[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
26
Part 1 (Secs. 1.401 to 1.440)
Revised as of April 1, 2002
Internal Revenue
Containing a codification of documents of general
applicability and future effect
As of April 1, 2002
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 853
Alphabetical List of Agencies Appearing in the CFR...... 871
Table of OMB Control Numbers............................ 881
List of CFR Sections Affected........................... 897
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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
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into 50 titles which represent broad areas subject to Federal
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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.
[[Page vi]]
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
the period beginning January 1, 1986, a ``List of CFR Sections
Affected'' is published at the end of each CFR volume.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
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the revision dates of the 50 CFR titles.
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[[Page vii]]
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Raymond A. Mosley,
Director,
Office of the Federal Register.
April 1, 2002.
[[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,
2002. 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.
[[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
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
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Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980,
deleting statutory sections from their regulations. In Chapter I cross
references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross reference has been deleted. For further explanation, see 45 FR
20795, Mar. 31, 1980.
SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes................................ 5
Supplementary Publication: Internal Revenue Service Looseleaf
Regulations System.
Additional supplementary publications are issued covering Alcohol and
Tobacco Tax Regulations, and Regulations Under Tax Conventions.
[[Page 5]]
SUBCHAPTER A--INCOME TAX (CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Normal Taxes and Surtaxes (Continued)
DEFERRED COMPENSATION, ETC.
Pension, Profit-Sharing, Stock Bonus Plans, etc.
Sec.
1.401-0 Scope and definitions.
1.401-1 Qualified pension, profit-sharing, and stock bonus plans.
1.401-2 Impossibility of diversion under the trust instrument.
1.401-3 Requirements as to coverage.
1.401-4 Discrimination as to contributions or benefits (before 1994).
1.401-5 Period for which requirements of section 401(a) (3), (4), (5),
and (6) are applicable with respect to plans put into effect
before September 2, 1974.
1.401-6 Termination of a qualified plan.
1.401-7 Forfeitures under a qualified pension plan.
1.401-8 Custodial accounts prior to January 1, 1974.
1.401-9 Face-amount certificates--nontransferable annuity contracts.
1.401-10 Definitions relating to plans covering self-employed
individuals.
1.401-11 General rules relating to plans covering self-employed
individuals.
1.401-12 Requirements for qualification of trusts and plans benefiting
owner-employees.
1.401-13 Excess contributions on behalf of owner-employees.
1.401-14 Inclusion of medical benefits for retired employees in
qualified pension or annuity plans.
1.401(a)-1 Post-ERISA qualified plans and qualified trusts; in general.
1.401(a)-2 Impossibility of diversion under qualified plan or trust.
1.401(a)-4 Optional forms of benefit (before 1994).
1.401(a)-11 Qualified joint and survivor annuities.
1.401(a)-12 Mergers and consolidations of plans and transfers of plan
assets.
1.401(a)-13 Assignment or alienation of benefits.
1.401(a)-14 Commencement of benefits under qualified trusts.
1.401(a)-15 Requirement that plan benefits are not decreased on account
of certain Social Security increases.
1.401(a)-16 Limitations on benefits and contributions under qualified
plans.
1.401(a)-19 Nonforfeitability in case of certain withdrawals.
1.401(a)-20 Requirements of qualified joint and survivor annuity and
qualified preretirement survivor annuity.
1.401(a)-30 Limit on elective deferrals.
1.401(a)-50 Puerto Rican trusts; election to be treated as a domestic
trust.
1.401(a)(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
[[Page 7]]
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)-8 Changes in vesting schedule.
1.411(a)-8T Changes in vesting schedule (temporary).
1.411(a)-9 Amendment of break in service rules; transitional period.
1.411(a)-11 Restriction and valuation of distributions.
1.411(b)-1 Accrued benefit requirements.
1.411(c)-1 Allocation of accrued benefits between employer and employee
contributions.
1.411(d)-1 Coordination of vesting and discrimination requirements.
[Reserved]
1.411(d)-2 Termination or partial termination; discontinuance of
contributions.
1.411(d)-3 Other special rules.
1.411(d)-4 Section 411(d)(6) protected benefits.
1.411(d)-5 Class year plans; plan years beginning after October 22,
1986.
1.411(d)-6 Section 204(h) notice.
[[Page 8]]
1.412(b)-2 Amortization of experience gains in connection with certain
group deferred annuity contracts.
1.412(b)-5 Election of the alternative amortization method of funding.
1.412(c)(1)-1 Determinations to be made under funding method--terms
defined.
1.412(c)(1)-2 Shortfall method.
1.412(c)(1)-3 Applying the minimum funding requirements to restored
plans.
1.412(c)(1)-3T Applying the minimum funding requirements to restored
plans (temporary).
1.412(c)(2)-1 Valuation of plan assets; reasonable actuarial valuation
methods.
1.412(c)(3)-1 Reasonable funding methods.
1.412(c)(3)-2 Effective dates and transitional rules relating to
reasonable funding methods.
1.412(i)-1 Certain insurance contract plans.
1.413-1 Special rules for collectively bargained plans.
1.413-2 Special rules for plans maintained by more than one employer.
1.414(b)-1 Controlled group of corporations.
1.414(c)-1 Commonly controlled trades or businesses.
1.414(c)-2 Two or more trades or businesses under common control.
1.414(c)-3 Exclusion of certain interests or stock in determining
control.
1.414(c)-4 Rules for determining ownership.
1.414(c)-5 Effective date.
1.414(e)-1 Definition of church plan.
1.414(f)-1 Definition of multiemployer plan.
1.414(g)-1 Definition of plan administrator.
1.414(l)-1 Mergers and consolidations of plans or transfers of plan
assets.
1.414(q)-1 Highly compensated employee.
1.414(q)-1T Highly compensated employee (temporary).
1.414(r)-0 Table of contents.
1.414(r)-1 Requirements applicable to qualified separate lines of
business.
1.414(r)-2 Line of business.
1.414(r)-3 Separate line of business.
1.414(r)-4 Qualified separate line of business--fifty-employee and
notice requirements.
1.414(r)-5 Qualified separate line of business--administrative scrutiny
requirement--safe harbors.
1.414(r)-6 Qualified separate line of business--administrative scrutiny
requirement--individual determinations.
1.414(r)-7 Determination of the employees of an employer's qualified
separate lines of business.
1.414(r)-8 Separate application of section 410(b).
1.414(r)-9 Separate application of section 401(a)(26).
1.414(r)-10 Separate application of section 129(d)(8). [Reserved]
1.414(r)-11 Definitions and special rules.
1.414(s)-1 Definition of compensation.
1.415-1 General rules with respect to limitations on benefits and
contributions under qualified plans.
1.415-2 Definitions and special rules.
1.415-3 Limitations for defined benefit plans.
1.415-4 Transitional rule for defined benefit plans.
1.415-5 Cost of living adjustments for defined benefit plans.
1.415-6 Limitation for defined contribution plans.
1.415-7 Limitation in case of defined benefit and defined contribution
plan for same employee.
1.415-8 Combining and aggregating plans.
1.415-9 Disqualification of plans and trusts.
1.415-10 Special aggregation rules.
1.416-1 Questions and answers on top-heavy plans.
1.417(e)-1 Restrictions and valuations of distributions from plans
subject to sections 401(a)(11) and 417.
1.417(e)-1T Restrictions and valuations of distributions from plans
subject to sections 401(a)(11) and 417. (Temporary)
1.419-1T Treatment of welfare benefit funds. (Temporary)
1.419A-1T Qualified asset account limitation of additions to account.
(Temporary)
1.419A-2T Qualified asset account limitation for collectively bargained
funds. (Temporary)
1.420-1 Significant reduction in retiree health coverage during the cost
maintenance period.
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).
Sec. 1.401(b)-1 also issued under 26 U.S.C. 401(b).
[[Page 9]]
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)-7 also issued under 26 U.S.C. 411(a)(7)(B)(i).
Sec. 1.411(d)-4 also issued under 26 U.S.C. 411(d)(6).
Sec. 1.411(d)-6 is issued under Reorganization Plan No. 4 of 1978, 29
U.S.C. 1001nt.
Secs. 1.414(c)-1 through 1.414(c)-5 also issued under 26 U.S.C. 414(c).
Sec. 1.414(q)-1T is also issued under 26 U.S.C. 414(q).
Secs. 1.414(r)-0 through 1.414(r)-7 also issued under 26 U.S.C. 414(r).
Sec. 1.414(r)-8 also issued under 26 U.S.C. 410(b) and 414(r).
Sec. 1.414(r)-9 also issued under 26 U.S.C. 401(a)(26) and 414(r).
Sec. 1.414(r)-10 also issued under 26 U.S.C. 129 and 414(r).
Sec. 1.414(r)-1 also issued under 26 U.S.C. 414(r).
Sec. 1.414(s)-1 also issued under 26 U.S.C. 414(s).
Sec. 1.417(e)-1 also issued under 26 U.S.C. 417(e)(3)(A)(ii)(II).
Sec. 1.417(e)-1T also issued under 26 U.S.C. 417(e)(3)(A)(ii)(II).
Sec. 1.420-1 also issued under 26 U.S.C. 420(c)(3)(E).
DEFERRED COMPENSATION, ETC.--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 underSec. 1.411(a)-11(c)(3)(ii). See
Sec. 1.417(e)-1.
Q-9: May separate portions of a participant's accrued benefit be
subject to QPSA and QJSA requirements at any particular point in time?
A-9: (a) Dual QPSA and QJSA rights. One portion of a participant's
benefit may be subject to the QPSA and another portion to the QJSA
requirements at the same time. For example, in order for a money
purchase pension plan to distribute any portion of a married
participant's benefit to the participant, the plan must distribute such
portion in the form of a QJSA (unless the plan satisfies the applicable
consent requirements of section 417 (a) and (e) with respect to such
portion of the participant's benefit). This rule applies even if the
distribution is merely an in-service distribution attributable to
voluntary employee contributions and regardless of whether the
participant has attained the normal retirement age under the plan. The
QJSA requirements apply to such a distribution because the annuity
starting date has occurred with respect to this portion of the
participant's benefit. In the event of a participant's death following
the commencement of a distribution in the form of a QJSA, the remaining
payments must be made to the surviving spouse under the QJSA. In
addition, the plan must satisfy the QPSA requirements with respect to
any portion of the participant's benefits for which the annuity starting
date had not yet occurred.
(b) Example. Assume that participant A has a $100,000 account
balance in a money purchase pension plan. A makes an in-service
withdrawal of $20,000 attributable to voluntary employee contributions.
The QJSA requirements apply to A's withdrawal of the
[[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)-11(c)(3)(ii). The spousal consent must be obtained no
earlier than the beginning of the 90-day period that ends on the date on
which the loan is to be so secured. The consent is subject to the
requirements of section 417(a)(2). Therefore, the consent must be in
writing, must acknowledge the effect of the loan and must be witnessed
by a plan representative or a notary public.
(2) Participant consent is deemed obtained at the time the
participant agrees to use his accrued benefit as security for a loan for
purposes of satisfying the requirements for participant consent under
sections 401(a)(11), 411(a)(11) and 417.
(b) Change in status. If spousal consent is obtained or is not
required under paragraph (a) of this Q&A 24 at the time the benefits are
used as security, spousal consent is not required at the time of any
setoff of the loan against the accrued benefit resulting 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; T.D. 8891, 65 FR 44682, July 19,
2000]
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 and gateway.
(2) Determination of equivalent accrual rates.
(3) Safe-harbor testing method for target benefit plans.
(c) Nondiscrimination in amount of contributions under a defined benefit
plan.
(1) General rule.
(2) Determination of equivalent allocation rates.
(3) Safe harbor testing method for cash balance plans.
(d) Safe-harbor testing method for defined benefit plans that are part
of a floor-offset arrangement.
(1) General rule.
(2) Application of safe-harbor testing method to qualified offset
arrangements.
Sec. 1.401(a)(4)-9 Plan aggregation and restructuring
(a) Introduction.
(b) Application of nondiscrimination requirements to DB/DC plans.
(1) General rule.
(2) Special rules for demonstrating nondiscrimination in amount of
contributions or benefits.
(3) Optional rules for demonstrating nondiscrimination in
availability of certain benefits, rights, and features.
(c) Plan restructuring.
(1) General rule.
(2) Identification of component plans.
(3) Satisfaction of section 401(a)(4) by a component plan.
(4) Satisfaction of section 410(b) by a component plan.
(5) Effect of restructuring under other sections.
(6) Examples.
Sec. 1.401(a)(4)-10 Testing of former employees
(a) Introduction.
[[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, as amended by T.D. 8954, 66 FR
34540, June 29, 2001]
Sec. 1.401(a)(4)-1 Nondiscrimination requirements of section 401(a)(4).
(a) In general. Section 401(a)(4) provides that a plan is a
qualified plan only if the contributions or the benefits provided under
the plan do not discriminate in favor of HCEs. Whether a plan satisfies
this requirement depends on the form of the plan and on its effect in
operation. In making this determination, intent is irrelevant. This
section sets forth the exclusive rules for determining whether a plan
satisfies section 401(a)(4). A plan that complies in form and operation
with the rules in this section therefore satisfies section 401(a)(4).
(b) Requirements a plan must satisfy--(1) In general. In order to
satisfy section 401(a)(4), a plan must satisfy each of the requirements
of this paragraph (b).
(2) Nondiscriminatory amount of contributions or benefits--(i)
General rule. Either the contributions or the benefits provided under
the plan must be nondiscriminatory in amount. It need not be shown that
both the contributions and the benefits provided are nondiscriminatory
in amount, but only that either the contributions alone or the benefits
alone are nondiscriminatory in amount.
(ii) Defined contribution plans--(A) General rule. A defined
contribution plan satisfies this paragraph (b)(2) if the contributions
allocated under the plan (including forfeitures) are nondiscriminatory
in amount under Sec. 1.401(a)(4)-2. Alternatively, a defined
contribution plan (other than an ESOP) satisfies this paragraph (b)(2)
if the equivalent benefits provided under the plan are nondiscriminatory
in amount under Sec. 1.401(a)(4)-8(b). Section 1.401(a)(4)-8(b) includes
a safe-harbor testing method for contributions provided under a target
benefit plan.
[[Page 94]]
(B) Section 401(k) plans and section 401(m) plans. A section 401(k)
plan is deemed to satisfy this paragraph (b)(2) because Sec. 1.410(b)-9
defines a section 401(k) plan as a plan consisting of elective
contributions under a qualified cash or deferred arrangement (i.e., one
that satisfies section 401(k)(3), the nondiscriminatory amount
requirement applicable to qualified cash or deferred arrangements). A
section 401(m) plan satisfies this paragraph (b)(2) only if the plan
satisfies Secs. 1.401(m)-1(b) and 1.401(m)-2. Contributions under a
nonqualified cash or deferred arrangement, elective contributions
described in Sec. 1.401(k)-1(b)(4)(iv) that fail to satisfy the
allocation and compensation requirements of Sec. 1.401(k)-1(b)(4)(i),
matching contributions that fail to satisfy Sec. 1.401(m)-
1(b)(4)(ii)(A), and qualified nonelective contributions treated as
elective or matching contributions for certain purposes under
Secs. 1.401(k)-1(b)(5) and 1.401(m)-1(b)(5), respectively, are not
subject to the special rule in this paragraph (b)(2)(ii)(B), because
they are not treated as part of a section 401(k) plan or section 401(m)
plan as those terms are defined in Sec. 1.410(b)-9. The contributions
described in the preceding sentence must satisfy paragraph (b)(2)(ii)(A)
of this section.
(iii) Defined benefit plans. A defined benefit plan satisfies this
paragraph (b)(2) if the benefits provided under the plan are
nondiscriminatory in amount under Sec. 1.401(a)(4)-3. Alternatively, a
defined benefit plan satisfies this paragraph (b)(2) if the equivalent
allocations provided under the plan are nondiscriminatory in amount
under Sec. 1.401(a)(4)-8(c). Section 1.401(a)(4)-8(c) includes a safe-
harbor testing method for benefits provided under a cash balance plan.
In addition, Sec. 1.401(a)(4)-8(d) provides a safe-harbor testing method
for benefits provided under a defined benefit plan that is part of a
floor-offset arrangement.
(3) Nondiscriminatory availability of benefits, rights, and
features. All benefits, rights, and features provided under the plan
must be made available 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
[[Page 95]]
plan year under Sec. 1.410(b)-8(a) (e.g., quarterly testing) must also
be used for purposes of determining whether the plan satisfies section
401(a)(4) for the plan year.
(ii) Special rules for certain aggregated plans. Special rules are
set forth in Sec. 1.401(a)(4)-9(b) for applying the nondiscriminatory
amount and availability requirements of paragraphs (b)(2) and (b)(3) of
this section to a plan that includes one or more defined benefit plans
and one or more defined contribution plans that have been permissively
aggregated under Sec. 1.410(b)-7(d).
(iii) Restructuring. In certain circumstances, a plan may be
restructured on the basis of employee groups and treated as comprising
two or more plans, each of which is treated as a separate plan that must
independently satisfy sections 401(a)(4) and 410(b). Rules relating to
restructuring plans for purposes of applying the requirements of
paragraph (b) of this section are set forth in Sec. 1.401(a)(4)-9(c).
(iv) References to section 410(b). Except as otherwise specifically
provided, references to satisfying section 410(b) in Secs. 1.401(a)(4)-1
through 1.401(a)(4)-13 mean satisfying Sec. 1.410(b)-2 (taking into
account any special rules available in satisfying that section, other
than the permissive aggregation rules of Sec. 1.410(b)-7(d)). In the
case of a plan described in section 410(c)(1) that has not made the
election described in section 410(d) and is not subject to section
403(b)(12)(A)(i), references in Secs. 1.401(a)(4)-1 through 1.401(a)(4)-
13 to satisfying section 410(b) mean satisfying section 410(c)(2).
(5) Collectively-bargained plans. The requirements of paragraph (b)
of this section are treated as satisfied by a collectively-bargained
plan that automatically satisfies section 410(b) under Sec. 1.410(b)-
2(b)(7).
(6) Former employees. In applying the nondiscriminatory amount and
availability requirements of paragraphs (b)(2) and (b)(3) of this
section, former employees are tested separately from active employees,
unless otherwise provided. Rules for applying paragraphs (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
[[Page 96]]
paragraphs (b)(2) and (b)(3) of this section except as provided in
Sec. 1.401(a)(4)-11(d).
(12) Governmental plans. The rules of this section apply to a
governmental plan within the meaning of section 414(d), except as
provided in Secs. 1.401(a)(4)-11(f) and 1.401(a)(4)-13(b).
(13) Employee stock ownership plans. [Reserved]
(14) Section 401(h) benefits. In applying the requirements of
paragraph (b) of this section, the portion of a plan providing benefits
described in section 401(h) is tested separately from the portion of the
same plan providing retirement benefits, and thus is not required to
satisfy this section. Rules applicable to section 401(h) benefits are
set forth in Sec. 1.401-14(b)(2).
(15) Definitions. In applying the requirements of this section, the
definitions in Sec. 1.401(a)(4)-12 govern.
(16) Effective dates and fresh-start rules. In applying the
requirements of this section, the effective dates set forth in
Sec. 1.401(a)(4)-13 govern. Section 1.401(a)(4)-13 also provides certain
transition and fresh-start rules that apply for purposes of this
section.
(d) Additional guidance. The Commissioner may, in revenue rulings,
notices, and other guidance, published in the Internal Revenue Bulletin,
provide any additional guidance that may be necessary or appropriate in
applying the nondiscrimination requirements of section 401(a)(4),
including additional safe harbors and alternative methods and procedures
for satisfying those requirements. See Sec. 601.601(d)(2)(ii)(b) of this
chapter.
[T.D. 8485, 58 FR 46780, Sept. 3, 1993]
Sec. 1.401(a)(4)-2 Nondiscrimination in amount of employer contributions under a defined contribution plan.
(a) Introduction--(1) Overview. This section provides rules for
determining whether the employer contributions allocated under a defined
contribution plan are nondiscriminatory in amount as required by
Sec. 1.401(a)(4)-1(b)(2)(ii)(A). Certain defined contribution plans that
provide uniform allocations are permitted to satisfy this requirement by
meeting one of the safe harbors in paragraph (b) of this section. Plans
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
[[Page 97]]
if it satisfies both of the following requirements:
(A) The plan must allocate amounts under a uniform points allocation
formula. A uniform points allocation formula defines each employee's
allocation for the plan year as the product of the total of all amounts
taken into account under paragraph (c)(2)(ii) of this section and a
fraction, the numerator of which is the employee's points for the plan
year and the denominator of which is the sum of the points of all
employees in the plan for the plan year. For this purpose, an employee's
points for a plan year equal the sum of the employee's points for age,
service, and units of plan year compensation for the plan year. Under a
uniform points allocation formula, each employee must receive the same
number of points for each year of age, the same number of points for
each year of service, and the same number of points for each unit of
plan year compensation. (See Sec. 1.401(a)(4)-11(d)(3) regarding service
that may be taken into account as years of service.) A uniform points
allocation formula need not grant points for both age and service, but
it must grant points for at least one of them. If the allocation formula
grants points for years of service, the plan is permitted to limit the
number of years of service taken into account to a single maximum number
of years of service. A uniform points allocation formula need not grant
points for units of plan year compensation, but if it does, the unit
used must be a single dollar amount for all employees that does not
exceed $200.
(B) For the plan year, the average of the allocation rates for the
HCEs in the plan must not exceed the average of the allocation rates for
the NHCEs in the plan. For this purpose, allocation rates are determined
in accordance with paragraph (c)(2) of this section, without imputing
permitted disparity and without grouping allocation rates under
paragraphs (c)(2) (iv) and (v) of this section, respectively.
(ii) Example. The following example illustrates the safe harbor in
this paragraph (b)(3):
Example. (a) Plan A has a single allocation formula that applies to
all employees, under which each employee's allocation for the 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
[[Page 98]]
plan does not fail to satisfy this paragraph (b) merely because the plan
contains one or more of the provisions described in this paragraph
(b)(4). Unless otherwise provided, any such provision must apply
uniformly to all employees.
(ii) Entry dates. The plan provides one or more entry dates during
the plan year as permitted by section 410(a)(4).
(iii) Certain conditions on allocations. The plan provides that an
employee's allocation for the plan year is conditioned on either the
employee's employment on the last day of the plan year or the employee's
completion of a minimum number of hours of service during the plan year
(not to exceed 1,000), or both. Such a provision may include an
exception from this condition for all employees whose employment
terminates during the plan year or only for those employees whose
employment terminates during the plan year on account of one or more of
the following circumstances: retirement, disability, death, or military
service.
(iv) Certain limits on allocations. The plan limits allocations
otherwise provided under the allocation formula to a maximum dollar
amount or a maximum percentage of plan year compensation, limits the
dollar amount of plan year compensation taken into account in
determining the amount of allocations, or applies the restrictions of
section 409(n) or the limits of section 415.
(v) Lower allocations for HCEs. The allocations provided to one or
more HCEs under the plan are less than the allocations that would
otherwise be provided to those employees if the plan satisfied this
paragraph (b) (without regard to this paragraph (b)(4)(v)).
(vi) Multiple formulas--(A) General rule. The plan provides that an
employee's allocation under the plan is the greater of the allocations
determined under two or more formulas, or is the sum of the allocations
determined under two or more formulas. This paragraph (b)(4)(vi) does
not apply to a plan unless each of the formulas under the plan satisfies
the requirements of paragraph (b)(4)(vi) (B) through (D) of this
section.
(B) Sole formulas. The formulas must be the only formulas under the
plan.
(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
[[Page 99]]
of the allocations under two or more formulas, and one or more of those
formulas is the sum of the allocations under two or more other formulas,
provided that each of the formulas under the plan satisfies the
requirements of paragraph (b)(4)(vi) (B) through (D) of this section.
(F) Examples. The following examples illustrate the rules in this
paragraph (b)(4)(vi):
Example 1. Under Plan A, each employee's allocation equals the sum
of the allocations determined under two formulas. The first formula
provides an allocation of five percent of plan year compensation. The
second formula provides an allocation of $100. Plan A satisfies this
paragraph (b)(4)(vi).
Example 2. Under Plan B, each employee's allocation equals the
greater of the allocations determined under two formulas. The first
formula provides an allocation of seven percent of plan year
compensation and is available to all employees who complete at least
1,000 hours of service during the plan year and who have not separated
from service as of the last day of the plan year. The second formula is
a top-heavy formula that provides an allocation of three percent of plan
year compensation and that is available to all employees described in
Sec. 1.416-1, Q&A M-10. Plan B does not satisfy the general rule in
paragraph (b)(4)(vi)(D)(1) of this section because the two formulas are
not available on the same terms to all employees (i.e., an employee is
required to complete 1,000 hours of service during the plan year to
receive an allocation under the first formula, but not under the second
formula). Nonetheless, because the second formula is a top-heavy
formula, the special availability rules for top-heavy formulas in
paragraph (b)(4)(vi)(D)(3) of this section apply. Thus, the second
formula does not fail to be available on the same terms as the first
formula merely because the second formula is available to all employees
described in Sec. 1.416-1, Q&A M-10, as long as the plan would satisfy
section 410(b) if all employees who are benefiting under the plan solely
as a result of receiving allocations under the top-heavy formula were
treated as not currently benefiting under the plan. This is true even if
the plan conditions the availability of the second formula on the plan's
being top-heavy for the plan year.
Example 3. The facts are the same as in Example 2, except that the
first formula is available to all employees who have not separated from
service as of the last day of the plan year, regardless of whether they
complete at least 1,000 hours of service during the plan year. Plan B
still does not satisfy the general rule in paragraph (b)(4)(vi)(D)(1) of
this section because the two formulas are 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,
[[Page 100]]
and losses attributable to the balance in an employee's account are not
taken into account in determining allocation rates.
(iv) Imputation of permitted disparity. The disparity permitted
under section 401(l) may be imputed in accordance with the rules of
Sec. 1.401(a)(4)-7.
(v) Grouping of allocation rates--(A) General rule. An employer may
treat all employees who have allocation rates within a specified range
above and below a midpoint rate chosen by the employer as having an
allocation rate equal to the midpoint rate within that range. Allocation
rates within a given range may not be grouped under this paragraph
(c)(2)(v) if the allocation rates of HCEs within the range generally are
significantly higher than the allocation rates of NHCEs in the range.
The specified ranges within which all employees are treated as having
the same allocation rate may not overlap and may be no larger than
provided in paragraph (c)(2)(v)(B) of this section. Allocation rates of
employees that are not within any of these specified ranges are
determined without regard to this paragraph (c)(2)(v).
(B) Size of specified ranges. The lowest and highest allocation
rates in the range must be within five percent (not five percentage
points) of the midpoint rate. If allocation rates are determined as a
percentage of plan year compensation, the lowest and highest allocation
rates need not be within five percent of the midpoint rate, if they are
no more than one quarter of a percentage point above or below the
midpoint rate.
(vi) Consistency requirement. Allocation rates must be determined in
a consistent manner for all employees for the plan year.
(3) Satisfaction of section 410(b) by a rate group--(i) General
rule. For purposes of determining whether a rate group satisfies section
410(b), the rate group is treated as if it were a separate plan that
benefits only the employees included in the rate group for the plan
year. Thus, for example, under Sec. 1.401(a)(4)-1(c)(4)(iv), the ratio
percentage of the rate group is determined taking into account all
nonexcludable employees regardless of whether they benefit under the
plan. Paragraph (c)(3) (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
[[Page 101]]
employees who have those rates as having an allocation rate of 7.0
percent (provided that the allocation rates of HCEs within the range
generally are not significantly higher than the allocation rates of
NHCEs within the range).
Example 3. (a) Employer Y has only six nonexcludable employees, all
of whom benefit under Plan D. The HCEs are H1 and H2, and the NHCEs are
N1 through N4. For the 1994 plan year, H1 and N1 through N4 have an
allocation rate of 5.0 percent of plan year compensation. For the same
plan year, H2 has an allocation rate of 7.5 percent of plan year
compensation.
(b) There are two rate groups under Plan D. Rate group 1 consists of
H1 and all those employees who have an allocation rate greater than or
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists
of H1, H2, and N1 through N4. Rate group 2 consists only of H2 because
no other employee has an allocation rate greater than or equal to H2's
allocation rate (7.5 percent).
(c) The ratio percentage for rate group 2 is zero percent--i.e.,
zero percent (the percentage of all nonhighly compensated nonexcludable
employees who are in the rate group) divided by 50 percent (the
percentage of all highly compensated nonexcludable employees who are in
the rate group). Therefore rate group 2 does not satisfy the ratio
percentage test under Sec. 1.410(b)-2(b)(2). Rate group 2 also does not
satisfy the nondiscriminatory classification test of Sec. 1.410(b)-4 (as
modified by paragraph (c)(3) of this section). Rate group 2 therefore
does not satisfy section 410(b) and, as a result, Plan D does not
satisfy the general test in paragraph (c)(1) of this section. This is
true regardless of whether rate group 1 satisfies Sec. 1.410(b)-2(b)(2).
Example 4. (a) The facts are the same as in Example 3, except that
N4 has an allocation rate of 8.0 percent.
(b) There are two rate groups in Plan D. Rate group 1 consists of H1
and all those employees who have an allocation rate greater than or
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists
of H1, H2 and N1 through N4. Rate group 2 consists of H2, and all those
employees who have an allocation rate greater than or equal to H2's
allocation rate (7.5 percent). Thus, rate group 2 consists of H2 and N4.
(c) Rate group 1 satisfies the ratio percentage test under
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is
100 percent--i.e., 100 percent (the percentage of all nonhighly
compensated nonexcludable employees who are in the rate group) divided
by 100 percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(d) Rate group 2 does not satisfy the ratio percentage test of
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is
50 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
[[Page 102]]
nondiscriminatory in amount as required by Sec. 1.401(a)(4)-
1(b)(2)(iii). Certain defined benefit plans that provide uniform
benefits are permitted to satisfy this requirement by meeting one of the
safe harbors in paragraph (b) of this section. Plans that do not provide
uniform benefits may satisfy this requirement by satisfying the general
test in paragraph (c) of this section. Paragraph (d) of this section
provides rules for determining the individual benefit accrual rates
needed for the general test. Paragraph (e) of this section provides
rules for determining compensation for purposes of applying the
requirements of this section. Paragraph (f) of this section provides
additional rules that apply generally for purposes of both the safe
harbors in paragraph (b) of this section and the general test in
paragraph (c) of this section. See Sec. 1.401(a)(4)-6 for rules for
determining the amount of employer-provided benefits under a
contributory DB plan, and for determining whether the employee-provided
benefits under such a plan are nondiscriminatory in amount.
(2) Alternative methods of satisfying nondiscriminatory amount
requirement. A defined benefit plan is permitted to satisfy paragraph
(b) or (c) of this section on a restructured basis pursuant to
Sec. 1.401(a)(4)-9(c). Alternatively, a defined benefit plan is
permitted to satisfy the nondiscriminatory amount requirement of
Sec. 1.401(a)(4)-1(b)(2)(iii) on the basis of equivalent allocations
pursuant to Sec. 1.401(a)(4)-8(c). In addition, a defined benefit plan
that is part of a floor-offset arrangement is permitted to satisfy this
section pursuant to Sec. 1.401(a)(4)-8(d).
(b) Safe harbors--(1) In general. The employer-provided benefits
under a defined benefit plan are nondiscriminatory in amount for a plan
year if the plan satisfies each of the uniformity requirements of
paragraph (b)(2) of this section and any one of the safe harbors in
paragraphs (b)(3) (unit credit plans), (b)(4) (fractional accrual
plans), and (b)(5) (insurance contract plans) of this section. Paragraph
(b)(6) of this section provides exceptions for certain plan provisions
that do not cause a plan to fail to satisfy this paragraph (b).
Paragraph (f) of this section provides additional rules that apply in
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
[[Page 103]]
benefit accrues. Thus, for example, a plan does not satisfy the safe
harbor in paragraph (b)(4) of this section unless the plan uses the same
years of service to determine both the normal retirement benefit under
the plan's benefit formula and the fraction by which an employee's
fractional rule benefit is multiplied to derive the employee's accrued
benefit as of any plan year.
(vi) Examples. The following examples illustrate the rules in this
paragraph (b)(2):
Example 1. Plan A provides a normal retirement benefit equal to two
percent of average annual compensation times each year of service
commencing at age 65 for all employees. Plan A provides that employees
of Division S receive their benefit in the form of a straight life
annuity and that employees of Division T receive their benefit in the
form of a life annuity with an automatic cost-of-living increase. Plan A
does not provide a uniform normal retirement benefit within the meaning
of paragraph (b)(2)(i) of this section because the annual benefit is not
payable in the same form to all employees.
Example 2. Plan B provides a normal retirement benefit equal to 1.5
percent of average annual compensation times each year of service at
normal retirement age for all employees. The normal retirement age under
the plan is the earlier of age 65 or the age at which the employee
completes 10 years of service, but in no event earlier than age 62. Plan
B does not provide a uniform normal retirement benefit within the
meaning of paragraph (b)(2)(i) of this section because the same uniform
normal retirement age does not apply to all employees.
Example 3. Plan C is an accumulation plan under which the benefit
for each year of service equals one percent of plan year compensation
payable in the same form to all employees commencing at the same uniform
normal retirement age. Under paragraph (e)(2) of this section, an
accumulation plan may substitute plan year compensation for average
annual compensation. Plan C provides a uniform normal retirement benefit
within the meaning of paragraph (b)(2)(i) of this section, because all
employees with the same number of years of service at normal retirement
age will receive an annual benefit that is treated as the same
percentage of average annual compensation.
Example 4. The facts are the same as in Example 3, except that the
benefit for each year of service equals one percent of plan year
compensation increased by reference to the increase in the cost of
living from the year of service to normal retirement age. Plan C does
not provide a uniform normal retirement benefit, because the annual
benefit defined by the benefit formula can vary for employees with the
same number of years of 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).
[[Page 104]]
(b) A similar analysis would apply if, instead of an unreduced early
retirement benefit, the early retirement window benefit consisted of a
special schedule of early retirement factors, defined by starting with
the plan's usual schedule and then treating each employee eligible for
the early retirement window benefit as being five years older than the
employee actually is, but not older than the employee's normal
retirement age.
Example 7. Plan F generally provides a normal retirement benefit of
1.5 percent of an employee's average annual compensation multiplied by
the employee's years of service with the employer. For employees
transferred outside of the group of employees covered by the plan, the
plan's benefit formula takes into account only years of service prior to
the transfer, but determines average annual compensation taking into
account section 414(s) compensation both before and after the transfer.
Plan F does not satisfy the requirements of paragraph (b)(2)(v) of this
section with respect to transferred employees, because their benefits
are accrued over years of service (i.e., after transfer) that are not
taken into account in applying the plan's benefit formula to them.
However, see Example 2 of paragraph (b)(6)(x)(B) of this section for an
example of how a plan that continues to take transferred employees'
section 414(s) compensation into account after their transfer may still
satisfy this paragraph (b).
(3) Safe harbor for unit credit plans--(i) General rule. A plan
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it
satisfies both of the following requirements:
(A) The plan must satisfy the 133\1/3\ percent accrual rule of
section 411(b)(1)(B).
(B) Each employee's accrued benefit under the plan as of any plan
year must be determined by applying the plan's benefit formula to the
employee's years of service and (if applicable) average annual
compensation, both determined as of that plan year.
(ii) Example. The following example illustrates the rules in this
paragraph (b)(3):
Example. Plan A provides that the accrued benefit of each employee
as of any plan year equals the employee's average annual compensation
times a percentage that depends on the employee's years of service
determined as of that plan year. The percentage is 2 percent for each of
the first 10 years of service, plus 1.5 percent for each of the next 10
years of service, plus 2 percent for all additional years of service.
Plan A satisfies this paragraph (b)(3).
(4) Safe harbor for plans using fractional accrual rule--(i) General
rule. A 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
[[Page 105]]
percentage of average annual compensation or the same dollar amount for
all employees who have a minimum number of years of service at normal
retirement age (e.g., 50 percent of average annual compensation), with a
pro rata reduction in the flat benefit for employees who have less than
the minimum number of years of service at normal retirement age. An
employee is permitted to accrue the maximum benefit permitted under
section 415 over a period of less than 25 years, provided that the flat
benefit under the plan, determined without regard to section 415, can
accrue over no less than 25 years.
(3) The plan must satisfy the requirements of paragraph
(b)(4)(i)(C)(2) of this section (other than the requirement that the
minimum number of years of service for receiving the unreduced flat
benefit is at least 25 years), and, for the plan year, the average of
the normal accrual rates for all nonhighly compensated nonexcludable
employees must be at least 70 percent of the average of the normal
accrual rates for all highly compensated nonexcludable employees. The
averages in the preceding sentence are determined taking into account
all nonexcludable employees (regardless of whether they benefit under
the plan). In addition, contributions and benefits under other plans of
the employer are disregarded. For purposes of this paragraph
(b)(4)(i)(C)(3), normal accrual rates are determined under paragraph (d)
of this section.
(ii) Examples. The following examples illustrate the rules in this
paragraph (b)(4). In each example, it is assumed that the plan has never
permitted employee contributions.
Example 1. Plan A provides a normal retirement benefit equal to 1.6
percent of average annual compensation times each year of service up to
25. Plan A further provides that an employee's accrued benefit as of any
plan year equals the employee's fractional rule benefit multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service as of normal retirement age. The greatest
benefit that an employee could accrue in any plan year is 1.6 percent of
average annual compensation (this is the case for an employee with 25 or
fewer years of projected service at normal retirement age). Among
potential employees with 33 or fewer years of projected service at
normal retirement age, the lowest benefit that an employee could accrue
in any plan year is 1.212 percent of average annual compensation (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.
[[Page 106]]
Example 4. Plan D provides a normal retirement benefit of 100
percent of average annual compensation, reduced by four percentage
points for each year of service below 25 the employee has at normal
retirement age. Plan D further provides that an employee's accrued
benefit as of any plan year is equal to the employee's fractional rule
benefit multiplied by a fraction, the numerator of which is the
employee's years of service as of the plan year, and the denominator of
which is the employee's projected years of service at normal retirement
age. In the case of an employee who has five years of service as of the
current plan year, and who is projected to have 10 years of service at
normal retirement age, the employee's fractional rule benefit would be
40 percent of average annual compensation, and the employee's accrued
benefit as of the current plan year would be 20 percent of average
annual compensation (the fractional rule benefit multiplied by a
fraction of five years over 10 years). Plan D satisfies this paragraph
(b)(4).
Example 5. The facts are the same as in Example 4, except that the
normal retirement benefit is 125 percent of average annual compensation,
reduced by five percentage points for each year of service below 25 that
the employee has at normal retirement age. Plan D satisfies this
paragraph (b)(4), even though an employee may accrue the maximum benefit
allowed under section 415 (i.e., 100 percent of the participant's
average compensation for the high three years of service) in less than
25 years.
Example 6. The facts are the same as in Example 1, except that the
plan determines each employee's accrued benefit by multiplying the
employee's projected normal retirement benefit (rather than the
fractional rule benefit) by the fraction described in Example 1. In
determining an employee's projected normal retirement benefit, the plan
defines each employee's average annual compensation as the average
annual compensation the employee would have at normal retirement age if
the employee's annual section 414(s) compensation in future plan years
equaled the employee's plan year compensation for the prior plan year.
Under these facts, Plan A does not satisfy paragraph (b)(4)(i)(B) of
this section because the employee's accrued benefit is determined on the
basis of a projected normal retirement benefit that is not the same as
the employee's fractional rule benefit determined in accordance with
Sec. 1.411(b)-1(b)(3)(ii)(A).
Example 7. Plan E provides a normal retirement benefit of 50 percent
of average annual compensation, with a pro rata reduction for employees
with less than 30 years of service at normal retirement age. Plan E
further provides that an employee's accrued benefit as of any plan year
is equal to the employee's fractional rule benefit multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service at normal retirement age. For purposes of
determining 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
[[Page 107]]
paragraph (b)(4)(i)(B) of this section. Thus, the benefit formula may
not recognize years of service before an employee commenced
participation in the plan because, otherwise, the definition of years of
service for determining the normal retirement benefit would differ from
the definition of years of service for determining the accrued benefit
under paragraph (b)(4)(i)(B) of this section. See paragraph (b)(4)(ii),
Example 7, of this section. Notwithstanding the foregoing, an insurance
contract plan adopted and in effect on September 19, 1991, may continue
to recognize years of service prior to an employee's participation in
the plan for an employee who is a participant in the plan on that date
to the extent provided by the benefit formula in the plan on such date.
(iv) The scheduled premium payments under an individual or group
insurance contract used to fund an employee's normal retirement benefit
must be level annual payments to normal retirement age. Thus, payments
may not be scheduled to cease before normal retirement age.
(v) The premium payments for an employee who continues benefiting
after normal retirement age must be equal to the amount necessary to
fund additional benefits that accrue under the plan's benefit formula
for the plan year.
(vi) Experience gains, dividends, forfeitures, and similar items
must be used solely to reduce future premiums.
(vii) All benefits must be funded through contracts of the same
series. Among other requirements, contracts of the same series must have
cash values based on the same terms (including interest and mortality
assumptions) and the same conversion rights. A plan does not fail to
satisfy this requirement, however, if any change in the contract series
or insurer applies on the same terms to all employees. But see
Sec. 1.401(a)(4)-5(a)(4), Example 12 (change in insurer considered a
plan amendment subject to Sec. 1.401(a)(4)-5(a)).
(viii) If permitted disparity is taken into account, the normal
retirement benefit stated under the plan's benefit formula must satisfy
Sec. 1.401(l)-3. For this purpose, the 0.75-percent factor in the
maximum excess or offset allowance in Sec. 1.401(l)-3(b)(2)(i) or
(b)(3)(i), respectively, adjusted in accordance with Sec. 1.401(l)-
3(d)(9) and (e), is reduced by multiplying the factor by 0.80.
(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
[[Page 108]]
fresh-start date for all employees under a benefit formula and accrual
method that differ from the benefit formula and accrual method
previously used to determine benefit accruals for employees in a fresh-
start group for years of service before the fresh-start date. This
paragraph (b)(6)(vii) applies solely to plans that satisfy
Sec. 1.401(a)(4)-13(c) with respect to the fresh start.
(viii) Employee contributions. The plan is a contributory DB plan
that would satisfy the requirements of paragraph (b) of this section if
the plan's benefit formula provided benefits at employees' employer-
provided benefit rates determined under Sec. 1.401(a)(4)-6(b). This
paragraph (b)(6)(viii) does not apply to a plan tested under paragraph
(b)(4) or (b)(5) of this section unless the plan satisfies one of the
methods in Sec. 1.401(a)(4)-6 (b)(4) through (b)(6). A minimum benefit
added to the plan solely to satisfy Sec. 1.401(a)(4)-6(b)(3) is not
taken into account in determining whether this paragraph (b)(6)(viii) is
satisfied.
(ix) Certain subsidized optional forms. The plan provides a
subsidized optional form of benefit that is available to fewer than
substantially all employees because the optional form of benefit has
been eliminated prospectively as provided in Sec. 1.401(a)(4)-4(b)(3).
(x) Lower benefits for HCEs--(A) General rule. The benefits
(including any subsidized optional form of benefit) provided to one or
more HCEs under the plan are inherently less valuable to those HCEs
(determined by applying the principles of Sec. 1.401(a)(4)-4(d)(4)) than
the benefits that would otherwise be provided to those HCEs if the plan
satisfied this paragraph (b) (determined without regard to this
paragraph (b)(6)(x)). These inherently less valuable benefits are deemed
to satisfy this paragraph (b).
(B) Examples. The following examples illustrate the rules in this
paragraph (b)(6)(x):
Example 1. Plan A would satisfy this paragraph (b) (determined
without regard to this paragraph (b)(6)(x)), except for the fact that it
fails to satisfy the requirement of paragraph (b)(2)(iii) of this
section (i.e., a subsidized optional form must be available to
substantially all employees on similar terms). Each subsidized optional
form in the plan is available to all the NHCEs on similar terms, but one
of the subsidized optional forms of benefit is not available to any of
the 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.
[[Page 109]]
(C) Separate testing. Each of the formulas must separately satisfy
the uniformity requirements of paragraph (b)(2) of this section and also
separately satisfy one of the safe harbors in paragraphs (b)(3) through
(b)(5) of this section. A formula that is available solely to some or
all NHCEs is deemed to satisfy this paragraph (b)(6)(xi)(C).
(D) Availability--(1) General rule. All of the formulas must be
available on the same terms to all employees.
(2) Formulas for NHCEs. A formula does not fail to be available on
the same terms to all employees merely because the formula is not
available to any HCEs, but is available to some or all NHCEs on the same
terms as all of the other formulas in the plan.
(3) Top-heavy formulas. Rules parallel to those in Sec. 1.401(a)(4)-
2(b)(4)(vi)(D)(3) apply in the case of a plan that provides the greater
of the benefits under two or more formulas, one of which is a top-heavy
formula. For purposes of this paragraph (b)(6)(xi)(D)(3), a top-heavy
formula is a formula that provides a benefit equal to the minimum
benefit described in section 416(c)(1) (taking into account, if
applicable, the modification in section 416(h)(2)(A)(ii)(I)).
(E) Provisions may be applied more than once. The provisions of this
paragraph (b)(6)(xi) may be applied more than once. See
Sec. 1.401(a)(4)-2(b)(4)(vi)(E) for an example of the application of
these provisions more than once.
(F) Examples. The following examples illustrate the rules in this
paragraph (b)(6)(xi):
Example 1. Under Plan A, each employee's benefit equals the sum of
the benefits determined under two formulas. The first formula provides
one percent of average annual compensation per year of service. The
second formula provides $10 per year of service. Plan A is eligible to
apply the rules in this paragraph (b)(6)(xi).
Example 2. Under Plan B, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula
provides $15 per year of service and is available to all employees who
complete at least 500 hours of service during the plan year. The second
formula provides 1.5 percent of average annual compensation per year of
service and is available to all employees who complete at least 1,000
hours of service during the plan year. Plan B does not satisfy this
paragraph (b)(6)(xi) because the two formulas are not available on the
same terms to all employees.
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,
[[Page 110]]
plus one percent of average annual compensation per year of service
after 1993. Plan E satisfies this paragraph (b)(6)(xi).
Example 6. The facts are the same as in Example 5, except that the
plan amendment in 1994 decreases the benefit to 0.75 percent of average
annual compensation per year of service after 1993, while retaining the
one-percent formula for all years of service before 1994. Thus, the
plan's amended benefit formula provides a benefit equal to the sum of
the benefits determined under two benefit formulas: 0.75 percent of
average annual compensation per year of service, plus 0.25 percent of
average annual compensation per year of service before 1994. Under these
facts, the second formula does not separately satisfy any of the safe
harbors in this paragraph (b) because the years of service over which
each employee's benefit accrues under the second formula (i.e., all
years of service) are not the same years of service that are taken into
account in applying the benefit formula under the plan to that employee
(i.e., years of service before 1994). See paragraph (b)(2)(v) of this
section. But see paragraph (b)(6)(vii) of this section and
Sec. 1.401(a)(4)-13, which provide rules under which Plan E, as amended,
may be able to satisfy this paragraph (b).
Example 7. Plan F provides a benefit to all employees of one percent
of average annual compensation per year of service. Employee M was hired
as the president of the employer in December 1994 and was not a HCE
under section 414(q) during the 1994 calendar plan year. In 1994, Plan F
is amended to provide a benefit that is the greater of the benefit
determined under the pre-existing formula in the plan and a new formula
that is available solely to some NHCEs (including Employee M). The new
formula does not satisfy the uniformity requirements of paragraph (b)(2)
of this section, because it provides a different benefit for some NHCEs
than for other NHCEs. As a result of this change, Employee M receives a
higher accrual in 1994 than the NHCEs who are not eligible for the new
formula. In 1995, when Employee M first becomes a HCE, the second
formula no longer applies to Employee M. It would be inconsistent with
the purpose of preventing discrimination in favor of HCEs for Plan F to
use the special rule for a formula that is available solely to some or
all NHCEs to satisfy the separate testing requirement of paragraph
(b)(6)(xi)(C) of this section for the 1994 calendar plan year. See
Sec. 1.401(a)(4)-1(c)(2).
(c) General test for nondiscrimination in amount of benefits--(1)
General rule. The employer-provided benefits under a defined benefit
plan are nondiscriminatory in amount for a plan year if each rate group
under the plan satisfies section 410(b). For purposes of this paragraph
(c)(1), a rate group exists 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
[[Page 111]]
accrued when a participant was not a HCE.
(4) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. (a) Employer X has 1100 nonexcludable employees, N1
through N1000, who are NHCEs, and H1 through H100, who are HCEs.
Employer X maintains Plan A, a defined benefit plan that benefits all of
these nonexcludable employees. The normal and most valuable accrual
rates (determined as a percentage of average annual compensation) for
the employees in Plan A for the 1994 plan year are listed in the
following table.
------------------------------------------------------------------------
Most
Normal valuable
Employee accrual accrual
rate rate
------------------------------------------------------------------------
N1 through N100.................................. 1.0 1.4
N101 through N500................................ 1.5 3.0
N501 through N750................................ 2.0 2.65
N751 through N1000............................... 2.3 2.8
H1 through H50................................... 1.5 2.0
H51 through H100................................. 2.0 2.65
------------------------------------------------------------------------
(b) There are 100 rate groups in Plan A because there are 100 HCEs
in Plan A.
(c) Rate group 1 consists of H1 and all those employees who have a
normal accrual rate greater than or equal to H1's normal accrual rate
(1.5 percent) and who also have a most valuable accrual rate greater
than or equal to H1's most valuable accrual rate (2.0 percent). Thus,
rate group 1 consists of H1 through H100 and N101 through N1000.
(d) Rate group 1 satisfies the ratio percentage test of
Sec. 1.410(b)-2(b)(2) because the ratio percentage of the rate group is
90 percent, i.e., 90 percent (the percentage of all nonhighly
compensated nonexcludable employees who are in the rate group) divided
by 100 percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(e) Because H1 through H50 have the same normal accrual rates and
the same most valuable accrual rates, the rate group with respect to
each of them is identical. Thus, because rate group 1 satisfies section
410(b), rate groups 2 through 50 also satisfy section 410(b).
(f) Rate group 51 consists of H51 and all those employees who have a
normal accrual rate greater than or equal to H51's normal accrual rate
(2.0 percent) and who also have a most valuable accrual rate greater
than or equal to H51's most valuable accrual rate (2.65 percent). Thus,
rate group 51 consists of H51 through H100 and N501 through N1000. (Even
though N101 through N500 have a most valuable accrual rate (3.0 percent)
greater than H51's most valuable accrual rate (2.65 percent), they are
not included in this rate group because their normal accrual rate (1.5
percent) is less than H51's normal accrual rate (2.0 percent).)
(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
[[Page 112]]
payment of the accrued benefit is determined by calculating for the
employee the normalized QJSA associated with the accrued benefit that is
potentially payable in the current or any future plan year at any age
under the plan and selecting the largest (per year of testing service).
If the plan provides a QSUPP, the most valuable accrual rate also takes
into account the QSUPP payable in conjunction with the QJSA at each age
under the plan. Thus, the most valuable accrual rate reflects the value
of all benefits accrued or treated as accrued under section 411(d)(6)
that are payable in any form and at any time under the plan, including
early retirement benefits, retirement-type subsidies, early retirement
window benefits, and QSUPPs. In addition, the most valuable accrual rate
must take into account any such benefits that are available during a
plan year, even if the benefits cease to be available before the end of
the current or any future plan year.
(iii) Measurement period. The measurement period can be--
(A) The current plan year;
(B) The current plan year and all prior years; or
(C) The current plan year and all prior and future years.
(iv) Testing service--(A) General rule. Testing service means an
employee's years of service as defined in the plan for purposes of
applying the benefit formula under the plan, subject to the requirements
of paragraph (d)(1)(iv)(B) of this section. Alternatively, testing
service means service determined for all employees in a reasonable
manner that satisfies the requirements of paragraph (d)(1)(iv)(B) of
this section. For example, the number of plan years that an employee has
benefited under the plan within the meaning of Sec. 1.410(b)-3(a) is an
acceptable definition of testing service because it determines service
in a reasonable manner and satisfies paragraph (d)(1)(iv)(B) of this
section. See also Sec. 1.401(a)(4)-11(d)(3) (additional limits on
service that may be taken into account as testing service).
(B) Requirements for testing service--(1) Employees not credited
with years of service under the benefit formula. An employee must be
credited with testing service for any year in which the employee
benefits under the plan (within the meaning of Sec. 1.410(b)-3(a)),
unless that year is part of a period of service 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
[[Page 113]]
section 415(d)(1) adjustments for former employees who were employees in
a plan year in which such plan provisions were taken into account in
applying this paragraph (d). If the limits of section 415 are taken into
account under this paragraph (d)(2)(ii)(B) as of the end of the
measurement period, they must also be taken into account as of the
beginning of the measurement period. If the limits of section 415 are
not taken into account in testing the plan for the current plan year,
but were taken into account in testing the plan for the preceding plan
year, any resulting increase in the accrued benefits taken into account
in testing the plan is treated as an increase in accrued benefits during
the current plan year.
(iii) Requirements for measurement period that includes future
years--(A) Discriminatory pattern of accruals. A measurement period that
includes future years (as described in paragraph (d)(1)(iii)(C) of this
section) may not be used if the pattern of accruals under the plan
discriminates in favor of HCEs (i.e., if projected benefits for HCEs are
relatively frontloaded when compared to the degree of front loading or
backloading for NHCEs). This determination is made based on all of the
relevant facts and circumstances.
(B) Future-period limitation. Future years beginning after an
employee's attainment of the employee's testing age (or after the
employee's assumed termination in the case of most valuable accrual
rates) may not be included in the measurement period.
(3) Optional rules--(i) Imputation of permitted disparity. The
disparity permitted under section 401(l) may be imputed in accordance
with the rules of Sec. 1.401(a)(4)-7.
(ii) Grouping of accrual rates--(A) General rule. An employer may
treat all employees who have accrual rates within a specified range
above and below a midpoint rate chosen by the employer as having an
accrual rate equal to the midpoint rate within that range. Accrual rates
within a given range may not be grouped under this paragraph (d)(3)(ii)
if the accrual rates of HCEs within the range generally are
significantly higher than the accrual rates of NHCEs in the range. The
specified ranges within which all employees are treated as having the
same accrual rate may not overlap and may be no larger than provided in
paragraph (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).
[[Page 114]]
(B) Application of consistency requirements. Limiting the
application of the fresh-start alternative in this paragraph (d)(3)(iii)
to a fresh-start group that consists of fewer than all employees does
not violate the consistency requirement of paragraph (d)(2)(i) of this
section.
(iv) Floor on most valuable accrual rate. In lieu of determining an
employee's most valuable accrual rate in accordance with the definition
in paragraph (d)(1)(ii) of this section, an employer may determine an
employee's most valuable accrual rate for the current plan year as the
employee's highest most valuable accrual rate determined for any prior
plan year. This option may be used only if the employee's normal accrual
rate has not changed significantly from the normal accrual rate for the
relevant prior plan year and, there have been no plan amendments in the
interim period since that prior plan year that affect the determination
of most valuable accrual rates.
(4) Examples. The following examples illustrate the rules in this
paragraph (d):
Example 1. The employees in Plan A have the following normal accrual
rates (expressed as percentage of average annual compensation): 0.8
percent, 0.83 percent, 0.9 percent, 1.9 percent, 2.0 percent, and 2.1
percent. Because the first three rates are within a range of no more
than one twentieth of a percentage point above or below 0.85 percent (a
midpoint rate chosen by the employer), the employer may treat the
employees who have those rates as having an accrual rate of 0.85 percent
(provided that the accrual rates of HCEs within the range are not
significantly higher than the accrual rates for NHCEs within the range).
Because the last three rates are within a range of no more than five
percent above or below 2.0 percent (a midpoint rate chosen by the
employer), the employer may treat the employees who have those rates as
having an accrual rate of 2.0 percent (provided that the accrual rates
of HCEs within the range are not significantly higher than the accrual
rates for NHCEs within the range).
Example 2. Employer X maintains a plan under which headquarters
employees accrue a benefit of 1.25 percent of average compensation for
the first 10 years of service and 0.75 percent of average compensation
for subsequent years of service, while all other employees accrue a
benefit of one percent of compensation for all years of service. Assume
that the group of headquarters employees does not satisfy section
410(b). Under these facts, the pattern of accruals under the plan
discriminates in favor of HCEs, and, 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
[[Page 115]]
be disregarded in determining the employee's average annual compensation
(including for purposes of the requirement to average section 414(s)
compensation over consecutive 12-month periods), but only if the plan
disregards the employee's compensation for those periods in determining
benefits--
(1) The 12-month period in which the employee terminates employment;
(2) All 12-month periods in which the employee performs no services;
or
(3) All 12-month periods in which the employee performs services for
less than a specified number of hours or specified period of time in the
12-month period. The specified number of hours or specified period of
time may be selected by the employer, but may not exceed three quarters
of the time that an employee in the same job category working on a full-
time basis would perform services during that 12-month period.
(C) Drop-out months within 12-month periods. If a plan determines an
employee's average annual compensation using 12-month periods that do
not end on a fixed date (e.g., average annual compensation as of a date
is defined as the average of the employee's section 414(s) compensation
for the 60 consecutive months within the compensation history in which
the average is highest), then, for purposes of determining a 12-month
period, any of the following type of months may be disregarded
(including for purposes of the requirement to average section 414(s)
compensation over consecutive 12-month periods), but only if the plan
disregards the employee's compensation for those months in determining
benefits--
(1) The month in which the employee terminates employment;
(2) All months in which the employee performs no services; or
(3) All months in which the employee performs services for less than
a specified number of hours or specified period of time in the month.
The specified number of hours or specified period of time may be
selected by the employer, but may not exceed three quarters of the time
that an employee in the same job category working on a full-time basis
would perform services during that month.
(D) Employees working less than full-time. In the case of an
employee who normally works less than full-time, the rules in paragraphs
(e)(2)(ii)(B)(3) and (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
[[Page 116]]
periods ending on the employee's termination date. In determining the
average, Plan B disregards all months in which the employee performs
services for less than 100 hours (60 percent of a full-time work
schedule of 173 hours). In the case of an employee whose normal work
schedule is less than a full-time schedule, Plan B disregards all months
in which that employee performs services for less than 60 percent of the
employee's normal work schedule. Plan B defines compensation for each
12-month period using a single definition that satisfies Sec. 1.414(s)-
1. Plan B determines benefits on the basis of average annual
compensation.
Example 3. (a) The facts are the same as in Example 1, except that,
for plan years prior to 1996, the compensation for a plan year was
determined under a rate of pay definition of compensation that satisfies
section 414(s), while, for plan years after 1995, the compensation for a
plan year is determined using a definition that satisfies section 414(s)
as a safe harbor definition under Sec. 1.414(s)-1(c).
(b) The underlying definition of compensation for each plan year in
the employee's compensation history is section 414(s) compensation,
because for each plan year the definition satisfies the requirements for
section 414(s) compensation under Sec. 1.401(a)(4)-12. Therefore, Plan A
determines benefits on the basis of average annual compensation, even
though the underlying definition used to measure the amount of
compensation for each plan year in an employee's compensation history is
not the same for all plan years.
Example 4. The facts are the same as in Example 1, except that Plan
A determines benefits on the basis of the average of the employee's
annual section 414(s) compensation for the five consecutive 12-month
periods ending on June 30 during the employee's compensation history in
which the average is highest. An employee's compensation history begins
when the employee commences participation in the plan and ends in the
current plan year. In the case of an employee with less than five
consecutive years of plan participation as of June 30, the compensation
history is extended prior to the employee's commencement of
participation to include the five consecutive 12-month periods ending on
June 30 of the current plan year (or the employee's total period of
employment, if shorter). Plan A determines benefits on the basis of
average annual compensation.
Example 5. The facts are the same as in Example 4, except that Plan
A determines benefits on the basis of the average of each employee's
compensation for the employee's entire compensation history. Plan A
determines benefits on the basis of average annual compensation.
(f) Special rules--(1) In general. The special rules in this
paragraph (f) apply for purposes of applying the provisions of this
section to a defined benefit plan. Any special rule provided in this
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
[[Page 117]]
each year that an employee defers commencement of benefits beyond normal
retirement age. For employees who continue in service beyond normal
retirement age, the employee's two-percent accrual for the current plan
year is offset by the six-percent actuarial increase, as permitted under
section 411(b)(1)(H)(iii)(II). For purposes of this section, the
actuarial increase (and hence the offset) may be disregarded, and thus
all employees may be treated as if they were accruing at the rate of two
percent of average annual compensation per year.
Example 2. The facts are the same as in Example 1, except that the
employee's two- percent accrual for the current plan year is not offset
by the six-percent actuarial increase. The employer may disregard the
actuarial increase and thus may treat all employees as if they were
accruing at the rate of two percent of average annual compensation per
year.
(4) Early retirement window benefits--(i) General rule. In applying
the requirements of this section, all early retirement benefits,
retirement-type subsidies, QSUPPs, and other optional forms of benefit
under a plan, and changes in the plan's benefit formula, are taken into
account regardless of whether they are permanent features of the plan or
are offered only to employees whose employment terminates within a
limited period of time. Additional rules and examples relevant to the
testing of early retirement window benefits are found in Example 6 of
paragraph (b)(2)(vi) of this section; paragraph (b)(2)(ii)(A)(2),
Example 2 of paragraph (c)(2), paragraph (d)(3), and Example 3 of
paragraph (e)(1)(iii) of Sec. 1.401(a)(4)-4; paragraph (c)(4)(i) and
Example 2 of paragraph (c)(6) of Sec. 1.401(a)(4)-9; and the definition
of benefit formula in Sec. 1.401(a)(4)-12.
(ii) Special rules--(A) Year in which early retirement window
benefit taken into account. Notwithstanding paragraph (f)(4)(i) of this
section, an early retirement window benefit is disregarded for purposes
of determining whether a plan satisfies this section with respect to an
employee for all plan years other than the first plan year in which the
benefit is currently available (within the meaning of Sec. 1.401(a)(4)-
4(b)(2)) to the employee. For purposes of this paragraph (f)(4)(ii)(A),
in determining which plan years the benefit is currently available, an
early retirement window benefit that consists of a temporary change in
the plan's benefit formula is treated as an optional form of benefit.
(B) Treatment of early retirement window benefit that consists of
temporary 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
[[Page 118]]
currently available (within the meaning of paragraph (f)(4)(ii)(A) of
this section) satisfies section 410(b) without regard to the average
benefit percentage test of Sec. 1.410(b)-5.
(iii) Early retirement window benefit defined. For purposes of this
paragraph (f)(4), an early retirement window benefit is an early
retirement benefit, retirement-type subsidy, QSUPP, or other optional
form of benefit under a plan that is available, or a change in the
plan's benefit formula that is applicable, only to employees who
terminate employment within a limited period specified by the plan (not
to exceed one year) under circumstances specified by the plan. A benefit
does not fail to be described in the preceding sentence merely because
the plan contains provisions under which certain employees may receive
the benefit even though, for bona fide business reasons, they terminate
employment within a reasonable period after the end of the limited
period. An amendment to an early retirement window benefit that merely
extends the periods in the preceding sentences is not treated as a
separate early retirement window benefit, provided that the periods, as
extended, satisfy the preceding sentences. However, any other amendment
to an early retirement window benefit creates a separate early
retirement window benefit.
(iv) Examples. The following examples illustrate the rules of this
paragraph (f)(4):
Example 1. (a) Plan A provides a benefit of one percent of average
annual compensation per year of service and satisfies the requirements
of paragraph (b)(2) of this section. Thus, the plan provides the same
benefit to all employees with the same years of service under the Plan.
Plan A is amended to treat all employees with ten or more years of
service who terminate employment after attainment of age 55 and between
March 1, 1999, and January 31, 2000, as if they had an additional five
years of service under the benefit formula. However, in order to ensure
the orderly implementation of the early retirement window, the plan
amendment provides that designated employees in the human resources
department who would otherwise be eligible for the early retirement
window benefit are eligible to be treated as having the additional five
years of service only if they terminate between January 1, 2000, and
April 30, 2000.
(b) The additional benefits provided under this amendment are tested
as benefits provided to employees rather than former employees. The
effect of this amendment is temporarily to change the benefit formula
for employees who are eligible for the early retirement window benefit
because the amendment changes (albeit temporarily) the 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
[[Page 119]]
change in the benefit formula, Component Plan A2 satisfies this
paragraph (b) both reflecting and disregarding the change in the benefit
formula. Thus, Component Plan A2 satisfies paragraph (b) of this
section.
Example 2. The facts are the same as in Example 1, except that Plan
A's benefit formula used the maximum amount of permitted disparity under
section 401(l) prior to the amendment. The analysis is the same as in
paragraphs (a) through the first sentence of paragraph (e) of Example 1.
In order to satisfy the requirements of paragraph (b)(2) of this
section, a plan that uses permitted disparity must satisfy the
requirements of section 401(l) after reflecting the change in the
benefit formula. Because, as stated in Example 1, the additional five
years of service may not be taken into account for purposes of
satisfying paragraph (b) of this section, the disparity that results
from crediting that service exceeds the maximum permitted disparity
under section 401(l). Thus, Component Plan A2 does not satisfy the
requirements of paragraph (b) of this section.
Example 3. The facts are the same as in Example 1, except that Plan
A is tested under the general test in paragraph (c) of this section. The
early retirement window benefit is disregarded for purposes of
determining the normal accrual rates, but is taken into account in 1999
for purposes of determining the most valuable accrual rates, of
employees who were eligible for the early retirement window benefit
(regardless of whether they elected to receive it). As stated in Example
1, the additional five years of service do not represent past service,
pre-participation service, or imputed service, and thus under
Sec. 1.401(a)(4)-11(d)(3)(i)(A) may not be taken into account as testing
service.
(5) Unpredictable contingent event benefits--(i) General rule. In
general, an unpredictable contingent event benefit (within the meaning
of section 412(l)(7)(B)(ii)) is not taken into account under this
section until the occurrence of the contingent event. Thus, the special
rule in Sec. 1.401(a)(4)-4(d)(7) (treating the contingent event as
having occurred) does not apply for purposes of this section. In the
case of an unpredictable contingent event that is expected to result in
the termination from employment of certain employees within a period of
time consistent with the rules for defining an early retirement window
benefit in paragraph (f)(4)(iii) of this section, the unpredictable
contingent event benefit available to those employees is permitted to be
treated as an early retirement window benefit, thus permitting the rules
of paragraph (f)(4) of this section to be applied to it.
(ii) Example. The following example illustrates the rules of this
paragraph (f)(5):
Example. (a) Employer X operates various manufacturing plants and
maintains Plan A, 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
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this section, accruals are generally determined based on the plan year.
Nevertheless, an employer may determine accruals on the basis of any
period ending within the plan year as long as the period is at least 12
months in duration. For example, accruals for all employees may be
determined based on accrual computation periods ending within the plan
year.
(7) Adjustments for certain plan distributions. For purposes of this
section, an employee's accrued benefit includes the actuarial equivalent
of prior distributions of accrued benefits from the plan to the employee
if the years of service taken into account in determining the accrued
benefits that were distributed continue to be taken into account under
the plan for purposes of determining the employee's current accrued
benefit. For purposes of this paragraph (f)(7), actuarial equivalence
must be determined in a uniform manner for all employees using
reasonable actuarial assumptions. A standard interest rate and a
standard mortality table are among the assumptions considered reasonable
for this purpose. Thus, for example, if an employee has commenced
receipt of benefits in accordance with the minimum distribution
requirements of section 401(a)(9), and the plan reduces the employee's
accrued benefit to take into account the amount of the distributions,
the employee's accrued benefit for purposes of this section is restored
to the value it would have had if the distributions had not occurred.
(8) Adjustment for certain QPSA charges. For purposes of this
section, an employee's accrued benefit includes the cost of a qualified
preretirement survivor annuity (QPSA) that reduces the employee's
accrued benefit otherwise determined under the plan, as permitted under
Sec. 1.401(a)-20, Q&A-21. Thus, an employee's accrued benefit for
purposes of this section is determined as if the cost of the QPSA had
not been charged against the accrued benefit. This paragraph (f)(8)
applies only if the QPSA charges apply uniformly to all employees.
(9) Disregard of certain offsets--(i) General rule. For purposes of
this section, an employee's accrued benefit under a plan includes that
portion of the benefit that is offset under an offset provision
described in Sec. 1.401(a)(4)-11(d)(3)(i)(D). The rule in the preceding
sentence applies only to the extent that the benefit by which the
benefit under the plan being tested is offset is attributable to periods
for which the 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
[[Page 121]]
the benefits are offset solely by vested benefits under another
qualified plan. Thus, for example, the accrual rates of employees in
Plan B are determined as if there were no offset, i.e., by adding back
the benefits that are offset to the net benefits under Plan B.
(d) The result would be the same even if Plan A continued to
recognize compensation paid after the transfer in the determination of
benefits under Plan A. However, if Plan A continued to credit benefit or
accrual service after the transfer, then, to the extent that Plan B's
offset of benefits under Plan A increased as a result, the additional
benefits offset under Plan B would not be added back in determining the
benefits under Plan B that are taken into account under this section.
Example 2. The facts are the same as in Example 1, except that Plan
A is not a plan described in paragraph (f)(9)(i)(A) of this section.
None of the benefits under Plan B that are offset by benefits under Plan
A may be added back in determining the benefits under Plan B that are
taken into account under this section. Thus, benefits under Plan B are
tested on a net basis.
(10) Special rule for multiemployer plans. For purposes of this
section, if a multiemployer plan increases benefits for service prior to
a specific date subject to a plan provision requiring employees to
complete a specified amount of service (not to exceed five years) after
that date, then benefits are permitted to be determined disregarding the
service condition, provided that the condition is applicable to all
employees in the multiemployer plan (including collectively bargained
employees).
[T.D. 8485, 58 FR 46785, Sept. 3, 1993]
Sec. 1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights, and features.
(a) Introduction. This section provides rules for determining
whether the benefits, rights, and features provided under a plan (i.e.,
all optional forms of benefit, ancillary benefits, and other rights and
features available to any employee under the plan) are made available in
a nondiscriminatory manner. Benefits, rights, and features provided
under a plan are made available to employees in a nondiscriminatory
manner only if each benefit, right, or feature satisfies the current
availability requirement of paragraph (b) of this section and the
effective availability requirement of paragraph (c) of this section.
Paragraph (d) of this section provides special rules for applying these
requirements. Paragraph (e) of this section defines optional form of
benefit, ancillary benefit, and other right or feature.
(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
[[Page 122]]
the condition must be satisfied within a limited period of time.
However, in determining the current availability of an optional form of
benefit or a social security supplement subject to such an age or
service condition, the age and service of employees may be projected to
the last date by which the age condition or service condition must be
satisfied in order to be eligible for the optional form of benefit or
social security supplement under the plan. Thus, for example, an
optional form of benefit that is available only to employees who
terminate employment between July 1, 1995, and December 31, 1995, after
attainment of age 55 with at least 10 years of service is treated as
currently available to an employee only if the employee could satisfy
those age and service conditions by December 31, 1995.
(B) Certain other conditions. Specified conditions on the
availability of a benefit, right, or feature requiring a specified
percentage of the employee's accrued benefit to be nonforfeitable,
termination of employment, death, satisfaction of a specified health
condition (or failure to meet such condition), disability, hardship,
family status, default on a plan loan secured by a participant's account
balance, execution of a covenant not to compete, application for
benefits or similar ministerial or mechanical acts, election of a
benefit form, execution of a waiver of rights under the Age
Discrimination in Employment Act or other federal or state law, or
absence from service, are disregarded in determining the employees to
whom the benefit, right, or feature is currently available. In addition,
if a multiemployer plan includes a reasonable condition that limits
eligibility for an ancillary benefit, or other right or feature, to
those employees who have recent service under the plan (e.g., a
condition on a death benefit that requires an employee to have a minimum
number of hours credited during the last two years) and the condition
applies to all employees in the multiemployer plan (including the
collectively bargained employees) to whom the ancillary benefit, or
other right or feature, is otherwise currently available, then the
condition is disregarded in determining the employees to whom the
ancillary benefit, or other right or feature, is currently available.
(C) Certain conditions relating to mandatory cash-outs. In the case
of a plan that provides for mandatory cash-outs of all terminated
employees who have a vested accrued benefit with an actuarial present
value less than or equal to a specified dollar amount (not to exceed the
cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii)) as permitted
by sections 411(a)(11) and 417(e), the implicit condition on any
benefit, right, or feature (other than the mandatory cash-out) that
requires the employee to have a vested accrued benefit with an actuarial
present value in excess of the specified dollar amount is disregarded in
determining the employees to whom the benefit, right, or feature is
currently available.
(D) Other dollar limits. A condition that the amount of an
employee's vested accrued benefit or the actuarial present value of that
benefit be less than or equal to a specified dollar amount is
disregarded in determining the employees to whom the benefit, right, or
feature is currently available.
(E) Certain conditions on plan loans. In the case of an employee's
right to a loan from the plan, the condition that an employee must have
an account balance sufficient to be eligible to receive a minimum loan
amount specified in the plan (not to exceed $1,000) is disregarded in
determining the employees to whom the right is currently available.
(3) Benefits, rights, and features that are eliminated
prospectively--(i) Special testing rule. Notwithstanding paragraph
(b)(1) of this section, a benefit, right, or feature that is eliminated
with respect to benefits accrued after the later of the eliminating
amendment's adoption or effective date (the elimination date), but is
retained with respect to benefits accrued as of the elimination date,
and that satisfies this paragraph (b) as of the elimination date, is
treated as satisfying this paragraph (b) for all subsequent periods.
This rule does not apply if the terms of the benefit, right, or feature
(including the employees to whom it is available) are changed after the
elimination date.
(ii) Elimination of a benefit, right, or feature--(A) General rule.
For purposes
[[Page 123]]
of this paragraph (b)(3), a benefit, right, or feature provided to an
employee is eliminated with respect to benefits accrued after the
elimination date if the amount or value of the benefit, right, or
feature depends solely on the amount of the employee's accrued benefit
(within the meaning of section 411(a)(7)) as of the elimination date,
including subsequent income, expenses, gains, and losses with respect to
that benefit in the case of a defined contribution plan.
(B) Special rule for benefits, rights, and features that are not
section 411(d)(6)-protected benefits. Notwithstanding paragraph
(b)(3)(ii)(A) of this section, in the case of a benefit, right, or
feature under a defined contribution plan that is not a section
411(d)(6)-protected benefit (within the meaning of Sec. 1.411(d)-4, Q&A-
1), e.g., the availability of plan loans, for purposes of this paragraph
(b)(3)(ii) each employee's accrued benefit as of the elimination date
may be treated, on a uniform basis, as consisting exclusively of the
dollar amount of the employee's account balance as of the elimination
date.
(C) Special rule for benefits, rights, and features that depend on
adjusted accrued benefits. For purposes of this paragraph (b)(3), a
benefit, right, or feature provided to an employee under a plan that has
made a fresh start does not fail to be eliminated as of an elimination
date that is the fresh-start date merely because it depends solely on
the amount of the employee's adjusted accrued benefit (within the
meaning of Sec. 1.401(a)(4)-13(d)(8)).
(c) Effective availability--(1) General rule. Based on all of the
relevant facts and circumstances, the group of employees to whom a
benefit, right, or feature is effectively available must not
substantially favor HCEs.
(2) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. Employer X maintains Plan A, a defined benefit plan that
covers both of its highly compensated nonexcludable employees and nine
of its 12 nonhighly compensated nonexcludable employees. Plan A provides
for a normal retirement benefit payable as an annuity and based on a
normal retirement age of 65, and an early retirement benefit payable
upon termination in the form of an annuity to employees who terminate
from service with the employer on or after age 55 with 30 or more years
of service. Both HCEs of Employer X currently meet the age and service
requirement, or will have 30 years of service by the time they reach age
55. All but two of the nine NHCEs of Employer X who are covered by Plan
A were hired on or after 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.
[[Page 124]]
(d) Special rules--(1) Mergers and acquisitions--(i) Special testing
rule. A benefit, right, or feature available under a plan solely to an
acquired group of employees is treated as satisfying paragraphs (b) and
(c) of this section during the period that each of the following
requirements is satisfied:
(A) The benefit, right, or feature must satisfy paragraphs (b) and
(c) of this section (determined without regard to the special rule in
section 410(b)(6)(C)) on the date that is selected by the employer as
the latest date by which an employee must be hired or transferred into
the acquired trade or business for an employee to be included in the
acquired group of employees. This determination is made with reference
to the plan of the current employer and its nonexcludable employees.
(B) The benefit, right, or feature must be available under the plan
of the current employer after the transaction on the same terms as it
was available under the plan of the prior employer before the
transaction. This requirement is not violated merely because of a change
made to the benefit, right, or feature that is permitted by section
411(d)(6), provided that--
(1) The change is a replacement of the benefit, right, or feature
with another benefit, right, or feature that is available to the same
employees as the original benefit, right, or feature, and the original
benefit, right, or feature is of inherently equal or greater value
(within the meaning of paragraph (d)(4)(i)(A) of this section) than the
benefit, right, or feature that replaces it; or
(2) The change is made before January 12, 1993.
(ii) Scope of special testing rule. This paragraph (d)(1) applies
only to benefits, rights, and features with respect to benefits accruing
under the plan of the current employer, and not to benefits, rights, and
features with respect to benefits accrued under the plan of the prior
employer (unless, pursuant to the transaction, the plan of the prior
employer becomes the plan of the current employer, or the assets and
liabilities with respect to the acquired group of employees under the
plan of the prior employer are transferred to the plan of the current
employer in a plan merger, consolidation, or other transfer described in
section 414(l)).
(iii) Example. The following example illustrates the rules of this
paragraph (d)(1):
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.
[[Page 125]]
(iii) No change in the availability of the benefit, right, or
feature may have been made that is first effective in the current plan
year with respect to a frozen participant.
(iv) Any change in the availability of the benefit, right, or
feature that is first effective in the current plan year with respect to
a frozen participant must be made in a nondiscriminatory manner. Thus,
any expansion in the availability of the benefit, right, or feature to
any highly compensated frozen participant must be applied on a
consistent basis to all nonhighly compensated frozen participants.
Similarly, any contraction in the availability of the benefit, right, or
feature that affects any nonhighly compensated frozen participant must
be applied on a consistent basis to all highly compensated frozen
participants.
(3) Early retirement window benefits. If a benefit, right, or
feature meets the definition of an early retirement window benefit in
Sec. 1.401(a)(4)-3(f)(4)(iii) (or would meet that definition if the
definition applied to all benefits, rights, and features), the benefit,
right, or feature is disregarded for purposes of applying this section
with respect to an employee for all plan years other than the first plan
year in which the benefit is currently available to the employee.
(4) Permissive aggregation of certain benefits, rights, or features-
-(i) General rule. An optional form of benefit, ancillary benefit, or
other right or feature may be aggregated with another optional form of
benefit, ancillary benefit, or other right or feature, respectively, and
the two may be treated as a single optional form of benefit, ancillary
benefit, or other right or feature, if both of the following
requirements are satisfied:
(A) One of the two optional forms of benefit, ancillary benefit, or
other rights or features must in all cases be of inherently equal or
greater value than the other. For this purpose, one benefit, right, or
feature is of inherently equal or greater value than another benefit,
right, or feature only if, at any time and under any conditions, it is
impossible for any employee to receive a smaller amount or a less
valuable right under the first benefit, right, or feature than under the
second benefit, right, or feature.
(B) The optional form of benefit, ancillary benefit, or other right
or feature of inherently equal or greater 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
[[Page 126]]
of service would receive a smaller single sum amount (i.e., zero) than a
similarly-situated employee of Division T who terminates employment with
less than 20 years of service. Under these facts, the two single sum
optional forms of benefit may not be aggregated and treated as a single
optional form of benefit for purposes of this section.
(5) Certain spousal benefits. In the case of a plan that includes
two or more plans that have been permissively aggregated under
Sec. 1.410(b)-7(d), the aggregated plan satisfies this section with
respect to the availability of any nonsubsidized qualified joint and
survivor annuities, qualified preretirement survivor annuities, or
spousal death benefits described in section 401(a)(11), if each plan
that is part of the aggregated plan satisfies section 401(a)(11).
Whether a benefit is considered subsidized for this purpose may be
determined using any reasonable actuarial assumptions. For purposes of
this paragraph (d)(5), a qualified joint and survivor annuity, qualified
preretirement survivor annuity, or spousal death benefit is deemed to be
nonsubsidized if it is provided under a defined contribution plan.
(6) Special ESOP rules. An ESOP does not fail to satisfy paragraphs
(b) and (c) of this section merely because it makes an investment
diversification right or feature or a distribution option available
solely to all qualified participants (within the meaning of section
401(a)(28)(B)(iii)), or merely because the restrictions of section
409(n) apply to certain individuals.
(7) Special testing rule for unpredictable contingent event
benefits. A benefit, right, or feature that is contingent on the
occurrence of an unpredictable contingent event (within the meaning of
section 412(l)(7)(B)(ii)) is tested under this section as if the event
had occurred. Thus, the current availability of a benefit that becomes
an optional form of benefit upon the occurrence of an unpredictable
contingent event is tested by deeming the event to have occurred and by
disregarding age and service conditions on the eligibility for that
benefit to the extent permitted for optional forms of benefit under
paragraph (b)(2) of this section.
(e) Definitions--(1) Optional form of benefit--(i) General rule. The
term optional form of benefit means a distribution alternative
(including the normal form of benefit) that is available under a plan
with respect to benefits described in section 411(d)(6)(A) or a
distribution alternative that is an early 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
[[Page 127]]
in which amounts described in Sec. 1.401(a)(4)-2(c)(2)(iii) are
allocated) underlying, or the manner in which employees vest in, the
accrued benefit that is paid in the form of the distribution alternative
are different for different employees to whom the distribution
alternative is available.
(C) Distributions subject to section 417(e). A distribution
alternative available under a defined benefit plan does not fail to be a
single optional form of benefit merely because, in determining the
amount of a distribution, the plan applies a lower interest rate to
determine the distribution for employees with a vested accrued benefit
having an actuarial present value not in excess of $25,000, as required
by section 417(e)(3) and Sec. 1.417(e)-1.
(D) Differences attributable to uniform normal retirement age. A
distribution alternative available under a defined benefit plan does not
fail to be a single optional form of benefit, to the extent that the
differences are attributable to differences in normal retirement dates
among employees, provided that the differences do not prevent the
employees from having the same uniform normal retirement age under the
definition of uniform normal retirement age in Sec. 1.401(a)(4)-12.
(iii) Examples. The following examples illustrate the rules in this
paragraph (e)(1):
Example 1. Plan A is a defined benefit plan that benefits all
employees of Divisions S and T. The plan offers a qualified joint and
50-percent survivor annuity at normal retirement age, calculated by
multiplying an employee's single life annuity payment by a factor. For
an employee of Division S whose benefit commences at age 65, the plan
provides a factor of 0.90, but for a similarly-situated employee of
Division T the plan provides a factor of 0.85. The qualified joint and
survivor annuity is not available to employees of Divisions S and T on
substantially the same terms, and thus it constitutes two separate
optional forms of benefit.
Example 2. Plan B is a defined benefit plan that benefits all
employees of Divisions U and V. The plan offers a single sum
distribution alternative available on the same terms and determined
using the same actuarial assumptions, to all employees. However,
different benefit formulas apply to employees of each division. Under
the exception provided in paragraph (e)(1)(ii)(A) of this section, the
single sum optional form of benefit available to employees of Division U
is not a separate optional form of benefit from the single sum optional
form of benefit available to employees of Division V.
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
[[Page 128]]
be taken into account but for paragraph (e)(1)(ii) of this section
(e.g., benefit formulas or the manner in which benefits vest); or
(C) Cannot reasonably be expected to be of meaningful value to an
employee (e.g., administrative details).
(iii) Examples. Other rights and features include, but are not
limited to--
(A) Plan loan provisions (other than those relating to a
distribution of an employee's accrued benefit upon default under a
loan);
(B) The right to direct investments;
(C) The right to a particular form of investment, including, for
example, a particular class or type of employer securities (taking into
account, in determining whether different forms of investment exist, any
differences in conversion, dividend, voting, liquidation preference, or
other rights conferred under the security);
(D) The right to make each rate of elective contributions described
in Sec. 1.401(k)-1(g)(3) (determining the rate based on the plan's
definition of the compensation out of which the elective contributions
are made (regardless of whether that definition satisfies section
414(s)), but also treating different rates as existing if they are based
on definitions of compensation or other requirements or formulas that
are not substantially the same);
(E) The right to make after-tax employee contributions to a defined
benefit plan that are not allocated to separate accounts;
(F) The right to make each rate of after-tax employee contributions
described in Sec. 1.401(m)-1(f)(6) (determining the rate based on the
plan's definition of the compensation out of which the after-tax
employee contributions are made (regardless of whether that definition
satisfies section 414(s)), but also treating different rates as existing
if they are based on definitions of compensation or other requirements
or formulas that are not substantially the same);
(G) The right to each rate of allocation of matching contributions
described in Sec. 1.401(m)-1(f)(12) (determining the rate using the
amount of matching, elective, and after-tax employee contributions
determined after any corrections under Secs. 1.401(k)-1(f)(1)(i),
1.401(m)-1(e)(1)(i), and 1.401(m)-2(c), but also treating different
rates as existing if they are based on definitions of compensation or
other requirements or formulas that are not substantially the same);
(H) The right to purchase additional retirement or ancillary
benefits under the plan; and
(I) The right to make rollover contributions and transfers to and
from the plan.
[T.D. 8485, 58 FR 46796, Sept. 3, 1993, as amended by T.D. 8794, 63 FR
70338, Dec. 21, 1998; T.D. 8891, 65 FR 44682, July 19, 2000]
Sec. 1.401(a)(4)-5 Plan amendments and plan terminations.
(a) Introduction--(1) Overview. This paragraph (a) provides rules
for determining whether the timing of a plan amendment or series of
amendments has the effect of discriminating significantly in favor of
HCEs or former HCEs. For purposes of this section, a plan amendment
includes, for example, the establishment or termination of the plan, and
any change in the benefits, rights, or features, benefit formulas, or
allocation formulas under the plan. Paragraph (b) of this section sets
forth additional requirements that must be satisfied in the case of a
plan termination.
(2) Facts-and-circumstances determination. Whether the timing of a
plan amendment or series of plan amendments has the effect of
discriminating significantly in favor of HCEs or former HCEs is
determined at the time the plan amendment first becomes effective for
purposes of section 401(a), based on all of the relevant facts and
circumstances. These include, for example, the relative numbers of
current and former HCEs and NHCEs affected by the plan amendment, the
relative length of service of current and former HCEs and NHCEs, the
length of time the plan or plan provision being amended has been in
effect, and the turnover of employees prior to the plan amendment. In
addition, the relevant facts and circumstances include the relative
accrued benefits of current and former HCEs and NHCEs before and after
the plan amendment and any additional benefits provided to current and
former HCEs and NHCEs under
[[Page 129]]
other plans (including plans of other employers, if relevant). In the
case of a plan amendment that provides additional benefits based on an
employee's service prior to the amendment, the relevant facts and
circumstances also include the benefits that employees and former
employees who do not benefit under the amendment would have received had
the plan, as amended, been in effect throughout the period on which the
additional benefits are based.
(3) Safe harbor for certain grants of benefits for past periods. The
timing of a plan amendment that credits (or increases benefits
attributable to) years of service for a period in the past is deemed not
to have the effect of discriminating significantly in favor of HCEs or
former HCEs if the period for which the service credit (or benefit
increase) is granted does not exceed the five years immediately
preceding the year in which the amendment first becomes effective, the
service credit (or benefit increase) is granted on a reasonably uniform
basis to all employees, benefits attributable to the period are
determined by applying the current plan formula, and the service
credited is service (including pre-participation or imputed service)
with the employer or a previous employer that may be taken into account
under Sec. 1.401(a)(4)-11(d)(3) (without regard to Sec. 1.401(a)(4)-
11(d)(3)(i)(B)). However, this safe harbor is not available if the plan
amendment granting the service credit (or increasing benefits) is part
of a pattern of amendments that has the effect of discriminating
significantly in favor of HCEs or former HCEs.
(4) Examples. The following examples illustrate the rules in this
paragraph (a):
Example 1. Plan A is a defined benefit plan that covered both HCEs
and NHCEs for most of its existence. The employer decides to wind up its
business. In the process of ceasing operations, but at a time when the
plan covers only HCEs, Plan A is amended to increase benefits and
thereafter is terminated. The timing of this plan amendment has the
effect of discriminating significantly in favor of HCEs.
Example 2. Plan B is a defined benefit plan that provides a social
security supplement that is not a QSUPP. After substantially all of the
HCEs of the employer have benefited from the supplement, but before a
substantial number of NHCEs have become eligible for the supplement,
Plan B is amended to reduce significantly the amount of the supplement.
The timing of this plan amendment 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
[[Page 130]]
NHCEs. Employer W establishes Plan F, a defined benefit plan providing a
benefit of one percent of average annual compensation per year of
service, including years of service prior to the establishment of the
plan. H1 and H2 each have 15 years of prior service, N1 has nine years
of past service, N2 has five years, N3 has three years, and N4 has one
year. The timing of this plan establishment has the effect of
discriminating significantly in favor of HCEs.
Example 8. Assume the same facts as in Example 7, except that N1
through N4 were hired in the current year, and Employer W never employed
any NHCEs prior to the current year. Thus, no NHCEs would have received
additional benefits had Plan F been in existence during the preceding 15
years. The timing of this plan establishment does not have the effect of
discriminating significantly in favor of HCEs or former HCEs.
Example 9. The facts are the same as in Example 7, except that Plan
F limits the grant of past service credit to five years, and the grant
of past service otherwise satisfies the safe harbor in paragraph (a)(3)
of this section. The timing of this plan establishment is deemed not to
have the effect of discriminating significantly in favor of HCEs or
former HCEs.
Example 10. The facts are the same as in Example 9, except that,
five years after the establishment of Plan F, Employer W amends the plan
to provide a benefit equal to two percent of average annual compensation
per year of service, taking into account all years of service since the
establishment of the plan. The ratio of HCEs to former HCEs who
terminated employment during the five-year period since the
establishment of the plan is significantly higher than the ratio of
NHCEs to former NHCEs who terminated employment during the five-year
period since the establishment of the plan. Although the amendment
described in this example might separately satisfy the safe harbor in
paragraph (a)(3) of this section, the safe harbor is not available with
respect to the amendment because, under these facts, the amendment is
part of a pattern of amendments that has the effect of discriminating
significantly in favor of HCEs.
Example 11. Employer Y maintains Plan G, a defined benefit plan,
covering all its employees. In 1995, Employer Y acquires Division S from
Employer Z. Some of the employees of Division S had been covered under a
defined benefit plan maintained by Employer Z. Soon after the
acquisition, Employer Y amends Plan G to cover all employees of Division
S and to credit those who were in Division S's defined benefit plan with
years of service for years of employment with Employer Z. Because the
timing of the plan amendment was determined by the timing of the
transaction, the timing of this plan amendment does not have the effect
of discriminating significantly in favor of HCEs or former HCEs. See
also Sec. 1.401(a)(4)-11(d)(3) for other rules regarding the crediting
of pre-participation service.
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
[[Page 131]]
(B) A social security supplement, if any, that the restricted
employee is entitled to receive.
(ii) Restricted employee defined. For purposes of this paragraph
(b), the term restricted employee generally means any HCE or former HCE.
However, an HCE or former HCE need not be treated as a restricted
employee in the current year if the HCE or former HCE is not one of the
25 (or a larger number chosen by the employer) nonexcludable employees
and former employees of the employer with the largest amount of
compensation in the current or any prior year. Plan provisions defining
or altering this group can be amended at any time without violating
section 411(d)(6).
(iii) Benefit defined. For purposes of this paragraph (b), the term
benefit includes, among other benefits, loans in excess of the amounts
set forth in section 72(p)(2)(A), any periodic income, any withdrawal
values payable to a living employee or former employee, and any death
benefits not provided for by insurance on the employee's or former
employee's life.
(iv) Nonapplicability in certain cases. The restrictions in this
paragraph (b)(3) do not apply, however, if any one of the following
requirements is satisfied:
(A) After taking into account payment to or on behalf of the
restricted employee of all benefits payable to or on behalf of that
restricted employee under the plan, the value of plan assets must equal
or exceed 110 percent of the value of current liabilities, as defined in
section 412(l)(7).
(B) The value of the benefits payable to or on behalf of the
restricted employee must be less than one percent of the value of
current liabilities before distribution.
(C) The value of the benefits payable to or on behalf of the
restricted employee must not exceed the amount described in section
411(a)(11)(A) (restrictions on certain mandatory distributions).
(v) Determination of current liabilities. For purposes of this
paragraph (b), any reasonable and consistent method may be used for
determining the value of current liabilities and the value of plan
assets.
(4) Operational restrictions on certain money purchase pension
plans. A money purchase pension plan that has an accumulated funding
deficiency, within the meaning of section 412(a), or an 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
[[Page 132]]
that satisfies paragraph (b)(2)(ii) (A) and (B) of this section may
determine employees' employer-provided benefit rates under the rules of
paragraph (b)(2)(iii) of this section.
(ii) Eligibility requirements--(A) Uniform rate of employee
contributions. A contributory DB plan satisfies this paragraph
(b)(2)(ii)(A) if all employees make employee contributions at the same
rate, expressed as a percentage of plan year compensation (the employee
contribution rate). A plan does not fail to satisfy this paragraph
(b)(2)(ii)(A) merely because it eliminates employee contributions for
all employees with plan year compensation below a specified contribution
breakpoint that is either a stated dollar amount or a stated percentage
of covered compensation (within the meaning of Sec. 1.401(l)-1(c)(7));
or merely because all employees make employee contributions at the same
rate (expressed as a percentage of plan year compensation) with respect
to plan year compensation up to the contribution breakpoint (base
employee contribution rate) and at a higher rate (expressed as a
percentage of plan year compensation) that is the same for all employees
with respect to plan year compensation above the contribution breakpoint
(excess employee contribution rate). A plan described in paragraph
(c)(4)(i) of this section that satisfies paragraph (c)(4)(iii) of this
section is deemed to satisfy this paragraph.
(B) Demographic requirements--(1) In general. A contributory DB plan
satisfies this paragraph (b)(2)(ii)(B) if it satisfies either of the
demographic tests in paragraph (b)(2)(ii)(B) (2) or (3) of this section.
(2) Minimum percentage test. This test is satisfied only if more
than 40 percent of the NHCEs in the plan have attained ages at least
equal to the plan's target age, and more than 20 percent of the NHCEs in
the plan have attained ages at least equal to the average attained age
of the HCEs in the plan. For this purpose, a plan's target age is the
lower of age 50 or the average attained age of the HCEs in the plan
minus X years, where X equals 20 minus the product of five times the
employee contribution rate under the plan. In no case, however, may X
years be fewer than zero (0) years. Thus, for example, if the average
attained age of the HCEs in the plan is 53 and the employee contribution
rate is two percent of plan year compensation, the plan's target age is
43 years (i.e., 53 - (20 - (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
[[Page 133]]
this section, solely for purposes of reducing an employee's base benefit
percentage as required under paragraph (b)(2)(iii)(B)(1) of this
section, it may be assumed that the employee's employee contribution
rate equals the weighted average of the base employee contribution rate
and the excess employee contribution rate. In determining this weighted
average, the weight of the base employee contribution rate is equal to a
fraction, the numerator of which is the lesser of the integration level
and the contribution breakpoint and the denominator of which is the
integration level. The weight of the excess employee contribution rate
is equal to the difference between one and the weight of the base
employee contribution rate.
(3) Offset plans with varying contribution rates. In the case of an
offset plan described in the second sentence of paragraph (b)(2)(ii)(A)
of this section, an equivalent adjustment to the alternative method in
paragraph (b)(2)(iii)(B)(2) of this section may be made to the offset
percentage.
(C) Employer-provided benefits under the general test. For purposes
of applying the general test of Sec. 1.401(a)(4)-3(c) with respect to
employer-provided benefits, an employee's normal and most valuable
accrual rates otherwise determined under Sec. 1.401(a)(4)-3(d) (without
applying any of the options under Sec. 1.401(a)(4)-3(d)(3) other than
the fresh-start alternative of Sec. 1.401(a)(4)-3(d)(3)(iii)) are each
reduced by subtracting the product of the employee's contributions
(expressed as a percentage of plan year compensation) and the factor
determined under paragraph (b)(2)(iv) of this section from the
respective accrual rates. A plan may then apply the optional rules in
Sec. 1.401(a)(4)-3(d)(3) (i) and (ii) to this resulting accrual rate.
(D) Additional limitation. A plan may not use the composition-of-
workforce method provided in this paragraph (b)(2) to determine an
employee's base benefit percentage, excess benefit percentage, gross
benefit percentage, offset percentage, or accrual rates unless employee
contributions have been made at the same rate (or rates) throughout the
period after the fresh-start date or throughout the measurement period
used to determine accrual rates.
(iv) Determination of plan factor. The factor for a plan is
determined under the following table based on the average entry age of
the employees in the 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
[[Page 134]]
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.
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 = 2xunadjusted 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 (2x5 percent), and
Employee M's B rate is 10.7 percent (5 percent+5.7 percent). Thus,
Employee M's adjusted allocation rate is 10 percent, the lesser of the A
rate and the B rate.
(c) Employee N's allocations are $8,000 (8 percentx$100,000).
Because Employee N's plan year compensation exceeds the taxable wage
base, Employee N's C rate is 10.76 percent ($8,000 divided by ($100,000-
(\1/2\x$51,300))), and Employee N's D rate is 10.92 percent (($8,000+
(5.7 percentx$51,300)) divided by $100,000). Thus, Employee N's adjusted
allocation rate is 10.76 percent, the lesser of the C rate and the D
rate.
(c) Adjusting accrual rates--(1) In general. The rules in this
paragraph (c) produce an adjusted accrual rate for each employee by
determining the excess benefit percentage under the hypothetical plan
formula that would yield the employer-provided accrual actually received
by the employee, if the plan took into account the full permitted
disparity under section 401(l)(3)(A) in 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 percentx$21,000).
Employee N has an unadjusted normal accrual rate of 1.7 percent, average
annual compensation of $106,000, and an employer-provided accrual of
$1,802 (1.7 percentx$106,000). The covered compensation of both
Employees M and N is $25,000, and social security retirement age for
both employees is 65. Neither employee has testing service of more than
35 years and neither has ever participated in another plan.
(b) Because Employee M's average annual compensation does not exceed
covered compensation, Employee M's A rate is 2.96 percent (2.0x1.48
percent), and Employee M's B rate is 2.23 percent (1.48 percent+0.75
percent). Thus, Employee M's adjusted accrual rate is 2.23 percent, the
lesser of the A rate and the B rate.
(c) Because Employee N's average annual compensation exceeds covered
compensation, Employee N's C rate is 1.93 percent ($1,802/($106,000-
(0.5x$25,000))), and Employee N's D rate is 1.88 percent (($1,802+(0.75
percentx$25,000))/$106,000). Thus, Employee N's adjusted accrual rate is
1.88 percent, the lesser of the C rate and the D rate.
(d) Rules of general application--(1) Eligible plans. The rules in
this section may be used only for those plans to which the permitted
disparity rules of section 401(l) are available. See Sec. 1.401(l)-
1(a)(3).
(2) Exceptions from consistency requirements. A plan does not fail
to satisfy the consistency requirements of Sec. 1.401(a)(4)-2(c)(2)(vi)
or Sec. 1.401(a)(4)-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 and gateway--(i) General rule.
Equivalent benefits under a defined contribution plan (other than an
ESOP) are nondiscriminatory in amount for a plan year if--
(A) The plan would satisfy Sec. 1.401(a)(4)-2(c)(1) for the plan
year if an equivalent accrual rate, as determined under paragraph (b)(2)
of this section, were substituted for each employee's allocation rate in
the determination of rate groups; and
(B) For plan years beginning on or after January 1, 2002, the plan
satisfies one of the following conditions--
(1) The plan has broadly available allocation rates (within the
meaning of paragraph (b)(1)(iii) of this section) for the plan year;
(2) The plan has age-based allocation rates that are based on either
a gradual age or service schedule (within the meaning of paragraph
(b)(1)(iv) of this section) or a uniform target benefit allocation
(within the meaning of paragraph (b)(1)(v) of this section) for the plan
year; or
(3) The plan satisfies the minimum allocation gateway of paragraph
(b)(1)(vi) of this section for the plan year.
(ii) Allocations after testing age. A plan does not fail to satisfy
paragraph (b)(1)(i)(A) of this section merely because allocations are
made at the same rate for employees who are older than their testing age
(determined without regard to the current-age rule in paragraph (4) of
the definition of testing age in Sec. 1.401(a)(4)-12) as they are made
for employees who are at that age.
(iii) Broadly available allocation rates--(A) In general. A plan has
broadly available allocation rates for the plan year if each allocation
rate under the plan is currently available during the plan year (within
the meaning of Sec. 1.401(a)(4)-4(b)(2)), to a group of employees that
satisfies section 410(b) (without regard to the average benefit
percentage test of Sec. 1.410(b)-5). For this purpose, if two allocation
rates could be permissively aggregated under Sec. 1.401(a)(4)-4(d)(4),
assuming the allocation rates were treated as benefits, rights or
features, they may be aggregated and treated as a single allocation
rate. In addition, the disregard of age and service conditions described
in Sec. 1.401(a)(4)-4(b)(2)(ii)(A) does not apply for purposes of this
paragraph (b)(1)(iii)(A).
(B) Certain transition allocations. In determining whether a plan
has broadly available allocation rates for the plan year within the
meaning of paragraph (b)(1)(iii)(A) of this section, an employee's
allocation may be disregarded to the extent that the allocation is a
transition allocation for the plan year. In order for an allocation to
be a transition allocation, the allocation must comply with the
requirements of paragraph (b)(1)(iii)(C) of this section and must be
either--
(1) A defined benefit replacement allocation within the meaning of
paragraph (b)(1)(iii)(D) of this section; or
(2) A pre-existing replacement allocation or pre-existing merger and
acquisition allocation, within the meaning of paragraph (b)(1)(iii)(E)
of this section.
(C) Plan provisions relating to transition allocations--(1) In
general. Plan provisions providing for transition allocations for the
plan year must specify both the group of employees who are eligible for
the transition allocations and the amount of the transition allocations.
(2) Limited plan amendments. Allocations are not transition
allocations within the meaning of paragraph (b)(1)(iii)(B) of this
section for the plan year if the plan provisions relating to the
allocations are amended after the date those plan provisions are both
adopted and effective. The preceding sentence in this paragraph
(b)(1)(iii)(C)(2) does not apply to a plan amendment that reduces
transition allocations to HCEs, makes de minimis changes in the
calculation of the transition allocations (such as a change in the
definition of compensation to include section 132(f) elective
reductions), or adds or removes a provision permitted under paragraph
(b)(1)(iii)(C)(3) of this section.
[[Page 141]]
(3) Certain permitted plan provisions. An allocation does not fail
to be a transition allocation within the meaning of paragraph
(b)(1)(iii)(B) of this section merely because the plan provides that
each employee who is eligible for a transition allocation receives the
greater of such allocation and the allocation for which the employee
would otherwise be eligible under the plan. In a plan that contains such
a provision, for purposes of determining whether the plan has broadly
available allocation rates within the meaning of paragraph
(b)(1)(iii)(A) of this section, the allocation for which an employee
would otherwise be eligible is considered currently available to the
employee, even if the employee's transition allocation is greater.
(D) Defined benefit replacement allocation. An allocation is a
defined benefit replacement allocation for the plan year if it is
provided in accordance with guidance prescribed by the Commissioner
published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2)(ii)(b) of this chapter) and satisfies the following
conditions--
(1) The allocations are provided to a group of employees who
formerly benefitted under an established nondiscriminatory defined
benefit plan of the employer or of a prior employer that provided age-
based equivalent allocation rates;
(2) The allocations for each employee in the group were reasonably
calculated, in a consistent manner, to replace the retirement benefits
that the employee would have been provided under the defined benefit
plan if the employee had continued to benefit under the defined benefit
plan;
(3) Except as provided in paragraph (b)(1)(iii)(C) of this section,
no employee who receives the allocation receives any other allocations
under the plan for the plan year; and
(4) The composition of the group of employees who receive the
allocations is nondiscriminatory.
(E) Pre-existing transition allocations--(1) Pre-existing
replacement allocations. An allocation is a pre-existing replacement
allocation for the plan year if the allocation satisfies the following
conditions--
(i) The allocations are provided pursuant to a plan provision
adopted before June 29, 2001;
(ii) The allocations are provided to employees who formerly
benefitted under a defined benefit plan of the employer; and
(iii) The allocations for each employee in the group are reasonably
calculated, in a consistent manner, to replace some or all of the
retirement benefits that the employee would have received under the
defined benefit plan and any other plan or arrangement of the employer
if the employee had continued to benefit under such defined benefit plan
and such other plan or arrangement.
(2) Pre-existing merger and acquisition allocations. An allocation
is a pre-existing merger and acquisition allocation for the plan year if
the allocation satisfies the following conditions--
(i) The allocations are provided solely to employees of a trade or
business that has been acquired by the employer in a stock or asset
acquisition, merger, or other similar transaction occurring prior to
August 28, 2001, involving a change in the employer of the employees of
the trade or business;
(ii) The allocations are provided only to employees who were
employed by the acquired trade or business before a specified date that
is no later than two years after the transaction (or January 1, 2002, if
earlier);
(iii) The allocations are provided pursuant a plan provision adopted
no later than the specified date; and
(iv) The allocations for each employee in the group are reasonably
calculated, in a consistent manner, to replace some or all of the
retirement benefits that the employee would have received under any plan
of the employer if the new employer had continued to provide the
retirement benefits that the prior employer was providing for employees
of the trade or business.
(F) Successor employers. An employer that accepts a transfer of
assets (within the meaning of section 414(l)) from the plan of a prior
employer may continue to treat any transition allocations provided under
that plan as transition allocations under paragraph (b)(1)(iii)(B) of
this section, provided that the successor employer continues
[[Page 142]]
to satisfy the applicable requirements set forth in paragraphs
(b)(1)(iii)(C) through (E) of this section for the plan year.
(iv) Gradual age or service schedule--(A) In general. A plan has a
gradual age or service schedule for the plan year if the allocation
formula for all employees under the plan provides for a single schedule
of allocation rates under which--
(1) The schedule defines a series of bands based solely on age,
years of service, or the number of points representing the sum of age
and years of service (age and service points), under which the same
allocation rate applies to all employees whose age, years of service, or
age and service points are within each band; and
(2) The allocation rates under the schedule increase smoothly at
regular intervals, within the meaning of paragraphs (b)(1)(iv)(B) and
(C) of this section.
(B) Smoothly increasing schedule of allocation rates. A schedule of
allocation rates increases smoothly if the allocation rate for each band
within the schedule is greater than the allocation rate for the
immediately preceding band (i.e., the band with the next lower number of
years of age, years of service, or age and service points) but by no
more than 5 percentage points. However, a schedule of allocation rates
will not be treated as increasing smoothly if the ratio of the
allocation rate for any band to the rate for the immediately preceding
band is more than 2.0 or if it exceeds the ratio of allocation rates
between the two immediately preceding bands.
(C) Regular intervals. A schedule of allocation rates has regular
intervals of age, years of service or age and service points, if each
band, other than the band associated with the highest age, years of
service, or age and service points, is the same length. For this
purpose, if the schedule is based on age, the first band is deemed to be
of the same length as the other bands if it ends at or before age 25. If
the first age band ends after age 25, then, in determining whether the
length of the first band is the same as the length of other bands, the
starting age for the first age band is permitted to be treated as age 25
or any age earlier than 25. For a schedule of allocation rates based on
age and service points, the rules of the preceding two sentences are
applied by substituting 25 age and service points for age 25. For a
schedule of allocation rates based on service, the starting service for
the first service band is permitted to be treated as one year of service
or any lesser amount of service.
(D) Minimum allocation rates permitted. A schedule of allocation
rates under a plan does not fail to increase smoothly at regular
intervals, within the meaning of paragraphs (b)(1)(iv)(B) and (C) of
this section, merely because a minimum uniform allocation rate is
provided for all employees or the minimum benefit described in section
416(c)(2) is provided for all non-key employees (either because the plan
is top heavy or without regard to whether the plan is top heavy) if the
schedule satisfies one of the following conditions--
(1) The allocation rates under the plan that are greater than the
minimum allocation rate can be included in a hypothetical schedule of
allocation rates that increases smoothly at regular intervals, within
the meaning of paragraphs (b)(1)(iv)(B) and (C) of this section, where
the hypothetical schedule has a lowest allocation rate no lower than 1%
of plan year compensation; or
(2) For a plan using a schedule of allocation rates based on age,
for each age band in the schedule that provides an allocation rate
greater than the minimum allocation rate, there could be an employee in
that age band with an equivalent accrual rate that is less than or equal
to the equivalent accrual rate that would apply to an employee whose age
is the highest age for which the allocation rate equals the minimum
allocation rate.
(v) Uniform target benefit allocations. A plan has allocation rates
that are based on a uniform target benefit allocation for the plan year
if the plan fails to satisfy the requirements for the safe harbor
testing method in paragraph (b)(3) of this section merely because the
determination of the allocations under the plan differs from the
allocations determined under that safe harbor testing method for any of
the following reasons--
[[Page 143]]
(A) The interest rate used for determining the actuarial present
value of the stated plan benefit and the theoretical reserve is lower
than a standard interest rate;
(B) The stated benefit is calculated assuming compensation increases
at a specified rate; or
(C) The plan computes the current year contribution using the actual
account balance instead of the theoretical reserve.
(vi) Minimum allocation gateway--(A) General rule. A plan satisfies
the minimum allocation gateway of this paragraph (b)(1)(vi) if each NHCE
has an allocation rate that is at least one third of the allocation rate
of the HCE with the highest allocation rate.
(B) Deemed satisfaction. A plan is deemed to satisfy the minimum
allocation gateway of this paragraph (b)(1)(vi) if each NHCE receives an
allocation of at least 5% of the NHCE's compensation within the meaning
of section 415(c)(3), measured over a period of time permitted under the
definition of plan year compensation.
(vii) Determination of allocation rate. For purposes of paragraph
(b)(1)(i)(B) of this section, allocations and allocation rates are
determined under Sec. 1.401(a)(4)-2(c)(2), but without taking into
account the imputation of permitted disparity under Sec. 1.401(a)(4)-7.
However, in determining whether the plan has broadly available
allocation rates as provided in paragraph (b)(1)(iii) of this section,
differences in allocation rates attributable solely to the use of
permitted disparity described in Sec. 1.401(l)-2 are disregarded.
(viii) Examples. The following examples illustrate the rules in this
paragraph (b)(1):
Example 1. (i) Plan M, a defined contribution plan without a minimum
service requirement, provides an allocation formula under which
allocations are provided to all employees according to the following
schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Completed years of service rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
0-5........................................... 3.0 (\1\)
6-10.......................................... 4.5 1.50
11-15......................................... 6.5 1.44
16-20......................................... 8.5 1.31
21-25......................................... 10.0 1.18
26 or more.................................... 11.5 1.15
------------------------------------------------------------------------
\1\ Not applicable.
(ii) Plan M provides that allocation rates for all employees are
determined using a single schedule based solely on service, as described
in paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the
allocation rates under the schedule increase smoothly at regular
intervals as described in paragraph (b)(1)(iv)(A)(2) of this section,
then the plan has a gradual age or service schedule described in
paragraph (b)(1)(iv) of this section.
(iii) The schedule of allocation rates under Plan M does not
increase by more than 5 percentage points between adjacent bands and the
ratio of the allocation rate for any band to the allocation rate for the
immediately preceding band is never more than 2.0 and does not increase.
Therefore, the allocation rates increase smoothly as described in
paragraph (b)(1)(iv)(B) of this section. In addition, the bands (other
than the highest band) are all 5 years long, so the increases occur at
regular intervals as described in paragraph (b)(1)(iv)(C) of this
section. Thus, the allocation rates under the plan's schedule increase
smoothly at regular intervals as described in paragraph (b)(1)(iv)(A)(2)
of this section. Accordingly, the plan has a gradual age or service
schedule described in paragraph (b)(1)(iv) of this section.
(iv) Under paragraph (b)(1)(i) of this section, Plan M satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section, regardless of whether it satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
Example 2. (i) The facts are the same as in Example 1, except that
the 4.5% allocation rate applies for all employees with 10 years of
service or less.
(ii) Plan M provides that allocation rates for all employees are
determined using a single schedule based solely on service, as described
in paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the
allocation rates under the schedule increase smoothly at regular
intervals as described in paragraph (b)(1)(iv)(A)(2) of this section,
then the plan has a gradual age or service schedule described in
paragraph (b)(1)(iv) of this section.
(iii) The bands (other than the highest band) in the schedule are
not all the same length, since the first band is 10 years long
[[Page 144]]
while other bands are 5 years long. Thus, the schedule does not have
regular intervals as described in paragraph (b)(1)(iv)(C) of this
section. However, under paragraph (b)(1)(iv)(D) of this section, the
schedule of allocation rates does not fail to increase smoothly at
regular intervals merely because the minimum allocation rate of 4.5%
results in a first band that is longer than the other bands, if either
of the conditions of paragraph (b)(1)(iv)(D)(1) or (2) of this section
is satisfied.
(iv) In this case, the schedule of allocation rates satisfies the
condition in paragraph (b)(1)(iv)(D)(1) of this section because the
allocation rates under the plan that are greater than the 4.5% minimum
allocation rate can be included in the following hypothetical schedule
of allocation rates that increases smoothly at regular intervals and has
a lowest allocation rate of at least 1% of plan year compensation:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Completed years of service rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
0-5........................................... 2.5 (\1\)
6-10.......................................... 4.5 1.80
11-15......................................... 6.5 1.44
16-20......................................... 8.5 1.31
21-25......................................... 10.0 1.18
26 or more.................................... 11.5 1.15
------------------------------------------------------------------------
\1\ Not applicable.
(v) Accordingly, the plan has a gradual age or service schedule
described in paragraph (b)(1)(iv) of this section. Under paragraph
(b)(1)(i) of this section, Plan M satisfies the nondiscrimination in
amount requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits
if it satisfies paragraph (b)(1)(i)(A) of this section, regardless of
whether it satisfies the minimum allocation gateway of paragraph
(b)(1)(vi) of this section.
Example 3. (i) Plan N, a defined contribution plan, provides an
allocation formula under which allocations are provided to all employees
according to the following schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Age rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
Under 25...................................... 3.0 (\1\)
25-34......................................... 6.0 2.00
35-44......................................... 9.0 1.50
45-54......................................... 12.0 1.33
55-64......................................... 16.0 1.33
65 or older................................... 21.0 1.31
------------------------------------------------------------------------
\1\ Not applicable.
(ii) Plan N provides that allocation rates for all employees are
determined using a single schedule based solely on age, as described in
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation
rates under the schedule increase smoothly at regular intervals as
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan
has a gradual age or service schedule described in paragraph (b)(1)(iv)
of this section.
(iii) The schedule of allocation rates under Plan N does not
increase by more than 5 percentage points between adjacent bands and the
ratio of the allocation rate for any band to the allocation rate for the
immediately preceding band is never more than 2.0 and does not increase.
Therefore, the allocation rates increase smoothly as described in
paragraph (b)(1)(iv)(B) of this section. In addition, the bands (other
than the highest band and the first band, which is deemed to be the same
length as the other bands because it ends prior to age 25) are all 5
years long, so the increases occur at regular intervals as described in
paragraph (b)(1)(iv)(C) of this section. Thus, the allocation rates
under the plan's schedule increase smoothly at regular intervals as
described in paragraph (b)(1)(iv)(A)(2) of this section. Accordingly,
the plan has a gradual age or service schedule described in paragraph
(b)(1)(iv) of this section.
(iv) Under paragraph (b)(1)(i) of this section, Plan N satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section, regardless of whether it satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
Example 4. (i) Plan O, a defined contribution plan, provides an
allocation formula under which allocations are provided to all employees
according to the following schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Age rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
Under 40...................................... 3 (\1\)
40-44......................................... 6 2.00
45-49......................................... 9 1.50
[[Page 145]]
50-54......................................... 12 1.33
55-59......................................... 16 1.33
60-64......................................... 20 1.25
65 or older................................... 25 1.25
------------------------------------------------------------------------
\1\ Not applicable.
(ii) Plan O provides that allocation rates for all employees are
determined using a single schedule based solely on age, as described in
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation
rates under the schedule increase smoothly at regular intervals as
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan
has a gradual age or service schedule described in paragraph (b)(1)(iv)
of this section.
(iii) The bands (other than the highest band) in the schedule are
not all the same length, since the first band is treated as 15 years
long while other bands are 5 years long. Thus, the schedule does not
have regular intervals as described in paragraph (b)(1)(iv)(C) of this
section. However, under paragraph (b)(1)(iv)(D) of this section, the
schedule of allocation rates does not fail to increase smoothly at
regular intervals merely because the minimum allocation rate of 3%
results in a first band that is longer than the other bands, if either
of the conditions of paragraph (b)(1)(iv)(D)(1) or (2) of this section
is satisfied.
(iv) In this case, in order to define a hypothetical schedule that
could include the allocation rates in the actual schedule of allocation
rates, each of the bands below age 40 would have to be 5 years long (or
be treated as 5 years long). Accordingly, the hypothetical schedule
would have to provide for a band for employees under age 30, a band for
employees in the range 30-34 and a band for employees age 35-39.
(v) The ratio of the allocation rate for the age 40-44 band to the
next lower band is 2.0. Accordingly, in order for the applicable
allocations rates under this hypothetical schedule to increase smoothly,
the ratio of the allocation rate for each band in the hypothetical
schedule below age 40 to the allocation rate for the immediately
preceding band would have to be 2.0. Thus, the allocation rate for the
hypothetical band applicable for employees under age 30 would be .75%,
the allocation rate for the hypothetical band for employees in the range
30-34 would be 1.5% and the allocation rate for employees in the range
35-39 would be 3%.
(vi) Because the lowest allocation rate under any possible
hypothetical schedule is less than 1% of plan year compensation, Plan O
will be treated as satisfying the requirements of paragraphs
(b)(1)(iv)(B) and (C) of this section only if the schedule of allocation
rates satisfies the steepness condition described in paragraph
(b)(1)(iv)(D)(2) of this section. In this case, the steepness condition
is not satisfied because the equivalent accrual rate for an employee age
39 is 2.81%, but there is no hypothetical employee in the band for ages
40-44 with an equal or lower equivalent accrual rate (since the lowest
equivalent accrual rate for hypothetical employees within this band is
3.74% at age 44).
(vii) Since the schedule of allocation rates under the plan does not
increase smoothly at regular intervals, Plan O's schedule of allocation
rates is not a gradual age or service schedule. Further, Plan O does not
provide uniform target benefit allocations. Therefore, under paragraph
(b)(1)(i) of this section, Plan O cannot satisfy the nondiscrimination
in amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on
the basis of benefits unless either Plan O provides for broadly
available allocation rates for the plan year as described in paragraph
(b)(1)(iii) of this section (i.e., the allocation rate at each age is
provided to a group of employees that satisfies section 410(b) without
regard to the average benefit percentage test), or Plan O satisfies the
minimum allocation gateway of paragraph (b)(1)(vi) of this section for
the plan year.
Example 5. (i) Plan P is a profit-sharing plan maintained by
Employer A that covers all of Employer A's employees, consisting of two
HCEs, X and Y, and 7 NHCEs. Employee X's compensation is $170,000 and
Employee Y's compensation is $150,000. The allocation for Employees X
and Y is $30,000 each, resulting in an allocation rate of 17.65% for
Employee X and 20% for Employee Y. Under Plan P, each NHCE receives an
allocation of 5% of compensation within the meaning of section
415(c)(3), measured over a period of time permitted under the definition
of plan year compensation.
(ii) Because the allocation rate for X is not currently available to
any NHCE, Plan P does not have broadly available allocation rates within
the meaning of paragraph (b)(1)(iii) of this section. Furthermore, Plan
P does not provide for age based-allocation rates within the meaning of
paragraph (b)(1)(iv) or (v) of this section. Thus, under paragraph
(b)(1)(i) of this section, Plan P can satisfy the nondiscrimination in
amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on the
basis of benefits only if Plan P satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section for the plan year.
(iii) The highest allocation rate for any HCE under Plan P is 20%.
Accordingly, Plan P would satisfy the minimum allocation gateway of
paragraph (b)(1)(vi) of this section if all NHCEs have an allocation
rate of
[[Page 146]]
at least 6.67%, or if all NHCEs receive an allocation of at least 5% of
compensation within the meaning of section 415(c)(3) (measured over a
period of time permitted under the definition of plan year
compensation).
(iv) Under Plan P, each NHCE receives an allocation of 5% of
compensation within the meaning of section 415(c)(3) (measured over a
period of time permitted under the definition of plan year
compensation). Accordingly, Plan P satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
(v) Under paragraph (b)(1)(i) of this section, Plan P satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section.
(2) Determination of equivalent accrual rates--(i) Basic definition.
An employee's equivalent accrual rate for a plan year is the annual
benefit that is the result of normalizing the increase in the employee's
account balance during the measurement period, divided by the number of
years in which the employee benefited under the plan during the
measurement period, and expressed either as a dollar amount or as a
percentage of the employee's average annual compensation. A measurement
period that includes future years may not be used for this purpose.
(ii) Rules of application--(A) Determination of account balance. The
increase in the account balance during the measurement period taken into
account under paragraph (b)(2)(i) of this section does not include
income, expenses, gains, or losses allocated during the measurement
period that are attributable to the account balance as of the beginning
of the measurement period, but does include any additional amounts that
would have been included in the increase in the account balance but for
the fact that they were previously distributed (including a reasonable
adjustment for interest). In the case of a measurement period that is
the current plan year, an employer may also elect to disregard the
income, expenses, gains, and losses allocated during the current plan
year that are attributable to the increase in account balance since the
beginning of the year, and thus, determine the increase in account
balance during the plan year taking into account only the allocations
described in Sec. 1.401(a)(4)-2(c)(2)(ii). In addition, an employer may
disregard distributions made to a NHCE as well as distributions made to
any employee in plan years beginning before a selected date no later
than January 1, 1986.
(B) Normalization. The account balances determined under paragraph
(b)(2)(ii)(A) of this section are normalized by treating them as single-
sum benefits that are immediately and unconditionally payable to the
employee. A standard interest rate, and a straight life annuity factor
that is based on the same or a different standard interest rate and on a
standard mortality table, must be used in normalizing these benefits. In
addition, no mortality may be assumed prior to the employee's testing
age.
(iii) Options. Any of the optional rules in Sec. 1.401(a)(4)-3(d)(3)
(e.g., imputation of permitted disparity) may be applied in determining
an employee's equivalent accrual rate by substituting the employee's
equivalent accrual rate (determined without regard to the option) for
the employee's normal accrual rate (i.e., not most valuable accrual
rate) in that section where appropriate. For this purpose, however, the
last sentence of the fresh-start alternative in Sec. 1.401(a)(4)-
3(d)(3)(iii)(A) (dealing with compensation adjustments to the frozen
accrued benefit) is not applicable. No other options are available in
determining an employee's equivalent accrual rate except those (e.g.,
selection of alternative measurement periods) specifically provided in
this paragraph (b)(2). Thus, for example, none of the optional special
rules in Sec. 1.401(a)(4)-3(f) (e.g., determination of benefits on other
than a plan year basis under Sec. 1.401(a)(4)-3(f)(6)) is available.
(iv) Consistency rule. Equivalent accrual rates must be determined
in a consistent manner for all employees for the plan year. Thus, for
example, the same measurement periods and standard interest rates must
be used, and any available options must be applied consistently if at
all.
(3) Safe-harbor testing method for target benefit plans--(i) General
rule. A target benefit plan is a money purchase pension plan under which
contributions to an employee's account are determined by reference to
the amounts necessary
[[Page 147]]
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. 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
[[Page 148]]
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 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)
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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 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
[[Page 150]]
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)-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
[[Page 151]]
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
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
[[Page 152]]
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 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
[[Page 153]]
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 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
[[Page 154]]
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.
(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
[[Page 155]]
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 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.
[[Page 156]]
(2) Application of safe-harbor testing method to qualified offset
arrangements. A defined benefit plan that is part of a qualified offset
arrangement as defined in section 1116(f)(5) of the Tax Reform Act of
1986, Public Law No. 99-514, is deemed to satisfy the requirements of
paragraph (d)(1)(vi) and (vii) of this section, if the only defined
contribution plans included in the qualified offset arrangement are
section 401(k) plans, section 401(m) plans, or both, and the defined
benefit plan would satisfy the requirements of paragraph (d)(1)(vi) of
this section assuming the elective contributions for each employee under
the defined contribution plan were the same (either as a dollar amount
or as a percentage of compensation) for all plan years since the
establishment of the plan.
[T.D. 8360, 56 FR 47580, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992; 57 FR
10952, 10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46807, Sept.
3, 1993; T.D. 8954, 66 FR 34540, June 29, 2001]
Sec. 1.401(a)(4)-9 Plan aggregation and restructuring.
(a) Introduction. Two or more plans that are permissively aggregated
and treated as a single plan under Secs. 1.410(b)-7(d) must also be
treated as a single plan for purposes of section 401(a)(4). See
Sec. 1.401(a)(4)-12 (definition of plan). An aggregated plan is
generally tested under the same rules applicable to single plans.
Paragraph (b) of this section, however, provides special rules for
determining whether a plan that consists of one or more defined
contribution plans and one or more defined benefit plans (a DB/DC plan)
satisfies section 401(a)(4) with respect to the amount of employer-
provided benefits and the availability of benefits, rights, and
features. Paragraph (c) of this section provides rules allowing a plan
to be treated as consisting of separate component plans and allowing the
component plans to be tested separately under section 401(a)(4).
(b) Application of nondiscrimination requirements to DB/DC plans--
(1) General rule. Except as provided in paragraph (b)(2) of this
section, whether a DB/DC plan satisfies section 401(a)(4) is determined
using the same rules applicable to a single plan. In addition, paragraph
(b)(3) of this section provides an optional rule for demonstrating
nondiscrimination in availability of benefits, rights, and features
provided under a DB/DC plan.
(2) Special rules for demonstrating nondiscrimination in amount of
contributions or benefits--(i) Application of general tests. A DB/DC
plan satisfies section 401(a)(4) with respect to the amount of
contributions or benefits for a plan year if it would satisfy
Sec. 1.401(a)(4)-3(c)(1) (without regard to the special rule in
Sec. 1.401(a)(4)-3(c)(3)) for the plan year if an employee's aggregate
normal and most valuable allocation rates, as determined under paragraph
(b)(2)(ii)(A) of this section, or an employee's aggregate normal and
most valuable accrual rates, as determined under paragraph (b)(2)(ii)(B)
of this section, were substituted for each employee's normal and most
valuable accrual rates, respectively, in the determination of rate
groups.
(ii) Determination of aggregate rates--(A) Aggregate allocation
rates. An employee's aggregate normal and most valuable allocation rates
are determined by treating all defined contribution plans that are part
of the DB/DC plan as a single plan, and all defined benefit plans that
are part of the DB/DC plan as a separate single plan; and determining an
allocation rate and equivalent normal and most valuable allocation rates
for the employee under each plan under Secs. 1.401(a)(4)-2(c)(2) and
1.401(a)(4)-8(c)(2), respectively. The employee's aggregate normal
allocation rate is the sum of the employee's allocation rate and
equivalent normal allocation rate determined in this manner, and the
employee's aggregate most valuable allocation rate is the sum of the
employee's allocation rate and equivalent most valuable allocation rate
determined in this manner.
(B) Aggregate accrual rates. An employee's aggregate normal and most
valuable accrual rates are determined by treating all defined
contribution plans that are part of the DB/DC plan as a single plan, and
all defined benefit plans that are part of the DB/DC plan as a separate
single plan; and determining an equivalent accrual rate and normal and
most valuable accrual
[[Page 157]]
rates for the employee under each plan under Secs. 1.401(a)(4)-8(b)(2)
and 1.401(a)(4)-3(d), respectively. The employee's aggregate normal
accrual rate is the sum of the employee's equivalent accrual rate and
the normal accrual rate determined in this manner, and the employee's
aggregate most valuable accrual rate is the sum of the employee's
equivalent accrual rate and most valuable accrual rate determined in
this manner.
(iii) Options applied on an aggregate basis. The optional rules in
Sec. 1.401(a)(4)-2(c)(2)(iv) (imputation of permitted disparity) and (v)
(grouping of rates) may not be used to determine an employee's
allocation or equivalent allocation rate, but may be applied to
determine an employee's aggregate normal and most valuable allocation
rates by substituting those rates (determined without regard to the
option) for the employee's allocation rate in that section where
appropriate. The optional rules in Sec. 1.401(a)(4)-3(d)(3) (e.g.,
imputation of permitted disparity) may not be used to determine an
employee's accrual or equivalent accrual rate, but may be applied to
determine an employee's aggregate normal and most valuable accrual rate
by substituting those rates (determined without regard to the option)
for the employee's normal and most valuable accrual rates, respectively,
in that section where appropriate.
(iv) Consistency rule--(A) General rule. Aggregate normal and most
valuable allocation rates and aggregate normal and most valuable accrual
rates must be determined in a consistent manner for all employees for
the plan year. Thus, for example, the same measurement periods and
interest rates must be used, and any available options must be applied
consistently, if at all, for the entire DB/DC plan. Consequently,
options that are not permitted to be used under Sec. 1.401(a)(4)-8 in
cross-testing a defined contribution plan or a defined benefit plan
(such as measurement periods that include future periods, non-standard
interest rates, the option to disregard compensation adjustments
described in Sec. 1.401(a)(4)-13(d), or the option to disregard plan
provisions providing for actuarial increases after normal retirement age
under Sec. 1.401(a)(4)-3(f)(3)) may not be used in testing a DB/DC plan
on either a benefits or contributions basis, because their use would
inevitably result in inconsistent determinations under the defined
contribution and defined benefit portions of the plan.
(B) Exception for section 415 alternative. A DB/DC plan does not
fail to satisfy the consistency rule in paragraph (b)(2)(iv)(A) of this
section merely because the limitations under section 415 are not taken
into account, or may not be taken into account, under Sec. 1.401(a)(4)-
3(d)(2)(ii)(B) in determining employees' accrual or equivalent
allocation rates under the defined benefit portion of the plan, even
though those limitations are applied in determining employees'
allocation and equivalent accrual rates under the defined contribution
portion of the plan.
(v) Eligibility for testing on a benefits basis--(A) General rule.
For plan years beginning on or after January 1, 2002, unless, for the
plan year, a DB/DC plan is primarily defined benefit in character
(within the meaning of paragraph (b)(2)(v)(B) of this section) or
consists of broadly available separate plans (within the meaning of
paragraph (b)(2)(v)(C) of this section), the DB/DC plan must satisfy the
minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this
section for the plan year in order to be permitted to demonstrate
satisfaction of the nondiscrimination in amount requirement of
Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits.
(B) Primarily defined benefit in character. A DB/DC plan is
primarily defined benefit in character if, for more than 50% of the
NHCEs benefitting under the plan, the normal accrual rate for the NHCE
attributable to benefits provided under defined benefit plans that are
part of the DB/DC plan exceeds the equivalent accrual rate for the NHCE
attributable to contributions under defined contribution plans that are
part of the DB/DC plan.
(C) Broadly available separate plans. A DB/DC plan consists of
broadly available separate plans if the defined contribution plan and
the defined benefit plan that are part of the DB/DC plan each would
satisfy the requirements of
[[Page 158]]
section 410(b) and the nondiscrimination in amount requirement of
Sec. 1.401(a)(4)-1(b)(2) if each plan were tested separately and
assuming that the average benefit percentage test of Sec. 1.410(b)-5
were satisfied. For this purpose, all defined contribution plans that
are part of the DB/DC plan are treated as a single defined contribution
plan and all defined benefit plans that are part of the DB/DC plan are
treated as a single defined benefit plan. In addition, if permitted
disparity is used for an employee for purposes of satisfying the
separate testing requirement of this paragraph (b)(2)(v)(C) for plans of
one type, it may not be used in satisfying the separate testing
requirement for plans of the other type for the employee.
(D) Minimum aggregate allocation gateway--(1) General rule. A DB/DC
plan satisfies the minimum aggregate allocation gateway if each NHCE has
an aggregate normal allocation rate that is at least one third of the
aggregate normal allocation rate of the HCE with the highest such rate
(HCE rate), or, if less, 5% of the NHCE's compensation, provided that
the HCE rate does not exceed 25% of compensation. If the HCE rate
exceeds 25% of compensation, then the aggregate normal allocation rate
for each NHCE must be at least 5% increased by one percentage point for
each 5-percentage-point increment (or portion thereof) by which the HCE
rate exceeds 25% (e.g., the NHCE minimum is 6% for an HCE rate that
exceeds 25% but not 30%, and 7% for an HCE rate that exceeds 30% but not
35%).
(2) Deemed satisfaction. A plan is deemed to satisfy the minimum
aggregate allocation gateway of this paragraph (b)(2)(v)(D) if the
aggregate normal allocation rate for each NHCE is at least 7\1/2\% of
the NHCE's compensation within the meaning of section 415(c)(3),
measured over a period of time permitted under the definition of plan
year compensation.
(3) Averaging of equivalent allocation rates for NHCEs. For purposes
of this paragraph (b)(2)(v)(D), a plan is permitted to treat each NHCE
who benefits under the defined benefit plan as having an equivalent
normal allocation rate equal to the average of the equivalent normal
allocation rates under the defined benefit plan for all NHCEs
benefitting under that plan.
(E) Determination of rates. For purposes of this paragraph
(b)(2)(v), the normal accrual rate and the equivalent normal allocation
rate attributable to defined benefit plans, the equivalent accrual rate
attributable to defined contribution plans, and the aggregate normal
allocation rate are determined under paragraph (b)(2)(ii) of this
section, but without taking into account the imputation of permitted
disparity under Sec. 1.401(a)(4)-7, except as otherwise permitted under
paragraph (b)(2)(v)(C) of this section.
(F) Examples. The following examples illustrate the application of
this paragraph (b)(2)(v):
Example 1. (i) Employer A maintains Plan M, a defined benefit plan,
and Plan N, a defined contribution plan. All HCEs of Employer A are
covered by Plan M (at a 1% accrual rate), but are not covered by Plan N.
All NHCEs of Employer A are covered by Plan N (at a 3% allocation rate),
but are not covered by Plan M. Because Plan M does not satisfy section
410(b) standing alone, Plans M and N are aggregated for purposes of
satisfying sections 410(b) and 401(a)(4).
(ii) Because none of the NHCEs participate in the defined benefit
plan, the aggregated DB/DC plan is not primarily defined benefit in
character within the meaning of paragraph (b)(2)(v)(B) of this section
nor does it consist of broadly available separate plans within the
meaning of paragraph (b)(2)(v)(C) of this section. Accordingly, the
aggregated Plan M and Plan N must satisfy the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section in order be
permitted to demonstrate satisfaction of the nondiscrimination in amount
requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits.
Example 2. (i) Employer B maintains Plan O, a defined benefit plan,
and Plan P, a defined contribution plan. All of the six employees of
Employer B are covered under both Plan O and Plan P. Under Plan O, all
employees have a uniform normal accrual rate of 1% of compensation.
Under Plan P, Employees A and B, who are HCEs, receive an allocation
rate of 15%, and participants C, D, E and F, who are NHCEs, receive an
allocation rate of 3%. Employer B aggregates Plans O and P for purposes
of satisfying sections 410(b) and 401(a)(4). The equivalent normal
allocation and normal accrual rates under Plans O and P are as follows:
[[Page 159]]
------------------------------------------------------------------------
Equivalent Equivalent
normal normal
allocation accural
rates for rates for
the 1% the 15%/3%
Employee accural allocation
under plan under plan P
O (defined (defined
benefit contribution
plan) (in plan) (in
percent) percent)
------------------------------------------------------------------------
HCE A (age 55)............................... 3.93 3.82
HCE B (age 50)............................... 2.61 5.74
C (age 60)................................... 5.91 .51
D (age 45)................................... 1.74 1.73
E (age 35)................................... .77 3.90
F (age 25)................................... .34 8.82
------------------------------------------------------------------------
(ii) Although all of the NHCEs benefit under Plan O (the defined
benefit plan), the aggregated DB/DC plan is not primarily defined
benefit in character because the normal accrual rate attributable to
defined benefit plans (which is 1% for each of the NHCEs) is greater
than the equivalent accrual rate under defined contribution plans only
for Employee C. In addition, because the 15% allocation rate is
available only to HCEs, the defined contribution plan cannot satisfy the
requirements of Sec. 1.401(a)(4)-2 and does not have broadly available
allocation rates within the meaning of Sec. 1.401(a)(4)-8(b)(1)(iii).
Further, the defined contribution plan does not satisfy the minimum
allocation gateway of Sec. 1.401(a)(4)-8(b)(1)(vi) (3% is less than 1/3
of the 15% HCE rate). Therefore, the defined contribution plan within
the DB/DC plan cannot separately satisfy Sec. 1.401(a)(4)-1(b)(2) and
does not constitute a broadly available separate plan within the meaning
of paragraph (b)(2)(v)(C) of this section. Accordingly, the aggregated
plans are permitted to demonstrate satisfaction of the nondiscrimination
in amounts requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of
benefits only if the aggregated plans satisfy the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section.
(iii) Employee A has an aggregate normal allocation rate of 18.93%
under the aggregated plans (3.93% from Plan O plus 15% from Plan P),
which is the highest aggregate normal allocation rate for any HCE under
the plans. Employee F has an aggregate normal allocation rate of 3.34%
under the aggregated plans (.34% from Plan O plus 3% from Plan P) which
is less than the 5% aggregate normal allocation rate that Employee F
would be required to have to satisfy the minimum aggregate allocation
gateway of paragraph (b)(2)(v)(D) of this section.
(iv) However, for purposes of satisfying the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section, Employer B
is permitted to treat each NHCE who benefits under Plan O (the defined
benefit plan) as having an equivalent allocation rate equal to the
average of the equivalent allocation rates under Plan O for all NHCEs
benefitting under that plan. The average of the equivalent allocation
rates for all of the NHCEs under Plan O is 2.19% (the sum of 5.91%,
1.74%, .77%, and .34%, divided by 4). Accordingly, Employer B is
permitted to treat all of the NHCEs as having an equivalent allocation
rate attributable to Plan O equal to 2.19%. Thus, all of the NHCEs can
be treated as having an aggregate normal allocation rate of 5.19% for
this purpose (3% from the defined contribution plan and 2.19% from the
defined benefit plan) and the aggregated DB/DC plan satisfies the
minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this
section.
(3) Optional rules for demonstrating nondiscrimination in
availability of certain benefits, rights, and features--(i) Current
availability. A DB/DC plan is deemed to satisfy Sec. 1.401(a)(4)-4(b)(1)
with respect to the current availability of a benefit, right, or feature
other than a single sum benefit, loan, ancillary benefit, or benefit
commencement date (including the availability of in-service
withdrawals), that is provided under only one type of plan (defined
benefit or defined contribution) included in the DB/DC plan, if the
benefit, right, or feature is currently available to all NHCEs in all
plans of the same type as the plan under which it is provided.
(ii) Effective availability. The fact that it may be difficult or
impossible to provide a benefit, right, or feature described in
paragraph (b)(3)(i) of this section under a plan of a different type
than the plan or plans under which it is provided is one of the factors
taken into account in determining whether the plan satisfies the
effective availability requirement of Sec. 1.401(a)(4)-4(c)(1).
(c) Plan restructuring--(1) General rule. A plan may be treated, in
accordance with this paragraph (c), as consisting of two or more
component plans for purposes of determining whether the plan satisfies
section 401(a)(4). If each of the component plans of a plan satisfies
all of the requirements of sections 401(a)(4) and 410(b) as if it were a
separate plan, then the plan is treated as satisfying section 401(a)(4).
(2) Identification of component plans. A plan may be restructured
into component plans, each consisting of all the allocations, accruals,
and other benefits, rights, and features provided to a
[[Page 160]]
selected group of employees. The employer may select the group of
employees used for this purpose in any manner, and the composition of
the groups may be changed from plan year to plan year. Every employee
must be included in one and only one component plan under the same plan
for a plan year.
(3) Satisfaction of section 401(a)(4) by a component plan--(i)
General rule. The rules applicable in determining whether a component
plan satisfies section 401(a)(4) are the same as those applicable to a
plan. Thus, for this purpose, any reference to a plan in section
401(a)(4) and the regulations thereunder (other than this paragraph (c))
is interpreted as a reference to a component plan. As is true for a
plan, whether a component plan satisfies the uniformity and other
requirements applicable to safe harbor plans under Secs. 1.401(a)(4)-
2(b) and 1.401(a)(4)-3(b) is determined on a design basis. Thus, for
example, plan provisions are not disregarded merely because they do not
currently apply to employees in the component plan if they will apply to
those employees as a result of the mere passage of time.
(ii) Restructuring not available for certain testing purposes. The
safe harbor in Sec. 1.401(a)(4)-2(b)(3) for plans with uniform points
allocation formulas is not available in testing (and thus cannot be
satisfied by) contributions under a component plan. Similarly, component
plans cannot be used for purposes of determining whether a plan provides
broadly available allocation rates (as defined in Sec. 1.401(a)(4)-
8(b)(1)(iii)), determining whether a plan has a gradual age or service
schedule (as defined in Sec. 1.401(a)(4)-8(b)(1)(iv)), determining
whether a plan has allocation rates that are based on a uniform target
benefit allocation (as defined in Sec. 1.401(a)(4)-8(b)(1)(v)), or
determining whether a plan is primarily defined benefit in character or
consists of broadly available separate plans (as defined in paragraphs
(b)(2)(v)(B) and (C) of this section). In addition, the minimum
allocation gateway of Sec. 1.401(a)(4)-8(b)(1)(vi) and the minimum
aggregate allocation gateway of paragraph (b)(2)(v)(D) of this section
cannot be satisfied on the basis of component plans. See Secs. 1.401(k)-
1(b)(3)(iii) and 1.401(m)-1(b)(3)(iii) for rules regarding the
inapplicability of restructuring to section 401(k) plans and section
401(m) plans.
(4) Satisfaction of section 410(b) by a component plan--(i) General
rule. The rules applicable in determining whether a component plan
satisfies section 410(b) are generally the same as those applicable to a
plan. However, a component plan is deemed to satisfy the average benefit
percentage test of Sec. 1.410(b)-5 if the plan of which it is a part
satisfies Sec. 1.410(b)-5 (without regard to Sec. 1.410(b)-5(f)). In the
case of a component plan that is part of a plan that relies on
Sec. 1.410(b)-5(f) to satisfy the average benefit percentage test, the
component plan is deemed to satisfy the average benefit percentage test
only if the component plan separately satisfies Sec. 1.410(b)-5(f). In
addition, all component plans of a plan are deemed to satisfy the
average benefit percentage test if the plan makes an early retirement
window benefit (within the meaning of Sec. 1.401(a)(4)-3(f)(4)(iii))
currently available (within the meaning of Sec. 1.401(a)(4)-
3(f)(4)(ii)(A)) to a group of employees that satisfies section 410(b)
(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
[[Page 161]]
of which it is a part satisfies the ratio percentage test.
(5) Effect of restructuring under other sections. The restructuring
rules provided in this paragraph (c) apply solely for purposes of
sections 401(a)(4) and 401(l), and those portions of sections 410(b),
414(s), and any other provisions that are specifically applicable in
determining whether the requirements of section 401(a)(4) are satisfied.
Thus, for example, a component plan is not treated as a separate plan
under section 401(a)(26).
(6) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. Employer X maintains a defined benefit plan. The plan
provides a normal retirement benefit equal to 1.0 percent of average
annual compensation times years of service to employees at Plant S, and
1.5 percent of average annual compensation times years of service to
employees at Plant T. Under paragraph (c)(2) of this section, the plan
may be treated as consisting of two component defined benefit plans, one
providing retirement benefits equal to 1.0 percent of average annual
compensation times years of service to the employees at Plant S, and
another providing benefits equal to 1.5 percent of average annual
compensation times years of service to employees at Plant T. If each
component plan satisfies sections 401(a)(4) and 410(b) as if it were a
separate plan under the rules of this paragraph (c), then the entire
plan satisfies section 401(a)(4).
Example 2. (a) Employer Y maintains Plan A, a defined benefit plan,
for its Employees M, N, O, P, Q, and R. Plan A provides benefits under a
uniform formula that satisfies the requirements of Sec. 1.401(a)(4)-3
(b)(2) and (b)(3) before it is amended on February 14, 1994. The
amendment provides an early retirement window benefit that is a
subsidized optional form of benefit under Sec. 1.401(a)(4)-3(b)(2)(iii)
and that is available on the same terms to all employees who satisfy the
eligibility requirements for the window. The early retirement window
benefit is available only to employees who retire between June 1, 1994,
and November 30, 1994.
