[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2000 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
26
Part 1 (Secs. 1.401 to 1.440)
Revised as of April 1, 2000
Internal Revenue
Containing a Codification of documents of general
applicability and future effect
As of April 1, 2000
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
As a Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2000
For sale by U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
[[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........................ 839
Alphabetical List of Agencies Appearing in the CFR...... 857
Table of OMB Control Numbers............................ 867
List of CFR Sections Affected........................... 885
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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.
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[[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
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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.
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Many agencies have begun publishing numerous OMB control numbers as
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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, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For
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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
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the revision dates of the 50 CFR titles.
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[[Page vii]]
The Office of the Federal Register also offers a free service on the
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Raymond A. Mosley,
Director,
Office of the Federal Register.
April 1, 2000.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of nineteen volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2000. The first twelve 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 and
Sec. 1.1401 to end. The thirteenth 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.
For this volume, Bonnie J. Fritts was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Frances D. McDonald, assisted by Alomha S. Morris.
[[Page x]]
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Secs. 1.401 to 1.440)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (continued)...................................... 1
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CHAPTER I--INTERNAL REVENUE SERVICE,
DEPARTMENT OF THE TREASURY
(CONTINUED)
(Part 1, Secs. 1.401 to 1.440)
--------------------------------------------------------------------
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................................ 15
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)(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)(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.
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.
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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(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 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
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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.
1.408A-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.
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)-7T Definitions and special rules (temporary).
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(a)-11T Restriction and valuation of distributions (temporary).
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.
[[Page 8]]
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)
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)(5)-1 also issued under 26 U.S.C. 401(a)(5).
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).
[[Page 9]]
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. 1.408A-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)-7T 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)-4T 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).
DEFERRED COMPENSATION, ETC.--Table of Contents
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 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
[[Page 10]]
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).
(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
[[Page 11]]
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 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
[[Page 12]]
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 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
[[Page 13]]
(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
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.
[[Page 14]]
(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 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
[[Page 15]]
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 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
[[Page 16]]
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 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
[[Page 17]]
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 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
[[Page 18]]
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 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
[[Page 19]]
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 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
[[Page 20]]
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,
(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
[[Page 21]]
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 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
[[Page 22]]
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 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.
[[Page 23]]
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 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
[[Page 24]]
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 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
[[Page 25]]
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.
(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
[[Page 26]]
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 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
[[Page 27]]
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-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
[[Page 28]]
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 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
[[Page 29]]
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 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
[[Page 30]]
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), 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
[[Page 31]]
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 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
[[Page 32]]
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 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
[[Page 33]]
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 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
[[Page 34]]
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 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
[[Page 35]]
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.
(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
[[Page 36]]
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 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
[[Page 37]]
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.
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
[[Page 38]]
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 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
[[Page 39]]
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 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
[[Page 40]]
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.
(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
[[Page 41]]
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 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
[[Page 42]]
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, 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
[[Page 43]]
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 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.
[[Page 44]]
(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 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
[[Page 45]]
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
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
[[Page 46]]
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 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
[[Page 47]]
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 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
[[Page 48]]
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-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
[[Page 49]]
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''.
(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--
[[Page 50]]
(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 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.
[[Page 51]]
(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 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
[[Page 52]]
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 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
[[Page 53]]
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 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
[[Page 54]]
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 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
[[Page 55]]
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 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
[[Page 56]]
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 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
[[Page 57]]
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 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
[[Page 58]]
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 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
[[Page 59]]
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 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
[[Page 60]]
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 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
[[Page 61]]
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 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
[[Page 62]]
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
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.
[[Page 63]]
(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.
(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
[[Page 64]]
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 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,
[[Page 65]]
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 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
[[Page 66]]
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--
(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
[[Page 67]]
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 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
[[Page 68]]
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 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.
[[Page 69]]
(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 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--
[[Page 70]]
(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 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
[[Page 71]]
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.
(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--
[[Page 72]]
(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 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
[[Page 73]]
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 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
[[Page 74]]
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 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
[[Page 75]]
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 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
[[Page 76]]
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 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
[[Page 77]]
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.
(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 under Sec. 1.411(a)-11T(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
[[Page 78]]
$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 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.
[[Page 79]]
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 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
[[Page 80]]
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?
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
[[Page 81]]
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.
(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.
[[Page 82]]
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
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
[[Page 83]]
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)-11T(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 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
[[Page 84]]
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
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
[[Page 85]]
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
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
[[Page 86]]
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 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.
[[Page 87]]
(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 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?
[[Page 88]]
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 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
[[Page 89]]
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]
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
[[Page 90]]
(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.
(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
[[Page 91]]
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)(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.
(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.
[[Page 92]]
(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.
(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.
(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.
[[Page 93]]
(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.
(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]
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)
[[Page 94]]
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 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
[[Page 95]]
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 (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
[[Page 96]]
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
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
[[Page 97]]
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 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
[[Page 98]]
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.
(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
[[Page 99]]
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 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
[[Page 100]]
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) (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
[[Page 101]]
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 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
[[Page 102]]
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
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
[[Page 103]]
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 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
[[Page 104]]
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 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
[[Page 105]]
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 (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
[[Page 106]]
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 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
[[Page 107]]
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.
(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
[[Page 108]]
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 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
[[Page 109]]
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.
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
[[Page 110]]
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 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
[[Page 111]]
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).)
(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
[[Page 112]]
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 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
[[Page 113]]
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 (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.
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(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, 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--
[[Page 115]]
(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 (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
[[Page 116]]
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
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
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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 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
[[Page 118]]
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 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
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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, 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,
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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 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
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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.
(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
[[Page 122]]
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 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)-11T(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
[[Page 123]]
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 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
[[Page 124]]
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):
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
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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 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
[[Page 126]]
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 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
[[Page 127]]
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.
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;
[[Page 128]]
(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 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]
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
[[Page 129]]
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 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
[[Page 130]]
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.
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
[[Page 131]]
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 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.
[[Page 132]]
(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 - (5 x 2))).
(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
[[Page 133]]
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 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 percent
x 0.2) and equal 1.2 percent and 1.7 percent, respectively.
[[Page 134]]
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) 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 percent
x $3,000)).
(4) Grandfather rule for plans in existence on May 14, 1990. A
contributory DB plan that satisfies paragraph (c)(4) of
[[Page 135]]
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.
(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
[[Page 136]]
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 = 2 x unadjusted allocation rate
B Rate = unadjusted allocation rate + permitted disparity rate
(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
[[Page 137]]
(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 (2 x 5 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 percent x $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 percent x $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 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
[[Page 138]]
(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 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.
[[Page 139]]
(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 percent x $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 percent x $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 (2.0 x 1.48
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-(0.5 x $25,000))), and Employee N's D rate is 1.88 percent
(($1,802+(0.75 percent x $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)-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
[[Page 140]]
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. Equivalent benefits under a defined
contribution plan (other than an ESOP) are nondiscriminatory in amount
for a plan year if 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. A plan does not
fail to satisfy this paragraph (b)(1) 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.
(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 (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,
[[Page 141]]
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 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.
[[Page 142]]
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, 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
[[Page 143]]
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 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
[[Page 144]]
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.
(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)-
[[Page 145]]
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
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
[[Page 146]]
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,
(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
[[Page 147]]
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 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
[[Page 148]]
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 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.
[[Page 149]]
(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.
(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
[[Page 150]]
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]
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.
(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
[[Page 151]]
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.
(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 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).
[[Page 152]]
(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) Certain testing rules involving averaging. The safe harbor in
Sec. 1.401(a)(4)-2(b)(3) for plans with uniform points allocation
formulas are not available in testing (and thus cannot be satisfied by)
contributions under a component plan. 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)
(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
[[Page 153]]
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 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]
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,
[[Page 154]]
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 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
[[Page 155]]
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 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
[[Page 156]]
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 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
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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 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,
[[Page 158]]
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--(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
[[Page 159]]
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.
(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.
[[Page 160]]
(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.
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
[[Page 161]]
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 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
[[Page 162]]
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 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
[[Page 163]]
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 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
[[Page 164]]
(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
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.
[[Page 165]]
(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
(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
[[Page 166]]
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
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
[[Page 167]]
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
(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
[[Page 168]]
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 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.
[[Page 169]]
(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 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),
[[Page 170]]
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.
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'
[[Page 171]]
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.
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.
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.
[[Page 172]]
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 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
[[Page 173]]
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]
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.
(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;
[[Page 174]]
(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.
(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
[[Page 175]]
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.
(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 percent x $30,000 x 10 years)+(1.5
percent x $8,000 x 10 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 percent x $32,000 x 1 year)+(1.4
percent x $8,000 x 1 year), or $352); or
(2) $3,872, the amended formula applied to Employee M's total years
of service ((0.75 percent x $32,000 x 11 years)+(1.4
percent x $8,000 x 11 years)).
[[Page 176]]
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 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
[[Page 177]]
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 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
[[Page 178]]
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 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
[[Page 179]]
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 percent x $20,000 x 10 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 ($1,000 x $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
percent x $30,000 x 4 years) plus (1.2 percent x $5,000 x 4 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 date x (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 years of service prior to the fresh-start
date x (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
service x $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
[[Page 180]]
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 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.
[[Page 181]]
(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 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
[[Page 182]]
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 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.
[[Page 183]]
(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.
(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
[[Page 184]]
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 ($9,000 x 50 percent x 35/35). Under the plan's benefit formula
(disregarding the final pay limitation), A would be entitled to receive
a normal retirement benefit of $17,500 ($500 x 35 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 ($500 x 32 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
[[Page 185]]
amount under the Social Security Act attributable to A's service for Z
is 32/35 x $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 percent x $15,000 x 25/30). 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 percent x $14,500 x 26/30). 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.
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 Final pay amount under is applied Column 3,
compensation x 0.9 x social in full but not
years of security (Column 4 - less than
service/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
----------------------------------------------------------------------------------------------------------------
[[Page 186]]
(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)(17)-1 Limitation on annual compensation.
(a) Compensation limit requirement--(1) In general. In order to be a
qualified plan, a plan must satisfy section 401(a)(17). Section
401(a)(17) provides an annual compensation limit for each employee under
a qualified plan. This limit applies to a qualified plan in two ways.
First, a plan may not base allocations, in the case of a defined
contribution plan, or benefit accruals, in the case of a defined benefit
plan, on compensation in excess of the annual compensation limit.
Second, the amount of an employee's annual compensation that may be
taken into account in applying certain specified nondiscrimination rules
under the Internal Revenue Code is subject to the annual compensation
limit. These two limitations are set forth in paragraphs (b) and (c) of
this section, respectively. Paragraph (d) of this section provides the
effective dates of section 401(a)(17), the amendments made by section
13212 of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93), and
this section. Paragraph (e) of this section provides rules for
determining post-effective-date accrued benefits under the fresh-start
rules.
(2) Annual compensation limit for plan years beginning before
January 1, 1994. For purposes of this section, for plan years beginning
prior to the OBRA '93 effective date, annual compensation limit means
$200,000, adjusted as provided by the Commissioner. The amount of the
annual compensation limit is adjusted at the same time and in the same
manner as under section 415(d). The base period for the annual
adjustment is the calendar quarter ending December 31, 1988, and the
first adjustment is effective on January 1, 1990. Any increase in the
annual compensation limit is effective as of January 1 of a calendar
year and applies to any plan year beginning in that calendar year. In
any plan year beginning prior to the OBRA '93 effective date, if
compensation for any plan year beginning prior to the statutory
effective date is used for determining allocations or benefit accruals,
or when applying any nondiscrimination rule, then the annual
compensation limit for the first plan year beginning on or after the
statutory effective date (generally $200,000) must be applied to
compensation for that prior plan year.
(3) Annual compensation limit for plan years beginning on or after
January 1, 1994--(i) In general. For purposes of this
[[Page 187]]
section, for plan years beginning on or after the OBRA '93 effective
date, annual compensation limit means $150,000, adjusted as provided by
the Commissioner. The adjusted dollar amount of the annual compensation
limit is determined by adjusting the $150,000 amount for changes in the
cost of living as provided in paragraph (a)(3)(ii) of this section and
rounding this adjusted dollar amount as provided in paragraph
(a)(3)(iii) of this section. Any increase in the annual compensation
limit is effective as of January 1 of a calendar year and applies to any
plan year beginning in that calendar year. For example, if a plan has a
plan year beginning July 1, 1994, and ending June 30, 1995, the annual
compensation limit in effect on January 1, 1994 ($150,000), applies to
the plan for the entire plan year.
(ii) Cost of living adjustment. The $150,000 amount is adjusted for
changes in the cost of living by the Commissioner at the same time and
in the same manner as under section 415(d). The base period for the
annual adjustment is the calendar quarter ending December 31, 1993.
(iii) Rounding of adjusted compensation limit. After the $150,000,
adjusted in accordance with paragraph (a)(3)(ii) of this section,
exceeds the annual compensation limit for the prior calendar year by
$10,000 or more, the annual compensation limit will be increased by the
amount of such excess, rounded down to the next lowest multiple of
$10,000.
(4) Additional guidance. The Commissioner may, in revenue rulings
and procedures, notices, and other guidance, published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter),
provide any additional guidance that may be necessary or appropriate
concerning the annual limits on compensation under section 401(a)(17).
(b) Plan limit on compensation--(1) General rule. A plan does not
satisfy section 401(a)(17) unless it provides that the compensation
taken into account for any employee in determining plan allocations or
benefit accruals for any plan year is limited to the annual compensation
limit. For purposes of this rule, allocations and benefit accruals under
a plan include all benefits provided under the plan, including ancillary
benefits.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (b), the limit in effect for the current plan year applies
only to the compensation for that year that is taken into account in
determining plan allocations or benefit accruals for the year. The
compensation for any prior plan year taken into account in determining
an employee's allocations or benefit accruals for the current plan year
is subject to the applicable annual compensation limit in effect for
that prior year. Thus, increases in the annual compensation limit apply
only to compensation taken into account for the plan year in which the
increase is effective. In addition, if compensation for any plan year
beginning prior to the OBRA '93 effective date is used for determining
allocations or benefit accruals in a plan year beginning on or after the
OBRA '93 effective date, then the annual compensation limit for that
prior year is the annual compensation limit in effect for the first plan
year beginning on or after the OBRA '93 effective date (generally
$150,000).
(3) Application of limit to a plan year--(i) In general. For
purposes of applying this paragraph (b), the annual compensation limit
is applied to the compensation for the plan year on which allocations or
benefit accruals are based.
(ii) Compensation for the plan year. If a plan determines
compensation used in determining allocations or benefit accruals for a
plan year based on compensation for the plan year, then the annual
compensation limit that applies to the compensation for the plan year is
the limit in effect for the calendar year in which the plan year begins.
Alternatively, if a plan determines compensation used in determining
allocations or benefit accruals for the plan year on the basis of
compensation for a 12-consecutive-month period, or periods, ending no
later than the last day of the plan year, then the annual compensation
limit applies to compensation for each of those periods based on the
annual compensation limit in effect for the respective calendar year in
which each 12-month period begins.
[[Page 188]]
(iii) Compensation for a period of less than 12-months--(A)
Proration required. If compensation for a period of less than 12 months
is used for a plan year, then the otherwise applicable annual
compensation limit is reduced in the same proportion as the reduction in
the 12-month period. For example, if a defined benefit plan provides
that the accrual for each month in a plan year is separately determined
based on the compensation for that month and the plan year accrual is
the sum of the accruals for all months, then the annual compensation
limit for each month is \1/12\th of the annual compensation limit for
the plan year. In addition, if the period for determining compensation
used in calculating an employee's allocation or accrual for a plan year
is a short plan year (i.e., shorter than 12 months), the annual
compensation limit is an amount equal to the otherwise applicable annual
compensation limit multiplied by a fraction, the numerator of which is
the number of months in the short plan year, and the denominator of
which is 12.
(B) No proration required for participation for less than a full
plan year. Notwithstanding paragraph (b)(3)(iii)(A) of this section, a
plan is not treated as using compensation for less than 12 months for a
plan year merely because the plan formula provides that the allocation
or accrual for each employee is based on compensation for the portion of
the plan year during which the employee is a participant in the plan. In
addition, no proration is required merely because an employee is covered
under a plan for less than a full plan year, provided that allocations
or benefit accruals are otherwise determined using compensation for a
period of at least 12 months. Finally, notwithstanding paragraph
(b)(3)(iii)(A) of this section, no proration is required merely because
the amount of elective contributions (within the meaning of
Sec. 1.401(k)-1(g)(3)), matching contributions (within the meaning of
Sec. 1.401(m)-1(f)(12)), or employee contributions (within the meaning
of Sec. 1.401(m)-1(f)(6)) that is contributed for each pay period during
a plan year is determined separately using compensation for that pay
period.
(4) Limits on multiple employer and multiemployer plans. For
purposes of this paragraph (b), in the case of a plan described in
section 413(c) or 414(f) (a plan maintained by more than one employer),
the annual compensation limit applies separately with respect to the
compensation of an employee from each employer maintaining the plan
instead of applying to the employee's total compensation from all
employers maintaining the plan.
(5) Family aggregation. [Reserved]
(6) Examples. The following examples illustrate the rules in this
paragraph (b).
Example 1. Plan X is a defined benefit plan with a calendar year
plan year and bases benefits on the average of an employee's high 3
consecutive years' compensation. The OBRA '93 effective date for Plan X
is January 1, 1994. Employee A's high 3 consecutive years' compensation
prior to the application of the annual compensation limits is $160,000
(1994), $155,000 (1993), and $135,000 (1992). To satisfy this paragraph
(b), Plan X cannot base plan benefits for Employee A in 1994 on
compensation in excess of $145,000 (the average of $150,000 (A's 1994
compensation capped by the annual compensation limit), $150,000 (A's
1993 compensation capped by the $150,000 annual compensation limit
applicable to all years before 1994), and $135,000 (A's 1992
compensation capped by the $150,000 annual compensation limit applicable
to all years before 1994)). For purposes of determining the 1994
accrual, each year (1994, 1993, and 1992), not the average of the 3
years, is subject to the 1994 annual compensation limit of $150,000.
Example 2. Assume the same facts as Example 1, except that Employee
A's high 3 consecutive years' compensation prior to the application of
the limits is $185,000 (1997), $175,000 (1996), and $165,000 (1995).
Assume that the annual compensation limit is first adjusted to $160,000
for plan years beginning on or after January 1, 1997. Plan X cannot base
plan benefits for Employee A in 1997 on compensation in excess of
$153,333 (the average of $160,000 (A's 1997 compensation capped by the
1997 limit), $150,000 (A's 1996 compensation capped by the 1996 limit),
and $150,000 (A's 1995 compensation capped by the 1995 limit)).
Example 3. Plan Y is a defined benefit plan that bases benefits on
an employee's high consecutive 36 months of compensation ending within
the plan year. Employee B's high 36 months are the period September 1995
to August 1998, in which Employee B earned $50,000 in each month. Assume
that the annual compensation limit is first adjusted to $160,000 for
plan years beginning on or after January 1, 1997. The annual
compensation
[[Page 189]]
limit is $150,000, $150,000, and $160,000 in 1995, 1996, and 1997,
respectively. To satisfy this paragraph (b), Plan Y cannot base Employee
B's plan benefits for the 1998 plan year on compensation in excess of
$153,333. This amount is determined by applying the applicable annual
compensation limit to compensation for each of the three 12-consecutive-
month periods. The September 1995 to August 1996 period is capped by the
annual compensation limit of $150,000 for 1995; the September 1996 to
August 1997 period is capped by the annual compensation limit of
$150,000 for 1996; and the September 1997 to August 1998 period is
capped by the annual compensation limit of $160,000 for 1997. The
average of these capped amounts is the annual compensation limit
applicable in determining benefits for the 1998 year.
Example 4. (a) Employer P is a partnership. Employer P maintains
Plan Z, a profit-sharing plan that provides for an annual allocation of
employer contributions of 15 percent of plan year compensation for
employees other than self-employed individuals, and 13.0435 percent of
plan year compensation for self-employed individuals. The plan year of
Plan Z is the calendar year. The OBRA '93 effective date for Plan Z is
January 1, 1994. In order to satisfy section 401(a)(17), as amended by
OBRA '93, the plan provides that, beginning with the 1994 plan year, the
plan year compensation used in determining the allocation of employer
contributions for each employee may not exceed the annual limit in
effect for the plan year under OBRA '93. Plan Z defines compensation for
self-employed individuals (employees within the meaning of section
401(c)(1)) as the self-employed individual's net profit from self-
employment attributable to Employer P minus the amount of the self-
employed individual's deduction under section 164(f) for one-half of
self-employment taxes. Plan Z defines compensation for all other
employees as wages within the meaning of section 3401(a). Employee C and
Employee D are partners of Employer P and thus are self-employed
individuals. Neither Employee C nor Employee D owns an interest in any
other business or is a common-law employee in any business. For the 1994
calendar year, Employee C has net profit from self-employment of
$80,000, and Employee D has net profit from self-employment of $175,000.
