan, i.e., is not expected to resume performing services as an employee 
for the employer. The preceding sentence does not apply in the case of 
an individual who is not performing services for the employer because of 
disability or is performing services for another employer under an 
arrangement (such as a transfer of the employee to another employer) 
that provides some ongoing business benefit to the original employer. 
The first sentence in this paragraph (d)(3)(iv)(A)(1) also does not 
apply in the case of vesting and entitlement service if the employee is 
performing services for another employer that is being treated under the 
plan as actual service with the original employer.
    (2) Certain presumptions applicable. Whether an individual has 
permanently ceased to perform services as an employee for an employer is 
determined taking into account all of the relevant facts and 
circumstances. There is a rebuttable presumption for a period of up to 
two years that an individual who has ceased to perform services as an 
employee for an employer is nonetheless expected to resume performing 
services as an employee for the employer, if the employer continues to 
treat the individual as an employee for significant purposes unrelated 
to the plan. After two years, there is a rebuttable presumption that an 
individual who has ceased to perform services as an employee for the 
employer is not expected to resume performing services as an employee 
for the employer. The fact that an individual is absent to perform jury 
duty or military service automatically rebuts the latter presumption. 
Other evidence, such as the employer's layoff policy, the terms of an 
employment contract, or specific leave to pursue a degree requiring more 
than two years of study, may also rebut this presumption.
    (3) Imputed service for part-time employees. Rules similar to the 
rules in paragraph (d)(3)(iv)(A) (1) and (2) of this section apply in 
the case of an employee whose work hours are temporarily reduced and who 
therefore would normally be credited with service at a reduced rate, but 
who continues to be credited with service at the same rate as before the 
reduction (e.g., an employee who continues to be credited with service 
as if the employee were a full-time employee during a temporary change 
from a full-time to a part-time work schedule).
    (B) Additional factors for determining whether a provision crediting 
imputed service discriminates significantly. In addition to the factors 
described in paragraph (d)(3)(iii)(C)(2) of this section, relevant facts 
and circumstances for determining whether a plan provision crediting 
imputed service during a leave of absence or a period of reduced 
services discriminates significantly include any employer policies or 
practices that restrict the ability of employees to take leaves of 
absence or work temporarily on a part-time basis, respectively.
    (v) Satisfaction of other service-crediting rules. A plan does not 
fail to satisfy this paragraph (d)(3) merely because it credits service 
to the extent necessary to satisfy the service-crediting rules in 
section 410(a), 411(a), 413, or 414(a), Sec. 1.410(a)-7 (elapsed-time 
method of service-crediting) or 29 CFR

[[Page 172]]

2530.200b-2 (regarding hours of service to be credited), whichever is 
applicable, or 29 CFR Sec. 2530.204-2(d) (regarding double proration of 
service and compensation).
    (e) Family aggregation rules. [Reserved]
    (f) Governmental plans. [Reserved]
    (g) Corrective amendments--(1) In general. A corrective amendment 
that satisfies the rules of this paragraph (g) is taken into account for 
purposes of satisfying certain section 401(a) requirements for a plan 
year, by treating the corrective amendment as if it were adopted and 
effective as of the first day of the plan year. These rules apply in 
addition to the rules of section 401(b). Paragraph (g)(2) of this 
section describes the scope of the corrective amendments that are 
permitted to be made. Paragraph (g)(3) of this section specifies the 
conditions under which a corrective amendment may be made. Paragraph 
(g)(4) of this section provides a rule prohibiting a corrective 
amendment from being taken into account to the extent that it does not 
have substance. Paragraph (g)(5) of this section discusses the effect of 
the corrective amendments permitted under this paragraph (g) under 
provisions other than section 401(a).
    (2) Scope of corrective amendments. For purposes of satisfying the 
minimum coverage requirements of section 410(b), the nondiscriminatory 
amount requirement of Sec. 1.401(a)(4)-1(b)(2), or the nondiscriminatory 
plan amendment requirement of Sec. 1.401(a)(4)-1(b)(4), a corrective 
amendment may retroactively increase accruals or allocations for 
employees who benefited under the plan during the plan year being 
corrected, or may grant accruals or allocations to individuals who did 
not benefit under the plan during the plan year being corrected. In 
addition, for purposes of satisfying the nondiscriminatory current 
availability requirement of Sec. 1.401(a)(4)-4(b) for benefits, rights, 
or features, a corrective amendment may make a benefit, right, or 
feature available to employees to whom it was previously not available. 
A corrective amendment may not, however, correct for a failure to 
incorporate the pre-termination restrictions of Sec. 1.401(a)(4)-5(b).
    (3) Conditions for corrective amendments--(i) In general. A 
corrective amendment is not taken into account prior to its adoption 
under this paragraph (g) unless it satisfies each of the requirements of 
paragraph (g)(3) (ii) through (vii) of this section, whichever are 
applicable. Thus, for example, if any of the applicable requirements are 
not satisfied, any additional accruals arising from an amendment adopted 
after the end of a plan year are not given retroactive effect and, thus, 
are tested in the plan year in which the amendment is adopted.
    (ii) Benefits not reduced. Except as permitted under paragraph 
(g)(3)(vi)(C)(2) of this section, the corrective amendment may not 
result in a reduction of an employee's benefits (including any benefit, 
right, or feature), determined based on the terms of the plan in effect 
immediately before the amendment.
    (iii) Amendment effective for all purposes. For purposes of 
determining an employee's rights and benefits under the plan, the 
corrective amendment must generally be effective as if the amendment had 
been made on the first day of the plan year being corrected. Thus, if 
the corrective amendment is made after the close of the plan year being 
corrected, an employee's allocations or accruals, along with the 
associated benefits, rights, and features, must be increased to the 
level at which they would have been had the amendment been in effect for 
the entire preceding plan year. Accordingly, such increases are taken 
into account for testing purposes as if the increases had actually 
occurred in the prior plan year. However, to the extent that an 
amendment makes a benefit, right, or feature available to a group of 
employees, the amendment does not fail to satisfy this paragraph 
(g)(3)(iii) merely because it is not effective prior to the date of 
adoption and, therefore, the benefit, right, or feature is not made 
currently available to those employees before that date.
    (iv) Time when amendment must be adopted and put into effect--(A) 
General rule. Any corrective amendment intended to apply to the 
preceding plan year must be adopted and implemented on or before the 
15th day of the 10th

[[Page 173]]

month after the close of the plan year in order to be taken into account 
for the preceding plan year.
    (B) Determination letter requested by employer or plan 
administrator. If, on or before the end of the period set forth in 
paragraph (g)(3)(iv)(A) of this section, the employer or plan 
administrator files a request pursuant to Sec. 601.201(o) of this 
chapter (Statement of Procedural Rules) for a determination letter on 
the amendment, the initial or continuing qualification of the plan, or 
the trust that is part of the plan, the period set forth in paragraph 
(g)(3)(iv)(A) of this section is extended in the same manner as provided 
for an extension of the remedial amendment period under Sec. 1.401(b)-
1(d)(3).
    (v) Corrective amendment for coverage or amounts testing--(A) 
Retroactive benefits must be provided to nondiscriminatory group. Except 
as provided in paragraph (g)(3)(v)(B) of this section, if the corrective 
amendment is adopted after the close of the plan year, the additional 
allocations or accruals for the preceding year resulting from the 
corrective amendment must separately satisfy section 401(a)(4) for the 
preceding plan year and must benefit a group of employees that 
separately satisfies section 410(b) (determined by applying the same 
rules as are applied in determining whether a component plan separately 
satisfies section 410(b) under Sec. 1.401(a)(4)-9(c)(4)). Thus, for 
example, in applying the rules of this paragraph (g)(3)(v), an employer 
may not aggregate the additional accruals or allocations for the 
preceding plan year resulting from the corrective amendment with the 
other accruals or allocations already provided under the terms of the 
plan as in effect during the preceding plan year without regard to the 
corrective amendment.
    (B) Corrective amendment to conform to safe harbor. The requirements 
of paragraph (g)(3)(v)(A) of this section need not be met if the 
corrective amendment is for purposes of conforming the plan to one of 
the safe harbors in Sec. 1.401(a)(4)-2(b) or Sec. 1.401(a)(4)-3(b) 
(including for purposes of applying the requirements of those safe 
harbors under the optional testing methods in Sec. 1.401(a)(4)-8 (b)(3) 
or (c)(3)), or ensuring that the plan continues to meet one of those 
safe harbors.
    (vi) Conditions for corrective amendment of the availability of 
benefits, rights, and features. A corrective amendment may not be taken 
into account under this paragraph (g) for purposes of satisfying 
Sec. 1.401(a)(4)-4(b) for a given plan year unless--
    (A) The corrective amendment is not part of a pattern of amendments 
being used to correct repeated failures with respect to a particular 
benefit, right, or feature;
    (B) The relevant provisions of the plan immediately after the 
corrective amendment with respect to the benefit, right, or feature 
(including a corrective amendment eliminating the benefit, right, or 
feature) remain in effect until the end of the first plan year beginning 
after the date of the amendment; and
    (C) The corrective amendment either--
    (1) Expands the group of employees to whom the benefit, right, or 
feature is currently available so that for each plan year in which the 
corrective amendment is taken into account in determining whether the 
plan satisfies Sec. 1.401(a)(4)-4(b), the group of employees to whom the 
benefit, right, or feature is currently available, after taking into 
account the amendment, satisfies the nondiscriminatory classification 
requirement of Sec. 1.410(b)-4 (and thus the current availability 
requirement of Sec. 1.401(a)(4)-4(b)) with a ratio percentage greater 
than or equal to the lesser of--
    (i) The safe harbor percentage applicable to the plan; and
    (ii) The ratio percentage of the plan; or
    (2) Eliminates the benefit, right, or feature (to the extent 
permitted under section 411(d)(6)) on or before the last day of the plan 
year for which the corrective amendment is taken into account.
    (vii) Special rules for section 401(k) plans and section 401(m) 
plans--(A) Minimum coverage requirements. In the case of a section 
401(k) plan, a corrective amendment may only be taken into account for 
purposes of satisfying Sec. 1.410(b)-3(a)(2)(i) under this paragraph (g) 
for a given plan year to the extent that the corrective amendment grants

[[Page 174]]

qualified nonelective contributions within the meaning of Sec. 1.401(k)-
1(g)(13)(ii) (QNECs) to nonhighly compensated nonexcludable employees 
who were not eligible employees within the meaning of Sec. 1.401(k)-
1(g)(4) for the given plan year, and the amount of the QNECs granted to 
each nonhighly compensated nonexcludable employee equals the product of 
the nonhighly compensated nonexcludable employee's plan year 
compensation and the actual deferral percentage (within the meaning of 
section 401(k)(3)(B)) for the given plan year for the group of NHCEs who 
are eligible employees. Similarly, in the case of a section 401(m) plan, 
a corrective amendment may only be taken into account for purposes of 
satisfying Sec. 1.410(b)-3(a)(2)(i) under this paragraph (g) for a given 
plan year to the extent that the corrective amendment grants qualified 
nonelective contributions (QNECs) to nonhighly compensated nonexcludable 
employees who were not eligible employees within the meaning of 
Sec. 1.401(m)-1(f)(4) for the given plan year, and the amount of the 
QNECs granted to each nonhighly compensated nonexcludable employee 
equals the product of the nonhighly compensated nonexcludable employee's 
plan year compensation and the actual contribution percentage (within 
the meaning of section 401(m)(3)) for the given plan year for the group 
of NHCEs who are eligible employees.
    (B) Correction of rate of match. In the case of a section 401(m) 
plan, allocations for a given plan year granted under a corrective 
amendment to NHCEs who made contributions for the plan year eligible for 
a matching contribution may be treated as matching contributions. These 
allocations treated as matching contributions may be taken into account 
for purposes of satisfying the current availability requirement of 
Sec. 1.401(a)(4)-4(b) with respect to the right to a rate of match, but 
may not be taken into account for satisfying other amounts testing.
    (4) Corrective amendments must have substance. A corrective 
amendment is not taken into account in determining whether a plan 
satisfies section 401(a)(4) or 410(b) to the extent the amendment 
affects nonvested employees whose employment with the employer 
terminated on or before the close of the preceding year, and who 
therefore would not have received any economic benefit from the 
amendment if it had been made in the prior year. Similarly, in 
determining whether the requirements of paragraph (g)(3)(vi)(C)(1) of 
this section are satisfied, a corrective amendment making a benefit, 
right, or feature available to employees is not taken into account to 
the extent the benefit, right, or feature is not currently available to 
any of those employees immediately after the amendment. However, a plan 
will not fail to satisfy the requirements of paragraph (g)(3)(vi)(C)(1) 
of this section by operation of the provisions in this paragraph (g)(4) 
if the benefit, right, or feature is made available to all employees in 
the plan as of the date of the amendment.
    (5) Effect under other statutory requirements. A corrective 
amendment under this paragraph (g) is treated as if it were adopted and 
effective as of the first day of the plan year only for the specific 
purposes described in this paragraph (g). Thus, for example, the 
corrective amendment is taken into account not only for purposes of 
sections 401(a)(4) and 410(b), but also for purposes of determining 
whether the plan satisfies sections 401(l). By contrast, the amendment 
is not given retroactive effect for purposes of section 404 (deductions 
for employer contributions) or section 412 (minimum funding standards), 
unless otherwise provided for in rules applicable to those sections.
    (6) Examples. The following examples illustrate the rules in this 
paragraph (g):

    Example 1. Employer U maintains a calendar year defined benefit plan 
that in 1994 is tested using the safe harbor for flat benefit plans in 
Sec. 1.401(a)(4)-3(b)(4). In 1996, Employer U is concerned that the plan 
will not satisfy the demographic requirement in Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(3) for the 1995 plan year because the average of the 
normal accrual rates for all NHCEs is less than 70 percent of the 
average of the normal accrual rates for all HCEs. Provided the 
corrective amendment would otherwise satisfy this paragraph (g), 
Employer U may make a corrective amendment to the plan to increase the 
number of NHCEs so that the amended plan satisfies the safe harbor for 
the 1995 plan year. The corrective amendment need not satisfy paragraph

[[Page 175]]

(g)(3)(v)(A) of this section because Employer U is retroactively 
amending the plan to conform to a safe harbor in Sec. 1.401(a)(4)-3(b). 
See paragraph (g)(3)(v)(B) of this section.
    Example 2. (a) Employer V maintains a calendar year defined 
contribution plan covering all the employees in Division M and Division 
N. Under the plan, only employees in Division M have the right to direct 
the investments in their account. For plan years prior to 1996, the plan 
met the current availability requirement of Sec. 1.401(a)(4)-4(b) 
because the employees in Division M were a group of employees that 
satisfied the nondiscriminatory classification test of Sec. 1.410(b)-4. 
Because of attrition in the employee population in Division M in 1996, 
the group of employees to whom the right to direct investments is 
available during that plan year no longer meets the nondiscriminatory 
classification test of Sec. 1.410(b)-4. Thus, the right to direct 
investments under the plan does not meet the current availability 
requirement of Sec. 1.401(a)(4)-4(b) during the 1996 plan year.
    (b) Employer V may amend the plan in 1997 (but on or before October 
15) to make the right to direct investments available from the date of 
the corrective amendment to a larger group of employees and the 
corrective amendment may be taken into account for purposes of 
satisfying the current availability requirement of Sec. 1.401(a)(4)-4(b) 
for 1996 if the amendment satisfies this paragraph (g). Thus, for 
example, the group of employees to whom the right to direct investments 
is currently available, after taking into account the corrective 
amendment, must satisfy the nondiscriminatory classification test of 
Sec. 1.410(b)-4 for 1996 using a safe harbor percentage (or if lower, 
the ratio percentage of the plan for 1996). In addition, the corrective 
amendment making the right to direct investments available to a larger 
group of employees must remain in effect through the end of the 1998 
plan year.
    (c) In order for Employer V to take the corrective amendment into 
account for purposes of satisfying the current availability requirement 
of Sec. 1.401(a)(4)-4(b) for the portion of the 1997 plan year before 
the amendment, the group of employees to whom the right to direct 
investments is currently available, taking into account the amendment, 
must satisfy the nondiscriminatory classification test of Sec. 1.410(b)-
4 for 1997 using a safe harbor percentage (or if lower, the ratio 
percentage of the plan for 1997).
    (d) Alternatively, if Employer V adopts the corrective amendment 
before the end of the 1996 plan year, the corrective amendment need only 
remain in force through the end of the 1997 plan year, or the corrective 
amendment may eliminate the right to direct investments (provided that 
the elimination remains in effect through the end of the 1997 plan 
year).
    Example 3. The facts are the same as in Example 2. In 1997, Employer 
V makes a corrective amendment to extend the plan to employees of 
Division O as well as Divisions M and N. Assume that the corrective 
amendment satisfies paragraph (g)(3)(v)(A) of this section, and thus, 
may be taken into account for purposes of satisfying the 
nondiscriminatory amounts requirement of Sec. 1.401(a)(4)-1(b)(2) or the 
minimum coverage requirements of section 410(b). However, the employees 
in Division O will not be taken into account in determining whether the 
right to direct investments meets the current availability requirements 
of Sec. 1.401(a)(4)-4(b) unless the corrective amendment meets the 
requirements of paragraph (g)(3)(vi) of this section. Thus, for example, 
the group of employees to whom the right to direct investments is made 
available as a result of the expansion of coverage, after taking into 
account the corrective amendment, must satisfy the nondiscriminatory 
clarification test of Sec. 1.410(b)-4 for 1996 using a safe harbor 
percentage (or if lower, the ratio percentage of the plan for 1996). In 
addition, the amendment making the right to direct investments available 
to a larger group of employees must remain in effect though the end of 
the 1998 plan year.
    Example 4. Employer W maintains a defined benefit plan that covers 
all employees and that offsets an employee's benefit by the employee's 
projected primary insurance amount. The plan is not eligible to use the 
safe harbors under Sec. 1.401(a)(4)-3(b) because the plan does not 
satisfy section 401(l). Under the plan, the accrual rates for all HCEs 
(determined under the general test of Sec. 1.401(a)(4)-3(c)) for 1998 
are less than 1.5 percent of average annual compensation, and the 
accrual rates for all NHCEs (determined under the general test of 
Sec. 1.401(a)(4)-3(c)) for 1998 are two percent of average annual 
compensation. If Employer W adopts a corrective amendment adopted in 
1999 that retroactively increases HCEs' benefits under the plan so that 
their accrual rates equal those of the NHCEs, the corrective amendment 
may not be taken into account in testing the 1998 plan year (i.e., the 
accruals that result from the corrective amendment are treated as 1999 
accruals), because the accruals for the 1998 plan year resulting from 
the corrective amendment would not separately satisfy sections 410(b) 
and 401(a)(4). This is the case even if, after taking the amendment into 
account, the plan would satisfy sections 410(b) and 401(a)(4) for the 
1998 plan year.
    Example 5. Employer X maintains two plans--Plan A and Plan B. Plan A 
satisfies the ratio percentage test of Sec. 1.410(b)-2(b)(2), but Plan B 
does not. Thus, in order to satisfy section 410(b), Plan B must satisfy 
the average benefits test of Sec. 1.410(b)-2(b)(3). The average benefit 
percentage of Plan B is 60 percent. Employer X may take into account a

[[Page 176]]

corrective amendment that increases the accruals under either Plan A or 
Plan B so that the average benefit percentage meets the 70 percent 
requirement of the average benefits test, if the amendment satisfies 
paragraph (g)(3)(v) of this section.
    Example 6. Employer Y maintains Plan C, which does not satisfy 
section 401(a)(4) in a plan year. Under the terms of paragraph (g)(2) of 
this section, Employer Y amends Plan C to increase the benefits of 
certain employees retroactively. In designing the amendment, Employer Y 
identifies those employees who have terminated without vested benefits 
during the period after the end of the prior plan year and before the 
adoption date of the amendment, and the amendment provides increases in 
benefits primarily to those employees. It would be inconsistent with the 
purpose of preventing discrimination in favor of HCEs for Plan C to 
treat the amendment as retroactively effective under this paragraph (g). 
See Sec. 1.401(a)(4)-1(c)(2).
    Example 7. Employer Z maintains both a section 401(k) plan and a 
section 401(m) plan that provides matching contributions at a rate of 50 
percent with respect to elective contributions under the section 401(k) 
plan. In plan year 1995, the section 401(k) plan fails to satisfy the 
actual deferral percentage test of section 401(k)(3). In order to 
satisfy section 401(k)(3), Employer Z makes corrective distributions to 
HCEs H1 through H10 of their excess contributions as provided under 
Sec. 1.401(k)-1(f). The matching contributions that H1 through H10 had 
received on account of their excess contributions are not forfeited, 
however. Thus, the effective rate of matching contributions provided to 
H1 through H10 is increased as a result of the corrective distributions. 
See Sec. 1.401(a)(4)-4(e)(3)(iii)(G). Since no NHCE in the section 
401(m) plan is provided with an equivalent rate of matching 
contributions, the rate of matching contributions provided to H1 through 
H10 does not satisfy the nondiscriminatory availability requirement of 
Sec. 1.401(a)(4)-4 in plan year 1995. Employer Z makes a corrective 
amendment by October 15, 1996, that grants allocations to NHCEs who made 
contributions for the 1995 plan year eligible for a matching 
contribution. Employer Z may treat the allocations granted under the 
corrective amendment to those NHCEs as matching contributions for the 
1995 plan year and, as a result, take them into account in determining 
whether the availability of the rate of matching contributions provided 
to H1 through H10 satisfies the current availability requirement of 
Sec. 1.401(a)(4)-4(b) for the 1995 plan year.

[T.D. 8485, 58 FR 46813, Sept. 3, 1993]



Sec. 1.401(a)(4)-12  Definitions.

    Unless otherwise provided, the definitions in this section govern in 
applying the provisions of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
    Accumulation plan. Accumulation plan means a defined benefit plan 
under which the benefit of every employee for each plan year is 
separately determined, using plan year compensation (if benefits are 
determined as a percentage of compensation rather as than a dollar 
amount) separately calculated for the plan year, and each employee's 
total accrued benefit as of the end of a plan year is the sum of the 
separately determined benefit for that plan year and the total accrued 
benefit as of the end of the preceding plan year.
    Acquired group of employees. Acquired group of employees means 
employees of a prior employer who become employed by the employer in a 
transaction between the employer and the prior employer that is a stock 
or asset acquisition, merger, or other similar transaction involving a 
change in the employer of the employees of a trade or business, plus 
employees hired by or transferred into the acquired trade or business on 
or before a date selected by the employer that is within the transition 
period defined in section 410(b)(6)(C)(ii). In addition, in the case of 
a transaction prior to the effective date of these regulations, the date 
by which employees must be hired by or transferred into the acquired 
trade or business in order to be included in the acquired group of 
employees may be any date prior to February 11, 1993, without regard to 
whether it is later than the end of the transition period defined in 
section 410(b)(6)(C)(ii).
    Actuarial equivalent. An amount or benefit is the actuarial 
equivalent of, or is actuarially equivalent to, another amount or 
benefit at a given time if the actuarial present value of the two 
amounts or benefits (calculated using the same actuarial assumptions) at 
that time is the same.
    Actuarial present value. Actuarial present value means the value as 
of a specified date of an amount or series of amounts due thereafter, 
where each amount is--
    (1) Multiplied by the probability that the condition or conditions 
on which payment of the amount is contingent will be satisfied; and

[[Page 177]]

    (2) Discounted according to an assumed rate of interest to reflect 
the time value of money.
    Ancillary benefit. Ancillary benefit is defined in Sec. 1.401(a)(4)-
4(e)(2).
    Average annual compensation. Average annual compensation is defined 
in Sec. 1.401(a)(4)-3(e)(2).
    Base benefit percentage. Base benefit percentage is defined in 
Sec. 1.401(l)-1(c)(3).
    Benefit formula. Benefit formula means the formula a defined benefit 
plan applies to determine the accrued benefit (within the meaning of 
section 411(a)(7)(A)(i)) in the form of an annual benefit commencing at 
normal retirement age of an employee who continues in service until 
normal retirement age. Thus, for example, the benefit formula does not 
include the accrual method the plan applies (in conjunction with the 
benefit formula) to determine the accrued benefit of an employee who 
terminates employment before normal retirement age. For purposes of this 
definition, a change in plan provisions that applies only to certain 
employees who terminate within a limited period of time (e.g., an early 
retirement window benefit) is treated as a change in the plan's benefit 
formula for the employees to whom the change is potentially applicable 
during the period that the change is potentially applicable to them. The 
preceding sentence applies only to the extent that the change in plan 
provisions would result in a change in the benefit formula if it were 
permanent and applied without regard to when the employees' employment 
was terminated.
    Benefit, right, or feature. Benefit, right, or feature means an 
optional form of benefit, an ancillary benefit, or an other right or 
feature within the meaning of Sec. 1.401(a)(4)-4(e).
    Contributory DB plan. Contributory DB plan means a defined benefit 
plan that includes employee contributions not allocated to separate 
accounts.
    Defined benefit excess plan. Defined benefit excess plan is defined 
in Sec. 1.401(l)-1(c)(16)(i).
    Defined benefit plan. Defined benefit plan is defined in 
Sec. 1.410(b)-9.
    Defined contribution plan. Defined contribution plan is defined in 
Sec. 1.410(b)-9.
    Determination date. Determination date is defined in 
Sec. 1.401(a)(4)-8(b)(3)(iv)(A).
    Employee. With respect to a plan for a given plan year, employee 
means an employee (within the meaning of Sec. 1.410(b)-9) who benefits 
as an employee under the plan for the plan year (within the meaning of 
Sec. 1.410(b)-3).
    Employer. Employer is defined in Sec. 1.410(b)-9.
    ESOP. ESOP is defined in Sec. 1.410(b)-9.
    Excess benefit percentage. Excess benefit percentage is defined in 
Sec. 1.401(l)-1(c)(14).
    Former employee. With respect to a plan for a given plan year, 
former employee means a former employee (within the meaning of 
Sec. 1.410(b)-9).
    Former HCE. Former HCE means a highly compensated former employee as 
defined in Sec. 1.410(b)-9.
    Former NHCE. Former NHCE means a former employee who is not a former 
HCE.
    Fresh-start date. Fresh-start date is defined in Sec. 1.401(a)(4)-
13(c)(5)(iii).
    Fresh-start group. Fresh-start group is defined in Sec. 1.401(a)(4)-
13(c)(5)(ii).
    Gross benefit percentage. Gross benefit percentage is defined in 
Sec. 1.401(l)-1(c)(18).
    HCE. HCE means a highly compensated employee as defined in 
Sec. 1.410(b)-9 who benefits under the plan for the plan year (within 
the meaning of Sec. 1.410(b)-3).
    Integration level. Integration level is defined in Sec. 1.401(l)-
1(c)(20).
    Measurement period. Measurement period is defined in 
Sec. 1.401(a)(4)-3(d)(1)(iii).
    Multiemployer plan. Multiemployer plan is defined in Sec. 1.410(b)-
9.
    NHCE. NHCE means an employee who is not an HCE.
    Nonexcludable employee. Nonexcludable employee means an employee 
within the meaning of Sec. 1.410(b)-9, other than an excludable employee 
with respect to the plan as determined under Sec. 1.410(b)-6. A 
nonexcludable employee may be either a highly or nonhighly compensated 
nonexcludable employee, depending on the nonexcludable employee's status 
under section 414(q).
    Normalize. With respect to a benefit payable to an employee in a 
particular form, normalize means to convert the benefit to an 
actuarially equivalent