(b) Assume that Employees M, N, and O will be eligible to receive
the window benefit by the end of the window period and Employees P, Q,
and R will not. Because substantially all employees will not satisfy the
eligibility requirements for the early retirement window benefit by the
close of the early retirement window benefit period, Plan A fails to
satisfy the uniform subsidies requirement of Sec. 1.401(a)(4)-
3(b)(2)(iii). See Sec. 1.401(a)(4)-3(b)(2)(vi), Example 6.
(c) Under paragraph (c)(2) of this section, Employees M, N, O, P, Q,
and R may be grouped into two component plans, one consisting of
Employees M, N, and O, and all their accruals and other benefits,
rights, and features under the plan (including the early retirement
window benefit), and another consisting of Employees P, Q, and R, and
all their accruals and other benefits, rights, and features under the
plan. Each of the component plans identified in this manner satisfies
the uniform subsidies requirement of Sec. 1.401(a)(4)-3(b)(2)(iii), and
thus satisfies Sec. 1.401(a)(4)-3(b). The entire plan satisfies section
401(a)(4) under the rules of this paragraph (c), if each of these
component plans also satisfies section 410(b) as if it were a separate
plan (including, if applicable, the reasonable classification
requirement of Sec. 1.410(b)-4(b), and taking into account the special
rule of paragraph (c)(4)(i) of this section that forgives the average
benefit percentage test in certain situations in which the average
benefit percentage test would be required solely as a result of the
early retirement window benefit).
Example 3. (a) Employer Z maintains Plan B, a defined benefit plan
with a benefit formula that provides two percent of average annual
compensation for each year of service up to 20 to each employee. Assume
that Plan B would satisfy the fractional accrual rule safe harbor in
Sec. 1.401(a)(4)-3(b)(4), except that some employees accrue a portion of
their normal retirement benefit in the current plan year that is more
than one-third larger than the portion of the same benefit accrued by
other employees for the current plan year, and the plan therefore fails
to satisfy the one-third-larger requirement of Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(1).
(b) Employer Z restructures Plan B into two plans, one covering
employees with 30 years or less of service at normal retirement age, and
the other covering all other employees. Each component plan would
separately satisfy the one-third-larger requirement of Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(1) if the only employees taken into account were those
employees included in the component plan in the current plan year. Under
paragraph (c)(3)(i) of this section and Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(1), however, the component plans do not satisfy the one-
third-larger requirement because the safe harbor determination is made
taking into account the effect of the plan benefit formula on any
potential employee in the component plan (other than employees with more
than 33 years of service at normal retirement age), and not just those
employees included in the component plan in the current plan year.
[T.D. 8485, 58 FR 46810, Sept. 3, 1993, as amended by T.D. 8954, 66 FR
34544, June 29, 2001]
[[Page 162]]
Sec. 1.401(a)(4)-10 Testing of former employees.
(a) Introduction. This section provides rules for determining
whether a plan satisfies the nondiscriminatory amount and
nondiscriminatory availability requirements of Sec. 1.401(a)(4)-1(b)(2)
and (3), respectively, with respect to former employees. Generally, this
section is relevant only in the case of benefits provided through an
amendment to the plan effective in the current plan year. See the
definitions of employee and former employee in Sec. 1.401(a)(4)-12.
(b) Nondiscrimination in amount of contributions or benefits--(1)
General rule. A plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to
the amount of contributions or benefits provided to former employees if,
under all of the relevant facts and circumstances, the amount of
contributions or benefits provided to former employees does not
discriminate significantly in favor of former HCEs. For this purpose,
contributions or benefits provided to former employees includes all
contributions or benefits provided to former employees or, at the
employer's option, only those contributions or benefits arising out of
the amendment providing the contributions or benefits. A plan under
which no former employee currently benefits (within the meaning of
Sec. 1.410(b)-3(b)) is deemed to satisfy this paragraph (b).
(2) Permitted disparity. Section 401(l) and Sec. 1.401(a)(4)-7
generally apply to benefits provided to former employees in the same
manner as those provisions apply to employees. Thus, for example, for
purposes of determining a former employee's cumulative permitted
disparity limit, the sum of the former employee's total annual disparity
fractions (within the meaning of Sec. 1.401(l)-5) as an employee
continues to be taken into account. However, the permitted disparity
rate applicable to a former employee is determined under Sec. 1.401(l)-
3(e) as of the age the former employee commenced receipt of benefits,
not as of the date the employee receives the accrual for the current
plan year.
(3) Examples. The following examples illustrate the rules in this
paragraph (b):
Example 1. Employer X maintains a section 401(l) plan, Plan A, that
uses maximum permitted disparity. Plan A is amended to increase the
benefits of all former employees in pay status. The percentage increase
for each former employee is reasonably comparable to the adjustment in
social security benefits under section 215(i)(2)(A) of the Social
Security Act since the former employee commenced receipt of benefits.
Plan A does not fail to satisfy this paragraph (b) merely because of the
amendment.
Example 2. The facts are the same as in Example 1, except that the
amendment provides an across-the-board 20 percent increase in benefits
for all former employees in pay status. The cost of living has increased
at an average rate of three percent in the two years preceding the
amendment, and some HCEs have retired and become former HCEs during that
period. Because this amendment increases the disparity in the plan
formula beyond the maximum permitted disparity adjusted for any
reasonable approximation of the increase in the cost of living since the
HCEs retired, Plan A discriminates significantly in favor of former
HCEs, and thus does not satisfy this paragraph (b).
Example 3. The facts are the same as in Example 1, except that Plan
A is only amended to increase the benefits of former employees in pay
status who terminated employment with Employer X after attaining early
retirement age. The determination of whether the amendment causes Plan A
to fail to satisfy this paragraph (b) must take into account the
relative numbers of former HCEs 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]
[[Page 163]]
Sec. 1.401(a)(4)-11 Additional rules.
(a) Introduction. This section provides additional rules for
determining whether a plan satisfies section 401(a)(4). Paragraph (b) of
this section provides rules for the treatment of the portion of an
employee's accrued benefit or account balance that is attributable to
rollovers, transfers between plans, and employee buybacks. Paragraph (c)
of this section provides rules regarding vesting. Paragraph (d) of this
section provides rules regarding service crediting. Paragraph (e) of
this section, regarding family aggregation, and paragraph (f) of this
section, regarding governmental plans, are reserved. Paragraph (g) of
this section provides rules regarding the extent to which corrective
amendments may be made for purposes of section 401(a).
(b) Rollovers, transfers, and buybacks--(1) Rollovers and elective
transfers. The portion of an employee's accrued benefit or account
balance under a plan that is attributable to rollover (including direct
rollover) contributions to the plan that are described in section
402(c), 402(e)(6), 403(a)(4), 403(a)(5), or 408(d)(3), or elective
transfers to the plan that are described in Sec. 1.411(d)-4, Q&A-3(b),
is not taken into account in determining whether the plan satisfies the
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2).
(2) Other transfers. [Reserved]
(3) Employee buybacks--(i) Rehired employee buyback of previous
service. An employee's repayment to a plan of a prior distribution from
the plan (including reasonable interest from the time of the
distribution) that results in the restoration of the employee's accrued
benefit under the plan (or the service associated with that accrued
benefit) that would otherwise be disregarded in determining the
employee's accrued benefit in accordance with section 411 on account of
the distribution is not treated as an employee contribution for purposes
of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
(ii) Make-up of missed employee contributions. If a contributory DB
plan gives all employees who did not make employee contributions for a
prior period the right to make the missed contributions at a later date
(including reasonable interest from the time of the missed
contributions) and, once the contributions have been made, determines
benefits under the plan by treating the employee contributions
(excluding the interest) as if they were actually made during that prior
period, then those contributions must satisfy Sec. 1.401(a)(4)-6(c) as
if they were employee contributions actually made during that prior
period. Thus, for example, Sec. 1.401(a)(4)-6(c)(2) is not satisfied for
the current plan year if the employee contribution rate (within the
meaning of Sec. 1.401(a)(4)-6(b)(2)(ii)(A) but determined without regard
to the interest) for the employees making up missed contributions is
different than the employee contribution rate applicable to other
employees during the prior period. The rule in this paragraph (b)(3)(ii)
may be extended to employees who did not make employee contributions for
a period of service that is or would otherwise have been credited under
the plan and that preceded their participation in the plan.
(c) Vesting--(1) General rule. A plan satisfies this paragraph (c)
if the manner in which employees vest in their accrued benefits under
the plan does not discriminate in favor of HCEs. Whether the manner in
which employees vest in their accrued benefits under 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)
[[Page 164]]
and (B) are treated as equivalent to one another.
(3) Safe harbor for vesting schedules. The manner in which employees
vest in their accrued benefits under a plan is deemed not to
discriminate in favor of HCEs if each combination of plan provisions
that affect the nonforfeitability of any employee's accrued benefit
would satisfy the nondiscriminatory availability requirements of
Sec. 1.401(a)(4)-4 if that combination were an other right or feature.
(4) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. Plan A provides the six-year graded vesting schedule
described in section 416(b)(1)(B). In 1996, Plan A is amended to provide
the five-year vesting schedule described in section 411(a)(2)(A). To
comply with section 411(a)(10)(B), the plan amendment also provides that
all employees with at least three years of service may elect to retain
the prior vesting schedule. The manner in which employees vest in their
accrued benefits under Plan A does not discriminate in favor of HCEs
merely because the prior vesting schedule continues to apply to the
accrued benefits of electing employees, even if, at the time of the
election or in future years, the prior vesting schedule applies only to
a group of employees that does not satisfy section 410(b).
Example 2. The facts are the same as in Example 1, except that, for
administrative convenience in complying with section 411(a)(10)(B), the
plan amendment automatically provides all employees employed on the date
of the amendment with the higher of the nonforfeitable percentages
determined under either schedule. The manner in which employees vest in
their accrued benefits under Plan A does not discriminate in favor of
HCEs merely because, for administrative convenience in complying with
section 411(a)(10), the amendment exceeds the requirements of section
411(a)(10). The result would be the same if the plan amendment
automatically provided the higher of the nonforfeitable percentages only
to those employees with at least three years of service.
Example 3. (a) Employer Y maintains Plan B covering all of its
employees. On January 1, 1996, Employer Y sells Division M to Employer
Z, and all of the employees in Division M become employees of Employer
Z. Employer Y obtains a determination letter that the resulting
cessation of participation by these employees in Plan B constitutes a
partial termination. Therefore, in order to satisfy section 411(d)(3),
Plan B fully vests the accrued benefit of each of the employees of
Division M whose participation in Plan B ceased as a result of the sale
on January 1, 1996.
(b) The manner in which employees vest in their accrued benefits
under Plan B does not discriminate in favor of HCEs merely because, in
order to satisfy section 411(d)(3), the accrued benefits of all
employees affected by the partial termination become fully vested. This
is true even if the affected group of employees does not satisfy section
410(b).
Example 4. (a) The facts are the same as in Example 3, except that
Employer Y does not obtain a determination letter that the sale of
Division M to Employer Z will cause a partial termination. Instead,
based on its reasonable belief that the sale will cause a partial
termination, and in order to ensure that Plan B will satisfy section
411(d)(3), Employer Y amends Plan B to vest fully the accrued benefit on
January 1, 1996 of each of the employees it reasonably believes to be an
affected employee.
(b) The manner in which employees vest in their accrued benefits
under Plan B does not discriminate in favor of HCEs merely because,
based on Employer Y's reasonable belief that the sale will cause a
partial termination, Plan B is amended to vest fully the accrued
benefits of each of the employees it reasonably believes to be an
affected employee.
(d) Service-crediting rules--(1) Overview--(i) In general. A defined
benefit plan or a defined contribution plan does not satisfy this
paragraph (d) with 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,
[[Page 165]]
and features (entitlement service), application of the requirements for
eligibility to participate in the plan (eligibility service).
(ii) Special rule for pre-effective date service. A plan is deemed
to satisfy this paragraph (d) with respect to service credited for
periods prior to the effective date applicable to the plan under
Sec. 1.401(a)(4)-13 (a) or (b) under a plan provision adopted and in
effect as of February 11, 1993 (and any such service may be taken into
account for purposes of satisfying Sec. 1.401(a)(4)-1 (b)(2) or (b)(3)),
if the plan satisfied the applicable nondiscrimination requirements with
respect to the service that were in effect for all relevant periods
prior to the applicable effective date.
(2) Manner of crediting service--(i) General rule. A plan satisfies
this paragraph (d)(2) if, on the basis of all of the relevant facts and
circumstances, the manner in which employees' service is credited for
all purposes under the plan does not discriminate in favor of HCEs.
(ii) Equivalent service-crediting methods. For purposes of this
paragraph (d)(2), a service-crediting method used for a specified
purpose that is based on hours of service, as provided in 29 CFR
2530.200b-2, and a service-crediting method used for the same purpose
that is based on one of the equivalencies set forth in 29 CFR 2530.200b-
3, are treated as equivalent if the service-crediting methods are
otherwise the same.
(iii) Safe harbor for service-crediting. The manner in which service
is credited under a plan for a specified purpose is deemed to satisfy
this paragraph (d)(2) if each combination of service-crediting
provisions applied for that purpose would satisfy the nondiscriminatory
availability requirements of Sec. 1.401(a)(4)-4 if that combination were
an other right or feature.
(iv) Examples. The following examples illustrate the rules in this
paragraph (d)(2):
Example 1. (a) Plan A covers both salaried employees and hourly
employees. All of the HCEs in Plan A are salaried employees. For
administrative convenience, salaried employees in Plan A (none of whom
are part-time) have their years of service calculated in accordance with
the elapsed time provisions in Sec. 1.410(a)-7. Hourly employees in Plan
A (most of whom are scheduled to work 2,000 hours in a year) have their
hours of service calculated in accordance with 29 CFR 2530.200b-2 and
are credited with a year of service for each plan year in which they
complete 1,000 hours of service.
(b) Plan A does not fail to satisfy this paragraph (d)(2) merely
because different service-crediting provisions are applied to salaried
and hourly employees for administrative convenience. The service-
crediting provisions for hourly employees in Plan A are reasonably
comparable to the service-crediting provisions for salaried employees.
This is because the amount of service credited to hourly employees who
complete fewer than 1,000 hours of service before termination of
employment (i.e., quit, retirement, discharge, or death) during the plan
year (and are treated less favorably than the salaried employees with
the same period of employment during the plan year) is balanced by the
amount of service credited to hourly employees who complete more than
1,000 hours of service before termination of employment during the plan
year (who are treated more favorably than the salaried employees with
the same period of employment during the plan year).
Example 2. (a) The facts are the same as in Example 1, except Plan A
requires hourly employees to complete 2,000 hours of service in order to
be credited with a full year of service, with a pro rata reduction for
hourly employees who complete fewer than 2,000 hours of service.
(b) Plan A does not fail to satisfy this paragraph (d)(2) merely
because different service-crediting provisions are applied to 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
[[Page 166]]
than one year of service may be taken into account with respect to any
12-consecutive-month period (with adjustments for shorter periods, if
appropriate) unless the additional service is required to be credited
under section 410 or 411, whichever is applicable.
(B) Past service. Notwithstanding paragraph (d)(3)(i)(A) of this
section, service for periods in which an employee performed services as
an employee of the employer and did not participate in a plan, but in
which the employee would have participated in the plan but for the fact
that the plan (or the plan amendment extending coverage to the employee)
was not in existence during that period, may be taken into account in
determining whether the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and
(b)(3). This is because service for such periods generally would have
been credited for the employee but for the timing of the plan
establishment or amendment, and the timing of the plan establishment or
amendment must satisfy Sec. 1.401(a)(4)-5(a).
(C) Pre-participation and imputed service. Notwithstanding paragraph
(d)(3)(i)(A) of this section, to the extent that a plan treats pre-
participation service and imputed service as actual service with the
employer, such service may be taken into account in determining whether
the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and (b)(3) if the service
satisfies each of the requirements in paragraph (d)(3)(iii) of this
section taking into account, in the case of imputed service, the
additional rules in paragraph (d)(3)(iv) of this section.
(D) Additional limitations on service-crediting in the case of
certain offsets. Notwithstanding paragraphs (d)(3)(i) (B) and (C) of
this section, if a plan credits benefit service or accrual service under
paragraph (d)(3)(i) (B) or (C) of this section for a period before an
employee becomes a participant in the plan, but offsets the benefits
determined under the plan by benefits under another plan (whether or not
qualified or terminated) that are attributable to the same period for
which that service is credited, then that service may not be taken into
account for purposes of determining whether the first plan satisfies
Sec. 1.401(a)(4)-1 (b)(2) or (b)(3) unless the offset provision applies
on the same basis to all similarly-situated employees (within the
meaning of paragraph (d)(3)(iii)(A) of this section).
(ii) Definitions--(A) Pre-participation service. For purposes of
this section, pre-participation service includes all years of service
credited under a plan for years of service with the employer or a prior
employer for periods before the employee commenced or recommenced
participation in the plan (other than past service described in
paragraph (d)(3)(i)(B) of this section).
(B) Imputed service. For purposes of this section, imputed service
includes any service credited for periods after an employee has
commenced participation in a plan while the employee is not performing
services as an employee for the employer (including a period in which
the employee performs services for another employer, e.g., a joint
venture), or while the employee has a reduced work schedule and would
not otherwise be credited with service at the level being credited under
the general terms of the plan.
(iii) Requirements for pre-participation and imputed service--(A)
Provision applied to all similarly-situated employees--(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.
[[Page 167]]
(2) Examples. The following examples illustrate the rules in this
paragraph (d)(3)(iii)(A):
Example 1. Employer X maintains defined benefit Plans A and B and
defined contribution Plan C. Plan A covers all employees who work at the
headquarters of Employer X. Plan B covers some employees in Division M
of Employer X, and Plan C covers the other employees of Division M.
Plans B and C have not been aggregated for purposes of satisfying
section 401(a)(4) or 410(b) for the period for which service is being
credited. Plan A provides that, whenever an employee covered by Plan B
transfers from Division M to the headquarters, the employee's service
credited under Plan B is credited under Plan A, and the employee's
benefit under Plan A is offset by the employee's benefit under Plan B.
However, Plan A provides for no similar recognition of service or offset
for employees covered by Plan C who transfer from Division M to the
headquarters. Plan A does not fail to satisfy this paragraph
(d)(3)(iii)(A) merely because it credits service for employees
transferring from Plan B but not from Plan C, because it is reasonable
to treat employees participating in different plans that have not been
aggregated as not being similarly situated.
Example 2. The facts are the same as in Example 1, except that
Employer X acquires two trades or businesses from different employers.
Employees of the acquired trades or businesses become employees of
Division M and become covered by Plan B. In addition, Plan B is amended
to credit service with one of the trades or businesses but not the
other. Plan B does not fail to satisfy this paragraph (d)(3)(iii)(A)
merely because it credits service for one acquired trade or business but
not another, because it is reasonable to treat employees of one acquired
trade or business as not similarly situated to employees of another
acquired trade or business.
(B) Legitimate business reason--(1) General rule. There must be a
legitimate business reason, based on all of the relevant facts and
circumstances, for a plan to credit imputed service or for a plan to
credit pre-participation service for a period of service with another
employer.
(2) Relevant facts and circumstances when crediting service with
another employer. The following are examples of relevant facts and
circumstances for determining whether a legitimate business reason
exists for a plan to credit pre-participation or imputed service for a
period of service with another employer as service with the employer:
whether one employer has a significant ownership, control, or similar
interest in, or relationship with, the other employer (though not enough
to cause the two employers to be treated as a single employer under
section 414); whether the two employers share interrelated business
operations; whether the employers maintain the same multiple-employer
plan; whether the employers share similar attributes, such as operation
in the same industry or the same geographic area; and whether the
employees are an acquired group of employees or the employees became
employed by the other employer in a transaction between the two
employers that was a stock or asset acquisition, merger, or other
similar transaction involving a change in the employer of the employees
of a trade or business. Other factors may also be relevant for this
purpose, such as the plan's treatment of service with other employers
with which the employer has a similar relationship and the type of
service being credited (e.g., vesting service as compared to benefit
service or accrual service). A legitimate business reason is deemed to
exist for a plan to credit military service as service with the
employer.
(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
[[Page 168]]
widget manufacturers. Employer Z maintains a defined benefit plan, Plan
B, which credits pre-participation service for periods of service with
all other members of the Association located in the western half of the
United States as service with Employer Z. There is a legitimate business
reason for Plan B to treat service with other members of the Association
as service with Employer Z.
(C) No significant discrimination--(1) General rule. Based on all of
the relevant facts and circumstances, a plan provision crediting pre-
participation or imputed service must not by design or in operation
discriminate significantly in favor of HCEs.
(2) Relevant facts and circumstances. The following are examples of
relevant facts and circumstances for determining whether a plan
provision crediting pre-participation service or imputed service
discriminates significantly in favor of HCEs: whether the service credit
does not duplicate benefits but merely makes an employee whole (i.e.,
prevents the employee from being disadvantaged with respect to benefits
by a change in job or employer or provides the employee with benefits
comparable to those of other employees); the degree of business ties
between the current employer and the prior employer, such as the degree
of ownership interest or other affiliation; the degree of excess
coverage under section 410(b) of NHCEs for the plan crediting the
service, taking into account employees who are credited with pre-
participation service; whether the other employer maintains a qualified
plan for its employees; the existence of reciprocal service credit under
other plans of the employer or the prior employer; the circumstances
underlying the employee's transfer into the group of employees covered
by the plan; the type of service being credited; and the relative number
of employees other than five-percent owners or the most highly-paid HCEs
of the employer (determined without regard to the one officer rule of
section 414(q)(5)(B)) who are being credited with pre-participation
service or imputed service. The relative number referred to in the last
factor is determined taking into account all employees who have been
over time, or are reasonably expected to be in the future, credited with
such service.
(3) Examples. The following examples illustrate the rules in this
paragraph (d)(3)(iii)(C). It is assumed that facts not described in an
example do not, in the aggregate, suggest that the relevant plan
provision either does or does not discriminate significantly in favor of
HCEs.
Example 1. (a) Employer U maintains defined benefit Plans A and B.
Plan A covers all employees who work at the headquarters of Employer U.
Plan B covers all employees of Division M of Employer U. Plan A provides
that, whenever an employee transfers from Division M to the
headquarters, the employee's service credited under Plan B is credited
under Plan A, and the employee's benefit under Plan A is offset by the
employee's benefit under Plan B. Employees, including a meaningful
number of NHCEs, are periodically transferred from Division M to the
headquarters of Employer U for bona fide business reasons.
(b) The Plan A provision crediting service under Plan B does not
discriminate significantly in favor of HCEs. The provision is designed
only to prevent employees from being disadvantaged by being transferred
from Division M to the headquarters, and a meaningful number of NHCEs
can be expected to benefit from it.
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,
[[Page 169]]
who is among the most highly-paid HCEs of Employer U. Plan A provides an
unreduced early retirement benefit at age 55 for employees with 20 years
of service, but Plan B's early retirement benefits are not subsidized.
Employee P is transferred to the headquarters with 20 years of service
credited under Plan B and shortly before attainment of age 55. Employee
P is expected to retire upon reaching age 55.
(b) The Plan A provision crediting service under Plan B
discriminates significantly in favor of HCEs in the year of the
transfer. This is because the circumstances underlying this transfer
(i.e., its occurrence shortly before Employee P's expected retirement
and the fact that the transfer significantly increased Employee P's
early retirement benefits) indicate that Employee P was transferred to
the headquarters primarily to obtain the higher pension benefits
provided under Plan A.
(c) Because of this conclusion, the pre-participation service
credited to Employee P cannot be taken into account in determining
whether Plan A satisfies Sec. 1.401(a)(4)-1 (b)(2) and (b)(3). Thus, if
Plan A credits the service, it cannot be a safe harbor plan because the
benefit formula will take into account service that may not be taken
into account under this paragraph (d)(3). In addition, Employee P's
accrual rates under the general test in Sec. 1.401(a)(4)-3(c) are likely
to be higher than those of other employees because, while the pre-
participation service may be used to determine Employee P's benefits
under Plan A, the service must be disregarded in determining Employee
P's testing service. Also, if Employee P's pre-participation service is
used in determining Employee P's entitlement to a benefit, right, or
feature under Plan A, the fact that the service must be disregarded in
determining Employee P's entitlement service for purposes of
Sec. 1.401(a)(4)-4 may cause the benefit, right, or feature to be
treated as a separate benefit, right, or feature that is currently
available only to Employee P.
Example 4. (a) Employer V manufactures widgets and belongs to the
National Widget Manufacturers' Association. Each member of the
Association maintains a defined benefit plan that credits pre-
participation service for periods of service with other members and
offsets benefits under the plan by benefits under the plans of the other
members. Employer V maintains defined benefit Plan C. Employer V
periodically hires employees from other widget manufacturers who are not
among its most highly-paid HCEs. In 1997, however, the only employee
hired by Employer V from another member of the Association is Employee
Q, who is among Employer V's most highly-paid HCEs. Employee Q receives
pre-participation service credit in accordance with the terms of Plan C.
Some of the plans maintained by other members of the Association
credited pre-participation service to NHCEs for the same period for
which the pre-participation service is credited to Employee Q.
(b) The provision of Plan C crediting pre-participation service with
other members of the Association does not discriminate significantly in
1997, despite the fact that the only employee who received pre-
participation service credit under the provision in that year was among
the most highly-paid HCEs of Employer V. This conclusion is based on the
relative number of employees other than Employer V's most highly-paid
HCEs who have been credited in the past, or are reasonably expected to
be credited in the future, with pre-participation service for periods of
service with other members of the Association, and the fact that other
employees who are NHCEs are being credited with pre-participation
service under a reciprocal agreement.
Example 5. Employer W owns 79 percent of the outstanding stock of
Employer X. From time to time, employees transfer from Employer W to
Employer X at the request of Employer W. The only employees who have
ever been transferred are HCEs. Employer W maintains a defined benefit
plan, Plan D, which credits employees transferred to Employer X with
imputed benefit and accrual service while employed by Employer X.
Employer X maintains no qualified plan. Plan D would fail either section
401(a)(4) or section 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
[[Page 170]]
ceased to perform services as an employee (within the meaning of
Sec. 1.410(b)-9) for the employer maintaining the plan, i.e., is not
expected to resume performing services as an employee for the employer.
The preceding sentence does not apply in the case of an individual who
is not performing services for the employer because of disability or is
performing services for another employer under an arrangement (such as a
transfer of the employee to another employer) that provides some ongoing
business benefit to the original employer. The first sentence in this
paragraph (d)(3)(iv)(A)(1) also does not apply in the case of vesting
and entitlement service if the employee is performing services for
another employer that is being treated under the plan as actual service
with the original employer.
(2) Certain presumptions applicable. Whether an individual has
permanently ceased to perform services as an employee for an employer is
determined taking into account all of the relevant facts and
circumstances. There is a rebuttable presumption for a period of up to
two years that an individual who has ceased to perform services as an
employee for an employer is nonetheless expected to resume performing
services as an employee for the employer, if the employer continues to
treat the individual as an employee for significant purposes unrelated
to the plan. After two years, there is a rebuttable presumption that an
individual who has ceased to perform services as an employee for the
employer is not expected to resume performing services as an employee
for the employer. The fact that an individual is absent to perform jury
duty or military service automatically rebuts the latter presumption.
Other evidence, such as the employer's layoff policy, the terms of an
employment contract, or specific leave to pursue a degree requiring more
than two years of study, may also rebut this presumption.
(3) Imputed service for part-time employees. Rules similar to the
rules in paragraph (d)(3)(iv)(A) (1) and (2) of this section apply in
the case of an employee whose work hours are temporarily reduced and who
therefore would normally be credited with service at a reduced rate, but
who continues to be credited with service at the same rate as before the
reduction (e.g., an employee who continues to be credited with service
as if the employee were a full-time employee during a temporary change
from a full-time to a part-time work schedule).
(B) Additional factors for determining whether a provision crediting
imputed service discriminates significantly. In addition to the factors
described in paragraph (d)(3)(iii)(C)(2) of this section, relevant facts
and circumstances for determining whether a plan provision crediting
imputed service during a leave of absence or a period of reduced
services discriminates significantly include any employer policies or
practices that restrict the ability of employees to take leaves of
absence or work temporarily on a part-time basis, respectively.
(v) Satisfaction of other service-crediting rules. A plan does not
fail to satisfy this paragraph (d)(3) merely because it credits service
to the extent necessary to satisfy the service-crediting rules in
section 410(a), 411(a), 413, or 414(a), Sec. 1.410(a)-7 (elapsed-time
method of service-crediting) or 29 CFR 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
[[Page 171]]
have substance. Paragraph (g)(5) of this section discusses the effect of
the corrective amendments permitted under this paragraph (g) under
provisions other than section 401(a).
(2) Scope of corrective amendments. For purposes of satisfying the
minimum coverage requirements of section 410(b), the nondiscriminatory
amount requirement of Sec. 1.401(a)(4)-1(b)(2), or the nondiscriminatory
plan amendment requirement of Sec. 1.401(a)(4)-1(b)(4), a corrective
amendment may retroactively increase accruals or allocations for
employees who benefited under the plan during the plan year being
corrected, or may grant accruals or allocations to individuals who did
not benefit under the plan during the plan year being corrected. In
addition, for purposes of satisfying the nondiscriminatory current
availability requirement of Sec. 1.401(a)(4)-4(b) for benefits, rights,
or features, a corrective amendment may make a benefit, right, or
feature available to employees to whom it was previously not available.
A corrective amendment may not, however, correct for a failure to
incorporate the pre-termination restrictions of Sec. 1.401(a)(4)-5(b).
(3) Conditions for corrective amendments--(i) In general. A
corrective amendment is not taken into account prior to its adoption
under this paragraph (g) unless it satisfies each of the requirements of
paragraph (g)(3) (ii) through (vii) of this section, whichever are
applicable. Thus, for example, if any of the applicable requirements are
not satisfied, any additional accruals arising from an amendment adopted
after the end of a plan year are not given retroactive effect and, thus,
are tested in the plan year in which the amendment is adopted.
(ii) Benefits not reduced. Except as permitted under paragraph
(g)(3)(vi)(C)(2) of this section, the corrective amendment may not
result in a reduction of an employee's benefits (including any benefit,
right, or feature), determined based on the terms of the plan in effect
immediately before the amendment.
(iii) Amendment effective for all purposes. For purposes of
determining an employee's rights and benefits under the plan, the
corrective amendment must generally be effective as if the amendment had
been made on the first day of the plan year being corrected. Thus, if
the corrective amendment is made after the close of the plan year being
corrected, an employee's allocations or accruals, along with the
associated benefits, rights, and features, must be increased to the
level at which they would have been had the amendment been in effect for
the entire preceding plan year. Accordingly, such increases are taken
into account for testing purposes as if the increases had actually
occurred in the prior plan year. However, to the extent that an
amendment makes a benefit, right, or feature available to a group of
employees, the amendment does not fail to satisfy this paragraph
(g)(3)(iii) merely because it is not effective prior to the date of
adoption and, therefore, the benefit, right, or feature is not made
currently available to those employees before that date.
(iv) Time when amendment must be adopted and put into effect--(A)
General rule. Any corrective amendment intended to apply to the
preceding plan year must be adopted and implemented on or before the
15th day of the 10th 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
[[Page 172]]
allocations or accruals for the preceding year resulting from the
corrective amendment must separately satisfy section 401(a)(4) for the
preceding plan year and must benefit a group of employees that
separately satisfies section 410(b) (determined by applying the same
rules as are applied in determining whether a component plan separately
satisfies section 410(b) under Sec. 1.401(a)(4)-9(c)(4)). Thus, for
example, in applying the rules of this paragraph (g)(3)(v), an employer
may not aggregate the additional accruals or allocations for the
preceding plan year resulting from the corrective amendment with the
other accruals or allocations already provided under the terms of the
plan as in effect during the preceding plan year without regard to the
corrective amendment.
(B) Corrective amendment to conform to safe harbor. The requirements
of paragraph (g)(3)(v)(A) of this section need not be met if the
corrective amendment is for purposes of conforming the plan to one of
the safe harbors in Sec. 1.401(a)(4)-2(b) or Sec. 1.401(a)(4)-3(b)
(including for purposes of applying the requirements of those safe
harbors under the optional testing methods in Sec. 1.401(a)(4)-8 (b)(3)
or (c)(3)), or ensuring that the plan continues to meet one of those
safe harbors.
(vi) Conditions for corrective amendment of the availability of
benefits, rights, and features. A corrective amendment may not be taken
into account under this paragraph (g) for purposes of satisfying
Sec. 1.401(a)(4)-4(b) for a given plan year unless--
(A) The corrective amendment is not part of a pattern of amendments
being used to correct repeated failures with respect to a particular
benefit, right, or feature;
(B) The relevant provisions of the plan immediately after the
corrective amendment with respect to the benefit, right, or feature
(including a corrective amendment eliminating the benefit, right, or
feature) remain in effect until the end of the first plan year beginning
after the date of the amendment; and
(C) The corrective amendment either--
(1) Expands the group of employees to whom the benefit, right, or
feature is currently available so that for each plan year in which the
corrective amendment is taken into account in determining whether the
plan satisfies Sec. 1.401(a)(4)-4(b), the group of employees to whom the
benefit, right, or feature is currently available, after taking into
account the amendment, satisfies the nondiscriminatory classification
requirement of Sec. 1.410(b)-4 (and thus the current availability
requirement of Sec. 1.401(a)(4)-4(b)) with a ratio percentage greater
than or equal to the lesser of--
(i) The safe harbor percentage applicable to the plan; and
(ii) The ratio percentage of the plan; or
(2) Eliminates the benefit, right, or feature (to the extent
permitted under section 411(d)(6)) on or before the last day of the plan
year for which the corrective amendment is taken into account.
(vii) Special rules for section 401(k) plans and section 401(m)
plans--(A) Minimum coverage requirements. In the case of a section
401(k) plan, a corrective amendment may only be taken into account for
purposes of satisfying Sec. 1.410(b)-3(a)(2)(i) under this paragraph (g)
for a given plan year to the extent that the corrective amendment grants
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
[[Page 173]]
year, and the amount of the QNECs granted to each nonhighly compensated
nonexcludable employee equals the product of the nonhighly compensated
nonexcludable employee's plan year compensation and the actual
contribution percentage (within the meaning of section 401(m)(3)) for
the given plan year for the group of NHCEs who are eligible employees.
(B) Correction of rate of match. In the case of a section 401(m)
plan, allocations for a given plan year granted under a corrective
amendment to NHCEs who made contributions for the plan year eligible for
a matching contribution may be treated as matching contributions. These
allocations treated as matching contributions may be taken into account
for purposes of satisfying the current availability requirement of
Sec. 1.401(a)(4)-4(b) with respect to the right to a rate of match, but
may not be taken into account for satisfying other amounts testing.
(4) Corrective amendments must have substance. A corrective
amendment is not taken into account in determining whether a plan
satisfies section 401(a)(4) or 410(b) to the extent the amendment
affects nonvested employees whose employment with the employer
terminated on or before the close of the preceding year, and who
therefore would not have received any economic benefit from the
amendment if it had been made in the prior year. Similarly, in
determining whether the requirements of paragraph (g)(3)(vi)(C)(1) of
this section are satisfied, a corrective amendment making a benefit,
right, or feature available to employees is not taken into account to
the extent the benefit, right, or feature is not currently available to
any of those employees immediately after the amendment. However, a plan
will not fail to satisfy the requirements of paragraph (g)(3)(vi)(C)(1)
of this section by operation of the provisions in this paragraph (g)(4)
if the benefit, right, or feature is made available to all employees in
the plan as of the date of the amendment.
(5) Effect under other statutory requirements. A corrective
amendment under this paragraph (g) is treated as if it were adopted and
effective as of the first day of the plan year only for the specific
purposes described in this paragraph (g). Thus, for example, the
corrective amendment is taken into account not only for purposes of
sections 401(a)(4) and 410(b), but also for purposes of determining
whether the plan satisfies sections 401(l). By contrast, the amendment
is not given retroactive effect for purposes of section 404 (deductions
for employer contributions) or section 412 (minimum funding standards),
unless otherwise provided for in rules applicable to those sections.
(6) Examples. The following examples illustrate the rules in this
paragraph (g):
Example 1. Employer U maintains a calendar year defined benefit plan
that in 1994 is tested using the safe harbor for flat benefit plans in
Sec. 1.401(a)(4)-3(b)(4). In 1996, Employer U is concerned that the plan
will not satisfy the demographic requirement in Sec. 1.401(a)(4)-
3(b)(4)(i)(C)(3) for the 1995 plan year because the average of the
normal accrual rates for all NHCEs is less than 70 percent of the
average of the normal accrual rates for all HCEs. Provided the
corrective amendment would otherwise satisfy this paragraph (g),
Employer U may make a corrective amendment to the plan to increase the
number of NHCEs so that the amended plan satisfies the safe harbor for
the 1995 plan year. The corrective amendment need not satisfy paragraph
(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
[[Page 174]]
amendment may be taken into account for purposes of satisfying the
current availability requirement of Sec. 1.401(a)(4)-4(b) for 1996 if
the amendment satisfies this paragraph (g). Thus, for example, the group
of employees to whom the right to direct investments is currently
available, after taking into account the corrective amendment, must
satisfy the nondiscriminatory classification test of Sec. 1.410(b)-4 for
1996 using a safe harbor percentage (or if lower, the ratio percentage
of the plan for 1996). In addition, the corrective amendment making the
right to direct investments available to a larger group of employees
must remain in effect through the end of the 1998 plan year.
(c) In order for Employer V to take the corrective amendment into
account for purposes of satisfying the current availability requirement
of Sec. 1.401(a)(4)-4(b) for the portion of the 1997 plan year before
the amendment, the group of employees to whom the right to direct
investments is currently available, taking into account the amendment,
must satisfy the nondiscriminatory classification test of Sec. 1.410(b)-
4 for 1997 using a safe harbor percentage (or if lower, the ratio
percentage of the plan for 1997).
(d) Alternatively, if Employer V adopts the corrective amendment
before the end of the 1996 plan year, the corrective amendment need only
remain in force through the end of the 1997 plan year, or the corrective
amendment may eliminate the right to direct investments (provided that
the elimination remains in effect through the end of the 1997 plan
year).
Example 3. The facts are the same as in Example 2. In 1997, Employer
V makes a corrective amendment to extend the plan to employees of
Division O as well as Divisions M and N. Assume that the corrective
amendment satisfies paragraph (g)(3)(v)(A) of this section, and thus,
may be taken into account for purposes of satisfying the
nondiscriminatory amounts requirement of Sec. 1.401(a)(4)-1(b)(2) or the
minimum coverage requirements of section 410(b). However, the employees
in Division O will not be taken into account in determining whether the
right to direct investments meets the current availability requirements
of Sec. 1.401(a)(4)-4(b) unless the corrective amendment meets the
requirements of paragraph (g)(3)(vi) of this section. Thus, for example,
the group of employees to whom the right to direct investments is made
available as a result of the expansion of coverage, after taking into
account the corrective amendment, must satisfy the nondiscriminatory
clarification test of Sec. 1.410(b)-4 for 1996 using a safe harbor
percentage (or if lower, the ratio percentage of the plan for 1996). In
addition, the amendment making the right to direct investments available
to a larger group of employees must remain in effect though the end of
the 1998 plan year.
Example 4. Employer W maintains a defined benefit plan that covers
all employees and that offsets an employee's benefit by the employee's
projected primary insurance amount. The plan is not eligible to use the
safe harbors under Sec. 1.401(a)(4)-3(b) because the plan does not
satisfy section 401(l). Under the plan, the accrual rates for all HCEs
(determined under the general test of Sec. 1.401(a)(4)-3(c)) for 1998
are less than 1.5 percent of average annual compensation, and the
accrual rates for all NHCEs (determined under the general test of
Sec. 1.401(a)(4)-3(c)) for 1998 are two percent of average annual
compensation. If Employer W adopts a corrective amendment adopted in
1999 that retroactively increases HCEs' benefits under the plan so that
their accrual rates equal those of the NHCEs, the corrective amendment
may not be taken into account in testing the 1998 plan year (i.e., the
accruals that result from the corrective amendment are treated as 1999
accruals), because the accruals for the 1998 plan year resulting from
the corrective amendment would not separately satisfy sections 410(b)
and 401(a)(4). This is the case even if, after taking the amendment into
account, the plan would satisfy sections 410(b) and 401(a)(4) for the
1998 plan year.
Example 5. Employer X maintains two plans--Plan A and Plan B. Plan A
satisfies the ratio percentage test of Sec. 1.410(b)-2(b)(2), but Plan B
does not. Thus, in order to satisfy section 410(b), Plan B must satisfy
the average benefits test of Sec. 1.410(b)-2(b)(3). The average benefit
percentage of Plan B is 60 percent. Employer X may take into account a
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
[[Page 175]]
of section 401(k)(3). In order to satisfy section 401(k)(3), Employer Z
makes corrective distributions to HCEs H1 through H10 of their excess
contributions as provided under Sec. 1.401(k)-1(f). The matching
contributions that H1 through H10 had received on account of their
excess contributions are not forfeited, however. Thus, the effective
rate of matching contributions provided to H1 through H10 is increased
as a result of the corrective distributions. See Sec. 1.401(a)(4)-
4(e)(3)(iii)(G). Since no NHCE in the section 401(m) plan is provided
with an equivalent rate of matching contributions, the rate of matching
contributions provided to H1 through H10 does not satisfy the
nondiscriminatory availability requirement of Sec. 1.401(a)(4)-4 in plan
year 1995. Employer Z makes a corrective amendment by October 15, 1996,
that grants allocations to NHCEs who made contributions for the 1995
plan year eligible for a matching contribution. Employer Z may treat the
allocations granted under the corrective amendment to those NHCEs as
matching contributions for the 1995 plan year and, as a result, take
them into account in determining whether the availability of the rate of
matching contributions provided to H1 through H10 satisfies the current
availability requirement of Sec. 1.401(a)(4)-4(b) for the 1995 plan
year.
[T.D. 8485, 58 FR 46813, Sept. 3, 1993]
Sec. 1.401(a)(4)-12 Definitions.
Unless otherwise provided, the definitions in this section govern in
applying the provisions of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
Accumulation plan. Accumulation plan means a defined benefit plan
under which the benefit of every employee for each plan year is
separately determined, using plan year compensation (if benefits are
determined as a percentage of compensation rather as than a dollar
amount) separately calculated for the plan year, and each employee's
total accrued benefit as of the end of a plan year is the sum of the
separately determined benefit for that plan year and the total accrued
benefit as of the end of the preceding plan year.
Acquired group of employees. Acquired group of employees means
employees of a prior employer who become employed by the employer in a
transaction between the employer and the prior employer that is a stock
or asset acquisition, merger, or other similar transaction involving a
change in the employer of the employees of a trade or business, plus
employees hired by or transferred into the acquired trade or business on
or before a date selected by the employer that is within the transition
period defined in section 410(b)(6)(C)(ii). In addition, in the case of
a transaction prior to the effective date of these regulations, the date
by which employees must be hired by or transferred into the acquired
trade or business in order to be included in the acquired group of
employees may be any date prior to February 11, 1993, without regard to
whether it is later than the end of the transition period defined in
section 410(b)(6)(C)(ii).
Actuarial equivalent. An amount or benefit is the actuarial
equivalent of, or is actuarially equivalent to, another amount or
benefit at a given time if the actuarial present value of the two
amounts or benefits (calculated using the same actuarial assumptions) at
that time is the same.
Actuarial present value. Actuarial present value means the value as
of a specified date of an amount or series of amounts due thereafter,
where each amount is--
(1) Multiplied by the probability that the condition or conditions
on which payment of the amount is contingent will be satisfied; and
(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
[[Page 176]]
plan provisions that applies only to certain employees who terminate
within a limited period of time (e.g., an early retirement window
benefit) is treated as a change in the plan's benefit formula for the
employees to whom the change is potentially applicable during the period
that the change is potentially applicable to them. The preceding
sentence applies only to the extent that the change in plan provisions
would result in a change in the benefit formula if it were permanent and
applied without regard to when the employees' employment was terminated.
Benefit, right, or feature. Benefit, right, or feature means an
optional form of benefit, an ancillary benefit, or an other right or
feature within the meaning of Sec. 1.401(a)(4)-4(e).
Contributory DB plan. Contributory DB plan means a defined benefit
plan that includes employee contributions not allocated to separate
accounts.
Defined benefit excess plan. Defined benefit excess plan is defined
in Sec. 1.401(l)-1(c)(16)(i).
Defined benefit plan. Defined benefit plan is defined in
Sec. 1.410(b)-9.
Defined contribution plan. Defined contribution plan is defined in
Sec. 1.410(b)-9.
Determination date. Determination date is defined in
Sec. 1.401(a)(4)-8(b)(3)(iv)(A).
Employee. With respect to a plan for a given plan year, employee
means an employee (within the meaning of Sec. 1.410(b)-9) who benefits
as an employee under the plan for the plan year (within the meaning of
Sec. 1.410(b)-3).
Employer. Employer is defined in Sec. 1.410(b)-9.
ESOP. ESOP is defined in Sec. 1.410(b)-9.
Excess benefit percentage. Excess benefit percentage is defined in
Sec. 1.401(l)-1(c)(14).
Former employee. With respect to a plan for a given plan year,
former employee means a former employee (within the meaning of
Sec. 1.410(b)-9).
Former HCE. Former HCE means a highly compensated former employee as
defined in Sec. 1.410(b)-9.
Former NHCE. Former NHCE means a former employee who is not a former
HCE.
Fresh-start date. Fresh-start date is defined in Sec. 1.401(a)(4)-
13(c)(5)(iii).
Fresh-start group. Fresh-start group is defined in Sec. 1.401(a)(4)-
13(c)(5)(ii).
Gross benefit percentage. Gross benefit percentage is defined in
Sec. 1.401(l)-1(c)(18).
HCE. HCE means a highly compensated employee as defined in
Sec. 1.410(b)-9 who benefits under the plan for the plan year (within
the meaning of Sec. 1.410(b)-3).
Integration level. Integration level is defined in Sec. 1.401(l)-
1(c)(20).
Measurement period. Measurement period is defined in
Sec. 1.401(a)(4)-3(d)(1)(iii).
Multiemployer plan. Multiemployer plan is defined in Sec. 1.410(b)-
9.
NHCE. NHCE means an employee who is not an HCE.
Nonexcludable employee. Nonexcludable employee means an employee
within the meaning of Sec. 1.410(b)-9, other than an excludable employee
with respect to the plan as determined under Sec. 1.410(b)-6. A
nonexcludable employee may be either a highly or nonhighly compensated
nonexcludable employee, depending on the nonexcludable employee's status
under section 414(q).
Normalize. With respect to a benefit payable to an employee in a
particular form, normalize means to convert the benefit to an
actuarially equivalent 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.
[[Page 177]]
Plan year compensation--(1) In general. Plan year compensation means
section 414(s) compensation for the plan year determined by measuring
section 414(s) compensation during one of the periods described in
paragraphs (2) through (4) of this definition. Whichever period is
selected must be applied uniformly to determine the plan year
compensation of every employee.
(2) Plan year. This period consists of the plan year.
(3) Twelve-month period ending in the plan year. This period
consists of a specified 12-month period ending with or within the plan
year, such as the calendar year or the period for determining benefit
accruals described in Sec. 1.401(a)(4)-3(f)(6).
(4) Period of plan participation during the plan year. This period
consists of the portion of the plan year during which the employee is a
participant in the plan. This period may be used to determine plan year
compensation for the plan year in which participation begins, the plan
year in which participation ends, or both. This period may be used to
determine plan year compensation when substituted for average annual
compensation in Sec. 1.401(a)(4)-3(e)(2)(ii)(A) only if the plan year is
also the period for determining benefit accruals under the plan rather
than another period as permitted under Sec. 1.401(a)(4)-3(f)(6).
Further, selection of this period must be made on a reasonably
consistent basis from plan year to plan year in a manner that does not
discriminate in favor of HCEs.
(5) Special rule for new employees. Notwithstanding the uniformity
requirement of paragraph (1) of this definition, if employees' plan year
compensation for a plan year is determined based on a 12-month period
ending within the plan year under paragraph (3) of this definition, then
the plan year compensation of any employees whose date of hire was less
than 12 months before the end of that 12-month period must be determined
uniformly based either on the plan year or on the employees' periods of
participation during the plan year, as provided in paragraphs (2) and
(4), respectively, of this definition.
QJSA. QJSA means a qualified joint and survivor annuity as defined
in section 417(b).
QSUPP--(1) In general. QSUPP or qualified social security supplement
means a social security supplement that meets each of the requirements
in paragraphs (2) through (6) of this definition.
(2) Accrual--(i) General rule. The amount of the social security
supplement payable at any age for which the employee is eligible for the
social security supplement must be equal to the lesser of--
(A) The employee's old-age insurance benefit, unreduced on account
of age, under title II of the Social Security Act; and
(B) The accrued social security supplement, determined under one of
the methods in paragraph (2) (ii) through (iv) of this definition.
(ii) Section 401(l) plans. In the case of a section 401(l) plan that
is a defined benefit excess plan, each employee's accrued social
security supplement equals the employee's average annual compensation up
to the integration level, multiplied by the disparity provided by the
plan for the employee's years of service used in determining the
employee's accrued benefit under the plan. In the case of a section
401(l) plan that is an offset plan, each employee's accrued social
security supplement equals the dollar amount of the 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
[[Page 178]]
amendment adding the social security supplement or the effective date of
the amendment modifying an existing social security supplement to comply
with the requirements of this definition. If, by the end of the first
plan year to which these regulations apply, as set forth in
Sec. 1.401(a)(4)-13 (a) and (b), an amendment is made to a social
security supplement in existence on September 19, 1991, the employer may
treat the accrued portion of the social security supplement, as
determined under the plan without regard to amendments made after
September 19, 1991, as included in the employee's accrued social
security supplement, provided that the remainder of the social security
supplement is accrued under the otherwise-applicable method.
(3) Vesting. The plan must provide that an employee's right to the
accrued social security supplement becomes nonforfeitable within the
meaning of section 411 as if it were an early retirement benefit.
(4) Eligibility. The plan must impose the same eligibility
conditions on receipt of the social security supplement as on receipt of
the early retirement benefit in conjunction with which the social
security supplement is payable. Furthermore, if the service required for
an employee to become eligible for the social security supplement
exceeds 15 years, then the ratio percentage of the group of employees
who actually satisfy the eligibility conditions on receipt of the QSUPP
in the current plan year must equal or exceed the unsafe harbor
percentage applicable to the plan under Sec. 1.410(b)-4(c)(4)(ii).
(5) QJSA. At each age, the most valuable QSUPP commencing at that
age must be payable in conjunction with the QJSA commencing at that age.
In addition, the plan must provide that, in the case of a social
security supplement payable in conjunction with a QJSA, the social
security supplement will be paid after the employee's death on the same
terms as the QJSA, but in no event for a period longer than the period
for which the social security supplement would have been paid to the
employee had the employee not died. For example, if the QJSA is in the
form of a joint annuity with a 50-percent survivor's benefit, the social
security supplement must provide a 50-percent survivor's benefit. When
section 417(c) requires the determination of a QJSA for purposes of
determining a qualified pre-retirement survivor's annuity as defined in
section 417(c) (QPSA), the social security supplement payable in
conjunction with that QJSA must be paid in conjunction with the QPSA.
(6) Protection. The plan must specifically provide that the social
security supplement is treated as an early retirement benefit that is
protected under section 411(d)(6) (other than for purposes of sections
401(a)(11) and 417). Thus, the accrued social security supplement must
continue to be payable notwithstanding subsequent amendment of the plan
(including the plan's termination), and an employee may meet the
eligibility requirements for the social security supplement after plan
termination.
Qualified plan. Qualified plan means a plan that satisfies section
401(a). For this purpose, a qualified plan includes an annuity plan
described in section 403(a).
Rate group. Rate group is defined in Sec. 1.401(a)(4)-2(c)(1) or is
defined in Sec. 1.401(a)(4)-3(c)(1).
Ratio percentage. Ratio percentage is defined in Sec. 1.410(b)-9.
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
[[Page 179]]
plan years beginning before the effective date applicable to the plan
under Sec. 1.401(a)(4)-13 (a) or (b). For a plan year or 12-month period
beginning before January 1, 1988, any underlying definition of
compensation may be used to measure the amount of employees'
compensation for purposes of this definition, provided that the
definition was nondiscriminatory based on the facts and circumstances in
existence for that plan year or for the plan year in which that 12-month
period ends.
(2) Determination period for section 414(s) nondiscrimination
requirement--(i) General rule. If an underlying definition of
compensation must satisfy the nondiscrimination requirement in
Sec. 1.414(s)-1(d)(3) in order to satisfy section 414(s) for a plan
year, any one of the following determination periods may be used to
satisfy the nondiscrimination requirement--
(A) The plan year;
(B) The calendar year ending in the plan year; or
(C) The 12-month period ending in the plan year that is used to
determine the underlying definition of compensation.
(ii) Exception for partial plan year compensation. Notwithstanding
the general rule in paragraph (2)(i) of this definition, if the period
for measuring the underlying compensation is the portion of the plan
year during which each employee is a participant in the plan (as
provided in paragraph (4) of the definition of plan year compensation in
this section), that period must be used as the determination period.
(3) Plans using permitted disparity. In the case of a section 401(l)
plan or a plan that imputes permitted disparity in accordance with
Sec. 1.401(a)(4)-7, an underlying definition of compensation is not
section 414(s) compensation if the definition results in significant
under- inclusion of compensation for employees.
(4) Double proration of service and compensation. If a defined
benefit plan prorates benefit accruals as permitted under section
411(b)(4)(B) by crediting less than full years of participation, then
compensation for a plan year, 12-month period, or other specified period
that is used to determine the amount of an employee's benefits under the
plan will not fail to be section 414(s) compensation, merely because the
amount of compensation for that period is adjusted to reflect the
equivalent of full-time compensation to the extent necessary to satisfy
the requirements of 29 CFR 2530.204-2(d) (regarding double proration of
service and compensation). This adjustment is disregarded in determining
whether the underlying definition of compensation used satisfies the
requirements of section 414(s). Thus, for example, if the underlying
definition of compensation is an alternative definition that must
satisfy the nondiscrimination requirement of Sec. 1.414(s)-1(d)(3), in
determining whether that requirement is satisfied with regard to the
underlying definition, the compensation included for any employee is
determined without any adjustment to reflect the equivalent of full-time
compensation required by 29 CFR 2530.204-2(d).
Social security supplement. Social security supplement is defined in
Sec. 1.411(a)-7(c)(4)(ii).
Standard interest rate. Standard interest rate means an interest
rate that is neither less than 7.5 percent nor greater than 8.5 percent,
compounded annually. The Commissioner may, in revenue rulings, notices,
and other guidance of general applicability, change the definition of
standard interest rate.
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
[[Page 180]]
Sec. 601.601(d)(2)(ii)(b) of this Chapter. The applicable mortality
table under section 417(e)(3)(A)(ii)(I) is also a standard mortality
table.
Straight life annuity. Straight life annuity means an annuity
payable in equal installments for the life of the employee that
terminates upon the employee's death.
Testing age. With respect to an employee, testing age means the age
determined for the employee under the following rules:
(1) If the plan provides the same uniform normal retirement age for
all employees, the employee's testing age is the employee's normal
retirement age under the plan.
(2) If a plan provides different uniform normal retirement ages for
different employees or different groups of employees, the employee's
testing age is the employee's latest normal retirement age under any
uniform normal retirement age under the plan, regardless of whether that
particular uniform normal retirement age actually applies to the
employee under the plan.
(3) If the plan does not provide a uniform normal retirement age,
the employee's testing age is 65.
(4) If an employee is beyond the testing age otherwise determined
for the employee under paragraphs (1) through (3) of this definition,
the employee's testing age is the employee's current age. The rule in
the preceding sentence does not apply in the case of a defined benefit
plan that fails to satisfy the requirements of Sec. 1.401(a)(4)-
3(f)(3)(i) (permitting certain increases in benefits that commence after
normal retirement age to be disregarded).
Testing service. Testing service is defined in Sec. 1.401(a)(4)-
3(d)(1)(iv).
Uniform normal retirement age--(1) General rule. Uniform normal
retirement age means a single normal retirement age under the plan that
does not exceed the maximum age in paragraph (2) of this definition and
that is the same for all of the employees in a given group. A group of
employees does not fail to have a uniform normal retirement age merely
because the plan contains provisions described in paragraphs (3) and (4)
of this definition.
(2) Maximum age. The maximum age is generally 65. However, if all
employees have the same social security retirement age (within the
meaning of section 415(b)(8)), the maximum age is the employees' social
security retirement age. Thus, for example, a component plan has a
uniform normal retirement age of 67 if it defines normal retirement age
as social security retirement age and all employees in the component
plan have a social security retirement age of 67.
(3) Stated anniversary date--(i) General rule. A group of employees
does not fail to have a uniform normal retirement age merely because the
plan provides that the normal retirement age of all employees in the
group is the later of a stated age (not exceeding the maximum age in
paragraph (2) of this definition) or a stated anniversary no later than
the fifth anniversary of the time each employee commenced participation
in the plan. For employees who commenced participation in the plan
before the first plan year beginning on or after January 1, 1988, the
stated anniversary date may be later than the anniversary described in
the preceding sentence if it is no later than the earlier of the tenth
anniversary of the date the employee commenced participation in the plan
(or such earlier anniversary selected by the employer, if less than 10)
or the fifth anniversary of 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
[[Page 181]]
for the commencement of normal retirement benefits on different
retirement dates for different employees if each employee's normal
retirement date is determined on a reasonable basis with reference to an
otherwise uniform normal retirement age and the difference between the
normal retirement date and the uniform normal retirement age cannot
exceed six months for any employee. Thus, for example, benefits under a
plan do not fail to commence at a uniform normal retirement age of age
62 for purposes of Sec. 1.401(a)(4)-3(b)(2)(i), merely because the
plan's normal retirement date is defined as the last day of the plan
year nearest attainment of age 62.
Year of service. Year of service means a year of service as defined
in the plan for a specific purpose, including the method of crediting
service for that purpose under the plan.
[T.D. 8485, 58 FR 46820, Sept. 3, 1993, as amended by T.D. 8954, 66 FR
34545, June 29, 2001]
Sec. 1.401(a)(4)-13 Effective dates and fresh-start rules.
(a) General effective dates--(1) In general. Except as otherwise
provided in this section, Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13
apply to plan years beginning on or after January 1, 1994.
(2) Plans of tax-exempt organizations. In the case of plans
maintained by organizations exempt from income taxation under section
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective
plans), Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 apply to plan years
beginning on or after January 1, 1996.
(3) Compliance during transition period. For plan years beginning
before the effective date of these regulations, as set forth in
paragraph (a)(1) and (2) of this section, and on or after the first day
of the first plan year to which the amendments made to section 410(b) by
section 1112(a) of the Tax Reform Act of 1986 (TRA '86) apply, a plan
must be operated in accordance with a reasonable, good faith
interpretation of section 401(a)(4), taking into account pre-existing
guidance and the amendments made by TRA '86 to related provisions of the
Code (including, for example, sections 401(l), 401(a)(17), and 410(b)).
Whether a plan is operated in accordance with a reasonable, good faith
interpretation of section 401(a)(4) will generally be determined on the
basis of all the relevant facts and circumstances, including the extent
to which an employer has resolved unclear issues in its favor. A plan
will be deemed to be operated in accordance with a reasonable, good
faith interpretation of section 401(a)(4) if it is operated in
accordance with the terms of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13.
(b) Effective date for governmental plans. In the case of
governmental plans described in section 414(d), including plans subject
to section 403(b)(12)(A)(i) (nonelective plans), Secs. 1.401(a)(4)-1
through 1.401(a)(4)-13 apply to plan years beginning on or after the
later of January 1, 1996, or 90 days after the opening of the first
legislative session beginning on or after January 1, 1996, of the
governing body with authority to amend the plan, if that body does not
meet continuously. Such plans are deemed to satisfy section 401(a)(4)
for plan years before that effective date. For purposes of this
paragraph (b), the governing body with authority to amend the plan is
the legislature, board, commission, council, or other governing body
with authority to amend the plan.
(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
[[Page 182]]
under the general test of Sec. 1.401(a)(4)-3(c). See Sec. 1.401(a)(4)-
3(b)(6)(vii) and (d)(3)(iii).
(2) General rule. A defined benefit plan satisfies this paragraph
(c) if--
(i) Accrued benefits of employees in the fresh-start group are
frozen as of the fresh-start date in accordance with paragraph (c)(3) of
this section;
(ii) Accrued benefits after the fresh-start date for employees in
the fresh-start group are determined under one of the fresh-start
formulas in paragraph (c)(4) of this section; and
(iii) Paragraph (c)(5) of this section is satisfied.
(3) Definition of frozen--(i) General rule. An employee's accrued
benefit under a plan is frozen as of the fresh-start date if it is
determined as if the employee terminated employment with the employer as
of the fresh-start date (or the date the employee actually terminated
employment with the employer, if earlier), and without regard to any
amendment to the plan adopted after that date, other than amendments
recognized as effective as of or before that date under section 401(b)
or Sec. 1.401(a)(4)-11(g). The assumption that an employee has
terminated employment applies solely for purposes of this paragraph
(c)(3). Thus, for example, the fresh start has no effect on the service
taken into account for purposes of determining vesting and eligibility
for benefits, rights, and features under the plan.
(ii) Permitted compensation adjustments. An employee's accrued
benefit under a plan that satisfies paragraph (d) of this section does
not fail to be frozen as of the fresh-start date merely because the plan
makes the adjustments described in paragraph (d)(7) and (8) of this
section with regard to the fresh-start date. In addition, if the frozen
accrued benefit of an employee under the plan includes top-heavy minimum
benefits, an employee's accrued benefit under a plan does not fail to be
frozen as of the fresh-start date merely because the plan increases the
frozen accrued benefit of each employee in the fresh-start group solely
to the extent necessary to comply with the average compensation
requirement of section 416(c)(1)(D)(i).
(iii) Permitted changes in optional forms. An employee's accrued
benefit under a plan does not fail to be frozen as of the fresh-start
date merely because the plan provides a new optional form of benefit
with respect to the frozen accrued benefit, if--
(A) The optional form is provided with respect to each employee's
entire accrued benefit (i.e., accrued both before and after the fresh-
start date);
(B) The plan provided meaningful coverage as of the fresh-start
date, as described in paragraph (d)(4) of this section; and
(C) The plan provides meaningful current benefit accruals as
described in paragraph (d)(6) of this section.
(iv) Floor-offset plans. In the case of a plan that was a floor-
offset plan described in Sec. 1.401(a)(4)-8(d) prior to the fresh-start
date, an employee's accrued benefit as of the fresh-start date does not
fail to be frozen merely because the actuarial equivalent of the account
balance in the defined contribution plan that is offset against the
defined benefit plan varies as a result of investment return that is
different from the assumed interest rate used to determine the actuarial
equivalent of the account balance.
(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--
[[Page 183]]
(A) The amount determined under paragraph (c)(4)(i) of this section;
or
(B) The amount determined under paragraph (c)(4)(ii)(B) of this
section.
(5) Rules of application--(i) Consistency requirement. This
paragraph (c)(5) is not satisfied unless the fresh-start rules in this
paragraph (c) (and paragraph (d) of this section, if applicable) are
applied consistently to all employees in the fresh-start group. Thus,
for example, the same fresh-start date and fresh-start formula (within
the meaning of paragraph (c)(4) of this section) must apply to all
employees in the fresh-start group. Similarly, if a plan makes a fresh
start for all employees with accrued benefits on the fresh-start date
and, for a later plan year, is aggregated for purposes of section
401(a)(4) with another plan that did not make the same fresh start, the
aggregated plan must make a new fresh start in order to use the fresh-
start rules for that later plan year or any subsequent plan year.
(ii) Definition of fresh-start group. Generally, the fresh-start
group with respect to a fresh start consists of all employees who have
accrued benefits as of the fresh-start date and have at least one hour
of service with the employer after that date. However, a fresh-start
group with respect to a fresh start may consist exclusively of all
employees who have accrued benefits as of the fresh-start date, have at
least one hour of service with the employer after that date, and are--
(A) Section 401(a)(17) employees;
(B) Members of an acquired group of employees (provided the fresh-
start date is the date determined under paragraph (c)(5)(iii)(B) of this
section); or
(C) Employees with a frozen accrued benefit that is attributable to
assets and liabilities transferred to the plan as of a fresh-start date
in connection with the transfer (provided the fresh-start date is the
date determined under paragraph (c)(5)(iii)(C) of this section) and for
whom the current formula is different from the formula used to determine
the frozen accrued benefit.
(iii) Definition of fresh-start date. Generally, the fresh-start
date is the last day of a plan year. However, a plan may use a fresh-
start date other than the last day of the plan year if--
(A) The plan satisfied the safe harbor rules of Sec. 1.401(a)(4)-
3(b) for the period from the beginning of the plan year through the
fresh-start date;
(B) The fresh-start group is an acquired group of employees, and the
fresh-start date is the latest date of hire or transfer into an acquired
trade or business selected by the employer for any employees to be
included in the acquired group of employees; or
(C) The fresh-start group is the group of employees with a frozen
accrued benefit that is attributable to assets and liabilities
transferred to the plan and the fresh-start date is the date as of which
the employees begin accruing benefits under the plan.
(6) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. (a) Employer X maintains a defined benefit plan with a
calendar plan year. The plan formula provides an employee with a normal
retirement benefit at age 65 of one percent of average annual
compensation up to covered compensation multiplied by the employee's
years of service for Employer X, plus 1.5 percent of average annual
compensation in excess of covered compensation, multiplied by the
employee's years of service for Employer X up to 40.
(b) For plan years beginning after 1994, Employer X amends the plan
formula to provide a normal retirement benefit of 0.75 percent of
average annual compensation up to covered compensation multiplied by the
employee's total years of service for Employer X up to 35, plus 1.4
percent of average annual compensation in excess of covered compensation
multiplied by the employee's years of service for Employer X up to 35.
For plan years after 1994, each employee's accrued benefit is determined
under the fresh-start formula in paragraph (c)(4)(iii) of this section
(formula with extended wear-away), using December 31, 1994, as the
fresh-start date.
(c) As of December 31, 1994, Employee M has 10 years of service for
Employer X, has average annual compensation of $38,000, and has covered
compensation of $30,000. Employee M's accrued benefit as of December 31,
1994, is therefore $4,200 ((1 percentx$30,000x10 years)+(1.5
percentx$8,000x10 years)). As of December 31, 1995, Employee M has 11
years of service for Employer X, has average annual compensation of
$40,000 (determined by taking into account compensation before and after
the fresh-start date), and has covered compensation of $32,000. Employee
M's accrued benefit as of December 31, 1995, is $4,552, the greater of--
[[Page 184]]
(1) $4,552, the sum of Employee M's accrued benefit frozen as of
December 31, 1994, ($4,200) and the amended formula applied to Employee
M's years of service after 1994 ((0.75 percentx$32,000x1 year)+(1.4
percentx$8,000x1 year), or $352); or
(2) $3,872, the amended formula applied to Employee M's total years
of service ((0.75 percentx$32,000x11 years)+(1.4 percentx$8,000x11
years)).
Example 2. (a) Employer Y maintains a defined benefit plan, Plan A,
that has a calendar plan year. For the 1995 plan year, Plan A satisfies
the requirements for a safe harbor plan in Sec. 1.401(a)(4)-3(b).
Employer Y selects a date in 1995 for all the employees, freezes the
employees' accrued benefits as of that date under the rules of paragraph
(c)(3) of this section, and, in accordance with the rules of this
paragraph (c), amends Plan A to determine benefits for all employees
after that date using the formula with wear-away described in paragraph
(c)(4)(ii) of this section. The new benefit formula would satisfy the
requirements for a safe harbor plan in Sec. 1.401(a)(4)-3(b) if all
accrued benefits were determined under it.
(b) Because Plan A satisfied the requirements for a safe harbor plan
for the period from the beginning of the plan year through the selected
date, paragraph (c)(5)(iii)(A) of this section permits the selected date
to be a fresh-start date, even if it is not the last day of the plan
year. Thus, Plan A satisfies the requirements in this paragraph (c) for
a fresh start as of the fresh-start date.
(c) Under Sec. 1.401(a)(4)-3(b)(6)(vii), a plan does not fail to
satisfy the requirements of Sec. 1.401(a)(4)-3(b), merely because of
benefits accrued under a different formula prior to a fresh-start date.
Thus, Plan A still satisfies the safe harbor requirements of
Sec. 1.401(a)(4)-3(b) after the amendment to the benefit formula.
Because Plan A satisfied the requirements for a safe harbor plan for the
period from the beginning of the plan year, taking the amendment into
account, Employer Y may select any date within the plan year (which may
be the same date as the first fresh-start date) and apply the fresh-
start rules in this paragraph (c) a second time as of that date.
(d) Compensation adjustments to frozen accrued benefits--(1)
Introduction. In addition to the fresh-start rules in paragraph (c) of
this section, this paragraph (d) sets forth requirements that must be
satisfied in order for a plan to disregard increases in benefits accrued
as of a fresh-start date that are attributable to increases in
employees' compensation after the fresh-start date.
(2) In general. In the case of a defined benefit plan that is tested
under the safe harbors in Sec. 1.401(a)(4)-3(b) or Sec. 1.401(a)(4)-
8(c)(3), an employee's adjusted accrued benefit (determined under the
rules in paragraph (d)(8) of this section) may be substituted for the
employee's frozen accrued benefit in applying the formulas in paragraph
(c)(4) of this section (or paragraph (f)(2) of this section, if
applicable) if paragraphs (d)(3) through (d)(7) of this section are
satisfied. Thus, for example, in determining whether such a plan
satisfies Sec. 1.401(a)(4)-3(b), any compensation adjustments to the
employee's frozen accrued benefit described in paragraph (d)(8) of this
section are disregarded. Similarly, in the case of a defined benefit
plan tested under the general test in Sec. 1.401(a)(4)-3(c), the
compensation adjustments described in paragraph (d)(8) of this section
may be disregarded under the rules of Sec. 1.401(a)(4)-3(d)(3)(iii) if
paragraphs (d)(3) through (d)(7) of this section are satisfied. Of
course, any increases in accrued benefits exceeding these adjustments
must be taken into account under the general test, and a plan providing
such excess increases generally will fail to satisfy the safe harbor
requirements of Sec. 1.401(a)(4)-3(b). Where paragraphs (d)(3) through
(d)(7) of this section are satisfied with respect to a plan as of 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
[[Page 185]]
sentence of this paragraph (d)(3) was added primarily in order to
provide additional benefits to HCEs that are disregarded under the
special testing rules described in this paragraph (d).
(ii) Post-fresh-start date. The plan by its terms must provide that
the accrued benefits of each employee in the fresh-start group after the
fresh-start date be at least equal to the employee's adjusted accrued
benefit (i.e., the frozen accrued benefit as of the fresh-start date,
adjusted as provided under paragraph (d)(7) of this section, plus the
compensation adjustments described in paragraph (d)(8) of this section).
(4) Meaningful coverage as of fresh-start date. The plan must have
provided meaningful coverage as of the fresh-start date. A plan provided
meaningful coverage as of the fresh-start date if the group of employees
with accrued benefits under the plan as of the fresh-start date
satisfied the minimum coverage requirements of section 410(b) as in
effect on that date (determined without regard to section 410(b)(6)(C)).
In order to satisfy the requirement in the preceding sentence, an
employer may amend the plan to grant past service credit under the
formula in effect as of the fresh-start date to NHCEs, if the amount of
past service granted them is reasonably comparable, on average, to the
amount of past service HCEs have under the plan. Any benefit increase
that results from the grant of past service credit to a NHCE under this
paragraph (d)(4) is included in the employee's frozen accrued benefit.
(5) Meaningful ongoing coverage--(i) General rule. The fresh-start
group must have satisfied the minimum coverage requirements of section
410(b) for all plan years from the first plan year beginning after the
fresh-start date through the current plan year. Thus, if a fresh-start
group fails to satisfy the minimum coverage requirements of section
410(b) for any plan year, this paragraph (d)(5) is not satisfied for
that plan year or any subsequent plan year; however, such a failure is
not taken into account in determining whether this paragraph (d)(5) is
satisfied for any previous plan year.
(ii) Alternative rules. Notwithstanding paragraph (d)(5)(i) of this
section, a fresh-start group is deemed to satisfy this paragraph (d)(5)
for all plan years following the fresh-start date if any one of the
following requirements is satisfied:
(A) Section 410(b) coverage for first five years. The fresh-start
group must have satisfied the minimum coverage requirements of section
410(b) for the first five plan years beginning after the fresh-start
date.
(B) Ratio percentage coverage as of fresh-start date. The fresh-
start group must have satisfied the ratio percentage test of
Sec. 1.410(b)-2(b)(2) as of the fresh-start date.
(C) Fresh start for acquired group of employees. The fresh-start
group must consist of an acquired group of employees that satisfied the
minimum coverage requirements of section 410(b) (determined without
regard to section 410(b)(6)(C)) as of the fresh-start date.
(D) Fresh start before applicable effective date. The fresh-start
date with respect to the fresh-start group must have been on or before
the effective date applicable to the plan under paragraph (a) or (b) of
this section.
(6) Meaningful current benefit accruals. The benefit formula and
accrual method under the plan that applies to the fresh-start group in
the aggregate must 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
[[Page 186]]
is adjusted so that the base benefit percentage is not less than 50
percent of the excess benefit percentage. In the case of a plan that is
a PIA offset plan (as defined in paragraph (2)(iii) of the definition of
QSUPP in Sec. 1.401(a)(4)-12) as of the fresh-start date, each
employee's offset as applied to determine the frozen accrued benefit is
adjusted so that it does not exceed 50 percent of the benefit determined
without applying the offset.
(iii) Other plans. In the case of a plan that is not described in
paragraph (d)(7)(ii) of this section, each employee's frozen accrued
benefit is adjusted in a manner that is economically equivalent to the
adjustment required under that paragraph, taking into account the plan's
benefit formula, accrual rate, and relevant employee factors, such as
period of service.
(8) Adjusted accrued benefit--(i) General rule. The term adjusted
accrued benefit means an employee's frozen accrued benefit that is
adjusted as provided in paragraph (d)(7) of this section and then
multiplied by a fraction (not less than one), the numerator of which is
the employee's compensation for the current plan year and the
denominator of which is the employee's compensation as of the fresh-
start date determined under the same definition. For purposes of this
adjustment, the compensation definition must be either the same
compensation definition and formula used to determine the frozen accrued
benefit or average annual compensation (determined without regard to
Sec. 1.401(a)(4)-3(e)(2)(ii)(A) (use of plan year compensation)).
(ii) Alternative formula for pre-effective-date fresh starts. In the
case of a fresh-start date before the effective date that applies to the
plan under paragraph (a) or (b) of this section, the adjusted accrued
benefit may be determined by multiplying the frozen accrued benefit by a
fraction (not less than one) determined under this paragraph (d)(8)(ii).
The numerator of the fraction is the employee's average annual
compensation for the current plan year. The denominator of the fraction
is the employee's reconstructed average annual compensation as of the
fresh-start date. An employee's reconstructed average annual
compensation is determined by--
(A) Selecting a single plan year beginning after the fresh-start
date but beginning not later than the last day of the first plan year to
which these regulations apply under paragraph (a) or (b) of this
section;
(B) Determining the employee's average annual compensation for the
selected plan year under the same method used to determine the
employee's average annual compensation for the current plan year under
this paragraph (d)(8)(ii); and
(C) Multiplying the employee's average annual compensation for the
selected plan year by a fraction, the numerator of which is the
employee's compensation as of the fresh-start date determined under the
same compensation definition and formula used to determine the
employee's frozen accrued benefit and the denominator of which is the
employee's compensation for the selected plan year determined under the
compensation definition and formula used to determine the employee's
frozen accrued benefit.
(iii) Effect of section 401(a)(17). In determining the numerators
and the denominators of the fractions described in this paragraph
(d)(8), the annual compensation limit under section 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
[[Page 187]]
employee's frozen accrued benefit) in the benefit formula used to
determine the frozen accrued benefit. For this purpose, insignificant
changes in the underlying definition of compensation to reflect current
compensation practices will not be treated as a change in the definition
of compensation. A plan may apply the alternative in this paragraph
(d)(8)(v), only if it is reasonable to expect as of the fresh-start date
that, over time, the use of this method instead of the general rule of
paragraph (d)(8)(i) will not discriminate significantly in favor of
HCEs.
(9) Examples. The following examples illustrate the rules of this
paragraph (d).
Example 1. (a) Employer X maintains a defined benefit plan that is
an excess plan with a calendar plan year. For plan years before 1989,
the plan is integrated with benefits provided under the Social Security
Act, providing each employee with a normal retirement benefit equal to
one percent of the employee's average annual compensation in excess of
the employee's covered compensation, multiplied by the employee's years
of service for Employer X. The benefit formula thus provides no benefit
with respect to average annual compensation up to covered compensation.
(b) As of December 31, 1988, Employee M has 10 years of service for
Employer X and has covered compensation of $25,000 and average annual
compensation of $20,000. Employee M's average annual compensation has
never exceeded $20,000. Therefore, as of December 31, 1988, Employee M's
accrued benefit under the plan is zero.
(c) Effective with the 1989 plan year, the plan is amended to
provide each employee with a normal retirement benefit of 0.6 percent of
average annual compensation up to covered compensation plus 1.2 percent
of average annual compensation in excess of covered compensation,
multiplied by the employee's years of service up to 35. The plan also
provides that, for plan years after 1988, each employee's accrued
benefit is determined under the formula in paragraph (c)(4)(i) of this
section (formula without wear-away) and, in applying the fresh-start
formula, each employee's frozen accrued benefit under paragraph
(c)(4)(i) of this section will be adjusted under this paragraph (d),
using the same compensation definition and formula used to determine the
frozen accrued benefit under paragraph (d)(8)(i) of this section.
(d) The plan uses the permitted disparity of section 401(l) and thus
must also make the minimum benefit adjustment under paragraph (d)(7) of
this section. Because the excess benefit percentage under the plan for
years before 1989 was one percent, the plan must provide a base benefit
percentage for those years of at least 0.5 percent. After the minimum
benefit adjustment, Employee M's accrued benefit as of December 31,
1988, is $1,000 (0.5 percentx$20,000x10 years).
(e) As of December 31, 1992, Employee M has 14 years of service and
has covered compensation of $30,000 and average annual compensation of
$35,000. Employee M's adjusted accrued benefit as of December 31, 1992,
is $1,750 ($1,000x$35,000/$20,000), and Employee M's accrued benefit as
of December 31, 1992, is $2,710 (the sum of $1,750 plus $960 ((0.6
percentx$30,000x4 years) plus (1.2 percentx$5,000x4 years))).
Example 2. (a) The facts are the same as in Example 1, except that
in determining adjusted accrued benefits, the plan specifies the
alternative method of paragraph (d)(8)(v) of this section. This method
may be used because it is reasonable to expect as of the fresh-start
date that, over time, the use of this method instead of the general rule
of paragraph (d)(8)(i) will not discriminate significantly in favor of
HCEs.
(b) As of December 31, 1992, Employee M's adjusted accrued benefit
is $2,000 (10 years of service prior to the fresh-start datex(0.5
percent of $30,000+1.0 percent of the excess of $35,000 over $30,000)).
(c) Alternatively, Employer X may choose to use the method of
paragraph (d)(8)(v) of this section but freezes the covered compensation
level at the dollar level in place as of the fresh-start date. In such
case, Employee M's adjusted accrued benefit as of December 31, 1992,
would have been $2,250 (10 years of service prior to the fresh-start
datex(0.5 percent of $25,000+1.0 percent of the excess of $35,000 over
$25,000)). This method may be used because it is reasonable to expect as
of the fresh-start date that, over time, the use of this method instead
of the general rule of paragraph (d)(8)(i) will not discriminate
significantly in favor of HCEs.
Example 3. (a) The facts are the same as in Example 1, except that
for plan years before 1989, the plan provided a minimum benefit to
certain employees equal to $120 per year of service. Employee M is
entitled to the minimum benefit, and thus, Employee M's frozen accrued
benefit as of December 31, 1988 was $1,200 (the greater of 10 years of
servicex$120 and $1,000, Employee M's benefit under the underlying
formula, after the minimum benefit adjustment of paragraph (d)(7) of
this section).
(b) Employer X's plan specifies instead the alternative method of
adjusting accrued benefits described in paragraph (d)(8)(v) of this
section. (The fact that a minimum benefit applying to certain employees
is not adjusted under the alternative method of paragraph (d)(8)(v) of
this section, but would be adjusted under the general rule of paragraph
[[Page 188]]
(d)(8)(i) of this section does not change the conclusion in Example 2,
that the plan may apply the alternative method).
(e) Determination of initial theoretical reserve for target benefit
plans--(1) General rule. In the case of a target benefit plan the stated
benefit formula under which takes into account service for years in
which the plan did not satisfy Sec. 1.401(a)(4)-8(b)(3), as permitted
under Sec. 1.401(a)(4)-8(b)(3)(vii), the theoretical reserve as of the
determination date for the last plan year beginning before the first day
of the first plan year in which the plan satisfies Sec. 1.401(a)(4)-
8(b)(3) of an employee who was a participant in the plan on that
determination date, is determined as follows:
(i) Determine the actuarial present value, as of that determination
date, of the stated benefit that the employee is projected to have at
the employee's normal retirement age, using the actuarial assumptions,
the provisions of the plan, and the employee's compensation as of that
determination date. For an employee whose attained age equals or exceeds
the employee's normal retirement age, determine the actuarial present
value of the employee's stated benefit at the employee's current age,
but using an immediate straight life annuity factor for an employee
whose attained age equals the employee's normal retirement age.
(ii) Calculate the actuarial present value of future required
employer contributions (without regard to limitations under section 415
or additional contributions described in Sec. 1.401(a)(4)-8(b)(3)(v)) as
of that determination date (i.e., the actuarial present value of the
level contributions due for each plan year through the end of the plan
year in which the employee attains normal retirement age). This
calculation is made assuming that the required contribution in each
future year will be equal to the required contribution for the plan year
that includes that determination date, and applying the interest rate
that was used in determining that required contribution.
(iii) Determine the excess, if any, of the amount determined in
paragraph (e)(1)(i) of this section over the amount determined in
paragraph (e)(1)(ii) of this section. This excess is the employee's
theoretical reserve on that determination date.
(2) Example. The following example illustrates the determination of
an employee's theoretical reserve.
Example. (a) A target benefit plan was adopted and in effect before
September 19, 1991, and satisfied the requirements of Rev. Rul. 76-464,
1976-2 C.B. 115, with respect to all years credited under the stated
benefit formula through 1993. The plan provides a stated benefit equal
to 40 percent of compensation, payable annually as a straight life
annuity beginning at normal retirement age. Normal retirement age under
the plan is 65. The stated interest rate under the plan is six percent.
The determination date for required contributions under the plan is the
last day of the plan year. Employee M is 38 years old on the
determination date for the 1993 plan year, has participated in the plan
for five years, and has compensation equal to $60,000 in 1993. The
amount of employer contribution to Employee M's account for 1993 was
$2,468.
(b) Under these facts, Employee M's theoretical reserve is equal to
$13,909, calculated as follows:
(1) The actuarial present value of Employee M's stated benefit is
calculated using the actuarial assumptions, provisions of the plan and
Employee M's compensation as of the determination date for the 1993 plan
year. This amount is equal to $46,512, Employee M's stated benefit of
$24,000 ($60,000 multiplied by 40 percent), multiplied by 1.938, the
actuarial present value factor applicable 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
[[Page 189]]
the rules of paragraph (c) of this section as modified under this
paragraph (f). Paragraph (f)(2) of this section provides an alternative
formula that may be used in addition to the formulas in paragraphs
(c)(2) through (c)(4) of this section. Paragraph (f)(3) of this section
sets forth certain limitations on use of the formulas in paragraph (c)
or (f)(2) of this section.
(2) Alternative formula--(i) In general. An employee's accrued
benefit under the plan is equal to the greater of--
(A) The employee's frozen accrued benefit, or
(B) The employee's accrued benefit determined under the plan's
benefit formula applicable to benefit accruals in the current plan year
as applied to years of service after the fresh-start date, modified in
accordance with paragraph (f)(2)(ii) of this section.
(ii) Addition of opening hypothetical account. As of the first day
after the fresh-start date, the plan must credit each employee's
hypothetical account with an amount equal to the employee's opening
hypothetical account (determined under paragraph (f)(2)(iii) of this
section), adjusted for interest for the period that begins on the first
day after the fresh-start date and that ends at normal retirement age.
The interest adjustment in the preceding sentence must be made using the
same interest rate applied to the hypothetical allocation for the first
plan year beginning after the fresh-start date.
(iii) Determination of opening hypothetical account--(A) General
rule. An employee's opening hypothetical account equals the actuarial
present value of the employee's frozen accrued benefit as of the fresh-
start date. For this purpose, if the plan provides for a single sum
distribution as of the fresh-start date, the actuarial present value of
the employee's frozen accrued benefit as of the fresh-start date equals
the amount of a single sum distribution payable under the plan on that
date, assuming that the employee terminated employment on the fresh-
start date, the employee's accrued benefit was 100-percent vested, and
the employee satisfied all eligibility requirements under the plan for
the single sum distribution. If the plan does not offer a single sum
distribution as of the fresh-start date, the actuarial present value of
the employee's frozen accrued benefit as of the fresh-start date must be
determined using a standard mortality table and the applicable section
417(e) rates, as defined in Sec. 1.417(e)-1(d).
(B) Alternative opening hypothetical account. Alternatively, the
employee's opening hypothetical account is the greater of the opening
hypothetical account determined under paragraph (f)(2)(ii)(A) of this
section and the employee's hypothetical account as of the fresh-start
date determined in accordance with Sec. 1.401(a)(4)-8(c)(3)(v)(A)
calculated under the plan's benefit formula applicable to benefit
accruals in the current plan year as applied to the employee's total
years of service through the fresh-start date in a manner that satisfies
the past service credit rules of Sec. 1.401(a)(4)-8(c)(3)(viii).
(3) Limitations on formulas--(i) Past service restriction. If the
plan does not satisfy the uniform hypothetical allocation formula
requirement of Sec. 1.401(a)(4)-8(c)(3)(iii)(B) as of the fresh-start
date, under Sec. 1.401(a)(4)-8(c)(3)(viii) the plan may not provide for
past service credits, and thus may not use the formula in paragraph
(c)(3) of this section (formula with wear-away), the formula in
paragraph (c)(4) of this section (formula with extended 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,
[[Page 190]]
and minimum benefit adjustment, respectively).
[T.D. 8360, 56 FR 47598, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992; 57 FR
10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46823, Sept. 3,
1993]
Sec. 1.401(a)(5)-1 Special rules relating to nondiscrimination requirements.
(a) In general. Section 401(a)(5) sets out certain provisions that
will not of themselves be discriminatory within the meaning of section
410(b)(2)(A)(i) or section 401(a)(4). The exceptions specified in
section 401(a)(5) are not an exclusive enumeration, but are merely a
recital of provisions frequently encountered that will not of themselves
constitute prohibited discrimination in contributions or benefits. See
section 401(a)(4) and the regulations thereunder for the basic
nondiscrimination rules. See Sec. 1.410(b)-4 for the rule of section
410(b)(2)(A)(i) (relating to the nondiscriminatory classification test
that is part of the minimum coverage requirements) referred to in
section 401(a)(5)(A). See paragraphs (b) through (f) of this section for
special rules used in applying the section 401(a)(4) nondiscrimination
requirements under the remaining provisions of section 401(a)(5).
(b) Salaried or clerical employees. A plan does not fail to satisfy
the nondiscrimination requirements of section 401(a)(4) merely because
contributions or benefits provided under the plan are limited to
salaried or clerical employees.
(c) Uniform relationship to compensation. A plan does not fail to
satisfy the nondiscrimination requirements of section 401(a)(4) merely
because the contributions or benefits of, or on behalf of, the employees
under the plan bear a uniform relationship to the compensation (within
the meaning of section 414(s)) of those employees.
(d) Certain disparity permitted. Under section 401(a)(5)(C), a plan
does not discriminate in favor of highly compensated employees (as
defined in section 414(q)), within the meaning of section 401(a)(4), in
the amount of employer-provided contributions or benefits solely
because--
(1) In the case of a defined contribution plan, employer
contributions allocated to the accounts of employees favor highly
compensated employees in a manner permitted by section 401(l) (relating
to permitted disparity in plan contributions and benefits), and
(2) In the case of a defined benefit plan, employer-provided
benefits favor highly compensated employees in a manner permitted by
section 401(l) (relating to permitted disparity in plan contributions
and benefits).
See Secs. 1.401(l)-1 through 1.401(l)-6 for rules under which a plan may
satisfy section 401(l) for purposes of the safe harbors of
Secs. 1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b).
(e) Defined benefit plans integrated with social security--(1) In
general. Under section 401(a)(5)(D), a defined benefit plan does not
discriminate in favor of highly compensated employees (as defined in
section 414(q)) with respect to the amount of employer-provided
contributions or benefits solely because the plan provides that, with
respect to each employee, the employer-provided accrued retirement
benefit under the plan is limited to the excess (if any) of--
(i) The employee's final pay from the employer, over
(ii) The employer-provided retirement benefit created under the
Social Security Act and attributable to service by the employee for the
employer.
(2) Final pay. For purposes of paragraph (e)(1)(i) of this section,
an employee's final pay from the employer as 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
[[Page 191]]
the specified 12-month period is uniformly and consistently applied with
respect to all employees. In determining an employee's final pay,
compensation for any year in excess of the applicable limit under
section 401(a)(17) for the year may not be taken into account.
(3) Rules for determining amount of employer-provided social
security retirement benefit. For purposes of paragraph (e)(1)(ii) of
this section, the following rules apply.
(i) The employer-provided retirement benefit on which any reduction
or offset in the employee's accrued retirement benefit is based is
limited solely to the employer-provided primary insurance amount payable
under section 215 of the Social Security Act attributable to service by
the employee for the employer.
(ii) The employer-provided primary insurance amount attributable to
service by the employee for the employer is determined by multiplying
the employer-provided portion of the employee's projected primary
insurance amount by a fraction (not exceeding 1), the numerator of which
is the employee's number of complete years of covered service for the
employer under the Social Security Act, and the denominator of which is
35.
(4) Projected primary insurance amount. (i) As of a plan year, an
employee's projected primary insurance amount is the primary insurance
amount, determined as of the close of the plan year (the ``determination
date''), payable to the employee upon attainment of the employee's
social security retirement age (as determined under section 415(b)(8)),
assuming the employee's annual compensation from the employer that is
treated as wages for purposes of the Social Security Act remains the
same from the plan year until the employee's attainment of social
security retirement age. With respect to service by the employee for the
employer before the determination date, the actual compensation paid to
the employee by the employer during all periods of service of the
employee for the employer covered by the Social Security Act must be
used in determining an employee's projected primary insurance amount.
With respect to years before the employee's commencement of service for
the employer, in determining the employee's projected primary insurance
amount, it may be assumed that the employee received compensation in an
amount computed by using a six-percent salary scale projected backwards
from the determination date to the employee's 21st birthday. However, if
the employee provides the employer with satisfactory evidence of the
employee's actual past compensation for the prior years treated as wages
under the Social Security Act at the time the compensation was earned
and the actual past compensation results in a smaller projected primary
insurance amount, the plan must use the actual past compensation. The
plan administrator must give clear written notice to each employee of
the employee's right to supply actual compensation history and of the
financial consequences of failing to supply the history. The notice must
be given each time the summary plan description is provided to the
employee and must also be given upon the employee's separation from
service. The notice must also state that the employee can obtain the
actual compensation history from the Social Security Administration. In
determining the employee's projected primary insurance amount, the
employer may not take into account any compensation from any other
employer while the employee is employed by the employer.
(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
[[Page 192]]
411(c) for rules relating to the allocation of accrued benefits between
employer contributions and employee contributions.
(6) Additional rules. (i) As of a plan year, paragraph (e)(1) of
this section does not apply to the extent that its application would
result in a decrease in an employee's accrued benefit. See sections
411(b)(1)(G) and 411(d)(6).
(ii) Section 401(a)(5)(D) and this paragraph (e) do not apply to a
plan maintained by an employer, determined for purposes of the Federal
Insurance Contributions Act or the Railroad Retirement Tax Act, as
applicable, that does not pay any wages within the meaning of section
3121(a) or compensation within the meaning of section 3231(e). For this
purpose, a plan maintained for a self-employed individual within the
meaning of section 401(c)(1), who is also subject to the tax under
section 1401, is deemed to be a plan maintained by an employer that pays
wages within the meaning of section 3121(a).
(iii) If a plan provides for the payment of an employee's accrued
retirement benefit (whether or not subsidized) commencing before an
employee's social security retirement age, the projected employer-
provided primary insurance amount attributable to service by the
employee for the employer (as determined under paragraphs (e)(3) and
(e)(4) of this section) that may be applied as an offset to limit the
employee's accrued retirement benefit must be reduced in accordance with
Sec. 1.401(l)-3(e)(1). The reduction is made by multiplying the
employee's projected employer-provided primary insurance amount by a
fraction, the numerator of which is the appropriate factor under
Sec. 1.401(l)-3(e)(1), and the denominator of which is 0.75 percent.
(iv) The Commissioner may, in revenue rulings, notices or other
documents of general applicability, prescribe additional rules that may
be necessary or appropriate to carry out the purposes of this section,
including rules relating to the determination of an employee's projected
primary insurance amount attributable to the employee's service for
former employers and rules applying section 401(a)(5)(D) with respect to
an employer that pays wages within the meaning of section 3121(a) or
compensation within the meaning of section 3231(e) for some years and
not for other years.
(7) Examples. The following examples illustrate this paragraph (e).
Example 1. Employer Z maintains a noncontributory defined benefit
plan that uses the calendar year as its plan year. The plan provides a
normal retirement benefit, commencing at age 65, equal to $500 a year,
multiplied by the employee's years of service for Z, limited to the
excess of the amount of the employee's final pay from Z (as determined
in accordance with paragraph (e)(2) of this section) over the employee's
employer-provided primary insurance amount attributable to the
employee's service for Z. If an employee's social security retirement
age is greater than 65, the plan provides for reduction of the
employee's employer-provided primary insurance amount in accordance with
paragraph (e)(6)(iii) of this section. The plan provides no limitation
on the number of years of service taken into account in determining
benefits under the plan. Employee A retires on July 6, 1995, at A's
social security retirement age of 65 with 35 years of service for Z. The
plan uses the plan year as the 12- month period for determining an
employee's year of final highest pay from the employer. A's compensation
for A's final 5 plan years is as follows:
1995 plan year................................................ $10,500
1994 plan year................................................ $20,000
1993 plan year................................................ $18,000
1992 plan year................................................ $17,000
1991 plan year................................................ $16,500
A's annual primary insurance amount under social security,
determined as of A's social security retirement age, is $9,000, of which
$4,500 is the employer-provided portion attributable to A's service for
Z ($9,000 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.
[[Page 193]]
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 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 x Final pay amount under is applied Column 3,
compensation 0.9 x years social in full but not
of service/ security (Column 4 - less than
30) attributable Column 5) Column 7
to service for prior
for employer year)
----------------------------------------------------------------------------------------------------------------
25.............................. $15,000 $11,250 $15,400 $4,000 $11,400 $11,250
26.............................. 14,500 11,310 15,400 4,200 11,200 11,250
[[Page 194]]
27.............................. 15,500 12,555 15,800 4,400 11,400 11,400
28.............................. 15,500 13,020 16,000 4,500 11,500 11,500
29.............................. 15,000 13,050 16,000 4,800 11,200 11,500
30.............................. 14,500 13,050 16,000 5,000 11,000 11,500
----------------------------------------------------------------------------------------------------------------
(f) Certain benefits not taken into account. In determining whether
a plan satisfies section 401(a)(4) and this section, other benefits
created under state or federal law (e.g., worker's compensation benefits
or black lung benefits) may not be taken into account.
(g) More than one plan treated as single plan. [Reserved]
(h) Effective date--(1) In general. Except as provided in paragraph
(h)(2) of this section, this section is effective for plan years
beginning on or after January 1, 1994.
(2) Plans of tax-exempt organizations. In the case of plans
maintained by organizations exempt from income taxation under section
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective
plans), this section is effective for plan years beginning on or after
January 1, 1996.
(3) Compliance during transition period. For plan years beginning
before the effective date of these regulations, as set forth in
paragraphs (h)(1) and (h)(2) of this section, and on or after the first
day of the first plan year to which the amendments made to section
401(a)(5) by section 1111(b) of the Tax Reform Act of 1986 (TRA '86)
apply, a plan must be operated in accordance with a reasonable, good
faith interpretation of section 401(a)(5), taking into account pre-
existing guidance and the amendments made by TRA '86 to related
provisions of the Code. Whether a plan is operated in accordance with a
reasonable, good faith interpretation of section 401(a)(5) will
generally be determined based on all of the relevant facts and
circumstances, including the extent to which an employer has resolved
unclear issues in its favor. A plan will be deemed to be operated in
accordance with a reasonable, good faith interpretation of section
401(a)(5) if it is operated in accordance with the terms of this
section.
[T.D. 8359, 56 FR 47614, Sept. 19, 1991; 57 FR 10817, 10818, 10951, Mar.
31, 1992, as amended by T.D. 8486, 58 FR 46830, Sept. 3, 1993]
Sec. 1.401(a)(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
[[Page 195]]
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 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
[[Page 196]]
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.
(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
[[Page 197]]
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 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
[[Page 198]]
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
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
[[Page 199]]
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 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,
[[Page 200]]
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 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
[[Page 201]]
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.
(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)
[[Page 202]]
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 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,
[[Page 203]]
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 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
[[Page 204]]
(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.
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
[[Page 205]]
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.
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.
[[Page 206]]
(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.
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
[[Page 207]]
(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 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.
[[Page 208]]
(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 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
[[Page 209]]
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 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,
[[Page 210]]
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 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)-11(c)(3)(ii).
[T.D. 8375, 56 FR 63416, Dec. 4, 1991, as amended by T.D. 8794, 63 FR
70338, Dec. 21, 1998; T.D. 8891, 65 FR 44682, July 19, 2000]
Sec. 1.401(a)(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
[[Page 211]]
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), 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]
[[Page 212]]
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
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
[[Page 213]]
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 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,
[[Page 214]]
(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 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)-11(c)(3)(ii).
This determination is made in accordance with the rules of sections
411(a)(11) and 417(e).
[[Page 215]]
(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; T.D. 8891, 65 FR 44682, July 19, 2000]
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 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.
[[Page 216]]
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).
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
[[Page 217]]
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 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
[[Page 218]]
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 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
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rollover distribution required to accept the distribution?
Q-14. If a plan accepts an invalid rollover contribution, whether or
not as a direct rollover, how will the contribution be treated for
purposes of applying the qualification requirements of section 401(a) or
403(a) to the plan?
Q-15: 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-16: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset amount?
Q-17: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
Q-18: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
Q-19: 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 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
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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 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
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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 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
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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 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: 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).
Q-14. If a plan accepts an invalid rollover contribution, whether or
not as a direct rollover, how will the contribution be treated for
purposes of applying the qualification requirements of section 401(a) or
403(a) to the plan?
A-14. (a) Acceptance of invalid rollover contribution. If a plan
accepts an invalid rollover contribution, the contribution will be
treated, for purposes of applying the qualification requirements of
section 401(a) or 403(a) to the receiving plan, as if it were a valid
rollover contribution, if the following two conditions are satisfied.
First, when accepting the amount from the employee
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as a rollover contribution, the plan administrator of the receiving plan
reasonably concludes that the contribution is a valid rollover
contribution. While evidence that the distributing plan is the subject
of a determination letter from the Commissioner indicating that the
distributing plan is qualified would be useful to the receiving plan
administrator in reasonably concluding that the contribution is a valid
rollover contribution, it is not necessary for the distributing plan to
have such a determination letter in order for the receiving plan
administrator to reach that conclusion. Second, if the plan
administrator of the receiving plan later determines that the
contribution was an invalid rollover contribution, the amount of the
invalid rollover contribution, plus any earnings attributable thereto,
is distributed to the employee within a reasonable time after such
determination.
(b) Definitions. For purposes of this Q&A-14:
(1) An invalid rollover contribution is an amount that is accepted
by a plan as a rollover within the meaning of Sec. 1.402(c)-2, Q&A-1 (or
as a rollover contribution within the meaning of section
408(d)(3)(A)(ii)) but that is not an eligible rollover distribution from
a qualified plan (or an amount described in section 408(d)(3)(A)(ii)) or
that does not satisfy the other requirements of section 401(a)(31),
402(c), or 408(d)(3) for treatment as a rollover or a rollover
contribution.
(2) A valid rollover contribution is a contribution that is accepted
by a plan as a rollover within the meaning of Sec. 1.402(c)-2, Q&A-1 or
as a rollover contribution within the meaning of section 408(d)(3) and
that satisfies the requirements of section 401(a)(31), 402(c), or
408(d)(3) for treatment as a rollover or a rollover contribution.
(c) Examples. The provisions of paragraph (a) of this Q&A-14 are
illustrated by the following examples:
Example 1. (i) Employer X maintains for its employees Plan M, a
profit sharing plan qualified under section 401(a). Plan M provides that
any employee of Employer X may make a rollover contribution to Plan M.
Employee A is an employee of Employer X, will not have attained age
70\1/2\ by the end of the year, and has a vested account balance in Plan
O (a plan maintained by Employee A's prior employer). Employee A elects
a single sum distribution from Plan O and elects that it be paid to Plan
M in a direct rollover.
(ii) Employee A provides the plan administrator of Plan M with a
letter from the plan administrator of Plan O stating that Plan O has
received a determination letter from the Commissioner indicating that
Plan O is qualified.
(iii) Based upon such a letter, absent facts to the contrary, a plan
administrator may reasonably conclude that Plan O is qualified and that
the amount paid as a direct rollover is an eligible rollover
distribution.
Example 2. (i) The facts are the same as Example 1, except that,
instead of the letter provided in paragraph (ii) of Example 1, Employee
A provides the plan administrator of Plan M with a letter from the plan
administrator of Plan O representing that Plan O satisfies the
requirements of section 401(a) (or representing that Plan O is intended
to satisfy the requirements of section 401(a) and that the administrator
of Plan O is not aware of any Plan O provision or operation that would
result in the disqualification of Plan O).
(ii) Based upon such a letter, absent facts to the contrary, a plan
administrator may reasonably conclude that Plan O is qualified and that
the amount paid as a direct rollover is an eligible rollover
distribution.
Example 3. (i) Same facts as Example 1, except that Employee A
elects to receive the distribution from Plan O and wishes to make a
rollover contribution described in section 402 rather than a direct
rollover.
(ii) When making the rollover contribution, Employee A certifies
that, to the best of Employee A's knowledge, Employee A is entitled to
the distribution as an employee and not as a beneficiary, the
distribution from Plan O to be contributed to Plan M is not one of a
series of periodic payments, the distribution from Plan O was received
by Employee A not more than 60 days before the date of the rollover
contribution, and the entire amount of the rollover contribution would
be includible in gross income if it were not being rolled over.
(iii) As support for these certifications, Employee A provides the
plan administrator of Plan M with two statements from Plan O. The first
is a letter from the plan administrator of Plan O, as described in
Example 1, stating that Plan O has received a determination letter from
the Commissioner indicating that Plan O is qualified. The second is the
distribution statement that accompanied the distribution check. The
distribution statement indicates that the distribution is being made by
Plan O to Employee A, indicates the gross amount of the distribution,
and indicates the amount withheld as Federal income tax. The amount
withheld as Federal income tax is 20 percent of the gross
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amount of the distribution. Employee A contributes to Plan M an amount
not greater than the gross amount of the distribution stated in the
letter from Plan O and the contribution is made within 60 days of the
date of the distribution statement from Plan O.
(iv) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the distribution
otherwise satisfies the requirements of section 402(c) for treatment as
a rollover contribution.
Example 4. (i) The facts are the same as in Example 3, except that,
rather than contributing the distribution from Plan O to Plan M,
Employee A contributes the distribution from Plan O to IRA P, an
individual retirement account described in section 408(a). After the
contribution of the distribution from Plan O to IRA P, but before the
year in which Employee A attains age 70\1/2\, Employee A requests a
distribution from IRA P and decides to contribute it to Plan M as a
rollover contribution. To make the rollover contribution, Employee A
endorses the check received from IRA P as payable to Plan M.
(ii) In addition to providing the certifications described in
Example 3 with respect to the distribution from Plan O, Employee A
certifies that, to the best of Employee A's knowledge, the contribution
to IRA P was not made more than 60 days after the date Employee A
received the distribution from Plan O, no amount other than the
distribution from Plan O has been contributed to IRA P, and the
distribution from IRA P was received not more than 60 days earlier than
the rollover contribution to Plan M.
(iii) As support for these certifications, in addition to the two
statements from Plan O described in Example 3, Employee A provides
copies of statements from IRA P. The statements indicate that the
account is identified as an IRA, the account was established within 60
days of the date of the letter from Plan O informing Employee A that an
amount had been distributed, and the opening balance in the IRA does not
exceed the amount of the distribution described in the letter from Plan
O. There is no indication in the statements that any additional
contributions have been made to IRA P since the account was opened. The
date on the check from IRA P is less than 60 days before the date that
Employee A makes the contribution to Plan M.
(iv) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the contribution
by Employee A is a rollover contribution described in section
408(d)(3)(A)(ii) that satisfies the other requirements of section
408(d)(3) for treatment as a rollover contribution.
Q-15: 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-15: 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 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-16: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset amount?
A-16: 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
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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-16. 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-17: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
A-17: 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-18: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
A-18: (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-18 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-19: When must a qualified plan be amended to comply with section
401(a)(31)?
A-19: 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
(b) The amendment applies retroactively to January 1, 1993.
[T.D. 8619, 60 FR 49204, Sept. 22, 1995, as amended by T.D. 8880, 65 FR
21314, Apr. 21, 2000; 65 FR 34534, May 30, 2000]
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
[[Page 226]]
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.
(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
[[Page 227]]
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:
(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
[[Page 228]]
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 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.
[[Page 229]]
(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 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
[[Page 230]]
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]
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
[[Page 231]]
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 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
[[Page 232]]
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 (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
[[Page 233]]
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 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).
[[Page 234]]
(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 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
[[Page 235]]
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 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
[[Page 236]]
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 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]
[[Page 237]]
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.
(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.
[[Page 238]]
(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.
(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.
[[Page 239]]
(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 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
[[Page 240]]
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 is earned, or before the amount
is currently available. See Sec. 1.402(a)-1(d).
(vi) Examples. The provisions of this paragraph (a)(3) are
illustrated by the following examples:
Example 1. An employer maintains a profit-sharing plan under which
each eligible employee has an election to defer an annual bonus payable
on January 30 each year. The bonus equals 10 percent of compensation
during the previous calendar year. Deferred amounts are not treated as
after-tax employee contributions. The bonus is currently available on
January 30. An election made prior to January 30 to defer all or part of
the bonus is a cash or deferred election, and the bonus deferral
arrangement is a cash or deferred arrangement.
Example 2. An employer maintains a profit-sharing plan under which
each eligible employee may elect to defer up to 10 percent of
compensation for each payroll period during the plan year. An election
to defer compensation for a payroll period is a cash or deferred
election if the election is made prior to the date on which the
compensation is to be paid to the employee and if the deferred amount is
not treated as an after-tax employee contribution at the time of
deferral.
Example 3. (i) Employer A establishes a qualified money purchase
pension plan in 1986. This is the first qualified plan established by
Employer A. All salaried employees are eligible to participate under the
plan. Hourly-paid employees are not eligible to participate under the
plan. In 1996, Employer A establishes a profit-sharing plan under which
all employees (both salaried and hourly) are eligible. Employer A
permits all employees on the effective date of the profit-
[[Page 241]]
sharing plan to make a one-time irrevocable election to have Employer A
contribute five percent of compensation on their behalf to the plan and
to any other plan of Employer A (including plans not yet established)
for the duration of the employee's employment with Employer A, and have
their salaries reduced by five percent.
(ii) The election provided under the profit-sharing plan is not a
one-time irrevocable election within the meaning of Sec. 1.401(k)-
1(a)(3)(iv) with respect to the salaried employees of Employer A who, at
any time before becoming eligible to participate under the profit-
sharing plan, became eligible to participate under the money purchase
pension plan. The election under the profit-sharing plan is a one-time
irrevocable election within the meaning of Sec. 1.401(k)- 1(a)(3)(iv)
with respect to the hourly employees, because they were not previously
eligible to participate under another plan of the employer.
(4) Rules applicable to qualified cash or deferred arrangements--(i)
Definition of qualified cash or deferred arrangement. A qualified cash
or deferred arrangement is a cash or deferred arrangement that satisfies
the requirements of paragraphs (b), (c), (d), and (e) of this section
and that is part of a plan that otherwise satisfies the requirements of
section 401(a).
(ii) Treatment of elective contributions as employer contributions.
Except as provided in paragraph (f) of this section, elective
contributions under a qualified cash or deferred arrangement are treated
as employer contributions. Thus, for example, elective contributions are
treated as employer contributions for purposes of sections 401(a) and
401(k), 402, 404, 409, 411, 412, 415, 416, and 417.
(iii) Tax treatment of employees. Except as provided in section
402(g) and paragraph (f) of this section, elective contributions under a
qualified cash or deferred arrangement are neither includible in an
employee's gross income at the time the cash or other taxable amounts
would have been includible in the employee's gross income (but for the
cash or deferred election), nor at the time the elective contributions
are contributed to the plan. See Sec. 1.402(a)-1(d)(2)(i).
(iv) Application of nondiscrimination requirements to plan that
includes a qualified cash or deferred arrangement. A plan that includes
a qualified cash or deferred arrangement must satisfy the requirements
of sections 401(a)(4) and 410(b). Thus, for example, the plan must
satisfy section 401(a)(4) with respect to the amount of contributions or
benefits and the availability of benefits, rights and features under the
plan. See Sec. 1.401(a)(4)-1(b)(3). The right to make each level of
elective contributions under a cash or deferred arrangement is a
benefit, right or feature subject to this requirement, and each of these
rights must therefore generally be available to a group of employees
that satisfies section 410(b). See Sec. 1.401(a)(4)-4(e)(3)(i) and
(iii)(D). Thus, for example, if all employees are eligible to make a
stated level of elective contributions under a cash or deferred
arrangement, but that level of contributions can only be made from
compensation in excess of a stated amount, such as the Social Security
taxable wage base, the arrangement will generally favor highly
compensated employees with respect to the availability of elective
contributions and thus will generally not satisfy the requirements of
section 401(a)(4). For plan years beginning after December 31, 1984, the
amount of elective contributions under a qualified cash or deferred
arrangement satisfies the requirements of section 401(a)(4) only if the
amount of elective contributions satisfies the special nondiscrimination
test of section 401(k)(3) and paragraph (b)(2) of this section. See
Sec. 1.401(a)(4)-1(b)(2)(ii)(B). See also Sec. 1.401(a)(4)-
11(g)(3)(vii)(A), relating to corrective amendments that may be made to
satisfy the minimum coverage requirements of section 410(b).
(5) Rules applicable to nonqualified cash or deferred arrangements--
(i) Definition of nonqualified cash or deferred arrangement. A
nonqualified cash or deferred arrangement is a cash or deferred
arrangement that is not a qualified cash or deferred arrangement. Thus,
if a cash or deferred arrangement fails to satisfy one or more of the
requirements in paragraph (b), (c), (d) or (e) of this section, the
arrangement is a nonqualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
Except as specifically provided otherwise, elective contributions under
a nonqualified
[[Page 242]]
cash or deferred arrangement are treated as nonelective employer
contributions. Thus, for example, the elective contributions are treated
as nonelective employer contributions for purposes of sections 401(a)
(including section 401(a)(4)) and 401(k), 404, 409, 411, 412, 415, 416,
and 417 and are not subject to the requirements of section 401(m).
(iii) Tax treatment of employees. Elective contributions under a
nonqualified cash or deferred arrangement are includible in an
employee's gross income at the time the cash or other taxable amount
that the employee would have received (but for the cash or deferred
election) would have been includible in the employee's gross income. See
Sec. 1.402(a)-1(d)(1).
(iv) Qualification of plan that includes a nonqualified 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
nonqualified cash or deferred arrangement. In determining whether the
plan satisfies the requirements of section 401(a)(4), the special
nondiscrimination tests of sections 401(k)(3) and 401(m)(2) may not be
used. See Secs. 1.401(a)(4)-1(b)(2)(ii)(B) and 1.410(b)-9 (definition of
section 401(k) plan).
(6) Rules applicable to partnership cash or deferred arrangements--
(i) Application of general rules. A partnership may maintain a cash or
deferred arrangement, and individual partners may make cash or deferred
elections with respect to compensation attributable to services rendered
to the partnership. Generally, the same rules apply to partnership cash
or deferred arrangements as apply to other cash or deferred
arrangements. Thus, a partnership cash or deferred arrangement is not a
qualified cash or deferred arrangement unless the requirements of
section 401(k) and this section are satisfied. For example, any
contributions made on behalf of an individual partner pursuant to a
partnership cash or deferred arrangement are elective contributions
unless they are designated or treated as after-tax employee
contributions. Consistent with Sec. 1.402(a)-1(d), the elective
contributions are includible in income and are not deductible under
section 404(a) unless the arrangement is a qualified cash or deferred
arrangement. Also, even if the arrangement is a qualified cash or
deferred arrangement, the elective contributions are includible in gross
income and are not deductible under section 404(a) to the extent they
exceed the applicable limit under section 402(g). See also
Sec. 1.401(a)-30.
(ii) Definition of partnership cash or deferred arrangement--(A)
General rule. Effective for contributions made for plan years beginning
after December 31, 1988, a cash or deferred arrangement includes any
arrangement that directly or indirectly permits individual partners to
vary the amount of contributions made on their behalf.
(B) Timing of partner's cash or deferred election. For purposes of
paragraph (a)(3)(ii) of this section, a partner's compensation is deemed
currently available on the last day of the partnership taxable year.
Accordingly, an individual partner may not make a cash or deferred
election with respect to compensation for a partnership taxable year
after the last day of that year. A partner's compensation for a
partnership taxable year ending with or within a plan year beginning
before January 1, 1992, is, however, deemed not to be currently
available until the due date, including extensions, for filing the
partnership's federal income tax return for its taxable year ending with
or within the plan year. See Sec. 1.401(k)-1(b)(4)(iii) for the rules
regarding when contributions are treated as allocated.
(C) Transition rule for partnership cash or deferred elections. A
one-time irrevocable election to participate or not to participate in a
plan in which partners may participate is not a cash or deferred
election if the election was made on or before the later of the first
day of the first plan year beginning after December 31, 1988, or March
31, 1989. This election may be made after the commencement of employment
or after the employee's first becoming eligible under any plan of the
employer. In no event, however, may the election be made after December
23, 1994. The election may be made even if the one-time
[[Page 243]]
irrevocable election in Sec. 1.401(k)-1(a)(3)(iv) was previously made.
(iii) Treatment of certain matching contributions as elective
contributions. If a partnership makes matching contributions with
respect to an individual partner's elective contributions or employee
contributions, then the matching contributions are treated as elective
contributions made on behalf of the partner. In the case of a plan that,
on August 8, 1988, did not treat matching contributions as elective
contributions, the preceding sentence applies only to plan years
beginning after August 8, 1988. See also Secs. 1.401(m)-1(f)(12) and
1.404(e)-1A(f).
(7) Rules applicable to collectively bargained plans--(i) In
general. The amount of employer contributions under a nonqualified cash
or deferred arrangement is treated as satisfying section 401(a)(4) if
the arrangement is part of a collectively bargained plan (including a
plan adopted by a state or local government before May 6, 1986) that
automatically satisfies the requirements of section 410(b). See
Secs. 1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7). Except as specifically
provided otherwise, elective contributions under the arrangement are
treated as employer contributions. See Sec. 1.401(k)-1(a)(5)(ii).
However, elective contributions under the nonqualified cash or deferred
arrangement are treated as employee contributions for purposes of
section 402(a) for plan years beginning after December 31, 1992, and are
therefore not excludable from gross income under section 402(e)(3). See
Sec. 1.402(a)-1(d)(3)(iv).
(ii) Example. The provisions of this paragraph (a)(7) are
illustrated by the following example:
Example. For the 1994 plan year, Employer A maintains a collectively
bargained plan that includes a cash or deferred arrangement. Employer
contributions under the cash or deferred arrangement not satisfy the
actual deferral percentage test of section 401(k)(3) and paragraph (b)
of this section. Therefore, the arrangement is a nonqualified cash or
deferred arrangement. The employer contributions under the cash or
deferred arrangement are considered to be nondiscriminatory under
section 401(a)(4), and the elective contributions are generally treated
as employer contributions. Under Sec. 1.402(a)-1(d)(1), however,
elective contributions are includible in an employee's gross income.
(b) Coverage and nondiscrimination requirements--(1) In general. A
cash or deferred arrangement satisfies this paragraph (b) for a plan
year only if:
(i) The group of eligible employees under the section 401(k) plan
and the group of employees benefiting under the plan to which the
nonelective employer contributions are made separately satisfy the
requirements of section 410(b) (including the average benefit percentage
test, if applicable). For special rules governing the application of
section 410(b) to a cash or deferred arrangement, see Secs. 1.410(b)-
7(c)(1) and 1.410(b)-8(a)(1). See also Sec. 1.401(a)(4)-
11(g)(3)(vii)(A), relating to corrective amendments that may be made to
satisfy the minimum coverage requirements of section 410(b).
(ii) The cash or deferred arrangement satisfies the actual deferral
percentage test described in paragraph (b)(2) of this section. This is
the exclusive nondiscrimination test applicable to the amount of
elective contributions under a qualified cash or deferred arrangement.
See Sec. 1.401(a)(4)-1(b)(2)(ii)(B).
(2) Actual deferral percentage test--(i) General rule. For plan
years beginning after December 31, 1986, or such later date provided in
paragraph (h) of this section, a cash or deferred arrangement satisfies
this paragraph (b) for a plan year only if:
(A) The actual deferral percentage for the group of eligible highly
compensated employees is not more than the actual deferral percentage
for the group of all other eligible employees multiplied by 1.25; or
(B) The excess of the actual deferral percentage for the group of
eligible highly compensated employees over the actual deferral
percentage for the group of all other eligible employees is not more
than two percentage points, and the actual deferral percentage for the
group of eligible highly compensated employees is not more than the
actual deferral percentage for the group of all other eligible employees
multiplied by two.
An arrangement does not fail to satisfy the requirements of this
paragraph (b)(2) merely because all of the eligible employees under an
arrangement for a year are highly compensated employees.
[[Page 244]]
(ii) Rule for plan years beginning after 1979 and before 1987. For
plan years beginning after December 31, 1979, and before January 1,
1987, or such later date provided in paragraph (h) of this section, a
cash or deferred arrangement satisfies this paragraph (b) for a plan
year only if:
(A) The actual deferral percentage for the group of eligible highly
compensated employees (top one-third) is not more than the actual
deferral percentage for the group of all other eligible employees (lower
two-thirds) multiplied by 1.5; or
(B) The excess of the actual deferral percentage for the top one-
third over the actual deferral percentage for the lower two-thirds is
not more than three percentage points, and the actual deferral
percentage for the top one-third is not more than the actual deferral
percentage for the lower two-thirds multiplied by 2.5.
(iii) Plan provision requirement. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (h) of this
section, a plan that includes a cash or deferred arrangement does not
satisfy the requirements of section 401(a) unless it provides that the
actual deferral percentage test of section 401(k)(3) will be met. For
purposes of this paragraph (b)(2)(iii), the plan may incorporate by
reference the provisions of section 401(k)(3), this paragraph (b), and
if applicable, section 401(m)(9) and Sec. 1.401(m)-2.
(3) Aggregation--(i) Aggregation of arrangements and plans. Except
as otherwise specifically provided in this paragraph (b)(3), all cash or
deferred arrangements included in a plan are treated as a single cash or
deferred arrangement. Thus, for example, if two groups of employees are
eligible for separate cash or deferred arrangements under the same plan,
the two cash or deferred arrangements are treated as a single cash or
deferred arrangement, even if they have significantly different
features, such as significantly different limits on elective
contributions. See Sec. 1.401(k)-1(g)(11) for the definition of plan
used for purposes of this section. That definition contains the
exclusive rules for aggregation and disaggregation of plans for purposes
of this section. See also paragraph (g)(1)(ii) of this section for rules
requiring the aggregation of elective contributions under two or more
plans in computing the actual deferral ratios of certain employees.
(ii) Restructuring and Permissive Aggregation. Effective for plan
years beginning after December 31, 1991, restructuring under
Sec. 1.401(a)(4)-9(c) may not be used to demonstrate compliance with the
requirements of section 401(k). See Sec. 1.401(a)(4)-9(c)(3)(ii). For
plan years beginning before January 1, 1992, see Sec. 1.401(k)-
1(h)(3)(iii). An employer may, however, treat a plan benefiting
otherwise excludable employees as two separate plans for purposes of
sections 401(k) and 410(b) in accordance with Secs. 1.410(b)-6(b)(3) and
1.410(b)-7(c)(3).
(4) Elective contributions taken into account under the actual
deferral percentage test--(i) General rule. An elective contribution is
taken into account under paragraph (b)(2) of this section for a plan
year only if each of the following requirements is satisfied:
(A) The elective contribution is allocated to the employee's account
under the plan as of a date within that plan year. For purposes of this
rule, an elective contribution is considered allocated as of a date
within a plan year only if--
(1) The allocation is not contingent upon the employee's
participation in the plan or performance of services on any date
subsequent to that date, and
(2) The elective contribution is actually paid to the trust no later
than the end of the 12-month period immediately following the plan year
to which the contribution relates.
(B) The elective contribution relates to compensation that either--
(1) Would have been received by the employee in the plan year but
for the employee's election to defer under the arrangement, or
(2) Is attributable to services performed by the employee in the
plan year and, but for the employee's election to defer, would have been
received by the employee within two and one-half months after the close
of the plan year.
(ii) Elective contributions and qualified nonelective contributions
used to satisfy
[[Page 245]]
actual contribution percentage test. Except as provided in
Sec. 1.401(m)-1(b)(5)(iii), elective contributions treated as matching
contributions must satisfy the actual contribution percentage test of
section 401(m)(2) and are not taken into account under paragraph (b)(2)
of this section. A qualified nonelective contribution that is treated as
a matching contribution is subject to the actual contribution percentage
test of section 401(m)(2) and is not taken into account as an elective
contribution under paragraph (b)(2) or (5) of this section.
(iii) Elective contributions for partners. For purposes of paragraph
(b)(2) of this section, a partner's distributive share of partnership
income is treated as received on the last day of the partnership taxable
year. Thus, an elective contribution made on behalf of a partner is
treated as allocated to the partner's account for the plan year that
includes the last day of the partnership taxable year, provided the
requirements of paragraph (b)(4)(i)(A) of this section are met.
(iv) Elective contributions not taken into account. Elective
contributions that do not satisfy the requirements of paragraph
(b)(4)(i) of this section may not use the special nondiscrimination rule
of section 401(k)(3) and paragraph (b)(2) of this section for the plan
year with respect to which the contributions were made, or for any other
plan year. Instead, the amount of the elective contributions must
satisfy the requirements of section 401(a)(4) (without regard to the
special nondiscrimination test in section 401(k)(3) and paragraph (b)(2)
of this section) for the plan year in which they are allocated under the
plan as if they were nonelective employer contributions and were the
only nonelective employer contributions for the year. See
Secs. 1.401(a)(4)-1(b)(2)(ii)(B); 1.410(b)-7(c)(1).
(5) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the actual deferral
percentage test. Except as specifically provided otherwise, for purposes
of paragraph (b)(2) of this section, all or part of the qualified
nonelective contributions and qualified matching contributions made with
respect to any or all employees who are eligible employees under the
cash or deferred arrangement being tested may be treated as elective
contributions under the arrangement, provided that each of the following
requirements (to the extent applicable) is satisfied:
(i) The amount of nonelective contributions, including those
qualified nonelective contributions treated as elective contributions
for purposes of the actual deferral percentage test, satisfies the
requirements of section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2).
(ii) The amount of nonelective contributions, excluding those
qualified nonelective contributions treated as elective contributions
for purposes of the actual deferral percentage test and those qualified
nonelective contributions treated as matching contributions under
Sec. 1.401(m)-1(b)(5) for purposes of the actual contribution percentage
test, satisfies the requirements of section 401(a)(4). See
Sec. 1.401(a)(4)-1(b)(2).
(iii) For plan years beginning before January 1, 1987, or such later
date provided in paragraph (h) of this section, the matching
contributions, including those qualified matching contributions treated
as elective contributions for purposes of the actual deferral percentage
test, satisfy the requirements of section 401(a)(4).
(iv) For plan years beginning before January 1, 1987, or such later
date provided in paragraph (h) of this section, the matching
contributions, excluding those qualified matching contributions treated
as elective contributions for purposes of the actual deferral percentage
test, satisfy the requirements of section 401(a)(4).
(v) The qualified nonelective contributions and qualified matching
contributions satisfy the requirements of paragraph (b)(4)(i)(A) of this
section for the plan year as if the contributions were elective
contributions.
(vi) For plan years beginning after December 31, 1988, or such later
date provided in paragraph (h) of this section, the section 401(k) plan
and the plan or plans to which the qualified nonelective contributions
and qualified matching contributions are made, could be aggregated under
Sec. 1.410(b)-7(d) after application of the mandatory disaggregation
rules of Sec. 1.410(b)-7(c), as
[[Page 246]]
modified in Sec. 1.401(k)-1(g)(11). If the plan year of the section
401(k) plan is changed to satisfy the requirement under Sec. 1.410(b)-
7(d)(5) that aggregated plans have the same plan year, the qualified
nonelective contributions and qualified matching contributions may be
taken into account in the resulting short plan year only if the
contributions satisfy the requirements of paragraph (b)(4)(i) of this
section with respect to the short year as if the contributions were
elective contributions and the aggregated plans could otherwise be
aggregated for purposes of section 410(b).
(6) Examples. The provisions of this paragraph (b) are illustrated
by the following examples.
Example 1. (i) Employees A, B, and C are eligible employees who earn
$30,000, $15,000, and $10,000, respectively, in 1989. ln addition, their
employer, X, contributes a bonus of up to 10 percent of their regular
compensation to a trust under a profit-sharing plan that includes a cash
or deferred arrangement. Under the arrangement, each eligible employee
may elect to receive none, all, or any part of the 10 percent in cash.
The employer contributes the remainder to the trust. The cash portion of
the bonus, if any, is paid after the end of the plan year. The 10
percent is therefore not included in compensation until the year paid.
Employee A is highly compensated. For the 1989 plan year, A, B, and C
make the following elections:
------------------------------------------------------------------------
Elective
Employee Compensation contribution
------------------------------------------------------------------------
A..................................... $30,000 $1,780
B..................................... 15,000 750
C..................................... 10,000 450
------------------------------------------------------------------------
(ii) The ratios of employer contributions to the trust on behalf of
each eligible employee to the employee's compensation for the plan year
(calculated separately for each employee) are:
------------------------------------------------------------------------
Ratio of Actual
elective deferral
Employee contribution to ratio
compensation (percent)
------------------------------------------------------------------------
A......................................... $1,780/30,000 5.93
B......................................... 750/15,000 5.00
C......................................... 450/10,000 4.50
------------------------------------------------------------------------
(iii) The actual deferral percentage for the highly compensated
group (Employee A) is 5.93 percent. The actual deferral percentage for
the nonhighly compensated group is 4.75 percent ((5%+4.5%)/2)). Because
5.93 percent is less than 5.94 percent (4.75% multiplied by 1.25), the
first percentage test is satisfied.
Example 2. (i) The facts are the same as in Example 1, except that
elective contributions are made pursuant to a salary reduction agreement
and no bonuses are paid. Employer X includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See
Sec. 1.401(k)-1(g)(2)(i). In addition, A defers $2,025. Thus, the
compensation and elective contributions for A, B, and C are:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio
(percent)
------------------------------------------------------------------------
A.............................. $30,000 $2,025 6.75
B.............................. 15,000 750 5.00
C.............................. 10,000 450 4.50
------------------------------------------------------------------------
(ii) The actual deferral percentage for the highly compensated group
(Employee A) is 6.75 percent. The actual deferral percentage for the
nonhighly compensated group is 4.75 percent ((5.00%+4.50%)/2). Because
6.75 percent exceeds 5.94 percent (4.75x1.25), the first percentage test
is not satisfied. However, since the actual deferral percentage equals
the maximum percentage allowed under the second percentage test,
(4.75+2=6.75), the second percentage test is satisfied.
Example 3. (i) Employees D through L are eligible employees in
Employer A's profit-sharing plan that contains a cash or deferred
arrangement. Employer A includes elective contributions in compensation
as permitted under Sec. 1.414(s)-1(c)(4)(i). Each eligible employee may
elect to defer up to six percent of compensation under the cash or
deferred arrangement. Employees D and E are highly compensated. The
compensation, elective contributions, and actual deferral ratios of
these employees for the 1989 plan year are shown below:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio
(percent)
------------------------------------------------------------------------
D.............................. $100,000 $6,000 6
E.............................. 80,000 4,000 5
F.............................. 60,000 3,600 6
G.............................. 40,000 1,600 4
H.............................. 30,000 1,200 4
I.............................. 20,000 600 3
J.............................. 20,000 600 3
K.............................. 10,000 300 3
L.............................. 5,000 150 3
------------------------------------------------------------------------
(ii) The actual deferral percentage for the highly compensated group
is 5.5 percent. The actual deferral percentage for the nonhighly
compensated group is 3.71 percent. Because 5.5 percent is greater than
4.64 percent (3.71%x1.25), the first percentage test is not satisfied.
However, because 5.5 percent is less than 5.71 percent (the lesser of
3.71%+2 or 3.71%x2), the second percentage test is satisfied.
Example 4. (i) Employer D maintains a profit-sharing plan that
contains a cash or deferred arrangement. Employer D includes
[[Page 247]]
elective contributions in compensation as permitted under Sec. 1.414(s)-
1(c)(4)(i). The following amounts are contributed under the plan:
(A) Six percent of each employee's compensation. These contributions
are not qualified nonelective contributions (QNCs).
(B) Two percent of each employee's compensation. These contributions
are QNCs.
(C) Three percent of each employee's compensation that the employee
may elect to receive as cash or to defer under the plan.
(ii) For the 1990 plan year, the compensation, elective
contributions, and actual deferral ratios of employees M through S were:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio
(percent)
------------------------------------------------------------------------
M.............................. $100,000 $3,000 3
N.............................. 80,000 1,600 2
O.............................. 60,000 1,800 3
P.............................. 40,000 0 0
Q.............................. 30,000 0 0
R.............................. 20,000 0 0
S.............................. 20,000 0 0
------------------------------------------------------------------------
(iii) Both types of nonelective contributions are made for all
employees. Thus, both the six percent and the two percent employer
contributions satisfy the requirements of section 401(a)(4) and
paragraph (b)(5)(i) of this section.
(iv) The elective contributions alone do not satisfy the special
rules in paragraph (b)(4) of this section because the actual deferral
percentage for the highly compensated group, consisting of employees M
and N, is 2.5 percent and the actual deferral percentage for the
nonhighly compensated group is 0.6 percent. However, the two percent
QNCs may be taken into account in applying the special rules. The six
percent nonelective contributions may not be taken into account because
they are not QNCs.
(v) If the two percent QNCs are taken into account, the actual
deferral percentage for the highly compensated group is 4.5 percent, and
the actual deferral percentage for the nonhighly compensated group is
2.6 percent. Because 4.5 percent is not more than two percentage points
greater than 2.6 percent, and not more than two times 2.6, the actual
deferral percentage test of section 401(k)(3) and paragraph (b)(2) of
this section is satisfied. Thus, the plan satisfies this paragraph (b).
Example 5. (i) Employer N maintains a plan that contains a cash or
deferred arrangement. The plan year and the employer's taxable year are
the calendar year. The plan provides for employee contributions,
elective contributions, matching contributions, and qualified
nonelective contributions (QNCs), all of which meet the applicable
requirements of section 401(a)(4). Matching contributions on behalf of
nonhighly compensated employees are qualified matching contributions
(QMACs). Matching contributions on behalf of highly compensated
employees are not QMACs. For the 1988 plan year, elective contributions
and matching contributions with respect to highly compensated and
nonhighly compensated employees are shown in the following chart.
------------------------------------------------------------------------
Elective
contributions Total
(including matching QMACs
QNCs) contributions (percent)
(percent) (percent)
------------------------------------------------------------------------
Highly compensated............. 15 5 0
Nonhighly compensated.......... 11 5 5
------------------------------------------------------------------------
(ii) The plan fails to meet the requirements of section 401(k)(3)(A)
because 15 percent is more than 125 percent of, and more than two
percentage points greater than, 11 percent. However, the plan provides
that QMACs may be used to meet the requirements of section
401(k)(3)(A)(ii) to the extent needed under that section. Under this
provision, the plan takes QMACs of one percent of compensation into
account for each nonhighly compensated employee in applying the actual
deferral percentage test. After this adjustment, the actual deferral and
actual contribution percentages are as follows:
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Highly compensated........................... 15 5
Nonhighly compensated........................ 12 4
------------------------------------------------------------------------
(iii) The elective contributions and QMACs taken into account under
section 401(k) meet the requirements of section 401(k)(3)(A)(ii) because
15 percent is 125 percent of 12 percent. The remaining matching
contributions meet the requirements of section 401(m) because five
percent is 125 percent of four percent.
(c) Nonforfeitability requirement--(1) General rule. A cash or
deferred arrangement satisfies this paragraph (c) only if the elective
contributions meet each of the following requirements:
(i) Each employee's right to the amount attributable to elective
contributions is immediately nonforfeitable within the meaning of
section 411, and would be nonforfeitable under the plan regardless of
the age and service of the employee or whether the employee is employed
on a specific date. A contribution that is subject to forfeitures or
suspensions permitted by section 411(a)(3) does not satisfy the
requirements of this paragraph (c).
[[Page 248]]
(ii) The contributions are disregarded for purposes of applying
section 411(a) to other contributions or benefits.
(iii) The contributions remain nonforfeitable even if the employee
makes no additional elective contributions under a cash or deferred
arrangement.
(2) Example. The provisions of this paragraph (c) are illustrated by
the following example:
Example. (i) Employees B and C are covered by Employer Y's stock
bonus plan, which includes a cash or deferred arrangement. Under the
plan, Employer Y makes a nonelective contribution on behalf of each
employee equal to four percent of compensation. All employees
participating in the plan have a nonforfeitable right to a percentage of
their accrued benefit derived from this contribution as shown in the
following table:
------------------------------------------------------------------------
Nonforfeitable
Years of service percentage
------------------------------------------------------------------------
Less than 1.......................................... 0
1.................................................... 20
2.................................................... 40
3.................................................... 60
4.................................................... 80
5 or more............................................ 100
------------------------------------------------------------------------
(ii) B and C have three and six years of service, respectively.
Employer Y also permits employees to elect to defer up to 6 percent of
compensation through salary reduction agreements. Amounts deferred under
these agreements are nonforfeitable at all times. In accordance with
paragraph (c)(1)(i) of this section, the nonforfeitable percentage of
Employer Y's nonelective contribution on behalf of B and C may not be
treated as a qualified nonelective contribution under paragraph (b)(3)
of this section, because these amounts are nonforfeitable by reason of
the completion by B and C of a stated number of years of service, and
not regardless of the age and service of B and C.
(d) Distribution limitation--(1) General rule. A cash or deferred
arrangement satisfies this paragraph (d) only if amounts attributable to
elective contributions may not be distributed before one of the
following events, and any distributions so permitted also satisfy the
requirements of paragraphs (d) (2) through (6) of this section (to the
extent applicable):
(i) The employee's retirement, death, disability, or separation from
service.
(ii) In the case of a profit-sharing or stock bonus plan, the
employee's attainment of age 59\1/2\, or the employee's hardship.
(iii) For plan years beginning after December 31, 1984, the
termination of the plan.
(iv) For plan years beginning after December 31, 1984, the date of
the sale or other disposition by a corporation of substantially all the
assets (within the meaning of section 409(d)(2)) used by the corporation
in a trade or business of the corporation to an unrelated corporation.
(v) For plan years beginning after December 31, 1984, the date of
the sale or other disposition by a corporation of its interest in a
subsidiary (within the meaning of section 409(d)(3)) to an unrelated
entity or individual.
(2) Rules applicable to hardship distributions--(i) Distribution
must be on account of hardship. A distribution is treated as made after
an employee's hardship for purposes of paragraph (d)(1)(ii) of this
section only if it is made on account of the hardship. For purposes of
this rule, a distribution is made on account of hardship only if the
distribution both is made on account of an immediate and heavy financial
need of the employee and is necessary to satisfy the financial need. The
determination of the existence of an immediate and heavy financial need
and of the amount necessary to meet the need must be made in accordance
with nondiscriminatory and objective standards set forth in the plan.
See section 411(d)(6) and the regulations thereunder.
(ii) Limit on distributable amount. For plan years beginning after
December 31, 1988, a distribution on account of hardship must be limited
to the distributable amount. The distributable amount is equal to the
employee's total elective contributions as of the date of distribution,
reduced by the amount of previous distributions on account of hardship.
If the plan so provides, the employee's total elective contributions
used in determining the distributable amount may be increased by income
allocable to elective contributions, by amounts treated as elective
contributions under paragraph (b)(5) of this section, and by income
allocable to amounts treated as elective contributions. The
distributable amount may only include amounts that were credited to the
employee's
[[Page 249]]
account as of a date specified in the plan that is no later than
December 31, 1988, or if later, the end of the last plan year ending
before July 1, 1989 (or such later date provided in paragraph (h) of
this section).
(iii) General hardship distribution standards--(A) Immediate and
heavy financial need. Whether an employee has an immediate and heavy
financial need is to be determined based on all relevant facts and
circumstances. Generally, for example, the need to pay the funeral
expenses of a family member would constitute an immediate and heavy
financial need. A distribution made to an employee for the purchase of a
boat or television would generally not constitute a distribution made on
account of an immediate and heavy financial need. A financial need may
be immediate and heavy even if it was reasonably foreseeable or
voluntarily incurred by the employee.
(B) Distribution necessary to satisfy financial need. A distribution
is not treated as necessary to satisfy an immediate and heavy financial
need of an employee to the extent the amount of the distribution is in
excess of the amount required to relieve the financial need or to the
extent the need may be satisfied from other resources that are
reasonably available to the employee. This determination generally is to
be made on the basis of all relevant facts and circumstances. For
purposes of this paragraph, the employee's resources are deemed to
include those assets of the employee's spouse and minor children that
are reasonably available to the employee. Thus, for example, a vacation
home owned by the employee and the employee's spouse, whether as
community property, joint tenants, tenants by the entirety, or tenants
in common, generally will be deemed a resource of the employee. However,
property held for the employee's child under an irrevocable trust or
under the Uniform Gifts to Minors Act is not treated as a resource of
the employee. The amount of an immediate and heavy financial need may
include any amounts necessary to pay any federal, state, or local income
taxes or penalties reasonably anticipated to result from the
distribution. A distribution generally may be treated as necessary to
satisfy a financial need if the employer relies upon the employee's
written representation, unless the employer has actual knowledge to the
contrary, that the need cannot reasonably be relieved:
(1) Through reimbursement or compensation by insurance or otherwise;
(2) By liquidation of the employee's assets;
(3) By cessation of elective contributions or employee contributions
under the plan; or
(4) By other distributions or nontaxable (at the time of the loan)
loans from plans maintained by the employer or by any other employer, or
by borrowing from commercial sources on reasonable commercial terms, in
an amount sufficient to satisfy the need.
For purposes of this paragraph (d)(2)(iii)(B), a need cannot reasonably
be relieved by one of the actions listed above if the effect would be to
increase the amount of the need. For example, the need for funds to
purchase a principal residence cannot reasonably be relieved by a plan
loan if the loan would disqualify the employee from obtaining other
necessary financing.
(iv) Deemed hardship distribution standards--(A) Deemed immediate
and heavy financial need. A distribution is deemed to be on account of
an immediate and heavy financial need of the employee if the
distribution is for:
(1) Expenses for medical care described in section 213(d) previously
incurred by the employee, the employee's spouse, or any dependents of
the employee (as defined in section 152) or necessary for these persons
to obtain medical care described in section 213(d);
(2) Costs directly related to the purchase of a principal residence
for the employee (excluding mortgage payments);
(3) Payment of tuition, related educational fees, and room and board
expenses, for the next 12 months of post-secondary education for the
employee, or the employee's spouse, children, or dependents (as defined
in section 152); or
(4) Payments necessary to prevent the eviction of the employee from
the
[[Page 250]]
employee's principal residence or foreclosure on the mortgage on that
residence.
(B) Distribution deemed necessary to satisfy financial need. A
distribution is deemed necessary to satisfy an immediate and heavy
financial need of an employee if all of the following requirements are
satisfied:
(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the employee. The amount of an immediate and
heavy financial need may include any amounts necessary to pay any
federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution.
(2) The employee has obtained all distributions, other than hardship
distributions, and all nontaxable (at the time of the loan) loans
currently available under all plans maintained by the employer.
(3) The plan and all other plans maintained by the employer limit
the employee's elective contributions for the next taxable year to the
applicable limit under section 402(g) for that year minus the employee's
elective contributions for the year of the hardship distribution.
(4) The employee is prohibited, under the terms of the plan or an
otherwise legally enforceable agreement, from making elective
contributions and employee contributions to the plan and all other plans
maintained by the employer for at least 12 months after receipt of the
hardship distribution. For this purpose the phrase ``all other plans
maintained by the employer'' means all qualified and nonqualified plans
of deferred compensation maintained by the employer. The phrase includes
a stock option, stock purchase, or similar plan, or a cash or deferred
arrangement that is part of a cafeteria plan within the meaning of
section 125. However, it does not include the mandatory employee
contribution portion of a defined benefit plan. It also does not include
a health or welfare benefit plan, including one that is part of a
cafeteria plan within the meaning of section 125. See Sec. 1.401(k)-
1(g)(4)(i) for the continued treatment of suspended employees as
eligible employees.
(C) Commissioner may expand standards. The Commissioner may expand
the list of deemed immediate and heavy financial needs and may prescribe
additional methods for distributions to be deemed necessary to satisfy
an immediate and heavy financial need only in revenue rulings, notices,
and other documents of general applicability, and not on an individual
basis.
(3) Rules applicable to distributions upon plan termination. A
distribution may not be made under paragraph (d)(1)(iii) of this section
if the employer establishes or maintains a successor plan. For purposes
of this rule, the definition of the term ``employer'' contained in
paragraph (g)(6) of this section is applied as of the date of plan
termination, and a successor plan is any other defined contribution plan
maintained by the same employer. However, if at all times during the 24-
month period beginning 12 months before the termination, fewer than two
percent of the employees who were eligible under the defined
contribution plan that includes the cash or deferred arrangement as of
the date of plan termination are eligible under the other defined
contribution plan, the other plan is not a successor plan. The term
``defined contribution plan'' means a plan that is a defined
contribution plan as defined in section 414(i), but does not include an
employee stock ownership plan as defined in section 4975(e) or 409(a) or
a simplified employee pension as defined in section 408(k). A plan is a
successor plan only if it exists at any time during the period beginning
on the date of plan termination and ending 12 months after distribution
of all assets from the terminated plan.
(4) Rules applicable to distributions upon sale of assets or
subsidiary--(i) Seller must maintain the plan. A distribution may be
made under section 401(k)(10) and paragraph (d)(1) (iv) or (v) of this
section only from a plan that the seller continues to maintain after the
disposition. This requirement is satisfied if and only if the purchaser
does not maintain the plan after the disposition. A purchaser maintains
the plan of the seller if it adopts the plan or otherwise becomes an
employer whose employees accrue benefits under the plan. A purchaser
also maintains
[[Page 251]]
the plan if the plan is merged or consolidated with, or any assets or
liabilities are transferred from the plan to a plan maintained by the
purchaser in a transaction subject to section 414(l)(1). A purchaser is
not treated as maintaining the plan merely because a plan that it
maintains accepts elective transfers described in Sec. 1.411(d)-4, Q&A-
3(b)(1), or rollover contributions of amounts distributed by the plan
(including distributions that the recipient elects, under section
401(a)(31), to have paid in a direct rollover to the plan of the
purchaser).
(ii) Employee must continue employment. A distribution may be made
under paragraph (d)(1) (iv) or (v) of this section only to an employee
who continues employment with the purchaser of assets or with the
subsidiary, whichever is applicable.
(iii) Distribution must be in connection with disposition of assets
or subsidiary. Elective contributions may not be distributed under
paragraph (d)(1) (iv) or (v) of this section except in connection with
the disposition that results in the employee's transfer to the
purchaser. Whether a distribution is made in connection with the
disposition of assets or a subsidiary depends on all of the facts and
circumstances. Except in unusual circumstances, however, a distribution
will not be treated as having been made in connection with a disposition
unless it was made by the end of the second calendar year after the
calendar year in which the disposition occurred.