The deduction for Employee C under section 164(f) for one-half of self-
employment taxes is $4,828. The deduction for Employee D under section
164(f) for one-half of self-employment taxes is $6,101
(b) The plan year compensation under the plan formula for Employee C
is $75,172 ($80,000 minus $4,828). The allocation of employer
contributions under the plan allocation formula for 1994 for Employee C
is $9,805 ($75,172 (Employee C's plan year compensation for 1994)
multiplied by 13.0435%). The plan year compensation under the plan
formula before application of the annual limit under section 401(a)(17)
for Employee D is $168,899 ($175,000 minus $6101). After application of
the annual limit, the plan year compensation for the 1994 plan year for
Employee D is $150,000 (the annual limit for 1994). Therefore, the
allocation of employer contributions under the plan allocation formula
for 1994 for Employee D is $19,565 ($150,000 (Employee D's plan year
compensation after application of the annual limit for 1994) multiplied
by 13.0435%).
Example 5. The facts are the same as in Example 4, except that Plan
Z provides that plan year compensation for self-employed individuals is
defined as earned income within the meaning of section 401(c)(2)
attributable to Employer P. In addition, Plan Z provides for an annual
allocation of employer contributions of 15 percent of plan year
compensation for all employees in the plan, including self-employed
individuals, such as Employees C and D. The net profit from self-
employment for Employee C and the net profit from self-employment for
Employee D are the same as provided in Example 4. However, the earned
income of Employee C determined in accordance with section 401(c)(2) is
$65,367 ($80,000 minus $4,828 minus $9,805). The earned income of
Employee D determined in accordance with section 401(c)(2) is $146,869
($175,000 minus $6,101 minus $22,030). Therefore, the allocation of
employer contributions under the plan allocation formula for 1994 for
Employee C is $9,805 ($65,367 (Employee C's plan year compensation for
1994) multiplied by 15%). Employee D's earned income for 1994 does not
exceed the 1994 annual limit of $150,000. Therefore, the allocation of
employer contributions under the plan allocation formula for 1994 for
Employee D is $22,030 ($146,869 (Employee D's plan year compensation for
1994) multiplied by 15%).
(c) Limit on compensation for nondiscrimination rules--(1) General
rule. The annual compensation limit applies for purposes of applying the
nondiscrimination rules under sections 401(a)(4), 401(a)(5), 401(l),
401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2) and 410(b)(2). The annual
compensation limit also applies in determining whether an alternative
method of determining compensation impermissibly discriminates under
section 414(s)(3). Thus, for example, the annual compensation limit
applies when determining a self-employed individual's total earned
income that is used to determine the equivalent alternative compensation
amount under Sec. 1.414(s)-1(g)(1). This paragraph (c) provides rules
for applying the annual compensation limit for these purposes. For
[[Page 190]]
purposes of this paragraph (c), compensation means the compensation used
in applying the applicable nondiscrimination rule.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (c), when applying an applicable nondiscrimination rule for a
plan year, the compensation for each plan year taken into account is
limited to the applicable annual compensation limit in effect for that
year, and an employee's compensation for that plan year in excess of the
limit is disregarded. Thus, if the nondiscrimination provision is
applied on the basis of compensation determined over a period of more
than one year (for example, average annual compensation), the annual
compensation limit in effect for each of the plan years that is taken
into account in determining the average applies to the respective plan
year's compensation. In addition, if compensation for any plan year
beginning prior to the OBRA '93 effective date is used when applying any
nondiscrimination rule in a plan year beginning on or after the OBRA '93
effective date, then the annual compensation limit for that prior year
is the annual compensation limit for the first plan year beginning on or
after the OBRA '93 effective date (generally $150,000).
(3) Plan-by-plan limit. For purposes of this paragraph (c), the
annual compensation limit applies separately to each plan (or group of
plans treated as a single plan) of an employer for purposes of the
applicable nondiscrimination requirement. For this purpose, the plans
included in the testing group taken into account in determining whether
the average benefit percentage test of Sec. 1.410(b)-5 is satisfied are
generally treated as a single plan.
(4) Application of limit to a plan year. The rules provided in
paragraph (b)(3) of this section regarding the application of the limit
to a plan year apply for purposes of this paragraph (c).
(5) Limits on multiple employer and multiemployer plans. The rule
provided in paragraph (b)(4) of this section regarding the application
of the limit to multiple employer and multiemployer plans applies for
purposes of this paragraph (c).
(d) Effective date--(1) Statutory effective date--(i) General rule.
Except as otherwise provided in this paragraph (d), section 401(a)(17)
applies to a plan as of the first plan year beginning on or after
January 1, 1989. For purposes of this section, statutory effective date
generally means the first day of the first plan year that section
401(a)(17) is applicable to a plan. In the case of governmental plans,
statutory effective date means the first day of the first plan year for
which the plan is not deemed to satisfy section 401(a)(17) by reason of
paragraph (d)(4) of this section.
(ii) Exception for collectively bargained plans. 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, section 401(a)(17) applies to allocations and
benefit accruals for plan years beginning on or after the earlier of--
(A) January 1, 1991; or
(B) The later of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension or renegotiation of any agreement occurring
after February 28, 1986). For purposes of this paragraph (d)(1)(ii), the
rules of Sec. 1.410(b)-10(a)(2) apply for purposes of determining
whether a plan is maintained pursuant to one or more collective
bargaining agreements, and any extension or renegotiation of a
collective bargaining agreement, which extension or renegotiation is
ratified after February 28, 1986, is to be disregarded in determining
the date on which the agreement terminates.
(2) OBRA '93 effective date--(i) In general. For purposes of this
section, OBRA '93 effective date means the first day of the first plan
year beginning on or after January 1, 1994, except as provided in this
paragraph (d)(2).
(ii) Exception for collectively bargained plans--(A) In general. In
the case of a plan maintained pursuant to one or more collective
bargaining agreements between employee representatives and 1 or more
employers ratified before August 10, 1993, OBRA '93 effective date means
the first day of the first plan
[[Page 191]]
year beginning on or after the earlier of--
(1) The latest of--
(i) January 1, 1994;
(ii) The date on which the last of such collective bargaining
agreements terminates (without regard to any extension, amendment, or,
modification of such agreements on or after August 10, 1993); or
(iii) In the case of a plan maintained pursuant to collective
bargaining under the Railway Labor Act, the date of execution of an
extension or replacement of the last of such collective bargaining
agreements in effect on August 10, 1993; or
(2) January 1, 1997.
(B) Determination of whether plan is collectively bargained. For
purposes of this paragraph (d)(2)(ii), the rules of Sec. 1.410(b)-
10(a)(2) apply for purposes of determining whether a plan is maintained
pursuant to one or more collective bargaining agreements, except that
August 10, 1993, is substituted for March 1, 1986, as the date before
which the collective bargaining agreements must be ratified.
(3) Regulatory effective date. This Sec. 1.401(a)(17)-1 applies to
plan years beginning on or after the OBRA '93 effective date. However,
in the case of a plan maintained by an organization that is exempt from
income taxation under section 501(a), including plans subject to section
403(b)(12)(A)(i) (nonelective plans), this Sec. 1.401(a)(17)-1 applies
to plan years beginning on or after January 1, 1996. For plan years
beginning before the effective date of these regulations and on or after
the statutory effective date, a plan must be operated in accordance with
a reasonable, good faith interpretation of section 401(a)(17), taking
into account, if applicable, the OBRA '93 reduction to the annual
compensation limit under section 401(a)(17).
(4) Special rules for governmental plans--(i) Deemed satisfaction by
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), section 401(a)(17) is considered satisfied for plan
years beginning before 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. For purposes of this paragraph
(d)(4), the term governing body with authority to amend the plan means
the legislature, board, commission, council, or other governing body
with authority to amend the plan.
(ii) Transition rule for governmental plans--(A) In general. In the
case of an eligible participant in a governmental plan (within the
meaning of section 414(d)), the annual compensation limit under this
section shall not apply to the extent that the application of the
limitation would reduce the amount of compensation that is allowed to be
taken into account under the plan below the amount that was allowed to
be taken into account under the plan as in effect on July 1, 1993. Thus,
for example, if a plan as in effect on July 1, 1993, determined benefits
without any reference to a limit on compensation, then the annual
compensation limit in effect under this section will not apply to any
eligible participant in any future year.
(B) Eligible participant. For purposes of this paragraph (d)(4)(ii),
an eligible participant is an individual who first became a participant
in the plan prior to the first day of the first plan year beginning
after the earlier of--
(1) The last day of the plan year by which a plan amendment to
reflect the amendments made by section 13212 of OBRA '93 is both adopted
and effective; or
(2) December 31, 1995.
(C) Plan must be amended to incorporate limits. This paragraph
(d)(4)(ii) shall not apply to any eligible participant in a plan unless
the plan is amended so that the plan incorporates by reference the
annual compensation limit under section 401(a)(17), effective with
respect to noneligible participants for plan years beginning after
December 31, 1995 (or earlier, if the plan amendment so provides).
(5) Benefits earned prior to effective date--(i) In general.
Allocations under a defined contribution plan or benefits accrued under
a defined benefit plan for plan years beginning before the statutory
effective date are not subject
[[Page 192]]
to the annual compensation limit. Allocations under a defined
contribution plan or benefits accrued under a defined benefit plan for
plan years beginning on or after the statutory effective date, but
before the OBRA '93 effective date, are subject to the annual
compensation limit under paragraph (a)(2) of this section. However,
these allocations or accruals are not subject to the OBRA '93 reduction
to the annual compensation limit described in paragraph (a)(3) of this
section.
(ii) Allocation for a plan year. The allocations for a plan year
include amounts described in Sec. 1.401(a)(4)-2(c)(ii) or Sec. 1.401(m)-
1(f)(6) plus the earnings, expenses, gains, and losses attributable to
those amounts.
(iii) Benefits accrued for years before the effective date. The
benefits accrued for plan years prior to a specified date by any
employee are the employee's benefits accrued under the plan, determined
as if those benefits had been frozen (as defined in Sec. 1.401(a)(4)-
13(c)(3)(i)) as of the day immediately preceding such specified date.
Thus, for example, benefits accrued for those plan years generally do
not include any benefits accrued under an amendment increasing prior
benefits that is adopted after the date on which the employee's benefits
under the plan must be treated as frozen.
(e) Determination of post-effective-date accrued benefits--(1) In
general. The plan formula that is used to determine the amount of
allocations or benefit accruals for plan years beginning on or after the
dates described in paragraph (d)(1) or (2) must comply with section
401(a)(17) as in effect on such date. This paragraph (e) provides rules
for applying section 401(a)(17) in the case of section 401(a)(17)
employees who accrue additional benefits under a defined benefit plan in
a plan year beginning on or after the relevant effective date. Paragraph
(e)(2) of this section contains definitions used in applying these
rules. Paragraphs (e)(3) and (e)(4) of this section explain the
application of the fresh-start rules in Sec. 1.401(a)(4)-13 to the
determination of the accrued benefits of section 401(a)(17) employees.
(2) Definitions. For purposes of this paragraph (e), the following
definitions apply:
(i) Section 401(a)(17) employee. An employee is a section 401(a)(17)
employee as of a date, on or after the statutory effective date, if the
employee's current accrued benefit as of that date is based on
compensation for a year prior to the statutory effective date that
exceeded the annual compensation limit for the first plan year beginning
on or after the statutory effective date. In addition, an employee is a
section 401(a)(17) employee as of a date, on or after the OBRA '93
effective date, if the employee's current accrued benefit as of that
date is based on compensation for a year prior to the OBRA '93 effective
date that exceeded the annual compensation limit for the first plan year
beginning on or after the OBRA '93 effective date. For this purpose, a
current accrued benefit is not treated as based on compensation that
exceeded the relevant annual compensation limit, if a plan makes a fresh
start using the formula with wear-away described in Sec. 1.401(a)(4)-
13(c)(4)(ii), and the employee's accrued benefit determined under
Sec. 1.401(a)(4)-13(c)(4)(ii)(B), taking into account the annual
compensation limit, exceeds the employee's frozen accrued benefit (or,
if applicable, the employee's adjusted accrued benefit) as of the fresh-
start date.
(ii) Section 401(a)(17) fresh-start date. Section 401(a)(17) fresh-
start date means a fresh-start date as defined in Sec. 1.401(a)(4)-12
not earlier than the last day of the last plan year beginning before the
statutory effective date, and not later than the last day of the last
plan year beginning before the effective date of these regulations.
(iii) OBRA '93 fresh-start date. OBRA '93 fresh-start date means a
fresh-start date as defined in Sec. 1.401(a)(4)-12 not earlier than the
last day of the last plan year beginning before the OBRA '93 effective
date, and not later than the last day of the last plan year beginning
before the effective date of these regulations.
(iv) Section 401(a)(17) frozen accrued benefit. Section 401(a)(17)
frozen accrued benefit means the accrued benefit for any section
401(a)(17) employee frozen (as defined in Sec. 1.401(a)(4)-13(c)(3)(i))
as of the last day of the last plan year beginning before the statutory
effective date.
[[Page 193]]
(v) OBRA '93 frozen accrued benefit. OBRA '93 frozen accrued benefit
means the accrued benefit for any section 401(a)(17) employee frozen (as
defined in Sec. 1.401(a)(4)-13(c)(3)(i)) as of the OBRA '93 fresh-start
date.
(3) Application of fresh-start rules--(i) General rule. In order to
satisfy section 401(a)(17), a defined benefit plan must determine the
accrued benefit of each section 401(a)(17) employee by applying the
fresh-start rules in Sec. 1.401(a)(4)-13(c). The fresh-start rules must
be applied using a section 401(a)(17) fresh-start date and using the
plan benefit formula, after amendment to comply with section 401(a)(17)
and this section, as the formula applicable to benefit accruals in the
current plan year. In addition, the fresh-start rules must be applied to
determine the accrued benefit of each section 401(a)(17) employee using
an OBRA '93 fresh-start date and using the plan benefit formula, after
amendment to comply with the reduction in the section 401(a)(17) annual
compensation limit described in paragraph (a)(3) of this section, as the
formula applicable to benefit accruals in the current plan year.
(ii) Consistency rules in Sec. 1.401(a)(4)-13(c) and (d)--(A)
General rule. In applying the fresh-start rules of Sec. 1.401(a)(4)-
13(c) and (d), the group of section 401(a)(17) employees is a fresh-
start group. See Sec. 1.401(a)(4)-13(c)(5)(ii)(A). Thus, the consistency
rules of those sections govern, unless otherwise provided. For example,
if the plan is using a fresh-start date applicable to all employees and
is not adjusting frozen accrued benefits under Sec. 1.401(a)(4)-13(d)
for employees who are not section 401(a)(17) employees, then the frozen
accrued benefits for section 401(a)(17) employees may not be adjusted
under Sec. 1.401(a)(4)-13(d) or this paragraph (e).
(B) Determination of adjusted accrued benefit. If the fresh-start
rules of Sec. 1.401(a)(4)-13(c) and (d) are applied to determine the
benefits of all employees after a fresh-start date, the plan will not
fail to satisfy the consistency requirement of Sec. 1.401(a)(4)-
13(c)(5)(i) merely because the plan makes the adjustment described in
Sec. 1.401(a)(4)-13(d) to the frozen accrued benefits of employees who
are not section 401(a)(17) employees, but does not make the adjustment
to the frozen accrued benefits of section 401(a)(17) employees. In
addition, the plan does not fail to satisfy the consistency requirement
of Sec. 1.401(a)(4)-13(c)(5)(i) merely because the plan makes the
adjustment described in Sec. 1.401(a)(4)-13(d) for section 401(a)(17)
employees on the basis of the compensation formula that was used to
determine the frozen accrued benefit (as required under paragraph
(e)(4)(iii) of this section) but makes the adjustment for employees who
are not section 401(a)(17) employees on the basis of any other method
provided in Sec. 1.401(a)(4)-13(d)(8).
(4) Permitted adjustments to frozen accrued benefit of section
401(a)(17) employees--(i) General rule. Except as otherwise provided in
paragraphs (e)(4)(ii) and (iii) of this section, the rules in
Sec. 1.401(a)(4)-13(c)(3) (permitting certain adjustments to frozen
accrued benefits) apply to section 401(a)(17) frozen accrued benefits or
OBRA '93 frozen accrued benefits.
(ii) Optional forms of benefit. After either the section 401(a)(17)
fresh-start date or the OBRA '93 fresh-start date, a plan may be amended
either to provide a new optional form of benefit or to make an optional
form of benefit available with respect to the section 401(a)(17) frozen
accrued benefit or the OBRA '93 frozen accrued benefit, provided that
the optional form of benefit is not subsidized. Whether an optional form
is subsidized may be determined using any reasonable actuarial
assumptions.
(iii) Adjusting section 401(a)(17) accrued benefits--(A) In general.
If the plan adjusts accrued benefits for employees under the rules of
Sec. 1.401(a)(4)-13(d) as of a fresh-start date, the adjusted accrued
benefit (within the meaning of section Sec. 1.401(a)(4)-13(d)) for each
section 401(a)(17) employee must be determined after the fresh-start
date by reference to the plan's compensation formula that was actually
used to determine the frozen accrued benefit as of the fresh-start date.
For this purpose, the plan's compensation formula incorporates the
plan's underlying compensation definition and compensation averaging
period. In
[[Page 194]]
making the adjustment, the denominator of the adjustment fraction
described in Sec. 1.401(a)(4)-13(d)(8)(i) is the employee's compensation
as of the fresh-start date using the plan's compensation formula as of
that date and, in the case of an OBRA '93 fresh-start date, reflecting
the annual compensation limits that applied as of the fresh-start date.
The numerator of the adjustment fraction is the employee's updated
compensation (i.e., compensation for the current plan year within the
meaning of Sec. 1.401(a)(4)-13(d)(8)), determined after applying the
annual compensation limits to each year's compensation that is used in
the plan's compensation formula as of the fresh-start date. Similarly,
in applying the alternative rule in Sec. 1.401(a)(4)-13(d)(8)(v), the
updated compensation that is substituted must be determined after
applying the annual compensation limits to each year's compensation that
is used in the plan's compensation formula. Thus, no adjustment will be
permitted unless the updated compensation (determined after applying the
annual compensation limit) exceeds the compensation that was used to
determine the employee's frozen accrued benefit.
(B) Multiple fresh starts. If a plan makes more than one fresh start
with respect to a section 401(a)(17) employee, the employee's frozen
accrued benefit as of the latest fresh-start date will either be
determined by applying the current benefit formula to the employee's
total years of service as of that fresh-start date or will consist of
the sum of the employee's frozen accrued benefit (or adjusted accrued
benefit (as defined in Sec. 1.401(a)(4)-13(d)(8)(i))) as of the previous
fresh-start date plus additional frozen accruals since the previous
fresh start. If the frozen accrued benefit consists of such a sum, in
making the adjustments described in paragraph (e)(4)(iii)(A) of this
section, separate adjustments must be made to that previously frozen
accrued benefit (or adjusted accrued benefit) and the additional frozen
accruals to the extent that the frozen accrued benefit and the
additional accruals have been determined using different compensation
formulas or different compensation limits (i.e., the section 401(a)(17)
limit before and after the reduction in limit described in paragraph
(a)(3) of this section). In this case, if the plan is applying the
adjustment fraction of Sec. 1.401(a)(4)-13(d)(8)(i), the denominator of
the separate adjustment fraction for adjusting each portion of the
frozen accrued benefit must reflect the actual compensation formula,
and, if applicable, compensation limit, originally used for determining
that portion. For example, the frozen accrued benefit of a section
401(a)(17) employee as of the OBRA '93 fresh-start date may be based on
the sum of the section 401(a)(17) frozen accrued benefit (determined
without any annual compensation limit) plus benefit accruals in the
years between the statutory effective date and the OBRA '93 effective
date (based on compensation that was subject to the annual compensation
limits for those years). In this example, in adjusting the section
401(a)(17) frozen accrued benefit, the denominator of the adjustment
fraction does not reflect any annual compensation limit. Similarly, in
adjusting the frozen accruals for years between the statutory effective
date and the OBRA '93 effective date, the denominator of the adjustment
fraction reflects the level of the annual compensation limit in effect
for those years.
(5) Examples. The following examples illustrate the rules in this
paragraph (e).
Example 1. (a) Employer X maintains Plan Y, a calendar year defined
benefit plan providing an annual benefit for each year of service equal
to 2 percent of compensation averaged over an employee's high 3
consecutive calendar years' compensation. Section 401(a)(17) applies to
Plan Y in 1989. As of the close of the last plan year beginning before
January 1, 1989 (i.e., the 1988 plan year), Employee A, with 5 years of
service, had accrued a benefit of $25,000 which equals 10 percent (2
percent multiplied by 5 years of service) of average compensation of
$250,000. Employer X decides to comply with the provisions of this
section for plan years before the effective date of this section.