[[Page 178]]

straight life annuity commencing at the employee's testing age. The 
actuarial assumptions used in normalizing a benefit must be reasonable 
and must be applied on a gender-neutral basis. A standard interest rate 
and a standard mortality table are among the assumptions considered 
reasonable for this purpose.
    Offset plan. Offset plan is defined in Sec. 1.401(l)-1(c)(24).
    Optional form of benefit. Optional form of benefit is defined in 
Sec. 1.401(a)(4)-4(e)(1).
    Other right or feature. Other right or feature is defined in 
Sec. 1.401(a)(4)-4(e)(3).
    Plan. Plan means a plan within the meaning of Sec. 1.410(b)-7 (a) 
and (b), after application of the mandatory disaggregation rules of 
Sec. 1.410(b)-7(c) and the permissive aggregation rules of 
Sec. 1.410(b)-7(d).
    Plan year. Plan year is defined in Sec. 1.410(b)-9.
    Plan year compensation--(1) In general. Plan year compensation means 
section 414(s) compensation for the plan year determined by measuring 
section 414(s) compensation during one of the periods described in 
paragraphs (2) through (4) of this definition. Whichever period is 
selected must be applied uniformly to determine the plan year 
compensation of every employee.
    (2) Plan year. This period consists of the plan year.
    (3) Twelve-month period ending in the plan year. This period 
consists of a specified 12-month period ending with or within the plan 
year, such as the calendar year or the period for determining benefit 
accruals described in Sec. 1.401(a)(4)-3(f)(6).
    (4) Period of plan participation during the plan year. This period 
consists of the portion of the plan year during which the employee is a 
participant in the plan. This period may be used to determine plan year 
compensation for the plan year in which participation begins, the plan 
year in which participation ends, or both. This period may be used to 
determine plan year compensation when substituted for average annual 
compensation in Sec. 1.401(a)(4)-3(e)(2)(ii)(A) only if the plan year is 
also the period for determining benefit accruals under the plan rather 
than another period as permitted under Sec. 1.401(a)(4)-3(f)(6). 
Further, selection of this period must be made on a reasonably 
consistent basis from plan year to plan year in a manner that does not 
discriminate in favor of HCEs.
    (5) Special rule for new employees. Notwithstanding the uniformity 
requirement of paragraph (1) of this definition, if employees' plan year 
compensation for a plan year is determined based on a 12-month period 
ending within the plan year under paragraph (3) of this definition, then 
the plan year compensation of any employees whose date of hire was less 
than 12 months before the end of that 12-month period must be determined 
uniformly based either on the plan year or on the employees' periods of 
participation during the plan year, as provided in paragraphs (2) and 
(4), respectively, of this definition.
    QJSA. QJSA means a qualified joint and survivor annuity as defined 
in section 417(b).
    QSUPP--(1) In general. QSUPP or qualified social security supplement 
means a social security supplement that meets each of the requirements 
in paragraphs (2) through (6) of this definition.
    (2) Accrual--(i) General rule. The amount of the social security 
supplement payable at any age for which the employee is eligible for the 
social security supplement must be equal to the lesser of--
    (A) The employee's old-age insurance benefit, unreduced on account 
of age, under title II of the Social Security Act; and
    (B) The accrued social security supplement, determined under one of 
the methods in paragraph (2) (ii) through (iv) of this definition.
    (ii) Section 401(l) plans. In the case of a section 401(l) plan that 
is a defined benefit excess plan, each employee's accrued social 
security supplement equals the employee's average annual compensation up 
to the integration level, multiplied by the disparity provided by the 
plan for the employee's years of service used in determining the 
employee's accrued benefit under the plan. In the case of a section 
401(l) plan that is an offset plan, each employee's accrued social 
security supplement equals the dollar amount of the

[[Page 179]]

offset accrued for the employee under the plan.
    (iii) PIA offset plan. In the case of a PIA offset plan, each 
employee's accrued social security supplement equals the dollar amount 
of the offset accrued for the employee under the plan. For this purpose, 
a PIA offset plan is a plan that reduces an employee's benefit by an 
offset based on a stated percentage of the employee's primary insurance 
amount under the Social Security Act.
    (iv) Other plans. In the case of any other plan, each employee's 
social security supplement accrues ratably over the period beginning 
with the later of the employee's commencement of participation in the 
plan or the effective date of the social security supplement and ending 
with the earliest age at which the social security supplement is payable 
to the employee. The effective date of the social security supplement is 
the later of the effective date of the amendment adding the social 
security supplement or the effective date of the amendment modifying an 
existing social security supplement to comply with the requirements of 
this definition. If, by the end of the first plan year to which these 
regulations apply, as set forth in Sec. 1.401(a)(4)-13 (a) and (b), an 
amendment is made to a social security supplement in existence on 
September 19, 1991, the employer may treat the accrued portion of the 
social security supplement, as determined under the plan without regard 
to amendments made after September 19, 1991, as included in the 
employee's accrued social security supplement, provided that the 
remainder of the social security supplement is accrued under the 
otherwise-applicable method.
    (3) Vesting. The plan must provide that an employee's right to the 
accrued social security supplement becomes nonforfeitable within the 
meaning of section 411 as if it were an early retirement benefit.
    (4) Eligibility. The plan must impose the same eligibility 
conditions on receipt of the social security supplement as on receipt of 
the early retirement benefit in conjunction with which the social 
security supplement is payable. Furthermore, if the service required for 
an employee to become eligible for the social security supplement 
exceeds 15 years, then the ratio percentage of the group of employees 
who actually satisfy the eligibility conditions on receipt of the QSUPP 
in the current plan year must equal or exceed the unsafe harbor 
percentage applicable to the plan under Sec. 1.410(b)-4(c)(4)(ii).
    (5) QJSA. At each age, the most valuable QSUPP commencing at that 
age must be payable in conjunction with the QJSA commencing at that age. 
In addition, the plan must provide that, in the case of a social 
security supplement payable in conjunction with a QJSA, the social 
security supplement will be paid after the employee's death on the same 
terms as the QJSA, but in no event for a period longer than the period 
for which the social security supplement would have been paid to the 
employee had the employee not died. For example, if the QJSA is in the 
form of a joint annuity with a 50-percent survivor's benefit, the social 
security supplement must provide a 50-percent survivor's benefit. When 
section 417(c) requires the determination of a QJSA for purposes of 
determining a qualified pre-retirement survivor's annuity as defined in 
section 417(c) (QPSA), the social security supplement payable in 
conjunction with that QJSA must be paid in conjunction with the QPSA.
    (6) Protection. The plan must specifically provide that the social 
security supplement is treated as an early retirement benefit that is 
protected under section 411(d)(6) (other than for purposes of sections 
401(a)(11) and 417). Thus, the accrued social security supplement must 
continue to be payable notwithstanding subsequent amendment of the plan 
(including the plan's termination), and an employee may meet the 
eligibility requirements for the social security supplement after plan 
termination.
    Qualified plan. Qualified plan means a plan that satisfies section 
401(a). For this purpose, a qualified plan includes an annuity plan 
described in section 403(a).
    Rate group. Rate group is defined in Sec. 1.401(a)(4)-2(c)(1) or is 
defined in Sec. 1.401(a)(4)-3(c)(1).
    Ratio percentage. Ratio percentage is defined in Sec. 1.410(b)-9.

[[Page 180]]

    Section 401(a)(17) employee. Section 401(a)(17) employee is defined 
in Sec. 1.401(a)(17)-1(e)(2)(ii).
    Section 401(k) plan. Section 401(k) plan is defined in 
Sec. 1.410(b)-9.
    Section 401(l) plan. Section 401(l) plan is defined in 
Sec. 1.410(b)-9.
    Section 401(m) plan. Section 401(m) plan is defined in 
Sec. 1.410(b)-9.
    Section 414(s) compensation--(1) General rule. When used with 
reference to compensation for a plan year, 12-month period, or other 
specified period, section 414(s) compensation means compensation 
measured using an underlying definition that satisfies section 414(s) 
for the applicable plan year. Whether an underlying definition of 
compensation satisfies section 414(s) is determined on a year-by-year 
basis, based on the provisions of section 414(s) in effect for the 
applicable plan year and, if relevant, the employer's HCEs and NHCEs for 
that plan year. See Sec. 1.414(s)-1(i) for transition rules for plan 
years beginning before the effective date applicable to the plan under 
Sec. 1.401(a)(4)-13 (a) or (b). For a plan year or 12-month period 
beginning before January 1, 1988, any underlying definition of 
compensation may be used to measure the amount of employees' 
compensation for purposes of this definition, provided that the 
definition was nondiscriminatory based on the facts and circumstances in 
existence for that plan year or for the plan year in which that 12-month 
period ends.
    (2) Determination period for section 414(s) nondiscrimination 
requirement--(i) General rule. If an underlying definition of 
compensation must satisfy the nondiscrimination requirement in 
Sec. 1.414(s)-1(d)(3) in order to satisfy section 414(s) for a plan 
year, any one of the following determination periods may be used to 
satisfy the nondiscrimination requirement--
    (A) The plan year;
    (B) The calendar year ending in the plan year; or
    (C) The 12-month period ending in the plan year that is used to 
determine the underlying definition of compensation.
    (ii) Exception for partial plan year compensation. Notwithstanding 
the general rule in paragraph (2)(i) of this definition, if the period 
for measuring the underlying compensation is the portion of the plan 
year during which each employee is a participant in the plan (as 
provided in paragraph (4) of the definition of plan year compensation in 
this section), that period must be used as the determination period.
    (3) Plans using permitted disparity. In the case of a section 401(l) 
plan or a plan that imputes permitted disparity in accordance with 
Sec. 1.401(a)(4)-7, an underlying definition of compensation is not 
section 414(s) compensation if the definition results in significant 
under- inclusion of compensation for employees.
    (4) Double proration of service and compensation. If a defined 
benefit plan prorates benefit accruals as permitted under section 
411(b)(4)(B) by crediting less than full years of participation, then 
compensation for a plan year, 12-month period, or other specified period 
that is used to determine the amount of an employee's benefits under the 
plan will not fail to be section 414(s) compensation, merely because the 
amount of compensation for that period is adjusted to reflect the 
equivalent of full-time compensation to the extent necessary to satisfy 
the requirements of 29 CFR 2530.204-2(d) (regarding double proration of 
service and compensation). This adjustment is disregarded in determining 
whether the underlying definition of compensation used satisfies the 
requirements of section 414(s). Thus, for example, if the underlying 
definition of compensation is an alternative definition that must 
satisfy the nondiscrimination requirement of Sec. 1.414(s)-1(d)(3), in 
determining whether that requirement is satisfied with regard to the 
underlying definition, the compensation included for any employee is 
determined without any adjustment to reflect the equivalent of full-time 
compensation required by 29 CFR 2530.204-2(d).
    Social security supplement. Social security supplement is defined in 
Sec. 1.411(a)-7(c)(4)(ii).
    Standard interest rate. Standard interest rate means an interest 
rate that is neither less than 7.5 percent nor greater than 8.5 percent, 
compounded annually. The Commissioner may, in revenue rulings, notices, 
and other guidance of general applicability, change the definition of 
standard interest rate.

[[Page 181]]

    Standard mortality table. Standard mortality table means one of the 
following tables: the UP-1984 Mortality Table (Unisex); the 1983 Group 
Annuity Mortality Table (1983 GAM) (Female); the 1983 Group Annuity 
Mortality Table (1983 GAM) (Male); the 1983 Individual Annuity Mortality 
Table (1983 IAM) (Female); the 1983 Individual Annuity Mortality Table 
(1983 IAM) (Male); the 1971 Group Annuity Mortality Table (1971 GAM) 
(Female); the 1971 Group Annuity Mortality Table (1971 GAM) (Male); the 
1971 Individual Annuity Mortality Table (1971 IAM) (Female); or the 1971 
Individual Annuity Mortality Table (1971 IAM) (Male). These standard 
mortality tables are available from the Society of Actuaries, 475 N. 
Martingale Road, Suite 800, Schaumberg, Illinois 60173. The Commissioner 
may, in revenue rulings, notices, and other guidance of general 
applicability, change the definition of standard mortality table. See 
Sec. 601.601(d)(2)(ii)(b) of this Chapter. The applicable mortality 
table under section 417(e)(3)(A)(ii)(I) is also a standard mortality 
table.
    Straight life annuity. Straight life annuity means an annuity 
payable in equal installments for the life of the employee that 
terminates upon the employee's death.
    Testing age. With respect to an employee, testing age means the age 
determined for the employee under the following rules:
    (1) If the plan provides the same uniform normal retirement age for 
all employees, the employee's testing age is the employee's normal 
retirement age under the plan.
    (2) If a plan provides different uniform normal retirement ages for 
different employees or different groups of employees, the employee's 
testing age is the employee's latest normal retirement age under any 
uniform normal retirement age under the plan, regardless of whether that 
particular uniform normal retirement age actually applies to the 
employee under the plan.
    (3) If the plan does not provide a uniform normal retirement age, 
the employee's testing age is 65.
    (4) If an employee is beyond the testing age otherwise determined 
for the employee under paragraphs (1) through (3) of this definition, 
the employee's testing age is the employee's current age. The rule in 
the preceding sentence does not apply in the case of a defined benefit 
plan that fails to satisfy the requirements of Sec. 1.401(a)(4)-
3(f)(3)(i) (permitting certain increases in benefits that commence after 
normal retirement age to be disregarded).
    Testing service. Testing service is defined in Sec. 1.401(a)(4)-
3(d)(1)(iv).
    Uniform normal retirement age--(1) General rule. Uniform normal 
retirement age means a single normal retirement age under the plan that 
does not exceed the maximum age in paragraph (2) of this definition and 
that is the same for all of the employees in a given group. A group of 
employees does not fail to have a uniform normal retirement age merely 
because the plan contains provisions described in paragraphs (3) and (4) 
of this definition.
    (2) Maximum age. The maximum age is generally 65. However, if all 
employees have the same social security retirement age (within the 
meaning of section 415(b)(8)), the maximum age is the employees' social 
security retirement age. Thus, for example, a component plan has a 
uniform normal retirement age of 67 if it defines normal retirement age 
as social security retirement age and all employees in the component 
plan have a social security retirement age of 67.
    (3) Stated anniversary date--(i) General rule. A group of employees 
does not fail to have a uniform normal retirement age merely because the 
plan provides that the normal retirement age of all employees in the 
group is the later of a stated age (not exceeding the maximum age in 
paragraph (2) of this definition) or a stated anniversary no later than 
the fifth anniversary of the time each employee commenced participation 
in the plan. For employees who commenced participation in the plan 
before the first plan year beginning on or after January 1, 1988, the 
stated anniversary date may be later than the anniversary described in 
the preceding sentence if it is no later than the earlier of the tenth 
anniversary of the date the employee commenced participation in the plan 
(or such earlier anniversary selected by the employer, if less than 10) 
or the fifth anniversary of

[[Page 182]]

the first day of the first plan year beginning on or after January 1, 
1988.
    (ii) Use of service other than anniversary of commencement of 
participation. In lieu of using a stated anniversary date as permitted 
under paragraph (3)(i) of this definition, a plan may use a stated 
number of years of service measured on another basis, provided that the 
determination is made on a basis that satisfies section 411(a)(8) and 
that the stated number of years of service does not exceed the number of 
anniversaries permitted under paragraph (3)(i) of this definition. For 
example, a uniform normal retirement age could be based on the earlier 
of the fifth anniversary of the commencement of participation and the 
completion of five years of vesting service.
    (4) Conversion of normal retirement age to normal retirement date. A 
group of employees does not fail to have a uniform normal retirement age 
merely because a defined benefit plan provides for the commencement of 
normal retirement benefits on different retirement dates for different 
employees if each employee's normal retirement date is determined on a 
reasonable basis with reference to an otherwise uniform normal 
retirement age and the difference between the normal retirement date and 
the uniform normal retirement age cannot exceed six months for any 
employee. Thus, for example, benefits under a plan do not fail to 
commence at a uniform normal retirement age of age 62 for purposes of 
Sec. 1.401(a)(4)-3(b)(2)(i), merely because the plan's normal retirement 
date is defined as the last day of the plan year nearest attainment of 
age 62.
    Year of service. Year of service means a year of service as defined 
in the plan for a specific purpose, including the method of crediting 
service for that purpose under the plan.

[T.D. 8485, 58 FR 46820, Sept. 3, 1993, as amended by T.D. 8954, 66 FR 
34545, June 29, 2001]



Sec. 1.401(a)(4)-13  Effective dates and fresh-start rules.

    (a) General effective dates--(1) In general. Except as otherwise 
provided in this section, Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 
apply to plan years beginning on or after January 1, 1994.
    (2) Plans of tax-exempt organizations. In the case of plans 
maintained by organizations exempt from income taxation under section 
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective 
plans), Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 apply to plan years 
beginning on or after January 1, 1996.
    (3) Compliance during transition period. For plan years beginning 
before the effective date of these regulations, as set forth in 
paragraph (a)(1) and (2) of this section, and on or after the first day 
of the first plan year to which the amendments made to section 410(b) by 
section 1112(a) of the Tax Reform Act of 1986 (TRA '86) apply, a plan 
must be operated in accordance with a reasonable, good faith 
interpretation of section 401(a)(4), taking into account pre-existing 
guidance and the amendments made by TRA '86 to related provisions of the 
Code (including, for example, sections 401(l), 401(a)(17), and 410(b)). 
Whether a plan is operated in accordance with a reasonable, good faith 
interpretation of section 401(a)(4) will generally be determined on the 
basis of all the relevant facts and circumstances, including the extent 
to which an employer has resolved unclear issues in its favor. A plan 
will be deemed to be operated in accordance with a reasonable, good 
faith interpretation of section 401(a)(4) if it is operated in 
accordance with the terms of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
    (b) Effective date for governmental plans. In the case of 
governmental plans described in section 414(d), including plans subject 
to section 403(b)(12)(A)(i) (nonelective plans), Secs. 1.401(a)(4)-1 
through 1.401(a)(4)-13 apply to plan years beginning on or after the 
later of January 1, 1996, or 90 days after the opening of the first 
legislative session beginning on or after January 1, 1996, of the 
governing body with authority to amend the plan, if that body does not 
meet continuously. Such plans are deemed to satisfy section 401(a)(4) 
for plan years before that effective date. For purposes of this 
paragraph (b), the governing body with authority to amend the plan is 
the legislature, board, commission, council, or other governing body 
with authority to amend the plan.

[[Page 183]]

    (c) Fresh-start rules for defined benefit plans--(1) Introduction. 
This paragraph (c) provides rules that must be satisfied in order to use 
the fresh-start testing options for defined benefit plans in 
Sec. 1.401(a)(4)-3(b)(6)(vii) and (d)(3)(iii), relating to the safe 
harbors and the general test, respectively. Those fresh-start options 
are designed to allow a plan to be tested without regard to benefits 
accrued before a selected fresh-start date. To the extent provided in 
paragraph (d) of this section, those options also may be used to 
disregard certain increases in benefits attributable to compensation 
increases after a fresh-start date. Although this paragraph (c) 
generally requires a plan to be amended to freeze employees' accrued 
benefits as of a fresh-start date and to provide any additional accrued 
benefits after the fresh-start date solely in accordance with certain 
specified formulas, certain of these requirements do not apply to a plan 
that is tested under the general test of Sec. 1.401(a)(4)-3(c). See 
Sec. 1.401(a)(4)-3(b)(6)(vii) and (d)(3)(iii).
    (2) General rule. A defined benefit plan satisfies this paragraph 
(c) if--
    (i) Accrued benefits of employees in the fresh-start group are 
frozen as of the fresh-start date in accordance with paragraph (c)(3) of 
this section;
    (ii) Accrued benefits after the fresh-start date for employees in 
the fresh-start group are determined under one of the fresh-start 
formulas in paragraph (c)(4) of this section; and
    (iii) Paragraph (c)(5) of this section is satisfied.
    (3) Definition of frozen--(i) General rule. An employee's accrued 
benefit under a plan is frozen as of the fresh-start date if it is 
determined as if the employee terminated employment with the employer as 
of the fresh-start date (or the date the employee actually terminated 
employment with the employer, if earlier), and without regard to any 
amendment to the plan adopted after that date, other than amendments 
recognized as effective as of or before that date under section 401(b) 
or Sec. 1.401(a)(4)-11(g). The assumption that an employee has 
terminated employment applies solely for purposes of this paragraph 
(c)(3). Thus, for example, the fresh start has no effect on the service 
taken into account for purposes of determining vesting and eligibility 
for benefits, rights, and features under the plan.
    (ii) Permitted compensation adjustments. An employee's accrued 
benefit under a plan that satisfies paragraph (d) of this section does 
not fail to be frozen as of the fresh-start date merely because the plan 
makes the adjustments described in paragraph (d)(7) and (8) of this 
section with regard to the fresh-start date. In addition, if the frozen 
accrued benefit of an employee under the plan includes top-heavy minimum 
benefits, an employee's accrued benefit under a plan does not fail to be 
frozen as of the fresh-start date merely because the plan increases the 
frozen accrued benefit of each employee in the fresh-start group solely 
to the extent necessary to comply with the average compensation 
requirement of section 416(c)(1)(D)(i).
    (iii) Permitted changes in optional forms. An employee's accrued 
benefit under a plan does not fail to be frozen as of the fresh-start 
date merely because the plan provides a new optional form of benefit 
with respect to the frozen accrued benefit, if--
    (A) The optional form is provided with respect to each employee's 
entire accrued benefit (i.e., accrued both before and after the fresh-
start date);
    (B) The plan provided meaningful coverage as of the fresh-start 
date, as described in paragraph (d)(4) of this section; and
    (C) The plan provides meaningful current benefit accruals as 
described in paragraph (d)(6) of this section.
    (iv) Floor-offset plans. In the case of a plan that was a floor-
offset plan described in Sec. 1.401(a)(4)-8(d) prior to the fresh-start 
date, an employee's accrued benefit as of the fresh-start date does not 
fail to be frozen merely because the actuarial equivalent of the account 
balance in the defined contribution plan that is offset against the 
defined benefit plan varies as a result of investment return that is 
different from the assumed interest rate used to determine the actuarial 
equivalent of the account balance.

[[Page 184]]

    (4) Fresh-start formulas--(i) Formula without wear-away. An 
employee's accrued benefit under the plan is equal to the sum of--
    (A) The employee's frozen accrued benefit; and
    (B) The employee's accrued benefit determined under the formula 
applicable to benefit accruals in the current plan year (current 
formula) as applied to the employee's years of service after the fresh-
start date.
    (ii) Formula with wear-away. An employee's accrued benefit under the 
plan is equal to the greater of--
    (A) The employee's frozen accrued benefit; or
    (B) The employee's accrued benefit determined under the current 
formula as applied to the employee's total years of service (before and 
after the fresh-start date) taken into account under the current 
formula.
    (iii) Formula with extended wear-away. An employee's accrued benefit 
under the plan is equal to the greater of--
    (A) The amount determined under paragraph (c)(4)(i) of this section; 
or
    (B) The amount determined under paragraph (c)(4)(ii)(B) of this 
section.
    (5) Rules of application--(i) Consistency requirement. This 
paragraph (c)(5) is not satisfied unless the fresh-start rules in this 
paragraph (c) (and paragraph (d) of this section, if applicable) are 
applied consistently to all employees in the fresh-start group. Thus, 
for example, the same fresh-start date and fresh-start formula (within 
the meaning of paragraph (c)(4) of this section) must apply to all 
employees in the fresh-start group. Similarly, if a plan makes a fresh 
start for all employees with accrued benefits on the fresh-start date 
and, for a later plan year, is aggregated for purposes of section 
401(a)(4) with another plan that did not make the same fresh start, the 
aggregated plan must make a new fresh start in order to use the fresh-
start rules for that later plan year or any subsequent plan year.
    (ii) Definition of fresh-start group. Generally, the fresh-start 
group with respect to a fresh start consists of all employees who have 
accrued benefits as of the fresh-start date and have at least one hour 
of service with the employer after that date. However, a fresh-start 
group with respect to a fresh start may consist exclusively of all 
employees who have accrued benefits as of the fresh-start date, have at 
least one hour of service with the employer after that date, and are--
    (A) Section 401(a)(17) employees;
    (B) Members of an acquired group of employees (provided the fresh-
start date is the date determined under paragraph (c)(5)(iii)(B) of this 
section); or
    (C) Employees with a frozen accrued benefit that is attributable to 
assets and liabilities transferred to the plan as of a fresh-start date 
in connection with the transfer (provided the fresh-start date is the 
date determined under paragraph (c)(5)(iii)(C) of this section) and for 
whom the current formula is different from the formula used to determine 
the frozen accrued benefit.
    (iii) Definition of fresh-start date. Generally, the fresh-start 
date is the last day of a plan year. However, a plan may use a fresh-
start date other than the last day of the plan year if--
    (A) The plan satisfied the safe harbor rules of Sec. 1.401(a)(4)-
3(b) for the period from the beginning of the plan year through the 
fresh-start date;
    (B) The fresh-start group is an acquired group of employees, and the 
fresh-start date is the latest date of hire or transfer into an acquired 
trade or business selected by the employer for any employees to be 
included in the acquired group of employees; or
    (C) The fresh-start group is the group of employees with a frozen 
accrued benefit that is attributable to assets and liabilities 
transferred to the plan and the fresh-start date is the date as of which 
the employees begin accruing benefits under the plan.
    (6) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. (a) Employer X maintains a defined benefit plan with a 
calendar plan year. The plan formula provides an employee with a normal 
retirement benefit at age 65 of one percent of average annual 
compensation up to covered compensation multiplied by the employee's 
years of service for Employer X, plus 1.5 percent of average annual 
compensation in excess of covered compensation, multiplied by the 
employee's years of service for Employer X up to 40.