(iv) Definitions--(A) Substantially all. For purposes of paragraph
(d)(1)(iv) of this section, the sale of ``substantially all'' the assets
used in a trade or business means the sale of at least 85 percent of the
assets.
(B) Unrelated employer. For purposes of paragraph (d)(1) (iv) and
(v) of this section, an ``unrelated'' entity or individual is one that
is not required to be aggregated with the seller under section 414 (b),
(c), (m), or (o) after the sale or other disposition.
(5) Lump sum requirement for certain distributions. After March 31,
1988, a distribution may be made under paragraph (d)(1) (iii), (iv), or
(v) of this section only if it is a lump sum distribution. The term lump
sum distribution has the meaning provided in section 402(d)(4), without
regard to subparagraphs (A) (i) through (iv), (B), and (F) of that
section.
(6) Rules applicable to all distributions--(i) Impermissible
distributions. Amounts attributable to elective contributions may not be
distributed on account of any event not described in this paragraph (d),
such as completion of a stated period of plan participation or the lapse
of a fixed number of years. For example, if excess deferrals (and
income) for an employee's taxable year are not distributed within the
time prescribed in Sec. 1.402(g)-1(e) (2) or (3), the amounts may be
distributed only on account of an event described in this paragraph (d).
(ii) Deemed distributions. The cost of life insurance (P.S. 58
costs) is not treated as a distribution for purposes of section
401(k)(2) and this paragraph. The making of a loan is not treated as a
distribution, even if the loan is secured by the employee's accrued
benefit attributable to elective contributions or is includible in the
employee's income under section 72(p). However, the reduction, by reason
of default on a loan, of an employee's accrued benefit derived from
elective contributions is treated as a distribution.
(iii) ESOP dividend distributions. A plan does not fail to satisfy
the requirements of this paragraph (d) merely by reason of a dividend
distribution described in section 404(k)(2).
(iv) Limitations apply after transfer. The limitations of this
paraqraph (d) generally continue to apply to amounts attributable to
elective contributions (including amounts treated as elective
contributions) that are transferred to another qualified plan of the
same or another employer. Thus, the transferee plan will generally fail
to satisfy the requirements of section 401(a) and this section if
transferred amounts may be distributed before the times specified in
this paragraph (d). The limitations of paragraph (d) of this section
cease to apply after the transfer, however, if the amounts could have
been distributed at the time of the transfer (other than on account of
hardship), and the transfer is an elective transfer described in
Sec. 1.411(d)-4, Q&A-3(b)(1). The limitations of paragraph (d) of this
section
[[Page 252]]
also do not apply to amounts distributed from another plan that the
recipient elects under section 401(a)(31) to have paid in a direct
rollover to the plan.
(v) Required consent. A distribution may be made under this
paragraph (d) only if any consent or election required under section
411(a)(11) or 417 is obtained.
(7) Examples. The provisions of this paragraph (d) are illustrated
by the following examples:
Example 1. Employer C maintains a profit-sharing plan that includes
a cash or deferred arrangement. Elective contributions under the
arrangement may be withdrawn for any reason after two years following
the end of the plan year in which the contributions were made. Because
the plan permits distributions of elective contributions before the
occurrence of one of the events specified in section 401(k)(2)(B) and
this paragraph (d), the plan includes a nonqualified cash or deferred
arrangement and the elective contributions are currently includible in
income under section 402.
Example 2. Employer D maintains a pre-ERISA money purchase plan that
includes a cash or deferred arrangement. Elective contributions under
the arrangement may be distributed to an employee on account of
hardship. Under paragraph (d)(1) of this section, hardship is a
distribution event only in a profit-sharing or stock bonus plan. Since
elective contributions under the arrangement may be distributed before a
distribution event occurs, the cash or deferred arrangement does not
satisfy this paragraph (d), and is not a qualified cash or deferred
arrangement. Moreover, the plan is not a qualified plan because a
pension plan may not provide for payment of benefits upon hardship. See
Sec. 1.401-1(b)(1)(i).
(e) Additional requirements for qualified cash or deferred
arrangements--(1) Qualified profit-sharing, stock bonus, pre-ERISA money
purchase or rural cooperative plan requirement. A cash or deferred
arrangement satisfies this paragraph (e) only if the plan of which it is
a part is a profit-sharing, stock bonus, pre-ERISA money purchase or
rural cooperative plan that otherwise satisfies the requirements of
section 401(a) (taking into account the cash or deferred arrangement). A
plan that includes a cash or deferred arrangement may provide for other
contributions, including employer contributions (other than elective
contributions), employee contributions, or both. See paragraph (e)(7) of
this section, however, for limitations on the extent to which elective
contributions under a cash or deferred arrangement may be taken into
account in determining whether the other contributions satisfy the
requirements of section 401(a).
(2) Cash availability requirement. A cash or deferred arrangement
satisfies this paragraph (e) only if the arrangement provides that the
amount that each eligible employee may defer as an elective contribution
is available to the employee in cash. Thus, for example, if an eligible
employee is provided the option to receive a taxable benefit (other than
cash) or to have the employer contribute on the employee's behalf to a
profit-sharing plan an amount equal to the value of the taxable benefit,
the arrangement is not a qualified cash or deferred arrangement.
Similarly, if an employee has the option to receive a specified amount
in cash or to have the employer contribute an amount in excess of the
specified cash amount to a profit-sharing plan on the employee's behalf,
any contribution made by the employer on the employee's behalf in excess
of the specified cash amount is not treated as made pursuant to a
qualified cash or deferred arrangement. This cash availability
requirement applies even if the cash or deferred arrangement is part of
a cafeteria plan within the meaning of section 125.
(3) Separate accounting requirement--(i) General rule. A cash or
deferred arrangement satisfies this paragraph (e) only if the portion of
an employee's benefit subject to the requirements of paragraphs (c) and
(d) of this section is determined by an acceptable separate accounting
between that portion and any other benefits. Separate accounting is not
acceptable unless gains, losses, withdrawals, and other credits or
charges are separately allocated on a reasonable and consistent basis to
the accounts subject to the requirements of paragraphs (c) and (d) of
this section and to other accounts. Subject to section 401(a)(4),
forfeitures are not required to be allocated to the accounts in which
benefits are subject to paragraphs (c) and (d) of this section.
(ii) Failure to satisfy separate accounting requirement. The
requirements of
[[Page 253]]
paragraph (e)(3)(i) of this section are treated as satisfied if all
amounts held under a plan that includes a cash or deferred arrangement
or under another plan, contributions under which are taken into account
under the arrangement for purposes of paragraph (b) of this section are
treated as attributable to elective contributions subject to the
requirements of paragraphs (c) and (d) of this section.
(4) Limitations on cash or deferred arrangements of state and local
governments and tax-exempt organizations--(i) A cash or deferred
arrangement does not satisfy the requirements of this paragraph (e) if
the arrangement is adopted:
(A) After May 6, 1986, by a state or local government or political
subdivision thereof, or any agency or instrumentality thereof (``a
governmental unit''), or
(B) After July 1, 1986, by any organization exempt from tax under
subtitle A of the Internal Revenue Code.
For purposes of paragraph (e)(4) of this section, whether an
organization is exempt from tax under subtitle A of the Internal Revenue
Code is determined without regard to section 414 (b), (c), (m) or (o).
(ii) A cash or deferred arrangement is treated as adopted after the
dates described in paragraph (e)(4)(i) of this section with respect to
all employees of any employer that adopts the arrangement after such
dates. If an employer adopted an arrangement prior to such dates, all
employees of the employer may participate in the arrangement.
(iii) For purposes of this paragraph (e)(4), an employer that has
made a legally binding commitment to adopt a cash or deferred
arrangement is treated as having adopted the arrangement on that date.
(iv) If a governmental unit adopted a cash or deferred arrangement
before May 7, 1986, then any cash or deferred arrangement adopted by the
unit at any time is treated as adopted before that date.
(v) This paragraph (e)(4) does not apply to a rural cooperative
plan.
(vi) For purposes of this paragraph (e)(4), an employee
representative is treated as an employee of a tax exempt employer even
if the employee could be treated as an employee by another employer
under Sec. 1.413-1(i)(1).
(5) One-year eligibility requirement. For plan years beginning after
December 31, 1988, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if no employee is required to complete a period of service greater
than one year (determined without regard to section 410(a)(1)(B)(i))
with the employer maintaining the plan to be eligible to make an
election under the arrangement.
(6) Other benefits not contingent upon elective contributions--(i)
General rule. For plan years beginning after December 31, l988, or such
later date provided in paragraph (h) of this section, a cash or deferred
arrangement satisfies this paragraph (e) only if no other benefit is
conditioned (directly or indirectly) upon the employee's electing to
make or not to make elective contributions under the arrangement. The
preceding sentence does not apply to any matching contribution (as
defined in section 401(m)) made by reason of such an election or to any
benefit that is provided at the employee's election under a plan
described in section 125(d) in lieu of an elective contribution under a
qualified cash or deferred arrangement.
(ii) Definition of other benefits. Other benefits include, but are
not limited to, benefits under a defined benefit plan; nonelective
employer contributions under a defined contribution plan; the
availability, cost, or amount of health benefits; vacations or vacation
pay; life insurance; dental plans; legal services plans; loans
(including plan loans); financial planning services; subsidized
retirement benefits; stock options; property subject to section 83; and
dependent care assistance. Also, increases in salary and bonuses (other
than those actually subject to the cash or deferred election) are
benefits for purposes of this paragraph (e)(6). The ability to make
after-tax employee contributions is a benefit, but that benefit is not
contingent upon an employee's electing to make or not make elective
contributions under the arrangement merely because the amount of
elective contributions reduces dollar-for-dollar the amount of after-tax
employee contributions that may be
[[Page 254]]
made. Benefits under any other plan or arrangement (whether or not
qualified) are not contingent upon an employee's electing to make or not
to make elective contributions under a cash or deferred arrangement
merely because the elective contributions are or are not taken into
account as compensation under the other plan or arrangement for purposes
of determining benefits.
(iii) Effect of certain statutory limits. A benefit under a defined
benefit plan that is contingent upon elective contributions solely by
reason of the combined plan fraction of section 415(e) is not treated as
contingent for purposes of this paragraph (e)(6). Similarly, any benefit
under an excess benefit plan described in section 3(36) of the Employee
Retirement Income Security Act of l974 that is dependent on the
employee's electing to make or not to make elective contributions is not
treated as contingent.
(iv) Nonqualified deferred compensation. Participation in a
nonqualified deferred compensation plan is treated as contingent for
purposes of this paragraph (e)(6) only to the extent that an employee
may receive additional deferred compensation under the nonqualified plan
to the extent the employee makes or does not make elective
contributions. Deferred compensation under a nonqualified plan of
deferred compensation that is dependent on an employee's having made the
maximum elective deferrals under section 402(g) or the maximum elective
contributions permitted under the terms of the plan also is not treated
as contingent.
(v) Plan loans and distributions. A loan or distribution of elective
contributions is not a benefit conditioned on an employee's electing to
make or not make elective contributions under the arrangement merely
because the amount of the loan or distribution is based on the amount of
the employee's account balance.
(vi) Examples. The provisions of this paragraph (e)(6) are
illustrated by the following examples.
Example 1. Employer T maintains a cash or deferred arrangement for
all of its employees. Employer T also maintains a nonqualified deferred
compensation plan for two highly paid executives, Employees R and C.
Under the terms of the nonqualified deferred compensation plan, R and C
are eligible to participate only if they do not make elective
contributions under the cash or deferred arrangement. Participation in
the nonqualified plan is a contingent benefit for purposes of this
paragraph (e)(6), because R's and C's participation is conditioned on
their electing not to make elective contributions under the cash or
deferred arrangement.
Example 2. Employer T maintains a cash or deferred arrangement for
all its employees. Employer T also maintains a nonqualified deferred
compensation plan for two highly paid executives, Employees R and C.
Under the terms of the arrangements, Employees R and C may defer a
maximum of 10 percent of their compensation, and may allocate their
deferral between the cash or deferred arrangement and the nonqualified
deferred compensation plan in any way they choose (subject to the
overall 10 percent maximum). Because the maximum deferral available
under the nonqualified deferred compensation plan depends on the
elective deferrals made under the cash or deferred arrangement, the
right to participate in the nonqualified plan is a contingent benefit
for purposes of paragraph (e)(6).
(7) Coordination with other plans. For plan years beginning after
December 31, 1988, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if no elective contributions (or qualified matching contributions
treated as elective contributions under paragraph (b)(5) of this
section) under the arrangement are taken into account for purposes of
determining whether any other contributions under any plan (including
the plan to which the elective contributions are made) satisfy the
requirements of section 401(a). Indeed, the portion of a plan that
consists of elective contributions is treated as a separate plan for
purposes of sections 401(a)(4) and 410(b). See Sec. 1.410(b)-7(c)(1).
Similarly, elective contributions under a cash or deferred arrangement
generally may not be taken into account in determining whether a plan
satisfies the minimum contribution or benefit requirements of section
416. See Sec. 1.416-1, M-20. However, qualified nonelective
contributions that are treated as elective contributions for purposes of
section 401(k)(3) under paragraph (b)(5) of this section may be used to
enable a
[[Page 255]]
plan to satisfy the minimum contribution or benefit requirements under
section 416. See Sec. 1.416-1, M-18. This paragraph (e) does not apply
for purposes of determining whether a plan satisfies the average benefit
percentage requirement of section 410(b)(2)(A)(ii). See also
Sec. 1.401(m)-1(b)(5) for circumstances under which elective
contributions may be used to determine whether a plan satisfies the
requirements of section 401(m).
(8) Recordkeeping requirements. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if the employer maintains the records necessary to demonstrate
compliance with the applicable nondiscrimination requirements of
paragraph (b) of this section, including the extent to which qualified
nonelective contributions and qualified matching contributions are taken
into account.
(9) Consistent application of separate line of business rules. If an
employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with Sec. 1.414(r)-1(b) for purposes
of applying section 410(b), and applies the special rule for employer-
wide plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of the plan that
consists of contributions under the cash or deferred arrangement, then
the requirements of section 401(k) and this section must be applied on
an employer-wide rather than a qualified-separate-line-of-business basis
to all of the plans or portions of plans taken into account in
determining whether the cash or deferred arrangement is a qualified cash
or deferred arrangement, regardless of whether those plans or portions
of plans also satisfy the requirements necessary to apply the special
rule in Sec. 1.414(r)-1(c)(2)(ii). Conversely, if an employer is treated
as operating qualified separate lines of business under section 414(r)
in accordance with Sec. 1.414(r)-1(b) for purposes of applying section
410(b), and does not apply the special rule for employer-wide plans in
Sec. 1.414(r)-1(c)(2)(ii) to the portion of the plan that consists of
contributions under the cash or deferred arrangement, then the
requirements of section 401(k) and this section must be applied on a
qualified-separate-line-of-business rather than an employer-wide basis
to all of the plans or portions of plans taken into account in
determining whether the cash or deferred arrangement is a qualified cash
or deferred arrangement, regardless of whether one or more of those
plans or portions of plans is tested under the special rule
Sec. 1.414(r)-1(c)(2)(ii). This requirement applies solely for purposes
of determining whether the cash or deferred arrangement is a qualified
cash or deferred arrangement under section 401(k) and this section. The
rules of this paragraph are illustrated by the following example.
Example. (i) Employer A maintains a profit-sharing plan that
includes a cash or deferred arrangement in which all of the employees of
Employer A are eligible to participate. Employer A is treated as
operating qualified separate lines of business under section 414(r) in
accordance with Sec. 1.414(r)-1(b) for purposes of applying section
410(b). However, Employer A applies the special rule for employer-wide
plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of its profit-sharing
plan that consists of elective contributions under the cash or deferred
arrangement (and to no other plans or portions of plans). Employer A
makes qualified nonelective contributions to the profit-sharing plan for
the 1995 plan year, and the profit-sharing plan provides that these
qualified nonelective contributions may be used to satisfy the actual
deferral percentage test.
(ii) Under these facts, the requirements of sections 401(a)(4) and
410(b) must be applied on an employer-wide rather than a qualified-
separate-line-of-business basis in determining whether the qualified
nonelective contributions made to the profit-sharing plan satisfy the
requirements of Sec. 1.401(k)-1(b)(5), and thus whether they may be
taken into account under the actual deferral percentage test. Therefore,
in order for the nonelective contributions to be used to satisfy the
actual deferral percentage test, both (1) the total amount of
nonelective contributions under the profit-sharing plan, including the
qualified nonelective contributions to be used to satisfy the actual
deferral percentage test, and (2) the total amount of nonelective
contributions under the profit-sharing plan, excluding the qualified
nonelective contributions to be used to satisfy the actual deferral
percentage test, must satisfy the requirements of section 401(a)(4) on
an employer-wide basis. Of course, in order for the profit-sharing plan
to satisfy section 401(a), it must still satisfy sections
[[Page 256]]
410(b) and 401(a)(4) on a qualified-separate-line-of-business basis.
(f) Correction of excess contributions--(1) General rule--(i)
Permissible correction methods. A cash or deferred arrangement does not
fail to satisfy the requirements of section 401(k)(3) or paragraph
(b)(2) of this section with respect to the amount of elective
contributions under the arrangement if the employer, in accordance with
the terms of the plan that includes the cash or deferred arrangement and
paragraph (b)(5) of this section, makes qualified nonelective
contributions or qualified matching contributions that are treated as
elective contributions under the arrangement and that, in combination
with the elective contributions, satisfy the requirements of paragraph
(b)(2) of this section. In addition, a cash or deferred arrangement does
not fail to satisfy the requirements of section 401(k)(3) or paragraph
(b)(2) of this section for a plan year with respect to the amount of the
elective contributions under the arrangement if, in accordance with the
terms of the plan that includes the cash or deferred arrangement, excess
contributions are recharacterized in accordance with paragraph (f)(3) of
this section, or excess contributions (and income allocable thereto) are
distributed in accordance with paragraph (f)(4) of this section.
(ii) Combination of correction methods. A plan may use any of the
correction methods described in paragraph (f)(1)(i) of this section, may
limit elective contributions in a manner designed to prevent excess
contributions from being made, or may use a combination of these
methods, to avoid or correct excess contributions. Thus, for example, a
portion of the excess contributions for a highly compensated employee
may be recharacterized under paragraph (f)(3) of this section, and the
remaining portion of the excess contributions may be distributed under
paragraph (f)(4) of this section. A plan may require or permit a highly
compensated employee to elect whether any excess contributions are to be
recharacterized or distributed.
(iii) Impermissible correction methods. Excess contributions for a
plan year may not remain unallocated or be allocated to a suspense
account for allocation to one or more employees in any future year. In
addition, excess contributions may not be corrected using the
retroactive correction rules of Sec. 1.401(a)(4)-11(g). See
Sec. 1.401(a)(4)-11(g) (3)(vii) and (5). See paragraph (f)(6) of this
section for the effects of a failure to correct excess contributions.
(iv) Partial distributions. Any distribution of less than the entire
amount of excess contributions with respect to any highly compensated
employee is treated as a pro rata distribution of excess contributions
and allocable income or loss.
(2) Amount of excess contributions. The amount of excess
contributions for a highly compensated employee for a plan year is the
amount (if any) by which the employee's elective contributions must be
reduced for the employee's actual deferral ratio to equal the highest
permitted actual deferral ratio under the plan. To calculate the highest
permitted actual deferral ratio under a plan, the actual deferral ratio
of the highly compensated employee with the highest actual deferral
ratio is reduced by the amount required to cause the employee's actual
deferral ratio to equal the ratio of the highly compensated employee
with the next highest actual deferral ratio. If a lesser reduction would
enable the arrangement to satisfy the actual deferral percentage test,
only this lesser reduction may be made. This process must be repeated
until the cash or deferred arrangement satisfies the actual deferral
percentage test. The highest actual deferral ratio remaining under the
plan after leveling is the highest permitted actual deferral ratio.
Thus, for each highly compensated employee, the amount of excess
contributions for a plan year is equal to the employee's elective
contributions, plus qualified nonelective contributions and qualified
matching contributions taken into account in determining the employee's
actual deferral ratio under paragraph (g)(1) of this section, minus the
amount determined by multiplying the employee's actual deferral ratio
(determined after application of this paragraph (f)(2)) by the
compensation used in determining the ratio. In no case may the amount of
excess contributions to be recharacterized or distributed for a
[[Page 257]]
plan year with respect to any highly compensated employee exceed the
amount of elective contributions made on behalf of the highly
compensated employee for the plan year.
(3) Recharacterization of excess contributions--(i) General rule.
Excess contributions are recharacterized in accordance with this
paragraph (f)(3) only if the excess contributions are treated as
described in paragraph (f)(3)(ii) of this section, and all of the
conditions set forth in paragraph (f)(3)(iii) of this section are
satisfied.
(ii) Treatment of recharacterized excess contributions.
(A) Excess contributions recharacterized under this paragraph (f)(3)
are includable in the employee's gross income on the earliest dates any
elective contribution made on behalf of the employee during the plan
year would have been received by the employee had the employee
originally elected to receive the amounts in cash, or on such later date
permitted in paragraph (f)(3)(iv) of this section. The recharacterized
excess contributions must be treated as employee contributions for
purposes of section 72, section 401(a)(4) and 401(m), and paragraphs (b)
and (d) of this section. This requirement is not treated as satisfied
unless:
(1) The payor or plan administrator reports the recharacterized
excess contributions as employee contributions to the Internal Revenue
Service and the employee by--
(i) Timely providing such forms as the Commissioner may designate to
the employer and to employees whose excess contributions are
recharacterized under this paragraph (f)(3); and
(ii) Timely taking such other action as the Commissioner may
require; and
(2) The plan administrator accounts for the amounts as contributions
by the employee for purposes of sections 72 and 6047.
(B) Recharacterized excess contributions continue to be treated as
employer contributions that are elective contributions for all other
purposes under the Internal Revenue Code, including sections 401(a)
(other than 401(a)(4) and 401(m)), 404, 409, 411, 412, 415, 416, and
417. Thus, for example, recharacterized excess contributions remain
subject to the requirements of paragraph (c) of this section; must be
deducted under section 404; and are treated as employer contributions
described in section 415(c)(2)(A) and Sec. 1.415-6(b). In addition,
these amounts are not treated as compensation for purposes of sections
404 and 415, and may be treated as compensation for purposes of sections
401(a)(4), 401(a)(5), 401(k), 401(l) and 414(s) only to the extent that
elective contributions may be treated, and are treated under the plan,
as compensation. See Sec. 1.414(s)-1(c)(4)(i). Recharacterized excess
contributions that relate to plan years ending on or before October 24,
1988, may be treated as either employer contributions or employee
contributions for purposes of paragraph (d) of this section. The amount
of excess contributions included in an employee's gross income is
reduced as provided under paragraph (f)(5)(i)(B) of this section.
(iii) Additional rules--(A) Time of recharacterization. Excess
contributions may not be recharacterized under this paragraph (f)(3)
after the later of October 24, 1988, or 2\1/2\ months after the close of
the plan year to which the recharacterization relates.
Recharacterization is deemed to have occurred on the date on which the
last of those highly compensated employees with excess contributions to
be recharacterized is notified in accordance with paragraph
(f)(3)(ii)(A) of this section. The Commissioner may designate the means
by which this notification is to be provided.
(B) Employee contributions must be permitted under plan. The amount
of recharacterized excess contributions, in combination with the
employee contributions actually made by the highly compensated employee,
may not exceed the maximum amount of employee contributions (determined
without regard to the actual contribution percentage test of section
401(m)(2)) that the highly compensated employee could have made under
the provisions of the plan in effect on the first day of the plan year
in the absence of recharacterization. See Sec. 1.401(m)-1(a)(2) for
requirements relating to the availability of employee contributions.
(C) Plans under which excess contributions may be recharacterized.
For plan
[[Page 258]]
years beginning after December 31, 1991, elective contributions may be
recharacterized under this paragraph (f)(3) only under the plan under
which they are made or under a plan with which that plan could be
aggregated under Sec. 1.410(b)-7(d) after application of the mandatory
disaggregation rules of Sec. 1.410(b)-7(c), as modified in
Sec. 1.401(k)-1(g)(11). For plan years beginning before that date and
after December 31, 1988, or such later date provided under paragraph (h)
of this section, elective contributions may be recharacterized under
this paragraph (f)(3) only under the plan under which they are made or
under a plan with the same plan year as that plan.
(iv) Transition rules. If amounts recharacterized for any plan year
were not previously included in income, they must be treated as received
by employees for income tax purposes on the first day of the first plan
year ending after 1987. If notice of recharacterization was provided to
the affected highly compensated employees by October 24, 1988,
recharacterization is deemed to have occurred 2\1/2\ months after the
close of the plan year and the penalty tax of section 4979 will not be
imposed. The rules in this paragraph (f)(3)(iv) are effective only for
plan years ending before August 9, 1988.
(v) Example. The provisions of this paragraph (f)(3) are illustrated
by the following example:
Example. (i) Employer X maintains Plan Y, a calendar year profit-
sharing plan that includes a qualified cash or deferred arrangement.
Under Plan Y, each eligible employee may elect to defer up to 10 percent
of compensation under a salary reduction agreement. An eligible employee
may also make employee contributions of up to 10 percent of
compensation. X pays the amounts deferred to the trust on the last day
of each month. Employer X includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See
Sec. 1.401(k)-1(g)(2)(i). Salaries are paid on the same date.
(ii) (A) In January 1989, X determines that during 1988 the
compensation and actual deferral ratios (ADRs) of X's six employees were
as follows:
------------------------------------------------------------------------
Elective ADR
Employee Compensation contribution (%)(B/
(A) (B) A)
------------------------------------------------------------------------
A................................. $70,000 $7,000 10.00
B................................. 60,000 4,500 7.50
C................................. 20,000 1,000 5.00
D................................. 15,000 0 0
E................................. 10,000 350 3.50
F................................. 10,000 350 3.50
------------------------------------------------------------------------
(B) The average deferral percentage (ADP) for X's highly compensated
group, A and B, is 8.75 percent ((10.00%+7.50%)/2). The ADP for X's
other employees is 3 percent ((5.00%+0% + 3.50% + 3.50%)/4). Because
8.75 percent is more than 2 times 3 percent and more than 3 percent plus
2 percentage points, the plan fails to satisfy paragraph (b)(2) of this
section. Neither A nor B made any employee contributions for the year.
(iii) Plan Y provides that each highly compensated participant will
have excess contributions, as defined in paragraph (g)(7) of this
section, recharacterized. The amount to be recharacterized will be
determined according to the method described in paragraph (f)(2) of this
section.
(iv) In order to satisfy paragraph (b)(2) of this section, Plan Y
must reduce the ADP for X's highly compensated employees to not more
than 5 percent. This will satisfy the test described in paragraph (b)(2)
of this section, because 5 percent is not more than 2 times 3 percent
and is not more than 2 percentage points greater than 3 percent. Plan Y
first reduces A's ADR to 7.5 percent (the ADR of the highly compensated
employee having the next highest ADR). Since this is not sufficient to
satisfy the ADP test in paragraph (b)(2) of this section, the ADR of
both A and B must be reduced to 5 percent.
(v) The maximum dollar amount that may be deferred by each employee
is determined by using the formula D=(ADRxS) where D is the maximum
allowable deferral, ADR is the reduced ADR, and S is the compensation.
Thus, A's maximum allowable deferral is $3,500 (.05x$70,000), and B's
maximum allowable deferral is $3,000 (.05x$60,000). The balance of the
original deferrals by A and B ($3,500 and $1,500 respectively) must be
included in their taxable wages for 2988, the year in which X would have
paid cash to A and B.
(vi) A deferred $583.33 per month, except for January, February,
March, and April, when A deferred $583.34. Pursuant to the first-in,
first-out rule in paragraph (f)(3)(ii) of this section, the deferrals
made in January, February, March, April, and May, as well as $583.31 of
the deferral made in June, are treated as employee contributions. A
similar procedure is undertaken with respect to B. X and the plan
administrator provide A and B with the forms and notices that the
Commissioner requires. If A and B had already filed income tax returns
for 1988, they must file amended returns. If Plan Y had a plan year
ending November 30, 1987, and A and B had made elective deferrals in
December 1987,
[[Page 259]]
they would also have to file amended returns for 1987. In addition, the
plan administrator must satisfy paragraph (f)(3)(ii)(B) of this section.
Of course, the actual contribution percentage test of section 401(m)(2)
must be satisfied for 1988, taking the recharacterized amounts into
account.
(4) Corrective distribution of excess contributions (and income)--
(i) General rule. Excess contributions (and income allocable thereto)
are distributed in accordance with this paragraph (f)(4) only if the
excess contributions and allocable income are designated by the employer
as a distribution of excess contributions (and income), and are
distributed to the appropriate highly compensated employees after the
close of the plan year in which the excess contributions arose and
within 12 months after the close of that plan year. In the event of a
complete termination of the plan during the plan year in which an excess
contribution arose, the corrective distribution must be made as soon as
administratively feasible after the date of termination of the plan, but
in no event later than 12 months after the date of termination. If the
entire account balance of a highly compensated employee is distributed
during the plan year in which an excess contribution arose, the
distribution is deemed to have been a corrective distribution of excess
contributions (and income) to the extent that a corrective distribution
would otherwise have been required.
(ii) Income allocable to excess contributions--(A) General rule. The
income allocable to excess contributions is equal to the sum of the
allocable gain or loss for the plan year and, if the plan so provides,
the allocable gain or loss for the period between the end of the plan
year and the date of distribution (the ``gap period'').
(B) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess contributions,
provided that the method does not violate section 401(a)(4), is used
consistently for all participants and for all corrective distributions
under the plan for the plan year, and is used by the plan for allocating
income to participants' accounts. See Sec. 1.401(a)(4)-1(c)(8).
(C) Alternative method of allocating income. A plan may allocate
income to excess contributions by multiplying the income for the plan
year (and the gap period, if the plan so provides) allocable to elective
contributions and amounts treated as elective contributions by a
fraction. The numerator of the fraction is the excess contributions for
the employee for the plan year. The denominator of the fraction is equal
to the sum of:
(1) The total account balance of the employee attributable to
elective contributions and amounts treated as elective contributions as
of the beginning of the plan year; plus
(2) The employee's elective contributions and amounts treated as
elective contributions for the plan year and for the gap period if gap
period income is allocated.
(D) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess contributions for the gap period is
equal to 10 percent of the income allocable to excess contributions for
the plan year (calculated under the method described in paragraph
(f)(4)(ii)(C)) of this section, multiplied by the number of calendar
months that have elapsed since the end of the plan year. For purposes of
calculating the number of calendar months that have elapsed under the
safe harbor method, a corrective distribution that is made on or before
the fifteenth day of the month is treated as made on the last day of the
preceding month. A distribution made after the fifteenth day of the
month is treated as made on the first day of the next month.
(iii) No employee or spousal consent required. A corrective
distribution of excess contributions (and income) may be made under the
terms of the plan without regard to any notice or consent otherwise
required under sections 411(a)(11) and 417.
(iv) Treatment of corrective distributions as employer
contributions. Excess contributions are treated as employer
contributions for purposes of sections 404 and 415 even if distributed
from the plan.
(v) Tax treatment of corrective distributions--(A) General rule.
Except as provided in paragraph (f)(4)(v) (B) or (C) of this section, a
corrective distribution of excess contributions (and income)
[[Page 260]]
that is made within 2\1/2\ months after the end of the plan year for
which the excess contributions were made is includible in the employee's
gross income on the earliest dates any elective contributions by the
employee during the plan year would have been received by the employee
had the employee originally elected to receive the amounts in cash. A
corrective distribution of excess contributions (and income) that is
made more than 2\1/2\ months after the end of the plan year for which
the contributions were made is includible in the employee's gross income
in the employee's taxable year in which distributed. Regardless of when
the corrective distribution is made, it is not subject to the early
distribution tax of section 72(t) and is not treated as a distribution
for purposes of applying the excise tax under section 4980A. See
paragraph (f)(5)(i)(B) of this section for rules relating to the
taxation of excess contributions that reduce excess deferrals. See
paragraph (f)(6)(i) of this section for additional rules relating to the
employer excise tax on amounts distributed more than 2\1/2\ months after
the end of the plan year.
(B) Rule for de minimis distributions. If the total amount of excess
contributions and excess aggregate contributions distributed to a
recipient under a plan for any plan year is less than $100 (excluding
income), a corrective distribution of excess contributions (and income)
is includible in the gross income of the recipient in the taxable year
of the recipient in which the corrective distribution is made.
(C) Rule for certain 1987 and 1988 excess contributions.
Distributions for plan years beginning in 1987 and 1988 to which the de
minimis rule of this section would otherwise apply may be reported by
the recipient, at the recipient's option, either in the year described
in paragraph (f)(4)(v)(A) of this section, or in the year described in
paragraph (f)(4)(v)(B) of this section. This special rule may be used
only for distributions made within 2\1/2\ months after the close of the
plan year, but in no event later than April 17, 1989.
(vi) No reduction of required minimum distribution. A distribution
of excess contributions (and income) is not treated as a distribution
for purposes of determining whether the plan satisfies the minimum
distribution requirements of section 401(a)(9).
(5) Rules applicable to all corrections--(i) Coordination with
distribution of excess deferrals--(A) In general. The amount of excess
contributions to be recharacterized under paragraph (f)(3) of this
section or distributed under paragraph (f)(4) of this section with
respect to an employee for a plan year, is reduced by any excess
deferrals previously distributed to the employee for the employee's
taxable year ending with or within the plan year in accordance with
section 402(g)(2).
(B) Treatment of excess contributions that reduce excess deferrals.
Under Sec. 1.402(g)-1(e), the amount of excess deferrals that may be
distributed with respect to an employee for a taxable year is reduced by
any excess contributions previously distributed or recharacterized with
respect to the employee for the plan year beginning with or within the
taxable year. The amount of excess contributions includible in the gross
income of the employee, and the amount of excess contributions reported
by the payor or plan administrator as includible in the gross income of
the employee, does not include the amount of any reduction under
Sec. 1.402(g)-1(e)(6).
(ii) Correction of family members. The determination and correction
of excess contributions of a highly compensated employee whose actual
deferral ratio is determined under the family aggregation rules of
paragraph (g)(1)(ii)(C) of this section is accomplished by reducing the
actual deferral ratio as required under paragraph (f)(2) of this section
and allocating the excess contributions for the family group among the
family members in proportion to the elective contribution of each family
member that is combined to determine the actual deferral ratio.
(iii) Matching contributions forfeited because of excess deferral or
contribution. For purposes of section 401(k)(2)(C) and paragraph (c)(1)
of this section, a qualified matching contribution is not treated as
forfeitable merely because under the plan it is forfeited if the
contribution to which it relates is treated as an excess contribution,
excess deferral, or excess aggregate contribution.
[[Page 261]]
(6) Failure to correct--(i) Failure to correct within 2\1/2\ months
after end of plan year. If a plan does not correct excess contributions
within 2\1/2\ months after the close of the plan year for which the
excess contributions are made, the employer will be liable for a 10-
percent excise tax on the amount of the excess contributions. See
section 4979 and Sec. 54.4979-1. Qualified nonelective contributions and
qualified matching contributions properly taken into account under
paragraph (b)(5) of this section for a plan year may enable a plan to
avoid having excess contributions, even if the contributions are made
after the close of the 2\1/2\ month period.
(ii) Failure to correct within 12 months after end of plan year. If
excess contributions are not corrected within 12 months after close of
the plan year for which they were made, the cash or deferred arrangement
will fail to satisfy the requirements of section 401(k)(3) for the plan
year for which the excess contributions are made and all subsequent plan
years during which the excess contributions remain in the trust.
(7) Examples. The provisions of this paragraph (f) are illustrated
by the following examples:
Example 1. (i) The Y corporation maintains a cash or deferred
arrangement. The plan year is the calendar year. For plan year 1989, all
10 of Y's employees are eligible to participate in the cash or deferred
arrangement. The Y corporation includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See
Sec. 1.401(k)-1(g)(2)(i). The employees' compensation, elective
contributions, and actual deferral ratios are shown in the following
table:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio (ADR)
(percent)
------------------------------------------------------------------------
A............................. $160,000 $6,400 4.0
B............................. 140,000 7,000 5.0
C............................. 70,000 7,000 10.0
D............................. 65,000 6,500 10.0
E............................. 42,000 2,100 5.0
F............................. 35,000 3,500 10.0
G............................. 28,000 2,800 10.0
H............................. 21,000 700 3.33
I............................. 21,000 0 0
J............................. 21,000 0 0
------------------------------------------------------------------------
(ii) Employees A, B, C, and D are highly compensated employees.
Employees E, F, G, H, I, and J are nonhighly compensated employees. The
actual deferral percentage (ADP) for the highly compensated group is
7.25 percent. The ADP for the nonhighly compensated group is 4.72
percent. These percentages do not meet the requirements of section
401(k)(3)(A)(ii).
(iii) Employees A and C have each received a distribution of excess
deferrals of $1,000. However, the ADR for employee A remains 4.0 percent
and the actual deferral ratio for Employee C remains 10.0 percent. The
ADP for the group of highly compensated employees remains 7.25 percent.
(iv) The ADP for the highly compensated group must be reduced to
6.72 percent. This is done by reducing the ADR of the highly compensated
employees with the highest ADR (Employees C and D) to 8.94 percent. This
makes Employee C's maximum elective contribution $6,258. This requires a
distribution or recharacterization of $742. But since $1,000 has already
been distributed as an excess deferral, no additional distribution or
recharacterization is required or permitted. Employee D's elective
contribution must be reduced by $689 ($6,500--.0894 ($65,000)) to $5,811
through distribution or recharacterization.
Example 2. A, B, and C are highly compensated employees of Employer
R. Employer R maintains a cash or deferred arrangement. Employer R
includes elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). For the plan year 1990, A, B, and C each earns
compensation of $100,000 and contributes $7,000 to the plan during the
period January through June. B retires in November of 1990 and makes a
withdrawal of B's entire account balance of $200,000. In January of
1991, R computes the ADP test for its employees and learns that the
highly compensated employees should have contributed only five percent
of compensation. Since B made a contribution of $7,000 for 1990, B's
contribution and compensation are used in determining the ADP despite
the subsequent $200,000 withdrawal. A, B, and C must each receive a
corrective distribution of $2,000 in order to meet the ADP test. Since B
has already withdrawn B's total account balance under the plan, only A
and C must receive a distribution of $2,000 each in order for the plan
to meet the ADP test of section 401(k)(3)(A)(ii). Pursuant to the 1990
Form 1099-R Instructions, the plan must issue two Forms 1099-R to B, one
reporting the portion of the distribution that was necessary to correct
the excess contribution (including income), and one reporting the
balance of the distribution. If B had withdrawn less than the total
account balance, B would have to withdraw the lesser of $2,000 or the
remaining account balance.
Example 3. Individual A has a child, B. Both participate in a cash
or deferred arrangement maintained by Employer X. A is one of the 10
most highly compensated employees and B is a nonhighly compensated
employee. Employer X includes elective contributions in compensation as
permitted under
[[Page 262]]
Sec. 1.414(s)-1(c)(4)(i). A has compensation of $100,000 and defers
$7,000 under the cash or deferred arrangement; B has compensation of
$40,000 and defers $4,000 under the arrangement. The actual deferral
ratio of the family unit is 7.86 percent, calculated by aggregating the
contributions and compensation of A and B ($7,000 + $4,000)/($100,000 +
$40,000). For the plan, it is determined that under Sec. 1.401(k)-
1(f)(2), the actual deferral ratio of the aggregate family unit must be
reduced to 7.20 percent. This reduction is applied in proportion to A's
and B's contributions. The excess contributions are $920 ($11,000 total
contributions minus $10,080 (7.20% x $140,000)). A's share of the excess
contributions is $585.45 ($7,000/$11,000 x $920); B's share is $334.55
($4,000/$11,000 x $920).
Example 4. (i) Employer T maintains a profit-sharing plan containing
a cash or deferred arrangement for all employees. Six employees are
covered by a collective bargaining agreement, the other seven employees
are not. The employee data for 1994 is shown in the following table:
------------------------------------------------------------------------
Actual
deferral
Employee Collective bargaining unit ratio
status (ADR),
(percent)
------------------------------------------------------------------------
A Member......................... 8.0
B Member......................... 6.0
C Nonmember...................... 9.0
D Nonmember...................... 7.0
E-H Members........................ 4.5
I-M Nonmembers..................... 6.0
------------------------------------------------------------------------
Employees A, B, C, and D are highly compensated.
(ii) For purposes of sections 410(b), 401(a)(4) and 401(k), the
portion of T's plan covering collectively bargained unit members must be
disaggregated from the portion covering other employees.
------------------------------------------------------------------------
ADR
Employee (percent)
------------------------------------------------------------------------
Collective Bargaining Unit Members:
A....................................................... 8.0
B....................................................... 6.0
E-H..................................................... \1\ 4.5
Other Employees:
C....................................................... 9.0
D....................................................... 7.0
I-M..................................................... \1\ 6.0
------------------------------------------------------------------------
\1\ Average.
(iii) The ADPs for the collectively bargained highly compensated
group and nonhighly compensated group, respectively, are seven percent
and 4.5 percent. The ADPs for the other highly compensated and nonhighly
compensated employees, respectively, are eight percent and six percent.
(iv) The non-collectively bargained portion of the disaggregated
plan satisfies the ADP test for the 1994 plan year, but the collectively
bargained portion does not. Employer T is not required to make
corrections to the collectively bargained portion of the cash or
deferred arrangement, because a collectively bargained plan
automatically satisfies the nondiscrimination requirements of 401(a)(4).
However, unless Employer T corrects the ADP test failure in the
collectively bargained portion of the plan, either by reducing A's ADR
to seven percent or adding QNCs for the nonhighly compensated employees,
all elective contributions made by collectively bargained employees for
the year will be includible in income in l994.
(g) Definitions. The following definitions apply for purposes of
this section, unless the context clearly indicates otherwise:
(1) Actual deferral percentage--(i) General rule. The actual
deferral percentage for a group of employees for a plan year is the
average of the actual deferral ratios of employees in the group for that
plan year. For plan years that begin after December 31, l988, or such
later date provided in paragraph (h) of this section, actual deferral
ratios and the actual deferral percentage for a group are calculated to
the nearest hundredth of a percentage point.
(ii) Actual deferral ratio--(A) General rule. An employee's actual
deferral ratio for the plan year is the sum of the employee's elective
contributions and amounts treated as elective contributions for the plan
year, divided by the employee's compensation taken into account for the
plan year. If an eligible employee makes no elective contributions, and
no qualified matching contributions or qualified nonelective
contributions are taken into account with respect to the employee, the
actual deferral ratio of the employee is zero. See paragraphs (b)(4),
(b)(5), and (g)(2) of this section for rules regarding the elective
contributions, qualified nonelective contributions, and compensation
taken into account in calculating this fraction.
(B) Employee eligible under more than one arrangement--(1) Highly
compensated employees. For plan years beginning after December 31, 1984,
the actual deferral ratio of a highly compensated employee who is
eligible to participate in more than one cash or deferred arrangement of
the same employer is generally calculated by treating all the cash or
deferred arrangements in which the employee is eligible to participate
as one arrangement. However, plans
[[Page 263]]
that are not permitted to be aggregated under Sec. 1.410(b)-7(c), as
modified in paragraph (g)(11) of this section, are not aggregated for
this purpose. For example, if a highly compensated employee with
compensation of $80,000 could make elective contributions under two
separate cash or deferred arrangements, the actual deferral ratio for
the employee under each arrangement would generally be calculated by
dividing the total elective contributions by the employee under both
arrangements by $80,000. If one of the cash or deferred arrangements
were part of an ESOP, however, while the other was not, the actual
deferral percentage of the employee under each arrangement would be
calculated by dividing the employee's elective contributions under each
arrangement by $80,000 because the ESOP portion is mandatorily
disaggregated from the non-ESOP portion.
(2) Nonhighly compensated employees. For plan years beginning after
December 31, 1984, and before January 1, 1987 (or such later date
provided under paragraph (h) of this section), this paragraph
(g)(1)(ii)(B) applies to all employees, and not only to highly
compensated employees.
(3) Treatment of plans with different plan years. If the cash or
deferred arrangements that are treated as a single arrangement under
this paragraph (g)(1)(ii)(B) are parts of plans that have different plan
years, the cash or deferred arrangements are treated as a single
arrangement with respect to the plan years ending with or within the
same calendar year.
(C) Employees subject to family aggregation rules--(1) Aggregation
of elective contributions and other amounts. For plan years beginning
after December 31, 1986, or any later date provided in paragraph (h) of
this section, if a highly compensated employee is subject to the family
aggregation rules of section 414(q)(6) because that employee is either a
five-percent owner or one of the 10 most highly compensated employees,
the combined actual deferral ratio for the family group (which is
treated as one highly compensated employee) must be determined by
combining the elective contributions, compensation, and amounts treated
as elective contributions of all family members.
(2) Effect on actual deferral percentage of nonhighly compensated
employees. The elective contributions, compensation, and amounts treated
as elective contributions of all family members are disregarded for
purposes of determining the actual deferral percentage for the group of
nonhighly compensated employees.
(3) Multiple family groups. If an employee is required to be
aggregated as a member of more than one family group in a plan, all
eligible employees who are members of those family groups that include
that employee are aggregated as one family group.
(2) Compensation--(i) Years beginning after December 31, 1986. For
plan years beginning after December 31, 1986, or such later date
provided in paragraph (h) of this section, the term compensation means
compensation as defined in section 414(s) and Sec. 1.414(s)-1. The
period used to determine an employee's compensation for a plan year must
be either the plan year or the calendar year ending within the plan
year. Whichever period is selected must be applied uniformly to
determine the compensation of every eligible employee under the plan for
that plan year for purposes of this section. An employer may, however,
limit the period taken into account under either method to that portion
of the plan year or calendar year in which the employee was an eligible
employee, provided that this limit is applied uniformly to all eligible
employees under the plan for the plan year for purposes of this section.
See also section 401(a)(17) and Sec. 1.401(a)(17)-1(c)(1).
(ii) Years beginning before January 1, 1987--(A) General rule. An
employee's compensation for a plan year beginning before January 1,
1987, or such later date provided under paragraph (h) of this section,
is the amount taken into account under the plan (or plans) in
calculating the elective contribution that may be made on behalf of the
employee. In a plan that is top-heavy (as defined in section 416),
compensation may not exceed $200,000. Compensation may not exclude
amounts less than a stated amount, such as the integration level under
the plan. Compensation
[[Page 264]]
may include all compensation for the plan year, including compensation
for the period when an employee was ineligible to make a cash or
deferred election.
(B) Nondiscrimination requirement--(1) If the plan's definition of
compensation has the effect of discriminating in favor of employees who
are highly compensated, a nondiscriminatory definition shall be
determined by the Commissioner.
(2) A plan's definition of compensation is treated as
nondiscriminatory if the plan defines compensation for a plan year
either as--
(i) an employee's total nondeferred compensation includible in gross
income plus elective contributions under the plan and elective
contributions under a plan described in section 125, and/or
(ii) an employee's W-2 or total nondeferred compensation includible
in gross income.
(3) Elective contributions. The term ``elective contribution'' means
employer contributions made to a plan that were subject to a cash or
deferred election under a cash or deferred arrangement (whether or not
the arrangement is a qualified cash or deferred arrangement under
paragraph (a)(4) of this section). No amount that has become currently
available to an employee or that is designated or treated, at the time
of deferral or contribution, as an after-tax employee contribution may
be treated as an elective contribution. See paragraphs (a)(2) and (a)(3)
of this section. See also paragraph (a)(6)(iii) of this section for
rules relating to the treatment as elective contributions of certain
matching contributions made by partnerships.
(4) Eligible employee--(i) General rule. The term ``eligible
employee'' means an employee who is directly or indirectly eligible to
make a cash or deferred election under the plan for all or a portion of
the plan year. For example, if an employee must perform purely
ministerial or mechanical acts (e.g., formal application for
participation or consent to payroll withholding) in order to be eligible
to make a cash or deferred election for a plan year, the employee is an
eligible employee for the plan year without regard to whether the
employee performs the acts. An employee who is unable to make a cash or
deferred election because the employee has not contributed to another
plan is also an eligible employee. By contrast, if an employee must
perform additional service (e.g., satisfy a minimum period of service
requirement) in order to be eligible to make a cash or deferred election
for a plan year, the employee is not an eligible employee for the plan
year unless the service is actually performed. See paragraph (e)(5) of
this section, however, for certain limits on the use of minimum service
requirements. An employee who would be eligible to make elective
contributions but for a suspension due to a distribution, a loan, or an
election not to participate in the plan, is treated as an eligible
employee for purposes of section 401(k)(3) for a plan year even though
the employee may not make a cash or deferred election by reason of the
suspension. Finally, an employee does not fail to be treated as an
eligible employee merely because the employee may receive no additional
annual additions because of section 415(c)(1) or 415(e).
(ii) Certain one-time elections. An employee is not an eligible
employee merely because the employee, upon commencing employment with
the employer or upon the employee's first becoming eligible to make a
cash or deferred election under any arrangement of the employer, is
given the one-time opportunity to elect, and the employee does in fact
elect, not to be eligible to make a cash or deferred election under the
plan or any other plan maintained by the employer (including plans not
yet established) for the duration of the employee's employment with the
employer. This rule applies in addition to the rules in paragraphs
(a)(3)(iv) and (a)(6)(ii)(C) of this section relating to the definition
of a cash or deferred election. In no event is an election made after
December 23, 1994 treated as a 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.
(5) Employee. The term employee means an employee within the meaning
of Sec. 1.410(b)-9.
[[Page 265]]
(6) Employer. The term employer means the employer within the
meaning of Sec. 1.410(b)-9.
(7) Excess contributions and excess deferrals--(i) Excess
contributions. The term ``excess contribution'' means, with respect to a
plan year, the excess of the elective contributions, including qualified
nonelective contributions and qualified matching contributions that are
treated as elective contributions under paragraph (b)(2) of this
section, on behalf of eligible highly compensated employees for the plan
year over the maximum amount of the contributions permitted under
paragraph (b)(2) of this section. The amount of excess contributions for
each highly compensated employee is determined by using the method
described in paragraph (f)(2) of this section.
(ii) Excess deferrals. The term ``excess deferrals'' means excess
deferrals as defined in Sec. 1.402(g)-1(e)(3).
(8) Highly compensated employees--(i) Plan years beginning after
December 31, 1986. For plan years beginning after December 31, 1986, or
such later date provided under paragraph (h) of this section, the term
``highly compensated employee'' has the meaning provided in section
414(q).
(ii) Plan years beginning after December 31, 1979, and before
January 1, 1987. For plan years beginning after December 31, 1979, and
before January 1, 1987, or such later date provided under paragraph (h)
of this section, for purposes of the actual deferral percentage test,
highly compensated employees are the one-third of all eligible employees
(rounded to the nearest integer) who receive the most compensation. When
one or more employees of a group would be highly compensated employees
except that each member of the group receives the same amount of
compensation, the employer must designate which employees of the group
are highly compensated, so that one-third of all eligible employees are
considered highly compensated.
(9) Matching contributions. The term ``matching contribution'' means
matching contributions as defined in Sec. 1.401(m)-1(f)(12).
(10) Nonelective contributions. The term ``nonelective
contribution'' means employer contributions (other than matching
contributions) with respect to which the employee may not elect to have
the contributions paid to the employee in cash or other benefits instead
of being contributed to the plan.
(11) Plan--(i) Application of section 410(b) rules. The term 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), with the
modifications provided in paragraph (g)(11)(ii) of this section. Thus,
for example, two plans (within the meaning of Sec. 1.410(b)-7(b)) that
are treated as a single plan pursuant to the permissive aggregation
rules of Sec. 1.410(b)-7(d) are treated as a single plan for purposes of
section 401(k). See also Sec. 1.401(k)-1(b)(3)(ii).
(ii) Modifications to section 410(b) rules--(A) In general. For
purposes of this paragraph (g)(11), Sec. 1.410(b)-7 (c) and (d) are
applied without regard to Sec. 1.410(b)-7(c)(1), relating to section
401(k) and 401(m) plans.
(B) Plans benefiting collective bargaining unit employees. A plan
that benefits employees who are included in a unit of employees covered
by a collective bargaining agreement and employees who are not included
in such a collective bargaining unit is treated as comprising separate
plans. This paragraph (g)(11)(ii)(B) is generally applied separately
with respect to each collective bargaining unit. At the option of the
employer, however, two or more separate collective bargaining units can
be treated as a single collective bargaining unit, provided that the
combinations of units are determined on a basis that is reasonable and
reasonably consistent from year to year. Thus, for example, if a plan
benefits employees in three categories--employees included in collective
bargaining unit A, employees included in collective bargaining unit B,
and employees who are not included in any collective bargaining unit--
the plan can be treated as comprising three separate plans, each of
which benefits only one category of employees. However, if collective
bargaining units A and B are treated as a single collective bargaining
unit, the plan will be treated
[[Page 266]]
as comprising only two separate plans, one benefiting all employees who
are included in a collective bargaining unit and another benefiting all
other employees. Similarly, if a plan benefits only employees who are
included in collective bargaining unit A and employees who are included
in collective bargaining unit B, the plan can be treated as comprising
two separate plans. However, if collective bargaining units A and B are
treated as a single collective bargaining unit, the plan will be treated
as a single plan. An employee is treated as included in a unit of
employees covered by a collective bargaining agreement if and only if
the employee is a collectively bargained employee within the meaning of
Sec. 1.410(b)-6(d)(2).
(C) Multiemployer plans. Consistent with section 413(b), the portion
of the plan that is maintained pursuant to a collective bargaining
agreement (within the meaning of Sec. 1.413-1(a)(2)) is treated as a
single plan maintained by a single employer that employs all the
employees benefiting under the same benefit computation formula and
covered pursuant to that collective bargaining agreement. The rules of
paragraph (g)(11)(ii)(B) of this section (including the optional
aggregation of collective bargaining units) apply to the resulting
deemed single plan in the same manner as they would to a single employer
plan, except that the plan administrator is substituted for the employer
where appropriate and appropriate fiduciary obligations are taken into
account. The noncollectively bargained portion of the plan is treated as
maintained by one or more employers, depending on whether the
noncollective bargaining unit employees who benefit under the plan are
employed by one or more employers.
(12) Pre-ERISA money purchase pension plan--(i) A pre-ERISA money
purchase pension plan is a pension plan:
(A) That is a defined contribution plan (as defined in section
414(i));
(B) That was in existence on June 27, 1974, and as in effect on that
date, included a salary reduction agreement described in paragraph
(a)(3)(i) of this section; and
(C) Under which neither the employee contributions nor the employer
contributions, including elective contributions, may exceed the levels
(as a percentage of compensation) provided for by the contribution
formula in effect on June 27, 1974.
(ii) A plan was in existence on June 27, 1974, if it was a written
plan adopted on or before that date, even if no funds had yet been paid
to the trust associated with the plan.
(13) Qualified matching contributions and qualified nonelective
contributions--(i) Qualified matching contributions. The term
``qualified matching contribution'' means matching contributions that
satisfy the additional requirements of paragraph (g)(13)(iii) of this
section.
(ii) Qualified nonelective contributions. The term ``qualified
nonelective contribution'' means employer contributions, other than
elective contributions and matching contributions, that satisfy the
additional requirements of paragraph (g)(13)(iii) of this section.
(iii) Additional requirements. Except to the extent that paragraphs
(c) and (d) of this section specifically provide otherwise, the matching
contributions and the nonelective contributions must satisfy the
requirements of paragraphs (c) and (d) of this section as though the
contributions were elective contributions, without regard to whether the
contributions are actually taken into account as elective contributions
under paragraph (b)(2) of this section. Thus, the matching and
nonelective contributions must satisfy the vesting requirements of
paragraph (c) of this section and be subject to the distribution
requirements of paragraph (d) of this section when they are contributed
to the plan. See Sec. 1.401(k)-1(f)(5)(iii) for rules regarding matching
contributions not treated as forfeitable under section 411(a)(3)(G)
because of excess deferrals or contributions.
(14) Rural cooperative plan. For purposes of this section, a rural
cooperative plan is a plan described in section 401(k)(7).
(15) Section 401(k) plan. The term section 401(k) plan means a
section 401(k) plan within the meaning of Sec. 1.410(b)-9.
(16) Section 401(m) plan. The term section 401(m) plan means a
section 401(m) plan within the meaning of Sec. 1.401(b)-9.
[[Page 267]]
(h) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (h) or as specifically provided elsewhere in this
section, this section applies to plan years beginning after December 31,
1979.
(2) 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:
(i) The provisions of this section first effective for plan years
beginning after December 31, 1986, do not apply to years that begin
before the earlier of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension thereof after February 28, 1986).
(ii) The provisions of this section first effective for plan years
beginning after December 31, 1988, do not apply to years beginning
before the earlier of:
(A) 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 thereof after February 28, 1986); or
(B) January 1, 1991.
(3) Transition rules--(i) Cash or deferred arrangements in existence
on June 27, 1974. See Sec. 1.402(a)-1(d)(3)(ii) for a transition rule
applicable to cash or deferred arrangements in existence on June 27,
1974.
(ii) Plan years beginning after December 31, 1979, and before
January 1, 1992. For plan years beginning after December 31, 1979 (or,
in the case of a pre-ERISA money purchase plan, plan years beginning
after July 18, 1984) and before January 1, 1992, a reasonable
interpretation of the rules set forth in section 401 (k) and (m) of the
Internal Revenue Code (as in effect during those years) may be relied
upon to determine whether a cash or deferred arrangement was qualified
during those years.
(iii) Restructuring--(A) General rule. In determining whether the
requirements of section 401(k) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. See Sec. 1.401(a)(4)-9(c). An employee may not be
included in more than one component plan of the same plan for a plan
year under this method. If this method is used for a plan year, the
requirements of section 401(k) are applied separately with respect to
each component plan for the plan year. Thus, for example, the actual
deferral ratio and the amount of excess contributions, if any, of each
eligible employee under each component plan must be determined as if the
component plan were a separate plan. This method applies solely for
purposes of section 401(k). Thus, for example, the requirements of
section 410(b) must still be satisfied by the entire plan.
(B) Identification of component plans--(1) Minimum coverage
requirement. The group of eligible employees described in Sec. 1.401(k)-
1(g)(4) under each component plan must separately satisfy the
requirements of section 410(b) as if the component plan were a separate
plan. Component plans may not be aggregated to satisfy this requirement.
(2) Commonality requirement. The group of employees used to identify
a component plan must share some common attribute or attributes, other
than similar actual deferral ratios. Permissible common attributes
include, for example, employment at the same work site, in the same job
category, for the same division or subsidiary, or for a unit acquired in
a specific merger or acquisition, employment for the same number of
years, compensation under the same method, e.g., salaried or hourly,
coverage under the same contribution formula, and attributes that could
be used as the basis of a classification that would be treated as
reasonable under Sec. 1.410(b)-4(b). Employees whose only common
attribute is the same or similar actual deferral ratios, or another
attribute having substantially the same effect as the same or similar
actual deferral ratios, are not considered as sharing a common attribute
for this purpose. This rule applies regardless of whether the component
plan or the plan of which it is a part satisfies the ratio or percentage
test of section 410(b).
(4) State and local government plans--(i) Plans adopted before May
6, 1986. A
[[Page 268]]
plan adopted by a state or local government prior to May 6, 1986, is
subject to the transitional rules of paragraph (h)(4) (ii) or (iii) of
this section.
(ii) Plan years beginning before January 1, 1996. (A) The plan does
not fail to satisfy the requirements of section 401(a) merely because of
the nonqualified cash or deferred arrangement.
(B) Employer contributions under the nonqualified cash or deferred
arrangement are considered to satisfy the requirements of section
401(a)(4).
(C) Except as provided in paragraphs (a)(7) and (f) of this section,
elective contributions under the arrangement are treated as employer
contributions under the Internal Revenue Code of 1986, as if the
arrangement were a qualified cash or deferred arrangement. See
Sec. 1.401(k)-1(a)(4)(ii). See Sec. 1.402(a)-1(d) for rules governing
when elective contributions under the arrangement are includible in an
employee's gross income.
(iii) Collectively bargained plans. The transition rules in
paragraph (h)(4)(ii) of this section apply to a plan maintained pursuant
to one or more collective bargaining agreements between employee
representatives and one or more employers and adopted by a state or
local government before May 6, 1986, effective on the date the
provisions of section 401(k) and this section would be effective under
paragraph (h)(2) of this section.
[T.D. 8357, 56 FR 40517, Aug. 15, 1991, as amended by T.D. 8376, 56 FR
63432, Dec. 4, 1991; T.D. 8357, 57 FR 10289, 10290, Mar. 25, 1992; 58 FR
14151, Mar. 16, 1993; T.D. 8581, 59 FR 66169, Dec. 23, 1994; T.D. 8581,
60 FR 12416, Mar. 7, 1995; T.D. 8581, 60 FR 15874, Mar. 28, 1995; T.D.
8581, 60 FR 25140, May 11, 1995]
Sec. 1.401(l)-0 Table of contents.
This section contains a listing of the headings of Secs. 1.401(l)-1
through 1.401(l)-6.
Sec. 1.401(l)-1 Permitted disparity with respect to employer-provided
contributions or benefits.
(a) Permitted disparity.
(1) In general.
(2) Overview.
(3) Exclusive rules.
(4) Exceptions.
(5) Additional rules.
(b) Relationship to other requirements.
(c) Definitions.
(1) Accumulation plan.
(2) Average annual compensation.
(3) Base benefit percentage.
(4) Base contribution percentage.
(5) Benefit formula.
(6) Benefit, right, or feature.
(7) Covered compensation.
(i) In general.
(ii) Special rules.
(A) Rounded table.
(B) Proposed regulation definition.
(iii) Period for using covered compensation amount.
(8) Defined benefit plan.
(9) Defined contribution plan.
(10) Disparity.
(11) Employee.
(12) Employer.
(13) Employer contributions.
(14) Excess benefit percentage.
(15) Excess contribution percentage.
(16) Excess plan.
(i) Defined benefit excess plan.
(ii) Defined contribution excess plan.
(17) Final average compensation.
(i) In general.
(ii) Limitations.
(iii) Determination of section 414(s) compensation.
(18) Gross benefit percentage.
(19) Highly compensated employee.
(20) Integration level.
(21) Nonexcludable employee.
(22) Nonhighly compensated employee.
(23) Offset level.
(24) Offset percentage.
(25) Offset plan.
(26) PIA.
(27) Plan.
(28) Plan year compensation.
(29) Qualified plan.
(30) Section 401(l) plan.
(31) Section 414(s) compensation.
(32) Social security retirement age.
(33) Straight life annuity.
(34) Taxable wage base.
(35) Year of service.
Sec. 1.401(l)-2 Permitted disparity for defined contribution plans.
(a) Requirements.
(1) In general.
(2) Excess plan requirement.
(3) Maximum disparity.
(4) Uniform disparity.
(5) Integration level.
(b) Maximum permitted disparity.
(1) In general.
(2) Maximum excess allowance.
(c) Uniform disparity.
(1) In general.
(2) Deemed uniformity.
(i) In general.
(ii) Overall permitted disparity.
(iii) Non-FICA employees.
(d) Integration level.
(1) In general.
(2) Taxable wage base.
[[Page 269]]
(3) Single dollar amount.
(4) Intermediate amount.
(5) Prorated integration level for short plan year.
(e) Examples.
Sec. 1.401(l)-3 Permitted disparity for defined benefit plans.
(a) Requirements.
(1) In general.
(2) Excess or offset plan requirement.
(3) Maximum disparity.
(4) Uniform disparity.
(5) Integration or offset level.
(6) Benefits, rights, and features.
(b) Maximum permitted disparity.
(1) In general.
(2) Maximum excess allowance.
(3) Maximum offset allowance.
(4) Rules of application.
(i) Disparity provided for the plan year.
(ii) Reductions in disparity rate.
(iii) Normal and optional forms of benefit.
(A) In general.
(B) Level annuity forms.
(C) Other forms.
(D) Post-retirement cost-of-living adjustments.
(1) In general.
(2) Requirements.
(E) Section 417(e) exception.
(5) Examples.
(c) Uniform disparity.
(1) In general.
(2) Deemed uniformity.
(i) In general.
(ii) Use of fractional accrual and disparity for 35 years.
(iii) Use of fractional accrual and disparity for fewer than 35
years.
(iv) Different social security retirement ages.
(v) Reduction for integration level.
(vi) Overall permitted disparity.
(A) In general.
(B) Unit credit plans.
(C) Fractional accrual plans.
(vii) Non-FICA employees.
(viii) Average annual compensation adjustment for offset plan.
(ix) PIA offsets.
(3) Examples.
(d) Requirements for integration level or offset compensation.
(1) In general.
(2) Covered compensation.
(3) Uniform percentage of covered compensation.
(4) Single dollar amount.
(5) Intermediate amount.
(6) Intermediate amount safe harbor.
(7) Prorated integration level for short plan year.
(8) Demographic requirements.
(i) In general.
(ii) Attained age requirement.
(iii) Nondiscrimination requirement.
(A) Minimum percentage test.
(B) Ratio test.
(C) High dollar amount test.
(D) Individual disparity reductions.
(9) Reduction in the 0.75-percent factor if integration or offset
level exceeds covered compensation.
(i) In general.
(ii) Uniform percentage of covered compensation.
(iii) Single dollar amount.
(A) Plan-wide reduction.
(B) Individual reductions.
(iv) Reductions.
(A) Table.
(B) Interpolation.
(10) Examples.
(e) Adjustments to the 0.75-percent factor for benefits commencing
at ages other than social security retirement age.
(1) In general.
(2) Adjustments.
(i) Benefits commencing on or after age 55 and before social
security retirement age.
(ii) Benefits commencing after social security retirement age and on
or before age 70.
(iii) Benefits commencing before age 55.
(iv) Benefits commencing after age 70.
(3) Tables.
(4) Benefit commencement date.
(i) In general.
(ii) Qualified social security supplement.
(5) Examples.
(f) Benefits, rights, and features.
(1) Defined benefit excess plan.
(2) Offset plan.
(3) Examples.
(g) No reductions in 0.75-percent factor for ancillary benefits.
(h) Benefits attributable to employee contributions not taken into
account.
(i) Multiple integration levels. [Reserved]
(j) Additional rules.
Sec. 1.401(l)-4 Special rules for railroad plans.
(a) In general.
(b) Defined contribution plans.
(1) In general.
(2) Single integration level method.
(i) In general.
(ii) Definitions.
(3) Two integration level method.
(i) In general.
(ii) Total disparity requirement.
(iii) Intermediate disparity requirement.
(iv) Definitions.
(c) Defined benefit excess plans.
(1) In general.
(2) Single integration level method.
(i) In general.
(ii) Definitions.
(3) Two integration level method.
(i) In general.
(ii) Employee with lower covered compensation.
(iii) Employee with lower railroad retirement covered compensation.
[[Page 270]]
(iv) Definitions.
(d) Offset plans.
(1) In general.
(2) Maximum tier 2 and supplementary annuity offset allowance.
(e) Additional rules.
(1) Definitions.
(2) Adjustments to 0.75-percent factor.
(3) Adjustments to 0.56-percent factor.
(4) Overall permitted disparity.
Sec. 1.401(l)-5 Overall permitted disparity limits.
(a) Introduction.
(1) In general.
(2) Plan requirements.
(3) Plans taken into account.
(b) Annual overall permitted disparity limit.
(1) In general.
(2) Total annual disparity fraction.
(3) Annual defined contribution plan disparity fraction.
(4) Annual defined benefit excess plan disparity fraction.
(5) Annual offset plan disparity fraction.
(i) In general.
(ii) PIA offset plans.
(6) Annual imputed disparity fraction.
(7) Annual nondisparate fraction.
(8) Determination of fraction.
(i) General rule
(ii) Multiple formulas.
(iii) Offset arrangements.
(A) In general.
(B) Defined benefit plans.
(C) Defined contribution plans.
(iv) Applicable percentages.
(v) Fractional accrual plans.
(9) Examples.
(c) Cumulative permitted disparity limit.
(1) In general.
(i) Employees who benefit under defined benefit plans.
(ii) Employees who do not benefit under defined benefit plans.
(iii) Certain plan years disregarded.
(iv) Determination of type of plan.
(v) Applicable plan years.
(vi) Transition rule for defined contribution plans.
(2) Cumulative disparity fraction.
(3) Determination of total annual disparity fractions for prior
years.
(4) Special rules for greater of formulas and offset arrangements.
(i) Greater of formulas.
(A) In general.
(B) Separate satisfaction by formulas.
(C) Single plan.
(ii) Offset arrangements.
(A) In general.
(B) Separate satisfaction by plans.
(C) No other plan.
(5) Examples.
(d) Additional rules.
Sec. 1.401(l)-6 Effective dates and transition rules.
(a) Statutory effective date.
(1) In general.
(2) Collectively bargained plans.
(b) Regulatory effective date.
(1) In general.
(2) Plans of tax-exempt organizations.
(3) Defined contribution plans.
(4) Defined benefit plans.
(c) Compliance during transition period.
[T.D. 8359, 56 FR 47617, Sept. 19, 1991; 57 FR 10818, Mar. 31, 1992, as
amended by T.D. 8486, 58 FR 46830, Sept. 3, 1993]
Sec. 1.401(l)-1 Permitted disparity in employer-provided contributions or benefits.
(a) Permitted disparity--(1) In general. Section 401(a)(4) provides
that a plan is a qualified plan only if the amount of contributions or
benefits provided under the plan does not discriminate in favor of
highly compensated employees. See Sec. 1.401(a)(4)-1(b)(2). Section
401(a)(5)(C) provides that a plan does not discriminate in favor of
highly compensated employees merely because of disparities in employer-
provided contributions or benefits provided to, or on behalf of,
employees under the plan that are permitted under section 401(l). Thus,
if a plan satisfies section 401(l), permitted disparities in employer-
provided contributions or benefits under a plan are disregarded, by
reason of section 401(a)(5)(C), in determining whether the plan
satisfies any of the safe harbors under Secs. 1.401(a)(4)-2(b)(2) and
1.401(a)(4)-3(b). However, even if disparities in employer-provided
contributions or benefits under a plan are permitted under section
401(l) and thus do not cause the plan to fail to satisfy
Sec. 1.401(a)(4)-1(b)(2), the plan may still fail to satisfy section
401(a)(4) for other reasons. Similarly, even if disparities in employer-
provided contributions or benefits under a plan are not permitted under
section 401(l) and thus may not be disregarded under section 401(a)(4)
by reason of section 401(l), the plan may still be found to be
nondiscriminatory under the tests of section 401(a)(4), including the
rules for imputing permitted disparity under Sec. 1.401(a)(4)-7.
(2) Overview. Rules relating to disparities in employer-provided
contributions under a defined contribution plan
[[Page 271]]
are provided in Sec. 1.401(l)-2. For rules relating to disparities in
employer-provided benefits under a defined benefit plan, see
Sec. 401(l)-3. For rules relating to the application of section 401(l)
to a plan maintained by a railroad employer, see Sec. 1.401(l)-4. For
rules relating to the overall permitted disparity limits, see
Sec. 1.401(l)-5. For rules relating to the effective date of section
401(l), see Sec. 1.401(l)-6.
(3) Exclusive rules. The rules provided in Sec. Sec. 1.401(l)-1
through 1.401(l)-6 are the exclusive means for a plan to satisfy
sections 401(l) and 401(a)(5)(C). Accordingly, a plan that provides
disparities in employer-provided contributions or benefits that are not
permitted under Sec. Sec. 1.401(l)-1 through 1.401(l)-6 does not satisfy
section 401(l) or 401(a)(5)(C).
(4) Exceptions. Sections 401(a)(5)(C) and 401(l) are not available
in the following arrangements--
(i) A plan maintained by an employer, determined for purposes of the
Federal Insurance Contributions Act or the Railroad Retirement Tax Act,
as applicable, that does not pay any wages within the meaning of section
3121(a) or compensation within the meaning of section 3231(e). For this
purpose, a plan maintained for a self-employed individual within the
meaning of section 401(c)(1), who is also subject to the tax under
section 1401, is deemed to be a plan maintained by an employer that pays
wages within the meaning of section 3121(a).
(ii) A plan, or the portion of a plan, that is an employee stock
ownership plan described in section 4975(e)(7) (an ESOP) or a tax credit
employee stock ownership plan described in section 409(a) (a TRASOP),
except as provided in Sec. 54.4975-11(a)(7)(ii) of this chapter, which
contains a limited exception to this rule for certain ESOPs in existence
on November 1, 1977.
(iii) With respect to elective contributions as defined in
Sec. 1.401(k)-1(g)(3) under a qualified cash or deferred arrangement as
defined in Sec. 1.401(k)-1(a)(4)(i) or with respect to employee or
matching contributions defined in Sec. 1.401(m)-1(f)(6) or (f)(12),
respectively.
(iv) With respect to contributions to a simplified employee pension
made under a salary reduction arrangement described in section 408(k)(6)
(a SARSEP).
(5) Additional rules. 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 section 401(l), including rules applying section 401(l) 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 other years.
(b) Relationship to other requirements. Unless explicitly provided
otherwise, section 401(l) does not provide an exception to any other
requirement under section 401(a). Thus, for example, even if the plan
complies with section 401(l), the plan may not provide a benefit lower
than the minimum benefit required under section 416. Moreover, a plan
may not adjust benefits in any manner that results in a decrease in any
employee's accrued benefit in violation of section 411(d)(6) and section
411(b)(1)(G). However, a plan does not fail to satisfy section 401(l)
merely because, in order to ensure compliance with section 411, an
employee's accrued benefit under the plan is defined as the greater of
the employee's previously accrued benefit and the benefit determined
under a strict application of the plan's benefit formula and accrual
method. See section 401(a)(15) for additional rules relating to
circumstances under which plan benefits may not be decreased because of
increases in social security benefits.
(c) Definitions. In applying Secs. 1.401(l)-1 through 1.401(l)-6,
the definitions in this paragraph (c) govern unless otherwise provided.
(1) Accumulation plan. Accumulation plan means an accumulation plan
within the meaning of Sec. 1.401(a)(4)-12.
(2) Average annual compensation. Average annual compensation means
average annual compensation within the meaning of Sec. 1.401(a)(4)-
3(e)(2).
(3) Base benefit percentage. Base benefit percentage means the rate
at which employer-provided benefits are determined under a defined
benefit excess plan with respect to an employee's average annual
compensation at or below the integration level (expressed as a
[[Page 272]]
percentage of such average annual compensation).
(4) Base contribution percentage. Base contribution percentage means
the rate at which employer contributions are allocated to the account of
an employee under a defined contribution excess plan with respect to the
employee's plan year compensation at or below the integration level
(expressed as a percentage of such plan year compensation).
(5) Benefit formula. Benefit formula means benefit formula within
the meaning of Sec. 1.401(a)(4)-12.
(6) Benefit, right, or feature. Benefit, right, or feature means a
benefit, right, or feature within the meaning of Sec. 1.401(a)(4)-12.
(7) Covered compensation--(i) In general. Covered compensation for
an employee means the average (without indexing) of the taxable wage
bases in effect for each calendar year during the 35-year period ending
with the last day of the calendar year in which the employee attains (or
will attain) social security retirement age. A 35-year period is used
for all individuals regardless of the year of birth of the individual.
In determining an employee's covered compensation for a plan year, the
taxable wage base for all calendar years beginning after the first day
of the plan year is assumed to be the same as the taxable wage base in
effect as of the beginning of the plan year. An employee's covered
compensation for a plan year beginning after the 35-year period
applicable under this paragraph (c)(7)(i) is the employee's covered
compensation for the plan year during which the 35-year period ends. An
employee's covered compensation for a plan year beginning before the 35-
year period applicable under this paragraph (c)(7)(i) is the taxable
wage base in effect as of the beginning of the plan year.
(ii) Special rules--(A) Rounded table. For purposes of determining
the amount of an employee's covered compensation under paragraph
(c)(7)(i) of this section, a plan may use tables, provided by the
Commissioner, that are developed by rounding the actual amounts of
covered compensation for different years of birth.
(B) Proposed regulation definition. For plan years beginning before
January 1, 1995, in lieu of the definition of covered compensation
contained in paragraph (c)(7)(i) of this section, a plan may define
covered compensation as the average (without indexing) of the taxable
wage bases in effect for each calendar year during the 35-year period
ending with the last day of the calendar year preceding the calendar
year in which the employee attains (or will attain) social security
retirement age.
(iii) Period for using covered compensation amount. A plan must
generally provide that an employee's covered compensation is
automatically adjusted for each plan year. However, a plan may use an
amount of covered compensation for employees equal to each employee's
covered compensation (as defined in paragraph (c)(7)(i) or (c)(7)(ii) of
this section) for a plan year earlier than the current plan year,
provided the earlier plan year is the same for all employees and is not
earlier than the later of--
(A) The plan year that begins 5 years before the current plan year,
and
(B) The plan year beginning in 1989.
In the case of an accumulation plan, the benefit accrued for an employee
in prior years is not affected by changes in the employee's covered
compensation that occur in later years.
(8) Defined benefit plan. Defined benefit plan means a defined
benefit plan within the meaning of Sec. 1.410(b)-9.
(9) Defined contribution plan. Defined contribution plan means a
defined contribution plan within the meaning of Sec. 1.410(b)-9. In
addition, for purposes of Secs. 1.401(l)-1 through 1.401(l)-6, a defined
contribution plan includes a simplified employee pension as defined in
section 408(k) (SEP), other than a SEP (or portion or a SEP) that is a
salary reduction arrangement described in section 408(k)(6) (SARSEP).
(10) Disparity. Disparity means--
(i) In the case of a defined contribution excess plan, the amount by
which the excess contribution percentage exceeds the base contribution
percentage,
(ii) In the case of a defined benefit excess plan, the amount by
which the excess benefit percentage exceeds the base benefit percentage,
and
[[Page 273]]
(iii) In the case of an offset plan, the offset percentage.
(11) Employee. Employee means employee within the meaning of
Sec. 1.401(a)(4)-12.
(12) Employer. Employer means the employer within the meaning of
Sec. 1.410(b)-9.
(13) Employer contributions. Employer contributions means all
amounts taken into account with respect to an employee under a plan
under Sec. 1.401(a)(4)-2(c)(2)(ii).
(14) Excess benefit percentage. Excess benefit percentage means the
rate at which employer-provided benefits are determined under a defined
benefit excess plan with respect to an employee's average annual
compensation above the integration level (expressed as a percentage of
such average annual compensation).
(15) Excess contribution percentage. Excess contribution percentage
means the rate at which employer contributions are allocated to the
account of an employee under a defined contribution excess plan with
respect to the employee's plan year compensation above the integration
level (expressed as a percentage of such plan year compensation).
(16) Excess plan--(i) Defined benefit excess plan. Defined benefit
excess plan means a defined benefit plan under which the rate at which
employer-provided benefits are determined with respect to average annual
compensation above the integration level under the plan (expressed as a
percentage of such average annual compensation) is greater than the rate
at which employer-provided benefits are determined with respect to
average annual compensation at or below the integration level (expressed
as a percentage of such average annual compensation).
(ii) Defined contribution excess plan. Defined contribution excess
plan means a defined contribution plan under which the rate at which
employer contributions are allocated to the account of an employee with
respect to plan year compensation above the integration level (expressed
as a percentage of such plan year compensation) is greater than the rate
at which employer contributions are allocated to the account of an
employee with respect to plan year compensation at or below the
integration level (expressed as a percentage of such plan year
compensation).
(17) Final average compensation--(i) In general. Final average
compensation for an employee means the average of the employee's annual
section 414(s) compensation for the 3-consecutive-year period ending
with or within the plan year or for the employee's period of employment
if shorter. The year in which an employee terminates employment may be
disregarded in determining final average compensation. The definition of
final average compensation used in the plan must be applied consistently
with respect to all employees. For example, if the plan provides that
the year in which the employee terminates employment is disregarded in
determining final average compensation, the year must be disregarded for
all employees who terminate employment in that year. The plan may
specify any 3-consecutive-year period ending in the plan year, provided
the period is determined consistently for all employees. See
Sec. 1.401(a)(4)-11(d)(3)(iii) and Sec. 1.414(s)-1(f) for rules
permitting service and compensation with another employer to be taken
into account for purposes of nondiscrimination testing, including
satisfying section 401(l).
(ii) Limitations. In determining an employee's final average
compensation under this paragraph (c)(17), annual section 414(s)
compensation for any year in excess of the taxable wage base in effect
at the beginning of that year must not be taken into account. A plan may
provide that each employee's final average compensation for a plan year
is limited to the employee's average annual compensation for the plan
year.
(iii) Determination of section 414(s) compensation. A plan must use
the same definition of section 414(s) compensation to determine final
average compensation as the plan uses to determine average annual
compensation (or plan year compensation in the case of an accumulation
plan).
(18) Gross benefit percentage. Gross benefit percentage means the
rate at which employer-provided benefits are determined under an offset
plan (before application of the offset) with respect to
[[Page 274]]
an employee's average annual compensation (expressed as a percentage of
average annual compensation).
(19) Highly compensated employee. Highly compensated employee means
HCE within the meaning of Sec. 1.401(a)(4)-12.
(20) Integration level. Integration level means the dollar amount
specified in an excess plan at or below which the rate of employer-
provided contributions or benefits (expressed in each case as a
percentage of an employee's plan year compensation or average annual
compensation up to the specified dollar amount) under the plan is less
than the rate of employer-provided contributions or benefits (expressed
in each case as a percentage of the employee's plan year compensation or
average annual compensation above the specified dollar amount) under the
plan above such dollar amount.
(21) Nonexcludable employee. Nonexcludable employee means
nonexcludable employee within the meaning of Sec. 1.401(a)(4)-12.
(22) Nonhighly compensated employee. Nonhighly compensated employee
means NHCE within the meaning of Sec. 1.401(a)(4)-12.
(23) Offset level. Offset level means the dollar limit specified in
the plan on the amount of each employee's final average compensation
taken into account in determining the offset under an offset plan.
(24) Offset percentage. Offset percentage means the rate at which an
employee's employer-provided benefit is reduced or offset under an
offset plan (expressed as a percentage of the employee's final average
compensation up to the offset level).
(25) Offset plan. Offset plan means a defined benefit plan that is
not a defined benefit excess plan and that provides that each employee's
employer-provided benefit is reduced or offset by a specified percentage
of the employee's final average compensation up to the offset level
under the plan.
(26) PIA. PIA or primary insurance amount means the old-age
insurance benefit under section 202 of the Social Security Act (42
U.S.C. 402) payable to each employee at a single age that is not earlier
than age 62 and not later than age 65. PIA must be determined under the
Social Security Act as in effect at the time the employee's offset is
determined. Thus, it is determined without assuming any future increases
in compensation, any future increases in the taxable wage base, any
changes in the formulas used under the Social Security Act to determine
PIA (for example, changes in the breakpoints), or any future increases
in the consumer price index. However, it may be assumed that the
employee will continue to receive compensation at the same rate as that
received at the time the offset is being determined, until reaching the
single age described in the first sentence of this paragraph (c)(26).
PIA must be determined in a consistent manner for all employees and in
accordance with revenue rulings or other guidance provided by the
Commissioner.
(27) Plan. Plan means a plan within the meaning of Sec. 1.401(a)(4)-
12 or a component plan treated as a plan under Sec. 1.401(a)(4)-9(c).
(28) Plan year compensation. Plan year compensation means plan year
compensation within the meaning of Sec. 1.401(a)(4)-12.
(29) Qualified plan. Qualified plan means a qualified plan within
the meaning of Sec. 1.401(a)(4)-12.
(30) Section 401(l) plan. Section 401( l) plan means a section
401(l) plan within the meaning of Sec. 1.401(a)(4)-12.
(31) Section 414(s) compensation. Section 414(s) compensation means
section 414(s) compensation within the meaning of Sec. 1.401(a)(4)-12.
(32) Social security retirement age. Social security retirement age
for an employee means the social security retirement age of the employee
as determined under section 415(b)(8).
(33) Straight life annuity. Straight life annuity means a straight
life annuity within the meaning of Sec. 1.401(a)(4)-12.
(34) Taxable wage base. Taxable wage base means the contribution and
benefit base under section 230 of the Social Security Act (42 U.S.C.
430).
(35) Year of service. Year of service means a year of service as
defined in the plan for purposes of the benefit formula and the accrual
method under the plan, unless the context clearly indicates otherwise.
See Sec. 1.401(a)(4)-11(d)(3) for rules on years of service that may
[[Page 275]]
be taken into account for purposes of nondiscrimination testing,
including satisfying section 401(l).
[T.D. 8359, 56 FR 47618, Sept. 19, 1991; 57 FR 10818, 10951, Mar. 31,
1992, as amended by T.D. 8486, 58 FR 46831, Sept. 3, 1993]
Sec. 1.401(l)-2 Permitted disparity for defined contribution plans.
(a) Requirements--(1) In general. Disparity in the rates of employer
contributions allocated to employees' accounts under a defined
contribution plan is permitted under section 401(l) and this section for
a plan year only if the plan satisfies paragraphs (a)(2) through (a)(5)
of this section. A plan that otherwise satisfies this paragraph (a) will
not be considered to fail section 401(l) merely because it contains one
or more provisions described in Sec. 1.401(a)(4)-2(b)(4). See
Sec. 1.401(a)(4)-8(b)(3)(i)(C) for special rules applicable to target
benefit plans.
(2) Excess plan requirement. The plan must be a defined contribution
excess plan.
(3) Maximum disparity. The disparity for all employees under the
plan must not exceed the maximum permitted disparity prescribed in
paragraph (b) of this section.
(4) Uniform disparity. The disparity for all employees under the
plan must be uniform within the meaning of paragraph (c) of this
section.
(5) Integration level. The integration level specified in the plan
must satisfy paragraph (d) of this section.
(b) Maximum permitted disparity--(1) In general. The disparity
provided for the plan year must not exceed the maximum excess allowance
as defined in paragraph (b)(2) of this section. In addition, the plan
must satisfy the overall permitted disparity limits of Sec. 1.401(l)-5.
(2) Maximum excess allowance. The maximum excess allowance for a
plan year is the lesser of--
(i) The base contribution percentage, or
(ii) The greater of--
(A) 5.7 percent, reduced as required under paragraph (d) of this
section, or
(B) The percentage rate of tax under section 3111(a), in effect as
of the beginning of the plan year, that is attributable to the old age
insurance portion of the Old Age, Survivors and Disability Insurance
provisions of the Social Security Act, reduced as required under
paragraph (d) of this section. For a year in which the percentage rate
of tax described in this paragraph (b)(2)(ii)(B) exceeds 5.7 percent,
the Commissioner will publish the rate of such tax and a revised table
under paragraph (d)(4) of this section.
(c) Uniform disparity--(1) In general. The disparity provided under
a plan is uniform only if the plan uses the same base contribution
percentage and the same excess contribution percentage for all employees
in the plan.
(2) Deemed uniformity--(i) In general. The disparity under a plan
does not fail to be uniform for purposes of this paragraph (c) merely
because the plan contains one or more of the provisions described in
paragraphs (c)(2) (ii) and (iii) of this section.
(ii) Overall permitted disparity. The plan provides that, in the
case of each employee who has reached the cumulative permitted disparity
limit applicable to the employee under Sec. 1.401(l)-5(c), employer
contributions are allocated to the account of the employee with respect
to the employee's total plan year compensation at the excess
contribution percentage.
(iii) Non-FICA employees. The plan provides that, in the case of
each employee under the plan with respect to whom none of the taxes
under section 3111(a), section 3221, or section 1401 is required to be
paid, employer contributions are allocated to the account of the
employee with respect to the employee's total plan year compensation at
the excess contribution percentage.
(d) Integration level--(1) In general. The integration level under
the plan must satisfy paragraph (d)(2), (d)(3), or (d)(4) of this
section, as modified by paragraph (d)(5) of this section in the case of
a short plan year. If a reduction applies to the disparity factor under
this paragraph (d), the reduced factor is used for all purposes in
determining whether the permitted disparity rules for defined
contribution plans are satisfied.
(2) Taxable wage base. The requirement of this paragraph (d)(2) is
satisfied only if the integration level under
[[Page 276]]
the plan for each employee is the taxable wage base in effect as of the
beginning of the plan year.
(3) Single dollar amount. The requirement of this paragraph (d)(3)
is satisfied only if the integration level under the plan for all
employees is a single dollar amount (either specified in the plan or
determined under a formula specified in the plan) that does not exceed
the greater of $10,000 or 20 percent of the taxable wage base in effect
as of the beginning of the plan year.
(4) Intermediate amount. The requirement of this paragraph (d)(4) is
satisfied only if--
(i) The integration level under the plan for all employees is a
single dollar amount (either specified in the plan or determined under a
formula specified in the plan) that is greater than the highest amount
determined under paragraph (d)(3) of this section and less than the
taxable wage base, and
(ii) The plan adjusts the factor determined under paragraph
(b)(2)(ii) of this section in accordance with the table below.
Table
------------------------------------------------------------------------
If the integration level The 5.7 percent
------------------------------------------------------- factor in the
maximum excess
Is more than But not more than allowance is
reduced to--
------------------------------------------------------------------------
Greater of $10,000 or 20% of 80% of taxable wage 4.3%
taxable wage base. base.
80% of taxable wage base......... Amount less than 5.4%
taxable wage base.
------------------------------------------------------------------------
(5) Prorated integration level for short plan year. If a plan uses
paragraph (2) or (4) of the definition of plan year compensation under
Sec. 1.401(a)(4)-12 (i.e., section 414(s) compensation for the plan year
or the period of plan participation) and has a plan year that comprises
fewer than 12 months, the integration level under the plan for each
employee must be an amount equal to the otherwise applicable integration
level described in paragraph (d)(2), (d)(3), or (d)(4) of this section,
multiplied by a fraction, the numerator of which is the number of months
in the plan year, and the denominator of which is 12. No adjustment to
the maximum excess allowance is required as a result of the application
of this paragraph (d)(5), other than any adjustment already required
under paragraph (d)(4) of this section.
(e) Examples. The following examples illustrate this section. In
each example, 5.7 percent exceeds the percentage rate of tax described
in paragraph (b)(2)(ii)(B) of this section.
Example 1. Employer X maintains a profit-sharing plan with the
calendar year as its plan year. For the 1989 plan year, the plan
provides that the account of each employee who has plan year
compensation in excess of the taxable wage base in effect at the
beginning of the plan year will receive an allocation for the plan year
of 5.7 percent of plan year compensation in excess of the taxable wage
base. The plan provides that no allocation will be made to the account
of any employee for the plan year with respect to plan year compensation
not in excess of the taxable wage base. The maximum excess allowance is
exceeded for the 1989 plan year because the excess contribution
percentage (5.7 percent) for the plan year exceeds the base contribution
percentage (0 percent) for the plan year by more than the lesser of the
base contribution percentage (0 percent) or the percentage determined
under paragraph (b)(2)(ii) of this section (5.7 percent) for the plan
year.
Example 2. Employer Y maintains a money purchase pension plan with
the calendar year as its plan year. For the 1990 plan year, the plan
provides that the account of each employee will receive an allocation of
5 percent of the employee's plan year compensation up to the taxable
wage base in effect at the beginning of the plan year plus an allocation
of 10 percent of the employee's plan year compensation in excess of the
taxable wage base. The maximum excess allowance is not exceeded for the
plan year because the excess contribution percentage (10 percent) for
the plan year does not exceed the base contribution percentage (5
percent) for the plan year by more than the lesser of the base
contribution percentage (5 percent) or the percentage determined under
paragraph (b)(2)(ii) of this section (5.7 percent) for the plan year.
Example 3. Assume the same facts as in Example 2, except that the
plan provides that, with respect to plan year compensation in excess of
the taxable wage base, the account of each employee will receive an
allocation for the plan year of 12 percent of such compensation. The
maximum excess allowance is exceeded for the plan year because the
excess contribution percentage (12 percent) for the plan year exceeds
the base contribution percentage (5 percent) for the plan year by more
than the lesser of the base contribution percentage (5 percent) or the
percentage determined under paragraph (b)(2)(ii) of this section (5.7
percent) for the plan year.
[[Page 277]]
Example 4. Employer Z maintains a money purchase pension plan with a
plan year beginning July 1 and ending June 30. The taxable wage base for
the 1990 calendar year is $51,300 and the taxable wage base for the 1991
calendar year is $53,400. For the plan year beginning July 1, 1990, and
ending June 30, 1991, the plan provides that the account of each
employee will receive an allocation of 4 percent of the employee's plan
year compensation up to $53,400 plus an allocation of 6 percent of the
employee's plan year compensation in excess of $53,400. Although the
excess contribution percentage (6 percent) for the plan year does not
exceed the base contribution percentage (4 percent) for the plan year by
more than the lesser of the base contribution percentage (4 percent) or
the percentage determined under paragraph (b)(2)(ii) of this section
(5.7 percent), the plan does not satisfy paragraph (a)(5) of this
section because the integration level of $53,400 exceeds the maximum
permitted integration level of $51,300 (the taxable wage base in effect
as of the beginning of the plan year).
Example 5. Assume the same facts as in Example 4, except that for
the plan year beginning July 1, 1990, and ending June 30, 1991, the plan
provides that the account of each employee will receive an allocation of
5 percent of the employee's plan year compensation up to $30,000 plus an
allocation of 9 percent of the employee's plan year compensation in
excess of $30,000. The integration level of $30,000 is 58 percent of the
taxable wage base of $51,300 for the 1990 calendar year. The maximum
excess allowance is not exceeded for the plan year because the excess
contribution percentage (9 percent) for the plan year does not exceed
the base contribution percentage (5 percent) for the plan year by more
than the lesser of the base contribution percentage (5 percent) or the
percentage determined under paragraphs (b)(2)(ii) and (d) of this
section (4.3 percent) for the plan year.
[T.D. 8359, 56 FR 47621, Sept. 19, 1991; 57 FR 10818, 10951, Mar. 31,
1992, as amended by T.D. 8486, 58 FR 46832, Sept. 3, 1993]
Sec. 1.401(l)-3 Permitted disparity for defined benefit plans.
(a) Requirements--(1) In general. Disparity in the rates of
employer-provided benefits under a defined benefit plan is permitted
under section 401(l) and this section for a plan year only if the plan
satisfies paragraphs (a)(2) through (a)(6) of this section. A plan that
otherwise satisfies this paragraph (a) will not be considered to fail
section 401(l) merely because it contains one or more provisions
described in Sec. 1.401(a)(4)-3(b)(6) (such as multiple formulas).
Section 401(a)(5)(D) and Sec. 1.401(a)(5)-1(d) provide other rules under
which benefits provided under a defined benefit plan (including defined
benefit excess and offset plans) may be limited. See Sec. 1.401(a)(4)-
3(b)(5)(viii) for special rules under which an insurance contract plan
may satisfy Sec. 1.401(a)(4)-1(b)(2) and section 401(l). See
Sec. 1.401(a)(4)-8(c)(3)(iii)(B) for special rules applicable to cash
balance plans.
(2) Excess or offset plan requirement. The plan must be a defined
benefit excess plan or an offset plan.
(3) Maximum disparity. The disparity for all employees under the
plan must not exceed the maximum permitted disparity prescribed in
paragraph (b) of this section.
(4) Uniform disparity. The disparity for all employees under the
plan must be uniform within the meaning of paragraph (c) of this
section.
(5) Integration or offset level. The integration or offset level
specified in the plan must satisfy paragraph (d) of this section.
(6) Benefits, rights, and features. The benefits, rights, and
features provided under the plan must satisfy paragraph (f)(1) of this
section.
(b) Maximum permitted disparity--(1) In general. In the case of a
defined benefit excess plan, the disparity provided for the plan year
may not exceed the maximum excess allowance as defined in paragraph
(b)(2) of this section. In the case of an offset plan, the disparity
provided for the plan year may not exceed the maximum offset allowance
as defined in paragraph (b)(3) of this section. In addition, either type
of plan must satisfy the overall permitted disparity limits of
Sec. 1.401(l)-5.
(2) Maximum excess allowance. The maximum excess allowance for a
plan year is the lesser of--
(i) 0.75 percent, reduced as required under paragraphs (d) and (e)
of this section, or
(ii) The base benefit percentage for the plan year.
(3) Maximum offset allowance. The maximum offset allowance for a
plan year is the lesser of--
(i) 0.75 percent, reduced as required under paragraphs (d) and (e)
of this section, or
[[Page 278]]
(ii) One-half of the gross benefit percentage, multiplied by a
fraction (not to exceed one), the numerator of which is the employee's
average annual compensation, and the denominator of which is the
employee's final average compensation up to the offset level.
(4) Rules of application--(i) Disparity provided for the plan year.
Disparity provided for the plan year generally means the disparity
provided under the plan's benefit formula for the employee's year of
service with respect to the plan year. However, if a plan determines
each employee's accrued benefit under the fractional accrual method of
section 411(b)(1)(C), disparity provided under the plan also means the
disparity in the benefit accrued for the employee for the plan year.
Thus, a plan using the fractional accrual method must satisfy this
paragraph (b) with respect to the plan's benefit formula and with
respect to the benefits accrued for the plan year.
(ii) Reduction in disparity rate. Any reductions in the 0.75-percent
factor required under paragraphs (d) and (e) of this section are
cumulative.
(iii) Normal and optional forms of benefit--(A) In general. A plan
satisfies the maximum permitted disparity requirement of this paragraph
(b) only if the plan satisfies this paragraph (b) with respect to each
optional form of benefit (including the normal form of benefit) provided
under the plan.
(B) Level annuity forms. In the case of an optional form of benefit
payable as a level annuity over a period of not less than the life of
the employee, the optional form must satisfy the maximum permitted
disparity requirement of this paragraph (b). Thus, for example, if the
form of a defined benefit plan's normal retirement benefit is an annuity
for life with a 10-year certain feature and the plan permits employees
to elect an optional form of benefit in the form of a straight life
annuity, the plan must satisfy the maximum disparity requirement of this
paragraph (b) with respect to each of the optional forms of benefit. An
annuity that decreases only after the death of the employee, or that
decreases only after the death of either the employee or the joint
annuitant, is considered a level annuity for purposes of this paragraph
(b).
(C) Other forms. In the case of an optional form of benefit that is
not described in paragraph (b)(4)(iii)(B) of this section, the optional
form must satisfy the maximum permitted disparity requirement of this
paragraph (b), when the respective portions of the optional form are
normalized under the rules of Sec. 1.401(a)(4)-12 to a straight life
annuity commencing at the same time as the optional form of benefit,
regardless of whether the straight life annuity form is actually
provided under the plan. In the case of a defined benefit excess plan,
the respective portions are the portion of the optional form
attributable to average annual compensation up to the integration level
(the ``base portion'') and the portion of the optional form attributable
to average annual compensation in excess of the integration level (the
``excess portion''). In the case of an offset plan, the respective
portions are the optional form determined without regard to the offset
(the ``gross amount'') and the offset applied to the gross amount to
determine the optional form (the ``offset amount'').
(D) Post-retirement cost-of-living adjustments--(1) In general. A
benefit does not fail to be a level annuity described in paragraph
(b)(4)(iii)(B) of this section merely because it provides an automatic
post-retirement cost-of-living adjustment that satisfies paragraph
(b)(4)(iii)(D)(2) of this section. Thus, increases in the employee's
annuity pursuant to such a cost-of-living adjustment do not cause the
disparity provided under the optional form of benefit to exceed the
maximum disparity permitted under this paragraph (b). For rules on ad
hoc post-retirement cost-of-living adjustments, see Sec. 1.401(a)(4)-
10(b).
(2) Requirements. A cost-of-living adjustment satisfies this
paragaph (b)(4)(iii)(D)(2) if--
(i) It is included in the accrued benefit of all employees, and.
(ii) It increases, on a uniform and consistent basis, the benefits
of all former employees who are no younger than age 62, at a rate no
greater than adjustments to social security benefits under section
215(i)(2)(A) of the Social Security Act that have occurred since
[[Page 279]]
the later of the employee's attainment of age 62 or commencement of
benefits.
(E) Section 417(e) exception. A plan will not fail to satisfy this
paragraph (b) merely because the disparity in a benefit that is subject
to the interest rate restrictions of sections 401(a)(11) and 417(e)
exceeds the maximum disparity that would otherwise be allowed under this
paragraph (b) if the increase in disparity is required to satisfy
Sec. 1.417(e)-1(d). In applying the exception in this paragraph
(b)(4)(iii)(E), for purposes of determining what is required under
Sec. 1.417(e)-1(d), a plan may use the rate described in Sec. 1.417(e)-
1(d)(2)(i) for all employees, without regard to whether the present
value of an employee's vested benefit exceeds $25,000.
(5) Examples. The following examples illustrate this paragraph (b).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan N is a defined benefit excess plan that provides a
normal retirement benefit of 0.5 percent of average annual compensation
in excess of the integration level, for each year of service. The plan
provides no benefits with respect to average annual compensation up to
the integration level. The disparity provided under the plan exceeds the
maximum excess allowance because the excess benefit percentage (0.5
percent) exceeds the base benefit percentage (0 percent) by more than
the base benefit percentage (0 percent).
Example 2. Plan O is an offset plan that provides a normal
retirement benefit equal to 2 percent of average annual compensation,
minus 0.75 percent of final average compensation up to the offset level,
for each year of service up to 35. The disparity provided under the plan
satisfies this paragraph (b) because the offset percentage (0.75
percent) does not exceed the maximum offset allowance equal to the
lesser of 0.75 percent or one-half of the gross benefit percentage (1
percent).
Example 3. Plan P is a defined benefit excess plan that provides a
normal retirement benefit of 0.5 percent of average annual compensation
up to the integration level, plus 1.25 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35. The disparity provided under the plan exceeds the
maximum excess allowance because the excess benefit percentage (1.25
percent) exceeds the base benefit percentage (0.5 percent) by more than
the base benefit percentage (0.5 percent).
Example 4. Plan Q is an offset plan that provides a normal
retirement benefit of 1 percent of average annual compensation, minus
0.75 percent of final average compensation up to the offset level, for
each year of service up to 35. The disparity under the plan exceeds the
maximum offset allowance because the offset percentage exceeds one-half
of the gross benefit percentage (0.5 percent).
Example 5. (a) Plan R is an offset plan that provides a normal
retirement benefit of 1 percent of average annual compensation, minus
0.5 percent of final average compensation up to the offset level, for
each year of service up to 35. The plan determines an employee's average
annual compensation using an averaging period comprising five
consecutive 12-month periods and taking into account the employee's
compensation for the ten consecutive 12-month periods ending with the
plan year. The plan does not provide that an employee's final average
compensation is limited to the employee's average annual compensation.
(b) Employee A has average annual compensation of $20,000, final
average compensation of $25,000, and covered compensation of $32,000.
The maximum offset allowance applicable to Employee A for the plan year
under paragraph (b)(3) of this section is one-half of the gross benefit
percentage multiplied by the ratio, not to exceed one, of Employee A's
average annual compensation to Employee A's final average compensation
up to the offset level. Thus, the maximum offset allowance is 0.4
percent (\1/2\ x 1 percentx$20,000/$25,000). With respect to Employee A,
the benefit formula provides an offset that exceeds the maximum offset
allowance. The plan must therefore reduce Employee A's offset percentage
to 0.4 percent. (Under paragraph (c)(2)(viii) of this section, Employee
A's adjusted disparity rate is deemed uniform.)
(c) Alternatively, under Sec. 1.401(l)-1(c)(17)(ii) (the definition
of final average compensation), the plan could specify that an
employee's final average compensation is limited to
[[Page 280]]
the amount of the employee's average annual compensation. Thus, the
ratio of average annual compensation to final average compensation would
always be equal to at least one, and the maximum offset allowance under
the plan would be one-half of the gross benefit percentage.
Example 6. Plan S is a defined benefit excess plan that provides a
base benefit percentage of 1 percent of average annual compensation up
to the integration level for each year of service. The plan also
provides, for each of the first 10 years of service, an excess benefit
percentage of 1.85 percent of average annual compensation in excess of
the integration level. For each year of service after 10, the plan
provides an excess benefit percentage of 1.65 percent of the employee's
average annual compensation in excess of the integration level. The
disparity provided under the plan exceeds the maximum excess allowance
because the excess benefit percentage for each of the first ten years of
service (1.85 percent) exceeds the base benefit percentage (1 percent)
by more than 0.75 percent.
Example 7. The facts are the same as in Example 6, except that the
plan provides an excess benefit percentage of 1.65 percent of average
annual compensation in excess of the integration level for each of the
first 10 years of service and an excess benefit percentage of 1.85
percent of average annual compensation in excess of the integration
level for each year of service after 10. The disparity provided under
the plan exceeds the maximum excess allowance because the excess benefit
percentage for each year of service after 10 (1.85 percent) exceeds the
base benefit percentage (1 percent) by more than 0.75 percent.
Example 8. Plan T is a defined benefit excess plan that provides a
normal retirement benefit of 1.0 percent of average annual compensation
up to the integration level, plus 1.7 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35, payable in the form of a joint and survivor annuity.
The plan also allows an employee to receive the retirement benefit in
the form of an actuarially equivalent straight life annuity. The
actuarially equivalent straight life annuity equals 1.09 percent of
average annual compensation up to the integration level, plus 1.85
percent of average annual compensation in excess of the integration
level, for each year of service up to 35. The disparity provided under
the plan with respect to the straight life annuity form of benefit (0.76
percent) exceeds the maximum excess allowance because the excess benefit
percentage (1.85 percent) exceeds the base benefit percentage (1.09
percent) by more than 0.75 percent.
Example 9. Plan U is a defined benefit excess plan that provides a
normal retirement benefit of 1.0 percent of average annual compensation
up to the integration level, plus 1.7 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35, payable in the form of a straight life annuity. Plan U
provides a single sum optional form of benefit at normal retirement age
equal to 100 times the monthly annuity payable at that age. Thus, if an
employee elects the single sum optional form of benefit, the base
portion of the single sum benefit is 8.33 percent (100 times 1.0
percent/12) of average annual compensation up to the integration level
per year of service, and the excess portion of the single sum benefit is
14.17 percent (100 times 1.7 percent/12) of average annual compensation
in excess of the integration level per year of service. Each respective
portion of the single sum option is normalized to a straight life
annuity commencing at normal retirement age, using 8-percent interest
and the UP-84 mortality table. After normalization, the base portion of
the benefit is 1.02 percent of average annual compensation up to the
integration level, and the excess portion of the benefit is 1.73 percent
of average annual compensation in excess of the integration level. The
single sum optional form of benefit satisfies this paragraph (b) because
the disparity provided in the optional form of benefit does not exceed
the maximum excess allowance.
(c) Uniform disparity--(1) In general. The disparity provided under
a defined benefit excess plan is uniform only if the plan uses the same
base benefit percentage and the same excess benefit percentage for all
employees with the same number of years of service. The disparity
provided under an offset plan is uniform only if the plan uses the same
gross benefit percentage and the same offset percentage for all
employees with the same number of years of service. The disparity
provided under a plan that determines each employee's accrued benefit
under the fractional accrual method of section 411(b)(1)(C) is uniform
only if the plan satisfies one of the deemed uniformity rules of
paragraph (c)(2) (ii) or (iii) of this section.
(2) Deemed uniformity--(i) In general. The disparity provided under
a plan does not fail to be uniform for purposes of this paragraph (c)
merely because the plan contains one or more of the provisions described
in paragraphs (c)(2) (ii) through (ix) of this section.
(ii) Use of fractional accrual and disparity for 35 years. The plan
contains a
[[Page 281]]
benefit formula as described in paragraphs (c)(2)(ii) (A) and (B) of
this section, and the plan determines each employee's accrued benefit
under the method described in Sec. 1.401(a)(4)-3(b)(4)(i)(B), i.e., 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.
(A) For each year of service at least up to 35, the benefit plan
formula provides the same base benefit percentage and the same excess
benefit percentage for all employees in the case of a defined benefit
excess plan or the same gross benefit percentage and the same offset
percentage for all employees in the case of an offset plan.
(B) For each additional year of service, the benefit formula
provides a uniform percentage of all average annual compensation that is
no greater than the excess benefit percentage or the gross benefit
percentage under paragraph (c)(2)(ii)(A) of this section, whichever is
applicable.
(iii) Use of fractional accrual and disparity for fewer than 35
years. The plan contains a benefit formula as described in paragraphs
(c)(2)(iii) (A) through (C) of this section, and the plan determines
each employee's accrued benefit under the method described in
Sec. 1.401(a)(4)-3(b)(4)(i)(B).
(A) For each year in the employee's initial period of service
comprising fewer than 35 years, the benefit formula provides the same
base benefit percentage and the same excess benefit percentage for all
employees in the case of a defined benefit excess plan or the same gross
benefit percentage and the same offset percentage for all employees in
the case of an offset plan.
(B) For each year of service after the initial period and at least
up to 35, the benefit formula provides a uniform percentage of all
average annual compensation, that is equal to the excess benefit
percentage or the gross benefit percentage under paragraph
(c)(2)(iii)(A) of this section.
(C) For each year of service after the period described in paragraph
(c)(2)(iii)(B) of this section, the benefit formula provides a uniform
percentage of all average annual compensation that is no greater than
the excess benefit percentage or the gross benefit percentage under
paragraph (c)(2)(iii)(A) of this section.
(iv) Different social security retirement ages. The benefit formula
uses the same excess benefit percentage or the same gross benefit
percentage for all employees with the same number of years of service
and, for employees with social security retirement ages later than age
65, adjusts the 0.75-percent factor in the maximum excess or offset
allowance as required under paragraph (e)(1) of this section, by
increasing the base benefit percentage in the case of a defined benefit
excess plan, or reducing the offset percentage in the case of an offset
plan.
(v) Reduction for integration level. The plan uses an integration
level or offset level greater than each employee's covered compensation
and makes individual reductions in the 0.75-percent factor, as permitted
under paragraph (d)(9)(iii)(B) of this section, by increasing the base
benefit percentage in the case of a defined benefit excess plan or
reducing the offset percentage in the case of an offset plan.
(vi) Overall permitted disparity--(A) In general. The benefit
formula provides that, with respect to each employee's years of service
after reaching the cumulative permitted disparity limit applicable to
the employee under Sec. 1.401(l)-5(c), employer-provided benefits are
determined with respect to the employee's total average annual
compensation at a rate equal to the nondisparate percentage. For
purposes of this paragraph (c)(2)(vi), the nondisparate percentage is
generally the excess benefit percentage or gross benefit percentage
otherwise applicable under the benefit formula to an employee with the
same number of years of service.
(B) Unit credit plans. In the case of a unit credit plan described
in Sec. 1.401(a)(4)-3(b)(3), if the 411(b)(1)(B) limit percentage is
less than the nondisparate percentage, the 411(b)(1)(B) limit percentage
must be substituted for the nondisparate percentage. For this purpose,
the 411(b)(1)(B) limit percentage is 133\1/3\ percent of the smallest
[[Page 282]]
base benefit percentage, or 133\1/3\ percent of the smallest difference
between the gross benefit percentage and the offset percentage,
whichever is applicable, where the smallest base benefit percentage or
difference is determined by reference to the benefit formula as applied
to employees with no more years of service than the employee.
(C) Fractional accrual plans. In the case of a fractional accrual
plan described in Sec. 1.401(a)(4)-3(b)(4), the benefit formula must
provide for the nondisparate percentage with respect to years of service
after the employee would reach the cumulative permitted disparity limit
applicable to the employee under Sec. 1.401(l)-5(c) as modified by this
paragraph (c)(2)(vi)(C). Solely for purposes of this paragraph
(c)(2)(vi)(C), the employee's annual disparity fractions (and thus the
year in which the employee would reach the cumulative permitted
disparity limit) are determined using the disparity provided under the
benefit formula (rather than the special rule for fractional accrual
plans in Sec. 1.401(l)-5(b)(8)(v)).
(vii) Non-FICA employees. The plan provides that, in the case of
each employee under the plan with respect to whom none of the taxes
under section 3111(a), section 3221, or section 1401 is required to be
paid, employer-provided benefits are determined with respect to the
employee's total average annual compensation at the excess benefit
percentage or gross benefit percentage applicable to an employee with
the same number of years of service.
(viii) Average annual compensation adjustment for offset plan. In
the case of each employee whose final average compensation exceeds the
employee's average annual compensation, the plan adjusts the offset
percentage as required under paragraph (b)(3)(ii) of this section in
order to satisfy the maximum offset allowance.
(ix) PIA offsets. In the case of an offset plan, the plan provides
that the offset applied to each employee's benefit is the lesser of a
specified percentage of the employee's PIA and an offset that otherwise
satisfies the requirements of this section (the ``section 401(l)
overlay''). The specified percentage of PIA must be the same for all
employees with the same number of years of service. In the case of a
plan that determines each employee's accrued benefit under the
fractional accrual method of section 411(b)(1)(C), the specified
percentage of PIA is deemed to be the same for all employees with the
same number of years of service if the plan satisfies either of the
deemed uniformity rules in paragraph (c)(2)(ii) or (iii) of this
section, substituting ``offset, expressed as a percentage of PIA, per
year of service'' for the term ``offset percentage'' (in addition to
satisfying either of those rules with respect to the section 401(l)
overlay).
(3) Examples. The following examples illustrate this paragraph (c).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan M is a defined benefit excess plan that satisfies
the 133\1/3\ percent accrual rule of section 411(b)(1)(B). The plan
provides a normal retirement benefit of 1.0 percent of average annual
compensation up to the integration level, plus 1.65 percent of average
annual compensation in excess of the integration level, for each year of
service up to 25. The plan also provides a benefit of 1.0 percent of all
average annual compensation for each year of service in excess of 25.
The disparity provided under the plan is uniform because the plan uses
the same base and excess benefit percentages for all employees with the
same number of years of service. If the plan formula were the same
except that it used a different excess benefit percentage for some of
the years of service between one and 25, the disparity under the plan
would continue to be uniform.
Example 2. Plan O is a defined benefit excess plan that provides a
normal retirement
[[Page 283]]
benefit of 50 percent of average annual compensation up to the
integration level and 68.75 percent of average annual compensation in
excess of the integration level, multiplied by a fraction, the numerator
of which is the employee's service, up to 25 years, and the denominator
of which is 25. The plan determines an employee's accrued benefit as
described in Sec. 1.401(a)(4)-3(b)(4)(i)(B). The benefit formula thus
provides a base benefit percentage of 2 percent (50 percentx\1/25\) and
an excess benefit percentage of 2.75 percent (68.75 percentx\1/25\) for
each of an employee's first 25 years of service and no benefit for years
of service after 25. The disparity provided under the plan is not
uniform within the meaning of this paragraph (c) because the benefit
formula does not satisfy either of the uniform disparity rules for
fractional accrual plans under paragraphs (c)(2) (ii) and (iii) of this
section.
Example 3. Plan P is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation for each
year of service up to 35, minus 0.75 percent of the final average
compensation up to the offset level for each year of service up to 25.
The plan determines an employee's accrued benefit under the method
described in Sec. 1.401(a)(4)-3(b)(4)(i)(B). Because the formula under
the plan provides the same gross benefit percentage and offset
percentage for 25 years of service (fewer than 35) and, for years of
service after 25 and up to 35, provides a benefit at a uniform rate
(equal to the gross benefit percentage) of all average annual
compensation, and the plan accrues the benefit ratably, the disparity
under the plan is deemed to be uniform under paragraph (c)(2)(iii) of
this section.
Example 4. Plan Q is an offset plan that benefits employees with
social security retirement ages of 65, 66, and 67. For each year of
service up to 35, the plan provides a normal retirement benefit equal to
2 percent of average annual compensation, minus an offset based on the
employee's final average compensation up to the offset level. For
employees with a social security retirement age of 65, the offset
percentage is 0.75 percent; for employees with a social security
retirement age of 66, the offset percentage is 0.70 percent; and for
employees with a social security retirement age of 67, the offset
percentage is 0.65 percent. The disparity under the plan is deemed to be
uniform under paragraph (c)(2)(iv) of this section because the plan uses
the same gross benefit percentage for all employees and reduces the
offset percentage for employees with social security retirement ages of
66 and 67 to comply with the adjustments in the 0.75-percent factor in
the maximum excess or offset allowance required under paragraph (e)(1)
of this section. (Because Plan Q effectively provides unreduced benefits
prior to the social security retirement age for employees with social
security retirement ages of 66 and 67, the 0.75-percent factor in the
maximum offset allowance must be reduced to 0.70 percent and 0.65
percent, respectively.) Alternatively, Plan Q could satisfy this
paragraph (c) if it provided a uniform offset percentage of 0.65 percent
for all employees because 0.65 percent is the maximum offset allowance
under the plan for an employee with a social security retirement age of
67.
Example 5. Plan R is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus an
offset determined as a percentage of total final average compensation,
for each year of service up to 35. For an employee whose final average
compensation does not exceed the employee's covered compensation, the
offset percentage is 0.75 percent. For an employee whose final average
compensation exceeds the employee's covered compensation, the plan
reduces the offset percentage, as required by paragraph (d) of this
section. The reduced offset percentage is determined by comparing the
employee's final average compensation to the employee's covered
compensation as permitted under paragraph (d)(9)(iii)(B) of this
section. The disparity provided under the plan is deemed uniform under
paragraph (c)(2)(v) of this section because the plan uses the same gross
benefit percentage for all employees and makes individual reductions in
the 0.75-percent factor, as permitted under paragraph (d)(9)(iii)(B) of
this section, by reducing the offset percentage in the case of an
employee whose final average compensation exceeds covered compensation.
(d) Requirements for integration or offset level--(1) In general.
The integration level under a defined benefit excess plan or the offset
level under an offset plan must satisfy paragraphs (d)(2), (d)(3),
(d)(4), (d)(5) or (d)(6) of this section, as modified by paragraph
(d)(7) of this section in the case of a short plan year. Paragraph
(d)(8) of this section contains demographic tests that apply to certain
defined benefit plans. Paragraph (d)(9) of this section explains certain
reductions required in the 0.75-percent factor under paragraph (b)(2) or
(b)(3) of this section. Paragraph (d)(10) of this section contains
examples. If a reduction applies to the 0.75-percent factor under this
paragraph (d), the reduced factor is used for all purposes in
determining whether the permitted disparity rules for defined benefit
plans are satisfied.
(2) Covered compensation. The requirement of this paragraph (d)(2)
is satisfied only if the integration or offset
[[Page 284]]
level under the plan for each employee is the employee's covered
compensation.
(3) Uniform percentage of covered compensation. The requirement of
this paragraph (d)(3) is satisfied only if--
(i) The integration or offset level under the plan for each employee
is a uniform percentage (greater than 100 percent) of each employee's
covered compensation,
(ii) In the case of a defined benefit excess plan, the integration
level does not exceed the taxable wage base in effect for the plan year,
and, in the case of an offset plan, the offset level does not exceed the
employee's final average compensation, and
(iii) The plan adjusts the 0.75-percent factor in the maximum excess
or offset allowance in accordance with paragraph (d)(9) of this section.
(4) Single dollar amount. The requirement of this paragraph (d)(4)
is satisfied only if the integration or offset level under the plan for
all employees is a single dollar amount (either specified in the plan or
determined under a formula specified in the plan) that does not exceed
the greater of $10,000 or one-half of the covered compensation of an
individual who attains social security retirement age in the calendar
year in which the plan year begins. In the case of a calendar year in
which no individual could attain social security retirement age, for
example, the year 2003, this rule is applied using covered compensation
of an individual attaining social security retirement age in the
preceding calendar year.
(5) Intermediate amount. The requirement of this paragraph (d)(5) is
satisfied only if--
(i) The integration or offset level under the plan for all employees
is a single dollar amount (either specified in the plan or determined
under a formula specified in the plan) that is greater than the highest
amount determined under paragraph (d)(4) of this section,
(ii) In the case of a defined benefit excess plan, the single dollar
amount does not exceed the taxable wage base in effect for the plan
year, and, in the case of an offset plan, the single dollar amount does
not exceed the employee's final average compensation,
(iii) The plan satisfies the demographic requirements of paragraph
(d)(8) of this section, and
(iv) The plan adjusts the 0.75-percent factor in the maximum excess
or offset allowance in accordance with paragraph (d)(9) of this section.
For purposes of this paragraph (d)(5), an offset level of each
employee's final average compensation is considered a single dollar
amount determined under a formula specified in the plan.
(6) Intermediate amount safe harbor. The requirement of this
paragraph (d)(6) is satisfied only if--
(i) The integration or offset level under the plan for all employees
is a single dollar amount described in paragraph (d)(5) of this section,
and
(ii) The 0.75-percent factor in the maximum excess or offset
allowance under paragraph (b)(2) or (b)(3) of this section is reduced to
the lesser of the adjusted factor determined under paragraph (d)(9) of
this section or 80 percent of the otherwise applicable factor under
paragraph (b)(2) or (b)(3) of this section, determined without regard to
paragraph (d)(9) of this section.
(7) Prorated integration level for short plan year. If an
accumulation plan uses paragraph (2) or (4) of the definition of plan
year compensation under Sec. 1.401(a)(4)-12 (i.e., section 414(s)
compensation for the plan year or the period of plan participation) and
has a plan year that comprises fewer than 12 months, the integration or
offset level under the plan for each employee must be an amount equal to
the otherwise applicable integration or offset level described in
paragraph (d)(2), (d)(3), (d)(4), (d)(5), or (d)(6) of this section,
multiplied by a fraction, the numerator of which is the number of months
in the plan year and the denominator of which is 12. No adjustment to
the maximum excess or offset allowance is required as a result of the
application of this paragraph (d)(7), other than any adjustment already
required under paragraph (d)(6) or (d)(9) of this section.
(8) Demographic requirements--(i) In general. A plan that satisfies
the demographic requirements of paragraphs (d)(8)(ii) and (iii) of this
section may use an integration level described in paragraph (d)(5) of
this section.
[[Page 285]]
(ii) Attained age requirement. The requirement of this paragraph
(d)(8)(ii) is satisfied only if the average attained age of the
nonhighly compensated employees in the plan is not greater than the
greater of--
(A) Age 50, or
(B) 5 plus the average attained age of the highly compensated
employees in the plan. For purposes of this paragraph (d)(8)(ii),
attained ages are determined as of the beginning of the plan year.
(iii) Nondiscrimination requirement. The requirement of this
paragraph (d)(8)(iii) is satisfied only if at least one of the following
tests in paragraphs (d)(8)(iii) (A) through (D) of this section is
satisfied.
(A) Minimum percentage test. This test is satisfied only if more
than 50 percent of the nonhighly compensated employees in the plan have
average annual compensation at least equal to 120 percent of the
integration or offset level.
(B) Ratio test. This test is satisfied only if the percentage of
nonhighly compensated nonexcludable employees, who are in the plan and
who have average annual compensation at least equal to 120 percent of
the integration or offset level, is at least 70 percent of the
percentage of highly compensated nonexcludable employees who are
employees in the plan.
(C) High dollar amount test. This test is satisfied only if the
integration or offset level exceeds 150 percent of the covered
compensation of an individual who attains social security retirement age
in the calendar year in which the plan year begins. In the case of a
calendar year in which no individual could attain social security
retirement age, for example, the year 2003, this rule is applied using
covered compensation of an individual attaining social security
retirement age in the preceding calendar year.
(D) Individual disparity reductions. This test is satisfied only if
the plan is an offset plan that uses an offset level of each employee's
final average compensation and makes individual disparity reductions as
permitted under paragraph (d)(9)(iii)(B) of this section.
(9) Reduction in the 0.75-percent factor if integration or offset
level exceeds covered compensation--(i) In general. If the integration
or offset level specified under the plan is each employee's covered
compensation as of the plan year, no reduction in the 0.75-percent
factor in the maximum excess or offset allowance is required for the
plan year under this paragraph (d)(9). If a plan specifies an
integration or offset level that exceeds an employee's covered
compensation, the 0.75-percent factor in the maximum excess or offset
allowance must be reduced as required in paragraph (d)(9)(ii) or (iii)
of this section. Paragraph (d)(9)(iv) of this section contains a table
of the applicable reductions.
(ii) Uniform percentage of covered compensation. If a plan specifies
an integration or offset level that is a uniform percentage (in excess
of 100 percent) of each employee's covered compensation, the 0.75-
percent factor in the maximum excess or offset allowance must be reduced
in accordance with the table in paragraph (d)(9)(iv) of this section.
Thus, for example, if a plan specifies an integration or offset level of
120 percent of each employee's covered compensation, the 0.75-percent
factor in the maximum excess or offset allowance must be reduced to 0.69
percent in accordance with the table because the specified integration
or offset level is more than covered compensation but not more than 125
percent of covered compensation.
(iii) Single dollar amount. If a plan specifies an integration or
offset level of a single dollar amount as permitted under paragraph
(d)(5) of this section (for example, $30,000), the applicable reduction
in the maximum excess or offset allowance must be determined under
paragraph (d)(9)(iii) (A) or (B) of this section, as specified under the
plan.
(A) Plan-wide reduction. The applicable reduction in the maximum
excess or offset allowance under the table in paragraph (d)(9)(iv) of
this section may be determined by comparing the single dollar amount
specified in the plan to the covered compensation of an individual
attaining social security retirement age in the calendar year in which
the plan year begins. Thus, for example, if a plan specifies a single
integration or offset level of $30,000 that is uniformly applicable to
all employees
[[Page 286]]
for a plan year and the covered compensation of an individual attaining
social security retirement age in the calendar year in which the plan
year begins is $20,000, the 0.75-percent factor in the maximum excess or
offset allowance must be reduced to 0.60 percent for all employees in
accordance with the table in paragraph (d)(9)(iv) of this section
because the specified integration or offset level of $30,000 is more
than 125 percent of $20,000 but not more than 150 percent of $20,000. In
the case of a calendar year in which no individual could attain social
security retirement age (for example, 2003), the comparison is made with
covered compensation of an individual who attained social security
retirement age in the preceding calendar year. If an offset plan uses an
offset level of each employee's final average compensation, the
reduction under this paragraph (d)(9)(iii)(A) is determined by comparing
the highest possible amount of final average compensation to the covered
compensation of an individual attaining social security retirement age
in the calendar year in which the plan year begins.
(B) Individual reductions. The applicable reduction in the maximum
excess or offset allowance under the table in paragraph (d)(9)(iv) of
this section may be determined by comparing the single dollar amount
specified in the plan to the covered compensation of each employee under
the plan. Thus, for example, if a plan specifies a single integration or
offset level of $30,000 that is uniformly applicable to all employees
for a plan year, the 0.75-percent factor in the maximum excess or offset
allowance must be reduced to 0.60 percent for an employee with covered
compensation of $20,000, but need not be reduced for an employee whose
covered compensation is $30,000 or greater.
(iv) Reductions--(A) Table.
Table
------------------------------------------------------------------------
The permitted disparity factor
If the integration or offset level is is
------------------------------------------------------------------------
100 percent of covered compensation..... 0.75 percent
125 percent of covered compensation..... 0.69 percent
150 percent of covered compensation..... 0.60 percent
175 percent of covered compensation..... 0.53 percent
200 percent of covered compensation..... 0.47 percent
The taxable wage base or final average 0.42 percent
compensation.
------------------------------------------------------------------------
(B) Interpolation. If the integration or offset level used under a
plan is between the percentages of covered compensation in the table,
the permitted disparity factor applicable to the plan can be determined
either by straight-line interpolation between the permitted disparity
factors in the table or by rounding the integration or offset level up
to the next highest percentage of covered compensation in the table.
(10) Examples. The following examples illustrate this paragraph (d).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of an offset
plan, the plan provides that an employee's final average compensation is
limited to the employee's average annual compensation. Each example
discusses the benefit formula applicable to an employee who has a social
security retirement age of 65.
Example 1. (a) Plan M is a defined benefit excess plan that uses the
calendar year as its plan year. For the 1989 plan year, the plan uses an
integration level of $20,000, which is 118 percent of the 1989 covered
compensation of $16,968 for an individual reaching social security
retirement age in 1989. The plan may use that integration level without
satisfying paragraph (d)(8) of this section, provided the adjustment to
the 0.75-percent factor required under paragraph (d)(6) of this section
is made. That adjustment is the lesser of the factor determined under
paragraph (d)(9) of this section or 80 percent of the factor otherwise
applicable under paragraph (b)(2) or (b)(3) of this section.
(b) The plan determines the factor under paragraph (d)(9) of this
section by comparing the integration level to the covered compensation
of an individual attaining social security retirement age in the
calendar year in which the plan year begins and by rounding the
integration level up to 125 percent of that covered compensation amount.
The 0.75-percent factor is therefore replaced by 0.69 percent pursuant
to the table in paragraph (d)(9) of this section. The 0.69-percent
factor is 92 percent of the 0.75-percent factor. Because the lesser of
80 percent and 92 percent is 80 percent, the 0.75-percent factor is
reduced to 0.6 percent (80 percent of 0.75 percent) under paragraph
(d)(6) of this section. The 0.6-percent factor applies to benefits
[[Page 287]]
commencing at age 65 for an employee with a social security retirement
age of 65. In determining normal retirement benefits for employees with
social security retirement ages of 66 or 67, the applicable factors for
benefits commencing at age 65 are, respectively, 0.56 percent (80
percent of 0.7 percent) and 0.52 percent (80 percent of 0.65 percent).
(c) The plan could also determine the factor under paragraph (d)(9)
of this section by comparing the integration level to the covered
compensation of each employee under the plan, or by straight line
interpolation between the disparity factors contained in the table in
paragraph (d)(9) of this section, or both. (Of course, if the plan
satisfied paragraph (d)(8) of this section, the plan could use the
factor determined under paragraph (d)(9) of this section.)
Example 2. (a) Plan N, an accumulation plan, is a defined benefit
excess plan that, for each year of service up to 35, accrues a normal
retirement benefit of 1 percent of plan year compensation up to the
taxable wage base, plus 1.75 percent of plan year compensation above the
taxable wage base, for each year of service up to 35. An employee's
total retirement benefit is the sum of the accruals for all years. The
plan satisfies paragraph (d)(8) of this section.
(b) Because the plan uses the taxable wage base (an amount above
covered compensation) as the integration level, it must reduce the 0.75-
percent factor in the maximum excess allowance as required under
paragraphs (d)(5) and (d)(9) of this section. The reduced factor, if
determined on a plan-wide basis under paragraph (d)(9)(iii)(A) of this
section, is 0.42 percent. The plan must therefore reduce the disparity
in the plan so that it does not exceed 0.42 percent.
Example 3. (a) For the 1990 plan year, Plan O provides a normal
retirement benefit of 2 percent of average annual compensation, minus a
percentage of final average compensation up to $48,000, for each year of
service up to 35. The plan satisfies paragraph (d)(8) of this section.
As permitted under paragraph (d)(9) of this section, the plan provides
that each employee's offset percentage is determined by comparing
$48,000 to the employee's covered compensation and by rounding the
result up to the next highest percentage of covered compensation.
(b) Employee A has a social security retirement age of 66 and
covered compensation of $40,000. Because the plan provides for
commencement of Employee A's benefit at age 65, the 0.75-percent factor
in the maximum offset allowance is reduced to 0.7 percent under
paragraph (e)(1) of this section (the ``paragraph (e) factor''). In
addition, because $48,000 is rounded up to 125 percent of Employee A's
covered compensation, the 0.75-percent factor in the maximum offset
allowance is reduced to 0.69 percent under paragraph (d)(9) of this
section (the ``paragraph (d) factor''). The reductions are cumulative
under paragraph (b)(3)(ii) of this section.
(c) The cumulative reductions can be made by multiplying the
paragraph (e) facdtor by the ratio of the paragraph (d) factor to 0.75
percent or by multiplying the paragraph (d) factor by the ratio of the
paragraph (e) factor to 0.75 percent. The disparity factor for Employee
A is therefore 0.64 percent ((0.7 percent x 0.69 percent/0.75 percent)
or (0.69 percent x 0.7 percent/0.75 percent)).
Example 4. Plan P is an offset plan that uses the calendar year as
the plan year and uses an offset level of each employee's final average
compensation. Assume that the taxable wage bases for 1990-1992 are the
following:
1990--$51,300
1991--$53.400
1992--$58,000
Employee B's final average compensation, determined as of the close of
the 1992 plan year, is the average of Employee B's annual compensation
for the period 1990-1992. Employee B's annual compensation for each year
is the following:
1990--$47,000
1991--$59,000
1992--$65,000
For purposes of determining the offset applied to Employee B's employer-
provided benefit under the plan. Employee's B's final average
compensation as of the close of the 1992 plan year is $52,800 ($47,000 +
$53,400 + $58,000/3). This is because annual compensation in excess of
the taxable wage base in effect at the beginning of the year may not be
taken into account in determining an employee's final average
compensation or in determining the employee's offset. If the plan
determines the offset applied to Employee B's benefit by reference to
compensation in excess of $52,800, the plan fails to satisfy this
paragraph (d).
(e) Adjustments to the 0.75-percent factor for benefits commencing
at ages other than social security retirement age--(1) In general. The
0.75-percent factor in the maximum excess allowance and in the maximum
offset allowance applies to a benefit commencing at an employee's social
security retirement age. Except as provided in paragraph (g) of this
section, if a benefit payable to an employee under a defined benefit
excess plan or a defined benefit offset plan commences at an age before
the employee's social security retirement age (including a benefit
payable at the normal retirement age under the plan), the 0.75-percent
factor in the maximum excess allowance or in the maximum
[[Page 288]]
offset allowance, respectively, is reduced in accordance with paragraph
(e)(2)(i) of this section. If a benefit payable to an employee under a
defined benefit excess plan or a defined offset plan commences at an age
after the employee's social security retirement age, the 0.75-percent
factor in the maximum excess allowance or in the maximum offset
allowance, respectively, may be increased in accordance with paragraph
(e)(2)(ii) of this section. Paragraph (e)(4) of this section provides
rules on the age at which a benefit commences. See paragraph (f) of this
section for the requirements applicable to optional forms of benefit.
(2) Adjustments--(i) Benefits commencing on or after age 55 and
before social security retirement age. If benefits commence before an
employee's social security retirement age, the 0.75-percent factor in
the maximum excess allowance and in the maximum offset allowance must be
reduced for such early commencement of benefits in accordance with the
tables set forth in paragraph (e)(3) of this section.
(ii) Benefits commencing after social security retirement age and on
or before age 70. If benefits commence after an employee's social
security retirement age, the 0.75-percent factor in the maximum excess
allowance and in the maximum offset allowance may be increased for such
delayed commencement of benefits in accordance with the tables set forth
in paragraph (e)(3) of this section.
(iii) Benefits commencing before age 55. If benefits commence before
the employee attains age 55, the 0.75-percent factor in the maximum
excess allowance and in the maximum offset allowance is further reduced
(on a monthly basis to reflect the month in which benefits commence) to
a factor that is the actuarial equivalent of the 0.75-percent factor, as
adjusted under the tables in paragraph (e)(3) of this section,
applicable to a benefit commencing in the month in which the employee
attains age 55. In determining actuarial equivalence for this purpose, a
reasonable interest rate must be used. In addition, a reasonable
mortality table must be used to determine the actuarial present value,
as defined in Sec. 1.401(a)(4)-12, of the benefits commencing at age 55
and at the earlier commencement age, and a reasonable mortality table
may be used to determine the actuarial present value at the earlier
commencement age of the benefits commencing at age 55. A standard
interest rate and a standard mortality table, as defined in
Sec. 1.401(a)(4)-12, are considered reasonable.
(iv) Benefits commencing after age 70. If benefits commence after
the employee attains age 70, the 0.75-percent factor in the maximum
excess allowance and in the maximum offset allowance may be further
increased (on a monthly basis to reflect the month in which benefits
commence) to a factor that is the actuarial equivalent of the 0.75-
percent factor (as adjusted in accordance with this paragraph (e))
applicable to a benefit commencing in the month in which the employee
attains age 70. In determining actuarial equivalence for this purpose, a
reasonable interest rate must be used. In addition, a reasonable
mortality table must be used to determine the actuarial present value,
as defined in Sec. 1.401(a)(4)-12, of the benefits commencing at age 70
and at the later commencement age, and a reasonable mortality table may
be used to determine the value at the later commencement age of the
benefits commencing at age 70. A standard interest rate and a standard
mortality table, as defined in Sec. 1.401(a)(4)-12, are considered
reasonable.
(3) Tables. Tables I, II, and III provide the adjustments in the
0.75-percent factor in the maximum excess allowance and in the maximum
offset allowance applicable to benefits commencing on or after age 55
and on or before age 70 to an employee who has a social security
retirement age of 65, 66 or 67. Table IV is a simplified table for a
plan that uses a single disparity factor of 0.65 percent for all
employees at age 65. The factors in the following tables are applicable
to benefits that commence in the month the employee attains the
specified age. Accordingly, if benefits commence in a month other than
the month in which the employee attains the specified age, appropriate
adjustments in the 0.75-percent factor in the maximum excess allowance
and the maximum offset allowance must be made. For this purpose,
adjustments
[[Page 289]]
may be based on straight-line interpolation from the factors in the
tables or in accordance with the methods of adjustment specified in
paragraphs (e)(2)(iii) and (iv) of this section.
Table I
[Social security retirement age 67]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
70 1.002
69 0.908
68 0.825
67 0.750
66 0.700
65 0.650
64 0.600
63 0.550
62 0.500
61 0.475
60 0.450
59 0.425
58 0.400
57 0.375
56 0.344
55 0.316
------------------------------------------------------------------------
Table II
[Social security retirement age 66]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
70 1.101
69 0.998
68 0.907
67 0.824
66 0.750
65 0.700
64 0.650
63 0.600
62 0.550
61 0.500
60 0.475
59 0.450
58 0.425
57 0.400
56 0.375
55 0.344
------------------------------------------------------------------------
Table III
[Social security retirement age 65]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
70 1.209
69 1.096
68 0.996
67 0.905
66 0.824
65 0.750
64 0.700
63 0.650
62 0.600
61 0.550
60 0.500
59 0.475
58 0.450
57 0.425
56 0.400
55 0.375
------------------------------------------------------------------------
Table IV
[Simplified table]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
70 1.048
69 0.950
68 0.863
67 0.784
66 0.714
65 0.650
64 0.607
63 0.563
62 0.520
61 0.477
60 0.433
59 0.412
58 0.390
57 0.368
56 0.347
55 0.325
------------------------------------------------------------------------
(4) Benefit commencement date--(i) In general. Except as provided in
paragraph (e)(4)(ii) of this section, a benefit commences for purposes
of this paragraph (e) on the first day of the period for which the
benefit is paid under the plan.
(ii) Qualified social security supplement. If a plan uses a
qualified social security supplement, as defined in Sec. 1.401(a)(4)-12,
to provide an aggregate benefit at retirement before social security
retirement age that is a uniform percentage of average annual
compensation, benefits will be considered to commence on the first day
of the period for which the qualified social security supplement is no
longer payable. In order for this paragraph (e)(4)(ii) to apply, the
uniform percentage must be equal to the excess benefit percentage in the
case of an excess plan or the gross benefit percentage in the case of an
offset plan.
(5) Examples. The following examples illustrate this paragraph (e).
Unless otherwise provided, the following facts
[[Page 290]]
apply. The plan is noncontributory and is the only plan ever maintained
by the employer. The plan uses a normal retirement age of 65 and
contains no provision that would require a reduction in the 0.75-percent
factor under paragraph (b)(2) or (b)(3) of this section. In the case of
a defined benefit excess plan, the plan uses each employee's covered
compensation as the integration level; in the case of an offset plan,
the plan uses each employee's covered compensation as the offset level
and provides that an employee's final average compensation is limited to
the employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan M is a defined benefit excess plan that, for an
employee with a social security retirement age of 65, provides a normal
retirement benefit of 1.25 percent of average annual compensation up to
the integration level, plus 2.0 percent of average annual compensation
in excess of the integration level, for each year of service up to 35.
For an employee with at least 20 years of service, the plan provides a
benefit commencing at age 55 that is equal to the benefit payable at age
65. For that employee, the disparity provided under the plan at age 55
is 0.75 percent (2 percent-1.25 percent). Because this disparity exceeds
the 0.375 percent factor provided in the table for a benefit payable at
age 55 to an employee with a social security retirement age of 65, the
plan fails to satisfy paragraphs (b) and (e) of this section with
respect to the early retirement benefit.
Example 2. Assume the same facts as in Example 1, except that the
base benefit percentage under the plan is 1.75 percent. Thus, the
disparity provided under the plan at age 55 is 0.25 percent (2 percent-
1.75 percent). Because the disparity does not exceed the 0.375 percent
factor provided in the table for a benefit payable at age 55 to an
employee with a social security retirement age of 65, the plan does not
fail to satisfy paragraphs (b) and (e) of this section with respect to
the early retirement benefit.
Example 3. Plan N is an offset plan that, for an employee with a
social security retirement age of 65, provides a normal retirement
benefit of 1.75 percent of average annual compensation, minus 0.75
percent of final average compensation up to the offset level, for each
year of service up to 35. For an employee with at least 20 years of
service, the plan provides a benefit commencing at age 55 that is equal
to the benefit payable at age 65. For that employee, the disparity
provided under the plan at age 55 is 0.75 percent. Because this
disparity exceeds the 0.375-percent factor provided in the table for an
offset applied to a benefit payable at age 55 to an employee with a
social security retirement age of 65, the plan fails to satisfy
paragraphs (b) and (e) of this section with respect to the early
retirement benefit. The plan would not fail to satisfy paragraphs (b)
and (e) of this section with respect to the early retirement benefit if
the applicable factor for determining the offset applied to the benefit
were reduced to 0.375 percent.
Example 4. Plan O is a defined benefit excess plan that, for an
employee with a social security retirement age of 65, provides a normal
retirement benefit of 1.25 percent of average annual compensation up to
the integration level, plus 2.0 percent of average annual compensation
in excess of the integration level, for each year of service up to 35.
The plan provides benefits commencing before normal retirement age with
the following reductions:
------------------------------------------------------------------------
Percentage of normal
Age retirement benefit (%)
------------------------------------------------------------------------
64........................................ 90
63........................................ 85
62........................................ 80
------------------------------------------------------------------------
Under the plan, a benefit payable at age 64 is equal to 90 percent of
the normal retirement benefit payable at age 65. Thus, the excess
benefit percentage under the plan is 1.8 percent, the base benefit
percentage under the plan is 1.125 percent, and the disparity provided
under the plan at age 64 is 0.675 percent. Similarly, a benefit payable
at age 63 is equal to 85 percent of the normal retirement benefit
payable at age 65. Thus, the excess benefit percentage under the plan is
1.7 percent, the base benefit percentage under the plan is 1.0625
percent, and the disparity provided under the plan at age 63 is 0.6375
percent. Finally, a benefit payable at age 62 is equal to 80 percent of
the normal retirement benefit payable at age 65. Thus, the excess
benefit percentage under the plan is 1.6 percent, the base benefit
percentage under the plan is 1.0 percent, and the disparity provided
under the plan at age 62 is 0.6 percent. Because the disparities
provided under the plan at each early commencement age do not exceed the
factors provided in the applicable table in paragraph (e)(3) of this
section, the plan does not fail to satisfy paragraphs (b) and (e) of
this section with respect to the early retirement benefits.
Example 5. Plan P is a defined benefit excess plan that provides a
normal retirement benefit of 0.75 percent of average annual compensation
up to the integration level, plus 1.5 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35. The plan does not provide any benefits, other than
normal
[[Page 291]]
retirement benefits, commencing before an employee's social security
retirement age. Employee A, born in 1947, has a social security
retirement age of 66. Because the plan provides for the distribution of
normal retirement benefits before Employee A's social security
retirement age, the 0.75-percent factor in the maximum excess allowance
applicable to Employee A must be reduced to 0.70 percent in accordance
with this paragraph (e). Accordingly, the disparity provided to A under
the plan exceeds the maximum excess allowance because the excess benefit
percentage (1.5 percent) exceeds the base benefit percentage (0.75
percent) by more than the maximum excess allowance of 0.70 percent, as
reduced in accordance with this paragraph (e).
Example 6. Assume the same facts as in Example 5, except that the
plan also provides an early retirement benefit, commencing at age 62, to
an employee who satisfies the conditions for early retirement specified
in the plan. The early retirement benefit is based upon the employee's
accrued benefit at early retirement age and equals the amount that would
have been paid commencing at the employee's normal retirement age based
upon the employee's average annual compensation, covered compensation
and years of service at the date of the employee's early retirement.
Employee B, who has a social security retirement age of 65, meets the
conditions for early retirement under the plan and retires at age 62
with 30 years of service. At the time of early retirement, Employee B
has average annual compensation of $20,000 and covered compensation of
$16,000. Under the plan's benefit formula, Employee B has accrued a
normal retirement benefit, commencing at age 65, of $5,400 ((22.5
percent x $16,000) + (45 percent x $4,000)) based on Employee B's
average annual compensation, covered compensation and years of service
at early retirement. Accordingly, under the plan's early retirement
provisions, Employee B is entitled to receive, commencing at early
retirement, a benefit of $5,400. Because the early retirement benefit is
a benefit commencing at age 62 (before Employee B's social security
retirement age), the 0.75-percent factor in the maximum excess allowance
must be reduced to 0.60 percent in accordance with this paragraph (e).