Employer X decides to make the amendment effective for plan years
beginning on or after January 1, 1989, and uses December 31, 1988 as the
section
[[Page 195]]
401(a)(17) fresh-start date. Plan Y, as amended, provides that, in
determining an employee's benefit, compensation taken into account is
limited in accordance with the provisions of this section to the annual
compensation limit under section 401(a)(17), and that, for section
401(a)(17) employees, the employee's accrued benefit is the greater of
(i) The employee's benefit under the plan's benefit formula (after
the plan formula is amended to comply with section 401(a)(17)) as
applied to the employee's total years of service; and
(ii) The employee's accrued benefit as of December 31, 1988,
determined as though the employee terminated employment on that date
without regard to any plan amendments after that date.
Employer X decides not to amend Plan Y to provide for the
adjustments permitted under Sec. 1.401(a)(4)-13(d) to the accrued
benefit of section 401(a)(17) employees as of December 31, 1988.
(b) Under Plan Y, Employee A's accrued benefit at the end of 1989 is
$25,000, which is the greater of Employee A's accrued benefit as of the
last day of the 1988 plan year ($25,000), and $24,000, which is Employee
A's benefit based on the plan's benefit formula applied to Employee A's
total years of service ($200,000 multiplied by (2 percent multiplied by
6 years of service)). The formula of Plan Y applicable to section
401(a)(17) employees for calculating their accrued benefits for years
after the section 401(a)(17) fresh-start date is the formula in
Sec. 1.401(a)-13(c)(4)(ii) (formula with wear-away). The fresh-start
formula is applied using a benefit formula for the 1989 plan year that
satisfies section 401(a)(17) and this section, and the December 31, 1988
fresh-start date used for the plan is a section 401(a)(17) fresh-start
date within the meaning of paragraph (e)(2)(ii) of this section. Thus,
Plan Y, as amended, satisfies paragraph (e)(3)(i) of this section for
plan years commencing prior to the OBRA '93 effective date.
Example 2. Assume the same facts as in Example 1, except that the
plan formula provides that effective January 1, 1989, for section
401(a)(17) employees, an employee's benefit will equal the sum of the
employee's accrued benefit as of December 31, 1988 (determined as though
the employee terminated employment on that date and without regard to
any amendments after that date), and 2 percent of compensation averaged
over an employee's high 3 consecutive years' compensation times years of
service taking into account only years of service after December 31,
1988. Thus, under Plan Y's formula, Employee A's accrued benefit as of
December 31, 1989 is $29,000, which is equal to the sum of $25,000
(Employee A's accrued benefit as of December 31, 1988) plus $4,000
($200,000 multiplied by (2 percent multiplied by 1 year of service)).
The formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-13(c)(4)(i)
(formula without wear-away). The fresh-start formula is applied using a
benefit formula for the 1989 plan year that satisfies section 401(a)(17)
and this section, and the December 31, 1988 fresh-start date used for
the plan is a section 401(a)(17) fresh-start date within the meaning of
paragraph (e)(2)(ii) of this section. Thus, Plan Y, as amended,
satisfies paragraph (e)(3)(i) of this section for plan years commencing
prior to the OBRA '93 effective date.
Example 3. (a) Assume the same facts as in Example 1, except that
the plan formula provides that effective January 1, 1989, an employee's
benefit equals the greater of the plan formulas in Example 1 and Example
2. The formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-
13(c)(4)(iii) (formula with extended wear-away). The fresh-start formula
is applied using a benefit formula for the 1989 plan year that satisfies
section 401(a)(17) and this section, and the December 31, 1988 fresh-
start date used for the plan is a section 401(a)(17) fresh-start date
within the meaning of paragraph (e)(2)(ii) of this section. Thus, Plan
Y, as amended, satisfies paragraph (e)(3)(i) of this section for plan
years commencing prior to the OBRA '93 effective date.
(b) Assume that for each of the years 1991-93 Employee A's annual
compensation under the plan compensation formula, disregarding the
amendment to comply with section 401(a)(17) is $300,000. The annual
compensation limit is adjusted to $222,220, $228,860, and $235,840 for
plan years beginning January 1, 1991, 1992, and 1993, respectively.
Because Employer X has decided to amend Plan Y to comply with the
provisions of this section effective for plan years beginning on or
after January 1, 1989, and has used December 31, 1988 as the section
401(a)(17) fresh-start date, the compensation that may be taken into
account for plan benefits in 1993 cannot exceed $228,973 (the average of
$222,220, $228,860, and $235,840). Therefore, as of December 31, 1993,
the benefit determined under the fresh-start formula with wear-away
would be $45,795 ($228,973 multiplied by (2 percent multiplied by 10
years of service)). The benefit determined under the fresh-start formula
without wear-away would be $47,897, which is equal to $25,000 (Employee
A's section 401(a)(17) frozen accrued benefit) plus $22,897 ($228,973
multiplied by (2 percent multiplied by 5 years of service)). Because
Employee A's accrued benefit is being determined using the fresh-start
formula with extended wear-away, Employee A's accrued benefit as of
December 31, 1993, is equal to $47,897, the greater of the two amounts.
[[Page 196]]
Example 4. (a) Assume the same facts as in Example 3, except that
Plan Y satisfies Sec. 1.401(a)(4)-13(d)(3) through (d)(7) and that the
amendment to Plan Y effective for plan years beginning after December
31, 1988, also provided for adjustments to the section 401(a)(17) frozen
accrued benefit in accordance with Sec. 1.401(a)(4)-13(d) using the
fraction described in Sec. 1.401(a)(4)-13(d)(8)(i).
(b) As of December 31, 1993, the numerator of Employee A's
compensation fraction is $228,973 (the average of Employee A's annual
compensation for 1991, 1992, and 1993, as limited by the respective
annual limit for each of those years). The denominator of Employee A's
compensation fraction determined in accordance with paragraph
(e)(4)(iii) of this section is $250,000 (the average of Employee A's
high 3 consecutive calendar year compensation as of December 31, 1988,
determined without regard to section 401(a)(17)). Therefore, Employee
A's compensation fraction is $228,973/$250,000. Because the compensation
adjustment fraction is less than 1, Employee A's section 401(a)(17)
frozen accrued benefit is not adjusted. Therefore, Employee A's accrued
benefit as of December 31, 1993, would still be $47,897, which is equal
to $25,000 (Employee A's section 401(a)(17) frozen accrued benefit) plus
$22,897 ($228,973 multiplied by (2 percent multiplied by 5 years of
service).
Example 5. (a) Assume the same facts as in Example 3, except that as
of January 1, 1994, Plan Y is amended to provide that benefits will be
determined based on compensation of $150,000 (the limit in effect under
section 401(a)(17) for plan years beginning on or after the OBRA '93
effective date) and that for section 401(a)(17) employees, each
employee's accrued benefit will be determined under Sec. 1.401(a)(4)-
13(c)(4)(i) (formula without wear-away) using December 31, 1993 as the
OBRA '93 fresh-start date.
(b) Assume that for each of the years 1996-98 Employee A's annual
compensation under the plan compensation definition, disregarding the
amendment to comply with section 401(a)(17), is $400,000. Assume that
the annual compensation limit is first adjusted to $160,000 for plan
years beginning on or after January 1, 1997, and is not adjusted for the
plan year beginning on or after January 1, 1998. The compensation that
may be taken into account for the 1998 plan year cannot exceed $156,667
(the average of $150,000 for 1996, $160,000 for 1997, and $160,000 for
1998).
(c) Therefore, at the end of December 31, 1998, Employee A's accrued
benefit is $63,564, which is equal to $47,897 (Employee A's OBRA '93
frozen accrued benefit) plus $15,667 ($156,667 multiplied by (2 percent
multiplied by 5 years of service)).
Example 6. (a) Assume the same facts as in Example 5, except that,
for the fresh-start group (in this case the section 401(a)(17)
employees), the amendments to Plan Y provide for adjustments to the
section 401(a)(17) frozen accrued benefit and the OBRA '93 frozen
accrued benefit in accordance with Sec. 1.401(a)(4)-13(d) using the
fraction described in Sec. 1.401(a)(4)-13(d)(8)(i).
(b) Employee A's frozen accrued benefit as of December 31, 1993, is
adjusted as of December 31, 1998, as follows:
(1) Employee A's frozen accrued benefit as of December 31, 1993, is
the sum of Employee A's section 401(a)(17) frozen accrued benefit
($25,000) and Employee A's frozen accruals for the years 1989-93
($22,897).
(2) The numerator of Employee A's adjustment fraction is $156,667
(the average of $150,000, $160,000, and $160,000). The denominator of
Employee A's adjustment fraction with respect to Employee A's section
401(a)(17) frozen accrued benefit is $250,000, and the denominator of
Employee A's adjustment fraction with respect to the rest of Employee
A's frozen accrued benefit is $228,973 (the average of Employee A's
annual compensation for 1991, 1992, and 1993, as limited by the
respective annual limit for each of those years).
(3) Employee A's section 401(a)(17) frozen accrued benefit as
adjusted through December 31, 1998, remains $25,000. The compensation
adjustment fraction determined in accordance with paragraph (e)(4)(iii)
of this section is less than one ($156,667 divided by $250,000).
(4) Employee A's frozen accruals for the years 1989-93, as adjusted
through December 31, 1998, remain $22,897 because the adjustment
fraction is less than one ($156,667 divided by $228,973).
(5) Employee A's adjusted accrued benefit as of December 31, 1998,
equals $47,897 (the sum of the $25,000 and $22,897 amounts from
paragraphs (b)(3) and (b)(4), respectively, of this Example).
(c) Employee A's section 401(a)(17) frozen accrued benefit will not
be adjusted for compensation increases until the numerator of the
fraction used to adjust that frozen accrued benefit exceeds the
denominator of $250,000 used in determining those accruals.
Similarly, the portion of Employee A's OBRA '93 frozen accrued
benefit attributable to the frozen accruals for the years 1989-1993 will
not be adjusted for compensation increases until the numerator of the
fraction used to adjust those frozen accruals exceeds the denominator of
$228,973 used in determining those accruals.
[T.D. 8547, 59 FR 32905, June 27, 1994]
Sec. 1.401(a)(26)-0 Table of contents.
This section contains a listing of the headings of Secs. 1.401
(a)(26)-1 through 1.401(a)(26)-9.
[[Page 197]]
Sec. 1.401(a)(26)-1 Minimum participation requirements
(a) General rule.
(b) Exceptions to section 401(a)(26).
(1) Plans that do not benefit any highly compensated employees.
(2) Multiemployer plans.
(i) In general.
(ii) Multiemployer plans covering noncollectively bargained
employees.
(A) In general.
(B) Special testing rule.
(3) Certain underfunded defined benefit plans.
(i) In general.
(ii) Eligible plans.
(iii) Actuarial certification.
(iv) Cessation of all benefit accruals.
(4) Section 401(k) plan maintained by employers that include certain
governmental or tax-exempt entities.
(5) Certain acquisitions or dispositions.
(i) General rule.
(ii) Special rule for transactions that occur in the plan year prior
to the first plan year to which section 401(a)(26) applies.
(iii) Definition of ``acquisition'' or ``disposition''.
(c) Additional rules.
Sec. 1.401(a)(26)-2 Minimum participation rule
(a) General rule.
(b) Frozen plans.
(c) Plan.
(d) Disaggregation of certain plans.
(1) Mandatory disaggregation.
(i) ESOPs and non-ESOPs.
(ii) Plans maintained by more than one employer.
(A) Multiple employer plans.
(B) Multiemployer plans.
(iii) Defined benefit plans with other arrangements.
(A) In general.
(B) Examples.
(iv) Plans benefiting employees of qualified separate lines of
business.
(2) Permissive disaggregation.
(i) Plans benefiting collectively bargained employees.
(ii) Plans benefiting otherwise excludable employees.
Sec. 1.401(a)(26)-3 Rules applicable to a defined benefit plan's prior
benefit structure
(a) General rule.
(b) Prior benefit structure.
(c) Testing a prior benefit structure.
(1) General rule.
(2) Meaningful benefits.
(d) Multiemployer plan rule.
Sec. 1.401(a)(26)-4 Testing former employees
(a) Scope.
(b) Minimum participation rule for former employees.
(c) Special rule.
(d) Excludable former employees.
(1) General rule.
(2) Exception.
Sec. 1.401(a)(26)-5 Employees who benefit under a plan
(a) Employees benefiting under a plan.
(1) In general.
(2) Sequential or concurrent benefit offset arrangements.
(i) In general.
(ii) Offset by sequential or grandfathered benefits.
(iii) Concurrent benefit offset arrangements.
(A) General rule.
(B) Special rules for certain section 414(n) employer-recipients.
(b) Former employees benefiting under a plan.
Sec. 1.401(a)(26)-6 Excludable employees
(a) In general.
(b) Excludable employees.
(1) Minimum age and service exclusions.
(i) In general.
(ii) Plans benefiting otherwise excludable employees.
(iii) Examples.
(2) Certain air pilots.
(3) Certain nonresident aliens.
(i) In general.
(ii) Special treaty rule.
(4) Employees covered pursuant to a collective bargaining agreement.
(5) Employees not covered pursuant to a collective bargaining
agreement.
(6) Examples.
(7) Certain terminating employees.
(i) In general.
(ii) Hours of service.
(8) Employees of qualified separate lines of business.
(c) Former employees.
(1) In general.
(2) Employees terminated before a specified date.
(3) Previously excludable employees.
(4) Vested accrued benefits eligible for mandatory distribution.
(d) Certain police or firefighters.
Sec. 1.401(a)(26)-7 Testing methods
(a) Testing on each day of the plan year.
(b) Simplified testing method.
(c) Retroactive correction.
Sec. 1.401(a)(26)-8 Definitions
Collective bargaining agreement.
Collectively bargained employee.
Covered by a collective bargaining agreement.
Defined benefit plan.
Defined contribution plan.
Employee.
[[Page 198]]
Employer.
ESOP.
Former employee.
Highly compensated employee.
Highly compensated former employee.
Multiemployer plan.
Noncollectively bargained employee.
Nonhighly compensated employee.
Nonhighly compensated former employee.
Plan.
Plan year.
Professional employee.
Section 401(k) plan.
Section 401(m) plan.
Sec. 1.401(a)(26)-9 Effective dates and transition rules
(a) In general.
(b) Transition rules.
(1) Governmental plans and certain section 403(b) annuities.
(2) Early retirement ``window-period'' benefits.
(3) Employees who do not benefit because of a minimum-period-of-
service requirement or a last-day requirement.
(4) Certain plan terminations.
(i) In general.
(ii) Exception.
(5) ESOPs and non-ESOPs.
(c) Waiver of excise tax on reversions.
(1) In general.
(2) Termination date.
(3) Failure to satisfy section 401(a)(26).
(d) Special rule for collective bargaining agreements.
[T.D. 8375, 56 FR 63413, Dec. 4, 1991]
Sec. 1.401(a)(26)-1 Minimum participation requirements.
(a) General rule. A plan is a qualified plan for a plan year only if
the plan satisfies section 401(a)(26) for the plan year. A plan that
satisfies any of the exceptions described in paragraph (b) of this
section passes section 401(a)(26) automatically for the plan year. A
plan that does not satisfy one of the exceptions in paragraph (b) of
this section must satisfy Sec. 1.401(a)(26)-2(a). In addition, a defined
benefit plan must satisfy Sec. 1.401(a)(26)-3 with respect to its prior
benefit structure. Finally, a defined benefit plan that benefits former
employees (for example, a defined benefit plan that is amended to
provide an ad hoc cost-of-living adjustment to former employees) must
separately satisfy Sec. 1.401(a)(26)-4 with respect to its former
employees.
(b) Exceptions to section 401(a)(26)--(1) Plans that do not benefit
any highly compensated employees. A plan, other than a frozen defined
benefit plan as defined in Sec. 1.401(a)(26)-2(b), satisfies section
401(a)(26) for a plan year if the plan is not a top-heavy plan under
section 416 and the plan meets the following requirements:
(i) The plan benefits no highly compensated employee or highly
compensated former employee of the employer; and
(ii) The plan is not aggregated with any other plan of the employer
to enable the other plan to satisfy section 401(a)(4) or 410(b). The
plan may, however, be aggregated with the employer's other plans for
purposes of the average benefit percentage test in section
410(b)(2)(A)(ii).
(2) Multiemployer plans--(i) In genera1. The portion of a
multiemployer plan that benefits only employees included in a unit of
employees covered by a collective bargaining agreement may be treated as
a separate plan that satisfies section 401(a)(26) for a plan year.
(ii) Multiemployer plans covering noncollectively bargained
employees--(A) In general. The rule provided in paragraph (b)(2)(i) does
not apply to the portion of a multiemployer plan that benefits employees
who are not included in any collective bargaining unit covered by a
collective bargaining agreement. Thus, the portion of the plan
benefiting these employees must separately satisfy section 401(a)(26).
(B) Special testing rule. A multiemployer plan that benefits
employees who are not included in any collective bargaining unit covered
by a collective bargaining agreement satisfies section 401(a)(26) if the
plan benefits 50 employees. For purposes of this special testing rule,
employees who are included in a unit of employees covered by a
collective bargaining agreement may be included in determining whether
the plan benefits 50 employees.
(3) Certain underfunded defined benefit plans--(i) In general. A
defined benefit plan is deemed to satisfy section 401(a)(26) for a plan
year if all of the conditions of paragraphs (b)(3)(ii) through
(b)(3)(iv) of this section are satisfied with respect to the plan for
the plan year.
(ii) Eligible plans. This condition is satisfied for a plan year
only if the
[[Page 199]]
plan is subject to Title IV of the Employee Retirement Income Security
Act of 1974 (ERISA) for the plan year or, if the plan is not a Title IV
plan under ERISA, it is not a top-heavy plan within the meaning of
section 416. This condition does not apply for plan years beginning
before January 1, 1992.
(iii) Actuarial certification. This condition is satisfied for a
plan year only if the employer's timely filed actuarial report, as
required by section 6059, evidences that the plan does not have
sufficient assets to satisfy all liabilities under the plan (determined
in accordance with section 401(a)(2)).
(iv) Cessation of all benefit accruals. This condition is satisfied
for a plan year only if, for the plan year, no employee or former
employee is benefiting within the meaning of Sec. 1.401(a)(26)-5(a) or
(b). For this purpose, an employee is not treated as benefiting solely
by reason of being a non-key employee receiving minimum benefit accruals
required by section 416.
(4) Section 401(k) plan maintained by employers that include certain
governmental or tax-exempt entities. Section 401(k)(4)(B) prevents
certain State and local governments and tax-exempt organizations from
maintaining a qualified cash or deferred arrangement. A plan (or portion
of a plan) that is either a section 401(k) plan or a section 401(m) plan
that is provided under the same general arrangement as a section 401(k)
plan may be treated as a separate plan that satisfies section 401(a)(26)
for a plan year if the following requirements are satisfied:
(i) The section 401(k) plan is maintained by an employer who has
employees precluded from being eligible employees under the arrangement
by reason of section 401(k)(4)(B), and
(ii) More than 95 percent of the employees of the employer who are
not precluded from being eligible employees under a section 401(k) plan
by reason of section 401(k)(4)(B) benefit under the section 401(k) plan.
(5) Certain acquisitions or dispositions--(i) General rule. Rules
similar to the rules prescribed under section 410(b)(6)(C) apply under
section 401(a)(26). Pursuant to these rules, the requirements of section
401(a)(26) are treated as satisfied for certain plans of an employer
involved in an acquisition or disposition (transaction) for the
transition period. The transition period begins on the date of the
transaction and ends on the last day of the first plan year beginning
after the date of the transaction.
(ii) Special rule for transactions that occur in the plan year prior
to the first plan year to which section 401(a)(26) applies. Where there
has been a transaction described in section 410(b)(6)(C) in the plan
year prior to the first plan year in which section 401(a)(26) applies to
a plan, the plan satisfies section 401(a)(26) for the transition period
if the plan benefited 50 employees or 40 percent of the employees of the
employer immediately prior to the transaction.
(iii) Definition of ``acquisition'' and ``disposition.'' For
purposes of this paragraph (b)(5), the terms ``acquisition'' and
``disposition'' refer to an asset or stock acquisition, merger, or other
similar transaction involving a change in employer of the employees of a
trade or business.
(c) Additional rules. The Commissioner may, in revenue rulings,
notices, and other guidance of general applicability, provide any
additional rules that may be necessary or appropriate in applying the
minimum participation requirements of section 401(a)(26).
[T.D. 8375, 56 FR 63413, Dec. 4, 1991, as amended by T.D. 8487, 58 FR
46838, Sept. 3, 1993]
Sec. 1.401(a)(26)-2 Minimum participation rule.