[[Page 185]]

    (b) For plan years beginning after 1994, Employer X amends the plan 
formula to provide a normal retirement benefit of 0.75 percent of 
average annual compensation up to covered compensation multiplied by the 
employee's total years of service for Employer X up to 35, plus 1.4 
percent of average annual compensation in excess of covered compensation 
multiplied by the employee's years of service for Employer X up to 35. 
For plan years after 1994, each employee's accrued benefit is determined 
under the fresh-start formula in paragraph (c)(4)(iii) of this section 
(formula with extended wear-away), using December 31, 1994, as the 
fresh-start date.
    (c) As of December 31, 1994, Employee M has 10 years of service for 
Employer X, has average annual compensation of $38,000, and has covered 
compensation of $30,000. Employee M's accrued benefit as of December 31, 
1994, is therefore $4,200 ((1 percentx$30,000x10 years)+(1.5 
percentx$8,000x10 years)). As of December 31, 1995, Employee M has 11 
years of service for Employer X, has average annual compensation of 
$40,000 (determined by taking into account compensation before and after 
the fresh-start date), and has covered compensation of $32,000. Employee 
M's accrued benefit as of December 31, 1995, is $4,552, the greater of--
    (1) $4,552, the sum of Employee M's accrued benefit frozen as of 
December 31, 1994, ($4,200) and the amended formula applied to Employee 
M's years of service after 1994 ((0.75 percentx$32,000x1 year)+(1.4 
percentx$8,000x1 year), or $352); or
    (2) $3,872, the amended formula applied to Employee M's total years 
of service ((0.75 percentx$32,000x11 years)+(1.4 percentx$8,000x11 
years)).
    Example 2. (a) Employer Y maintains a defined benefit plan, Plan A, 
that has a calendar plan year. For the 1995 plan year, Plan A satisfies 
the requirements for a safe harbor plan in Sec. 1.401(a)(4)-3(b). 
Employer Y selects a date in 1995 for all the employees, freezes the 
employees' accrued benefits as of that date under the rules of paragraph 
(c)(3) of this section, and, in accordance with the rules of this 
paragraph (c), amends Plan A to determine benefits for all employees 
after that date using the formula with wear-away described in paragraph 
(c)(4)(ii) of this section. The new benefit formula would satisfy the 
requirements for a safe harbor plan in Sec. 1.401(a)(4)-3(b) if all 
accrued benefits were determined under it.
    (b) Because Plan A satisfied the requirements for a safe harbor plan 
for the period from the beginning of the plan year through the selected 
date, paragraph (c)(5)(iii)(A) of this section permits the selected date 
to be a fresh-start date, even if it is not the last day of the plan 
year. Thus, Plan A satisfies the requirements in this paragraph (c) for 
a fresh start as of the fresh-start date.
    (c) Under Sec. 1.401(a)(4)-3(b)(6)(vii), a plan does not fail to 
satisfy the requirements of Sec. 1.401(a)(4)-3(b), merely because of 
benefits accrued under a different formula prior to a fresh-start date. 
Thus, Plan A still satisfies the safe harbor requirements of 
Sec. 1.401(a)(4)-3(b) after the amendment to the benefit formula. 
Because Plan A satisfied the requirements for a safe harbor plan for the 
period from the beginning of the plan year, taking the amendment into 
account, Employer Y may select any date within the plan year (which may 
be the same date as the first fresh-start date) and apply the fresh-
start rules in this paragraph (c) a second time as of that date.

    (d) Compensation adjustments to frozen accrued benefits--(1) 
Introduction. In addition to the fresh-start rules in paragraph (c) of 
this section, this paragraph (d) sets forth requirements that must be 
satisfied in order for a plan to disregard increases in benefits accrued 
as of a fresh-start date that are attributable to increases in 
employees' compensation after the fresh-start date.
    (2) In general. In the case of a defined benefit plan that is tested 
under the safe harbors in Sec. 1.401(a)(4)-3(b) or Sec. 1.401(a)(4)-
8(c)(3), an employee's adjusted accrued benefit (determined under the 
rules in paragraph (d)(8) of this section) may be substituted for the 
employee's frozen accrued benefit in applying the formulas in paragraph 
(c)(4) of this section (or paragraph (f)(2) of this section, if 
applicable) if paragraphs (d)(3) through (d)(7) of this section are 
satisfied. Thus, for example, in determining whether such a plan 
satisfies Sec. 1.401(a)(4)-3(b), any compensation adjustments to the 
employee's frozen accrued benefit described in paragraph (d)(8) of this 
section are disregarded. Similarly, in the case of a defined benefit 
plan tested under the general test in Sec. 1.401(a)(4)-3(c), the 
compensation adjustments described in paragraph (d)(8) of this section 
may be disregarded under the rules of Sec. 1.401(a)(4)-3(d)(3)(iii) if 
paragraphs (d)(3) through (d)(7) of this section are satisfied. Of 
course, any increases in accrued benefits exceeding these adjustments 
must be taken into account under the general test, and a plan providing 
such excess increases generally will fail to satisfy the safe harbor 
requirements of Sec. 1.401(a)(4)-3(b). Where paragraphs (d)(3) through 
(d)(7) of this section are satisfied with respect to a plan as of

[[Page 186]]

the fresh-start date, but one or more of those paragraphs fail to be 
satisfied for a later plan year, further compensation adjustments 
described in paragraph (d)(8) of this section may not be disregarded in 
testing the plan under Sec. 1.401(a)(4)-3.
    (3) Plan requirements--(i) Pre-fresh-start date. As of the fresh-
start date, the plan must have contained a benefit formula under which 
benefits of each employee in the fresh-start group that are accrued as 
of the fresh-start date and are attributable to service before the 
fresh-start date would be affected by the employee's compensation after 
the fresh-start date. A plan satisfies this requirement, for example, if 
it based benefits on an employee's highest average pay over a fixed 
period of years or on an employee's average pay over the employee's 
entire career with the employer. A plan does not satisfy this paragraph 
(d)(3)(i) if the Commissioner determines, based on all of the relevant 
facts and circumstances, that the plan provision described in the first 
sentence of this paragraph (d)(3) was added primarily in order to 
provide additional benefits to HCEs that are disregarded under the 
special testing rules described in this paragraph (d).
    (ii) Post-fresh-start date. The plan by its terms must provide that 
the accrued benefits of each employee in the fresh-start group after the 
fresh-start date be at least equal to the employee's adjusted accrued 
benefit (i.e., the frozen accrued benefit as of the fresh-start date, 
adjusted as provided under paragraph (d)(7) of this section, plus the 
compensation adjustments described in paragraph (d)(8) of this section).
    (4) Meaningful coverage as of fresh-start date. The plan must have 
provided meaningful coverage as of the fresh-start date. A plan provided 
meaningful coverage as of the fresh-start date if the group of employees 
with accrued benefits under the plan as of the fresh-start date 
satisfied the minimum coverage requirements of section 410(b) as in 
effect on that date (determined without regard to section 410(b)(6)(C)). 
In order to satisfy the requirement in the preceding sentence, an 
employer may amend the plan to grant past service credit under the 
formula in effect as of the fresh-start date to NHCEs, if the amount of 
past service granted them is reasonably comparable, on average, to the 
amount of past service HCEs have under the plan. Any benefit increase 
that results from the grant of past service credit to a NHCE under this 
paragraph (d)(4) is included in the employee's frozen accrued benefit.
    (5) Meaningful ongoing coverage--(i) General rule. The fresh-start 
group must have satisfied the minimum coverage requirements of section 
410(b) for all plan years from the first plan year beginning after the 
fresh-start date through the current plan year. Thus, if a fresh-start 
group fails to satisfy the minimum coverage requirements of section 
410(b) for any plan year, this paragraph (d)(5) is not satisfied for 
that plan year or any subsequent plan year; however, such a failure is 
not taken into account in determining whether this paragraph (d)(5) is 
satisfied for any previous plan year.
    (ii) Alternative rules. Notwithstanding paragraph (d)(5)(i) of this 
section, a fresh-start group is deemed to satisfy this paragraph (d)(5) 
for all plan years following the fresh-start date if any one of the 
following requirements is satisfied:
    (A) Section 410(b) coverage for first five years. The fresh-start 
group must have satisfied the minimum coverage requirements of section 
410(b) for the first five plan years beginning after the fresh-start 
date.
    (B) Ratio percentage coverage as of fresh-start date. The fresh-
start group must have satisfied the ratio percentage test of 
Sec. 1.410(b)-2(b)(2) as of the fresh-start date.
    (C) Fresh start for acquired group of employees. The fresh-start 
group must consist of an acquired group of employees that satisfied the 
minimum coverage requirements of section 410(b) (determined without 
regard to section 410(b)(6)(C)) as of the fresh-start date.
    (D) Fresh start before applicable effective date. The fresh-start 
date with respect to the fresh-start group must have been on or before 
the effective date applicable to the plan under paragraph (a) or (b) of 
this section.
    (6) Meaningful current benefit accruals. The benefit formula and 
accrual method under the plan that applies to the fresh-start group in 
the aggregate must

[[Page 187]]

provide benefit accruals in the current plan year (other than increases 
in benefits accrued as of the fresh-start date) at a rate that is 
meaningful in comparison to the rate at which benefits accrued for the 
fresh-start group in plan years beginning before the fresh-start date. 
Whether this requirement is satisfied with respect to a fresh-start 
group that does not include all employees in the plan with an hour of 
service after the fresh-start date may be determined taking into account 
the rate at which benefits are provided to other employees in the plan.
    (7) Minimum benefit adjustment--(i) In general. In the case of a 
section 401(l) plan or a plan that imputes disparity under 
Sec. 1.401(a)(4)-7, the plan must make the minimum benefit adjustment 
described in paragraph (d)(7)(ii) or (iii) of this section.
    (ii) Excess or offset plans. In the case of a plan that is a defined 
benefit excess plan as of the fresh-start date, each employee's frozen 
accrued benefit is adjusted so that the base benefit percentage is not 
less than 50 percent of the excess benefit percentage. In the case of a 
plan that is a PIA offset plan (as defined in paragraph (2)(iii) of the 
definition of QSUPP in Sec. 1.401(a)(4)-12) as of the fresh-start date, 
each employee's offset as applied to determine the frozen accrued 
benefit is adjusted so that it does not exceed 50 percent of the benefit 
determined without applying the offset.
    (iii) Other plans. In the case of a plan that is not described in 
paragraph (d)(7)(ii) of this section, each employee's frozen accrued 
benefit is adjusted in a manner that is economically equivalent to the 
adjustment required under that paragraph, taking into account the plan's 
benefit formula, accrual rate, and relevant employee factors, such as 
period of service.
    (8) Adjusted accrued benefit--(i) General rule. The term adjusted 
accrued benefit means an employee's frozen accrued benefit that is 
adjusted as provided in paragraph (d)(7) of this section and then 
multiplied by a fraction (not less than one), the numerator of which is 
the employee's compensation for the current plan year and the 
denominator of which is the employee's compensation as of the fresh-
start date determined under the same definition. For purposes of this 
adjustment, the compensation definition must be either the same 
compensation definition and formula used to determine the frozen accrued 
benefit or average annual compensation (determined without regard to 
Sec. 1.401(a)(4)-3(e)(2)(ii)(A) (use of plan year compensation)).
    (ii) Alternative formula for pre-effective-date fresh starts. In the 
case of a fresh-start date before the effective date that applies to the 
plan under paragraph (a) or (b) of this section, the adjusted accrued 
benefit may be determined by multiplying the frozen accrued benefit by a 
fraction (not less than one) determined under this paragraph (d)(8)(ii). 
The numerator of the fraction is the employee's average annual 
compensation for the current plan year. The denominator of the fraction 
is the employee's reconstructed average annual compensation as of the 
fresh-start date. An employee's reconstructed average annual 
compensation is determined by--
    (A) Selecting a single plan year beginning after the fresh-start 
date but beginning not later than the last day of the first plan year to 
which these regulations apply under paragraph (a) or (b) of this 
section;
    (B) Determining the employee's average annual compensation for the 
selected plan year under the same method used to determine the 
employee's average annual compensation for the current plan year under 
this paragraph (d)(8)(ii); and
    (C) Multiplying the employee's average annual compensation for the 
selected plan year by a fraction, the numerator of which is the 
employee's compensation as of the fresh-start date determined under the 
same compensation definition and formula used to determine the 
employee's frozen accrued benefit and the denominator of which is the 
employee's compensation for the selected plan year determined under the 
compensation definition and formula used to determine the employee's 
frozen accrued benefit.
    (iii) Effect of section 401(a)(17). In determining the numerators 
and the denominators of the fractions described in this paragraph 
(d)(8), the annual compensation limit under section

[[Page 188]]

401(a)(17) generally applies. See, however, Sec. 1.401(a)(17)-1(e)(4) 
for special rules applicable to section 401(a)(17) employees.
    (iv) Option to make less than the full permitted adjustment. A plan 
may limit the increase in an employee's frozen accrued benefit for the 
current and all future years to a percentage (not more than 100 percent) 
of the increase otherwise provided under this paragraph (d)(8). 
Furthermore, the plan may, at any time, terminate all future adjustments 
permitted under this paragraph (d).
    (v) Alternative determination of adjusted accrued benefit. In lieu 
of applying the fractions in paragraph (d)(8)(i) or (ii) of this 
section, a plan may determine an employee's adjusted accrued benefit by 
substituting the employee's compensation for the current plan year 
(determined under the same compensation formula and underlying 
definition of compensation used to determine the employee's frozen 
accrued benefit) in the benefit formula used to determine the frozen 
accrued benefit. For this purpose, insignificant changes in the 
underlying definition of compensation to reflect current compensation 
practices will not be treated as a change in the definition of 
compensation. A plan may apply the alternative in this paragraph 
(d)(8)(v), only if it is reasonable to expect as of the fresh-start date 
that, over time, the use of this method instead of the general rule of 
paragraph (d)(8)(i) will not discriminate significantly in favor of 
HCEs.
    (9) Examples. The following examples illustrate the rules of this 
paragraph (d).

    Example 1. (a) Employer X maintains a defined benefit plan that is 
an excess plan with a calendar plan year. For plan years before 1989, 
the plan is integrated with benefits provided under the Social Security 
Act, providing each employee with a normal retirement benefit equal to 
one percent of the employee's average annual compensation in excess of 
the employee's covered compensation, multiplied by the employee's years 
of service for Employer X. The benefit formula thus provides no benefit 
with respect to average annual compensation up to covered compensation.
    (b) As of December 31, 1988, Employee M has 10 years of service for 
Employer X and has covered compensation of $25,000 and average annual 
compensation of $20,000. Employee M's average annual compensation has 
never exceeded $20,000. Therefore, as of December 31, 1988, Employee M's 
accrued benefit under the plan is zero.
    (c) Effective with the 1989 plan year, the plan is amended to 
provide each employee with a normal retirement benefit of 0.6 percent of 
average annual compensation up to covered compensation plus 1.2 percent 
of average annual compensation in excess of covered compensation, 
multiplied by the employee's years of service up to 35. The plan also 
provides that, for plan years after 1988, each employee's accrued 
benefit is determined under the formula in paragraph (c)(4)(i) of this 
section (formula without wear-away) and, in applying the fresh-start 
formula, each employee's frozen accrued benefit under paragraph 
(c)(4)(i) of this section will be adjusted under this paragraph (d), 
using the same compensation definition and formula used to determine the 
frozen accrued benefit under paragraph (d)(8)(i) of this section.
    (d) The plan uses the permitted disparity of section 401(l) and thus 
must also make the minimum benefit adjustment under paragraph (d)(7) of 
this section. Because the excess benefit percentage under the plan for 
years before 1989 was one percent, the plan must provide a base benefit 
percentage for those years of at least 0.5 percent. After the minimum 
benefit adjustment, Employee M's accrued benefit as of December 31, 
1988, is $1,000 (0.5 percentx$20,000x10 years).
    (e) As of December 31, 1992, Employee M has 14 years of service and 
has covered compensation of $30,000 and average annual compensation of 
$35,000. Employee M's adjusted accrued benefit as of December 31, 1992, 
is $1,750 ($1,000x$35,000/$20,000), and Employee M's accrued benefit as 
of December 31, 1992, is $2,710 (the sum of $1,750 plus $960 ((0.6 
percentx$30,000x4 years) plus (1.2 percentx$5,000x4 years))).
    Example 2. (a) The facts are the same as in Example 1, except that 
in determining adjusted accrued benefits, the plan specifies the 
alternative method of paragraph (d)(8)(v) of this section. This method 
may be used because it is reasonable to expect as of the fresh-start 
date that, over time, the use of this method instead of the general rule 
of paragraph (d)(8)(i) will not discriminate significantly in favor of 
HCEs.
    (b) As of December 31, 1992, Employee M's adjusted accrued benefit 
is $2,000 (10 years of service prior to the fresh-start datex(0.5 
percent of $30,000+1.0 percent of the excess of $35,000 over $30,000)).
    (c) Alternatively, Employer X may choose to use the method of 
paragraph (d)(8)(v) of this section but freezes the covered compensation 
level at the dollar level in place as of the fresh-start date. In such 
case, Employee M's adjusted accrued benefit as of December 31, 1992, 
would have been $2,250 (10

[[Page 189]]

years of service prior to the fresh-start datex(0.5 percent of 
$25,000+1.0 percent of the excess of $35,000 over $25,000)). This method 
may be used because it is reasonable to expect as of the fresh-start 
date that, over time, the use of this method instead of the general rule 
of paragraph (d)(8)(i) will not discriminate significantly in favor of 
HCEs.
    Example 3. (a) The facts are the same as in Example 1, except that 
for plan years before 1989, the plan provided a minimum benefit to 
certain employees equal to $120 per year of service. Employee M is 
entitled to the minimum benefit, and thus, Employee M's frozen accrued 
benefit as of December 31, 1988 was $1,200 (the greater of 10 years of 
servicex$120 and $1,000, Employee M's benefit under the underlying 
formula, after the minimum benefit adjustment of paragraph (d)(7) of 
this section).
    (b) Employer X's plan specifies instead the alternative method of 
adjusting accrued benefits described in paragraph (d)(8)(v) of this 
section. (The fact that a minimum benefit applying to certain employees 
is not adjusted under the alternative method of paragraph (d)(8)(v) of 
this section, but would be adjusted under the general rule of paragraph 
(d)(8)(i) of this section does not change the conclusion in Example 2, 
that the plan may apply the alternative method).

    (e) Determination of initial theoretical reserve for target benefit 
plans--(1) General rule. In the case of a target benefit plan the stated 
benefit formula under which takes into account service for years in 
which the plan did not satisfy Sec. 1.401(a)(4)-8(b)(3), as permitted 
under Sec. 1.401(a)(4)-8(b)(3)(vii), the theoretical reserve as of the 
determination date for the last plan year beginning before the first day 
of the first plan year in which the plan satisfies Sec. 1.401(a)(4)-
8(b)(3) of an employee who was a participant in the plan on that 
determination date, is determined as follows:
    (i) Determine the actuarial present value, as of that determination 
date, of the stated benefit that the employee is projected to have at 
the employee's normal retirement age, using the actuarial assumptions, 
the provisions of the plan, and the employee's compensation as of that 
determination date. For an employee whose attained age equals or exceeds 
the employee's normal retirement age, determine the actuarial present 
value of the employee's stated benefit at the employee's current age, 
but using an immediate straight life annuity factor for an employee 
whose attained age equals the employee's normal retirement age.
    (ii) Calculate the actuarial present value of future required 
employer contributions (without regard to limitations under section 415 
or additional contributions described in Sec. 1.401(a)(4)-8(b)(3)(v)) as 
of that determination date (i.e., the actuarial present value of the 
level contributions due for each plan year through the end of the plan 
year in which the employee attains normal retirement age). This 
calculation is made assuming that the required contribution in each 
future year will be equal to the required contribution for the plan year 
that includes that determination date, and applying the interest rate 
that was used in determining that required contribution.
    (iii) Determine the excess, if any, of the amount determined in 
paragraph (e)(1)(i) of this section over the amount determined in 
paragraph (e)(1)(ii) of this section. This excess is the employee's 
theoretical reserve on that determination date.
    (2) Example. The following example illustrates the determination of 
an employee's theoretical reserve.

    Example. (a) A target benefit plan was adopted and in effect before 
September 19, 1991, and satisfied the requirements of Rev. Rul. 76-464, 
1976-2 C.B. 115, with respect to all years credited under the stated 
benefit formula through 1993. The plan provides a stated benefit equal 
to 40 percent of compensation, payable annually as a straight life 
annuity beginning at normal retirement age. Normal retirement age under 
the plan is 65. The stated interest rate under the plan is six percent. 
The determination date for required contributions under the plan is the 
last day of the plan year. Employee M is 38 years old on the 
determination date for the 1993 plan year, has participated in the plan 
for five years, and has compensation equal to $60,000 in 1993. The 
amount of employer contribution to Employee M's account for 1993 was 
$2,468.
    (b) Under these facts, Employee M's theoretical reserve is equal to 
$13,909, calculated as follows:
    (1) The actuarial present value of Employee M's stated benefit is 
calculated using the actuarial assumptions, provisions of the plan and 
Employee M's compensation as of the determination date for the 1993 plan 
year. This amount is equal to $46,512, Employee M's stated benefit of 
$24,000 ($60,000 multiplied by 40 percent), multiplied by 1.938, the 
actuarial present value factor applicable

[[Page 190]]

to a participant who is 38 years old using a stated interest rate of six 
percent.
    (2) The actuarial present value of future employer contributions is 
calculated assuming that the required contribution in each future year 
will be equal to the required contribution for the 1993 plan year and 
assuming the same interest rate as was used in determining that 
contribution. This amount is equal to $32,603, which is equal to the 
amount of the level annual employer contribution ($2,468) multiplied by 
a factor of 13.2105 (the temporary annuity factor for a period of 27 
years, assuming the six percent interest rate that was used to determine 
the required employer contribution).
    (3) Employee M's theoretical reserve is $13,909, the excess of the 
amount determined in paragraph (b)(1) of this Example over the amount 
determined in paragraph (b)(2) of this Example.

    (f) Special fresh-start rules for cash balance plans--(1) In 
general. In order to satisfy the optional testing method of 
Sec. 1.401(a)(4)-8(c)(3) after a fresh-start date, a cash balance plan 
must apply the rules of paragraph (c) of this section as modified under 
this paragraph (f). Paragraph (f)(2) of this section provides an 
alternative formula that may be used in addition to the formulas in 
paragraphs (c)(2) through (c)(4) of this section. Paragraph (f)(3) of 
this section sets forth certain limitations on use of the formulas in 
paragraph (c) or (f)(2) of this section.
    (2) Alternative formula--(i) In general. An employee's accrued 
benefit under the plan is equal to the greater of--
    (A) The employee's frozen accrued benefit, or
    (B) The employee's accrued benefit determined under the plan's 
benefit formula applicable to benefit accruals in the current plan year 
as applied to years of service after the fresh-start date, modified in 
accordance with paragraph (f)(2)(ii) of this section.
    (ii) Addition of opening hypothetical account. As of the first day 
after the fresh-start date, the plan must credit each employee's 
hypothetical account with an amount equal to the employee's opening 
hypothetical account (determined under paragraph (f)(2)(iii) of this 
section), adjusted for interest for the period that begins on the first 
day after the fresh-start date and that ends at normal retirement age. 
The interest adjustment in the preceding sentence must be made using the 
same interest rate applied to the hypothetical allocation for the first 
plan year beginning after the fresh-start date.
    (iii) Determination of opening hypothetical account--(A) General 
rule. An employee's opening hypothetical account equals the actuarial 
present value of the employee's frozen accrued benefit as of the fresh-
start date. For this purpose, if the plan provides for a single sum 
distribution as of the fresh-start date, the actuarial present value of 
the employee's frozen accrued benefit as of the fresh-start date equals 
the amount of a single sum distribution payable under the plan on that 
date, assuming that the employee terminated employment on the fresh-
start date, the employee's accrued benefit was 100-percent vested, and 
the employee satisfied all eligibility requirements under the plan for 
the single sum distribution. If the plan does not offer a single sum 
distribution as of the fresh-start date, the actuarial present value of 
the employee's frozen accrued benefit as of the fresh-start date must be 
determined using a standard mortality table and the applicable section 
417(e) rates, as defined in Sec. 1.417(e)-1(d).
    (B) Alternative opening hypothetical account. Alternatively, the 
employee's opening hypothetical account is the greater of the opening 
hypothetical account determined under paragraph (f)(2)(ii)(A) of this 
section and the employee's hypothetical account as of the fresh-start 
date determined in accordance with Sec. 1.401(a)(4)-8(c)(3)(v)(A) 
calculated under the plan's benefit formula applicable to benefit 
accruals in the current plan year as applied to the employee's total 
years of service through the fresh-start date in a manner that satisfies 
the past service credit rules of Sec. 1.401(a)(4)-8(c)(3)(viii).
    (3) Limitations on formulas--(i) Past service restriction. If the 
plan does not satisfy the uniform hypothetical allocation formula 
requirement of Sec. 1.401(a)(4)-8(c)(3)(iii)(B) as of the fresh-start 
date, under Sec. 1.401(a)(4)-8(c)(3)(viii) the plan may not provide for 
past service credits, and thus may not use the formula in paragraph 
(c)(3) of this section (formula with wear-away), the formula in 
paragraph (c)(4) of this section (formula with extended

[[Page 191]]

wear-away), or the alternative determination of the opening hypothetical 
account in paragraph (f)(2)(iii)(B) of this section.
    (ii) Change in interest rate. If the interest rate used to adjust 
employees' hypothetical allocations under Sec. 1.401(a)(4)-8(c)(3)(iv) 
for the plan year is different from the interest rate used for this 
purpose in the immediately preceding plan year, the plan must use the 
formula in paragraph (c)(2) of this section (formula without wear-away).
    (iii) Meaningful benefit requirement. A plan is permitted to use the 
formula provided in paragraph (f)(2) of this section only if the plan 
satisfies paragraphs (d)(3) through (d)(5) of this section (regarding 
coverage as of fresh-start date, current benefit accruals, and minimum 
benefit adjustment, respectively).

[T.D. 8360, 56 FR 47598, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992; 57 FR 
10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46823, Sept. 3, 
1993]



Sec. 1.401(a)(5)-1  Special rules relating to nondiscrimination requirements.

    (a) In general. Section 401(a)(5) sets out certain provisions that 
will not of themselves be discriminatory within the meaning of section 
410(b)(2)(A)(i) or section 401(a)(4). The exceptions specified in 
section 401(a)(5) are not an exclusive enumeration, but are merely a 
recital of provisions frequently encountered that will not of themselves 
constitute prohibited discrimination in contributions or benefits. See 
section 401(a)(4) and the regulations thereunder for the basic 
nondiscrimination rules. See Sec. 1.410(b)-4 for the rule of section 
410(b)(2)(A)(i) (relating to the nondiscriminatory classification test 
that is part of the minimum coverage requirements) referred to in 
section 401(a)(5)(A). See paragraphs (b) through (f) of this section for 
special rules used in applying the section 401(a)(4) nondiscrimination 
requirements under the remaining provisions of section 401(a)(5).
    (b) Salaried or clerical employees. A plan does not fail to satisfy 
the nondiscrimination requirements of section 401(a)(4) merely because 
contributions or benefits provided under the plan are limited to 
salaried or clerical employees.
    (c) Uniform relationship to compensation. A plan does not fail to 
satisfy the nondiscrimination requirements of section 401(a)(4) merely 
because the contributions or benefits of, or on behalf of, the employees 
under the plan bear a uniform relationship to the compensation (within 
the meaning of section 414(s)) of those employees.
    (d) Certain disparity permitted. Under section 401(a)(5)(C), a plan 
does not discriminate in favor of highly compensated employees (as 
defined in section 414(q)), within the meaning of section 401(a)(4), in 
the amount of employer-provided contributions or benefits solely 
because--
    (1) In the case of a defined contribution plan, employer 
contributions allocated to the accounts of employees favor highly 
compensated employees in a manner permitted by section 401(l) (relating 
to permitted disparity in plan contributions and benefits), and
    (2) In the case of a defined benefit plan, employer-provided 
benefits favor highly compensated employees in a manner permitted by 
section 401(l) (relating to permitted disparity in plan contributions 
and benefits).