Accordingly, the disparity provided to Employee B under the plan at
early retirement exceeds the maximum excess allowance.
Example 7. (a) Plan Q is a defined benefit excess plan that provides
a normal retirement benefit of 1.35 percent of average annual
compensation up to the integration level, plus 2 percent of average
annual compensation in excess of the integration level, for each year of
service up to 35. The plan provides that an employee with 10 years of
service at age 55 may receive an unreduced retirement benefit. The plan
also provides that employee with a supplemental benefit of 0.65 percent
of average annual compensation up to the integration level for each year
of service up to 35, payable from early retirement until age 65. The
supplemental benefit is a qualified social security supplement under
Sec. 1.401(a)(4)-12. The effect of the supplement is to provide an
employee with a uniform benefit of 2 percent of average annual
compensation from early retirement until age 65, when the supplement is
no longer payable. Therefore, for purposes of this paragraph (e), the
employee's benefit will be considered to commence at age 65.
(b) Assume that Plan Q is instead an offset plan that provides a
normal retirement benefit of 2 percent of average annual compensation,
minus 0.65 percent of final average compensation up to the offset level,
for each year of service up to 35. The plan provides the same early
retirement benefit on the same conditions, except that the supplement is
0.65 percent of an employee's final average compensation up to the
offset level. An employee at age 55 thus receives a uniform benefit of 2
percent of average annual compensation until age 65, when the supplement
is no longer payable. Therefore, for purposes of this paragraph (e), the
employee's benefit will be considered to commence at age 65.
(f) Benefits, rights, and features--(1) Defined benefit excess plan.
In the case of a defined benefit excess plan, each benefit, right, or
feature provided under the plan with respect to employer-provided
benefits attributable to average annual compensation above the
integration level (an ``excess benefit, right, or feature'') must also
be provided on the same terms with respect to employer-provided benefits
attributable to average annual compensation up to the integration level
(a ``base benefit, right, or feature''). Alternatively, an excess
benefit, right, or feature may be provided on different terms than the
base benefit, right, or feature, if the terms used to determine the base
benefit, right, or feature produce a benefit, right, or feature of
inherently equal or greater value than the benefit, right, or feature
that would be produced under the terms used to determine the excess
benefit, right, or feature.
(2) Offset plan. In the case of an offset plan, each benefit, right,
or feature provided under the plan with respect to employer-provided
benefits before application of the offset (a ``gross benefit, right, or
feature'') must be provided on
[[Page 292]]
the same terms as those used to determine the offset applied to the
gross benefit, right, or feature. Alternatively, a gross benefit, right,
or feature may be provided on different terms from those used to
determine the offset applied to the gross benefit, right, or feature, if
the terms used to determine the gross benefit, right, or feature produce
a benefit, right, or feature of inherently equal or greater value than
the benefit, right, or feature that would be produced under the terms
used to determine the offset applied to the gross benefit, right, or
feature. In addition, if benefits commence before an employee's normal
retirement age, the gross benefit percentage under the plan must be
reduced by a number of percentage points that is not less than the
number of percentage points by which the offset percentage must be
reduced, from normal retirement age to the age at which benefits
commence, under the rules of paragraph (e) of this section.
(3) Examples. The following examples illustrate this paragraph (f).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65. All optional forms of benefit under each plan are
provided on the same terms.
Example 1. Plan M is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation above the integration level, for each year of service up to
35. The plan provides an early retirement benefit for any employee who
terminates employment at or after age 55 with 10 or more years of
service. In determining an employee's early retirement, the 1.65 percent
excess benefit percentage is reduced in accordance with the table in
paragraph (e)(3) of this section for a plan that uses a single disparity
factor of 0.65 percent for all employees at age 65. However, a larger
reduction factor is applied to determine the base benefit percentage at
early retirement. The plan violates this paragraph (f) because the
excess early retirement benefit is not provided on the same terms as the
base early retirement benefit, nor do the terms used to determine the
base early retirement benefit produce an early retirement benefit of
inherently equal or greater value than the early retirement benefit that
would be produced under the terms used to determine the excess benefit,
right, or feature.
Example 2. The facts are the same as in Example 1 except that the
plan determines the early retirement benefit by applying the same
reduction factors under paragraph (e)(3) of this section to the base and
excess benefit percentages. Furthermore, if an employee terminates
employment at or after age 55 with 30 or more years of service, the plan
provides that the base benefit percentage of 1 percent is not reduced.
Although the excess early retirement benefit is provided on different
terms than the base early retirement benefit, the plan satisfies this
paragraph (f) because the terms used to determine the base early
retirement benefit produce an early retirement of inherently equal or
greater value than the early retirement benefit that would be produced
under the terms used to determine the excess benefit, right, or feature.
Example 3. Plan N is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.65 percent of final average compensation up to the offset level, for
each year of service up to 35. In determining the qualified joint and
survivor (``QJSA'') form of the normal retirement benefit, the plan
applies a factor of 80 percent to the gross benefit percentage and a
factor of 100 percent to the offset percentage. Thus, the QJSA form is
1.6 percent of average annual compensation, minus 0.65 percent of final
average compensation up to the offset level, for each year of service up
to 35. The plan violates this paragraph (f) because the gross QJSA form
is not provided on the same terms as the terms used to determine the
offset applied to the QJSA, nor does it produce a QJSA benefit that is
of inherently equal or greater value than the QJSA benefit that would be
produced under the terms used to determine the offset under the plan.
Example 4. Plan O is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation
[[Page 293]]
above the integration level, for each year of service up to 35. The plan
also provides a single sum optional form of benefit determined by
applying a single interest rate and mortality assumption to the entire
normal retirement benefit. The plan satisfies this paragraph (f) because
the excess optional form is provided on the same terms as the base
optional form. The plan would also satisfy this paragraph (f) if it used
a lower interest rate to determine the base optional form than used to
determine the excess optional form because the lower interest rate would
produce an optional form of inherently equal or greater value than the
optional form produced by using the same interest rate.
Example 5. Plan R is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation above the integration level, for each year of service up to
35. If an employee continues to work after normal retirement age, the
plan provides that the employee receives credit for additional years of
service up to the service limit of 35. The plan also provides that the
disparity provided under the plan will increase as permitted under
paragraph (e) of this section for benefits commencing after social
security retirement age. However, the plan does not provide an increase
in the base benefit percentage to reflect the fact that the employee has
delayed commencement of benefits past normal retirement age. Thus, for
example, for an employee at age 68, the plan provides a benefit of 1
percent of average annual compensation up to the integration level, plus
1.86 percent of average annual compensation above the integration level,
for each year of service up to 35. The plan violates this paragraph (f)
because the excess benefit provided for an employee after normal
retirement age is not provided on the same terms as the base benefit,
nor do the terms used to determine the base benefit produce a benefit of
inherently equal or greater value than the benefit that would be
produced under the terms used to determine the excess benefit.
Example 6. Plan Q is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.65 percent of final average compensation up to the offset level, for
each year of service up to 35. In accordance with paragraph (e) of this
section, the plan reduces the offset percentage under the plan for early
retirement and provides a benefit at age 55 of 2 percent of average
annual compensation, minus 0.325 percent of final average compensation
up to the offset level, for each year of service up to 35. However, the
early retirement benefit does not meet this paragraph (f) because an
employee's gross benefit percentage is not reduced for early retirement.
Example 7. The facts are the same as in Example 6 except that the
plan reduces the gross benefit percentage for early retirement at age 55
to 1.675 percent. Because the gross benefit percentage is reduced by
0.325 percent (from 2.0 percent to 1.675 percent), the same percentage
point reduction made in the offset percentage (from 0.65 percent to
0.325 percent), the early retirement benefit meets this paragraph (f).
(g) No reductions in 0.75-percent factor for ancillary benefits. For
purposes of applying the maximum excess allowance or the maximum offset
allowance under paragraph (b)(2) or (3) of this section, no reduction is
made to the 0.75-percent factor merely because the plan provides
disparity in qualified disability benefits (within the meaning of
section 411(a)(9)) or preretirement death benefits and the relevant
benefits are payable before an employee's social security retirement
age.
(h) Benefits attributable to employee contributions not taken into
account. Benefits attributable to employee contributions to a defined
benefit plan are not taken into account in determining whether the
disparity provided under a defined benefit excess plan or an offset plan
exceeds the maximum permitted disparity described in paragraph (b) of
this section. See Sec. 1.401(a)(4)-6(b) for methods of determining the
employer-provided benefit under a plan that includes employee
contributions not allocated to separate accounts (i.e., a contributory
DB plan), including Sec. 1.401(a)(4)-6(b)(2)(iii)(B) for adjustments to
the base and excess benefit percentages or the gross benefit percentage
under a section 401(l) plan. If, after adjustment, the employee's base
benefit percentage or gross benefit percentage (whichever is applicable)
is less than zero, such percentage is deemed to be zero for purposes of
the maximum excess allowance or maximum offset allowance under paragraph
(b)(2) or (3) of this section.
(i) Multiple integration levels [Reserved]
(j) Additional rules. The Commissioner may, in revenue rulings,
notices or other documents of general applicability, prescribe
additional rules as may be necessary or appropriate to carry out the
purposes of this section,
[[Page 294]]
including updated tables under paragraphs (d) and (e) of this section
providing for reductions in the 0.75-percent factor in the maximum
excess allowance and in the maximum offset allowance and rules in
paragraph (h) of this section for determining the portion of an
employee's benefit attributable to employee contributions.
[T.D. 8359, 56 FR 47622, Sept. 19, 1991; 57 FR 10818, 10819, 10951,
10952, Mar. 31, 1992, as amended by T.D. 8486, 58 FR 46832, Sept. 3,
1993]
Sec. 1.401(l)-4 Special rules for railroad plans.
(a) In general. Section 401(l)(6) provides that, in the case of a
plan maintained by a railroad employer that covers employees who are
entitled to benefits under the Railroad Retirement Act of 1974, in
determining whether such a plan satisfies section 401(l), rules similar
to the rules under section 401(l) apply and such rules take into account
the employer-derived portion of tier 2 and supplemental annuity benefits
provided under the railroad retirement system. In general, for purposes
of determining whether a defined contribution plan or a defined benefit
plan maintained by a railroad employer and covering employees described
in te preceding sentence, satisfies section 401(l), the employer-derived
portion of an employee's tier 2 benefits and supplementary annuity
benefits under the Railroad Retirement Act of 1974 are treated as though
such benefits were provided by the railroad employer under a qualified
plan. Paragraph (b) of this section contains rules for defined
contribution plans. Paragraph (c) of this section contains rules for
defined benefit excess plans. Paragraph (d) of this section contains
rules for offset plans. Paragraph (e) of this section contains
definitions and additional rules of application.
(b) Defined contribution plans--(1) In general. A defined
contribution plan maintained by a railroad employer satisfies section
401(l) and Sec. 1.401(l)-2 for a plan year only if the plan satisfies
paragraph (b)(2) or (b)(3) of this section for the plan year.
(2) Single integration level method--(i) In general. A plan
satisfies this paragraph (b)(2) if--
(A) The plan specifies a single integration level for all employees
that does not exceed the railroad retirement taxable wage base in effect
as of the beginning of the plan year,
(B) The plan uses the same base contribution percentage and the same
excess contribution percentage for all employees, and
(C) The excess contribution percentage does not exceed the sum of
11.4 percentage points and the base contribution percentage.
(ii) Definitions. The following definitions govern for purposes of
this paragraph (b)(2).
(A) Base contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation at or below the
railroad retirement taxable wage base (expressed as a percentage of such
plan year compensation).
(B) Excess contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation above the railroad
retirement taxable wage base (expressed as a percentage of such plan
year compensation).
(3) Two integration level method--(i) In general. A plan satisfies
this paragraph (b)(3) if--
(A) The plan specifies two integration levels for all employees,
equal to the railroad retirement taxable wage base in effect as of the
beginning of the plan year and the taxable wage base in effect as of the
beginning of the plan year, and
(B) The plan satisfies paragraphs (b)(3) (ii) and (iii) of this
section.
(ii) Total disparity requirement. A plan satisfies this paragraph
(b)(3)(ii) if--
(A) The plan uses the same base contribution percentage and the same
excess contribution percentage for all employees, and
(B) The excess contribution percentage does not exceed the sum of
11.4 percentage points and the base contribution percentage.
(iii) Intermediate disparity requirement. A plan satisfies this
paragraph (b)(3)(iii) if--
[[Page 295]]
(A) The plan uses the same base contribution percentage and the same
intermediate contribution percentage for all employees, and
(B) The intermediate contribution percentage does not exceed the sum
of 5.7 percentage points and the base contribution percentage.
(iv) Definitions. The following definitions govern for purposes of
this paragraph (b)(3).
(A) Base contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation at or below the
railroad retirement taxable wage base (expressed as a percentage of such
plan year compensation).
(B) Intermediate contribution percentage means the rate at which
employer contributions are allocated to the account of an employee under
the plan with respect to the employee's plan year compensation between
the railroad retirement taxable wage base and the taxable wage base
(expressed as a percentage of such plan year compensation).
(C) Excess contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation above the taxable
wage base (expressed as a percentage of such plan year compensation).
(c) Defined benefit excess plans--(1) In general. A defined benefit
excess plan maintained by a railroad employer satisfies section 401(l)
and Sec. 1.401(l)-3 for a plan year only if the plan satisfies paragraph
(c)(2) or (c)(3) of this section for the plan year.
(2) Single integration level method--(i) In general. A plan
satisfies this paragraph (c)(2) if--
(A) The plan specifies a single integration level for all employees
that does not exceed railroad retirement covered compensation,
(B) The plan uses the same base benefit percentage and the same
excess benefit percentage for all employees, and
(C) The excess benefit percentage does not exceed the lesser of--
(1) Two times the sum of 0.56 percent and the base benefit
percentage, or
(2) 0.56 percent plus the base benefit percentage plus 0.75 percent.
(ii) Definitions. The following definitions govern for purposes of
this paragraph (c)(2).
(A) Base benefit percentage means the rate at which employer-
provided benefits are determined under the plan with respect to an
employee's average annual compensation at or below the employee's
railroad retirement covered compensation (expressed as a percentage of
such average annual compensation).
(B) Excess benefit percentage means the rate at which employer-
provided benefits are determined under the plan with respect to an
employee's average annual compensation above the employee's railroad
retirement covered compensation (expressed as a percentage of such
average annual compensation).
(3) Two integration level method--(i) In general. A plan satisfies
this paragraph (c)(3) for a plan year if--
(A) The plan specifies two integration levels for all employees,
equal to each employee's railroad retirement covered compensation and
each employee's covered compensation, and
(B) The plan satisfies paragraph (c)(3) (ii) and (iii) of this
section.
(ii) Employee with lower covered compensation. A plan satisfies this
paragraph (c)(3)(ii) if, with respect to each employee whose lower
integration level is the employee's covered compensation--
(A) The plan uses the same base benefit percentage and the same
intermediate benefit percentage for all employees,
(B) The intermediate benefit percentage does not exceed the base
benefit percentage by more than the lesser of 0.75 percent or the base
benefit percentage,
(C) The plan uses the same intermediate benefit percentage and the
same excess benefit percentage for all employees, and
(D) The excess benefit percentage does not exceed the intermediate
benefit percentage by more than 0.56 percent.
[[Page 296]]
(iii) Employee with lower railroad retirement covered compensation.
A plan satisfies this paragraph (c)(3)(iii) if, with respect to each
employee whose lower integration level is the employee's railroad
retirement covered compensation--
(A) The plan uses the same base benefit percentage and the same
excess benefit percentage for all employees,
(B) The excess benefit percentage does not exceed the lesser of--
(1) Two times the sum of 0.56 percent and the base benefit
percentage, or
(2) The sum of 0.56 percent plus the base benefit percentage plus
0.75 percent,
(C) The plan uses the same the base benefit percentage and the same
intermediate benefit percentage for all employees, and
(D) The intermediate benefit percentage does not exceed the sum of
0.56 percent plus the base benefit percentage.
(iv) Definitions. The following definitions govern for purposes of
this paragraph (c)(3).
(A) Base benefit percentage means the rate at which employer-
provided benefits are determined under the plan with respect to an
employee's average annual compensation at or below the lower integration
level specified in the plan (expressed as a percentage of such average
annual compensation).
(B) Intermediate benefit percentage means the rate at which
employer-provided benefits are determined under the plan with respect to
an employee's average annual compensation between the lower and higher
integration levels specified in the plan (expressed as a percentage of
such average annual compensation).
(C) Excess benefit percentage means the rate at which employer-
provided benefits are determined under the plan with respect to an
employee's average annual compensation above the higher integration
level specified in the plan (expressed as a percentage of such average
annual compensation).
(d) Offset plans--(1) In general. An offset plan maintained by a
railroad employer satisfies section 401(l) and Sec. 1.401(l)-3 for a
plan year only if--
(i) The plan satisfies Sec. 1.401(l)-3 for the plan year without
regard to the offset for the employer-derived portion of tier 2 and
supplementary annuity benefits provided under the railroad retirement
system, and
(ii) The offset for the employer-derived portion of tier 2 and
supplementary annuity benefits provided under the railroad retirement
system does not exceed the maximum tier 2 and supplementary annuity
offset allowance.
(2) Maximum tier 2 and supplementary annuity offset allowance. For
purposes of paragraph (d)(1) of this section, the maximum tier 2 and
supplementary annuity offset allowance for a plan year is equal to 0.56
percent of the employee's railroad retirement covered compensation for
the plan year.
(e) Additional rules--(1) Definitions. The following definitions
govern for purposes of this section.
(i) Railroad retirement taxable wage base means the applicable base,
as determined under section 3231(e)(2)B)(ii), for purposes of the tax
under section 3221(b) (the tier 2 tax).
(ii) Railroad retirement covered compensation for an employee means
12 multiplied by the average of the 60 highest monthly railroad
retirement taxable wage bases in effect for the employee's period of
employment. The monthly railroad retirement taxable wage base is
determined by dividing the railroad retirement taxable wage base for the
calendar year in which the month occurs by 12. An employee's railroad
retirement covered compensation for the plan year is determined as of
the beginning of the plan year. A plan must provide that an employee's
railroad retirement covered compensation is automatically adjusted for
each plan year. See Sec. 1.401(l)-1(b) for rules relating to prohibited
decreases in an employee's accrued benefit within the meaning of section
411(d)(6) or section 411(b)(1)(G).
(2) Adjustments to 0.75-percent factor. The 0.75-percent factor in
the maximum excess allowance and in the maximum offset allowance is
subject to the reductions prescribed in Sec. 1.401(l)-3 (d) and (e),
except that in the case of an employee with at least 30 years of service
with a railroad employer, the following tables are substituted for
Tables I through III contained in Sec. 1.401(l)-3(e)(3).
[[Page 297]]
Table I
[Social security retirement age 67]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
66 0.750
65 0.750
64 0.750
63 0.750
62 0.750
61 0.525
60 0.525
59 0.508
58 0.490
57 0.472
56 0.433
55 0.398
------------------------------------------------------------------------
Table II
[Social security retirement age 66]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
65 0.750
64 0.750
63 0.750
62 0.750
61 0.563
60 0.563
59 0.544
58 0.525
57 0.506
56 0.488
55 0.447
------------------------------------------------------------------------
Table III
[Social security retirement age 65]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
64 0.750
63 0.750
62 0.750
61 0.600
60 0.600
59 0.580
58 0.560
57 0.540
56 0.520
55 0.500
------------------------------------------------------------------------
(3) Adjustments to 0.56-percent factor. The 0.56-percent factor for
defined benefit excess plans and offset plans under paragraphs (c) and
(d) of this section respectively is subject to the reductions prescribed
in Sec. 1.401(l)-3 (d) and (e), except that, for purposes of applying
this paragraph (e)(3)--
(i) ``Railroad retirement covered compensation'' is substituted for
``covered compensation'' in Sec. 1.401(l)-3(d),
(ii) The reductions under Sec. 1.401(l)-3(d) are made by multiplying
the 0.56-percent factor by the ratio of the applicable factor from the
table in Sec. 1.401(l)-(3)(d)(9)(iv)(A) to 0.75, and
(iii) The following tables are substituted for Tables I through III
set forth in Sec. 1.401(l)-3(e)(3).
(A) Tables applicable to 0.56% factor for employees covered by tier
2 of railroad retirement with 30 or more years of railroad service.
Table I
[Social security retirement age 67]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
66 0.560
65 0.560
64 0.560
63 0.560
62 0.560
61 0.560
60 0.560
59 0.541
58 0.523
57 0.504
56 0.462
55 0.425
------------------------------------------------------------------------
Table II
[Social security retirement age 66]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
65 0.560
64 0.560
63 0.560
62 0.560
61 0.560
60 0.560
59 0.541
58 0.523
57 0.504
56 0.485
55 0.445
------------------------------------------------------------------------
Table III
[Social security retirement age 65]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
64 0.560
63 0.560
62 0.560
61 0.560
60 0.560
59 0.541
58 0.523
57 0.504
56 0.485
[[Page 298]]
55 0.467
------------------------------------------------------------------------
(B) Tables applicable to 0.56% factor for employees covered by tier
2 of railroad retirement with less than 30 years of railroad service.
Table I
[Social security retirement age 67]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
66 0.523
65 0.485
64 0.448
63 0.420
62 0.392
61 0.379
60 0.366
59 0.353
58 0.340
57 0.327
56 0.300
55 0.275
------------------------------------------------------------------------
Table II
[Social security retirement age 66]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
65 0.523
64 0.485
63 0.448
62 0.420
61 0.392
60 0.378
59 0.364
58 0.350
57 0.336
56 0.322
55 0.295
------------------------------------------------------------------------
Table III
[Social security retirement age 65]
------------------------------------------------------------------------
Annual factor in maximum excess
Age at which benefits commence allowance and maximum offset
allowance (percent)
------------------------------------------------------------------------
64 0.523
63 0.485
62 0.448
61 0.418
60 0.388
59 0.373
58 0.358
57 0.343
56 0.329
55 0.314
------------------------------------------------------------------------
(4) Overall permitted disparity. The overall permitted disparity
rules of Sec. 1.401(l)-5 apply to employees who benefit under a plan
maintained by a railroad employer.
[T.D. 8359, 56 FR 47632, Sept. 19, 1991; 57 FR 10819, 10952, Mar. 31,
1992]
Sec. 1.401(l)-5 Overall permitted disparity limits.
(a) Introduction--(1) In general. The maximum excess allowance and
maximum offset allowance limit the disparity that can be provided under
a plan for a plan year. The overall permitted disparity rules apply to
limit the disparity provided for a plan year if an employee benefits
under more than one plan maintained by the employer (the ``annual
overall permitted disparity limit'') and to limit the disparity provided
for an employee's total years of service, either in a single plan or in
more than one plan of the employer (the ``cumulative overall permitted
disparity limit''). The overall permitted disparity rules take into
account the disparity provided under a section 401(l) plan and the
permitted disparity imputed under a plan that satisfies section
401(a)(4) by relying on Sec. 1.401(a)(4)-7. A plan that is not a section
401(l) plan is generally deemed to impute permitted disparity under
Sec. 1.401(a)(4)-7 unless established otherwise. Paragraph (b) of this
section provides rules on the annual overall permitted disparity limit.
Paragraph (c) of this section provides rules on the cumulative overall
permitted disparity limit.
(2) Plan requirements. In order to satisfy section 401(l), a plan
must provide that the overall permitted disparity limits may not be
exceeded and must specify how employer-provided contributions or
benefits under the plan are adjusted, if necessary, to satisfy the
overall permitted disparity limits. Any adjustments made to satisfy the
overall permitted disparity limits must
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be made in a uniform manner for all employees.
(3) Plans taken into account. For purposes of this section, all
plans of the employer are taken into account. In addition, all plans of
any other employer are taken into account for all periods of service
with the other employer for which the employee receives credit for
purposes of benefit accrual under any plan of the current employer.
(b) Annual overall permitted disparity limit--(1) In general. If, in
the plan year, an employee benefits under more than one plan, the annual
overall permitted disparity limit is satisfied only if the employee's
total annual disparity fraction, as defined in paragraph (b)(2) of this
section, does not exceed one. Paragraphs (b)(3) through (b)(8) of this
section explain the determination of an employee's annual disparity
fractions. Paragraph (b)(9) of this section provides examples.
(2) Total annual disparity fraction. An employee's total annual
disparity fraction is the sum of the employee's annual disparity
fractions, as defined in paragraphs (b)(3) through (b)(7) of this
section. An employee's total annual disparity fraction is determined as
of the end of the current plan year, based on the employee's annual
disparity fractions under all plans with plan years ending in the
current plan year.
(3) Annual defined contribution plan disparity fraction. For a plan
year, the annual defined contribution plan disparity fraction for an
employee benefiting under a defined contribution plan that is a section
401(l) plan is a fraction--
(i) The numerator of which is the disparity provided under the plan
for the plan year, and
(ii) The denominator of which is the maximum excess allowance under
Sec. 1.401(l)-2(b)(2) for the plan year.
(4) Annual defined benefit excess plan disparity fraction. For a
plan year, the annual defined benefit excess plan disparity fraction for
an employee benefiting under a defined benefit excess plan that is a
section 401(l) plan is a fraction--
(i) The numerator of which is the disparity provided under the plan
for the plan year, and
(ii) The denominator of which is the maximum excess allowance under
Sec. 1.401(l)-3(b)(2) for the plan year.
(5) Annual offset plan disparity fraction--(i) In general. For a
plan year, the annual offset plan disparity fraction for an employee
benefiting under an offset plan that is a section 401(l) plan is a
fraction--
(A) The numerator of which is the disparity provided under the plan
for the plan year; and
(B) The denominator of which is the maximum offset allowance under
Sec. 1.401(l)-3(b)(3) for the plan year.
(ii) PIA offset plans. In the case of an offset plan that applies an
offset of a specified percentage of the employee's PIA, as permitted
under Sec. 1.401(l)-3(c)(2)(ix), the numerator of the annual offset plan
disparity fraction is the offset percentage used in the section 401(l)
overlay under the plan.
(6) Annual imputed disparity fraction. For a plan year, the annual
imputed disparity fraction for an employee benefiting under a plan that
imputes permitted disparity with respect to the employee under
Sec. 1.401(a)(4)-7 is one.
(7) Annual nondisparate fraction. For a plan year, the annual
nondisparate fraction for an employee benefiting under a plan that
neither is a section 401(l) plan nor imputes permitted disparity under
Sec. 1.401(a)(4)-7 is zero.
(8) Determination of fraction--(i) General rule. A separate annual
disparity fraction is generally determined for each plan under which the
employee benefits. Thus, for example, if two plans are aggregated and
treated as a single plan for purposes of section 401(a)(4), a single
annual disparity fraction applies to the aggregated plan.
(ii) Multiple formulas. If a plan provides an allocation or benefit
equal to the sum of two or more formulas, each formula is considered a
separate plan for purposes of this section. If a plan provides an
allocation or benefit equal to the greater of two or more formulas, an
annual disparity fraction is calculated for the employee under each
formula and the largest of the fractions is the employee's annual
disparity fraction under the plan.
(iii) Offset arrangements--(A) In general. If an employee benefits
under two
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plans taken into account under paragraph (a)(3) of this section as
described in paragraph (b)(8)(iii)(B) or (C) of this section, the
employee's annual disparity fraction under both plans is the larger of
the annual disparity fractions calculated separately under each plan.
(B) Defined benefit plans. The employee's employer-provided accrued
benefit under a defined benefit plan is offset by the employee's total
employer-provided accrued benefit under another defined benefit plan or
by the actuarial equivalent (as defined in Sec. 1.401(a)(4)-12) of the
employee's total account balance under a defined contribution plan that
is attributable to employer contributions.
(C) Defined contribution plans. The amount allocated to the
employee's account under a defined contribution plan is offset by the
total amount allocated to the employee's account under another defined
contribution plan.
(iv) Applicable percentages. The disparity provided under a plan is
determined on the base and excess percentages under an excess plan and
the offset percentage under an offset plan, regardless of whether the
employee's plan year or average annual compensation exceeds the
integration or offset level under the plan.
(v) Fractional accrual plans. If a section 401(l) plan determines
each employee's accrued benefit under the fractional accrual method of
section 411(b)(1)(C), the numerator of an employee's annual disparity
fraction is based on the disparity provided in the benefit accrued for
the employee for the plan year.
(9) Examples. The following examples illustrate this paragraph (b).
Except as otherwise provided, each plan is a section 401(l) plan.
Example 1. (a) Employee A benefits for the plan year under a defined
contribution excess plan, Plan X, and a defined benefit excess plan,
Plan Y, of the employer. Plans X and Y have the same plan year. Employee
A benefits under no other plan of the employer for the plan year of any
other plan ending in the plan year of Plans X and Y. Plan X provides a
base contribution percentage of 5 percent and an excess contribution
percentage of 7 percent, thus providing Employee A with disparity of 2
percent for the plan year. The maximum excess allowance for the plan
year under Plan X is 5 percent. Plan Y provides a base benefit
percentage of 1 percent and an excess benefit percentage of 1.35
percent, thus providing Employee A with disparity of 0.35 percent for
the plan year. The maximum excess allowance for the plan year under Plan
Y is 0.75 percent.
(b) Employee A's annual defined contribution plan disparity fraction
under Plan X for the plan year is 0.4 (2 percent divided by 5 percent).
Employee A's annual defined benefit excess plan disparity fraction under
Plan Y for the plan year is 0.47 (0.35 percent divided by 0.75 percent).
Employee A's total annual disparity fraction is the sum of 0.4 and 0.47
or 0.87. Because Employee A's total annual disparity fraction does not
exceed one, the plans satisfy the annual overall permitted disparity
limit with respect to Employee A for the plan year.
Example 2. (a) The facts are the same as in Example 1, except that
Plan Y is a defined contribution plan, rather than a defined benefit
plan. Plan X and Plan Y cover the same employees and are identical in
their terms except for the base and excess contribution percentages
provided under the plans. Plan Y provides a base contribution percentage
of 3 percent and an excess contribution percentage of 6 percent, thus
providing Employee A with disparity of 3 percent for the plan year. The
maximum excess allowance for the plan year under Plan Y is 3 percent.
(b) Employee A's annual defined contribution plan disparity fraction
under Plan X for the plan year is 0.4 (2 percent divided by 5 percent).
Employee A's annual defined contribution plan disparity fraction under
Plan Y for the plan year is 1 (3 percent divided by 3 percent). Because
Employee A's total annual disparity fraction (the sum of 0.4 and 1 or
1.4) exceeds one, the plans do not satisfy the annual overall permitted
disparity requirements with respect to Employee A for the plan year.
(c) Plan X and Plan Y are aggregated for purposes of section
401(a)(4) and form a single section 401(l) plan. Under the plan, the
base contribution percentage is 8 percent (5 percent plus 3 percent),
and the excess contribution percentage is 13 percent (7 percent plus 6
percent). A single annual defined contribution plan disparity fraction
is determined for Employee A for the plan year, the numerator of which
is the disparity of 5 percent provided under the plan (13 percent minus
8 percent), and the denominator of which is 5.7 percent, the maximum
excess allowance that applies to the plan. Because Employee A's only
annual disparity fraction of 0.88 (5 percent divided by 5.7 percent)
does not exceed one, Employee A's total annual disparity fraction also
does not exceed one. The plan thus satisfies the annual overall
permitted disparity limit with respect to Employee A for the plan year.
Example 3. Assume the same facts as in Example 2, except that Plan X
and Plan Y use
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different integration levels. Therefore, when Plan X and Plan Y are
aggregated to form a single plan for purposes of section 401(a)(4), the
single plan does not satisfy section 401(l). In applying the general
test of Sec. 1.401(a)(4)-2(c), the plan imputes disparity under
Sec. 1.401(a)(4)-7. Employee A's only annual disparity fraction is the
annual imputed disparity fraction of one. Employee A's total annual
disparity fraction is also one, and the plan satisfies the annual
overall permitted disparity limit with respect to Employee A for the
plan year.
Example 4. (a) Employee B participates in two plans: Plan M, which
is a section 401(l) plan, and Plan N, which is subject to the general
test under Sec. 1.401(a)(4)-3(c). Plan M provides that the disparity
provided an employee for the plan year will be reduced to the extent
necessary to satisfy the annual overall permitted disparity limits. The
employer wishes to impute permitted disparity under Sec. 1.401(a)(4)-7
in order for Plan N to satisfy section 401(a)(4). Employee B's imputed
disparity fraction under Plan N is therefore one, and Plan M provides no
disparity for Employee B for the plan year. As a result, Plan M provides
disparity that is neither uniform nor deemed uniform under
Sec. 1.401(l)-3(c); Plan M therefore does not satisfy section 401(l).
(b) Assume instead that Plan M provides that the annual overall
permitted disparity limits must be satisfied without reducing the
disparity provided for an employee under Plan M, thus requiring a
reduction in the employee's annual disparity fraction under another
plan. In that case, the disparity provided under Plan M would be uniform
for the plan year and Plan M would continue to satisfy section 401(l).
However, imputation of permitted disparity with respect to Employee B
would not be allowed under Plan N.
(c) Cumulative permitted disparity limit--(1) In general--(i)
Employees who benefit under defined benefit plans. In the case of an
employee who has benefited under one or more defined benefit plans for a
plan year described in paragraph (c)(1)(v) of this section, the
cumulative permitted disparity limit is satisfied if the employee's
cumulative disparity fraction, as defined in paragraph (c)(2) of this
section, does not exceed 35.
(ii) Employees who do not benefit under defined benefit plans. In
the case of an employee who has not benefited under a defined benefit
plan for any plan year described in paragraph (c)(1)(v) of this section,
the cumulative permitted disparity limit is satisfied.
(iii) Certain plan years disregarded. For purposes of this paragraph
(c), an employee is not treated as benefiting under a defined benefit
plan for a plan year described in paragraph (c)(1)(v) of this section if
the employer can establish that for that plan year the defined benefit
plan was not a section 401(l) plan and did not impute permitted
disparity under Sec. 1.401(a)(4)-7.
(iv) Determination of type of plan. For purposes of this paragraph
(c), a target benefit plan that relies on the special rule of
Sec. 1.401(a)(4)-8(b)(3) to satisfy section 401(a)(4) and a DB/DC plan
within the meaning of Sec. 1.401(a)(4)-9(a) are treated as defined
benefit plans. Similarly, a cash balance plan that relies on the special
rule of Sec. 1.401(a)(4)-8(c)(3) to satisfy section 401(a)(4) is treated
as a defined contribution plan.
(v) Applicable plan years. In applying paragraphs (c)(1) (i), (ii),
and (iii) of this section, for purposes of determining whether an
employee benefits under a defined benefit plan, the applicable plan
years are all plan years that begin on or after the regulatory effective
date, as set forth in Sec. 1.401(l)-6(b), or, in the case of
governmental plans, as set forth in Sec. 1.401(a)(4)-13(b).
(vi) Transition rule for defined contribution plans. A defined
contribution plan is deemed to satisfy the cumulative permitted
disparity limit for the first plan year to which these regulations
apply, as set forth in Sec. 1.401(l)-6(b), or, in the case of
governmental plans, as set forth in Sec. 1.401(a)(4)-13(b).
(2) Cumulative disparity fraction. An employee's cumulative
disparity fraction is the sum of the employee's total annual disparity
fractions, as defined in paragraph (b)(2) of this section, attributable
to the employee's total years of service under all plans.
(3) Determination of total annual disparity fractions for prior
years. For each of the employee's years of service credited as of the
end of the last plan year beginning before January 1, 1989, not to
exceed 35, under all plans as of that time that are taken into account
under paragraph (a)(3) of this section (whether or not terminated), the
employee's total annual disparity fraction is one. Therefore, if, before
the first plan year beginning on or after January 1, 1989, an employee
never participated in or benefited under any plan taken into account
under paragraph (a)(3) of this
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section, the employee's total annual disparity fractions are determined
without regard to this paragraph (c)(3). An employer may apply the rule
in this paragraph (c)(3) with respect to all employees, using a year
(including the current year) that is chosen by the employer and is later
than 1989. Thus, for example, in lieu of calculating annual disparity
fractions for all plan years, the employer may assume that the full
disparity limit has been used in each prior plan year for which an
employee has been credited with a year of service.
(4) Special rules for greater of formulas and offset arrangements--
(i) Greater of formulas--(A) In general. A defined benefit plan that is
a section 401(l) plan and that provides a benefit equal to the greater
of the benefits determined under two or more formulas is deemed to
satisfy the cumulative permitted disparity limit with respect to an
employee if each of the requirements in paragraphs (c)(4)(i) (B) and (C)
of this section is satisfied. For this purpose, a plan that uses a
fresh-start formula that determines the accrued benefit as the greater
of two amounts under Sec. 1.401(a)(4)-13(c)(4) (ii) or (iii) provides a
benefit equal to the greater of the benefits determined under two or
more formulas.
(B) Separate satisfaction by formulas. Each formula under the plan
would satisfy the cumulative permitted disparity limit if it were the
only formula under the plan. In the case of a current formula that
applies to the employee's total years of service (as, for example, under
Sec. 1.401(a)(4)-13(c)(4) (ii)(B) or (iii)(B)), for purposes of
determining whether that formula would satisfy the cumulative permitted
disparity limit if it were the only formula under the plan, the special
rule for prior years under paragraph (c)(3) of this section may be
disregarded.
(C) Single plan. The employee has never benefited under another plan
taken into account under paragraph (a)(3) of this section that is a
section 401(l) plan or that satisfies section 401(a)(4) by relying on
Sec. 1.401(a)(4)-7. For this purpose, if the benefit under the plan is
offset in an offset arrangement described in paragraph (b)(8)(iii)(B) of
this section, the other plan is disregarded. In addition, a plan does
not fail the requirements of this paragraph (c)(4)(i)(C) merely because
the employee benefits under another defined benefit plan, provided that-
-
(1) With respect to each benefit formula under the plan, no years of
service taken into account under that benefit formula are taken into
account under a benefit formula of the other plan; and
(2) Paragraph (c)(4)(i)(B) of this section would be satisfied if the
plans were treated as a single plan that provided a benefit equal to the
greater of the benefits provided under two or more formulas. For this
purpose, a formula consists of the sum of a formula for the years of
service taken into account under one plan and a formula for the years of
service taken into account under the other plan. Thus, each possible
combination of the formulas under the plans must satisfy paragraph
(c)(4)(i)(B) of this section.
(ii) Offset arrangements--(A) In general. If a defined benefit plan
is a section 401(l) plan and the benefit under the plan (the gross
benefit plan) is offset by the benefit under another plan (the
offsetting plan) in an offset arrangement described in paragraph
(b)(8)(iii)(B) of this section, the gross benefit plan is deemed to
satisfy the cumulative permitted disparity limit with respect to an
employee if each of the requirements in paragraphs (c)(4)(ii) (B) and
(C) of this section is satisfied.
(B) Separate satisfaction by plans. This requirement is satisfied if
the gross benefit plan would satisfy the cumulative disparity limit if
no offset applied, and the offsetting plan satisfies the cumulative
permitted disparity limit, not taking into account the gross benefit
plan.
(C) No other plan. Except for the plans in the offset arrangement,
the employee has never benefited under another plan taken into account
under paragraph (a)(3) of this section that is a section 401(l) plan or
that satisfies section 401(a)(4) by relying on Sec. 1.401(a)(4)-7. An
offset arrangement does not fail the requirements of this paragraph
(c)(4)(ii)(C) merely because the employee benefits under another defined
benefit plan, provided no years
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of service taken into account under a benefit formula of any plan in the
offset arrangement are also taken into account under a benefit formula
of the other plan.
(5) Examples. The following examples illustrate this paragraph (c).
In each example the plan is noncontributory and, unless provided
otherwise, is the only plan ever maintained by the employer. Each plan
uses a normal retirement age of 65 and contains no provision that would
require a reduction in the 0.75-percent factor under Sec. 1.401(l)-
3(b)(2) or (3). Each example discusses the benefit formula applicable to
an employee who has a social security retirement age of 65.
Example 1. Plan M is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to covered compensation, plus 1.75 percent of average annual
compensation above covered compensation, for each year of service
without limit. The disparity provided under the plan for the plan year
is 0.75 percent, the excess benefit percentage of 1.75 percent minus the
base benefit percentage of 1 percent. The maximum excess allowance for
the plan year is 0.75 percent. Thus, each employee's annual defined
benefit excess plan disparity fraction under the plan for each plan year
is one. Because the plan contains no limit on the years of service taken
into account under the plan, the sum of the total annual disparity
fractions for a potential employee with more than 35 years of service
will exceed 35. In addition, the plan does not provide that the overall
permitted disparity limits may not be exceeded as required by paragraph
(a)(2) of this section. The plan therefore does not satisfy the
cumulative permitted disparity limit of this paragraph (c).
Example 2. Plan N is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.75 percent of final average compensation up to the lesser of covered
compensation and average annual compensation, for each year of service
up to 35. The disparity provided under the plan for the plan year is
0.75 percent, the offset percentage. The maximum offset allowance for
the plan year is 0.75 percent. Thus, each employee's annual offset plan
disparity fraction under the plan for each plan year is one. Because the
plan limits the years of service taken into account under the plan to
35, the sum of the total annual disparity fractions for an employee
cannot exceed 35. The plan therefore satisfies the cumulative permitted
disparity limit of this paragraph (c).
Example 3. Plan O is a defined benefit excess plan that provides a
normal retirement benefit of 0.75 percent of average annual compensation
up to covered compensation, plus 1.25 percent of average annual
compensation above covered compensation, for each year of service up to
45. The disparity provided under the plan for the plan year is 0.5
percent, the excess benefit percentage of 1.25 percent minus the base
benefit percentage of 0.75 percent. The maximum excess allowance for the
plan year is 0.75 percent. Thus, each employee's annual defined benefit
excess plan disparity fraction under the plan for each plan year is 0.67
(0.5 percent divided by 0.75 percent). Because the plan limits the years
of service taken into account under the plan to 45, the sum of the total
annual disparity fractions for an employee cannot exceed 30 (0.67 x 45).
The plan therefore satisfies the cumulative permitted disparity limit of
this paragraph (c).
Example 4. (a) Plan P is a defined contribution excess plan. Plan P
provides a base contribution percentage of 6 percent and an excess
contribution percentage of 11.7 percent, thus providing disparity of 5.7
percent for the plan year. Because the maximum excess allowance for each
plan year under Plan P is 5.7 percent, each employee's annual defined
contribution plan disparity fraction under Plan P for each plan year is
one. Plan Q is a defined benefit excess plan maintained by the same
employer. Plan Q provides a base benefit percentage of 1 percent and an
excess benefit percentage of 1.75 percent for each year of service up to
35, thus providing disparity of 0.75 percent for the plan year. Because
the maximum excess allowance for each plan year under Plan Q is 0.75
percent, each employee's annual defined benefit excess plan disparity
fraction under Plan Q for each plan year is one.
(b) Employee A benefits under Plan P for the 1980 through the 1994
plan years. The sum of Employee A's total annual disparity fractions
under Plan P is 15. (Under paragraph (c)(3)(i) of this section, Employee
A's annual disparity fraction for each year of service as of the end of
the 1988 plan year is one.) As of the 1995 plan year, Employee A no
longer benefits under Plan P and begins to benefit under Plan Q for the
first time. In order to satisfy the cumulative permitted disparity limit
of this paragraph (c), Plan Q must provide that no disparity will be
provided if the sum of an employee's total annual disparity fractions
reaches 35, taking into account the employee's annual defined
contribution plan disparity fractions under Plan P as well as the
employee's annual defined benefit excess plan disparity fractions under
Plan Q. Thus, after Employee A has benefited under Plan Q for 20 years,
Plan Q may not provide any disparity in additional benefits accrued for
Employee A.
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Example 5. (a) Plan O is a noncontributory defined benefit excess
plan. Plan O provides an employee whose social security retirement age
is 65 with the greater of the benefits determined under two formulas.
The first formula provides a benefit of 1 percent of average annual
compensation up to covered compensation, plus 1.75 percent of average
annual compensation above covered compensation, for each year of service
up to 35. The second formula provides a benefit of 1 percent of average
annual compensation up to covered compensation, plus 1.6 percent of
average annual compensation above covered compensation, for each year of
service up to 40.
(b) Under paragraph (b)(4) of this section, an employee's annual
defined benefit excess plan fraction for each of the 35 years under the
first formula is 0.75/0.75 or one, and an employee's annual defined
benefit excess plan fraction for each of the 40 years under the second
formula is 0.6/0.75 or 0.8. Under paragraph (b)(8)(ii) of this section,
an employee's annual defined benefit excess plan fraction (and total
annual disparity fraction because the employee benefits only under Plan
O) for the plan year is the larger fraction under the two formulas or
one. Therefore, after 35 years, the employee has a cumulative disparity
fraction of 35. The disparity provided under the second formula for
years of service after 35 thus exceeds the cumulative permitted
disparity limit unless the plan qualifies for the special rule in
paragraph (c)(4)(i) of this section.
(c) Assume the condition in paragraph (c)(4)(i)(C) of this section
is satisfied because no employee has benefited under another plan taken
into account under paragraph (a)(3) of this section. In addition, the
largest cumulative disparity fraction possible under the first formula
is 35 times one or 35, and the largest cumulative disparity fraction
possible under the second formula is 40 times 0.8 or 32. Thus, the
requirement of paragraph (c)(4)(i)(B) of this section is also satisfied
because each formula would satisfy the cumulative permitted disparity
limit if it were the only formula under the plan. Under paragraph
(c)(4)(i) of this section, the plan is deemed to satisfy the cumulative
permitted disparity limit with respect to an employee whose social
security retirement age is 65.
(d) Additional rules. The Commissioner may prescribe additional
rules under this section as the Commissioner considers appropriate.
Additional rules may include (without being limited to) rules for
computing the fractions described in this section with respect to
terminated plans, rules for applying the overall permitted disparity
limits to employees who benefit under plans maintained by railroad
employers, and rules for determining which plans do not satisfy section
401(l) if the overall permitted disparity limits are exceeded.
[T.D. 8359, 56 FR 47634, Sept. 19, 1991; 57 FR 10819, 10952, Mar. 31,
1992, as amended by T.D. 8486, 58 FR 46833, Sept. 3, 1993]
Sec. 1.401(l)-6 Effective dates and transition rules.
(a) Statutory effective date--(1) In general. Except as otherwise
provided in paragraph (a)(2) of this section, section 401(a)(5)(C) is
effective for plan years beginning on or after January 1, 1989, and
section 401(l) is effective with respect to plan years, and benefits
attributable to plan years, beginning on or after January 1, 1989. The
preceding sentence is applicable to a plan without regard to whether the
plan was in existence as of a particular date.
(2) Collectively bargained plans. (i) In the case of a plan
maintained pursuant to 1 or more collective bargaining agreements
between employee representatives and 1 or more employers ratified before
March 1, 1986, sections 401(a)(5) and 401(l) are applicable for plan
years beginning on or after the later of--
(A) January 1, 1989; or
(B) The date on which the last of such collective bargaining
agreements terminates (determined without regard to any extension of any
such agreement occurring on or after March 1, 1986). However,
notwithstanding the preceding sentence, sections 401(a)(5) and 401(l)
apply to plans described in this paragraph (a)(2) no later than the
first plan year beginning after January 1, 1991.
(ii) For purposes of paragraph (a)(2)(i)(B) of this section, a
change made after October 22, 1986, in the terms or conditions of a
collectively bargained plan, pursuant to a collective bargaining
agreement ratified before March 1, 1986, is not treated as a change in
the terms and conditions of the plan.
(iii) In the case of a collectively bargained plan described in
paragraph (a)(2)(i) of this section, if the date in paragraph
(a)(2)(i)(B) of this section precedes November 15, 1988, then the date
in this paragraph (a)(2) is replaced with the date on which the last of
any
[[Page 305]]
collective bargaining agreements in effect on November 15, 1988,
terminates, provided that the plan complies during this period with a
reasonable good faith interpretation of section 401(l).
(iv) Whether a plan is maintained pursuant to a collective
bargaining agreement 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 is not 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 of this chapter for other requirements for a plan to
be considered to be collectively bargained.
(b) Regulatory effective date--(1) In general. Except as otherwise
provided in paragraph (b)(2) of this section, Secs. 1.401(l)-1 through
1.401(l)-6 apply to plan years beginning on or after January 1, 1994.
(2) Plans of tax-exempt organizations. In the case of plans
maintained by an organization exempt from income taxation under section
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective
plans), Secs. 1.401(l)-1 through 1.401(l)-6 apply to plan years
beginning on or after January 1, 1996.
(3) Defined contribution plans. A defined contribution plan
satisfies section 401(l) with respect to a plan year beginning on or
after the effective date of these regulations, as set forth in
paragraphs (b)(1) and (b)(2) of this section, if it satisfies the
applicable requirements of Secs. 1.401(l)-1 through 1.401(l)-5 for the
plan year.
(4) Defined benefit plans. A defined benefit excess plan or offset
plan satisfies section 401(l) with respect to all plan years, and
benefits attributable to all plan years, beginning on or after the
effective date of these regulations, as set forth in paragraphs (b)(1)
and (b)(2) of this section, by satisfying the applicable requirements of
Secs. 1.401(l)-1 through 1.401(l)-5 and the requirements of
Sec. 1.401(a)(4)-13(c) (and Sec. 1.401(a)(4)-13(d), if applicable),
using a fresh-start date that is on or after December 31, 1988, and
before the effective date of these regulations. A defined benefit excess
plan or offset plan that does not satisfy section 401(l) with respect to
all plan years beginning on or after the effective date of these
regulations may, under the rules of Sec. 1.401(a)(4)-13(c) (and
Sec. 1.401(a)(4)-13(d), if applicable), satisfy section 401(l) for plan
years beginning after a fresh-start date by satisfying the applicable
requirements of Secs. 1.401(l)-1 through 1.401(l)-5 after the fresh-
start date.
(c) Compliance during transition period. For plan years beginning on
or after January 1, 1989, and before the effective date of these
regulations, as set forth in paragraph (b) of this section, a plan must
be operated in accordance with a reasonable, good faith interpretation
of section 401(l). Whether a plan is operated in accordance with a
reasonable, good faith interpretation of section 401(l) 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(l) if it is
operated in accordance with the terms of Secs. 1.401(l)-1 through
1.401(l)-5.
[T.D. 8486, 58 FR 46835, Sept. 3, 1993]
Sec. 1.401(m)-0 Employee and matching contributions, table of contents.
This section contains the captions that appear in Secs. 1.401(m)-1
and 1.401(m)-2.
Sec. 1.401(m)-1 Employee and matching contributions.
(a) General rules.
(1) Nondiscriminatory amount of contributions.
(2) Other nondiscrimination rules.
(3) Rules applicable to collectively bargained plans.
(b) Actual contribution percentage test.
(1) General rule.
(2) Plan provision requirement.
(3) Aggregation of plans.
(i) General rule.
(ii) Restructuring and Permissive Disaggregation.
(4) Employee and matching contributions taken into account under the
actual contribution percentage test.
(i) Employee contributions.
(A) General rule.
(B) Recharacterized elective contributions.
(ii) Matching contributions.
[[Page 306]]
(A) General rule.
(B) Matching contributions and qualified nonelective contributions
used to satisfy actual deferral percentage test.
(C) Treatment of forfeited matching contributions.
(5) Qualified nonelective contributions and elective contributions
that may be taken into account under the actual contribution percentage
test.
(c) Additional requirements.
(1) Coordination with other plans.
(2) Recordkeeping requirement.
(3) Consistent application of separate line of business rules.
(d) Examples.
(e) Correction of excess aggregate contributions.
(1) General rule.
(i) Permissible correction methods.
(ii) Combination of correction methods.
(iii) Impermissible correction methods.
(iv) Partial correction.
(2) Amount of excess aggregate contributions.
(i) General rule.
(ii) Coordination with correction of excess contributions.
(iii) Correction of family members.
(3) Corrective distribution of excess aggregate contributions (and
income).
(i) General rule.
(ii) Income allocable to excess aggregate contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating income.
(D) Safe harbor method of allocating gap period income.
(E) Allocable income for recharacterized elective contributions.
(iii) No employee or spousal consent required.
(iv) Treatment of corrective distributions and forfeited
contributions 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 aggregate contributions.
(vi) No reduction of required minimum distribution.
(vii) No corrective distribution of matching contributions other
than excess aggregate contributions.
(4) Coordination with section 401(a)(4).
(5) 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.
(6) Examples.
(f) Definitions.
(1) Actual contribution percentage.
(i) General rule.
(ii) Actual contribution ratio.
(A) General rule.
(B) Highly compensated employee eligible under more than one plan.
(C) Employees subject to family aggregation rules.
(1) Aggregation of employee contributions and other amounts.
(2) Effect on actual contribution percentage of nonhighly
compensated employees.
(3) Multiple family groups.
(2) Compensation.
(3) Elective contributions.
(4) Eligible employee.
(i) General.
(ii) Certain one-time elections.
(5) Employee.
(6) Employee contributions.
(7) Employer.
(8) Excess aggregate contributions.
(9) Excess contributions.
(10) Excess deferrals.
(11) Highly compensated employee.
(12) Matching contributions.
(i) In general.
(ii) Employer contributions made on account of employee or elective
contributions.
(iii) Contributions used to meet the requirements of section 416.
(13) Nonelective contributions.
(14) Plan.
(15) Qualified nonelective contributions.
(16) Section 401(k) plan.
(17) Section 401(m) plan.
(g) Effective dates.
(1) General rule.
(2) Collectively bargained plans.
(3) Certain annuity contracts.
(4) State and local government plans.
(5) Transition rule for plan years beginning before 1992.
(i) General rule.
(ii) Restructuring.
(A) General rule.
(B) Identification of component plans.
(1) Minimum coverage requirement.
(2) Commonality requirement.
Sec. 1.401(m)-2 Multiple Use of alternative limitation.
(a) In general.
(b) General rule for determination of multiple use.
(1) In general.
(2) Alternative limitation.
(3) Aggregate limit.
(i) In general.
(ii) Relevant actual deferral percentage and relevant actual
contribution percentage defined.
(iii) Examples.
(c) Correction of multiple use.
(1) In general.
(2) Treatment of required reduction.
[[Page 307]]
(3) Required reduction.
(4) Examples.
(d) Effective date.
(1) General rule.
(2) Transition rule.
[T.D. 8357, 56 FR 40534, Aug. 15, 1991, as amended by T.D. 8376, 56 FR
63432, Dec. 4, 1991; T.D. 8581, 59 FR 66175, Dec. 23, 1994]
Sec. 1.401(m)-1 Employee and matching contributions.
(a) General Rules--(1) Nondiscriminatory amount of contributions. A
defined contribution plan does not satisfy section 401(a)(4) for a plan
year unless the amount of employee and matching contributions to the
plan for the plan year satisfies section 401(a)(4). See
Sec. 1.401(a)(4)-1(b)(2)(ii). Except as specifically provided otherwise,
for plan years beginning after December 31, 1986 (or such later date
provided in paragraph (g) of this section) the amount of employee and
matching contributions under a plan satisfies the requirements of
section 401(a)(4) only if the employee and matching contributions under
the plan satisfy the actual contribution percentage test of section
401(m)(2) and paragraph (b) of this section. See Sec. 1.401(a)(4)-
1(b)(2)(ii)(B). Also, except as specifically provided otherwise, for
plan years beginning after December 31, 1988 (or such later date
provided in Sec. 1.401(m)-2(d)), the amount of employee and matching
contributions under a plan satisfies the requirements of sections 401(m)
and 401(a)(4) only if any multiple use of the alternative methods of
compliance with sections 401 (k) and (m) (contained in sections
401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii), respectively) is corrected
under Sec. 1.401(m)- 2(c). See section 401(m)(9) and Sec. 1.401(m)-2.
For these purposes, the employee and matching contributions are combined
with the elective and qualified nonelective contributions, if any, that
are treated as matching contributions, and the recharacterized elective
contributions, if any, that are treated as employee contributions for
purposes of section 401(m).
(2) Other nondiscrimination rules. Nondiscrimination requirements in
addition to those described in paragraph (a)(1) of this section apply to
employee and matching contributions under sections 401(a)(4) and 410(b).
For example, under section 401(a)(4) a plan may not discriminate with
respect to the availability of benefits, rights, and features under the
plan. See Sec. 1.401(a)(4)-1(b)(3). The right to make each level of
employee contributions, and the right to each level of matching
contributions, are benefits, rights, or features subject to this
requirement, and each level must therefore generally be available to a
group of employees that satisfies section 410(b). See Sec. 1.401(a)(4)-
4(e)(3) (i) and (iii) (F) through (G). Thus, for example, a plan does
not satisfy section 401(a)(4) if it provides a higher rate of matching
contributions for highly compensated employees than for nonhighly
compensated employees. See paragraph (e)(4) of this section for rules
relating to the application of section 401(a)(4) to the correction of
excess aggregate contributions. See Sec. 1.401(a)(4)-11(g)(3)(vii) for
special rules relating to correction of violations of the minimum
coverage requirements or discriminatory rates of match in a section
401(m) plan. For special rules governing the application of section
410(b) to employee and matching contributions, see Secs. 1.410(b)-
7(c)(1) and 1.410(b)-8(a)(1).
(3) Rules applicable to collectively bargained plans. The
requirements of this section are treated as satisfied by employee and
matching contributions under a collectively bargained plan (or the
portion of a plan) that automatically satisfies section 410(b). See
Secs. 1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7). There are no excess
aggregate contributions under a plan (or a portion of a plan) that is
treated under this paragraph (a)(3) as satisfying the requirements of
this section. Thus, the provisions of section 4979 and Sec. 54.4979-1 of
this chapter do not apply to contributions described in the first
sentence of this paragraph (a)(3).
(b) Actual contribution percentage test--(1) General rule. (i) For
plan years beginning after December 31, 1986, or such later date
provided in paragraph (g) of this section, the actual contribution
percentage test is satisfied if--
(A) The actual contribution percentage for the group of eligible
highly compensated employees is not more than the actual contribution
percentage for the group of all other eligible employees multiplied by
1.25; or
[[Page 308]]
(B) The excess of the actual contribution percentage for the group
of eligible highly compensated employees over the actual contribution
percentage for the group of all other eligible employees is not more
than two percentage points, and the actual contribution percentage for
the group of eligible highly compensated employees is not more than the
actual contribution percentage for the group of all other eligible
employees multiplied by two.
(ii) A plan does not fail to satisfy the requirements of this
paragraph (b)(1) merely because all of the eligible employees under the
plan for a year are highly compensated employees.
(2) Plan provision requirement. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (g) of this
section, a plan that permits employee or matching contributions does not
satisfy the requirements of section 401(a) unless it provides that the
actual contribution percentage test of section 401(m)(2) will be met.
For purposes of this paragraph (b)(2), the plan may incorporate the
provisions of section 401(m)(2), this paragraph (b), and, if applicable,
section 401(m)(9) and Sec. 1.401(m)-2.
(3) Aggregation of plans--(i) General rule. See Sec. 1.401(m)-
1(f)(14) for the definition of a plan used for purposes of this section
and Sec. 1.401(m)-2. That definition contains the exclusive rules for
aggregation and disaggregation of plans for purposes of this section and
Sec. 1.401(m)-2.
(ii) Restructuring and Permissive Disaggregation. Effective for plan
years beginning after December 31, 1991, restructuring under
Sec. 1.401(a)(4)-9(c) may not be used to demonstrate compliance with the
requirements of section 401(m). See Sec. 1.401(a)(4)- 9(c)(3)(ii). For
plan years beginning before January 1, 1992, see Sec. 1.401(m)-
1(g)(5)(ii). An employer may, however, treat a plan benefiting otherwise
excludable employees as two separate plans for purposes of sections
401(m) and 410(b) in accordance with Secs. 1.410(b)-6(b)(3) and
1.410(b)-7(c)(3).
(4) Employee and matching contributions taken into account under the
actual contribution percentage test--(i) Employee contributions--(A)
General rule. An employee contribution is taken into account under
paragraph (b)(1) of this section for the plan year in which the
contribution is made to the trust. For this purpose, a payment by the
employee to an agent of the plan is treated as a contribution to the
trust at the time of payment to the agent if the funds paid are
transmitted to the trust within a reasonable period after the payment to
the agent.
(B) Recharacterized elective contributions. An excess contribution
that is recharacterized under Sec. 1.401(k)-1(f)(3) is taken into
account as an employee contribution for the plan year that includes the
time at which the excess contribution is includible in the gross income
of the employee under Sec. 1.401(k)-1(f)(3)(ii).
(ii) Matching contributions--(A) General rule. A matching
contribution is taken into account under paragraph (b)(1) of this
section for a plan year only if the contribution is allocated to the
employee's account under the terms of the plan as of any date within the
plan year, is actually paid to the trust no later than 12 months after
the close of the plan year, and is made on behalf of an employee on
account of the employee's elective contributions or employee
contributions for the plan year. Matching contributions that do not
satisfy these requirements are not taken into account under paragraph
(b)(1) of this section for any plan year. Instead, the amount of these
matching contributions must satisfy the requirements of section
401(a)(4) (without regard to the special nondiscrimination rule in
paragraph (b)(1) of this section) for the plan year for which they are
allocated under the plan, as if they were nonelective contributions and
were the only nonelective employer contributions for that year. See
Secs. 1.401(a)(4)-1(b)(2)(ii)(B); 1.410(b)-7(c)(1).
(B) Matching contributions and qualified nonelective contributions
used to satisfy actual deferral percentage test. A matching contribution
that is treated as an elective contribution is subject to the actual
deferral percentage test of section 401(k)(3) and is not taken into
account under paragraph (b)(1) of this section. See Sec. 1.401(k)-
1(b)(5)(iii) for the rule relating to years before January 1, 1987. A
qualified nonelective
[[Page 309]]
contribution that is treated as an elective contribution is subject to
the actual deferral percentage test of section 401(k)(3) and is not
taken into account as a matching contribution under paragraph (b)(1) or
(5) of this section.
(C) Treatment of forfeited matching contributions. A matching
contribution that is forfeited to correct excess aggregate
contributions, or because the contribution to which it relates is
treated as an excess contribution, excess deferral, or excess aggregate
contribution, is not taken into account under paragraph (b)(1) of this
section.
(5) Qualified nonelective contributions and elective contributions
that may be taken into account under the actual contribution percentage
test. Except as specifically provided otherwise, for purposes of
paragraph (b)(1) of this section, all or part of the qualified
nonelective contributions and elective contributions made with respect
to any or all employees who are eligible employees under the plan of the
employer being tested may be treated as matching contributions provided
that each of the following requirements (to the extent applicable) is
satisfied:
(i) The amount of nonelective contributions, including those
qualified nonelective contributions treated as matching contributions
for purposes of the actual contribution percentage test, satisfies the
requirements of section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2).
(ii) The amount of nonelective contributions, excluding those
qualified nonelective contributions treated as matching contributions
for purposes of the actual contribution percentage test and those
qualified nonelective contributions treated as elective contributions
under Sec. 1.401(k)-1(b)(5) for purposes of the actual deferral
percentage test, satisfies the requirements of section 401(a)(4). See
Sec. 1.401(a)(4)-1(b)(2).
(iii) The elective contributions, including those treated as
matching contributions for purposes of the actual contribution
percentage test, satisfy the requirements of section 401(k)(3).
(iv) The qualified nonelective contributions are allocated to the
employee under the plan as of a date within the plan year (within the
meaning of Sec. 1.401(k)-1(b)(4)(i)(A)), and the elective contributions
satisfy Sec. 1.401(k)-1(b)(4)(i) for the plan year.
(v) For plan years beginning after December 31, 1988, or such later
date provided in paragraph (g) of this section, the plan that takes
qualified nonelective contributions and elective contributions into
account in determining whether employee and matching contributions
satisfy the requirements of section 401(m)(2)(A), and the plans to which
the qualified nonelective contributions and elective contributions are
made, could be aggregated under Sec. 1.410(b)-7(d) after application of
the mandatory disaggregation rules of Sec. 1.410(b)-7(c), as modified in
Sec. 1.401(k)-1(g)(11). If the plan year of the section 401(m) plan is
changed to satisfy the requirement under Sec. 1.410(b)-7(d)(5) that the
aggregated plans have the same plan year, the elective contributions may
be taken into account in the resulting short plan year only if these
contributions satisfy the requirements of Sec. 1.401(k)-1(b)(4) with
respect to the short year, and the qualified nonelective contributions
may be taken into account in the resulting short plan year only if these
contributions satisfy the requirements of Sec. 1.401(k)-1(b)(4)(i)(A)
with respect to the short year as if they were elective contributions.
(c) Additional requirements--(1) Coordination with other plans.
Except as expressly permitted under section 401(k) or 401(m), for plan
years beginning after December 31, 1988, or such later date provided in
paragraph (g) of this section, employee or matching contributions (or
elective contributions treated as matching contributions under paragraph
(b)(5) of this section) may not be taken into account for purposes of
determining whether any other contributions under any plan (including
the plan to which the employee or matching contributions are made)
satisfy the requirements of section 401(a). Indeed, the portion of a
plan that consists of employee and matching contributions is treated as
a separate plan for purposes of sections 401(a)(4) and 410(b). See
Sec. 1.410(b)-7(c)(1). Similarly, although matching contributions and
qualified nonelective contributions may be used to enable a
[[Page 310]]
plan to satisfy the minimum contribution or benefit requirements under
section 416, matching contributions that are used in this way are not
treated as matching contributions, and must therefore satisfy the
nondiscrimination requirements of section 401(a)(4) without regard to
section 401(k) or 401(m). See Sec. 1.416-1, M-18 & M-19 and paragraph
(f)(12)(iii) of this section. See also Sec. 1.401(k)-1(b)(5) for
circumstances under which matching contributions may be used to
determine whether a plan satisfies the requirements of section 401(k).
This paragraph does not apply for purposes of determining whether a plan
satisfies the average benefit percentage test of section
410(b)(2)(A)(ii).
(2) Recordkeeping requirement. A plan satisfies this section only if
the employer maintains the records necessary to demonstrate compliance
with the applicable nondiscrimination requirements of paragraph (b) of
this section, including records showing the extent to which qualified
nonelective contributions and elective contributions are taken into
account.
(3) Consistent application of separate line of business rules. If an
employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with Sec. 1.414(r)-1(b) for purposes
of applying section 410(b), and applies the special rule for employer-
wide plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of the plan that
consists of matching contributions or to the portion of the plan that
consists of employee contributions (the ``matching and employee
contribution portions''), then the requirements of this section, section
401(m), and Sec. 1.401(m)-2 must be applied on an employer-wide rather
than a qualified-separate-line-of-business basis to all of the plans or
portions of plans taken into account in determining whether those
requirements are satisfied by the matching and employee contribution
portions of the plan (regardless of whether the other plans or portions
of plans also satisfy the requirements necessary to apply the special
rule in Sec. 1.414(r)-1(c)(2)(ii)). Conversely, if an employer is
treated as operating qualified separate lines of business under section
414(r) in accordance with Sec. 1.414(r)-1(b) for purposes of applying
section 410(b), and does not apply the special rule for employer-wide
plans in Sec. 1.414(r)1-(c)(2)(ii) to either the matching or employee
contribution portions of the plan, then the requirements of this
section, section 401(m) and Sec. 1.401(m)-2 must be applied on a
qualified-separate-line-of-business rather than an employer-wide basis
to all of the plans or portions of plans taken into account in
determining whether those requirements are satisfied by the matching and
employee contribution portions of the plan (regardless of whether one or
more of the other plans or portions of plans is tested under the special
rule Sec. 1.414(r)-1(c)(2)(ii)). This requirement applies solely for
purposes of determining whether the requirements of this section,
section 401(m), and Sec. 1.401(m)-2 are satisfied by the matching and
employee contribution portions of the plan. The rules of this paragraph
are illustrated by the following example.
Example. (i) Employer A maintains a profit-sharing plan that
includes a cash or deferred arrangement in which all of the employees of
Employer A are eligible to participate. Under the profit-sharing plan,
each $1.00 of elective contributions under the cash or deferred
arrangement is matched by $0.50 of employer contributions. Employer A is
treated as operating qualified separate lines of business under section
414(r) in accordance with Sec. 1.414(r)-1(b) for purposes of applying
section 410(b). However, Employer A applies the special rule for
employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of its
profitsharing plan that consists of matching contributions. Employer A
makes qualified nonelective contributions to the profit-sharing plan for
the 1995 plan year.
(ii) Under these facts, the requirements of sections 401(a)(4) and
410(b) must be applied on an employer-wide rather than a qualified-
separate-line-of-business basis in determining whether these qualified
nonelective contributions (and any elective contributions under the cash
or deferred arrangement) satisfy the requirements of Sec. 1.401(m)-
1(b)(5), and thus whether they may be taken into account under the
actual contribution percentage test. Thus, in order for the nonelective
contributions to be used to satisfy the actual contribution percentage
test, both (1) the total amount of nonelective contributions under the
profit-sharing plan, including the qualified nonelective contributions
to be used to satisfy the actual contribution percentage test, and (2)
the total amount of nonelective contributions under the profit-
[[Page 311]]
sharing plan, excluding the qualified nonelective contributions to be
used to satisfy the actual contribution percentage test, must satisfy
the requirements of section 401(a)(4) on an employer-wide basis.
Further, in order for any elective contributions under the cash or
deferred arrangement to be used to satisfy the actual contribution
percentage test, the total amount of elective contributions, including
any treated as matching contributions under the actual contribution
percentage test, must satisfy the requirements of section 401(k)(3) on
an employer-wide basis. Of course, in order for the profit-sharing plan
to satisfy section 401(a), it must still satisfy sections 410(b) and
401(a)(4) on a qualified-separate-line-of-business basis.
(d) Examples. The provisions of paragraphs (a) through (c) of this
section are illustrated by the following examples. Assume in each case
that the employer is a corporation, and that the employer's taxable year
and plan year are the calendar year. Also assume that the employee
contributions, elective contributions, matching contributions and
qualified nonelective contributions meet the applicable requirements of
sections 401(a)(4) and 410. For methods to be used to correct excess
aggregate contributions, see paragraph (e) of this section.
Example 1. (i) Employer L maintains a profit-sharing plan providing
for voluntary employee contributions. L does not maintain a plan that
includes a cash or deferred arrangement. For the 1988 plan year, the
actual contribution percentages (ACPs) for the highly compensated
employees and nonhighly compensated employees are shown in the following
chart:
------------------------------------------------------------------------
Actual
contribution
percentage
------------------------------------------------------------------------
Highly compensated..................................... 10
Nonhighly compensated.................................. 5
------------------------------------------------------------------------
(ii) This plan fails to qualify under either of the tests of section
401(m)(2)(A) because the ACP for highly compensated employees is more
than 125 percent of the ACP for nonhighly compensated employees, and
exceeds the ACP for the nonhighly compensated employees by more than two
percentage points. L must either reduce the ACP for the highly
compensated employees to seven percent (to satisfy the 200 percent/two
percentage point test) or increase the ACP of the nonhighly compensated
employees to eight percent (to satisfy the 125 percent test).
Example 2. (i) Employer M maintains a plan under which each dollar
of employee contributions is matched with $.50 of employer
contributions. M maintains no other plan. For the 1988 plan year, the
average percentage of compensation contributed to the plan for the
employees is shown in the following chart:
------------------------------------------------------------------------
Employee Matching Actual
contributions contributions contribution
(percent) (percent) percentage
------------------------------------------------------------------------
Highly compensated.......... 10 5 15
Nonhighly compensated....... 5 2.5 7.5
------------------------------------------------------------------------
(ii) This plan fails to satisfy either of the tests of section
401(m)(2)(A). Employer M must either reduce the actual contribution
percentage of the highly compensated employees to 9.5 percent (to
satisfy the 200 percent/two percentage point test) or increase the
actual contribution percentage of the nonhighly compensated employees to
12 percent (to satisfy the 125 percent test).
Example 3. (i) Employer N maintains a plan that contains a cash or
deferred arrangement and permits employee contributions. Employer N
includes elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). For the 1988
plan year, the average percentages of compensation contributed to the
plan by the highly compensated and nonhighly compensated employees as
elective contributions and employee contributions are shown in the chart
below. Elective contributions meet the requirements of paragraph (b)(5)
of this section.
------------------------------------------------------------------------
Elective Employee
Contributions Contributions
(percent) (percent)
------------------------------------------------------------------------
Highly compensated...................... 10 10
Nonhighly compensated................... 10 6
------------------------------------------------------------------------
(ii) The plan fails to meet the requirements of section 401(m)
because the actual contribution percentage (ACP) of highly compensated
employees is more than 125 percent of the ACP of the other employees,
and exceeds the ACP of the other employees by more than two percentage
points.
(iii) The plan provides that elective contributions made by
nonhighly compensated employees may be used to meet the requirements of
section 401(m) to the extent needed under that section. Under this
provision, the plan uses elective contributions equal to two percent of
the compensation of the nonhighly compensated employees in the ACP test.
After this adjustment, the actual deferral percentages (ADPs) and ACPs
are as follows:
------------------------------------------------------------------------
ADP (percent) ACP (percent)
------------------------------------------------------------------------
Highly compensated...................... 10 10
Nonhighly compensated................... 8 8
------------------------------------------------------------------------
(iv) The ACP of the highly compensated employees meets the
requirements of section
[[Page 312]]
401(m)(2)(A)(i) because it is 125 percent of that for nonhighly
compensated employees. The ADP of the highly compensated employees
similarly satisfies the 125 percent test. The plan would also meet the
requirements of section 401(m) if all elective contributions were used
in the ACP test. This is because the ACP for the highly compensated
employees (20 percent) would be 125 percent of the ACP for the nonhighly
compensated employees (16 percent).
Example 4. (i) Employer P maintains a plan that includes a cash or
deferred arrangement. Elective contributions, qualified nonelective
contributions (QNCs), employee contributions, and matching contributions
are made to the plan. Employer P includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). The elective
contributions and QNCs meet the requirements of paragraph (b)(5) of this
section. For the 1989 plan year, the QNCs, elective contributions, and
employee and matching contributions, expressed as a percentage of
compensation, are shown in the following table:
------------------------------------------------------------------------
Employee/
QNCs Elective Matching
(percent) Contributions Contributions
(percent) (percent)
------------------------------------------------------------------------
Highly compensated............. 3 5 6
Nonhighly compensated.......... 3 4 2
------------------------------------------------------------------------
(ii) The elective contributions meet the test of section
401(k)(3)(A)(ii). The employee and matching contributions, however, do
not meet the actual contribution percentage (ACP) test. P may not use
any QNCs of the nonhighly compensated employees to meet the ACP test
because the remaining QNCs would discriminate in favor of the highly
compensated employees. However, P could make additional QNCs or matching
contributions of two percent of compensation on behalf of the nonhighly
compensated employees. Alternatively, P could treat all QNCs for all
employees and elective contributions equal to one percent of
compensation for nonhighly compensated employees as matching
contributions and make additional QNCs of 1.2 percent of compensation on
behalf of nonhighly compensated employees. The ACPs for highly and
nonhighly compensated employees would then be nine percent and 7.2
percent, respectively, thus satisfying the 125 percent test. The actual
deferral percentages would be five and three percent, respectively,
which would satisfy the 200 percent/two percentage point test.
Example 5. (i) Employer P maintains a cash or deferred arrangement.
Elective contributions, qualified nonelective contributions (QNCs),
employee contributions, and matching contributions are made to the plan.
The elective contributions and the QNCs meet the requirements of
paragraph (b)(5) of this section. For the 1989 plan year, the
contributions are shown in the following table:
------------------------------------------------------------------------
Employee/
QNCs Elective matching
(percent) contributions contributions
(percent) (percent)
------------------------------------------------------------------------
Highly compensated............. 0 6 6
Nonhighly compensated.......... 3 3 3
------------------------------------------------------------------------
(ii) The QNCs may be used in the actual deferral percentage (ADP)
test, the actual contribution percentage (ACP) test, or a combination of
the two. If P treats one-third of the QNCs as elective contributions and
two-thirds as matching contributions, the ADPs for the highly
compensated and nonhighly compensated employees are six and four
percent, respectively, and satisfy the 200 percent/two percentage point
test. Similarly, the ACPs for the two groups are six and five percent,
respectively, and satisfy the 125 percent test.
(e) Correction of excess aggregate contributions--(1) General rule--
(i) Permissible correction methods. A plan satisfies the requirements of
section 401(m)(2) and paragraph (b)(1) of this section with respect to
the amount of employee and matching contributions under the plan if the
employer, in accordance with the terms of the plan and paragraph (b)(5)
of this section, makes qualified nonelective contributions or elective
contributions that, in combination with employee and matching
contributions, satisfy the actual contribution percentage test. In
addition, a plan subject to the requirements of section 401(m) satisfies
section 401(m)(2) and paragraph (b)(1) of this section if, in accordance
with the terms of the plan, excess aggregate contributions on behalf of
highly compensated employees (and the income allocable to these
contributions) are distributed in accordance with paragraph (e)(3) of
this section. Matching contributions (and the income allocable to
matching contributions) that are not vested (determined without regard
to any increase in vesting that may occur after the date of the
forfeiture) may also be forfeited to correct excess aggregate
contributions. Finally, a plan may limit employee or matching
contributions in a manner that prevents excess aggregate contributions
from being made.
[[Page 313]]
(ii) Combination of correction methods. The plan may permit a
combination of the methods listed in paragraph (e)(1)(i) of this section
to avoid or correct excess aggregate contributions.
(iii) Impermissible correction methods. Excess aggregate
contributions may not be corrected by forfeiting vested matching
contributions, recharacterizing matching contributions, or not making
matching contributions required under the terms of the plan. Excess
aggregate contributions for a plan year may not remain unallocated or be
allocated to a suspense account for allocation to one or more employees
in any future year. In addition, excess aggregate contributions may not
be corrected using the retroactive correction rules of Sec. 1.401(a)(4)-
11(g). See Sec. 1.401(a)(4)-11(g)(3)(vii) and (5). See paragraph (e)(5)
of this section for the effects of a failure to correct excess aggregate
contributions. See Sec. 1.411(a)-4(b)(7) regarding permissible
forfeitures of matching contributions.
(iv) Partial correction. Any distribution of less than the entire
amount of excess aggregate contributions (and income) is treated as a
pro rata distribution of excess aggregate contributions and income.
(2) Amount of excess aggregate contributions--(i) General rule. The
amount of excess aggregate contributions for a highly compensated
employee for a plan year is the amount (if any) by which the employee's
employee and matching contributions must be reduced for the employee's
actual contribution ratio to equal the highest permitted actual
contribution ratio under the plan. To calculate the highest permitted
actual contribution ratio under a plan, the actual contribution ratio of
the highly compensated employee with the highest actual contribution
ratio is reduced by the amount required to cause the employee's actual
contribution ratio to equal the ratio of the highly compensated employee
with the next highest actual contribution ratio. If a lesser reduction
would enable the arrangement to satisfy the actual contribution
percentage test, only this lesser reduction may be made. This process
must be repeated until the plan satisfies the actual contribution
percentage test. The highest actual contribution ratio remaining under
the plan after leveling is the highest permitted actual contribution
ratio. For each highly compensated employee, the amount of excess
aggregate contributions for a plan year is equal to the total employee
and matching contributions, plus qualified nonelective contributions and
elective contributions taken into account in determining the employee's
actual contribution ratio under paragraph (f)(1) of this section, minus
the amount determined by multiplying the employee's actual contribution
ratio (determined after application of this paragraph (e)(2)) by the
compensation used in determining the ratio. In no case may the amount of
excess aggregate contributions with respect to any highly compensated
employee exceed the amount of employee and matching contributions made
on behalf of the highly compensated employee for the plan year.
(ii) Coordination with correction of excess contributions. The
amount of excess aggregate contributions with respect to an employee for
a plan year is calculated after determining the excess contributions to
be recharacterized as employee contributions for the plan year.
(iii) Correction of family members. The determination and correction
of excess aggregate contributions of a highly compensated employee whose
actual contribution ratio is determined under the family aggregation
rules of paragraph (f)(1)(ii)(C) of this section, is accomplished by
reducing the actual contribution ratio as required under this paragraph
(e)(2) and allocating the excess aggregate contributions for the family
group among the family members in proportion to the employee and
matching contributions of each family member that are combined to
determine the actual contribution ratio.
(3) Corrective distribution of excess aggregate contributions (and
income)--(i) Genera1 rule. Excess aggregate contributions (and income
allocable thereto) are distributed in accordance with this paragraph
(e)(3) only if the excess aggregate contributions and allocable income
are designated by the employer as a distribution of excess aggregate
contributions (and income), and are distributed to the appropriate
highly
[[Page 314]]
compensated employees after the close of the plan year in which the
excess aggregate contributions arose and within 12 months after the
close of that plan year. In the event of a complete termination of the
plan during the plan year in which an excess aggregate contribution
arose, the corrective distribution must be made as soon as
administratively feasible after the date of termination of the plan, but
in no event later than 12 months after the date of termination. If the
entire account balance of a highly compensated employee is distributed
during the plan year in which the excess aggregate contribution arose,
the distribution is deemed to have been a corrective distribution of
excess aggregate contributions (and income) to the extent that a
corrective distribution would otherwise have been required.
(ii) Income allocable to excess aggregate contributions--(A) General
rule. The income allocable to excess aggregate contributions is equal to
the sum of the allocable gain or loss for the plan year and, if the plan
so provides, the allocable gain or loss for the period between the end
of the plan year and the date of distribution (the ``gap period'').
(B) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess aggregate
contributions, provided that the method does not violate section
401(a)(4), is used consistently for all participants and for all
corrective distributions under the plan for the plan year, and is used
by the plan for allocating income to participants' accounts. See
Sec. 1.401(a)(4)-1(c)(8).
(C) Alternative method of allocating income. A plan may allocate
income to excess aggregate contributions by multiplying the income for
the plan year (and the gap period, if the plan so provides) allocable to
employee contributions, matching contributions, and amounts treated as
matching contributions by a fraction. The numerator of the fraction is
the excess aggregate contributions for the employee for the plan year.
The denominator of the fraction is equal to the sum of:
(1) The total account balance of the employee attributable to
employee and matching contributions, and amounts treated as matching
contributions as of the beginning of the plan year; plus
(2) The employee and matching contributions, and amounts treated as
matching contributions for the plan year and for the gap period if gap
period income is allocated.
(D) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess aggregate contributions for the gap
period is equal to 10 percent of the income allocable to excess
aggregate contributions for the plan year (calculated under the method
described in paragraph (e)(3)(ii)(C) of this section), multiplied by the
number of calendar months that have elapsed since the end of the plan
year. For purposes of calculating the number of calendar months that
have elapsed under the safe harbor method, a corrective distribution
that is made on or before the fifteenth day of the month is treated as
made on the last day of the preceding month. A distribution made after
the fifteenth day of the month is treated as made on the first day of
the next month.
(E) Allocable income for recharacterized elective contributions. If
recharacterized elective contributions are distributed as excess
aggregate contributions, the income allocable to the excess aggregate
contributions is determined as if recharacterized elective contributions
had been distributed as excess contributions. Thus, income must be
allocated to the recharacterized amounts distributed using the methods
in Sec. 1.401(k)-1(f)(4)(ii).
(iii) No employee or spousal consent required. A distribution of
excess aggregate contributions (and income) may be made under the terms
of the plan without regard to any notice or consent otherwise required
under sections 411(a)(11) and 417.
(iv) Treatment of corrective distributions and forfeited
contributions as employer contributions. Excess aggregate contributions,
including forfeited matching contributions, are treated as employer
contributions for purposes of sections 404 and 415 even if distributed
from the plan. Forfeited matching contributions that are reallocated to
the accounts of other participants for the plan year in which the
forfeiture occurs are treated under section 415 as
[[Page 315]]
annual additions for the participants to whose accounts they are
reallocated and for the participants from whose accounts they are
forfeited.
(v) Tax treatment of corrective distributions--(A) Genera1 rule.
Except as otherwise provided in this paragraph (e)(3)(v), a corrective
distribution of excess aggregate contributions (and income) that is made
within 2\1/2\ months after the end of the plan year for which the excess
aggregate contributions were made is includible in the employee's gross
income for the taxable year of the employee ending with or within the
plan year for which the excess aggregate contributions were made. A
corrective distribution of excess aggregate contributions (and income)
that is made more than 2\1/2\ months after the plan year for which the
excess aggregate contributions were made is includible in the employee's
gross income in the taxable year of the employee in which distributed.
The portion of the distribution that is treated as an investment in the
contract under section 72 is determined without regard to any plan
contributions other than those distributed as excess aggregate
contributions. Regardless of when the corrective distribution is made,
it is not subject to the early distribution tax of section 72(t) and is
not treated as a distribution for purposes of applying the excise tax
under section 4980A. See paragraph (e)(5) of this section for additional
rules relating to the employer excise tax on amounts distributed more
than 2\1/2\ months after the end of the plan year.
(B) Rule for de minimis distributions. If the total excess
contributions and excess aggregate contributions distributed to a
recipient under a plan for any plan year are less than $100 (excluding
income), a corrective distribution of excess aggregate contributions
(and income) is includible in gross income in the recipient's taxable
year in which the corrective distribution is made.
(C) Rule for certain 1987 and 1988 excess aggregate contributions.
Distributions for plan years beginning in 1987 and 1988 to which the de
minimis rule of this paragraph (e)(3)(v) of this section would otherwise
apply may be reported by the recipient, at the recipient's option,
either in the year described in paragraph (e)(3)(v)(A) of this section,
or in the year described in paragraph (e)(3)(v)(B) of this section. This
special rule may be used only for distributions made within 2\1/2\
months after the close of the plan year, but not later than April 17,
1989.
(vi) No reduction of required minimum distribution. A distribution
of excess aggregate contributions (and income) is not treated as a
distribution for purposes of determining whether the plan satisfies the
minimum distribution requirements of section 401(a)(9).
(vii) No corrective distribution of matching contributions other
than excess aggregate contributions. A matching contribution that is an
excess aggregate contribution may be distributed as provided in section
401(m)(6) and Sec. 1.401(m)-1(e)(3). A matching contribution may not be
distributed merely because the contribution to which it relates is
treated as an excess contribution, excess deferral, or excess aggregate
contribution. See Secs. 1.401(k)-1(f)(5)(iii) and 1.411(a)-4(b)(7)
regarding permissible forfeitures of matching contributions that relate
to excess contributions, excess deferrals, or excess aggregate
contributions.
(4) Coordination with section 401(a)(4). A matching contribution is
taken into account under section 401(a)(4) even if it is distributed,
unless the distributed contribution is an excess aggregate contribution.
However, the method of distributing excess aggregate contributions
provided in the plan must satisfy the requirements of section 401(a)(4).
This requires that after correction each level of matching contributions
be currently and effectively available to a group of employees that
satisfies section 410(b). See Sec. 1.401(a)(4)-4(e)(3)(iii)(G). Thus, a
plan that provides the same rate of matching contributions to all
employees will not meet the requirements of section 401(a)(4) if
employee contributions are distributed under this paragraph (e) to
highly compensated employees to the extent needed to meet the
requirements of section 401(m)(2), while matching contributions
attributable to employee contributions remain allocated to the highly
compensated employees' accounts. See Sec. 1.411(a)-4(b)(7) for a rule
that allows forfeiture of
[[Page 316]]
these matching contributions to avoid a violation of section 401(a)(4).
See also Sec. 1.401(a)(4)-11(g)(3)(vii)(B) regarding the use of
additional allocations to the accounts of nonhighly compensated
employees for the purpose of correcting a discriminatory rate of
matching contributions. A method of distributing excess aggregate
contributions will not be considered discriminatory solely because, in
accordance with the terms of the plan, unmatched employee contributions
that exceed the highest rate at which employee contributions are matched
are distributed before matched employee contributions, or matching
contributions are distributed (or forfeited) prior to employee
contributions. See Example 6 in paragraph (e)(6) of this section.
(5) Failure to correct--(i) Failure to correct within 2\1/2\ months
after end of plan year. If a plan does not correct excess aggregate
contributions within 2\1/2\ months after the close of the plan year for
which the excess aggregate contributions are made, the employer will be
liable for a 10 percent excise tax on the amount of the excess aggregate
contributions. See section 4979 and Sec. 54.4979-1. Qualified
nonelective contributions properly taken into account under paragraph
(b)(5) of this section for a plan year may enable a plan to avoid having
excess aggregate contributions, even if the contributions are made after
the close of the 2\1/2\ month period.
(ii) Failure to correct within 12 months after end of plan year. If
excess aggregate contributions are not corrected within 12 months after
the close of the plan year for which they were made, the plan will fail
to meet the requirements of section 401(a)(4) for the plan year for
which the excess aggregate contributions were made and all subsequent
plan years in which the excess aggregate contributions remain in the
plan.
(6) Examples. The principles of this paragraph (e) are illustrated
by the following examples. Assume in each example that no income or loss
is allocable to elective, employee, or matching contributions.
Example 1. (i) Employer A maintains a thrift plan that does not
include a cash or deferred arrangement. In 1990, the actual contribution
percentage (ACP) for nonhighly compensated employees is four percent.
Thus, the ACP for the group of highly compensated employees may not
exceed six percent. The three highly compensated employees who
participate have the following compensation, contributions, and actual
contribution ratios (ACRs):
----------------------------------------------------------------------------------------------------------------
Employee and Actual
Employee Compensation matching contribution
contributions ratio (percent)
----------------------------------------------------------------------------------------------------------------
A........................................................... 100,000 10,000 10
B........................................................... 90,000 6,300 7
C........................................................... 75,000 3,750 5
-----------------
Average................................................. ............... ............... 7.33
----------------------------------------------------------------------------------------------------------------
(ii) The maximum amount of employee and matching contributions
permitted on behalf of A, B, and C is determined by reducing
contributions in order of their ACRs, beginning with the highest ACR.
Thus, A's contribution is first reduced to $7,000 or 7.0 percent. Since
the resulting ACP of 6.33 percent still exceeds the permitted highly
compensated ACP of six percent, the contributions allocated to A and B
must be further reduced to 6.5 percent. This results in an ACP of six
percent, which meets the 200 percent/two percentage point test. The
excess aggregate contributions for A and B are $3,500 and $450,
respectively.
Example 2. (i) Employee A is the sole highly compensated participant
in a cash or deferred arrangement maintained by Employer X. The plan
that includes the arrangement, Plan X, provides a fully vested matching
contribution equal to 50 percent of elective contributions. Plan X is a
calendar year plan. Employer X includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See
Sec. 1.401(k)-1(g)(2)(i). Plan X corrects excess contributions by
recharacterization. For the 1988 plan year, A's compensation is $58,333,
and A's elective contributions are $7,000. The actual deferral
percentages and actual contribution percentages of A and other employees
under Plan X are shown below:
[[Page 317]]
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Employee A.................................... 12 6
Nonhighly compensated......................... 8 4
------------------------------------------------------------------------
(ii) In February 1989, Employer X determines that A's actual
deferral ratio must be reduced to 10 percent, or $5,833, which requires
a recharacterization of $1,167 as an employee contribution. This
increases A's actual contribution ratio to eight percent ($3,500 in
matching contributions plus $1,167 recharacterized as employee
contributions, divided by $58,333 in compensation). Since A's actual
contribution ratio must be limited to six percent for Plan X to satisfy
the actual contribution percentage test, Plan X must distribute $1,167
of A's employee and matching contributions. If $1,167 in matching
contributions is distributed, this will correct the excess aggregate
contributions and will not result in a discriminatory rate of matching
contributions. See Example 8.
Example 3. Same as Example 2, except that in 1988 A also had
elective contributions of $1,313 under Plan Y, maintained by an employer
unrelated to X. In January 1989, A requests and receives a distribution
of $1,000 in excess deferrals from Plan X. Pursuant to the terms of Plan
X, A forfeits the $500 match on the excess deferrals to correct a
discriminatory rate of match (see Example 8). The $1,167 that would
otherwise have been recharacterized for Plan X to satisfy the actual
deferral percentage test is reduced by the $1,000 already distributed as
an excess deferral, leaving $167 to be recharacterized. See
Sec. 1.401(k)-1(f)(5)(i). Pursuant to the terms of Plan X, A forfeits
the $83.50 match on the recharacterized $167 to correct a discriminatory
rate of match. A's actual contribution ratio is now 5.29 percent
($2,916.50 ($3,500-$500-$83.50)) in matching contributions plus $167 in
employee contributions, divided by $58,333 in compensation. Since Plan X
satisfies the actual contribution percentage test, no further
distribution is required or permitted.
Example 4. Same as Example 3, except that A does not request a
distribution of excess deferrals until March 1989. Employer X has
already recharacterized $1,167 as employee contributions. Under
Sec. 1.402(g)-1(e)(6), the amount of excess deferrals is reduced by the
amount of excess contributions that are recharacterized. Because the
amount recharacterized is greater than the excess deferrals, Plan X is
neither required nor permitted to make a distribution of excess
deferrals, and the recharacterization has corrected the excess
deferrals.
Example 5. For the 1987 plan year, Employee B defers $7,000 under
Plan C and $1,000 under plan D. Plans C and D are maintained by
unrelated Employers C and D; both Plans C and D have calendar plan
years. Plan C provides a fully vested, 100 percent matching contribution
and does not take elective contributions into account under section
401(m) or take matching contributions into account under section 401(k).
Employer C determines that B has excess contributions of $600 and excess
aggregate contributions of $1,600. B timely requests and receives a
distribution of the $1,000 excess deferral from Plan C, and pursuant to
the terms of Plan C, forfeits the corresponding $1,000 matching
contribution to correct a discriminatory rate of match (see Example 8).
Plan C provides that excess contributions and excess aggregate
contributions are corrected by distribution. No distribution is required
or permitted to correct the excess contributions because $1,000 has been
distributed from this plan as excess deferrals. The distribution
required to correct the excess aggregate contributions (after forfeiting
the matching contribution) is $600 ($1,600 in excess aggregate
contributions minus $1,000 in forfeited matching contributions). If B
had corrected the excess deferrals of $1,000 by withdrawing $1,000 from
Plan D, Plan C would have had to correct the $600 excess contributions
in Plan C by distributing $600. Since B then would have forfeited $600
(instead of $1,000) in matching contributions, B would have had $1,000
($1,600 in excess aggregate contributions minus $600 in forfeited
matching contributions) remaining of excess aggregate contributions in
Plan C. These would have been corrected by distributing an additional
$1,000 from Plan C.
Example 6. Employee B is the sole highly compensated employee in a
thrift plan under which the employer matches 100 percent of employee
contributions up to two percent of compensation, and 50 percent of
employee contributions up to the next four percent of compensation. For
the 1988 plan year, B has compensation of $100,000. B makes an employee
contribution of $7,000, or seven percent, and receives a four percent
matching contribution of $4,000. Thus, B's actual contribution ratio
(ACR) is 11 percent. The actual contribution percentage for the
nonhighly compensated employees is five percent, and the employer
determines that B's ACR must be reduced to seven percent to comply with
the rules of section 401(m). In this case, the plan satisfies the
requirements of this paragraph if it distributes the unmatched employee
contributions of $1,000, and $2,000 of matched employee contributions
with their related matches of $1,000. This would leave B with four
percent employee contributions, and three percent matching
contributions, for an ACR of seven percent. The plan could instead
distribute all matching contributions. The plan would fail to meet the
requirements of this paragraph if it distributed $4,000 (four percent)
of B's employee contributions and none of B's matching contributions
because this would
[[Page 318]]
result in a discriminatory rate of matching contributions. See
Sec. 1.401(m)-1(e)(2) and (4). See also Example 8.
Example 7. (i) Employee C is a highly compensated employee in
Employer X's thrift plan, which matches 100 percent of employee
contributions up to five percent of compensation. The matching
contribution is vested at the rate of 20 percent per year. In 1991, C
makes $5,000 in employee contributions and receives $5,000 of matching
contributions. C is 60 percent vested in the matching contributions at
the end of the 1991 plan year.
(ii) In February 1992, X determines that C has excess aggregate
contributions of $1,000. The plan provides that only matching
contributions will be distributed as excess aggregate contributions.
(iii) X has two options available in distributing C's excess
contributions. The first option is to distribute $600 of vested matching
contributions and forfeit $400 of nonvested matching contributions.
These amounts are in proportion to C's vested and nonvested interests in
all matching contributions. The second option is to distribute $1,000 of
vested matching contributions, leaving the nonvested matching
contributions in the plan.
(iv) If the second option is chosen, the plan must also provide a
separate vesting schedule for vesting these nonvested matching
contributions. This is necessary because the nonvested matching
contributions must vest as rapidly as they would have had no
distribution been made. Thus, 50 percent must vest in each of the next
two years.
(v) The plan will not satisfy the nondiscriminatory availability
requirement of section 401(a)(4) if only nonvested matching
contributions are distributed because the effect is that matching
contributions for highly compensated employees vest more rapidly than
those for nonhighly compensated employees. See Sec. 1.401(m)-1(e)(4).
Example 8. (i) Employer B maintains a calendar year profit sharing
plan that includes a cash or deferred arrangement. Elective
contributions are matched at the rate of 100 percent. After-tax employee
contributions are permitted under the plan only for nonhighly
compensated employees and are matched at the same rate. No employees
make excess deferrals. Employee A, a highly compensated employee, makes
an $8,000 elective contribution and receives an $8,000 matching
contribution.
(ii) Employer B performs the actual deferral percentage (ADP), the
actual contribution percentage (ACP), and the multiple use tests. To
correct failures of the ADP and ACP tests, the plan distributes to A
$1,000 of excess contributions and $500 of excess aggregate
contributions. After the distributions, A's contributions for the year
are $7,000 of elective contributions and $7,500 of matching
contributions. As a result, A has received a higher effective rate of
matching contributions than nonhighly compensated employees ($7,000 of
elective contributions matched by $7,500 is an effective matching rate
of 107 percent). If this amount remains in A's account without
correction, it will cause the plan to fail to satisfy section 401(a)(4),
because only a highly compensated employee receives the higher matching
contribution rate. The remaining $500 matching contribution may be
forfeited (but not distributed) under section 411(a)(3)(G), if the plan
so provides. The plan could instead correct the discriminatory rate of
matching contributions by making additional allocations to the accounts
of nonhighly compensated employees. See Sec. 1.401(a)(4)-
11(g)(3)(vii)(B) and (6), Example 7.
(f) Definitions. The following definitions apply for purposes of
this section and Sec. 1.401(m)-2 except as otherwise specifically
provided:
(1) Actual contribution percentage--(i) General rule. The actual
contribution percentage for a group of employees for a plan year is the
average of the actual contribution ratios of the employees in the group.
For plan years beginning after December 31, 1988, or such later date
provided in paragraph (g) of this section, actual contribution ratios
and the actual contribution percentage for a group are calculated to the
nearest one-hundredth of a percentage point.
(ii) Actual contribution ratio--(A) General rule. An employee's
actual contribution ratio is the sum of the employee and matching
contributions allocated to the employee's account for the plan year, and
the qualified nonelective and elective contributions treated as matching
contributions for the plan year, divided by the employee's compensation
for the plan year. If an eligible employee makes no employee
contributions and no matching, qualified nonelective contributions, or
elective contributions are taken into account with respect to the
employee, the actual contribution ratio of the employee is zero. See
paragraphs (b)(4), (b)(5), and (f)(2) of this section for rules
regarding the employee and matching contributions, qualified nonelective
and elective contributions, and compensation that are taken into account
in calculating this fraction.
(B) Highly compensated employee eligible under more than one plan.
The actual contribution ratio of a highly compensated employee who is
eligible to
[[Page 319]]
participate in more than one plan of an employer to which employee or
matching contributions are made is calculated by treating all the plans
in which the employee is eligible to participate as one plan. However,
plans that are not permitted to be aggregated under Sec. 1.410(b)-7(c),
as modified in Sec. 1.401(k)-1(g)(11), are not aggregated for this
purpose. For example, if a highly compensated employee with compensation
of $80,000 may receive matching contributions under two plans of an
employer, the employee's actual contribution ratio under each plan is
calculated by dividing the employee's total matching contributions under
both plans by $80,000, unless the plans are required to be
disaggregated. In that case, the actual contribution ratio of the
employee under each plan is to be calculated by dividing the employee's
matching contributions under that plan by $80,000. See paragraph (b)(3)
of this section for the treatment of certain multiple plans. For plan
years beginning after December 31, 1988, or such later date provided in
paragraph (g) of this section, if a highly compensated employee
participates in two or more plans that have different plan years, this
paragraph (f)(1)(ii) is applied by treating all plans whose plan years
end with or within the same calendar year as a single plan.
(C) Employees subject to family aggregation rules--(1) Aggregation
of employee contributions and other amounts. For plan years beginning
after December 31, 1986, or such later date provided in paragraph (g) of
this section, if a highly compensated employee is subject to the family
aggregation rules of section 414(q)(6) because that employee is either a
five-percent owner or one of the 10 most highly compensated employees,
the combined actual contribution ratio for the family group (treated as
one highly compensated employee) must be determined by combining the
employee contributions, matching contributions, amounts treated as
matching contributions, and compensation of all family members.
(2) Effect on actual contribution percentage of nonhighly
compensated employees. The employee and matching contributions, amounts
treated as matching contributions, and compensation of all family
members are disregarded for purposes of determining the actual
contribution percentage for the group of highly compensated employees,
and the group of nonhighly compensated employees.
(3) Multiple family groups. If an employee is required to be
aggregated as a member of more than one family group in a plan, all
eligible employees who are members of those family groups that include
that employee are aggregated as one family group.
(2) Compensation. The term compensation means compensation as
defined in Sec. 1.401(k)-1(g)(2)(i).
(3) Elective contributions. The term ``elective contribution'' means
elective contribution as defined in Sec. 1.401(k)-1(g)(3).
(4) Eligible employee--(i) General rule. The term ``eligible
employee'' means an employee who is directly or indirectly eligible to
make an employee contribution or to receive an allocation of matching
contributions (including matching contributions derived from
forfeitures) under the plan for a plan year. For example, if an employee
must perform ministerial or mechanical acts (e.g., formal application
for participation or consent to payroll withholding) in order to be
eligible to make an employee contribution for a plan year, the employee
is an eligible employee for the plan year without regard to whether the
employee performs these acts. An employee who is unable to make an
employee contribution or to receive an allocation of matching
contributions because the employee has not contributed to another plan
is also an eligible employee. By contrast, if an employee must perform
additional service (e.g., satisfy a minimum period of service
requirement) in order to be eligible to make an employee contribution or
to receive an allocation of matching contributions for a plan year, the
employee is not an eligible employee for the plan year unless the
service is actually performed. An employee who would be eligible to make
employee contributions but for a suspension due to a distribution, a
loan, or an election not to participate in the plan, is an eligible
employee for purposes of section
[[Page 320]]
401(m) for a plan year even though the employee may not make an employee
contribution or receive an allocation of matching contributions by
reason of the suspension. Finally, an employee does not fail to be an
eligible employee merely because the employee may receive no additional
annual additions because of section 415(c)(1) or 415(e).
(ii) Certain one-time elections. An employee is not an eligible
employee merely because the employee, upon commencing employment with
the employer or upon the employee's first becoming eligible under any
plan of the employer providing for employee or matching contributions,
is given a one-time opportunity to elect, and the employee does in fact
elect, not to be eligible to make employee contributions or to receive
allocations of matching contributions under the plan or any other plan
maintained by the employer (including plans not yet established) for the
duration of the employee's employment with the employer. In no event is
an election made after December 23, 1994 treated as a 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.
(5) Employee. The term ``employee'' means an employee as defined in
Sec. 1.401(k)-1(g)(5).
(6) Employee contributions. The term ``employee contribution'' means
any mandatory or voluntary contribution to the plan that is treated at
the time of contribution as an after-tax employee contribution (e.g., by
reporting the contribution as taxable income subject to applicable
withholding requirements) and is allocated to a separate account to
which the attributable earnings and losses are allocated. See
Sec. 1.401(k)-1(a)(2)(ii). The term includes:
(i) Employee contributions to the defined contribution portion of a
plan described in section 414(k);
(ii) Employee contributions to a qualified cost-of-living
arrangement described in section 415(k)(2)(B);
(iii) Employee contributions applied to the purchase of whole life
insurance protection or survivor benefit protection under a defined
contribution plan;
(iv) Amounts attributable to excess contributions within the meaning
of section 401(k)(8)(B) that are recharacterized as employee
contributions; and
(v) Employee contributions to an annuity contract described in
section 403(b).
The term does not include repayment of loans, repayment of distributions
described in section 411(a)(7)(C), or employee contributions that are
transferred to a plan from another plan. For purposes of this paragraph
(f)(6), employee contributions described in paragraph (f)(6)(ii) of this
section are deemed contributed to a defined contribution plan.
(7) Employer. The term ``employer'' means the employer as defined in
Sec. 1.401(k)-1(g)(6).
(8) Excess aggregate contributions. The term ``excess aggregate
contribution'' means, with respect to any plan year, the excess of the
aggregate amount of the employee and matching contributions (and any
qualified nonelective contribution or elective deferral taken into
account in computing the contribution percentage) actually made on
behalf of highly compensated employees for the plan year, over the
maximum amount of contributions permitted under the limitations of
section 401(m)(2)(A). The amount of excess aggregate contributions for
each highly compensated employee is determined by using the method
described in paragraph (e)(2) of this section. For purposes of this
paragraph, qualified matching contributions treated as elective
contributions in accordance with Sec. 1.401(k)-1(b)(5) are disregarded.
(9) Excess contributions. The term ``excess contribution'' means an
excess contribution as defined in Sec. 1.401(k)-1(g)(7)(i).
(10) Excess deferrals. The term ``excess deferrals'' means excess
deferral as defined in Sec. 1.402(g)-1(e)(1)(iii).
(11) Highly compensated employee. The term ``highly compensated
employee'' means a highly compensated employee as defined in section
414(q).
(12) Matching contributions--(i) In general. The term ``matching
contribution'' means:
[[Page 321]]
(A) Any employer contribution (including a contribution made at the
employer's discretion) to a defined contribution plan on account of an
employee contribution to a plan maintained by the employer;
(B) Any employer contribution (including a contribution made at the
employer's discretion) to a defined contribution plan on account of an
elective deferral (as defined in Sec. 1.402(g)-1(b)); and
(C) Any forfeiture allocated on the basis of employee contributions,
matching contributions, or elective contributions.
(ii) Employer contributions made on account of employee or elective
contributions. For purposes of paragraph (f)(12)(i) of this section,
whether an employer contribution is made on account of an employee
contribution or an elective contribution is determined on the basis of
all relevant facts and circumstances, including the relationship between
the employer contribution and employee actions outside the plan. Thus,
for example, an employer contribution made to a defined contribution
plan on account of contributions made by an employee under an employer-
sponsored savings arrangement that are not held in a plan that is
intended to be a qualified plan or a plan described in Sec. 1.402(g)-
1(b) is not a matching contribution. Notwithstanding the foregoing, for
plan years beginning before January 1, 1992, an employer may elect to
take into account as matching contributions, contributions made to a
plan pursuant to an arrangement under which the employer makes
contributions to the plan on account of either employee contributions to
the plan or contributions made by an employee to an employer-sponsored
savings arrangement that are not held in the plan, provided that the
arrangement was in effect prior to August 8, 1988.
(iii) Contributions used to meet the requirements of section 416.
For plan years beginning after December 31, 1988, a contribution or
allocation that is used to meet the minimum contribution or benefit
requirement of section 416 is not treated as made on account of an
employee or elective contribution and therefore is not a matching
contribution.
(13) Nonelective contributions. The term ``nonelective
contribution'' means nonelective contributions as defined in
Sec. 1.401(k)-1(g)(10).
(14) Plan. The term ``plan'' means a plan as defined in
Sec. 1.401(k)-1(g)(11).
(15) Qualified nonelective contributions. The term ``qualified
nonelective contribution'' means qualified nonelective contributions as
defined in Sec. 1.401(k)-1(g)(13)(ii).
(16) Section 401(k) plan. The term section 401(k) plan means a
section 401(k) plan within the meaning of Sec. 1.410(b)-9.
(17) Section 401(m) plan. The term section 401(m) plan means a
section 401(m) plan within the meaning of Sec. 1.410(b)-9.
(g) Effective dates--(1) General rule. Except as provided in
paragraphs (g)(2), (g)(3), (g)(4), and (g)(5) of this section, or as
specifically provided otherwise in this section, this section is
effective for plan years beginning after December 31, 1986.
(2) 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, this section does not apply to years beginning before the
earlier of--
(i) January 1, 1989, or
(ii) The date on which the last collective bargaining agreement
terminates (determined without regard to any extension thereof after
February 28, 1986).
(3) Certain annuity contracts--(i) In the case of an annuity
contract under section 403(b), not maintained pursuant to a collective
bargaining agreement, except as otherwise provided in paragraph (g)(5)
of this section, this section applies to plan years beginning after
December 31, 1988.
(ii) In the case of an annuity contract described in section 403(b)
maintained pursuant to a collective bargaining agreement described in
paragraph (g)(2)(i) of this section, this section does not apply to
years beginning before the earlier of
(A) The later of--
(1) January 1, 1989, or
(2) The date determined under paragraph (g)(2)(ii) of this section;
or
(B) January 1, 1991.
[[Page 322]]
(4) State and local government plans. A governmental plan described
in section 414(d), including a plan subject to section 403(b)(12)(A)(i)
(nonelective plan) is treated as satisfying section 401(m) 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
(g)(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.
(5) Transition rule for plan years beginning before 1992--(i)
General rule. For plan years beginning before January 1, 1992, a
reasonable interpretation of the rules set forth in section 401 (k) and
(m) of the Internal Revenue Code (as in effect during those years) may
be relied upon to determine whether a plan was qualified during those
years.
(ii) Restructuring--(A) General rule. In determining whether the
requirements of section 401(m) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. See Sec. 1.401(a)(4)-9(c). An employee may not be
included in more than one component plan of the same plan for a plan
year under this method. If this method is used for a plan year, the
requirements of section 401(m) are applied separately with respect to
each component plan for the plan year. Thus, for example, the actual
contribution ratio and the amount of excess aggregate contributions, if
any, of each eligible employee under each component plan must be
determined as if the component plan were a separate plan. This method
applies solely for purposes of section 401(m). Thus, for example, the
requirements of section 410(b) must still be satisfied by the entire
plan.
(B) Identification of component plans--(1) Minimum coverage
requirement. The group of eligible employees described in Sec. 1.401(m)-
1(f)(4) under each component plan must separately satisfy the
requirements of section 410(b) as if the component plan were a separate
plan. Component plans may not be aggregated to satisfy this requirement.
(2) Commonality requirement. The group of employees used to identify
a component plan must share some common attribute or attributes, other
than similar actual contribution ratios. Permissible common attributes
include, for example, employment at the same work site, in the same job
category, for the same division or subsidiary, or for a unit acquired in
a specific merger or acquisition, employment for the same number of
years, compensation under the same method (e.g., salaried or hourly),
coverage under the same contribution formula, and attributes that could
be used as the basis of a classification that would be treated as
reasonable under Sec. 1.410(b)-4(b). Employees whose only common
attribute is the same or similar actual contribution ratios, or another
attribute having substantially the same effect as the same or similar
actual contribution ratios, are not considered as sharing a common
attribute for this purpose. This rule applies regardless of whether the
component plan or the plan of which it is a part satisfies the ratio or
percentage test of section 410(b).
[T.D. 8357, 56 FR 40534, Aug. 15, 1991, as amended by T.D. 8376, 56 FR
63432, Dec. 4, 1991; T.D. 8357, 57 FR 10290, Mar. 25, 1992; T.D. 8581,
59 FR 66175, Dec. 23, 1994; TD 8581, 60 FR 12416, Mar. 7, 1995]
Sec. 1.401(m)-2 Multiple use of alternative limitation.
(a) In general. The rules in this section prevent the multiple use
of the alternative methods of compliance with sections 401 (k) and (m)
contained in section 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii)
respectively. Paragraph (b) of this section discusses the scope of this
section and contains the general rule for determination of a multiple
use of the alternative limitation. Paragraph (c) of this section
contains rules for the correction of multiple use. The consequences of
multiple use of the alternative methods of compliance are described in
Sec. 1.401(m)-1(a)(1).
(b) General rule for determination of multiple use--(1) In general.
(i) Multiple use of the alternative limitation occurs
[[Page 323]]
if all of the conditions of this paragraph (b)(1) are satisfied:
(A) One or more highly compensated employees of the employer are
eligible employees in both a cash or deferred arrangement subject to
section 401(k) and a plan maintained by the employer subject to section
401(m).
(B) The sum of the actual deferral percentage of the entire group of
eligible highly compensated employees under the arrangement subject to
section 401(k) and the actual contribution percentage of the entire
group of eligible highly compensated employees under the plan subject to
section 401(m) exceeds the aggregate limit of paragraph (b)(3) of this
section.
(C) The actual deferral percentage of the entire group of eligible
highly compensated employees under the arrangement subject to section
401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(I).
(D) The actual contribution percentage of the entire group of
eligible highly compensated employees under the arrangement subject to
section 401(m) exceeds the amount described in section 401(m)(2)(A)(i).
(ii) The actual deferral percentage and actual contribution
percentage of the group of eligible highly compensated employees are
determined after use of qualified nonelective contributions and
qualified matching contributions to meet the requirements of section
401(k)(3)(A)(ii) and after use of qualified nonelective contributions
and elective contributions to meet the requirements of section
401(m)(2)(A). The actual deferral percentage and actual contribution
percentage of the group of eligible highly compensated employees are
determined after any corrective distribution or forfeiture of excess
deferrals, excess contributions, or excess aggregate contributions and
after any recharacterization of excess contributions required without
regard to this section. Only plans and arrangements maintained by the
same employer are taken into account under this paragraph (b)(1). If the
employer maintains two or more plans after application of the rules
under Sec. 1.401(k)- 1(g)(11), multiple use is tested separately with
respect to each plan. Thus, for example, if an employer maintains a cash
or deferred arrangement with matching contributions, under which
elective contributions may be made under either an ESOP or a non-ESOP,
multiple use is tested separately with respect to elective contributions
and matching contributions under the ESOP, and with respect to elective
contributions and matching contributions under the non-ESOP.
(2) Alternative limitation. For purposes of this section, the term
``alternative limitation'' means the 200 percent or 2 percentage point
limits in sections 401(k)(3)(A)(ii)(ii) and 401(m)(2)(A)(ii).
(3) Aggregate limit--(i) In general. For purposes of this section,
the aggregate limit is the greater of:
(A) The sum of--
(1) 1.25 times the greater of the relevant actual deferral
percentage or the relevant actual contribution percentage, and
(2) Two percentage points plus the lesser of the relevant actual
deferral percentage or the relevant actual contribution percentage. In
no event, however, may this amount exceed twice the lesser of the
relevant actual deferral percentage or the relevant actual contribution
percentage; or
(B) The sum of--
(1) 1.25 times the lesser of the relevant actual deferral percentage
or the relevant actual contribution percentage, and
(2) Two percentage points plus the greater of the relevant actual
deferral percentage or the relevant actual contribution percentage. In
no event, however, may this amount exceed twice the greater of the
relevant actual deferral percentage or the relevant actual contribution
percentage.
(ii) Relevant actual deferral percentage and relevant actual
contribution percentage defined. For purposes of paragraph (b)(3)(i) of
this section, the term ``relevant actual deferral percentage'' means the
actual deferral percentage of the group of nonhighly compensated
employees eligible under the arrangement subject to section 401(k) for
the plan year, and the term ``relevant actual contribution percentage''
means the actual contribution percentage of the group of nonhighly
compensated employees eligible under the plan subject to section 401(m)
for the plan year
[[Page 324]]
beginning with or within the plan year of the arrangement subject to
section 401(k).
(iii) Examples. The provisions of this paragraph (b) are illustrated
by the following examples:
Example 1. (i) Assume that Employer G maintains a plan that contains
a cash or deferred arrangement under which the actual deferral
percentages of highly compensated and nonhighly compensated employees
are 5.5 and four percent respectively. The plan also permits employee
contributions, and the actual contribution percentages for the two
groups are 4.2 and three percent respectively. The multiple use of the
alternative limitation is tested as follows:
(1) Greater of the relevant actual deferral percentage or the 4.00
relevant actual contribution percentage........................
(2) 1.25 times (1).............................................. 5.00
(3) Lesser of the relevant actual deferral percentage or the 3.00
relevant actual contribution percentage........................
(4) (3) plus two percentage points.............................. 5.00
(5) (2)+(4)..................................................... 10.00
(6) 1.25 times (3).............................................. 3.75
(7) (1) plus two percentage points.............................. 6.00
(8) (6)+(7)..................................................... 9.75
(9) Aggregate limit greater of (5) or (8)....................... 10.00
(ii) In this case, the sum of the actual deferral percentage and the
actual contribution percentage of highly compensated employees is 9.70
percent, which is less than the aggregate limit. Therefore, there is no
multiple use of the alternative limitation.
Example 2. Employer F maintains a plan subject to section 401(k)
with a plan year beginning January 1, and a plan subject to section
401(m) with a plan year beginning July 1. The plan subject to section
401(k) does not correct excess contributions by recharacterization. The
first actual deferral percentage taken into account is that for the plan
year beginning January 1, 1989. The first actual contribution percentage
taken into account is that for the plan year beginning July 1, 1989.
Example 3. (i) Employer E maintains a plan that contains a cash or
deferred arrangement and provides for matching contributions. The actual
deferral and contribution percentages for a plan year are as follows:
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Highly compensated........................... 3.6 1.69
Nonhighly compensated........................ 1.8 1.35
------------------------------------------------------------------------
(ii) The actual deferral percentage of the highly compensated
employees exceeds the normal limit (1.25 times 1.8, or 2.25%) but not
the alternative limit (two plus 1.8, but not more than twice 1.8, or
3.6%). The actual contribution percentage of the highly compensated
employees does not exceed the normal limit (1.25 times 1.35, or 1.69%).
Accordingly, the plan satisfies both the actual deferral and
contribution percentage tests. Since the actual contribution percentage
of the highly compensated employees does not exceed the normal limit,
condition (iv) of paragraph (b)(1) of this section is not satisfied.
Therefore, there is no multiple use of the alternative limitation.
(c) Correction of multiple use--(1) In general. If multiple use of
the alternative limitation occurs with respect to two or more plans or
arrangements maintained by an employer, it must be corrected by reducing
the actual deferral percentage, the actual contribution percentage of
highly compensated employees, or a combination of the two, in the manner
described in paragraph (c)(3) of this section. Instead of making this
reduction, the employer may eliminate the multiple use of the
alternative limitation by making qualified nonelective contributions in
accordance with Sec. 1.401(k)-1(b)(5) and (f)(1) or Sec. 1.401(m)-
1(b)(5) and (e)(1).
(2) Treatment of required reduction. The required reduction is
treated as an excess contribution under the arrangement subject to
section 401(k) or excess aggregate contribution under the plan subject
to section 401(m). However, if an excess contribution arising under this
section is recharacterized as an employee contribution, the
recharacterized amount is treated as an excess aggregate contribution.
(3) Required reduction. The amount of the reduction of the actual
deferral percentage of the entire group of highly compensated employees
eligible in the arrangement subject to section 401(k) is calculated in
the manner described in Sec. 1.401(k)-1(f)(2) or the amount of the
reduction of the actual contribution percentage of the entire group of
highly compensated employees eligible in the plan subject to section
401(m) is calculated in the manner described in Sec. 1.401(m)-1(e)(2),
as designated in the plan, so that there is no multiple use of the
alternative limitation. The employer may elect to reduce the actual
deferral ratios or the actual contribution ratios, as designated in the
plan, either for all highly compensated employees under the plan or
arrangements subject to reduction or
[[Page 325]]
for only those highly compensated employees who are eligible in both the
arrangement subject to section 401(k) and the plan subject to section
401(m).
(4) Examples. The principles of this paragraph (c) are illustrated
by the following examples. In all cases, the employer maintains both an
arrangement subject to section 401(k) and a plan subject to section
401(m). Assume that there is no income or loss allocable to the
elective, employee, or matching contributions.
Example 1. (i) All employees of Employer Q are eligible in both an
arrangement subject to section 401(k) and a plan subject to section
401(m). Both plans have a calendar plan year. The plans provide that
multiple use of the alternative limitation will be corrected in the plan
subject to section 401(m) and that any required reduction in actual
contribution ratios will apply only to employees eligible to participate
in both arrangements. Employer Q includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See
Sec. 1.401(k)-1(g)(2)(i). Employees X and Y are highly compensated. Each
received compensation of $100,000, deferred $6,000, received a $3,000
matching contribution, and made employee contributions of $3,000. Actual
deferral and contribution percentages under the arrangement and plan for
the 1989 plan year are shown below. No excess deferrals, excess
contributions, or excess aggregate contributions have yet been required
to be distributed, forfeited, or recharacterized under the plan.
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Highly compensated............................ 6 6
Nonhighly compensated......................... 4 4
------------------------------------------------------------------------
(ii) The aggregate limit and amount required, to be corrected are
determined as follows:
Step 1: Determination of Aggregate Limit
(1) Greater of relevant actual deferral percentage or relevant 4.0
actual contribution percentage................................
(2) 1.25 times (1)............................................. 5.0
(3) Lesser of relevant actual deferral percentage or relevant 4.0
actual contribution percentage................................
(4) (3) plus two percentage points............................. 6.0
(5) (2)+(4).................................................... 11.0
(6) 1.25 times (3)............................................. 5.0
(7) (1) plus two percentage points............................. 6.0
(8) (6)+(7).................................................... 11.0
(9) Aggregate limit Greater of (5) or (8)...................... 11.0
Step 2: Calculation of Correction Amount
(10) Actual deferral percentage of highly compensated.......... 6.0
(11) Maximum permitted actual contribution percentage of highly 5.0
compensated ((9)-(10))........................................
(12) Amount taken into account in determining actual $6,000
contribution percentage of highly compensated Employee X......
(13) Maximum amount permitted without use of alternative $5,000
limitation ((11)xcompensation of Employee X)..................
(14) Excess aggregate contribution ((12)-(13))................. $1,000
(iii) A similar correction must be made for Employee Y.
Example 2. Same as Example 1, but the plan corrects the multiple use
in the arrangement subject to section 401(k) and provides that excess
contributions are recharacterized. In this case, the aggregate limit for
the plans will be 11 percent. Similarly, the excess contributions for
Employees X and Y, determined in a manner analogous to that used in
Example 1, will be $1,000. When this is recharacterized, the actual
contribution percentage for these employees will increase to seven
percent, resulting in an excess aggregate contribution of $1,000 that
must be distributed.
Example 3. Same as Example 1, except that Employee Y is not eligible
to participate in the arrangement subject to section 401(k). No
reduction of Y's actual contribution ratio is required because Y is only
in the plan subject to section 401(m). In order to reduce the actual
contribution percentage of the entire group of highly compensated
employees eligible for the plan subject to section 401(m) to five
percent, the plan must reduce X's actual contribution percentage to four
percent. X's employee and matching contributions are limited to $4,000.
Therefore X has an excess aggregate contribution of $2,000.
(d) Effective date--(1) General rule. This section is effective for
plan years beginning after December 31, 1988, or such later date
provided in Sec. 1.402(m)-1(g).
(2) Transition rule. For plan years beginning before January 1,
1992, a reasonable interpretation of the rules set forth in sections 401
(k) and (m) of the Internal Revenue Code (as in effect during those
years) may be relied upon to determine whether a plan was qualified
during those years. For plan years beginning before January 1, 1992, a
plan
[[Page 326]]
may be restructured only in accordance with Sec. 1.401(k)-1(h)(3)(iii)
or Sec. 1.401(m)-1(g)(5)(ii).
[T.D. 8357, 56 FR 40543, Aug. 15, 1991, as amended at 57 FR 10290, Mar.
25, 1992; T.D. 8581, 59 FR 66179, Dec. 23, 1994]
Sec. 1.402(a)-1 Taxability of beneficiary under a trust which meets the requirements of section 401(a).
(a) In general. (1)(i) Section 402 relates to the taxation of the
beneficiary of an employees' trust. If an employer makes a contribution
for the benefit of an employee to a trust described in section 401(a)
for the taxable year of the employer which ends within or with a taxable
year of the trust for which the trust is exempt under section 501(a),
the employee is not required to include such contribution in his income
except for the year or years in which such contribution is distributed
or made available to him. It is immaterial in the case of contributions
to an exempt trust whether the employee's rights in the contributions to
the trust are forfeitable or nonforfeitable either at the time the
contribution is made to the trust or thereafter.
(ii) The provisions of section 402(a) relate only to a distribution
by a trust described in section 401(a) which is exempt under section
501(a) for the taxable year of the trust in which the distribution is
made. With two exceptions, the distribution from such an exempt trust
when received or made available is taxable to the distributee to the
extent provided in section 72 (relating to annuities). First, for
taxable years beginning before January 1, 1964, section 72(e)(3)
(relating to the treatment of certain lump sums), as in effect before
such date, shall not apply to such distributions. For taxable years
beginning after December 31, 1963, such distributions may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). Secondly, certain total distributions described in
section 402(a)(2) are taxable as long-term capital gains. For the
treatment of such total distributions, see subparagraph (6) of this
paragraph. Under certain circumstances, an amount representing the
unrealized appreciation in the value of the securities of the employer
is excludable from gross income for the year of distribution. For the
rules relating to such exclusion, see paragraph (b) of this section.
Furthermore, the exclusion provided by section 105(d) is applicable to a
distribution from a trust described in section 401(a) and exempt under
section 501(a) if such distribution constitutes wages or payments in
lieu of wages for a period during which an employee is absent from work
on account of a personal injury or sickness. See Sec. 1.72-15 for the
rules relating to the tax treatment of accident or health benefits
received under a plan to which section 72 applies.
(iii) Except as provided in paragraph (b) of this section, a
distribution of property by a trust described in section 401(a) and
exempt under section 501(a) shall be taken into account by the
distributee at its fair market value.
(iv) If a trust is exempt for the taxable year in which the
distribution occurs, but was not so exempt for one or more prior taxable
years under section 501(a) (or under section 165(a) of the Internal
Revenue Code of 1939 for years to which such section was applicable),
the contributions of the employer which were includible in the gross
income of the employee for the taxable year when made shall, in
accordance with section 72(f), also be treated as part of the
consideration paid by the employee.
(v) If the trust is not exempt at the time the distribution is
received by or made available to the employee, see section 402(b) and
paragraph (b) of Sec. 1.402(b)-1.
(vi) For the treatment of amounts paid to provide medical benefits
described in section 401(h) as defined in paragraph (a) of Sec. 1.401-
14, see paragraph (h) of Sec. 1.72-15.
(2) If a trust described in section 401(a) and exempt under section
501(a) purchases an annuity contract for an employee and distributes it
to the employee in a year for which the trust is exempt, the contract
containing a cash surrender value which may be available to an employee
by surrendering the contract, such cash surrender value will not be
considered income to the employee unless and until the contract is
surrendered. For the rule as to nontransferability of annuity contracts
[[Page 327]]
issued after 1962, see paragraph (b)(2) of Sec. 1.401-9. If, however,
the contract distributed by such exempt trust is a retirement income,
endowment, or other life insurance contract and is distributed after
October 26, 1956, the entire cash value of such contract at the time of
distribution must be included in the distributee's income in accordance
with the provisions of section 402(a), except to the extent that, within
60 days after the distribution of such contract, all or any portion of
such value is irrevocably converted into a contract under which no part
of any proceeds payable on death at any time would be excludable under
section 101(a) (relating to life insurance proceeds). If the contract
distributed by such trust is a transferable annuity contract issued
after 1962, or a retirement income, endowment, or other life insurance
contract which is distributed after 1962 (whether or not transferable),
then notwithstanding the preceding sentence the entire cash value of the
contract is includible in the distributee's gross income, unless within
such 60 days such contract is also made nontransferable.
(3) For the rules applicable to premiums paid by a trust described
in section 401(a) and exempt under section 501(a) for the purchase of
retirement income, endowment, or other contracts providing life
insurance protection payable upon the death of the employee-participant,
see paragraph (b) of Sec. 1.72-16.
(4) For the rules applicable to the amounts payable by reason of the
death of an employee under a contract providing life insurance
protection, or an annuity contract, purchased by a trust described in
section 401(a) and exempt under section 501(a), see paragraph (c) of
Sec. 1.72-16.
(5) If pension or annuity payments or other benefits are paid or
made available to the beneficiary of a deceased employee or a deceased
retired employee by a trust described in section 401(a) which is exempt
under section 501(a), such amounts are taxable in accordance with the
rules of section 402(a) and this section. In case such amounts are
taxable under section 72, the ``investment in the contract'' shall be
determined by reference to the amount contributed by the employee and by
applying the applicable rules of sections 72 and 101(b)(2)(D). In case
the amounts paid to, or includible in the gross income of, the
beneficiaries of the deceased employee or deceased retired employee
constitute a distribution to which subparagraph (6) of this paragraph is
applicable, the extent to which the distribution is taxable is
determined by reference to the contributions of the employee, by
reference to any prior distributions which were excludable from gross
income as a return of employee contributions, and by applying the
applicable rules of sections 72 and 101(b).
(6)(i) If the total distributions payable with respect to any
employee under a trust described in section 401(a) which in the year of
distribution is exempt under section 501(a) are paid to, or includible
in the gross income of, the distributee within one taxable year of the
distributee on account of the employee's death or other separation from
the service, or death after such separation from service, the amount of
such distribution, to the extent it exceeds the net amount contributed
by the employee, shall be considered a gain from the sale or exchange of
a capital asset held for more than six months. The total distributions
payable are includible in the gross income of the distributee within one
taxable year if they are made available to such distributee and the
distributee fails to make a timely election under section 72(h) to
receive an annuity in lieu of such total distributions. The ``net amount
contributed by the employee'' is the amount actually contributed by the
employee plus any amounts considered to be contributed by the employee
under the rules of section 72(f), 101(b), and subparagraph (3) of this
paragraph, reduced by any amounts theretofore distributed to him which
were excludable from gross income as a return of employee contributions.
See, however, paragraph (b) of this section for rules relating to the
exclusion of amounts representing net unrealized appreciation in the
value of securities of the employer corporation. In addition, all
[[Page 328]]
or part of the amount otherwise includible in gross income under this
paragraph by a non-resident alien individual in respect of a
distribution by the United States under a qualified pension plan may be
excludable from gross income under section 402(a)(4). For rules relating
to such exclusion, see paragraph (c) of this section. For additional
rules relating to the treatment of total distributions described in this
subdivision in the case of a nonresident alien individual, see sections
871 and 1441 and the regulations thereunder.
(ii) The term ``total distributions payable'' means the balance to
the credit of an employee which becomes payable to a distributee on
account of the employee's death or other separation from the service or
on account of his death after separation from the service. Thus,
distributions made before a total distribution (for example, annuity
payments received by the employee after retirement), will not defeat
application of the capital gains treatment with respect to the total
distributions received by a beneficiary upon the death of the employee
after retirement. However, a distribution on separation from service
will not receive capital gains treatment unless it constitutes the total
amount in the employee's account at the time of his separation from
service. If the total amount in the employee's account at the time of
his death or other separation from the service or death after separation
from the service is paid or includible in the gross income of the
distributee within one taxable year of the distributee, such amount is
entitled to the capital gains treatment notwithstanding that in a later
taxable year an additional amount, attributable to the last year of
service, is credited to the account of the employee and distributed.
(iii) If an employee retires and commences to receive an annuity but
subsequently, in some succeeding taxable year, is paid a lump sum in
settlement of all future annuity payments, the capital gains treatment
does not apply to such lump sum settlement paid during the lifetime of
the employee since it is not a payment on account of separation from the
service, or death after separation, but is on account of the settlement
of future annuity payments.
(iv) If the ``total distributions payable'' are paid or includible
in the gross income of several distributees within one taxable year on
account of the employee's death or other separation from the service or
on account of his death after separation from the service, the capital
gains treatment is applicable. The total distributions payable are paid
within one taxable year of the distributees when, for example, a portion
of such total is distributed in cash to one distributee and the balance
is used to purchase an annuity contract which is distributed to the
other distributee. However, if the share of any distributee is not paid
or includible in his gross income within the same taxable year in which
the shares of the other distributees are paid or includible in their
gross income, none of the distributees is entitled to the capital gains
treatment, since the total distributions payable are not paid or
includible in the distributees' gross income within one taxable year.
For example, if the total distributions payable are made available to
each of two distributees and one elects to receive his share in cash
while the other makes a timely election under section 72(h) to receive
his share in installment payments from the trust, the capital gains
treatment does not apply to either distributee.
(v) For regulations as to certain plan terminations, see
Sec. 1.402(e)-1.
(vi) The term ``total distributions payable'' does not include
United States Retirement Plan Bonds held by a trust to the credit of an
employee. Thus, a distribution by a qualified trust may constitute a
total distributions payable with respect to an employee even though the
trust retains retirement plan bonds registered in the name of such
employee. Similarly, the proceeds of a retirement plan bond received as
a part of the total amount to the credit of an employee will not be
entitled to capital gains treatment. See section 405(e) and paragraph
(a)(4) of Sec. 1.405-3.
(vii) For purposes of determining whether the total distributions
payable to an employee have been distributed
[[Page 329]]
within one taxable year, the term ``total distributions payable''
includes amounts held by a trust to the credit of an employee which are
attributable to contributions on behalf of the employee while he was a
self-employed individual in the business with respect to which the plan
was established. Thus, a distribution by a qualified trust is not a
total distributions payable with respect to an employee if the trust
retains amounts which are so attributable.
(viii) The term ``total distributions payable'' does not include any
amount which has been placed in a separate account for the funding of
medical benefits described in section 401(h) as defined in paragraph (a)
of Sec. 1.401-14. Thus, a distribution by a qualified trust may
constitute a total distributions payable with respect to an employee
even though the trust retains amounts attributable to the funding of
medical benefits described in section 401(h).
(7) The capital gains treatment provided by section 402(a)(2) and
subparagraph (6) of this paragraph is not applicable to distributions
paid to a distributee to the extent such distributions are attributable
to contributions made on behalf of an employee while he was a self-
employed individual in the business with respect to which the plan was
established. For the taxation of such amounts, see Sec. 1.72-18. For the
rules for determining the amount attributable to contributions on behalf
of an employee while he was self-employed, see paragraphs (b)(4) and
(c)(2) of such section.
(8) For purposes of this section, the term ``employee'' includes a
self-employed individual who is treated as an employee under section
401(c)(1), and paragraph (b) of Sec. 1.401-10, and the term ``employer''
means the person treated as the employer of such individual under
section 401(c)(4).
(b) Distributions including securities of the employer corporation--
(1) In general. (i) If a trust described in section 401(a) which is
exempt under section 501(a) makes a distribution to a distributee, and
such distribution includes securities of the employer corporation, the
amount of any net unrealized appreciation in such securities shall be
excluded from the distributee's income in the year of such distribution
to the following extent:
(A) If the distribution constitutes a total distribution to which
the regulations of paragraph (a)(6) of this section are applicable, the
amount to be excluded is the entire net unrealized appreciation
attributable to that part of the total distribution which consists of
securities of the employer corporation; and
(B) If the distribution is other than a total distribution to which
paragraph (a)(6) of this section is applicable, the amount to be
excluded is that portion of the net unrealized appreciation in the
securities of the employer corporation which is attributable to the
amount considered to be contributed by the employee to the purchase of
such securities.
The amount of net unrealized appreciation which is excludable under the
regulations of (A) and (B) of this subdivision shall not be included in
the basis of the securities in the hands of the distributee at the time
of distribution for purposes of determining gain or loss on their
subsequent disposition. In the case of a total distribution the amount
of net unrealized appreciation which is not included in the basis of the
securities in the hands of the distributee at the time of distribution
shall be considered as a gain from the sale or exchange of a capital
asset held for more than six months to the extent that such appreciation
is realized in a subsequent taxable transaction. However, if the net
gain realized by the distributee in a subsequent taxable transaction
exceeds the amount of the net unrealized appreciation at the time of
distribution, such excess shall constitute a long-term or short-term
capital gain depending upon the holding period of the securities in the
hands of the distributee.
(ii) For purposes of section 402(a) and of this section, the term
``securities'' means only shares of stock and bonds or debentures issued
by a corporation with interest coupons or in registered form, and the
term ``securities of the employer corporation'' includes securities of a
parent or subsidiary corporation (as defined in subsections (e) and
[[Page 330]]
(f) of section 425) of the employer corporation.
(2) Determination of net unrealized appreciation. (i) The amount of
net unrealized appreciation in securities of the employer corporation
which are distributed by the trust is the excess of the market value of
such securities at the time of distribution over the cost or other basis
of such securities to the trust. Thus, if a distribution consists in
part of securities which have appreciated in value and in part of
securities which have depreciated in value, the net unrealized
appreciation shall be considered to consist of the net increase in value
of all of the securities included in the distribution. For this purpose,
two or more distributions made by a trust to a distributee in a single
taxable year of the distributee shall be treated as a single
distribution.
(ii) For the purpose of determining the net unrealized appreciation
on a distributed security of the employer corporation, the cost or other
basis of such security to the trust shall be computed in accordance with
whichever of the following rules is applicable:
(A) If a security was earmarked for the account of a particular
employee at the time it was purchased by or contributed to the trust so
that the cost or other basis of such security to the trust is reflected
in the account of such employee, such cost or other basis shall be used.
(B) If as of the close of each taxable year of the trust (or other
specified period of time not in excess of 12 consecutive calendar
months) the trust allocates among the accounts of participating
employees all securities acquired by the trust during the period
(exclusive of securities unallocated under a plan providing for
allocation in whole shares only), the cost or other basis to the trust
of any securities allocated as of the close of a particular allocation
period shall be the average cost or other basis to the trust of all
securities of the same type which were purchased or otherwise acquired
by the trust during such allocation period. For purposes of determining
the average cost to the trust of securities included in a subsequent
allocation, the actual cost to the trust of the securities unallocated
as of the close of a prior allocation period shall be deemed to be the
average cost or other basis to the trust of securities of the same type
allocated as of the close of such prior allocation period.
(C) In a case where neither (a) nor (b) of this subdivision is
applicable, if the trust fund, or a specified portion thereof, is
invested exclusively in one particular type of security of the employer
corporation, and if during the period the distributee participated in
the plan none of such securities has been sold except for the purpose of
paying benefits under the trust or for the purpose of enabling the
trustee to obtain funds with which to exercise rights which have accrued
to the trust, the cost or other basis to the trust of all securities
distributed to such distributee shall be the total amount credited to
the account of such distributee (or such portion thereof as was
available for investment in such securities) reduced by the amount
available for investment but uninvested on the date of distribution. If
at the time of distribution to a particular distributee a portion of the
amount credited to his account is forfeited, appropriate adjustment
shall be made with respect thereto in determining the cost or other
basis to the trust of the securities distributed.
(D)(1) In all other cases, there shall be used the average cost (or
other basis) to the trust of all securities of the employer corporation
of the type distributed to the distributee which the trust has on hand
at the time of the distribution, or which the trust had on hand on a
specified inventory date which date does not precede the date of
distribution by more than twelve calendar months. If a distribution
includes securities of the employer corporation of more than one type,
the average cost (or other basis) to the trust of each type of security
distributed shall be determined. The average cost to the trust of
securities of the employer corporation on hand on a specified inventory
date (or on hand at the time of distribution) shall be computed on the
basis of their actual cost, considering the securities most recently
purchased to be those on hand, or by means of a moving average
calculated by subtracting from the total cost of
[[Page 331]]
securities on hand immediately preceding a particular sale or
distribution an amount computed by multiplying the number of securities
sold or distributed by the average cost of all securities on hand
preceding such sale or distribution.
(2) These methods of computing average cost may be illustrated by
the following examples:
Example 1. A, a distributee who makes his income tax returns on the
basis of a calendar year, receives on August 1, 1954, in a total
distribution, to which paragraph (a)(6) of this section is applicable,
ten shares of class D stock of the employer corporation. On July 1, 1954
(the specified inventory date of the trust), the trust had on hand 80
shares of class D stock. The average cost of the 10 shares distributed,
on the basis of the actual cost method, is $100 computed as follows:
------------------------------------------------------------------------
Cost
Shares Purchase date per Total
share cost
------------------------------------------------------------------------
20............................... June 24, 1954...... $101 $2,020
40............................... Jan. 10, 1953...... 102 4,080
20............................... Oct. 20, 1952...... 95 1,900
---------------------------------- --------
80............................... ................... 8,000
------------------------------------------------------------------------
Example 2. B, a distributee who makes his income tax returns on the
basis of a calendar year, receives on October 31, 1954, in a total
distribution, to which paragraph (a)(6) of this section is applicable,
20 shares of class E stock of the employer corporation. The specified
inventory date of the trust is the last day of each calendar year. The
trust had on hand on December 31, 1952, 1,000 shares of class E stock of
the employer corporation. During the calendar year 1953 the trust
distributed to four distributees a total of 100 shares of such stock and
acquired, through a number of purchases, a total of 120 shares. The
average cost of the 20 shares distributed to B, on the basis of the
moving average method, is $52 computed as follows:
------------------------------------------------------------------------
Total Average
Shares cost cost
------------------------------------------------------------------------
On hand Dec. 31, 1952...................... 1,000 $50,000 $50
Distributed during 1953 at average cost of 100 5,000 (0)
$50.......................................
----------------------------
900 45,000 (0)
Purchased during 1953...................... 120 8,000 (0)
On hand Dec. 31, 1953...................... 1,020 53,040 52
------------------------------------------------------------------------
(3) Unrealized appreciation attributable to employee contributions.
In any case in which it is necessary to determine the amount of net
unrealized appreciation in securities of the employer corporation which
is attributable to contributions made by an employee:
(i) The cost or other basis of the securities to the trust and the
amount of net unrealized appreciation shall first be determined in
accordance with the regulations in subparagraph (2) of this paragraph;
(ii) The amount contributed by the employee to the purchase of the
securities shall be solely the portion of his actual contributions to
the trust properly allocable to such securities, and shall not include
any part of the increment in the trust fund expended in the purchase of
the securities;
(iii) The amount of net unrealized appreciation in the securities
distributed which is attributable to the contributions of the employee
shall be that proportion of the net unrealized appreciation determined
under the regulations of subparagraph (2) of this paragraph which the
contributions of the employee properly allocable to such securities bear
to the cost or other basis to the trust of the securities;
(iv) If a distribution consists solely of securities of the employer
corporation, the contributions of the employee expended in the purchase
of such securities shall be allocated to the securities distributed in a
manner consistent with the principles set forth in subparagraph (2)(ii)
(a), (b), (c), or (d) of this paragraph, whichever is applicable. Thus,
the amount of the employee's contribution which can be identified as
having been expended in the purchase of a particular security shall be
allocated to such security, and the amount of such contribution which
cannot be so identified shall be allocated ratably among the securities
distributed. If a distribution consists in part of securities of the
employer corporation and in part of cash or other property, appropriate
allocation of a portion of the employee's contribution to such cash or
other property shall be made unless such a location is inconsistent with
the terms of the plan or trust.
(v) The application of this subparagraph may be illustrated by the
following example:
Example. A trust distributes ten shares of stock issued by the
employer corporation each of which has an average cost to the
[[Page 332]]
trust of $100, consisting of employee contributions in the amount of $60
and employer contributions in the amount of $40, and on the date of
distribution has a fair market value of $180. The portion of the net
unrealized appreciation attributable to the contributions of the
employee with respect to each of the shares of stock is $48 computed as
follows:
(1) Value of one share of stock on distribution date............ $180
=======
(2) Employee contributions...................................... 60
(3) Employer contributions...................................... 40
-------
(4) Total contributions......................................... 100
=======
(5) Net unrealized appreciation................................. 80
(6) Portion of net unrealized appreciation attributable to 48
employee contributions \60/100\ (amount of employee
contributions (item 2) over total contributions (item 4) of $80
(item 5).......................................................
(vi) For the purpose of determining gain or loss to the distributee
in the year or years in which any share of stock referred to in the
example in subdivision (v) of this subparagraph is sold or otherwise
disposed of in a taxable transaction, the basis of each such share in
the hands of the distributee at the time of the distribution by the
trust will be $132 computed as follows:
(a) Employee contributions...................................... $60
(b) Employer contributions (taxable as ordinary income in the 40
year the securities were distributed)..........................
(c) Portion of net unrealized appreciation attributable to 32
employer contributions (item 5) minus (item 6) (taxable as
ordinary income in the year the securities were distributed)...
-------
(d) Basis of stock.............................................. 132
(4) Change in exempt status of trust. For principles applicable in
making appropriate adjustments if the trust was not exempt for one or
more years before the year of distribution, see paragraph (a) of this
section.
(c) Certain distributions by United States to nonresident alien
individuals. (1) This paragraph applies to a distribution--
(i) Which is made by the United States under a pension plan
described in section 401(a);
(ii) Which is made in respect of services performed by an employee
of the United States; and
(iii) Which is received by, or made available to, a nonresident
alien individual (including a nonresident alien individual who is a
beneficiary of a deceased employee) during a taxable year beginning
after December 31, 1959.