(a) General rule. A plan satisfies this paragraph (a) for a plan
year only if the plan benefits at least the lesser of--
(1) 50 employees of the employer, or
(2) 40 percent of the employees of the employer.
(b) Frozen plans. A plan under which no employee or former employee
benefits (within the meaning of Sec. 1.401(a)(26)-5 (a) or (b)), is a
frozen plan for purposes of this section and satisfies paragraph (a) of
this section automatically. Thus, a frozen defined contribution plan
satisfies section 401(a)(26) automatically and a frozen defined benefit
plan satisfies section 401(a)(26) for a plan year by satisfying
[[Page 200]]
the prior benefit structure requirements in Sec. 1.401(a)(26)-3. For
purposes of the rule in this paragraph (b), a defined benefit plan that
provides only the minimum benefits for non-key employees required by
section 416 is a frozen defined benefit plan.
(c) Plan. ``Plan'' means a plan within the meaning of Sec. 1.401(b)-
7 (a) and (b), after the application of the mandatory disaggregation
rules of paragraph (d)(1) of this section and, if applicable, the
permissive disaggregation rules of paragraph (d)(2) of this section.
(d) Disaggregation of certain plans--(1) Mandatory disaggregation--
(i) ESOPs and non-ESOPs. The portion of a plan that is an ESOP and the
portion of the plan that is not an ESOP are treated as separate plans
for purposes of section 401(a)(26), except as otherwise permitted under
Sec. 54.4975-11(e) of this Chapter.
(ii) Plans maintained by more than one employer--(A) Multiple
employer plans. If a plan benefits employees of more than one employer
and those employees are not included in a unit of employees covered by
one or more collective bargaining agreements, the plan is a multiple
employer plan. A multiple employer plan is treated as separate plans,
each of which is maintained by a separate employer and must separately
satisfy section 401(a)(26) by reference only to that employer's
employees.
(B) Multiemployer plans. The portion of a multiemployer plan that
benefits employees who are included in one or more units of employees
covered by one or more collective bargaining agreements and the portion
of that plan that benefits employees who are not included in a unit of
employees covered pursuant to any collective bargaining agreement are
treated as separate plans. The portion of a multiemployer plan that
benefits employees who are not included in a unit of employees covered
by a collective bargaining agreement is a multiple employer plan as
described in paragraph (d)(1)(ii)(A) of this section. This paragraph
(d)(1)(ii)(B) does not apply to the extent that the special testing rule
in Sec. 1.401(a)(26)-1(b)(2)(ii) applies. Also, this paragraph
(d)(1)(B)(2) does not apply for purposes of prior benefit structure
testing under Sec. 1.401 (a)(26)-3.
(iii) Defined benefit plans with other arrangements--(A) In general.
A defined benefit plan is treated as comprising separate plans if, under
the facts and circumstances, there is an arrangement (either under or
outside the plan) that has the effect of providing any employee with a
greater interest in a portion of the assets of a plan in a way that has
the effect of creating separate accounts. Separate plans are not
created, however, merely because a partnership agreement provides for
allocation among partners, in proportion to their partnership interests,
of either the cost of funding the plan or surplus assets upon plan
termination.
(B) Examples. The following examples illustrate certain situations
in which other arrangements relating to a defined benefit plan are or
are not treated as creating separate plans:
Example 1. Employer A maintains a defined benefit plan under which
each highly compensated employee can direct the investment of the
portion of the plan's assets that represents the accumulated
contributions with respect to that employee's plan benefits. In
addition, by agreement outside the plan, if the product of the
employee's investment direction exceeds the value needed to fund that
employee's benefits, Employer A agrees to make a special payment to the
participant. In this case, each separate portion of the pool of assets
over which an employee has investment authority is a separate plan for
the employee.
Example 2. Employer B is a partnership that maintains a defined
benefit plan. The partnership agreement provides that, upon termination
of the plan, a special allocation of any excess plan assets after
reversion is made to the partnership on the basis of partnership share.
This arrangement does not create separate plans with respect to the
partners.
(iv) Plans benefiting employees of qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business for purposes of section 401(a)(26) in accordance with
Sec. 1.414(r)-1(b), the portion of a plan that benefits employees of one
qualified separate line of business is treated as a separate plan from
the portions of the same plan that benefit employees of the other
qualified separate lines of business of the employer. See
Secs. 1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of section
401(a)(26) to the employees of a qualified separate line
[[Page 201]]
of business). The rule in this paragraph (d)(6) does not apply to a plan
that is tested under the special rule for employer-wide plans in
Sec. 1.414(r)-1(c)(3)(ii) for a plan year.
(2) Permissive disaggregation--(i) Plans benefiting collectively
bargained employees. For purposes of section 401(a)(26), an employer may
treat the portion of a plan that benefits employees who are included in
a unit of employees covered by a collective bargaining agreement as a
plan separate from the portion of a plan that benefits employees who are
not included in such a collective bargaining unit. This paragraph
(d)(2)(i) applies separately to each collective bargaining agreement.
Thus, for example, the portion of a plan that benefits employees
included in a unit of employees covered by one collective bargaining
agreement may be treated as a plan that is separate from the portion of
the plan that benefits employees included in a unit of employees covered
by another collective bargaining agreement.
(ii) Plans benefiting otherwise excludable employees. If an employer
applies section 401(a)(26) separately to the portion of a plan that
benefits only employees who satisfy age and service conditions under the
plan that are lower than the greatest minimum age and service conditions
permissible under section 410(a), the plan is treated as comprising
separate plans, one benefiting the employees who have not satisfied the
lower minimum age and service but not the greatest minimum age and
service conditions permitted under section 410(a) and one benefiting
employees who have satisfied the greatest minimum age and service
conditions permitted under section 410(a). See Sec. 1.401(a)(26)-
6(b)(1)(ii) for rules concerning testing of otherwise excludable
employees.
[T.D. 8375, 56 FR 63414, Dec. 4, 1991]
Sec. 1.401(a)(26)-3 Rules applicable to a defined benefit plan's prior benefit structure.
(a) General rule. A defined benefit plan that does not meet one of
the exceptions in Sec. 1.401(a)(26)-1(b) must satisfy paragraph (c) of
this section with respect to its prior benefit structure. Defined
contribution plans are not subject to this section.
(b) Prior benefit structure. Each defined benefit plan has only one
prior benefit structure, and all accrued benefits under the plan as of
the beginning of a plan year (including benefits rolled over or
transferred to the plan) are included in the prior benefit structure for
the year.
(c) Testing a prior benefit structure--(1) General rule. A plan's
prior benefit structure satisfies this paragraph if the plan provides
meaningful benefits to a group of employees that includes the lesser of
50 employees or 40 percent of the employer's employees. Thus, a plan
satisfies the requirements of this paragraph (c) if at least 50
employees or 40 percent of the employer's employees currently accrue
meaningful benefits under the plan. Alternatively, a plan satisfies this
paragraph if at least 50 employees and former employees or 40 percent of
the employer's employees and former employees have meaningful accrued
benefits under the plan.
(2) Meaningful benefits. Whether a plan is providing meaningful
benefits, or whether individuals have meaningful accrued benefits under
a plan, is determined on the basis of all the facts and circumstances.
The relevant factors in making this determination include, but are not
limited to, the following: the level of current benefit accruals; the
comparative rate of accruals under the current benefit formula compared
to prior rates of accrual under the plan; the projected accrued benefits
under the current benefit formula compared to accrued benefits as of the
close of the immediately preceding plan year; the length of time the
current benefit formula has been in effect; the number of employees with
accrued benefits under the plan; and the length of time the plan has
been in effect. A rule for determining whether an offset plan provides
meaningful benefits is provided in Sec. 1.401(a)(26)-5(a)(2). A plan
does not satisfy this paragraph (c) if it exists primarily to preserve
accrued benefits for a small group of employees and thereby functions
more as an individual plan for the small group of employees or for the
employer.
(d) Multiemployer plan rule. A multiemployer plan is deemed to
satisfy the
[[Page 202]]
prior benefit structure rule in paragraph (c)(1) of this section for a
plan year if the multiemployer plan provides meaningful benefits to at
least 50 employees for a plan year, or 50 employees have meaningful
accrued benefits under the plan. For purposes of this paragraph, all
employees benefiting under the multiemployer plan may be considered,
whether or not these employees are included in a unit of employees
covered pursuant to any collective bargaining agreement.
[T.D. 8375, 56 FR 63415, Dec. 4, 1991]
Sec. 1.401(a)(26)-4 Testing former employees.
(a) Scope. This section applies to any defined benefit plan that
benefits former employees in a plan year within the meaning of
Sec. 1.401(a)(26)-5(b) and does not meet one of the exceptions in
Sec. 1.401(a)(26)-1(b).
(b) Minimum participation rule for former employees. Except as set
forth in paragraph (c) of this section, a plan that is subject to this
section must benefit at least the lesser of:
(1) 50 former employees of the employer, or
(2) 40 percent of the former employees of the employer.
(c) Special rule. A plan satisfies the minimum participation rule in
paragraph (b) of this section if the plan benefits at least five former
employees, and if either:
(1) More than 95 percent of all former employees with vested accrued
benefits under the plan benefit under the plan for the plan year, or
(2) At least 60 percent of the former employees who benefit under
the plan for the plan year are nonhighly compensated former employees.
(d) Excludable former employees--(1) General rule. Whether a former
employee is an excludable former employee for purposes of this section
is determined under Sec. 1.401(a)(26)-6(c).
(2) Exception. Solely for purposes of paragraph (c) of this section,
the rule in Sec. 1.401(a)(26)-6(c)(4) (regarding vested accrued benefits
eligible for mandatory distribution) does not apply to any former
employee having a vested accrued benefit. Thus, a former employee who
has a vested accrued benefit is not an excludable former employee merely
because that vested accrued benefit does not exceed the cash-out limit
in effect under Sec. 1.411(a)-11T(c)(3)(ii).
[T.D. 8375, 56 FR 63416, Dec. 4, 1991, as amended by T.D. 8794, 63 FR
70338, Dec. 21, 1998]
Sec. 1.401(a)(26)-5 Employees who benefit under a plan.
(a) Employees benefiting under a plan--(1) In general. Except as
provided in paragraph (a)(2) of this section, an employee is treated as
benefiting under a plan for a plan year if and only if, for that plan
year, the employee would be treated as benefiting under the provisions
of Sec. 1.410(b)-3(a), without regard to Sec. 1.410(b)-3(a)(iv).
(2) Sequential or concurrent benefit offset arrangements--(i) In
general. An employee is treated as accruing a benefit under a plan that
includes an offset or reduction of benefits that satisfies either
paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the
employee accrues a benefit under the plan for the year, or the employee
would have accrued a benefit if the offset or reduction portion of the
benefit formula were disregarded. In addition, an employee is treated as
accruing a meaningful benefit for purposes of prior benefit structure
testing under Sec. 1.401(a)(26)-3 if the employee would have accrued a
meaningful benefit if the offset or reduction portion of the benefit
formula were disregarded.
(ii) Offset by sequential or grandfathered benefits. An offset or
reduction of benefits under a defined benefit plan satisfies this
paragraph (a)(2) if the benefit formula provides that an employee will
not accrue additional benefits under the current portion of the benefit
formula until the employee has accrued, under such portion, a benefit in
excess of such employee's benefit under one or more formulas in effect
for prior years that are based wholly on prior years of service. The
prior benefit may have accrued under the same or a separate plan, may be
provided under the same or a separate plan and may relate to service
with the same or previous employers. Benefits will not fail to be
treated as based wholly on prior years if they are based, directly or
indirectly, on compensation earned after such prior years (including
compensation earned in the current year),
[[Page 203]]
if they are adjusted to reflect increases in the section 415
limitations, or if they are increased to provide an ad hoc cost of
living adjustment designed to adjust, in whole or in part, for
inflation. Furthermore, benefits do not fail to be treated as based
wholly on prior years merely because the benefits (e.g., early
retirement benefits) are subject to an age or years-of-service condition
and, in applying the condition or conditions, the current and prior
years are taken into account.
(iii) Concurrent benefit offset arrangements--(A) General rule. An
offset or reduction of benefits under a defined benefit plan satisfies
the requirements of this paragraph (a)(2)(iii) if the benefit formula
provides a benefit that is offset or reduced by contributions or
benefits under another plan that is maintained by the same employer and
the following additional requirements are met:
(1) The contributions or benefits under a plan that are used to
offset or reduce the benefits under the positive portion of the fomu1a
being tested accrued under such other plan;
(2) The employees who benefit under the formula being tested also
benefit under the other plan on a reasonable and uniform basis; and
(3) The contributions or benefits under the plan that are used to
offset or reduce the benefits under the formula being tested are not
used to offset or reduce that employee's benefits under any other plan
or any other formula.
(B) Special rules for certain section 414(n) employer-recipients.
The same employer requirement in the concurrent benefit offset rule in
paragraph (a)(2)(iii)(A) of this section is waived for certain section
414(n) employer-recipients. Under this exception, an employer-recipient
(within the meaning of sections 414 (n) and (o)) may treat contributions
or benefits under a plan maintained by a leasing organization as
contributions or benefits accrued under the recipient organization plan
provided the following requirements are met: the employer-recipient
maintains a plan covering leased employees (which employees are treated
as employees of the employer-recipient within the meaning of sections
414(n)(2) and 414(o)(2)); the leased employees are also covered under a
plan maintained by the leasing organization; and contributions or
benefits under the plan maintained by the employer-recipient are offset
or reduced by the contributions or benefits under the leasing
organization plan that are attributable to service with the recipient
organization. Also, for purposes of the benefiting condition requirement
in paragraph (a)(2)(iii)(A)(2) of this section, the employees of the
employer-recipient who are not leased from the leasing organization are
not required to benefit under the plan of the leasing organization.
(b) Former employees benefiting under a plan. A former employee is
treated as benefiting for a plan year if and only if the former employee
would be treated as benetiting under the rules in Sec. 1.410(b)-3(b).
[T.D. 8375, 56 FR 63416, Dec. 4, 1991]
Sec. 1.401(a)(26)-6 Excludable employees.
(a) In general. For purposes of applying section 401(a)(26) with
respect to either employees, former employees, or both employees and
former employees, as applicable, all employees other than excludable
employees described in paragraph (b) of this section, all former
employees other than excludable former employees described in paragraph
(c) of this section, or both, as the case may be, must be taken into
account. Except as specifically provided otherwise in this section, the
rules of this section are applied by reference only to the particular
plan and must be applied on a uniform and consistent basis.
(b) Excludable employees. An employee is an excludable employee if
the employee is covered by one or more of the following exclusions:
(1) Minimum age and service exclusions--(i) In general. If a plan
applies minimum age and service eligibility conditions permissible under
section 410(a)(1) and excludes all employees who do not meet those
conditions from benefiting under the plan, tbn all employees who fail to
satisfy those conditions may be treated as excludable employees with
respect to that plan. An employee is treated as meeting the age and
service requirements on the date any employee with the same age and
[[Page 204]]
service would be eligible to commence participation in the plan, as
provided in section 410(b)(4)(C).
(ii) Plans benefiting otherwise excludable employees. An employer
may treat a plan benefiting otherwise excludable employees as two
separate plans, one for the otherwise excludable employees and one for
the other employees benefiting under the plan. The effect of this rule
is that employees who would be excludable under paragraph (b)(1) of this
section (applied without regard to section 410(a)(1)(B)), but for the
fact that the plan does not apply the greatest permissible minimum age
and service conditions, may be treated as excludable employees with
respect to the plan. This treatment is only available if each of the
following conditions is satisfied:
(A) The plan under which the otherwise excludable employees benefit
also benefits employees who are not otherwise excludable.
(B) The plan under which the otherwise excludable employees benefit
satisfies section 401(a)(26), both by reference only to otherwise
excludable employees and by reference only to employees who are not
otherwise excludable.
(C) The contributions or benefits provided to the otherwise
excludable employees (expressed as percentages of compensation) are not
greater than the contributions or benefits provided to the employees who
are not otherwise excludable under the plan.
(D) No highly compensated employee is included in the group of
otherwise excludable employees for more than one plan year.
(iii) Examples. The following examples illustrate some of the
minimum-age-and-service exclusion requirements:
Example 1. Employer X maintains a defined contribution plan, Plan X,
under which employees who have not completed 1 year of service are not
eligible to participate. Employer X has six employees. Two of the
employees participate in Plan X. The other four employees have not
completed 1 year of service and are therefore not eligible to
participate in Plan X. The four employees who have not completed 1 year
of service are excludable employees and may be disregarded for purposes
of applying the minimum participation test. Therefore, Plan X satisfies
section 401(a)(26) because both of the two employees who must be
considered are participants in Plan X.
Example 2. Employer Y has 100 employees and maintains two plans,
Plan 1 and Plan 2. Plan 1 provides that employees who have not completed
1 year of service are not eligible to participate. Plan 2 has no minimum
age or service requirement. Twenty of Y's employees do not meet the
minimum service requirement under Plan 1. Each plan satisfies the ratio
test under section 410(b)(1)(B). In testing Plan 1 to determine whether
it satisfies section 401(a)(26), the 20 employees not meeting the
minimum age and service requirement under Plan 1 are treated as
excludable employees. In testing Plan 2 to determine whether it
satisfies section 401(a)(26), no employees are treated as excludable
employees because Plan 2 does not have a minimum age or service
requirement.
(2) Certain air pilots. An employee who is excluded from
consideration under section 410(b)(3)(B) (relating to certain air
pilots) may be treated as an excludable employee.
(3) Certain nonresident aliens--(i) In general. An employee who is
excluded from consideration under section 410(b)(3)(C) (relating to
certain nonresident aliens) may be treated as an excludable employee.
(ii) Special treaty rule. In addition, an employee who is a
nonresident alien (within the meaning of section 7701(b)(1)(B)) and who
does receive earned income (within the meaning of section 911(d)(2))
from the employer that constitutes income from sources within the United
States (within the meaning of section 861(a)(3)) is permitted to be
excluded, if all of the employee's earned income from the employer from
sources within the United States is exempt from United States income tax
under an applicable income tax convention. This paragraph (b)(3)(ii)
applies only if all employees described in the preceding sentence are so
excluded.
(4) Employees covered pursuant to a collective bargaining agreement.
When testing a plan benefiting only noncollectively bargained employees,
an employee who is excluded from consideration under section
410(b)(3)(A) (exclusion for employees included in a unit of employees
covered by a collective bargaining agreement) may be treated as an
excludable employee. This rule may be applied separately to each
collective
[[Page 205]]
bargaining agreement. See Sec. 1.401(a)(26)-8 for the definitions of the
terms ``collective bargaining agreement'', ``collectively bargained
employee,'' and ``covered pursuant to a collective bargaining
agreement''.
(5) Employees not covered pursuant to a collective bargaining
agreement. When testing a plan that benefits only employees who are
included in a group of employees who are covered pursuant to a
collective bargaining agreement, an employee who is not included in the
group of employees who are covered by the collective bargaining
agreement may be treated as an excludable employee.
(6) Examples. The following examples illustrate the excludable
employee rules that relate to employees covered pursuant to collective
bargaining agreements. For purposes of these examples assume that no
other exclusion rules are applicable.
Example 1. Employer W has 70 collectively bargained employees and 30
non-collectively bargained employees. Employer W maintains Plan W, which
benefits only the 30 non-collectively bargained employees. The 70
collectively bargained employees may be treated as excludable employees
and thus may be disregarded in applying section 401(a)(26) to Plan W.
Example 2. Assume the same facts as Example I, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there are no ``collectively bargained employees.'' In this case, all
employees of W must be considered in determining whether section
401(a)(26) is met.
Example 3. Employer X has collectively bargained employees and 70
noncollectively bargained employees. Employer X maintains Plan X, which
benefits only the 30 collectively bargained employees. Employer X may
treat the non-collectively bargained employees as excludable employees
and disregard them in applying section 401(a)(26) to the collectively
bargained plan.
Example 4. Assume the same facts as Example 3, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there is no recognized collective bargaining agreement. In this case,
Employer X may not treat the non-collectively bargained employees of X
as excludable employees.
Example 5. Assume the same facts as Example 3, except that 3 percent
of the 30 collectively bargained employees are professionals. In this
case, Employer X may not treat the non-collectively bargained employees
of X as excludable employees.
Example 6. Employer Y has 100 collectively bargained employees.
Thirty of Y's employees are represented by Collective Bargaining Unit 1
and covered under Plan 1. Seventy of Y's employees are represented by
Collective Bargaining Unit 2 and covered under Plan 2. For purposes of
testing Plan 1, the employees of Collective Bargaining Unit 2 may be
treated as excludable employees. Similarly, for purposes of testing Plan
2, the employees of Collective Bargaining Unit 1 may be treated as
excludable employees.