See Secs. 1.401(l)-1 through 1.401(l)-6 for rules under which a plan may 
satisfy section 401(l) for purposes of the safe harbors of 
Secs. 1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b).
    (e) Defined benefit plans integrated with social security--(1) In 
general. Under section 401(a)(5)(D), a defined benefit plan does not 
discriminate in favor of highly compensated employees (as defined in 
section 414(q)) with respect to the amount of employer-provided 
contributions or benefits solely because the plan provides that, with 
respect to each employee, the employer-provided accrued retirement 
benefit under the plan is limited to the excess (if any) of--
    (i) The employee's final pay from the employer, over
    (ii) The employer-provided retirement benefit created under the 
Social Security Act and attributable to service by the employee for the 
employer.
    (2) Final pay. For purposes of paragraph (e)(1)(i) of this section, 
an employee's final pay from the employer as

[[Page 192]]

of a plan year is the employee's compensation (as defined in section 
414(q)(7)) for the year (ending with or within the 5-plan-year period 
ending with the plan year in which the employee terminates from 
employment with the employer) in which the employee receives the highest 
compensation from the employer. Notwithstanding the preceding sentence, 
final pay for each employee under the plan may be determined with 
reference to the 5-plan-year period ending with the plan year before the 
plan year in which the employee terminates from employment with the 
employer. In determining an employee's final pay, the plan may specify 
any 12-month period (ending with or within the applicable 5-plan-year 
period) as a year provided the specified 12-month period is uniformly 
and consistently applied with respect to all employees. In determining 
an employee's final pay, compensation for any year in excess of the 
applicable limit under section 401(a)(17) for the year may not be taken 
into account.
    (3) Rules for determining amount of employer-provided social 
security retirement benefit. For purposes of paragraph (e)(1)(ii) of 
this section, the following rules apply.
    (i) The employer-provided retirement benefit on which any reduction 
or offset in the employee's accrued retirement benefit is based is 
limited solely to the employer-provided primary insurance amount payable 
under section 215 of the Social Security Act attributable to service by 
the employee for the employer.
    (ii) The employer-provided primary insurance amount attributable to 
service by the employee for the employer is determined by multiplying 
the employer-provided portion of the employee's projected primary 
insurance amount by a fraction (not exceeding 1), the numerator of which 
is the employee's number of complete years of covered service for the 
employer under the Social Security Act, and the denominator of which is 
35.
    (4) Projected primary insurance amount. (i) As of a plan year, an 
employee's projected primary insurance amount is the primary insurance 
amount, determined as of the close of the plan year (the ``determination 
date''), payable to the employee upon attainment of the employee's 
social security retirement age (as determined under section 415(b)(8)), 
assuming the employee's annual compensation from the employer that is 
treated as wages for purposes of the Social Security Act remains the 
same from the plan year until the employee's attainment of social 
security retirement age. With respect to service by the employee for the 
employer before the determination date, the actual compensation paid to 
the employee by the employer during all periods of service of the 
employee for the employer covered by the Social Security Act must be 
used in determining an employee's projected primary insurance amount. 
With respect to years before the employee's commencement of service for 
the employer, in determining the employee's projected primary insurance 
amount, it may be assumed that the employee received compensation in an 
amount computed by using a six-percent salary scale projected backwards 
from the determination date to the employee's 21st birthday. However, if 
the employee provides the employer with satisfactory evidence of the 
employee's actual past compensation for the prior years treated as wages 
under the Social Security Act at the time the compensation was earned 
and the actual past compensation results in a smaller projected primary 
insurance amount, the plan must use the actual past compensation. The 
plan administrator must give clear written notice to each employee of 
the employee's right to supply actual compensation history and of the 
financial consequences of failing to supply the history. The notice must 
be given each time the summary plan description is provided to the 
employee and must also be given upon the employee's separation from 
service. The notice must also state that the employee can obtain the 
actual compensation history from the Social Security Administration. In 
determining the employee's projected primary insurance amount, the 
employer may not take into account any compensation from any other 
employer while the employee is employed by the employer.

[[Page 193]]

    (ii) As of a plan year, the employer-provided portion of the 
employee's projected primary insurance amount under the Social Security 
Act is 50 percent of the employee's projected primary insurance amount 
(as determined under paragraph (e)(4)(i) of this section).
    (5) Employer-provided accrued retirement benefit. For purposes of 
this section, the employee's employer-provided accrued retirement 
benefit as of a plan year is the employee's accrued retirement benefit 
under the plan (determined on an actual basis and not on a projected 
basis) attributable to employer contributions under the plan. With 
respect to plans that provide for employee contributions, see section 
411(c) for rules relating to the allocation of accrued benefits between 
employer contributions and employee contributions.
    (6) Additional rules. (i) As of a plan year, paragraph (e)(1) of 
this section does not apply to the extent that its application would 
result in a decrease in an employee's accrued benefit. See sections 
411(b)(1)(G) and 411(d)(6).
    (ii) Section 401(a)(5)(D) and this paragraph (e) do not apply to a 
plan maintained by an employer, determined for purposes of the Federal 
Insurance Contributions Act or the Railroad Retirement Tax Act, as 
applicable, that does not pay any wages within the meaning of section 
3121(a) or compensation within the meaning of section 3231(e). For this 
purpose, a plan maintained for a self-employed individual within the 
meaning of section 401(c)(1), who is also subject to the tax under 
section 1401, is deemed to be a plan maintained by an employer that pays 
wages within the meaning of section 3121(a).
    (iii) If a plan provides for the payment of an employee's accrued 
retirement benefit (whether or not subsidized) commencing before an 
employee's social security retirement age, the projected employer-
provided primary insurance amount attributable to service by the 
employee for the employer (as determined under paragraphs (e)(3) and 
(e)(4) of this section) that may be applied as an offset to limit the 
employee's accrued retirement benefit must be reduced in accordance with 
Sec. 1.401(l)-3(e)(1). The reduction is made by multiplying the 
employee's projected employer-provided primary insurance amount by a 
fraction, the numerator of which is the appropriate factor under 
Sec. 1.401(l)-3(e)(1), and the denominator of which is 0.75 percent.
    (iv) The Commissioner may, in revenue rulings, notices or other 
documents of general applicability, prescribe additional rules that may 
be necessary or appropriate to carry out the purposes of this section, 
including rules relating to the determination of an employee's projected 
primary insurance amount attributable to the employee's service for 
former employers and rules applying section 401(a)(5)(D) with respect to 
an employer that pays wages within the meaning of section 3121(a) or 
compensation within the meaning of section 3231(e) for some years and 
not for other years.
    (7) Examples. The following examples illustrate this paragraph (e).

    Example 1. Employer Z maintains a noncontributory defined benefit 
plan that uses the calendar year as its plan year. The plan provides a 
normal retirement benefit, commencing at age 65, equal to $500 a year, 
multiplied by the employee's years of service for Z, limited to the 
excess of the amount of the employee's final pay from Z (as determined 
in accordance with paragraph (e)(2) of this section) over the employee's 
employer-provided primary insurance amount attributable to the 
employee's service for Z. If an employee's social security retirement 
age is greater than 65, the plan provides for reduction of the 
employee's employer-provided primary insurance amount in accordance with 
paragraph (e)(6)(iii) of this section. The plan provides no limitation 
on the number of years of service taken into account in determining 
benefits under the plan. Employee A retires on July 6, 1995, at A's 
social security retirement age of 65 with 35 years of service for Z. The 
plan uses the plan year as the 12- month period for determining an 
employee's year of final highest pay from the employer. A's compensation 
for A's final 5 plan years is as follows:

1995 plan year................................................   $10,500
1994 plan year................................................   $20,000
1993 plan year................................................   $18,000
1992 plan year................................................   $17,000
1991 plan year................................................   $16,500
 

    A's annual primary insurance amount under social security, 
determined as of A's social security retirement age, is $9,000, of which 
$4,500 is the employer-provided portion attributable to A's service for 
Z ($9,000x50

[[Page 194]]

percentx35/35). Under the plan's benefit formula (disregarding the final 
pay limitation), A would be entitled to receive a normal retirement 
benefit of $17,500 ($500x35 years). However, under the plan, A's 
otherwise determined normal retirement benefit of $17,500 is limited to 
the excess of the amount of A's final pay from Z over A's employer-
provided primary insurance amount under social security attributable to 
A's service for Z. Accordingly, A's normal retirement benefit is 
determined to be $15,500 ($20,000 (A's final pay from Z) less $4,500 
(A's employer-provided primary insurance amount attributable to A's 
service for Z)) rather than $17,500. The final pay limitation in Z's 
plan satisfies section 401(a)(5)(D) and this paragraph (e). Accordingly, 
the plan maintained by Z does not discriminate in favor of highly 
compensated employees within the meaning of section 401(a)(4) merely 
because of the final pay limitation contained in the plan.
    Example 2. Assume the same facts as in Example 1, except that A has 
32 years of service for Z when A retires at A's social security 
retirement age. Under the plan's benefit formula (disregarding the final 
pay limitation), A would be entitled to receive an annual normal 
retirement benefit of $16,000 ($500x32 years). However, the plan 
provides that A's normal retirement benefit of $16,000 will be limited 
to $15,500 ($20,000 (the amount of A's final pay from Z) less $4,500 
(\1/2\ of A's primary insurance amount under the Social Security Act)). 
The final pay limitation does not satisfy this paragraph (e). The 
portion of A's employer-provided primary insurance amount under the 
Social Security Act attributable to A's service for Z is 32/35x$4,500, 
or $4,114. Therefore, to satisfy this paragraph (e), the final pay 
provision in Z's plan may not limit A's otherwise determined normal 
retirement benefit of $16,000 to less than $15,886 ($20,000 (the amount 
of X's final pay) minus $4,114 (the portion of A's employer-provided 
primary insurance amount attributable to A's service for Z)).
    Example 3. (a) Employer X maintains a noncontributory defined 
benefit plan that uses the calendar year as its plan year. The formula 
for determining benefits under the plan provides a normal retirement 
benefit at age 65 equal to 90 percent of an employee's final average 
compensation, with the benefit reduced by \1/30\th for each year of the 
employee's service less than 30 and limited to the employee's final pay 
(as determined in accordance with paragraph (e)(2) of this section) less 
the employee's employer-provided primary insurance amount under social 
security attributable to the employee's service for X. The plan 
determines an employee's employer-provided projected primary insurance 
amount under social security attributable to the employee's service for 
X in accordance with paragraph (e)(3) of this section and applies the 
reductions applicable under paragraph (e)(6)(iii) of this section if 
benefits commence before social security retirement age. The plan 
determines an employee's accrued benefit under the fractional accrual 
method of section 411(b)(1)(C).
    (b) Employee A commences participation in the plan on January 1, 
1990, when A is 35 years of age. A's social security retirement age is 
67. As of the close of the 2014 plan year, A's final average 
compensation from X is $15,000; A's final pay from X is $15,400, and A's 
projected employer-provided annual primary insurance amount under social 
security attributable to A's service for X is $4,000 (after the 
reduction applicable under paragraph (e)(6)(iii) of this section). Under 
the plan formula, A's accrued benefit as of the close of the 2014 plan 
year is $11,250 (90 percentx$15,000x25/30). As of the close of the 2014 
plan year, the plan's final pay limitation does not affect A's benefit 
because A's benefit under the plan as of the close of the plan year and 
before application of the final pay limitation ($11,250) does not exceed 
A's final pay of $15,400 from X, determined as of the close of the plan 
year, less A's employer-provided projected primary insurance amount 
under social security attributable to A's service for X ($4,000).
    (c) Assume that, as of the close of the 2015 plan year, A's final 
average compensation from X is $14,500 and A's final pay from X is 
$15,400. Assume also that as of the close of the 2015 plan year, A's 
employer-provided primary insurance amount attributable to A's service 
for X is $4,200 (after the reduction applicable under paragraph 
(e)(6)(iii) of this section). Accordingly, A's benefit as of the close 
of the 2015 plan year and before application of the final pay limitation 
is $11,310 (90 percentx$14,500x26/30). Under the plan's final pay 
limitation, A's benefit of $11,310 would be limited to $11,200, the 
amount of A's final pay from X ($15,400), less A's employer-provided 
projected primary insurance amount under social security attributable to 
A's service for X ($4,200). However, the plan's final pay limitation may 
not be applied to limit A's accrued benefit for the 2015 plan year to an 
amount below $11,250, which was A's accrued benefit under the plan at 
the close of the prior plan year. The foregoing is further illustrated 
in the following table for the plan years presented above and for 
additional years of service performed by A for X.

[[Page 195]]



                                                      Table
                                               [In dollar amounts]
----------------------------------------------------------------------------------------------------------------
                1                       2            3            4             5            6            7
----------------------------------------------------------------------------------------------------------------
                                                                            Employer-                 Benefit to
                                                                            provided                  which A is
                                                  Benefit                   projected    Benefit if    entitled
                                                 under plan                  primary     final pay   (smaller of
                                      Final       formula                   insurance    reduction   Column 6 or
        Years of service             average    (Column 2 x   Final pay   amount under   is applied   Column 3,
                                  compensation  0.9 x years                  social       in full      but not
                                                of service/                 security    (Column 4 -   less than
                                                    30)                   attributable   Column 5)     Column 7
                                                                           to service                 for prior
                                                                          for employer                  year)
----------------------------------------------------------------------------------------------------------------
25..............................       $15,000      $11,250      $15,400        $4,000      $11,400      $11,250
26..............................        14,500       11,310       15,400         4,200       11,200       11,250
27..............................        15,500       12,555       15,800         4,400       11,400       11,400
28..............................        15,500       13,020       16,000         4,500       11,500       11,500
29..............................        15,000       13,050       16,000         4,800       11,200       11,500
30..............................        14,500       13,050       16,000         5,000       11,000       11,500
----------------------------------------------------------------------------------------------------------------

    (f) Certain benefits not taken into account. In determining whether 
a plan satisfies section 401(a)(4) and this section, other benefits 
created under state or federal law (e.g., worker's compensation benefits 
or black lung benefits) may not be taken into account.
    (g) More than one plan treated as single plan. [Reserved]
    (h) Effective date--(1) In general. Except as provided in paragraph 
(h)(2) of this section, this section is effective for plan years 
beginning on or after January 1, 1994.
    (2) Plans of tax-exempt organizations. In the case of plans 
maintained by organizations exempt from income taxation under section 
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective 
plans), this section is effective for plan years beginning on or after 
January 1, 1996.
    (3) Compliance during transition period. For plan years beginning 
before the effective date of these regulations, as set forth in 
paragraphs (h)(1) and (h)(2) of this section, and on or after the first 
day of the first plan year to which the amendments made to section 
401(a)(5) by section 1111(b) of the Tax Reform Act of 1986 (TRA '86) 
apply, a plan must be operated in accordance with a reasonable, good 
faith interpretation of section 401(a)(5), taking into account pre-
existing guidance and the amendments made by TRA '86 to related 
provisions of the Code. Whether a plan is operated in accordance with a 
reasonable, good faith interpretation of section 401(a)(5) will 
generally be determined based on all of the relevant facts and 
circumstances, including the extent to which an employer has resolved 
unclear issues in its favor. A plan will be deemed to be operated in 
accordance with a reasonable, good faith interpretation of section 
401(a)(5) if it is operated in accordance with the terms of this 
section.

[T.D. 8359, 56 FR 47614, Sept. 19, 1991; 57 FR 10817, 10818, 10951, Mar. 
31, 1992, as amended by T.D. 8486, 58 FR 46830, Sept. 3, 1993]



Sec. 1.401(a)(9)-0  Required minimum distributions; table of contents.

    This table of contents lists the regulations relating to required 
minimum distributions under section 401(a)(9) of the Internal Revenue 
Code as follows:

Sec. 1.401(a)(9)-0  Required minimum distributions; table of contents.
Sec. 1.401(a)(9)-1  Minimum distribution requirement in general.
Sec. 1.401(a)(9)-2  Distributions commencing during an employee's 
          lifetime.
Sec. 1.401(a)(9)-3  Death before required beginning date.
Sec. 1.401(a)(9)-4  Determination of the designated beneficiary.
Sec. 1.401(a)(9)-5  Required minimum distributions from defined 
          contribution plans.
Sec. 1.401(a)(9)-6T  Required minimum distributions for defined benefit 
          plans and annuity contracts (temporary).
Sec. 1.401(a)(9)-7  Rollovers and transfers.
Sec. 1.401(a)(9)-8  Special rules.
Sec. 1.401(a)(9)-9  Life expectancy and distribution period tables.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]

[[Page 196]]



Sec. 1.401(a)(9)-1  Minimum distribution requirement in general.

    Q-1. What plans are subject to the minimum distribution requirement 
under section 401(a)(9), this section, and Secs. 1.401(a)(9)-2 through 
1.401(a)(9)-9?
    A-1. Under section 401(a)(9), all stock bonus, pension, and profit-
sharing plans qualified under section 401(a) and annuity contracts 
described in section 403(a) are subject to required minimum distribution 
rules. See this section and Secs. 1.401(a)(9)-2 through 1.401(a)(9)-9 
for the distribution rules applicable to these plans. Under section 
403(b)(10), annuity contracts or custodial accounts described in section 
403(b) are subject to required minimum distribution rules. See 
Sec. 1.403(b)-3 for the distribution rules applicable to these annuity 
contracts or custodial accounts. Under section 408(a)(6) and 408(b)(3), 
individual retirement plans (including, for some purposes, Roth IRAs 
under section 408A) are subject to required minimum distribution rules. 
See Sec. 1.408-8 for the distribution rules applicable to individual 
retirement plans and see Sec. 1.408A-6 for the distribution rules 
applicable to Roth IRAs under section 408A. Under section 457(d)(2), 
certain deferred compensation plans for employees of tax exempt 
organizations or state and local government employees are subject to 
required minimum distribution rules.
    Q-2. Which employee account balances and benefits held under 
qualified trusts and plans are subject to the distribution rules of 
section 401(a)(9), this section, and Secs. 1.401(a)(9)-2 through 
1.401(a)(9)-9?
    A-2. (a) In general. The distribution rules of section 401(a)(9) 
apply to all account balances and benefits in existence on or after 
January 1, 1985. This section and Secs. 1.401(a)(9)-2 through 
1.401(a)(9)-9 apply for purposes of determining required minimum 
distributions for calendar years beginning on or after January 1, 2003.
    (b) Beneficiaries. (1) The distribution rules of this section and 
Secs. 1.401(a)(9)-2 through 1.401(a)(9)-9 apply to account balances and 
benefits held for the benefit of a beneficiary for calendar years 
beginning on or after January 1, 2003, even if the employee died prior 
to January 1, 2003. Thus, in the case of an employee who died prior to 
January 1, 2003, the designated beneficiary must be redetermined in 
accordance with the provisions of Sec. 1.401(a)(9)-4 and the applicable 
distribution period (determined under Sec. 1.401(a)(9)-5 or 1.401(a)(9)-
6T, whichever is applicable) must be reconstructed for purposes of 
determining the amount required to be distributed for calendar years 
beginning on or after January 1, 2003.
    (2) A designated beneficiary that is receiving payments under the 5-
year rule of section 401(a)(9)(B)(ii), either by affirmative election or 
default provisions, may, if the plan so provides, switch to using the 
life expectancy rule of section 401(a)(9)(B)(iii) provided any amounts 
that would have been required to be distributed under the life 
expectancy rule of section 401(a)(9)(B)(iii) for all distribution 
calendar years before 2004 are distributed by the earlier of December 
31, 2003 or the end of the 5-year period determined under A-2 of 
Sec. 1.401(a)(9)-3.
    (c) Trust documentation. If a trust fails to meet the rule of A-5 of 
Sec. 1.401(a)(9)-4 (permitting the beneficiaries of the trust, and not 
the trust itself, to be treated as the employee's designated 
beneficiaries) solely because the trust documentation was not provided 
to the plan administrator by October 31 of the calendar year following 
the calendar year in which the employee died, and such documentation is 
provided to the plan administrator by October 31, 2003, the 
beneficiaries of the trust will be treated as designated beneficiaries 
of the employee under the plan for purposes of determining the 
distribution period under section 401(a)(9).
    Q-3. What specific provisions must a plan contain in order to 
satisfy section 401(a)(9)?
    A-3. (a) Required provisions. In order to satisfy section 401(a)(9), 
the plan must include the provisions described in this paragraph 
reflecting section 401(a)(9). First, the plan must generally set forth 
the statutory rules of section 401(a)(9), including the incidental death 
benefit requirement in section 401(a)(9)(G). Second, the plan must 
provide that distributions will be made in accordance with this section 
and Secs. 1.401(a)(9)-2 through 1.401(a)(9)-9. The

[[Page 197]]

plan document must also provide that the provisions reflecting section 
401(a)(9) override any distribution options in the plan inconsistent 
with section 401(a)(9). The plan also must include any other provisions 
reflecting section 401(a)(9) that are prescribed by the Commissioner in 
revenue rulings, notices, and other guidance published in the Internal 
Revenue Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
    (b) Optional provisions. The plan may also include written 
provisions regarding any optional provisions governing plan 
distributions that do not conflict with section 401(a)(9) and the 
regulations thereunder.
    (c) Absence of optional provisions. Plan distributions commencing 
after an employee's death will be required to be made under the default 
provision set forth in Sec. 1.401(a)(9)-3 for distributions unless the 
plan document contains optional provisions that override such default 
provisions. Thus, if distributions have not commenced to the employee at 
the time of the employee's death, distributions after the death of an 
employee are to be made automatically in accordance with the default 
provisions in A-4(a) of Sec. 1.401(a)(9)-3 unless the plan either 
specifies in accordance with A-4(b) of Sec. 1.401(a)(9)-3 the method 
under which distributions will be made or provides for elections by the 
employee (or beneficiary) in accordance with A-4(c) of Sec. 1.401(a)(9)-
3 and such elections are made by the employee or beneficiary.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-2  Distributions commencing during an employee's lifetime.

    Q-1. In the case of distributions commencing during an employee's 
lifetime, how must the employee's entire interest be distributed in 
order to satisfy section 401(a)(9)(A)?
    A-1. (a) In order to satisfy section 401(a)(9)(A), the entire 
interest of each employee must be distributed to such employee not later 
than the required beginning date, or must be distributed, beginning not 
later than the required beginning date, over the life of the employee or 
joint lives of the employee and a designated beneficiary or over a 
period not extending beyond the life expectancy of the employee or the 
joint life and last survivor expectancy of the employee and the 
designated beneficiary.
    (b) Section 401(a)(9)(G) provides that lifetime distributions must 
satisfy the incidental death benefit requirements.
    (c) The amount required to be distributed for each calendar year in 
order to satisfy section 401(a)(9)(A) and (G) generally depends on 
whether a distribution is in the form of distributions under a defined 
contribution plan or annuity payments under a defined benefit plan or 
under an annuity contract. For the method of determining the required 
minimum distribution in accordance with section 401(a)(9)(A) and (G) 
from an individual account under a defined contribution plan, see 
Sec. 1.401(a)(9)-5. For the method of determining the required minimum 
distribution in accordance with section 401(a)(9)(A) and (G) in the case 
of annuity payments from a defined benefit plan or an annuity contract, 
see Sec. 1.401(a)(9)-6T.
    Q-2. For purposes of section 401(a)(9)(C), what does the term 
required beginning date mean?
    A-2. (a) Except as provided in paragraph (b) of this A-2 with 
respect to a 5-percent owner, as defined in paragraph (c) of this A-2, 
the term required beginning date means April 1 of the calendar year 
following the later of the calendar year in which the employee attains 
age 70\1/2\ or the calendar year in which the employee retires from 
employment with the employer maintaining the plan.
    (b) In the case of an employee who is a 5-percent owner, the term 
required beginning date means April 1 of the calendar year following the 
calendar year in which the employee attains age 70\1/2\ .
    (c) For purposes of section 401(a)(9), a 5-percent owner is an 
employee who is a 5-percent owner (as defined in section 416) with 
respect to the plan year ending in the calendar year in which the 
employee attains age 70\1/2\.
    (d) Paragraph (b) of this A-2 does not apply in the case of a 
governmental plan (within the meaning of section 414(d)) or a church 
plan. For purposes of this paragraph, the term church plan means a plan 
maintained by a church

[[Page 198]]

for church employees, and the term church means any church (as defined 
in section 3121(w)(3)(A)) or qualified church-controlled organization 
(as defined in section 3121(w)(3)(B)).
    (e) A plan is permitted to provide that the required beginning date 
for purposes of section 401(a)(9) for all employees is April 1 of the 
calendar year following the calendar year in which an employee attains 
age 70\1/2\ regardless of whether the employee is a 5-percent owner.
    Q-3. When does an employee attain age 70\1/2\?
    A-3. An employee attains age 70\1/2\ as of the date six calendar 
months after the 70th anniversary of the employee's birth. For example, 
if an employee's date of birth was June 30, 1933, the 70th anniversary 
of such employee's birth is June 30, 2003. Such employee attains age 
70\1/2\ on December 30, 2003. Consequently, if the employee is a 5-
percent owner or retired, such employee's required beginning date is 
April 1, 2004. However, if the employee's date of birth was July 1, 
1933, the 70th anniversary of such employee's birth would be July 1, 
2003. Such employee would then attain age 70\1/2\ on January 1, 2004 and 
such employee's required beginning date would be April 1, 2005.
    Q-4. Must distributions made before the employee's required 
beginning date satisfy section 401(a)(9)?
    A-4. Lifetime distributions made before the employee's required 
beginning date for calendar years before the employee's first 
distribution calendar year, as defined in A-1(b) of Sec. 1.401(a)(9)-5, 
need not be made in accordance with section 401(a)(9). However, if 
distributions commence before the employee's required beginning date 
under a particular distribution option, such as in the form of an 
annuity, the distribution option fails to satisfy section 401(a)(9) at 
the time distributions commence if, under terms of the particular 
distribution option, distributions to be made for the employee's first 
distribution calendar year or any subsequent distribution calendar year 
will fail to satisfy section 401(a)(9).
    Q-5. If distributions have begun to an employee during the 
employee's lifetime (in accordance with section 401(a)(9)(A)(ii)), how 
must distributions be made after an employee's death?
    A-5. Section 401(a)(9)(B)(i) provides that if the distribution of 
the employee's interest has begun in accordance with section 
401(a)(9)(A)(ii) and the employee dies before his entire interest has 
been distributed to him, the remaining portion of such interest must be 
distributed at least as rapidly as under the distribution method being 
used under section 401(a)(9)(A)(ii) as of the date of his death. The 
amount required to be distributed for each distribution calendar year 
following the calendar year of death generally depends on whether a 
distribution is in the form of distributions from an individual account 
under a defined contribution plan or annuity payments under a defined 
benefit plan. For the method of determining the required minimum 
distribution in accordance with section 401(a)(9)(B)(i) from an 
individual account, see Sec. 1.401(a)(9)-5. In the case of annuity 
payments from a defined benefit plan or an annuity contract, see 
Sec. 1.401(a)(9)-6T.
    Q-6. For purposes of section 401(a)(9)(B), when are distributions 
considered to have begun to the employee in accordance with section 
401(a)(9)(A)(ii)?
    A-6. (a) General rule. Except as otherwise provided in A-10 of 
Sec. 1.401(a)(9)-6T, distributions are not treated as having begun to 
the employee in accordance with section 401(a)(9)(A)(ii) until the 
employee's required beginning date, without regard to whether payments 
have been made before that date. Thus, section 401(a)(9)(B)(i) only 
applies if an employee dies on or after the employee's required 
beginning date. For example, if employee A retires in 2003, the calendar 
year A attains age 65\1/2\, and begins receiving installment 
distributions from a profit-sharing plan over a period not exceeding the 
joint life and last survivor expectancy of A and A's spouse, benefits 
are not treated as having begun in accordance with section 
401(a)(9)(A)(ii) until April 1, 2009 (the April 1 following the calendar 
year in which A attains age 70\1/2\). Consequently, if A dies before 
April 1, 2009 (A's required beginning date), distributions after A's 
death must be made in accordance with section 401(a)(9)(B)(ii)

[[Page 199]]

or (iii) and (iv) and Sec. 1.401(a)(9)-3, and not section 
401(a)(9)(B)(i). This is the case without regard to whether the plan has 
distributed the minimum distribution for the first distribution calendar 
year (as defined in A-1(b) of Sec. 1.401(a)(9)-5) before A's death.
    (b) If a plan provides, in accordance with A-2(e) of this section, 
that the required beginning date for purposes of section 401(a)(9) for 
all employees is April 1 of the calendar year following the calendar 
year in which an employee attains age 70\1/2\, an employee who dies on 
or after the required beginning date determined under the plan terms is 
treated as dying after the employee's distributions have begun for 
purposes of this A-6 even though the employee dies before the April 1 
following the calendar year in which the employee retires.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-3  Death before required beginning date.