The amount of such a distribution that is includible in the gross income
of the nonresident alien individual under section 402(a) (1) or (2)
shall not exceed an amount which bears the same ratio to the amount
which would be includible in gross income if it were not for this
paragraph, as--
(A) The aggregate basic salary paid by the United States to the
employee for his services in respect of which the distribution is being
made, reduced by the amount of such basic salary which was not
includible in the employee's gross income by reason of being from
sources without the United States, bears to
(B) The aggregate basic salary paid by the United States to the
employee for his services in respect of which the distribution is being
made.
See section 402(a)(4). See, also, paragraph (a) of this section for
rules relating to the amount that is includible in gross income under
section 402(a) (1) or (2) in the case of a distribution under a pension
plan described in section 401(a).
(2) For purposes of applying section 402(a)(4) and this paragraph to
distributions under the Civil Service Retirement Act (5 U.S.C. 2251),
the term ``basic salary'' shall have the meaning provided in section
1(d) of such Act. In applying section 402(a)(4) and this paragraph to
distributions under any other qualified pension plan of the United
States, such term shall have a similar meaning. Thus, for example,
``basic salary'' does not, in any case, include bonuses, allowances, or
overtime pay.
(3) The rules in this paragraph may be illustrated by the following
examples:
Example 1. A, a retired employee of the United States who performed
all of his services for the United States in a foreign country,
receives, in respect of such services, a monthly pension of $200 under
the Civil Service Retirement Act (a pension plan described in section
410(a)). A received an aggregate basic salary for his services for the
United States of $100,000. A was a nonresident alien
[[Page 333]]
individual during the whole of his employment with the United States
and, therefore, his basic salary from the United States was not
includible in his gross income by reason of being from sources without
the United States. A would be requited, under section 72 but without
regard to section 402(a)(4) and this paragraph, to include $60 of each
monthly pension payment in his gross income. The amount that is
includible in A's gross income under section 402(a)(1) with respect to
the monthly payments received during taxable years beginning after
December 31, 1959, and while A is a nonresident alien individual, is
computed as follows:
(i) Amount of distribution includible in gross income under $60
section 72 without regard to section 402(a)(4)...............
(ii) Aggregate basic salary for services for United States.... 100,000
(iii) Aggregate basic salary for services for United States 0
reduced by amount of such salary not includible in A's gross
income by reason of being from sources without the United
States.......................................................
(iv) Amount includible in A's gross income under section 0
402(a)(1) ((iii)/(ii)x(i), or $0/$100,000x$60)...............
Example 2. B, a retired employee of the United States who performed
services for the United States both in a foreign country and in the
United States, receives, in respect of such services, a monthly pension
of $240 under the Civil Service Retirement Act. B received an aggregate
basic salary for his services for the United States of $120,000; $80,000
of which was for his services performed in the United States, and
$40,000 of which was for his services performed in the foreign country.
B was a nonresident alien individual during the whole of his employment
with the United States and, consequently, the $40,000 basic salary for
his services performed in the foreign country was not includible in his
gross income by reason of being from sources without the United States.
B would be required, under section 72 but without regard to section
402(a)(4) and this paragraph, to include $165 of each monthly pension in
his gross income. The amount that is includible in B's gross income
under section 402(a)(1) with respect to the monthly payments received
during taxable years beginning after December 31, 1959, and while B is a
nonresident alien individual, is computed as follows:
(i) Amount of distribution includible in gross income under $165
section 72 without regard to section 402(a)(4)...............
(ii) Aggregate basic salary for services for United States.... 120,000
(iii) Aggregate basic salary for services for United States 80,000
reduced by amount of such salary not includible in B's gross
income by reason of being from sources without the United
States ($120,000-$40,000)....................................
(iv) Amount includible in B's gross income under section 110
402(a)(1)(iii)/(ii)x(i), or $80,000/$120,000x$165)...........
(d) Salary reduction, cash or deferred arrangements--(1) Inclusion
in income. Whether a contribution to an exempt trust or plan described
in section 401(a) or 403(a) is made by the employer or the employee is
determined on the basis of the particular facts and circumstances of
each case. Nevertheless, an amount contributed to a plan or trust will,
except as otherwise provided under paragraph (d)(2) of this section, be
treated as contributed by the employee if it was contributed at the
employee's election, even though the election was made before the year
in which the amount was earned by the employee or before the year in
which the amount became currently available to the employee. Any amount
treated as contributed by the employee is includible in the gross income
of the employee for the year in which the amount would have been
received by the employee but for the election. Thus, for example,
amounts contributed to an exempt trust or plan by reason of a salary
reduction agreement under a cash or deferred arrangement are treated as
received by the employee when they would have been received by the
employee but for the election to defer. Accordingly, they are includible
in the gross income of the employee for that year (except as provided
under paragraph (d)(2) of this section). See Sec. 1.401(k)-1(a)(3)(iii)
and (2)(i) for the meaning of currently available and cash or deferred
arrangement, respectively.
(2) Amounts not included in income--(i) Qualified cash or deferred
arrangement. Elective contributions as defined in Sec. 1.401(k)-l (g)(3)
for a plan year made by an employer on behalf of an employee pursuant to
a cash or deferred election under a qualified cash or deferred
arrangement, as defined in Sec. 1.401(k)-1(a)(4)(i), are not treated as
received by or distributed to the employee or as employee contributions.
[[Page 334]]
For plan years beginning after December 31, 1992, whether a cash or
deferred election is made under a qualified cash or deferred arrangement
is determined without regard to the special rules for certain
collectively bargained plans contained in Sec. 1.401(k)-1(a)(7). As a
result, elective contributions under these plans are treated as employee
contributions for purposes of this section if the cash or deferred
arrangement does not satisfy the actual deferral percentage test of
section 401(k)(3) or otherwise fails to be a qualified cash or deferred
arrangement.
(ii) Matching contributions. Matching contributions described in
Sec. 1.401(m)-1(f)(12) and section 401(m)(4) are not treated as
contributed by an employee merely because they are made by the employer
as a result of an employee's election.
(iii) Effect of certain one-time elections. Amounts contributed to
an exempt plan or trust described in section 401(a) or 403(a) pursuant
to the one-time irrevocable employee election to participate in a plan
described in Sec. 1.401(k)-1(a)(3)(iv) are not treated as contributed by
an employee. Similarly, amounts contributed to an exempt plan or trust
described in section 401(a) or 403(a) in which self-employed individuals
may participate pursuant to the one-time irrevocable election described
in Sec. 1.401(k)-1(a)(6)(ii)(C) are not treated as contributed by an
employee.
(3) Effective date and transition rules--(i) Effective date. In the
case of a plan or trust that does not include a salary reduction or cash
or deferred arrangement in existence on June 27, 1974, this paragraph
applies to taxable years ending after that date.
(ii) Transition rule for cash or deferred arrangements in existence
on June 27, 1974--(A) General rule. In the case of a plan or trust that
includes a salary reduction or a cash or deferred arrangement in
existence on June 27, 1974, this paragraph applies to plan years
beginning after December 31, 1979 (or, in the case of a pre-ERISA money
purchase plan, as defined in Sec. 1.401(k)-1(g)(12), plan years
beginning after July 18, 1984). For plan years beginning prior to
January 1, 1980 (or, in the case of a pre-ERISA money purchase plan,
plan years beginning before July 19, 1984), the taxable year of
inclusion in gross income of the employee of any amount so contributed
by the employer to the trust is determined in a manner consistent with
Rev. Rul. 56-497, 1956-2 CB 284, Rev. Rul. 63-180, 1963-2 CB 189, and
Rev. Rul. 68-89, 1968-1 CB 402.
(B) Meaning of cash or deferred arrangement in existence on June 27,
1974. A cash or deferred arrangement is considered as in existence on
June 27, 1974, if, on or before that date, it was reduced to writing and
adopted by the employer (including, in the case of a corporate employer,
formal approval by the employer's board of directors and, if required,
shareholders), even though no amounts had been contributed pursuant to
the terms of the arrangement as of that date.
(iii) Reasonable interpretation for plan years beginning after 1979
and before 1992. For plan years beginning after December 31, 1979 (or in
the case of a pre-ERISA money purchase plan, plan years beginning after
July 18, 1984) and before January 1, 1992, a reasonable interpretation
of the rules set forth in section 401(k) (as in effect during those
years) may be relied upon to determine whether contributions were made
under a qualified cash or deferred arrangement.
(iv) Special rule for collectively bargained plans. For plan years
beginning before January 1, 1993, a nonqualified cash or deferred
arrangement will be treated as satisfying section 401(k)(3) solely for
purposes of paragraph (d)(2)(i) of this section if it is part of a plan
(or portion of a plan) that automatically satisfies section 401(a)(4)
under Sec. 1.401(k)-1(a)(7), relating to certain collectively bargained
plans.
(v) Special rule for governmental plans. 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), a nonqualified cash or deferred arrangement will be
treated as satisfying section 401(k)(3) solely for purposes of paragraph
(d)(2)(i) of this section if it is part of a plan adopted by a state or
local government before May
[[Page 335]]
6, 1986. For purposes of this paragraph (d)(3)(v), 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.
[T.D. 6500, 25 FR 11675, Nov. 26, 1960, as amended by T.D. 6497, 25 FR
10021, Oct. 20, 1960; T.D. 6676, 28 FR 10142, Sept. 17, 1963; T.D. 6717,
29 FR 4092, Mar. 28, 1964; T.D. 6722, 29 FR 5073, Apr. 14, 1964; T.D.
6823, 30 FR 6340, May 6, 1965; T.D. 6885, 31 FR 7800, June 2, 1966; T.D.
6887, 31 FR 8786, June 24, 1966; T.D. 8217, 53 FR 29673, Aug. 8, 1988;
T.D. 8357, 56 FR 40545, Aug. 15, 1991; T.D. 8357, 57 FR 10290, Mar. 25,
1992; T.D. 8581, 59 FR 66180, Dec. 23, 1994]
Sec. 1.402(a)(5)-1T Rollovers of partial distributions from qualified trusts and annuities. (Temporary)
Q-1: Can an employee or the surviving spouse of a deceased employee
roll over to an individual retirement account or annuity, described in
section 408 (a) or (b), the taxable portion of a partial distribution
from a qualifiedtrust described in section 401(a), a qualified plan
described in section 403(a), or a tax-sheltered annuity contract under
section 403(b)?
A-1: Yes. For distributions made after July 18, 1984, the taxable
portion of a partial distribution may be rolled over within 60 days of
the distribution to an individual retirement account or annuity.
Q-2: Are there special requirements applicable to rollovers of
partial distributions?
A-2: Yes. Section 402(a)(5)(D)(i) specifies that no part of a
partial distribution may be rolled over unless the distribution is equal
to at least 50 percent of the balance to the credit of the employee in
the contract or plan immediately before the distribution, and the
distribution is not one of a series of periodic payments. For purposes
of this section, the balance to the credit of an employee does not
include any accumulated deductible employee contributions (within the
meaning of section 72(o)). In addition, in calculating the balance to
the credit for purposes of the 50 percent test, qualified plans are not
to be aggregated with other qualified plans and tax-sheltered annuity
contracts are not to be aggregated with other tax-sheltered annuity
contracts. Also, in applying the 50 percent test to a surviving spouse,
the balance to the credit is the maximum amount the spouse is entitled
to receive under the plan or contract, rather than the total balance to
the credit of the employee. The rollover of a partial distribution may
result in adverse tax consequences; see section 402(a)(5)(D) (iii) and
(iv).
Q-3: Are there any other requirements applicable to rollovers of
partial distribution?
A-3: Yes. Section 402(a)(5)(D)(i)(III) requires the employee to
elect, in conformance with Treasury regulations, to treat a contribution
of a partial distribution to an IRA as a rollover contribution. An
election is made by designating, in writing, to the trustee or issuer of
the IRA at the time of the contribution that the contribution is to be
treated as a rollover contribution. This requirement of a written
designation to the trustee or issuer of the IRA is effective for
contributions paid to the trustee or issuer of the IRA after March 20,
1986. For contributions paid to the trustee or issuer before March 21,
1986, an election is made by computing the individual's income tax
liability on the income tax return for the taxable year in which the
distribution occurs in a manner consistent with not including the
distribution (or portion thereof) in gross income. Both such elections
are irrevocable, except that an election made on an income tax return
filed before March 21, 1986 is revocable.
Q-4: Does the election requirement apply to rollovers of qualified
total distributions or rollover contributions described in section
402(a) (5) or (7), 403(a)(4), 403(b)(8), 405(d)(3), or 408(d)(3) to
individual retirement accounts and annuities (IRAs)?
A-4: Yes. No amounts may be treated as a rollover contribution to an
IRA under section 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 405(d)(3)
(as amended by section 491(c) of the TRA of 1984), or 408(d)(3) unless
the requirements described in Q & A-3 of this section are satisfied.
Thus, once any portion of a total distribution is irrevocably designated
as a rollover contribution, such
[[Page 336]]
distribution is not taxable under section 402 or 403 and, therefore, is
not eligible for the special capital gains and separate tax treatment
under section 402 (a) and (e). Election requirements for rollover
contributions to IRAs described in this Q &A-4 are subject to the same
effective date rules set forth in Q &A-3.
[T.D. 8073, 51 FR 4320, Feb. 4, 1986]
Sec. 1.402(b)-1 Treatment of beneficiary of a trust not exempt under section 501(a).
(a) Taxation by reason of employer contributions made after August
1, 1969--(1) Taxation of contributions. Section 402(b) provides rules
for taxing an employee on contributions made on his behalf by an
employer to an employees' trust that is not exempt under section 501(a).
In general, any such contributions made after August 1, 1969, during a
taxable year of the employer which ends within or with a taxable year of
the trust for which it is not so exempt shall be included as
compensation in the gross income of the employee for his taxable year
during which the contribution is made, but only to the extent that the
employee's interest in such contribution is substantially vested at the
time the contribution is made. The preceding sentence does not apply to
contracts referred to in the transitional rule of paragraph (d)(1) (ii)
or (iii) of this section. For the definition of the terms
``substantially vested'' and ``substantially nonvested'' see Sec. 1.83-
3(b).
(2) Determination of amount of employer contributions. If, for an
employee, the actual amount of employer contributions referred to in
paragraph (a)(1) of this section for any taxable year of the employee is
not known, such amount shall be either an amount equal to the excess of-
-
(i) The amount determined in accordance with the formula described
in Sec. 1.403(b)-1(d)(4) as the end of such taxable year, over
(ii) The amount determined in accordance with the formula described
in Sec. 1.403(b)-1(d)(4) as of the end of the prior taxable year,
or the amount determined under any other method utilizing recognized
actuarial principles that are consistent with the provisions of the plan
under which such contributions are made and the method adopted by the
employer for funding the benefits under the plan.
(b) Taxability of employee when rights under nonexempt trust change
from nonvested to vested--(1) In general. If rights of an employee under
a trust become substantially vested during a taxable year of the
employee (ending after August 1, 1969), and a taxable year of the trust
for which it is not exempt under section 501(a) ends with or within such
year, the value of the employee's interest in the trust on the date of
such change shall be included in his gross income for such taxable year,
to the extent provided in paragraph (b)(3) of this section. When an
employees' trust that was exempt under section 501(a) ceases to be so
exempt, an employee shall include in his gross income only amounts
contributed to the trust during a taxable year of the employer that ends
within or with a taxable year of the trust in which it is not so exempt
(to the same extent as if the trust had not been so exempt in all prior
taxable years).
(2) Value of an employee's interest in a trust. (i) For purposes of
this section, the term ``the value of an employee's interest in a
trust'' means the amount of the employee's beneficial interest in the
net fair market value of all the assets in the trust as of any date on
which some or all of the employee's interest in the trust becomes
substantially vested. The net fair market value of all the assets in the
trust is the total amount of the fair market values (determined without
regard to any lapse restriction, as defined in Sec. 1.83-3(h)) of all
the assets in the trust, less the amount of all the liabilities
(including taxes) to which such assets are subject or which the trust
has assumed (other than the rights of any employee in such assets), as
of the date on which some or all of the employee's interest in the trust
becomes substantially vested.
(ii) If a separate account in a trust for the benefit of two or more
employees is not maintained for each employee, the value of an
employee's interest in such trust shall be determined
[[Page 337]]
in accordance with the formula described in Sec. 403(b)-1(d)(4) or any
other method utilizing recognized actuarial principles that are
consistent with the provisions of the plan under which the contributions
are made and the method adopted by the employer for funding the benefits
under the plan.
(iii) If there is no valuation of a nonexempt trust's assets on the
date of the change referred to in paragraph (b)(1) of this section, the
value of an employee's interest in such trust is determined by taking
the weighted average of the values on the nearest valuation dates
occurring before and after the date of such change. The average is to be
determined in the manner described in Sec. 20.2031-2(b)(1).
(3) Extent to which value of an employee's interest is includible in
gross income. For purposes of paragraph (b)(1) of this section, there
shall be included in the gross income of the employee for his taxable
year in which his rights under the trust become substantially vested
only that portion of the value of his interest in the trust that is
attributable to contributions made by the employer after August 1, 1969.
However, the preceding sentence shall not apply--
(i) To the extent such value is attributable to a contribution made
on the date of such change, and
(ii) To the extent such value is attributable to contributions
described in paragraph (d)(1) (ii) or (iii) of this section (relating to
contributions made pursuant to a binding contract entered into before
April 22, 1969).
For purposes of this (3), if the value of an employee's interest in a
trust which is attributable to contributions made by the employer after
August 1, 1969, is not known, it shall be deemed to be an amount which
bears the same ratio to the value of the employee's interest as the
contributions made by the employer after such date bear to the total
contributions made by the employer.
(4) Partial vesting. For purposes of paragraph (b)(1) of this
section, if only part of an employee's interest in the trust becomes
substantially vested during any taxable year, then only the
corresponding part of the value of the employee's interest in such trust
is includible in his gross income for such year. In such a case, it is
first necessary to compute, under the rules in paragraphs (b) (1) and
(2) of this section, the amount that would be includdible if his entire
interest had changed to a substantially vested interest during such a
year. The amount that is includible under this paragraph (4) is the
amount determined under the preceding sentence multiplied by the percent
of the employee's interest which became substantially vested during the
taxable year.
(5) Basis. The basis of any employee's interest in a trust to which
this section applies shall be increased by the amount included in his
gross income under this section.
(6) Treatment as owner of trust. In general, a beneficiary of a
trust to which this section applies may not be considered to be the
owner under subpart E, part I, subchapter J, chapter I of the Code of
any portion of such trust which is attributable to contributions to such
trust made by the employer after August 1, 1969, or to incidental
contributions made by the employee after such date. However, where
contributions made by the employee are not incidental when compared to
contributions made by the employer, such beneficiary shall be considered
to be the owner of the portion of the trust attributable to
contributions made by the employee, if the applicable requirements of
such subpart E are satisfied. For purposes of this paragraph (6),
contributions made by an employee are not incidental when compared to
contributions made by the employer if the employee's total contributions
as of any date exceed the employer's total contributions on behalf of
the employee as of such date.
(7) Example. The provisions in this paragraph may be illustrated by
the following example:
Example. On January 1, 1968 M corporation establishes an employees'
trust, which is not exempt under section 501(a), for some of its
employees, including A, reserving the right to discontinue contributions
at any time. M corporation contributes $5,000 on A's behalf to the trust
on February 1, 1968. At the time of contribution 50 percent of A's
interest was substantially vested. On January 1, 1971, and January 1,
1974, M corporation makes additional $5,000 contributions to the trust
on A's behalf. A's interest in the trust changed from a 50 percent
substantially vested to a
[[Page 338]]
100 percent substantialy vested interest in the trust on December 31,
1974. Assume that the value of A's interest in the trust on December 31,
1974, which is attributable to employer contributions made after August
1, 1969, is calculated to be $11,000 under paragraph (b)(3) of this
section. The amount includible in A's gross income for 1971 and 1974 is
computed as follows:
(i) Amount of M corporation's contribution made on January 1, 1971,
to the trust which is includible in A's gross income under paragraph
(b)(1) of this section (50 percent substantially vested interest in the
trust times $5,000 contribution)--$2,500.
1974
(i) Amount of M corporation's contribution made on January 1, 1974,
to the trust which is includible in A's gross income under paragraph
(b)(1) of this section (50 percent substantially vested interest in the
trust times $5,000 contribution)--$2,500.
(ii) Amount which would have been includible if A's entire interest
had changed to a substantially vested interest (value of employee's
interest in the trust attributable to employer contributions made after
August 1, 1969--$11,000.
(iii) Percent of A's interest that became substantially vested on
December 31, 1974--50 percent.
(iv) Amount includible in A;s gross income for 1974 in respect of
his percentage change from a substantially nonvested to a substantially
vested interest in the trust (50 percent of $11,000)--$5,500.
(v) Total amount includible in A's gross income for 1974 ((i) plus
(iv))--$8,000.
(c) Taxation of distributions from trust not exempt under section
501(a)--(1) In general. Any amount actually distributed or made
available to any distributee by an employees' trust in a taxable year in
which it is not exempt under section 501(a) shall be taxable under
section 72 (relating to annuities) to the distributee in the taxable
year in which it is so distributed or made available. For taxable years
beginning after December 31, 1963, such amounts may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). If, for example, the distribution from such a trust
consists of an annuity contract, the amount of the distribution shall be
considered to be the entire value of the contract at the time of
distribution. Such value is includible in the gross income of the
distributee to the extent that such value exceeds the investment in the
contract, determined by applying sections 72 and 101(b). The
distributions by such a trust shall be taxed as provided in section 72
whether or not the employee's rights to the contributions become
substantially vested beforehand. For rules relating to the treatment of
employer contributions to a nonexempt trust as part of the consideration
paid by the employee, see section 72(f). For rules relating to the
treatment of the limited exclusion allowable under section 101(b)(2)(D)
as additional consideration paid by the employee, see the regulations
under that section.
(2) Distributions before annuity starting date. Any amount
distributed or made available to any distributee before the annuity
starting date (as defined in section 72(c)(4)) by an employees' trust in
a taxable year in which it is not exempt under section 501(a) shall be
treated as distributed in the following order--
(i) First, from that portion of the employee's interest in the trust
attributable to contributions made by the employer after August 1, 1969
(other than those referred to in paragraph (d)(1) (ii) or (iii) of this
section) that has not been previously includible in the employee's gross
income, to the extent that such a distribution is permitted under the
trust (or the plan of which the trust is a part);
(ii) Second, from that portion of the employee's interest in the
trust attributable to contributions made by the employer on or before
August 1, 1969 (or contributions referred to in paragraph (d)(1) (ii) or
(iii) of this section);
(iii) Third, from the remaining portion of the employee's interest
in the trust attributable to contributions made by the employer.
If the employee has made contributions to the trust, amounts
attributable thereto shall be treated as distributed prior to any
amounts attributable to the employer's contributions, to the extent
provided by the trust (or the plan of which the trust is a part).
However, the portion of such amounts attributable to income earned on
the employee's contributions made after August 1, 1969, shall be treated
as distributed prior to any return of such contributions.
[[Page 339]]
(d) Taxation by reason of employer contributions made on or before
August 1, 1969. (1) Except as provided in section 402(d) (relating to
taxable years beginning before January 1, 1977), any contribution to a
trust made by an employer on behalf of an employee--
(i) On or before August 1, 1969, or
(ii) After such date, pursuant to a binding contract (as defined in
Sec. 1.83-3(b)(2)) entered into before April 22, 1969, or
(iii) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969, and under which the obligation
of the employer on such date was essentially the same as under a binding
written contract, during a taxable year of the employer which ends
within or with a taxable year of the trust for which the trust is not
exempt under section 501(a) shall be included in income of the employee
for his taxable year during which the contribution is made, if the
employee's beneficial interest in the contribution is nonforfeitable at
the time the contribution is made. If the employee's beneficial interest
in the contribution is forfeitable at the time the contribution is made,
even though his interest becomes nonforfeitable later the amount of such
contribution is not required to be included in the income of the
employee at the time his interest becomes nonforfeitable.
(2)(i) An employee's beneficial interest in the contribution is
nonforfeitable, within the meaning of sections 402(b), 403(c), and
404(a)(5) prior to the amendments made thereto by the Tax Reform Act of
1969 and section 403(b), at the time the contribution is made if there
is no contingency under the plan that may cause the employee to lose his
rights in the contribution. Similarly, an employee's rights under an
annuity contract purchased for him by his employer change from
forfeitable to nonforfeitable rights within the meaning of section
403(d) prior to the repeal thereof by the Tax Reform Act of 1969 at that
time when, for the first time, there is no contingency which may cause
the employee to lose his rights under the contract. For example, if
under the terms of a pension plan, an employee upon termination of his
services before the retirement date, whether voluntarily or
involuntarily, is entitled to a deferred annuity contract to be
purchased with the employer's contributions made on his behalf, or is
entitled to annuity payments which the trustee is abligated to make
under the terms of the trust instrument based on the contributions made
by the employer on his behalf, the employee's beneficial interest in
such contributions is nonforfeitable.
(ii) On the other hand, if, under the terms of a pension plan, an
employee will lose the right to any annuity purchased from or to be
provided by, contributions made by the employer if his services should
be terminated before retirement, his beneficial interest in such
contributions is nonforfeitable.
(iii) The mere fact that an employee may not live to the retirement
date, or may live only a short period after the retirement date, and may
not be able to enjoy the receipt of annuity or pension payments, does
not make his beneficial interest in the contributions made by the
employer on his behalf forfeitable. If the employer's contributions have
been irrevocably applied to purchase an annuity contract for the
employee, or if the trustee is obligated to use the employer's
contributions to provide an annuity for the employee provide only that
the employee is alive on the dates the annuity payments are due, the
employee's rights in the employer's contributions are nonforfeitable.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 588;
68A Stat. 917; 26 U.S.C. 83 and 7805))
[T.D. 7554, 43 FR 31922, July 24, 1978]
Sec. 1.402(c)-1 Taxability of beneficiary of certain foreign situs trusts.
Section 402(c) has the effect of treating, for purposes of section
402, the distributions from a trust which at the time of the
distribution is located outside the United States in the same manner as
distributions from a trust which is located in the United States. If the
trust would qualify for exemption from tax under section 501(a) except
for the fact that it fails to comply with the provisions of paragraph
(a)(3)(i) of Sec. 1.401-1, which restricts
[[Page 340]]
qualification to trusts created or organized in the United States and
maintained here, section 402(a) and Sec. 1.402(a)-1 are applicable to
the distributions from such a trust. Thus, for example, a total
distribution from such a trust is entitled to the long-term capital
gains treatment of section 402(a)(2), except in the case of a
nonresident alien individual (see section 871 and 1441 and the
regulations thereunder). However, if the plan fails to meet any
requirement of section 401 and the regulations thereunder in addition to
paragraph (a)(3)(i) of Sec. 1.401-1, section 402(b) and Sec. 1.402(b)-1
are applicable to the distributions from such a trust.
[T.D. 6500, 25 FR 11679, Nov. 26, 1960]
Sec. 1.402(c)-2 Eligible rollover distributions; questions and answers.
The following questions and answers relate to the rollover rules
under section 402(c) of the Internal Revenue Code of 1986, as added by
sections 521 and 522 of the Unemployment Compensation Amendments of
1992, Public Law 102-318, 106 Stat. 290 (UCA). For additional UCA
guidance under sections 401(a)(31), 402(f), 403(b)(8) and (10), and
3405(c), see Secs. 1.401(a)(31)-1, 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 is the rule regarding distributions that may be rolled
over to an eligible retirement plan?
Q-2: What is an eligible retirement plan and a qualified plan?
Q-3: What is an eligible rollover distribution?
Q-4: Are there other amounts that are not eligible rollover
distributions?
Q-5: For purposes of determining whether a distribution is an
eligible rollover distribution, how is it determined whether a series of
payments is a series of substantially equal periodic payments over a
period specified in section 402(c)(4)(A)?
Q-6: What types of variations in the amount of a payment cause the
payment to be independent of a series of substantially equal periodic
payments and thus not part of the series?
Q-7: When is a distribution from a plan a required minimum
distribution under section 401(a)(9)?
Q-8: How are amounts that are not includible in gross income
allocated for purposes of determining the required minimum distribution?
Q-9: What is a distribution of a plan loan offset amount and is it
an eligible rollover distribution?
Q-10: What is a qualified plan distributed annuity contract, and is
an amount paid under such a contract a distribution of the balance to
the credit of the employee in a qualified plan for purposes of section
402(c)?
Q-11: If an eligible rollover distribution is paid to an employee,
and the employee contributes all or part of the eligible rollover
distribution to an eligible retirement plan within 60 days, is the
amount contributed not currently includible in gross income?
Q-12: How does section 402(c) apply to a distributee who is not the
employee?
Q-13: Must an employee's (or spousal distributee's) election to
treat a contribution of an eligible rollover distribution to an
individual retirement plan as a rollover contribution be irrevocable?
Q-14: How is the $5,000 death benefit exclusion under section 101(b)
treated for purposes of determining the amount that is an eligible
rollover distribution?
Q-15: May an employee (or spousal distributee) roll over more than
the plan administrator determines to be an eligible rollover
distribution using an assumption described in Sec. 1.401(a)(31)-1, Q&A-
18?
Q-16: Is a rollover from a qualified plan to an individual
retirement account or individual retirement annuity treated as a
rollover contribution for purposes of the one-year look-back rollover
limitation of section 408(d)(3)(B)?
Questions and Answers
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan?
A-1: (a) General rule. Under section 402(c), as added by UCA, any
portion of a distribution from a qualified plan that is an eligible
rollover distribution described in section 402(c)(4) may be rolled over
to an eligible retirement plan described in section 402(c)(8)(B). For
purposes of section 402(c) and this section, a rollover is either a
direct rollover as described in Sec. 1.401(a)(31)-1, Q&A-3 or a
contribution of an eligible rollover distribution to an eligible
retirement plan that satisfies the time period requirement in section
402(c)(3) and Q&A-11 of this section and the designation requirement
described in Q&A-13 of this section. See Q&A-2 of this section for the
definition of an eligible retirement plan and a qualified plan.
[[Page 341]]
(b) Related Internal Revenue Code provisions--(1) Direct rollover
option. Section 401(a)(31), added by UCA, requires qualified plans to
provide a distributee of an eligible rollover distribution the option to
elect to have the distribution paid directly to an eligible retirement
plan in a direct rollover. See Sec. 1.401(a)(31)-1 for further guidance
concerning this direct rollover option.
(2) Notice requirement. Section 402(f) requires the plan
administrator of a qualified plan to provide, within a reasonable 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) Mandatory income tax 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 provisions relating to the withholding requirements applicable to
eligible rollover distributions.
(4) Section 403(b) annuities. 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 402(c),
added by UCA, applies to eligible rollover distributions made on or
after January 1, 1993, even if the event giving rise to the distribution
occurred on or before January 1, 1993 (e.g. termination of the
employee's employment with the employer maintaining the plan before
January 1, 1993), and even if the eligible rollover distribution is part
of a series of payments that began before January 1, 1993.
(2) Regulatory effective date. This section applies to any
distribution made on or after October 19, 1995. For eligible rollover
distributions made on or after January 1, 1993 and before October 19,
1995, Sec. 1.402(c)-2T (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, any or all of the
provisions of this section may be substituted for the corresponding
provisions of Sec. 1.402(c)-2T, if any.
Q-2: What is an eligible retirement plan and a qualified plan?
A-2: An eligible retirement plan, under section 402(c)(8)(B), means
a qualified plan or an individual retirement plan. For purposes of
section 402(c) and this section, a qualified plan is an employees' trust
described in section 401(a) which is exempt from tax under section
501(a) or an annuity plan described in section 403(a). An individual
retirement plan is an individual retirement account described in section
408(a) or an individual retirement annuity (other than an endowment
contract) described in section 408(b).
Q-3: What is an eligible rollover distribution?
A-3: (a) General rule. Unless specifically excluded, an eligible
rollover distribution means any distribution to an employee (or to a
spousal distributee described in Q&A-12(a) of this section) of all or
any portion of the balance to the credit of the employee in a qualified
plan. Thus, except as specifically provided in Q&A-4(b) of this section,
any amount distributed to an employee (or such a spousal distributee)
from a qualified plan is an eligible rollover distribution, regardless
of whether it is a distribution of a benefit that is protected under
section 411(d)(6).
(b) Exceptions. An eligible rollover distribution does not include
the following:
(1) Any distribution that is one of a series of substantially equal
periodic payments made (not less frequently than annually) over any one
of the following periods--
(i) The life of the employee (or the joint lives of the employee and
the employee's designated beneficiary);
(ii) The life expectancy of the employee (or the joint life and last
survivor expectancy of the employee and the employee's designated
beneficiary); or
[[Page 342]]
(iii) A specified period of ten years or more;
(2) Any distribution to the extent the distribution is a required
minimum distribution under section 401(a)(9); or
(3) The portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation described in section 402(e)(4)). Thus, for example, an
eligible rollover distribution does not include the portion of any
distribution that is excludible from gross income under section 72 as a
return of the employee's investment in the contract (e.g., a return of
the employee's after-tax contributions), but does include net unrealized
appreciation.
Q-4: Are there other amounts that are not eligible rollover
distributions?
A-4: Yes. The following amounts are not eligible rollover
distributions:
(a) Elective deferrals, as defined in section 402(g)(3), that,
pursuant to Sec. 1.415-6(b)(6)(iv), are returned as a result of the
application of the section 415 limitations, together with the income
allocable to these corrective distributions.
(b) Corrective distributions of excess deferrals as described in
Sec. 1.402(g)-1(e)(3), together with the income allocable to these
corrective distributions.
(c) Corrective distributions of excess contributions under a
qualified cash or deferred arrangement described in Sec. 1.401(k)-
1(f)(4) and excess aggregate contributions described in Sec. 1.401(m)-
1(e)(3), together with the income allocable to these distributions.
(d) Loans that are treated as deemed distributions pursuant to
section 72(p).
(e) Dividends paid on employer securities as described in section
404(k).
(f) The costs of life insurance coverage (P.S. 58 costs).
(g) Similar items designated by the Commissioner in revenue rulings,
notices, and other guidance published in the Internal Revenue Bulletin.
See Sec. 601.601(d)(2)(ii)(b) of this chapter.
Q-5: For purposes of determining whether a distribution is an
eligible rollover distribution, how is it determined whether a series of
payments is a series of substantially equal periodic payments over a
period specified in section 402(c)(4)(A)?
A-5: (a) General rule. Generally, whether a series of payments is a
series of substantially equal periodic payments over a specified period
is determined at the time payments begin, and by following the
principles of section 72(t)(2)(A)(iv), without regard to contingencies
or modifications that have not yet occurred. Thus, for example, a joint
and 50-percent survivor annuity will be treated as a series of
substantially equal payments at the time payments commence, as will a
joint and survivor annuity that provides for increased payments to the
employee if the employee's beneficiary dies before the employee.
Similarly, for purposes of determining if a disability benefit payment
is part of a series of substantially equal payments for a period
described in section 402(c)(4)(A), any contingency under which payments
cease upon recovery from the disability may be disregarded.
(b) Certain supplements disregarded. For purposes of determining
whether a distribution is one of a series of payments that are
substantially equal, social security supplements described in section
411(a)(9) are disregarded. For example, if a distributee receives a life
annuity of $500 per month, plus a social security supplement consisting
of payments of $200 per month until the distributee reaches the age at
which social security benefits of not less than $200 a month begin, the
$200 supplemental payments are disregarded and, therefore, each monthly
payment of $700 made before the social security age and each monthly
payment of $500 made after the social security age is treated as one of
a series of substantially equal periodic payments for life. A series of
payments that are not substantially equal solely because the amount of
each payment is reduced upon attainment of social security retirement
age (or, alternatively, upon commencement of social security early
retirement, survivor, or disability benefits) will also be treated as
substantially equal as long as the reduction in the actual payments is
level and does not exceed the applicable social security benefit.
(c) Changes in the amount of payments or the distributee. If the
amount (or, if applicable, the method of calculating
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the amount) of the payments changes so that subsequent payments are not
substantially equal to prior payments, a new determination must be made
as to whether the remaining payments are a series of substantially equal
periodic payments over a period specified in Q&A-3(b)(1) of this
section. This determination is made without taking into account payments
made or the years of payment that elapsed prior to the change. However,
a new determination is not made merely because, upon the death of the
employee, the spouse or former spouse of the employee becomes the
distributee. Thus, once distributions commence over a period that is at
least as long as either the first annuitant's life or 10 years (e.g., as
provided by a life annuity with a five-year or ten-year-certain
guarantee), then substantially equal payments to the survivor are not
eligible rollover distributions even though the payment period remaining
after the death of the employee is or may be less than the period
described in section 402(c)(4)(A). For example, substantially equal
periodic payments made under a life annuity with a five-year term
certain would not be an eligible rollover distribution even when paid
after the death of the employee with three years remaining under the
term certain.
(d) Defined contribution plans. The following rules apply in
determining whether a series of payments from a defined contribution
plan constitute substantially equal periodic payments for a period
described in section 402(c)(4)(A):
(1) Declining balance of years. A series of payments from an account
balance under a defined contribution plan will be considered
substantially equal payments over a period if, for each year, the amount
of the distribution is calculated by dividing the account balance by the
number of years remaining in the period. For example, a series of
payments will be considered substantially equal payments over 10 years
if the series is determined as follows. In year 1, the annual payment is
the account balance divided by 10; in year 2, the annual payment is the
remaining account balance divided by 9; and so on until year 10 when the
entire remaining balance is distributed.
(2) Reasonable actuarial assumptions. If an employee's account
balance under a defined contribution plan is to be distributed in annual
installments of a specified amount until the account balance is
exhausted, then, for purposes of determining if the period of
distribution is a period described in section 402(c)(4)(A), the period
of years over which the installments will be distributed must be
determined using reasonable actuarial assumptions. For example, if an
employee has an account balance of $100,000, elects distributions of
$12,000 per year until the account balance is exhausted, and the future
rate of return is assumed to be 8% per year, the account balance will be
exhausted in approximately 14 years. Similarly, if the same employee
elects a fixed annual distribution amount and the fixed annual amount is
less than or equal to $10,000, it is reasonable to assume that a future
rate of return will be greater than 0% and, thus, the account will not
be exhausted in less than 10 years.
(e) Series of payments beginning before January 1, 1993. Except as
provided in paragraph (c) of this Q&A, if a series of periodic payments
began before January 1, 1993, the determination of whether the post-
December 31, 1992 payments are a series of substantially equal periodic
payments over a specified period is made by taking into account all
payments made, including payments made before January 1, 1993. For
example, if a series of substantially equal periodic payments beginning
on January 1, 1983, is scheduled to be paid over a period of 15 years,
payments in the series that are made after December 31, 1992, will not
be eligible rollover distributions even though they will continue for
only five years after December 31, 1992, because the pre- January 1,
1993 payments are taken into account in determining the specified
period.
Q-6: What types of variations in the amount of a payment cause the
payment to be independent of a series of substantially equal periodic
payments and thus not part of the series?
A-6: (a) Independent payments. Except as provided in paragraph (b)
of this Q&A, a payment is treated as independent of the payments in a
series of substantially equal payments, and thus not part of the series,
if the payment is
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substantially larger or smaller than the other payments in the series.
An independent payment is an eligible rollover distribution if it is not
otherwise excepted from the definition of eligible rollover
distribution. This is the case regardless of whether the payment is made
before, with, or after payments in the series. For example, if an
employee elects a single payment of half of the account balance with the
remainder of the account balance paid over the life expectancy of the
distributee, the single payment is treated as independent of the
payments in the series and is an eligible rollover distribution unless
otherwise excepted. Similarly, if an employee's surviving spouse
receives a survivor life annuity of $1,000 per month plus a single
payment on account of death of $7,500, the single payment is treated as
independent of the payments in the annuity and is an eligible rollover
distribution unless otherwise excepted (e.g., $5,000 of the $7,500 might
qualify to be excluded from gross income as a death benefit under
section 101(b)).
(b) Special rules--(1) Administrative error or delay. If, due solely
to reasonable administrative error or delay in payment, there is an
adjustment after the annuity starting date to the amount of any payment
in a series of payments that otherwise would constitute a series of
substantially equal payments described in section 402(c)(4)(A) and this
section, the adjusted payment or payments will be treated as part of the
series of substantially equal periodic payments and will not be treated
as independent of the payments in the series. For example, if, due
solely to reasonable administrative delay, the first payment of a life
annuity is delayed by two months and reflects an additional two months
worth of benefits, that payment will be treated as a substantially equal
payment in the series rather than as an independent payment. The result
will not change merely because the amount of the adjustment is paid in a
separate supplemental payment.
(2) Supplemental payments for annuitants. A supplemental payment
from a defined benefit plan to annuitants (e.g., retirees or
beneficiaries) will be treated as part of a series of substantially
equal payments, rather than as an independent payment, provided that the
following conditions are met--
(i) The supplement is a benefit increase for annuitants;
(ii) The amount of the supplement is determined in a consistent
manner for all similarly situated annuitants;
(iii) The supplement is paid to annuitants who are otherwise
receiving payments that would constitute substantially equal periodic
payments; and
(iv) The aggregate supplement is less than or equal to the greater
of 10% of the annual rate of payment for the annuity, or $750 or any
higher amount prescribed by the Commissioner in revenue rulings,
notices, and other guidance published in the Federal Register. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(3) Final payment in a series. If a payment in a series of payments
from an account balance under a defined contribution plan represents the
remaining balance to the credit and is substantially less than the other
payments in the series, the final payment must nevertheless be treated
as a payment in the series of substantially equal payments and may not
be treated as an independent payment if the other payments in the series
are substantially equal and the payments are for a period described in
section 402(c)(4)(A) based on the rules provided in paragraph (d)(2) of
Q&A-5 of this section. Thus, such final payment will not be an eligible
rollover distribution.
Q-7: When is a distribution from a plan a required minimum
distribution under section 401(a)(9)?
A-7: (a) General rule. Except as provided in paragraphs (b) and (c)
of this Q&A, if a minimum distribution is required for a calendar year,
the amounts distributed during that calendar year are treated as
required minimum distributions under section 401(a)(9), to the extent
that the total required minimum distribution under section 401(a)(9) for
the calendar year has not been satisfied. Accordingly, these amounts are
not eligible rollover distributions. For example, if an employee is
required under section 401(a)(9) to receive a required minimum
distribution for a calendar year of $5,000 and the employee receives a
total
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of $7,200 in that year, the first $5,000 distributed will be treated as
the required minimum distribution and will not be an eligible rollover
distribution and the remaining $2,200 will be an eligible rollover
distribution if it otherwise qualifies. If the total section 401(a)(9)
required minimum distribution for a calendar year is not distributed in
that calendar year (e.g., when the distribution for the calendar year in
which the employee reaches age 70\1/2\ is made on the following April
1), the amount that was required but not distributed is added to the
amount required to be distributed for the next calendar year in
determining the portion of any distribution in the next calendar year
that is a required minimum distribution.
(b) Distribution before age 70\1/2\. Any amount that is paid before
January 1 of the year in which the employee attains (or would have
attained) age 70\1/2\ will not be treated as required under section
401(a)(9) and, thus, is an eligible rollover distribution if it
otherwise qualifies.
(c) Special rule for annuities. In the case of annuity payments from
a defined benefit plan, or under an annuity contract purchased from an
insurance company (including a qualified plan distributed annuity
contract (as defined in Q&A-10 of this section)), the entire amount of
any such annuity payment made on or after January 1 of the year in which
an employee attains (or would have attained) age 70\1/2\ will be treated
as an amount required under section 401(a)(9) and, thus, will not be an
eligible rollover distribution.
Q-8: How are amounts that are not includible in gross income
allocated for purposes of determining the required minimum distribution?
A-8: If section 401(a)(9) has not yet been satisfied by the plan for
the year with respect to an employee, a distribution is made to the
employee that exceeds the amount required to satisfy section 401(a)(9)
for the year for the employee, and a portion of that distribution is
excludible from gross income, the following rule applies for purposes of
determining the amount of the distribution that is an eligible rollover
distribution. The portion of the distribution that is excludible from
gross income is first allocated toward satisfaction of section 401(a)(9)
and then the remaining portion of the required minimum distribution, if
any, is satisfied from the portion of the distribution that is
includible in gross income. For example, assume an employee is required
under section 401(a)(9) to receive a minimum distribution for a calendar
year of $4,000 and the employee receives a $4,800 distribution, of which
$1,000 is excludible from income as a return of basis. First, the $1,000
return of basis is allocated toward satisfying the required minimum
distribution. Then, the remaining $3,000 of the required minimum
distribution is satisfied from the $3,800 of the distribution that is
includible in gross income, so that the remaining balance of the
distribution, $800, is an eligible rollover distribution if it otherwise
qualifies.
Q-9: What is a distribution of a plan loan offset amount, and is it
an eligible rollover distribution?
A-9: (a) General rule. A distribution of a plan loan offset amount,
as defined in paragraph (b) of this Q&A, is an eligible rollover
distribution if it satisfies Q&A-3 of this section. Thus, an amount
equal to the plan loan offset amount can be rolled over by the employee
(or spousal distributee) to an eligible retirement plan within the 60-
day period under section 402(c)(3), unless the plan loan offset amount
fails to be an eligible rollover distribution for another reason. See
Sec. 1.401(a)(31)-1, Q&A-16 for guidance concerning the offering of a
direct rollover of a plan loan offset amount. See Sec. 31.3405(c)-1,
Q&A-11 of this chapter for guidance concerning special withholding rules
with respect to plan loan offset amounts.
(b) Definition of plan loan offset amount. For purposes of section
402(c), a distribution of a plan loan offset amount is a distribution
that occurs when, under the plan terms governing a plan loan, the
participant's accrued benefit is reduced (offset) in order to repay the
loan (including the enforcement of the plan's security interest in a
participant's accrued benefit). A distribution of a plan loan offset
amount can occur in a variety of circumstances, e.g., where the terms
governing a plan loan require that, in the
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event of the employee's termination of employment or request for a
distribution, the loan be repaid immediately or treated as in default. A
distribution of a plan loan offset amount also occurs when, under the
terms governing the plan loan, the loan is cancelled, accelerated, or
treated as if it were in default (e.g., where the plan treats a loan as
in default upon an employee's termination of employment or within a
specified period thereafter). A distribution of a plan loan offset
amount is an actual distribution, not a deemed distribution under
section 72(p).
(c) Examples. The rules with respect to a plan loan offset amount in
this Q&A-9, Sec. 1.401(a)(31)-1, Q&A-16 and Sec. 31.3405(c)-1, Q&A-11 of
this chapter are illustrated by the following examples:
Example 1. (a) In 1996, Employee A has an account balance of $10,000
in Plan Y, of which $3,000 is invested in a plan loan to Employee A that
is secured by Employee A's account balance in Plan Y. Employee A has
made no after-tax employee contributions to Plan Y. Plan Y does not
provide any direct rollover option with respect to plan loans. Upon
termination of employment in 1996, Employee A, who is under age 70\1/2\
, elects a distribution of Employee A's entire account balance in Plan
Y, and Employee A's outstanding loan is offset against the account
balance on distribution. Employee A elects a direct rollover of the
distribution.
(b) In order to satisfy section 401(a)(31), Plan Y must pay $7,000
directly to the eligible retirement plan chosen by Employee A in a
direct rollover. When Employee A's account balance was offset by the
amount of the $3,000 unpaid loan balance, Employee A received a plan
loan offset amount (equivalent to $3,000) that is an eligible rollover
distribution. However, under Sec. 1.401(a)(31)-1, Q&A-16 Plan Y
satisfies section 401(a)(31), even though a direct rollover option was
not provided with respect to the $3,000 plan loan offset amount.
(c) No withholding is required under section 3405(c) on account of
the distribution of the $3,000 plan loan offset amount because no cash
or other property (other than the plan loan offset amount) is received
by Employee A from which to satisfy the withholding. Employee A may roll
over $3,000 to an eligible retirement plan within the 60 day period
provided in section 402(c)(3).
Example 2. (a) The facts are the same as in Example 1, except that
the terms governing the plan loan to Employee A provide that, upon
termination of employment, Employee A's account balance is automatically
offset by the amount of any unpaid loan balance to repay the loan.
Employee A terminates employment but does not request a distribution
from Plan Y. Nevertheless, pursuant to the terms governing the plan
loan, Employee A's account balance is automatically offset by the amount
of the $3,000 unpaid loan balance.
(b) The $3,000 plan loan offset amount attributable to the plan loan
in this example is treated in the same manner as the $3,000 plan loan
offset amount in Example 1.
Example 3. (a) The facts are the same as in Example 2, except that,
instead of providing for an automatic offset upon termination of
employment to repay the plan loan, the terms governing the plan loan
require full repayment of the loan by Employee A within 30 days of
termination of employment. Employee A terminates employment, does not
elect a distribution from Plan Y, and also fails to repay the plan loan
within 30 days. The plan administrator of Plan Y declares the plan loan
to Employee A in default and executes on the loan by offsetting Employee
A's account balance by the amount of the $3,000 unpaid loan balance.
(b) The $3,000 plan loan offset amount attributable to the plan loan
in this example is treated in the same manner as the $3,000 plan loan
offset amount in Example 1 and in Example 2. The result in this Example
3 is the same even though the plan administrator treats the loan as in
default before offsetting Employee A's accrued benefit by the amount of
the unpaid loan.
Example 4. (a) The facts are the same as in Example 1, except that
Employee A elects to receive the distribution of the account balance
that remains after the $3,000 offset to repay the plan loan, instead of
electing a direct rollover of the remaining account balance.
(b) In this case, the amount of the distribution received by
Employee A is $10,000, not $3,000. Because the amount of the $3,000
offset attributable to the loan is included in determining the amount
that equals 20 percent of the eligible rollover distribution received by
Employee A, withholding in the amount of $2,000 (20 percent of $10,000)
is required under section 3405(c). The $2,000 is required to be withheld
from the $7,000 to be distributed to Employee A in cash, so that
Employee A actually receives a check for $5,000.
Example 5. The facts are the same as in Example 4, except that the
$7,000 distribution to Employee A after the offset to repay the loan
consists solely of employer securities within the meaning of section
402(e)(4)(E). In this case, no withholding is required under section
3405(c) because the distribution consists solely of the $3,000 plan loan
offset amount and the $7,000 distribution of employer securities. This
is the result because the total amount required to be withheld does not
exceed the sum of the cash and the
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fair market value of other property distributed, excluding plan loan
offset amounts and employer securities. Employee A may roll over the
employer securities and $3,000 to an eligible retirement plan within the
60-day period provided in section 402(c)(3).
Example 6. Employee B, who is age 40, has an account balance in Plan
Z, a profit sharing plan qualified under section 401(a) that includes a
qualified cash or deferred arrangement described in section 401(k). Plan
Z provides for no after-tax employee contributions. In 1990, Employee B
receives a loan from Plan Z, the terms of which satisfy section
72(p)(2), and which is secured by elective contributions subject to the
distribution restrictions in section 401(k)(2)(B). In 1996, the loan
fails to satisfy section 72(p)(2) because Employee B stops repayment. In
that year, pursuant to section 72(p), Employee B is taxed on a deemed
distribution equal to the amount of the unpaid loan balance. Under Q&A-4
of this section, the deemed distribution is not an eligible rollover
distribution. Because Employee B has not separated from service or
experienced any other event that permits the distribution under section
401(k)(2)(B) of the elective contributions that secure the loan, Plan Z
is prohibited from executing on the loan. Accordingly, Employee B's
account balance is not offset by the amount of the unpaid loan balance
at the time Employee B stops repayment on the loan. Thus, there is no
distribution of an offset amount that is an eligible rollover
distribution in 1996.
Q-10: What is a qualified plan distributed annuity contract, and is
an amount paid under such a contract a distribution of the balance to
the credit of the employee in a qualified plan for purposes of section
402(c)?
A-10: (a) Definition of a qualified plan distributed annuity
contract. A qualified plan distributed annuity contract is an annuity
contract purchased for a participant, and distributed to the
participant, by a qualified plan.
(b) Treatment of amounts paid as eligible rollover distributions.
Amounts paid under a qualified plan distributed annuity contract are
payments of the balance to the credit of the employee for purposes of
section 402(c) and are eligible rollover distributions, if they
otherwise qualify. Thus, for example, if the employee surrenders the
contract for a single sum payment of its cash surrender value, the
payment would be an eligible rollover distribution to the extent it is
includible in gross income and not a required minimum distribution under
section 401(a)(9). This rule applies even if the annuity contract is
distributed in connection with a plan termination. See
Sec. 1.401(a)(31)-1, Q&A-17 and Sec. 31.3405(c)-1, Q&A-13 of this
chapter concerning the direct rollover requirements and 20-percent
withholding requirements, respectively, that apply to eligible rollover
distributions from such an annuity contract.
Q-11: If an eligible rollover distribution is paid to an employee,
and the employee contributes all or part of the eligible rollover
distribution to an eligible retirement plan within 60 days, is the
amount contributed not currently includible in gross income?
A-11: Yes, the amount contributed is not currently includible in
gross income, provided that it is contributed to the eligible retirement
plan no later than the 60th day following the day on which the employee
received the distribution. If more than one distribution is received by
an employee from a qualified plan during a taxable year, the 60-day rule
applies separately to each distribution. Because the amount withheld as
income tax under section 3405(c) is considered an amount distributed
under section 402(c), an amount equal to all or any portion of the
amount withheld can be contributed as a rollover to an eligible
retirement plan within the 60-day period, in addition to the net amount
of the eligible rollover distribution actually received by the employee.
However, if all or any portion of an amount equal to the amount withheld
is not contributed as a rollover, it is included in the employee's gross
income to the extent required under section 402(a), and also may be
subject to the 10-percent additional income tax under section 72(t). See
Sec. 1.401(a)(31)-1, Q&A-14, for guidance concerning the qualification
of a plan that accepts a rollover contribution.
Q-12: How does section 402(c) apply to a distributee who is not the
employee?
A-12: (a) Spousal distributee. If any distribution attributable to
an employee is paid to the employee's surviving spouse, section 402(c)
applies to the distribution in the same manner as if the spouse were the
employee. The same rule applies if any distribution attributable to an
employee is paid in accordance with a qualified domestic
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relations order (as defined in section 414(p)) to the employee's spouse
or former spouse who is an alternate payee. Therefore, a distribution to
the surviving spouse of an employee (or to a spouse or former spouse who
is an alternate payee under a qualified domestic relations order),
including a distribution of ancillary death benefits attributable to the
employee, is an eligible rollover distribution if it meets the
requirements of section 402(c)(2) and (4) and Q&A-3 through Q&A-10 and
Q&A-14 of this section. However, a qualified plan (as defined in Q&A-2
of this section) is not treated as an eligible retirement plan with
respect to a surviving spouse. Only an individual retirement plan is
treated as an eligible retirement plan with respect to an eligible
rollover distribution to a surviving spouse.
(b) Non-spousal distributee. A distributee other than the employee
or the employee's surviving spouse (or a spouse or former spouse who is
an alternate payee under a qualified domestic relations order) is not
permitted to roll over distributions from a qualified plan. Therefore,
those distributions do not constitute eligible rollover distributions
under section 402(c)(4) and are not subject to the 20-percent income tax
withholding under section 3405(c).
Q-13: Must an employee's (or spousal distributee's) election to
treat a contribution of an eligible rollover distribution to an
individual retirement plan as a rollover contribution be irrevocable?
A-13: (a) In general. Yes. In order for a contribution of an
eligible rollover distribution to an individual retirement plan to
constitute a rollover and, thus, to qualify for current exclusion from
gross income, a distributee must elect, at the time the contribution is
made, to treat the contribution as a rollover contribution. An election
is made by designating to the trustee, issuer, or custodian of the
eligible retirement plan that the contribution is a rollover
contribution. This election is irrevocable. Once any portion of an
eligible rollover distribution has been contributed to an individual
retirement plan and designated as a rollover distribution, taxation of
the withdrawal of the contribution from the individual retirement plan
is determined under section 408(d) rather than under section 402 or 403.
Therefore, the eligible rollover distribution is not eligible for
capital gains treatment, five-year or ten-year averaging, or the
exclusion from gross income for net unrealized appreciation on employer
stock.
(b) Direct rollover. If an eligible rollover distribution is paid to
an individual retirement plan in a direct rollover at the election of
the distributee, the distributee is deemed to have irrevocably
designated that the direct rollover is a rollover contribution.
Q-14: How is the $5,000 death benefit exclusion under section 101(b)
treated for purposes of determining the amount that is an eligible
rollover distribution?
A-14: To the extent that a death benefit is a distribution from a
qualified plan, the portion of the distribution that is excluded from
gross income under section 101(b) is not an eligible rollover
distribution. See Sec. 1.401(a)(31)-1, Q&A-18 for guidance concerning
assumptions that a plan administrator may make with respect to whether
and to what extent a distribution of a survivor benefit is excludible
from gross income under section 101(b).
Q-15: May an employee (or spousal distributee) roll over more than
the plan administrator determines to be an eligible rollover
distribution using an assumption described in Sec. 1.401(a)(31)-1, Q&A-
18?
A-15: Yes. The portion of any distribution that an employee (or
spousal distributee) may roll over as an eligible rollover distribution
under section 402(c) is determined based on the actual application of
section 402 and other relevant provisions of the Internal Revenue Code.
The actual application of these provisions may produce different results
than any assumption described in Sec. 1.401(a)(31)-1, Q&A-18 that is
used by the plan administrator. Thus, for example, even though the plan
administrator calculates the portion of a distribution that is a
required minimum distribution (and thus is not made eligible for direct
rollover under section 401(a)(31)), by assuming that there is no
designated beneficiary, the portion of
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the distribution that is actually a required minimum distribution and
thus not an eligible rollover distribution is determined by taking into
account the designated beneficiary, if any. If, by taking into account
the designated beneficiary, a greater portion of the distribution is an
eligible rollover distribution, the distributee may rollover the
additional amount. Similarly, even though a plan administrator assumes
that a distribution from a qualified plan is the only death benefit with
respect to an employee that qualifies for the $5,000 death benefit
exclusion under section 101(b), to the extent that the death benefit
exclusion is allocated to a different death benefit, a greater portion
of the distribution may actually be includible in gross income and,
thus, be an eligible rollover distribution, and the surviving spouse may
roll over the additional amount if it otherwise qualifies.
Q-16: Is a rollover from a qualified plan to an individual
retirement account or individual retirement annuity treated as a
rollover contribution for purposes of the one-year look-back rollover
limitation of section 408(d)(3)(B)?
A-16: No. A distribution from a qualified plan that is rolled over
to an individual retirement account or individual retirement annuity is
not treated for purposes of section 408(d)(3)(B) as an amount received
by an individual from an individual retirement account or individual
retirement annuity which is not includible in gross income because of
the application of section 408(d)(3).
[T.D. 8619, 60 FR 49208, Sept. 22, 1995, as amended by T.D. 8880, 65 FR
21315, Apr. 21, 2000]
Sec. 1.402(d)-1 Effect of section 402(d).
(a) If the requirements of section 402(d) are met, a contribution
made by an employer on behalf of an employee to a trust which is not
exempt under section 501(a) shall not be included in the income of the
employee in the year in which the contribution is made. Such
contribution will be taxable to the employee, when received in later
years, as provided in section 72 (relating to annuities). For taxable
years beginning before January 1, 1964, section 72(e)(3) (relating to
the treatment of certain lump sums), as in effect before such date,
shall not apply to such contributions. For taxable years beginning after
December 31, 1963, such contributions, when received, may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). See paragraph (b) of Sec. 1.403(c)-1. The intent and
purpose of section 402(d) is to give those employees, covered under
certain non-exempt trusts to which such section applies, essentially the
same tax treatment as those covered by trusts described in section
401(a) and exempt under section 501(a), except that the capital gains
treatment referred to in section 402(a)(2) does not apply.
(b) Every person claiming the benefit of section 402(d) must be able
to demonstrate to the satisfaction of the Commissioner that all of the
provisions of such section are met. The taxpayer must produce sufficient
evidence to prove:
(1) That, before October 21, 1942, he was employed by the particular
employer making the contribution in question and was at such time
definitely covered by a written agreement, entered into before October
21, 1942, between himself and the employer, or between the employer and
the trustee of a trust established by the employer before October 21,
1942, and that the contribution by the employer was made pursuant to
such agreement. The fact that an employee may have been potentially
covered is not sufficient. Evidence that the employment was entered
into, or the agreement executed, ``as of'' a date before October 21,
1942, or that the agreement or trust instrument which did not
theretofore meet the requirements of section 402(d) was modified or
amended after October 20, 1942, so as to come within the provisions of
such section, will not satisfy the requirements of section 402(d).
(2) That such contribution, pursuant to the terms of such agreement,
was to be applied for the purchase of an annuity contract for the
taxpayer. In the case of a contribution by the employer of an annuity
contract purchased by such employer and transferred by him to the
trustee of the trust, evidence should be presented to prove that such
[[Page 350]]
contract was purchased for the taxpayer by the employer pursuant to the
terms of a written agreement between the employer and the employee or
between the employer and the trustee, entered into before October 21,
1942.
(3) That under the written terms of the trust agreement the taxpayer
is not entitled during his lifetime, except with the consent of the
trustee, to any payments other than annuity payments under the annuity
contract or contracts purchased by the trustee or by the employer and
transferred to the trustee, and that the trustee may grant or withhold
such consent free from control by the taxpayer, the employer, or any
other person. However, such control will not be presumed from the fact
that the trustee is himself an officer or employee of the employer. As
used in section 402(d) the phrase ``if * * * under the terms of the
trust agreement the employee is not entitled'' means that the trust
instrument must make it impossible for the prohibited distribution to
occur whether by operation or natural termination of the trust, whether
by power of revocation or amendment, other than with the consent of the
trustee, whether by the happening of a contingency, by collateral
arrangement, or any other means. It is not essential that the employer
relinquish all power to modify or terminate the trust but it must be
impossible, except with the consent of the trustee, to be received by
the taxpayer contracts purchased by the trustee, or by the employer and
transferred to the trustee, to be received by the taxpayer directly or
indirectly, other than as annuity payments.
(4) The nature and amount of such contribution and the extent to
which income taxes have been paid thereon before January 1, 1949, and
not credited or refunded.
(5) If it is claimed that section 402(d) applies to amounts
contributed to a trust after June 1, 1949, the taxpayer must prove to
the satisfaction of the Commissioner that the trust did not, on June 1,
1949, qualify for exemption under section 165(a) of the Internal Revenue
Code of 1939. Where an employer buys an annuity contract which is
transferred to the trustee, the date of the purchase of the annuity
contract and not the date of the transfer to the trustee is the
controlling date in determining whether or not the contribution was made
to the trust after June 1, 1949.
[T.D. 6500, 25 FR 11679, Nov. 26, 1960, as amended by T.D. 6885, 31 FR
7801, June 2, 1966]
Sec. 1.402(e)-1 Certain plan terminations.
Distributions made after December 31, 1953, and before January 1,
1955, as a result of the complete termination of an employees' trust
described in section 401(a) which is exempt under section 501(a) shall
be considered distributions on account of separation form service for
purposes of section 402(a)(2) if the employer who established the trust
is a corporation, and the termination of the plan is incident to the
complete liquidation of the corporation before August 16, 1954,
regardless of whether such liquidation is incident to a reorganization
as defined in section 368.
[T.D. 6500, 25 FR 11680, Nov. 26, 1960]
Sec. 1.402(f)-1 Required explanation of eligible rollover distributions; questions and answers.
The following questions and answers concern the written explanation
requirement imposed by section 402(f) of the Internal Revenue Code of
1986 relating to distributions eligible for rollover treatment. Section
402(f) was amended by section 521(a) of the Unemployment Compensation
Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). For
additional UCA guidance under sections 401(a)(31), 402(c), 403(b)(8) and
(10), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.403(b)-2, and
31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What are the requirements for a written explanation under
section 402(f)?
Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?
Q-3: Must the plan administrator provide a separate section 402(f)
notice for each distribution in a series of periodic payments that are
eligible rollover distributions?
[[Page 351]]
Q-4: May a plan administrator post the section 402(f) notice as a
means of providing it to distributees?
Questions and Answers
Q-1: What are the requirements for a written explanation under
section 402(f)?
A-1: (a) General rule. Under section 402(f), as amended by UCA, the
plan administrator of a qualified plan is required, within a reasonable
period of time before making an eligible rollover distribution, to
provide the distributee with the written explanation described in
section 402(f) (section 402(f) notice). The section 402(f) notice must
be designed to be easily understood and must explain the following: the
rules under which the distributee may elect that the distribution be
paid in the form of a direct rollover to an eligible retirement plan;
the rules that require the withholding of tax on the distribution if it
is not paid in a direct rollover; the rules under which the distributee
may defer tax on the distribution if it is contributed in a rollover to
an eligible retirement plan within 60 days of the distribution; and if
applicable, certain special rules regarding the taxation of the
distribution as described in section 402(d) (averaging with respect to
lump sum distributions) and (e) (other rules including treatment of net
unrealized appreciation). See Sec. 1.401(a)(31)-1, Q&A-7 for additional
information that must be provided if a plan provides a default procedure
regarding the election of a direct rollover.
(b) Model section 402(f) notice. The plan administrator will be
deemed to have complied with the requirements of paragraph (a) of this
Q&A-1 relating to the contents of the section 402(f) notice if the plan
administrator provides the applicable model section 402(f) notice
published by the Internal Revenue Service for this purpose in a revenue
ruling, notice, or other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
(c) Delegation to Commissioner. The Commissioner, in revenue
rulings, notices, and other guidance, published in the Internal Revenue
Bulletin, may modify, or provide any additional guidance with respect
to, the notice requirement of this section. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(d) Effective date--(1) Statutory effective date. Section 402(f)
applies to eligible rollover distributions made after December 31, 1992.
(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. 1.402(c)-2T, Q&A-11 through 15 (as it appeared in
the April 1, 1995 edition of 26 CFR part 1), apply. However, for any
distribution made on or after January 1, 1993 but before October 19,
1995, a plan administrator or payor may satisfy the requirements of
section 402(f) by substituting any or all provisions of this section for
the corresponding provisions of Sec. 1.402(c)-1T, Q&A-11 through 15, if
any.
Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?
A-2: The plan administrator must provide the section 402(f) notice
to a distributee at a time that satisfies either paragraph (a) or (b) of
this Q&A-2.
(a) This paragraph (a) is satisfied if the plan administrator
provides a distributee with the section 402(f) notice no less than 30
days and no more than 90 days before the date of a distribution.
However, if the distributee, after having received the section 402(f)
notice, affirmatively elects a distribution, a plan will not fail to
satisfy section 402(f) merely because the distribution is made less than
30 days after the section 402(f) notice was provided to the distributee,
provided the plan administrator clearly indicates to the distributee
that the distributee has a right to consider the decision of whether or
not to elect a direct rollover for at least 30 days after the notice is
provided. The plan administrator may use any method to inform the
distributee of the relevant time period, provided that the method is
reasonably designed to attract the attention of the distributee. For
example, this information could be either provided in the section 402(f)
notice or stated in a separate document (e.g., attached to the election
form) that is provided at the same
[[Page 352]]
time as the notice. For purposes of satisfying the requirement in the
first sentence of paragraph (a) of this Q&A-2, the plan administrator
may substitute the annuity starting date, within the meaning of
Sec. 1.401(a)-20, Q&A-10, for the date of the distribution.
(b) This paragraph (b) is satisfied if the plan administrator--
(1) Provides a distributee with the section 402(f) notice;
(2) Provides the distributee with a summary of the section 402(f)
notice within the time period described in paragraph (a) of this Q&A-2;
and
(3) If the distributee so requests after receiving the summary
described in paragraph (b)(2) of this Q&A-2, provides the section 402(f)
notice to the distributee without charge and no less than 30 days before
the date of a distribution (or the annuity starting date), subject to
the rules for the distributee's waiver of that 30-day period. The
summary described in paragraph (b)(2) of this Q&A-2 must set forth a
summary of the principal provisions of the section 402(f) notice, must
refer the distributee to the most recent version of the section 402(f)
notice (and, in the case of a notice provided in any document containing
information in addition to the notice, must identify that document and
must provide a reasonable indication of where the notice may be found in
that document, such as by index reference or by section heading), and
must advise the distributee that, upon request, a copy of the section
402(f) notice will be provided without charge.
Q-3: Must the plan administrator provide a separate section 402(f)
notice for each distribution in a series of periodic payments that are
eligible rollover distributions?
A-3: No. In the case of a series of periodic payments that are
eligible rollover distributions, the plan administrator is permitted to
satisfy section 402(f) with respect to each payment in the series by
providing the section 402(f) notice prior to the first payment in the
series, in accordance with the rules in Q&A-1 and Q&A-2 of this section,
and providing the notice at least once annually for as long as the
payments continue. However, see Sec. 1.401(a)(31)-1, Q&A-12 for
additional guidance if the plan administrator intends 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 applicable to
all subsequent payments in the series (absent a subsequent change of
election).
Q-4: May a plan administrator post the section 402(f) notice as a
means of providing it to distributees?
A-4: No. The posting of the section 402(f) notice will not be
considered provision of the notice. The written notice must be provided
individually to any distributee of an eligible rollover distribution
within the time period described in Q&A-2 and Q&A-3 of this section.
Q-5: Will the requirements of section 402(f) be satisfied if a plan
administrator provides a distributee with the section 402(f) notice or
the summary of the notice described in paragraph (b)(2) of Q&A-2 of this
section other than through a written paper document?
A-5: A plan administrator may provide a distributee with the section
402(f) notice or the summary of that notice described in paragraph
(b)(2) of Q&A-2 of this section either on a written paper document or
through an electronic medium reasonably accessible to the distributee. A
notice or summary provided through an electronic medium must be provided
under a system that satisfies the following requirements:
(a) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the distributee than a
written paper document.
(b) At the time the notice or summary is provided, the distributee
must be advised that the distributee may request and receive the notice
on a written paper document at no charge, and, upon request, that
document must be provided to the distributee at no charge.
Q-6: Are there examples that illustrate the provisions of Q&A-2 and
Q&A-5 of this section?
A-6: The following examples illustrate the provisions of Q&A-2 and
Q&A-5 of this section:
Example 1. (i) A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A's system for such
[[Page 353]]
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match that
in Plan A's records in order for the transaction to proceed. If a
participant requests a distribution from Plan A by e-mail and the
distribution is an eligible rollover distribution, the plan
administrator provides the participant with a section 402(f) notice by
e-mail. The plan administrator also advises the participant that he or
she may request the section 402(f) notice on a written paper document
and that, if the participant requests the notice on a written paper
document, it will be provided at no charge. To proceed with the
distribution by e-mail, the participant must acknowledge receipt,
review, and comprehension of the section 402(f) notice.
(ii) In Example 1, Plan A does not fail to satisfy the notice
requirement of section 402(f) merely because the notice is provided to
the participant other than through a written paper document.
Example 2. (i) A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B's system for such transactions, a participant
must enter his or her account number and personal identification number
(PIN); this information must match that in Plan B's records in order for
the transaction to proceed. A participant may request a distribution
from Plan B by following the applicable instructions on the Plan B web
site. After the participant has requested a distribution that is an
eligible rollover distribution, the participant is automatically shown a
page on the web site containing a section 402(f) notice. Although this
page of the web site may be printed, the page also advises the
participant that he or she may request the section 402(f) notice on a
written paper document by calling a telephone number indicated on the
web page and that, if the participant requests the notice on a written
paper document, it will be provided at no charge. To proceed with the
distribution by e-mail, the participant must acknowledge receipt,
review, and comprehension of the section 402(f) notice.
(ii) In this Example 2, Plan B does not fail to satisfy the notice
requirement of section 402(f) merely because the notice is provided to
the participant other than through a written paper document.
Example 3. (i) A qualified plan (Plan C) permits participants to
request distributions through Plan C's automated telephone system. Under
Plan C's system for such transactions, a participant must enter his or
her account number and personal identification number (PIN); this
information must match that in Plan C's records in order for the
transaction to proceed. Plan C provides the section 402(f) notice in the
summary plan description, the most recent version of which was
distributed to participants in 1997. A participant may request a
distribution from Plan C by following the applicable instructions on the
automated telephone system. In 1999, a participant, using Plan C's
automated telephone system, requests a distribution that is an eligible
rollover distribution. The automated telephone system refers the
participant to the most recent version of the section 402(f) notice
which was provided in the summary plan description, informs the
participant where the section 402(f) notice may be located in the
summary plan description, and provides an oral summary of the material
provisions of the section 402(f) notice. The system also advises the
participant that the participant may request the section 402(f) notice
on a written paper document and that, if the participant requests the
notice on a written paper document, it will be provided at no charge.
Before proceeding with the distribution, the participant must
acknowledge receipt, review, and comprehension of the summary. Under
Plan C's system for processing such transactions, the participant's
distribution will be made no more than 90 days and no fewer than 30 days
after the participant requests the distribution and receives the summary
of the section 402(f) notice (unless the participant waives the 30-day
period).
(ii) In this Example 3, Plan C does not fail to satisfy the notice
requirement of section 402(f) merely because Plan C provides a summary
of the section 402(f) notice or merely because the summary is provided
to the participant other than through a written paper document.
Example 4. (i) Same facts as Example 3, except that, pursuant to
Plan C's system for processing such transactions, a participant who so
requests is transferred to a customer service representative whose
conversation with the participant is recorded. The customer service
representative provides the summary of the section 402(f) notice by
reading from a prepared text.
(ii) In this Example 4, Plan C does not fail to satisfy the notice
requirement of section 402(f) merely because Plan C provides a summary
of the section 402(f) notice or merely because the summary of the
section 402(f) notice is provided to the participant other than through
a written paper document.
Example 5. (i) Same facts as Example 3, except that Plan C does not
provide the section 402(f) notice in the summary plan description.
Instead, the automated telephone system reads the section 402(f) notice
to the participant.
(ii) In this Example 5, Plan C does not satisfy the notice
requirement of section 402(f) because oral delivery alone of the section
402(f) notice through the automated telephone system is not sufficient.
[[Page 354]]
Example 6. (i) The facts are the same as in Example 1, except that
Participant D requested a distribution by e-mail, then terminated
employment, and, following the termination, no longer has reasonable
access to Plan A e-mail.
(ii) In this Example 6, Plan A does not satisfy the notice
requirement of section 402(f) because the electronic medium through
which the notice is provided is not reasonably accessible to Participant
D. Plan A must provide the section 402(f) notice to Participant D in a
written paper document or by an electronic means that is reasonably
accessible to Participant D.
[T.D. 8619, 60 FR 49213, Sept. 22, 1995, as amended by T.D. 8873, 65 FR
6005, Feb. 8, 2000]
Sec. 1.402(g)-0 Limitation on exclusion for elective deferrals, table of contents.
This section contains the captions that appear in Sec. 1.402(g)-1.
Sec. 1.402(g)-1 Limitation on exclusion for elective deferrals.
(a) In general.
(b) Elective deferrals.
(c) Certain one-time irrevocable elections.
(d) Applicable limit.
(1) In general.
(2) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract.
(3) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract for certain long-term employees.
(4) Example.
(e) Treatment of excess deferrals.
(1) Plan qualification.
(i) Effect of excess deferrals.
(ii) Treatment of excess deferrals as employer contributions.
(iii) Definition of excess deferrals.
(2) Correction of excess deferrals after the taxable year.
(3) Correction of excess deferrals during taxable year.
(4) Plan provisions.
(5) Income allocable to excess deferrals.
(i) General rule.
(ii) Method of allocating income.
(iii) Alternative method of allocating income.
(iv) Safe harbor method of allocating gap period income.
(6) Coordination with distribution or recharacterization of excess
contributions.
(7) No employee or spousal consent required.
(8) Tax treatment.
(i) Corrective distributions on or before April 15 after close of
taxable year.
(ii) Special rule for 1987 and 1988 excess deferrals.
(iii) Distributions of excess deferrals after correction period.
(9) No reduction of required minimum distribution.
(10) Partial correction.
(11) Examples.
(f) Community property laws.
(g) Effective date.
(1) In general.
(2) Deferrals under collective bargaining agreements.
(3) Transition rule.
(4) Partnership cash or deferred arrangements.
[T.D. 8357, 56 FR 40545, Aug. 15, 1991]
Sec. 1.402(g)-1 Limitation on exclusion for elective deferrals.
(a) In general. The excess of an individual's elective deferrals for
any taxable year over the applicable limit for the year may not be
excluded from gross income under sections 402(a)(8), 402(h)(1)(B),
403(b), 408(k)(6), or 501(c)(18). Thus, an individual's elective
deferrals in excess of the applicable limit for a taxable year (i.e.,
the individual's excess deferrals for the year) must be included in
gross income for the year.
(b) Elective deferrals. An individual's elective deferrals for a
taxable year are the sum of the following:
(1) Any elective contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) to the extent not includible
in the individual's gross income for the taxable year on account of
section 402(a)(8) (before applying the limits of section 402(g) or this
section).
(2) Any employer contribution to a simplified employee pension (as
defined in section 408(k)) to the extent not includible in the
individual's gross income for the taxable year on account of section
402(h)(1)(B) (before applying the limits of section 402(g) or this
section).
(3) Any employer contribution to an annuity contract under section
403(b) under a salary reduction agreement (within the meaning of section
3121(a)(5)(D)) to the extent not includible in the individual's gross
income for the taxable year on account of section 403(b) (before
applying the limits of section 402(g) or this section).
[[Page 355]]
(4) Any employee contribution designated as deductible under a trust
described in section 501(c)(18) to the extent deductible from the
individual's income for the taxable year on account of section
501(c)(18) (before appying the limits of section 402(g) or this
section). For purposes of this section, the employee contribution is
treated as though it were excluded from the individual's gross income.
(c) Certain one-time irrevocable elections. An employer contribution
is not treated as an elective deferral under paragraph (b) of this
section if the contribution is made pursuant to a one-time irrevocable
election made by the employee:
(1) In the case of an annuity contract under section 403(b), at the
time of initial eligibility to participate in the salary reduction
agreement;
(2) In the case of a qualified cash or deferred arrangement, at a
time when, under Sec. 1.401(k)-1(a)(3)(iv), the election is not treated
as a cash or deferred election;
(3) In the case of a trust described in section 501(c)(18), at the
time of initial eligibility to have the employer contribute on the
employee's behalf to the trust.
(d) Applicable limit--(1) In general. Except as adjusted under
paragraphs (d)(2) and (d)(3) of this section, the applicable limit for
an individual's taxable year beginning in the 1987 calendar year is
$7,000. This amount is increased for the taxable year beginning in 1988
and subsequent calendar years in the same manner as the $90,000 amount
is adjusted under section 415(d).
(2) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract. The applicable limit for an individual
who makes elective deferrals described in paragraph (b)(3) of this
section for a taxable year is adjusted by increasing the applicable
limit otherwise determined under paragraph (d)(1) of this section by the
amount of the individual's elective deferrals described in paragraph
(b)(3) of this section for the taxable year. This adjustment cannot
cause the applicable limit for any taxable year to exceed $9,500.
(3) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract for certain long-term employees. The
applicable limit for an individual who is a qualified employee (as
defined in section 402(g)(8)(C)) and has elective deferrals described in
paragraph (b)(3) of this section for a taxable year is adjusted by
increasing the applicable limit otherwise determined under paragraphs
(d)(1) and (d)(2) of this section in accordance with section
402(g)(8)(A).
(4) Example. The provisions of this paragraph (d) are illustrated by
the following example.
Example. Employer X maintains a cash or deferred arrangement under
section 401(k), and offers its employees section 403(b) contracts to
which elective deferrals may be made. For the 1987 taxable year, three
of X's employees, A, B, and C, contribute $3,500, $1,000, and $8,500,
respectively, as elective deferrals under the section 403(b) contract.
The maximum amounts that A, B, and C may contribute to the cash or
deferred arrangement are $6,000, $7,000, and $1,000, respectively. B may
only contribute $7,000 under the cash or deferred arrangement because
the special adjustment under paragraph (d)(2) of this section applies
only to section 403(b) annuity contracts. B could, of course, contribute
up to $2,500 under the section 403(b) contract (to the extent otherwise
permitted), in addition to the $7,000 under the cash or deferred
arrangement.
(e) Treatment of excess deferrals--(1) Plan qualification--(i)
Effect of excess deferrals. For plan years beginning before January 1,
1988, a plan, annuity contract, simplified employee pension, or trust
does not fail to meet the requirements of section 401(a), section
403(b), section 408(k), or section 501(c)(18), respectively, merely
because excess deferrals are made with respect to the plan, contract,
pension, or trust. For plan years beginning after December 3l, 1987, see
section 401(a)(30) and Sec. 1.401(a)-30 for the effect of excess
deferrals on the qualification of a plan or trust under section 401(a).
For purposes of determining whether a plan or trust complies in
operation with section 401(a)(30), excess deferrals that are distributed
under paragraph (e)(2) or (3) of this section are disregarded. Similar
rules apply to annuity contracts under
[[Page 356]]
section 403(b), simplified employee pensions under section 408(k), and
plans or trusts under section 501(c)(28).
(ii) Treatment of excess deferrals as employer contributions. For
other purposes of the Code, including sections 401(a)(4), 401(k)(3),
404, 409, 411, 412, and 416, excess deferrals must be treated as
employer contributions even if they are distributed in accordance with
paragraph (e)(2) or (3) of this section. However, excess deferrals of a
nonhighly compensated employee are not taken into account under section
401(k)(3) (the actual deferral percentage test) to the extent the excess
deferrals are prohibited under section 401(a)(30). Excess deferrals are
also treated as employer contributions for purposes of section 415
unless distributed under paragraph (e)(2) or (3) of this section.
(iii) Definition of excess deferrals. The term ``excess deferrals''
means the excess of an individual's elective deferrals for any taxable
year, as defined in Sec. 1.402(g)-1(b), over the applicable limit under
section 402(g)(1) for the taxable year.
(2) Correction of excess deferrals after the taxable year. A plan
may provide that if any amount is included in the gross income of an
individual under paragraph (a) of this section for a taxable year:
(i) Not later than the first April 15 (or such earlier date
specified in the plan) following the close of the individual's taxable
year, the individual may notify each plan under which deferrals were
made of the amount of the excess deferrals received by that plan. A plan
may provide that an individual is deemed to have notified the plan of
excess deferrals to the extent the individual has excess deferrals for
the taxable year calculated by taking into account only elective
deferrals under the plan and other plans of the same employer. A plan
may instead provide that the employer may notify the plan on behalf of
the individual under these circumstances.
(ii) Not later than the first April 15 following the close of the
taxable year, the plan may distribute to the individual the amount
designated under paragraph (e)(2)(i) of this section (and any income
allocable to that amount).
(3) Correction of excess deferrals during taxable year--(i) A plan
may provide that an individual who has excess deferrals for a taxable
year may receive a corrective distribution of excess deferrals during
the same year. This corrective distribution may be made only if all of
the following conditions are satisfied:
(A) The individual designates the distribution as an excess
deferral. A plan may provide that an individual is deemed to have
designated the distribution to the extent the individual has excess
deferrals for the taxable year calculated by taking into account only
elective deferrals under the plan and other plans of the same employer.
A plan may instead provide that the employer may make the designation on
behalf of the individual under these circumstances.
(B) The correcting distribution is made after the date on which the
plan received the excess deferral.
(C) The plan designates the distribution as a distribution of excess
deferrals.
(ii) The provisions of this paragraph (e)(3) are illustrated by the
following example:
Example. S is a 62 year old individual who participates in Employer
Y's qualified cash or deferred arrangement. In January 1991, S withdraws
$5,000 from Y's cash or deferred arrangement. From February through
September, S defers $900 per month. On October 1, S leaves Employer Y
and becomes employed by Employer Z (unrelated to Y). During the
remainder of 1991, S defers $1,800 under Z's qualified cash or deferred
arrangement. In January 1992, S realizes that S has deferred a total of
$9,000 in 1991, and therefore has a $525 excess deferral ($9,000 minus
$8,475, the applicable limit for 1991). An additional $525 must be
distributed to S before April 15, 1992, to correct the excess deferral.
The $5,000 withdrawal did not correct the excess deferral because it
occurred before the excess deferral was made.
(4) Plan provisions. In order to distribute excess deferrals
pursuant to paragraphs (e)(2) or (e)(3) of this section, a plan must
contain language permitting distribution of excess deferrals. A plan may
require the notification in paragraphs (e)(2) and (e)(3) of this section
to be in writing and may require that the employee certify or otherwise
establish that the designated
[[Page 357]]
amount is an excess deferral. A plan need not permit distribution of
excess deferrals.
(5) Income allocable to excess deferrals--(i) General rule. The
income allocable to excess deferrals is equal to the sum of the
allocable gain or loss for the taxable year of the individual and, if
the plan so provides, the allocable gain or loss for the period between
the end of the taxable year and the date of distribution (the ``gap
period'').
(ii) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess deferrals, provided
that the method does not violate section 401(a)(4), is used consistently
for all participants and for all corrective distributions under a plan
for the plan year, and is used by the plan for allocating income to
participants' accounts. See Sec. 1.401(a)(4)-1(c)(8).
(iii) Alternative method of allocating income. A plan may allocate
income to excess deferrals by multiplying the income for the taxable
year (and the gap period, if the plan so provides) allocable to elective
contributions by a fraction. The numerator of the fraction is the excess
deferrals by the employee for the taxable year. The denominator of the
fraction is equal to the sum of:
(A) The total account balance of the employee attributable to
elective contributions as of the beginning of the taxable year, plus
(B) The employee's elective contributions for the taxable year (and
the gap period, if the plan so provides).
(iv) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess deferrals for the gap period is
equal to 10 percent of the income allocable to excess deferrals for the
taxable year (calculated under the method described in paragraph
(e)(5)(iii) of this section), multiplied by the number of calendar
months that have elapsed since the end of the taxable year. For purposes
of calculating the number of calendar months that have elapsed under the
safe harbor method, a corrective distribution that is made on or before
the fifteenth day of the month is treated as made on the last day of the
preceding month. A distribution made after the fifteenth day of the
month is treated as made on the first day of the next month.
(6) Coordination with distribution or recharacterization of excess
contributions. The amount of excess deferrals that may be distributed
under this paragraph (e) with respect to an employee for a taxable year
is reduced by any excess contributions previously distributed or
recharacterized with respect to the employee for the plan year beginning
with or within the taxable year. In the event of a reduction under this
paragraph (e)(6), the amount of excess contributions includible in the
gross income of the employee and reported by the employer as a
distribution of excess contributions is reduced by the amount of the
reduction under this paragraph (e)(6). See Sec. 1.401(k)-1(f)(5)(i). In
no case may an individual receive from a plan as a corrective
distribution for a taxable year under paragraph (e)(2) or (e)(3) of this
section an amount in excess of the individual's total elective deferrals
under the plan for the taxable year.
(7) No employee or spousal consent required. A corrective
distribution of excess deferrals (and income) may be made under the
terms of the plan without regard to any notice or consent otherwise
required under sections 411(a)(11) or 417.
(8) Tax treatment--(i) Corrective distributions on or before April
15 after close of taxable year. A corrective distribution of excess
deferrals within the period described in paragraph (e)(2) or (e)(3) of
this section is excludable from the employee's gross income. However,
the income allocable to excess deferrals is includible in the employee's
gross income for the taxable year in which the allocable income is
distributed. The corrective distribution of excess deferrals (and
income) is not subject to the early distribution tax of section 72(t)
and is not treated as a distribution for purposes of applying the excise
tax under section 4980A.
(ii) Special rule for 1987 and 1988 excess deferrals. Income on
excess deferrals for 1987 or 1988 that were timely distributed on or
before April 17, 1989, may be reported by the recipient either in the
year described in paragraph (e)(8)(i) of this section, or in the year in
which the employee would have received the
[[Page 358]]
elective deferrals had the employee originally elected to receive the
amounts in cash.
(iii) Distributions of excess deferrals after correction period. If
excess deferrals (and income) for a taxable year are not distributed
within the period described in paragraphs (e)(2) and (e)(3) of this
section, they may only be distributed when permitted under section
401(k)(2)(B). These amounts are includible in gross income when
distributed, and are treated for purposes of the distribution rules
otherwise applicable to the plan as elective deferrals (and income) that
were excludable from the individual's gross income under section 402(g).
Thus, any amount includible in gross income for any taxable year under
this section that is not distributed by April 15 of the following
taxable year is not treated as an investment in the contract for
purposes of section 72 and is includible in the employee's gross income
when distributed from the plan. Excess deferrals that are distributed
under this paragraph (e)(8)(iii) are treated as employer contributions
for purposes of section 415 when they are contributed to the plan.
(9) No reduction of required minimum distribution. A distribution of
excess deferrals (and income) under paragraphs (e)(2) and (e)(3) of this
section is not treated as a distribution for purposes of determining
whether the plan meets the minimum distribution requirements of section
401(a)(9).
(10) Partial correction. Any distribution under paragraphs (e)(2) or
(e)(3) of this section of less than the entire amount of excess
deferrals (and income) is treated as a pro rata distribution of excess
deferrals and income.
(11) Examples. The provisions of this paragraph are illustrated by
the following examples. Assume in Examples 1 and 2 that there is no
income or loss allocable to the elective deferrals.
Example 1. Employee A is a 60-year old highly compensated employee
who participates in Employer M's cash or deferred arrangement. During
the period of January through September of 1988, A contributed $7,000 to
the arrangement in elective deferrals. During the same period A also
contributed $813 in elective deferrals under a plan of an unrelated
employer. In December of 1988, A made a withdrawal of $1,000 from
Employer M's plan but did not designate this as a withdrawal of an
excess deferral. In January of 1989, A notifies Employer M of an excess
deferral, specifying a distribution of $500 for 1988. To correct the
excess deferrals, A must receive this additional $500 even though A has
already withdrawn $1,000 for 1988. A may exclude from income in 1988
only $7,313. However, if the $500 is distributed by April 25, 1989, the
distribution is excludable from A's gross income in 1989. Even if A
withdraws the $500, M must take into account the entire $7,000 in
computing A's actual deferral percentage for 1988.
Example 2. (i) Corporation X maintains a cash or deferred
arrangement. The plan year is the calendar year. For plan year 1989, all
10 of X's employees are eligible to participate in the plan. The
employees' compensation, contributions, and actual deferral ratios are
shown in the following table:
------------------------------------------------------------------------
Actual
deferral
Employee Compensation Contribution ratio
(percent)
------------------------------------------------------------------------
A............................ $140,000 $7,000 5.0
B............................ 70,000 7,000 10.0
C............................ 70,000 7,000 10.0
D............................ 45,000 2,250 5.0
E............................ 40,000 4,000 10.0
F............................ 35,000 1,750 5.0
G............................ 35,000 350 1.0
H............................ 30,000 3,000 10.0
I............................ 17,500 0 0
J............................ 17,500 0 0.0
------------------------------------------------------------------------
(ii) Employees A, B, and C are highly compensated employees within
the meaning of section 414(q). Employees D, E, F, G, H, I, and J are
nonhighly compensated employees. The actual deferral percentages for the
highly compensated employees and nonhighly compensated employees are
8.33 percent and 4.43 percent, respectively. These percentages do not
satisfy the requirements of section 401(k)(3)(A)(ii). The actual
deferral percentage for the highly compensated employees may not exceed
6.43 percent.
(iii) The plan reduces the actual deferral ratios of B and C to 7.14
percent by distributing $2,002 ($7,000-.0714x$70,000) to each in January
1990. Section 401(k)(3)(A)(ii) is therefore satisfied.
(iv) In February 1990, B notifies X that B made elective deferrals
of $2,000 under a qualified cash or deferred arrangement maintained by
an unrelated employer in 1989, and requests distribution of $2,000 from
X's plan. However, since B has already received a distribution of $2,002
to meet the ADP test, no additional amounts are required or are
permitted to be distributed as excess deferrals by this plan, and the
prior distribution of excess contributions has corrected the excess
deferrals. But X must report $2,000 as a distribution of an excess
deferral and $2 as a distribution of an excess contribution.
[[Page 359]]
Example 3. Employee T has excess deferrals of $1,000. The income
attributable to excess deferrals is $100. T properly notifies the
employer, and requests a distribution of the excess deferral (and
income) on February 1. The plan distributes $1,000 to T by April 15.
Because the plan did not distribute any additional amount as income,
$909 is treated as a distribution of excess deferrals, and $91 is
treated as a distribution of earnings. With respect to amounts remaining
in the account, $91 is treated as an elective deferral and is not
included in T's investment in the contract. Because it was not
distributed by the required date, the $91 is includible in gross income
upon distribution as well as in the year of deferral.
(f) Community property laws. This section is applied without regard
to community property laws.
(g) Effective date--(1) In general. Except as otherwise provided,
the provisions of this section are effective for taxable years beginning
after December 31, 1986.
(2) 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, the provisions of this section do not
apply to contributions made pursuant to the collective bargaining
agreement for taxable years beginning before the earlier of January 1,
1989, or the date on which the agreement terminates (determined without
regard to any extension thereof after February 28, 1986). These
contributions under a collective bargaining agreement are taken into
account for purposes of applying this section to elective deferrals
under plans not described in this paragraph (g)(2).
(3) Transition rule. For taxable years beginning before January 1,
1992, a plan or an individual may rely on a reasonable interpretation of
the rules set forth in section 402(g), as in effect during those years.
(4) Partnership cash or deferred arrangements. For purposes of
section 402(g), employer contributions for any plan year beginning after
December 31, 1986, and before January 1, 1989, under an arrangement that
directly or indirectly permits individual partners to vary the amount of
contributions made on their behalf will be treated as elective
contributions only if the arrangement was intended to satisfy and did
satisfy the nondiscrimination test of section 401(k)(3) and
Sec. 1.401(k)-1(b) for the plan year.
[T.D. 8357, 56 FR 40546, Aug. 15, 1991, as amended by T.D. 8581, 59 FR
66180, Dec. 23, 1994]
Sec. 1.403(a)-1 Taxability of beneficiary under a qualified annuity plan.
(a) An employee or retired or former employee for whom an annuity
contract is purchased by his employer is not required to include in his
gross income the amount paid for the contract at the time such amount is
paid, whether or not his rights to the contract are forfeitable, if the
annuity contract is purchased under a plan which meets the requirements
of section 404(a)(2). For purposes of the preceding sentence, it is
immaterial whether the employer deducts the amounts paid for the
contract under such section 404(a)(2). See Sec. 1.403(b)-1 for rules
relating to annuity contracts which are not purchased under qualified
plans but which are purchased by organizations described in section
501(c)(3) and exempt under section 501(a) or which are purchased for
employees who perform services for certain public schools.
(b) The amounts received by or made available to any employee
referred to in paragraph (a) of this section under such annuity contract
shall be included in gross income of the employee for the taxable year
in which received or made available, as provided in section 72 (relating
to annuities), except that certain total distributions described in
section 403(a)(2) are taxable as long-term capital gains. For the
treatment of such total distributions, see Sec. 1.403(a)-2. However, for
taxable years beginning before January 1, 1964, section 72(e)(3)
(relating to the treatment of certain lump sums), as in effect before
such date, shall not apply to such amounts. For taxable years beginning
after December 31, 1963, such amounts may be taken into account in
computations under sections 1301 through 1305 (relating to income
averaging).
(c) If upon the death of an employee or of a retired employee, the
widow or other beneficiary of such employee is paid, in accordance with
the terms of
[[Page 360]]
the annuity contract relating to the deceased employee, an annuity or
other death benefit, the extent to which the amounts received by or made
available to the beneficiary must be included in the beneficiary's
income under section 403(a) shall be determined in accordance with the
rules presented in paragraph (a)(5) of Sec. 1.402(a)-1.
(d) An individual contract issued after December 31, 1962, or a
group contract, which provides incidental life insurance protection may
be purchased under a qualified annuity plan. For the rules as to
nontransferability of such contracts issued after December 31, 1962, see
Sec. 1.401-9. For the rules relating to the taxation of the cost of the
life insurance protection and the proceeds thereunder, see Sec. 1.72-16.
Section 403(a) is not applicable to premiums paid after October 26,
1956, for individual contracts which were issued prior to January 1,
1963, and which provide life insurance protection.
(e) As to inclusion of full-time life insurance salesmen within the
class of persons considered to be employees, see section 7701(a)(20).
(f) For purposes of this section and Sec. 1.403(a)-2, the term
``employee'' includes a self-employed individual who is treated as an
employee under section 401(c)(1) and paragraph (b) of Sec. 1.401-10, and
the term ``employer'' means the person treated as the employer of such
individual under section 401(c)(4). For the rules relating to annuity
plans covering self-employed individuals, see section 404(a)(2) and
Secs. 1.404(a)-8 and 1.401-10 through 1.401-13.
(g) For the treatment of amounts paid to provide medical benefits
described in section 401(h) as defined in Sec. 1.401-14, see paragraph
(h) of Sec. 1.72-15.
[T.D. 6500, 25 FR 11680, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10143, Sept. 17, 1963; T.D. 6722, 29 FR 5073, Apr. 14, 1964; T.D. 6783,
29 FR 18359, Dec. 24, 1964; T.D. 6885, 31 FR 7801, June 2, 1966]
Sec. 1.403(a)-2 Capital gains treatment for certain distributions.
(a) If the total amounts payable with respect to any employee for
whom an annuity contract has been purchased by an employer under a plan
which--
(1) Is a plan described in section 403(a)(1) and Sec. 1.403(a)-1,
and
(2) Requires that refunds of contributions with respect to annuity
contracts purchased under such plan be used to reduce subsequent
premiums on the contracts under the plan,
are paid to, or includible in gross income of, the payee within one
taxable year of the payee by reason of the employee's death or other
separation from the service, or death after such separation from the
service, such total payments, to the extent they exceed the net amount
contributed by the employee, shall be considered a gain from the sale or
exchange of a capital asset held for more than six months. The ``net
amount contributed by the employee'' is the amount actually contributed
by the employee plus any amounts considered to be contributed by the
employee under the rules of sections 72(f), 101(b), and paragraph (d) of
Sec. 1.403(a)-1, reduced by any amounts theretofore distributed to him
which were excludable from his gross income as a return of employee
contributions. For example, if under an annuity contract purchased under
a plan described in this section, the total distributions payable to the
employee's widow are paid to her in the year in which the employee dies,
in the amount of $8,000, and if $5,000 thereof is excludable under
section 101(b), and if the employee made contributions of $600 and had
received no payments, the remaining amount of $2,400 will be considered
a gain from the sale or exchange of a capital asset held for more than
six months.
(b)(1) The term ``total amounts'' means the balance to the credit of
an employee with respect to all annuities under the annuity plan which
becomes payable to the payee by reason of the employee's death or other
separation from the service, or by reason of his death after separation
from the service. If an employee commences to receive annuity payments
on retirement and then a lump sum payment is made to his widow upon his
death, the capital gains treatment applies to the lump sum payment, but
it does not apply to amounts received before the time the ``total
amounts'' become payable. However, if the total amount to the credit of
the employee at the time of his death or other separation from
[[Page 361]]
the service or death after separation from the service is paid or
includible in the gross income of the payee within one taxable year of
the payee, such amount is entitled to the capital gains treatment
notwithstanding that in a later taxable year an additional amount is
credited to the employee and paid to the payee.
(2) If more than one annuity contract is received under the plan,
the capital gains treatment does not apply to any amount received on the
surrender thereof unless all contracts under the plan with respect to a
particular employee are surrendered either at the time of the employee's
death or other separation from the service or death after separation
from the service. Thus, if an employee receives two contracts on
separation from the service and surrenders one of them in the year of
separation and receives payments under the other until his death, the
capital gains treatment is applicable to the balance paid to his
beneficiary on his death if paid within one taxable year of the
beneficiary. The amount received by the employee on surrender of the
contract in the year of his separation from the service, however, would
not receive capital gains treatment since the balance to the credit of
the employee with respect to all amounts under the plan did not become
payable at that time.
(3) If an employee retires and commences to receive an annuity but
subsequently in some succeeding taxable year, he is paid a lump sum in
settlement of all future annuity payments, the capital gains treatment
does not apply to such lump sum settlement paid during the lifetime of
the employee since it is not a payment on account of separation from the
service, or death after separation, but is on account of the settlement
of future annuity payments.
(4) If the ``total amounts'' payable under all annuity contracts
under the plan with respect to a particular employee are paid or
includible in the gross income of several payees within one taxable year
on account of the employee's death or other separation from the service
or on account of his death after separation from the service, the
capital gains treatment is applicable. Thus, if the balance to the
credit of a deceased employee under all annuity contracts provided under
an annuity plan becomes payable to two payees, the capital gains
treatment is applicable provided the ``total amounts'' payable are
received by or includible in the gross income of both payees within the
same taxable year. However, if the ``total amounts'' payable are made
available to each payee and one elects to receive his share in cash
while the other makes a timely election under section 72(h) to receive
his share as an annuity, the capital gains treatment does not apply to
either payee.
(5) For purposes of determining whether the total amounts payable to
an employee have been paid within one taxable year, the term ``total
amounts'' includes amounts under a plan which are attributable to
contributions on behalf of an individual while he was self-employed in
the business with respect to which the plan was established. Thus, the
``total amounts'' payable are not paid within one taxable year if
amounts remain payable which are so attributable.
(6) The term ``total amounts'' does not include any amount which has
been placed in a separate account for the funding of benefits described
in section 401(h). Thus, a distribution under a qualified annuity plan
may constitute a distribution of the total amounts payable with respect
to an employee even though amounts attributable to the funding of
section 401(h) medical benefits as defined in paragraph (a) of
Sec. 1.401-14 are not so distributed.
(c) The provisions of this section are not applicable to any amounts
paid to a payee to the extent such amounts are attributable to
contributions made on behalf of an employee while he was a self-employed
individual in the business with respect to which the plan was
established. For the taxation of such amounts, see Sec. 1.72-18. For the
rules for determining the amount attributable to contributions on behalf
of an employee while he was self-employed, see paragraphs (b)(4) and
(c)(2) of such section.
[T.D. 6500, 25 FR 11681, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10143, Sept. 17, 1963; T.D. 6722, 29 FR 5073, Apr. 14, 1964]
[[Page 362]]
Sec. 1.403(b)-1 Taxability of beneficiary under annuity purchased by a section 501(c)(3) organization or public school.
(a) Amounts paid by employer during taxable years beginning before
January 1, 1958--(1) In general. If an amount is paid during a taxable
year of an employee (or a retired or former employee) beginning before
January 1, 1958, toward the purchase for such employee of an annuity
contract and such purchase is not part of an annuity plan which meets
the requirements of section 404(a)(2), then such amount is not required
to be included in the gross income of such employee for such taxable
year--
(i) If such amount is paid by an employer which, at the time of the
payment, is an organization described in section 501(c)(3) and exempt
from tax under section 501(a), and
(ii) If the purchase of the annuity contract is merely a supplement
to the past or current compensation of such employee (within the meaning
of subparagraph (2) of this paragraph).
For purposes of this paragraph, it is immaterial whether or not the
employee's rights to the annuity contract are forfeitable.
(2) Supplement to past or current compensation. For purposes of this
paragraph, whether the purchase of an annuity contract is merely a
``supplement to past or current compensation'' is to be determined by
all the surrounding facts and circumstances. One of the pertinent facts
to be taken into consideration is the ratio of the consideration paid by
the employer for an employee's contract to the amount of his past or
current compensation. For example, if the annual premium paid for an
employee's contract is $1,000 and his annual salary is $10,000, the
ratio indicates that the premium paid for the contract is merely a
supplement to the employee's current compensation. If, however, an
employee receives no current compensation, or the annual premiums paid
for his annuity contract approximate his annual salary, the amount paid
for his contract will be considered to be current compensation and
taxable to the employee in the year in which it is paid by the employer.
Other pertinent considerations are whether the annuity contract is
purchased as a result of an agreement for a reduction of the employee's
annual salary, or whether it is purchased at his request in lieu of an
increase in current compensation to which he otherwise might be
entitled. In such cases, the amount paid for the contract shall also be
considered to be current compensation.
(b) Amounts paid by employer during taxable years beginning after
December 31, 1957--(1) In general. If amounts are contributed by an
employer during a taxable year of an employee (or a retired or former
employee) beginning after December 31, 1957, toward the purchase for
such employee of an annuity contract and such purchase is not part of an
annuity plan which meets the requirements of section 404(a)(2), then, to
the extent such amounts do not exceed the exclusion allowance for such
taxable year, they are not required to be included in the gross income
of such employee for such taxable year, if at the time of the
contribution--
(i) The employer is an organization described in section 501(c)(3)
and exempt from tax under section 501(a), or
(ii) The employer is a State, a political subdivision of a State, or
an agency or instrumentality of any one or more of the foregoing, and
the employee is performing (or has performed) services for an
educational institution (as defined in section 151(e)(4)), and
(iii) The employee's rights under the annuity contract are
nonforfeitable except for failure to pay future premiums.
See paragraph (d) of this section for rules relating to the computation
of an employee's exclusion allowance for a taxable year.
(2) Forfeitable rights which change to nonforfeitable rights. If an
employee's rights under an annuity contract change from forfeitable to
nonforfeitable rights, the amount which, under section 403(d), is
includible in the gross income of such employee by reason of such change
(computed without regard to subparagraph (1) of this paragraph) shall,
for purposes of subparagraph (1) of this paragraph, be considered an
amount contributed by the employer for such annuity contract as of the
[[Page 363]]
time the employee's rights under the contract change to nonforfeitable
rights. Such amount will, therefore, be excludable from the employee's
gross income for the taxable year in which the change occurs to the
extent that it is so excludable under the rules contained in this
section. In determining the extent to which such amount is excludable,
this section shall be applied in the same manner as in the case of
current employer contributions. Thus, no part of such amount is
excludable if the employer is not an employer described in subparagraph
(1) of this paragraph at the time the employee's rights under the
annuity contract change from forfeitable to nonforfeitable rights. In
addition, such amount will be excludable only to the extent it does not
exceed the employee's exclusion allowance for the taxable year in which
the change occurs. Since such an amount is considered as an amount
contributed by the employer at the time the change occurs, it is
immaterial whether the employer was an employer described in
subparagraph (1) of this paragraph at the time the actual contributions
were made.
(3) Agreement to take a reduction in salary or to forego an increase
in salary. (i) There is no requirement that the purchase of an annuity
contract for an employee must be merely a ``supplement to past or
current compensation'' in order for the exclusion provided by this
paragraph to apply to employer contributions for such annuity contract.
Thus, the exclusion provided by this paragraph is applicable to amounts
contributed by an employer for an annuity contract as a result of an
agreement with an employee to take a reduction in salary, or to forego
an increase in salary, but only to the extent such amounts are earned by
the employee after the agreement becomes effective. Such an agreement
must be legally binding and irrevocable with respect to amounts earned
while the agreement is in effect. Except as provided in subdivision (ii)
of this subparagraph, the employee must not be permitted to make more
than one agreement with the same employer during any taxable year of
such employee beginning after December 31, 1963; the exclusion provided
by this paragraph shall not apply to any amounts which are contributed
under any further agreement made by such employee during the same
taxable year beginning after such date. However, the employee may be
permitted to terminate the entire agreement with respect to amounts not
yet earned.
(ii) An individual who is employed by an organization described in
section 415(c)(4) may make a salary reduction agreement for his taxable
year beginning in 1976 or 1977 at any time before the end of the 1976 or
1977 taxable year, respectively, without the agreement's being
considered a new agreement within the meaning of this subparagraph. The
agreement for 1976 may be made on or before June 15, 1977, and the
agreement for 1977 may be made on or before April 17, 1978. This special
rule only applies if the individual makes a statement of intention in
accordance with Sec. 11.415(c)(4)-1(b) electing, or determines his
income tax liability for the taxable year in a way which is consistent
with, one of the alternative limitations under section 415(c)(4) for
1976 or 1977 (as the case may be). The salary reduction agreement for
1976 may be made effective with respect to any amount earned during the
taxpayer's most recent one-year period of service (as defined in
paragraph (f) of this section) ending not later than the end of the 1976
taxable year, notwithstanding subdivision (i) of this subparagraph.
Similarly, the salary reduction agreement for 1977 may be made effective
with respect to such period of service ending not later than the end of
the 1977 taxable year. If the salary reduction agreement for 1976 is
entered into at any time after December 31, 1976, or if the salary
reduction agreement for 1977 is entered into at any time after December
31, 1977, an amended Form W-2 must be filed on behalf of the individual.
(iii) The rules of subdivision (i) of this subparagraph may be
illustrated by the following example:
Example. A is an employee of X Organization (an employer described
in section 501(c)(3) and exempt from tax under section 501(a) ) for the
entire calendar year 1964. A uses the calendar year as a taxable year.
A's annual salary as of January 1, 1964, is $12,000. On February 1,
1964, A and his employer enter a binding and irrevocable agreement
[[Page 364]]
whereby A is to take a 10-percent reduction in salary (from $1,000 per
month to $900 per month) and X Organization is to contribute $100 per
month for an annuity contract described in section 403(b). The agreement
also provides that A may terminate the entire agreement with respect to
amounts not yet earned. Since the agreement to reduce A's salary and
invest the amount of such reduction in an annuity contract was made
after A earned his salary for January, A's current compensation for
January is $1,000 even though the agreement may provide that X
Organization shall contribute $100 with respect to January for the
benefit of A for an annuity contract described in section 403(b). For
February and subsequent months ending before July 1, 1964, X
Organization contributes $100 per month for A's annuity. Thus, A's
current compensation for each of these months is $900, and the $100
which is contributed during such months by X Organization for an annuity
contract for A is an employer contribution to which the exclusion
provided in this paragraph applies. On July 1, 1964, A becomes entitled
to a salary increase of $200 per month and, pursuant to the agreement of
February 1, 1964, X Organization contributes 10 percent of such increase
or an additional $20 per month for a section 403(b) annuity. For July
and subsequent months ending before October 1, 1964, X Organization
contributes $120 per month for A's annuity. Thus, A's current
compensation for each of these months is $1,080, and the $120 which is
contributed during such months by X Organization for an annuity contract
for A is an employer contribution to which the exclusion provided in
this paragraph applies. On November 1, 1964, A terminates the entire
agreement with respect to amounts not yet earned. Since the termination
occurred after A earned his salary for the month of October, the
contribution for October is an employer contribution to which the
exclusion provided in this paragraph applies. For the months November
and December, A's full salary of $1,200 per month is includible in his
gross income whether or not his employer makes contributions for a
section 403(b) annuity.
(4) Two or more annuity contracts. If, during a taxable year of an
employee, this paragraph applies to amounts contributed (including
amounts which are considered to be contributed under subparagraph (2) of
this paragraph) by his employer for two or more annuity contracts for
such employee, such two or more annuity contracts shall, for such
taxable year, be considered a single contract for purposes of applying
the rules contained in this paragraph.
(5) Employees performing services for public schools. For purposes
of this section, a person shall be considered an employee who performs
services for an educational institution (as defined in section
151(e)(4)) if he is performing services as an employee directly or
indirectly for such an institution. Thus, for example, the principal,
clerical employees, custodial employees, and teachers at a public
elementary school are employees performing services directly for such an
educational institution. An employee who performs services involving the
operation or direction of a State's, or political subdivision's,
education program as carried on through educational institutions (as
defined in section 151(e)(4)) is an employee performing services
indirectly for such institutions. An employee participating in an ``in-
home'' teaching program is included since such program is merely an
extension of the activities carried on by such educational institutions.
On the other hand, a person occupying an elective or appointive public
office is not an employee performing services for an educational
institution unless such office is one to which an individual is elected
or appointed only if he has received training, or is experienced, in the
field of education. The term ``public office'' includes any elective or
appointive office of a State, a political subdivision of a State, or an
agency or instrumentality of any one or more of the foregoing. Thus, for
example, a regent or trustee of a State university or a member of a
board of education is not an employee performing services for an
educational institution. On the other hand, a commissioner or
superintendent of education will generally be considered an employee
performing services for an educational institution.
(c) Taxation of amounts received under annuity contracts--(1) In
general. The amounts received by or made available to any employee under
an annuity contract to which paragraph (a) or (b) of this section
applies shall be included in the gross income of the employee for the
taxable year in which received or made available, as provided in section
72 (relating to annuities). For taxable years beginning before January
1, 1964,
[[Page 365]]
section 72(e)(3) (relating to the treatment of certain lump sums), as in
effect before such date, shall not apply to any amount received by or
made available to any such employee under such an annuity contract. For
taxable years beginning after December 31, 1963, amounts received or
made available to any such employee under such annuity contract may be
taken into account in computations under sections 1301 through 1305
(relating to income averaging).
(2) Taxation of beneficiaries. If, upon the death of an employee or
of a retired employee, the widow or other beneficiary of such employee
is paid, in accordance with the terms of the annuity contract relating
to the deceased employee, an annuity or other death benefit, the extent
to which the amounts received by or made available to the beneficiary
must be included in the beneficiary's income under subparagraph (1) of
this paragraph shall be determined in accordance with the rules
presented in paragraph (a)(5) of Sec. 1.402(a)-1.
(3) Life insurance protection. An individual contract issued after
December 31, 1962, or a group contract, which provides incidental life
insurance protection may be purchased as an annuity contract to which
paragraph (a) or (b) of this section applies. For the rules as to
nontransferability of such contracts issued after December 31, 1962, see
Sec. 1.401-9. For the rules relating to the taxation of the cost of the
life insurance protection and the proceeds thereunder, see Sec. 1.72-16.
Section 403(b) is not applicable to premiums paid after October 26,
1956, for individual contracts which were issued prior to January 1,
1963, and which provide life insurance protection.
(d) Exclusion allowance--(1) In general. For purposes of paragraph
(b) of this section, an employee's exclusion allowance for a taxable
year is an amount equal to the excess, if any, of--
(i) The amount determined by multiplying (a) 20 percent of such
employee's includible compensation in respect of such taxable year, by
(b) such employee's total number of years of service as of the close of
such taxable year, over
(ii) The aggregate of (a) the amounts which have been contributed by
the employer for annuity contracts for such employee and which were
excludable from the gross income of the employee for any taxable year
prior to the taxable year for which the exclusion allowance is being
determined, and (b) the amounts of compensation excludable from the
gross income of the employee under section 457(a) (relating to eligible
State deferred compensation plans) for any prior taxable year that is
taken into account as a year of service under paragraph (f) of this
section.
Compensation deferred under an eligible State deferred compensation plan
shall be taken into account as described in subdivision (ii) of this
subparagraph even if the entity sponsoring the eligible plan is not the
employer purchasing the annuity contract with respect to which the
employee's exclusion allowance is to be determined. See paragraph (e) of
this section for the definition of an employee's includible compensation
in respect of a taxable year and paragraph (f) of this section for rules
for computing an employee's total number of years of service for an
employer.
(2) More than one employer. If, during a taxable year of an
employee, amounts are contributed for annuity contracts for such
employee by two or more employers described in paragraph (b)(1) (i) or
(ii) of this section, a separate exclusion allowance shall be computed
with respect to each employer. In such a case, therefore, there shall
not be taken into account, in computing the exclusion allowance with
respect to one employer, the ``includible compensation'' received by the
employee from any other employer, the employee's years of service with
any other employer, or amounts which have been contributed by any other
employer for annuity contracts for such employee.
(3) Amounts previously contributed by the employer which were
excludable from the employee's gross income. In computing, for purposes
of subparagraph (1)(ii) of this paragraph, the aggregate of the amounts
which have been contributed by an employer for annuity contracts for an
employee and which were excludable from the gross income of the employee
for any taxable year prior to the taxable year for which the
[[Page 366]]
exclusion allowance is being determined, there shall be included all
contributions made by the employer for the benefit of the employee--
(i) Which, under section 402(a) or section 403(a), were excludable
from the employee's gross income for any such prior taxable year by
reason of being contributions to a trust described in section 401(a) and
exempt from tax under section 501(a) or contributions toward the
purchase of an annuity contract under a plan which meets the
requirements of section 404(a)(2) (whether forfeitable or
nonforfeitable); or
(ii) Which, under section 405(d), were excludable from the
employee's gross income for any such prior taxable year by reason of
being contributions toward the purchase of United States bonds under a
plan which meets the requirements of section 405(a)(1); or
(iii) Which were excludable from the employee's gross income for any
such prior taxable year by reason of being contributions described in
paragraph (a) or (b) of this section; or
(iv) (a) Which were excludable from the employee's gross income for
the taxable year when made solely by reason of the fact that the
employee's rights to such contributions were forfeitable at the time
they were made (and not for any of the reasons described in subdivisions
(i), (ii), and (iii) of this subparagraph);
(b) With respect to which the employee's rights changed to
nonforfeitable rights prior to the taxable year for which the exclusion
allowance is being determined; and
(c) Which were not, under section 403(d) and without regard to
paragraph (b) of this section, includible in the employee's gross income
for the taxable year in which his rights to such contributions changed
from forfeitable to nonforfeitable rights.
For purposes of subdivisions (i) and (iii) of this subparagraph, all
references to provisions of the Internal Revenue Code of 1954 and to
provisions of the regulations under such Code shall also be considered
references to the corresponding provisions of prior law and regulations.
See subparagraph (4) of this paragraph for rules relating to the
allocation of employer contributions to an employee where the actual
contributions are not allocated among individual employees; or
(v) Which were contributions to a section 403(b) annuity contract
for a prior taxable year and which exceeded the limitations of section
415(c)(1) applicable to the employee. See Sec. 1.415-6(e)(1)(ii) for a
more detailed discussion of this rule. See also Sec. 1.415-9(c) for
rules relating to the treatment of certain contributions to a section
403(b) annuity contract which are excess contributions because of the
aggregation of the annuity contract with a qualified plan.
(4) Determination of excludable amounts by allocation of
contributions. If, for any employee, the actual amounts of employer
contributions to a defined benefit plan described in subparagraph (3) of
this paragraph are not known, such amounts shall be determined under the
formula described in this subparagraph or under any other method
utilizing recognized actuarial principles which are consistent with the
provisions of the plan under which such contributions are made and the
method adopted by the employer for funding the benefits under the plan.
If the formula described in this subparagraph is to be used, the
contributions made by the employer for the benefit of the employee as of
the end of any taxable year shall be deemed to be the product of the
quantities described in subdivisions (i), (ii), (iii), and (iv) of this
subparagraph. Such quantities are--
(i) The projected annual amount of the employee's pension (as of the
end of the taxable year) to be provided at normal retirement age from
employer contributions, based upon the provisions of the plan in effect
at such time and upon the assumption of the employee's continued
employment with his present employer at his then current salary rate.
(ii) The value, from Table I below, at normal retirement age of an
annuity of $1.00 per annum payable in equal monthly installments during
the life of the employee, based upon the normal retirement age as
defined in the plan.
(iii) The amount from Table II below (representing the level annual
contribution which will accumulate to $1.00 at normal retirement age)
for the
[[Page 367]]
sum of (a) the number of years remaining from the end of the taxable
year to normal retirement age and (b) the lesser of the number of years
of service credited through the end of the taxable year or the number of
years that the plan has been in existence at such time.
(iv) The lesser of the number of years of service credited through
the end of the taxable year or the number of years that the plan has
been in existence at such time.
Table I--Value at Normal Retirement Ages of Annuity of $1.00 per Annum
Payable in Equal Monthly Installments During the Life of the Employee
[For taxable years beginning after July 1, 1986]
------------------------------------------------------------------------
Ages Values
------------------------------------------------------------------------
40........................................................... 11.49
41........................................................... 11.40
42........................................................... 11.31
43........................................................... 11.22
44........................................................... 11.12
45........................................................... 11.01
46........................................................... 10.91
47........................................................... 10.79
48........................................................... 10.68
49........................................................... 10.56
50........................................................... 10.43
51........................................................... 10.30
52........................................................... 10.18
53........................................................... 10.04
54........................................................... 9.89
55........................................................... 9.75
56........................................................... 9.60
57........................................................... 9.44
58........................................................... 9.28
59........................................................... 9.13
60........................................................... 8.96
61........................................................... 8.79
62........................................................... 8.62
63........................................................... 8.44
64........................................................... 8.25
65........................................................... 8.08
66........................................................... 7.88
67........................................................... 7.70
68........................................................... 7.50
69........................................................... 7.29
70........................................................... 7.10
71........................................................... 6.88
72........................................................... 6.68
73........................................................... 6.46
74........................................................... 6.25
75........................................................... 6.03
76........................................................... 5.82
77........................................................... 5.61
78........................................................... 5.40
79........................................................... 5.20
80........................................................... 4.99
------------------------------------------------------------------------
Note: If the normal form of retirement benefit under the plan is
other than a straight life annuity, the value from Table I above should
be divided by the figure set forth below opposite the normal form of
retirement benefit provided by the plan:
Annuity for 5 years certain and life thereafter................ 0.97
Annuity for 10 years certain and life thereafter............... 0.90
Annuity for 15 years certain and life thereafter............... 0.80
Annuity for 20 years certain and life thereafter............... 0.70
Life annuity with installment refund........................... 0.80
Life annuity with cash refund \1\.............................. 0.75
\1\ The term ``cash refund'' refers to refund of accumulated employer
contributions, and does not refer to refund of employee contributions
only, often referred to as ``modified cash refund''.
Table II--Level Annual Contribution Which Will Accumulate To $1.00 at
End of Number of Years
[For taxable years beginning after July 1, 1986]
------------------------------------------------------------------------
Number of years Amounts
------------------------------------------------------------------------
1............................................................ $1.0000
2............................................................ .4808
3............................................................ .3080
4............................................................ .2219
5............................................................ .1705
6............................................................ .1363
7............................................................ .1121
8............................................................ .0940
9............................................................ .0801
10........................................................... .0690
11........................................................... .0601
12........................................................... .0527
13........................................................... .0465
14........................................................... .0413
15........................................................... .0368
16........................................................... .0330
17........................................................... .0296
18........................................................... .0267
19........................................................... .0241
20........................................................... .0219
21........................................................... .0198
22........................................................... .0180
23........................................................... .0164
24........................................................... .0150
25........................................................... .0137
26........................................................... .0125
27........................................................... .0114
28........................................................... .0105
29........................................................... .0096
30........................................................... .0088
31........................................................... .0081
32........................................................... .0075
33........................................................... .0069
34........................................................... .0063
35........................................................... .0058
36........................................................... .0053
37........................................................... .0049
38........................................................... .0045
39........................................................... .0042
40........................................................... .0039
41........................................................... .0036
42........................................................... .0033
43........................................................... .0030
44........................................................... .0028
45........................................................... .0026
46........................................................... .0024
[[Page 368]]
47........................................................... .0022
48........................................................... .0020
49........................................................... .0019
50........................................................... .0017
------------------------------------------------------------------------
(5) Election to have allowance determined under section 415 rules.
Under section 415(c)(4)(D), an employee may elect to have the provisions
of section 415(c)(4)(C) (relating to special limitations for annuity
contracts purchased by educational organizations, hospitals and home
health service agencies) apply for a taxable year. If the employee so
elects, his exclusion allowance is the maximum amount under section 415
that could be contributed by the employer for the benefit of the
employee if the annuity contract for the benefit of the employee were
treated as a defined contribution plan maintained by the employer. Thus,
the exclusion allowance for the taxable year of an employee who makes
the election may not exceed the limitation on contributions and other
additions (as described in Sec. 1.415-6) applicable to the employee for
that taxable year. See Sec. 1.415-7 for provisions applicable in the
event an employer maintains a defined benefit plan and a defined
contribution plan for the same employee. See Sec. 1.415-8 for provisions
applicable in the event an employer maintains more than one defined
contribution plan covering the same employee.
(e) Includible compensation--(1) In general. For purposes of
computing, under paragraph (d) of this section, an employee's exclusion
allowance for a taxable year, such employee's includible compensation in
respect of such taxable year means the amount of compensation from the
employer--
(i) Which was earned during the most recent period (ending not later
than the close of the employee's taxable year for which the exclusion
allowance is being determined) that, under paragraph (f) of this
section, may be counted as one-year of service,
(ii) Which is includible in the employee's gross income, and
(iii) In the case of an employee of an employer described in
paragraph (b)(1)(ii) of this section, which is attributable to services
performed for an educational institution (as defined in section
151(e)(4)).
See subparagraph (2) of this paragraph for special rules for determining
the amount of compensation which is includible in the employee's gross
income.
(2) Special rules for determining the amount of compensation
includible in the employee's gross income. For purposes of subparagraph
(1) of this paragraph, the amount of compensation which is includible in
the employee's gross income shall be computed without regard to the
exclusions allowed by section 105(d) (relating to wage continuation
plans) and section 911 (relating to earned income from sources without
the United States). Therefore, although amounts received by the employee
from the employer while he is absent from work on account of personal
injuries or sickness may be excludable from his gross income under
section 105(d), such amounts are, nevertheless, considered as includible
in his gross income for purposes of computing his includible
compensation. On the other hand, in computing the amount which is
includible in the gross income of the employee for purposes of
subparagraph (1) of this paragraph, there shall not be included any
amount which is contributed by the employer for an annuity contract to
which paragraph (b) of this section applies. Thus, although the amount
of any employer contributions for an annuity contract to which paragraph
(b) of this section applies is, to the extent it exceeds in any taxable
year the employee's exclusion allowance for such year, includible in the
employee's gross income for that year, such amount is not considered as
includible in the employee's gross income for purposes of computing his
includible compensation for that year.
(3) Period during which compensation must be earned. For purposes of
computing an employee's exclusion allowance for a taxable year, there
may not be taken into account, as includible compensation, any
compensation
[[Page 369]]
which was earned by the employee during a taxable year ending after the
taxable year for which the exclusion allowance is being determined. On
the other hand, an employee's includible compensation may include all or
part of his compensation earned during a taxable year prior to the
taxable year for which the exclusion allowance is being determined. Such
a situation can occur, for example, when an employer purchases an
annuity contract for a retired employee, or when an employer purchases
an annuity contract for a part-time employee whose most recent one-year
period of service (within the meaning of paragraph (f) of this section)
extends over more than one taxable year of such employee. For purposes
of this subparagraph, it is immaterial when the compensation is actually
received by the employee or for what taxable year it is includible in
his gross income.
(4) Status of employer. In computing an employee's exclusion
allowance for a taxable year, there is not taken into account, as
includible compensation, any compensation which was earned during a
period when the employer was not an employer described in paragraph
(b)(1) (i) or (ii) of this section since under paragraph (f)(2) of this
section an employee is not considered to be in the service of the
employer for any such period. On the other hand, it is immaterial
whether the employer is an employer described in paragraph (b)(1) (i) or
(ii) of this section at the time the compensation is actually received
by the employee. Thus, if an employee receives compensation during his
1961 taxable year for services performed during his 1960 taxable year,
such compensation can qualify as includible compensation if his employer
was an employer described in paragraph (b)(1) (i) or (ii) of this
section during 1960, even though such employer was not such an employer
during 1961. See, also, paragraph (b) of this section which provides
that the exclusion allowance is only applicable with respect to
contributions which are made by an employer at a time when such employer
is an employer described in paragraph (b)(1) (i) or (ii) of this
section.
(f) Years of service--(1) In general. In computing an employee's
exclusion allowance for a taxable year, it is necessary to determine
such employee's number of years of service for the employer as of the
close of such taxable year. For this purpose, the number of years of
service of an employee for an employer shall be determined in accordance
with the rules set forth in this paragraph. In addition, such rules are
applicable in determining, for purposes of paragraph (e) of this
section, an employee's most recent one-year period of service.
(2) Exempt status requirement. For purposes of determining an
employee's number of years of service for an employer and his most
recent one-year period of service for such employer, an employee shall
not be considered to be employed by the employer, or to be in the
service of the employer, during any period that the employer is not an
employer described in paragraph (b)(1) (i) or (ii) of this section, or,
in the case of an employee of an employer described in paragraph
(b)(1)(ii) of this section, during any period when the employee is not
performing services for an educational institution (as defined in
section 151(e)(4)). The rule in this subparagraph may be illustrated by
the following example: A was employed on a full-time basis by the X
scientific organization during the whole of 1959 and 1960 and during
half of 1961. Both A and the X Organization use the calendar year as
their taxable year. The X Organization was an organization described in
section 501(c)(3) and exempt from tax under section 501(a) during the
years 1959 and 1961, but not during the year 1960. For purposes of
determining A's exclusion allowance for 1961, he is considered to have
1\1/2\ years of service (his service during 1959 and 1961) and his most
recent one-year period of service ending not later than the close of
1961 consists of his service during 1961 (which is equal to \1/2\ year
of service) and his service during the last half of 1959 (which is equal
to another \1/2\ year of service).
(3) Service included. For purposes of computing an employee's
exclusion allowance for a taxable year, there may be taken into account,
in determining
[[Page 370]]
his number of years of service, all service performed by him as of the
close of such taxable year. Therefore, whenever possible, service
performed during each of the employee's taxable years should be
considered separately in arriving at his total number of years of
service. For example, if an employee who reports his income on a
calendar year basis is employed on a full-time basis on July 1, 1959,
and continues on a full-time basis through December 31, 1960, his number
of years of service as of the close of his 1960 taxable year should, if
possible, be computed as follows:
(a) Number of years of service performed during 1959 taxable year \1/2\
(b) Number of years of service performed during 1960 taxable year 1
(c) Total number of years of service as of close of 1960 taxable 1\1/
year ((a)+(b)).................................................. 2\
However, in determining what constitutes a full year of service, the
employer's annual work period, and not the employee's taxable year, is
the standard of measurement. For example, in determining whether a
professor is employed full time, the number of months in the school's
academic year shall be the standard of measurement.
(4) Full-time employee for full year. (i) Each full year during
which an individual was employed full time shall be considered as one
year of service. In determining whether an individual is employed full-
time, the amount of work which he is required to perform shall be
compared with the amount of work which is normally required of
individuals holding the same position with the same employer and who
generally derive the major portion of their personal service income from
such position.
(ii)(a) In measuring the amount of work required of individuals
holding a particular position, any method that reasonably and accurately
reflects such amount may be used. For example, the number of hours of
classroom instruction is only an indication of the amount of work
required, but it may be used as a measure.
(b) In determining whether positions with the same employer are the
same, all of the facts and circumstances concerning the positions shall
be considered, including the work performed, the methods by which
compensation is computed, and the descriptions (or titles) of the
positions. For example, an assistant professor employed in the English
department of a university will be considered a full-time employee if
the amount of work that he is required to perform is the same as the
amount of work normally required of assistant professors of English at
that university who derive the main portion of their personal service
income from such position.
(c) In case an individual's position is not the same as another with
his employer, the rules of this paragraph shall be applied by
considering the same position with similar employers or similar
positions with the same employer.
(iii) A full year of service for a particular position means the
usual annual work period of individuals employed full-time in that
general type of employment at the place of employment. For example, if a
doctor employed by a hospital works throughout the 12 months of a year
except for a one-month vacation, such doctor will be considered as being
employed for a full year, if the other doctors at that hospital work 11
months of the year with a one-month vacation. Similarly, if the usual
annual work period at a university consists of the fall and spring
semesters, an instructor at that university who teaches those semesters
will be considered as working a full year.
(5) Other employees. (i) An individual shall be treated as having a
fraction of a year of service for each year during which he was a full-
time employee for part of the year or for each year during which he was
a part-time employee for the entire year or for a part of the year.
(ii) In determining the fraction which represents the fractional
year of service for an individual employed full time for part of a year,
the numerator shall be the number of weeks (or months) during which the
individual was a full-time employee in a position during that year, and
the denominator shall be the number of weeks (or months) which is
considered under subparagraph (4)(iii) of this paragraph as the usual
annual work period for that position. For example, if an instructor is
employed full time by a university for the 1959 spring semester (which
[[Page 371]]
lasts from February 1959 through May 1959), and the academic year of the
university is 8 months long, beginning in October 1958, and ending in
May 1959, then he is considered as having completed \4/8\ of a year of
service.
(iii) In determining the fraction which represents the fractional
year of service of an individual who is employed part time for a full
year, the numerator shall be the amount of work required to be performed
by the individual, and the denominator shall be the amount of work
normally required of individuals who hold the same position. The amount
of work required to be performed by the individual and the amount of
work normally required of individuals holding the same position shall be
determined in accordance with the principles of subparagraph (4) of this
paragraph. Thus, if a practicing physician teaches one course at a local
medical school 3 hours per week for two semesters and other faculty
members at that medical school teach 9 hours per week for two semesters,
then the practicing physician is considered as having completed \3/9\ of
a year of service.
(iv) In determining the fraction representing the fractional year of
service of an individual who is employed part time for part of a year,
it is necessary to compute the fractional year of service if the
individual were a part-time employee for a full year, and the fractional
year of service if the individual were a full-time employee for the part
of a year. The two fractions shall be multiplied and the product is the
fractional year of service of such individual who is employed part time
for part of a year. For example, if an attorney who is a specialist in a
subject teaches a course in that subject for 3 hours per week for one
semester at a nearby law school, and the full-time instructors at that
law school teach 12 hours per week for two semesters, then the
fractional part of a year of service for such part-time instructor is
computed as follows: The fractional year of service if the instructor
were a part-time employee for a full year is \3/12\ (number of hours
employed divided by the usual number of hours of work required for that
position); the fractional year of service if the instructor were a full-
time employee for part of a year is \1/2\ (period worked or one
semester, divided by usual work period, or 2 semesters). These fractions
are multiplied to obtain the fractional year of service: \3/12\ times
\1/2\, or \3/24\ (\1/8\).
(6) Less than one year of service considered as one year. If, at the
close of a taxable year, an employee has, under the rules in this
paragraph, a period of service of less than one year, such employee
shall, nevertheless, be considered to have one year of service for
purposes of computing his exclusion allowance for that taxable year.
Such period of service of less than one year shall also be considered to
be such employee's most recent one-year period of service for purposes
of determining his includible compensation.
(7) Most recent one-year period of service. (i) In determining, for
purposes of paragraph (e) of this section (relating to includible
compensation), an employee's most recent one-year period of service,
there is first taken into account all service performed by the employee
during the taxable year for which the exclusion allowance is being
determined. For this purpose, therefore, an employee's most recent one-
year period of service may not be the same as his employer's most recent
annual work period. The rule in this subdivision may be illustrated by
the following example: A, a professor who reports his income on a
calendar year basis, is employed by a university on a full-time basis
during the university's 1959-1960 and 1960-1961 academic years (October
through May). For purposes of computing A's exclusion allowance for his
1960 taxable year, his most recent one-year period of service consists
of his service performed during January through May, 1960 (which is part
of the 1959-1960 academic year) and his service performed during October
through December 1960 (which is part of the 1960-1961 academic year).
(ii) In the case of a part-time employee or a full-time employee who
is employed for only part of a year, it will be necessary to aggregate
his most recent periods of service to determine his most recent one-year
period of service. In such a case, there is first taken into account his
service during the taxable year for which the exclusion allowance
[[Page 372]]
is being determined; then there is taken into account his service during
his next preceding taxable year and so forth until his service equals,
in the aggregate, one year of service. For example, if an employee, who
reports his income on the calendar year basis, is employed on a full-
time basis during the months July through December 1959 (\1/2\ year of
service), July through December 1960 (\1/2\ year of service), and
October through December 1961 (\1/4\ year of service), his most recent
one-year period of service for purposes of computing his exclusion
allowance for 1961 consists of his service during 1961 (\1/4\ year of
service), his service during 1960 (\1/2\ year of service), and his
service during the months October through December 1959 (\1/4\ year of
service).
(g) Illustration of computation of exclusion allowance. The
exclusion provided under paragraph (b) of this section may be
illustrated by the following example: A, a professor who reports his
income on the calendar year basis, became a full-time employee of X
University on October 1, 1958 (beginning of X University's 1958-1959
academic year) and continued as a full-time employee for the academic
years 1958-1959, 1959-1960, and 1960-1961. X University was, during all
such academic years, an organization described in section 501(c)(3) and
exempt from tax under section 501(a). X University's academic year runs
for a period of 8 months: October through May. A received an annual
salary, all of which was includible in his gross income, of $8,000 for
the 1958-1959 academic year, $8,800 for the 1959-1960 academic year, and
$9,600 for the 1960-1961 academic year. Starting in 1958, X University
contributed amounts toward the purchase of annuity contracts for A and
such purchase was not part of a qualified annuity plan. X University
paid, as premiums for such contracts, $1,000 in 1958, $2,000 in 1959,
$2,400 in 1960, and $1,400 in 1961. The amount of such premiums which is
excludable from A's gross income for the year in which paid is computed
as follows:
1958
(1) Amount contributed by employer for annuity contracts in $1,000.00
1958.......................................................
(2) Includible compensation for most recent one-year period $3,000.00
of service (since A was employed for only \3/8\ of a year
at the close of 1958, this period is counted as most recent
one-year period of service) \3/8\ x $8,000.................
(3) 20% x includible compensation........................... $600.00
(4) Number of years of service (although A was employed for 1
less than a year, he is considered to have one-year of
service)...................................................
(5) Item (4) x item (3)..................................... $600.00
(6) Contributions excludable in prior taxable years of A.... None
(7) Amount excludable from A's gross income for 1958 ((5)-- $600.00
(6)).......................................................
(8) Amount includible in A's gross income for 1958 ((1)-(7)) $400.00
1959
(9) Amount contributed by employer for annuity contracts in $2,000.00
1959.......................................................
(10) Includible compensation for most recent one-year period $8,800.00
of service. (\3/8\ x $8,800+\5/8\x$8,000)..................
(11) 20% x includible compensation.......................... $1,660.00
(12) Number of years of service............................. 1\3/8\
(13) Item (12) x item (11).................................. $2,282.50
(14) Contributions excludable in prior taxable years of A $600.00
(item 7))..................................................
(15) Amount excludable from A's gross income for 1959 ((13)- $1,682.50
(14))......................................................
(16) Amount includible in A's gross income for 1959 ((9)- $317.50
(15))......................................................
1960
(17) Amount contributed by employer for annuity contracts in $2,400.00
1960.......................................................
(18) Includible compensation for most recent one-year period $9,100.00
of service (\3/8\x$9,600+\5/8\x$8,800).....................
(19) 20% x includible compensation.......................... $1,820.00
(20) Number of years of service............................. 2\3/8\
(21) Item (20) x item (19).................................. $4,322.50
(22) Contributions excludable in prior taxable years ((7) + $2,282.50
(15))......................................................
(23) Amount excludable from A's gross income for 1960 ((21) - $2,040.00
(22)).....................................................
(24) Amount includible in A's gross income for 1960 ((17) - $360.00
(23))......................................................
1961
(25) Amount contributed by employer for annuity contracts in $1,400.00
1961.......................................................
(26) Includible compensation for most recent one-year period $9,600.00
of service (\5/8\ x $9,600+\3/8\x$9,600)...................
(27) 20% x includible compensation.......................... $1,920.00
(28) Number of years of service............................. 3
(29) Item (28) x item (27).................................. $5,760.00
(30) Contributions excludable in prior taxable years ((7) + $4,322.50
(15) + (23))...............................................
(31) Amount excludable from A's gross income for 1961 (item $1,400.00
(25) since it is less than (29) - (30))....................
(32) Amount includable in A's gross income for 1961 ((25) - None
(31))......................................................
[T.D. 6783, 29 FR 18360, Dec. 24, 1964, as amended by T.D. 6885, 31 FR
7802, June 2, 1966; T.D. 7748, 46 FR 1696, Jan. 7, 1981; T.D. 7836, 47
FR 42337, Sept. 27, 1982; T.D. 8115, 51 FR 45736, Dec. 19, 1986]
[[Page 373]]
Sec. 1.403(b)-2 Eligible rollover distributions; questions and answers.
The following questions and answers relate to eligible rollover
distributions from annuities, custodial accounts, and retirement income
accounts described in section 403(b) of the Internal Revenue Code of
1986, as amended by sections 521 and 522 of the Unemployment
Compensation Amendments of 1992 (Public Law 102-318, 106 Stat. 290)
(UCA). For additional UCA guidance under sections 401(a)(31), 402(c),
402(f), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.402(f)-1,
and Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan from annuities, custodial accounts,
and retirement income accounts described in section 403(b)?
Q-2: Is a section 403(b) annuity required to provide the direct
rollover option described in section 401(a)(31) as a distribution
option?
Q-3: Is the payor of a section 403(b) annuity required to provide a
distributee of an eligible rollover distribution with an explanation of
the direct rollover option?
Q-4: When do sections 403 (b)(8) and (b)(10), as amended by UCA, and
this Sec. 1.403(b)-2 apply to distributions from section 403(b)
annuities?
Questions and Answers
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan from annuities, custodial accounts,
and retirement income accounts described in section 403(b)?
A-1: Under section 403(b)(8), as amended by UCA, any eligible
rollover distribution from a section 403(b) annuity is permitted to be
rolled over to an eligible retirement plan. For purposes of this
section, a section 403(b) annuity includes an annuity contract, a
custodial account, and a retirement income account described in section
403(b). For purposes of section 403(b)(8) and this section, an eligible
retirement plan means another section 403(b) annuity or an individual
retirement plan (as defined in Sec. 1.402(c)(2), Q&A-2 but does not
include a qualified plan (as defined in Sec. 1.402(c)-2), Q&A-2. Except
to the extent otherwise provided in this section, an eligible rollover
distribution from a section 403(b) annuity is an eligible rollover
distribution described in section 402(c) (2) and (4) and Sec. 1.402(c)-
2, Q&A-3 through Q&A-10 and Q&A-14, except that the distribution is from
section 403(b) annuity rather than a qualified plan. Thus, for example,
to the extent that corrective distributions described in Sec. 1.402(c)-
2, Q&A-4 are properly made from a section 403(b) annuity, such
distributions are not eligible rollover distributions. Similarly, in the
case of annuity distributions from an annuity contract described in
section 403(b), the entire amount of any such annuity payment made on or
after January 1 of the year in which an employee attains (or would have
attained) age 70\1/2\ will be treated as an amount required under
section 401(a)(9) and, thus, will not be an eligible rollover
distribution. The rules with respect to rollovers in sections 402
(c)(1), (c)(3), and (c)(9) and Sec. 1.402(c)-2, Q&A-11 through Q&A-13
and Q&A-15 also apply to eligible rollover distributions from section
403(b) annuities.
Q-2: Is a section 403(b) annuity required to provide the direct
rollover option described in section 401(a)(31) as a distribution
option?
A-2: (a) General rule. Yes. Pursuant to section 403(b)(10), section
403(b) does not apply to an annuity contract, custodial account, or
retirement income account unless the annuity contract, custodial
account, or retirement income account provides that if the distributee
of any eligible rollover distribution elects to have the distribution
paid directly to an eligible retirement plan (as defined in Q&A-1 of
this section) 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. For purposes of
determining whether a section 403(b) annuity has satisfied this direct
rollover requirement, the provisions of Sec. 1.401(a)(31)-1 apply to the
section 403(b) annuity as though it were a plan qualified under section
401(a) unless otherwise provided in this section. For example, as
described in Sec. 1.401(a)(31)-1, Q&A-15 a direct rollover from a
section 403(b) annuity to another section 403(b) annuity is a
distribution and a rollover and not a transfer of funds between
[[Page 374]]
section 403(b) annuities and, thus, is not subject to the applicable law
governing transfers of funds between section 403(b) annuities. In
applying the provisions of Sec. 1.401(a)(31)-1, the payor of the
eligible rollover distribution is treated as the plan administrator.
(b) Mandatory withholding. As in the case of an eligible rollover
distribution from a qualified plan, if a distributee of an eligible
rollover distribution from a section 403(b) annuity does not elect to
have the eligible rollover distribution paid directly to an eligible
retirement plan in a direct rollover, the eligible rollover distribution
is subject to 20-percent income tax withholding imposed under section
3405(c). See Sec. 31.3405(c)-1 of this chapter for provisions regarding
the withholding requirements relating to eligible rollover
distributions.
Q-3: Is the payor of a section 403(b) annuity required to provide
the distributee of an eligible rollover distribution with an explanation
of the direct rollover option?
A-3: Yes. In order to ensure that the distributee of an eligible
rollover distribution from a section 403(b) annuity has a meaningful
right to elect a direct rollover, the distributee must be informed of
the option. Thus, within a reasonable time period before making an
eligible rollover distribution, the payor must provide an explanation to
the distributee of his or her right to elect a direct rollover and the
income tax withholding consequences of not electing a direct rollover.
For purposes of satisfying the reasonable time period, the qualified
plan timing rule provided in Sec. 1.402(f)-1, Q&A-2 does not apply to
section 403(b) annuities. However, a payor of a section 403(b) annuity
will be deemed to have provided the explanation within a reasonable time
period if the payor complies with the time period in that rule.
Q-4: When do sections 403(b)(8) and (b)(10), as amended by UCA, and
this Sec. 1.403(b)-2 apply to distributions from section 403(b)
annuities?
A-4: (a) General rule--(1) Statutory effective date. Section
403(b)(8), as amended by UCA, and section 403(b)(10), as amended by UCA,
apply to distributions made on or after January 1, 1993. In addition,
the underlying section 403(b) annuity document must be amended at the
time provided in, and the section 403(b) annuity must operate in
accordance with the requirements of Sec. 1.401(a)(31)-1, Q&A-19. Section
522 of UCA provides a special effective date for governmental section
403(b) annuities. This special effective date is specified in
Sec. 1.403(b)-2T (as it appeared in the April 1, 1995 edition of 26 CFR
part 1).