(7) Certain terminating employees--(i) In general. An employee may
be treated as an excludable employee for a plan year with respect to a
particular plan if--
(A) The employee does not benefit under the plan for the plan year,
(B) The employee is eligible to participate in the plan,
(C) The plan has a minimum period of service requirement or a
requirement that an employee be employed on the last day of the plan
year (last-day requirement) in order for an employee to accrue a benefit
or receive an allocation for the plan year,
(D) The employee fails to accrue a benefit or receive an allocation
under the plan solely because of the failure to satisfy the minimum
period of service or last-day requirement,
(E) The employee terminates employment during the plan year with no
more than 500 hours of service, and the employee is not an employee as
of the last day of the plan year (for purposes of this paragraph
(b)(7)(i)(E), a plan that uses the elapsed time method of determining
years of service may use either 91 consecutive calendar days or 3
consecutive calendar months instead of 500 hours of service, provided it
uses the same convention for all employees during a plan year), and
(F) If this paragraph (b)(7) is applied with respect to any employee
with respect to a plan for a plan year, it is applied with respect to
all employees with respect to the plan for the plan year.
(ii) Hours of service. For purposes of this paragraph (b)(7), the
term ``hour of service'' has the same meaning as set forth in 29 CFR
2530.200b-2 under the general method of crediting service for
[[Page 206]]
the employee. If one of the equivalencies set forth in 29 CFR 2530.200b-
3 is used for crediting service under the plan, the 500-hour requirement
must be adjusted accordingly.
(8) Employees of qualified separate lines of business. If an
employer is treated as operating qualified separate lines of business
for purposes of section 401(a)(26) in accordance with Sec. 1.414(r)-
1(b), in testing a plan that benefits employees of one qualified
separate line of business, the employees of the other qualified separate
lines of business of the employer are treated as excludable employees.
See Secs. 1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of
section 401(a)(26) to the employees of a qualified separate line of
business). The rule in this paragraph (b)(8) does not apply to a plan
that is tested under the special rule for employer-wide plans in
Sec. 1.414(r)-l(c)(3)(ii) for a plan year.
(c) Former employees--(1) In general. For purposes of applying
section 401(a)(26) with respect to former employees, all former
employees of the employer are taken into account, except that the
employer may treat a former employee described in paragraph (c)(2)
through (c)(4) of this section as an excludable former employee. If any
of the former employee exclusion rules under paragraphs (c)(2) through
(c)(4) of this section is applied, it must be applied to all former
employees for the plan year on a consistent basis.
(2) Employees terminated before a specified date. The employer may
treat a former employee as excludable if--
(i) The former employee became a former employee either prior to
January 1, 1984, or prior to the tenth calendar year preceding the
calendar year in which the current plan year begins, and
(ii) The former employee became a former employee in a calendar year
that precedes the earliest calendar year in which any former employee
who benefits under the plan in the current plan year became a former
employee.
(3) Previously excludable employees. The employer may treat a former
employee as excludable if the former employee was an excludable employee
(or would have been an excludable employee if these regulations had been
in effect) under the rules of paragraphs (a) and (b) of this section
during the plan year in which the former employee became a former
employee. If the employer treats a former employee as excludable
pursuant to this paragraph (c)(3), the former employee is not taken into
account with respect to a plan even if the former employee is benefiting
under the plan.
(4) Vested accrued benefits eligible for mandatory distribution. A
former employee may be treated as an excludable former employee if the
present value of the former employee's vested accrued benefit does not
exceed the cash-out limit in effect under Sec. 1.411(a)-11T(c)(3)(ii).
This determination is made in accordance with the rules of sections
411(a)(11) and 417(e).
(d) Certain police or firefighters. An employer may apply section
401(a)(26) separately with respect to any classification of qualified
public safety employees for whom a separate plan is maintained. Thus,
for purposes of testing a separate plan covering a class of qualified
public safety employees, all employees who are not in that
classification are treated as excludable employees. Also, such employees
need not be taken into account in determining whether or not any other
plan satisfies section 401(a)(26). For purposes of this paragraph (d),
qualified public safety employee means any employee of any police
department or fire department organized and operated by a State or
political subdivision if the employee provides police protection,
firefighting services, or emergency medical services for any area within
the jurisdiction of a State or political subdivision.
[T.D. 8375, 56 FR 63416, Dec. 4, 1991, as amended by T.D. 8794, 63 FR
70338, Dec. 21, 1998]
Sec. 1.401(a)(26)-7 Testing methods.
(a) Testing on each day of the plan year. A plan satisfies section
401(a)(26) for a plan year only if the plan satisfies section 401(a)(26)
on each day of the plan year. An employee benefits on a day if the
employee is a participant for such day and the employee benefits under
the plan for the year under the rules in Sec. 1.401(a)(26)-5.
(b) Simplified testing method. A plan is treated as satisfying the
requirements
[[Page 207]]
of paragraph (a) of this section if it satisfies section 401(a)(26) on
any single plan day during the plan year, but only if that day is
reasonably representative of the employer's workforce and the plan's
coverage. A plan does not have to be tested on the same day each plan
year.
(c) Retroactive correction. If a plan fails to satisfy section
401(a)(26) for a plan year, the plan may be retroactively amended during
the same period and under the same conditions as provided for in
Sec. 1.401(a)(4)-11(g)(3) through (g)(5) to satisfy section 401(a)(26).
A plan merger that occurs by the end of the period provided in
Sec. l.401(a)(4)-11(g)(3)(iv) is treated solely for purposes of section
401(a)(26) as if it were effective as of the first day of the plan year.
The rule of this paragraph (c) may be illustrated by the following
example.
Example. Assume that an employer with 500 employees maintains two
defined contribution plans. Plan A benefits 45 employees. Plan B
benefits 50 employees. Immediately before the end of the period provided
for in Sec. 1.401(a)(4)-11(g)(3)(iv), the employer expands coverage
under Plan A to benefit 20 more employees retroactively for the plan
year. Thus, Plan A satisfies paragraph (a) of this section for the plan
year. Alternatively, before the end of the period provided for in
Sec. 1.401(a)(4)-11(g)(3)(iv), or later if a later period is applicable
under section 401(b), the employer could merge Plan A with Plan B to
satisfy section 401(a)(26).
[T.D. 8375, 56 FR 63418, Dec. 4, 1991]
Sec. 1.401(a)(26)-8 Definitions.
In applying this section and Secs. 1.401(a)(26)-1 through
1.401(a)(26)-9 the definitions in this section govern unless otherwise
provided.
Collective bargaining agreement. Collective bargaining agreement
means an agreement that the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and the employer
that satisfies Sec. 301.7701-17T. Employees described in section
413(b)(8) who are employees of the union or the plan and are treated as
employees of an employer are not employees covered pursuant to a
collective bargaining agreement for purposes of section 401(a)(26)
unless the employees are actually covered pursuant to such an agreement.
Collectively bargained employee. Collectively bargained employee
means a collectively bargained employee within the meaning of
Sec. 1.410(b)-6(d)(2).
Covered by a collective bargaining agreement. Covered by a
collective bargaining agreement means covered by a collective bargaining
agreement within the meaning of Sec. 1.410(b)-6(d)(2)(iii).
Defined benefit plan. Defined benefit plan means a defined benefit
plan within the meaning of Sec. 1.410(b)-9.
Defined contribution plan. Defined contribution plan means a defined
contribution plan within the meaning of Sec. 1.410(b)-9.
Employee. Employee means an employee, within the meaning of
Sec. 1.410(b)-9.
Employer. Employer means the employer within the meaning of
Sec. 1.410(b)-9.
ESOP. ESOP means an employee stock ownership plan within the meaning
of section 4975(e)(7) or a tax credit employee stock ownership plan
within the meaning of section 409(a).
Former employee. Former employee means a former employee within the
meaning of Sec. 1.410(b)-9.
Highly compensated employee. Highly compensated employee means an
employee who is highly compensated within the meaning of section 414(q).
Highly compensated former employee. Highly compensated former
employee means a former employee who is highly compensated within the
meaning of section 414(q)(9).
Multiemployer plan. Multiemployer plan means a multiemployer plan
within the meaning of section 414(f).
Noncollectively bargained employee. Noncollectively bargained
employee means an employee who is not a collectively bargained employee.
Nonhighly compensated employee. Nonhighly compensated employee'
means an employee who is not a highly compensated employee.
Nonhighly compensated former employee. Nonhighly compensated former
employee means a former employee who is not a highly compensated former
employee.
Plan. Plan means plan as defined in Sec. 1.401(a)(26)-2(c).
[[Page 208]]
Plan year. Plan year means the plan year of the plan as defined in
the written plan document. In the absence of a specifically designated
plan year, the plan year is deemed to be the calendar year.
Professional employee. Professional employee means a professional
employee as defined in Sec. 1.410(b)-9.
Section 401(k) plan. Section 401(k) plan means a plan consisting of
elective contributions described in Sec. 1.401(k)-1 (g)(3) under a
qualified cash or deferred arrangement described in Sec. 1.401(k)-
1(a)(4)(i).
Section 401(m) plan. Section 401(m) plan means a plan consisting of
employee contributions described in Sec. 1.401(m)-1(f)(6) or matching
contributions described in Sec. 1.401(m)-1(f)(12), or both.
[T.D. 8375, 56 FR 63418, Dec. 4, 1991]
Sec. 1.401(a)(26)-9 Effective dates and transition rules.
(a) In general. Except as provided in paragraphs (b), (c), and (d)
of this section, section 401(a)(26) and the regulations thereunder apply
to plan years beginning on or after January 1, 1989.
(b) Transition rules--(1) Governmental plans and certain section
403(b) annuities. Section 401(a)(26) is treated as satisfied for plan
years beginning before 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, in the case of governmental
plans described in section 414(d), including plans subject to section
403(b)(12)(A)(i) (nonelective plans). For purposes of this paragraph
(b)(1), the term ``governing body with authority to amend the plan''
means the legislature, board, commission, council, or other governing
body with authority to amend the plan.
(2) Early retirement ``window-period'' benefits. Early retirement
benefits available under a plan only to employees who retire within a
limited period of time, not to exceed one year, are treated as
satisfying section 401(a)(26) if such benefits are provided under plan
terms that were adopted and in effect on or before March 14, 1989.
(3) Employees who do not benefit because of a minimum-period-of-
service requirement or a last-day requirement. For the first plan year
beginning after December 31, 1988, and before January 1, 1990, employees
who are eligible to participate under the plan and who fail to accrue a
benefit solely because of the failure to satisfy either a minimum-
period-of-service requirement of 1000 hours of service or less or a
last-day requirement may be treated as benefiting under the plan.
(4) Certain plan terminations--(i) In general. Except as provided in
paragraph (b)(4)(ii) of this section, if a plan terminates after section
401(a)(26) becomes effective with respect to the plan (as determined
under paragraph (a) of this section), the plan is not treated as a
qualified plan upon termination unless it complies with section
401(a)(26) and the regulations thereunder (to the extent they are
applicable) for all periods for which section 401(a)(26) is effective
with respect to the plan.
(ii) Exception. Notwithstanding paragraphs (a) and (b)(4)(i) of this
section, a plan does not fail to be treated as a qualified plan upon
termination merely because the plan fails to satisfy the requirements of
section 401(a)(26) and the regulations thereunder if the plan is
terminated with a termination date on or before December 31, 1989, and
either of the following conditions is satisfied:
(A) In the case of a defined benefit plan, no highly compensated
employee has an accrued benefit under the plan exceeding the lesser of
either the benefit the employee had accrued as of the close of the last
plan year beginning before January 1, 1989, or the benefit the employee
would have accrued as of the close of the last plan year under the terms
of the plan in effect and applicable with respect to the employee on
December 13, 1988.
(B) In the case of a defined contribution plan, no highly
compensated employee receives a contribution allocation for any plan
year beginning after December 31, 1988. For this purpose, a contribution
allocation with respect to an employee for a plan year beginning before
January 1, 1989, may be treated as a contribution allocation for a plan
year beginning after December 31, 1988, if the allocation for the prior
year exceeds the allocation that the employee
[[Page 209]]
would have received for such year under the terms of the plan in effect
and applicable with respect to the employee on December 13, 1988. An
allocation of forfeitures to highly compensated employees with respect
to contributions made for plan years beginning before January 1, 1988,
does not cause a defined contribution plan to fail to satisfy the
conditions of this paragraph (b)(4)(ii)(B).
(5) ESOPs and non-ESOPs. Notwithstanding paragraph (a) of this
section and Sec. 54.4975-11(a)(5) of this Chapter, an employer may treat
the rule in Sec. 1.401(a)(26)-2(d)(1)(i), regarding mandatory
disaggregation of ESOPs and non-ESOPs as not effective for plan years
beginning before January 1, 1990.
(c) Waiver of excise tax on reversions--(1) In general. Pursuant to
section 1112(e)(3) of the Tax Reform Act of 1986 (TRA '86), if certain
conditions are satisfied, a waiver of the excise tax under section 4980
applies with respect to any employer reversion that occurs by reason of
the termination or merger of a plan before the first year to which
section 401(a)(26) applies to the plan. In general, the applicable
conditions are that the plan must have been in existence on August 16,
1986; that if section 401(a)(26) was in effect for the plan year
including August 16, 1986, the plan would have failed to satisfy the
requirements of section 401(a)(26) and would have continued to fail the
requirements at all times thereafter; that the plan satisfies the
applicable conditions in paragraph (b)(4)(ii)(A) or (B) of this section;
and that certain requirements regarding asset or liability transfers and
mergers and spinoffs involving the plan after August 16, 1986, are
satisfied.
(2) Termination date. An employer reversion with respect to a plan
is eligible for the section 4980 excise tax waiver only if the employer
reversion occurs by reason of the termination of the plan with a
termination date prior to the first plan year for which section
401(a)(26) applies to the plan. Solely for purposes of this waiver, the
employer reversion is treated as satisfying this paragraph (c)(2) even
though the plan's termination date is during the first plan year for
which section 401(a)(26) applies to the plan if the plan's termination
date is on or before May 31, 1989. If the termination date occurs in the
first plan year for which section 401(a)(26) applied to the plan and the
employer receives a reversion that is eligible for the waiver of the
section 4980 tax, the plan is subject to the interest rate restriction
set forth in section 11 12(e)(3)(B) of TRA `86 as amended.
(3) Failure to satisfy section 401(a)(26). An employer reversion
with respect to a plan is eligible for the excise tax waiver only if the
plan was in existence on August 16, 1986, and, if section 401(a)(26) had
applied to the plan for the plan year including such date, the plan
would have failed to satisfy section 401(a)(26) for the plan year and
continuously thereafter until the plan's termination or merger. For
purposes of this paragraph (c)(3), a plan is treated as though it would
have failed to satisfy section 401(a)(26) before such section actually
applied to the plan only if the plan (as defined under section 414(1))
failed to benefit at least the lesser of 50 employees or 40 percent of
the employer's employees. In general, this determination is to be made
on the basis of only the applicable statutory provisions, without regard
to the regulations under section 401(a)(26). Thus, for example, the
prior benefit structure rules in Sec. 1.401(a)(26)-3 do not apply in
determining whether a plan would have failed to satisfy section
401(a)(26) for plan years beginning prior to the effective date of
section 401(a)(26) with respect to the plan.
(d) Special rule for collective bargaining agreements. In the case
of a plan maintained pursuant to one or more collective bargaining
agreements (as defined in Sec. 1.401(a)(26)-8(a)) that were ratified
before March 1, 1986, section 401(a)(26) and the regulations thereunder
shall not apply to plan years beginning before the earlier of--
(1) January 1, 1991, or
(2) The later of--
(i) January 1, 1989, or
(ii) The date on which the last of such collective bargaining
agreements terminates. For purposes of this paragraph (d), any extension
or renegotiation of any collective bargaining
[[Page 210]]
agreement that is ratified after February 28, 1986, is disregarded in
determining the date on which such collective bargaining agreement
terminates.
[T.D. 8375, 56 FR 63419, Dec. 4, 1991, as amended by T.D. 8487, 58 FR
46838, Sept. 3, 1993]
Sec. 1.401(a)(31)-1 Requirement to offer direct rollover of eligible rollover distributions; questions and answers.
The following questions and answers relate to the qualification
requirement imposed by section 401(a)(31) of the Internal Revenue Code
of 1986, pertaining to the direct rollover option for eligible rollover
distributions from pension, profit-sharing, and stock bonus plans.
Section 401(a)(31) was added by section 522(a) of the Unemployment
Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290
(UCA). For additional UCA guidance under sections 402(c), 402(f),
403(b)(8) and (10), and 3405(c), see Secs. 1.402(c)-2, 1.402(f)-1, and
1.403(b)-2, and Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What are the direct rollover requirements under section
401(a)(31)?
Q-2: Does section 401(a)(31) require that a qualified plan permit a
direct rollover to be made to a qualified trust that is not part of a
defined contribution plan?
Q-3: What is a direct rollover that satisfies section 401(a)(31),
and how is it accomplished?
Q-4: Is providing a distributee with a check for delivery to an
eligible retirement plan a reasonable means of accomplishing a direct
rollover?
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible in
gross income or subject to 20-percent withholding?
Q-6: What procedures may a plan administrator prescribe for electing
a direct rollover, and what information may the plan administrator
require a distributee to provide when electing a direct rollover?
Q-7: May the plan administrator treat a distributee as having made
an election under a default procedure where the distributee does not
affirmatively elect to make or not make a direct rollover within a
certain time period?
Q-8: May the plan administrator establish a deadline after which the
distributee may not revoke an election to make or not make a direct
rollover?
Q-9: Must the plan administrator permit a distributee to elect to
have a portion of an eligible rollover distribution paid to an eligible
retirement plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
Q-10: Must the plan administrator allow a distributee to divide an
eligible rollover distribution into two or more separate distributions
to be paid in direct rollovers to two or more eligible retirement plans?
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct rollover
if his or her eligible rollover distributions during a year are
reasonably expected to total less than $200?
Q-12: Is a plan administrator permitted to treat a distributee's
election to make or not make a direct rollover with respect to one
payment in a series of periodic payments as applying to all subsequent
payments in the series?
Q-13: Is the eligible retirement plan designated by a distributee to
receive a direct rollover distribution required to accept the
distribution?
Q-14: For purposes of applying the plan qualification requirements
of section 401(a), is an eligible rollover distribution that is paid to
an eligible retirement plan in a direct rollover a distribution and
rollover or is it a transfer of assets and liabilities?
Q-15: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset amount?
Q-16: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
Q-17: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
Q-18: When must a qualified plan be amended to comply with section
401(a)(31)?
Questions and Answers
Q-1: What are the direct rollover requirements under section
401(a)(31)?
A-1: (a) General rule. To satisfy section 401(a)(31), added by UCA,
a plan must provide that if the distributee of any eligible rollover
distribution elects to have the distribution paid directly to an
eligible retirement plan, and specifies the eligible retirement plan to
which the distribution is to be paid, then the distribution will be paid
to that eligible retirement plan in a direct rollover described in Q&A-3
of this section. Thus, the plan must give the distributee the option of
having his or
[[Page 211]]
her distribution paid in a direct rollover to an eligible retirement
plan specified by the distributee. For purposes of section 401(a)(31)
and this section, eligible rollover distribution has the meaning set
forth in section 402(c)(4) and Sec. 1.402(c)-2, Q&A-3 through Q&A-10 and
Q&A-14, except as otherwise provided in Q&A-2 of this section, eligible
retirement plan has the meaning set forth in section 402(c)(8)(B) and
Sec. 1.402(c)-2, Q&A-2.
(b) Related Internal Revenue Code provisions--(1) Mandatory
withholding. If a distributee of an eligible rollover distribution does
not elect to have the eligible rollover distribution paid directly from
the plan to an eligible retirement plan in a direct rollover under
section 401(a)(31), the eligible rollover distribution is subject to 20-
percent income tax withholding under section 3405(c). See
Sec. 31.3405(c)-1 of this chapter for guidance concerning the
withholding requirements applicable to eligible rollover distributions.
(2) Notice requirement. Section 402(f) requires the plan
administrator of a qualified plan to provide, within a reasonable period
of time before making an eligible rollover distribution, a written
explanation to the distributee of the distributee's right to elect a
direct rollover and the withholding consequences of not making that
election. The explanation also is required to provide certain other
relevant information relating to the taxation of distributions. See
Sec. 1.402(f)-1 for guidance concerning the written explanation required
under section 402(f).
(3) Section 403(b) annuities. Section 403(b)(10) provides that
requirements similar to those imposed by section 401(a)(31) apply to
annuities described in section 403(b). See Sec. 1.403(b)-2 for guidance
concerning the direct rollover requirements for distributions from
annuities described in section 403(b).
(c) Effective date--(1) Statutory effective date. Section 401(a)(31)
applies to eligible rollover distributions made on or after January 1,
1993.