    Q-1. If an employee dies before the employee's required beginning 
date, how must the employee's entire interest be distributed in order to 
satisfy section 401(a)(9)?
    A-1. (a) Except as otherwise provided in A-10 of Sec. 1.401(a)(9)-
6T, if an employee dies before the employee's required beginning date 
(and, thus, before distributions are treated as having begun in 
accordance with section 401(a)(9)(A)(ii)), distribution of the 
employee's entire interest must be made in accordance with one of the 
methods described in section 401(a)(9)(B)(ii) or (iii) and (iv). One 
method (the 5-year rule in section 401(a)(9)(B)(ii)) requires that the 
entire interest of the employee be distributed within 5 years of the 
employee's death regardless of who or what entity receives the 
distribution. Another method (the life expectancy rule in section 
401(a)(9)(B)(iii) and (iv)) requires that any portion of an employee's 
interest payable to (or for the benefit of) a designated beneficiary be 
distributed, commencing within one year of the employee's death, over 
the life of such beneficiary (or over a period not extending beyond the 
life expectancy of such beneficiary). Section 401(a)(9)(B)(iv) provides 
special rules where the designated beneficiary is the surviving spouse 
of the employee, including a special commencement date for distributions 
under section 401(a)(9)(B)(iii) to the surviving spouse.
    (b) See A-4 of this section for the rules for determining which of 
the methods described in paragraph (a) of this A-1 applies. See A-3 of 
this section to determine when distributions under the exception to the 
5-year rule in section 401(a)(9)(B)(iii) and (iv) must commence. See A-2 
of this section to determine when the 5-year period in section 
401(a)(9)(B)(ii) ends. For distributions using the life expectancy rule 
in section 401(a)(9)(B)(iii) and (iv), see Sec. 1.401(a)(9)-4 in order 
to determine the designated beneficiary under section 401(a)(9)(B)(iii) 
and (iv), see Sec. 1.401(a)(9)-5 for the rules for determining the 
required minimum distribution under a defined contribution plan, and see 
Sec. 1.401(a)(9)-6T for required minimum distributions under defined 
benefit plans.
    Q-2. By when must the employee's entire interest be distributed in 
order to satisfy the 5-year rule in section 401(a)(9)(B)(ii)?
    A-2. In order to satisfy the 5-year rule in section 
401(a)(9)(B)(ii), the employee's entire interest must be distributed by 
the end of the calendar year which contains the fifth anniversary of the 
date of the employee's death. For example, if an employee dies on 
January 1, 2003, the entire interest must be distributed by the end of 
2008, in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii).
    Q-3. When are distributions required to commence in order to satisfy 
the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?
    A-3. (a) Nonspouse beneficiary. In order to satisfy the life 
expectancy rule in section 401(a)(9)(B)(iii), if the designated 
beneficiary is not the employee's surviving spouse, distributions must 
commence on or before the end of the calendar year immediately following 
the calendar year in which the employee died. This rule also applies to 
the distribution of the entire remaining benefit if another individual 
is a designated beneficiary in addition to the employee's surviving 
spouse. See A-2 and A-3 of Sec. 1.401(a)(9)-8, however,

[[Page 200]]

if the employee's benefit is divided into separate accounts.
    (b) Spousal beneficiary. In order to satisfy the rule in section 
401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the 
employee's surviving spouse, distributions must commence on or before 
the later of--
    (1) The end of the calendar year immediately following the calendar 
year in which the employee died; and
    (2) The end of the calendar year in which the employee would have 
attained age 70\1/2\.
    Q-4. How is it determined whether the 5-year rule in section 
401(a)(9)(B)(ii) or the life expectancy rule in section 
401(a)(9)(B)(iii) and (iv) applies to a distribution?
    A-4. (a) No plan provision. If a plan does not adopt an optional 
provision described in paragraph (b) or (c) of this A-4 specifying the 
method of distribution after the death of an employee, distribution must 
be made as follows:
    (1) If the employee has a designated beneficiary, as determined 
under Sec. 1.401(a)(9)-4, distributions are to be made in accordance 
with the life expectancy rule in section 401(a)(9)(B)(iii) and (iv).
    (2) If the employee has no designated beneficiary, distributions are 
to be made in accordance with the 5-year rule in section 
401(a)(9)(B)(ii).
    (b) Optional plan provisions. A plan may adopt a provision 
specifying either that the 5-year rule in section 401(a)(9)(B)(ii) will 
apply to certain distributions after the death of an employee even if 
the employee has a designated beneficiary or that distribution in every 
case will be made in accordance with the 5-year rule in section 
401(a)(9)(B)(ii). Further, a plan need not have the same method of 
distribution for the benefits of all employees in order to satisfy 
section 401(a)(9).
    (c) Elections. A plan may adopt a provision that permits employees 
(or beneficiaries) to elect on an individual basis whether the 5-year 
rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section 
401(a)(9)(B)(iii) and (iv) applies to distributions after the death of 
an employee who has a designated beneficiary. Such an election must be 
made no later than the earlier of the end of the calendar year in which 
distribution would be required to commence in order to satisfy the 
requirements for the life expectancy rule in section 401(a)(9)(B)(iii) 
and (iv) (see A-3 of this section for the determination of such calendar 
year) or the end of the calendar year which contains the fifth 
anniversary of the date of death of the employee. As of the last date 
the election may be made, the election must be irrevocable with respect 
to the beneficiary (and all subsequent beneficiaries) and must apply to 
all subsequent calendar years. If a plan provides for the election, the 
plan may also specify the method of distribution that applies if neither 
the employee nor the beneficiary makes the election. If neither the 
employee nor the beneficiary elects a method and the plan does not 
specify which method applies, distribution must be made in accordance 
with paragraph (a) of this A-4.
    Q-5. If the employee's surviving spouse is the employee's sole 
designated beneficiary and such spouse dies after the employee, but 
before distributions have begun to the surviving spouse under section 
401(a)(9)(B)(iii) and (iv), how is the employee's interest to be 
distributed?
    A-5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving 
spouse is the employee's sole designated beneficiary and dies after the 
employee, but before distributions to such spouse have begun under 
section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section 
401(a)(9)(B)(ii) and the life expectancy rule in section 
401(a)(9)(B)(iii) are to be applied as if the surviving spouse were the 
employee. In applying this rule, the date of death of the surviving 
spouse shall be substituted for the date of death of the employee. 
However, in such case, the rules in section 401(a)(9)(B)(iv) are not 
available to the surviving spouse of the deceased employee's surviving 
spouse.
    Q-6. For purposes of section 401(a)(9)(B)(iv)(II), when are 
distributions considered to have begun to the surviving spouse?
    A-6. Distributions are considered to have begun to the surviving 
spouse of an employee, for purposes of section 401(a)(9)(B)(iv)(II), on 
the date, determined in accordance with A-3 of this

[[Page 201]]

section, on which distributions are required to commence to the 
surviving spouse, even though payments have actually been made before 
that date. See A-11 of Sec. 1.401(a)(9)-6T for a special rule for 
annuities.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-4  Determination of the designated beneficiary.

    Q-1. Who is a designated beneficiary under section 401(a)(9)(E)?
    A-1. A designated beneficiary is an individual who is designated as 
a beneficiary under the plan. An individual may be designated as a 
beneficiary under the plan either by the terms of the plan or, if the 
plan so provides, by an affirmative election by the employee (or the 
employee's surviving spouse) specifying the beneficiary. A beneficiary 
designated as such under the plan is an individual who is entitled to a 
portion of an employee's benefit, contingent on the employee's death or 
another specified event. For example, if a distribution is in the form 
of a joint and survivor annuity over the life of the employee and 
another individual, the plan does not satisfy section 401(a)(9) unless 
such other individual is a designated beneficiary under the plan. A 
designated beneficiary need not be specified by name in the plan or by 
the employee to the plan in order to be a designated beneficiary so long 
as the individual who is to be the beneficiary is identifiable under the 
plan. The members of a class of beneficiaries capable of expansion or 
contraction will be treated as being identifiable if it is possible, to 
identify the class member with the shortest life expectancy. The fact 
that an employee's interest under the plan passes to a certain 
individual under a will or otherwise under applicable state law does not 
make that individual a designated beneficiary unless the individual is 
designated as a beneficiary under the plan. See A-6 of Sec. 1.401(a)(9)-
8 for rules which apply to qualified domestic relation orders.
    Q-2. Must an employee (or the employee's spouse) make an affirmative 
election specifying a beneficiary for a person to be a designated 
beneficiary under section 40l(a)(9)(E)?
    A-2. No, a designated beneficiary is an individual who is designated 
as a beneficiary under the plan whether or not the designation under the 
plan was made by the employee. The choice of beneficiary is subject to 
the requirements of sections 401(a)(11), 414(p), and 417.
    Q-3. May a person other than an individual be considered to be a 
designated beneficiary for purposes of section 401(a)(9)?
    A-3. No, only individuals may be designated beneficiaries for 
purposes of section 401(a)(9). A person that is not an individual, such 
as the employee's estate, may not be a designated beneficiary. If a 
person other than an individual is designated as a beneficiary of an 
employee's benefit, the employee will be treated as having no designated 
beneficiary for purposes of section 401(a)(9), even if there are also 
individuals designated as beneficiaries. However, see A-5 of this 
section for special rules that apply to trusts and A-2 and A-3 of 
Sec. 1.401(a)(9)-8 for rules that apply to separate accounts.
    Q-4. When is the designated beneficiary determined?
    A-4. (a) General rule. In order to be a designated beneficiary, an 
individual must be a beneficiary as of the date of death. Except as 
provided in paragraph (b) and Sec. 1.401(a)(9)-6T, the employee's 
designated beneficiary will be determined based on the beneficiaries 
designated as of the date of death who remain beneficiaries as of 
September 30 of the calendar year following the calendar year of the 
employee's death. Consequently, except as provided in Sec. 1.401(a)(9)-
6T, any person who was a beneficiary as of the date of the employee's 
death, but is not a beneficiary as of that September 30 (e.g., because 
the person receives the entire benefit to which the person is entitled 
before that September 30), is not taken into account in determining the 
employee's designated beneficiary for purposes of determining the 
distribution period for required minimum distributions after the 
employee's death. Accordingly, if a person disclaims entitlement to the 
employee's benefit, pursuant to a disclaimer that satisfies section 2518 
by that September 30 thereby allowing

[[Page 202]]

other beneficiaries to receive the benefit in lieu of that person, the 
disclaiming person is not taken into account in determining the 
employee's designated beneficiary.
    (b) Surviving spouse. As provided in A-5 of Sec. 1.401(a)(9)-3, if 
the employee's spouse is the sole designated beneficiary as of September 
30 of the calendar year following the calendar year of the employee's 
death, and the surviving spouse dies after the employee and before the 
date on which distributions have begun to the surviving spouse under 
section 401(a)(9)(B)(iii) and (iv), the rule in section 
40l(a)(9)(B)(iv)(II) will apply. Thus, for example, the relevant 
designated beneficiary for determining the distribution period after the 
death of the surviving spouse is the designated beneficiary of the 
surviving spouse. Similarly, such designated beneficiary will be 
determined based on the beneficiaries designated as of the date of the 
surviving spouse's death and who remain beneficiaries as of September 30 
of the calendar year following the calendar year of the surviving 
spouse's death. Further, if, as of that September 30, there is no 
designated beneficiary under the plan with respect to that surviving 
spouse, distribution must be made in accordance with the 5-year rule in 
section 401(a)(9)(B)(ii) and A-2 of Sec. 1.401(a)(9)-3.
    (c) Deceased beneficiary. For purposes of this A-4, an individual 
who is a beneficiary as of the date of the employee's death and dies 
prior to September 30 of the calendar year following the calendar year 
of the employee's death without disclaiming continues to be treated as a 
beneficiary as of the September 30 of the calendar year following the 
calendar year of the employee's death in determining the employee's 
designated beneficiary for purposes of determining the distribution 
period for required minimum distributions after the employee's death, 
without regard to the identity of the successor beneficiary who is 
entitled to distributions as the beneficiary of the deceased 
beneficiary. The same rule applies in the case of distributions to which 
A-5 of Sec. 1.401(a)(9)-3 applies so that, if an individual is 
designated as a beneficiary of an employee's surviving spouse as of the 
spouse's date of death and dies prior to September 30 of the year 
following the year of the surviving spouse's death, that individual will 
continue to be treated as a designated beneficiary.
    Q-5. If a trust is named as a beneficiary of an employee, will the 
beneficiaries of the trust with respect to the trust's interest in the 
employee's benefit be treated as having been designated as beneficiaries 
of the employee under the plan for purposes of determining the 
distribution period under section 401(a)(9)?
    A-5. (a) If the requirements of paragraph (b) of this A-5 are met 
with respect to a trust that is named as the beneficiary of an employee 
under the plan, the beneficiaries of the trust (and not the trust 
itself) will be treated as having been designated as beneficiaries of 
the employee under the plan for purposes of determining the distribution 
period under section 401(a)(9).
    (b) The requirements of this paragraph (b) are met if, during any 
period during which required minimum distributions are being determined 
by treating the beneficiaries of the trust as designated beneficiaries 
of the employee, the following requirements are met--
    (1) The trust is a valid trust under state law, or would be but for 
the fact that there is no corpus.
    (2) The trust is irrevocable or will, by its terms, become 
irrevocable upon the death of the employee.
    (3) The beneficiaries of the trust who are beneficiaries with 
respect to the trust's interest in the employee's benefit are 
identifiable within the meaning of A-1 of this section from the trust 
instrument.
    (4) The documentation described in A-6 of this section has been 
provided to the plan administrator.
    (c) In the case of payments to a trust having more than one 
beneficiary, see A-7 of Sec. 1.401(a)(9)-5 for the rules for determining 
the designated beneficiary whose life expectancy will be used to 
determine the distribution period and A-3 of this section for the rules 
that apply if a person other than an individual is designated as a 
beneficiary of an employee's benefit. However, the separate account 
rules under A-2 of

[[Page 203]]

Sec. 1.401(a)(9)-8 are not available to beneficiaries of a trust with 
respect to the trust's interest in the employee's benefit.
    (d) If the beneficiary of the trust named as beneficiary of the 
employee's interest is another trust, the beneficiaries of the other 
trust will be treated as being designated as beneficiaries of the first 
trust, and thus, having been designated by the employee under the plan 
for purposes of determining the distribution period under section 
401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of 
this A-5 are satisfied with respect to such other trust in addition to 
the trust named as beneficiary.
    Q-6. If a trust is named as a beneficiary of an employee, what 
documentation must be provided to the plan administrator?
    A-6. (a) Required minimum distributions before death. If an employee 
designates a trust as the beneficiary of his or her entire benefit and 
the employee's spouse is the sole beneficiary of the trust, in order to 
satisfy the documentation requirements of this A-6 so that the spouse 
can be treated as the sole designated beneficiary of the employee's 
benefits (if the other requirements of paragraph (b) of A-5 of this 
section are satisfied), the employee must either--
    (1) Provide to the plan administrator a copy of the trust instrument 
and agree that if the trust instrument is amended at any time in the 
future, the employee will, within a reasonable time, provide to the plan 
administrator a copy of each such amendment; or
    (2) Provide to the plan administrator a list of all of the 
beneficiaries of the trust (including contingent and remaindermen 
beneficiaries with a description of the conditions on their entitlement 
sufficient to establish that the spouse is the sole beneficiary) for 
purposes of section 401(a)(9); certify that, to the best of the 
employee's knowledge, this list is correct and complete and that the 
requirements of paragraph (b)(1), (2), and (3) of A-5 of this section 
are satisfied; agree that, if the trust instrument is amended at any 
time in the future, the employee will, within a reasonable time, provide 
to the plan administrator corrected certifications to the extent that 
the amendment changes any information previously certified; and agree to 
provide a copy of the trust instrument to the plan administrator upon 
demand.
    (b) Required minimum distributions after death. In order to satisfy 
the documentation requirement of this A-6 for required minimum 
distributions after the death of the employee (or spouse in a case to 
which A-5 of Sec. 1.401(a)(9)-3 applies), by October 31 of the calendar 
year immediately following the calendar year in which the employee died, 
the trustee of the trust must either--
    (1) Provide the plan administrator with a final list of all 
beneficiaries of the trust (including contingent and remaindermen 
beneficiaries with a description of the conditions on their entitlement) 
as of September 30 of the calendar year following the calendar year of 
the employee's death; certify that, to the best of the trustee's 
knowledge, this list is correct and complete and that the requirements 
of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; 
and agree to provide a copy of the trust instrument to the plan 
administrator upon demand; or
    (2) Provide the plan administrator with a copy of the actual trust 
document for the trust that is named as a beneficiary of the employee 
under the plan as of the employee's date of death.
    (c) Relief for discrepancy between trust instrument and employee 
certifications or earlier trust instruments. (1) If required minimum 
distributions are determined based on the information provided to the 
plan administrator in certifications or trust instruments described in 
paragraph (a) or (b) of this A-6, a plan will not fail to satisfy 
section 401(a)(9) merely because the actual terms of the trust 
instrument are inconsistent with the information in those certifications 
or trust instruments previously provided to the plan administrator, but 
only if the plan administrator reasonably relied on the information 
provided and the required minimum distributions for calendar years after 
the calendar year in which the discrepancy is discovered are determined 
based on the actual terms of the trust instrument.
    (2) For purposes of determining the amount of the excise tax under 
section

[[Page 204]]

4974, the required minimum distribution is determined for any year based 
on the actual terms of the trust in effect during the year.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-5  Required minimum distributions from defined contribution plans.

    Q-1. If an employee's benefit is in the form of an individual 
account under a defined contribution plan, what is the amount required 
to be distributed for each calendar year?
    A-1. (a) General rule. If an employee's accrued benefit is in the 
form of an individual account under a defined contribution plan, the 
minimum amount required to be distributed for each distribution calendar 
year, as defined in paragraph (b) of this A-1, is equal to the quotient 
obtained by dividing the account (determined under A-3 of this section) 
by the applicable distribution period (determined under A-4 or A-5 of 
this section, whichever is applicable). However, the required minimum 
distribution amount will never exceed the entire account balance on the 
date of the distribution. See A-8 of this section for rules that apply 
if a portion of the employee's account is not vested. Further, the 
minimum distribution required to be distributed on or before an 
employee's required beginning date is always determined under section 
401(a)(9)(A)(ii) and this A-1 and not section 401(a)(9)(A)(i).
    (b) Distribution calendar year. A calendar year for which a minimum 
distribution is required is a distribution calendar year. If an 
employee's required beginning date is April 1 of the calendar year 
following the calendar year in which the employee attains age 70\1/2\, 
the employee's first distribution calendar year is the year the employee 
attains age 70\1/2\. If an employee's required beginning date is April 1 
of the calendar year following the calendar year in which the employee 
retires, the employee's first distribution calendar year is the calendar 
year in which the employee retires. In the case of distributions to be 
made in accordance with the life expectancy rule in Sec. 1.401(a)(9)-3 
and in section 401(a)(9)(B)(iii) and (iv), the first distribution 
calendar year is the calendar year containing the date described in A-
3(a) or A-3(b) of Sec. 1.401(a)(9)-3, whichever is applicable.
    (c) Time for distributions. The distribution required to be made on 
or before the employee's required beginning date shall be treated as the 
distribution required for the employee's first distribution calendar 
year (as defined in paragraph (b) of this A-1). The required minimum 
distribution for other distribution calendar years, including the 
required minimum distribution for the distribution calendar year in 
which the employee's required beginning date occurs, must be made on or 
before the end of that distribution calendar year.
    (d) Minimum distribution incidental benefit requirement. If 
distributions of an employee's account balance under a defined 
contribution plan are made in accordance with this section, the minimum 
distribution incidental benefit requirement of section 401(a)(9)(G) is 
satisfied. Further, with respect to the retirement benefits provided by 
that account balance, to the extent the incidental benefit requirement 
of Sec. 1.401-1(b)(1)(i) requires a distribution, that requirement is 
deemed to be satisfied if distributions satisfy the minimum distribution 
incidental benefit requirement of section 401(a)(9)(G) and this section.
    (e) Annuity contracts. Instead of satisfying this A-1, the minimum 
distribution requirement may be satisfied by the purchase of an annuity 
contract from an insurance company in accordance with A-4 of 
Sec. 1.401(a)(9)-6T with the employee's entire individual account. If 
such an annuity is purchased after distributions are required to 
commence (the required beginning date, in the case of distributions 
commencing before death, or the date determined under A-3 of 
Sec. 1.401(a)(9)-3, in the case of distributions commencing after 
death), payments under the annuity contract purchased will satisfy 
section 401(a)(9) for distribution calendar years after the calendar 
year of the purchase if payments under the annuity contract are made in 
accordance with Sec. 1.401(a)(9)-6T. In such a case, payments under the 
annuity contract will

[[Page 205]]

be treated as distributions from the individual account for purposes of 
determining if the individual account satisfies section 401(a)(9) for 
the calendar year of the purchase. An employee may also purchase an 
annuity contract with a portion of the employee's account under the 
rules of A-2(a)(3) of Sec. 1.401(a)(9)-8.
    Q-2. If an employee's benefit is in the form of an individual 
account and, in any calendar year, the amount distributed exceeds the 
minimum required, will credit be given in subsequent calendar years for 
such excess distribution?
    A-2. If, for any distribution calendar year, the amount distributed 
exceeds the minimum required, no credit will be given in subsequent 
calendar years for such excess distribution.
    Q-3. What is the amount of the account of an employee used for 
determining the employee's required minimum distribution in the case of 
an individual account?
    A-3. (a) In the case of an individual account, the benefit used in 
determining the required minimum distribution for a distribution 
calendar year is the account balance as of the last valuation date in 
the calendar year immediately preceding that distribution calendar year 
(valuation calendar year) adjusted in accordance with paragraphs (b) and 
(c) of this A-3.
    (b) The account balance is increased by the amount of any 
contributions or forfeitures allocated to the account balance as of 
dates in the valuation calendar year after the valuation date. For this 
purpose, contributions that are allocated to the account balance as of 
dates in the valuation calendar year after the valuation date, but that 
are not actually made during the valuation calendar year, are permitted 
to be excluded.
    (c) The account balance is decreased by distributions made in the 
valuation calendar year after the valuation date.
    (d) If an amount is distributed by one plan and rolled over to 
another plan (receiving plan), A-2 of Sec. 1.401(a)(9)-7 provides 
additional rules for determining the benefit and required minimum 
distribution under the receiving plan. If an amount is transferred from 
one plan (transferor plan) to another plan (transferee plan), A-3 and A-
4 of Sec. 1.401(a)(9)-7 provide additional rules for determining the 
amount of the required minimum distribution and the benefit under both 
the transferor and transferee plans.
    Q-4. For required minimum distributions during an employee's 
lifetime, what is the applicable distribution period?
    A-4. (a) General rule. Except as provided in paragraph (b) of this 
A-4, the applicable distribution period for required minimum 
distributions for distribution calendar years up to and including the 
distribution calendar year that includes the employee's date of death is 
determined using the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-9 
for the employee's age as of the employee's birthday in the relevant 
distribution calendar year. If an employee dies on or after the required 
beginning date, the distribution period applicable for calculating the 
amount that must be distributed during the distribution calendar year 
that includes the employee's death is determined as if the employee had 
lived throughout that year. Thus, a minimum required distribution, 
determined as if the employee had lived throughout that year, is 
required for the year of the employee's death and that amount must be 
distributed to a beneficiary to the extent it has not already been 
distributed to the employee.
    (b) Spouse is sole beneficiary--(1) General rule. Except as 
otherwise provided in paragraph (b)(2) of this A-4, if the sole 
designated beneficiary of an employee is the employee's surviving 
spouse, for required minimum distributions during the employee's 
lifetime, the applicable distribution period is the longer of the 
distribution period determined in accordance with paragraph (a) of this 
A-4 or the joint life expectancy of the employee and spouse using the 
employee's and spouse's attained ages as of the employee's and the 
spouse's birthdays in the distribution calendar year. The spouse is sole 
designated beneficiary for purposes of determining the applicable 
distribution period for a distribution calendar year during the 
employee's lifetime only if the spouse is the sole beneficiary of the