(2) Regulatory effective date. This section applies to distributions
made on or after October 19, 1995. For distributions made on or after
January 1, 1993 and before October 19, 1995, Sec. 1.403(b)-2T (as it
appeared in the April 1, 1995 edition of 26 CFR part 1), applies.
However, for distributions made on or after January 1, 1993 but before
October 19, 1995, a section 403(b) annuity may satisfy section
403(b)(10) by substituting any or all provisions of this section for the
corresponding provisions of Sec. 1.403(b)-2T, if any.
[T.D. 8619, 60 FR 49214, Sept. 22, 1995, as amended by T.D. 8880, 65 FR
21315, Apr. 21, 2000]
Sec. 1.403(c)-1 Taxability of beneficiary under a nonqualified annuity.
(a) Taxability of vested interest in premiums. If after August 1,
1969, an employer (whether or not exempt under section 501(a)) pays
premiums for an annuity contract for the benefit of an employee, the
amount of such premiums shall be included as compensation in the gross
income of the employee for the taxable year during which such premiums
are paid, but only to the extent that the employees's rights in such
premiums are substantially vested (as defined in Sec. 1.83-3(b)) at the
time such premiums are paid. The preceding sentence shall not apply to
contracts referred to in the transitional rule of paragraph (d) (1),
(ii), or (iii) of this section, or to premiums subject to Sec. 1.403(a)-
1(a) or excludible under Sec. 1.403(b)-1(b). If any employer has
purchased annuity contracts and transfered them to a trust (other than
one described in section 401(a)) that is to provide annuity contracts or
benefits for his employees, the amounts so paid shall be treated as
contributions to a trust described in section 402(b). For the rules
relating to the taxation
[[Page 375]]
of the cost of life insurance protection when rights in a life insurance
contract are substantially nonvested, see Sec. 1.83-1(a)(2).
(b) Taxability of employee when rights under annuity contract change
from nonvested to vested--(1) In general. If, during a taxable year of
an employee ending after August 1, 1969, the rights of such employee
under an annuity contract purchased for him by an employer (whether or
not exempt under section 501(a) or 521(a)) become substantially vested,
the value of the annuity contract on the date of such change shall be
included in the employee's gross income for such year, to the extent
provided in paragraph (b)(2) of this section. The preceding sentence
shall not apply, however, to an annuiity contract purchased and held as
part of a plan which met at the time of such purchase, and continues to
meet, the requirements of section 404(a)(2) or an annuity contract
referred to in paragraph (d) (ii) or (iii) of this section. For purposes
of this section, the value of an annuity contract on the date the
employee's rights become substantially vested means the cash surrender
value of such contract on such date.
(2) Extent to which value of annuity contract is includible in
employee's gross income. For purposes of paragraph (b)(1) of this
section, the only amount includible in the gross income of the employee
is that the portion of the value of the contract on the date of the
change that is attributable to premiums which were paid by the employer
after August 1, 1969, and which were not excludible from the employer's
gross income under Sec. 1.403(b)-1(b). However, the includible portion
does not include--
(i) The value attributable to a premium paid on the date of such
change, and
(ii) The value attributable to premiums described in the
transitional rule of paragraph (d)(1) (ii) or (iii) of this section.
See Sec. 1.403(b)-1(b)(2) for the treatment of an amount otherwise
includible in gross income under section 403(c) as an employer
contribution for purposes of the exclusion under section 403(b).
(3) Partial vesting. If, during any taxable year of an employee,
only part of his beneficial interest in an annuity contract becomes
substantially vested, then only the corresponding part of the value of
the annuity contract on the date of such change is includible in the
employee's gross income for such taxable year. In such a case, it is
first necessary to compute, under the rules in paragraphs (b)(1) and (2)
of this section but without regard to any exclusion allowable under
Sec. 1.403(b)-1(b), the amount which would be includible in the
employee's gross income for the taxable year if his entire beneficial
interest in the annuity contract had changed to a substantially vested
interest during such year. The amount that is includible under this (3)
(without regard to the section 403(b) exclusion) is equal to the amount
determined under the preceding sentence multiplied by the percent of the
employee's beneficial interest which became substantially vested during
the taxable year.
(c) Amounts paid or made available under an annuity contract. The
amounts paid or made available to the employee under an annuity contract
subject to this section shall be included in the gross income of the
employee for the taxable year in which paid or made available, as
provided in section 72 (relating to annuities). Such amounts may be
taken into account in computations under sections 1301 through 1305
(relating to income averaging). For rules relating to the treatment of
employer contributions as part of the consideration paid by the
employee, see section 72(f). See also section 101(b)(2)(D) for rules
relating to the treatment of the limited exclusion provided thereunder
as part of the consideration paid by the employee.
(d) Taxability of beneficiary under a nonqualified annuity on or
before August 1, 1969. (1) Except as provided in section 402(d)
(relating to taxable years beginning before Janaury 1, 1977), if an
employer purchases an annuity contract and if the amounts paid for the
contract.
(i) On or before August 1, 1969, or
(ii) After such date, if pursuant to a binding written contract (as
defined in Sec. 1.83-8(b)(2)) entered into before April 22, 1969, or
[[Page 376]]
(iii) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969 and under which the obligation
of the employer is essentially the same as under a binding written
contract, are not subject to paragraph (a) of Sec. 1.403(a)-1 or
paragraph (a) of Sec. 1.403-1, the amount of such contribution shall, to
the extent it is not excludible under paragraph (b) of Sec. 1.403(b)-1,
be included in the income of the employee for the taxable year during
which such contribution is made if, at at the time the contribution is
made, the employee's rights under the annuity contract are
nonforfeitable, except for failure to pay future premiums. If the
annuity contract was purchased by an employer which is not exempt from
tax under section 501(a) or section 521(a), and if the employee's rights
under the annuity contract in such a case were forfeitable at the time
the employer's contribution was made for the annuity contract, even
though they become nonforfeitable later the amount of such contribution
is not required to be included in the income of the employee at the time
his rights under the contract become nonforfeitable. On the other hand,
if the annuity contract is purchased by an employer which is exempt from
tax under section 501(a) or section 521(a), all or part of the value of
the contract may be includible in the employee's gross income at the
time his rights under the contract become nonforfeitable (see section
403(d) prior to the repeal thereof by the Tax Reform Act of 1969 and the
regulations thereunder). As to what constitutes nonforfeitable rights of
an employee, see Sec. 1.402(b)-1(d)(2). The amounts received by or made
available to the employee under the annuity contract shall be included
in the gross income of the employee for the taxable year in which
received or made available, as provided in section 72 (relating to
annuities). For taxable years beginning before Janaury 1, 1964, sections
72(e)(3) (relating to the treatment of certain lump sums), as in effect
before such date, shall not apply to such amounts. For taxable years
beginning after December 31, 1963, such amounts may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). For rules relating to the treatment of employer
contributions as part of the consideration paid by the employee, see
section 72(f). See also section 101(b)(2)(D) for rules relating to the
treatment of the limited exclusion provided thereunder as part of the
consideration paid by the employee.
(2) If an employer has purchased annuity contracts and transferred
them to a trust, or if an employer has made contributions to a trust for
the purpose of providing annuity contracts for his employees as provided
in section 402(d) (see paragraph (a) of Sec. 1.402(D)-1, the amount so
paid or contributed is not required to be included in the income of the
employee, but any amount received by or made available to the employee
under the annuity contract shall be includible in the gross income of
the employee for the taxable year in which received or made available,
as provided in section 72 (relating to annuities). For taxable years
beginning before January 1, 1964, section 72(e)(3) (relating to the
treatment of certain lump sums), as in effect before such date, shall
not apply to any amount received by or made available to the employee
under the annuity contract. For taxable years beginning after December
31, 1963, amounts received by or made available to the employee under
the annuity contract may be taken into account in computations under
sections 1301 through 1305 (relating to income averaging). In such case
the amount paid or contributed by the employer shall not constitute
consideration paid by the employee for such annuity contract in
determining the amount of annuity payments required to be included in
his gross income under section 72 unless the employee has paid income
tax for any taxable year beginning before January 1, 1949, with respect
to such payment or contribution by the employer for such year and such
tax is not credited or refunded to the employee. In the event such tax
has been paid and not creditid or refunded the amount paid or
contributed by the employer for such year shall constitute consideration
paid by the employee for the annuity contract in determining the amount
of the annuity required to be included in the income of the employee
under section 72.
[[Page 377]]
(3) For taxable years beginning before January 1, 1958, the
provisions contained in section 403(c) prior to the amendment made
thereto by the Tax Reform Act of 1969 were included in section 403(b) of
the Internal Revenue Code of 1954. Therefore, the regulations contained
in this paragraph shall, for such taxable years, be considered as the
regulations under section 403(b) as in effect for such taxable years.
For the rules with respect to contributions paid after August 1, 1969,
see paragraphs (a), (b), and (c) of this section.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 588;
68A Stat. 917; 26 U.S.C. 83 and 7805))
[T.D. 7554, 43 FR 31924, July 24, 1978]
Sec. 1.403(d)-1 Taxability of employee when rights under contracts purchased by exempt organizations change from forfeitable to nonforfeitable.
(a) In general. The provisions of section 403(d), repealed by
section 321(b) of the Tax Reform Act of 1969 (83 Stat. 571), applied for
taxable years beginning after December 31, 1957, only with respect to
amounts paid for an annuity contract--
(1) On or before August 1, 1969, or
(2) After such date, if pursuant to a binding written contract (as
defined in Sec. 1.83-8(b)(2)) entered into before April 22, 1969, or
(3) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969, and under which the obligation
of the employer is essentially the same as under a binding written
contract.
If, during a taxable year of an employee beginning after December 31,
1957, the rights of such employee under an annuity contract purchased
for him by an employer which is exempt from tax under section 501(a) or
521(a) change from forfeitable to nonforfeitable rights, then (except in
the case of contracts to which Sec. 1.403(c)--1(b) applies for taxable
years ending after August 1, 1969) the value of such annuity contract on
the date of such change shall be included in the employee's gross income
for such taxable year, to the extent provided in paragraph (b) of this
section. However, the preceding sentence does not apply to an annuity
contract purchased and held as part of a plan that at the time of such
purchase and at all times thereafter meets the requirements of section
404(a)(2). For purposes of this section, the value of an annuity
contract on the date the employee's rights change from forfeitable to
nonforfeitable rights means the cash surrender value of such contract on
such date. As to what constitutes nonforfeitable rights of an employee,
see Sec. 1.402(b)-1(d)(2). For the rules with respect to amounts paid
after August 1, 1969, under an annuity contract purchased for an
employee by an employer which is exempt from tax under section 501(a) or
521(a), see generally section 403(c) and the regulations thereunder.
(b) Extent to which value of annuity contract is includible in
employee's gross income. For purposes of paragraph (a) of this section,
there shall be included in the gross income of an employee for his
taxable year in which his rights under an annuity contract change from
forfeitable to nonforfeitable rights only an amount equal to the portion
of the value of such contract on the date of such change (1) that is
attributable to contributions:
(i) Which were made by the employer while it was exempt from tax
under section 501(a) or 521(a);
(ii) Which were made after December 31, 1957; and
(iii) Which were not, at the time they were made, excludable from
the employee's gross income under paragraph (a) of Sec. 1.403(b)-1;
and (2) that is not excludable from the employee's gross income under
paragraph (b) of Sec. 1.403(b)-1. Thus, although amounts are contributed
by an employer after December 31, 1957, toward the purchase for an
employee of an annuity contract and, at the time of the contribution,
such employer is an organization described in section 501(c)(3) and
exempt from tax under section 501(a), the value of such annuity contract
attributable to such contributions would not be includible in the
employee's gross income for the taxable year in which his rights under
the contract change to nonforfeitable rights if such amounts were
contributed during a taxable year of the employee beginning before
January 1, 1958, and were, therefore, excludable
[[Page 378]]
from the employee's gross income under paragraph (a) of Sec. 1.403(b)-1.
Similarly, the value of such an annuity contract is not includible in
the gross income of the employee for the year in which the change occurs
to the extent that it is excludable under paragraph (b) of
Sec. 1.403(b)-1. See paragraph (b)(2) of Sec. 1.403(b)-1 which provides
that the amount otherwise includible in gross income under section
403(d) is considered to be a contribution by the employer for purposes
of the exclusion provided in paragraph (b) of Sec. 1.403(b)-1. In
addition, the portion of the value of an annuity contract attributable
to contributions made by the employer while it was not exempt from tax
under either section 501(a) or 521(a) is not includible in the gross
income of the employee at the time his rights under the contract change
to nonforfeitable rights even though the employer is exempt from tax
under section 501(a) or 521(a) at the time of such change. On the other
hand, the value of the annuity contract purchased by an organization
exempt from tax under section 501(a) or 521(a) may be includible in the
gross income of an employee for the year during which his rights under
the contract change to nonforfeitable rights even though such
organization is not exempt on the date of such change.
(c) Partial vesting--(1) General rule. If, during any taxable year
of an employee, only part of his beneficial interest in an annuity
contract changes from a forfeitable to a nonforfeitable interest, then
only the corresponding part of the value of the annuity contract on the
date of such change is includible in the employee's gross income for
such taxable year. In such a case, it is first necessary to compute,
under the rules in paragraphs (a) and (b) of this section but without
regard to any exclusion allowable under paragraph (b) of Sec. 1.403(b)-
1, the amount which would be includible in the employee's gross income
for the taxable year if his entire beneficial interest in the annuity
contract had changed to a nonforfeitable interest during such year. The
amount that is includible (without regard to any exclusion allowed by
paragraph (b) of Sec. 1.403(b)-1) in the gross income of the employee
for the taxable year in which the change occurs is an amount equal to
the amount determined under the preceding sentence multiplied by the
percent of the employee's beneficial interest which changed to a
nonforfeitable interest during the taxable year. If at the time the
employee's interest changes to a nonforfeitable interest, the employer
is an organization described in section 501(a)(3) and exempt from tax
under section 501(a), then the amount that is includible in the
employee's gross income under this subparagraph is considered as an
employer contribution to which the exclusion provided in paragraph (b)
of Sec. 1.403(b)-1 applies (see paragraph (b)(2) of Sec. 1.403(b)-1).
(2) Example. The provisions in paragraph (c)(1) of this section may
be illustrated by the following example:
Example. X organization purchased an annuity contract for A, one of
its employees who reports his income on a calendar year basis. X
contributed \1/3\ of of amount necessary to purchase the contract before
January 1, 1958, and the remaining \2/3\ after December 31, 1957. At the
time of the contributions, X was an organization exempt from tax under
section 501(a) and A's rights under the contract were forfeitable. The
annuity contract was not purchased as part of a qualified plan and A
made no contributions toward the purchase of the contract. On December
31, 1965, 50 percent of A's interest in the contract changed from a
forfeitable to a nonforfeitable interest, and on December 31, 1968, the
remaining 50 percent of A's interest in the contract changed to a
nonforfeitable interest. The cash surrender value of the contract was
$9,900 on December 31, 1965, and $12,000 on December 31, 1968. The
amount includible in A's gross income for 1965 and 1968 is computed as
follows--
1965
(i) Amount which would have been includible if A's entire interest
had changed to a nonforfeitable interest (cash surrender value of
contract on December 31, 1965, attributable to contributions made after
December 31, 1957), \2/3\ x $9,900, $6,600.
(ii) Percent of A's interest that changed to a nonforfeitable
interest on December 31, 1965, 50 percent.
(iii) Amount includible in A's gross income for 1965 ((ii) x (i)),
$3,300.
1968
(iv) Amount which would have been includible if A's entire interest
had changed to a nonforfeitable interest (cash surrender value
[[Page 379]]
of contract on December 31, 1968, attributable to contributions made
after December 31, 1957), \2/3\ $12,000, $8,000.
(v) Percent of A's interest that changed to a nonforfeitable
interest on December 31, 1968, 50 percent.
(vi) Amount includible in A's gross income for 1968 ((v) x (iv)),
$4,500.
If, on December 31, 1965, X is an organization described in section
501(c)(3) and exempt from tax under section 501(a), then only so much of
the $3,300 as is not excludable under paragraph (b) of Sec. 1.403(b)-1
is includible in A's gross income for 1965. Similarly, if, on December
31, 1968, X is an organization described in section 501(c)(3) and exempt
from tax under section 501(a), then only so much of the $4,000 as is not
excludable under paragraph (b) of Sec. 1.403(b)-1 is includible in A's
gross income for 1968.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 588;
68A Stat. 917; 26 U.S.C. 83 and 7805))
[T.D. 6783, 29 FR 18365, Dec. 24, 1964, as amended by T.D. 7554, 43 FR
31925, July 24, 1978]
Sec. 1.404(a)-1 Contributions of an employer to an employees' trust or annuity plan and compensation under a deferred payment plan; general rule.
(a)(1) Section 404(a) prescribes limitations upon deductions for
amounts contributed by an employer under a pension, annuity, stock
bonus, or profit-sharing plan, or under any plan of deferred
compensation. It is immaterial whether the plan covers present employees
only, or present and former employees, or only former employees. Section
404(a) also governs the deductibility of unfunded pensions and death
benefits paid directly to former employees or their beneficiaries (see
Sec. 1.404(a)-12). For taxable years beginning after 1962, certain self-
employed individuals may be covered by pension, annuity, or profit-
sharing plans. For the rules relating to the deduction of contributions
on behalf of such individuals, see paragraph (a)(2) of Sec. 1.404(a)-8
and Sec. 1.404(e)-1.
(2) Section 404(a) does not apply to a plan which does not defer the
receipt of compensation. Furthermore, section 404(a) does not apply to
deductions for contributions under a plan which is solely a dismissal
wage or unemployment benefit plan, or a sickness, accident,
hospitalization, medical expense, recreation, welfare, or similar
benefit plan, or a combination thereof. For example, if under a plan an
employer contributes 5 percent of each employee's compensation per month
to a fund out of which employees who are laid off will be paid benefits
for temporary periods, but employees who are not laid off have no rights
to the funds, such a plan is an unemployment benefit plan, and the
deductibility of the contributions to it is determined under section
162. As to the deductibility of such contributions, see Sec. 1.162-9.
(3) If, however, the contributions to a pension, profit-sharing,
stock bonus, or other plan of deferred compensation can be used to
provide any of the benefits referred to in subparagraph (2) of this
paragraph, then, except as provided in section 404(c), section 404(a)
applies to the entire contribution to the plan. Thus, if in the example
described in subparagraph (2) of this paragraph, the employer's
contribution on behalf of each employee is set up as a separate account,
and if any amount which remains in an employee's account at the time of
retirement is paid to him at such time, the deductibility of the
contributions to the plan is determined under section 404(a). For the
regulations for determining whether the benefits referred to in
subparagraph (2) of this paragraph can be included in a qualified
pension or profit-sharing plan, see Sec. 1.401-1(b).
(4) As to inclusion of full-time life insurance salesmen within the
class of persons considered to be employees, see section 7701(a)(20).
(b) In order to be deductible under section 404(a), contributions
must be expenses which would be deductible under section 162 (relating
to trade or business expenses) or 212 (relating to expenses for
production of income) if it were not for the provision in section 404(a)
that they are deductible, if at all, only under section 404(a).
Contributions may therefore be deducted under section 404(a) only to the
extent that they are ordinary and necessary expenses during the taxable
year in carrying on the trade or business or for the production of
income and are compensation for personal services actually rendered. In
no case is a deduction allowable under section 404(a) for the
[[Page 380]]
amount of any contribution for the benefit of an employee in excess of
the amount which, together with other deductions allowed for
compensation for such employee's services, constitutes a reasonable
allowance for compensation for the services actually rendered. What
constitutes a reasonable allowance depends upon the facts in the
particular case. Among the elements to be considered in determining this
are the personal services actually rendered in prior years as well as
the current year and all compensation and contributions paid to or for
such employee in prior years as well as in the current year. Thus, a
contribution which is in the nature of additional compensation for
services performed in prior years may be deductible, even if the total
of such contributions and other compensation for the current year would
be in excess of reasonable compensation for services performed in the
current year, provided that such total plus all compensation and
contributions paid to or for such employee in prior years represents a
reasonable allowance for all services rendered by the employee by the
end of the current year. A contribution under a plan which is primarily
for the benefit of shareholders of the employer is not deductible. Such
a contribution may constitute a dividend within the meaning of section
316. See also Secs. 1.162-6 and 1.162-8. In addition to the limitations
referred to above, deductions under section 404(a) are also subject to
further conditions and limitations particularly provided therein.
(c) Deductions under section 404(a) are generally allowable only for
the year in which the contribution or compensation is paid, regardless
of the fact that the taxpayer may make his returns on the accrual method
of accounting. Exceptions are made in the case of overpayments as
provided in paragraphs (1), (3), and (7) of section 404(a), and, as
provided by section 404(a)(6), in the case of payments made by a
taxpayer on the accrual method of accounting not later than the time
prescribed by law for filing the return for the taxable year of accrual
(including extensions thereof). This latter provision is intended to
permit a taxpayer on the accrual method to deduct such accrued
contribution or compensation in the year of accrual, provided payment is
actually made not later than the time prescribed by law for filing the
return for the taxable year of accrual (including extensions thereof),
but this provision is not applicable unless, during the taxable year on
account of which the contribution is made, the taxpayer incurs a
liability to make the contribution, the amount of which is accruable
under section 461 for such taxable year. See section 461 and the
regulations thereunder. There is another exception in the case of
certain taxpayers who are required to make additional contributions as a
result of the Act of June 15, 1955 (Public Law 74, 84th Cong., 69 Stat.
134), and the regulations thereunder.
[T.D. 6500, 25 FR 11682, Nov. 26, 1960, as amended by T.D. 6676, 28 FR
10144, Sept. 17, 1963]
Sec. 1.404(a)-1T Questions and answers relating to deductibility of deferred compensation and deferred benefits for employees. (Temporary)
Q-1: How does the amendment of section 404(b) by the Tax Reform Act
of 1984 affect the deduction of contributions or compensation under
section 404(a)?
A-1: As amended by the Tax Reform Act of 1984, section 404(b)
clarifies that section 404(a) shall govern the deduction of
contributions paid and compensation paid or incurred by the employer
under a plan, or method or arrangement, deferring the receipt of
compensation or providing for deferred benefits to employees, their
spouses, or their dependents. See section 404(b) and Sec. 1.404(b)-1T.
Section 404 (a) and (d) requires that such a contribution or
compensation be paid or incurred for purposes of section 162 or 212 and
satisfy the requirements for deductibility under either of those
sections. However, notwithstanding the above, section 404 does not apply
to contributions paid or accrued with respect to a ``welfare benefit
fund'' (as defined in section 419(e)) after July 18, 1984, in taxable
years of employers (and payors) ending after that date. Also, section
463 shall govern the deduction of vacation pay
[[Page 381]]
by a taxpayer that has elected the application of such section. For
rules relating to the deduction of contributions paid or accured with
respect to a welfare benefit fund, see section 419, Sec. 1.419-1T and
Sec. 1.419A-2T. For rules relating to the deduction of vacation pay for
which an election is made under section 463, see Sec. 301.9100-16T of
this chapter and Sec. 1.463-1T.
[T.D. 8073, 51 FR 4320, Feb. 4, 1986, as amended by T.D. 8435, 57 FR
43896, Sept. 23, 1992]
Sec. 1.404(a)-2 Information to be furnished by employer claiming deductions; taxable years ending before December 31, 1971.
(a) For the first taxable year for which a deduction from gross
income is claimed under section 404(a) (1), (2), (3), or (7), the
employer must file the following information (unless such information
has been previously filed in accordance with the regulations under
section 23(p) of the Internal Revenue Code of 1939) for each plan
involved to establish that it meets the requirements of section 401(a)
or 404(a)(2), and that deductions claimed do not exceed the amount
allowable under paragraphs (1), (2), (3), and (7) of section 404(a), as
the case may be:
(1) Verified copies of all the instruments constituting or
evidencing the plan, including trust indentures, group annuity
contracts, specimen copy of each type of individual contract, and
specimen copy of formal announcement and comprehensive detailed
description to employees, with all amendments to any such instruments.
(2) A statement describing the plan which identifies it and which
sets forth the name or names of the employers, the effective date of the
plan and of any amendments thereto, the method of distribution or of
disbursing benefits (whether by trustee, insurance company, or
otherwise), the dates when the instruments or amendments were executed,
the date of formal announcement and the dates when comprehensive
detailed description of the plan and of each amendment thereto were made
available to employees generally, the dates when the plan and when the
trust or the contract evidencing the plan and of any amendments thereto
were put into effect so that contributions thereunder were irrevocable
and a summary of the provisions and rules relating to--
(i) Employee eligibility requirements for participation in the plan,
(ii) Employee contributions,
(iii) Employer contributions,
(iv) The basis or formula for determining the amount of each type of
benefit and the requirements for obtaining such benefits and the vesting
conditions,
(v) The medium of funding (e. g., self-insured, unit purchase group
annuity contract, individual level annual premium retirement endowment
insurance contracts, etc.) and, if not wholly insured, the medium of
contributions and the kind of investments, and
(vi) The discontinuance or modification of the plan and
distributions or benefit payments upon liquidation or termination.
(3) A tabulation in columnar form showing the information specified
below with respect to each of the 25 highest paid employees covered by
the plan in the taxable year, listed in order of their nondeferred
compensation (where there are several plans of deferred compensation,
the information for each of the plans may be shown on a single
tabulation without repetition of the information common to the several
plans):
(i) Name.
(ii) Whether an officer.
(iii) Percentage of each class of stock owned directly or indirectly
by the employee or members of his family.
(iv) Whether the principal duties consist in supervising the work of
other employees.
(v) Year of birth.
(vi) Length of service for employer to the close of the year.
(vii) Total nondeferred compensation paid or accrued during the
taxable year with a breakdown of such compensation into the following
components:
(A) Basic compensation and overtime pay,
(B) Other direct payments, such as bonuses and commissions,
(C) Compensation paid other than in cash, such as goods, services,
insurance not directly related to the benefits or provided from funds
under the plan, etc.
[[Page 382]]
(viii) Amount allocated during the year for the benefit of the
employee or his beneficiary (including any insurance provided thereby or
directly related thereto), less the employee's contributions during the
year, under each other plan of deferred compensation.
(ix) Amount allocated during the year for the benefit of the
employee or his beneficiary (including any insurance provided thereby or
directly related thereto), less the employee's contributions during the
year, under the plan. If a profit-sharing or stock bonus plan, also a
breakdown of such amounts into the following components:
(A) Amounts originally allocated in the year, and
(B) Amounts reallocated in the year.
(x) Amounts of employee contributions during the year under the
plan,
(xi) If a pension or annuity plan,
(A) The retirement age and date and the form of the retirement
benefit,
(B) The annual rate or amount of the retirement benefit, and
(C) The aggregate of all of the employee's contributions under the
plan,
all based, in the case of an employee who is not on retirement benefit
under the plan, upon the assumption of his continued employment at his
current rate of compensation until his normal retirement age (or the end
of the current year if later) and retirement on such date with the
normal form of retirement benefit under the plan.
(4) The following totals:
(i) Total nondeferred compensation paid or accrued during the
taxable year for all employees covered under the plan and also for all
employees of the employer.
(ii) Total amount allocated during the year for the benefit of
employees, former or retired employees, or their beneficiaries
(including any insurance provided thereby or directly related thereto),
less employee contributions during the year under the plan and, if a
profit-sharing or stock bonus plan, also a breakdown of such total into
the following components:
(A) Amount originally allocated in the year, and
(B) Amount reallocated in the year.
(5) A schedule showing the total number of employees as of the close
of the year for each of the following groups, based on reasonable
estimates:
(i) All employees ineligible for coverage under the plan because of
requirements as to employment classification, specifying the reasons
applicable to the group (as, for example, temporary, seasonal, part
time, hourly pay basis, etc.).
(ii) All employees ineligible for coverage under the plan because of
requirements as to length of service and not included in subdivision (i)
of this subparagraph.
(iii) All employees ineligible for coverage under the plan because
of requirements as to minimum age and not included in subdivision (i) or
(ii) of this subparagraph.
(iv) All employees ineligible for coverage under the plan solely
because of requirements as to minimum rate of compensation.
(v) All employees ineligible for coverage under the plan other than
those employees included in subdivision (i), (ii), (iii), or (iv) of
this subparagraph, specifying the reason applicable to the group.
(vi) All employees ineligible for coverage under the plan for any
reasons, which should be the sum of subdivisions (i) to (v), inclusive,
of this subparagraph.
(vii) All employees eligible for coverage but not covered under the
plan.
(viii) All employees covered under the plan.
(ix) All employees of the employer, which should be the sum of
subdivisions (vi), (vii), and (viii) of this subparagraph.
If it is claimed that the requirements of section 401(a)(3)(A) are
satisfied, also the data and computations necessary to show that such
requirements are satisfied.
(6) In the case of a trust, a detailed balance sheet and a detailed
statement of receipts and disbursements during the year; in the case of
a nontrusteed annuity plan, a detailed statement of the names of the
insurers, the contributions paid by the employer and by the employees,
and a statement as to the amounts and kinds of premium refunds or
similar credits made available and the disposition of such credits in
the year.
[[Page 383]]
(7) If a pension or annuity plan, a detailed description of all the
methods, factors, and assumptions used in determining costs and in
adjusting the costs for actual experience under the plan (including any
loadings, contingency reserves, or special factors and the basis of any
insured costs or liabilities involved therein) explaining their source
and application in sufficient detail to permit ready analysis and
verification thereof, and, in the case of a trust, a detailed
description of the basis used in valuing the investments held.
(8) A statement of the applicable limitations under section 404(a)
(1), (2), (3), or (7) and an explanation of the method of determining
such limitations, a summary of the data, and a statement of computations
necessary to determine the allowable deductions for the taxable year.
Also, in the case of a pension or annuity plan, a summary of the costs
or liabilities and adjustments for the year under the plan based on the
application of the methods, factors, and assumptions used under the
plan, in sufficient detail to permit ready verification of the
reasonableness thereof.
(9) A statement of the contributions paid under the plan for the
taxable year showing the date and amount of each payment. Also, a
summary of the deductions claimed for the taxable year for the plan with
a breakdown of the deductions claimed into the following components:
(i) For contributions paid in the taxable year before giving effect
to the provisions of paragraph (7) of section 404(a).
(ii) For contributions paid in prior taxable years beginning after
December 31, 1941, in accordance with the carryover provisions of
paragraphs (1) and (3) of section 404(a), before giving effect to the
provisions of paragraph (7) thereof, and in accordance with the
carryover provisions of section 404(d).
(iii) Any reductions or increases in the deductions in accordance
with the provisions of paragraph (7) of section 404(a). However, if the
information in this subdivision is filed prior to the filing of the
information required by subparagraph (8) of this paragraph, then, in
determining the limit of deduction under paragraph (7) of section
404(a), the applicable percentage of the compensation otherwise paid or
accrued during the year may be used.
(b) For taxable years subsequent to the year for which all of the
applicable information under paragraph (a) of this section (or
corresponding provisions of prior regulations) has been filed,
information is to be filed only to the following extent:
(1) If there is any change in the plan, instruments, methods,
factors, or assumptions upon which the data and information specified in
paragraph (a) (1), (2), or (7) of this section are based, a detailed
statement explaining the change and its effect is to be filed only for
the taxable year in which the change is put into effect. However, if
there is no such change, unless otherwise requested by the district
director, merely a statement that there is no such change is to be
filed.
(2) The information specified in paragraph (a)(3) of this section
which has been filed for a taxable year, unless otherwise requested by
the district director and so long as the plan and the method and basis
of allocations are not changed, is to be filed for subsequent years only
to the extent of showing in the tabulation such information with respect
to employees who, at any time in the taxable year, own, directly or
indirectly, more than 5 percent of the voting stock, considering stock
so owned by an individual's spouse or minor lineal descendant as owned
by the individual for this purpose.
(3) The information specified in paragraph (a) (4), (5), (6), (8),
and (9) of this section.
In the case of corporate employers, the information required to be
submitted by this paragraph shall, except as otherwise provided by the
Commissioner, be filed on Form 2950 for taxable years ending on or after
December 31, 1961. In the case of other employers, the information
required to be submitted by this paragraph shall, except as otherwise
provided by the Commissioner, be filed on Form 2950 for taxable years
ending on or after December 31, 1962.
(c) If a deduction is claimed under section 404(a)(5) for the
taxable year, the taxpayer shall furnish such information as is
necessary to show that the
[[Page 384]]
deduction is not allowable under the other paragraphs of section 404(a),
that the amount paid is an ordinary and necessary expense or an expense
for the production of income, and that the employees' rights to, or
derived from, such employer's contribution or such compensation were
nonforfeitable at the time the contribution or compensation was paid. In
the case of corporate employers, the information required to be
submitted by this paragraph shall, except as otherwise provided by the
Commissioner, be filed on Form 2950 for taxable years ending on or after
December 31, 1961. In the case of other employers, the information
required to be submitted by this paragraph shall, except as otherwise
provided by the Commissioner, be filed on Form 2950 for taxable years
ending on or after December 31, 1962.
(d) For the purpose of the information required by this section,
contributions paid in a taxable year shall include those deemed to be so
paid in accordance with the provisions of section 404(a)(6) and shall
exclude those deemed to be paid in the prior taxable year in accordance
with such provisions. As used in this section, ``taxable year'' refers
to the taxable year of the employer and, unless otherwise requested by
the district director, a ``year'' which is not specified as a ``taxable
year'' may be taken as the taxable year of the employer or as the plan,
trust, valuation, or group contract year with respect to which
deductions are being claimed provided the same rule is followed
consistently so that there is no gap or overlap in the information
furnished for each item. In any case the date or period to which each
item of information furnished relates should be clearly shown. All the
information required by this section should be filed with the tax return
for the taxable year in which the deduction is claimed, except that,
unless sooner requested by the district director, such information,
other than that specified in paragraph (a)(4)(i) and (9) of this
section, may be filed within 12 months after the close of the taxable
year provided there is filed with the tax return a statement that the
information cannot reasonably be filed therewith, setting forth the
reasons therefor.
(e) In any case all the information and data required by this
section must be filed in the office of the district director in which
the employer files his tax returns and must be filed independently of
any information and data otherwise submitted in connection with a
determination of the qualification of the trust or plan under section
401(a). The district director may, in addition, require any further
information that he considers necessary to determine allowable
deductions under section 404 or qualification under section 401. For
taxable years ending on or before December 31, 1961, the district
director may waive the filing of such information required by this
section which he finds unnecessary in a particular case. For taxable
years ending after December 31, 1961, the Commissioner may waive the
filing of such information.
(f) Records substantiating all data and information required by this
section to be filed must be kept at all times available for inspection
by internal revenue officers at the main office or place of business of
the employer.
(g) In the case of a plan which covers employees, some or all of
whom are self-employed individuals and with respect to which a deduction
is claimed under section 404(a) (1), (2), (3), or (7), paragraphs (a)
and (b) of this section, and the provision of paragraph (d) of this
section relating to the time for filing the information required by this
section, shall not apply, but in lieu of the information required to be
submitted by paragraphs (a) and (b) of this section, the employer shall,
with the return for the taxable year in which the deduction is claimed,
submit the information required by the form provided by the Internal
Revenue Service for such purpose.
(h) When a custodial account forms a part of a plan for which a
deduction is claimed under section 404(a) (1), (2), (3), or (7), the
information which under this section is to be submitted with respect to
a qualified trust must be submitted with respect to such custodial
account. Thus, for purposes of this section--
(1) The term ``trust'' includes custodial account,
[[Page 385]]
(2) The term ``trustee'' includes custodian, and
(3) The term ``trust indenture'' includes custodial agreement.
(i) Except as provided under Sec. 1.503(d)-1(a) and Sec. 601.201 of
this chapter (Statement of Procedural Rules) in the case of a request
for the determination of qualification of a trust under section 401 and
exemption under section 501, paragraphs (a) through (h) of this section
shall not apply for taxable years ending on or after December 31, 1971.
For information to be furnished for taxable years ending on or after
December 31, 1971, see Sec. 1.404(a)-2A.
[T.D. 6500, 25 FR 11683, Nov. 26, 1960, as amended by T.D. 6599, 27 FR
4475, May 10, 1962; T.D. 6676, 28 FR 10144, Sept. 17, 1963; T.D. 7165,
37 FR 5025, Mar. 9, 1972; T.D. 7168, 37 FR 5491, Mar. 16, 1972]
Sec. 1.404(a)-2A Information to be furnished by employer; taxable years ending on or after December 31, 1971, and before December 31, 1975.
(a) In general. For any taxable year ending on or after December 31,
1971, any employer who maintains a pension, annuity, stock bonus,
profit-sharing, or other funded plan of deferred compensation shall file
the forms prescribed by this section. An employer (including a self-
employed individual) maintaining such a plan shall furnish such
information as is required by the forms and the instructions relating
thereto. The forms shall be filed in the manner and at the time
prescribed under paragraph (c) of this section. See Sec. 1.404(a)-2 with
respect to information to be furnished for taxable years ending before
December 31, 1971. For purposes of this section, in the case of a plan
of several employers described in Sec. 1.401-1(d), each employer shall
be deemed to be maintaining a separate plan corresponding to the plan of
which the trust is a part. For information required to be furnished with
respect to a funded deferred compensation plan maintained by an employer
who is exempt from tax under section 501(a), see Sec. 1.6033-
2(a)(2)(ii)(i).
(b) Forms. The forms prescribed by this section are:
(1) Form 4848, generally relating to information concerning the
qualification of the plan, and deductions for contributions made on
behalf of employees or self-employed individuals,
(2) Form 4849, generally relating to the financial position of the
trust, fund, or custodial or fiduciary account which is a part of the
plan, and
(3) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Forms 2950 and 2950SE, relating to the
identification of plans to which an employer has made a contribution and
information with respect to a deduction for a contribution made on
behalf of a self-employed individual, respectively.
(c) Filing requirements. (1) Form 4848 shall be filed by the
employer for each taxable year during which he maintains a pension,
annuity, stock bonus, profit-sharing, or other funded plan of deferred
compensation. Such form shall be filed on or before the 15th day of the
5th month following the close of the employer's taxable year. For rules
relating to the extension of time for filing, see section 6081 and the
regulations thereunder and the instructions for Form 4848.
(2) Form 4849 shall be filed by the employer as an attachment to
Form 4848 for each taxable year during which he maintains a pension,
annuity, stock bonus, profit-sharing, or other funded plan of deferred
compensation unless the employer (i) has been notified in writing that
Form 4849 will be filed by the fiduciary for such plan as an attachment
to Form 990-P or (ii) is not required to file Form 4849 under the
instructions relating thereto.
(3) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Form 2950 shall be filed with the employer's
tax return for any such taxable year during which a pension, annuity,
stock bonus, profit-sharing, or other funded plan of deferred
compensation is maintained.
(4) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Form 2950SE shall be filed by each self-
employed individual with his income tax return for any such taxable year
in which he claims a deduction for contributions made on his behalf.
(d) Additional information. In addition to the information otherwise
required
[[Page 386]]
to be furnished by this section, the district director may require any
further information that he considers necessary to determine allowable
deductions under section 404 or qualification under section 401.
(e) Records. Records substantiating all data and information
required by this section to be filed must be kept at all times available
for inspection by internal revenue officers at the main office or place
of business of the employer.
[T.D. 7165, 37 FR 5025, Mar. 9, 1972, as amended by T.D. 7223, 37 FR
24748, Nov. 21, 1972; T.D. 7551, 43 FR 29292, July 7, 1978]
Sec. 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).
(a) If contributions are paid by an employer to or under a pension
trust or annuity plan for employees and the general conditions and
limitations applicable to deductions for such contributions are
satisfied (see Sec. 1.404(a)-1), the contributions are deductible under
section 404(a) (1) or (2) if the further conditions provided therein are
also satisfied. As used in this section, a ``pension trust'' means a
trust forming part of a pension plan and an ``annuity plan'' means a
pension plan under which retirement benefits are provided under annuity
or insurance contracts without a trust. This section is also applicable
to contributions to a foreign situs pension trust which could qualify
for exemption under section 501(a) except that it is not created or
organized and maintained in the United States. For the meaning of
``pension plan'' as used in this section, see paragraph (b)(1)(i) of
Sec. 1.401-1. Where disability pensions, insurance, or survivorship
benefits incidental and directly related to the retirement benefits
under a pension or annuity plan are provided for the employees or their
beneficiaries by contributions under the plan, deductions on account of
such incidental benefits are also covered under section 404(a) (1) or
(2). See paragraph (b)(2) of Sec. 1.72-16 as to taxability to employees
of cost of incidental life insurance protection. Similarly, where
medical benefits described in section 401(h) as defined in paragraph (a)
of Sec. 1.401-14 are provided for retired employees, their spouses, or
their dependents under the plan, deductions on account of such
subordinate benefits are also covered under section 404(a) (1) or (2).
In order to be deductible under section 404(a)(1), contributions to a
pension trust must be paid in a taxable year of the employer which ends
with or within a year of the trust for which it is exempt under section
501(a). Contributions paid in such a taxable year of the employer may be
carried over and deducted in a succeeding taxable year of the employer
in accordance with section 404(a)(1)(D), whether or not such succeeding
taxable year ends with or within a taxable year of the trust for which
it is exempt under section 501(a). See Sec. 1.404(a)-7 for rules
relating to the limitation on the amount deductible in such a succeeding
taxable year of the employer. See Sec. 1.404(a)-8 as to conditions for
deductions under section 404(a)(2) in the case of an annuity plan. In
either case, the deductions are also subject to further limitations
provided in section 404(a)(1). The limitations provided in section
404(a)(1) are, with an exception provided for certain years under
subparagraph (A) thereof (see Sec. 1.404(a)-4), based on the actuarial
costs of the plan.
(b) In determining costs for the purpose of limitations under
section 404(a)(1), the effects of expected mortality and interest must
be discounted and the effects of expected withdrawals, changes in
compensation, retirements at various ages, and other pertinent factors
may be discounted or otherwise reasonably recognized. A properly
weighted retirement age based on adequate analyses of representative
experience may be used as an assumed retirement age. Different basic
assumptions or rates may be used for different classes of risks or
different groups where justified by conditions or required by contract.
In no event shall costs for the purpose of section 404(a)(1) exceed
costs based on assumptions and methods which are reasonable in view of
the provisions and coverage of the plan, the funding medium, reasonable
[[Page 387]]
expectations as to the effects of mortality and interest, reasonable and
adequate regard for other factors such as withdrawal and deferred
retirement (whether or not discounted) which can be expected to reduce
costs materially, reasonable expenses of operation, and all other
relevant conditions and circumstances. In any case, in determining the
costs and limitations, an adjustment shall be made on account of any
experience more favorable than that assumed in the basis of limitations
for prior years. Unless such adjustments are consistently made every
year by reducing the limitations otherwise determined by any decrease in
liability or cost arising from experience in the next preceding taxable
year which was more favorable than the assumptions on which the costs
and limitations were based, the adjustment shall be made by some other
method approved by the Commissioner.
(c) The amount of a contribution to a pension or annuity plan that
is deductible under section 404(a) (1) or (2) depends upon the methods,
factors, and assumptions which are used to compute the costs of the plan
and the limitation of section 404(a)(1) which is applied. Since the
amount that is deductible for one taxable year may affect the amount
that is deductible for other taxable years, the methods, factors, and
assumptions used in determining costs and the method of determining the
limitation which have been used for determining the deduction for a
taxable year for which the return has been filed shall not be changed
for such taxable year, except when the Commissioner determines that the
methods, factors, assumptions, or limitations were not proper, or except
when a change is necessitated by reason of the use of different methods,
factors, assumptions, or limitations for another taxable year. However,
different methods, factors, and assumptions, or a different method of
determining the limitation, if they are proper, may be used in
determining the deduction for a subsequent taxable year.
(d) Any expenses incurred by the employer in connection with the
plan, such as trustee's and actuary's fees, which are not provided for
by contributions under the plan are deductible by the employer under
section 162 (relating to trade or business expenses), or 212 (relating
to expenses for production of income) to the extent that they are
ordinary and necessary.
(e) In case deductions are allowable under section 404(a)(3), as
well as under section 404(a) (1) or (2), the limitations under section
404(a) (1) and (3) are determined and applied without giving effect to
the provisions of section 404(a)(7) but the amounts allowable as
deductions are subject to the further limitations provided in section
404(a)(7). See Sec. 1.404(a)-13.
(f)(1) Amounts contributed by an employer under the plan for the
funding of medical benefits described in section 401(h) as defined in
paragraph (a) of Sec. 1.401-14 must satisfy the general requirements
which are applicable to deductions allowable under section 404 and which
are set forth in Sec. 1.404(a)-1 including, for example, the
requirements described in paragraph (b) of such section. Accordingly,
such amounts must constitute an ordinary and necessary expense relating
to either the trade or business or the production of income and must
not, when added to all other compensation paid by the employer to the
employee on whose behalf such a contribution is made, constitute more
than reasonable compensation. However, in determining the amount which
is deductible with respect to contributions to provide retirement
benefits under the plan, amounts contributed for the funding of medical
benefits described in section 401(h) shall not be taken into
consideration.
(2) The amounts deductible with respect to employer contributions to
fund medical benefits described in section 401(h) shall not exceed the
total cost of providing such benefits. The total cost of providing such
benefits shall be determined in accordance with any generally accepted
actuarial method which is reasonable in view of the provisions and
coverage of the plan, the funding medium, and other applicable
considerations. The amount deductible for any taxable year with respect
to such cost shall not exceed the greater of--
(i) An amount determined by distributing the remaining unfunded
costs of
[[Page 388]]
past and current service credits as a level amount, or as a level
percentage of compensation, over the remaining future service of each
employee, or
(ii) 10 percent of the cost which would be required to completely
fund or purchase such medical benefits.
In determining the amount deductible, an employer must apply either
subdivision (i) of this subparagraph for all employees or subdivision
(ii) of this subparagraph for all employees. If contributions paid by an
employer in a taxable year to fund such medical benefits under a pension
or annuity plan exceed the limitations of this subparagraph but
otherwise satisfy the conditions for deduction under section 404, then
the excess contributions are carried over and are deductible in
succeeding taxable years of the employer which end with or within
taxable years of the trust for which it is exempt under section 501(a)
in order of time to the extent of the difference between the amount paid
and deductible in each succeeding year and the limitation applicable to
such year under this subparagraph. For purposes of subdivision (i) of
this subparagraph, if the remaining future service of an employee is one
year or less, it shall be treated as one year.
[T.D. 6500, 25 FR 11685, Nov. 26, 1960, as amended by T.D. 6722, 29 FR
5073, Apr. 14, 1964; T.D. 7165, 37 FR 5025, Mar. 9, 1972]
Sec. 1.404(a)-4 Pension and annuity plans; limitations under section 404(a)(1)(A).
(a) Subject to the applicable general conditions and limitations
(see Sec. 1.404(a)-3), the initial limitation under section 404(a)(1)(A)
is 5 percent of the compensation otherwise paid or accrued during the
taxable year to all employees under the pension or annuity plan. This
initial 5-percent limitation applies to the first taxable year for which
a deduction is allowed for contributions to or under such a plan and
also applies to any subsequent year (other than one described in
paragraph (d) of this section) for which the 5-percent figure is not
reduced as provided in this section. For years to which the initial 5-
percent limitation applies, no adjustment on account of prior experience
is required. If the contributions do not exceed the initial 5-percent
limitation in the first taxable year to which this limitation applies,
the taxpayer need not submit actuarial data for such year.
(b) For the first taxable year following the first year to which the
initial 5-percent limitation applies, and for every fifth year
thereafter, or more frequently where preferable to the taxpayer, the
taxpayer shall submit with his return an actuarial certification of the
amount reasonably necessary to provide the remaining unfunded cost of
past and current service credits of all employees under the plan with a
statement explaining all the methods, factors, and assumptions used in
determining such amount. This amount may be determined as the sum of (1)
the unfunded past service cost as of the beginning of the year, and (2)
the normal cost for the year. Such costs shall be determined by methods,
factors, and assumptions appropriate as a basis of limitations under
section 404(a)(1)(C). Whenever requested by the district director, a
similar certification and statement shall be submitted for the year or
years specified in such request. The district director will make
periodical examinations of such data at not less than 5-year intervals.
Based upon such examinations the Commissioner will reduce the limitation
under section 404(a)(1)(A) below the 5-percent limitation for the years
with respect to which he finds that the 5-percent limitation exceeds the
amount reasonably necessary to provide the remaining unfunded cost of
past and current service credits of all employees under the plan. Where
the limitation is so reduced, the reduced limitation shall apply until
the Commissioner finds that a subsequent actuarial valuation shows a
change to be necessary. Such subsequent valuation may be made by the
taxpayer at any time and submitted to the district director with a
request for a change in the limitation. See, however, paragraph (d) of
this section with respect to taxable years to which the limitation under
section 404(a)(1)(A) does not apply.
(c) For the purpose of limitations under section 404(a)(1)(A),
``compensation otherwise paid or accrued'' means all of the compensation
paid or accrued
[[Page 389]]
except that for which a deduction is allowable under a plan that
qualifies under section 401(a), including a plan that qualifies under
section 404(a)(2). Where two or more pension or annuity plans cover the
same employee, under section 404(a)(1)(A) the deductions with respect to
each such plan are subject to the limitations applicable to the
particular plan and the total deductions for all such plans are also
subject to the limitations which would be applicable thereto if they
constituted a single plan. Where, because of the particular provisions
applicable to a large class of employees under a plan, the costs with
respect to such employees are nominal in comparison with their
compensation, after the first year to which the initial 5-percent
limitation applies, deductions under section 404(a)(1)(A) are subject to
limitations determined by considering the plan applicable to such class
as if it were a separate plan. Deductions are allowable to the extent of
the applicable limitations under section 404(a)(1)(A) even where these
are greater than the applicable limitations under section 404(a)(1)(B)
or section 404(a)(1)(C).
(d) The limitation under section 404(a)(1)(A) shall not be used for
purposes of determining the amount deductible for a taxable year of the
employer which ends with or within a taxable year of the pension trust
during which it is not exempt under section 501(a), or, in the case of
an annuity plan, during which it does not meet the requirements of
section 404(a)(2), or which ends after the trust or plan has terminated.
See Sec. 1.404(a)-7 for rules relating to the limitation which is
applicable for purposes of determining the amount deductible for such a
taxable year of the employer.
[T.D. 6500, 25 FR 11685, Nov. 26, 1960, as amended by T.D. 6534, 26 FR
515, Jan. 20, 1961]
Sec. 1.404(a)-5 Pension and annuity plans; limitations under section 404(a)(1)(B).
(a) Subject to the applicable general conditions and limitations
(see Sec. 1.404(a)-3), under section 404(a)(1)(B), deductions may be
allowed to the extent of limitations based on costs determined by
distributing the remaining unfunded cost of the past and current service
credits with respect to all employees covered under the trust or plan as
a level amount or level percentage of compensation over the remaining
service of each such employee except that, as to any three individuals
with respect to whom more than 50 percent of such remaining unfunded
cost attributable to such individuals shall be distributed evenly over a
period of at least five taxable years. See, however, paragraph (e) of
this section with respect to taxable years to which the limitation under
section 404(a)(1)(B) does not apply.
(b) The statutory limitation for any taxable year under section
404(a)(1)(B) is any excess of the amount of the costs described in
paragraph (a) of this section for the year over the amount allowable as
a deduction under section 404(a)(1)(A).
(c) For this purpose, such excess, adjusted for prior experience,
may be computed for each year as follows, all determinations being made
as of the beginning of the year:
(1) Determine the value of all benefits expected to be paid, after
the beginning of the year for all employees, any former employees, and
any other beneficiaries, then covered under the plan.
(2) If employees contribute under the plan, determine the value of
all contributions expected to be made after the beginning of the year by
employees then covered under the plan.
(3) Determine the value of all funds of the plan as of the beginning
of the year.
(4) Determine the amount remaining to be distributed as a level
amount or as a level percentage of compensation over the remaining
future service of each employee by subtracting from subparagraph (1) of
this paragraph the sum of subparagraphs (2) and (3) of this paragraph.
(5) Determine the value of all compensation expected to be paid
after the beginning of the year to all employees then covered under the
plan.
(6) Determine an accrual rate for each employee by dividing
subparagraph (5) of this paragraph into subparagraph (4) of this
paragraph.
(7) Compute the excess under section 404(a)(1)(B) for the year by
multiplying
[[Page 390]]
the compensation paid to all employees covered under the plan during the
year by any excess of subparagraph (6) of this paragraph over 5 percent.
In general, where this method is used, the limitation under section
404(a)(1)(B) will be equal to the excess so computed without further
adjustment on account of prior favorable experience, provided all the
factors and assumptions used are reasonable in view of all applicable
considerations (see Sec. 1.404(a)-3) and provided subparagraph (5) of
this paragraph is not less than five times the annual rate of
compensation in effect at the beginning of the year.
(d) Instead of determining the excess deductible under section
404(a)(1)(B) by the method shown in paragraph (c), such excess may be
based upon cost determined by some other method which is reasonable and
appropriate under the circumstances. Thus, such excess may be based on
the amounts necessary with respect to each individual covered employee
to provide the remaining unfunded cost of all his benefits under the
plan distributed as a level amount over the period remaining until the
normal commencement of his retirement benefits, in accordance with other
generally accepted actuarial methods which are reasonable and
appropriate in view of the provisions of the plan, the funding medium,
and other applicable considerations.
(e) The limitation under section 404(a)(1)(B) shall not be used for
purposes of determining the amount deductible for a taxable year of the
employer which ends with or within a taxable year of the pension trust
during which it is not exempt under section 501(a), or, in the case of
an annuity plan, during which it does not meet the requirements of
section 404(a)(2), or which ends after the trust or plan has terminated.
See Sec. 1.404(a)-7 for rules relating to the limitation which is
applicable for purposes of determining the amount deductible for such a
taxable year of the employer.
[T.D. 6500, 25 FR 11686, Nov. 26, 1960, as amended by T.D. 6534, 26 FR
515, Jan. 20, 1961]
Sec. 1.404(a)-6 Pension and annuity plans; limitations under section 404(a)(1)(C).
(a) Application to a taxable year of the employer which ends with or
within a taxable year of the pension trust or annuity plan for which it
is exempt under section 501(a) or meets the requirements of section
404(a)(2). (1) The rules in this paragraph are applicable with respect
to the limitation under section 404(a)(1)(C) for taxable years of the
employer which end with or within a taxable year of the pension trust
for which it is exempt under section 501(a), or, in the case of an
annuity plan, during which it meets the requirements of section
404(a)(2). See paragraph (b) of this section for rules relating to the
limitation under section 404(a)(1)(C) for other taxable years of the
employer.
(2) Subject to the applicable general conditions and limitations
(see Sec. 1.404(a)-3), in lieu of amounts deductible under the
limitations of section 404(a)(1)(A) and section 404(a)(1)- (B),
deductions may be allowed under section 404(a)(1)(C) to the extent of
limitations based on normal and past service or supplementary costs of
providing benefits under the plan. ``Normal cost'' for any year is the
amount actuarially determined which would be required as a contribution
by the employer in such year to maintain the plan if the plan had been
in effect from the beginning of service of each then included employee
and if such costs for prior years had been paid and all assumptions as
to interest, mortality, time of payment, etc., had been fulfilled. Past
service or supplementary cost at any time is the amount actuarially
determined which would be required at such time to meet all the future
benefits provided under the plan which would not be met by future normal
costs and employee contributions with respect to the employees covered
under the plan at such time.
(3) The limitation under section 404(a)(1)(C) for any taxable year
to which this paragraph applies is the sum of normal cost for the year
plus an amount not in excess of one-tenth of the past service or
supplementary cost
[[Page 391]]
as of the date the past service or supplementary credits are provided
under the plan. For this purpose, the normal cost may be determined by
any generally accepted actuarial method and may be expressed either as
(i) the aggregate of level amounts with respect to each employee covered
under the plan, (ii) a level percentage of payroll with respect to each
employee covered under the plan, or (iii) the aggregate of the single
premium or unit costs for the unit credits accruing during the year with
respect to each employee covered under the plan, provided, in any case,
that the method is reasonable in view of the provisions and coverage of
the plan, the funding medium, and other applicable considerations. The
limitation may include one-tenth of the past service or supplementary
cost as of the date the provisions resulting in such cost were put into
effect, but it is subject to adjustments for prior favorable experience.
See Sec. 1.404(a)-3. In any case, past service or supplementary costs
shall not be included in the limitation for any year in which the amount
required to fund fully or to purchase such past service or supplementary
credits has been deducted, since no deduction is allowable for any
amount (other than the normal cost) which is paid in after such credits
are fully funded or purchased.
(b) Application to a taxable year of the employer which does not end
with or within a taxable year of the pension trust or annuity plan for
which it is exempt under section 501(a) or meets the requirements of
section 404(a)(2). (1) The rules in this paragraph are applicable with
respect to the limitation under section 404(a)(1)(C) for taxable years
of the employer which end with or within a taxable year of the pension
trust during which it is not exempt under section 501(a), or, in the
case of an annuity plan, during which it does not meet the requirements
of section 404(a)(2), or which end after the trust or plan has
terminated. Since contributions paid in such taxable years of the
employer are not deductible under section 404(a) (1) or (2) (except as
provided in section 404(a)(6)), the limitation under section
404(a)(1)(C) for such taxable years relates only to the amount of any
excess contributions that may be carried over to such taxable years
under section 404(a)(1)(D).
(2) Subject to the applicable general conditions and limitations
(see Sec. 1.404(a)-3), deductions may be allowed under section
404(a)(1)(C) for taxable years of the employer to which this paragraph
applies to the extent of limitations based on past service or
supplementary costs of providing benefits under the plan. For definition
of the ``past service or supplementary cost at any time'', see paragraph
(a)(2) of this section.
(3) The limitation under section 404(a)(1)(C) for any taxable year
to which this paragraph applies is an amount not in excess of one-tenth
of the past service or supplementary cost as of the date the past
service or supplementary credits are provided under the plan. The
limitation under section 404(a)(1)(C) is subject, however, to
adjustments for prior favorable experience. In any case, no amounts are
deductible under section 404(a)(1)(C) for any year to which this
paragraph applies if the amount required to fund fully or to purchase
the past service or supplementary credits has been deducted in prior
taxable years of the employer.
[T.D. 6534, 26 FR 515, Jan. 20, 1961]
Sec. 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).
When contributions paid by an employer in a taxable year to or under
a pension or annuity plan exceed the limitations applicable under
section 404(a)(1) but otherwise satisfy the conditions for deduction
under section 404(a) (1) or (2), then in accordance with section
404(a)(1)(D), the excess contributions are carried over and are
deductible in succeeding taxable years of the employer in order of time
pursuant to the following rules:
(a) In the case of a succeeding taxable year of the employer which
ends with or within a taxable year of the pension trust during which it
is not exempt under section 501(a), or, in the case of an annuity plan,
during which it meets the requirements of section 404(a)(2), such excess
contributions are
[[Page 392]]
deductible to the extent of the difference between the amount paid and
deductible in such succeeding taxable year and the limitation applicable
to such year under section 404(a)(1) (A), (B), or (C).
(b) In the case of a succeeding taxable year of the employer which
ends with or within a taxable year of the pension trust during which it
is not exempt under section 501(a), or, in the case of an annuity plan,
during which it does not meet the requirements of section 404(a)(2), or
which ends after the trust or plan has terminated, such excess
contributions are deductible to the extent of the limitation applicable
to such year under section 404(a)(1)(C) (see paragraph (b) of
Sec. 1.404(a)-6).
The provisions of section 404(a)(1)(D) are to be applied before giving
effect to the provisions of section 404(a)(7) for any year. The
carryover provisions of section 404(a)(1)(D), before effect has been
given to section 404(a)(7), may be illustrated by the following example
for a plan put into effect in a taxable year ending December 31, 1954:
Taxable Year Ending Dec. 31, 1954
Amount of contributions paid in year........................ $100,000
Limitation applicable to year............................... 60,000
Amount deductible for year.................................. 60,000
-----------
Excess carried over to succeeding years.................. 40,000
===========
Taxable Year Ending Dec. 31, 1955
Amount of contributions paid in year........................ $25,000
Carried over from previous years............................ 40,000
-----------
Total deductible subject to limitation................... 65,000
Limitation applicable to year............................... 50,000
Amount deductible for year.................................. 50,000
-----------
Excess carried over to succeeding years.................. 15,000
===========
Taxable Year Ending Dec. 31, 1956
Amount of contributions paid in year........................ $10,000
Carried over from previous years............................ 15,000
-----------
Total deductible subject to limitation................... 25,000
Limitation applicable to year............................... 45,000
Amount deductible for year.................................. 25,000
-----------
Excess carried over to succeeding years.................. None
Sec. 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).
(a) If contributions are paid by an employer under an annuity plan
for employees and the general conditions and limitations applicable to
deductions for such contributions are satisfied (see Sec. 1.404(a)-1),
the contributions are deductible under section 404(a)(2) if the further
conditions provided therein are satisfied. For the meaning of ``annuity
plan'' as used here, see Sec. 1.404(a)-3. In order that contributions by
the employer may be deducted under section 404(a)(2), all of the
following conditions must be satisfied:
(1) The contributions must be paid toward the purchase of retirement
annuities (or for disability, severance, insurance, survivorship
benefits incidental and directly related to such annuities, or medical
benefits described in section 401(h) as defined in paragraph (a) of
Sec. 1.404(h)-1) under an annuity plan for the exclusive benefit of the
employer's employees or their beneficiaries.
(2) The contributions must be paid in a taxable year of the employer
which ends with or within a year of the plan for which it meets the
applicable requirements set forth in section 401(a) (3), (4), (5), (6),
(7), (8), (11), (12), (13), (14), (15), (16), and (19). In the case of a
plan which covers a self-employed individual, the contributions must be
paid in a taxable year of the employer which ends with or within a year
of the plan for which it also meets the requrements of section 401(a),
(9), (10), (17), and (18) and of section 401(d) (other than paragraph
(1)). In the case of a plan which covers a shareholder-employee within
the meaning of section 1379(d), the contributions must be paid in a
taxable year of the employer which ends with or within a year of the
plan for which it also meets the requirements of section 401(a) (17) and
(18). See section 401(a) and the regulations thereunder for the
requirements and the applicable effective dates of the respective
paragraphs set forth in section 401(a). Any contributions of an employer
which are paid in a taxable year of the employer ending with or within a
year of the plan for which it meets the applicable requirements of
section 401 may be carried over and deducted in a succeeding taxable
year of the employer in accordance with section 404(a)(1)(D), whether or
not such succeeding taxable year ends with or within a taxable year of
the plan for
[[Page 393]]
which it meets the requirements set out in section 401 (a) and (d). See
section 401(b) and the regulations thereunder for special rules allowing
certain plan amendments to be given retroactive effect. See section
404(a)(6) for a special rule for determining the time when a
contribution is deemed to have been made.
(3) There must be a definite written arrangement between the
employer and the insurer that refunds of premiums, if any, shall be
applied within the taxable year of the employer in which received or
within the next succeeding taxable year toward the purchase of
retirement annuities (or for disability, severance, insurance,
survivorship benefits incidental and directly related to such annuities,
or medical benefits described in section 401(h) as defined in paragraph
(a) of Sec. 1.401(h)-1 under the plan. For the purpose of this
condition, ``refunds of premiums'' means payments by the insurer on
account of credits such as dividends, experience rating credits, or
surrender or cancellation credits. The arrangement may be in the form of
contract provisions or written directions of the employer or partly in
one form and partly in another. This condition will be considered
satisfied where--
(i) All credits are applied regularly, as they are determined,
toward the premiums next due under the contracts before any further
employer contributions are so applied, and
(ii) Under the arrangement,
(A) No refund of premiums may be made during continuance of the plan
unless applied as aforesaid, and
(B) If refunds of premiums may be made after discontinuance or
termination, whichever is applicable, of the plan on account of
surrenders or cancellations before all retirement annuities provided
under the plan with respect to service before its discontinuance or
termination have been purchased, such refunds will be applied in the
taxable year of the employer in which received, or in the next
succeeding taxable year, to purchase retirement annuities for employees
by a procedure which does not contravene the conditions of section
401(a)(4). If the plan also includes medical benefits described in
section 401(h) as defined in paragraph (a) of Sec. 1.401(h)-1, any
refund of premiums attributable to such benefits must, in accordance
with these rules, be applied toward the purchase of medical benefits
described in section 401(h).
(4) Any amounts described in subparagraph (3) of this paragraph
which are attributable to contributions on behalf of a self-employed
individual must be applied toward the purchase of retirement benefits.
Amounts which are so applied are not contributions and thus are not
taken into consideration in determining--
(i) The amount deductible with respect to contributions on his
behalf, nor
(ii) In the case of an owner-employee, the maximum amount of
contributions that may be made on his behalf.
(b) Where the above conditions are satisfied, the amounts deductible
under section 404(a)(2) are governed by the limitations provided in
section 404(a)(1). See Secs. 1.404(a)-3 to 1.404(a)-7, inclusive.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42321, Aug. 23, 1977]
Sec. 1.404(a)(8)-1T Deductions for plan contributions on behalf of self-employed individuals. (Temporary)
Q: How does the amendment to section 404(a)(8)(D), made by section
713(d)(6) of the Tax Reform Act of 1984 (TRA of 1984), affect section
404(a)(8)(C)?
A: In applying the rules of section 404(a)(8)(C), the Service will
treat the amendment to section 404(a)(8)(D) as also having been made to
section 404(a)(8)(C), pending enactment of technical corrections to TRA
of 1984. The effect of treating the amendment as having also been made
to section 404(a)(8)(C) is to increase the amount of contributions on
behalf of a self-employed individual that will be treated as satisfying
section 162 or 212. Generally, therefore, a contribution on behalf of a
self-employed individual is treated as satisfying section 162 or 212 if
it is not in excess of the individual's earned income for the year,
determined
[[Page 394]]
without regard to the deduction allowed by section 404 for the self-
employed individual's contribution.
[T.D. 8073, 51 FR 4321, Feb. 4, 1986]
Sec. 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).
(a) If contributions are paid by an employer to a profit-sharing or
stock bonus trust for employees and the general conditions and
limitations applicable to deductions for such contributions are
satisfied (see Sec. 1.404(a)-1), the contributions are deductible under
section 404(a)(3)(A) if the further conditions provided therein are also
satisfied. In order to be deductible under the first, second, or third
sentence of section 404(a)(3)(A), the contributions must be paid (or
deemed to have been paid under section 404(a)(6)) in a taxable year of
the employer which ends with or within a taxable year of the trust for
which it is exempt under section 501(a) and the trust must not be
designed to provide retirement benefits for which the contributions can
be determined actuarially. Excess contributions paid in such a taxable
year of the employer may be carried over and deducted in a succeeding
taxable year of the employer in accordance with the third sentence of
section 404(a)(3)(A), whether or not such succeeding taxable year ends
with or within a taxable year of the trust for which it is exempt under
section 501(a). This section is also applicable to contributions to a
foreign situs profit-sharing or stock bonus trust which could qualify
for exemption under section 501(a) except that it is not created or
organized and maintained in the United States.
(b) The amount of deductions under section 404(a)(3)(A) for any
taxable year is subject to limitations based on the compensation
otherwise paid or accrued by the employer during such taxable year to
employees who are beneficiaries under the plan. For purposes of
computing this limitation, the following rules are applicable:
(1) In the case of a taxable year of the employer which ends with or
within a taxable year of the trust for which it is exempt under section
501(a), the limitation shall be based on the compensation otherwise paid
or accrued by the employer during such taxable year of the employer to
the employees who, in such taxable year of the employer, are
beneficiaries of the trust funds accumulated under the plan.
(2) In the case of a taxable year of the employer which ends with or
within a taxable year of the trust during which it is not exempt under
section 501(a), or which ends after the trust has terminated, the
limitation shall be based on the compensation otherwise paid or accrued
by the employer during such taxable year of the employer to the
employees who, at any time during the one-year period ending on the last
day of the last calendar month during which the trust was exempt under
section 501(a), were beneficiaries of the trust funds accumulated under
the plan.
For purposes of this paragraph, ``compensation otherwise paid or
accrued'' means all of the compensation paid or accrued except that for
which a deduction is allowable under a plan that qualifies under section
401(a), including a plan that qualifies under section 404(a)(2). The
limitations under section 404(a)(3)(A) apply to the total amount
deductible for contributions to the trust regardless of the manner in
which the funds of the trust are invested, applied, or distributed, and
no other deduction is allowable on account of any benefits provided by
contributions to the trust or by the funds thereof. Where contributions
are paid to two or more profit-sharing or stock bonus trusts satisfying
the conditions for deduction under section 404(a)(3)(A), such trusts are
considered as a single trust in applying these limitations.
(c) The primary limitation on deductions for a taxable year is 15
percent of the compensation otherwise paid or accrued by the employer
during such taxable year to the employees who are beneficiaries under
the plan. See paragraph (b) of this section for rules for determining
who are the beneficiaries under the plan.
(d) In order that the deductions may average 15 percent of
compensation otherwise paid or accrued over a period of years, where
contributions in some taxable year are less than the primary
[[Page 395]]
limitation but contributions in some succeeding taxable year exceed the
primary limitation, deductions in each succeeding year are subject to a
secondary limitation instead of to the primary limitation. The secondary
limitation for any year is equal to the lesser of (1) twice the primary
limitation for the year, or (2) any excess of (i) the aggregate of the
primary limitations for the year and for all prior years over (ii) the
aggregate of the deductions allowed or allowable under the limitations
provided in section 404(a)(3)(A) for all prior years. Since
contributions paid into a profit-sharing or stock bonus trust are
deductible under section 404(a)(3)(A) only if they are paid (or deemed
to have been paid under section 404(a)(6)) in a taxable year of the
employer which ends with or within a taxable year of the trust for which
it is exempt under section 501(a), the secondary limitation described in
this paragraph is not applicable with respect to determining amounts
deductible for a taxable year of the employer which ends with or within
a taxable year of the trust during which it is not exempt under section
501(a), or which ends after the trust has terminated. See paragraph (e)
of this section for rules relating to amounts which are deductible in
such a taxable year.
(e) In any case when the contributions in a taxable year exceed the
amount allowable as a deduction for the year under section 404(a)(3)(A),
the excess is deductible in succeeding taxable years, in order of time,
in accordance with the following limitations:
(1) If the succeeding taxable year ends with or within a taxable
year of the trust for which it is exempt under section 501(a), such
excess is deductible in any such succeeding taxable year in which the
contributions are less than the primary limitation for that year; but
the total deduction for such succeeding taxable year cannot exceed the
lesser of (i) the primary limitation for such year, or (ii) the sum of
the contributions in such year and the excess contributions not deducted
under the limitations of section 404(a)(3)(A) for prior years.
(2) If the succeeding taxable year ends with or within a taxable
year of the trust during which it is not exempt under section 501(a), or
if such succeeding taxable year ends after the trust has terminated, the
total deduction for such succeeding taxable year cannot exceed the
lesser of (i) the primary limitation for such succeeding taxable year,
or (ii) the excess contributions not deducted under the limitations of
section 404(a)(3)(A) for prior years.
In no case, however, are excess contributions deductible in a succeeding
taxable year if such contributions were not paid (or deemed to have been
paid under section 404(a)(6)) in a taxable year of the employer which
ends with or within a taxable year of the trust for which it is exempt
under section 501(a).
(f) In case deductions are allowable under section 404(a) (1) or
(2), as well as under section 404(a)(3)(A), the limitations under
section 404(a) (1) and (3)(A) are determined and applied without giving
effect to the provisions of section 404(a)(7), but the amounts allowable
as deductions are subject to the further limitations provided in section
404(a)(7). See Sec. 1.404(a)-13.
(g) The provisions of section 404(a)(3)(A) before giving effect to
section 404(a)(7), may be illustrated as follows:
Illustration of Provisions of Section 404(a)(3)(A) for a Plan Put Into Effect in the Taxable (Calendar) Year
1954, Before Giving Effect to Section 404(a)(7) (All Figures Represent Thousands of Dollars and All Taxable
(Calendar) Years Are Years Which End With or Within a Taxable Year of the Trust For Which it is Exempt Under
Section 501(a))
----------------------------------------------------------------------------------------------------------------
Taxable (calendar) years
-------------------------------------------------------
1954 1955 1956 1957 1958 1959 1960
----------------------------------------------------------------------------------------------------------------
1. Amount of contributions:
(i) In taxable year................................... $65 $10 $15 $100 $70 $40 $30
(ii) Carried over from prior taxable years............ 0 8 0 0 4 5 3
[[Page 396]]
2. Primary limitation applicable to year:
15 percent of covered compensation in year \1\........ 57 54 51 48 45 42 39
3. Secondary limitation applicable to year:
(i) Twice primary limitation.......................... ...... ...... ...... 96 90 84 ......
=======================================================
(ii) (a) Aggregate primary limitations (see item 2)... ...... ...... ...... 210 255 297 ......
(b) Aggregate prior deductions (see item 4 (iii))... ...... ...... ...... 90 186 255
(c) Excess of (a) over (b).......................... ...... ...... ...... 120 69 42 ......
(iii) Lesser of (i) or (ii)........................... ...... ...... ...... 96 69 42 ......
=======================================================
4. Amount deductible for year on account of:
(i) Contributions in year............................. 57 10 15 96 69 40 30
(ii) Contributions carried over....................... 0 8 0 0 0 2 3
-------------------------------------------------------
(iii) Total........................................... 57 18 15 96 69 42 33
5. Excess contributions carried over to succeeding 8 0 0 4 5 3 0
years..................................................
----------------------------------------------------------------------------------------------------------------
\1\ Compensation otherwise paid or accrued during the year to the employees who are beneficiaries of trust funds
accumulated under the plan in the year.
[T.D. 6500, 25 FR 11687, Nov. 26, 1960, as amended by T.D. 6534, 26 FR
516, Jan. 20, 1961]
Sec. 1.404(a)-10 Profit-sharing plan of an affiliated group; application of section 404(a)(3)(B).
(a) Section 404(a)(3)(B) allows a corporation a deduction to the
extent provided in paragraphs (b) and (c) of this section for a
contribution which it makes for another corporation to a profit-sharing
plan or a stock bonus plan under which contributions are determined by
reference to profits, provided the following tests are met:
(1) The corporation for which the contribution is made and the
contributing corporation are members of an affiliated group of
corporations as defined in section 1504, relating to the filing of
consolidated returns, and both such corporations participate in the
plan. However, it is immaterial whether all the members of such group
participate in the plan.
(2) The corporation for which the contribution is made is required
under the plan to make the contribution, but such corporation is
prevented from making such contribution because it has neither current
nor accumulated earnings or profits, or because its current and
accumulated earnings or profits are insufficient to make the required
contribution. To the extent that such a corporation has any current or
accumulated earnings or profits, it is not considered to be prevented
from making its required contribution to the plan.
(3) The contribution is made out of the current or accumulated
earnings or profits of the contributing corporation.
(b) The amount that is deductible under section 404(a)(3)(B) is
determined by applying the rules of section 404(a)(3)(A) and
Sec. 1.404(a)-9 as if the contribution were made by the corporation for
which it is made. For example, the primary limitation described in
paragraph (e) of Sec. 1.404(a)-9 is determined by reference to the
compensation otherwise paid or accrued to the employees of the
corporation for which the contribution is made, and the secondary
limitation described in paragraph (d) of Sec. 1.404(a)-9 and the
contribution carryover described in paragraph (c) of Sec. 1.404(a)-9 are
determined by reference to the prior contributions and deductions of
such corporation. The contributing corporation may deduct the amount so
determined subject to the limitations contained in paragraph (c) of this
section. The contributing corporation shall not treat such amount as a
contribution made by it in applying the rules of section 404(a)(3)(A)
and Sec. 1.404(a)-9 either for the taxable year
[[Page 397]]
for which the contribution is made or for succeeding taxable years. The
corporation for which the contribution is made shall treat the
contribution as having been made by it in applying the rules of section
404(a)(3)(A) and Sec. 1.404(a)-9 for succeeding taxable years.
(c) The allowance of the deduction under section 404(a)(3)(B) does
not depend upon whether the affiliated group does or does not file a
consolidated return. If a consolidated return is filed, it is immaterial
which of the participating corporations makes the contribution and takes
the deduction or how the contribution or the deduction is allocated
among them. However, if a consolidated return is not filed, the
contribution which is deductible under section 404(a)(3)(B) by each
contributing corporation shall be limited to that portion of its total
current and accumulated earnings or profits (adjusted for its
contribution deductible without regard to section 404(a)(3)(B)) which
the prevented contribution bears to the total current and accumulated
earnings or profits of all the participating members of the group having
such earnings or profits (adjusted for all contributions deductible
without regard to section 404(a)(3)(B)). For the purpose of this
section, current earnings or profits shall be computed as of the close
of the taxable year without diminution by reason of any dividends during
the taxable year, and accumulated earnings or profits shall be computed
as of the beginning of the taxable year.
(d) The application of section 404(a)(3)(B) may be illustrated by
the following example in which the affiliated group does not file a
consolidated return:
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A............................................... ($10,000) ($140,000) ($150,000) $200,000 \1/5\ $6,000 ........ ........ ........ .........
B............................................... (5,000) 105,000 100,000 300,000 \3/ 9,000 $9,000 $91,000 6/326x $1,674.85
10\
......... .......... .......... ......... ..... ........ ........ ........ 91,000 .........
C............................................... 75,000 175,000 250,000 500,000 \1/2\ 15,000 15,000 235,000 6/326x 4,325.15
......... .......... .......... ......... ..... ........ ........ ........ 235,000 .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total......................................... 60,000 140,000 200,000 1,000,000 ..... 30,000 24,000 326,000 ........ 6,000.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Column:
(1) Member.
(2) Earnings and profits of the taxable year.
(3) Accumulated earnings and profits at beginning of taxable year.
(4) Total current and accumulated earnings and profits (column 2 plus column 3).
(5) Compensation of participating employees.
(6) Contribution formula: 50 percent of consolidated earnings and profits, allocated among participating member in proportion of covered payroll of each
to covered payroll of consolidated group.
(7) Individual contribution had it not been prevented.
(8) Individual contribution made by each employer for its own employees.
(9) Balance of accumulated earnings and profits (column 4 minus column 8).
(10) Proportion of make-up contribution.
(11) Make-up contribution.
[T.D. 6500, 25 FR 11688, Nov. 26, 1960]
Sec. 1.404(a)-11 Trusts created or organized outside the United States; application of section 404(a)(4).
In order that a trust may constitute a qualified trust under section
401(a) and be exempt under section 501(a), it must be created or
organized in the United States and maintained at all times as a domestic
trust. See paragraph (a) of Sec. 1.401-1. Paragraph (4) of section
404(a) provides, however, that an employer which is a resident, a
corporation, or other entity of the United States, making contributions
to a foreign stock bonus, pension, or profit-sharing trust, shall be
allowed deductions for such contributions, under the applicable
conditions and within the prescribed limits of section 404(a), if such
foreign trust would qualify for exemption under section 501(a) except
for the fact that it is a trust created, organized, or maintained
outside the United States. Moreover, if a nonresident alien individual,
foreign corporation, or other entity is engaged in trade or business
within the United States and makes contributions to a foreign stock
bonus, pension, or profit-sharing trust, which would qualify under
section 401(a) and be exempt under section 501(a) except that it is
[[Page 398]]
created, organized, or maintained outside the United States, such
contributions are deductible subject to the conditions and limitations
of section 404(a) and to the extent allowed by section 873 or 882(c).
[T.D. 6500, 25 FR 11689, Nov. 26, 1960]
Sec. 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).
(a) In general. Section 404(a)(5) covers all cases for which
deductions are allowable under section 404(a) (for contributions paid by
an employer under a stock bonus, pension, profit sharing, or annuity
plan or for any compensation paid on account of any employee under a
plan deferring the receipt of such compensation) but not allowable under
paragraph (1), (2), (3), (4), or (7) of such section. For the rules with
respect to the taxability of an employee when rights under a nonexempt
trust become substantially vested, see section 402(b) and the
regulations thereunder.
(b) Contributions made after August 1, 1969--(1) In general. A
deduction is allowable for a contribution paid after August 1, 1969,
under section 404(a)(5) only in the taxable year of the employer in
which or with which ends the taxable year of an employee in which an
amount attributable to such contribution is includible in his gross
income as compensation, and then only to the extent allowable under
section 404(a). See Sec. 1.404(a)-1. For example, if an employer A
contributes $1,000 to the account of its employee E for its taxable
(calendar) year 1977, but the amount in the account attributable to that
contribution is not includible in E's gross income until his taxable
(calendar) year 1980 (at which time the includible amount is $1,150),
A's deduction for that contribution is $1,000 in 1980 (if allowable
under section 404(a)). For purposes of this (1), a contribution is
considered to be so includible where the employee or his beneficiary
excludes it from his gross income under section 101(b) or subchapter N.
To the extent that property of the employer is transferred in connection
with such a contribution, such transfer will constitute a disposition of
such property by the employer upon which gain or loss is recognized,
except as provided in section 1032 and the regulations thereunder. The
amount of gain or loss recognized from such disposition shall be the
difference between the value of such property used to measure the
deduction allowable under this section and the employer's adjusted basis
in such property.
(2) Special rule for unfunded pensions and certain death benefits.
If unfunded pensions are paid directly to former employees, such
payments are includible in their gross income when paid, and
accordingly, such amounts are deductible under section 404(a)(5) when
paid. Similarly, if amounts are paid as a death benefit to the
beneficiaries of an employee (for example, by continuing his salary for
a reasonable period), and if such amounts meet the requirements of
section 162 or 212, such amounts are deductible under section 404(a)(5)
in any case when they are not includible under the other paragraphs of
section 404(a).
(3) Separate accounts for funded plans with more than one employee.
In the case of a funded plan under which more than one employee
participates, no deduction is allowable under section 404(a)(5) for any
contribution unless separate accounts are maintained for each employee.
The requirement of separate accounts does not require that a separate
trust be maintained for each employee. However, a separate account must
be maintained for each employee to which employer contributions under
the plan are allocated, along with any income earned thereon. In
addition, such accounts must be sufficiently separate and independent to
qualify as separate shares under section 663(c). Nothing shall preclude
a trust which loses its exemption under section 501(a) from setting up
such acounts and meeting the separate account requirement of section
404(a)(5) with respect to the taxable years in which such accounts are
set up and maintained.
(c) Contributions paid on or before August 1, 1969. No deduction is
allowable under section 404(a)(5) for any contribution paid on or before
August 1, 1969, by an employer under a stock bonus, pension, profit-
sharing, or annuity plan, or for any compensation paid
[[Page 399]]
on account of any employee under plan deferring the receipt of such
compensation, except in the year when paid, and then only to the extent
allowable under section 404(a). See Sec. 1.404(a)-1. If payments are
made under such a plan and the amounts are not deductible under the
other paragraphs of section 404(a), they are deductible under section
404(a)(5) to the extent that the rights of individual employees to, or
derived from, such employer's contribution or such compensation are
nonforfeitable at the time the contribution or compensation is paid. If
unfunded pensions are paid directly to former employees, their rights to
such payments are nonforfeitable, and accordingly, such amounts are
deductible under section 404(a)(5) when paid. Similarly, if amounts are
paid as a death benefit to the beneficiaries of an employee (for
example, by continuing his salary for a reasonable period), and if such
amounts meet the requirements of section 162 or 212, such amounts are
deductible under section 404(a)(5) in any case where they are not
deductible under the other paragraphs of section 404(a). As to what
constitutes nonforfeitable rights of an employee in other cases, see
Sec. 1.402(b)-1(d)(2). If an amount is accrued but not paid during the
taxable year, no deduction is allowable for such amount for such year.
If an amount is paid during the taxable year to a trust or under a plan
and the employee's rights to such amount are forfeitable at the time the
amount is paid, no deduction is allowable for such amount for any
taxable year.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 588;
68A Stat. 917; 26 U.S.C. 83 and 7805))
[T.D. 7554, 43 FR 31926, July 24, 1978]
Sec. 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).
(a) Where deductions are allowable under section 404(a) (1) or (2)
on account of contributions under a pension or annuity plan and
deductions are also allowable under section 404(a)(3) for the same
taxable year on account of contributions to a profit-sharing or stock
bonus trust, the total deductions under these sections are subject to
the provisions of section 404(a)(7) unless no employee who is a
beneficiary under the trusts or plans for which deductions are allowable
under section 404(a) (1) or (2) is also a beneficiary under the trusts
for which deductions are allowable under section 404(a)(3). The
provisions of section 404(a)(7) apply only to deductions for overlapping
trusts or plans, i.e., for all trusts or plans for which deductions are
allowable under section 404(a) (1), (2), or (3) except (1) any trust or
plan for which deductions are allowable under section 404(a) (1) or (2)
and which does not cover any employee who is also covered under a trust
for which deductions are allowable under section 404(a) (3), and (2) any
trust for which deductions are allowable under section 404(a)(3) and
which does not cover any employee who is also covered under a trust or
plan for which deductions are allowable under section 404(a) (1) or (2).
The limitations under section 404(a)(7) for any taxable year of the
employer are based on the compensation otherwise paid or accrued during
the year by the employer to all employees who, in such year, are
beneficiaries of the funds accumulated under one or more of the
overlapping trusts or plans. For purposes of the preceding sentence, if
the taxable year of the employer with respect to which the limitation is
being computed ends with or within a taxable year of any of the
overlapping trusts or plans during which any such trust is not exempt
under section 501(a) or, in the case of a plan, during which it does not
meet the requirements of section 404(a)(2), or if such taxable year of
the employer ends after any such trust or plan has terminated, then,
with respect to such trust or plan, those employees, and only those
employees, who, at any time during the one-year period ending on the
last day of the last calendar month during which the trust was exempt
under section 501(a), or the plan met the requirements of section
404(a)(2), were beneficiaries of the funds accumulated under such trust
or plan shall be considered the beneficiaries of such trust or plan in
the taxable year of the employer with respect to which the limitation is
being computed. For purposes of this paragraph, ``compensation
[[Page 400]]
otherwise paid or accrued'' means all of the compensation paid or
accrued except that for which a deduction is allowable under a plan that
qualifies under section 401(a), including a plan that qualifies under
section 404(a)(2).
(b) Under section 404(a)(7), any excess of the total amount
otherwise deductible for the taxable year under section 404(a) (1), (2),
or (3) as contributions to overlapping trusts or plans over 25 percent
of the compensation otherwise paid or accrued during the year to all the
employees who are beneficiaries under such trusts or plans, is not
deductible for such year but is deductible for succeeding taxable years,
in order of time, so that the total deduction for contributions to such
trusts or plans for a succeeding taxable year is equal to the lesser of-
-
(1) 30 percent of the compensation otherwise paid or accrued during
the taxable year to all the employees who are beneficiaries under such
trusts or plans in the year, or
(2) The sum of (i) the smaller of (a) 25 percent of the compensation
otherwise paid or accrued during the taxable year to all employees who
are beneficiaries under such trusts or plans in the year, or (b) the
total of the amounts otherwise deductible under section 404(a) (1), (2),
or (3) for the year for such trusts or plans and (ii) any carryover to
the year from prior years under section 404(a)(7), i.e., any excess
otherwise deductible under section 404(a) (1), (2), or (3), but not
deducted for a prior taxable year because of the limitations under
section 404(a)(7).
(c) The limitations under section 404(a)(7) are determined and
applied after all the limitations, deductions otherwise allowable, and
carryovers under section 404(a) (1), (2), and (3) have been determined
and applied, and, in particular, after effect has been given to the
carryover provision in section 404(a)(1)(D) and in the second and third
sentences of section 404(a)(3)(A). Where the limitations under section
404(a)(7) reduce the total amount deductible, the excess deductible in
succeeding years is treated as a carryover which is distinct from, and
additional to, any excess contributions carried over and deductible in
succeeding years under the provisions in section 404(a)(1)(D) or in the
third sentence of section 404(a)(3)(A). The application of the
provisions of section 404(a)(7) and the treatment of carryovers for a
case where the taxable years are calendar years and the overlapping
trusts or plans consist of a pension trust and a profit-sharing trust
put into effect in 1954 and covering the same employees may be
illustrated as follows:
Illustration of Application of Provisions of Section 404(a)(7) and of
Treatment of Carryovers for Overlapping Pension and Profit-Sharing
Trusts Put Into Effect in 1954 and Covering the Same Employees (All
Figures Represent Thousands of Dollars and all Taxable (Calendar) Years
of the Employer are Years Which End With or Within A Taxable Year of the
Trust for Which it is Exempt Under Section 501(a))
------------------------------------------------------------------------
Taxable calendar years
-----------------------------------
1954 1955 1956 1957
------------------------------------------------------------------------
before giving effect to section 404(
a)(7)
Pension trust contributions and
limitations, deductions, and
carryovers under section 404(a)(1):
1. Contributions paid in year..... $215 $85 $140 $60
2. Contributions carried over from 0 5 0 20
prior years......................
-----------------------------------
3. Total deductible for year 215 90 140 80
subject to limitation............
4. Limitation applicable to year.. 210 175 120 85
5. Amount deductible for year..... 210 90 120 80
-----------------------------------
6. Contributions carried over to 5 0 20 0
succeeding years.................
===================================
Profit-sharing trust contributions
and limitations, deductions, and
carryovers under section 404(a)(3):
7. Contributions paid in year..... 200 125 105 65
8. Contributions carried over from 0 35 10 0
prior years......................
-----------------------------------
9. Total deductible for year 200 160 115 65
subject to limitation............
10. Limitation applicable to year. 165 150 135 \1\ 110
[[Page 401]]
11. Amount deductible for year.... 165 150 115 65
-----------------------------------
12. Contributions carried over to 35 10 0 0
succeeding years.................
===================================
application of section 404( a)(7)
Totals for pension and profit-
sharing trust:
13. Amount deductible for year
under section 404(a)(7):
(1) 30 percent of compensation (\3\ ) 300 270 180
covered in year \2\............
(2) (i) (a) 25 percent of 275 250 225 150
compensation covered in year
\2\............................
(b) Total amount otherwise 375 240 235 145
deductible for year: item 5
plus item 11.................
===================================
(c) Smaller of (a) or (b)..... 275 240 225 145
(ii) Carryover from prior years 0 100 40 10
under section 404(a)(7)........
-----------------------------------
(iii) Sum of (i)(c) and (ii).... 275 340 265 155
(3) Amount deductible: Lesser of 275 300 265 155
(1) or (2)(iii)................
14. Carryover to succeeding years 100 40 10 0
under section 404(a)(7): item
13(2)(ii) plus item 3(2)(i)(b)
minus item 13(3)...................
------------------------------------------------------------------------
\1\ Includes carryover of 20 from 1956.
\2\ Compensation otherwise paid or accrued during the year to the
employees who are beneficiaries under the trusts in the year.
\3\ 30 percent limitation not applicable to first year of plan.
[T.D. 6500, 25 FR 11689, Nov. 26, 1960, as amended by T.D. 6534, 26 FR
517, Jan. 20, 1961]
Sec. 1.404(a)-14 Special rules in connection with the Employee Retirement Income Security Act of 1974.
(a) Purpose of this section. This section provides rules for
determining the deductible limit under section 404(a)(1)(A) of the
Internal Revenue Code of 1954 for defined benefit plans.
(b) Definitions. For purposes of this section--
(1) Section 404(a). The term ``old section 404(a)'' means section
404(a) as in effect on September 1, 1974. Any reference to section 404
without the designation ``old'' is a reference to section 404 as amended
by the Employee Retirement Income Security Act of 1974.
(2) Ten-year amortization base. The term ``10-year amortization
base'' means either the past service and other supplementary pension and
annuity credits described in section 404(a)(1)(A)(iii) or any base
established in accordance with paragraph (g) of this section. A plan may
have several 10-year amortization bases to reflect different plan
amendments, changes in actuarial assumptions, changes in funding method,
and experience gains and losses of previous years.
(3) Limit adjustment. The term ``limit adjustment'' with respect to
any 10-year amortization base is the lesser of--
(i) The level annual amount necessary to amortize the base over 10
years using the valuation rate, or
(ii) The unamortized balance of the base,
in each case using absolute values (solely for the purpose of
determining which is the lesser). To compute the level amortization
amount, the base may be divided by the present value of an annuity of
one dollar, obtained from standard annuity tables on the basis of a
given interest rate (the valuation rate) and a known period (the
amortization period).
(4) Absolute value. The term ``absolute value'' for any number is
the value of that number, treating negative numbers as if they were
positive numbers. For example, the absolute value of 5 is 5 and the
absolute value of minus 3 is 3. On the other hand, the true value of
[[Page 402]]
minus 3 is minus 3. This term is relevant to the computation of the
limit adjustment described in paragraph (b)(3) and the remaining
amortization period of combined bases described in paragraph (i)(3) of
this section.
(5) Valuation rate. The term ``valuation rate'' means the assumed
interest rate used to value plan liabilities.
(c) Use of plan in determining deductible limit for employer's
taxable year. Although the deductible limit applies for an employer's
taxable year, the deductible limit is determined on the basis of a plan
year. If the employer's taxable year coincides with the plan year, the
deductible limit for the taxable year is the deductible limit for the
plan year that coincides with that year. If the employer's taxable year
does not coincide with the plan year, the deductible limit under section
404(a)(1)(A) (i), (ii), or (iii) for a given taxable year of the
employer is one of the following alternatives:
(1) The deductible limit determined for the plan year commencing
within the taxable year.
(2) The deductible limit determined for the plan year ending within
the taxable year, or
(3) A weighted average of alternatives (1) and (2). Such an average
may be based, for example, upon the number of months of each plan year
falling within the taxable year.
The employer must use the same alternative for each taxable year unless
consent to change is obtained from the Commissioner under section 446
(e).
(d) Computation of deductible limit for a plan year--(1) General
rules. The computation of the deductible limit for a plan year is based
on the funding methods, actuarial assumptions, and benefit structure
used for purposes of section 412, determined without regard to section
412(g) (relating to the alternative minimum funding standard), for the
plan year. The method of valuing assets for purposes of section 404 must
be the same method of valuing assets used for purposes of section 412.
(2) Special adjustments of computations under section 412. To apply
the rules of this section (i.e., rules regarding the computation of
normal cost with aggregate type funding methods, unfunded liabilities,
and the full funding limitation described in paragraph (k) of the
section, where applicable) with respect to a given plan year in
computing deductible limits under section 404 (a)(1)(A), the following
adjustments must be made:
(i) There must be excluded from the total assets of the plan the
amount of any plan contribution for a plan year for which the plan was
qualified under section 401(a), 403(a) or 405(a) that has not been
previously deducted, even though that amount may have been credited to
the funding standard account under section 412(b)(3). In the case of a
plan using a spread gain funding method which maintains an unfunded
liability (e.g., the frozen initial liability method, but not the
aggregate method), the amount described in the preceding sentence must
be included in the unfunded liability of the plan.
(ii) There must be included in the total assets of the plan for a
plan year the amount of any plan contribution that has been deducted
with respect to a prior plan year, even though that amount is considered
under section 412 to be contributed in a plan year subsequent to that
prior plan year. In the case of a plan using a spread gain funding
method which does not maintain an unfunded liability, the amount
described in the preceding sentence must be excluded from the unfunded
liability of the plan.
The special adjustments described in paragraph (d)(2) (i) and (ii) of
this section apply on a year-by-year basis for purposes of section
404(a)(1)(A) only. Thus, the adjustments have no effect on the
computation of the minimum funding requirement under section 412.
(e) Special computation rules under section 404(a)(1)(A)(i)--(1) In
general. For purposes of determining the deductible limit under section
404(a)(1)(A)(i), the deductible limit with respect to a plan year is the
sum of--
(i) The amount required to satisfy the minimum funding standard of
section 412(a) (determined without regard to section 412(g)) for the
plan year and
(ii) An amount equal to the includible employer contributions. The
term ``includible employer contributions'' means employer contributions
which were required by section 412 for the plan year immediately
preceding such
[[Page 403]]
plan year, and which were not deductible under section 404(a) for the
prior taxable year of the employer solely because they were not
contributed during the prior taxable year (determine with regard to
section 404(a)(6)).
(2) Rule for an employer using alternative minimum funding standard
account and computing its deduction under section 404(a)(1)(A)(i). This
paragraph (e)(2) applies if the minimum funding requirements for the
plan are determined under the alternative minimum funding standard
described in section 412(g) for both the current plan year and the
immediately preceding plan year. In that case, the deductible limit
under section 404(a)(1)(A)(i) (regarding the minimum funding requirement
of section 412) for the current year is the sum of the amount determined
under the rules of paragraph (e)(1) of this section.
(i) Plus the charge under section 412(b)(2)(D), and
(ii) Less the credit under section 412(b)(3)(D),
that would be required if in the current plan year the use of the
alternative method were discontinued.
(f) Special computation rules under section 404(a)(1)(A) (ii) and
(iii)--(1) In general. Subject to the full funding limitation described
in paragraph (k) of this section, the deductible limit under section
404(a)(1)(A)(ii) and (iii) is the normal cost of the plan (determined in
accordance with paragraph (d) of this section).
(2) Adjustments in calculating limit under section 404
(a)(1)(A)(iii). In calculating the deductible limit under section
404(a)(1)(A)(iii), the normal cost of the plan is--
(i) Decreased by the limit adjustments to any unamortized bases
required by paragraph (g) of this section, for example, bases that are
due to a net experience gain, a change in actuarial assumptions, a
change in funding method, or a plan provision or amendment which
decreases the accrued liability of the plan, and
(ii) Increased by the limit adjustments of any unamortized 10-year
amortization bases required by paragraph (g) or (j) of this section, for
example, bases that are due to a net experience loss, a change in
actuarial assumptions, a change in funding method, or a plan provision
or amendment which increases the accrued liability.
(3) Timing for computations and interest adjustments under section
404(a)(1)(A) (ii) and (iii). Regardless of the actual time when
contributions are made to a plan, in computing the deductible limit
under section 404(a)(1)(A) (ii) and (iii) the normal cost and limit
adjustments shall be computed as of the date when contributions are
assumed to be made (``the computation date'') and adjusted for interest
at the valuation rate from the computation date to the earlier of--
(i) The last day of the plan year used to compute the deductible
limit for the taxable year, or
(ii) The last day of that taxable year. For additional provisions
relating to the timing of computations and interest adjustments, see
paragraph (h)(6) of this section (relating to the timing of computations
and interest adjustments in the maintenance of 10-year amortization
bases). For taxable years beginning before April 22, 1981, computations
under the preceding sentence may, as an alternative, be based on prior
published positions of the Internal Revenue Service under section
404(a).
(4) Special limit under section 404(a)(1)(A)(ii). If the deduction
for the plan year is determined solely on the basis of section
404(a)(1)(A)(ii) (that is, without regard to clauses (i) or (iii)), the
special limitation contained in section 404(a)(1)(A)(ii), regarding the
unfunded cost with respect to any three individuals, applies,
notwithstanding the rules contained in paragraphs (d)(2) and (f)(1) of
this section.
(g) Establishment of a 10-year amortization base--(1) Experience
gains and losses. In the case of a plan valued by the use of a funding
method which is an immediate gain type of funding method (and therefore
separately amortizes rather than includes experience gains and losses as
a part of the normal cost of the plan), a 10-year amortization base must
be established in any plan year equal to the net experience gain or loss
required under section 412 to be determined with respect to that plan
year. The base is to be maintained in accordance with paragraph (h) of
this section. Such a base must not be established if
[[Page 404]]
the deductible limit is determined by use of a funding method which is a
spread gain type of funding method (under which experience gains and
losses are spread over future periods as a part of the plan's normal
cost). Examples of the immediate gain type of funding method are the
unit credit method, entry age normal cost method, and the individual
level premium cost method. Examples of the spread gain type of funding
method are the aggregate cost method, frozen initial liability cost
method, and the attained age normal cost method.
(2) Change in actuarial assumptions. (i) If the creation of an
amortization base is required under the rules of section 412(b)
(2)(B)(v) or (3)(B)(iii) (as applied to the funding method used by the
plan), a 10-year amortization base must be established at the time of a
change in actuarial assumptions used to value plan liabilities. The
amount of the base is the difference between the accrued liability
calculated on the basis of the new assumptions and the accrued liability
calculated on the basis of the old assumptions. Both computations of
accrued liability are made as of the date of the change in assumptions.
(ii) A plan using a funding method of the spread gain type does not
directly determine an accrued liability. If a plan using such a method
is required under section 412(b) (2)(B)(v) or (3)(B)(iii) to create an
amortization base, it must establish a base as described in paragraph
(g)(2)(i) of this section for a change in actuarial assumptions by
determining an accrued liability on the basis of another funding method
(of the immediate gain type) that does determine an accrued liability.
(The aggregate method is an example of a funding method that is not
required under section 412(b) (2)(B)(v) or (3)(B)(iii) to create an
amortization base.) The funding method chosen to determine the accrued
liability of the plan in these cases must be the same method used to
establish all other 10-year amortization bases maintained by the plan,
if any. These bases must be maintained in accordance with paragraph (h)
of this section.
(3) Past service or supplemental credits. A 10-year base must be
established when a plan is established or amended, if the creation of an
amortizable base is required under the rules of section 412(b)(2)(B)
(ii) or (iii), or (b)(3)(B)(i) (as applied to the funding method used by
the plan). The amount of the base is the accrued liability arising from,
or the decrease in accrued liability resulting from, the establishment
or amendment of the plan. The base must be maintained in accordance with
paragraph (h) of this section.
(4) Change in funding method. If a change in funding method results
in an increase or decrease in an unfunded liability required to be
amortized under section 412, a 10-year base must be established equal to
the increase or decrease in unfunded liability resulting from the change
in funding method. The base must be maintained in accordance with
paragraph (h) of this section.
(h) Maintenance of 10-year amortization base--(1) In general. Each
time a 10-year amortization base is established, whether by a change in
funding method, by plan amendment, by change in actuarial assumptions,
or by experience gains and losses, the base must, except as provided in
paragraph (i) of this section, be separately maintained in order to
determine when the unamortized amount of the base is zero. The sum of
the unamortized balances of all of the 10-year bases must equal the
plan's unfunded liability with the adjustments described in paragraph
(d) of this section, if applicable. When the unamortized amount of a
base is zero, the deductible limit is no longer adjusted to reflect the
amortization of the base.
(2) First year's base. See either paragraph (g) or paragraph (i) of
this section for rules applicable with respect to the first year of a
base.
(3) Succeeding year's base. For any plan year after the first year
of a base, the unamortized amount of the base is equal to--
(i) The unamortized amount of the base as of the valuation date in
the prior plan year, plus
(ii) Interest at the valuation rate from the valuation date in the
prior plan year to the valuation date in the current plan year on the
amount described in subdivision (i), minus
[[Page 405]]
(iii) The contribution described in paragraph (h)(4) of this section
with respect to the base for the prior plan year.
The valuation date is the date as of which plan liabilities are valued
under section 412(c)(9). If such a valuation is performed less often
than annually for purposes of section 412, bases must be adjusted for
purposes of section 404 each year as of the date on which a section 412
valuation would be performed were it required on an annual basis. See
paragraph (b)(3) of this section for the definition of valuation rate.
(4) Contribution allocation with respect to each base. A portion of
the total contribution for the prior plan year is allocated to each
base. Generally, this portion equals the product of--
(i) The total contribution described in paragraph (h)(6) of this
section with respect to all bases, and
(ii) The ratio of the amount described in paragraph (b)(3)(i) of
this section with respect to the base to the sum (using true rather than
absolute values) of such amounts with respect to all remaining bases.
However, if the result of this computation with respect to a particular
base exceeds the amount necessary to amortize such base fully, the
smaller amount shall be deemed the contribution made with respect to
such base. The unallocated excess with respect to a now fully amortized
base shall be allocated among the other bases as indicated above.
(5) Other allocation methods. The Commissioner may authorize the use
of methods other than the method described in paragraph (h)(4) of this
section for allocating contributions to bases.
(6) Total contribution for all bases. The contribution with respect
to all bases for the prior plan year (see paragraph (h)(3)(iii) of this
section) is the difference between--
(i) The sum of (A) the total deduction (including a carryover
deduction) for the prior year, (B) interest on the actual contributions
for the prior year (whether or not deductible) at the valuation rate for
the period between the dates as of which the contributions are credited
under section 412 and the valuation date in the current plan year, and
(C) interest on the carryover described in section 404(a)(1)(D) that is
available at the beginning of the prior taxable year at the valuation
rate for the period between the current and prior valuation dates, and
(ii) The normal cost for the prior plan year and interest on it at
the valuation rate from the date as of which the normal cost is
calculated to the current valuation date.
(7) Effect of failure to contribute normal cost plus interest on
unamortized amounts. The failure to make a contribution at least equal
to the sum of the normal cost plus interest on the unamortized amounts
has the following effects under the preceding rules of this section--
(i) It does not create a new base.
(ii) It results in an increase in the unamortized amount of each
base and consequently extends the time before the base is fully
amortized.
(iii) The limit adjustment for any base is not increased (in
absolute terms) even if the unamortized amount computed under paragraph
(h) of this section exceeds the initial 10-year amortization base. Thus,
if the total unamortized amount of the plan's bases at the beginning of
the plan year is $100,000 (which is also the unfunded liability of the
plan), and a required $50,000 normal cost contribution is not made for
the plan year, the following effects occur. The total unamortized
balance of the plan's bases increases by the $50,000 normal cost for the
year (adjusted for interest), plus interest on the $100,000 balance of
the bases; and, because of that increase, it will take a longer period
to amortize the remaining balance of the bases. (The annual amortization
amount does not change.)
(8) Required adjustment to a 10-year base limit adjustment if
valuation rate changed. If there is a change in the valuation rate, the
limit adjustment for all unamortized 10-year amortization bases must be
changed, in addition to establishing a new base as provided in paragraph
(g)(2) of this section. The new limit adjustment for any base is the
level amount necessary to amortize the unamortized amount of the base
over the remaining amortization period using the new valuation rate. The
remaining amortization period of the
[[Page 406]]
base is the number of years at the end of which the unamortized amount
of the base would be zero if the contribution made with respect to that
base equaled the limit adjustment each year. This calculation of the
remaining period is made on the basis of the valuation rate used before
the change. Both the remaining amortization period and the revised limit
adjustment may be determined through the use of standard annuity tables.
The remaining period may be computed in terms of fractional years, or it
may be rounded off to a full year. The unamortized amount of the base as
of the valuation date and the remaining amortization period of that base
shall not be changed by any change in the valuation rate.
(i) Combining bases--(1) General method. For purposes of section 404
only, and not for purposes of section 412, different 10-year
amortization bases may be combined into a single 10-year amortization
base if such single base satisfies all of the requirements of paragraph
(i) (2), (3), and (4) of this section at the time of the combining of
the different bases.
(2) Unamortized amount. The unamortized amount of the single base
equals the sum, as of the date the combination is made, of the
unamortized amount of the bases being combined (treating negative bases
as having negative unamortized amounts).
(3) Remaining amortization period. The remaining amortization period
of the single base is equal to (i) the sum of the separate products of
(A) the unamortized amount of each of these bases (using absolute
values) and (B) its remaining amortization period, divided by (ii) the
sum of the unamortized amounts of each of the bases (using absolute
values). For purposes of this paragraph (i)(3), the remaining
amortization period of each base being combined is that number of years
at the end of which the unamortized amount of the base would be zero if
the contribution made with respect to that base equaled the limit
adjustment of that base in each year. This number may be determined
through the use of standard annuity tables. The remaining amortization
period described in this paragraph may be computed in terms of
fractional years, or it may be rounded off to a whole year.
(4) Limit adjustment. The limit adjustment for the single base is
the level amount necessary to amortize the unamortized amount of the
combined base over the remaining amortization period described in
paragraph (i)(3) of this section, using the valuation rate. This amount
may be determined through the use of standard annuity tables.
(5) Fresh start alternative. In lieu of combining different 10-year
amortization bases, a plan may replace all existing bases with one new
10-year amortization base equal to the unfunded liability of the plan as
of the time the new base is being established. This unfunded liability
must be determined in accordance with the general rules of paragraphs
(d) and (f) of this section. The unamortized amount of the base and the
limit adjustment for the base will be determined as though the base were
newly established.
(j) Initial 10-year amortization base for existing plan--(1) In
general. In the case of a plan in existence before the effective date of
section 404(a), the 10-year amortization base on the effective date of
section 404(a) is the sum of all 10 percent bases existing immediately
before section 404(a) became effective for the plan, determined under
the rules of old section 404(a).
(2) Limit adjustment. The limit adjustment for the initial base is
the lesser of the unamortized amount of such base or the sum of the
amounts determined under paragraph (b)(3) of this section using the
original balances of the remaining bases (under old section 404(a)
rules) as the amount to be amortized.
(3) Unamortized amount. The employer may choose either to establish
a single initial base reflecting both all prior 10-percent bases and the
experience gain or loss for the immediately preceding actuarial period,
or to establish a separate base for the prior 10-percent bases and
another for the experience gain or loss for the immediately preceding
period. If the initial 10-year amortization base reflects the net
experience gain or loss from the immediately preceding actuarial period,
the unamortized amount of the initial base shall equal
[[Page 407]]
the total unfunded liability on the effective date of section 404(a)
determined in accordance with the general rules of paragraphs (d) and
(f) of this section. If, however, a separate base will be used to
reflect that gain or loss, the unamortized amount of the initial base
shall equal such unfunded liability on the effective date of section
404(a), reduced by the net experience loss or increased by the net
experience gain for the immediately preceding actuarial period. In this
case, a separate 10-year amortization base must be established on the
effective date equal to the net experience gain or loss. Thus, if the
effective date unfunded liability is $100,000 and an experience loss of
$15,000 is recognized on that date, and if the loss is to be treated as
a separate base, the unamortized balances of the two bases would be
$85,000 and $15,000. If the unfunded liability were the same $100,000,
but a gain of $15,000 instead of a loss were recognized on that date,
the unamortized balances of the two bases would be $115,000 and a credit
base of $15,000. In both cases, if only one 10-year base is to be
established on the effective date, its unamortized balance would be
$100,000 (the unfunded liability of the plan). See paragraphs (d) and
(f) for rules for determining the unfunded liability of the plan.
(k) Effect of full funding limit on 10-year-amortization bases. The
amount deductible under section 404(a)(1)(A) (i), (ii), or (iii) for a
plan year may not exceed the full funding limitation for that year. See
section 412 and paragraphs (d), (e), and (f) of this section for rules
to be used in the computation of the full funding limitation. If the
total deductible contribution (including carryover) for a plan year
equals or exceeds the full funding limitation for the year, all 10-year
amortization bases maintained by the plan will be considered fully
amortized, and the deductible limit for subsequent plan years will not
be adjusted to reflect the amortization of these bases.
(l) Transitional rules--(1) Plan years beginning before April 22,
1981. In determining the deductible limit for plan years beginning
before April 22, 1981, a contribution will be deductible under section
404(a)(1)(A) if the computation of the deductible limit is based on an
interpretation of section 404(a)(1)(A) that is reasonable when
considered with prior published positions of the Internal Revenue
Service. A computation of the deductible limit may satisfy the preceding
sentence even if it does not satisfy the rules contained in paragraphs
(c) through (i) of this section.
(2) Transitional approaches. The deductible limit determined for the
first plan year with respect to which a plan applies the rules contained
in paragraphs (c) through (i) of this section must be computed using one
of the following approaches--
(i) The plan (whether or not in existence before the effective date
of section 404(a)) may apply the rules of paragraph (j) for establishing
the initial base for an existing plan, treating 10-year bases (if any)
as 10 percent bases in adding bases.
(ii) The plan may apply the fresh start alternative for combining
bases under paragraph (i)(5).
(iii) The plan may retroactively establish 10-year amortization
bases for years with respect to which section 404(a)(1)(A) and the rules
of this section would have applied but for the transition rule contained
in paragraph (l)(1) of this section. Contributions actually deducted are
used in retroactively establishing and maintaining these bases under
paragraph (h). However, a deduction already taken shall not be
recomputed because of the retroactive establishment of a base.
(m) Effective date of section 404(a). In the case of a plan which
was in existence on January 1, 1974, section 404(a) generally applies
for contributions on account of taxable years of an employer ending with
or within plan years beginning after December 31, 1974. In the case of a
plan not in existence on January 1, 1974, section 404(a) generally
applies for contributions on account of taxable years of an employer
ending with or within plan years beginning after September 4, 1974. See
Sec. 1.410(a)-2(c) for rules concerning the time of plan existence. See
also Sec. 1.410(a)-2(d), which provides that a plan in existence on
January 1, 1974, may elect to have certain provisions, including the
amendments to section 404(a) contained in section 1013 of the Employee
Retirement Income Security Act of
[[Page 408]]
1974, apply to a plan year beginning after September 2, 1974, and before
the otherwise applicable effective date contained in that section.
[T.D. 7760, 46 FR 6914, Jan. 22, 1981; 46 FR 15685, Mar. 9, 1981]
Sec. 1.404(b)-1 Method of contribution, etc., having the effect of a plan; effect of section 404(b).
Section 404(a) is not confined to formal stock bonus, pension,
profit- sharing, and annuity plans, or deferred compensation plans, but
it includes any method of contributions or compensation having the
effect of a stock bonus, pension, profit-sharing, or annuity plan, or
similar plan deferring the receipt of compensation. Thus, where a
corporation pays pensions to a retired employee or employees or to their
beneficiaries in such amounts as may be determined from time to time by
the board of directors or responsible officers of the company, or where
a corporation is under an obligation, whether funded or unfunded, to pay
a pension or other deferred compensation to an employee or his
beneficiaries, there is a method having the effect of a plan deferring
the receipt of compensation for which deductions are governed by section
404(a). If an employer on the accrual basis defers paying any
compensation to an employee until a later year or years under an
arrangement having the effect of a stock bonus, pension, profit-sharing,
or annuity plan, or similar plan deferring the receipt of compensation,
he shall not be allowed a deduction until the year in which the
compensation is paid. This provision is not intended to cover the case
where an employer on the accrual basis defers payment of compensation
after the year of accrual merely because of inability to pay such
compensation in the year of accrual, as, for example, where the funds of
the company are not sufficient to enable payment of the compensation
without jeopardizing the solvency of the company, or where the liability
accrues in the earlier year, but the amount payable cannot be exactly
determined until the later year.
[T.D. 6500, 25 FR 11690, Nov. 26, 1960]
Sec. 1.404(b)-1T Method or arrangement of contributions, etc., deferring the receipt of compensation or providing for deferred benefits. (Temporary)
Q-1: As amended by the Tax Reform Act of 1984, what does section
404(b) of the Internal Revenue Code provide?
A-1: As amended, section 404(b) clarifies that any plan, or method
or arrangement, deferring the receipt of compensation or providing for
deferred benefits (other than compensation) is to be treated as a plan
deferring the receipt of compensation for purposes of section 404 (a)
and (d). Accordingly, section 404 (a) and (d) (in the case of employees
and nonemployees; respectively) shall govern the deduction of
contributions paid or compensation paid or incurred with respect to such
a plan, or method or arrangement. Section 404 (a) and (d) requires that
such a contribution or compensation be paid or incurred for purposes of
section 162 or 212 and satisfy the requirements for deductibility under
either of those sections. Thus, for example, under section 404 (a)(5)
and (b), if otherwise deductible under section 162 or 212, a
contribution paid or incurred with respect to a nonqualified plan, or
method or arragement, providing for deferred benefits is deductible in
the taxable year of the employer in which or with which ends the taxable
year of the employee in which the amount attributable to the
contribution is includible in the gross income of the employee (without
regard to any applicable exclusion under Chapter 1, Subtitle A, of the
Internal Revenue Code). Section 404 (a) and (d) applies to all
compensation and benefit plans, or methods or arrangements, however
denominated, which defer the receipt of any amount of compensation or
benefit, including fees or other payments. Thus, a limited partnership
(using the accrual method of accounting) may not accrue deductions for a
fee owed to an unrelated person (using the cash method of accounting )
who performs services for the partnership until the partnership taxable
year in which or with which ends the taxable year of the service
provider in which the fee is included in income. However,
notwithstanding the above,
[[Page 409]]
section 404 does not apply to contributions paid or accrued with respect
to a ``welfare benefit fund'' (as defined in section 419(e)) after July
18, 1984, in taxable years of employers (and payors) ending after that
date. Also, section 463 shall govern the deduction of vacation pay by a
taxpayer that has elected the application of such section. For rules
relating to the deduction of contributions paid or accrued with respect
to a welfare benefit fund, see section 419, Sec. 1.419-1T and
Sec. 1.419A-2T. For rules relating to the deduction of vacation pay for
which an election is made under section 463, see Sec. 301.9100-16T of
this chapter and Sec. 1.463-1T.
Q-2: When does a plan, or method or arrangement, defer the receipt
of compensation or benefits for purposes of section 404 (a), (b), and
(d)?
A-2: (a) For purposes of section 404 (a), (b), and (d), a plan, or
method or arrangement, defers the receipt of compensation or benefits to
the extent it is one under which an employee receives compensation or
benefits more than a brief period of time after the end of the
employer's taxable year in which the services creating the right to such
compensation or benefits are performed. The determination of whether a
plan, or method or arrangement, defers the receipts of compensation or
benefits is made separately with respect to each employee and each
amount of compensation or benefit. Compensation or benefits received by
an employee's spouse or dependent or any other person, but taxable to
the employee, are treated as received by the employee for purposes of
section 404. An employee is determined to receive compensation or
benefits within or beyond a brief period of time after the end of the
employer's taxable year under the rules provided in this Q&A. For the
treatment of expenses with respect to transactions between related
taxpayers, see section 267.
(b)(1) A plan, or method or arrangement, shall be presumed to be one
deferring the receipt of compensation for more than a brief period of
time after the end of an employer's taxable year to the extent that
compensation is received after the 15th day of the 3rd calendar month
after the end of the employer's taxable year in which the related
services are rendered (``the 2\1/2\ month period''). Thus, for example,
salary under an employment contract or a bonus under a year-end bonus
declaration is presumed to be paid under a plan, or method or
arrangement, deferring the receipt of compensation, to the extent that
the salary or bonus is received beyond the applicable 2\1/2\ month
period. Further, salary or a year-end bonus received beyond the
applicable 2\1/2\ month period by one employee shall be presumed to
constitute payment under a plan, or method or arrangement, deferring the
receipt of compensation for such employee even though salary or bonus
payments to all other employees are not similarly treated because they
are received within the 2\1/2\ month period. Benefits are ``deferred
benefits'' if, assuming the benefits were cash compensation, such
benefits would be considered deferred compensation. Thus, a plan, or
method or arrangement, shall be presumed to be one providing for
deferred benefits to the extent benefits for services are received by an
employee after the 2\1/2\ month period following the end of the
employer's taxable year in which the related services are rendered.
(2) The taxpayer may rebut the presumption established under the
previous subparagraph with respect to an amount of compensation or
benefits only by setting forth facts and circumstances the preponderance
of which demonstrates that it was impracticable, either administratively
or economically, to avoid the deferral of the receipt by an employee of
the amount of compensation or benefits beyond the applicable 2\1/2\
month period and that, as of the end of the employer's taxable year such
impracticability was unforeseeable. For example, the presumption may be
rebutted with respect to an amount of compensation to the extent that
receipt of such amount is deferred beyond the applicable 2\1/2\ month
period (i) either because the funds of the employer were not sufficient
to make the payment within the 2\1/2\ month period without jeopardizing
the solvency of the employer or because it was not reasonably possible
to determine within the 2\1/2\ month period whether payment of such
amount was to be made, and (ii) the circumstance causing the deferral
[[Page 410]]
described in (i) was unforeseeable as of the close of the employer's
taxable year. Thus, the presumption with respect to the receipt of an
amount of compensation or benefit is not rebutted to the extent it was
foreseeable, as of the end of the employer's taxable year, that the
amount would be received after the applicable 2\1/2\ month period. For
example, if, as of the end of the employer's taxable year, it is
foreseeable that calculation of a year-end bonus to be paid to an
employee under a given formula will not be completed and thus the bonus
will not be received (and is in fact not received) by the end of the
applicable 2\1/2\ month period, the presumption that the bonus is
deferred compensation is not rebutted.
(c) A plan, or method or arrangement, shall not be considered as
deferring the receipt of compensation or benefits for more than a brief
period of time after the end of the employer's taxable year to the
extent that compensation or benefits are received by the employee on or
before the end of the applicable 2\1/2\ month period. Thus, for example,
salary under an employment contract or a bonus under a year-end bonus
declaration is not considered paid under a plan, or method or
arrangement, deferring the receipt of compensation to the extent that
such salary or bonus is received by the employee on or before the end of
the applicable 2\1/2\ month period.
(d) Solely for purposes of applying the rules of paragraphs (b) and
(c) of this Q&A, in the case of an employer's taxable year ending on or
after July 18, 1984, and on or before March 21, 1986, compensation or
benefits that relate to services rendered in such taxable year shall be
deemed to have been received within the applicable 2\1/2\ month period
if such receipt actually occurs after such 2\1/2\ month period but on or
before March 21, 1986.
Q-3: When does section 404(b), as amended by the Tax Reform Act of
1984, become effective?
A-3: With the exceptions discussed below, section 404(b), as
amended, and the rules under Q&A-2 are effective with respect to amounts
paid or incurred after July 18, 1984, in taxable years of employers (and
payors) ending after that date. In the case of an extended vacation pay
plan maintained pursuant to a collective bargaining agreement (a)
between employee representatives and one or more employers, and (b) in
effect on June 22, 1984, section 404(b) is not effective before the date
on which such collective bargaining agreement terminates (determined
without regard to any extension thereof agreed to after June 22, 1984).
For purposes of the preceding sentence, any plan amendment made pursuant
to a collective bargaining agreement relating to the plan which amends
the plan solely to conform to any requirement added under section 512 of
the Tax Reform Act of 1984 shall not be treated as a termination of such
collective bargaining agreement. For purposes of this section, an
``extended vacation pay plan'' is one under which covered employees
gradually over a specified period of years earn the right to additional
vacation benefits, no part of which, under the terms of the plan, can be
taken until the end of the specified period.
[T.D. 8073, 51 FR 4321, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986; 51 FR
11303, Apr. 2, 1986, as amended by T.D. 8435, 57 FR 43896, Sept. 23,
1992]
Sec. 1.404(c)-1 Certain negotiated plans; effect of section 404(c).
(a) Section 404(a) does not apply to deductions for contributions
paid by an employer under a negotiated plan which meets the following
conditions:
(1) The contributions under the plan are held in trust for the
purpose of paying, either from principal or income or both, for the
benefit of employees and their families, at least medical or hospital
care, and pensions on retirement or death of employees; and
(2) Such plan was established before January 1, 1954, as a result of
an agreement between employee representatives and the Government of the
United States during a period of Government operation, under seizure
powers, of a major part of the productive facilities of the industry in
which such employer is engaged.
If these conditions are met, such contributions shall be deductible
under section 162, to the extent that they constitute ordinary and
necessary business expenses.
[[Page 411]]
(b) The term ``as a result of an agreement'' is intended primarily
to cover a trust established under the terms of an agreement referred to
in paragraph (a)(2) of this section. It will also include a trust
established under a plan of an employer, or group of employers, who are
in competition with the employers whose facilities were seized by reason
of producing the same commodity, and who would therefore be expected to
establish such a trust as a reasonable measure to maintain a sound
position in the labor market producing the commodity. Thus, for example,
if a trust was established under such an agreement in the bituminous
coal industry, a similar trust established about the same time in the
anthracite coal industry would be covered by this provision.
(c) If any such trust becomes qualified for exemption under section
501(a), the deductibility of contributions by an employer to such trust
on or after the date of such qualification would no longer be governed
by section 404(c), even though the trust may later lose its exemption
under section 501(a).
[T.D. 6500, 25 FR 11690, Nov. 26, 1960]
Sec. 1.404(d)-1T Questions and answers relating to deductibility of deferred compensation and deferred benefits for independent contractors. (Temporary)
Q-1: How does the amendment of section 404(b) by the Tax Reform Act
of 1984 affect the deduction of contributions or compensation under
section 404(d)?
A-1: As amended by the Tax Reform Act of 1984, section 404(b)
clarifies that section 404(d) shall govern the deduction of
contributions paid and compensation paid or incurred by a payor under a
plan, or method or arrangement, deferring the receipt of compensation or
providing for deferred benefits for service providers with respect to
which there is no employer-employee relationship. In such a case,
section 404 (a) and (b) and the regulations thereunder apply as if the
person providing the services were the employee and the person to whom
the services are provided were the employer. Section 404(a) requires
that such a contribution or compensation be paid or incurred for
purposes of section 162 or 212 and satisfy the requirements for
deductibility under either of those sections. However, notwithstanding
the above, section 404 does not apply to contributions paid or accrued
with respect to a ``welfare benefit fund'' (as defined in section
419(e)) after June 18, 1984, in taxable years of employers (and payors)
ending after that date. Also, section 463 shall govern the deduction of
vacation pay by a taxpayer that has elected under such section. For
rules relating to the deduction of contributions paid or accrued with
respect to a welfare benefit fund, see section 419, Sec. 1.419-1T and
Sec. 1.419A-2T. For rules relating to the deduction of vacation pay for
which an election is made under section 463, see Sec. 301.9100-16T of
this chapter and Sec. 1.463-1T.
[T.D. 8073, 51 FR 4322, Feb. 4, 1986, as amended by T.D. 8435, 57 FR
43896, Sept. 23, 1992]
Sec. 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).
(a) In general. (1) The Self-Employed Individuals Tax Retirement Act
of 1962 (76 Stat. 809) permits certain self-employed individuals to be
treated as employees for purposes of pension, annuity, and profit-
sharing plans included in paragraph (1), (2), or (3) of section 404(a).
Therefore, for taxable years of an employer beginning after December 31,
1962, employer contributions to qualified plans on behalf of self-
employed individuals are deductible under section 404 subject to the
limitations of paragraphs (b) and (c) of this section.
(2) In the case of contributions to qualified plans on behalf of
self-employed individuals, the amount deductible differs from the amount
allowed as a deduction. In general, the amount deductible is 10 percent
of the earned income derived by the self-employed individual from the
trade or business with respect to which the plan is established, or
$2,500, whichever is the lesser. This is the amount referred to in
section 401 when reference is made to the amounts which may be deducted
[[Page 412]]
under section 404 or the amount of contributions deductible under
section 404. Thus, this is the amount taken into consideration in
determining whether contributions under the plan are discriminatory. The
amount allowed as a deduction with respect to contributions on behalf of
a self-employed individual is one-half of the amount deductible. The
amount allowed as a deduction is relevant only for purposes of
determining the amount an employer may deduct from gross income.
(b) Determination of the amount deductible. (1) If a plan covers
employees, some of whom are self-employed individuals, the determination
of the amount deductible is made on the basis of independent
consideration of the common-law employees and of the self-employed
individuals. See subparagraphs (2) and (3) of this paragraph. For
purposes of determining the amount deductible with respect to
contributions on behalf of a self-employed individual, such
contributions shall be considered to satisfy the conditions of section
162 (relating to trade or business expenses) or 212 (relating to
expenses for the production of income), but only to the extent that such
contributions do not exceed the earned income of such individual derived
from the trade or business with respect to which the plan is
established. However, the portion of such contribution, if any,
attributable to the purchase of life, accident, health, or other
insurance protection shall be considered payment of a personal expense
which does not satisfy the requirements of section 162 or 212. See
paragraph (f) of this section. For the additional rules applicable where
contributions are made by more than one employer on behalf of a self-
employed individual, see paragraph (d) of this section.
(2) If contributions are made to a plan included in section 404(a)
(1), (2), or (3) on behalf of employees, some of whom are self-employed
individuals, the amount deductible with respect to contributions on
behalf of the common-law employees covered under the plan shall be
determined as if such employees were the only employees for whom
contributions and benefits are provided under the plan. Accordingly, for
purposes of such determination, the percentage of compensation
limitations of section 404(a) (1), (3), and (7) are applicable only with
respect to the compensation otherwise paid or accrued during the taxable
year by the employer to the common-law employees. Similarly, the costs
referred to in section 404(a)(1) (B) and (C) shall be the costs of
funding the benefits of the common-law employees. Also, the provisions
of section 404(a)(1)(D), (3), and (7), relating to certain carryover
deductions, shall be applicable only to amounts contributed, or to the
amounts deductible, on behalf of such employees.
(3) If contributions are made to a plan included in section 404(a)
(1), (2), or (3) on behalf of individuals some or all of whom are self-
employed individuals, the amount deductible in any taxable year with
respect to contributions on behalf of such individuals shall be
determined as follows:
(i) The provisions of section 404(a) (1), (2), (3), and (7) shall be
applied as if such individuals were the only participants for whom
contributions and benefits are provided under the plan. Thus, the costs
referred to in such provisions shall be the costs of funding the
benefits of the self-employed individuals. If such costs are less than
an amount equal to the amount determined under subdivision (iii) of this
subparagraph, the maximum amount deductible with respect to such
individuals shall be the costs of their benefits.
(ii) The provisions of section 404(a)(1)(D), the second and third
sentences of section 404(a)(3)(A), and the second sentence of section
404(a)(7), relating to certain carryover deductions, are not applicable
to contributions on behalf of self-employed individuals. Contributions
on behalf of self-employed individuals are deductible, if at all, only
in the taxable year in which the contribution is paid or deemed paid
under section 404(a)(6).
(iii) The amount deductible for the taxable year of the employer
with respect to contributions on behalf of a self-employed individual
shall not exceed the lesser of $2,500 or 10 percent of the earned income
derived by such individual for such taxable year from the trade or
business with respect to which the plan is established.
[[Page 413]]
(iv) If a self-employed individual receives in any taxable year
earned income with respect to which deductions are allowable to two or
more employers, the aggregate amounts deductible shall not exceed the
lesser of $2,500 or 10 percent of such earned income. See paragraph (d)
of this section.
(c) Special limitation on the amount allowed as a deduction for
self-employed individuals. The amount allowed as a deduction under
section 404(a) (1), (2), (3), and (7) in any taxable year with respect
to contributions made on behalf of a self-employed individual shall be
an amount equal to one-half of the amount deductible with respect to
such contributions under paragraph (b)(3) of this section. However, for
purposes of section 401, the amount which may be deducted, or the amount
deductible, under section 404 with respect to contributions made on
behalf of self-employed individuals shall be determined without regard
to the special limitation of this paragraph.
(d) Rules applicable where contributions are made by more than one
employer on behalf of a self-employed individual. (1) Under paragraph
(b)(3)(iv) of this section, if a self-employed individual receives in
any taxable year earned income with respect to which deductions are
allowable to two or more employers, the aggregate amounts deductible
shall not exceed the lesser of $2,500 or 10 percent of such earned
income. This limitation does not apply to contributions made under a
plan on behalf of an employee who is not self-employed in the trade or
business with respect to which the plan is established, even though such
employee may be covered as a self-employed individual under a plan or
plans established by other trades or businesses.
(2) In any case in which the application of subparagraph (1) of this
paragraph reduces the amount otherwise deductible, the amount deductible
by each employer shall be that amount which bears the same ratio to the
aggregate amount deductible with respect to all trades or businesses (as
determined in subparagraph (1) of this paragraph) as the earned income
derived from that employer bears to the aggregate of the earned income
derived from all of the trades or businesses with respect to which plans
are established. The amount allowed as a deduction to each employer is
one-half of the amount determined (in accordance with the preceding
sentence) to be deductible by such employer.
(e) Partner's distributive share of contributions and deductions.
For purposes of sections 702(a)(8) and 704, a partner's distributive
share of contributions on behalf of self-employed individuals under a
qualified pension, annuity, or profit-sharing plan is the contribution
made on his behalf, and his distributive share of deductions allowed the
partnership under section 404 for contributions on behalf of self-
employed individuals is that portion of the deduction which is
attributable to contributions made on his behalf under the plan. The
contribution on behalf of a partner and the deduction with respect
thereto must be accounted for separately by such partner, for his
taxable year with or within which the partnership's taxable year ends,
as an item described in section 702(a)(8).
(f) Contributions allocable to insurance protection. For purposes of
determining the amount deductible with respect to contributions on
behalf of a self-employed individual, amounts allocable to the purchase
of life, accident, health, or other insurance protection shall not be
taken into account. Such amounts are neither deductible nor considered
as contributions for purposes of determining the maximum amount of
contributions that may be made on behalf of an owner-employee. The
amount of a contribution allocable to insurance shall be an amount equal
to a reasonable net premium cost, as determined by the Commissioner, for
such amount of insurance for the appropriate period. See paragraph
(b)(5) of Sec. 1.72-16.
(g) Rules applicable to loans. For purposes of section 404, any
amount paid, directly or indirectly, by an owner-employee in repayment
of any loan which under section 72(m)(4)(B) was treated as an amount
received from a qualified trust or plan shall be treated as a
contribution to such trust or under such plan on behalf of such owner-
employee.
(h) Definitions. For purposes of section 404 and the regulations
thereunder--
[[Page 414]]
(1) The term ``employee'' includes an employee as defined in section
401(c)(1) and paragraph (b) of Sec. 1.401-10, and the term ``employer''
means the person treated as the employer of such individual under
section 401(c)(4);
(2) The term ``owner-employee'' means an owner-employee as defined
in section 401(c)(3) and paragraph (d) of Sec. 1.401-10;
(3) The term ``earned income'' means earned income as defined in
section 401(c)(2) and paragraph (c) of Sec. 1.401-10; and
(4) The term ``compensation'' when used with respect to an
individual who is an employee described in subparagraph (1) of this
paragraph shall be considered to be a reference to the earned income of
such individual derived from the trade or business with respect to which
the plan is established.
(i) Years to which this section applies. This section applies to
taxable years of employers beginning before January 1, 1974. For taxable
years beginning after December 31, 1973, see Sec. 1.404(e)-1A.
[T.D. 6673, 28 FR 10145, Sept. 17, 1963; as amended by T.D. 7636, 44 FR
47056, Aug. 10, 1979]
Sec. 1.404(e)-1A Contributions on behalf of a self-employed individual to or under a qualified pension, annuity, or profit-sharing plan.
(a) In general. This section provides rules relating to employer
contributions to qualified plans on behalf of self-employed individuals
described in subsections (a) (8) and (9), (e), and (f) of section 404.
Unless otherwise specifically provided, this section applies to taxable
years of an employer beginning after December 31, 1973. See section
1.404(e)-1 for rules relating to plans for self-employed individuals for
taxable years beginning before January 1, 1974. Paragraph (b) of this
section provides general rules of deductibility, paragraph (c) provides
rules relating to defined contribution plans, paragraph (d) provides
rules relating to defined benefit plans, paragraph (e) provides rules
relating to combinations of plans, paragraph (f) provides rules for
partnerships, paragraph (g) provides rules for insurance, paragraph (h)
provides rules for loans, and paragraph (i) provides definitions.
(b) Determination of the amount deductible. (1) If a defined
contribution plan covers employees, some of whom are self-employed
individuals, the determination of the amount deductible is made on the
basis of independent consideration of the common-law employees and of
the self-employed individuals. See subparagraphs (2) and (3) of this
paragraph. For purposes of determining the amount deductible with
respect to contributions on behalf of a self-employed individual, such
contributions shall be considered to satisfy the conditions of section
162 (relating to trade or business expenses) or 212 (relating to
expenses for the production of income), but only to the extent that such
contributions do not exceed the earned income of such individual derived
from the trade or business with respect to which the plan is
established. However, the portion of such contribution, if any,
attributable to the purchase of life, accident, health, or other
insurance protection shall be considered payment of a personal expense
which does not satisfy the requirements of section 162 or 212. See
paragraph (g) of this section.
(2)(i) If contributions are made on behalf of employees, some of
whom are self-employed individuals, to a defined contribution plan
described in section 414(i) and included in section 404(a) (1), (2), or
(3), the amount deductible with respect to contributions on behalf of
the common-law employees covered under the plan shall be determined as
if such employees were the only employees for whom contributions and
benefits are provided under the plan. Accordingly, for purposes of such
determination, the percentage of compensation limitations of section
404(a) (3) and (7) are applicable only with respect to the compensation
otherwise paid or accrued during the taxable year by the employer with
respect to the common-law employees. Similarly, the costs referred to in
section 404(a)(1) (A) and (B) shall be the costs of funding the benefits
of the common-law employees. Also, the provisions of section
404(a)(1)(D), (3), and (7), relating to certain carryover deductions,
shall be applicable only to amounts contributed
[[Page 415]]
or to the amounts deductible on behalf of such employees.
(ii) The amount deductible, by reason of contributions on behalf of
employees to a defined benefit plan, shall be determined without regard
to the self-employed or common law status of each employee.
(3)(i) If contributions are made on behalf of individuals, some or
all of whom are self-employed individuals, to a defined contribution
plan described in section 414(i) and included in section 404(a) (1),
(2), or (3), the amount deductible in any taxable year with respect to
contributions on behalf of such individuals shall be determined as
follows:
(A) The provisions of section 404(a) (1), (2), (3), and (7) shall be
applied as if such individuals were the only participants for whom
contributions and benefits are provided under the plan. Thus, the costs
referred to in such provisions shall be the costs of funding the
benefits of the self-employed individuals. If such costs are less than
an amount equal to the amount determined under paragraph (c) of this
section, the maximum amount deductible with respect to such individuals
shall be the cost of their benefits.
(B) The provisions of section 404(a) (1), (D), the third sentence of
section 404(a) (3), (A), and the second sentence of section 404(a)(7),
relating to certain carryover deductions are applicable to contributions
on behalf of self-employed individuals made in taxable years of an
employer beginning after December 31, 1975.
(C) For any employer taxable year in applying the 15 percent limit
on deductible contributions set forth section in 404(a)(3) and the 25
percent limit in section 404(a)(7) for any taxable year of the employer,
the amount deductible under section 404(e)(4) and paragraph (c)(4) of
this section (relating to the minimum deduction of $750 or 100 percent
of earned income) shall be substituted for such limits with respect to
the self-employed individuals on whose behalf contributions are
deductible under section 404(e)(4) for the taxable year of the employer.
In addition, although the limitations of section 415 are applicable to
the plan for plan years beginning after December 31, 1975, the defined
contribution compensation limitation described in section 415(c)(1)(B)
shall not be less than the amount deductible under section 404(e)(4) and
paragraph (c)(4) of this section with respect to any self-employed
individual for the taxable year of the employer wnding with or within
the limitation year. The special rule in the second sentence of
paragraph (3)(A) of section 404(a) is not applicable in determining the
amounts deductible on behalf of self-employed individuals.
(ii) The limitations of this subparagraph are not applicable to a
defined benefit plan for self-employed individuals.
(c) Defined contribution plans. (1) Under section 404(e)(1) in the
case of a defined contribution plan, as defined in section 414(i), the
amount deductible for the taxable year of the employer with respect to
contributions on behalf of a self-employed individual shall not exceed
the lesser of $7,500 or 15 percent of the earned income derived by such
individual for such taxable year from the trade or business with respect
to which the plan is established.
(2) Under section 404(e)(2)(A) if a self-employed individual
receives in any taxable year earned income with respect to which
deductions are allowable to two or more employers under two or more
defined contribution plans the aggregate amounts deductible shall not
exceed the lesser of $7,500 or 15 percent of such earned income. This
limitation does not apply to contributions made under a plan on behalf
of an employee who is not self-employed in the trade or business with
respect to which the plan is established.
(3) Under section 404(e)(2)(B) in any case in which the applicable
limitation of subparagraph (2) of this paragraph reduces the amount
otherwise deductible with respect to contributions on behalf of any
employee within the meaning of section 401(c)(1), the amount deductible
by each employer for such employee shall be that amount which bears the
same ratio to the aggregate amount deductible for such employee with
respect to all trades or businesses (as determined in subparagraph (1)
of this paragraph) as his earned income derived from the employer bears
to the aggregate of his earned income derived from all of the
[[Page 416]]
trades or businesses with respect to which plans are established.
Under section 404(e)(4), notwithstanding the provisions of
subparagraphs (1) and (2) of this paragraph, the limitations on the
amount deductible for the taxable year of the employer with respect to
contributions on behalf of a self-employed individual shall not be less
than the lesser of $750 or 100 percent of the earned income derived by
such individual for such taxable year from the trade or business with
respect to which the plan is established. If such individual receives in
any taxable year earned income with respect to which deductions are
allowable to two or more employers, 100 percent of such earned income
shall be taken into account for purposes of the limitations determined
under this subparagraph. This subparagraph does not apply to any taxable
year beginning after December 31, 1975, to any employee whose adjusted
gross income for that taxable year is greater than $15,000. In applying
the preceding sentence, the adjusted gross income of an employee for a
taxable year is determined separately for each individual, without
regard to any community property laws, and without regard to the
deduction allowable under section 404(a).
(d) Defined benefit plans. In the case of a defined benefit plan, as
defined in section 401(j), the special limitations provided by section
404(e) and paragraph (c) of this section do not apply. See section
401(j) for requirements applicable to defined benefit plans.
(e) Combination of plans. For special rules applied if a self-
employed individual in any taxable year is a paraticipant in both a
defined benefit plan and a defined contribution plan, see section 401(j)
and the regulations thereunder.
(f) Partner's distributive share of contributions and deductions.
(1) For purposes of sections 702(a)(8) and 704 in the case of a defined
contribution plan, a partner's distributive share of contributions on
behalf of self-employed individuals under such a plan is the
contribution made on his behalf, and his distributive share of
deductions allowed the partnership under section 404 for contributions
on behalf of a self-employed individual is that portion of the deduction
which is attributable to contributions made on his behalf under the
plan. The contribution on behalf of a partner and the deduction with
respect thereto must be accounted for separately by such partner, for
his taxable year with or within which the partnership's taxable year
ends, as an item described in section 702(a)(8).
(2) In the case of a defined benefit plan, a partner's distributive
share of contributions on behalf of self-employed individuals and his
distributive share of deductions allowed the partnership under section
404 for such contributions is determined in the same manner as his
distributive share of partnership taxable income. See section 704,
relating to the determination of the distributive share and the
regulations thereunder.
(g) Contributions allocable to insurance protection. Under Section
404(e)(3), for purposes of determining the amount deductible with
respect to contributions on behalf of a self-employed individual,
amounts allocable to the purchase of life, accident, health, or other
insurance protection shall not be taken into account. Such amounts are
neither deductible nor considered as contributions for purposes of
determining the maximum amount of contributions that may be made on
behalf of an owner-employee. The amount of a contribution allocable to
insurance shall be an amount equal to a reasonable net premium cost, as
determined by the Commissioner, for such amount of insurance for the
appropriate period. See paragraph (b)(5) of Sec. 1.72-16.
(h) Rules applicable to loans. Under section 404(f), for purposes of
section 404, any amount paid, directly or indirectly, by an owner-
employee in repayment of any loan which under section 72(m)(4)(B) was
treated as an amount recieved from a qualified trust or plan shall be
treated as a contribution to such trust or under such plan on behalf of
such owner-employee.
(i) Definitions. Under section 404(a)(8), for purposes of section
404 and the regulations thereunder--
(1) The term ``employee'' includes an employee as defined in section
401(c)(1) and the term ``employer'' means the person treated as the
employer of such individual under section 401(c)(4);
[[Page 417]]
(2) The term ``owner-employee'' means an owner-employee as defined
in section 401(c)(3);
(3) The term ``earned income'' means earned income as defined in
section 401(c)(2); and
(4) The term ``compensation'' when used with respect to an
individual who is an employee described in subparagraph (1) of this
paragraph shall be considered to be a reference to the earned income of
such individual derived from the trade or business with respect to which
the plan is established.
[T.D. 7636, 44 FR 47056, Aug. 10, 1979]
Sec. 1.404(g)-1 Deduction of employer liability payments.
(a) General rule. Employer liability payments shall be treated as
contributions to a stock bonus, pension, profit-sharing, or annuity plan
to which section 404 applies. Such payments that satisfy the limitations
of this section shall be deductible under section 404 when paid without
regard to any other limitations in section 404.
(b) Employer liability payments. For purposes of this section,
employer liability payments mean:
(1) Any payment to the Pension Benefit Guaranty Corporation (PBGC)
for termination or withdrawal liability imposed under section 4062
(without regard to section 4062(b)(2)), 4063, or 4064 of the Employee
Retirement Insurance Security Act of 1974 (ERISA). Any bond or escrow
payment furnished under section 4063 of ERISA shall not be considered as
a payment of liability until applied against the liability of the
employer.
(2) Any payment to a non-multiemployer plan pursuant to a commitment
to the PBGC made in accordance with PBGC Determination of Plan
Sufficiency and Termination of Sufficient Plans. See PBGC regulations,
29 CFR 2617.13(b) for rules concerning these commitments. Such payments
shall not exceed an amount necessary to provide for, and used to fund,
the benefits guaranteed under section 4022 of ERISA.
(3) Any payment to a multiemployer plan for withdrawal liability
imposed under part 1 of subtitle E of title IV of ERISA. Any bond or
escrow payment furnished under such part shall not be considered as a
payment of liability until applied against the liability of the
employer.