(2) Regulatory effective date. This section applies to eligible
rollover distributions made on or after October 19, 1995. For eligible
rollover distributions made on or after January 1, 1993 and before
October 19, 1995, Sec. 1.401(a)(31)-1T (as it appeared in the April 1,
1995 edition of 26 CFR part 1), applies. However, for any distribution
made on or after January 1, 1993 but before October 19, 1995, a plan may
satisfy section 401(a)(31) by substituting any or all provisions of this
section for the corresponding provisions of Sec. 1.401(a)(31)-1T, if
any.
Q-2: Does section 401(a)(31) require that a qualified plan permit a
direct rollover to be made to a qualified trust that is not part of a
defined contribution plan?
A-2: No. Section 401(a)(31)(D) limits the types of qualified trusts
that are treated as eligible retirement plans to defined contribution
plans that accept eligible rollover distributions. Therefore, although a
plan is permitted, at a participant's election, to make a direct
rollover to any type of eligible retirement plan, as defined in section
402(c)(8)(B) (including a defined benefit plan), a plan will not fail to
satisfy section 401(a)(31) solely because the plan will not permit a
direct rollover to a qualified trust that is part of a defined benefit
plan. In contrast, if a distributee elects a direct rollover of an
eligible rollover distribution to an annuity plan described in section
403(a), that distribution must be paid to the annuity plan, even if the
recipient annuity plan is a defined benefit plan.
Q-3: What is a direct rollover that satisfies section 401(a)(31),
and how is it accomplished?
A-3: A direct rollover that satisfies section 401(a)(31) is an
eligible rollover distribution that is paid directly to an eligible
retirement plan for the benefit of the distributee. A direct rollover
may be accomplished by any reasonable means of direct payment to an
eligible retirement plan. Reasonable means of direct payment include,
for example, a wire transfer or the mailing of a check to the eligible
retirement plan. If payment is made by check, the check must be
negotiable only by the trustee of the eligible retirement plan. If the
payment is made by wire transfer, the wire transfer must be directed
only to the trustee of the eligible retirement plan. In the case of an
eligible retirement plan that does not have a trustee (such as a
custodial individual
[[Page 212]]
retirement account or an individual retirement annuity), the custodian
of the plan or issuer of the contract under the plan, as appropriate,
should be substituted for the trustee for purposes of this Q&A-3, and
Q&A-4 of this section.
Q-4: Is providing a distributee with a check for delivery to an
eligible retirement plan a reasonable means of accomplishing a direct
rollover?
A-4: Providing the distributee with a check and instructing the
distributee to deliver the check to the eligible retirement plan is a
reasonable means of direct payment, provided that the check is made
payable as follows: [Name of the trustee] as trustee of [name of the
eligible retirement plan]. For example, if the name of the eligible
retirement plan is ``Individual Retirement Account of John Q. Smith,''
and the name of the trustee is ``ABC Bank,'' the payee line of a check
would read ``ABC Bank as trustee of Individual Retirement Account of
John Q. Smith.'' Unless the name of the distributee is included in the
name of the eligible retirement plan, the check also must indicate that
it is for the benefit of the distributee. If the eligible retirement
plan is not an individual retirement account or an individual retirement
annuity, the payee line of the check need not identify the trustee by
name. For example, the payee line of a check for the benefit of
distributee Jane Doe might read, ``Trustee of XYZ Corporation Savings
Plan FBO Jane Doe.''
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible in
gross income or subject to 20-percent withholding?
A-5: No. An eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover is not currently
includible in the distributee's gross income under section 402(c) and is
exempt from the 20-percent withholding imposed under section 3405(c)(2).
However, when any portion of the eligible rollover distribution is
subsequently distributed from the eligible retirement plan, that portion
will be includible in gross income to the extent required under section
402, 403, or 408.
Q-6: What procedures may a plan administrator prescribe for electing
a direct rollover, and what information may the plan administrator
require a distributee to provide when electing a direct rollover?
A-6: (a) Permissible procedures. Except as otherwise provided in
paragraph (b) of this Q&A-6, the plan administrator may prescribe any
procedure for a distributee to elect a direct rollover under section
401(a)(31), provided that the procedure is reasonable. The procedure may
include any reasonable requirement for information or documentation from
the distributee in addition to the items of adequate information
specified in Sec. 31.3405(c)-1(b), Q&A-7 of this chapter. For example,
it would be reasonable for the plan administrator to require that the
distributee provide a statement from the designated recipient plan that
the plan will accept the direct rollover for the benefit of the
distributee and that the recipient plan is, or is intended to be, an
individual retirement account, an individual retirement annuity, a
qualified annuity plan described in section 403(a), or a qualified trust
described in section 401(a), as applicable. In the case of a designated
recipient plan that is a qualified trust, it also would be reasonable
for the plan administrator to require a statement that the qualified
trust is not excepted from the definition of an eligible retirement plan
by section 401(a)(31)(D) (i.e., is not a defined benefit plan).
(b) Impermissible procedures. A plan will fail to satisfy section
401(a)(31) if the plan administrator prescribes any unreasonable
procedure, or requires information or documentation, that effectively
eliminates or substantially impairs the distributee's ability to elect a
direct rollover. For example, it would effectively eliminate or
substantially impair the distributee's ability to elect a direct
rollover if the recipient plan required the distributee to obtain an
opinion of counsel stating that the eligible retirement plan receiving
the rollover is a qualified plan or individual retirement account.
Similarly, it would effectively eliminate or substantially impair the
distributee's ability to elect a direct rollover if the distributing
plan required a letter from
[[Page 213]]
the recipient eligible retirement plan stating that, upon request by the
distributing plan, the recipient plan will automatically return any
direct rollover amount that the distributing plan advises the recipient
plan was paid incorrectly. It would also effectively eliminate or
substantially impair the distributee's ability to elect a direct
rollover if the distributing plan required, as a condition for making a
direct rollover, a letter from the recipient eligible retirement plan
indemnifying the distributing plan for any liability arising from the
distribution.
Q-7: May the plan administrator treat a distributee as having made
an election under a default procedure where the distributee does not
affirmatively elect to make or not make a direct rollover within a
certain time period?
A-7: Yes, the plan administrator may establish a default procedure
whereby any distributee who fails to make an affirmative election is
treated as having either made or not made a direct rollover election.
However, the plan administrator may not make a distribution under any
default procedure unless the distributee has received an explanation of
the default procedure and an explanation of the direct rollover option
as required under section 402(f) and Sec. 1.402(f)-1, Q&A-1 and unless
the timing requirements described in Sec. 1.402(f)-1, Q&A-2 and Q&A-3
have been satisfied with respect to the explanations of both the default
procedure and the direct rollover option.
Q-8: May the plan administrator establish a deadline after which the
distributee may not revoke an election to make or not make a direct
rollover?
A-8: Yes, but the plan administrator is not permitted to prescribe
any deadline or time period with respect to revocation of a direct
rollover election that is more restrictive for the distributee than that
which otherwise applies under the plan to revocation of the form of
distribution elected by the distributee.
Q-9: Must the plan administrator permit a distributee to elect to
have a portion of an eligible rollover distribution paid to an eligible
retirement plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
A-9: Yes, the plan administrator must permit a distributee to elect
to have a portion of an eligible rollover distribution paid to an
eligible retirement plan in a direct rollover and to have the remainder
paid to the distributee. However, the plan administrator is permitted to
require that, if the distributee elects to have only a portion of an
eligible rollover distribution paid to an eligible retirement plan in a
direct rollover, that portion be equal to at least a specified minimum
amount, provided the specified minimum amount is less than or equal to
$500 or any greater amount as 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. If the entire
amount of the eligible rollover distribution is less than or equal to
the specified minimum amount, the plan administrator need not allow the
distributee to divide the distribution.
Q-10: Must the plan administrator allow a distributee to divide an
eligible rollover distribution into two or more separate distributions
to be paid in direct rollovers to two or more eligible retirement plans?
A-10: No. The plan administrator is not required (but is permitted)
to allow the distributee to divide an eligible rollover distribution
into separate distributions to be paid to two or more eligible
retirement plans in direct rollovers. Thus, the plan administrator may
require that the distributee select a single eligible retirement plan to
which the eligible rollover distribution (or portion thereof) will be
distributed in a direct rollover.
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct rollover
if his or her eligible rollover distributions during a year are
reasonably expected to total less than $200?
A-11: Yes. A plan will satisfy section 401(a)(31) even though the
plan administrator does not permit any distributee to elect a direct
rollover with respect to eligible rollover distributions during a year
that are reasonably
[[Page 214]]
expected to total less than $200 or any lower minimum amount specified
by the plan administrator. The rules described in Sec. 31.3405(c)-1,
Q&A-14 of this chapter (relating to whether withholding under section
3405(c) is required for an eligible rollover distribution that is less
than $200) also apply for purposes of determining whether a direct
rollover election under section 401(a)(31) must be provided for an
eligible rollover distribution that is less than $200 or the lower
specified amount.
Q-12: Is a plan administrator permitted to treat a distributee's
election to make or not make a direct rollover with respect to one
payment in a series of periodic payments as applying to all subsequent
payments in the series?
A-12: (a) Yes. A plan administrator is permitted to treat a
distributee's election to make or not make a direct rollover with
respect to one payment in a series of periodic payments as applying to
all subsequent payments in the series, provided that:
(1) The employee is permitted at any time to change, with respect to
subsequent payments, a previous election to make or not make a direct
rollover; and
(2) The written explanation provided under section 402(f) explains
that the election to make or not make a direct rollover will apply to
all future payments unless the employee subsequently changes the
election.
(b) See Sec. 1.402(f)-1, Q&A-3 for further guidance concerning the
rules for providing section 402(f) notices when eligible rollover
distributions are made in a series of periodic payments.
Q-13: Is the eligible retirement plan designated by a distributee to
receive a direct rollover distribution required to accept the
distribution?
A-13: (a) General rule. No. Although section 401(a)(31) requires
qualified plans to provide distributees the option to make a direct
rollover of their eligible rollover distributions to an eligible
retirement plan, it imposes no requirement that any eligible retirement
plan accept rollovers. Thus, a plan can refuse to accept rollovers.
Alternatively, a plan can limit the circumstances under which it will
accept rollovers. For example, a plan can limit the types of plans from
which it will accept a rollover or limit the types of assets it will
accept in a rollover (such as accepting only cash or its equivalent).
(b) Qualification of receiving plan. A plan that accepts a direct
rollover from another plan will not fail to satisfy section 401(a)
merely because the plan making the distribution is, in fact, not
qualified under section 401(a) or section 403(a) at the time of the
distribution, if, prior to accepting the rollover, the receiving plan
reasonably concluded that the distributing plan was qualified under
section 401(a) or section 403(a). For example, the receiving plan may
reasonably conclude that the distributing plan was qualified under
section 401(a) or section 403(a) if, prior to accepting the rollover,
the plan administrator of the distributing plan provided the receiving
plan with a statement that the distributing plan had received a
determination letter from the Commissioner indicating that the plan was
qualified.
Q-14: For purposes of applying the plan qualification requirements
of section 401(a), is an eligible rollover distribution that is paid to
an eligible retirement plan in a direct rollover a distribution and
rollover or is it a transfer of assets and liabilities?
A-14: For purposes of applying the plan qualification requirements
of section 401(a), a direct rollover is a distribution and rollover of
the eligible rollover distribution and not a transfer of assets and
liabilities. For example, if the consent requirements under section
411(a)(11) or sections 401(a)(11) and 417(a)(2) apply to the
distribution, they must be satisfied before the eligible rollover
distribution may be distributed in a direct rollover. Similarly, the
direct rollover is not a transfer of assets and liabilities that must
satisfy the requirements of section 414(l). Finally, a direct rollover
is not a transfer of benefits for purposes of applying the requirements
under section 411(d)(6), as described in Sec. 1.411(d)-4, Q&A-3.
Therefore, for example, the eligible retirement plan is not required to
provide, with respect to amounts paid to it in a direct rollover, the
same optional forms of benefits that were provided under the plan that
made the direct
[[Page 215]]
rollover. The direct rollover requirements of section 401(a)(31) do not
affect the ability of a qualified plan to make an elective or
nonelective transfer of assets and liabilities to another qualified plan
in accordance with applicable law (such as section 414(l)).
Q-15: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset amount?
A-15: A plan will not fail to satisfy section 401(a)(31) merely
because the plan does not permit a distributee to elect a direct
rollover of an eligible rollover distribution in the form of a plan loan
offset amount. Section 1.402(c)-2(b), Q&A-9 defines a plan loan offset
amount, in general, as a distribution that occurs when, under the terms
governing a plan loan, the participant's accrued benefit is reduced
(offset) in order to repay the loan. A plan administrator is permitted
to allow a direct rollover of a participant note for a plan loan to a
qualified trust described in section 401(a) or a qualified annuity plan
described in section 403(a). See Sec. 1.402(c)-2, Q&A-9 for examples
illustrating the rules for plan loan offset amounts that are set forth
in this Q&A-15. See Sec. 31.3405(c)-1, Q&A-11 of this chapter for
guidance concerning special withholding rules that apply to a
distribution in the form of a plan loan offset amount.
Q-16: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
A-16: Yes. If any amount to be distributed under a qualified plan
distributed annuity contract is an eligible rollover distribution (in
accordance with Sec. 1.402(c)-2), Q&A-10 the annuity contract must
satisfy section 401(a)(31) in the same manner as a qualified plan under
section 401(a). Section 1.402(c)-2, Q&A-10 defines a qualified plan
distributed annuity contract as an annuity contract purchased for a
participant, and distributed to the participant, by a qualified plan. In
the case of a qualified plan distributed annuity contract, the payor
under the contract is treated as the plan administrator. See
Sec. 31.3405(c)-1, Q&A-13 of this chapter concerning the application of
mandatory 20-percent withholding requirements to distributions from a
qualified plan distributed annuity contract.
Q-17: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
A-17: (a) General rule. For purposes of section 401(a)(31), a plan
administrator may make the assumptions described in paragraphs (b) and
(c) of this Q&A-17 in determining the amount of a distribution that is
an eligible rollover distribution for which a direct rollover option
must be provided. Section 31.3405(c)-1, Q&A-10 of this chapter provides
assumptions for purposes of complying with section 3405(c). See
Sec. 1.402(c)-2, Q&A-15 concerning the effect of these assumptions for
purposes of section 402(c).
(b) $5,000 death benefit. A plan administrator is permitted to
assume that a distribution from the plan that qualifies for the $5,000
death benefit exclusion under section 101(b) is the only death benefit
being paid with respect to a deceased employee that qualifies for that
exclusion. Thus, to the extent that such a distribution would be
excludible from gross income based on this assumption, the plan
administrator is permitted to assume that it is not an eligible rollover
distribution.
(c) Determination of designated beneficiary. For the purpose of
determining the amount of the minimum distribution required to satisfy
section 401(a)(9)(A) for any calendar year, the plan administrator is
permitted to assume that there is no designated beneficiary.
Q-18: When must a qualified plan be amended to comply with section
401(a)(31)?
A-18: Even though section 401(a)(31) applies to distributions from
qualified plans made on or after January 1, 1993, a qualified plan is
not required to be amended before the last day by which amendments must
be made to comply with the Tax Reform Act of 1986 and related
provisions, as permitted in other administrative guidance of general
applicability, provided that:
(a) In the interim period between January 1, 1993, and the date on
which the plan is amended, the plan is operated in accordance with the
requirements of section 401(a)(31); and
[[Page 216]]
(b) The amendment applies retroactively to January 1, 1993.
[T.D. 8619, 60 FR 49204, Sept. 22, 1995]
Sec. 1.401(b)-1 Certain retroactive changes in plan.
(a) General rule. Under section 401(b) a stock bonus, pension,
profit-sharing, annuity, or bond purchase plan which does not satisfy
the requirements of section 401(a) on any day solely as a result of a
disqualifying provision (as defined in paragraph (b) of this section)
shall be considered to have satisfied such requirements on such date if,
on or before the last day of the remedial amendment period (as
determined under paragraphs (d), (e) and (f) of this section) with
respect to such disqualifying provision, all provisions of the plan
which are necessary to satisfy all requirements of sections 401(a),
403(a), or 405(a) are in effect and have been made effective for all
purposes for the whole of such period. Under some facts and
circumstances, it may not be possible to amend a plan retroactively so
that all provisions of the plan which are necessary to satisfy the
requirements of section 401(a) are in fact made effective for the whole
remedial amendment period. If it is not possible, the requirements of
this section will not be satisfied even if the employer adopts a
retroactive plan amendment which, in form, appears to satisfy such
requirements. Section 401(b) does not permit a plan to be made
retroactively effective, for qualification purposes, for a taxable year
prior to the taxable year of the employer in which the plan was adopted
by such employer.
(b) Disqualifying provisions. For purposes of this section, with
respect to a plan described in paragraph (a) of this section, the term
``disqualifying provision'' means:
(1) A provision of a new plan, the absence of a provision from a new
plan, or an amendment to an existing plan, which causes such plan to
fail to satisfy the requirements of the Code applicable to qualification
of such plan as of the date such plan or amendment is first made
effective.
(2) A plan provision which results in the failure of the plan to
satisfy the qualification requirements of the Code by reason of a change
in such requirements--
(i) Effected by the Employee Retirement Income Security Act of 1974
(Pub. L. 93-406, 88 Stat. 829), hereafter referred to as ``ERISA,'' or
the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248, 96
Stat. 324), hereafter referred to as ``TEFRA,'' or
(ii) Effective before the first day of the first plan year beginning
after December 31, 1989 and that is effected by the Tax Reform Act of
1986 (Pub. L. 99-514, 100 Stat. 2085, 2489), hereafter referred to as
``TRA '86,'' the Omnibus Budget Reconciliation Act of 1986, (Pub. L. 99-
509, 100 Stat. 1874), hereafter referred to as ``OBRA '86,'' or the
Omnibus Budget Reconciliation Act of 1987 (Pub. L. 100-203, 101 Stat.
1330), hereafter referred to as ``OBRA '87.'' For purposes of this
paragraph (b)(2)(ii), a disqualifying provision includes any plan
provision that is integral to a qualification requirement changed by TRA
'86, OBRA '86, or OBRA '87 or any requirement treated by the
Commissioner, directly or indirectly, as if section 1140 of TRA '86
applied to it, but only to the extent such provision is effective before
the first day of the first plan year beginning after December 31, 1989.
With respect to disqualifying provisions described in this paragraph
(b)(2)(ii) effective before the first day of the first plan year which
begins after December 31, 1988, there must be compliance with the
conditions of section 1140 of TRA '86 (other than the requirement that
the plan amendment be made on or before the last day of the first plan
year beginning after December 31, 1988), including operation in
accordance with the plan provision as of its effective date with respect
to the plan.
(3) A plan provision designated by the Commissioner, at the
Commissioner's discretion, as a disqualifying provision that either--
(i) Results in the failure of the plan to satisfy the qualification
requirements of the Internal Revenue Code by reason of a change in those
requirements; or
(ii) Is integral to a qualification requirement of the Internal
Revenue Code that has been changed.
[[Page 217]]
(c) Special rules applicable to disqualifying provisions--(1)
Absence of plan provision. For purposes of paragraphs (b)(2) and (3) of
this section, a disqualifying provision includes the absence from a plan
of a provision required by, or, if applicable, integral to the
applicable change to the qualification requirements of the Internal
Revenue Code, if the plan was in effect on the date the change became
effective with respect to the plan.
(2) Method of designating disqualifying provisions. The Commissioner
may designate a plan provision as a disqualifying provision pursuant to
paragraph (b)(3) of this section only in revenue rulings, notices, and
other guidance published in the Internal Revenue Bulletin. See
Sec. 601.601(d)(2) of this chapter.
(3) Authority to impose limitations. In the case of a provision that
has been designated as a disqualifying provision by the Commissioner
pursuant to paragraph (b)(3) of this section, the Commissioner may
impose limits and provide additional rules regarding the amendments that
may be made with respect to that disqualifying provision during the
remedial amendment period. The Commissioner may provide guidance in
revenue rulings, notices, and other guidance published in the Internal
Revenue Bulletin. See Sec. 601.601(d)(2) of this chapter.