[[Page 206]]

employee's entire interest at all times during the distribution calendar 
year.
    (2) Change in marital status. If the employee and the employee's 
spouse are married on January 1 of a distribution calendar year, but do 
not remain married throughout that year (i.e., the employee or the 
employee's spouse die or they become divorced during that year), the 
employee will not fail to have a spouse as the employee's sole 
beneficiary for that year merely because they are not married throughout 
that year. If an employee's spouse predeceases the employee, the spouse 
will not fail to be the employee's sole beneficiary for the distribution 
calendar year that includes the date of the spouse's death solely 
because, for the period remaining in that year after the spouse's death, 
someone other than the spouse is named as beneficiary. However, the 
change in beneficiary due to the death or divorce of the spouse will be 
effective for purposes of determining the applicable distribution period 
under section 401(a)(9) in the distribution calendar year following the 
distribution calendar year that includes the date of the spouse's death 
or divorce.
    Q-5. For required minimum distributions after an employee's death, 
what is the applicable distribution period?
    A-5. (a) Death on or after the employee's required beginning date. 
If an employee dies after distribution has begun as determined under A-6 
of Sec. 1.401(a)(9)-2 (generally on or after the employee's required 
beginning date), in order to satisfy section 401(a)(9)(B)(i), the 
applicable distribution period for distribution calendar years after the 
distribution calendar year containing the employee's date of death is 
either--
    (1) If the employee has a designated beneficiary as of the date 
determined under A-4 of Sec. 1.401(a)(9)-4, the longer of--
    (i) The remaining life expectancy of the employee's designated 
beneficiary determined in accordance with paragraph (c)(1) or (2) of 
this A-5; and
    (ii) The remaining life expectancy of the employee determined in 
accordance with paragraph (c)(3) of this A-5; or
    (2) If the employee does not have a designated beneficiary as of the 
date determined under A-4 of Sec. 1.401(a)(9)-4, the remaining life 
expectancy of the employee determined in accordance with paragraph 
(c)(3) of this A-5.
    (b) Death before an employee's required beginning date. If an 
employee dies before distribution has begun, as determined under A-5 of 
Sec. 1.401(a)(9)-2 (generally before the employee's required beginning 
date), in order to satisfy section 401(a)(9)(B)(iii) or (iv) and the 
life expectancy rule described in A-1 of Sec. 1.401(a)(9)-3, the 
applicable distribution period for distribution calendar years after the 
distribution calendar year containing the employee's date of death is 
determined in accordance with paragraph (c) of this A-5. See A-4 of 
Sec. 1.401(a)(9)-3 to determine when the 5-year rule in section 
401(a)(9)(B)(ii) applies (e.g., there is no designated beneficiary or 
the 5-year rule is elected or specified by plan provision).
    (c) Life expectancy--(1) Nonspouse designated beneficiary. Except as 
otherwise provided in paragraph (c)(2), the applicable distribution 
period measured by the beneficiary's remaining life expectancy is 
determined using the beneficiary's age as of the beneficiary's birthday 
in the calendar year immediately following the calendar year of the 
employee's death. In subsequent calendar years, the applicable 
distribution period is reduced by one for each calendar year that has 
elapsed after the calendar year immediately following the calendar year 
of the employee's death.
    (2) Spouse designated beneficiary. If the surviving spouse of the 
employee is the employee's sole beneficiary, the applicable distribution 
period is measured by the surviving spouse's life expectancy using the 
surviving spouse's birthday for each distribution calendar year after 
the calendar year of the employee's death up through the calendar year 
of the spouse's death. For calendar years after the calendar year of the 
spouse's death, the applicable distribution period is the life 
expectancy of the spouse using the age of the spouse as of the spouse's 
birthday in the calendar year of the spouse's death, reduced by one for 
each calendar year that has elapsed after the calendar year of the 
spouse's death.
    (3) No designated beneficiary. If the employee does not have a 
designated

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beneficiary, the applicable distribution period measured by the 
employee's remaining life expectancy is the life expectancy of the 
employee using the age of the employee as of the employee's birthday in 
the calendar year of the employee's death. In subsequent calendar years 
the applicable distribution period is reduced by one for each calendar 
year that has elapsed after the calendar year of the employee's death.
    Q-6. What life expectancies must be used for purposes of determining 
required minimum distributions under section 401(a)(9)?
    A-6. Life expectancies for purposes of determining required minimum 
distributions under section 401(a)(9) must be computed using the Single 
Life Table in A-1 of Sec. 1.401(a)(9)-9 and the Joint and Last Survivor 
Table in A-3 of Sec. 1.401(a)(9)-9.
    Q-7. If an employee has more than one designated beneficiary, which 
designated beneficiary's life expectancy will be used to determine the 
applicable distribution period?
    A-7. (a) General rule--(1) Except as otherwise provided in paragraph 
(c) of this A-7, if more than one individual is designated as a 
beneficiary with respect to an employee as of the applicable date for 
determining the designated beneficiary under A-4 of Sec. 1.401(a)(9)-4, 
the designated beneficiary with the shortest life expectancy will be the 
designated beneficiary for purposes of determining the applicable 
distribution period.
    (2) See A-3 of Sec. 1.401(a)(9)-4 for rules that apply if a person 
other than an individual is designated as a beneficiary and see A-2 and 
A-3 of Sec. 1.401(a)(9)-8 for special rules that apply if an employee's 
benefit under a plan is divided into separate accounts and the 
beneficiaries with respect to a separate account differ from the 
beneficiaries of another separate account.
    (b) Contingent beneficiary. Except as provided in paragraph (c)(1) 
of this A-7, if a beneficiary's entitlement to an employee's benefit 
after the employee's death is a contingent right, such contingent 
beneficiary is nevertheless considered to be a beneficiary for purposes 
of determining whether a person other than an individual is designated 
as a beneficiary (resulting in the employee being treated as having no 
designated beneficiary under the rules of A-3 of Sec. 1.401(a)(9)-4) and 
which designated beneficiary has the shortest life expectancy under 
paragraph (a) of this A-7.
    (c) Successor beneficiary--(1) A person will not be considered a 
beneficiary for purposes of determining who is the beneficiary with the 
shortest life expectancy under paragraph (a) of this A-7, or whether a 
person who is not an individual is a beneficiary, merely because the 
person could become the successor to the interest of one of the 
employee's beneficiaries after that beneficiary's death. However, the 
preceding sentence does not apply to a person who has any right 
(including a contingent right) to an employee's benefit beyond being a 
mere potential successor to the interest of one of the employee's 
beneficiaries upon that beneficiary's death. Thus, for example, if the 
first beneficiary has a right to all income with respect to an 
employee's individual account during that beneficiary's life and a 
second beneficiary has a right to the principal but only after the death 
of the first income beneficiary (any portion of the principal 
distributed during the life of the first income beneficiary to be held 
in trust until that first beneficiary's death), both beneficiaries must 
be taken into account in determining the beneficiary with the shortest 
life expectancy and whether only individuals are beneficiaries.
    (2) If the individual beneficiary whose life expectancy is being 
used to calculate the distribution period dies after September 30 of the 
calendar year following the calendar year of the employee's death, such 
beneficiary's remaining life expectancy will be used to determine the 
distribution period without regard to the life expectancy of the 
subsequent beneficiary.
    (3) This paragraph (c) is illustrated by the following examples:

    Example 1. (i) Employer M maintains a defined contribution plan, 
Plan X. Employee A, an employee of M, died in 2005 at the age of 55, 
survived by spouse, B, who was 50 years old. Prior to A's death, M had 
established an account balance for A in Plan X. A's account balance is 
invested only in productive assets. A named a testamentary trust (Trust 
P) established under A's will as the beneficiary of

[[Page 208]]

all amounts payable from A's account in Plan X after A's death. A copy 
of the Trust P and a list of the trust beneficiaries were provided to 
the plan administrator of Plan X by October 31 of the calendar year 
following the calendar year of A's death. As of the date of A's death, 
the Trust P was irrevocable and was a valid trust under the laws of the 
state of A's domicile. A's account balance in Plan X was includible in 
A's gross estate under Sec. 2039.
    (ii) Under the terms of Trust P, all trust income is payable 
annually to B, and no one has the power to appoint Trust P principal to 
any person other than B. A's children, who are all younger than B, are 
the sole remainder beneficiaries of the Trust P. No other person has a 
beneficial interest in Trust P. Under the terms of the Trust P, B has 
the power, exercisable annually, to compel the trustee to withdraw from 
A's account balance in Plan X an amount equal to the income earned on 
the assets held in A's account in Plan X during the calendar year and to 
distribute that amount through Trust P to B. Plan X contains no 
prohibition on withdrawal from A's account of amounts in excess of the 
annual required minimum distributions under section 401(a)(9). In 
accordance with the terms of Plan X, the trustee of Trust P elects, in 
order to satisfy section 401(a)(9), to receive annual required minimum 
distributions using the life expectancy rule in section 
401(a)(9)(B)(iii) for distributions over a distribution period equal to 
B's life expectancy. If B exercises the withdrawal power, the trustee 
must withdraw from A's account under Plan X the greater of the amount of 
income earned in the account during the calendar year or the required 
minimum distribution. However, under the terms of Trust P, and 
applicable state law, only the portion of the Plan X distribution 
received by the trustee equal to the income earned by A's account in 
Plan X is required to be distributed to B (along with any other trust 
income.)
    (iii) Because some amounts distributed from A's account in Plan X to 
Trust P may be accumulated in Trust P during B's lifetime for the 
benefit of A's children, as remaindermen beneficiaries of Trust P, even 
though access to those amounts are delayed until after B's death, A's 
children are beneficiaries of A's account in Plan X in addition to B and 
B is not the sole designated beneficiary of A's account. Thus the 
designated beneficiary used to determine the distribution period from 
A's account in Plan X is the beneficiary with the shortest life 
expectancy. B's life expectancy is the shortest of all the potential 
beneficiaries of the testamentary trust's interest in A's account in 
Plan X (including remainder beneficiaries). Thus, the distribution 
period for purposes of section 401(a)(9)(B)(iii) is B's life expectancy. 
Because B is not the sole designated beneficiary of the testamentary 
trust's interest in A's account in Plan X, the special rule in 
401(a)(9)(B)(iv) is not available and the annual required minimum 
distributions from the account to Trust M must begin no later than the 
end of the calendar year immediately following the calendar year of A's 
death.
    Example 2. (i) The facts are the same as Example 1 except that the 
testamentary trust instrument provides that all amounts distributed from 
A's account in Plan X to the trustee while B is alive will be paid 
directly to B upon receipt by the trustee of Trust P.
    (ii) In this case, B is the sole designated beneficiary of A's 
account in Plan X for purposes of determining the designated beneficiary 
under section 401(a)(9)(B)(iii) and (iv). No amounts distributed from 
A's account in Plan X to Trust P are accumulated in Trust P during B's 
lifetime for the benefit of any other beneficiary. Therefore, the 
residuary beneficiaries of Trust P are mere potential successors to B's 
interest in Plan X. Because B is the sole beneficiary of the 
testamentary trust's interest in A's account in Plan X, the annual 
required minimum distributions from A's account to Trust P must begin no 
later than the end of the calendar year in which A would have attained 
age 70\1/2\, rather than the calendar year immediately following the 
calendar year of A's death.

    Q-8. If a portion of an employee's individual account is not vested 
as of the employee's required beginning date, how is the determination 
of the required minimum distribution affected?
    A-8. If the employee's benefit is in the form of an individual 
account, the benefit used to determine the required minimum distribution 
for any distribution calendar year will be determined in accordance with 
A-1 of this section without regard to whether or not all of the 
employee's benefit is vested. If any portion of the employee's benefit 
is not vested, distributions will be treated as being paid from the 
vested portion of the benefit first. If, as of the end of a distribution 
calendar year (or as of the employee's required beginning date, in the 
case of the employee's first distribution calendar year), the total 
amount of the employee's vested benefit is less than the required 
minimum distribution for the calendar year, only the vested portion, if 
any, of the employee's benefit is required to be distributed by the end 
of the calendar year (or, if applicable, by the employee's required 
beginning date). However, the required minimum distribution for

[[Page 209]]

the subsequent distribution calendar year must be increased by the sum 
of amounts not distributed in prior calendar years because the 
employee's vested benefit was less than the required minimum 
distribution.
    Q-9. Which amounts distributed from an individual account are taken 
into account in determining whether section 401(a)(9) is satisfied and 
which amounts are not taken into account in determining whether section 
401(a)(9) is satisfied?
    A-9. (a) General rule. Except as provided in paragraph (b), all 
amounts distributed from an individual account are distributions that 
are taken into account in determining whether section 401(a)(9) is 
satisfied, regardless of whether the amount is includible in income. 
Thus, for example, amounts that are excluded from income as recovery of 
investment in the contract under section 72 are taken into account for 
purposes of determining whether section 401(a)(9) is satisfied for a 
distribution calendar year. Similarly, amounts excluded from income as 
net unrealized appreciation on employer securities also are amounts 
distributed for purposes of determining if section 401(a)(9) is 
satisfied.
    (b) Exceptions. The following amounts are not taken into account in 
determining whether the required minimum amount has been distributed for 
a calendar year:
    (1) Elective deferrals and employee contributions that, pursuant to 
Sec. 1.415-6(b)(6)(iv), are returned (together with the income allocable 
to these corrective distributions) as a result of the application of the 
section 415 limitations.
    (2) Corrective distributions of excess deferrals as described in 
Sec. 1.402(g)-1(e)(3), together with the income allocable to these 
distributions.
    (3) Corrective distributions of excess contributions under a 
qualified cash or deferred arrangement under section 401(k)(8) and 
excess aggregate contributions under section 401(m)(6), together with 
the income allocable to these distributions.
    (4) Loans that are treated as deemed distributions pursuant to 
section 72(p).
    (5) Dividends described in section 404(k) that are paid on employer 
securities. (Amounts paid to the plan that, pursuant to section 
404(k)(2)(A)(iii)(II), are included in the account balance and 
subsequently distributed from the account lose their character as 
dividends.)
    (6) The costs of life insurance coverage (P.S. 58 costs).
    (7) Similar items designated by the Commissioner in revenue rulings, 
notices, and other guidance published in the Internal Revenue Bulletin. 
See Sec. 601.601(d)(2)(ii)(b) of this chapter.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-6T  Required minimum distributions for defined benefit plans and annuity contracts (temporary).

    Q-1. How must distributions under a defined benefit plan be paid in 
order to satisfy section 401(a)(9)?
    A-1. (a) General rules. In order to satisfy section 401(a)(9), 
except as otherwise provided in this A-1, distributions under a defined 
benefit plan must be paid in the form of periodic annuity payments for 
the employee's life (or the joint lives of the employee and beneficiary) 
or over a period certain that does not exceed the maximum length of the 
period certain determined in accordance with A-3 of this section. The 
interval between payments for the annuity must be uniform over the 
entire distribution period and must not exceed one year. Once payments 
have commenced over a period certain, the period certain may not be 
changed even if the period certain is shorter than the maximum 
permitted. Life annuity payments must satisfy the minimum distribution 
incidental benefit requirements of A-2 of this section. Except as 
otherwise provided in A-4(b) of this section, all payments (life and 
period certain) also must either be nonincreasing or increase only in 
accordance with one or more of the following:
    (1) With an annual percentage increase that does not exceed the 
annual percentage increase in a cost-of-living index that is based on 
prices of all items and issued by the Bureau of Labor Statistics;
    (2) To the extent of the reduction in the amount of the employee's 
payments to provide for a survivor benefit upon death, but only if the 
beneficiary whose life was being used to determine the period described 
in section

[[Page 210]]

401(a)(9)(A)(ii) over which payments were being made dies or is no 
longer the employee's beneficiary pursuant to a qualified domestic 
relations order within the meaning of section 414(p);
    (3) To provide cash refunds of employee contributions upon the 
employee's death; or
    (4) To pay increased benefits that result from a plan amendment.
    (b) Life annuity with period certain. The annuity may be a life 
annuity (or joint and survivor annuity) with a period certain if the 
life (or lives, if applicable) and period certain each meet the 
requirements of paragraph (a) of this A-1. For purposes of this section, 
if distributions are permitted to be made over the lives of the employee 
and the designated beneficiary, references to a life annuity include a 
joint and survivor annuity.
    (c) Annuity commencement. (1) Annuity payments must commence on or 
before the employee's required beginning date (within the meaning of A-2 
of Sec. 1.401(a)(9)-2). The first payment, which must be made on or 
before the employee's required beginning date, must be the payment which 
is required for one payment interval. The second payment need not be 
made until the end of the next payment interval even if that payment 
interval ends in the next calendar year. Similarly, in the case of 
distributions commencing after death in accordance with section 
401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or 
before the date determined under A-3(a) or (b) (whichever is applicable) 
of Sec. 1.401(a)(9)-3, must be the payment which is required for one 
payment interval. Payment intervals are the periods for which payments 
are received, e.g., bimonthly, monthly, semi-annually, or annually. All 
benefit accruals as of the last day of the first distribution calendar 
year must be included in the calculation of the amount of annuity 
payments for payment intervals ending on or after the employee's 
required beginning date.
    (2) This paragraph (c) is illustrated by the following example:

    Example. A defined benefit plan (Plan X) provides monthly annuity 
payments of $500 for the life of unmarried participants with a 10-year 
period certain. An unmarried, retired participant (A) in Plan X attains 
age 70\1/2\ in 2005. In order to meet the requirements of this 
paragraph, the first monthly payment of $500 must be made on behalf of A 
on or before April 1, 2006, and the payments must continue to be made in 
monthly payments of $500 thereafter for the life and 10-year period 
certain.
    (d) Lump sum distributions. In the case of a lump sum distribution 
of an employee's entire accrued benefit during a distribution calendar 
year, the amount that is the required minimum distribution for the 
distribution calendar year (and thus not eligible for rollover under 
section 402(c)) is determined using either the rule in paragraph (d)(1) 
or (d)(2) of this A-1.
    (1) The portion of the single sum distribution that is a required 
minimum distribution is determined by treating the single sum 
distribution as a distribution from an individual account plan and 
treating the amount of the single sum distribution as the employee's 
account balance as of the end of the relevant valuation calendar year. 
If the single sum distribution is being made in the calendar year 
containing the required beginning date and the required minimum 
distribution for the employee's first distribution calendar year has not 
been distributed, the portion of the single sum distribution that 
represents the required minimum distribution for the employee's first 
and second distribution calendar years is not eligible for rollover.
    (2) The portion of the single sum distribution that is a required 
minimum distribution is permitted to be determined by expressing the 
employee's benefit as an annuity that would satisfy this section with an 
annuity starting date as of the first day of the distribution calendar 
year for which the required minimum distribution is being determined, 
and treating one year of annuity payments as the required minimum 
distribution for that year, and not eligible for rollover. If the single 
sum distribution is being made in the calendar year containing the 
required beginning date and the required minimum distribution for the 
employee's first distribution calendar year has not been made, the 
benefit must be expressed as an annuity with an annuity starting date as 
of the first day of the first distribution calendar

[[Page 211]]

year and the payments for the first two calendar years would be treated 
as required minimum distributions, and not eligible for rollover.
    (e) Death benefits. The rules prohibiting increasing payments under 
an annuity apply to payments made upon the death of the employee. The 
preceding sentence will not apply to an increase due to an ancillary 
death benefit described in this paragraph (e). A death benefit with 
respect to an employee's benefit is an ancillary death benefit for 
purposes of this A-1 if--
    (1) It is not paid as part of the employee's accrued benefit or 
under any optional form of the employee's benefit, and
    (2) The death benefit, together with any other potential payments 
with respect to the employee's benefit that may be provided to a 
survivor, satisfy the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i),
    (f) Additional guidance. Additional guidance regarding how 
distributions under a defined benefit plan must be paid in order to 
satisfy section 401(a)(9) may be issued by the Commissioner in revenue 
rulings, notices, or other guidance published in the Internal Revenue 
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
    Q-2. How must distributions in the form of a life (or joint and 
survivor) annuity be made in order to satisfy the minimum distribution 
incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the 
distribution component of the incidental benefit requirement of 
Sec. 1.401-1(b)(1)(i)?
    A-2. (a) Life annuity for employee. If the employee's benefit is 
payable in the form of a life annuity for the life of the employee 
satisfying section 401(a)(9) without regard to the MDIB requirement, the 
MDIB requirement of section 401(a)(9)(G) will be satisfied.
    (b) Joint and survivor annuity, spouse beneficiary. If the 
employee's sole beneficiary, as of the annuity starting date for annuity 
payments, is the employee's spouse and the distributions satisfy section 
401(a)(9) without regard to the MDIB requirement, the distributions to 
the employee will be deemed to satisfy the MDIB requirement of section 
401(a)(9)(G). For example, if an employee's benefit is being distributed 
in the form of a joint and survivor annuity for the lives of the 
employee and the employee's spouse and the spouse is the sole 
beneficiary of the employee, the amount of the periodic payment payable 
to the spouse is permitted to be 100 percent of the annuity payment 
payable to the employee regardless of the difference in the ages between 
the employee and the employee's spouse. The amount of the annuity 
payments must satisfy A-1 of this section (or A-4 of this section, if 
applicable).
    (c) Joint and survivor annuity, nonspouse beneficiary--(1) 
Explanation of rule. If distributions commence under a distribution 
option that is in the form of a joint and survivor annuity for the joint 
lives of the employee and a beneficiary other than the employee's 
spouse, the minimum distribution incidental benefit requirement will not 
be satisfied as of the date distributions commence unless the 
distribution option provides that annuity payments to be made to the 
employee on and after the employee's required beginning date will 
satisfy the conditions of this paragraph (c). The periodic annuity 
payment payable to the survivor must not at any time on and after the 
employee's required beginning date exceed the applicable percentage of 
the annuity payment payable to the employee using the table in paragraph 
(c)(2) of this A-2. The applicable percentage is based on the excess of 
the age of the employee on the employee's birthday in a calendar year 
over the age of the beneficiary as of the beneficiary's birthday in that 
calendar year. Additionally, the amount of the annuity payments must 
satisfy A-1 of this section (or A-4 of this section, if applicable). In 
the case of an annuity which provides for increasing payments, the 
requirement of this paragraph (c) will be satisfied if the increase is 
determined in the same manner for the employee and the beneficiary.
    (2) Table.

------------------------------------------------------------------------
                                                              Applicable
     Excess of age of employee over age of beneficiary        percentage
------------------------------------------------------------------------
10 years or less...........................................          100
11.........................................................           96
12.........................................................           93
13.........................................................           90
14.........................................................           87
15.........................................................           84
16.........................................................           82

[[Page 212]]

 
17.........................................................           79
18.........................................................           77
19.........................................................           75
20.........................................................           73
21.........................................................           72
22.........................................................           70
23.........................................................           68
24.........................................................           67
25.........................................................           66
26.........................................................           64
27.........................................................           63
28.........................................................           62
29.........................................................           61
30.........................................................           60
31.........................................................           59
32.........................................................           59
33.........................................................           58
34.........................................................           57
35.........................................................           56
36.........................................................           56
37.........................................................           55
38.........................................................           55
39.........................................................           54
40.........................................................           54
41.........................................................           53
42.........................................................           53
43.........................................................           53
44 and greater.............................................           52
------------------------------------------------------------------------

    (3) Example. This paragraph (c) is illustrated by the following 
example:

    Example. Distributions commence on January 1, 2003 to an employee 
(Z), born March 1, 1937, after retirement at age 65. Z's daughter (Y), 
born February 5, 1967, is Z's beneficiary. The distributions are in the 
form of a joint and survivor annuity for the lives of Z and Y with 
payments of $500 a month to Z and upon Z's death of $500 a month to Y, 
i.e., the projected monthly payment to Y is 100 percent of the monthly 
amount payable to Z. There is no provision under the option for a change 
in the projected payments to Y, and corresponding increase to Z, as of 
April 1, 2008, Z's required beginning date. Accordingly, under A-10 of 
this section, compliance with the rules of this section is determined as 
of the annuity starting date. Consequently, as of January 1, 2003 (the 
annuity starting date) the plan does not satisfy the MDIB requirement 
because, as of such date, the distribution option provides that, as of 
Z's required beginning date, the monthly payment to Y upon Z's death 
will exceed 60 percent of Z's monthly payment (the maximum percentage 
for a difference of ages of 30 years).