(c) Limitations, etc.--(1) Permissible expenses. A payment shall be
deductible under section 404(g) and this section only if the payment
satisfies the conditions of section 162 or section 212. Payments made by
an entity which is liable for such payments because it is a member of a
commonly controlled group of corporations, or trades or businesses,
within the meaning of section 414 (b) or (c), shall not fail to satisfy
such conditions merely because the entity did not directly employ
participants in the plan with respect to which the liability payments
were made.
(2) Qualified plan. A payment shall be deductible under section
404(g) and this section only if the payment is made in a taxable year of
the employer ending within or with a taxable year of the trust for which
the trust is exempt under section 501(a). For purposes of this
paragraph, the payment timing rules of section 404(a)(6) shall apply.
(3) Full funding limitation. (i) If the employer liability payment
is to a plan, the total amount deductible for such payment and for other
plan contributions may not exceed an amount equal to the full funding
limitation as defined in section 412(c)(7) for the taxable year with
respect to which the contributions are deemed made under section 404.
(ii) If the total contributions to the plan for the taxable year
including the employer liability payment exceed the amount equal to this
full funding limitation, the employer liability payment shall be
deductible first.
(iii) Any amount paid in a taxable year in excess of the amount
deductible in such year under the full funding limitation shall be
treated as a liability payment and be deductible in the succeeding
taxable years in order of time to the extent of the difference between
the employer liability payments made in each succeeding year and the
maximum amount deductible for such year under the full funding
limitation.
(4) Maximum deduction allowable under section 404. The amount
deductible
[[Page 418]]
under section 404 is limited to the higher of the maximum amount
deductible by the employer under section 404(a) or the amount otherwise
deductible under section 404(g). If the contributions are to a plan to
which more than one employer contributes, this limit shall apply to each
employer separately rather than all employers in the aggregate. Thus,
each employer may deduct the greater of its allocable share of the
deduction determined under sections 404(a) and 413(b)(7) or 413(c)(6) or
its allocable share of the amount deductible under section 404(g).
However, pursuant to the rule in subdivision (ii) of subparagraph (3),
in determining each employer's allocable share under section 404(a), the
total amount deductible under section 404(a) by all employers shall not
exceed the difference between the full funding limitation and the total
amount deductible by all employers under section 404(g).
(5) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. In the 1983 taxable year, Employer A makes a withdrawal
liability payment of $700,000 to multiemployer Plan X to which Employer
A and Employer B are required to contribute. Employer A's allocable
share of the deduction allowable under sections 404(a) and 413(b)(7) in
the 1983 taxable year is $600,000. Employer B's allocable share of the
deduction allowable under section 404(a) and 413(b)(7) in the 1983
taxable year is $400,000.
The full funding limitation for the 1983 taxable year is $1,000,000.
Based on paragraph (c)(4) of this section, Employer A may deduct
$700,000, the amount of the withdrawal liability payment. However, the
deduction of Employer B is limited to $300,000, the difference between
the full funding limitation and the amount deductible under section
404(g).
(d) Effective date etc.--(1) General rule. This section is effective
for employer payments made after September 25, 1980.
(2) Transitional rule. For employer payments made before September
26, 1980, for purposes of section 404, any amount paid by an employer
under section 4062, 4063, or 4064 of the Employee Retirement Income
Security Act of 1974 shall be treated as a contribution to which section
404 applies by such employer to or under a stock bonus, pension, profit-
sharing, or annuity plan.
[T.D. 8085, 51 FR 16297, May 2, 1986]
Sec. 1.404(k)-1T Questions and answers relating to the deductibility of certain dividend distributions. (Temporary)
Q-1: What does section 404(k) provide?
A-1: Section 404(k) allows a corporation a deduction for dividends
actually paid in accordance with section 404(k)(2) with respect to stock
of such corporation held by an employee stock ownership plan (as defined
in section 4975(e)(7)) maintained by the corporation (or by any other
corporation that is a member of a ``controlled group of corporations''
within the meaning of section 409(l)(4) that includes the corporation),
but only if such dividends may be immediately distributed under the
terms of the plan and all of the applicable qualification and
distribution rules. The deduction is allowed under section 404(k) for
the taxable year of the corporation during which the dividends are
received by the participants.
Q-2: Is the deductibility of dividends paid to plan participants
under section 404(k) affected by a plan provision which permits
participants to elect to receive or not receive payment of dividends?
A-2: No. Dividends actually paid in cash to plan participants in
accordance with section 404(k) are deductible under section 404(k)
despite such an election provision.
Q-3: Are dividends paid in cash directly to plan participants by the
corporation and dividends paid to the plan and then distributed in cash
to plan participants under section 404(k) treated as distributions under
the plan holding stock to which the dividends relate for purposes of
sections 72, 401 and 402?
A-3: Generally, yes. However, a deductible dividend under section
404(k) is treated for purposes of section 72 as paid under a contract
separate from any other contract that is part of the plan. Thus, a
deductible dividend is treated as a plan distribution and as paid under
a separate contract providing only for payment of deductible dividends.
Therefore, a deductible dividend under section 404(k) is a taxable
[[Page 419]]
plan distribution even though an employee has unrecovered employee
contributions or basis in the plan.
[T.D. 8073, 51 FR 4322, Feb. 4, 1986]
Sec. 1.405-1 Qualified bond purchase plans.
(a) Introduction. Section 405 relates to the requirements for
qualification of, and the tax treatment of funds contributed to,
retirement plans of an employer for the benefit of his employees which
are funded through the purchase of United States retirement plan bonds.
Such bonds may be purchased under a qualified bond purchase plan
described in section 405(a) and paragraph (b) of this section. The
qualified bond purchase plan is an alternative method of providing some
of the deferred compensation benefits provided by plans described in
section 401. In addition, retirement bonds may be purchased under a
qualified pension or profit-sharing plan described in section 401. A
qualified bond purchase plan or a qualified pension or profit-sharing
plan under which retirement bonds are purchased may cover only common-
law employees, self-employed individuals, or both. A qualified bond
purchase plan may be established after December 31, 1962, and retirement
bonds may be purchased by a qualified pension or profit-sharing plan
after December 31, 1962. For the terms and conditions of the retirement
bonds, see section 405(b) and Treasury Department Circular, Public Debt
Series--No. 1-63.
(b) Qualified bond purchase plans. (1) A qualified bond purchase
plan is a definite written program and arrangement which is communicated
to the employees and established and maintained by an employer solely to
purchase for and distribute to his employees or their beneficiaries
retirement bonds. These bonds must be purchased in the name of the
employee on whose behalf the contributions are made. The plan must be a
permanent plan which meets the requirements of section 401(a) (3), (4),
(5), (6), (7), (8), (16), and (19), and, if applicable, the requirements
of section 401(a) (9) and (10) and of section 401(d) (other than
paragraphs (1), (5)(B), (8), (16), and (19)). The rules set forth in the
regulations relating to those provisions shall be applicable to
qualified bond purchase plans.
(2) A qualified bond purchase plan must provide that an employee's
right to the proceeds of a bond purchased in his name are nonforfeitable
and will in no event inure to the benefit of the employer or be
reallocated in any manner.
(c) Benefits under a qualified bond purchase plan. (1) Except as
provided in subparagraph (2) of this paragraph, a qualified bond
purchase plan must conform to the definition of a pension plan in
paragraph (b)(1)(i) of Sec. 1.401-1, or the definition of a profit-
sharing plan in paragraph (b)(1)(ii) of Sec. 1.401-1. For example, if
the qualified bond purchase plan is a profit-sharing plan, the plan must
include the definite allocation formula described in paragraph
(b)(1)(ii) of Sec. 1.401-1. In addition, if such a profit-sharing plan
covers any owner-employee, the plan must also include the definite
contribution formula described in section 401(d)(2)(B).
(2)(i) Under a qualified bond purchase plan, the bonds may be
distributed to the employees at any time, and the plan need not prohibit
the distribution or redemption of the bonds until the retirement of the
employee. Accordingly, even though a qualified bond purchase plan is
designed as a pension plan, it need not provide systematically for the
payment of definitely determinable benefits. However, provisions for
distribution must apply in a nondiscriminatory manner.
(ii) A qualified bond purchase plan which is designed as a pension
plan may not contain a formula for contributions or benefits which might
require the reallocation of amounts to an employee's credit or which
might provide for the reversion of any amounts to the employer.
(d) Contributions under a qualified bond purchase plan. (1) The
retirement bonds will be issued in the denominations of $50, $100, $500,
and $1,000. Therefore, the contribution otherwise called for under the
plan may not coincide with an amount that can be invested in retirement
bonds. Accordingly, the plan must provide that the contributions on
behalf of an individual employee for any year shall be rounded to the
nearest multiple of $50.
[[Page 420]]
(2) Since the employee's rights to any bonds purchased for him under
a qualified bond purchase plan must be nonforfeitable, a qualified bond
purchase plan must, in order to conform to the requirements of section
401(a)(4) with respect to the early termination of the plan, restrict
the contributions on behalf of any employee to the amount which could be
allocated to him under paragraph (c) of Sec. 1.401-4.
(e) Definitions. For purposes of this section and Secs. 1.405-2 and
1.405-3--
(1) The term ``employee'' includes an employee as defined in section
401(c)(1) and paragraph (b) of Sec. 1.401-10, and the term ``employer''
means the person treated as the employer of such individual under
section 401(c)(4);
(2) The term ``owner-employee'' means an owner-employee as defined
in section 401(c)(3) and paragraph (d) of Sec. 1.401-10;
(3) The term ``earned income'' means earned income as defined in
section 401(c)(2) and paragraph (c) of Sec. 1.401-10; and
(4) The term ``retirement bond'' means a United States Retirement
Plan Bond, as described in section 405(b) and Treasury Department
Circular, Public Debt Series--No. 1-63.
[T.D. 6675, 28 FR 10131, Sept. 17, 1963, as amended by T.D. 7748, 46 FR
1697, Jan. 7, 1981]
Sec. 1.405-2 Deduction of contributions to qualified bond purchase plans.
(a) In general. An employer shall be allowed a deduction for
contributions paid to or under a qualified bond purchase plan in the
same manner and to the same extent as if such contributions were made to
a trust described in section 401(a) which is exempt from tax under
section 501(a). A deduction will be allowed only for the taxable year in
which the contributions are paid, or treated as paid, except as provided
by section 404(a) (1), (3), and (7). For purposes of the deduction, a
contribution is paid at the time the application for the bond is made
and the full purchase price paid.
(b) Rules for applying section 404. If a qualified bond purchase
plan is designed as a pension plan as defined in paragraph (b)(1)(i) of
Sec. 1.401-1, the limitations of section 404 applicable to qualified
pension trusts shall apply. See Secs. 1.404(a)-3 through 1.404(a)-7.
Similarly, if a qualified bond purchase plan is designed as a profit-
sharing plan as defined in paragraph (b)(1)(ii) of Sec. 1.401-1, the
limitations of section 404 applicable to qualified profit-sharing trusts
shall apply. See Secs. 1.404(a)-9 and 1.404(a)-10. In addition, if a
qualified bond purchase plan designed as a pension plan covers some or
all of the employees who are covered by a qualified profit-sharing plan
established and maintained by the same employer, or if a qualified bond
purchase plan which is designed as a profit-sharing plan covers some or
all the employees who are also covered by a qualified pension or annuity
plan established and maintained by the same employer, section 404(a)(7)
is applicable. See Sec. 1.404(a)-(13). Furthermore, if a qualified bond
purchase plan covers employees some or all of whom are employees within
the meaning of section 401(c)(1), the provisions of section 404(a) (8),
(9), and (10) and 404(e) shall also apply.
(c) Accrual method taxpayers. In the case of a taxpayer using the
accrual method of accounting, a contribution to a qualified bond
purchase plan will be deemed paid on the last day of the year of accrual
if--
(1) During the taxable year of accrual the taxpayer incurs a
liability to make the contribution, the amount of which is accruable
under section 461 for such taxable year, and
(2) Payment is in fact made no later than the time prescribed by the
law for filing the return for the taxable year of accrual (including
extensions thereof).
[T.D. 6675, 28 FR 10131, Sept. 17, 1963]
Sec. 1.405-3 Taxation of retirement bonds.
(a) In general. (1) As in the case of employer contributions under a
qualified pension, annuity, profit-sharing, or stock bonus plan,
employer contributions on behalf of his common-law employees under a
qualified bond purchase plan are not includible in the gross income of
the employees when made, and employer contributions on behalf of self-
employed individuals are deductible as provided in section 405(c) and
Sec. 1.405-2. Further, an employee or his beneficiary does not realize
gross income upon the receipt of a retirement bond pursuant to a
qualified bond
[[Page 421]]
purchase plan or from a trust described in section 401(a) which is
exempt from tax under section 501(a). Upon redemption of such a bond,
ordinary income will be realized to the extent the proceeds thereof
exceed the basis (determined in accordance with paragraph (b) of this
section) of the bond. The proceeds of a retirement bond are not entitled
to the special tax treatment of section 72(n) and Sec. 1.72-18.
(2) In the event a retirement bond is surrendered for partial
redemption and reissuance of the remainder, the person surrendering the
bond shall be taxable on the proceeds received to the extent such
proceeds exceed the basis in the portion redeemed. In such case, the
basis shall be determined (in accordance with paragraph (b) of this
section) as if the portion redeemed and the portion reissued had been
issued as separate bonds.
(3) In the event a retirement bond is redeemed after the death of
the registered owner, the amount taxable (as determined in accordance
with subparagraph (1) of this paragraph) is income in respect of a
decedent under section 691.
(4) The provisions of section 402(a)(2) are not applicable to a
retirement bond. In general, section 402(a)(2) provides for capital
gains treatment of certain distributions from a qualified trust which
constitute the total distributions payable with respect to any employee.
The proceeds of a retirement bond received upon redemption will not be
entitled to such capital gain treatment even though the bond is received
as a part of, or as the whole of, such a total distribution. Nor will
such a bond be taken into consideration in determining whether the
distribution represents the total amount payable by the trust with
respect to an employee. Thus, a distribution by a qualified trust may
constitute a total distribution payable with respect to an employee for
purposes of section 402(a)(2) even though the trust retains retirement
bonds registered in the name of such employee.
(b) Basis. (1) This paragraph is applicable in determining the basis
of any retirement bond distributed pursuant to a qualified bond purchase
plan or distributed by a trust qualifying under section 401. In the case
of such a bond purchased for an individual at the time he is a common-
law employee, the basis is that portion of the purchase price
attributable to employee contributions. In the case of such a bond
purchased for an individual at the time he is a self-employed
individual, the basis shall be determined under subparagraph (3) of this
paragraph.
(2) At the time a retirement bond is purchased, there shall be
indicated on the application for the retirement bond whether the
individual for whom the retirement bond is purchased is a common-law
employee or a self-employed individual, and in the case of common-law
employees the amount of the purchase price, if any, attributable to the
employee's contribution. The answers to these questions will appear on
the retirement bond, and when the retirement bond is purchased for a
common-law employee, the basis for the retirement bond is presumed to be
the amount of the purchase price which the retirement bond indicates was
contributed by the employee.
(3)(i) Except as provided in subdivision (ii) of this subparagraph,
for purposes of determining the basis of retirement bonds purchased for
an individual while he was a self-employed individual, all such bonds
redeemed during a taxable year shall be considered in the aggregate as a
single retirement bond. The basis of such retirement bonds shall be the
difference between the aggregate of their face amounts and the lesser
of:
(A)1 One-half the aggregate of their face amounts, or
(B) The aggregate of the unused amounts allowed as a deduction at
the end of the taxable year (as determined in subparagraph (4) of this
paragraph).
(ii) The basis of a retirement bond purchased for a self-employed
individual which is redeemed after his death is the amount determined by
multiplying the face amount of such retirement bond by a fraction--
(A) The numerator of which is the aggregate of the face amounts of
all the bonds registered in the individual's name at his death which
were purchased while he was a self-employed individual reduced by the
aggregate of
[[Page 422]]
the unused amounts allowed as a deduction at his death (as determined in
subparagraph (4) of this paragraph), and
(B) The denominator of which is the aggregate of the face amounts of
all such bonds.
(4)(i) In the case of retirement bonds purchased under a qualified
bond purchase plan, the aggregate of the unused amounts allowed as a
deduction at the end of any taxable year shall be an amount equal to the
total of the amounts allowable for such taxable year, and the amounts
allowed in all prior taxable years, as a deduction under section 405(c)
for contributions used to purchase retirement bonds for the registered
owner while he was a self-employed individual, reduced by an amount
equal to the portion of the face amounts of such retirement bonds
redeemed in prior taxable years which were included in the registered
owner's gross income.
(ii) In the case of retirement bonds purchased by a trust described
in section 401(a) and exempt under section 501(a), there shall be
allocated to the retirement bond the deduction under section 404
attributable to the contributions used to purchase the retirement bond.
The amount so allocated shall be treated in the same manner as the
deduction allowed under section 405(c) for purposes of computing the
unused amounts allowed as a deduction under subdivision (i) of this
subparagraph. Further, the amount so allocated shall not be included in
the investment in the contract for purposes of section 72 in determining
the portion of the other assets distributed by the trust included in
gross income.
(5) The application of the rule of subparagraphs (3) and (4) of this
paragraph may be illustrated by the following examples:
Example (1). B, a self-employed individual, adopts a qualified bond
purchase plan in 1963. During 1963 the plan purchased $2,000 worth of
retirement bonds in his name. As a result of overestimating his income
for 1963, only $400 was allowed B as a deduction pursuant to section
405(c). In 1964, prior to B's retirement in June of that year, the plan
purchased a $500 retirement bond in B's name for which a deduction was
allowable pursuant to section 405(c) in the amount of $250. B redeemed a
retirement bond with a face amount of $500 in September of 1964 and
another with a face amount of $500 in October of 1964. Of the proceeds
received in 1964 from the redemption of the bonds, $1,000 plus interest,
B shall exclude from his gross income $500 (face amount of the
retirement bonds, $1,000, less $500, one-half of the face amount, the
latter being less than the aggregate of the unused amounts allowed as a
deduction, $250 allowable for the taxable year in which the bonds were
redeemed plus $400, the unused amounts allowed in prior taxable years,
or $650). The aggregate of the unused amounts allowed as a deduction
shall be reduced by the amount so excluded ($650-$500=$150). During the
following year, B redeems another retirement bond with a face amount of
$500. Of the proceeds received from the redemption of such retirement
bond, $500 plus interest, B shall exclude from his gross income $350
(face amount of the retirement bonds, $500, less $150, the aggregate of
the unused amounts allowed as a deduction, the latter being less than
one-half of the face amount of the bond, $250). The aggregate of the
unused amounts allowed as a deduction is reduced to zero ($150-$150=0).
Upon redemption of the remaining retirement bonds registered in B's
name, B shall exclude from his gross income with respect to such
proceeds an amount equal to the face amounts of the bonds redeemed.
Example (2). C, a self-employed individual, participated in a
qualified bond purchase plan during the years 1963 through 1966. The
plan purchased in his name retirement bonds in the aggregate of $10,000.
C deducted $4,000 from his gross income for the four years ($1,000 for
each year) with respect to the purchase of such retirement bonds. C
retired in December of 1966 and during the following year redeemed one
retirement bond with a face amount of $1,000. C excluded from his gross
income $500 of the proceeds of the bond. C died without redeeming any of
the remaining retirement bonds registered in his name. The basis of each
remaining retirement bond shall be determined by multiplying the face
amount of each retirement bond by $5,500/$9,000. The numerator is the
aggregate of the face amounts registered in C's name (as a self-employed
individual) at his death, $9,000, reduced by the aggregate of the unused
amounts allowed as a deduction at his death, $3,500 (amounts allowed as
a deduction under section 405(c), $4,000, reduced by the portion of the
face amount of the retirement bond redeemed by C which was included in
C's gross income, $500), or $5,500. The denominator is the face amount
of the retirement bonds registered in his name as a self-employed
individual at his death, $9,000.
[T.D. 6675, 28 FR 10131, Sept. 17, 1963]
[[Page 423]]
Sec. 1.406-1 Treatment of certain employees of foreign subsidiaries as employees of the domestic corporation.
(a) Scope--(1) General rule. For purposes of applying the rules in
part 1 of subchapter D of chapter 1 of subtitle A of the Code and the
regulations thereunder with respect to a pension, profit-sharing, or
stock bonus plan described in section 401(a), an annuity plan described
in section 403(a), or a bond purchase plan described in section 405(a),
of a domestic corporation, an individual who is a citizen of the United
States and who is an employee of a foreign subsidiary (as defined in
section 3121(1)(8) and the regulations thereunder) of such domestic
corporation shall be treated as an employee of such domestic corporation
if the requirements of paragraph (b) of this section are satisfied.
(2) Cross-references. For rules relating to nondiscrimination
requirements and the determination of compensation, see paragraph (c) of
this section. For rules under which termination of the status of an
individual as an employe of the domestic corporation in certain
instances will not be considered as separation from service for certain
purposes, see paragraph (d) of this section. For rules regarding
deductibility of contribution, see paragraph (e) of this section. For
rules regarding treatment of such individual as an employee of the
domestic corporation under related provisions, see paragraph (f) of this
section.
(b) Application of this section--(1) Requirements. This section
shall apply and the employee of the foreign subsidiary shall be treated
as an employee of domestic corporation for the purposes set forth in
paragraph (a)(1) of this section only if each of the following
requirements is satisfied:
(i) The domestic corporation must have entered into an agreement
under section 3121(l) to provide social security coverage which applies
to the foreign subsidiary of which such individual is an employee and
which has not been terminated under section 3121(l)(3) or (4).
(ii) The plan, referred to in paragraph (a)(1) of this section, must
expressly provide for contributions or benefits for individuals who are
citizens of the United States and who are employees of one or more of
its foreign subsidiaries to which an agreement entered into by such
domestic corporation under section 3121(l) applies. The plan must apply
to all of the foreign subsidiaries to which such agreement applies.
(iii) Contributions under a funded plan of deferred compensation
(whether or not a plan described in section 401(a), 403(a), or 405(a))
must not be provided by any other person with respect to the
remuneration paid to such individual by the foreign subsidiary.
(2) Supplementary rules. Subparagraph (l)(ii) of this paragraph does
not modify the requirements for qualification of a plan described in
section 401(a), 403(a), or 405(a) and the regulations thereunder. It is
not necessary that the plan provide benefits or contributions for all
United States citizens who are employees of such foreign subsidiaries.
If the plan is amended to cover individuals who are employees by reason
of paragraph (a)(1) of this section, the plan will not qualify unless it
meets the coverage requirements of section 410(b)(1) (section 401(a)(3),
as in effect on September 1, 1974, for plan years to which section 410
does not apply; see Sec. 1.410(a)-2 for the effective dates of section
401) and the nondiscrimination requirements of section 401(a)(4). In
addition, the administrative rules contained in Sec. 1.401(a)-3(e)
(relating to the determination of the contributions or benefits provided
by the employer under the Social Security Act) will also apply for
purposes of determining whether the plan meets the requirements of
section 401. For purposes of subparagraph (1)(iii) of this paragraph,
contributions will not be considered as provided under a funded plan
merely because the foreign subsidiary is required under the laws of the
foreign jurisdiction to pay social insurance taxes or to make similar
payments with respect to the wages paid to the employee.
(c) Special rules--(1) Nondiscrimination requirements. For purposes
of applying sections 401(a)(4) and 410(b)(1)(B) (section 401(a)(3)(B),
as in effect on September 1, 1974, for plan years to which
[[Page 424]]
section 410 does not apply) and the regulations thereunder (relating to
nondiscrimination concerning benefits and contributions and coverage of
employees) with respect to an employee of the foreign subsidiary who is
treated as an employee of the domestic corporation under paragraph
(a)(1) of this section--
(i) If the employee is an officer, shareholder, or (with respect to
plan years to which section 410 does not apply) person whose principal
duties consist in supervising the work of other employees of the foreign
subsidiary of the domestic corporation, he shall be treated as having
such capacity with respect to the domestic corporation; and
(ii) The determination as to whether the employee is a highly
compensated employee shall be made by comparing his total compensation
(determined under subparagraph (2) of this paragraph) with the
compensation of all the employees of the domestic corporation (including
individuals treated as employees of the domestic corporation pursuant to
section 406 and this section).
(2) Determination of compensation. For purposes of applying section
401(a)(5) and the regulations thereunder, relating to classifications
that will not be considered discriminatory, with respect to an employee
of the foreign subsidiary who is treated as an employee of the domestic
corporation under paragraph (a)(1) of this section--
(i) The total compensation of the employee shall be the remuneration
of the employee from the foreign subsidiary (including any allowances
that are paid to the employee because of his employment in a foreign
country) which would constitute his total compensation if his services
had been performed for the domestic corporation;
(ii) The basic or regular rate of compensation of the employee shall
be determined for the employee in the same manner as it is determined
under section 401 for other employees of the domestic corporation; and
(iii) The amount paid by the domestic corporation which is
equivalent to the tax imposed with respect to the employee by section
3101 (relating to the tax on employees under the Federal Insurance
Contributions Act) shall be treated as having been paid by the employee
and shall be included in his compensation.
(d) Termination of status as deemed employee not to be treated as
separation from service for purposes of capital gain provisions and
limitation of tax. For purposes of applying the rules, relating to the
treatment of certain distributions which are made after an employee's
separation from service, set forth in section 72(n) as in effect on
September 1, 1974 (with respect to taxable years ending after December
31, 1969, and to which section 402(e) does not apply), and in sections
402(a)(2) and (e) and 403(a)(2) with respect to distributions or
payments made after December 31, 1973, and in taxable years beginning
after December 31, 1973) with respect to an employee of a foreign
subsidiary who is treated as an employee of a domestic corporation under
paragraph (a)(1) of this section, the employee shall not be considered
as separated from the service of the domestic corporation solely by
reason of the occurrence of any one or more of the following events:
(1) The termination, under the provisions of section 3121(l), of the
agreement entered into by the domestic corporation under that section
which covers the employment of the employee;
(2) The employee's becoming an employee of another foreign
subsidiary of the domestic corporation with respect to which such
agreement does not apply,
(3) The employee's ceasing to be an employee of the foreign
subsidiary by reason of which employment he was treated as an employee
of such domestic corporation, if he becomes an employee of another
corporation controlled by such domestic corporation; or
(4) The termination of the provision of the plan described in
paragraph (b)(1)(ii) of this section, for coverage of United States
citizens who are employees of foreign subsidiaries covered by an
agreement under section 3121(l).
For purposes of subparagraph (3) of this paragraph, a corporation is
considered to be controlled by a domestic corporation if such domestic
corporation owns
[[Page 425]]
directly or indirectly more than 50 percent of the voting stock of the
corporation.
(e) Deductibility of contributions--(1) In general. For purposes of
applying sections 404 and 405(c) with respect to the deduction for
contributions made to or under a pension, profit-sharing, or stock bonus
plan described in section 401(a), an annuity plan described in section
403(a), or a bond purchase plan described in section 405(a), by a
domestic corporation, or by another corporation which is entitled to
deduct its contributions under section 404(a)(3)(B), on behalf of an
employee of a foreign subsidiary treated as an employee of the domestic
corporation under paragraph (a)(1) of this section--
(i) Except as provided in subdivision (ii) of this subparagraph, no
deduction shall be allowed to such domestic corporation or to any other
corporation which would otherwise be entitled to deduct its
contributions on behalf of such employee under one of such sections;
(ii) There shall be allowed as a deduction from the gross income of
the foreign subsidiary which is effectively connected with the conduct
of a trade or business within the United States (within the meaning of
section 882 and the regulations thereunder) an amount which is allocable
and apportionable to such gross income under the rules of Sec. 1.861-8
and which in no event may exceed the amount which (but for subdivision
(i) of this subparagraph) would be deductible under section 404 or
section 405(c) by the domestic corporation if the individual were an
employee of the domestic corporation and if his compensation were paid
by the domestic corporation; and
(iii) Any reference to compensation shall be considered to be a
reference to the total compensation of such individual (determined by
applying paragraph (c)(2) of this section).
(2) Year of deduction. Any amount deductible by the foreign
subsidiary under section 406(d) and this paragraph shall be deductible
for its taxable year with or within which ends the taxable year of the
domestic corporation for which the contribution was made.
(3) Special rules. Whether contributions to a plan on behalf of an
employee of the foreign subsidiary who is treated as an employee of the
domestic corporation under paragraph (a)(1) of this section, or whether
forfeitures with regard to such employee, will require an inclusion in
the income of the domestic corporation or an adjustment in the basis of
its stock in the foreign subsidiary, shall be determined in accordance
with the rules of general application of subtitle A of chapter 1 of the
Code (relating to income taxes). For example, an unreimbursed
contribution by the domestic corporation to a plan which meets the
requirements of section 401(a) will be treated, to the extent each
employee's rights to the contribution are nonforfeitable, as a
contribution of capital to the foreign subsidiary to the extent that
such contributions are made on behalf of the employees of such
subsidiary.
(f) Treatment as an employee of the domestic corporation under
related provisions. An individual who is treated as an employee of a
domestic corporation under paragraph (a)(1) of this section shall also
be treated as an employee of such domestic corporation, with respect to
the plan having the provision described in paragraph (b)(1)(ii) of this
section, for purposes of applying section 72(d) (relating to employees'
annuities), section 72(f) (relating to special rules for computing
employees' contributions), section 101(b) (relating to employees' death
benefits), section 2039 (relating to annuities), and section 2517
(relating to certain annuities under qualified plans) and the
regulations thereunder.
(g) Nonexempt trust. If the plan of the domestic corporation is a
qualified plan described under section 401(a), the fact that a trust
which forms a part of such plan is not exempt from tax under section
501(a) shall not affect the treatment of an employee of a foreign
subsidiary as an employee of a domestic corporation under section 406(a)
and paragraph (a)(1) of this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42321, Aug. 23, 1978]
[[Page 426]]
Sec. 1.407-1 Treatment of certain employees of domestic subsidiaries
engaged in business outside the United States as employees of the
domestic parent corporation.
(a) Scope--(1) General rule. For purposes of applying the rules in
part 1 of subchapter D of chapter 1 of subtitle A of the Code and the
regulations thereunder with respect to a pension, profit-sharing, or
stock bonus plan described in section 401(a), an annuity plan described
in section 403(a), or a bond purchase plan described in section 405(a),
of a domestic parent corporation (as defined in paragraph (b)(3)(ii) of
this section), an individual who is a citizen of the United States and
who is an employee of a domestic subsidiary (as defined in paragraph
(b)(3)(i) of this section) of such domestic parent corporation shall be
treated as an employee of such domestic parent corporation if the
requirements of paragraph (b) of this section are satisfied.
(2) Cross-references. For rules relating to nondiscrimination
requirements and the determination of compensation, see paragraph (c) of
this section. For rules under which termination of the status of an
individual as an employee of the domestic parent corporation in certain
instances will not be considered as separation from service for certain
purposes, see paragraph (d) of this section. For rules regarding
deductibility of contributions, see paragraph (e) of this section. For
rules regarding treatment of such individual as an employee of the
domestic parent corporation under related provisions, see paragraph (f)
of this section.
(b) Application of this section--(1) Requirements. This section
shall apply and the employee of the domestic subsidiary shall be treated
as an employee of the domestic parent corporation for the purposes set
forth in paragraph (a)(1) of this section only if each of the following
requirements is satisfied:
(i) The plan, referred to in paragraph (a)(1) of this section, must
expressly provide for contributions of benefits for individuals who are
citizens of the United States and who are employees of one or more of
the domestic subsidiaries of the domestic parent corporation. The plan
must apply to every domestic subsidiary.
(ii) Contributions under a funded plan of deferred compensation
(whether or not a plan described in section 401(a), 403(a), or 405(a))
must not be provided by any other person with respect to the
remuneration paid to such individual by the domestic subsidiary.
(2) Supplementary rules. Subparagraph (1)(i) of this paragraph does
not modify the requirements for qualification of a plan described in
section 401(a), 403(a), or 405(a) and the regulations thereunder. It is
not necessary that the plan provide benefits or contributions for all
United States citizens who are employees of such domestic subsidiaries.
It the plan is amended to cover individuals who are employees by reason
of paragraph (a)(1) of this section, the plan will not qualify unless it
meets the coverage requirements of section 410(b)(1) (section 401(a)(3),
as in effect on September 1, 1974, for plan years to which section 410
does not apply; see Sec. 1.410 (a)-2 for the effective dates of section
401) and the nondiscrimination requirements of section 410(a)(4). The
administrative rules contained in Sec. 1.401 (a)-3(e) (relating to the
determination of the contributions or benefits provided by the employer
under the Social Security Act) will also apply for purposes of
determining whether the plan meets the requirements of section 401. For
purposes of subparagraph (1)(ii) of this paragraph, contributions will
not be considered as provided under a funded plan merely because the
domestic subsidiary employer pays the tax imposed by section 3111
(relating to tax on employers under the Federal Insurance Contributions
Act) with respect to such employee or is required under the laws of a
foreign jurisdiction to pay social insurance taxes or to make similar
payments with respect to the wages paid to the employee.
(3) Definitions--(i) Domestic subsidiary. For purposes of this
section, a corporation shall be treated as a domestic subsidiary for any
taxable year only if each of the following requirements is satisfied:
(A) It is a domestic corporation 80 percent or more of the
outstanding voting stock of which is owned by another domestic
corporation;
[[Page 427]]
(B) 95 percent of more of its gross income for the three-year period
immediately preceding the close of its taxable year which ends on or
before the close of the taxable year of such other domestic corporation
(or for such part of such period during which it was in existence) was
derived from sources without the United States, determined pursuant to
sections 861 through 864 and the regulations thereunder; and
(C) 90 percent or more of its gross income for such period (or such
part) was derived from the active conduct of a trade or business.
If for the period (or part thereof) referred to in (B) and (C) of this
subdivision such corporation has no gross income, the provisions of (B)
and (C) shall be treated as satisfied if it is reasonable to anticipate
that, with respect to the first taxable year thereafter for which such
corporation has gross income, such provisions will be satisfied.
(ii) Domestic parent corporation. The domestic parent corporation of
any domestic subsidiary is the domestic corporation which owns 80
percent or more of the outstanding voting stock of such domestic
subsidiary.
(c) Special rules--(1) Nondiscrimination requirements. For purposes
of applying sections 401(a)(4) and 410(b)(1)(B) (section 401(a)(3)(B),
as in effect on Septemeber 1, 1974, for plan years to which section 410
does not apply) and the regulation thereunder (relating to
nondiscrimination concerning benefits and contributions and coverage of
employees) with respect to an employee of the domestic subsidiary who is
treated as an employee of the domestic parent corporation under
paragraph (a)(1) of this section--
(i) If the employee is an officer, shareholder, or (with respect to
plan years to which section 410 does not apply) a person whose principal
duties consist in supervising the work of other employees of the
domestic subsidiary of the domestic parent corporation, he shall be
treated as having such capacity with respect to the domestic parent
corporation; and
(ii) The determination as to whether the employee is a highly
compensated employee shall be made by comparing his total compensation
determined under subparagraph (2) of this paragraph with the
compensation of all the employees of the domestic parent corporation
(including individuals treated as employees of the domestic parent
corporation pursuant to section 407 and this section).
(2) Determination of compensation. For purposes of applying section
401(a) (5) and the regulations thereunder, relating to classifications
that will not be considered discriminatory, with respect to an employee
of the domestic subsidiary who is treated as an employee of the domestic
parent corporation under paragraph (a)(1) of this section--
(i) The total compensation of the employee shall be the remuneration
of the employee from the domestic subsidiary (including any allowances
that are paid to the employee because of his employment in a foreign
country) which would constitute his total compensation if his services
had been performed for such domestic parent corporation; and
(ii) The basic or regular rate of compensation of the employee shall
be determined for the employee in the same manner as it is determined
under section 401 for other employees of the domestic parent
corporation.
(d) Termination of status as deemed employee not to be treated as
separation from service for purposes of captial gain provisions and
limitation of tax. For purposes of applying the rules, relating to
treatment of certain distributions which are made after an employee's
separation from service, set forth in section 72(n) as in effect on
September 1, 1974 (with respect to taxable years ending after December
31, 1969, and to which section 402(e) does not apply), and in sections
402 (a)(2) and (e) and 403(a)(2) (with respect to distributions or
payments made after December 31, 1973, and in taxable years beginning
after December 31, 1973) with respect to an employee of a domestic
subsidiary who is treated as an employee of a domestic parent
corporation under paragraph (a)(1) of this section, the employee shall
not be considered as separated from the service of the domestic parent
corporation solely by reason of the occurrence of any one or more of the
following events:
(1) The fact that the corporation of which such individual is an
employee
[[Page 428]]
ceases, for any taxable year, to be a domestic subsidiary within the
mean of paragraph (b)(3)(i) of this section;
(2) The employee' ceasing to be an employee of the domestic
subsidiary of such domestic parent corporation, if he becomes an
employee of another corporation controlled by such domestic parent
corporation; or
(3) The termination of the provision of the plan described in
paragraph (b)(1)(i) of this section, requiring coverage of the United
States citizens who are employees of domestic subsidiaries of the
domestic parent corporation.
For purposes of subparagraph (2) of this paragraph, a corporation is
considered to be controlled by a domestic parent corporation if the
domestic parent corporation owns directly or indirectly more than 50
percent of the voting stock of the corporation.
(e) Deductibility of contributions--(1) In general. For purposes of
applying sections 404 and 405(c) with respect to the deduction for
contributions made to or under a pension, profit-sharing, or stock bonus
plan described in section 401(a), and annuity plan described in section
403(a), or a bond purchase plan described in section 405(a), by a
domestic parent corporation, or by another corporation which is entitled
to deduct its contributions under section 404(a)(3)(B), on behalf of an
employee of a domestic subsidiary treated as an employee of the domestic
parent corporation under paragraph (a)(1) of this section--
(i) Except as provided in subdivision (ii) of this subparagraph, no
deduction shall be allowed to the domestic parent corporation which
would otherwise be entitled to deduct its contributions on behalf of
such employee under one of such sections;
(ii) There shall be allowed as a deduction to the domestic
subsidiary of which such individual is an employee an amount equal to
the amount which (but for subdivision (i) of this subparagraph) would be
deductible under section 404 or section 405(c) by the domestic parent
corporation if the individual were an employee of the domestic parent
corporation and if his compensation were paid by the domestic
corporation; and
(iii) Any reference to compensation shall be considered to be a
reference to the total compensation of such individual determined by
applying paragraph (c)(2) of this section).
(2) Year of deduction. Any amount deductible by the domestic
subsidiary under section 407(d) and this paragraph shall be deductible
for its taxable year with or within which ends the taxable year of the
domestic parent corporation for which the contribution was made.
(3) Special rules. Whether contributions to a plan on behalf of an
employee of the domestic subsidiary who is treated as an employee of the
domestic parent corporation under paragraph (a)(1) of this section, or
whether forfeitures with regard to such employee, will require an
inclusion in the income of the domestic parent corporation or an
adjustment in the basis of its stock in the domestic subsidiary, shall
be determined in accordance with the rules of general application of
subtitle A of chapter 1 of the Code (relating to income taxes). For an
example, and unreimbursed contribution by the domestic parent
corporation to a plan which meets the requirements of section 401(a)
will be treated, to the extent each employee's rights to the
contribution are nonforfeitable, as a contribution of capital to the
domestic subsidiary to the extent that such contributions are made on
behalf of the employees of such subsidiary.
(f) Treatment as an employee of the domestic parent corporation
under related provisions. An individual who is treated as an employee of
a domestic parent corporation under paragraph (a)(1) of this section
shall also be treated as an employee of such domestic corporation, with
respect to the plan having the provision described in paragraph
(b)(1)(i) of this section, for purposes of applying section 72(d)
(relating to special rules for computing employees' contributions),
section 72(f) (relating to special rules for computing employees'
contributions), section 101(b) (relating to employees' section 101(b)
(relating to employees' death benefits), section 2039 (relating to
annuities), and section 2517 (relating to certain annuities under
qualified plans) and the regulations thereunder.
[[Page 429]]
(g) Nonexempt trust. If the plan of the domestic parent corporation
is a qualified plan described under section 401(a), the fact that a
trust which forms a part of such plan is not exempt from tax under
section 501(a) shall not affect the treatment of an employee of a
domestic subsidiary as an employee of a domestic parent corporation
under section 407(a) and paragraph (a)(1) of this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42323, Aug. 23, 1977]
Sec. 1.408-1 General rules.
(a) In general. Section 408 prescribes rules relating to individual
retirement accounts and individual retirement annuities. In addition to
the rules set forth in Secs. 1.408-2 and 1.408-3, relating respectively
to individual retirement accounts and individual retirement annuities,
the rules set forth in this section shall also apply.
(b) Exemption from tax. The individual retirement account or
individual retirement annuity is exempt from all taxes under subtitle A
of the Code other than the taxes imposed under section 511, relating to
tax on unrelated business income of charitable, etc., organizations.
(c) Sanctions--(1) Excess contributions. If an individual retirement
account or individual retirement annuity accepts and retains excess
contributions, the individual on whose behalf the account is established
or who is the owner of the annuity will be subject to the excise tax
imposed by section 4973.
(2) Prohibited transactions by owner or beneficiary of individual
retirement account--(i) Under section 408(e)(2), if, during any taxable
year of the individual for whose benefit any individual retirement
account is established, that individual or the individual's beneficiary
engages in any transaction prohibited by section 4975 with respect to
such account, such account ceases to be an individual retirement account
as of the first day of such taxable year. In any case in which any
individual retirement account ceases to be an individual retirement
account by reason of the preceding sentence as of the first day of any
taxable year, section 408(d)(1) applies as if there were a distribution
on such first day in an amount equal to the fair market value (on such
first day) of all assets in the account (on such first day). The
preceding sentence applies even though part of the fair market value of
the individual retirement account as of the first day of the taxable
year is attributable to excess contributions which may be returned tax-
free under section 408(d)(4) or 408(d)(5).
(ii) If the trust with which the individual engages in any
transaction described in subdivision (i) of this subparagraph is
established by an employer or employee association under section 408(c),
only the employee who engages in the prohibited transaction is subject
to disqualification of his separate account.
(3) Prohibited transaction by person other than owner or beneficiary
of account. If any person other than the individual on whose behalf an
individual retirement account is established or the individual's
beneficiary engages in any transaction prohibited by section 4975 with
respect to such account, such person shall be subject to the taxes
imposed by section 4975.
(4) Pledging account as security. Under section 408(e)(4), if,
during any taxable year of the individual for whose benefit an
individual retirement account is established, that individual uses the
account or any portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(5) Borrowing on annuity contract. Under section 408(e)(3), if
during any taxable year the owner of an individual retirement annuity
borrows any money under or by use of such contract, the contract ceases
to be an individual retirement annuity as of the first day of such
taxable year. See Sec. 1.408-3(c).
(6) Premature distributions. If a distribution (whether a deemed
distribution or an actual distribution) is made from an individual
retirement account, or individual retirement annuity, to the individual
for whose benefit the account was established, or who is the owner of
the annuity, before the individual attains age 59\1/2\ (unless the
individual has become disabled within the meaning of section 72(m)(7)),
the tax
[[Page 430]]
under Chapter 1 of the Code for the taxable year in which such
distribution is received is increased under section 408(f)(1) or (f)(2).
The increase equals 10 percent of the amount of the distribution which
is includible in gross income for the taxable year. Except in the case
of the credits allowable under section 31, 39, or 42, no credit can be
used to offset the increased tax described in this subparagraph. See,
however, Sec. 1.408-4(c)(3).
(d) Limitation on contributions and benefits. An individual
retirement account or individual retirement annuity is subject to the
limitation on contributions and benefits imposed by section 415 for
years beginning after December 31, 1975.
(e) Community property laws. Section 408 shall be applied without
regard to any community property laws.
[T.D. 7714, 45 FR 52790, Aug. 8, 1980]
Sec. 1.408-2 Individual retirement accounts.
(a) In general. An individual retirement account must be a trust or
a custodial account (see paragraph (d) of this section). It must satisfy
the requirements of paragraph (b) of this section in order to qualify as
an individual retirement account. It may be established and maintained
by an individual, by an employer for the benefit of his employees (see
paragraph (c) of this section), or by an employee association for the
benefit of its members (see paragraph (c) of this section).
(b) Requirements. An individual retirement account must be a trust
created or organized in the United States (as defined in section
7701(a)(9)) for the exclusive benefit of an individual or his
beneficiaries. Such trust must be maintained at all times as a domestic
trust in the United States. The instrument creating the trust must be in
writing and the following requirements must be satisfied.
(1) Amount of acceptable contributions. Except in the case of a
contribution to a simplified employee pension described in section
408(k) and a rollover contribution described in section 408(d)(3),
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8) or 409(b)(3)(C), the trust
instrument must provide that contributions may not be accepted by the
trustee for the taxable year in excess of $1,500 on behalf of any
individual for whom the trust is maintained. An individual retirement
account maintained as a simplified employee pension may provide for the
receipt of up to $7,500 for a calendar year.
(2) Trustee. (i) The trustee must be a bank (as defined in section
408(n) and the regulations thereunder) or another person who
demonstrates, in the manner described in paragraph (e) of this section,
to the satisfaction of the Commissioner, that the manner in which the
trust will be administered will be consistent with the requirements of
section 408 and this section.
(ii) Section 11.408(a)(2)-1 of the Temporary Income Tax Regulations
under the Employee Retirement Income Security Act of 1974 is superseded
by this subparagraph (2).
(3) Life insurance contracts. No part of the trust funds may be
invested in life insurance contracts. An individual retirement account
may invest in annuity contracts which provide, in the case of death
prior to the time distributions commence, for a payment equal to the sum
of the premiums paid or, if greater, the cash value of the contract.
(4) Nonforfeitability. The interest of any individual on whose
behalf the trust is maintained in the balance of his account must be
nonforfeitable.
(5) Prohibition against commingling. (i) The assets of the trust
must not be commingled with other property except in a common trust fund
or common investment fund.
(ii) For purposes of this subparagraph, the term ``common investment
fund'' means a group trust created for the purpose of providing a
satisfactory diversification or investments or a reduction of
administrative expenses for the individual participating trusts, and
which group trust satisfies the requirements of section 408(c) (except
that it need not be established by an employer or an association of
employees) and the requirements of section 401(a) in the case of a group
trust in which one of the individual participating trusts is an
employees' trust described in section 401(a) which is exempt from tax
under section 501(a).
[[Page 431]]
(iii) For purposes of this subparagraph, the term ``individual
participating trust'' means an employees' trust described in section
401(a) which is exempt from tax under section 501(a) or a trust which
satisfies the requirements of section 408(a) provided that in the case
of such an employees' trust, such trust would be permitted to
participate in such a group trust if all the other individual
participating trusts were employees' trusts described in section 401(a)
which are exempt from tax under section 501(a).
(6) Distribution of interest. (i) The trust instrument must provide
that the entire interest of the individual for whose benefit the trust
is maintained must be distributed to him in accordance with paragraph
(b)(6)(ii) or (iii) of this section.
(ii) Unless the provisions of paragraph (b)(6)(iii) of this section
apply, the entire interest of the individual must be actually
distributed to him not later than the close of his taxable year in which
he attains age 70\1/2\.
(iii) In lieu of distributing the individual's entire interest as
provided in paragraph (b)(6)(ii) of this section, the interest may be
distributed commencing not later than the taxable year described in such
paragraph (b)(6)(ii). In such case, the trust must expressly provide
that the entire interest of the individual will be distributed to the
individual and the individual's beneficiaries, in a manner which
satisfies the requirements of paragraph (b)(6)(v) of this section, over
any of the following periods (or any combination thereof)--
(A) The life of the individual,
(B) The lives of the individual and spouse,
(C) A period certain not extending beyond the life expectancy of the
individual, or
(D) A period certain not extending beyond the joint life and last
survivor expectancy of the individual and spouse.
(iv) The life expectancy of the individual or the joint life and
last survivor expectancy of the individual and spouse cannot exceed the
period computed by 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 mortality tables of such
company.
(v) If an individual's entire interest is to be distributed over a
period described in paragraph (b)(6)(iii) of this section, beginning in
the year the individual attains 70\1/2\ the amount to be distributed
each year must be not less than the lesser of the balance of the
individual's entire interest or an amount equal to the quotient obtained
by dividing the entire interest of the individual in the trust at the
beginning of such year (including amounts not in the individual
retirement account at the beginning of the year because they have been
withdrawn for the purpose of making a rollover contribution to another
individual retirement plan) by the life expectancy of the individual (or
the joint life and last survivor expectancy of the individual and spouse
(whichever is applicable)), determined in either case as of the date the
individual attains age 70 in accordance with paragraph (b)(6)(iv) of
this section, reduced by one for each taxable year commencing after the
individual's attainment of age 70\1/2\. An annuity or endowment contract
issued by an insurance company which provides for non-increasing
payments over one of the periods described in paragraph (b)(6)(iii) of
this section beginning not later than the close of the taxable year in
which the individual attains age 70\1/2\ satisfies this provision.
However, no distribution need be made in any year, or a lesser amount
may be distributed, if beginning with the year the individual attains
age 70\1/2\ the aggregate amounts distributed by the end of any year are
at least equal to the aggregate of the minimum amounts required by this
subdivision to have been distributed by the end of such year.
(vi) If an individual's entire interest is distributed in the form
of an annuity contract, then the requirements of section 408(a)(6) are
satisfied if the distribution of such contract takes place before the
close of the taxable year described in subdivision (ii) of this
subparagraph, and if the individual's interest will be paid over a
period described in subdivision (iii) of this subparagraph
[[Page 432]]
and at a rate which satisfies the requirements of subdivision (v) of
this subparagraph.
(vii) In determining whether paragraph (b)(6)(v) of this section is
satisfied, all individual retirement plans maintained for an
individual's benefit (except those under which he is a beneficiary
described in section 408(a)(7)) at the close of the taxable year in
which he reaches age 70\1/2\ must be aggregated. Thus, the total
payments which such individual receives in any taxable year must be at
least equal to the amount he would have been required to receive had all
the plans been one plan at the close of the taxable year in which he
attained age 70\1/2\.
(7) Distribution upon death. (i) The trust instrument must provide
that if the individual for whose benefit the trust is maintained dies
before the entire interest in the trust has been distributed to him, or
if distribution has been commenced as provided in paragraph (b)(6) of
this section to the surviving spouse and such spouse dies before the
entire interest has been distributed to such spouse, the entire interest
(or the remaining part of such interest if distribution thereof has
commenced) must, within 5 years after the individual's death (or the
death of the surviving spouse) be distributed or applied to the purchase
of an immediate annuity for this beneficiary or beneficiaries (or the
beneficiary or beneficiaries of the surviving spouse) which will be
payable for the life of such beneficiary or beneficiaries (or for a term
certain not extending beyond the life expectancy of such beneficiary or
beneficiaries) and which annuity contract will be immediately
distributed to such beneficiary or beneficiaries. A contract described
in the preceding sentence is not includible in gross income upon
distribution. Section 1.408-4(e) provides rules applicable to the
taxation of such contracts. The first sentence of this paragraph (b)(7)
shall have no application if distributions over a term certain commenced
before the death of the individual for whose benefit the trust was
maintained and the term certain is for a period permitted under
paragraph (b)(6)(iii) (C) or (D) of this section.
(ii) Each such beneficiary (or beneficiary of a surviving spouse)
may elect to treat the entire interest in the trust (or the remaining
part of such interest if distribution thereof has commenced) as an
account subject to the distribution requirements of section 408(a)(6)
and paragraph (b)(6) of this section instead of those of section
408(a)(7) and paragraph (b)(7) of this section. Such an election will be
deemed to have been made if such beneficiary treats the account in
accordance with the requirements of section 408(a)(6) and paragraph
(b)(6) of this section. An election will be considered to have been made
by such beneficiary if either of the following occurs: (A) any amounts
in the account (including any amounts that have been rolled over, in
accordance with the requirements of section 408(d)(3)(A)(i), into an
individual retirement account, individual retirement annuity, or
retirement bond for the benefit of such individual) have not been
distributed within the appropriate time period required by section
408(a)(7) and paragraph (b)(7) of this section; or (B) any additional
amounts are contributed to the account (or to the account, annuity, or
bond to which the beneficiary has rolled such amounts over, as described
in (1) above) which are subject, or deemed to be subject, to the
distribution requirements of section 408(a)(6) and paragraph (b)(6) of
this section.
(8) Definition of beneficiaries. The term ``beneficiaries'' on whose
behalf an individual retirement account is established includes (except
where the context indicates otherwise) the estate of the individual,
dependents of the individual, and any person designated by the
individual to share in the benefits of the account after the death of
the individual.
(c) Accounts established by employers and certain association of
employees--(1) In general. A trust created or organized in the United
States (as defined in section 7701(a)(9)) by an employer for the
exclusive benefit of his employees or their beneficiaries, or by an
association of employees for the exclusive benefit of its members or
their beneficiaries, is treated as an individual retirement account if
the requirements of paragraphs (c)(2) and (c)(3) of this section
[[Page 433]]
are satisfied under the written governing instrument creating the trust.
A trust described in the preceding sentence is for the exclusive benefit
of employees or members even though it may maintain an account for
former employees or members and employees who are temporarily on leave.
(2) General requirements. The trust must satisfy the requirements of
paragraphs (b) (1) through (7) of this section.
(3) Special requirement. There must be a separate accounting for the
interest of each employee or member.
(4) Definitions--(i) Separate accounting. For purposes of paragraph
(c)(3) of this section, the term ``separate accounting'' means that
separate records must be maintained with respect to the interest of each
individual for whose benefit the trust is maintained. The assets of the
trust may be held in a common trust fund, common investment fund, or
common fund for the account of all individuals who have an interest in
the trust.
(ii) Employee association. For purposes of this paragraph and
section 408(c), the term ``employee association'' means any organization
composed of two or more employees, including but not limited to, an
employee association described in section 501(c)(4). Such association
may include employees within the meaning of section 401(c)(1). There
must be, however, some nexus between the employees (e.g., employees of
same employer, employees in the same industry, etc.) in order to qualify
as an employee association described in this subdivision (ii).
(d) Custodial accounts. For purposes of this section and section
408(a), a custodial account is treated as a trust described in section
408(a) if such account satisfies the requirements of section 408(a)
except that it is not a trust and if the assets of such account are held
by a bank (as defined in section 401(d)(1) and the regulations
thereunder) or such other person who satisfies the requirements of
paragraph (b)(2)(ii) of this section. For purposes of this chapter, in
the case of a custodial account treated as a trust by reason of the
preceding sentence, the custodian of such account will be treated as the
trustee thereof.
(e)(1) In general. The trustee of a trust described in paragraph (b)
of this section may be a person other than a bank if the person
demonstrates to the satisfaction of the Commissioner that the manner in
which the person will administer trusts will be consistent with the
requirements of section 408. The person must demonstrate by written
application that the requirements of paragraph (e)(2) to (e)(6) of this
section will be met. The written application must be sent to address
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). For procedural and
administrative rules, see paragraph (e)(7) of this section.
(2) Fiduciary ability. The applicant must demonstrate in detail its
ability to act within the accepted rules of fiduciary conduct. Such
demonstration must include the following elements of proof:
(i) Continuity. (A) The applicant must assure the uninterrupted
performance of its fiduciary duties nonwithstanding the death or change
of its owners. Thus, for example, there must be sufficient diversity in
the ownership of the applicant to ensure that the death or change of its
owners will not interrupt the conduct of its business. Therefore, the
applicant cannot be an individual.
(B) Sufficient diversity in the ownership of an incorporated
applicant is demonstrated in the following circumstances:
(1) Individuals each of whom owns more than 20 percent of the voting
stock in the applicant own, in the aggregate, no more than 50 percent of
such stock;
(2) The applicant has issued securities registered under section 12
(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or
required to be registered under section 12(g) (1) of that Act (15 U.S.C.
78l (g)(1)); or
(3) The applicant has a parent corporation within the meaning of
section 1563 (a) (1) that has issued securities registered under section
12 (b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or
required to be registered under Section 12 (g) (1) of that Act (15
U.S.C. 78l (g)(1)).
[[Page 434]]
(C) Sufficient diversity in the ownership of an applicant that is a
partnership means that--
(1) Individuals each of whom owns more than 20 percent of the
profits interest in the partnership own, in the aggregate, no more than
50 percent of such profits interest, and
(2) Individuals each of whom owns more than 20 percent of the
capital interest in the partnership own, in the aggregate, no more than
50 percent of such capital interest.
(D) For purposes of this subdivision, the ownership of stock and of
capital and profits interests shall be determined in accordance with the
rules for constructive ownership of stock provided in section 1563 (e)
and (f) (2). For this purpose, the rules for constructive ownership of
stock provided in section 1563(e) and (f) (2) shall apply to a capital
or profits interest in a partnership as if it were a stock interest.
(ii) Established location. The applicant must have an established
place of business in the United States where it is accessible during
every business day.
(iii) Fiduciary experience. The applicant must have fiduciary
experience or expertise sufficient to ensure that it will be able to
perform its fiduciary duties. Evidence of fiduciary experience must
include proof that a significant part of the business of the applicant
consists of exercising fiduciary powers similar to those it will
exercise if its application is approved. Evidence of fiduciary expertise
must include proof that the applicant employs personnel experienced in
the administration of fiduciary powers similar to those the applicant
will exercise if its application is approved.
(iv) Fiduciary responsibility. The applicant must assure compliance
with the rules of fiduciary conduct set out in paragraph (e)(5) of this
section.
(v) Financial responsibility. The applicant must exhibit a high
degree of solvency commensurate with the obligations imposed by this
paragraph. Among the factors to be taken into account are the
applicant's net worth, its liquidity, and its ability to pay its debts
as they come due.
(3) Capacity to account. The applicant must demonstrate in detail
its experience and competence with respect to accounting for the
interests of a large number of individuals (including calculating and
allocating income earned and paying out distributions to payees).
Examples of accounting for the interests of a large number of
individuals include accounting for the interests of a large number of
shareholders in a regulated investment company and accounting for the
interests of a large number of variable annuity contract holders.
(4) Fitness to handle funds--(i) In general. The applicant must
demonstrate in detail its experience and competence with respect to
other activities normally associated with the handling of retirement
funds.
(ii) Examples. Examples of activities normally associated with the
handling of retirement funds include:
(A) To Receive, issue receipts for, and safely keep securities;
(B) To collect income;
(C) To execute such ownership certificates, to keep such records,
make such returns, and render such statements as are required for
Federal tax purposes;
(D) To give proper notification regarding all collections;
(E) To collect matured or called principal and properly report all
such collections;
(F) To exchange temporary for definitive securities;
(G) To give proper notification of calls, subscription rights,
defaults in principal or interest, and the formation of protective
committees;
(H) To buy, sell, receive, or deliver securities on specific
directions.
(5) Rules of fiduciary conduct. The applicant must demonstrate that
under applicable regulatory requirements, corporate or other governing
instruments, or its established operating procedures:
(i) Administration of fiduciary powers. (A)(1) The owners or
directors of the applicant will be responsible for the proper exercise
of fiduciary powers by the applicant. Thus, all matters pertinent
thereto, including the determination of policies, the investment and
disposition of property held in a fiduciary capacity, and the direction
and review of the actions of all employees
[[Page 435]]
utilized by the applicant in the exercise of its fiduciary powers, will
be the responsibility of the owners or directors. In discharging this
responsibility, the owners or directors may assign to designated
employees, by action duly recorded, the administration of such of the
applicant's fiduciary powers as may be proper to assign.
(2) A written record will be made of the acceptance and of the
relinquishment or closing out of all fiduciary accounts, and of the
assets held for each account.
(3) If the applicant has the authority or the responsibility to
render any investment advice with regard to the assets held in or for
each fiduciary account, the advisability of retaining or disposing of
the assets will be determined at least once during each period of 12
months.
(B) All employees taking part in the performance of the applicant's
fiduciary duties will be adequately bonded. Nothing in this subdivision
(i)(B) shall require any person to be bonded in contravention of section
412(d) of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1112(d)).
(C) The applicant will employ or retain legal counsel who will be
readily available to pass upon fiduciary matters and to advise the
applicant.
(D) In order to segregate the performance of its fiduciary duties
from other business activities, the applicant will maintain a separate
trust division under the immediate supervision of an individual
designated for that purpose. The trust division may utilize the
personnel and facilities of other divisions of the applicant, and other
divisions of the applicant may utilize the personnel and facilities of
the trust division, as long as the separate identity of the trust
division is preserved.
(ii) Adequacy of net worth--(A) Initial net worth requirement. In
the case of applications received after January 5, 1995, no initial
application will be accepted by the Commissioner unless the applicant
has a net worth of not less than $250,000 (determined as of the end of
the most recent taxable year). Thereafter, the applicant must satisfy
the adequacy of net worth requirements of paragraph (e)(5)(ii)(B) and
(C) of this section.
(B) No fiduciary account will be accepted by the applicant unless
the applicant's net worth (determined as of the end of the most recent
taxable year) exceeds the greater of--
(1) $100,000, or
(2) Four percent (or, in the case of a passive trustee described in
paragraph (e)(6)(i)(A) of this section, two percent) of the value of all
of the assets held by the applicant in fiduciary accounts (determined as
of the most recent valuation date).
(C) The applicant will take whatever lawful steps are necessary
(including the relinquishment of fiduciary accounts) to ensure that its
net worth (determined as of the close of each taxable year) exceeds the
greater of--
(1) $50,000, or
(2) Two percent (or, in the case of a passive trustee described in
paragraph (e)(6)(i)(A) of this section, one percent) of the value of all
of the assets held by the applicant in fiduciary accounts (determined as
of the most recent valuation date).
(D) Assets held by members of SIPC--(1) For purposes of satisfying
the adequacy-of-net-worth requirement of this paragraph, a special rule
is provided for nonbank trustees that are members of the Securities
Investor Protection Corporation (SIPC) created under the Securities
Investor Protection Act of 1970 (SIPA)(15 U.S.C. 78aaa et seq., as
amended). The amount that the net worth of a nonbank trustee that is a
member of SIPC must exceed is reduced by two percent for purposes of
paragraph (e)(5)(ii)(B)(2), and one percent for purposes of paragraph
(e)(5)(ii)(C)(2), of the value of assets (determined on an account-by-
account basis) held for the benefit of customers (as defined in 15
U.S.C. 78fff-2(e)(4)) in fiduciary accounts by the nonbank trustee to
the extent of the portion of each account that does not exceed the
dollar limit on advances described in 15 U.S.C. 78fff-3(a), as amended,
that would apply to the assets in that account in the event of a
liquidation proceeding under the SIPA.
(2) The provisions of this special rule for assets held in fiduciary
accounts by members of SIPC are illustrated in the following example.
[[Page 436]]
Example: (a) Trustee X is a broker-dealer and is a member of the
Securities Investment Protection Corporation. Trustee X also has been
approved as a nonbank trustee for individual retirement accounts (IRAs)
by the Commissioner but not as a passive nonbank trustee. Trustee X is
the trustee for four IRAs. The total assets of each IRA (for which
Trustee X is the trustee) as of the most recent valuation date before
the last day of Trustee X's taxable year ending in 1995 are as follows:
the total assets for IRA-1 is $3,000,000 (all of which is invested in
securities); the value of the total assets for IRA-2 is $500,000
($200,000 of which is cash and $300,000 of which is invested in
securities), the value of the total assets for IRA-3 is $400,000 (all of
which is invested in securities); and the value of the total assets of
IRA-4 is $200,000 (all of which is cash). The value of all assets held
in fiduciary accounts, as defined in Sec. 1.408-2(e)(6)(viii)(A), is
$4,100,000.
(b) The dollar limit on advances described in 15 U.S.C. Sec. 78fff-
3(a) that would apply to the assets in each account in the event of a
liquidation proceeding under the Securities Investor Protection Act of
1970 in effect as of the last day of Trustee X's taxable year ending in
1995 is $500,000 per account (no more than $100,000 of which is
permitted to be cash). Thus, the dollar limit that would apply to IRA-1
is $500,000; the dollar limit for IRA-2 is $400,000 ($100,000 of the
cash and the $300,000 of the value of the securities); the dollar limit
for IRA-3 is $400,000 (the full value of the account because the value
of the account is less than $500,000 and no portion of the account is
cash); and the dollar limit for IRA-4 is $100,000 (the entire account is
cash and the dollar limit per account for cash is $100,000). The
aggregate dollar limits of the four IRAs is $1,400,000.
(c) For 1996, the amount determined under Sec. 1.408-2(e)(5)(ii)(B)
is determined as follows for Trustee X: (1) four percent of $4,100,000
equals $164,000; (2) two percent of $1,400,000 equals $28,000; and (3)
$164,000 minus $28,000 equals $136,000. Thus, because $136,000 exceeds
$100,000, the minimum net worth necessary for Trustee X to accept new
accounts for 1996 is $136,000.
(d) For 1996, the amount determined under Sec. 1.408-2(e)(5)(ii)(C)
for Trustee X is determined as follows: (1) two percent of $4,100,000
equals $82,000; (2) one percent of $1,400,000 equals $14,000; and (3)
$82,000 minus $14,000 equals $68,000. Thus, because $68,000 exceeds
$50,000, the minimum net worth necessary for Trustee X to avoid a
mandatory relinquishment of accounts for 1996 is $68,000.
(E) The applicant will determine the value of the assets held by it
in trust at least once in each calendar year and no more than 18 months
after the preceding valuation. The assets will be valued at their fair
market value, except that the assets of an employee pension benefit plan
to which section 103(b)(3)(A) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1023(b)(3)(A)) applies will be considered to have
the value stated in the most recent annual report of the plan.
(iii) Audits. (A) At least once during each period of 12 months, the
applicant will cause detailed audits of the fiduciary books and records
to be made by a qualified public accountant. At that time, the applicant
will ascertain whether the fiduciary accounts have been administered in
accordance with law, this paragraph, and sound fiduciary principles. The
audits shall be conducted in accordance with generally accepted auditing
standards, and shall involve whatever tests of the fiduciary books and
records of the applicant are considered necessary by the qualified
public accountant.
(B) In the case of an applicant which is regulated, supervised, and
subject to periodic examination by a State or Federal agency, such
applicant may adopt an adequate continuous audit system in lieu of the
periodic audits required by paragraph (e)(5)(iii)(A) of this section.
(C) A report of the audits and examinations required under this
subdivision, together with the action taken thereon, will be noted in
the fiduciary records of the applicant.
(iv) Funds awaiting investment or distribution. Funds held in a
fiduciary capacity by the applicant awaiting investment or distribution
will not be held uninvested or undistributed any longer than is
reasonable for the proper management of the account.
(v) Custody of investments. (A) Except for investments pooled in a
common investment fund in accordance with the provisions of paragraph
(e)(5)(vi) of this section, the investments of each account will not be
commingled with any other property.
(B) Assets of accounts requiring safekeeping will be deposited in an
adequate vault. A permanent record will be kept of assets deposited in
or withdrawn from the vault.
(vi) Common investment funds. The assets of an account may be pooled
in a common investment fund (as defined in
[[Page 437]]
paragraph (e)(5)(viii)(C) of this section) if the applicant is
authorized under applicable law to administer a common investment fund
and if pooling the assets in a common investment fund is not in
contravention of the plan documents or applicable law. The common
investment fund must be administered as follows:
(A) Each common investment fund must be established and maintained
in accordance with a written agreement, containing appropriate
provisions as to the manner in which the fund is to be operated,
including provisions relating to the investment powers and a general
statement of the investment policy of the applicant with respect to the
fund; the allocation of income, profits and losses; the terms and
conditions governing the admission or withdrawal of participations in
the funds; the auditing of accounts of the applicant with respect to the
fund; the basis and method of valuing assets held by the fund, setting
forth specific criteria for each type of asset; the minimum frequency
for valuation of assets of the fund; the period following each such
valuation date during which the valuation may be made (which period in
usual circumstances may not exceed 10 business days); the basis upon
which the fund may be terminated; and such other matters as may be
necessary to define clearly the rights of participants in the fund. A
copy of the agreement must be available at the principal office of the
applicant for inspection during all business hours, and upon request a
copy of the agreement must be furnished to the employer, the plan
administrator, any participant or beneficiary of an account, or the
individual for whose benefit the account is established or that
individual's beneficiary.
(B) All participations in the common investment fund must be on the
basis of a proportionate interest in all of the investments.
(C) Not less frequently than once during each period of 3 months the
applicant must determine the value of the assets in the fund as of the
date set for the valuation of assets. No participation may be admitted
to or withdrawn from the fund except (1) on the basis of such valuation
and (2) as of such valuation date. No participation may be admitted to
or withdrawn from the fund unless a written request for or notice of
intention of taking such action has been entered on or before the
valuation date in the fiduciary records of the applicant. No request or
notice may be canceled or countermanded after the valuation date.
(D)(1) The applicant must at least once during each period of 12
months cause an adequate audit to be made of the common investment fund
by a qualified public accountant.
(2) The applicant must at least once during each period of 12 months
prepare a financial report of the fund which, based upon the above
audit, must contain a list of investments in the fund showing the cost
and current value of each investment; a statement for the period since
the previous report showing purchases, with cost; sales, with profit or
loss; any other investment changes; income and disbursements; and an
appropriate notation as to any investments in default.
(3) The applicant must transmit and certify the accuracy of the
financial report to the administrator of each plan participating in the
common investment fund within 120 days after the end of the plan year.
(E) When participations are withdrawn from a common investment fund,
distributions may be made in cash or ratably in kind, or partly in cash
and partly in kind: Provided, That all distributions as of any one
valuation date must be made on the same basis.
(F) If for any reason an investment is withdrawn in kind from a
common investment fund for the benefit of all participants in the fund
at the time of such withdrawal and such investment is not distributed
ratably in kind, it must be segregated and administered or realized upon
for the benefit ratably of all participants in the common investment
fund at the time of withdrawal.
(vii) Books and records. (A) The applicant must keep its fiduciary
records separate and distinct from other records. All fiduciary records
must be so kept and retained for as long as the contents thereof may
become material in the administration of any internal revenue law. The
fiduciary records
[[Page 438]]
must contain full information relative to each account.
(B) The applicant must keep an adequate record of all pending
litigation to which it is a party in connection with the exercise of
fiduciary powers.
(viii) Definitions. For purposes of this paragraph (e)(5), and
paragraph (e)(2)(v), and paragraph (e)(7) of this section--
(A) The term ``account'' or ``fiduciary account'' means a trust
described in section 401(a) (including a custodial account described in
section 401(f)), a custodial account described in section 403(b)(7), or
an individual retirement account described in section 408(a) (including
a custodial account described in section 408(h)).
(B) The term ``plan administrator'' means an administrator as
defined in Sec. 1.414(g)-1.
(C) The term ``common investment fund'' means a trust that satisfies
the following requirements:
(1) The trust consists of all or part of the assets of several
accounts that have been established with the applicant, and
(2) The trust is described in section 401(a) and is exempt from tax
under section 501(a), or is a trust that is created for the purpose of
providing a satisfactory diversification of investments or a reduction
of administrative expenses for the participating accounts and that
satisfies the requirements of section 408(c).
(D) The term ``fiduciary records'' means all matters which are
written, transcribed, recorded, received or otherwise come into the
possession of the applicant and are necessary to preserve information
concerning the acts and events relevant to the fiduciary activities of
the applicant.
(E) The term ``qualified public accountant'' means a qualified
public accountant, as defined in section 103(a)(3)(D) of the Employee
Retirement Income Security Act of 1974, 29 U.S.C. 1023(a)(3)(D), who is
independent of the applicant.
(F) The term ``net worth'' means the amount of the applicant's
assets less the amount of its liabilities, as determined in accordance
with generally accepted accounting principles.
(6) Special rules--(i) Passive trustee. (A) An applicant that
undertakes to act only as a passive trustee may be relieved of one or
more of the requirements of this paragraph upon clear and convincing
proof that such requirements are not germane, under all the facts and
circumstances, to the manner in which the applicant will administer any
trust. A trustee is a passive trustee only if under the written trust
instrument the trustee has no discretion to direct the investment of the
trust funds or any other aspect of the business administration of the
trust, but is merely authorized to acquire and hold particular
investments specified by the trust instrument. Thus, for example, in the
case of an applicant that undertakes merely to acquire and hold the
stock of regulated investment companies, the requirements of paragraph
(e)(5)(i)(A)(3) in its place, and (i)(D), and (vi) of this section shall
not apply and no negative inference shall be drawn from the applicant's
failure to demonstrate its experience of competence with respect to the
activities described in paragraph (e)(4)(ii)(E) to (H) of this section.
(B) The notice of approval issued to an applicant that is approved
by reason of this subdivision shall state that the applicant is
authorized to act only as a passive trustee.
(ii) Federal or State regulation. Evidence that an applicant is
subject to Federal or State regulation with respect to one or more
relevant factors shall be given weight in proportion to the extent that
such regulatory standards are consonant with the requirements of section
401. Such evidence may be submitted in addition to, or in lieu of, the
specific proofs required by this paragraph.
(iii) Savings account. (A) An applicant will be approved to act as
trustee under this subdivision if the following requirements are
satisfied:
(1) The applicant is a credit union, industrial loan company, or
other financial institution designated by the Commissioner;
(2) The investment of the trust assets will be solely in deposits in
the applicant;
(3) Deposits in the applicant are insured (up to the dollar limit
prescribed
[[Page 439]]
by applicable law) by an agency or instrumentality of the United States,
or by an organization established under a special statute the business
of which is limited to insuring deposits in financial institutions and
providing related services.
(B) Any applicant that satisfies the requirements of this
subdivision is hereby approved, and (notwithstanding subparagraph (2) of
this paragraph) is not required to submit a written application. This
approval takes effect on the first day after December 22, 1976, on which
the applicant satisfies the requirements of this subdivision, and
continues in effect for so long as the applicant continues to satisfy
those requirements.
(C) If deposits are insured, but not in the manner provided in
paragraph (e)(6)(iii)(A)(3) of this section, the applicant must submit
an application. The application, notwithstanding subparagraph (2) of
this paragraph, will be limited to a complete description of the
insurance of applicant's deposits. The applicant will be approved if the
Commissioner approves of the applicant's insurance.
(iv) Notification of Commissioner. The applicant must notify the
Commissioner in writing of any change that affects the continuing
accuracy of any representation made in the application required by this
paragraph, whether the change occurs before or after the applicant
receives a notice of approval. The notification must be addressed to
address 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.
(v) Substitution of trustee. No applicant will be approved unless
the applicant undertakes to act as trustee only under trust instruments
which contain a provision to the effect that the grantor is to
substitute another trustee upon notification by the Commissioner that
such substitution is required because the applicant has failed to comply
with the requirements of this paragraph or is not keeping such records,
or making such returns, or rendering such statements as are required by
forms or regulations.
(7) Procedure and administration--(i) Notice of approval. If the
applicant is approved, a written notice of approval will be issued to
the applicant. The notice of approval will state the day on which it
becomes effective, and (except as otherwise provided therein) will
remain effective until revoked. This paragraph does not authorize the
applicant to accept any fiduciary account before such notice of approval
becomes effective.
(ii) Notice of disapproval. If the applicant is not approved, a
written notice will be furnished to the applicant containing a statement
of the reasons why the applicant has not been approved.
(iii) Copy to be furnished. The applicant must not accept a
fiduciary account until after the plan administrator or the person for
whose benefit the account is to be established is furnished with a copy
of the written notice of approval issued to the applicant. This
provision is effective six months after April 20, 1979 for new accounts
accepted thereafter. For accounts accepted before that date, the
administrator must be notified before the later of the effective date of
this provision or six months after acceptance of the account.
(iv) Grounds for revocation. The notice of approval issued to an
applicant will be revoked if the Commissioner determines that the
applicant is unwilling or unable to administer fiduciary accounts in a
manner consistent with the requirements of this paragraph. Generally,
the notice will not be revoked unless the Commissioner determines that
the applicant has knowingly, willfully, or repeatedly failed to
administer fiduciary accounts in a manner consistent with the
requirements of this paragraph, or has administered a fiduciary account
in a grossly negligent manner.
(v) Procedures for revocation. The notice of approval issued to an
applicant may be revoked in accordance with the following procedures:
(A) If the Commissioner proposes to revoke the notice of approval
issued to an applicant, the Commissioner will advise the applicant in
writing of the proposed revocation and of the reasons therefor.
[[Page 440]]
(B) Within 60 days after the receipt of such written advice, the
applicant may protest the proposed revocation by submitting a written
statement of facts, law, and arguments opposing such revocation to
address 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. In addition, the applicant
may request a conference in the National Office.
(C) If the applicant consents to the proposed revocation, either
before or after a National Office conference, or if the applicant fails
to file a timely protest, the Commissioner will revoke the notice of
approval that was issued to the applicant.
(D) If, after considering the applicant's protest and any
information developed in conference, the Commissioner determines that
the applicant is unwilling or unable to administer fiduciary accounts in
a manner consistent with the requirements of this paragraph, the
Commissioner will revoke the notice of approval that was issued to the
applicant and will furnish the applicant with a written statement of
findings on which the revocation is based.
(E) If at any time the Commissioner determines that immediate action
is necessary to protect the interest of the Internal Revenue Service or
of any fiduciary account, the notice of approval issued to the applicant
will be suspended at once, pending a final decision to be based on the
applicant's protest and any information developed in conference.
[T.D. 7714, 45 FR 52791, Aug. 8, 1980, as amended by T.D. 8635, 60 FR
65549, Dec. 20, 1995; 61 FR 11307, Mar. 20, 1996]
Sec. 1.408-3 Individual retirement annuities.
(a) In general. An individual retirement annuity is an annuity
contract or endowment contract (described in paragraph (e)(1) of this
section) issued by an insurance company which is qualified to do
business under the law of the jurisdiction in which the contract is sold
and which satisfies the requirements of paragraph (b) of this section. A
participation certificate in a group contract issued by an insurance
company described in this paragraph will be treated as an individual
retirement annuity if the contract satisfies the requirements of
paragraph (b) of this section; the certificate of participation sets
forth the requirements of paragraphs (1) through (5) of section 408 (b);
the contract provides for a separate accounting of the benefit allocable
to each participant-owner; and the group contract is for the exclusive
benefit of the participant owners and their beneficiaries. For purposes
of this title, a participant-owner of a group contract described in this
paragraph shall be treated as the owner of an individual retirement
annuity. A contract will not be treated as other than an individual
retirement annuity merely because it provides for waiver of premium on
disability. An individual retirement annuity contract which satisfies
the requirements of section 408 (b) need not be purchased under a trust
if the requirements of paragraph (b) of this section are satisfied. An
individual retirement endowment contract may not be held under a trust
which satisfies the requirements of section 408 (a). Distribution of the
contract is not a taxable event. Distributions under the contract are
includible in gross income in accordance with the provisions of
Sec. 1.408-4 (e).
(b) Requirements--(1) Transferability. The annuity or the endowment
contract must not be transferable by the owner. An annuity or endowment
contract is transferable if the owner can transfer any portion of his
interest in the contract to any person other than the issuer thereof.
Accordingly, such a 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 contract to any person other than the issuer thereof. On the
other hand, a contract is not to be considered transferable merely
because the contract contains: a provision permitting the individual to
designate a beneficiary to receive the proceeds in the event of his
death, a provision permitting the individual to elect a joint and
survivor annuity, or other similar provisions.
(2) Annual premium. Except in the case of a contribution to a
simplified
[[Page 441]]
employee pension described in section 408 (k), the annual premium on
behalf of any individual for the annuity or the endowment contract
cannot exceed $1,500. Any refund of premiums must be applied before the
close of the calendar year following the year of the refund toward the
payment of future premiums or the purchase of additional benefits.
(3) Distribution. The entire interest of the owner must be
distributed to him in the same manner and over the same period as
described in Sec. 1.408-2 (b) (6).
(4) Distribution upon death. If the owner dies before the entire
interest has been distributed to him, or if distribution has commenced
to the surviving spouse, the remaining interest must be distributed in
the same manner, over the same period, and to the same beneficiaries as
described in Sec. 1.408-2 (b) (7).
(5) Nonforfeitability. The entire interest of the owner in the
annuity or endowment contract must be nonforfeitable.
(6) Flexible premium. [Reserved]
(c) Disqualification. If during any taxable year the owner of an
annuity borrows any money under the annuity or endowment contract or by
use of such contract (including, but not limited to, pledging the
contract as security for any loan), such contract will cease to be an
individual retirement annuity as of the first day of such taxable year,
and will not be an individual retirement annuity at any time thereafter.
If an annuity or endowment contract which constitutes an individual
retirement annuity is disqualified as a result of the preceding
sentence, an amount equal to the fair market value of the contract as of
the first day of the taxable year of the owner in which such contract is
disqualified is deemed to be distributed to the owner. Such owner shall
include in gross income for such year an amount equal to the fair market
value of such contract as of such first day. The preceding sentence
applies even though part of the fair market value of the individual
retirement annuity as of the first day of the taxable year is
attributable to excess contributions which may be returned tax-free
under section 408(d)(4) or 408(d)(5).
(d) Premature distribution tax on deemed distribution. If the
individual has not attained age 59\1/2\ before the beginning of the year
in which the disqualification described in paragraph (c) of this section
occurs, see section 408(f)(2) for additional tax on premature
distributions.
(e) Endowment contracts--(1) Additional requirement for endowment
contracts. No contract providing life insurance protection issued by a
company described in paragraph (a) of this section shall be treated as
an endowment contract for purposes of this section if--
(i) Such contract matures later than the taxable year in which the
individual in whose name the contract is purchased attains the age of
70\1/2\;
(ii) Such contract is not for the exclusive benefit of such
individual or his beneficiaries;
(iii) Premiums under the contract may increase over the term of the
contract;
(iv) When all premiums are paid when due, the case value of such
contract at maturity is less than the death benefit payable under the
contract at any time before maturity;
(v) The death benefit does not, at some time before maturity, exceed
the greater of the cash value or the sum of premiums paid under the
contract;
(vi) Such contract does not provide for a cash value;
(vii) Such contract provides that the life insurance element of such
contract may increase over the term of such contract, unless such
increase is merely because such contract provides for the purchase of
additional benefits;
(viii) Such contract provides insurance other than life insurance
and waiver of premiums upon disability; or
(ix) Such contract is issued after November 6, 1978.
(2) Treatment of proceeds under endowment contract upon death of
individual. In the case of the payment of a death benefit under an
endowment contract upon the death of the individual in whose name the
contract is purchased, the portion of such payment which is equal to the
cash value immediately before the death of such individual is not
excludable from gross income under section 101(a) and is treated as a
[[Page 442]]
distribution from an individual retirement annuity. The remaining
portion, if any, of such payment constitutes current life insurance
protection and is excludable under section 101(a). If a death benefit is
paid under an endowment contract at a date or dates later than the death
of the individual, section 101(d) is applicable only to the portion of
the benefit which is attributable to the amount excludable under section
101(a).
[T.D. 7714, 45 FR 52792, Aug. 8, 1980]
Sec. 1.408-4 Treatment of distributions from individual retirement arrangements.
(a) General rule--(1) Inclusion in income. Except as otherwise
provided in this section, any amount actually paid or distributed or
deemed paid or distributed from an individual retirement account or
individual retirement annuity shall be included in the gross income of
the payee or distributee for the taxable year in which the payment or
distribution is received.
(2) Zero basis. Notwithstanding section 1015(d) or any other
provision of the Code, the basis (or investment in the contract) of any
person in such an account or annuity is zero. For purposes of this
section, an assignment of an individual's rights under an individual
retirement account or an individual retirement annuity shall, except as
provided in Sec. 1.408-4(g) (relating to transfer incident to divorce),
be deemed a distribution to such individual from such account or annuity
of the amount assigned.
(b) Rollover contribution--(1) To individual retirement arrangement.
Paragraph (a)(1) of this section shall not apply to any amount paid or
distributed from an individual retirement account or individual
retirement annuity to the individual for whose benefit the account was
established or who is the owner of the annuity if the entire amount
received (including the same amount of money and any other property) is
paid into an individual retirement account, annuity (other than an
endowment contract), or bond created for the benefit of such individual
not later than the 60th day after the day on which he receives the
payment or distribution.
(2) To qualified plan. Paragraph (a)(1) of this section does not
apply to any amount paid or distributed from an individual retirement
account or individual retirement annuity to the individual for whose
benefit the account was established or who is the owner of the annuity
if--
(i) No amount in the account or no part of the value of the annuity
is attributable to any source other than a rollover contribution from an
employees' trust described in section 401(a) which is exempt from tax
under section 501(a) or a rollover contribution from an annuity plan
described in section 403(a) and the earnings on such sums, and
(ii) The entire amount received (including the same amount of money
and any other property) represents the entire amount in the account and
is paid into another such trust or plan (for the benefit of such
individual) not later than the 60th day after the day on which the
payment or distribution is received.
This subparagraph does not apply if any portion of the rollover
contribution described in paragraph (b)(2)(i) of this section is
attributable to an employees' trust forming part of a plan or an annuity
under which the individual was an employee within the meaning of section
401(c)(1) at the time contributions were made on his behalf under the
plan.
(3) To section 403(b) contract. [Reserved]
(4) Frequency limitation. (i) For taxable years beginning on or
before December 31, 1977, paragraph (b)(1) of this section does not
apply to any amount received by an individual from an individual
retirement account, annuity or bond if at any time during the 3-year
period ending on the day of receipt, the individual received any other
amount from an individual retirement account, annuity or bond which was
not includible in his gross income because of the application of
paragraph (b)(1) of this section.
(ii) [Reserved]
(c) Excess contributions returned before due date of return--(1)
Excess contribution. For purposes of this paragraph, excess
contributions are the excess of
[[Page 443]]
the amounts contributed to an individual retirement account or paid for
an individual retirement annuity during the taxable year over the amount
allowable as a deduction under section 219 or 220 for the taxable year.
(2) General rule. (i) Paragraph (a)(1) of this section does not
apply to the distribution of any excess contribution paid during a
taxable year to an account or annuity if: the distribution is received
on or before the date prescribed by law (including extensions) for
filing the individual's return for such taxable year; no deduction is
allowed under section 219 or section 220 with respect to the excess
contribution; and the distribution is accompanied by the amount of net
income attributable to the excess contribution as of the date of the
distribution as determined under subdivision (ii).
(ii) The amount of net income attributable to the excess
contributions is an amount which bears the same ratio to the net income
earned by the account during the computation period as the excess
contribution bears to the sum of the balance of the account as of the
first day of the taxable year in which the excess contribution is made
and the total contribution made for such taxable year. For purposes of
this paragraph, the term ``computation period'' means the period
beginning on the first day of the taxable year in which the excess
contribution is made and ending on the date of the distribution from the
account.
(iii) For purposes of paragraph (c)(2)(ii), the net income earned by
the account during the computation period is the fair market value of
the balance of the account immediately after the distribution increased
by the amount of distributions from the account during the computation
period, and reduced (but not below zero) by the sum of: (A) the fair
market value of the balance of the account as of the first day of the
taxable year in which the excess contribution is made and (B) the
contributions to the account made during the computation period.
(3) Time of inclusion. (i) For taxable years beginning before
January 1, 1977, the amount of net income determined under subparagraph
(2) is includible in the gross income of the individual for the taxable
year in which it is received. The amount of net income thus distributed
is subject to the tax imposed by section 408(f)(1) for the year
includible in gross income.
(ii) [Reserved]
(4) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. On January 1, 1975, A, age 55, who is a calendar-year
taxpayer, contributes $1,500 to an individual retirement account
established for his benefit. For 1975, A is entitled to a deduction of
$1,400 under section 219. For 1975, A does not claim as deductions any
other items listed in section 62. A's gross income for 1975 is $9,334.
On April 1, 1976, $107 is distributed to A from his individual
retirement account. As of such date, the balance of the account is
$1,498 [$1,605 - $107]. There were no other distributions from the
account as of such date. The net amount of income earned by the account
is $105 [$1,498 + $107 - (0 + $1,500)]. The net income attributable to
the excess contribution is $7. [$105 x ($100/$1,500)]. A's adjusted
gross income for 1975 is his gross income for 1975 ($9,334) reduced by
the amount allowable to A as a deduction under section 219 ($1,400), or
$7,934. A will include the $7 of the $107 distributed on April 1, 1976,
in his gross income for 1976. Further, A will pay an additional income
tax of $.70 for 1976 under section 408(f)(1).
(d) Deemed distribution--(1) General rule. In any case in which an
individual retirement account ceases to be an individual retirement
account by reason of the application of section 408(e)(2), paragraph
(a)(1) of this section shall apply as if there were a distribution on
the first day of the taxable year in which such account ceases to be an
individual retirement account of an amount equal to the fair market
value on such day of all of the assets in the account on such day. In
the case of a deemed distribution from an individual retirement annuity,
see Sec. 1.408-3(d).
(2) Using account as security. In any case in which an individual
for whose benefit an individual retirement account is established uses,
directly or indirectly, all or any portion of the account as security
for a loan, paragraph (a)(1) of this section shall apply as if there
were distributed on the first day of the taxable year in which the loan
was made an amount equal to that portion of the account used as security
for such loan.
[[Page 444]]
(e) Distribution of annuity contracts. Paragraph (a)(1) of this
section does not apply to any annuity contract which is distributed from
an individual retirement account and which satisfies the requirements of
paragraphs (b) (1), (3), (4) and (5) of section 408. Amounts distributed
under such contracts will be taxable to the distributee under section
72. For purposes of applying section 72 to a distribution from such a
contract, the investment in such contract is zero.
(f) Treatment of assets distributed from an individual retirement
account for the purchase of an endowment contract. Under section
408(e)(5), if all, or any portion, of the assets of an individual
retirement account are used to purchase an endowment contract described
in Sec. 1.408-3(e) for the benefit of the individual for whose benefit
the account is established--
(1) The excess, if any, of the total amount of assets used to
purchase such contract over the portion of the assets attributable to
life insurance protection shall be treated as a rollover contribution
described in section 408(d)(3), and
(2) The portion of the assets attributable to life insurance
protection shall be treated as a distribution described in paragraph
(a)(91) of this section, except that the provisions of section 408(f)
shall not apply to such amount.
(g) Transfer incident to divorce--(1) General rule. The transfer of
an individual's interest, in whole or in part, in an individual
retirement account, individual retirement annuity, or a retirement bond,
to his former spouse under a valid divorce decree or a written
instrument incident to such divorce shall not be considered to be a
distribution from such an account or annuity to such individual or his
former spouse; nor shall it be considered a taxable transfer by such
individual to his former spouse notwithstanding any other provision of
Subtitle A of the Code.
(2) Spousal account. The interest described in this paragraph (g)
which is transferred to the former spouse shall be treated as an
individual retirement account of such spouse if the interest is an
individual retirement account; an individual retirement annuity of such
spouse if such interest is an individual retirement annuity; and a
retirement bond of such spouse if such interest is a retirement bond.
[T.D. 7714, 45 FR 52793, Aug. 8, 1980]
Sec. 1.408-5 Annual reports by trustees or issuers.
(a) In general. The trustee of an individual retirement account or
the issuer of an individual retirement annuity shall make annual
calendar year reports concerning the status of the account or annuity.
The report shall contain the information required in paragraph (b) and
be furnished or filed in the manner and time specified in paragraph (c).
(b) Information required to be included in the annual reports. The
annual calendar year report shall contain the following information for
transactions occurring during the calendar year--
(1) The amount of contributions;
(2) The amount of distributions;
(3) In the case of an endowment contract, the amount of the premium
paid allocable to the cost of life insurance;
(4) The name and address of the trustee or issuer; and
(5) Such other information as the Commissioner may require.
(c) Manner and time for filing. (1) The annual report shall be
furnished to the individual on whose behalf the account is established
or in whose name the annuity is purchased (or the beneficiary of the
individual or owner). The report shall be furnished on or before the
30th day of June following the calendar year for which the report is
required.
(2) The Commissioner may require the annual report to be filed with
the Service at the time the Commissioner specifies.
(d) Penalties. Section 6693 prescribes penalties for failure to file
the annual report.
(e) Effective date. This section shall apply to reports for calendar
years after 1978.
(f) Reports for years prior to 1979. For years prior to 1979, a
trustee or issuer shall make reports in the time and manner as the
Commissioner requires.
[T.D. 7714, 45 FR 52795, Aug. 8, 1980]
[[Page 445]]
Sec. 1.408-6 Disclosure statements for individual retirement arrangements.
(a) In general--(1) General rule. Trustees and issuers of individual
retirement accounts and annuities are, under the authority of section
408(i), required to provide disclosure statements. This section sets
forth these requirements.
(2) [Reserved]
(b)-(c) [Reserved]
(d) Requirements. (1)-(3) [Reserved]
(4) Disclosure statements--(i) Under the authority contained in
section 408(i), a disclosure statement shall be furnished in accordance
with the provisions of this subparagraph by the trustee of an individual
retirement account described in section 408(a) or the issuer of an
individual retirement annuity described in section 408(b) or of an
endowment contract described in section 408(b) to the individual
(hereinafter referred to as the ``benefited individual'') for whom such
an account, annuity, or contract is, or is to be, established.
(ii)(A)(1) The trustee or issuer shall furnish, or cause to be
furnished, to the benefited individual, a disclosure statement
satisfying the requirements of subdivisions (iii) through (viii) of this
subparagraph, as applicable, and a copy of the governing instrument to
be used in establishing the account, annuity, or endowment contract. The
copy of such governing instrument need not be filled in with financial
and other data pertaining to the benefited individual; however, such
copy must be complete in all other respects. The disclosure statement
and copy of the governing instrument must be received by the benefited
individual at least seven days preceding the earlier of the date of
establishment or purchase of the account, annuity, or endowment
contract. A disclosure statement or copy of the governing instrument
required by this subparagraph may be received by the benefited
individual less than seven days preceding, but no later than, the
earlier of the date of establishment or purchase, if the benefited
individual is permitted to revoke the account, annuity, or endowment
contract pursuant to a procedure which satisfies the requirements of
subdivision (ii)(A)(2) of this subparagraph.
(2) A procedure for revocation satisfies the requirements of this
subdivision (ii)(A)(2) of this subparagraph if the benefited individual
is permitted to revoke the account, or endowment contract by mailing or
delivering, at his option, a notice of revocation on or before a day not
less than seven days after the earlier of the date of establishment or
purchase and, upon revocation, is entitled to a return of the entire
amount of the consideration paid by him for the account, annuity, or
endowment contract without adjustment for such items as sales
commissions, administrative expenses or fluctuation in market value. The
procedure may require that the notice be in writing or that it be oral,
or it may require both a written and an oral notice. If an oral notice
is required or permitted, the procedure must permit it to be delivered
by telephone call during normal business hours. If a written notice is
required or permitted, the procedure must provide that, if mailed, it
shall be deemed mailed on the date of the postmark (or if sent by
certified or registered mail, the date of certification or registration)
if it is deposited in the mail in the United States in an envelope, or
other appropriate wrapper, first class postage prepaid, properly
addressed.
(B) If after a disclosure statement has been furnished, or caused to
be furnished, to the benefited individual pursuant to paragraph
(d)(4)(ii)(A) of this section and--
(1) On or before the earlier of the date of establishment or
purchase, or
(2) On or before the last day on which the benefited individual is
permitted to revoke the account, annuity, or endowment contract (if the
benefited individual has a right to revoke the account, annuity, or
endowment contract pursuant to the rules of subdivision (ii)(A) of this
subparagraph).
there becomes effective a material adverse change in the information set
forth in such disclosure statement or a material change in the governing
instrument to be used in establishing the account, annuity, or contract,
the trustee or issuer shall furnish, or cause to be furnished, to the
benefited individual such amendments to any previously furnished
disclosure statement or governing instrument as may be necessary to
adequately inform the
[[Page 446]]
benefited individual of such change. The trustee or issuer shall be
treated as satisfying this subdivision (ii)(B) of this subparagraph only
if material required to be furnished by this subdivision is received by
the benefited individual at least seven days preceding the earlier of
the date of establishment or purchase of the account, annuity, or
endowment contract or if the benefited individual is permitted to revoke
the account, annuity, or endowment contract on or before a date not less
than seven days after the date on which such material is received,
pursuant to a procedure for revocation otherwise satisfying the
provisions of subdivision (ii)(A)(2) of this subparagraph.
(C) If the governing instrument is amended after the account,
annuity, or endowment contract is no longer subject to revocation
pursuant to subdivision (ii)(A) or (B) of this subparagraph, the trustee
or issuer shall not later than the 30th day after the later of the date
on which the amendment is adopted or becomes effective, deliver or mail
to the last known address of the benefited individual a copy of such
amendment and, if such amendment affects a matter described in
subdivisions (iii) through (viii) of this subparagraph, a disclosure
statement with respect to such matter meeting the requirements of
subdivision (iv) of this subparagraph.
(D) For purposes of subdivision (ii) (A) and (B) of this
subparagraph, if a disclosure statement, governing instrument, or an
amendment to either, is mailed to the benefited individual, it shall be
deemed (in the absence of evidence to the contrary) to be received by
the benefited individual seven days after the date of mailing.
(E) In the case of a trust described in section 408(c) (relating to
certain retirement savings arrangements for employees or members of
associations of employees), the following special rules shall be
applied:
(1) For purposes of this subparagraph, references to the benefited
individual's account, annuity, or endowment contract shall refer to the
benefited individual's interest in such trust, and
(2) The provisions of subdivision (ii) of this subparagraph shall be
applied by substituting ``the date on which the benefited individual's
interest in such trust commences'' for ``the earlier of the date of
establishment or purchase'' wherever it appear therein.
Thus, for example, if an employer establishes a trust described in
section 408(c) for the benefit of employees, and the trustee furnishes
an employee with a disclosure statement and a copy of the governing
instrument (as required by this subparagraph) on the date such
employee's interest in the trust commences, such employee must be given
a right to revoke such interest within a period of at least seven days.
If any contribution has been made within such period (whether by the
employee or by the employer), the full amount of such contribution must
be paid to such employee pursuant to subdivision (ii)(A)(2) of this
subparagraph.
(iii) The disclosure statement required by this subparagraph shall
set forth in nontechnical language the following matters as such matters
relate to the account, annuity, or endowment contract (as the case may
be);
(A) Concise explanations of--
(1) The statutory requirements prescribed in section 408(a)
(relating to an individual retirement account) or section 408(b)
(relating to an individual retirement annuity and an endowment
contract), and any additional requirements (whether or not required by
law) that pertain to the particular retirement savings arrangement.
(2) The income tax consequences of establishing an account, annuity,
or endowment contract (as the case may be) which meets the requirements
of section 408(a) relating to an individual retirement account) or
section 408(b) (relating to an individual retirement annuity and an
endowment contract), including the deductibility of contributions to,
the tax treatment of distributions (other than premature distributions)
from, the availability of income tax free rollovers to and from, and the
tax status of such account, annuity, or endowment contract.
(3) The limitations and restrictions on the deduction for retirement
savings under section 219, including the ineligibility of certain
individuals who are active participants in a plan described in section
219(b)(2)(A) or for whom amounts are contributed under a contract
described in section
[[Page 447]]
219(b)(2)(B) to make deductible contributions to an account or for an
annuity or endowment contract.
(4) The circumstances under which the benefited individual may
revoke the account, annuity, or endowment contract, and the procedure
therefor (including the name, address, and telephone number of the
person designated to receive notice of such revocation). Such
explanation shall be prominently displayed at the beginning of the
disclosure statement.
(B) Statements to the effect that--
(1) If the benefited individual or his beneficiary engages in a
prohibited transaction, described in section 4975(c) with respect to an
individual retirement account, the account will lose its exemption from
tax by reason of section 408(e)(2)(A), and the benefited individual must
include in gross income, for the taxable year during which the benefited
individual or his beneficiary engages in the prohibited transaction the
fair market value of the account.
(2) If the owner of an individual retirement annuity or endowment
contract described in section 408(b) borrows any money under, or by use
of, such annuity or endowment contract, then, under section 408(e)(3),
such annuity or endowment contract loses its section 408(b)
classification, and the owner must include in gross income, for the
taxable year during which the owner borrows any money under, or by use
of, such annuity or endowment contract, the fair market value of the
annuity or endowment contract.
(3) If a benefited individual uses all or any portion of an
individual retirement account as security for a loan, then, under
section 408(e)(4), the portion so used is treated as distributed to such
individual and the benefited individual must include such distribution
in gross income for the taxable year during which he so uses such
account.
(4) An additional tax of 10 percent is imposed by section 408(f) on
distributions (including amounts deemed distributed as the result of a
prohibited loan or use as security for a loan) made before the benefited
individual has attained age 59\1/2\, unless such distribution is made on
account of death or disability, or unless a rollover contribution is
made with such distribution.
(5) Sections 2039(e) (relating to exemption from estate tax of
annuities under certain trusts and plans) and 2517 (relating to
exemption from gift tax of specified transfers of certain annuities
under qualified plans) apply (including the manner in which such
sections apply) to the account, annuity, or endowment contract.
(6) Section 402(a)(2) and (e) (relating to tax on lump sum
distributions) is not applicable to distributions from an account,
annuity, or endowment contract.
(7) A minimum distribution is required under section 408(a) (6) or
(7) and 408(b) (3) or (4) (including a brief explanation of the amount
of minimum distribution) and that if the amount distributed from an
account, annuity, or endowment contract during the taxable year of the
payee is less than the minimum required during such year, an excise tax,
which shall be paid by the payee, is imposed under section 4974, in an
amount equal to 50 percent of the excess of the minimum required to be
distributed over the amount actually distributed during the year.
(8) An excise tax is imposed under section 4973 on excess
contributions (including a brief explanation of an excess contribution).
(9) The benefited individual must file Form 5329 (Return for
Individual Retirement Savings Arrangement) with the Internal Revenue for
each taxable year during which the account, annuity, or endowment
contract is maintained.
(10) The account or contract has or has not (as the case may be)
been approved as to form for use as an account, annuity, or endowment
contract by the Internal Revenue Service. For purposes of this
subdivision, if a favorable opinion or determination letter with respect
to the form of a prototype trust, custodial account, annuity, or
endowment contract has been issued by the Internal Revenue Service, or
the instrument which establishes an individual retirement trust account
or an individual retirement custodial account utilizes the precise
language of a form currently provided by the Internal Revenue Service
(including any additional language permitted by such
[[Page 448]]
form), such account or contract may be treated as approved as to form.
(11) The Internal Revenue Service approval is a determination only
as to the form of the account, annuity, or endowment contract, and does
not represent a determination of the merits of such account, annuity, or
endowment contract.
(12) The proceeds from the account, annuity or endowment contract
may be used by the benefited individual as a rollover contribution to
another account or annuity or retirement bond in accordance with the
provisions of section 408(d)(3).
(13) In the case of an endowment contract described in section
408(b), no deduction is allowed under section 219 for that portion of
the amounts paid under the contract for the taxable year properly
allocable to the cost of life insurance.
(14) If applicable, in the event that the benefited individual
revokes the account, annuity, or endowment contract, pursuant to the
procedure described in the disclosure statement (see subdivision (A)(4)
of this subdivision (iii)), the benefited individual is entitled to a
return of the entire amount of the consideration paid by him for the
account, annuity, or endowment contract without adjustment for such
items as sales commissions, administrative expenses or fluctuation in
market value.
(15) Further information can be obtained from any district office of
the Internal Revenue Service.
To the extent that information on the matters described in
subdivisions (iii) (A) and (B) of this subparagraph is provided in a
publication of the Internal Revenue Service relating to individual
retirement savings arrangements, such publication may be furnished by
the trustee or issuer in lieu of providing information relating to such
matters in a disclosure statement.
(C) The financial disclosure required by paragraph (d)(4) (v), (vi),
and (vii) of this section.
(iv) In the case of an amendment to the terms of an account,
annuity, or endowment contract described in paragraph (d)(4)(i) of this
section, the disclosure statement required by this subparagraph need not
repeat material contained in the statement furnished pursuant to
paragraph (d)(4)(iii) of this section, but it must set forth in
nontechnical language those matters described in paragraph (d)(4)(iii)
of this section which are affected by such amendment.
(v) With respect to an account, annuity, or endowment contract
described in paragraph (d)(4)(i) of this section (other than an account
or annuity which is to receive only a rollover contribution described in
paragraph (d)(4)(vi) of this section and to which no deductible
contributions will be made), the disclosure statement must set forth in
cases where either an amount is guaranteed over period of time (such as
in the case of a nonparticipating endowment or annuity contract), or a
projection of growth of the value of the account, annuity, or endowment
contract can reasonably be made (such as in the case of a participating
endowment or annuity contract (other than a variable annuity) or
passbook savings account), the following:
(A) To the extent that an amount is guaranteed,
(1) The amount, determined without regard to any portion of a
contribution which is not deductible, that would be guaranteed to be
available to the benefited individual if (i) level annual contributions
in the amount of $1,000 were to be made on the first day of each year,
and (ii) the benefited individual were to withdraw in a single sum the
entire amount of such account, annuity, or endowment contract at the end
of each of the first five years during which contributions are to be
made, at the end of the year in which the benefited individual attains
the ages of 60, 65, and 70, and at the end of any other year during
which the increase of the guaranteed available amount is less than the
increase of the guaranteed available amount during any preceding year
for any reason other than decrease of cessation of contributions, and
(2) A statement that the amount described in subdivision (v)(A)(1)
of this subparagraph is guaranteed, and the period for which guaranteed;
[[Page 449]]
(B) To the extent a projection of growth of the value of the
account, annuity, or endowment contract can reasonably be made but the
amounts are not guaranteed.
(1) The amount, determined without regard to any portion of a
contribution which is not deductible, and upon the basis of an earnings
rate no greater than, and terms no different from, those currently in
effect, that would be available to the benefited individual if (i) level
annual contributions in the amount of $1,000 were to be made on the
first day of each year, and (ii) the benefited individual were to
withdraw in a single sum the entire amount of such account, annuity, or
endowment contract at the end of each of the first five years during
which contributions are to be made, at the end of each of the years in
which the benefited individual attains the ages of 60, 65, and 70, and
at the end of any other year during which the increase of the available
amount is less than the increase of the available amount during any
preceding year for any reason other than decrease or cessation of
contributions, and
(2) A statement that the amount described in paragraph
(d)(4)(v)(B)(1) of this section is a projection and is not guaranteed
and a statement of the earnings rate and terms on the basis of which the
projection is made;
(C) The portion of each $1,000 contribution attributable to the cost
of life insurance, which would not be deductible, for each year during
which contributions are to be made; and
(D) The sales commission (including any commission attributable to
the sale of life insurance), if any, to be charged in each year,
expressed as a percentage of gross annual contributions (including any
portion attributable to the cost of life insurance) to be made for each
year.
(vi) With respect to an account or annuity described in paragraph
(d)(4)(i) of this section to which a rollover contribution described in
section 402(a)(5)(A), 403(a)(4)(A), 408(d)(3)(A) or 409(b)(3)(C) will be
made, the disclosure statement must set forth, in cases where an amount
is guaranteed over a period of time (such as in the case of a non-
participating annuity contract, or a projection of growth of the value
of the account or annuity can reasonably be made (such as in the case of
a participating annuity contract (other than a variable annuity) or a
passbook savings account), the following:
(A) To the extent guaranteed,
(1) The amount that would be guaranteed to be available to the
benefited individual if (i) Such a rollover contribution in the amount
of $1,000 were to be made on the first day of the year, (ii) No other
contribution were to be made, and (iii) The benefited individual were to
withdraw in a single sum the entire amount of such account or annuity at
the end of each of the first five years after the contribution is made,
at the end of the year in which the benefited individual attains the
ages of 60, 65, and 70, and at the end of any other year during which
the increase of the guaranteed available amount is less than the
increase of the guaranteed available amount during any preceding year,
and
(2) A statement that the amount described in paragraph (d)(vi)(A)(1)
of this section is guaranteed;
(B) To the extent that a projection of growth of the value of the
account or annuity can reasonably be made but the amounts are not
guaranteed,
(1) The amount, determined upon the basis of an earnings rate no
greater than, and terms no different from, those currently in effect,
that would be available to the benefited individual if (i) such a
rollover contribution in the amount of $1,000 were to be made on the
first day of the year, (ii) no other contribution were to be made, and
(iii) the benefited individual were to withdraw in a single sum the
entire amount of such account or annuity at the end of each of the first
five years after the contribution is made, at the end of each of the
years in which the benefited individual attains the ages 60, 65, 70, and
at the end of any other year during which the increase of the available
amount is less than the increase of the available amount during any
preceding year, and
(2) A statement that the amount described in paragraph (d)(4)(vi)(B)
(1) of this section is a projection and is not guaranteed and a
statement of the
[[Page 450]]
earnings rate and terms on the basis of which the projection is made;
and
(C) The sales commission, if any, to be charged in each year,
expressed as a percentage of the assumed $1,000 contribution.
(vii) With respect to an account, annuity, or endowment contract
described in paragraph (d)(4)(i) of this section, in all cases not
subject to paragraph (d)(4) (v) or (vi) of this section (such as in the
case of a mutual fund or variable annuity), the disclosure statement
must set forth information described in subdivisions (A) through (C) of
this subdivisions (vii) based (as applicable with respect to the type or
types of contributions to be received by the account, annuity, or
endowment contract) upon the assumption of (1) level annual
contributions of $1,000 on the first day of each year, (2) a rollover
contribution of $1,000 on the first day of the year and no other
contributions, or (3) a rollover contribution of $1,000 on the first day
of the year plus level annual contributions of $1,000 on the first day
of each year.
(A) A description (in nontechnical language) with respect to the
benefited individual's interest in the account, annuity, or endowment
contract, of:
(1) Each type of charge, and the amount thereof, which may be made
against a contribution,
(2) The method for computing and allocating annual earnings, and
(3) Each charge (other than those described in complying with
paragraph (d)(4)(vii)(A)(1) of this section) which may be applied to
such interest in determining the net amount of money available to the
benefited individual and the method of computing each such charge;
(B) A statement that growth in value of the account, annuity, or
endowment contract is neither guaranteed nor projected; and
(C) The portion of each $1,000 contribution attributable to the cost
of life insurance, which would not be deductible, for every year during
which contributions are to be made.
(viii) A disclosure statement, or an amendment thereto, furnished
pursuant to the provisions of this subparagraph may contain information
in addition to that required by paragraph (d)(4)(iii) through (vii) of
this section. However, such disclosure statement will not be considered
to comply with the provisions of this subparagraph if the substance of
such additional material or the form in which it is presented causes
such disclosure statement to be false or misleading with respect to the
information required to be disclosed by this paragraph.
(ix) The provisions of section 6693, relating to failure to provide
reports on individual retirement accounts or annuities, shall apply to
any trustee or issuer who fails to furnish, or cause to be furnished, a
disclosure statement, a copy of the governing instrument, or an
amendment to either, as required by this paragraph.
(x) This section shall be effective for disclosure statements and
copies of governing instruments mailed, or delivered without mailing,
after February 14, 1977.
(xi) This section does not reflect the amendments made by section
1501 of the Tax Reform Act of 1976 (90 Stat. 1734) relating to
retirement savings for certain married individuals.
[T.D. 7714, 45 FR 52795, Aug. 8, 1980; 45 FR 56802, Aug. 26, 1980]
Sec. 1.408-7 Reports on distributions from individual retirement plans.
(a) Requirement of report. The trustee of an individual retirement
account or the issuer of an individual retirement annuity who makes a
distribution during any calendar year to an individual from such account
or under such annuity shall make a report on Form W-2P (in the case of
distributions that are not total distributions) or Form 1099R (in the
case of total distributions), and their related transmittal forms, for
such year. The return must show the name and address of the person to
whom the distribution was made, the aggregate amount of such
distribution, and such other information as is required by the forms.
(b) Amount subject to this section. The amounts subject to reporting
under paragraph (a) include all amounts distributed or made available to
which section 408(d) applies.
(c) Time and place for filing. The report required under this
section for any calendar year shall be filed after the
[[Page 451]]
close of that year and on or before February 28 of the following year
with the appropriate Internal Revenue Service Center.
(d) Statement to recipients. (1) Each trustee or issuer required to
file Form 1099R or Form W-2P under this section shall furnish to the
person whose identifying number is (or should be) shown on the forms a
copy of the form.
(2) Each statement required by this paragraph to be furnished to
recipients shall be furnished to such person after November 30 of the
year of the distribution and on or before January 31 of the following
year.
(e) Effective date. This section is effective for calendar years
beginning after December 31, 1977.
[T.D. 7714, 45 FR 52798, Aug. 8, 1980]
Sec. 1.408A-0 Roth IRAs; table of contents.
This table of contents lists the regulations relating to Roth IRAs
under section 408A of the Internal Revenue Code as follows:
Sec. 1.408A-1 Roth IRAs in general.
Sec. 1.408A-2 Establishing Roth IRAs.
Sec. 1.408A-3 Contributions to Roth IRAs.
Sec. 1.408A-4 Converting amounts to Roth IRAs.
Sec. 1.408A-5 Recharacterized contributions.
Sec. 1.408A-6 Distributions.
Sec. 1.408A-7 Reporting.
Sec. 1.408A-8 Definitions.
Sec. 1.408A-9 Effective date.
[T.D. 8816, 64 FR 5601, Feb. 4, 1999]
Sec. 1.408A-1 Roth IRAs in general.
This section sets forth the following questions and answers that
discuss the background and general features of Roth IRAs:
Q-1. What is a Roth IRA?
A-1. (a) A Roth IRA is a new type of individual retirement plan that
individuals can use, beginning in 1998. Roth IRAs are described in
section 408A, which was added by the Taxpayer Relief Act of 1997 (TRA
97), Public Law 105-34 (111 Stat. 788).
(b) Roth IRAs are treated like traditional IRAs except where the
Internal Revenue Code specifies different treatment. For example,
aggregate contributions (other than by a conversion or other rollover)
to all an individual's Roth IRAs are not permitted to exceed $2,000 for
a taxable year. Further, income earned on funds held in a Roth IRA is
generally not taxable. Similarly, the rules of section 408(e), such as
the loss of exemption of the account where the owner engages in a
prohibited transaction, apply to Roth IRAs in the same manner as to
traditional IRAs.
Q-2. What are the significant differences between traditional IRAs
and Roth IRAs?
A-2. There are several significant differences between traditional
IRAs and Roth IRAs under the Internal Revenue Code. For example,
eligibility to contribute to a Roth IRA is subject to special modified
AGI (adjusted gross income) limits; contributions to a Roth IRA are
never deductible; qualified distributions from a Roth IRA are not
includible in gross income; the required minimum distribution rules
under section 408(a)(6) and (b)(3) (which generally incorporate the
provisions of section 401(a)(9)) do not apply to a Roth IRA during the
lifetime of the owner; and contributions to a Roth IRA can be made after
the owner has attained age 70\1/2\.
[T.D. 8816, 64 FR 5601, Feb. 4, 1999]
Sec. 1.408A-2 Establishing Roth IRAs.
This section sets forth the following questions and answers that
provide rules applicable to establishing Roth IRAs:
Q-1. Who can establish a Roth IRA?
A-1. Except as provided in A-3 of this section, only an individual
can establish a Roth IRA. In addition, in order to be eligible to
contribute to a Roth IRA for a particular year, an individual must
satisfy certain compensation requirements and adjusted gross income
limits (see Sec. 1.408A-3 A-3).
Q-2. How is a Roth IRA established?
A-2. A Roth IRA can be established with any bank, insurance company,
or other person authorized in accordance with Sec. 1.408-2(e) to serve
as a trustee with respect to IRAs. The document establishing the Roth
IRA must clearly designate the IRA as a Roth IRA, and this designation
cannot be changed at a later date. Thus, an IRA that is designated as a
Roth IRA cannot later be treated as a traditional IRA. However, see
Sec. 1.408A-4 A-1(b)(3) for certain rules
[[Page 452]]
for converting a traditional IRA to a Roth IRA with the same trustee by
redesignating the traditional IRA as a Roth IRA, and see Sec. 1.408A-5
for rules for recharacterizing certain IRA contributions.
Q-3. Can an employer or an association of employees establish a Roth
IRA to hold contributions of employees or members?
A-3. Yes. Pursuant to section 408(c), an employer or an association
of employees can establish a trust to hold contributions of employees or
members made under a Roth IRA. Each employee's or member's account in
the trust is treated as a separate Roth IRA that is subject to the
generally applicable Roth IRA rules. The employer or association of
employees may do certain acts otherwise required by an individual, for
example, establishing and designating a trust as a Roth IRA.
Q-4. What is the effect of a surviving spouse of a Roth IRA owner
treating an IRA as his or her own?
A-4. If the surviving spouse of a Roth IRA owner treats a Roth IRA
as his or her own as of a date, the Roth IRA is treated from that date
forward as though it were established for the benefit of the surviving
spouse and not the original Roth IRA owner. Thus, for example, the
surviving spouse is treated as the Roth IRA owner for purposes of
applying the minimum distribution requirements under section 408(a)(6)
and (b)(3). Similarly, the surviving spouse is treated as the Roth IRA
owner rather than a beneficiary for purposes of determining the amount
of any distribution from the Roth IRA that is includible in gross income
and whether the distribution is subject to the 10-percent additional tax
under section 72(t).
[T.D. 8816, 64 FR 5601, Feb. 4, 1999]
Sec. 1.408A-3 Contributions to Roth IRAs.
This section sets forth the following questions and answers that
provide rules regarding contributions to Roth IRAs:
Q-1. What types of contributions are permitted to be made to a Roth
IRA?
A-1. There are two types of contributions that are permitted to be
made to a Roth IRA: regular contributions and qualified rollover
contributions (including conversion contributions). The term regular
contributions means contributions other than qualified rollover
contributions.
Q-2. When are contributions permitted to be made to a Roth IRA?
A-2. (a) The provisions of section 408A are effective for taxable
years beginning on or after January 1, 1998. Thus, the first taxable
year for which contributions are permitted to be made to a Roth IRA by
an individual is the individual's taxable year beginning in 1998.
(b) Regular contributions for a particular taxable year must
generally be contributed by the due date (not including extensions) for
filing a Federal income tax return for that taxable year. (See
Sec. 1.408A-5 regarding recharacterization of certain contributions.)
Q-3. What is the maximum aggregate amount of regular contributions
an individual is eligible to contribute to a Roth IRA for a taxable
year?
A-3. (a) The maximum aggregate amount that an individual is eligible
to contribute to all his or her Roth IRAs as a regular contribution for
a taxable year is the same as the maximum for traditional IRAs: $2,000
or, if less, that individual's compensation for the year.
(b) For Roth IRAs, the maximum amount described in paragraph (a) of
this A-3 is phased out between certain levels of modified AGI. For an
individual who is not married, the dollar amount is phased out ratably
between modified AGI of $95,000 and $110,000; for a married individual
filing a joint return, between modified AGI of $150,000 and $160,000;
and for a married individual filing separately, between modified AGI of
$0 and $10,000. For this purpose, a married individual who has lived
apart from his or her spouse for the entire taxable year and who files
separately is treated as not married. Under section 408A(c)(3)(A), in
applying the phase-out, the maximum amount is rounded up to the next
higher multiple of $10 and is not reduced below $200 until completely
phased out.
(c) If an individual makes regular contributions to both traditional
IRAs and Roth IRAs for a taxable year, the maximum limit for the Roth
IRA is the lesser of--
[[Page 453]]
(1) The amount described in paragraph (a) of this A-3 reduced by the
amount contributed to traditional IRAs for the taxable year; and
(2) The amount described in paragraph (b) of this A-3. Employer
contributions, including elective deferrals, made under a SEP or SIMPLE
IRA Plan on behalf of an individual (including a self-employed
individual) do not reduce the amount of the individual's maximum regular
contribution.
(d) The rules in this A-3 are illustrated by the following examples:
Example 1. In 1998, unmarried, calendar-year taxpayer B, age 60, has
modified AGI of $40,000 and compensation of $5,000. For 1998, B can
contribute a maximum of $2,000 to a traditional IRA, a Roth IRA or a
combination of traditional and Roth IRAs.
Example 2. The facts are the same as in Example 1. However, assume
that B violates the maximum regular contribution limit by contributing
$2,000 to a traditional IRA and $2,000 to a Roth IRA for 1998. The
$2,000 to B's Roth IRA would be an excess contribution to B's Roth IRA
for 1998 because an individual's contributions are applied first to a
traditional IRA, then to a Roth IRA.
Example 3. The facts are the same as in Example 1, except that B's
compensation is $900. The maximum amount B can contribute to either a
traditional IRA or a Roth (or a combination of the two) for 1998 is
$900.
Example 4. In 1998, unmarried, calendar-year taxpayer C, age 60, has
modified AGI of $100,000 and compensation of $5,000. For 1998, C
contributes $800 to a traditional IRA and $1,200 to a Roth IRA. Because
C's $1,200 Roth IRA contribution does not exceed the phased-out maximum
Roth IRA contribution of $1,340 and because C's total IRA contributions
do not exceed $2,000, C's Roth IRA contribution does not exceed the
maximum permissible contribution.
Q-4. How is compensation defined for purposes of the Roth IRA
contribution limit?
A-4. For purposes of the contribution limit described in A-3 of this
section, an individual's compensation is the same as that used to
determine the maximum contribution an individual can make to a
traditional IRA. This amount is defined in section 219(f)(1) to include
wages, commissions, professional fees, tips, and other amounts received
for personal services, as well as taxable alimony and separate
maintenance payments received under a decree of divorce or separate
maintenance. Compensation also includes earned income as defined in
section 401(c)(2), but does not include any amount received as a pension
or annuity or as deferred compensation. In addition, under section
219(c), a married individual filing a joint return is permitted to make
an IRA contribution by treating his or her spouse's higher compensation
as his or her own, but only to the extent that the spouse's compensation
is not being used for purposes of the spouse making a contribution to a
Roth IRA or a deductible contribution to a traditional IRA.
Q-5. What is the significance of modified AGI and how is it
determined?
A-5. Modified AGI is used for purposes of the phase-out rules
described in A-3 of this section and for purposes of the $100,000
modified AGI limitation described in Sec. 1.408A-4 A-2(a) (relating to
eligibility for conversion). As defined in section 408A(c)(3)(C)(i),
modified AGI is the same as adjusted gross income under section
219(g)(3)(A) (used to determine the amount of deductible contributions
that can be made to a traditional IRA by an individual who is an active
participant in an employer-sponsored retirement plan), except that any
conversion is disregarded in determining modified AGI. For example, the
deduction for contributions to an IRA is not taken into account for
purposes of determining adjusted gross income under section 219 and thus
does not apply in determining modified AGI for Roth IRA purposes.
Q-6. Is a required minimum distribution from an IRA for a year
included in income for purposes of determining modified AGI?
A-6. (a) Yes. For taxable years beginning before January 1, 2005,
any required minimum distribution from an IRA under section 408(a)(6)
and (b)(3) (which generally incorporate the provisions of section
401(a)(9)) is included in income for purposes of determining modified
AGI.
(b) For taxable years beginning after December 31, 2004, and solely
for purposes of the $100,000 limitation applicable to conversions,
modified AGI does not include any required minimum distributions from an
IRA under section 408(a)(6) and (b)(3).
[[Page 454]]
Q-7. Does an excise tax apply if an individual exceeds the aggregate
regular contribution limits for Roth IRAs?
A-7. Yes. Section 4973 imposes an annual 6-percent excise tax on
aggregate amounts contributed to Roth IRAs that exceed the maximum
contribution limits described in A-3 of this section. Any contribution
that is distributed, together with net income, from a Roth IRA on or
before the tax return due date (plus extensions) for the taxable year of
the contribution is treated as not contributed. Net income described in
the previous sentence is includible in gross income for the taxable year
in which the contribution is made. Aggregate excess contributions that
are not distributed from a Roth IRA on or before the tax return due date
(with extensions) for the taxable year of the contributions are reduced
as a deemed Roth IRA contribution for each subsequent taxable year to
the extent that the Roth IRA owner does not actually make regular IRA
contributions for such years. Section 4973 applies separately to an
individual's Roth IRAs and other types of IRAs.
[T.D. 8816, 64 FR 5601, Feb. 4, 1999]
Sec. 1.408A-4 Converting amounts to Roth IRAs.
This section sets forth the following questions and answers that
provide rules applicable to Roth IRA conversions:
Q-1. Can an individual convert an amount in his or her traditional
IRA to a Roth IRA?
A-1. (a) Yes. An amount in a traditional IRA may be converted to an
amount in a Roth IRA if two requirements are satisfied. First, the IRA
owner must satisfy the modified AGI limitation described in A-2(a) of
this section and, if married, the joint filing requirement described in
A-2(b) of this section. Second, the amount contributed to the Roth IRA
must satisfy the definition of a qualified rollover contribution in
section 408A(e) (i.e., it must satisfy the requirements for a rollover
contribution as defined in section 408(d)(3), except that the one-
rollover-per-year limitation in section 408(d)(3)(B) does not apply).
(b) An amount can be converted by any of three methods--
(1) An amount distributed from a traditional IRA is contributed
(rolled over) to a Roth IRA within the 60-day period described in
section 408(d)(3)(A)(i);
(2) An amount in a traditional IRA is transferred in a trustee-to-
trustee transfer from the trustee of the traditional IRA to the trustee
of the Roth IRA; or
(3) An amount in a traditional IRA is transferred to a Roth IRA
maintained by the same trustee. For purposes of sections 408 and 408A,
redesignating a traditional IRA as a Roth IRA is treated as a transfer
of the entire account balance from a traditional IRA to a Roth IRA.
(c) Any converted amount is treated as a distribution from the
traditional IRA and a qualified rollover contribution to the Roth IRA
for purposes of section 408 and section 408A, even if the conversion is
accomplished by means of a trustee-to-trustee transfer or a transfer
between IRAs of the same trustee.
(d) A transaction that is treated as a failed conversion under
Sec. 1.408A-5 A-9(a)(1) is not a conversion.
Q-2. What are the modified AGI limitation and joint filing
requirements for conversions?
A-2. (a) An individual with modified AGI in excess of $100,000 for a
taxable year is not permitted to convert an amount to a Roth IRA during
that taxable year. This $100,000 limitation applies to the taxable year
that the funds are paid from the traditional IRA, rather than the year
they are contributed to the Roth IRA.
(b) If the individual is married, he or she is permitted to convert
an amount to a Roth IRA during a taxable year only if the individual and
the individual's spouse file a joint return for the taxable year that
the funds are paid from the traditional IRA. In this case, the modified
AGI subject to the $100,000 limit is the modified AGI derived from the
joint return using the couple's combined income. The only exception to
this joint filing requirement is for an individual who has lived apart
from his or her spouse for the entire taxable year. If the married
individual has lived apart from his or her spouse for
[[Page 455]]
the entire taxable year, then such individual can treat himself or
herself as not married for purposes of this paragraph, file a separate
return and be subject to the $100,000 limit on his or her separate
modified AGI. In all other cases, a married individual filing a separate
return is not permitted to convert an amount to a Roth IRA, regardless
of the individual's modified AGI.
Q-3. Is a remedy available to an individual who makes a failed
conversion?
A-3. (a) Yes. See Sec. 1.408A-5 for rules permitting a failed
conversion amount to be recharacterized as a contribution to a
traditional IRA. If the requirements in Sec. 1.408A-5 are satisfied, the
failed conversion amount will be treated as having been contributed to
the traditional IRA and not to the Roth IRA.
(b) If the contribution is not recharacterized in accordance with
Sec. 1.408A-5, the contribution will be treated as a regular
contribution to the Roth IRA and, thus, an excess contribution subject
to the excise tax under section 4973 to the extent that it exceeds the
individual's regular contribution limit. This is the result regardless
of which of the three methods described in A-1(b) of this section
applies to this transaction. Additionally, the distribution from the
traditional IRA will not be eligible for the 4-year spread and will be
subject to the additional tax under section 72(t) (unless an exception
under that section applies).
Q-4. Do any special rules apply to a conversion of an amount in an
individual's SEP IRA or SIMPLE IRA to a Roth IRA?
A-4. (a) An amount in an individual's SEP IRA can be converted to a
Roth IRA on the same terms as an amount in any other traditional IRA.
(b) An amount in an individual's SIMPLE IRA can be converted to a
Roth IRA on the same terms as a conversion from a traditional IRA,
except that an amount distributed from a SIMPLE IRA during the 2-year
period described in section 72(t)(6), which begins on the date that the
individual first participated in any SIMPLE IRA Plan maintained by the
individual's employer, cannot be converted to a Roth IRA. Pursuant to
section 408(d)(3)(G), a distribution of an amount from an individual's
SIMPLE IRA during this 2-year period is not eligible to be rolled over
into an IRA that is not a SIMPLE IRA and thus cannot be a qualified
rollover contribution. This 2-year period of section 408(d)(3)(G)
applies separately to the contributions of each of an individual's
employers maintaining a SIMPLE IRA Plan.
(c) Once an amount in a SEP IRA or SIMPLE IRA has been converted to
a Roth IRA, it is treated as a contribution to a Roth IRA for all
purposes. Future contributions under the SEP or under the SIMPLE IRA
Plan may not be made to the Roth IRA.
Q-5. Can amounts in other kinds of retirement plans be converted to
a Roth IRA?
A-5. No. Only amounts in another IRA can be converted to a Roth IRA.
For example, amounts in a qualified plan or annuity plan described in
section 401(a) or 403(a) cannot be converted directly to a Roth IRA.
Also, amounts held in an annuity contract or account described in
section 403(b) cannot be converted directly to a Roth IRA.
Q-6. Can an individual who has attained at least age 70\1/2\ by the
end of a calendar year convert an amount distributed from a traditional
IRA during that year to a Roth IRA before receiving his or her required
minimum distribution with respect to the traditional IRA for the year of
the conversion?
A-6. (a) No. In order to be eligible for a conversion, an amount
first must be eligible to be rolled over. Section 408(d)(3) prohibits
the rollover of a required minimum distribution. If a minimum
distribution is required for a year with respect to an IRA, the first
dollars distributed during that year are treated as consisting of the
required minimum distribution until an amount equal to the required
minimum distribution for that year has been distributed.
(b) As provided in A-1(c) of this section, any amount converted is
treated as a distribution from a traditional IRA and a rollover
contribution to a Roth IRA and not as a trustee-to-trustee transfer for
purposes of section 408 and section 408A. Thus, in a year for
[[Page 456]]
which a minimum distribution is required (including the calendar year in
which the individual attains age 70\1/2\), an individual may not convert
the assets of an IRA (or any portion of those assets) to a Roth IRA to
the extent that the required minimum distribution for the traditional
IRA for the year has not been distributed.
(c) If a required minimum distribution is contributed to a Roth IRA,
it is treated as having been distributed, subject to the normal rules
under section 408(d)(1) and (2), and then contributed as a regular
contribution to a Roth IRA. The amount of the required minimum
distribution is not a conversion contribution.
Q-7. What are the tax consequences when an amount is converted to a
Roth IRA?
A-7. (a) Any amount that is converted to a Roth IRA is includible in
gross income as a distribution according to the rules of section
408(d)(1) and (2) for the taxable year in which the amount is
distributed or transferred from the traditional IRA. Thus, any portion
of the distribution or transfer that is treated as a return of basis
under section 408(d)(1) and (2) is not includible in gross income as a
result of the conversion.
(b) The 10-percent additional tax under section 72(t) generally does
not apply to the taxable conversion amount. But see Sec. 1.408A-6 A-5
for circumstances under which the taxable conversion amount would be
subject to the additional tax under section 72(t).
(c) Pursuant to section 408A(e), a conversion is not treated as a
rollover for purposes of the one-rollover-per-year rule of section
408(d)(3)(B).
Q-8. Is there an exception to the income-inclusion rule described in
A-7 of this section for 1998 conversions?
A-8. Yes. In the case of a distribution (including a trustee-to-
trustee transfer) from a traditional IRA on or before December 31, 1998,
that is converted to a Roth IRA, instead of having the entire taxable
conversion amount includible in income in 1998, an individual includes
in gross income for 1998 only one quarter of that amount and one quarter
of that amount for each of the next 3 years. This 4-year spread also
applies if the conversion amount was distributed in 1998 and contributed
to the Roth IRA within the 60-day period described in section
408(d)(3)(A)(i), but after December 31, 1998. However, see Sec. 1.408A-6
A-6 for special rules requiring acceleration of inclusion if an amount
subject to the 4-year spread is distributed from the Roth IRA before
2001.
Q-9. Is the taxable conversion amount included in income for all
purposes?
A-9. Except as provided below, any taxable conversion amount
includible in gross income for a year as a result of the conversion
(regardless of whether the individual is using a 4-year spread) is
included in income for all purposes. Thus, for example, it is counted
for purposes of determining the taxable portion of social security
payments under section 86 and for purposes of determining the phase-out
of the $25,000 exemption under section 469(i) relating to the
disallowance of passive activity losses from rental real estate
activities. However, as provided in Sec. 1.408A-3 A-5, the taxable
conversion amount (and any resulting change in other elements of
adjusted gross income) is disregarded for purposes of determining
modified AGI for section 408A.
Q-10. Can an individual who makes a 1998 conversion elect not to
have the 4-year spread apply and instead have the full taxable
conversion amount includible in gross income for 1998?
A-10. Yes. Instead of having the taxable conversion amount for a
1998 conversion included over 4 years as provided under A-8 of this
section, an individual can elect to include the full taxable conversion
amount in income for 1998. The election is made on Form 8606 and cannot
be made or changed after the due date (including extensions) for filing
the 1998 Federal income tax return.
Q-11. What happens when an individual who is using the 4-year spread
dies, files separately, or divorces before the full taxable conversion
amount has been included in gross income?
A-11. (a) If an individual who is using the 4-year spread described
in A-8 of this section dies before the full taxable conversion amount
has been included in gross income, then the remainder must be included
in the individual's
[[Page 457]]
gross income for the taxable year that includes the date of death.
(b) However, if the sole beneficiary of all the decedent's Roth IRAs
is the decedent's spouse, then the spouse can elect to continue the 4-
year spread. Thus, the spouse can elect to include in gross income the
same amount that the decedent would have included in each of the
remaining years of the 4-year period. Where the spouse makes such an
election, the amount includible under the 4-year spread for the taxable
year that includes the date of the decedent's death remains includible
in the decedent's gross income and is reported on the decedent's final
Federal income tax return. The election is made on either Form 8606 or
Form 1040, in accordance with the instructions to the applicable form,
for the taxable year that includes the decedent's date of death and
cannot be changed after the due date (including extensions) for filing
the Federal income tax return for the spouse's taxable year that
includes the decedent's date of death.
(c) If a Roth IRA owner who is using the 4-year spread and who was
married in 1998 subsequently files separately or divorces before the
full taxable conversion amount has been included in gross income, the
remainder of the taxable conversion amount must be included in the Roth
IRA owner's gross income over the remaining years in the 4-year period
(unless accelerated because of distribution or death).
Q-12. Can an individual convert a traditional IRA to a Roth IRA if
he or she is receiving substantially equal periodic payments within the
meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A-12. Yes. Not only is the conversion amount itself not subject to
the early distribution tax under section 72(t), but the conversion
amount is also not treated as a distribution for purposes of determining
whether a modification within the meaning of section 72(t)(4)(A) has
occurred. Distributions from the Roth IRA that are part of the original
series of substantially equal periodic payments will be nonqualified
distributions from the Roth IRA until they meet the requirements for
being a qualified distribution, described in Sec. 1.408A-6 A-1(b). The
additional 10-percent tax under section 72(t) will not apply to the
extent that these nonqualified distributions are part of a series of
substantially equal periodic payments. Nevertheless, to the extent that
such distributions are allocable to a 1998 conversion contribution with
respect to which the 4-year spread for the resultant income inclusion
applies (see A-8 of this section) and are received during 1998, 1999, or
2000, the special acceleration rules of Sec. 1.408A-6 A-6 apply.
However, if the original series of substantially equal periodic payments
does not continue to be distributed in substantially equal periodic
payments from the Roth IRA after the conversion, the series of payments
will have been modified and, if this modification occurs within 5 years
of the first payment or prior to the individual becoming disabled or
attaining age 59\1/2\, the taxpayer will be subject to the recapture tax
of section 72(t)(4)(A).
Q-13. Can a 1997 distribution from a traditional IRA be converted to
a Roth IRA in 1998?
A-13. No. An amount distributed from a traditional IRA in 1997 that
is contributed to a Roth IRA in 1998 would not be a conversion
contribution. See A-3 of this section regarding the remedy for a failed
conversion.
[T.D. 8816, 64 FR 5603, Feb. 4, 1999]
Sec. 1.408A-5 Recharacterized contributions.
This section sets forth the following questions and answers that
provide rules regarding recharacterizing IRA contributions:
Q-1. Can an IRA owner recharacterize certain contributions (i.e.,
treat a contribution made to one type of IRA as made to a different type
of IRA) for a taxable year?
A-1. (a) Yes. In accordance with section 408A(d)(6), except as
otherwise provided in this section, if an individual makes a
contribution to an IRA (the FIRST IRA) for a taxable year and then
transfers the contribution (or a portion of the contribution) in a
trustee-to-trustee transfer from the trustee of the FIRST IRA to the
trustee of another IRA (the SECOND IRA), the individual can elect to
treat the contribution as having been made to the SECOND IRA, instead of
to the FIRST IRA,
[[Page 458]]
for Federal tax purposes. A transfer between the FIRST IRA and the
SECOND IRA will not fail to be a trustee-to-trustee transfer merely
because both IRAs are maintained by the same trustee. For purposes of
section 408A(d)(6), redesignating the FIRST IRA as the SECOND IRA will
be treated as a transfer of the entire account balance from the FIRST
IRA to the SECOND IRA.
(b) This recharacterization election can be made only if the
trustee-to-trustee transfer from the FIRST IRA to the SECOND IRA is made
on or before the due date (including extensions) for filing the
individual's Federal income tax return for the taxable year for which
the contribution was made to the FIRST IRA. For purposes of this
section, a conversion that is accomplished through a rollover of a
distribution from a traditional IRA in a taxable year that, 60 days
after the distribution (as described in section 408(d)(3)(A)(i)), is
contributed to a Roth IRA in the next taxable year is treated as a
contribution for the earlier taxable year.
Q-2. What is the proper treatment of the net income attributable to
the amount of a contribution that is being recharacterized?
A-2. (a) The net income attributable to the amount of a contribution
that is being recharacterized must be transferred to the SECOND IRA
along with the contribution.
(b) If the amount of the contribution being recharacterized was
contributed to a separate IRA and no distributions or additional
contributions have been made from or to that IRA at any time, then the
contribution is recharacterized by the trustee of the FIRST IRA
transferring the entire account balance of the FIRST IRA to the trustee
of the SECOND IRA. In this case, the net income (or loss) attributable
to the contribution being recharacterized is the difference between the
amount of the original contribution and the amount transferred.
(c) If paragraph (b) of this A-2 does not apply, then the net income
attributable to the amount of a contribution is calculated in the manner
prescribed by Sec. 1.408-4(c)(2)(ii) (disregarding the parenthetical
clause in Sec. 1.408-4(c)(2)(iii)).
Q-3. What is the effect of recharacterizing a contribution made to
the FIRST IRA as a contribution made to the SECOND IRA?
A-3. The contribution that is being recharacterized as a
contribution to the SECOND IRA is treated as having been originally
contributed to the SECOND IRA on the same date and (in the case of a
regular contribution) for the same taxable year that the contribution
was made to the FIRST IRA. Thus, for example, no deduction would be
allowed for a contribution to the FIRST IRA, and any net income
transferred with the recharacterized contribution is treated as earned
in the SECOND IRA, and not the FIRST IRA.
Q-4. Can an amount contributed to an IRA in a tax-free transfer be
recharacterized under A-1 of this section?
A-4. No. If an amount is contributed to the FIRST IRA in a tax-free
transfer, the amount cannot be recharacterized as a contribution to the
SECOND IRA under A-1 of this section. However, if an amount is
erroneously rolled over or transferred from a traditional IRA to a
SIMPLE IRA, the contribution can subsequently be recharacterized as a
contribution to another traditional IRA.
Q-5. Can an amount contributed by an employer under a SIMPLE IRA
Plan or a SEP be recharacterized under A-1 of this section?
A-5. No. Employer contributions (including elective deferrals) under
a SIMPLE IRA Plan or a SEP cannot be recharacterized as contributions to
another IRA under A-1 of this section. However, an amount converted from
a SEP IRA or SIMPLE IRA to a Roth IRA may be recharacterized under A-1
of this section as a contribution to a SEP IRA or SIMPLE IRA, including
the original SEP IRA or SIMPLE IRA.
Q-6. How does a taxpayer make the election to recharacterize a
contribution to an IRA for a taxable year?
A-6. (a) An individual makes the election described in this section
by notifying, on or before the date of the transfer, both the trustee of
the FIRST IRA and the trustee of the SECOND IRA, that the individual has
elected to
[[Page 459]]
treat the contribution as having been made to the SECOND IRA, instead of
the FIRST IRA, for Federal tax purposes. The notification of the
election must include the following information: the type and amount of
the contribution to the FIRST IRA that is to be recharacterized; the
date on which the contribution was made to the FIRST IRA and the year
for which it was made; a direction to the trustee of the FIRST IRA to
transfer, in a trustee-to-trustee transfer, the amount of the
contribution and net income allocable to the contribution to the trustee
of the SECOND IRA; and the name of the trustee of the FIRST IRA and the
trustee of the SECOND IRA and any additional information needed to make
the transfer.
(b) The election and the trustee-to-trustee transfer must occur on
or before the due date (including extensions) for filing the
individual's Federal income tax return for the taxable year for which
the recharacterized contribution was made to the FIRST IRA, and the
election cannot be revoked after the transfer. An individual who makes
this election must report the recharacterization, and must treat the
contribution as having been made to the SECOND IRA, instead of the FIRST
IRA, on the individual's Federal income tax return for the taxable year
described in the preceding sentence in accordance with the applicable
Federal tax forms and instructions.
(c) The election to recharacterize a contribution described in this
A-6 may be made on behalf of a deceased IRA owner by his or her
executor, administrator, or other person responsible for filing the
final Federal income tax return of the decedent under section
6012(b)(1).
Q-7. If an amount is initially contributed to an IRA for a taxable
year, then is moved (with net income attributable to the contribution)
in a tax-free transfer to another IRA (the FIRST IRA for purposes of A-1
of this section), can the tax-free transfer be disregarded, so that the
initial contribution that is transferred from the FIRST IRA to the
SECOND IRA is treated as a recharacterization of that initial
contribution?
A-7. Yes. In applying section 408A(d)(6), tax-free transfers between
IRAs are disregarded. Thus, if a contribution to an IRA for a year is
followed by one or more tax-free transfers between IRAs prior to the
recharacterization, then for purposes of section 408A(d)(6), the
contribution is treated as if it remained in the initial IRA.
Consequently, an individual may elect to recharacterize an initial
contribution made to the initial IRA that was involved in a series of
tax-free transfers by making a trustee-to-trustee transfer from the last
IRA in the series to the SECOND IRA. In this case the contribution to
the SECOND IRA is treated as made on the same date (and for the same
taxable year) as the date the contribution being recharacterized was
made to the initial IRA.
Q-8. If a contribution is recharacterized, is the recharacterization
treated as a rollover for purposes of the one-rollover-per-year
limitation of section 408(d)(3)(B)?
A-8. No, recharacterizing a contribution under A-1 of this section
is never treated as a rollover for purposes of the one-rollover-per-year
limitation of section 408(d)(3)(B), even if the contribution would have
been treated as a rollover contribution by the SECOND IRA if it had been
made directly to the SECOND IRA, rather than as a result of a
recharacterization of a contribution to the FIRST IRA.
Q-9. If an IRA owner converts an amount from a traditional IRA to a
Roth IRA and then transfers that amount back to a traditional IRA in a
recharacterization, may the IRA owner subsequently reconvert that amount
from the traditional IRA to a Roth IRA?
A-9. (a)(1) Except as otherwise provided in paragraph (b) of this A-
9, an IRA owner who converts an amount from a traditional IRA to a Roth
IRA during any taxable year and then transfers that amount back to a
traditional IRA by means of a recharacterization may not reconvert that
amount from the traditional IRA to a Roth IRA before the beginning of
the taxable year following the taxable year in which the amount was
converted to a Roth IRA or, if later, the end of the 30-day period
beginning on the day on
[[Page 460]]
which the IRA owner transfers the amount from the Roth IRA back to a
traditional IRA by means of a recharacterization (regardless of whether
the recharacterization occurs during the taxable year in which the
amount was converted to a Roth IRA or the following taxable year). Thus,
any attempted reconversion of an amount prior to the time permitted
under this paragraph (a)(1) is a failed conversion of that amount.
However, see Sec. 1.408A-4 A-3 for a remedy available to an individual
who makes a failed conversion.
(2) For purposes of paragraph (a)(1) of this A-9, a failed
conversion of an amount resulting from a failure to satisfy the
requirements of Sec. 1.408A-4 A-1(a) is treated as a conversion in
determining whether an IRA owner has previously converted that amount.