(d) Remedial amendment period. (1) The remedial amendment period
with respect to a disqualifying provision begins:
(i) In the case of a provision of, or absence of a provision from, a
new plan, described in paragraph (b)(1) of this section, the date the
plan is put into effect,
(ii) In the case of an amendment to an existing plan, described in
paragraph (b)(1) of this section, the date the plan amendment is adopted
or put into effect (whichever is earlier),
(iii) In the case of a disqualifying provision described in
paragraph (b)(2) of this section, the date on which the change effected
by ERISA, TEFRA, TRA '86, OBRA '86, OBRA '87, or a qualification
requirement that is treated, directly or indirectly, as subject to the
conditions of section 1140 of TRA '86 described in paragraph (b)(2) of
this section, became effective with respect to such plan or, in the case
of a provision, described in paragraph (b)(2)(ii) of this section, that
is integral to such qualification requirement, the first day on which
the plan was operated in accordance with such provision, or
(iv) In the case of a disqualifying provision described in paragraph
(b)(3)(i) of this section, the date on which the change effected by an
amendment to the Internal Revenue Code became effective with respect to
the plan; or
(v) In the case of a disqualifying provision described in paragraph
(b)(3)(ii) of this section, the first day on which the plan was operated
in accordance with such provision, as amended, unless another time is
specified by the Commissioner in revenue rulings, notices, and other
guidance published in the Internal Revenue Bulletin. See
Sec. 601.601(d)(2) of this chapter.
(2) Unless further extended as provided by paragraph (e) of this
section, the remedial amendment period ends with the latest of:
(i) In the case of a plan maintained by one employer, the time
prescribed by law, including extensions, for filing the income tax
return (or partnership return of income) of the employer for the
employer's taxable year in which falls the latest of:
(A) The date on which the remedial amendment period begins.
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(ii) In the case of a plan maintained by one employer, the last day
of the plan year within which falls the latest of:
(A) The date on which the remedial amendment period begins,
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(iii) In the case of a plan maintained by more than one employer,
the last day of the tenth month following the last day of the plan year
in which falls the latest of:
[[Page 218]]
(A) The date on which the remedial amendment period begins,
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date of which a plan amendment described in paragraph (b)(1)
of this section is made effective, or
(iv) December 31, 1976, but only in the case of a plan to which
section 411 (relating to minimum vesting standards) applies without
regard to section 411(e)(2), and only in the case of a remedial
amendment period which began on or after September 2, 1974.
(3) For purposes of paragraphs (d)(2)(i), (d)(2)(ii), and
(d)(2)(iii) of this section, for any disqualifying provision described
in paragraph (b)(2)(ii) of this section, the remedial amendment period
shall be deemed to have begun with the first day of the first plan year
which begins after December 31, 1988.
(4) For purposes of this paragraph (d)(2) of this section, a master
or prototype plan shall not be considered to be a plan maintained by
more than one employer, and whether or not a plan is maintained by more
than one employer, shall be determined without regard to section 414 (b)
and (c) except that if a plan is maintained solely by an affiliated
group of corporations (within the meaning of section 1504) which files a
consolidated income tax return pursuant to section 1501 for a taxable
year within which falls the latest of the dates described in paragraph
(d)(2)(i) of this section, such plan shall be deemed to be maintained by
one employer.
(e) Extensions of remedial amendment period--(1) Opinion letter
request by sponsoring organization of master or prototype plan. In the
case of an employer who has adopted a master or prototype plan, a
remedial amendment period that began on or after September 2, 1974,
shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The opinion letter with respect to the request of the sponsoring
organization is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph apply only if the
sponsoring organization of such master or prototype plan has, after
September 2, 1974, and on or before December 31, 1976, filed a request
for an opinion letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan). The
provisions of this paragraph (e)(1) apply to a master or prototype plan
adopted to replace another plan even though the remedial amendment
period applicable to the replaced plan has expired at the time of
adoption of the replacement plan.
(2) Notification letter request by law firm sponsor of district-
approved plan. In the case of an employer who has adopted a pattern
plan, a remedial amendment period that began on or after September 2,
1974, shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The notification letter with respect to the request of the
sponsoring law firm is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph shall apply only if
the sponsoring law firm of such pattern plan has, on or before December
31, 1976, filed a request for a notification letter with the Internal
Revenue Service with respect to the initial or continuing qualification
of the plan (or a trust which is part of the plan). The provisions of
this paragraph (e)(2) apply to a pattern plan adopted to replace another
plan even though the remedial amendment period applicable to the
replaced plan has expired at the time of the adoption of the replacement
plan.
(3) Determination letter request by employer or plan administrator.
If on or before the end of a remedial amendment period determined
without regard to this paragraph (e), or in a case to which paragraph
(e) (1) or (2) of this section applies, on or before the 90th day
following the later of the dates described in paragraph (e) (1) or (2)
of this section, the employer or plan administrator files a request
pursuant to
[[Page 219]]
Sec. 601.201(s) of this chapter (Statement of Procedural Rules) for a
determination letter with respect to the initial or continuing
qualification of the plan, or a trust which is part of such plan, such
remedial amendment period shall be extended until the expiration of 91
days after:
(i) The date on which notice of the final determination with respect
to such request for a determination letter is issued by the Internal
Revenue Service, such request is withdrawn, or such request is otherwise
finally disposed of by the Internal Revenue Service, or
(ii) If a petition is timely filed with the United States Tax Court
for a declaratory judgment under section 7476 with respect to the final
determination (or the failure of the Internal Revenue Service to make a
final determination) in response to such request, the date on which the
decision of the United States Tax Court in such proceeding becomes
final.
(4) Transitional rule. In the case of a request for a determination
letter described in and filed within the time prescribed in paragraph
(e)(3) of this section with respect to which a final determination is
issued by the Internal Revenue Service on or before September 28, 1976
the remedial amendment period described in paragraph (d) of this section
shall not end prior to the expiration of 150 days beginning on the date
of such final determination by the Internal Revenue Service.
(5) Disqualifying provision prior to September 2, 1974. If the
remedial amendment period with respect to a disqualifying provision
described in paragraph (b)(1) of this section began prior to September
2, 1974, and the provisions of paragraphs (e)(5)(i), (ii) and (iii) of
this section are satisfied, the remedial amendment period described in
paragraph (d) shall not end prior to December 31, 1976. This
subparagraph shall apply only if--
(i) A request pursuant to Sec. 601.201 of this chapter for a
determination letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan) was
filed not later than the later of:
(A) The time prescribed by law, including extensions, for filing the
income tax return (or partnership return of income) of the employer for
the employer's taxable year in which falls the date on which the
remedial amendment period began, or
(B) The date 6 months after the close of such taxable year,
(ii) The employer, either:
(A) While such request for a determination letter is or was under
consideration by the Internal Revenue Service or,
(B) Promptly after the date on which notice of the final
determination with respect to such request for a determination letter is
issued by the Internal Revenue Service, such request is withdrawn, or
such request is otherwise finally disposed of by the Internal Revenue
Service, adopts or adopted either a plan amendment retroactive to the
date on which the remedial amendment period began, or a prospective plan
amendment, and
(iii) The amendment described in paragraph (e)(5)(ii) of this
section would have resulted in the plan's satisfying the requirements of
section 401(a) of the Code from the beginning of the remedial amendment
period to the date such amendment was made if this section had been in
effect during such period, and in the case of a prospective amendment,
if such amendment had been made retroactive to such beginning date.
(f) Discretionary extensions. At his discretion, the Commissioner
may extend the remedial amendment period or may allow a particular plan
to be amended after the expiration of its remedial amendment period and
any applicable extension of such period. In determining whether such an
extension will be granted, the Commissioner shall consider, among other
factors, whether substantial hardship to the employer would result if
such an extension were not granted, whether such an extension is in the
best interest of plan participants, and whether the granting of the
extension is adverse to the interests of the Government. The mere
absence of final regulations with respect to issues covered under the
Special Reliance Procedure announced by the Internal Revenue Service in
Technical Information Release 1416 on November 5, 1975, and as extended
by Internal Revenue Service News Release IR-1616 on May
[[Page 220]]
14, 1976, shall not be deemed to satisfy the criteria of this paragraph.
With regard to a particular plan, a request for extension of time
pursuant to this paragraph shall be submitted prior to the expiration of
the remedial amendment period determined without regard to this
paragraph, or within such time thereafter as the Internal Revenue
Service may consider resonable under the circumstances. The request
should be submitted to the appropriate District Director, determined
under Sec. 601.201(s)(3)(xii) of this chapter (Statement of Procedural
Rules). This subparagraph applies to disqualifying provisions that were
adopted or became effective prior to September 2, 1974, as well as
disqualifying provisions adopted or made effective on or after September
2, 1974.
(Secs. 401(b), 7805, Internal Revenue Code of 1954 (88 Stat. 943, 68A
Stat. 917; 26 U.S.C. 401(b), 7805))
[T.D. 7437, 41 FR 42653, Sept. 28, 1976, as amended by T.D. 7896, 48 FR
23817, May 27,1983; T.D. 7997, 49 FR 50645, Dec. 31, 1984; T.D. 8217, 53
FR 29662, Aug. 8, 1988; T.D. 8727, 62 FR 41273, 41274, Aug. 1, 1997;
T.D. 8871, 65 FR 5433, Feb. 4, 2000]
Sec. 1.401(e)-1 Definitions relating to plans covering self-employed individuals.
(a) ``Keogh'' or ``H.R. 10'' plans, in general--(1) Introduction and
organization of regulations. Certain self-employed individuals may be
covered by a qualified pension, annuity, or profit-sharing plan. This
section contains definitions contained in section 401(c) relating to
plans covering self-employed individuals and is applicable to employer
taxable years beginning after December 31, 1975, unless otherwise
specified.
The provisions of section 401(a) relating to qualification
requirements which are generally applicable to all qualified plans, and
other provisions relating to the special rules under section 401 (b),
(f), (g), (h), and (i), are also generally applicable to any plan
covering a self-employed individual. However, in addition to such
requirements and special rules, any plan covering a self-employed
individual is subject to the rules contained in Secs. 1.401 (e)-2, (e)-
5, and (j)-1 through (j)-5. Section 1.401(e)-2 contains general rules,
Sec. 1.401(e)-5 contains a special rule limiting the contribution and
benefit base to the first $100,000 of annual compensation, and
Sec. 1.401 (j)-1 through (j)-5 contains special rules for defined
benefit plans. Section 1.401(e)-3 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 section
401(c)(3). Section 1.401(e)-4 contains rules relating to contributions
on behalf of owner-employees for premiums on annuity, etc., contracts
and a transitional rule for certain excess contributions made on behalf
of owner-employees for employer taxable years beginning before January
1, 1976. The provisions of this section and of Secs. 1.401(e)-2 through
1.401(e)-5 are applicable to employer taxable years beginning after
December 31, 1975, unless otherwise specified.
(2) [Reserved]
(b) [Reserved]
[T.D. 7636, 44 FR 47053, Aug. 10, 1979]
Sec. 1.401(e)-2 General rules relating to plans covering self-employed individuals.
(a) ``Keogh'' or ``H.R. 10'' plans; introduction and organization of
regulations. This section provides certain rules which supplement, and
modify, the qualification requirements of section 401(a) and the special
rules provided by Sec. 1.401(b)-1 and other special rules under
subsections (f), (g), (h), and (i) of section 401 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). Section 1.401(e)-1(a)(1) sets forth other provisions which
also supplement, and modify, these requirements and special rules in the
case of a plan described in this section. The provisions of this section
apply to employer taxable years beginning after December 31, 1975,
unless otherwise specified.
(b) [Reserved]
[T.D. 7636, 44 FR 47053, Aug. 10, 1979]
[[Page 221]]
Sec. 1.401(e)-3 Requirements for qualification of trusts and plans benefiting owner-employees.
(a) ``Keogh'' or ``H.R. 10'' plans covering owner-employees;
introduction and organization of regulations. 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). These additional requirements are
prescribed in section 401(d) and are made applicable to such a trust by
section 401(a)(10)(B) and to an annuity plan by section 404(a)(2).
However, to the extent that the provisions of Secs. 1.401(e)-1 and
1.401(e)-2 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, 1975, unless otherwise specified.
(b) [Reserved]
[T.D. 7636, 44 FR 47053, Aug. 10, 1979]
Sec. 1.401(e)-4 Contributions for premiums on annuity, etc., contracts and transitional rule for certain excess contributions.
(a) In general. The provisions of this section prescribe the rules
specified in section 401(e) relating to certain 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 section
401(c)(3) and the regulations thereunder) in taxable years of the
employer beginning after December 31, 1975. In addition, such plans are
also subject to the limitations on contributions and benefits under
section 415 for years beginning after December 31, 1975. However, the
defined contribution compensation limitation described in section
415(c)(1)(B) will not apply to any contribution described in this
section provided that the requirements specified in section 415(c)(7)
and Sec. 1.415-6(h) are satisfied. Solely for the purpose of applying
section 4972(b) (relating to excise tax on excess contributions for
self-employed individuals) to other contributions made by an owner-
employee as an employee, the amount of any employer contribution which
is not deductible under section 404 for the employer's taxable year but
which is described in section 401(e) and this section shall be taken
into account as a contribution made by such owner-employee as an
employee during the taxable year of his employer in which such
contribution is made.
(b) Contributions described in section 401(e)--(1) An employer
contribution on behalf of an owner-employee is described in section
401(e), if--
(i) Under the provisions of the plan, the contribution 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 on the life of the owner-employee.
(ii) The employer contributions so applied meet the requirements of
subparagraphs (2) through (5) of this paragraph.
(iii) The amount of the contribution exceeds the amount deductible
under section 404 with respect to contributions made by the employer on
behalf of the owner-employee under the plan, and
(iv) 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 $7,500. For purposes of
computing such $7,500 limit, the total employer contributions include
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 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
[[Page 222]]
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).
(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. For example, a nontransferable face-amount
certificate described 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
by such employer on behalf of such owner-employee for the most recent
three taxable years of the employer which are described in the
succeeding sentence. The three employer taxable years described in the
preceding sentence must be years, 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.
(iii) For purposes of making the computations described in
subdivisions (i) and (ii) of this subparagraph for any taxable year of
the employer the average of the amounts deductible under section 404 by
the employer on behalf of an owner-employee for the most recent three
relevant taxable years of the employer shall be determined as if section
404, as in effect for the taxable year for which the computation is to
be made, had been in effect for all three such years.
(5) For any taxable year of an employer in which contributions are
made on behalf of an individual as an owner-employee under more than one
plan, the amount of contributions described in this section by the
employer on behalf of such an owner-employee under all such plans must
not exceed $7,500.
(c) Transitional rule for excess contributions--(1)(i) The rules of
this paragraph are inapplicable to a plan which was not in existence for
any taxable year of an employer which begins before January 1, 1976. For
taxable years of an employer which begin before January 1, 1976, the
rules with respect to excess contributions on behalf of owner-employees
set forth in section 401(d) (5) and (8) and in section 401(e), as these
sections were in effect on September 1, 1974, prior to their amendment
by section 2001(e) of the Employee Retirement Income Security Act of
1974 (hereinafter in this paragraph referred to as the ``Act'') (88
Stat. 954), shall apply except as provided by subparagraph (2) of this
paragraph. Section 1.401-13 generally provides the rules for excess
contributions on behalf of owner-employees set forth in these sections.
(ii) Notwithstanding the provisions of subdivision (i) of this
subparagraph, the rules set forth in such subsections
[[Page 223]]
(d) (5) and (8) and (e) of section 401 with respect to excess
contributions for such taxable years beginning before January 1, 1976,
apply even though the application of those rules affects a subsequent
taxable year. Thus, for example, if, in 1975, a nonwillful excess
contribution described in section 401(e)(1) (prior to such amendment) is
made on behalf of an owner-employee, the plan will not be qualified
unless the provisions required by subparagraphs (A) and (B) of such
401(d)(8) are contained in the plan and made applicable to excess
contributions made for such taxable years beginning before January 1,
1976. In such case, the effect of such contribution on the plan, the
employer, and the owner-employee would be determined under paragraph (2)
of section 401(e), as in effect on September 1, 1974. By reason of
section 401(e)(2)(F), as in effect on September 1, 1974, the period for
assessing any deficiency by reason of the excess contribution will not
expire until the expiration of the 6-month period described in section
401(e)(2)(C), as in effect on September 1, 1974, even if the first day
of such 6-month period falls in a taxable year beginning after December
31, 1975. For the rules applicable to a willful excess contribution,
which generally divide an owner-employee's interest in a plan into two
parts on the basis of employer taxable years beginning before and after
December 31, 1975, see Sec. 1.72-17A(e)(2)(v). In the case of a willful
excess contribution, the rule specified in section 401(e)(2)(E)(iii), as
in effect on September 1, 1974, shall not apply to any taxable year of
an employer beginning on or after January 1, 1976. Thus, for example, if
a willful excess contribution was made to a plan on behalf of an owner-
employee with respect to his employer's taxable year beginning January
1, 1975, the plan would not meet, for purposes of section 404, the
requirements of section 401(d) with respect to that owner-employee for
such year, but the 5 taxable years following such year would be
unaffected because those years begin on or after January 1, 1976.
(2)(i) For purposes of applying the excess contribution rules with
respect to the employer taxable years specified in subparagraph (1) of
this paragraph for such an employer taxable year which begins after
December 31, 1973, see section 404(e) and Sec. 1.404(e)-1A for rules
increasing the limitation on the amount of allowable employer deductions
on behalf of owner-employees under section 404. For purposes of applying
subparagraphs (A) and (B)(i) of section 401(e)(1) prior to the amendment
made by section 2001(e)(3) of the Act (88 Stat. 954), the employer
deduction allowable by section 404(e)(4) with respect to an owner-
employee in a defined contribution plan shall be deemed not to be an
excess contribution (see Sec. 1.404(e)-1A(c)(4)).
(ii) For purposes of applying the excess contribution rules with
respect to the employer taxable years specified in subparagraph (1) of
this paragraph to an employer's plan which was not in existence on
January 1, 1974, or to a plan in existence on January 1, 1974, which
elects under section 1017(d) of the Act (88 Stat. 934), in accordance
with regulations, to have the funding provisions of section 412 apply to
such an existing plan, see section 404 (a) (1), (a)(6), and (a)(7), as
amended by section 1013(c)(1), (2), and (3) of the Act (88 Stat. 922 and
923) for rules modifying the amount of employer deductions on behalf of
owner-employees.
[T.D. 7636, 44 FR 47053, Aug. 10, 1979]
Sec. 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.
(a) General rules--General rule. (1) Under section 401(a)(17), a
plan maintained by an employer which provided contributions or benefits
for employees some or all of whom are employees within the meaning of
section 401(c)(1) is a qualified plan only if the annual compensation of
each employee taken into account under the plan does not exceed the
first $100,000 of such compensation. For purposes of applying section
401(a)(17) and the preceding sentence, all plans maintained by such an
employer with respect to the same trade or business shall be treated as
a single plan. See also sections 401(d)(9) and (10) (relating to
controlled trades or businesses where a plan covers an owner-employee
who controls more than one trade or business); section
[[Page 224]]
404(e) (relating to special limitations for self-employed individuals);
section 413(b)(7) (relating to determination of limitations provided by
section 404(a) in the case of certain plans maintained pursuant to a
collective bargaining agreement); and section 413(c)(6) (relating to
determination of limitations provided by section 404(a) in the case of
certain plans maintained by more than one employer).
(2) Special section 414(b), (c) rule. This subparagraph (2) applies
to plans maintained by employers that are trades or businesses (whether
or not incorporated) that are under common control within the meaning of
section 414(c). All such plans that are described in paragraph (a)(1)
and Sec. 1.401(e)-6(a) (so called ``Subchapter S plans'') shall be
treated as a single plan in applying the limitation of paragraph (a)(1).
(b) Integrated plans. (1) In the case of a qualified plan, other
than a plan described in section 414(j), which is integrated with the
Social Security Act (chapter 21 of the Code), or with contributions or
benefits under chapter 2 of the Code (relating to tax on self-employment
income) or under any other Federal of State law, the $100,000 limitation
described in subparagraph (a) shall be determined without regard to any
adjustments to contributions or benefits under the plan on account of
such integration. See also subsections (a)(5), (a)(15), and (d)(6) of
section 401 and the regulations thereunder for other rules with respect
to plans which are integrated.
(2) In the case of a qualified defined benefit plan described in
section 414(j), see section 401(j)(4) for a special prohibition against
integration.
(c) Application of nondiscrimination requirement. (1) This paragraph
shall apply--
(i) In the case of a plan which provides contributions or benefits
for employees some or all of whom are employees within the meaning of
section 401(c)(1) and
(ii) For a year in which the compensation of any employee covered by
the plan exceeds $100,000. In the case of an employee who is an employee
within the meaning of section 401(c)(1), compensation includes earned
income within the meaning of section 401(c)(2).
(2) In applying section 401(a)(4) under the circumstances described
in subparagraph (1) of this paragraph, the determination whether the
rate of contributions or benefits under the plan discriminates in favor
of highly compensated employees shall be made as if the compensation for
the year of each employee described in the first sentence of
subparagraph (1)(ii) of this paragraph were $100,000, rather than the
compensation actually received by him for such year.