    (d) Period certain and annuity features. If a distribution form 
includes a life annuity and a period certain, the amount of the annuity 
payments payable to the beneficiary need not be reduced during the 
period certain, but in the case of a joint and survivor annuity with a 
period certain, the amount of the annuity payments payable to the 
beneficiary must satisfy paragraph (c) of this A-2 after the expiration 
of the period certain.
    (e) Deemed satisfaction of incidental benefit rule. Except in the 
case of distributions with respect to an employee's benefit that include 
an ancillary death benefit described in paragraph A-1(e) of this 
section, to the extent the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i) requires a distribution, that requirement is deemed to be 
satisfied if distributions satisfy the minimum distribution incidental 
benefit requirement of this A-2. If the employee's benefits include an 
ancillary death benefit described in paragraph A-1(e) of this section, 
the benefits must be distributed in accordance with the incidental 
benefit requirement described in Sec. 1.401-1(b)(1)(i) and must also 
satisfy the minimum distribution incidental benefit requirement of this 
A-2.
    Q-3. How long is a period certain under a defined benefit plan 
permitted to extend?
    A-3. (a) Distributions commencing during the employee's life. The 
period certain for any annuity distributions commencing during the life 
of the employee with an annuity starting date on or after the employee's 
required beginning date generally is not permitted to exceed the 
applicable distribution period for the employee (determined in 
accordance with the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-9) 
for the calendar year that contains the annuity starting date. See A-10 
for the rule for annuity payments with an annuity starting date before 
the required beginning date. However, if the employee's sole beneficiary 
is the employee's spouse and the annuity provides only a period certain 
and no life annuity, the period certain is permitted to be as long as 
the joint life and last survivor expectancy of the employee and the 
employee's spouse, if longer than the applicable distribution period for 
the employee.
    (b) Distributions commencing after the employee's death. (1) If 
annuity distributions commence after the death of the employee under the 
life expectancy rule (under section 401(a)(9)(B)(iii) or (iv)), the 
period certain for any distributions commencing after death

[[Page 213]]

cannot exceed the applicable distribution period determined under A-5(b) 
of Sec. 1.401(a)(9)-5 for the distribution calendar year that contains 
the annuity starting date.
    (2) If the annuity starting date is in a calendar year before the 
first distribution calendar year, the period certain may not exceed the 
life expectancy of the designated beneficiary using the beneficiary's 
age in the year that contains the annuity starting date.
    Q-4. Will a plan fail to satisfy section 401(a)(9) merely because 
distributions are made from an annuity contract which is purchased from 
an insurance company?
    A-4. (a) General rule. A plan will not fail to satisfy section 
401(a)(9) merely because distributions are made from an annuity contract 
which is purchased with the employee's benefit by the plan from an 
insurance company, as long as the payments satisfy the requirements of 
this section. If the annuity contract is purchased after the required 
beginning date, the first payment interval must begin on or before the 
purchase date and the payment required for one payment interval must be 
made no later than the end of such payment interval. If the payments 
actually made under the annuity contract do not meet the requirements of 
section 401(a)(9), the plan fails to satisfy section 401(a)(9).
    (b) Permitted increases. In the case of an annuity contract 
purchased from an insurance company with an employee's account balance 
under a defined contribution plan or under a section 403(a) annuity 
plan, if the total future expected payments (determined in accordance 
with paragraph (c)(3) of this A-4) exceed the account value being 
annuitized, the payments under the annuity will not fail to satisfy the 
nonincreasing payment requirement in A-1(a) of this section merely 
because the payments are increased in accordance with one or more of the 
following--
    (1) By a constant percentage, applied not less frequently than 
annually;
    (2) To provide a payment upon the death of the employee equal to the 
excess of the account value being annuitized over the total of payments 
before the death of the employee.
    (3) As a result of dividend payments or other payments that result 
from actuarial gains, but only if actuarial gain is measured no less 
frequently than annually and the resulting dividend payments or other 
payments are either paid no later than the year following the year for 
which the actuarial experience is measured or paid in the same form as 
the payment of the annuity over the remaining period of the annuity 
(beginning no later than the year following the year for which the 
actuarial experience is measured);
    (4) As a final payment under the annuity contract, but only if the 
payment does not exceed the total future expected payments as of the 
date of the payment; or
    (5) As a partial distribution under the contract, but only if the 
contract provides for a final payment as of the date of partial 
distribution that satisfies paragraph (b)(4) of this A-4 and the future 
payments under the contract are reduced by multiplying the otherwise 
applicable future payments by a fraction, the numerator of which is the 
excess of that final payment over the amount of the partial distribution 
and the denominator of which is the amount of that final payment. For 
the purpose of determining this ratio, the denominator is reduced by the 
amount of any regularly scheduled payment due on the date of the partial 
distribution.
    (c) Definitions. For purposes of this A-4, the following definitions 
apply--
    (1) Account value being annuitized means the value of the employee's 
entire interest (within the meaning of A-12 of this section) being 
annuitized (valued as of the date annuity payments commence) or, in the 
case of a defined contribution plan, the value of the employee's account 
balance used to purchase an immediate annuity under the contract.
    (2) Actuarial gain means the difference between the actuarial 
assumptions used in pricing (i.e., investment return, mortality, 
expense, and other similar assumptions) and the actual experience with 
respect to those assumptions. Actuarial gain also includes differences 
between the actuarial assumptions used in pricing when an annuity

[[Page 214]]

was purchased and actuarial assumptions used in pricing annuities at the 
time the actuarial gain is determined.
    (3) Total future expected payments means the total future payments 
to be made under the annuity contract as of the date of the 
determination, calculated using the Single Life Table in A-1 of 
Sec. 1.401(a)(9)-9 (or, if applicable, the Joint and Last Survivor Table 
in A-3 of in Sec. 1.401(a)(9)-9) for annuitants who are still alive, 
without regard to any increases in annuity payments after the date of 
determination, and taking into account any remaining period certain.
    (d) Examples. This A-4 is illustrated by the following examples:

    Example 1. A participant (Z1) in defined contribution plan X attains 
age 70 on March 5, 2005, and thus, attains age 70\1/2\ in 2005. Z1 
elects to purchase annuity Contract Y1 from Insurance Company W in 2005. 
Contract Y1 is a life annuity contract with a 10-year period certain. 
Contract Y1 provides for an initial annual payment calculated with an 
assumed interest rate (AIR) of 3 percent. Subsequent payments are 
determined by multiplying the prior year's payment by a fraction the 
numerator of which is 1 plus the actual return on the separate account 
assets underlying Contract Y1 since the preceding payment and the 
denominator of which is 1 plus the AIR during that period. The value of 
Z1's account balance in Plan X at the time of purchase is $105,000, and 
the purchase price of Contract Y1 is $105,000. Contract Y1 provides Z1 
with an initial payment of $7,200 at the time of purchase in 2005. The 
total future expected payments to Z1 under Contract Y1 are $122,400, 
calculated as the initial payment of $7,200 multiplied by the age 70 
life expectancy of 17. Because the total future expected payments on the 
purchase date exceed the account value used to purchase Contract Y1 and 
payments may only increase as a result of actuarial gain, with such 
increases, beginning no later than the next year, paid in the same form 
as the payment of the annuity over the remaining period of the annuity, 
distributions received by Z1 from Contract Y1 meet the requirements 
under paragraph (b)(3) of this A-4.
    Example 2. A participant (Z2) in defined contribution plan X attains 
age 70 on May 1, 2005, and thus, attains age 70\1/2\ in 2005. Z2 elects 
to purchase annuity Contract Y2 from Insurance Company W in 2005. 
Contract Y2 is a participating life annuity contract with a 10-year 
period certain. Contract Y2 provides for level annual payments with 
dividends paid in a lump sum in the year after the year for which the 
actuarial experience is measured or paid out levelly beginning in the 
year after the year for which the actuarial gain is measured over the 
remaining lifetime and period certain, i.e., the period certain ends at 
the same time as the original period certain. Dividends are determined 
annually by the Board of Directors of Company W based upon a comparison 
of actual actuarial experience to expected actuarial experience in the 
past year. The value of Z2's account balance in Plan X at the time of 
purchase is $265,000, and the purchase price of Contract Y2 is $265,000. 
Contract Y2 provides Z2 with an initial payment of $16,000 in 2005. The 
total future expected payments to Z2 under Contract Y2 are calculated as 
the annual initial payment of $16,000 multiplied by the age 70 life 
expectancy of 17 for a total of $272,000. Because the total future 
expected payments on the purchase date exceeds the account value used to 
purchase Contract Y2 and payments may only increase as a result of 
actuarial gain, with such increases, beginning no later than the next 
year, paid in the same form as the payment of the annuity over the 
remaining period of the annuity, distributions received by Z2 from 
Contract Y2 meet the requirements under paragraph (b)(3) of this A-4.
    Example 3. The facts are the same as in Example 2 except that the 
annuity provides a dividend accumulation option under which Z2 may defer 
receipt of the dividends to a time selected by Z2. Because the dividend 
accumulation option permits dividends to be paid later than the end of 
the year following the year for which the actuarial experience is 
measured or as a stream of payments that only increase as a result of 
actuarial gain, with such increases beginning no later than the next 
year, paid in the same form as the payment of the annuity over the 
remaining period of the annuity in Example 2, the dividend accumulation 
option does not meet the requirements of paragraph (b)(3) of this A-4. 
Neither does the dividend accumulation option fit within any of the 
other increases described in paragraph (b) of this A-4. Accordingly, the 
dividend accumulation option causes the contract, and consequently any 
distributions from the contract, to fail to meet the requirements of 
this A-4 and thus fail to satisfy the requirements of section 401(a)(9).
    Example 4. The facts are the same as in Example 2 except that the 
annuity provides an option under which actuarial gain under the contract 
is used to provide additional death benefit protection for Z2. Because 
this option permits payments as a result of actuarial gain to be paid 
later than the end of the year following the year for which the 
actuarial experience is measured or as a stream of payments that only 
increase as a result of actuarial gain, with such increases beginning no 
later than the next year, paid in the same form as the payment of the 
annuity over the remaining period of the annuity in Example

[[Page 215]]

2, the option does not meet the requirements of paragraph (b)(3) of this 
A-4. Neither does the option fit within any of the other increases 
described in paragraph (b) of this A-4. Accordingly, the addition of the 
option causes the contract, and consequently any distributions from the 
contract, to fail to meet the requirements of this A-4 and thus fail to 
satisfy the requirements of section 401(a)(9).
    Example 5. A participant (Z3) in defined contribution plan X attains 
age 70\1/2\ in 2005. Z3 elects to purchase annuity contract Y3 from 
Insurance Company W. Contract Y3 is a life annuity contract with a 20-
year period certain (which does not exceed the maximum period certain 
permitted under A-3(a) of this section) with fixed annual payments 
increasing 3 percent each year. The value of Z3's account balance in 
Plan X at the time of purchase is $110,000, and the purchase price of 
Contract Y3 is $110,000. Contract Y3 provides Z3 with an initial payment 
of $6,000 at the time of purchase in 2005. The total future expected 
payments to Z3 under Contract Y3 are $120,000, calculated as the initial 
annual payment of $6,000 multiplied by the period certain of 20 years. 
Because the total future expected payments on the purchase date exceed 
the account value used to purchase Contract Y3 and payments only 
increase as a constant percentage applied not less frequently than 
annually, distributions received by Z3 from Contract Y3 meet the 
requirements under paragraph (b)(1) of this A-4.
    Example 6. The facts are the same as in Example 5 except that the 
initial payment is $5,400 and the annual rate of increase is 4 percent. 
In this example, the total future expected payments are $108,000, 
calculated as the initial payment of $5,400 multiplied by the period 
certain of 20 years. Because the total future expected payments are less 
than the account value of $110,000 used to purchase Contract Y3, 
distributions received by Z3 do not meet the requirements underparagraph 
(b) of this A-4 and thus fail to meet the requirements of section 
401(a)(9).
    Example 7. (i) A participant (Z4) in defined contribution Plan X 
attains age 78 in 2005. Z4 elects to purchase Contract Y4 from Insurance 
Company W. Contract Y4 provides for fixed annual payments for 20 years 
(which does not exceed the maximum period certain permitted under A-3(a) 
of this section) and provides that, on any payment date, before 
receiving his payment due on that date, Z4 may cancel Contract Y4 and 
receive as a final payment an amount equal to his remaining payments 
discounted with interest at 4 percent. The value of Z4's account balance 
in Plan X at the time of purchase is $500,000, and the purchase price of 
Contract Y4 is $500,000. Contract Y4 provides Z4 with an initial payment 
in 2005 of $35,376.
    (ii) Under Contract Y4, the amount that Z4 could receive upon 
cancellation of Contract Y4 as a final payment, for all possible 
cancellation dates, will always be less than the total future expected 
payments on such cancellation date. This is so because the total future 
expected payments on any such cancellation date is equal to the 
remaining payments on such date, not discounted, an amount always 
greater than the final payment amount of these same remaining payments, 
discounted at 4 percent.
    (iii) The total future expected payments to Z4 under Y4 are 
$707,520, calculated as the annualized initial payment of $35,376 
multiplied by the period certain of 20 years. Because the total future 
expected payments on the purchase date exceed the account value used to 
purchase Contract Y4 and it is not possible for a final payment under 
Contract Y4 to ever exceed the total future expected payments on the day 
of such final payment, distributions received by Z4 under Contract Y4 
meet the requirements under paragraph (b)(4) of this A-4.
    (iv) As an illustration of the above, if Participant Z4 were to 
elect to cancel Contract Y4 on the day he was due to receive his 
eleventh payment, his contractual final payment would be $298,408 
(including the $35,376 he was due to receive on that day) which is less 
than his total future expected payments on that date ($353,760). These 
amounts are determined as follows. On the day Z4 was to receive his 
eleventh payment, Z4 was entitled to receive ten future payments of 
$35,376 (including the payment he was due to receive on that day). The 
discounted value of an annuity of ten payments of $35,376, with the 
first payment due on the date of the calculation of the discounted 
value, and a discount rate of 4 percent, is $298,408. The product of the 
payment amount of $35,376 multiplied by 10, the number of future 
payments to which Z4 would be entitled on the day Z4 was to receive the 
eleventh payment, is $353,760.
    Example 8. (i) The facts are the same as in Example 7 except that 
the annuity provides an option for partial distributions of less than 
the final payment amount (the maximum distribution), with payments 
following such a partial distribution reduced by multiplying the 
otherwise applicable future payments by a fraction, the numerator of 
which is the excess of the final payment amount over the amount of the 
partial distribution and the denominator of which is the amount of that 
final payment. For the purposes of determining this ratio, the 
denominator is reduced by the amount of any regularly scheduled payment 
due on the date of partial distribution. This partial distribution 
option meets the requirements of paragraph (b)(5) of this A-4.
    (ii) To illustrate the workings of this partial distribution option, 
assume Z4 takes a distribution of $100,000 on the date he was to receive 
his eleventh payment of $35,376. In such a case, under this partial 
distribution

[[Page 216]]

option, his remaining nine payments, absent any other extraordinary 
distributions, will be reduced to $26,685. This amount is determined as 
follows. The numerator of the ratio described in the paragraph above is 
equal to $ 198,408 (that is, the excess of a total distribution of 
$298,408 over the partial distribution of $100,000). The denominator of 
the ratio described in the paragraph above is equal to $263,032 (that 
is, the maximum distribution on the date of the partial distribution of 
$298,408 (see Example 6) less the regularly scheduled payment of 
$35,376). Thus, future payments must be multiplied by 75.43 percent 
(that is, $198,408 divided by $263,032). Thus, his future payments must 
be $26,685 (that is, $35,376 multiplied by 75.43 percent).
    Example 9. (i) A participant (Z5) in defined contribution plan X 
attains age 70\1/2\ in 2005. Z5 elects to purchase annuity Contract Y5 
from Insurance Company W in 2005. Contract Y5 is a participating life 
annuity contract with a 20-year period certain. Contract Y5 provides an 
initial payment at the time of purchase of 5 percent of the purchase 
price, a second payment one year from the time of purchase of two 
percent of the purchase price, and 18 succeeding annual payments each 
increasing at a constant percentage rate of 16 percent from the 
preceding payment.
    (ii) Contract Y5 fails to meet the requirements of paragraph (b) of 
this A-4, and thus fails to satisfy the requirements of section 
401(a)(9), because the expected total payments without regard to any 
increases in the annuity payment is only 43 percent of the purchase 
price (that is, an amount not exceeding the account value used to 
purchase the annuity), calculated as 5 percent of the purchase price in 
year one and two percent of the purchase price in each of years two 
through twenty (or, .05 multiplied by 1 year plus .02 multiplied by 19 
years).

    Q-5. In the case of annuity distributions under a defined benefit 
plan, how must additional benefits that accrue after the employee's 
first distribution calendar year be distributed in order to satisfy 
section 401(a)(9)?
    A-5. (a) In the case of annuity distributions under a defined 
benefit plan, if any additional benefits accrue in a calendar year after 
the employee's first distribution calendar year, distribution of the 
amount that accrues in a calendar year must commence in accordance with 
A-1 of this section beginning with the first payment interval ending in 
the calendar year immediately following the calendar year in which such 
amount accrues.
    (b) A plan will not fail to satisfy section 401(a)(9) merely because 
there is an administrative delay in the commencement of the distribution 
of the additional benefits accrued in a calendar year, provided that the 
actual payment of such amount commences as soon as practicable. However, 
payment must commence no later than the end of the first calendar year 
following the calendar year in which the additional benefit accrues, and 
the total amount paid during such first calendar year must be no less 
than the total amount that was required to be paid during that year 
under A-5(a) of this section.
    Q-6. If a portion of an employee's benefit is not vested as of 
December 31 of a distribution calendar year, how is the determination of 
the required minimum distribution affected?
    A-6. In the case of annuity distributions from a defined benefit 
plan, if any portion of the employee's benefit is not vested as of 
December 31 of a distribution calendar year, the portion that is not 
vested as of such date will be treated as not having accrued for 
purposes of determining the required minimum distribution for that 
distribution calendar year. When an additional portion of the employee's 
benefit becomes vested, such portion will be treated as an additional 
accrual. See A-5 of this section for the rules for distributing benefits 
which accrue under a defined benefit plan after the employee's first 
distribution calendar year.
    Q-7. If an employee (other than a 5-percent owner) retires after the 
calendar year in which the employee attains age 70\1/2\, for what period 
must the employee's accrued benefit under a defined benefit plan be 
actuarially increased?
    A-7. (a) Actuarial increase starting date. If an employee (other 
than a 5-percent owner) retires after the calendar year in which the 
employee attains age 70\1/2\, in order to satisfy section 
401(a)(9)(C)(iii), the employee's accrued benefit under a defined 
benefit plan must be actuarially increased to take into account any 
period after age 70\1/2\ in which the employee was not receiving any 
benefits under the plan. The actuarial increase required to satisfy 
section 401(a)(9)(C)(iii) must be provided for the period starting on 
the April 1 following the calendar year in

[[Page 217]]

which the employee attains age 70\1/2\, or January 1, 1997, if later.
    (b) Actuarial increase ending date. The period for which the 
actuarial increase must be provided ends on the date on which benefits 
commence after retirement in an amount sufficient to satisfy section 
401(a)(9).
    (c) Nonapplication to plan providing same required beginning date 
for all employees. If, as permitted under A-2(e) of Sec. 1.401(a)(9)-2, 
a plan provides that the required beginning date for purposes of section 
401(a)(9) for all employees is April 1 of the calendar year following 
the calendar year in which the employee attains age 70\1/2\ (regardless 
of whether the employee is a 5-percent owner) and the plan makes 
distributions in an amount sufficient to satisfy section 401(a)(9) using 
that required beginning date, no actuarial increase is required under 
section 401(a)(9)(C)(iii).
    (d) Nonapplication to governmental and church plans. The actuarial 
increase required under this A-7 does not apply to a governmental plan 
(within the meaning of section 414(d)) or a church plan. For purposes of 
this paragraph, the term church plan means a plan maintained by a church 
for church employees, and the term church means any church (as defined 
in section 3121(w)(3)(A)) or qualified church-controlled organization 
(as defined in section 3121(w)(3)(B)).
    Q-8. What amount of actuarial increase is required under section 
401(a)(9)(C)(iii)?
    A-8. In order to satisfy section 401(a)(9)(C)(iii), the retirement 
benefits payable with respect to an employee as of the end of the period 
for actuarial increases (described in A-7 of this section) must be no 
less than: the actuarial equivalent of the employee's retirement 
benefits that would have been payable as of the date the actuarial 
increase must commence under paragraph (a) of A-7 of this section if 
benefits had commenced on that date; plus the actuarial equivalent of 
any additional benefits accrued after that date; reduced by the 
actuarial equivalent of any distributions made with respect to the 
employee's retirement benefits after that date. Actuarial equivalence is 
determined using the plan's assumptions for determining actuarial 
equivalence for purposes of satisfying section 411.
    Q-9. How does the actuarial increase required under section 
401(a)(9)(C)(iii) relate to the actuarial increase required under 
section 411?
    A-9. In order for any of an employee's accrued benefit to be 
nonforfeitable as required under section 411, a defined benefit plan 
must make an actuarial adjustment to an accrued benefit the payment of 
which is deferred past normal retirement age. The only exception to this 
rule is that generally no actuarial adjustment is required to reflect 
the period during which a benefit is suspended as permitted under 
section 203(a)(3)(B) of the Employee Retirement Income Security Act of 
1974 (ERISA). The actuarial increase required under section 
401(a)(9)(C)(iii) for the period described in A-7 of this section is 
generally the same as, and not in addition to, the actuarial increase 
required for the same period under section 411 to reflect any delay in 
the payment of retirement benefits after normal retirement age. However, 
unlike the actuarial increase required under section 411, the actuarial 
increase required under section 401(a)(9)(C)(iii) must be provided even 
during any period during which an employee's benefit has been suspended 
in accordance with ERISA section 203(a)(3)(B).
    Q-10. What rule applies if distributions commence to an employee on 
a date before the employee's required beginning date over a period 
permitted under section 401(a)(9)(A)(ii) and the distribution form is an 
annuity under which distributions are made in accordance with the 
provisions of A-1 (and if applicable A-4) of this section?
    A-10. (a) General rule. If distributions commence to an employee on 
an irrevocable basis (except for acceleration) on a date before the 
employee's required beginning date over a period permitted under section 
401(a)(9)(A)(ii) and the distribution form is an annuity under which 
distributions are made in accordance with the provisions of A-1 (and, if 
applicable, A-4) of this section, the annuity starting date will be 
treated as the required beginning date for purposes of applying the 
rules of this

[[Page 218]]

section and Sec. 1.401(a)(9)-2. Thus, for example, the designated 
beneficiary distributions will be determined as of the annuity starting 
date. Similarly, if the employee dies after the annuity starting date 
but before the required beginning date determined under A-2 of 
Sec. 1.401(a)(9)-2, after the employee's death, the remaining portion of 
the employee's interest must continue to be distributed in accordance 
with this section over the remaining period over which distributions 
commenced (single or joint lives or period certain, as applicable). The 
rules in Sec. 1.401(a)(9)-3 and section 401(a)(9)(B)(ii) or (iii) and 
(iv) do not apply.
    (b) Period certain. If as of the employee's birthday in the year 
that contains the annuity starting date, the age of the employee is 
under 70, the following rule applies in applying the rule in paragraph 
(a) of A-3 of this section. The applicable distribution period for the 
employee (determined in accordance with the Uniform Lifetime Table in A-
2 of Sec. 1.401(a)(9)-9) is the distribution period for age 70 using the 
Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-9 plus the excess of 
70 over age of the employee as of the employee's birthday in the year 
that contains the annuity starting date.
    Q-11. What rule applies if distributions commence on an irrevocable 
basis (except for acceleration) to the surviving spouse of an employee 
over a period permitted under section 401(a)(9)(B)(iii)(II) before the 
date on which distributions are required to commence and the 
distribution form is an annuity under which distributions are made as of 
the date distributions commence in accordance with the provisions of A-1 
(and if applicable A-4) of this section.
    A-11.If distributions commence to the surviving spouse of an 
employee on an irrevocable basis (except for acceleration) over a period 
permitted under section 401(a)(9)(B)(iii)(II) before the date on which 
distributions are required to commence and the distribution form is an 
annuity under which distributions are made as of the date distributions 
commence in accordance with the provisions of A-1 (and if applicable A-
4) of this section, distributions will be considered to have begun on 
the actual commencement date for purposes of section 
401(a)(9)(B)(iv)(II). Consequently, in such case, A-5 of 
Sec. 1.401(a)(9)-3 and section 401(a)(9)(B)(ii) and (iii) will not apply 
upon the death of the surviving spouse as though the surviving spouse 
were the employee. Instead, the annuity distributions must continue to 
be made, in accordance with the provisions of A-1 (and if applicable A-
4) of this section over the remaining period over which distributions 
commenced (single life or period certain, as applicable).
    Q-12. In the case of an annuity contract under an individual account 
plan from which annuity payments have not commenced to on an irrevocable 
basis (except for acceleration), how is section 401(a)(9) satisfied with 
respect to the employee's or beneficiary's entire interest under the 
annuity contract for the period prior to the date annuity payments so 
commence?
    A-12. Prior to the date that annuity payments commence on an 
irrevocable basis (except for acceleration) under an individual account 
plan from an annuity contract, the interest of an employee or 
beneficiary under that contract is treated as an individual account for 
purposes of section 401(a)(9). Thus, the required minimum distribution 
for any year with respect to that interest is determined under 
Sec. 1.401(a)(9)-5 rather than this section. For purposes of applying 
the rules in Sec. 1.401(a)(9)-5, the entire interest under the annuity 
contract as of December 31 of the relevant valuation calendar year is 
treated as the account balance for the valuation calendar year described 
in A-3 of Sec. 1.401(a)(9)-5. The entire interest under an annuity 
contract is the dollar amount credited to the employee or beneficiary 
under the contract plus the actuarial value of any other benefits (such 
as minimum survivor benefits) that will be provided under the contract. 
See A-1 of Sec. 1.401(a)(9)-5 for rules relating to the satisfaction of 
section 401(a)(9) in the year that annuity payments commence and A-
2(a)(3) of Sec. 1.401(a)(9)-8.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-7  Rollovers and transfers.

    Q-1. If an amount is distributed by one plan (distributing plan) and 
is

[[Page 219]]

rolled over to another plan, is the required minimum distribution under 
the distributing plan affected by the rollover?
    A-1. No, if an amount is distributed by one plan and is rolled over 
to another plan, the amount distributed is still treated as a 
distribution by the distributing plan for purposes of section 401(a)(9), 
notwithstanding the rollover. See A-1 of Sec. 1.402(c)-2 for the 
definition of a rollover and A-7 of Sec. 1.402(c)-2 for rules for 
determining the portion of any distribution that is not eligible for 
rollover because it is a required minimum distribution.
    Q-2. If an amount is distributed by one plan (distributing plan) and 
is rolled over to another plan (receiving plan), how are the benefit and 
the required minimum distribution under the receiving plan affected?
    A-2. If an amount is distributed by one plan (distributing plan) and 
is rolled over to another plan (receiving plan), the benefit of the 
employee under the receiving plan is increased by the amount rolled over 
for purposes of determining the required minimum distribution for the 
calendar year immediately following the calendar year in which the 
amount rolled over is distributed. If the amount rolled over is received 
after the last valuation date in the calendar year under the receiving 
plan, the benefit of the employee as of such valuation date, adjusted in 
accordance with A-3 of Sec. 1.401(a)(9)-5, will be increased by the 
rollover amount valued as of the date of receipt. In addition, if the 
amount rolled over is received in a different calendar year from the 
calendar year in which it is distributed, the amount rolled over is 
deemed to have been received by the receiving plan in the calendar year 
in which it was distributed.
    Q-3. In the case of a transfer of an amount of an employee's benefit 
from one plan (transferor plan) to another plan (transferee plan), are 
there any special rules for satisfying section 401(a)(9) or determining 
the employee's benefit under the transferor plan?
    A-3. (a) In the case of a transfer of an amount of an employee's 
benefit from one plan (transferor plan) to another (transferee plan), 
the transfer is not treated as a distribution by the transferor plan for 
purposes of section 401(a)(9). Instead, the benefit of the employee 
under the transferor plan is decreased by the amount transferred. 
However, if any portion of an employee's benefit is transferred in a 
distribution calendar year with respect to that employee, in order to 
satisfy section 401(a)(9), the transferor plan must determine the amount 
of the required minimum distribution with respect to that employee for 
the calendar year of the transfer using the employee's benefit under the 
transferor plan before the transfer. Additionally, if any portion of an 
employee's benefit is transferred in the employee's second distribution 
calendar year but on or before the employee's required beginning date, 
in order to satisfy section 401(a)(9), the transferor plan must 
determine the amount of the minimum distribution requirement for the 
employee's first distribution calendar year based on the employee's 
benefit under the transferor plan before the transfer. The transferor 
plan may satisfy the minimum distribution requirement for the calendar 
year of the transfer (and the prior year if applicable) by segregating 
the amount which must be distributed from the employee's benefit and not 
transferring that amount. Such amount may be retained by the transferor 
plan and must be distributed on or before the date required under 
section 401(a)(9).
    (b) For purposes of determining any required minimum distribution 
for the calendar year immediately following the calendar year in which 
the transfer occurs, in the case of a transfer after the last valuation 
date for the calendar year of the transfer under the transferor plan, 
the benefit of the employee as of such valuation date, adjusted in 
accordance with A-3 of Sec. 1.401(a)(9)-5, will be decreased by the 
amount transferred, valued as of the date of the transfer.
    Q-4. If an amount of an employee's benefit is transferred from one 
plan (transferor plan) to another plan (transferee plan), how are the 
benefit and the required minimum distribution under the transferee plan 
affected?
    A-4. In the case of a transfer from one plan (transferor plan) to 
another

[[Page 220]]

(transferee plan), the benefit of the employee under the transferee plan 
is increased by the amount transferred in the same manner as if it were 
a plan receiving a rollover contribution under A-2 of this section.
    Q-5. How is a spinoff, merger or consolidation (as defined in 
Sec. 1.414(l)-1) treated for purposes of determining an employee's 
benefit and required minimum distribution under section 401(a)(9)?
    A-5. For purposes of determining an employee's benefit and required 
minimum distribution under section 401(a)(9), a spinoff, a merger, or a 
consolidation (as defined in Sec. 1.414(l)-1) will be treated as a 
transfer of the benefits of the employees involved. Consequently, the 
benefit and required minimum distribution of each employee involved 
under the transferor and transferee plans will be determined in 
accordance with A-3 and A-4 of this section.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-8  Special rules.