(d) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). A, a self-employed individual, has established the P
Profit-Sharing Plan, which covers A and his two commonlaw employees, B
and C. A's taxable year and the plan's plan year are both the calendar
year. For 1976, A has earned income of $150,000, and B and C each
receive compensation of less than $100,000 from A. If he wishes to
contribute $7,500 to the plan on his behalf for 1976, A must also
contribute to the accounts of B and C under the plan amounts at least
equal to 7\1/2\ percent of their respective compensation for 1976.
Example (2). D, an owner-employee within the meaning of section
401(c)(3), is a participant in the Q Qualified Defined Contribution
Plan, which, in 1975, satisfies the requirements of section 401(d)(6)
and all other integration requirements applicable to qualified defined
contribution plans. The taxable years of D, the employer of D within the
meaning of section 401(c)(4), and the plan are all calendar years. The
plan provides for an integration level of $13,200 and a contribution
rate of 5 percent of compensation in excess of $13,200. For 1975, D has
earned income of $115,000. The maximum amount of earned income upon
which D's contribution can be determined is $86,800, and the
contribution based upon this maximum amount of earned income is $4,340,
computed as follows:
Maximum annual compensation which may be taken into account.. $100,000
Less: Social Security Act integration level.................. 13,200
----------
Plan contribution base....................................... $86,800
Multiplied by: Contribution rate (percent)................... 5
----------
Total.................................................... $4,340
(e) Years to which section applies. This section applies to taxable
years of an employer beginning after December 31, 1975. However, if
employer contributions made under a plan for any employee for taxable
years of an employer
[[Page 225]]
beginning after December 31, 1973, exceed the amounts permitted to be
deducted for that employee under section 404(e), as in effect on
September 1, 1974, this section applies to such taxable years of an
employer.
Thus, for example, a plan of a calendar year employer which was
adopted on January 1, 1974, would be subject to this section in 1974, if
the employer made a contribution on behalf of any employee within the
meaning of section 401(c)(1) for such year in excess of the $2,500 or 10
percent earned income limit, whichever is applicable to that employee,
specified in section 404(e)(1) as in effect prior to the amendment to
such Code section made by section 2001(a)(1)(A) of the Employee
Retirement Income Security Act of 1974 (88 Stat. 952). The plan
described in the proceeding sentence would also be subject to this
section in 1974, if the employer made a contribution on behalf of any
employee within the meaning of section 401(c)(1) which is allowable as a
deduction only because of the addition of paragraph (4) to Code section
404(e) made by section 2001(a)(3) of such Act (88 Stat. 952).
(b) [Reserved]
[T.D. 7636, 44 FR 47055, Aug. 10, 1979; T.D. 7636, 60 FR 21435, May 2,
1995]
Sec. 1.401(e)-6 Special rules for shareholder-employees.
(a) Limitation of contributions and benefit bases to first $100,000
of annual compensation in case of plans covering shareholder-employees.
(1) Under section 401(a)(17), a plan which provides contributions or
benefits for employees, some or all of whom are shareholder-employees
within the meaning of section 1379(d), is subject to the same limitation
on annual compensation as a plan which provides such contributions or
benefits for employees some or all of whom are self-employed individuals
within the meaning of section 401(c)(1). Thus, a plan which provides
contributions or benefits for such shareholder-employees is subject to
the rules provided by Sec. 1.401(e)-5, unless otherwise specified. See
also section 1379. In the case of plans maintained by employers that are
corporations described in section 414(b) and that are described in this
subparagraph (1), the same rule described in Sec. 1.401(e)-5(a)(2) shall
apply.
(2) Subparagraph (1) applies to taxable years of an electing small
business corporation beginning after December 31, 1975. However, if
corporate contributions made under a plan on behalf of any shareholder-
employee for corporate taxable years beginning after December 31, 1973,
exceed the lesser of the amount of contributions specified in section
1379(b)(1) (A) or (B), as in effect on September 1, 1974, for that
shareholder-employee, subparagraph (1) applies to such corporate taxable
years. Thus, for example if an electing small business corporation whose
taxable year is the calendar year adopted a plan on January 1, 1974, the
plan would be subject to the provisions of subparagraph (1) of this
section in 1974, if the corporation made a contribution in excess of
$2,500 on behalf of any shareholder-employee for such year.
(b) [Reserved]
[T.D. 7636, 44 FR 47056, Aug. 10, 1979]
Sec. 1.401(f)-1 Certain custodial accounts and annuity contracts.
(a) Treatment of a custodial account or an annuity contract as a
qualified trust. Beginning on January 1, 1974, a custodial account or an
annuity contract may be used, in lieu of a trust, under any qualified
pension, profitsharing, or stock bonus plan if the requirements of
paragraph (b) of this section are met. A custodial account or an annuity
contract 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 or
annuity contract as part of a plan does not preclude the use of a trust
or another custodial account or another annuity contract as part of the
same plan. A plan under which a custodial account or an annuity contract
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 before January 1, 1974, see
Sec. 1.401-8.
(b) Rules applicable to custodial accounts and annuity contracts.
(1) Beginning on January 1, 1974, a custodial account or an annuity
contract is treated
[[Page 226]]
as a qualified trust under section 401 if the following requirements are
met:
(i) The custodial account or annuity contract would, except for that
fact that it is not a trust, constitute a qualified trust under section
401; and
(ii) In the case of a custodial account, the custodian either is a
bank or is another person who demonstrates, to the satisfaction of the
Commissioner, that the manner in which he will hold the assets will be
consistent with the requirements of section 401. This demonstration must
be made in the same manner as the demonstration required by Sec. 1.408-
2(e).
(2) If a custodial account would, except for the fact that it is not
a trust, constitute a qualified trust under section 401, it 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) An annuity contract would, except for the fact that it is not a
trust, constitute a qualified trust under section 401 if it is purchased
by an employer for an employee under a plan which meets the requirements
of section 404(a)(2) and the regulations thereunder, except that the
plan may be either a pension or a profit-sharing plan.
(c) Effect of this section. (1)(i) Any custodial account or annuity
contract which satisfies the requirements of paragraph (b) of this
section is treated as a qualified trust for all purposes of the Internal
Revenue Code of 1954. Such a custodial account or annuity contract is
treated as a separate legal person which is exempt from the income tax
under section 501(a). In addition, the person holding the assets of such
account or holding such contract is treated as the trustee thereof.
Accordingly, such person is required to file the returns described in
sections 6033 and 6047 and to supply any other information which the
trustee of a qualified trust is required to furnish.
(ii) Any procedure which has the effect of merely substituting one
custodian for another shall not be considered as terminating or
interrupting the legal existence of a custodial account which otherwise
satisfies the requirements of paragraph (b) of this section.
(2)(i) The beneficiary of a custodial account which satisfies the
requirements of paragraph (b) of this section is taxed in accordance
with section 402. 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.
(ii) 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.
(3) The beneficiary of an annuity contract which satisfies the
requirements of paragraph (b) of this section is taxed as if he were the
beneficiary of an annuity contract described in section 403(a).
(d) Definitions. For purposes of this section--
(1) The term bank means a bank as defined in section 408(n).
(2) The term annuity means an annuity as defined in section 401(g).
Thus, any contract or certificate issued after December 31, 1962, which
is transferable is not treated as a qualified trust under this section.
(e) Other contracts. For purposes of this section, other than the
non-transferability restriction of paragraph (d)(2), a contract issued
by an insurance company qualified to do business in a state shall be
treated as an annuity contract. For purposes of the preceding sentence,
the contract does not include a life, health or accident, property,
casualty or liability insurance contract. For purposes of this
paragraph, a contract which is issued by an
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insurance company will not be considered a life insurance contract
merely because the contract provides incidental life insurance
protection. The provisions of this paragraph are effective for taxable
years beginning after December 31, 1975.
(f) Cross reference. For the requirement that the assets of an
employee benefit plan be placed in trust, and exceptions thereto, see
section 403 of the Employee Retirement Income Security Act of 1974, 29
U.S.C. 1103, and the regulations prescribed thereunder by the Secretary
of Labor.
(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))
[43 FR 41204, Sept. 15, 1978. Redesignated and amended by T.D. 7748, 46
FR 1695-1696, Jan. 7, 1981; T.D. 8635, 60 FR 65549, Dec. 20, 1995]
Sec. 1.401(k)-0 Certain cash or deferred arrangements, table of contents.
This section contains the captions that appear in Sec. 1.401(k)-1.
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
(a) General rules.
(1) Certain plans permitted to include cash or deferred
arrangements.
(2) Rules applicable to cash or deferred arrangements generally.
(i) Definition of cash or deferred arrangement.
(ii) Treatment of after-tax employee contributions.
(iii) Treatment of elective contributions as plan assets.
(3) Rules applicable to cash or deferred elections generally.
(i) Definition of cash or deferred election.
(ii) Requirement that amounts not be currently available.
(iii) Amounts currently available.
(iv) Certain one-time elections not treated as cash or deferred
elections.
(v) Tax treatment of employees.
(vi) Examples.
(4) Rules applicable to qualified cash or deferred arrangements.
(i) Definition of qualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
(iii) Tax treatment of employees.
(iv) Application of nondiscrimination requirements to plan that
includes a qualified cash or deferred arrangement.
(5) Rules applicable to nonqualified cash or deferred arrangements.
(i) Definition of nonqualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
(iii) Tax treatment of employees.
(iv) Qualification of plan that includes a nonqualified cash or
deferred arrangement.
(6) Rules applicable to partnership cash or deferred arrangements.
(i) Application of general rules.
(ii) Definition of partnership cash or deferred arrangement.
(A) General rule.
(B) Timing of partner's cash or deferred election.
(C) Transition rule for partnership cash or deferred elections.
(iii) Treatment of certain matching contributions as elective
contributions.
(7) Rules applicable to collectively bargained plans.
(i) In general.
(ii) Example
(b) Coverage and nondiscrimination requirements.
(1) In general.
(2) Actual deferral percentage test.
(i) General rule.
(ii) Rule for plan years beginning after 1979 and before 1987.
(iii) Plan provision requirement.
(3) Aggregation.
(i) Aggregation of arrangements and plans.
(ii) Restructuring and Permissive Aggregation.
(4) Elective contributions taken into account under the actual
deferral percentage test.
(i) General rule.
(ii) Elective contributions and qualified nonelective contributions
used to satisfy actual contribution percentage test.
(iii) Elective contributions for partners.
(iv) Elective contributions not taken into account.
(5) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the actual deferral
percentage test.
(6) Examples.
(c) Nonforfeitability requirement.
(1) General rule.
(2) Example.
(d) Distribution limitation.
(1) General rule.
(2) Rules applicable to hardship distributions.
(i) Distribution must be on account of hardship.
(ii) Limit on distributable amount.
(iii) General hardship distribution standards.
(A) Immediate and heavy financial need.
(B) Distribution necessary to satisfy financial need.
[[Page 228]]
(iv) Deemed hardship distribution standards.
(A) Deemed immediate and heavy financial need.
(B) Distribution deemed necessary to satisfy financial need.
(C) Commissioner may expand standards.
(3) Rules applicable to distributions upon plan termination.
(4) Rules applicable to distributions upon sale of assets or
subsidiary.
(i) Seller must maintain the plan.
(ii) Employee must continue employment.
(iii) Distribution must be in connection with disposition of assets
or subsidiary.
(iv) Definitions.
(A) Substantially all.
(B) Unrelated employer.
(5) Lump sum requirement for certain distributions.
(6) Rules applicable to all distributions.
(i) Impermissible distributions.
(ii) Deemed distributions.
(iii) ESOP dividend distributions.
(iv) Limitations apply after transfer.
(v) Required consent.
(7) Examples.
(e) Additional requirements for qualified cash or deferred arrangements.
(1) Qualified profit-sharinq, stock bonus, pre-ERISA money purchase
or rural cooperative plan requirement.
(2) Cash availability requirement.
(3) Separate accounting requirement.
(i) General rule.
(ii) Failure to satisfy separate accounting requirement.
(4) Limitations on cash or deferred arrangements of state and local
governments and tax-exempt organizations.
(5) One-year eligibility requirement.
(6) Other benefits not contingent upon elective contributions.
(i) General rule.
(ii) Definition of other benefits.
(iii) Effect of certain statutory limits.
(iv) Nonqualified deferred compensation.
(v) Plan loans and distributions.
(vi) Examples.
(7) Coordination with other plans.
(8) Recordkeeping requirements.
(9) Consistent application of separate lines of business rules.
(f) Correction of excess contributions.
(1) General rule.
(i) Permissible correction methods.
(ii) Combination of correction methods.
(iii) Impermissible correction methods.
(iv) Partial distributions.
(2) Amount of excess contributions.
(3) Recharacterization of excess contributions.
(i) General rule.
(ii) Treatment of recharacterized excess contributions.
(iii) Additional rules.
(A) Time of recharacterization.
(B) Employee contributions must be permitted under plan.
(C) Plans under which excess contributions may be recharacterized.
(iv) Transition rules.
(v) Example.
(4) Corrective distribution of excess contributions (and income).
(i) General rule.
(ii) Income allocable to excess contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating income.
(D) Safe harbor method of allocating gap period income.
(iii) No employee or spousal consent required.
(iv) Treatment of corrective distributions as employer
contributions.
(v) Tax treatment of corrective distributions.
(A) General rule.
(B) Rule for de minimis distributions.
(C) Rule for certain 1987 and 1988 excess contributions.
(vi) No reduction of required minimum distribution.
(5) Rules applicable to all corrections.
(i) Coordination with distribution of excess deferrals.
(A) In general.
(B) Treatment of excess contributions that reduce excess deferrals.
(ii) Correction of family members.
(iii) Matching contributions forfeited because of excess deferral or
contribution.
(6) Failure to correct.
(i) Failure to correct within 2\1/2\ months after end of plan year.
(ii) Failure to correct within 12 months after end of plan year.
(7) Examples.
(g) Definitions.
(1) Actual deferral percentage.
(i) General rule.
(ii) Actual deferral ratio.
(A) General rule.
(B) Employee eligible under more than one arrangement.
(1) Highly compensated employees.
(2) Nonhighly compensated employees.
(3) Treatment of plans with different plan years.
(C) Employees subject to family aggregation rules.
(1) Aggregation of elective contributions and other amounts.
(2) Effect on actual deferral percentage of nonhighly compensated
employees.
(3) Multiple family groups.
(2) Compensation.
(i) Years beginning after December 31, 1986.
(ii) Years beginning before January 1, 1987.
(A) General rule.
(B) Nondiscrimination requirement.
[[Page 229]]
(3) Elective contributions.
(4) Eligible employee.
(i) General rule.
(ii) Certain one-time elections.
(5) Employee.
(6) Employer.
(7) Excess contributions and excess deferrals.
(i) Excess contributions.
(ii) Excess deferrals.
(8) Highly compensated employees.
(i) Plan years beginning after December 31, 1986.
(ii) Plan years beginning after December 31, 1979 and before January
1, 1987.
(9) Matching contributions.
(10) Nonelective contributions.
(11) Plan.
(i) Application of section 410(b) rules.
(ii) Modifications to section 410(b) rules.
(A) In general.
(B) Plans benefiting collective bargaining unit employees.
(C) Multiemployer plans.
(12) Pre-ERISA money purchase pension plan.
(13) Qualified matching contributions and qualified nonelective
contributions.
(i) Qualified matching contributions.
(ii) Qualified nonelective contributions.
(iii) Additional requirements.
(14) Rural cooperative plan.
(15) Section 401(k) plan.
(16) Section 401(m) plan.
(h) Effective dates.
(1) General rule.
(2) Collectively bargained plans.
(3) Transition rules.
(i) Cash or deferred arrangements in existence on June 27, 1974.
(ii) Plan years beginning after December 31, 1979, and before
January 1, 1992.
(iii) Restructuring.
(A) General rule.
(B) Identification of component plans.
(1) Minimum coverage requirement.
(2) Commonality requirement.
(4) State and local government plans.
(i) Plans adopted before May 6, 1986.
(ii) Plan years beginning before January 1, 1996.
(iii) Collectively bargained plans.
[T.D. 8357, 56 FR 40516, Aug. 15, 1991, as amended by T.D. 8376, 56 FR
63431, Dec. 4, 1991; T.D. 8581, 59 FR 66169, Dec. 23, 1994]
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
(a) General rules--(1) Certain plans permitted to include cash or
deferred arrangements. A plan, other than a profit-sharing, stock bonus,
pre-ERISA money purchase pension or rural cooperative plan, does not
satisfy the requirements of section 401(a) if the plan includes a cash
or deferred arrangement. A profit-sharing, stock bonus, pre-ERISA money
purchase pension, or rural cooperative plan does not fail to satisfy the
requirements of section 401(a) merely because the plan includes a cash
or deferred arrangement. A cash or deferred arrangement is part of a
plan for purposes of this section if any contributions to the plan, or
accruals or other benefits under the plan, are made or provided pursuant
to the cash or deferred arrangement.
(2) Rules applicable to cash or deferred arrangements generally--(i)
Definition of cash or deferred arrangement. Except as provided in
paragraph (a)(2)(ii) of this section, a cash or deferred arrangement is
an arrangement under which an eligible employee may make a cash or
deferred election with respect to contributions to, or accruals or other
benefits under, a plan that is intended to satisfy the requirements of
section 401(a) (including a contract that is intended to satisfy the
requirements of section 403(a)).
(ii) Treatment of after-tax employee contributions. A cash or
deferred arrangement does not include an arrangement under which amounts
contributed under a plan at an employee's election are designated or
treated at the time of contribution as after-tax employee contributions
(e.g., by reporting the contributions as taxable income subject to
applicable withholding requirements). See also section 414(h)(1). This
is the case even if the employee's election to make after-tax employee
contributions is made before the amounts subject to the election are
currently available to the employee.
(iii) Treatment of elective contributions as plan assets. The extent
to which elective contributions under a cash or deferred arrangement
constitute plan assets for purposes of the prohibited transaction
provisions of section 4975 of the Internal Revenue Code and title I of
the Employee Retirement Income Security Act of 1974 is determined in
accordance with regulations and rulings issued by the Department of
Labor.
(3) Rules applicable to cash or deferred elections generally--(i)
Definition of cash or deferred election. A cash or deferred
[[Page 230]]
election is any election (or modification of an earlier election) by an
employee to have the employer either--
(A) Provide an amount to the employee in the form of cash or some
other taxable benefit that is not currently available, or
(B) Contribute an amount to a trust, or provide an accrual or other
benefit, under a plan deferring the receipt of compensation.
A cash or deferred election includes a salary reduction agreement
between an employee and employer under which a contribution is made
under a plan only if the employee elects to reduce cash compensation or
to forgo an increase in cash compensation.
(ii) Requirement that amounts not be currently available. A cash or
deferred election can only be made with respect to an amount that is not
currently available to the employee on the date of the election.
Further, a cash or deferred election can only be made with respect to
amounts that would (but for the cash or deferred election) become
currently available after the later of the date on which the employer
adopts the cash or deferred arrangement or the date on which the
arrangement first becomes effective.
(iii) Amounts currently available. Cash or another taxable amount is
currently available to the employee if it has been paid to the employee
or if the employee is able currently to receive the cash or other
taxable amount at the employee's discretion. An amount is not currently
available to an employee if there is a significant limitation or
restriction on the employee's right to receive the amount currently.
Similarly, an amount is not currently available as of a date if the
employee may under no circumstances receive the amount before a
particular time in the future. The determination of whether an amount is
currently available to an employee does not depend on whether it has
been constructively received by the employee for purposes of section
451.
(iv) Certain one-time elections not treated as cash or deferred
elections. A cash or deferred election does not include a one-time
irrevocable election upon an employee's commencement of employment with
the employer or upon the employee's first becoming eligible under any
plan of the employer, to have contributions equal to a specified amount
or percentage of the employee's compensation (including no amount of
compensation) made by the employer on the employee's behalf to the plan
and to any other plan of the employer (including plans not yet
established) for the duration of the employee's employment with the
employer, or in the case of a defined benefit plan to receive accruals
or other benefits (including no benefits) under such plans. Thus, for
example, employer contributions pursuant to a one-time irrevocable
election described in this paragraph are not treated as having been made
pursuant to a cash or deferred election and are not includible in an
employee's gross income by reason of Sec. 1.402(a)-1(d). In no event is
an election made after December 23, 1994 treated as one-time irrevocable
election under this paragraph if the election is made by an employee who
previously became eligible under another plan (whether or not
terminated) of the employer. See paragraph (a)(6)(ii)(C) of this section
for an additional one-time election permitted under a cash or deferred
arrangement in which partners may participate.
(v) Tax treatment of employees. An amount generally is includible in
an employee's gross income for the taxable year in which the employee
actually or constructively receives the amount. But for section
402(e)(3) and section 401(k), an employee is treated as having received
an amount that is contributed to a plan pursuant to the employee's cash
or deferred election. This is the case even if the election to defer is
made before the year in which the amount