    Q-1. What distribution rules apply if an employee is a participant 
in more than one plan?
    A-1. If an employee is a participant in more than one plan, the 
plans in which the employee participates are not permitted to be 
aggregated for purposes of testing whether the distribution requirements 
of section 401(a)(9) are met. The distribution of the benefit of the 
employee under each plan must separately meet the requirements of 
section 401(a)(9). For this purpose, a plan described in section 414(k) 
is treated as two separate plans, a defined contribution plan to the 
extent benefits are based on an individual account and a defined benefit 
plan with respect to the remaining benefits.
    Q-2. If an employee's benefit under a defined contribution plan is 
divided into separate accounts (or under a defined benefit plan is 
divided into segregated shares), do the distribution rules in section 
401(a)(9) and these regulations apply separately to each separate 
account?
    A-2. (a) Defined contribution plan. (1) Except as otherwise provided 
in this A-2, if an employee's benefit under a defined contribution plan 
is divided into separate accounts under the plan, the separate accounts 
will be aggregated for purposes of satisfying the rules in section 
401(a)(9). Thus, except as otherwise provided in this A-2, all separate 
accounts, including a separate account for employee contributions under 
section 72(d)(2), will be aggregated for purposes of section 401(a)(9).
    (2) If the employee's benefit in a defined contribution plan is 
divided into separate accounts and the beneficiaries with respect to one 
separate account differ from the beneficiaries with respect to the other 
separate accounts of the employee under the plan, for years subsequent 
to the calendar year containing the date on which the separate accounts 
were established, or date of death if later, such separate account under 
the plan is not aggregated with the other separate accounts under the 
plan in order to determine whether the distributions from such separate 
account under the plan satisfy section 401(a)(9). Instead, the rules in 
section 401(a)(9) separately apply to such separate account under the 
plan. However, the applicable distribution period for each such separate 
account is determined disregarding the other beneficiaries of the 
employee's benefit only if the separate account is established on a date 
no later than the last day of the year following the calendar year of 
the employee's death. For example, if, in the case of a distribution 
described in section 401(a)(9)(B)(iii) and (iv), the only beneficiary of 
a separate account under the plan established on a date no later than 
the end of the year following the calendar year of the employee's death 
is the employee's surviving spouse, and beneficiaries other than the 
surviving spouse are designated with respect to the other separate 
accounts with respect to the employee, distribution of the spouse's 
separate account under the plan need not commence until the date 
determined under the first sentence in A-3(b) of Sec. 1.401(a)(9)-3, 
even if distribution of the other separate accounts under the plan must 
commence at an earlier date. Similarly, in the case of a distribution 
after the death of an employee to which section 401(a)(9)(B)(i) does not 
apply, distribution from a separate account of an employee established 
on a

[[Page 221]]

date no later than the end of the year following the year of the 
employee's death may be made over a beneficiary's life expectancy in 
accordance with section 401(a)(9)(B)(iii) and (iv) even though 
distributions from other separate accounts under the plan with different 
beneficiaries are being made in accordance with the 5-year rule in 
section 401(a)(9)(B)(ii).
    (3) A portion of an employee's account balance under a defined 
contribution plan is permitted to be used to purchase an annuity 
contract while another portion stays in the account. In that case, the 
remaining account under the plan must be distributed in accordance with 
Sec. 1.401(a)(9)-5 in order to satisfy section 401(a)(9) and the annuity 
payments under the annuity contract must satisfy Sec. 1.401(a)(9)-6T in 
order to satisfy section 401(a)(9).
    (b) Defined benefit plan. The rules of paragraph (a)(2) and (3) of 
this A-2 also apply to benefits under a defined benefit plan where the 
benefits under the plan are separated into separate identifiable 
components which are separately distributed.
    Q-3. What are separate accounts for purposes of section 401(a)(9)?
    A-3. For purposes of section 401(a)(9), separate accounts in an 
employee's account are separate portions of an employee's benefit 
reflecting the separate interests of the employee's beneficiaries under 
the plan as of the date of the employee's death for which separate 
accounting is maintained. The separate accounting must allocate all 
post-death investment gains and losses, contributions, and forfeitures, 
for the period prior to the establishment of the separate accounts on a 
pro rata basis in a reasonable and consistent manner among the separate 
accounts. However, once the separate accounts are actually established, 
the separate accounting can provide for separate investments for each 
separate account under which gains and losses from the investment of the 
account are only allocated to that account, or investment gain or losses 
can continue to be allocated among the separate accounts on a pro rata 
basis. A separate accounting must allocate any post-death distribution 
to the separate account of the beneficiary receiving that distribution.
    Q-4. If a distribution is required to be made to an employee by 
section 401(a)(9)(A) or is required to be made to a surviving spouse 
under section 401(a)(9)(B), must the distribution be made even if the 
employee, or spouse where applicable, fails to consent to a distribution 
while a benefit is immediately distributable?
    A-4. Yes, section 411(a)(11) and section 417(e) (see 
Secs. 1.411(a)(11)-1(c)(2) and 1.417(e)-1(c)) require employee and 
spousal consent to certain distributions of plan benefits while such 
benefits are immediately distributable. If an employee's normal 
retirement age is later than the employee's required beginning date and, 
therefore, benefits are still immediately distributable, the plan must, 
nevertheless, distribute plan benefits to the employee (or where 
applicable, to the spouse) in a manner that satisfies the requirements 
of section 401(a)(9). Section 401(a)(9) must be satisfied even though 
the employee (or spouse, where applicable) fails to consent to the 
distribution. In such a case, the plan may distribute in the form of a 
qualified joint and survivor annuity (QJSA) or in the form of a 
qualified preretirement survivor annuity (QPSA), as applicable, and the 
consent requirements of sections 411(a)(11) and 417(e) are deemed to be 
satisfied if the plan has made reasonable efforts to obtain consent from 
the employee (or spouse if applicable) and if the distribution otherwise 
meets the requirements of section 417. If, because of section 
401(a)(11)(B), the plan is not required to distribute in the form of a 
QJSA to a employee or a QPSA to a surviving spouse, the plan may 
distribute the required minimum distribution amount to satisfy section 
401(a)(9) and the consent requirements of sections 411(a)(11) and 417(e) 
are deemed to be satisfied if the plan has made reasonable efforts to 
obtain consent from the employee (or spouse if applicable) and if the 
distribution otherwise meets the requirements of section 417.
    Q-5. Who is an employee's spouse or surviving spouse for purposes of 
section 401(a)(9)?
    A-5. Except as otherwise provided in A-6(a) of this section (in the 
case of distributions of a portion of an employee's benefit payable to a 
former spouse

[[Page 222]]

of an employee pursuant to a qualified domestic relations order), for 
purposes of section 401(a)(9), an individual is a spouse or surviving 
spouse of an employee if such individual is treated as the employee's 
spouse under applicable state law. In the case of distributions after 
the death of an employee, for purposes of determining whether, under the 
life expectancy rule in section 401(a)(9)(B)(iii) and (iv), the 
provisions of section 401(a)(9)(B)(iv) apply, the spouse of the employee 
is determined as of the date of death of the employee.
    Q-6. In order to satisfy section 401(a)(9), are there any special 
rules which apply to the distribution of all or a portion of an 
employee's benefit payable to an alternate payee pursuant to a qualified 
domestic relations order as defined in section 414(p) (QDRO)?
    A-6. (a) A former spouse to whom all or a portion of the employee's 
benefit is payable pursuant to a QDRO will be treated as a spouse 
(including a surviving spouse) of the employee for purposes of section 
401(a)(9), including the minimum distribution incidental benefit 
requirement, regardless of whether the QDRO specifically provides that 
the former spouse is treated as the spouse for purposes of sections 
401(a)(11) and 417.
    (b)(1) If a QDRO provides that an employee's benefit is to be 
divided and a portion is to be allocated to an alternate payee, such 
portion will be treated as a separate account (or segregated share) 
which separately must satisfy the requirements of section 401(a)(9) and 
may not be aggregated with other separate accounts (or segregated 
shares) of the employee for purposes of satisfying section 401(a)(9). 
Except as otherwise provided in paragraph (b)(2) of this A-6, 
distribution of such separate account allocated to an alternate payee 
pursuant to a QDRO must be made in accordance with section 401(a)(9). 
For example, in general, distribution of such account will satisfy 
section 401(a)(9)(A) if required minimum distributions from such account 
during the employee's lifetime begin not later than the employee's 
required beginning date and the required minimum distribution is 
determined in accordance with Sec. 1.401(a)(9)-5 for each distribution 
calendar year (using an applicable distribution period determined under 
A-4 of Sec. 1.401(a)(9)-5 for the employee in the distribution calendar 
year either using the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-
9 or using the joint life expectancy of the employee and a spousal 
alternate payee in the distribution calendar year if the spousal 
alternate payee is more than 10 years younger than the employee). The 
determination of whether distribution from such account after the death 
of the employee to the alternate payee will be made in accordance with 
section 401(a)(9)(B)(i) or section 401(a)(9)(B)(ii) or (iii) and (iv) 
will depend on whether distributions have begun as determined under A-6 
of Sec. 1.401(a)(9)-2 (which provides, in general, that distributions 
are not treated as having begun until the employee's required beginning 
date even though payments may actually have begun before that date). For 
example, if the alternate payee dies before the employee and 
distribution of the separate account allocated to the alternate payee 
pursuant to the QDRO is to be made to the alternate payee's beneficiary, 
such beneficiary may be treated as a designated beneficiary for purposes 
of determining the minimum distribution required from such account after 
the death of the employee if the beneficiary of the alternate payee is 
an individual and if such beneficiary is a beneficiary under the plan or 
specified to or in the plan. Specification in or pursuant to the QDRO is 
treated as specification to the plan.
    (2) Distribution of the separate account allocated to an alternate 
payee pursuant to a QDRO will satisfy the requirements of section 
401(a)(9)(A)(ii) if such account is to be distributed, beginning not 
later than the employee's required beginning date, over the life of the 
alternate payee (or over a period not extending beyond the life 
expectancy of the alternate payee). Also, if the plan permits the 
employee to elect whether distribution upon the death of the employee 
will be made in accordance with the 5-year rule in section 
401(a)(9)(B)(ii) or the life expectancy rule in section 
401(a)(9)(B)(iii) and (iv) pursuant to A-4(c) of Sec. 1.401(a)(9)-3, 
such election is to be made only by the

[[Page 223]]

alternate payee for purposes of distributing the separate account 
allocated to the alternate payee pursuant to the QDRO. If the alternate 
payee dies after distribution of the separate account allocated to the 
alternate payee pursuant to a QDRO has begun (determined under A-6 of 
Sec. 1.401(a)(9)-2) but before the employee dies, distribution of the 
remaining portion of that portion of the benefit allocated to the 
alternate payee must be made in accordance with the rules in 
Sec. 1.401(a)(9)-5 or 1.401(a)(9)-6T for distributions during the life 
of the employee. Only after the death of the employee is the amount of 
the required minimum distribution determined in accordance with the 
rules of section 401(a)(9)(B).
    (c) If a QDRO does not provide that an employee's benefit is to be 
divided but provides that a portion of an employee's benefit (otherwise 
payable to the employee) is to be paid to an alternate payee, such 
portion will not be treated as a separate account (or segregated share) 
of the employee. Instead, such portion will be aggregated with any 
amount distributed to the employee and will be treated as having been 
distributed to the employee for purposes of determining whether section 
401(a)(9) has been satisfied with respect to that employee.
    Q-7. Will a plan fail to satisfy section 401(a)(9) merely because it 
fails to distribute an amount otherwise required to be distributed by 
section 401(a)(9) during the period in which the issue of whether a 
domestic relations order is a QDRO is being determined?
    A-7. A plan will not fail to satisfy section 401(a)(9) merely 
because it fails to distribute an amount otherwise required to be 
distributed by section 401(a)(9) during the period in which the issue of 
whether a domestic relations order is a QDRO is being determined 
pursuant to section 414(p)(7), provided that the period does not extend 
beyond the 18-month period described in section 414(p)(7)(E). To the 
extent that a distribution otherwise required under section 401(a)(9) is 
not made during this period, any segregated amounts, as defined in 
section 414(p)(7)(A), will be treated as though the amounts are not 
vested during the period and any distributions with respect to such 
amounts must be made under the relevant rules for nonvested benefits 
described in either A-8 of Sec. 1.401(a)(9)-5 or A-6 of 
Sec. 1.401(a)(9)-6T, as applicable.
    Q-8. Will a plan fail to satisfy section 401(a)(9) where an 
individual's distribution from the plan is less than the amount 
otherwise required to satisfy section 401(a)(9) because distributions 
were being paid under an annuity contract issued by a life insurance 
company in state insurer delinquency proceedings and have been reduced 
or suspended by reasons of such state proceedings?
    A-8. A plan will not fail to satisfy section 401(a)(9) merely 
because an individual's distribution from the plan is less than the 
amount otherwise required to satisfy section 401(a)(9) because 
distributions were being paid under an annuity contract issued by a life 
insurance company in state insurer delinquency proceedings and have been 
reduced or suspended by reasons of such state proceedings. To the extent 
that a distribution otherwise required under section 401(a)(9) is not 
made during the state insurer delinquency proceedings, this amount and 
any additional amount accrued during this period will be treated as 
though such amounts are not vested during the period and any 
distributions with respect to such amounts must be made under the 
relevant rules for nonvested benefits described in either A-8 of 
Sec. 1.401(a)(9)-5 or A-6 of Sec. 1.401(a)(9)-6T, as applicable.
    Q-9. Will a plan fail to qualify as a pension plan within the 
meaning of section 401(a) solely because the plan permits distributions 
to commence to an employee on or after April 1 of the calendar year 
following the calendar year in which the employee attains age 70\1/2\ 
even though the employee has not retired or attained the normal 
retirement age under the plan as of the date on which such distributions 
commence?
    A-9. No, a plan will not fail to qualify as a pension plan within 
the meaning of section 401(a) solely because the plan permits 
distributions to commence to an employee on or after April 1 of the 
calendar year following the calendar year in which the employee attains 
age 70\1/2\ even though the employee has not

[[Page 224]]

retired or attained the normal retirement age under the plan as of the 
date on which such distributions commence. This rule applies without 
regard to whether the employee is a 5-percent owner with respect to the 
plan year ending in the calendar year in which distributions commence.
    Q-10. Is the distribution of an annuity contract a distribution for 
purposes of section 401(a)(9)?
    A-10. No, the distribution of an annuity contract is not a 
distribution for purposes of section 401(a)(9).
    Q-11. Will a payment by a plan after the death of an employee fail 
to be treated as a distribution for purposes of section 401(a)(9) solely 
because it is made to an estate or a trust?
    A-11. A payment by a plan after the death of an employee will not 
fail to be treated as a distribution for purposes of section 401(a)(9) 
solely because it is made to an estate or a trust. As a result, the 
estate or trust which receives a payment from a plan after the death of 
an employee need not distribute the amount of such payment to the 
beneficiaries of the estate or trust in accordance with section 
401(a)(9)(B). Pursuant to A-3 of Sec. 1.401(a)(9)-4, an estate may not 
be a designated beneficiary. Thus, pursuant to A-4 of Sec. 1.401(a)(9)-
3, distribution to the estate must satisfy the 5-year rule in section 
401(a)(9)(B)(iii) if the distribution to the employee had not begun (as 
defined in A-6 of Sec. 1.401(a)(9)-2) as of the employee's date of 
death. However, see A-5 and A-6 of Sec. 1.401(a)(9)-4 for provisions 
under which beneficiaries of a trust with respect to the trust's 
interest in an employee's benefit are treated as having been designated 
as beneficiaries of the employee under the plan.
    Q-12. Will a plan fail to satisfy section 411(d)(6) if the plan is 
amended to eliminate the availability of an optional form of benefit to 
the extent that the optional form does not satisfy section 401(a)(9)?
    A-12. No, pursuant to section 411(d)(6)(B), a plan will not fail to 
satisfy section 411(d)(6) merely because the plan is amended to 
eliminate the availability of an optional form of benefit to the extent 
that the optional form does not satisfy section 401(a)(9). (See also A-3 
of Sec. 1.401(a)(9)-1, which requires a plan to provide that, 
notwithstanding any other plan provision, it will not distribute 
benefits under any option that does not satisfy section 401(a)(9).)
    Q-13. Is a plan disqualified merely because it pays benefits under a 
designation made before January 1, 1984, in accordance with section 
242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA)?
    A-13. No, even though the distribution requirements added by TEFRA 
were retroactively repealed by the Tax Reform Act of 1984 (TRA of 1984), 
the transitional election rule in section 242(b) of TEFRA was preserved. 
Satisfaction of the spousal consent requirements of section 417(a) and 
(e) (added by the Retirement Equity Act of 1984) will not be considered 
a revocation of the pre-1984 designation. However, sections 401(a)(11) 
and 417 must be satisfied with respect to any distribution subject to 
those sections. The election provided in section 242(b) of TEFRA is 
hereafter referred to as a section 242(b)(2) election.
    Q-14. If an amount is transferred from one plan (transferor plan) to 
another plan (transferee plan), may the transferee plan distribute the 
amount transferred in accordance with a section 242(b)(2) election made 
under either the transferor plan or under the transferee plan?
    A-14. (a) If an amount is transferred from one plan (transferor 
plan) to another plan (transferee plan), the amount transferred may be 
distributed in accordance with a section 242(b)(2) election made under 
the transferor plan if the employee did not elect to have the amount 
transferred and if the amount transferred is separately accounted for by 
the transferee plan. However, only the benefit attributable to the 
amount transferred, plus earnings thereon, may be distributed in 
accordance with the section 242(b)(2) election made under the transferor 
plan. If the employee elected to have the amount transferred, the 
transfer will be treated as a distribution and rollover of the amount 
transferred for purposes of this section.
    (b) In the case in which an amount is transferred from one plan to 
another plan, the amount transferred may not

[[Page 225]]

be distributed in accordance with a section 242(b)(2) election made 
under the transferee plan. If a section 242(b)(2) election was made 
under the transferee plan, the amount transferred must be separately 
accounted for. If the amount transferred is not separately accounted for 
under the transferee plan, the section 242(b)(2) election under the 
transferee plan is revoked and section 401(a)(9) will apply to 
subsequent distributions by the transferee plan.
    (c) A merger, spinoff, or consolidation, as defined in 
Sec. 1.414(l)-1(b), will be treated as a transfer for purposes of the 
section 242(b)(2) election.
    Q-15. If an amount is distributed by one plan (distributing plan) 
and rolled over into another plan (receiving plan), may the receiving 
plan distribute the amount rolled over in accordance with a section 
242(b)(2) election made under either the distributing plan or the 
receiving plan?
    A-15. No, if an amount is distributed by one plan (distributing 
plan) and rolled over into another plan (receiving plan), the receiving 
plan must distribute the amount rolled over in accordance with section 
401(a)(9) whether or not the employee made a section 242(b)(2) election 
under the distributing plan. Further, if the amount rolled over was not 
distributed in accordance with the election, the election under the 
distributing plan is revoked and section 401(a)(9) will apply to all 
subsequent distributions by the distributing plan. Finally, if the 
employee made a section 242(b)(2) election under the receiving plan and 
such election is still in effect, the amount rolled over must be 
separately accounted for under the receiving plan and distributed in 
accordance with section 401(a)(9). If amounts rolled over are not 
separately accounted for, any section 242(b)(2) election under the 
receiving plan is revoked and section 401(a)(9) will apply to subsequent 
distributions by the receiving plan.
    Q-16. May a section 242(b)(2) election be revoked after the date by 
which distributions are required to commence in order to satisfy section 
401(a)(9) and this section of the regulations?
    A-16. Yes, a section 242(b)(2) election may be revoked after the 
date by which distributions are required to commence in order to satisfy 
section 401(a)(9) and this section of the regulations. However, if the 
section 242(b)(2) election is revoked after the date by which 
distributions are required to commence in order to satisfy section 
401(a)(9) and this section of the regulations and the total amount of 
the distributions which would have been required to be made prior to the 
date of the revocation in order to satisfy section 401(a)(9), but for 
the section 242(b)(2) election, have not been made, the plan must 
distribute by the end of the calendar year following the calendar year 
in which the revocation occurs the total amount not yet distributed 
which was required to have been distributed to satisfy the requirements 
of section 401(a)(9) and continue distributions in accordance with such 
requirements.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002]



Sec. 1.401(a)(9)-9  Life expectancy and distribution period tables.

    Q-1. What is the life expectancy for an individual for purposes of 
determining required minimum distributions under section 401(a)(9)?
    A-1 The following table, referred to as the Single Life Table, is 
used for determining the life expectancy of an individual:

                            Single Life Table
------------------------------------------------------------------------
                                                                 Life
                            Age                               expectancy
------------------------------------------------------------------------
 0.........................................................         82.4
 1.........................................................         81.6
 2.........................................................         80.6
 3.........................................................         79.7
 4.........................................................         78.7
 5.........................................................         77.7
 6.........................................................         76.7
 7.........................................................         75.8
 8.........................................................         74.8
 9.........................................................         73.8
10.........................................................         72.8
11.........................................................         71.8
12.........................................................         70.8
13.........................................................         69.9
14.........................................................         68.9
15.........................................................         67.9
16.........................................................         66.9
17.........................................................         66.0
18.........................................................         65.0
19.........................................................         64.0
20.........................................................         63.0
21.........................................................         62.1
22.........................................................         61.1
23.........................................................         60.1
24.........................................................         59.1
25.........................................................         58.2

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26.........................................................         57.2
27.........................................................         56.2
28.........................................................         55.3
29.........................................................         54.3
30.........................................................         53.3
31.........................................................         52.4
32.........................................................         51.4
33.........................................................         50.4
34.........................................................         49.4
35.........................................................         48.5
36.........................................................         47.5
37.........................................................         46.5
38.........................................................         45.6
39.........................................................         44.6
40.........................................................         43.6
41.........................................................         42.7
42.........................................................         41.7
43.........................................................         40.7
44.........................................................         39.8
45.........................................................         38.8
46.........................................................         37.9
47.........................................................         37.0
48.........................................................         36.0
49.........................................................         35.1
50.........................................................         34.2
51.........................................................         33.3
52.........................................................         32.3
53.........................................................         31.4
54.........................................................         30.5
55.........................................................         29.6
56.........................................................         28.7
57.........................................................         27.9
58.........................................................         27.0
59.........................................................         26.1
60.........................................................         25.2
61.........................................................         24.4
62.........................................................         23.5
63.........................................................         22.7
64.........................................................         21.8
65.........................................................         21.0
66.........................................................         20.2
67.........................................................         19.4
68.........................................................         18.6
69.........................................................         17.8
70.........................................................         17.0
71.........................................................         16.3
72.........................................................         15.5
73.........................................................         14.8
74.........................................................         14.1
75.........................................................         13.4
76.........................................................         12.7
77.........................................................         12.1
78.........................................................         11.4
79.........................................................         10.8
80.........................................................         10.2
81.........................................................          9.7
82.........................................................          9.1
83.........................................................          8.6
84.........................................................          8.1
85.........................................................          7.6
86.........................................................          7.1
87.........................................................          6.7
88.........................................................          6.3
89.........................................................          5.9
90.........................................................          5.5
91.........................................................          5.2
92.........................................................          4.9
93.........................................................          4.6
94.........................................................          4.3
95.........................................................          4.1
96.........................................................          3.8
97.........................................................          3.6
98.........................................................          3.4
99.........................................................          3.1
100........................................................          2.9
101........................................................          2.7
102........................................................          2.5
103........................................................          2.3
104........................................................          2.1
105........................................................          1.9
106........................................................          1.7
107........................................................          1.5
108........................................................          1.4
109........................................................          1.2
110........................................................          1.1
111+.......................................................          1.0
------------------------------------------------------------------------

    Q-2. What is the applicable distribution period for an individual 
account for purposes of determining required minimum distributions 
during an employee's lifetime under section 401(a)(9)?
    A-2. Table for determining distribution period. The following table, 
referred to as the Uniform Lifetime Table, is used for determining the 
distribution period for lifetime distributions to an employee in 
situations in which the employee's spouse is either not the sole 
designated beneficiary or is the sole designated beneficiary but is not 
more than 10 years younger than the employee.

                         Uniform Lifetime Table
------------------------------------------------------------------------
                                                           Distribution
                     Age of employee                          period
------------------------------------------------------------------------
70......................................................            27.4
71......................................................            26.5
72......................................................            25.6
73......................................................            24.7
74......................................................            23.8
75......................................................            22.9
76......................................................            22.0
77......................................................            21.2
78......................................................            20.3
79......................................................            19.5
80......................................................            18.7
81......................................................            17.9
82......................................................            17.1
83......................................................            16.3
84......................................................            15.5
85......................................................            14.8
86......................................................            14.1
87......................................................            13.4
88......................................................            12.7
89......................................................            12.0
90......................................................            11.4
91......................................................            10.8
92......................................................            10.2
93......................................................             9.6
94......................................................             9.1
95......................................................             8.6
96......................................................             8.1

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97......................................................             7.6
98......................................................             7.1
99......................................................             6.7
100.....................................................             6.3
101.....................................................             5.9
102.....................................................             5.5
103.....................................................             5.2
104.....................................................             4.9
105.....................................................             4.5
106.....................................................             4.2
107.....................................................             3.9
108.....................................................             3.7
109.....................................................             3.4
110.....................................................             3.1
111.....................................................             2.9
112.....................................................             2.6
113.....................................................             2.4
114..