(b)(1) An IRA owner who converts an amount from a traditional IRA to
a Roth IRA during taxable year 1998 and then transfers that amount back
to a traditional IRA by means of a recharacterization may reconvert that
amount once (but no more than once) on or after November 1, 1998 and on
or before December 31, 1998; the IRA owner may also reconvert that
amount once (but no more than once) during 1999. The rule set forth in
the preceding sentence applies without regard to whether the IRA owner's
initial conversion or recharacterization of the amount occurred before,
on, or after November 1, 1998. An IRA owner who converts an amount from
a traditional IRA to a Roth IRA during taxable year 1999 that has not
been converted previously and then transfers that amount back to a
traditional IRA by means of a recharacterization may reconvert that
amount once (but no more than once) on or before December 31, 1999. For
purposes of this paragraph (b)(1), a failed conversion of an amount
resulting from a failure to satisfy the requirements of Sec. 1.408A-4 A-
1(a) is not treated as a conversion in determining whether an IRA owner
has previously converted that amount.
(2) A reconversion by an IRA owner during 1998 or 1999 for which the
IRA owner is not eligible under paragraph (b)(1) of this A-9 will be
deemed an excess reconversion (rather than a failed conversion) and will
not change the IRA owner's taxable conversion amount. Instead, the
excess reconversion and the last preceding recharacterization will not
be taken into account for purposes of determining the IRA owner's
taxable conversion amount, and the IRA owner's taxable conversion amount
will be based on the last reconversion that was not an excess
reconversion (unless, after the excess reconversion, the amount is
transferred back to a traditional IRA by means of a recharacterization).
An excess reconversion will otherwise be treated as a valid
reconversion.
(3) For purposes of this paragraph (b), any reconversion that an IRA
owner made before November 1, 1998 will not be treated as an excess
reconversion and will not be taken into account in determining whether
any later reconversion is an excess reconversion.
(c) In determining the portion of any amount held in a Roth IRA or a
traditional IRA that an IRA owner may not reconvert under this A-9, any
amount previously converted (or reconverted) is adjusted for subsequent
net income thereon.
Q-10. Are there examples to illustrate the rules in this section?
A-10. The rules in this section are illustrated by the following
examples:
Example 1. In 1998, Individual C converts the entire amount in his
traditional IRA to a Roth IRA. Individual C thereafter determines that
his modified AGI for 1998 exceeded $100,000 so that he was ineligible to
have made a conversion in that year. Accordingly, prior to the due date
(plus extensions) for filing the individual's Federal income tax return
for 1998, he decides to recharacterize the conversion contribution. He
instructs the trustee of the Roth IRA (FIRST IRA) to transfer in a
trustee-to-trustee transfer the amount of the contribution, plus net
income, to the trustee of a new traditional IRA (SECOND IRA). The
individual notifies the trustee of the FIRST IRA and the trustee of the
SECOND IRA that he is recharacterizing his IRA contribution (and
provides the other information described in A-6 of this section). On the
individual's Federal income tax return for 1998, he treats the original
amount of the conversion as having been contributed to the SECOND IRA
and not the Roth IRA. As a result, for Federal tax purposes, the
contribution is treated as having been made to the SECOND IRA and not to
the Roth IRA. The result would be the same if the conversion amount had
been transferred in a
[[Page 461]]
tax-free transfer to another Roth IRA prior to the recharacterization.
Example 2. In 1998, an individual makes a $2,000 regular
contribution for 1998 to his traditional IRA (FIRST IRA). Prior to the
due date (plus extensions) for filing the individual's Federal income
tax return for 1998, he decides that he would prefer to contribute to a
Roth IRA instead. The individual instructs the trustee of the FIRST IRA
to transfer in a trustee-to-trustee transfer the amount of the
contribution, plus attributable net income, to the trustee of a Roth IRA
(SECOND IRA). The individual notifies the trustee of the FIRST IRA and
the trustee of the SECOND IRA that he is recharacterizing his $2,000
contribution for 1998 (and provides the other information described in
A-6 of this section). On the individual's Federal income tax return for
1998, he treats the $2,000 as having been contributed to the Roth IRA
for 1998 and not to the traditional IRA. As a result, for Federal tax
purposes, the contribution is treated as having been made to the Roth
IRA for 1998 and not to the traditional IRA. The result would be the
same if the conversion amount had been transferred in a tax-free
transfer to another traditional IRA prior to the recharacterization.
Example 3. The facts are the same as in Example 2, except that the
$2,000 regular contribution is initially made to a Roth IRA and the
recharacterizing transfer is made to a traditional IRA. On the
individual's Federal income tax return for 1998, he treats the $2,000 as
having been contributed to the traditional IRA for 1998 and not the Roth
IRA. As a result, for Federal tax purposes, the contribution is treated
as having been made to the traditional IRA for 1998 and not the Roth
IRA. The result would be the same if the contribution had been
transferred in a tax-free transfer to another Roth IRA prior to the
recharacterization, except that the only Roth IRA trustee the individual
must notify is the one actually making the recharacterization transfer.
Example 4. In 1998, an individual receives a distribution from
traditional IRA 1 and contributes the entire amount to traditional IRA 2
in a rollover contribution described in section 408(d)(3). In this case,
the individual cannot elect to recharacterize the contribution by
transferring the contribution amount, plus net income, to a Roth IRA,
because an amount contributed to an IRA in a tax-free transfer cannot be
recharacterized. However, the individual may convert (other than by
recharacterization) the amount in traditional IRA 2 to a Roth IRA at any
time, provided the requirements of Sec. 1.408A-4 A-1 are satisfied.
[T.D. 8816, 64 FR 5605, Feb. 4, 1999]
Sec. 1.408A-6 Distributions.
This section sets forth the following questions and answers that
provide rules regarding distributions from Roth IRAs:
Q-1. How are distributions from Roth IRAs taxed?
A-1. (a) The taxability of a distribution from a Roth IRA generally
depends on whether or not the distribution is a qualified distribution.
This A-1 provides rules for qualified distributions and certain other
nontaxable distributions. A-4 of this section provides rules for the
taxability of distributions that are not qualified distributions.
(b) A distribution from a Roth IRA is not includible in the owner's
gross income if it is a qualified distribution or to the extent that it
is a return of the owner's contributions to the Roth IRA (determined in
accordance with A-8 of this section). A qualified distribution is one
that is both--
(1) Made after a 5-taxable-year period (defined in A-2 of this
section); and
(2) Made on or after the date on which the owner attains age 59\1/
2\, made to a beneficiary or the estate of the owner on or after the
date of the owner's death, attributable to the owner's being disabled
within the meaning of section 72(m)(7), or to which section 72(t)(2)(F)
applies (exception for first-time home purchase).
(c) An amount distributed from a Roth IRA will not be included in
gross income to the extent it is rolled over to another Roth IRA on a
tax-free basis under the rules of sections 408(d)(3) and 408A(e).
(d) Contributions that are returned to the Roth IRA owner in
accordance with section 408(d)(4) (corrective distributions) are not
includible in gross income, but any net income required to be
distributed under section 408(d)(4) together with the contributions is
includible in gross income for the taxable year in which the
contributions were made.
Q-2. When does the 5-taxable-year period described in A-1 of this
section (relating to qualified distributions) begin and end?
A-2. The 5-taxable-year period described in A-1 of this section
begins on the first day of the individual's taxable
[[Page 462]]
year for which the first regular contribution is made to any Roth IRA of
the individual or, if earlier, the first day of the individual's taxable
year in which the first conversion contribution is made to any Roth IRA
of the individual. The 5-taxable-year period ends on the last day of the
individual's fifth consecutive taxable year beginning with the taxable
year described in the preceding sentence. For example, if an individual
whose taxable year is the calendar year makes a first-time regular Roth
IRA contribution any time between January 1, 1998, and April 15, 1999,
for 1998, the 5-taxable-year period begins on January 1, 1998. Thus,
each Roth IRA owner has only one 5-taxable-year period described in A-1
of this section for all the Roth IRAs of which he or she is the owner.
Further, because of the requirement of the 5-taxable-year period, no
qualified distributions can occur before taxable years beginning in
2003. For purposes of this A-2, the amount of any contribution
distributed as a corrective distribution under A-1(d) of this section is
treated as if it was never contributed.
Q-3. If a distribution is made to an individual who is the sole
beneficiary of his or her deceased spouse's Roth IRA and the individual
is treating the Roth IRA as his or her own, can the distribution be a
qualified distribution based on being made to a beneficiary on or after
the owner's death?
A-3. No. If a distribution is made to an individual who is the sole
beneficiary of his or her deceased spouse's Roth IRA and the individual
is treating the Roth IRA as his or her own, then, in accordance with
Sec. 1.408A-2 A-4, the distribution is treated as coming from the
individual's own Roth IRA and not the deceased spouse's Roth IRA.
Therefore, for purposes of determining whether the distribution is a
qualified distribution, it is not treated as made to a beneficiary on or
after the owner's death.
Q-4. How is a distribution from a Roth IRA taxed if it is not a
qualified distribution?
A-4. A distribution that is not a qualified distribution, and is
neither contributed to another Roth IRA in a qualified rollover
contribution nor constitutes a corrective distribution, is includible in
the owner's gross income to the extent that the amount of the
distribution, when added to the amount of all prior distributions from
the owner's Roth IRAs (whether or not they were qualified distributions)
and reduced by the amount of those prior distributions previously
includible in gross income, exceeds the owner's contributions to all his
or her Roth IRAs. For purposes of this A-4, any amount distributed as a
corrective distribution is treated as if it was never contributed.
Q-5. Will the additional tax under 72(t) apply to the amount of a
distribution that is not a qualified distribution?
A-5. (a) The 10-percent additional tax under section 72(t) will
apply (unless the distribution is excepted under section 72(t)) to any
distribution from a Roth IRA includible in gross income.
(b) The 10-percent additional tax under section 72(t) also applies
to a nonqualified distribution, even if it is not then includible in
gross income, to the extent it is allocable to a conversion
contribution, if the distribution is made within the 5-taxable-year
period beginning with the first day of the individual's taxable year in
which the conversion contribution was made. The 5-taxable-year period
ends on the last day of the individual's fifth consecutive taxable year
beginning with the taxable year described in the preceding sentence. For
purposes of applying the tax, only the amount of the conversion
contribution includible in gross income as a result of the conversion is
taken into account. The exceptions under section 72(t) also apply to
such a distribution.
(c) The 5-taxable-year period described in this A-5 for purposes of
determining whether section 72(t) applies to a distribution allocable to
a conversion contribution is separately determined for each conversion
contribution, and need not be the same as the 5-taxable-year period used
for purposes of determining whether a distribution is a qualified
distribution under A-1(b) of this section. For example, if a calendar-
year taxpayer who received a distribution from a traditional IRA on
December 31, 1998, makes a conversion
[[Page 463]]
contribution by contributing the distributed amount to a Roth IRA on
February 25, 1999 in a qualifying rollover contribution and makes a
regular contribution for 1998 on the same date, the 5-taxable-year
period for purposes of this A-5 begins on January 1, 1999, while the 5-
taxable-year period for purposes of A-1(b) of this section begins on
January 1, 1998.
Q-6. Is there a special rule for taxing distributions allocable to a
1998 conversion?
A-6. Yes. In the case of a distribution from a Roth IRA in 1998,
1999 or 2000 of amounts allocable to a 1998 conversion with respect to
which the 4-year spread for the resultant income inclusion applies (see
Sec. 1.408A-4 A-8), any income deferred as a result of the election to
years after the year of the distribution is accelerated so that it is
includible in gross income in the year of the distribution up to the
amount of the distribution allocable to the 1998 conversion (determined
under A-8 of this section). This amount is in addition to the amount
otherwise includible in the owner's gross income for that taxable year
as a result of the conversion. However, this rule will not require the
inclusion of any amount to the extent it exceeds the total amount of
income required to be included over the 4-year period. The acceleration
of income inclusion described in this A-6 applies in the case of a
surviving spouse who elects to continue the 4-year spread in accordance
with Sec. 1.408A-4 A-11(b).
Q-7. Is the 5-taxable-year period described in A-1 of this section
redetermined when a Roth IRA owner dies?
A-7. (a) No. The beginning of the 5-taxable-year period described in
A-1 of this section is not redetermined when the Roth IRA owner dies.
Thus, in determining the 5-taxable-year period, the period the Roth IRA
is held in the name of a beneficiary, or in the name of a surviving
spouse who treats the decedent's Roth IRA as his or her own, includes
the period it was held by the decedent.
(b) The 5-taxable-year period for a Roth IRA held by an individual
as a beneficiary of a deceased Roth IRA owner is determined
independently of the 5-taxable-year period for the beneficiary's own
Roth IRA. However, if a surviving spouse treats the Roth IRA as his or
her own, the 5-taxable-year period with respect to any of the surviving
spouse's Roth IRAs (including the one that the surviving spouse treats
as his or her own) ends at the earlier of the end of either the 5-
taxable-year period for the decedent or the 5-taxable-year period
applicable to the spouse's own Roth IRAs.
Q-8. How is it determined whether an amount distributed from a Roth
IRA is allocated to regular contributions, conversion contributions, or
earnings?
A-8. (a) Any amount distributed from an individual's Roth IRA is
treated as made in the following order (determined as of the end of a
taxable year and exhausting each category before moving to the following
category)--
(1) From regular contributions;
(2) From conversion contributions, on a first-in-first-out basis;
and
(3) From earnings.
(b) To the extent a distribution is treated as made from a
particular conversion contribution, it is treated as made first from the
portion, if any, that was includible in gross income as a result of the
conversion.
Q-9. Are there special rules for determining the source of
distributions under A-8 of this section?
A-9. Yes. For purposes of determining the source of distributions,
the following rules apply:
(a) All distributions from all an individual's Roth IRAs made during
a taxable year are aggregated.
(b) All regular contributions made for the same taxable year to all
the individual's Roth IRAs are aggregated and added to the undistributed
total regular contributions for prior taxable years. Regular
contributions for a taxable year include contributions made in the
following taxable year that are identified as made for the taxable year
in accordance with Sec. 1.408A-3 A-2. For example, a regular
contribution made in 1999 for 1998 is aggregated with the contributions
made in 1998 for 1998.
(c) All conversion contributions received during the same taxable
year by all the individual's Roth IRAs are aggregated. Notwithstanding
the preceding sentence, all conversion contributions made by an
individual during 1999 that were distributed from a
[[Page 464]]
traditional IRA in 1998 and with respect to which the 4-year spread
applies are treated for purposes of A-8(b) of this section as
contributed to the individual's Roth IRAs prior to any other conversion
contributions made by the individual during 1999.
(d) A distribution from an individual's Roth IRA that is rolled over
to another Roth IRA of the individual in accordance with section 408A(e)
is disregarded for purposes of determining the amount of both
contributions and distributions.
(e) Any amount distributed as a corrective distribution (including
net income), as described in A-1(d) of this section, is disregarded in
determining the amount of contributions, earnings, and distributions.
(f) If an individual recharacterizes a contribution made to a
traditional IRA (FIRST IRA) by transferring the contribution to a Roth
IRA (SECOND IRA) in accordance with Sec. 1.408A-5, then, pursuant to
Sec. 1.408A-5 A-3, the contribution to the Roth IRA is taken into
account for the same taxable year for which it would have been taken
into account if the contribution had originally been made to the Roth
IRA and had never been contributed to the traditional IRA. Thus, the
contribution to the Roth IRA is treated as contributed to the Roth IRA
on the same date and for the same taxable year that the contribution was
made to the traditional IRA.
(g) If an individual recharacterizes a regular or conversion
contribution made to a Roth IRA (FIRST IRA) by transferring the
contribution to a traditional IRA (SECOND IRA) in accordance with
Sec. 1.408A-5, then pursuant to Sec. 1.408A-5 A-3, the contribution to
the Roth IRA and the recharacterizing transfer are disregarded in
determining the amount of both contributions and distributions for the
taxable year with respect to which the original contribution was made to
the Roth IRA.
(h) Pursuant to Sec. 1.408A-5 A-3, the effect of income or loss
(determined in accordance with Sec. 1.408A-5 A-2) occurring after the
contribution to the FIRST IRA is disregarded in determining the amounts
described in paragraphs (f) and (g) of this A-9. Thus, for purposes of
paragraphs (f) and (g), the amount of the contribution is determined
based on the original contribution.
Q-10. Are there examples to illustrate the ordering rules described
in A-8 and A-9 of this section?
A-10. Yes. The following examples illustrate these ordering rules:
Example 1. In 1998, individual B converts $80,000 in his traditional
IRA to a Roth IRA. B has a basis of $20,000 in the conversion amount and
so must include the remaining $60,000 in gross income. He decides to
spread the $60,000 income by including $15,000 in each of the 4 years
1998-2001, under the rules of Sec. 1.408A-4 A-8. B also makes a regular
contribution of $2,000 in 1998. If a distribution of $2,000 is made to B
anytime in 1998, it will be treated as made entirely from the regular
contributions, so there will be no Federal income tax consequences as a
result of the distribution.
Example 2. The facts are the same as in Example 1, except that the
distribution made in 1998 is $5,000. The distribution is treated as made
from $2,000 of regular contributions and $3,000 of conversion
contributions that were includible in gross income. As a result, B must
include $18,000 in gross income for 1998: $3,000 as a result of the
acceleration of amounts that otherwise would have been included in later
years under the 4-year-spread rule and $15,000 includible under the
regular 4-year-spread rule. In addition, because the $3,000 is allocable
to a conversion made within the previous 5 taxable years, the 10-percent
additional tax under section 72(t) would apply to this $3,000
distribution for 1998, unless an exception applies. Under the 4-year-
spread rule, B would now include in gross income $15,000 for 1999 and
2000, but only $12,000 for 2001, because of the accelerated inclusion of
the $3,000 distribution.
Example 3. The facts are the same as in Example 1, except that B
makes an additional $2,000 regular contribution in 1999 and he does not
take a distribution in 1998. In 1999, the entire balance in the account,
$90,000 ($84,000 of contributions and $6,000 of earnings), is
distributed to B. The distribution is treated as made from $4,000 of
regular contributions, $60,000 of conversion contributions that were
includible in gross income, $20,000 of conversion contributions that
were not includible in gross income, and $6,000 of earnings. Because a
distribution has been made within the 4-year-spread period, B must
accelerate the income inclusion under the 4-year-spread rule and must
include in gross income the $45,000 remaining under the 4-year-spread
rule in addition to the $6,000 of earnings. Because $60,000 of the
distribution is allocable to a conversion made within the previous 5
taxable years, it is subject to the 10-percent additional tax under
section 72(t)
[[Page 465]]
as if it were includible in gross income for 1999, unless an exception
applies. The $6,000 allocable to earnings would be subject to the tax
under section 72(t), unless an exception applies. Under the 4-year-
spread rule, no amount would be includible in gross income for 2000 or
2001 because the entire amount of the conversion that was includible in
gross income has already been included.
Example 4. The facts are the same as in Example 1, except that B
also makes a $2,000 regular contribution in each year 1999 through 2002
and he does not take a distribution in 1998. A distribution of $85,000
is made to B in 2002. The distribution is treated as made from the
$10,000 of regular contributions (the total regular contributions made
in the years 1998-2002), $60,000 of conversion contributions that were
includible in gross income, and $15,000 of conversion contributions that
were not includible in gross income. As a result, no amount of the
distribution is includible in gross income; however, because the
distribution is allocable to a conversion made within the previous 5
years, the $60,000 is subject to the 10-percent additional tax under
section 72(t) as if it were includible in gross income for 2002, unless
an exception applies.
Example 5. The facts are the same as in Example 4, except no
distribution occurs in 2002. In 2003, the entire balance in the account,
$170,000 ($90,000 of contributions and $80,000 of earnings), is
distributed to B. The distribution is treated as made from $10,000 of
regular contributions, $60,000 of conversion contributions that were
includible in gross income, $20,000 of conversion contributions that
were not includible in gross income, and $80,000 of earnings. As a
result, for 2003, B must include in gross income the $80,000 allocable
to earnings, unless the distribution is a qualified distribution; and if
it is not a qualified distribution, the $80,000 would be subject to the
10-percent additional tax under section 72(t), unless an exception
applies.
Example 6. Individual C converts $20,000 to a Roth IRA in 1998 and
$15,000 (in which amount C had a basis of $2,000) to another Roth IRA in
1999. No other contributions are made. In 2003, a $30,000 distribution,
that is not a qualified distribution, is made to C. The distribution is
treated as made from $20,000 of the 1998 conversion contribution and
$10,000 of the 1999 conversion contribution that was includible in gross
income. As a result, for 2003, no amount is includible in gross income;
however, because $10,000 is allocable to a conversion contribution made
within the previous 5 taxable years, that amount is subject to the 10-
percent additional tax under section 72(t) as if the amount were
includible in gross income for 2003, unless an exception applies. The
result would be the same whichever of C's Roth IRAs made the
distribution.
Example 7. The facts are the same as in Example 6, except that the
distribution is a qualified distribution. The result is the same as in
Example 6, except that no amount would be subject to the 10-percent
additional tax under section 72(t), because, to be a qualified
distribution, the distribution must be made on or after the date on
which the owner attains age 59\1/2\, made to a beneficiary or the estate
of the owner on or after the date of the owner's death, attributable to
the owner's being disabled within the meaning of section 72(m)(7), or to
which section 72(t)(2)(F) applies (exception for a first-time home
purchase). Under section 72(t)(2), each of these conditions is also an
exception to the tax under section 72(t).
Example 8. Individual D makes a $2,000 regular contribution to a
traditional IRA on January 1, 1999, for 1998. On April 15, 1999, when
the $2,000 has increased to $2,500, D recharacterizes the contribution
by transferring the $2,500 to a Roth IRA (pursuant to Sec. 1.408A-5 A-
1). In this case, D's regular contribution to the Roth IRA for 1998 is
$2,000. The $500 of earnings is not treated as a contribution to the
Roth IRA. The results would be the same if the $2,000 had decreased to
$1,500 prior to the recharacterization.
Example 9. In December 1998, individual E receives a distribution
from his traditional IRA of $300,000 and in January 1999 he contributes
the $300,000 to a Roth IRA as a conversion contribution. In April 1999,
when the $300,000 has increased to $350,000, E recharacterizes the
conversion contribution by transferring the $350,000 to a traditional
IRA. In this case, E's conversion contribution for 1998 is $0, because
the $300,000 conversion contribution and the earnings of $50,000 are
disregarded. The results would be the same if the $300,000 had decreased
to $250,000 prior to the recharacterization. Further, since the
conversion is disregarded, the $300,000 is not includible in gross
income in 1998.
Q-11. If the owner of a Roth IRA dies prior to the end of the 5-
taxable-year period described in A-1 of this section (relating to
qualified distributions) or prior to the end of the 5-taxable-year
period described in A-5 of this section (relating to conversions), how
are different types of contributions in the Roth IRA allocated to
multiple beneficiaries?
A-11. Each type of contribution is allocated to each beneficiary on
a pro-rata basis. Thus, for example, if a Roth IRA owner dies in 1999,
when the Roth IRA contains a regular contribution of $2,000, a
conversion contribution of $6,000 and earnings of $1,000, and the owner
leaves his Roth IRA equally to four children, each child will receive
[[Page 466]]
one quarter of each type of contribution. Pursuant to the ordering rules
in A-8 of this section, an immediate distribution of $2,000 to one of
the children will be deemed to consist of $500 of regular contributions
and $1,500 of conversion contributions. A beneficiary's inherited Roth
IRA may not be aggregated with any other Roth IRA maintained by such
beneficiary (except for other Roth IRAs the beneficiary inherited from
the same decedent), unless the beneficiary, as the spouse of the
decedent and sole beneficiary of the Roth IRA, elects to treat the Roth
IRA as his or her own (see A-7 and A-14 of this section).
Q-12. How do the withholding rules under section 3405 apply to Roth
IRAs?
A-12. Distributions from a Roth IRA are distributions from an
individual retirement plan for purposes of section 3405 and thus are
designated distributions unless one of the exceptions in section
3405(e)(1) applies. Pursuant to section 3405(a) and (b), nonperiodic
distributions from a Roth IRA are subject to 10-percent withholding by
the payor and periodic payments are subject to withholding as if the
payments were wages. However, an individual can elect to have no amount
withheld in accordance with section 3405(a)(2) and (b)(2).
Q-13. Do the withholding rules under section 3405 apply to
conversions?
A-13. Yes. A conversion by any method described in Sec. 1.408A-4 A-1
is considered a designated distribution subject to section 3405.
However, a conversion occurring in 1998 by means of a trustee-to-trustee
transfer of an amount from a traditional IRA to a Roth IRA established
with the same or a different trustee is not required to be treated as a
designated distribution for purposes of section 3405. Consequently, no
withholding is required with respect to such a conversion (without
regard to whether or not the individual elected to have no withholding).
Q-14. What minimum distribution rules apply to a Roth IRA?
A-14. (a) No minimum distributions are required to be made from a
Roth IRA under section 408(a)(6) and (b)(3) (which generally incorporate
the provisions of section 401(a)(9)) while the owner is alive. The post-
death minimum distribution rules under section 401(a)(9)(B) that apply
to traditional IRAs, with the exception of the at-least-as-rapidly rule
described in section 401(a)(9)(B)(i), also apply to Roth IRAs.
(b) The minimum distribution rules apply to the Roth IRA as though
the Roth IRA owner died before his or her required beginning date. Thus,
generally, the entire interest in the Roth IRA must be distributed by
the end of the fifth calendar year after the year of the owner's death
unless the interest is payable to a designated beneficiary over a period
not greater than that beneficiary's life expectancy and distribution
commences before the end of the calendar year following the year of
death. If the sole beneficiary is the decedent's spouse, such spouse may
delay distributions until the decedent would have attained age 70\1/2\
or may treat the Roth IRA as his or her own.
(c) Distributions to a beneficiary that are not qualified
distributions will be includible in the beneficiary's gross income
according to the rules in A-4 of this section.
Q-15. Does section 401(a)(9) apply separately to Roth IRAs and
individual retirement plans that are not Roth IRAs?
A-15. Yes. An individual required to receive minimum distributions
from his or her own traditional or SIMPLE IRA cannot choose to take the
amount of the minimum distributions from any Roth IRA. Similarly, an
individual required to receive minimum distributions from a Roth IRA
cannot choose to take the amount of the minimum distributions from a
traditional or SIMPLE IRA. In addition, an individual required to
receive minimum distributions as a beneficiary under a Roth IRA can only
satisfy the minimum distributions for one Roth IRA by distributing from
another Roth IRA if the Roth IRAs were inherited from the same decedent.
Q-16. How is the basis of property distributed from a Roth IRA
determined for purposes of a subsequent disposition?
A-16. The basis of property distributed from a Roth IRA is its fair
market value (FMV) on the date of distribution, whether or not the
distribution is
[[Page 467]]
a qualified distribution. Thus, for example, if a distribution consists
of a share of stock in XYZ Corp. with an FMV of $40.00 on the date of
distribution, for purposes of determining gain or loss on the subsequent
sale of the share of XYZ Corp. stock, it has a basis of $40.00.
Q-17. What is the effect of distributing an amount from a Roth IRA
and contributing it to another type of retirement plan other than a Roth
IRA?
A-17. Any amount distributed from a Roth IRA and contributed to
another type of retirement plan (other than a Roth IRA) is treated as a
distribution from the Roth IRA that is neither a rollover contribution
for purposes of section 408(d)(3) nor a qualified rollover contribution
within the meaning of section 408A(e) to the other type of retirement
plan. This treatment also applies to any amount transferred from a Roth
IRA to any other type of retirement plan unless the transfer is a
recharacterization described in Sec. 1.408A-5.
Q-18. Can an amount be transferred directly from an education IRA to
a Roth IRA (or distributed from an education IRA and rolled over to a
Roth IRA)?
A-18. No amount may be transferred directly from an education IRA to
a Roth IRA. A transfer of funds (or distribution and rollover) from an
education IRA to a Roth IRA constitutes a distribution from the
education IRA and a regular contribution to the Roth IRA (rather than a
qualified rollover contribution to the Roth IRA).
Q-19. What are the Federal income tax consequences of a Roth IRA
owner transferring his or her Roth IRA to another individual by gift?
A-19. A Roth IRA owner's transfer of his or her Roth IRA to another
individual by gift constitutes an assignment of the owner's rights under
the Roth IRA. At the time of the gift, the assets of the Roth IRA are
deemed to be distributed to the owner and, accordingly, are treated as
no longer held in a Roth IRA. In the case of any such gift of a Roth IRA
made prior to October 1, 1998, if the entire interest in the Roth IRA is
reconveyed to the Roth IRA owner prior to January 1, 1999, the Internal
Revenue Service will treat the gift and reconveyance as never having
occurred for estate tax, gift tax, and generation-skipping tax purposes
and for purposes of this A-19.
[T.D. 8816, 64 FR 5607, Feb. 4, 1999]
Sec. 1.408A-7 Reporting.
This section sets forth the following questions and answers that
relate to the reporting requirements applicable to Roth IRAs:
Q-1. What reporting requirements apply to Roth IRAs?
A-1. Generally, the reporting requirements applicable to IRAs other
than Roth IRAs also apply to Roth IRAs, except that, pursuant to section
408A(d)(3)(D), the trustee of a Roth IRA must include on Forms 1099-R
and 5498 additional information as described in the instructions
thereto. Any conversion of amounts from an IRA other than a Roth IRA to
a Roth IRA is treated as a distribution for which a Form 1099-R must be
filed by the trustee maintaining the non-Roth IRA. In addition, the
owner of such IRAs must report the conversion by completing Form 8606.
In the case of a recharacterization described in Sec. 1.408A-5 A-1, IRA
owners must report such transactions in the manner prescribed in the
instructions to the applicable Federal tax forms.
Q-2. Can a trustee rely on reasonable representations of a Roth IRA
contributor or distributee for purposes of fulfilling reporting
obligations?
A-2. A trustee maintaining a Roth IRA is permitted to rely on
reasonable representations of a Roth IRA contributor or distributee for
purposes of fulfilling reporting obligations.
[T.D. 8816, 64 FR 5610, Feb. 4, 1999]
Sec. 1.408A-8 Definitions.
This section sets forth the following question and answer that
provides definitions of terms used in the provisions of Secs. 1.408A-1
through 1.408A-7 and this section:
Q-1. Are there any special definitions that govern in applying the
provisions of Secs. 1.408A-1 through 1.408A-7 and this section?
A-1. Yes, the following definitions govern in applying the
provisions of Secs. 1.408A-1 through 1.408A-7 and this section. Unless
the context indicates
[[Page 468]]
otherwise, the use of a particular term excludes the use of the other
terms.
(a) Different types of IRAs--(1) IRA. Sections 408(a) and (b),
respectively, describe an individual retirement account and an
individual retirement annuity. The term IRA means an IRA described in
either section 408(a) or (b), including each IRA described in paragraphs
(a)(2) through (5) of this A-1. However, the term IRA does not include
an education IRA described in section 530.
(2) Traditional IRA. The term traditional IRA means an individual
retirement account or individual retirement annuity described in section
408(a) or (b), respectively. This term includes a SEP IRA but does not
include a SIMPLE IRA or a Roth IRA.
(3) SEP IRA. Section 408(k) describes a simplified employee pension
(SEP) as an employer-sponsored plan under which an employer can make
contributions to IRAs established for its employees. The term SEP IRA
means an IRA that receives contributions made under a SEP. The term SEP
includes a salary reduction SEP (SARSEP) described in section 408(k)(6).
(4) SIMPLE IRA. Section 408(p) describes a SIMPLE IRA Plan as an
employer-sponsored plan under which an employer can make contributions
to SIMPLE IRAs established for its employees. The term SIMPLE IRA means
an IRA to which the only contributions that can be made are
contributions under a SIMPLE IRA Plan or rollovers or transfers from
another SIMPLE IRA.
(5) Roth IRA. The term Roth IRA means an IRA that meets the
requirements of section 408A.
(b) Other defined terms or phrases--(1) 4-year spread. The term 4-
year spread is described in Sec. 1.408A-4 A-8.
(2) Conversion. The term conversion means a transaction satisfying
the requirements of Sec. 1.408A-4 A-1.
(3) Conversion amount or conversion contribution. The term
conversion amount or conversion contribution is the amount of a
distribution and contribution with respect to which a conversion
described in Sec. 1.408A-4 A-1 is made.
(4) Failed conversion. The term failed conversion means a
transaction in which an individual contributes to a Roth IRA an amount
transferred or distributed from a traditional IRA or Simple IRA
(including a transfer by redesignation) in a transaction that does not
constitute a conversion under Sec. 1.408A-4 A-1.
(5) Modified AGI. The term modified AGI is defined in Sec. 1.408A-3
A-5.
(6) Recharacterization. The term recharacterization means a
transaction described in Sec. 1.408A-5 A-1.
(7) Recharacterized amount or recharacterized contribution.The term
recharacterized amount or recharacterized contribution means an amount
or contribution treated as contributed to an IRA other than the one to
which it was originally contributed pursuant to a recharacterization
described in Sec. 1.408A-5 A-1.
(8) Taxable conversion amount. The term taxable conversion amount
means the portion of a conversion amount includible in income on account
of a conversion, determined under the rules of section 408(d)(1) and
(2).
(9) Tax-free transfer. The term tax-free transfer means a tax-free
rollover described in section 402(c), 402(e)(6), 403(a)(4), 403(a)(5),
403(b)(8), 403(b)(10) or 408(d)(3), or a tax-free trustee-to-trustee
transfer.
(10) Treat an IRA as his or her own. The phrase treat an IRA as his
or her own means to treat an IRA for which a surviving spouse is the
sole beneficiary as his or her own IRA after the death of the IRA owner
in accordance with the terms of the IRA instrument or in the manner
provided in the regulations under section 408(a)(6) or (b)(3).
(11) Trustee. The term trustee includes a custodian or issuer (in
the case of an annuity) of an IRA (except where the context clearly
indicates otherwise).
[T.D. 8816, 64 FR 5610, Feb. 4, 1999]
Sec. 1.408A-9 Effective date.
This section contains the following question and answer providing
the effective date of Secs. 1.408A-1 through 1.408A-8:
Q-1. To what taxable years do Secs. 1.408A-1 through 1.408A-8 apply?
[[Page 469]]
A-1 Sections 1.408A-1 through 1.408A-8 apply to taxable years
beginning on or after January 1, 1998.
[T.D. 8816, 64 FR 5611, Feb. 4, 1999]
Sec. 1.409-1 Retirement bonds.
(a) In general. Section 409 authorizes the issuance of bonds under
the Second Liberty Bond Act the purchase price of which would be
deductible under section 219. Section 409 also prescribes the tax
treatment of such bonds. See paragraph (b) of this section.
(b) Income tax treatment of bonds--(1) General rule. Except as
provided in paragraph (b)(2) of this section, the entire proceeds upon
redemption of a retirement bond described in section 409(a) shall be
included in the gross income of the taxpayer entitled to such proceeds.
If a bond has not been tendered for redemption by the registered owner
before the close of the taxable year in which he attains age 70\1/2\, he
must include in his gross income for such taxable year the amount of the
proceeds he would have received if the bond had been redeemed at age
70\1/2\. The provisions of sections 72 and 1232 do not apply to a
retirement bond.
(2) Exceptions. (i) If a retirement bond is redeemed within 12
months after the issue date, the proceeds are excluded from gross income
if no deduction is allowed under section 219 on account of the purchase
of such bond. For definition of issue date, see 31 CFR 346.1(c).
(ii) If a retirement bond is redeemed after the close of the taxable
year in which the registered owner attains age 70\1/2\ the proceeds from
the redemption of the bond are excludable from the gross income of the
registered owner or his beneficiary to the extent that such proceeds
were includible in the gross income of the registered owner for such
taxable year.
(iii) If a retirement bond is surrendered for reissuance in the same
or lesser face amount, the difference between current redemption value
of the bond surrendered for reissuance and the current surrender value
of the bond reissued is includible in the gross income of the registered
owner.
(3) Basis. The basis of a retirement bond is zero.
(c) Rollover. The first sentence of paragraph (b)(1) of this section
shall not apply in any case in which a retirement bond is redeemed by
the registered owner before the close of the taxable year in which he
attains the age of 70\1/2\ if he transfers the entire amount of the
proceeds of such redemption to--
(1) An individual retirement account described in section 408(a) or
an individual retirement annuity described in section 408(b) (other than
an endowment contract described in Sec. 1.408-3(e)), or
(2) An employees' trust which is described in section 401(a) which
is exempt from tax under section 501(a), or an annuity plan described in
section 403(a), for the benefit of the registered owner, on or before
the 60th day after the day on which he received the proceeds of such
redemption. This subparagraph shall not apply in the case of a transfer
to a trust or plan described in (c)(2) of this section unless no part of
the purchase price of the retirement bond redeemed is attributable to
any source other than a rollover contribution from such an employees'
trust or annuity plan (other than an annuity plan or employees' trust
forming part of a plan under which the individual was an employee within
the meaning of section 401(c)(1) at the time contributions were made on
his behalf under the plan).
(d) Additional tax--(1) Early redemption. Except as provided in
paragraph (d)(2) of this section, under section 409(c) if a retirement
bond is redeemed by the registered owner before he attains age 59\1/2\,
his tax under chapter 1 of the Code is increased by an amount equal to
10 percent of the proceeds of the redemption includible in his gross
income for the taxable year. Except in the case of the credits allowable
under sections 31, 39, or 42, no credit can be used to offset the tax
described in the preceding sentence.
(2) Limitations. Paragraph (d)(1) of this section shall not apply
if--
(i) During the taxable year of the registered owner in which a
retirement bond is redeemed, the registered owner becomes disabled
within the meaning of section 72(m)(7), or
[[Page 470]]
(ii) A retirement bond is tendered for redemption in accordance with
paragraph (b)(2)(i) of this section.
[T.D. 7714, 45 FR 52799, Aug. 8, 1980]
Sec. 1.410(a)-1 Minimum participation standards; general rules.
(a) In general. A plan is not a qualified plan (and a trust forming
a part of such plan is not a qualified trust) unless the plan satisfies-
-
(1) The minimum age and service requirements of section 410(a)(1)
and Sec. 1.410(a)-3,
(2) The maximum age requirements of section 410(a)(2) and
Sec. 1.410(a)-4, and
(3) The minimum coverage requirements of section 410(b)(1) and
Sec. 1.410(b)-1.
(b) Organization of regulations relating to minimum participation
standards--(1) General rules. This section prescribes general rules
relating to the minimum participation standards provided by Section 410.
(2) Effective dates. Section 1.410(a)-2 provides rules under section
1017 of the Employee Retirement Income Security Act of 1974 relating to
effective dates under section 410.
(3) Age and service conditions. Section 1.410(a)-3 provides rules
under section 410(a)(1) relating to minimum age and service conditions.
(4) Maximum age and time of participation. Section 1.410(a)-4
provides rules under section 410(a) (2) and (4) relating to maximum age
and time of participation.
(5) Year of service; breaks in service. For rules relating to years
of service and breaks in service, see 29 CFR Part 2530 (Department of
Labor regulations relating to minimum standards for employee pension
benefit plans). See Sec. 1.410(a)-5 for rules under section 410(a)(3)(B)
relating to seasonal industries and for certain rules under section
410(a)(5) relating to breaks in service.
(6) Breaks in service. Section 1.410(a)-6 provides special rules
under section 1017(f) of the Employee Retirement Income Security Act of
1974 relating to amendment of break in service rules.
(7) Elapsed time. Section 1.410 (a)-7 provides rules under sections
410 and 411 relating to the elapsed time method of crediting years of
service.
(8) Coverage. Section 1.410(b)-1 provides rules relating to the
minimum coverage requirements provided by section 410(b)(1).
(9) Church election. Section 1.410(d)-1 provides rules relating to
the election by a church to have participation, vesting, funding, etc.,
provisions apply.
(c) Application of participation standards to certain plans--(1)
General rule. Except as provided in subparagraph (2) of this paragraph,
section 410 does not apply to--
(i) A governmental plan (within the meaning of section 414(d) and
the regulations thereunder),
(ii) A church plan (within the meaning of section 414(e) and the
regulations thereunder) which has not made the election provided by
section 410(d) and the regulations thereunder,
(iii) A plan which has not provided for employer contributions at
any time after September 2, 1974, and
(iv) A plan established and maintained by a society, order, or
association described in section 501(c) (8) or (9), if no part of the
contributions to or under such plan are made by employers of
participants in such plan.
(2) Participation requirements. A plan described in subparagraph (1)
of this paragraph shall, for purposes of section 401(a), be treated as
meeting the requirements of section 410 if such plan meets the coverage
requirements resulting from the application of section 401(a)(3) as in
effect on September 1, 1974. Such coverage requirements include the
rules in Sec. 1.410(b)-1(d) (special rules relating to minimum coverage
requirements), that interpret statutory provisions substantially
identical to section 401(a)(3) as in effect on September 1, 1974. In
applying the rules of that paragraph (d) to plans described in this
paragraph (c) employees whose principal duties consist in supervising
the work of other employees shall be treated as officers, shareholders,
and highly compensated employees.
(d) Supersession. Section 11.410(a)-1 through 11.410(d)-1 inclusive,
of the Temporary Income Tax Regulation
[[Page 471]]
under the Employee Retirement Income Security Act of 1974 are superseded
by this section and Secs. 1.410(a)-2 through 1.410(d)-1.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47193, Sept. 20, 1977, as amended by T.D. 7703, 45 FR
40980, June 17, 1980; T.D. 7735, 45 FR 74722, Nov. 12, 1980]
Sec. 1.410(a)-2 Effective dates.
(a) Plans not in existence on January 1, 1974. Under section 1017(a)
of the Employee Retirement Income Security Act of 1974, in the case of a
plan which was not in existence on January 1, 1974, section 410 and the
regulations thereunder apply for plan years beginning after September 2,
1974. See paragraph (c) of this section for time plan is considered in
existence.
(b) Plans in existence on January 1, 1974. Under section 1017(b) of
the Employee Retirement Income Security Act of 1974, in the case of a
plan which was in existence on January 1, 1974, section 410 and the
regulations thereunder apply for plan years beginning after December 31,
1975. See paragraph (c) of this section for time plan is considered to
be in existence.
(c) Time of plan existence--(1) General rule. For purposes of this
section, a plan is considered to be in existence on a particular day if-
-
(i) The plan on or before that day was reduced to writing and
adopted by the employer (including, in the case of a corporate employer,
formal approval by the employer's board of directors and, if required,
shareholder), even though no amounts had been contributed under the plan
as of such day, and
(ii) The plan was not terminated on or before that day.
(2) Collectively bargained plan. Notwithstanding subparagraph (1) of
this paragraph, a plan described in section 413(a), relating to a plan
maintained pursuant to a collective bargaining agreement, is considered
to be in existance on a particular day if--
(i) On or before that day there is a legally enforceable agreement
to establish such a plan signed by the employer, and
(ii) The employer contributions to be made to the plan are set forth
in the agreement.
(3) Special rule. If a plan is considered to be in existence on
January 1, 1974, under subparagraph (1) of this paragraph, any other
plan with which such existing plan is merged or consolidated shall also
be considered to be in existence on such date.
(d) Certain existing plans may elect new provisions--(1) In general.
The plan administrator (as defined in section 414(g)) of a plan that was
in existence on January 1, 1974, may elect to have the provisions of the
Code relating to participation, vesting, funding, and form of benefit
(as in effect from time to time) apply to a plan year selected by the
plan year selected by the plan administrator which begins after
September 2, 1974, but before the otherwise applicable effective dates
determined under section 1017 (b) or (c), 1021, or 1024 of the Employee
Retirement Income Security Act of 1974, and to all subsequent plan
years. The provisions referred to are the amendments to the Code made by
sections 1011, 1012, 1013, 1015, 1016(a) (1) through (11) and (13)
through (27), 1021, and 1022(b) of the Employee Retirement Income
Security Act of 1974.
(2) Election is irrevocable. Any election made under this paragraph,
once made shall be irrevocable.
(3) Procedure and time for making election. An election under this
paragraph shall be made by attaching a statement to either the annual
return required under section 6058(a) (or an amended return) with
respect to the plan which is filed for the first plan year for which the
election is effective or to a written request for a determination letter
relating to the qualification of the plan under section 401(a), 403(a),
or 405(a) of the Code and, if trusteed, the exempt status under section
501(a) of the Code of a trust consituting a part of the plan. 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 become irrevocable upon issuance of such letter. The
statement shall indicate that the election is made under section 1017(d)
of the Employee Retirement Income Security Act of 1974 and the first
plan year for which the election is effective.
[[Page 472]]
(e) Examples. The rules of this section are illustrated by the
following examples:
Example (1). A plan is adopted on January 2, 1974, effective as of
Janurary 1, 1974. The plan is not considered to have been in existence
on Janurary 1, 1974.
Example (2). A plan was in existence on January 1, 1974, and was
amended on November 1, 1974, to increase benefits. The fact that the
plan was amended is not relevant and the amended plan is considered to
be in existence on January 1, 1974.
Example (3). (i) A subsidiary business corporation is a member of a
controlled group of corporations within the meaning of IRC section
1563(a). On November 1, 1974, the plan of the parent corporation is
amended to provide coverage for employees of the subsidiary corporation.
This amendment of the parent corporation's plan does not affect the
effective date of section 410 with respect to the parent corporation's
plan. No distinction is made for this purpose between employees of the
parent corporation and employees of the subsidiary corporation.
(ii) If the subsidiary adopted a separate plan on November 1, 1974,
under paragraph (a) of this section, section 410 would apply to that
plan for its first plan year beginning after September 2, 1974. However,
the adoption of a different plan by the subsidiary would not affect the
time section 410 applies to the plan of the parent corporation. If,
instead of adopting its own separate plan, the subsidiary merely
executed an adoption agreement under the terms of the parent plan
providing that a subsidiary, upon the execution of an adoption
agreement, will become part of the parent plan, the effective date of
section 410 with respect to such plan will not be affected by the
adoption of the plan by the subsidiary.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47194, Sept. 20, 1977]
Sec. 1.410(a)-3 Minimum age and service conditions.
(a) General rule. Except as provided by paragraph (b) or (c) of this
section, a plan is not a qualified plan (and a trust forming a part of
such plan is not a qualified trust) if the plan requires, as a condition
of participation in the plan, that an employee complete a period of
service with the employer or employers maintaining the plan extending
beyond the later of--
(1) Age 25. The date on which the employee attains the age of 25; or
(2) One year of service. The date on which the employee completes 1
year of service.
(b) Special rule for plan with 3-year 100 percent vesting. A plan
which provides that after not more than 3 years of service each
participant's right to his accrued benefit under the plan is completely
nonforfeitable (within the meaning of section 411 and the regulations
thereunder) at the time such benefit accrues satisfies the requirements
of paragraph (a) of this section if the period of service required by
the plan as a condition of participation does not extend beyond the
later of--
(1) Age 25. The date on which the employee attains the age of 25; or
(2) Three years of service. The date on which the employee completes
3 years of service.
(c) Special rule for employees of certain educational institutions.
A plan maintained exclusively for employees of an educational
institution (as defined in section 170(b)(1)(A)(ii)) by an employer
exempt from tax under section 501(a) which provides that after 1 year of
service each participant's right to his accrued benefit under the plan
is completely nonforfeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues satisfies the
requirements of paragraph (a) of this section if the period of service
required by the plan as a condition of participation does not extend
beyond the later of--
(1) Age 30. The date on which the employee attains the age of 30; or
(2) One year of service. The date on which the employee completes 1
year of service.
(d) Other conditions. Section 410(a), Sec. 1.410(a)-4, and this
section relate solely to age and service conditions and do not preclude
a plan from establishing conditions, other than conditions relating to
age or service, which must be satisfied by plan participants. For
example, such provisions would not preclude a qualified plan from
requiring, as a condition of participation, that an employee be employed
within a specified job classification. See section 410(b) and the
regulations thereunder for rules with respect to coverage of employees
under qualified plans.
(e) Age and service requirements--(1) General rule. For purposes of
applying the rules of this section, plan provisons may be treated as
imposing age or
[[Page 473]]
service requirements even though the provisions do not specifically
refer to age or service. Plan provisions which have the effect of
requiring an age or service requirement with the employer or employers
maintaing the plan will be treated as if they imposed an age or service
requirement. In general, a plan under which an employee cannot
participate unless he retires will impose an age and service
requirement. However, a plan may provide benefits which supplement
benefits provided for employees covered under a pension plan, as defined
in section 3(2) of the Employee Retirement Income Security Act of 1974,
satisfying the requirements of section 410(a)(1) without violating the
age and service rules.
(2) Examples. The rules of this paragraph are illustrated by the
following examples:
Example (1). Corporation A is divided into two divisions. In order
to work in division 2 an employee must first have been employed in
division 1 for 5 years. A plan provision which required division 2
employment for participation will be treated as a service requirement
because such a provision has the effect of requiring 5 years of service.
Example (2). Plan B requires as a condition of participation that
each employee have had a driver's license for 15 years or more. This
provision will be treated as an age requirement because such a provision
has the effect of requiring an employee to attain a specified age.
Example (3). A plan which requires 1 year of service as a condition
of participation also excludes a part-time or seasonal employee if his
customary employment is for not more than 20 hours per week or 5 months
in any plan year. The plan does not qualify because the provision could
result in the exclusion by reason of a minimum service requirement of an
employee who has completed a year of service. The plan would not qualify
even though after excluding all such employees, the plan satisfied the
coverage requirements of section 410(b).
Example (4). Employer A establishes a plan which covers employees
after they retire and does not cover current employees unless they
retire. Any employee who works past age 60 is treated as retired. The
plan fails to satisfy the requirements of section 410(a) because the
plan imposes a minimum age and service requirement in excess of that
allowed by this section.
Example (5). Employer B establishes plan X, which provides that
employees covered by qualified plan Y will receive benefits
supplementing their benefits under plan Y to take into account cost of
living increases after retirement. Plan X is not treated as imposing an
age of service requirement.
Example (6). Employer C establishes a qualified plan satisfying the
minimum age and service requirements. At a later time, entry into the
plan is frozen so that employees not covered at that time cannot
participate in the plan. The limitation on new participants is not
treated as imposing a minimum age and service requirement.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47194, Sept. 20, 1977]
Sec. 1.410(a)-3T Minimum age and service conditions (temporary).
(a) [Reserved]
(b) Special rule for plan with 2-year 100 percent vesting. A plan
which provides that after not more than 2 years of service each
participant's right to his or her accrued benefit under the plan is
completely nonforeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues satisfies the
requirements of paragraph (a) of this section if the period of service
required by the plan as a condition of participation does not extend
beyond the later of--
(1) [Reserved]
(2) Two years of service. The date on which the employee completes 2
years of service. For employees not described in Sec. 1.411(a)-3T(e)(1),
which describes employees with one hour of service in any plan year
beginning after December 31, 1988, or later in the case of certain
collectively bargained plans, the preceding sentence shall be applied by
substituting ``3 years of service'' for ``2 years of service''.
[T.D. 8170, 53 FR 239, Jan. 6, 1988]
Sec. 1.410(a)-4 Maximum age conditions and time of participation.
(a) Maximum age conditions--(1) General rule. A plan is not a
qualified plan (and a trust forming a part of such plan is not a
qualified trust) if the plan excludes from participation (on the basis
of age) an employee who has attained an age specified by the plan
unless--
(i) The plan is a defined benefit plan or a target benefit plan, and
(ii) The employee begins employment with the employer after the
employee has attained an age specified by the plan, which age is not
more than 5
[[Page 474]]
years before normal retirement age (within the meaning of section
411(a)(8) and Sec. 1.411(a)-7.
For purposes of this paragraph, a target benefit plan is a defined
contribution plan under which the amount of employer contributions
allocated to each participant is determined under a plan formula which
does not allow employer discretion and on the basis of the amount
necessary to provide a target benefit specified by the plan for such
participant. Such target benefit must be the type of benefit which is
provided by a defined benefit plan and the targeted benefit must not
discriminate in favor of employees who are officers, shareholders, or
highly compensated. For purposes of this paragraph, in the determination
of the time an employee begins employment, any such time which is
included in a period of service which may be disregarded under the break
in service rules need not be taken into account.
(2) Examples. The rules provided by this paragraph are illustrated
by the following examples:
Example (1). A defined benefit plan provides that an employee will
become a participant upon completion of 3 years of service if at such
time the employee is less than age 60. The normal retirement age under
the plan is age 65. The plan also provides full and immediate vesting
for each of the plan's participants. Under the plan, an employee hired
at age 58 would be denied participation on account of service for the
first 3 years and on account of maximum age for the remaining years even
though the employee was hired more than 5 years prior to the normal
retirement date. The plan therefore does not satisfy section 410(a)(2).
Example. (2). A defined benefit plan provides a normal retirement
age of the later of age 65 or completion of 10 years of service. Because
no employee could ever be hired within 5 years of his normal retirement
age, the plan could not exclude employees for being over a specified
age.
Example (3). Prior to the effective date of section 410, a defined
benefit plan with a normal retirement age of 65 contained a maximum age
55 requirement for participation. Because of the maximum age
requirement, and employee hired at age 58 was excluded from the plan.
This employee is age 61 at the time that section 410 first applies to
the plan. The employee cannot be excluded from participation because of
age. The exclusion under section 410(a)(2) is not applicable in this
instance because the employee's age at the time of hire, 58, was not
within 5 years of the normal retirement age specified in the plan.
Example (4). Employee A was hired at age 50 and participated in a
defined benefit plan until separating from service at age 55 with 5
years of service and with no vested benefit. At age 61, employee A was
rehired within 5 years of the normal retirement age of 65 after he
incurred 6 consecutive breaks in service. Because A's consecutive number
of 1-year breaks (6) exceeds his years of service prior to such breaks
(5), his service before the breaks may be disregarded. Consequently, A's
initial employment date falling within such period may be disregarded
and the plan could exclude A on account of his age because his
employment commenced within 5 years of normal retirement age.
(b) Time of participation--(1) General rule. A plan is not a
qualified plan (and a trust forming a part of such plan is not a
qualified trust) unless under the plan any employee who has satisfied
the applicable minimum age and service requirements specified in
Sec. 1.410(a)-3, and who is otherwise entitled to participate in the
plan, commences participation in the plan no later than the earlier of--
(i) The first day of the first plan year beginning after the date on
which such employee first satisfied such requirements, or
(ii) The date 6 months after the date on which he first satisfied
such requirements,
unless such employee was separated from service and has not returned
before the date referred to in subdivision (i) or (ii), whichever is
applicable. If such separated employee returns to service after either
of such dates without incurring a 1-year break in service, the employee
must commence participation immediately upon his return. In the case of
a plan using the elapsed time method described in Sec. 1.410(a)-7, such
an employee who has a period of absence commencing before the date
referred to in subdivision (i) or (ii) (whichever is applicable) must
commence participation as of such applicable date no later than the date
such absence ended. However, if an employee's prior service is
disregarded on account of the plan's break-in-service rules then, for
purposes of this subparagraph, such service is also disregarded for
purposes of determining the date on
[[Page 475]]
which such employee first satisfied the minimum age and service
requirements.
(2) Examples. The rules provided by this paragraph are illustrated
by the following examples:
Example (1). A calendar year plan provides that an employee may
enter the plan only on the first semi-annual entry date, January 1 or
July 1, after he has satisfied the applicable minimum age and service
requirements specified in section 410(a)(1). The plan satisfies the
requirements of this paragraph because an employee is eligible to
participate no later than the earlier of (1) the first day of the first
plan year beginning after he satisfied the applicable minimum age and
service requirements, or (2) the date 6 months after he satisfied such
requirements.
Example (2). A plan provides that an employee is not eligible to
participate until the first day of the first plan year beginning after
he has satisfied the minimum age and service requirements of section
410(a)(1). In this case, an employee who satisfies the ``6 month'' rule
described in subparagraph (1) of this paragraph will not be eligible to
participate in the plan. Therefore, the plan does not satisfy the
requirements of this paragraph.
Example (3). A calendar year plan provides that an employee may
enter the plan only on the first semi-annual entry date, January 1 or
July 1, after he has satisfied the applicable minimum age and service
requirements specified in section 410(a)(1). Employee A after 10 years
of service separated from service in 1976 with a vested benefit. On
February 1, 1990, A returns to employment covered by the plan. Assuming
A completes a year of service after his return, A must participate
immediately on his return, February 1. A's prior service cannot be
disregarded, because he had a vested benefit when he separated from
service. Therefore, the plan may not postpone his participation until
July 1.
Example (4). Assume the same facts as in example (3). The plan has
the break-in-service rule described in section 410(a)(5)(D) and
Sec. 1.410(a)-5(c)(4). Employee B, after he had 5 years of service but
no vested benefit incurs 5 consecutive 1-year breaks. Because B's prior
service can be disregarded, the plan may postpone B's participation in
the plan under the rule described in section 410(a)(4) and this
paragraph.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47195, Sept. 20, 1977, as amended by T.D. 7703, 45 FR
40980, June 17, 1980]
Sec. 1.410(a)-5 Year of service; break in service.
(a) Year of service. For the rules relating to years of service
under subparagraphs (A), (C), and (D) of section 410(a)(3), see
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530,
relating to minimum standards for employee pension benefit plans.
Rules relating to a general rule for a year of service, hours of
service, and maritime industries apply for purposes of section 410(a)
and the regulations thereunder.
(b) Seasonal industries. For rules which relate to seasonal
industries under section 410(a)(3)(B), see regulations prescribed by the
Secretary of Labor under 29 CFR Part 2530, relating to minimum standards
for employee pension benefits plans.
(c) Breaks in service--(1) General rule. This paragraph provides
rules with respect to breaks in service under section 410(a)(5). Except
as provided in subparagraphs (2), (3), (4), and (5) of this paragraph,
all of an employee's years of service with the employer or employers
maintaining a plan are taken into account in computing his period of
service under the plan for purposes of section 410(a)(1) and
Sec. 1.410(a)-3.
(2) Employees under 3-year 100 percent vesting schedule--( i)
General rule. In the case of an employee who incurs a 1-year break in
service under a plan which provides that after not more than 3 years of
service, each participant's right to his accrued benefit under the plan
in completely nonforfeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues, the employee's
service before the break in service is not required to be taken into
account after the break in service in determining the employee's years
of service under section 410(a)(1) and Sec. 1.410(a)-3 if such employee
has not satisfied such service requirement.
(ii) Example. The rules of this subparagraph are illustrated by the
following example.
Example. A qualified plan computing service by the actual counting
of hours provides full and immediate vesting. The plan can not require
as a condition of participation that
[[Page 476]]
an employee complete 3 consecutive years of service with the employer
because the requirement as to consecutive years is not permitted under
section 410(a) (5). However, such a plan can require 3 years without a
break in service, i.e., 3 years with no intervening years in which the
employee fails to complete more than 500 hours of service. Under a plan
containing such a participation requirement, the following example
illustrates when employees whould become eligible to participate.
------------------------------------------------------------------------
Hours of service completed
--------------------------------
Year Employee Employee Employee
A B C
------------------------------------------------------------------------
1...................................... 1,000 1,000 1,000
2...................................... 1,000 1,000 500
3...................................... 1,000 700 1,000
4...................................... 1,000 1,000 700
5...................................... 1,000 1,000 1,000
6...................................... 1,000 1,000 1,000
------------------------------------------------------------------------
Note.-- Employee A will have satisfied the plan's service requirement at
the end of year 3. Employee B at the end of year 4, and Employee C at
the end of year 6.
(3) One-year break in service--(i) In general. In computing the
period of service of an employee who has incurred a 1-year break in
service, for purposes of section 410(a)(1) and Sec. 1.410(a)-3, a plan
may disregard the employee's service before the break until the employee
completes a year of service after such break in service.
(ii) Examples. The rules provided by this subparagraph are
illustrated by the following examples.
Example (1). Employee A completes a year of service under a plan
computing service by the actual counting of hours for the 12-month
period ending December 31, 1980, and incurs a 1-year break in service
for the 12-month period ending December 31, 1981. The plan does not
contain the provisions permitted by section 410(a)(5)(B) (relating to 3-
year 100 percent vesting) and section 410(a)(5)(D) (relating to
nonvested participants). Thereafter, he does not complete a year of
service. As of January 1, 1982, in computing his period of service under
the plan his service prior to December 31, 1981, is not required to be
taken into account for purposes of section 410(a)(1) and Sec. 1.410 (a)-
3.
Example (2). The employee in example (1) completes a year of service
for the 12-month period ending December 31, 1982. Prior to December 31,
1982, in computing the employee's period of service as of any date
occurring in 1982, the employee's service before December 31, 1981, is
not required to be taken into account for purposes of section 410(a)(1)
and Sec. 11.410(a)-3. Because the employee completed a year of service
for the 12-month period ending December 31, 1982, however, his period of
service is redetermined as of January 1, 1982. Upon completion of a year
of service for 1982, the employee's period of service, determined as of
any date occurring in 1982, includes service prior to December 31, 1981.
(4) Nonvested participants--(i) General rule. In the case of a
participant in a plan who does not have any nonforfeitable right under
the plan to his employer-derived accrued benefit and who incurs a 1-year
break in service, for purposes of section 410(a)(1) and Sec. 1.410.(a)-3
the plan may disregard his years of service prior to such break if the
number of his consecutive 1-year breaks in service equals or exceeds his
aggregate number of years of service prior to such break. In the case of
a plan using the elapsed time method described in Department of Labor
regulations, the plan may disregard such years of service prior to such
break if the period of severance is at least 1 year and the period of
severance equals or exceeds the prior period of service, whether or not
consecutive, completed before such period of severance. The plan may in
computing such aggregate number of years of service prior to such break
disregard any years of service which could have been disregarded under
this subparagraph by reason of any prior break in service.
(ii) Examples. The rules of this subparagraph are illustrated by the
following example:
Example. In 1980, A, who was hired at age 35, separates from the
service of X Corporation after completing 4 years of service. At this
time A had no vested benefits. In 1985, after incurring 5 consecutive
one-year breaks in service, A was reemployed. Under section
410(a)(5)(D), A's 4 years of service may be disregarded because they are
exceeded by the number of years of consecutive one-year breaks (5) after
such service.
(d) Special continuity rule for certain plans. For special rules for
computing years of service in the case of a plan maintained by more than
one employer, see regulations prescribed by the Secretary of Labor under
29 CFR Part 2530, relating to minimum standards for employee pension
benefit plans.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47196, Sept. 20, 1977; T.D. 7508, 42 FR 57123, Nov. 1,
1977, as amended by T.D. 7703, 45 FR 40980, June 17, 1980]
[[Page 477]]
Sec. 1.410(a)-6 Amendment of break in service rules; Transition period.
(a) In general. Under section 1017(f) (1) of the Employee retirement
Income Security Act of 1974, a plan is not a qualified plan (and a trust
forming a part of such plan is not a qualified trust) if the rules of
the plan relating to breaks in service are amended, and--
(1) Such amendment is effective after January 1, 1974, and before
the date on which section 410 becomes applicable to the plan, and
(2) Under such amendment, any employee's participation in the plan
commences at any date later than the later of--
(i) The date on which his participation would commence under the
break in service rules of section 410(a)(5), or
(ii) The earliest date on which his participation would commence
under the plan as in effect on or after January 1, 1974.
(b) Break in service rules. For purposes of paragraph (a), the term
``break in service rules'' means the rules provided by a plan relating
to circumstances under which a period of an employee's service or plan
participation is disregarded for purposes of determining his rights to
participate in the plan, if under such rules such service is disregarded
by reason of the employee's failure to complete a required period of
service within a specified period of time.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47197, Sept. 20, 1977; 43 FR 2721, Jan. 19, 1978]
Sec. 1.410(a)-7 Elapsed time.
(a) In general--(1) Introduction to elapsed time method of crediting
service. (i) 29 CFR 2530.200b-2 sets forth the general method of
crediting service for an employee. The general method is based upon the
actual counting of hours of service during the applicable 12-
consecutive-month computation period. The equivalencies set forth in 29
CFR 2530.200b-3 are also methods for crediting hours of service during
computaton periods. Under the general method and the equivalencies an
employee receives a year's credit (in units of years of service or years
of participation) for a computation period during which the employee is
credited with a specified number of hours of service. In general, an
employee's statutory entitlement with respect to eligibility to
participate, vesting and benefit accrual is determined by totalling the
number of years' credit to which an employee is entitled.
(ii) Under the alternative method set forth in this section, by
contrast, an employee's statutory entitlement with respect to
eligibility to participate, vesting and benefit accrual is not based
upon the actual completion of a specified number of hours of service
during a 12-consecutive-month period. Instead, such entitlement is
determined generally with reference to the total period of time which
elapses while the employee is employed (i.e., while the employment
relationship exists) with the employer or employers maintaining the
plan. The alternative method set forth in this section is designed to
enable a plan to lessen the administrative burdens associated with the
maintenance of records of an employee's hours of service by permitting
each employee to be credited with his or her total period of service
with the employer or employers maintaining the plan, irrespective of the
actual hours of service completed in any 12-consecutive-month period.
(2) Overview of the operation of the elapsed time method. (i) Under
the elapsed time method of crediting service, a plan is generally
required to take into account the period of time which elapses while the
employee is employed (i.e., while the employment relationship exists)
with the employer or employers maintaining the plan, regardless of the
actual number of hours he or she completes during such period. Under
this alternative method of crediting service, an employee's service is
required to be taken into account for purposes of eligibility to
participate and vesting as of the date he or she first performs an hour
of service within the meaning of 29 CFR 2530.200b-2 (a) (1) for the
employer or employers maintaining the plan. Service is required to be
taken into account for the period of time from the date the employee
first performs such an hour of service until the date he or she severs
[[Page 478]]
from service with the employer or employers maintaining the plan.
(ii) The date the employee severs from service is the earlier of the
date the employee quits, is discharged, retires or dies, or the first
anniversary of the date the employee is absent from service for any
other reason (e.g., disability, vacation, leave of absence, layoff,
etc.). Thus, for example, if an employee quits, the severance from
service date is the date the employee quits. On the other hand, if an
employee is granted a leave of absence (and if no intervening event
occurs), the severance from service date will occur one year after the
date the employee was first absent on leave, and this one year of
absence is required to be taken into account as service for the employer
or employers maintaining the plan. Because the severance from service
date occurs on the earlier of two possible dates (i.e., quit, discharge,
retirement or death or the first anniversary of an absence from service
for any other reason), a quit, discharge, retirement or death within the
year after the beginning of an absence for any other reason results in
an immediate severance from service. Thus, for example, if an employee
dies at the end of a four-week absence resulting from illness, the
severance from service date is the date of death, rather than the first
anniversary date of the first day of absence for illness.
(iii) In addition, for purposes of eligibility to participate and
vesting under the elapsed time method of crediting service, an employee
who has severed from service by reason of a quit, discharge or
retirement may be entitled to have a period of time of 12 months or less
taken into account by the employer or employers maintaining the plan if
the employee returns to service within a certain period of time and
performs an hour of service within the meaning of 29 CFR 2530.200b-2 (a)
(1). In general, the period of time during which the employee must
return to service begins on the date the employee severs from service as
a result of a quit, discharge or retirement and ends on the first
anniversary of such date. However, if the employee is absent for any
other reason (e.g., layoff) and then quits, is discharged or retires,
the period of time during which the employee may return and receive
credit begins on the severance from service date and ends one year after
the first day of absence (e.g., first day of layoff). As a result of the
operation of these rules, a severance from service (e.g., a quit), or an
absence (e.g., layoff) followed by a severance from service, never
results in a period of time of more than one year being required to be
taken into account after an employee severs from service or is absent
from service.
(iv) For purposes of benefit accrual under the elapsed time method
of crediting service, an employee is entitled to have his or her service
taken into account from the date he or she begins to participate in the
plan until the severance from service date. Periods of severance under
any circumstances are not required to be taken into account. For
example, a participant who is discharged on December 14, 1980 and
rehired on October 14, 1981 is not required to be credited with the 10
month period of severance for benefit accrual purposes.
(3) Overview of certain concepts relating to the elapsed time
method--(i) In general. The rules with respect to the elapsed time
method of crediting service are based on certain concepts which are
defined in paragraph (b) of this section. These concepts are applied in
the substantive rules contained in paragraphs (c), (d), (e), (f) and (g)
of this section. The purpose of this subparagraph is to summarize these
concepts.
(ii) Employment commencement date. (A) A concept which is necessary
in order to credit service accurately under any service crediting method
is the establishment of a starting point for crediting service. The
employment commencement date, which is the date on which an employee
first performs an hour of service within the meaning of 29 CFR
2530.200b-2 (a) (1) for the employer or employers maintaining the plan,
is used to establish the date upon which an employee must begin to
receive credit for certain purposes (e.g., eligibility to participate
and vesting).
(B) In order to credit accurately an employee's total service with
an employer or employers maintaining the plan, a plan also may provide
for an
[[Page 479]]
``adjusted'' employment commencement date (i.e., a recalculation of the
employment commencement date to reflect noncreditable periods of
severance) or a reemployment commencement date as defined in paragraph
(b) (3) of this section. Fundamentally, all three concepts rely upon the
performance of an hour of service to provide a starting point for
crediting service. One purpose of these three concepts is to enable
plans to satisfy the requirements of this section in a variety of ways.
(C) The fundamental rule with respect to these concepts is that any
plan provision is permissible so long as it satisfies the minimum
standards. Thus, for example, although the rules of this section provide
that credit must begin on the employment commencement date, a plan is
permitted to ``adjust'' the employment commencement date to reflect
periods of time for which service is not required to be credited.
Similarly, a plan may wish to credit service under the elapsed time
method as discrete periods of service and provide for a reemployment
commencement date. Certain plans may wish to provide for both concepts,
although it is not a requirement of this section that plans so provide.
(iii) Severance from service date. Another fundamental concept of
the elapsed time method of crediting service is the severance from
service date, which is defined as the earlier of the date on which an
employee quits, retires, is discharged or dies, or the first anniversary
of the first date of absence for any other reason. One purpose of the
severance from service date is to provide the endpoint for crediting
service under the elapsed time method. As a general proposition, service
is credited from the employment commencement date (i.e., the starting
point) until the severance from service date (i.e., the endpoint). A
complementary purpose of the severance from service date is to establish
the starting point for measuring a period of severance from service in
order to determine a ``break in service'' (see paragraph (a)(3)(v) of
this section). A third purpose of such date is to establish the starting
point for measuring the period of time which may be required to be taken
into account under the service spanning rules (see paragraph (a)(3)(vi)
of this section).
(iv) Period of service. A third elapsed time concept is the use of
the ``period of service'' rather than the ``year of service'' in
determining service to be taken into account for purposes of eligibility
to participate, vesting and benefit accrual. For purposes of eligibility
to participate and vesting, the period of service runs from the
employment commencement date or reemployment commencement date until the
severance from service date. For purposes of benefit accrual, a period
of service runs from the date that a participant commences participation
under the plan until the severance from service date. Because the
endpoint of the period of service is marked by the severance from
service date, an employee is credited with the period of time which runs
during any absence from service (other than for reason of a quit,
retirement, discharge or death) which is 12 months or less. Thus, for
example, a three week absence for vacation is taken into account as part
of a period of service and does not trigger a severance from service
date.
(v) Period of severance. A period of severance begins on the
severance from service date and ends when an employee returns to service
with the employer or employers maintaining the plan. The purpose of the
period of severance is to apply the statutory ``break in service'' rules
to an elapsed time method of crediting service.
(vi) Service spanning. Under the elapsed time method of crediting
service, a plan is required to credit periods of service and, under the
service spanning rules, certain periods of severance of 12 months or
less for purposes of eligibility to participate and vesting. Under the
first service spanning rule, if an employee severs from service as a
result of quit, discharge or retirement and then returns to service
within 12 months, the period of severance is required to be taken into
account. Also, a situation may arise in which an employee is absent from
service for any reason other than quit, discharge, retirement or death
and during the absence a quit, discharge or retirement occurs. The
second service spanning
[[Page 480]]
rule provides in that set of circumstances that a plan is required to
take into account the period of time between the severance from service
date (i.e., the date of quit, discharge or retirement) and the first
anniversary of the date on which the employee was first absent, if the
employee returns to service on or before such first anniversary date.
(4) Organization and applicability. (i) The substantive rules for
crediting service under the elapsed time method with respect to
eligibility to participate are contained in paragraph (c), the rules
with respect to vesting are contained in subparagraph (d), and the rules
with respect to benefit accrual are contained in paragraph (e). The
format of the rules is designed to enable a plan to use the elapsed time
method of crediting service either for all purposes or for any one or
combination of purposes under sections 410 and 411. Thus, for example, a
plan may credit service for eligibility to participate purposes by the
use of the general method of crediting service set forth in 29 CFR
2530.200b-2 or by the use of any of the equivalences set forth in 29 CFR
2530.200b-3, while the plan may credit service for vesting and benefit
accrual purposes by the use of the elapsed time method of crediting
service.
(ii) A plan using the elapsed time method of crediting service for
one or more classifications of employees covered under the plan may use
the general method of crediting service set forth in 29 CFR 2530.200b-2
or any of the equivalencies set forth in 29 CFR 2530.200b-3 for other
classifications of employees, provided that such classifications are
reasonable and are consistently applied. Thus, for example, a plan may
provide that part-time employees are credited under the general method
of crediting service set forth in 29 CFR 2530.200b-2 and full-time
employees are credited under the elapsed time method. A classification,
however, will not be deemed to be reasonable or consistently applied if
such classification is designed with an intent to preclude an employee
or employees from attaining his or her statutory entitlement with
respect to eligibility to participate, vesting or benefit accrual. For
example, a classification applied so that any full-time employee
credited with less than 1,000 hours of service during a given 12-
consecutive-month period would be considered part-time and subject to
the general method of crediting service rather than the elapsed time
method would not be reasonable.
(iii) Notwithstanding paragraph (a) (4) (i) and (ii) of this
section, the use of the elapsed time method for some purposes or the use
of the elapsed time method for some employees may, under certain
circumstances, result in discrimination prohibited under section
401(a)(4), even though the use of the elapsed time method for such
purposes, and for such employees, is permitted under this section.
(5) More than one employer plans. For special rules for computing
years of service in the case of a plan maintained by more than one
employer, see 29 CFR Part 2530 (Department of Labor regulations relating
to minimum standards for employee pension benefit plans).
(b) Definitions--(1) Employment commencement date. For purposes of
this section, the term ``employment commencement date'' shall mean the
date on which the employee first performs an hour of service within the
meaning of 29 CFR 2530.200b-2 (a)(1) for the employer or employers
maintaining the plan.
(2) Severance from service date. For purposes of this section, a
``severance from service'' shall occur on the earlier of--
(i) The date on which an employee quits, retires, is discharged or
dies; or
(ii) The first anniversary of the first date of a period in which an
employee remains absent from service (with or without pay) with the
employer or employers maintaining the plan for any reason other than
quit, retirement, discharge or death, such as vacation, holiday,
sickness, disability, leave of absence or layoff.
(3) Reemployment commencement date. For purposes of this section,
the term ``reemployment commencement date'' shall mean the first date,
following a period of severance from service which is not required to be
taken into account under the service spanning rules in paragraphs
(c)(2)(iii) and (d)(1)(iii) of
[[Page 481]]
this section, on which the employee performs an hour of service within
the meaning of 29 CFR 2530.200b-2(a)(1) for the employer or employers
maintaining the plan.
(4) Participation commencement date. For purposes of this section,
the term ``participation commencement date'' shall mean the date a
participant first commences participation under the plan.
(5) Period of severance. For purposes of this section, the term
``period of severance'' shall mean the period of time commencing on the
severance from service date and ending on the date on which the employee
again performs an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) for an employer or employers maintaining the plan.
(6) Period of service--(i) General rule. For purposes of this
section, the term ``period of service'' shall mean a period of service
commencing on the employee's employment commencement date or
reemployment commencement date, whichever is applicable, and ending on
the severance from service date.
(ii) Aggregation rule. Unless a plan provides in some manner for an
``adjusted'' employment commencement date or similar method of
consolidating periods of service, periods of service shall be aggregated
unless such periods may be disregarded under section 410(a)(5) or
411(a)(4).
(iii) Other federal law. Nothing in this section shall be construed
to alter, amend, modify, invalidate, impair or supersede any law of the
United States or any rule or regulation issued under such law. Thus, for
example, nothing in this section shall be construed as denying an
employee credit for a ``period of service'' if credit is required by a
separate federal law. Furthermore, the nature and extent of such credit
shall be determined under such law.
(c) Eligibility to participate--(1) General rule. For purposes of
section 410(a)(1)(A), a plan generally may not require as a condition of
participation in the plan that an employee complete a period of service
with the employer or employers maintaining the plan extending beyond the
later of--
(i) The date on which the employee attains the age of 25; or
(ii) The date on which the employee completes a one-year period of
service. See the regulations under section 410(a) (relating to
eligibility to participate).
(2) Determination of one-year period of service. (i) For purposes of
determining the date on which an employee satisfies the service
requirement for initial eligibility to participate under the plan, a
plan using the elapsed time method of crediting service shall provide
that an employee who completes the 1-year period of service requirement
on the first anniversary of his employment commencement date satisfies
the minimum service requirement as of such date. In the case of an
employee who fails to complete a one-year period of service on the first
anniversary of his employment commencement date, a plan which does not
contain a provision permitted by section 410(a)(5)(D) (rule of parity)
shall provide for the aggregation of periods of service so that a one-
year period of service shall be completed as of the date the employee
completes 12 months of service (30 days are deemed to be a month in the
case of the aggregation of fractional months) or 365 days of service.
(ii) For purposes of section 410(a)(1)(B)(i), a ``3-year period of
service'' shall be deemed to be ``3 years of service.''
(iii) Service spanning rules. In determining a 1-year period of
service for purposes of initial eligibility to participate and a period
of service for purposes of retention of eligibility to participate, in
addition to taking into account an employee's period of service, a plan
shall take into account the following periods of severance--
(A) If an employee severs from service by reason of a quit,
discharge or retirement and the employee then performs an hour of
service within the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months
of the severance from service date, the plan is required to take into
account the period of severance; and
(B) Notwithstanding paragraph (c)(2)(iii)(A) of this section, if an
employee severs from service by reason of a quit, discharge or
retirement during an absence from service of 12 months or less for any
reason other than a quit,
[[Page 482]]
discharge, retirement or death, and then performs an hour of service
within the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months of the
date on which the employee was first absent from service, the plan is
required to take into account the period of severance.
(iv) For purposes of determining an employee's retention of
eligibility to participate in the plan, a plan shall take into account
an employee's entire period of service unless certain periods of service
may be disregarded under section 410(a)(5) of the Code.
(v) Example. Employee W, age 31, completed 6 months of service and
was laid off. After 2 months of layoff, W quit. Five months later, W
returned to service. For purposes of eligibility to participate, W was
required to be credited with 13 months of service (8 months of service
and 5 months of severance). If, on the other hand, W had not returned to
service within the first 10 months of severance (i.e., within 12 months
after the first day of layoff), W would be required to be credited with
only 8 months of service.
(3) Entry date requirements--(i) General rule. For purposes of
section 410(a)(4), it is necessary for a plan to provide that any
employee who has satisfied the minimum age and service requirements, and
who is otherwise entitled to participate in the plan, commences
participation in the plan no later than the earlier of--
(A) The first day of the first plan year beginning after the date on
which such employee satisfied such requirements, or
(B) The date six months after the date on which he satisfied such
requirements, unless such employee was separated from service before the
date referred to in subdivision (i) (A) or (B), whichever is applicable.
See the regulations under section 410(a) (relating to eligibility to
participate).
(ii) Separation from service--(A) Definition. For purposes of this
section, the term ``separated from service'' includes a severance from
service or an absence from service for any reason other than a quit,
discharge, retirement or death, regardless of the duration of such
absence. Accordingly, if an employee is laid off for a period of six
weeks, the employee shall be deemed to be ``separated from service''
during such period for purposes of the entry date requirements.
(B) Application. A period of severance which is taken into account
under the service spanning rules in paragraph (c)(2)(iii) of this
section or an absence of 12 months or less may result in an employee
satisfying the plan's minimum service requirement during such period of
time. In addition, once an employee satisfies the plan's minimum service
requirement, either before or during such period of time, such period of
time may contain an entry date applicable to such employee. In the case
of an employee whose period of severance is taken into account and such
period contains an entry date applicable to the employee, he or she
shall be made a participant in the plan (if otherwise eligible) no later
than the date on which he or she ended the period of severance. In the
case of an employee whose period of absence contains an entry date
applicable to such employee, he or she, no later than the date such
absence ended, shall be made a participant in the plan (if otherwise
eligible) as of the first applicable entry date which occurred during
such absence from service.
(iii) Examples. For purposes of the following examples, assume that
the plan provides for a minimum age requirement of 25 and a minimum
service requirement of one year, and provides for semi-annual entry
dates.
(A) Employee A, age 35, worked for 10 months in a job classification
covered under the plan, became disabled for nine consecutive months and
then returned to service. During the period of absence, A completed a 1-
year period of service and passed a semi-annual entry date after
satisfying the minimum service requirement. Accordingly, the plan is
required to make A a participant no later than his return to service
effective as of the applicable entry date.
(B) Employee B, after satisfying the minimum age and service
requirements, quit work before the next semi-annual entry date, and then
returned to service before incurring a 1-year period of severance, but
after such semi-
[[Page 483]]
annual entry date. Employee B is entitled to become a participant
immediately upon his return to service effective as of the date of his
return.
(4) Break in service. For purposes of applying the break in service
rules under section 410(a)(5) (B) and (C), the term ``1-year period of
severance'' shall be substituted for the term ``1-year break in
service''. A 1-year period of severance shall be determined on the basis
of a 12-consecutive-month period beginning on the severance from service
date and ending on the first anniversary of such date, provided that the
employee during such 12-consecutive-month period does not perform an
hour of service within the meaning of 29 CFR 2530.200b-2(a)(1) for the
employer or employers maintaining the plan.
(5) One-year hold-out--(i) General rule. (A) For purposes of section
410(a)(5)(C), in determining the period of service of an employee who
has incurred a 1-year period of severance, a plan may disregard the
employee's period of service before such period of severance until the
employee completes a 1-year period of service after such period of
severance.
(B) Example. Assume that a plan provides for a minimum service
requirement of 1-year and provides for semi-annual entry dates, but does
not contain the provisions permitted by section 410(a)(5)(D) (relating
to the rule of parity). Employee G, age 40, completed a seven-month
period of service, quit and then returned to service 15 months later,
thereby incurring a 1-year period of severance. After working four
months, G was laid off for nine months and then returned to work again.
Although the plan may hold employee G out from participation in the plan
until the completion of a 1-year period of service after the 1-year (or
greater) period of severance, once the 1-year hold-out is completed, the
plan is required to provide the employee with such statutory entitlement
as arose during the 1-year hold-out. Accordingly, employee G satisfied
the 1-year hold-out requirement as of the eighth month of layoff, and G
is entitled to become a participant in the plan immediately upon his
return to service after the nine-month layoff effective as of the first
applicable entry date occurring after the date on which he satisfied the
1-year of service requirement (i.e., the first applicable entry date
after the first month of layoff). See the regulations under section 410
(a) (relating to eligibility to participate).
(6) Rule of parity--(i) General rule. For purposes of section
410(a)(5)(D), in the case of a participant who does not have any
nonforfeitable right under the plan to his accrued benefit derived from
employer contributions and who incurs a 1-year period of severance, a
plan, in determining an employee's period of service for purposes of
section 410(a)(1), may disregard his period of service if his latest
period of severance equals or exceeds his prior periods of service,
whether or not consecutive, completed before such period of severance.
See the regulations under section 410(a) (relating to eligibility to
participate).
(ii) In determining whether a completely nonvested employee's
service may be disregarded under the rule of parity, a plan is not
permitted to apply the rule until the employee incurs a 1-year period of
severance. Accordingly, a plan may not disregard a period of service of
less than one year until an employee has incurred a period of severance
of at least one year.
(iii) Example. Assume that a plan provides for a minimum service
requirement of one year and provides for the rule of parity. An employee
works for three months, quits and then is rehired 10 months later. Such
employee is entitled to receive 13 months of credit for purposes of
eligibility to participate and vesting (see the service spanning rules).
Although the period of severance exceeded the period of service, the
three months of service may not be disregarded because no 1-year period
of severance occurred.
(d) Vesting--(1) General rule. (i) For purposes of section
411(a)(2), relating to vesting in accrued benefits derived from employer
contributions, a plan which determines service to be taken in account on
the basis of elapsed time shall provide that an employee is credited
with a number of years of service equal to at least the number of whole
years of the employee's period of service, whether or not such periods
of service were completed consecutively.
[[Page 484]]
(ii) In order to determine the number of whole years of an
employee's period of service, a plan shall provide that non-successive
periods of service must be aggregated and that less than whole year
periods of service (whether or not consecutive) must be aggregated on
the basis that 12 months of service (30 days are deemed to be a month in
the case of the aggregation of fractional months) or 365 days of service
equal a whole year of service.
(iii) Service spanning rules. In determining a participant's period
of service for vesting purposes, a plan shall take into account the
following periods of severance--
(A) If an employee severs from service by reason of a quit,
discharge or retirement and the employee then performs an hour of
service within the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months
of the severance from service date, the plan is required to take into
account the period of severance; and
(B) Nothwithstanding paragraph (d)(1)(iii)(A) of this section, if an
employee severs from service by reason of a quit, discharge or
retirement during an absence from service of 12 months or less for any
reason other than a quit, discharge, retirement or death, and then
performs an hour of service within the meaning of 29 CFR 2530.200b-
2(a)(1) within 12 months of the date on which the employee was first
absent from service, the plan is required to take into account the
period of severance.
(iv) For purposes of determining an employee's nonforfeitable
percentage of accrued benefits derived from employer contributions, a
plan, after calculating an employee's period of service in the manner
prescribed in this paragraph, may disregard any remaining less than
whole year, 12-month or 365-day period of service. Thus, for example, if
a plan provides for the statutory five to fifteen year graded vesting,
an employee with a period (or periods) of service which yield 5 whole
year periods of service and an additional 321-day period of service is
twenty-five percent vested in his or her employer-derived accrued
benefits (based solely on the 5 whole year periods of service).
(2) Service which may be disregarded. (i) For purposes of section
411(a)(4), in determining the nonforfeitable percentage of an employee's
right to his or her accrued benefits derived from employer
contributions, all of an employee's period or periods of service with an
employer or employers maintaining the plan shall be taken into account
unless such service may be disregarded under paragraph (d)(2)(ii) of
this section.
(ii) For purposes of paragraph (d)(2)(i) of this section, the
following periods of service may be disregarded--
(A) The period of service completed by an employee before the date
on which he attains age 22;
(B) In the case of a plan which requires mandatory employee
contributions, the period of service which falls within the period of
time to which a particular employee contribution relates, if the
employee had the opportunity to make a contribution for such period of
time and failed to do so;
(C) The period of service during any period for which the employer
did not maintain the plan or a predecessor plan;
(D) The period of service which is not required to be taken into
account by reason of a period of severance which constitutes a break in
service within the meaning of paragraph (d)(4) of this section;
(E) The period of service completed by an employee prior to January
1, 1971, unless the employee completes a period of service of at least 3
years at any time after December 31, 1970; and
(F) The period of service completed before the first plan year for
which this section applies to the plan, if such service would have been
disregarded under the plan rules relating to breaks in service in effect
at that time. See the regulations under section 411(a) (relating to
vesting).
(3) Seasonal industry. [Reserved]
(4) Break in service. For purposes of applying the break in service
rules, the term ``1-year period of severance'' shall be substituted for
the term ``1-year break in service''. A 1-year period of severance shall
be a 12-consecutive-month period beginning on the severance from service
date and ending on the first anniversary of such date, provided that the
employee during such 12-consecutive-month period fails to
[[Page 485]]
perform an hour of service within the meaning of 29 CFR 2530.200b-
2(a)(1) for an employer or employers maintaining the plan.
(5) One-year hold-out. For purposes of section 411(a)(6)(B), in
determining the nonforfeitable percentage of the right to accrued
benefits derived from employer contributions of an employee who has
incurred a 1-year period of severance, the period of service completed
before such period of severance is not required to be taken into account
until the employee has completed a 1-year period of service after his
return to service. See the regulations under section 411(a) (relating to
vesting).
(6) Vesting in pre-break accruals. For purposes of section
411(a)(6)(C), a ``1-year period of severance'' shall be deemed to
constitute a ``1-year break in service.'' See the regulations under
section 411(a) (relating to vesting).
(7) Rule of partity--(i) General rule. For purposes of section
411(a)(6)(D), in the case of an employee who is a nonvested participant
in employer-derived benefits at the time he incurs a 1-year period of
severance, the period of service completed by such participant before
such period of severance is not required to be taken into account for
purposes of determining the vested percentage of his or her right to
employer-derived benefits if at such time the consecutive period of
severance equals or exceeds his prior periods of service, whether or not
consecutive, completed before such period of severance. See the
regulations under section 411(a) (relating to vesting).
(e) Benefit accrual. (1) For purposes of section 411(b), a plan may
provide that a participant's service with an employer or employers
maintaining the plan shall be determined on the basis of the
participant's total period of service beginning on the participation
commencement date and ending on the severance from service date.
(2) Under section 411(b)(3)(A), a defined benefit pension plan may
determine an employee's service for purposes of benefit accrual on any
basis which is reasonable and consistent and which takes into account
all service during the employee's participation in the plan which is
included in a period of service required to be taken into account under
section 410(a)(5) (relating to service which must be taken into account
for purposes of determining an employee's eligibility to participate). A
plan which provides for the determination of an employee's service with
an employer or employers maintaining the plan on the basis permitted
under paragraph (e)(1) of this section will be deemed to meet the
requirements of section 411(b)(3)(A), provided that the plan meets the
requirements of 29 CFR 2530.204-3, relating to plans which determine an
employee's service for purposes of benefit accrual on a basis other than
computation periods. Specifically, under 29 CFR 2530.204-3, it must be
possible to prove that, despite the fact that benefit accrual under such
a plan is not based on computation periods, the plan's provisions meet
at least one of the three benefit accrual rules of section 411(b)(1)
under all circumstances. Further, 29 CFR 2530.204-3 prohibits such a
plan from disregarding service under section 411(b)(3)(C) (which would
otherwise permit a plan to disregard service performed by an employee
during a computation period in which the employee is credited with less
than 1,000 hours). See the regulations under section 411(b) (relating to
benefit accrual).
(f) Transfers between methods of crediting service--(1) Single plan.
A plan may provide that an employee's service for purposes of
eligibility to participate, vesting or benefit accrual shall be
determined on the basis of computation periods under the general method
set forth in 29 CFR 2530.200b-2 for certain classes of employees but
under the alternative method permitted under this section for other
classes of employees if the plan provides as follows--
(i) In the case of an employee who transfers from a class of
employees whose service is determined on the basis of computation
periods to a class of employees whose service is determined on the
alternative basis permitted under this section, the employee shall
receive credit for a period of service consisting of--
(A) A number of years equal to the number of years of service
credited to the employee before the computation period during which the
transfer occurs; and
[[Page 486]]
(B) The greater of (1) the period of service that would be credited
to the employee under the elapsed time method for his service during the
entire computation period in which the transfer occurs or (2) the
service taken into account under the computation periods method as of
the date of the transfer.
In addition, the employee shall receive credit for service
subsequent to the transfer commencing on the day after the last day of
the computation period in which the transfer occurs.
(ii) In the case of an employee who transfers from a class of
employees whose service is determined on the alternative basis permitted
under this section to a class of employees whose service is determined
on the basis of computation periods--
(A) The employee shall receive credit, as of the date of the
transfer, for a number of years of service equal to the number of 1-year
periods of service credited to the employee as of the date of the
transfer, and
(B) The employee shall receive credit, in the computation period
which includes the date of the transfer, for a number of hours of
service determined by applying one of the equivalencies set forth in 29
CFR 2530.200b-3 (e) (1) to any fractional part of a year credited to the
employee under this section as of the date of the transfer. Such
equivalency shall be set forth in the plan and shall apply to all
similarly situated employees.
(2) More than one plan. In the case of an employee who transfers
from a plan using either the general method of determining service on
the basis of computation periods set forth in 29 CFR 2530.200b-2 or the
method of determining service permitted under this section to a plan
using the other method of determining service, all service required to
be credited under the plan to which the employee transfers shall be
determined by applying the rules of paragraph (f)(1) of this section.
(g) Amendments to change method of crediting service. A plan may be
amended to change the method of crediting service for any purpose or for
any class of employees between the general method set forth in 29 CFR
2530.200-2 and the method permitted under this section, if such
amendment contains provisions under which each employee with respect to
whom the method of crediting service is changed is treated in the same
manner as an employee who transfers from one class of employees to
another under paragraph (f)(1) of this section.
(h) Transitional rule. For plans in existence on [insert the date of
the publication of this document], the provisions of paragraph (f) of
this section are effective for plan years beginning after December 31,
1983.
[T.D. 7703, 45 FR 40980, June 17, 1980]
Sec. 1.410(a)-8 Five consecutive 1-year breaks in service, transitional rules under the Retirement Equity Act of 1984.
Sections 410(a)(5)(D) and 411(a)(6)(D), as amended by the Retirement
Equity Act of 1984 (REA 1984), permit a plan to disregard years of
service that were disregarded under the plan provisions satisfying those
sections (as in effect on August 22, 1984) as of the day before the REA
amendments apply to the plan. Under section 302(a) of REA 1984, the new
break-in-service rules generally apply to plan years beginning after
December 31, 1984. Thus, for example, assume a plan has a calendar plan
year and disregarded years of service as permitted by sections
410(a)(5)(D) and 411(a)(6)(D) as in effect on August 22, 1984. An
employee completed two years of service in 1981 and 1982, and then
incurred two consecutive 1-year breaks in service in 1983 and 1984. The
plans may disregard the prior years of service even though the employee
did not incur five consecutive 1-year breaks in service. On the other
hand, assume the employee completed three consecutive years of service
beginning in 1980, and incurred two 1-year breaks in service in 1983 and
1984. Because, as of December 31, 1984, the years of service credited
before 1983 could not be disregarded, whether the plan may subsequently
disregard those years of service would be governed by the rules enacted
by REA 1984.
[T.D. 8219, 53 FR 31851, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]
Sec. 1.410(a)-8T Year of service; break in service (temporary).
(a)-(b) [Reserved]
[[Page 487]]
(c) Breaks in service.
(1) [Reserved]
(2) Employees under 2-year 100 percent vesting schedule--(i) General
rule. In the case of an employee who incurs a 1-year break in service
under a plan which provides that after not more than 2 years of service
each participant's right to his accrued benefit under the plan is
completely nonforfeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues, the employee's
service before the break in service is not required to be taken into
account after the break in service in determining the employee's years
of service under section 410(a)(1) and Sec. 1.410(a)-3 if such employee
has not satisfied such service requirement.
(ii) Example. The rules of this subparagraph are illustrated by the
following example:
Example. A qualified plan computing service by the actual counting
of hours provides full and immediate vesting. The plan can not require
as a condition of participation that an employee complete 2 consecutive
years of service with the employer because the requirement as to
consecutive years is not permitted under section 410(a)(5). However,
such a plan can require 2 years without a break in service, i.e., 2
years with no intervening years in which the employee fails to complete
more than 500 hours of service. Under a plan containing such a
participation requirement, the following example illustrates when
employees would become eligible to participate.
------------------------------------------------------------------------
Hours of service completed
Year -----------------------------------
Employee A Employee B Employee C
------------------------------------------------------------------------
1................................... 1,000 1,000 1,000
2................................... 1,000 700 500
3................................... 1,000 1,000 1,000
4................................... 1,000 1,000 700
5................................... 1,000 1,000 1,000
------------------------------------------------------------------------
Note: Employee A will have satisfied the plan's service requirement
at the end of year 2, Employee B at the end of year 3, and Employee C at
the end of year 5.
(3) One-year break in service--
(i) [Reserved]
(ii) Examples. The rules provided by this subparagraph are
illustrated by the following examples:
Example (1). Employee A completes a year of service under a plan
computing service by the actual counting of hours for the 12-month
period ending December 31, 1989, and incurs a 1-year break in service
for the 12-month period ending December 31, 1990. The plan does not
contain the provisions permitted by section 410(a)(5)(B) (relating to 2-
year 100 percent vesting) and section 410(a)(5)(D) (relating to
nonvested participants). Thereafter, he does not complete a year of
service. As of January 1, 1991, in computing his period of service under
the plan his service prior to December 31, 1990, is not required to be
taken into account for purposes of section 410(a)(1) and Sec. 1.410(a)-
3.
[T.D. 8170, 53 FR 239, Jan. 6, 1988]
Sec. 1.410(a)-9 Maternity and paternity absence.
(a) Elapsed time--(1) Rule. For purposes of applying the rules of
Sec. 1.410(a)-7 (relating to the elapsed time method of crediting
service) to absences described in sections 410(a)(5)(E) and 411(a)(6)(E)
(relating to maternity or paternity absence), the severance from service
date of an employee who is absent from service beyond the first
anniversary of the first day of absence by reason of a maternity or
paternity absence described in section 410(a)(5)(E)(i) or
411(a)(6)(E)(i) is the second anniversary of the first day of such
absence. The period between the first and second anniversaries of the
first day of absence from work is neither a period of service nor a
period of severance. This rule applies to maternity and paternity
absences beginning on or after the first day of the first plan year in
which the plan is required to credit service under sections 410(a)(5)(E)
and 411(a)(6)(E).
(2) Example. The rules of this section are illustrated by the
following example:
Assume an individual works until June 30, 1986; is first absent from
employment on July 1, 1986, on account of maternity or paternity
absence; and on July 1, 1989, performs an hour of service. The period of
service must include the period from employment commencement date until
June 30, 1987 (one year after the date of separation for any reason
other than a quit, discharge, retirement, or death). The period from
July 1, 1987, to June 30, 1988, is neither a period of service nor a
period of severance. The period of severance would be from July 1, 1988,
to June 30, 1989.
(b) Other methods. This paragraph provides a safe harbor for plans
that compute years of service under the
[[Page 488]]
hours of service methods or permitted equivalencies. Such a plan will be
treated as satisfying the requirements of sections 410(a)(5)(E) and
411(a)(6)(E) if the plan increases the minimum period of consecutive 1-
year breaks required to disregard any service (or deprive any employee
of any right) by one. Thus, a plan will satisfy sections 410(a)(5)(E)
and 411(a)(6)(E) without having to compute service for maternity or
paternity and sections 410(a)(5)(D) and 411 (a)(4)(D) and (a)(6)(C), by
increasing the period of consecutive breaks-in-service from 5 to 6.
[T.D. 8219, 53 FR 31852, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]
Sec. 1.410(a)-9T Elapsed time (temporary).
(a)-(b) [Reserved]
(c) Eligibility to participate.
(1) [Reserved]
(2) Determination of one-year period of service.
(i) [Reserved]
(ii) For purposes of section 410(a)(1)(B)(i), a ``2-year period of
service'' shall be deemed to be ``2 years of service.''
(d) Vesting--(1) General rule.
(i)-(iii) [Reserved]
(iv) For purposes of determining an employee's nonforfeitable
percentage of accrued benefits derived from employer contributions, a
plan, after calculating an employee's period of service in the manner
prescribed in this paragraph, may disregard any remaining less than
whole year, 12-month or 365-day period of service. Thus, for example, if
a plan provides for the statutory three to seven year graded vesting, an
employee with a period (or periods) of service which yields 3 whole year
periods of service and an additional 321-day period of service is twenty
percent vested in his or her employer-derived accrued benefits (based
solely on the 3 whole year periods of service).
[T.D. 8170, 53 FR 239, Jan. 6, 1988]
Sec. 1.410(b)-0 Table of contents.
This section contains a listing of the major headings of
Secs. 1.410(b)-1 through 1.410(b)-10.
Sec. 1.410(b)-1 Minimum coverage requirements (before 1994).
(a) In general.
(b) Coverage tests.
(1) Percentage test.
(2) Classification test.
(c) Exclusion of certain employees.
(1) Bargaining unit.
(2) Air pilots.
(3) Nonresident aliens.
(d) Special rules.
(1) Highly compensated.
(2) Discrimination.
(3) Multiple plans.
(4) Profit-sharing plans.
(5) Certain classifications.
(6) Integration with Social Security Act.
(7) Different age and service requirements.
(i) Application.
(ii) General rule.
(8) Certain controlled groups.
(9) Transitional rule.
(e) Example.
Sec. 1.410(b)-2 Minimum coverage requirements (after 1993).
(a) In general.
(b) Requirements with respect to employees.
(1) In general.
(2) Ratio percentage test.
(i) In general.
(ii) Examples.
(3) Average benefit test.
(4) Certain tax credit employee stock ownership plans.
(5) Employers with no nonhighly compensated employees.
(6) Plans benefiting no highly compensated employees.
(7) Plans benefiting collectively bargained employees.
(c) Requirements with respect to former employees.
(1) Former employees tested separately.
(2) Testing former employees.
(d) Nonelective contributions under section 403(b) plans.
(e) Certain governmental and church plans.
(f) Certain acquisitions or dispositions.
(g) Additional rules.
Sec. 1.410(b)-3 Employees and former employees who benefit under a plan.
(a) Employees benefiting under a plan.
(1) In general.
(2) Exceptions to allocation or accrual requirement.
(i) Section 401(k) and 401(m) plans.
(ii) Section 415 limits.
(iii) Certain employees treated as benefiting.
(iv) Section 412(i) plans.
(3) Examples.
(b) Former employees benefiting under a plan.
(1) In general.
(2) Examples.
[[Page 489]]
Sec. 1.410(b)-4 Nondiscriminatory classification test.
(a) In general.
(b) Reasonable classification established by the employer.
(c) Nondiscriminatory classification.
(1) General rule.
(2) Safe harbor.
(3) Facts and circumstances.
(i) General rule.
(ii) Factual determination.
(4) Definitions.
(i) Safe harbor percentage.
(ii) Unsafe harbor percentage.
(iii) Nonhighly compensated employee concentration percentage.
(iv) Table.
(5) Examples.
Sec. 1.410(b)-5 Average benefit percentage test.
(a) General rule.
(b) Determination of average benefit percentage.
(c) Determination of actual benefit percentage.
(d) Determination of employee benefit percentages.
(1) Overview.
(2) Employee contributions and employee-provided benefits
disregarded.
(3) Plans and plan years taken into account.
(i) Testing group.
(ii) Testing period.
(4) Contributions or benefits basis.
(5) Determination of employee benefit percentage.
(i) General rule.
(ii) Plans with differing plan years.
(iii) Options and consistency requirements.
(6) Permitted disparity.
(i) In general.
(ii) Plans which may not use permitted disparity.
(7) Requirements for certain plans providing early retirement
benefits.
(i) General rule.
(ii) Exception.
(e) Additional optional rules.
(1) Overview.
(2) Determination of employee benefit percentages as the sum of
separately determined rates.
(i) In general.
(ii) Exception from consistency requirement.
(iii) Permitted inconsistencies.
(3) Determination of employee benefit percentages without regard to
plans of another type.
(i) General rule.
(ii) Restriction on use of separate testing group determination
method.
(iii) Treatment of permitted disparity.
(iv) Example.
(4) Simplified method for determining employee benefit percentages
for certain defined benefit plans.
(i) In general.
(ii) Simplified method.
(5) Three-year averaging period.
(6) Alternative methods of determining compensation.
(f) Special rule for certain collectively bargained plans.
Sec. 1.410(b)-6 Excludable employees.
(a) Employees.
(1) In general.
(2) Rules of application.
(b) Minimum age and service exclusions.
(1) In general.
(2) Multiple age and service conditions.
(3) Plans benefiting certain otherwise excludable employees.
(i) In general.
(ii) Testing portion of plan benefiting otherwise excludable
employees.
(4) Examples.
(c) Certain nonresident aliens.
(1) General rule.
(2) Special treaty rule.
(d) Collectively bargained employees.
(1) General rule.
(2) Definition of collectively bargained employee.
(1) In general.
(ii) Special rules for certain employees in multiemployer plans.
(iii) Covered by a collective bargaining agreement.
(iv) Examples.
(e) Employees of qualified separate lines of business.
(f) Certain terminating employees.
(1) In general.
(2) Hours of service.
(3) Examples.
(g) Employees of certain governmental or tax-exempt entities
precluded from maintaining a section 401(k) plan.
(h) Former employees.
(1) In general.
(2) Employees terminated before a specified date.
(3) Previously excludable employees.
(i) Former employees treated as employees.
Sec. 1.410(b)-7 Definition of plan and rules governing plan
disaggregation and aggregation.
(a) In general.
(b) Separate asset pools are separate plans.
(c) Mandatory disaggregation of certain plans.
(1) Section 401(k) and section 401(m) plans.
(2) ESOPs and non-ESOPs.
(3) Plans benefiting otherwise excludable employees.
(4) Plans benefiting certain disaggregation populations of
employees.
(i) In general.
(ii) Definition of disaggregation population.
(5) Additional rules for plans benefiting employees of more than one
qualified separate line of business.
[[Page 490]]
(d) Permissive aggregation for ratio percentage and
nondiscriminatory classification tests.
(1) In general.
(2) Rules of disaggregation.
(3) Duplicative aggregation.
(4) Special rule for plans benefiting employees of a qualified
separate line of business.
(5) Same plan year requirement.
(e) Determination of plans in testing group for average benefit
percentage test.
(1) In general.
(2) Example.
(f) Section 403(b) plans.
Sec. 1.410(b)-8 Additional rules.
(a) Testing methods.
(1) In general.
(2) Daily testing option.
(3) Quarterly testing option.
(4) Annual testing option.
(5) Example.
(b) Family member aggregation rule.
Sec. 1.410(b)-9 Definitions.
Collectively bargained employee.
Defined benefit plan.
Defined contribution plan.
Employee.
Employer.
ESOP.
Former employee.
Highly compensated employee.
Highly compensated former employee.
Multiemployer plan.
Noncollectively bargained employee.
Nonhighly compensated employee.
Nonhighly compensated former employee.
Plan year.
Plan year compensation.
Professional employee.
Ratio percentage.
Section 401(k) plan.
Section 401(l) plan.
Section 401(m) plan.
Sec. 1.410(b)-10 Effective dates and transition rules.
(a) Statutory effective dates.
(1) In general.
(2) Special statutory effective date for collective bargaining
agreements.
(i) In general.
(ii) Example.
(iii) Plan maintained pursuant to a collective bargaining agreement.
(b) Regulatory effective dates.
(1) In general.
(2) Plans of tax-exempt organizations.
(c) Compliance during transition period.
(d) Effective date for governmental plans.
[T.D. 8363, 56 FR 47641, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992, as
amended by T.D. 8487, 58 FR 46838, Sept. 3, 1993; T.D. 8548, 59 FR
32914, June 27, 1994]
Sec. 1.410(b)-1 Minimum coverage requirements (before 1994).
(a) In general. A plan is not a qualified plan (and a trust forming
a part of the plan is not a qualified trust) unless the plan satisfies
section 410(b)(1). For plan years prior to the applicable effective date
set forth in Sec. 1.410(b)-10, a plan satisfies section 410(b)(1) if it
satisfies the requirements of paragraph (b)(1) or (b)(2) of this
section. See also Sec. 1.410(b)-2 for plan years beginning on or after
the applicable effective date set forth in Sec. 1.410(b)-10.
(b) Coverage tests--(1) Percentage test. A plan satisfies the
requirements of this subparagraph if it benefits--
(i) Seventy percent or more of all employees, or
(ii) Eighty percent or more of all employees who are eligible to
benefit under the plan if 70 percent or more of all the employees are
eligible to benefit under the plan,
excluding in each case employees who have not satisfied the minimum age
and service requirements (if any) prescribed by the plan, as of the date
coverage is tested, as a condition of participation and employees
permitted to be excluded under paragraph (c) of this section. The
percentage requirements of this subparagraph refer to a percentage of
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.
(2) Classification test. A plan satisfies the requirements of
section 410(b)(1) and this subparagraph if it benefits such employees as
qualify under a classification of employees set up by the employer,
which classification is found by the Internal Revenue Service not to be
discriminatory in favor of employees who are officers, shareholders, or
highly compensated. For purposes of this subparagraph, except as
provided by paragraph (c) of this section, all active employees
(including employees who do not satisfy the minimum age or service
requirements of the plan) are taken into account.
(c) Exclusion of certain employees. Under section 410(b)(2), for
purposes of section 410(b)(1) and paragraph (b) of this section, there
shall be excluded
[[Page 491]]
from consideration employees described in subparagraphs (1), (2), and
(3) of this paragraph.
(1) Bargaining unit. Under section 410(b)(2)(A) and this paragraph,
there may be excluded from consideration employees not included in the
plan who are included in a unit of employees covered by an agreement
which the Secretary of Labor finds to be a collective bargaining
agreement between employee representatives and one or more employers, if
the Internal Revenue Service finds that retirement benefits were the
subject of good faith bargaining between such employee representatives
and such employer or employers. For purposes of determining whether such
bargaining occurred, it is not material that such employees are not
covered by another plan or that the plan was not considered in such
bargaining.
(2) Air pilots. Under section 410(b)(2)(B) and this paragraph there
may be excluded from consideration, in the case of a plan established or
maintained pursuant to an agreement which the Secretary of Labor finds
to be a collective bargaining agreement between air pilots represented
in accordance with title II of the Railway Labor Act and one or more
employers all employees not covered by such agreement. Section
410(b)(2)(B) and this subparagraph do not apply to a plan if the plan
provides contributions or benefits for employees whose principal duties
are not customarily performed aboard aircraft in flight.
(3) Nonresident aliens. Under section 410(b)(2)(C) and this
paragraph, there may be excluded from consideration employees who are
nonresident aliens and who receive no earned income (within the meaning
of section 911(b) and the regulations thereunder) from the employer
which constitutes income from sources within the United States (within
the meaning of section 861(a)(3) and the regulations thereunder).
(d) Special rules--(1) Highly compensated. The classification of an
employee as highly compensated for purposes of section 410(b)(1)(B) and
Sec. 1.410(b)-1(b)(2) is made on the basis of the facts and
circumstances of each case, taking into account the level of the
employee's compensation and the level of compensation paid by the
employer to other employees, whether or not covered by the plan. Average
compensation levels determined on a local, regional, or national basis,
are not relevant for this purpose. Further, the classification of an
employee as highly compensated is not made solely on the basis of the
number or percentage of employees whose compensation exceeds, or is
exceeded by, the employee's.
(2) Discrimination. The determination as to whether a plan
discriminates in favor of employees who are officers, shareholders, or
highly compensated is made on the basis of the facts and circumstances
of each case, allowing a reasonable difference between the ratio of such
employees benefited by the plan to all such employees of the employer
and the ratio of the employees (other than officers, shareholders, or
highly compensated) of the employer benefited by the plan to all
employees (other than officers, shareholders, or highly compensated). A
showing that a specified percentage of employees covered by a plan are
not officers, shareholders, or highly compensated, is not in itself
sufficient to establish that the plan does not discriminate in favor of
employees who are officers, shareholders, or highly compensated.
(3) Multiple plans--(i) An employer may designate two or more plans
as constituting a single plan which is intended to qualify for purposes
of section 410(b)(1) and this section, in which case all plans so
designated shall be considered as a single plan in determining whether
the requirements of such section are satisfied by each of the separate
plans. A determination that the combination of plans so designated does
not satisfy such requirements does not preclude a determination that one
or more of such plans, considered separately, satisfies such
requirements.
(ii) Notwithstanding subdivision (i) of this subparagraph, a plan
which is subject to the limitations of section 401(a)(17) of the Code or
section 301(d)(3) of the Tax Reduction Act of 1975 cannot be considered
with any other plan which covers any employee covered by such plan.
[[Page 492]]
(4) Profit-sharing plans. Employees under a profit-sharing plan who
receive the amounts allocated to their accounts before the expiration of
a period of time or the occurrence of a contingency specified in the
plan shall not be considered covered by the plan. 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 be
considered covered by the plan.
(5) Certain classifications. See section 401(a)(5) and the
regulations thereunder for rules relating to classifications of
employees which are not considered to be discriminatory per se for
purposes of section 410(b)(1)(B) and Sec. 1.410(b)-1(b)(2).
(6) Integration with Social Security Act. See section 401(a)(5) and
the regulations thereunder for rules relating to integration of plans
with the Social Security Act.
(7) Different age and service requirements--(i) Application. The
rules of this subparagraph (7) apply to a plan which must satisfy the
minimum age and service requirements of section 410(a)(1)(A) in order to
be a qualified plan. Accordingly, the rules are inapplicable to plans
described in section 410(c)(1) (see Sec. 1.410(a)-1(c)(1)); plans
satisfying the alternative minimum age and service requirements of
section 410(a)(1)(B) but not satisfying the requirements of section
410(a)(1)(A); and plans which provide contributions or benefits for
employees, some or all of whom are owner-employees (see section
401(a)(10)).
(ii) General rules. A provision for different age and service
requirements for present and future employees either upon establishment
or subsequent amendment is not, of itself, discriminatory under section
410(b)(1)(B) even though present employees who are officers,
shareholders, or highly compensated cannot meet the age and service
requirements for future employees at the time the plan is established or
amended and even though present participants who are officers,
shareholders, or highly compensated would not have satisfied the age and
service requirements for future employees at the time they became
participants in the plan. Furthermore, prohibited discrimination will be
deemed not to arise in operation, solely because of such different
requirements, when future employees are added to the employer's work
force.
(8) Certain controlled groups. In applying the percentage test and
classification test described in paragraph (b) (1) and (2) of this
section for a year, all the employees of corporations or trades and
businesses whose employees are treated as employed by a single employer
by reason of section 414 (b) or (c) must be taken into account. The
preceding sentence shall apply for a plan year if, on 1 day in each
quarter of such plan year, such corporations are members of a controlled
group of corporations (within the meaning of section 414(b)) of such
trades or businesses are under common control (within the meaning of
section 414(c)).
(9) Transitional rule. In the case of a cash and deferred profit-
sharing plan, in existence on June 27, 1974, the requirements of
paragraph (b)(2) of this section are satisfied if over one-half of the
participants in the plan are among the lowest paid two-thirds of all
eligible employees. This subparagraph shall not apply after December 31,
1977.
(e) Example. The rules provided by this section are illustrated by
the following example:
Example. An employer established a non-contributory defined benefit
plan covering all employees of its ABC Division who are hired prior to
age 60 and who are at least 25 years old. The normal retirement age
under the plan is age 65. The employer has 100 employees including 20
employees who are under age 25 and 10 employees who were hired over age
60. The plan does not cover 15 employees who are over age 25 and were
hired before age 60 because they are not in the ABC Division. Of these
15 excluded employees, 3 have less than 1 year of service. In addition,
12 of the 55 employees covered have less than one year of service. The
plan can be shown not to satisfy the requirements of IRC section
410(b)(1)(A) as follows:
(i) Number of employees........................................ 100
(ii) Number of employees excluded on account of minimum age and 20
service.......................................................
(iii) (i)-(ii)................................................. 80
(iv) Number of employees who must be covered if plan is to 56
satisfy IRC section 410(b)(1)(A), 70% of (iii)................
(v) Number of employees actually covered....................... 55
Because the number of employees covered is less than the number of
employees who must
[[Page 493]]
be covered, the plan does not satisfy the percentage coverage
requirements of IRC section 410(b)(1)(A).
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47197, Sept. 20, 1977, as amended by T.D. 7735, 45 FR
74722, Nov. 12, 1980; T.D. 8363, 56 FR 47643, Sept. 19, 1991; T.D. 8487,
58 FR 46839, Sept. 3, 1993]
Sec. 1.410(b)-2 Minimum coverage requirements (after 1993).
(a) In general. A plan is a qualified plan for a plan year only if
the plan satisfies section 410(b) for the plan year. A plan satisfies
section 410(b) for a plan year if and only if it satisfies paragraph (b)
of this section with respect to employees for the plan year and
paragraph (c) of this section with respect to former employees for the
plan year. The rules in paragraphs (a), (b), and (c) of this section
apply to all plans as a condition of qualification, including plans
under which no employee is able to accrue any additional benefits (for
example, frozen plans). Paragraphs (d), (e), and (f) of this section
provide special rules for nonelective section 403(b) plans subject to
section 403(b)(12)(A)(i), for governmental and church plans subject to
section 410(c), and for certain acquisitions or dispositions,
respectively. See Sec. 1.410(b)-7 for rules for determining the ``plan''
subject to section 410(b).
(b) Requirements with respect to employees--(1) In general. A plan
satisfies this paragraph (b) for a plan year if and only if it satisfies
at least one of the tests in paragraphs (b)(2) through (b)(7) of this
section for the plan year.
(2) Ratio percentage test--(i) In general. A plan satisfies this
paragraph (b)(2) for a plan year if and only if the plan's ratio
percentage for the plan year is at least 70 percent. This test
incorporates both the percentage test of section 410(b)(1)(A) and the
ratio test of section 410(b)(1)(B). See Sec. 1.410(b)-9 for the
definition of ratio percentage.
(ii) Examples. The following examples illustrate the ratio
percentage test of this paragraph (b)(2).
Example 1. For a plan year, Plan A benefits 70 percent of an
employer's nonhighly compensated employees and 100 percent of the
employer's highly compensated employees. The plan's ratio percentage for
the year is 70 percent (70 percent/100 percent), and thus the plan
satisfies the ratio percentage test.
Example 2. For a plan year, Plan B benefits 40 percent of the
employer's nonhighly compensated employees and 60 percent of the
employer's highly compensated employees. Plan B fails to satisfy the
ratio percentage test because the plan's ratio percentage is only 66.67
percent (40 percent/60 percent).
(3) Average benefit test. A plan satisfies this paragraph (b)(3) for
a plan year if and only if the plan satisfies both the nondiscriminatory
classification test of Sec. 1.410(b)-4 and the average benefit
percentage test of Sec. 1.410(b)-5 for the plan year.
(4) Certain tax credit employee stock ownership plans. A plan
satisfies this paragraph (b)(4) for a plan year if and only if the plan-
-
(i) Is a tax credit employee stock ownership plan (as defined in
section 409(a)),
(ii) Is the only plan of the employer that is intended to qualify
under section 401(a), and
(iii) Is a plan that satisfies the rule set forth in section
410(b)(6)(D).
This paragraph (b)(4) is available only for plan years for which the
tax credit employee stock ownership plan receives contributions for
which the employer is allowed a tax credit under section 41 (as in
effect prior to its repeal by the Tax Reform Act of 1986) or section
48(n) (as in effect prior to its amendment by the Tax Reform Act of
1984). The requirement of this paragraph (b)(4) that the plan be the
only plan of the employer that is intended to qualify under section
401(a) is not satisfied if the employer has only one plan, but that plan
is treated as two or more separate plans under the mandatory
disaggregation rules of Sec. 1.410(b)-7(c).
(5) Employers with no nonhighly compensated employees. A plan
satisfies this paragraph (b)(5) for a plan year if and only if the plan
is maintained by an employer that has no nonhighly compensated employees
at any time during the plan year.
(6) Plans benefiting no highly compensated employees. A plan
satisfies this paragraph (b)(6) for a plan year if and only if the plan
benefits no highly compensated employees for the plan year.
(7) Plans benefiting collectively bargained employees. A plan that
benefits
[[Page 494]]
solely collectively bargained employees for a plan year satisfies this
paragraph (b)(7) for the plan year. If a plan (within the meaning of
Sec. 1.410(b)-7(b)) benefits both collectively bargained employees and
noncollectively bargained employees for a plan year, Sec. 1.410(b)-
7(c)(4) provides that the portion of the plan that benefits collectively
bargained employees is treated as a separate plan from the portion of
the plan that benefits noncollectively bargained employees. Thus, the
mandatorily disaggregated portion of the plan that benefits the
collectively bargained employees automatically satisfies this paragraph
(b)(7) for the plan year and hence section 410(b). See Sec. 1.410(b)-9
for the definitions of collectively bargained employee and
noncollectively bargained employee.
(c) Requirements with respect to former employees--(1) Former
employees tested separately. Former employees are tested separately from
employees for purposes of section 410(b). Thus, former employees are
disregarded in applying the ratio percentage test, the nondiscriminatory
classification test, and the average benefit percentage test with
respect to the coverage of employees under a plan, and employees are
disregarded in applying this section with respect to the coverage of
former employees under a plan.
(2) Testing former employees. A plan satisfies section 410(b) with
respect to former employees if and only if, under all of the relevant
facts and circumstances (including the group of nonexcludable former
employees not benefiting under the plan), the group of former employees
benefiting under the plan does not discriminate significantly in favor
of highly compensated former employees.
(d) Nonelective contributions under section 403(b) plans. For plan
years beginning on or after January 1, 1989, a plan subject to section
403(b)(12)(A)(i) with respect to nonelective contributions (i.e.,
contributions not made pursuant to a salary reduction agreement) is
treated as a plan subject to the requirements of this section. For this
purpose, a plan described in the preceding sentence must satisfy the
requirements of this section without regard to section 410(c) and
paragraph (e) of this section. For plan years beginning before the
effective date set forth in Sec. 1.410(b)-10(d), any plan described in
section 410(c)(1)(A) (regarding governmental plans) satisfies the
requirements of this section.
(e) Certain governmental and church plans. The requirements of
section 410(b) do not apply to a plan described in section 410(c)(1)
(other than a plan subject to section 403(b)(12)(A)(i) or a plan with
respect to which an election has been made under section 410(d)). Such a
plan must satisfy section 401(a)(3) as in effect on September 1, 1974.
For this purpose, a plan that satisfies section 410(b) (without regard
to this paragraph (e)) is treated as satisfying section 401(a)(3) as in
effect on September 1, 1974. For plan years beginning before the
effective date set forth in Sec. 1.410(b)-10(d), any plan described in
section 410(c)(1)(A) (regarding governmental plans) satisfies the
requirements of this section and is thus treated as satisfying the
requirements of section 401(a)(3) as in effect on September 1, 1974. See
Sec. 1.410(b)-10(b)(2) for a special rule for plans of tax-exempt
organizations.
(f) Certain acquisitions or dispositions. Section 410(b)(6)(C)
(relating to certain acquisitions or dispositions) provides a special
rule whereby a plan may be treated as satisfying section 410(b) for a
limited period of time after an acquisition or disposition if it
satisfies section 410(b) (without regard to the special rule)
immediately before the acquisition or disposition and there is no
significant change in the plan or in the coverage of the plan other than
the acquisition or disposition. For purposes of section 410(b)(6)(C) and
this paragraph (f), 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.
(g) 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 coverage requirements of section 410(b), including (without
limitation) additional rules limiting or expanding the methods in
[[Page 495]]
Sec. 1.410(b)-5(d) and (e) for determining employee benefit percentages.
[T.D. 8363, 56 FR 47643, Sept. 19, 1991; 57 FR 10817, Mar. 31, 1992, as
amended by T.D. 8487, 58 FR 46839, Sept. 3, 1993; T.D. 8548, 59 FR
32914, June 27, 1994]
Sec. 1.410(b)-3 Employees and former 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, in the case of a defined contribution plan, the employer receives
an allocation taken into account under Sec. 1.401(a)(4)-2(c)(2)(ii), or
in the case of a defined benefit plan, the employee has an increase in a
benefit accrued or treated as an accrued benefit under section
411(d)(6).
(2) Exceptions to allocation or accrual requirement--(i) Section
401(k) and 401(m) plans. Notwithstanding paragraph (a)(1) of this
section, an employee is treated as benefiting under a section 401(k)
plan for a plan year if and only if the employee is an eligible employee
under the plan as defined in Sec. 1.401(k)-1(g)(4) for the plan year.
Similarly, an employee is treated as benefiting under a section 401(m)
plan for a plan year if and only if the employee is an eligible employee
as defined in Sec. 1.401(m)-1(f)(4) for the plan year.
(ii) Section 415 limits--(A) General rule for defined benefit plans.
In determining whether an employee is treated as benefiting under a
defined benefit plan for a plan year, plan provisions that implement the
limits of section 415 are disregarded. Any plan provision that provides
for increases in an employee's accrued benefit under the plan due solely
to adjustments under section 415(d)(1), additional years of
participation or service under section 415(b)(5), or changes in the
defined contribution fraction under section 415(e) is also disregarded,
but only if such provision applies uniformly to all employees in the
plan.
(B) Defined benefit plans taking section 415 limits into account
under section 401(a)(4) testing. Paragraph (a)(2)(ii)(A) of this section
does not apply in the case of a defined benefit plan that uses the
option in Sec. 1.401(a)(4)-3(d)(2)(ii)(B) to take into account plan
provisions implementing the provisions of section 415 in determining
accrual rates under the section 401(a)(4) general test.
(C) Defined contribution plans. A defined contribution plan is
permitted to apply the rule in the first sentence of paragraph
(a)(2)(ii)(A) of this section in determining whether an employee is
treated as benefiting under the plan, provided it applies the rule on a
consistent basis for all employees in the plan.
(iii) Certain employees treated as benefiting--(A) In general. An
employee is treated as benefiting under a plan for a plan year if the
employee satisfies all of the applicable conditions for accruing a
benefit or receiving an allocation for the plan year but fails to have
an increase in accrued benefit or to receive an allocation solely
because of one or more of the conditions set forth in paragraphs
(a)(2)(iii) (B) through (F) of this section.
(B) Certain plan limits. The employee's benefit would otherwise
exceed a limit that is applicable on a uniform basis to all employees in
the plan. Thus, for example, if the formula under a defined benefit plan
takes into account only the first 30 years of service for accrual
purposes, an employee who has completed more than 30 years of service is
still treated as benefiting under the plan.
(C) Benefits previously accrued. The benefit previously accrued by
the employee is greater than the benefit that would be determined under
the plan if the benefit previously accrued were disregarded. This could
happen, for example, when the plan is applying the wear-away formula of
Sec. 1.401(a)(4)-13(c)(4)(ii) and the employee's frozen accrued benefit
exceeds the benefit determined under the current formula.
(D) Benefit offset arrangements. The plan offsets the employee's
current benefit accrual under an offset arrangement described in
Sec. 1.401(a)(4)-3(f)(9) (without regard to whether the offset is
attributable to pre-participation service or past service).
(E) Target benefit plans. In the case of a target benefit plan that
satisfies the nondiscriminatory amount requirement of Sec. 1.401(a)(4)-
1(b)(2) by satisfying the safe harbor in Sec. 1.401(a)(4)-8(b)(3),
[[Page 496]]
the employee's theoretical reserve is greater than or equal to the
actuarial present value of the fractional rule benefit.
(F) Post-normal retirement age adjustments. The employee has
attained normal retirement age under a defined benefit plan and fails to
accrue a benefit because of the provisions of section 411(b)(1)(H)(iii)
regarding adjustments for delayed retirement.
(iv) Section 412(i) plans--(A) General rule. Notwithstanding
paragraph (a)(1) of this section, an employee is treated as benefiting
under an insurance contract plan within the meaning of section 412(i)
for a plan year if and only if a premium is paid on behalf of the
employee for the plan year.
(B) Exceptions. Notwithstanding paragraph (a)(2)(iv)(A) of this
section, an employee is treated as benefiting under an insurance
contract plan within the meaning of section 412(i) for a plan year if
the sole reason that a premium is not paid on behalf of the employee is
one of the reasons described in paragraph (a)(2)(iii) of this section.
In addition, an employee is treated as benefiting under an insurance
contract plan, within the meaning of section 412(i), that is a defined
benefit plan if a premium is not paid on behalf of the employee solely
because the insurance contracts that have previously been purchased on
behalf of the employee guarantee to provide for the employee's projected
normal retirement benefit without regard to future premium payments.
(3) Examples. The following examples illustrate the determination of
whether an employee is benefiting under a plan for purposes of section
410(b).
Example 1. An employer has 35 employees who are eligible under a
defined benefit plan. The plan requires 1,000 hours of service to accrue
a benefit. Only 30 employees satisfy the 1,000-hour requirement and
accrue a benefit. The five employees who do not satisfy the 1,000-hour
requirement during the plan year are taken into account in testing the
plan under section 410(b) but are treated as not benefiting under the
plan.
Example 2. An employer maintains a section 401(k) plan. Only
employees who are at least age 21 and who complete one year of service
are eligible employees under the plan within the meaning of
Sec. 1.401(k)-1(g)(4). Under the rule of paragraph (a)(2)(i) of this
section, only employees who have satisfied these age and service
conditions are treated as benefiting under the plan.
Example 3. The facts are the same as in Example 2, except that the
employer also maintains a section 401(m) plan that provides matching
contributions contingent on elective contributions under the section
401(k) plan. The matching contributions are contingent on employment on
the last day of the plan year. Under Sec. 1.401(m)-1(f)(4), because
matching contributions are contingent on employment on the last day of
the plan year, not all employees who are eligible employees under the
section 401(k) plan are eligible employees under the section 401(m)
plan. Thus, employees who have satisfied the age and service conditions
but who do not receive a matching contribution because they are not
employed on the last day of the plan year are treated as not benefiting
under the section 401(m) portion of the plan.
(b) Former employees benefiting under a plan--(1) In general. A
former employee is treated as benefiting for a plan year if and only if
the plan provides an allocation or benefit increase described in
paragraph (a)(1) of this section to the former employee for the plan
year. Thus, for example, a former employee benefits under a defined
benefit plan for a plan year if the plan is amended to provide an ad hoc
cost-of-living adjustment in the former employee's benefits. In
contrast, because an increase in benefits payable under a plan pursuant
to an automatic cost-of-living provision adopted and effective before
the beginning of the plan year is previously accrued, a former employee
is not treated as benefiting in a subsequent plan year merely because
the former employee receives an increase pursuant to such an automatic
cost-of-living provision. Any accrual or allocation for an individual
during the plan year that arises from the individual's status as an
employee is treated as an accrual or allocation of an employee.
Similarly, any accrual or allocation for an individual during the plan
year that arises from the individual's status as a former employee is
treated as an accrual or allocation of a former employee. It is possible
for an individual to accrue a benefit both as an employee and as a
former employee in a given plan year. During the plan year in which an
individual ceases performing services for the employer, the individual
is treated as an employee in applying section 410(b) with respect to
[[Page 497]]
employees and is treated as a former employee in applying section 410(b)
with respect to former employees.
(2) Examples. The following examples illustrate the determination of
whether a former employee benefits under a plan for purposes of section
410(b).
Example 1. Employer A amends its defined benefit plan in the 1995
plan year to provide an ad hoc cost-of-living increase of 5 percent for
all retirees. Former employees who receive this increase are treated as
benefiting under the plan for the 1995 plan year.
Example 2. Employer B maintains a defined benefit plan with a
calendar plan year. In the 1995 plan year, Employer B amends the plan to
provide that an employee who has reached early retirement age under the
plan and who retires before July 31 of the 1995 plan year will receive
an unreduced benefit, even though the employee has not yet reached
normal retirement age. This early retirement window benefit is provided
to employees based on their status as employees. Thus, although
individuals who take advantage of the benefit become former employees,
the window benefit is treated as provided to employees and is not
treated as a benefit for former employees.
Example 3. The facts are the same as Example 2, except that on
September 1, 1995, Employer B also amends the defined benefit plan to
provide an ad hoc cost-of-living increase effective for all former
employees. An individual who ceases performing services for the employer
before July 31, 1995, under the early retirement window, and then
receives the ad hoc cost-of-living increase, is treated as benefiting
for the 1995 plan year both as an employee with respect to the early
retirement window, and as a former employee with respect to the ad hoc
COLA.
[T.D. 8363, 56 FR 47644, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992, as
amended by T.D. 8487, 58 FR 46839, Sept. 3, 1993]
Sec. 1.410(b)-4 Nondiscriminatory classification test.
(a) In general. A plan satisfies the nondiscriminatory
classification test of this section for a plan year if and only if, for
the plan year, the plan benefits the employees who qualify under a
classification established by the employer in accordance with paragraph
(b) of this section, and the classification of employees is
nondiscriminatory under paragraph (c) of this section.
(b) Reasonable classification established by the employer. A
classification is established by the employer in accordance with this
paragraph (b) if and only if, based on all the facts and circumstances,
the classification is reasonable and is established under objective
business criteria that identify the category of employees who benefit
under the plan. Reasonable classifications generally include specified
job categories, nature of compensation (i.e., salaried or hourly),
geographic location, and similar bona fide business criteria. An
enumeration of employees by name or other specific criteria having
substantially the same effect as an enumeration by name is not
considered a reasonable classification.
(c) Nondiscriminatory classification--(1) General rule. A
classification is nondiscriminatory under this paragraph (c) for a plan
year if and only if the group of employees included in the
classification benefiting under the plan satisfies the requirements of
either paragraph (c)(2) or (c)(3) of this section for the plan year.
(2) Safe harbor. A plan satisfies the requirement of this paragraph
(c)(2) for a plan year if and only if the plan's ratio percentage is
greater than or equal to the employer's safe harbor percentage, as
defined in paragraph (c)(4)(i) of this section. See Sec. 1.410(b)-9 for
the definition of a plan's ratio percentage.
(3) Facts and circumstances--(i) General rule. A plan satisfies the
requirements of this paragraph (c)(3) if and only if--
(A) The plan's ratio percentage is greater than or equal to the
unsafe harbor percentage, as defined in paragraph (c)(4)(ii) of this
section, and
(B) The classification satisfies the factual determination of
paragraph (c)(3)(ii) of this section.
(ii) Factual determination. A classification satisfies this
paragraph (c)(3)(ii) if and only if, based on all the relevant facts and
circumstances, the Commissioner finds that the classification is
nondiscriminatory. No one particular fact is determinative. Included
among the facts and circumstances relevant in determining whether a
classification is nondiscriminatory are the following--
(A) The underlying business reason for the classification. The
greater the business reason for the classification, the more likely the
classification is to
[[Page 498]]
be nondiscriminatory. Reducing the employer's cost of providing
retirement benefits is not a relevant business reason.
(B) The percentage of the employer's employees benefiting under the
plan. The higher the percentage, the more likely the classification is
to be nondiscriminatory.
(C) Whether the number of employees benefiting under the plan in
each salary range is representative of the number of employees in each
salary range of the employer's workforce. In general, the more
representative the percentages of employees benefiting under the plan in
each salary range, the more likely the classification is to be
nondiscriminatory.
(D) The difference between the plan's ratio percentage and the
employer's safe harbor percentage. The smaller the difference, the more
likely the classification is to be nondiscriminatory.
(E) The extent to which the plan's average benefit percentage
(determined under Sec. 1.410(b)-5) exceeds 70 percent.
(4) Definitions--(i) Safe harbor percentage. The safe harbor
percentage of an employer is 50 percent, reduced by \3/4\ of a
percentage point for each whole percentage point by which the nonhighly
compensated employee concentration percentage exceeds 60 percent. See
paragraph (c)(4)(iv) for a table that illustrates the safe harbor
percentage and unsafe harbor percentage.
(ii) Unsafe harbor percentage. The unsafe harbor percentage of an
employer is 40 percent, reduced by \3/4\ of a percentage point for each
whole percentage point by which the nonhighly compensated employee
concentration percentage exceeds 60 percent. However, in no case is the
unsafe harbor percentage less than 20 percent.
(iii) Nonhighly compensated employee concentration percentage. The
nonhighly compensated employee concentration percentage of an employer
is the percentage of all the employees of the employer who are nonhighly
compensated employees. Employees who are excludable employees for
purposes of the average benefit test are not taken into account.
(iv) Table. The following table sets forth the safe harbor and
unsafe harbor percentages at each nonhighly compensated employee
concentration percentage:
------------------------------------------------------------------------
Nonhighly compensated
employee concentration Safe harbor percentage Unsafe harbor
percentage percentage
------------------------------------------------------------------------
0-60 50.00 40.00
61 49.25 39.25
62 48.50 38.50
63 47.75 37.75
64 47.00 37.00
65 46.25 36.25
66 45.50 35.50
67 44.75 34.75
68 44.00 34.00
69 43.25 33.25
70 42.50 32.50
71 41.75 31.75
72 41.00 31.00
73 40.25 30.25
74 39.50 29.50
75 38.75 28.75
76 38.00 28.00
77 37.25 27.25
78 36.50 26.50
79 35.75 25.75
80 35.00 25.00
81 34.25 24.25
82 33.50 23.50
83 32.75 22.75
84 32.00 22.00
85 31.25 21.25
86 30.50 20.50
87 29.75 20.00
88 29.00 20.00
89 28.25 20.00
90 27.50 20.00
91 26.75 20.00
92 26.00 20.00
93 25.25 20.00
94 24.50 20.00
95 23.75 20.00
96 23.00 20.00
97 22.25 20.00
98 21.50 20.00
99 20.75 20.00
------------------------------------------------------------------------
(5) Examples. The following examples illustrate the rules in this
paragraph (c).
Example 1. Employer A has 200 nonexcludable employees, of whom 120
are nonhighly compensated employees and 80 are highly compensated
employees. Employer A maintains a plan that benefits 60 nonhighly
compensated employees and 72 highly compensated employees. Thus, the
plan's ratio percentage is 55.56 percent ([60/120]/[72/80]=50%/
90%=0.5556), which is below the percentage necessary to satisfy the
ratio percentage test of Sec. 1.410(b)-2(b)(2). The employer's nonhighly
compensated employee concentration percentage is 60 percent (120/200);
thus, Employer A's safe harbor percentage is 50 percent and its unsafe
harbor percentage is 40 percent. Because the plan's ratio percentage is
greater than the safe harbor percentage, the plan's classification
satisfies
[[Page 499]]
the safe harbor of paragraph (c)(2) of this section.
Example 2. The facts are the same as in Example 1, except that the
plan benefits only 40 nonhighly compensated employees. The plan's ratio
percentage is thus 37.03 percent ([40/120]/[72/80]=33.33%/90%=0.3703).
Under these facts, the plan's classification is below the unsafe harbor
percentage and is thus considered discriminatory.
Example 3. The facts are the same as in Example 1, except that the
plan benefits 45 nonhighly compensated employees. The plan's ratio
percentage is thus 41.67 percent ([45/120]/[72/80]=37.50%/90%=0.4167),
above the unsafe harbor percentage (40 percent) and below the safe
harbor percentage (50 percent). The Commissioner may determine that the
classification is nondiscriminatory after considering all the relevant
facts and circumstances.
Example 4. Employer B has 10,000 nonexcludable employees, of whom
9,600 are nonhighly compensated employees and 400 are highly compensated
employees. Employer B maintains a plan that benefits 600 nonhighly
compensated employees and 100 highly compensated employees. Thus, the
plan's ratio percentage is 25.00 percent ([600/9,600]/[100/400]=6.25%/
25%=0.2500), which is below the percentage necessary to satisfy the
ratio percentage test of Sec. 1.410(b)-2(b)(2). Employer B's nonhighly
compensated employee concentration percentage is 96 percent (9,600/
10,000); thus, Employer B's safe harbor percentage is 23 percent, and
its unsafe harbor percentage is 20 percent. Because the plan's ratio
percentage (25.00 percent) is greater than the safe harbor percentage
(23.00 percent), the plan's classification satisfies the safe harbor of
paragraph (c)(2) of this section.
Example 5. The facts are the same as in Example 4, except that the
plan benefits only 400 nonhighly compensated employees. The plan's ratio
percentage is thus 16.67 percent ([400/9,600]/[100/400]=4.17%/
25%=0.1667). The plan's ratio percentage is below the unsafe harbor
percentage and thus the classification is considered discriminatory.
Example 6. The facts are the same as in Example 4, except that the
plan benefits 500 nonhighly compensated employees. The plan's ratio
percentage is thus 20.83 percent ([500/9,600]/[100/400]=5.21%/
25%=0.2083), above the unsafe harbor percentage (20 percent) and below
the safe harbor percentage (23 percent). The Commissioner may determine
that the classification is nondiscriminatory after considering all the
facts and circumstances.
[T.D. 8363, 56 FR 47645, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992]
Sec. 1.410(b)-5 Average benefit percentage test.
(a) General rule. A plan satisfies the average benefit percentage
test of this section for a plan year if and only if the average benefit
percentage of the plan for the plan year is at least 70 percent. A plan
is deemed to satisfy this requirement if it satisfies paragraph (f) of
this section for the plan year.
(b) Determination of average benefit percentage. The average benefit
percentage of a plan for a plan year is the percentage determined by
dividing the actual benefit percentage of the nonhighly compensated
employees in plans in the testing group for the testing period that
includes the plan year by the actual benefit percentage of the highly
compensated employees in plans in the testing group for that testing
period. See paragraph (d)(3)(ii) of this section for the definition of
testing period.
(c) Determination of actual benefit percentage. The actual benefit
percentage of a group of employees for a testing period is the average
of the employee benefit percentages, calculated separately with respect
to each of the employees in the group for the testing period. All
nonexcludable employees of the employer are taken into account for this
purpose, even if they are not benefiting under any plan that is taken
into account.
(d) Determination of employee benefit percentages--(1) Overview.
This paragraph (d) provides rules for determining employee benefit
percentages. See paragraph (e) of this section for alternative methods
for determining employee benefit percentages.
(2) Employee contributions and employee-provided benefits
disregarded. Only employer-provided contributions and benefits are taken
into account in determining employee benefit percentages. Therefore,
employee contributions (including both employee contributions allocated
to separate accounts and employee contributions not allocated to
separate accounts), and benefits derived from such contributions, are
not taken into account in determining employee benefit percentages.
(3) Plans and plan years taken into account--(i) Testing group. All
plans included in the testing group under
[[Page 500]]
Sec. 1.410(b)-7(e)(1), and only those plans, are taken into account in
determining an employee's employee benefit percentage.
(ii) Testing period. An employee's employee benefit percentage is
determined on the basis of plan years ending with or within the same
calendar year. These plan years are referred to in this section as the
relevant plan years or, in the aggregate, as the testing period.
(4) Contributions or benefits basis. Employee benefit percentages
may be determined on either a contributions or a benefits basis.
Employee benefit percentages for any testing period must be determined
on the same basis (contributions or benefits) for all plans in the
testing group.
(5) Determination of employee benefit percentage--(i) General rule.
The employee benefit percentage for an employee for a testing period is
the rate that would be determined for that employee for purposes of
applying the general test for nondiscrimination in Secs. 1.401(a)(4)-2,
1.401(a)(4)-3, 1.401(a)(4)-8 or 1.401(a)(4)-9, if all the plans in the
testing group were aggregated for purposes of section 410(b). Thus, if
employee benefit percentages are determined on a contributions basis,
each employee's employee benefit percentage is the aggregate normal
allocation rate that would be determined for the employee under
Sec. 1.401(a)(4)-9(b)(2)(ii)(A) (if the plans in the testing group
include both defined benefit and defined contribution plans), the
allocation rate that would be determined for the employee under
Sec. 1.401(a)(4)-2(c)(2) (if the plans in the testing group include only
defined contribution plans), or the equivalent normal allocation rate
that would be determined for the employee under Sec. 1.401(a)(4)-8(c)(2)
(if the plans in the testing group include only defined benefit plans).
Similarly, if employee benefit percentages are determined on a benefits
basis, each employee's employee benefit percentage is the aggregate
normal accrual rate that would be determined for the employee under
Sec. 1.401(a)(4)-9(b)(2)(ii)(B), the normal accrual rate that would be
determined for the employee under Sec. 1.401(a)(4)-3(d), or the
equivalent accrual rate that would be determined for the employee under
Sec. 1.401(a)(4)-8(b)(2), depending on whether the plans in the testing
group include both defined benefit and defined contribution plans, only
defined benefit plans, or only defined contribution plans.
(ii) Plans with differing plan years. If not all the plans in the
testing group share the same plan year, Sec. 1.410(b)-7(d)(5) would
ordinarily prohibit them from being aggregated for purposes of section
410(b). In such a case, employee benefit percentages are determined by
applying the rules of paragraph (d)(5)(i) of this section separately to
each subset of plans in the testing group that share the same plan year
(or the same accrual computation period) and aggregating the results for
all plans in the testing group. Thus, an employee's employee benefit
percentage is determined as the sum of these separate employee benefit
percentages that are determined consistently for all the plans in the
testing group (except for differences attributable solely to the
differences in plan years).
(iii) Options and consistency requirements. In determining employee
benefit percentages under this paragraph (d)(5), any optional or
alternative methods or rules available for determining rates in
Secs. 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-9,
whichever is applicable, may be applied. Thus, for example, employee
benefit percentages may generally be calculated using any of the
alternative methods of determining average annual compensation or plan
year compensation under Sec. 1.401(a)(4)-12, and using any underlying
definition of compensation that satisfies section 414(s). Except as
otherwise specifically permitted, the determination of employee benefit
percentages must be made on a consistent basis for all employees and for
all plans in the testing group as required by Secs. 1.401(a)(4)-
2(c)(2)(vi), 1.401(a)(4)-3(d)(2)(i), 1.401(a)(4)-8(b)(2)(iv),
1.401(a)(4)-8(c)(2)(iv) or 1.401(a)(4)-9(b)(2)(iv).
(6) Permitted disparity--(i) In general. Permitted disparity may be
imputed in determining employee benefit percentages as provided in
Secs. 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-9,
whichever is applicable. When separate employee benefit percentages are
determined for individual plans under
[[Page 501]]
paragraph (e)(2) of this section (or for subsets of plans that have the
same plan year as described in paragraph (d)(5)(ii) of this section),
permitted disparity may be imputed for an employee only in one
individual plan (or subset of plans) and may not be imputed for the same
employee in another individual plan (or subset of plans). However, if
the same average annual compensation or plan year compensation is used
to determine employee benefit percentages in more than one plan, the
employee's employee benefit percentages for those plans may be summed
prior to imputing permitted disparity.
(ii) Plans which may not use permitted disparity. Permitted
disparity may be reflected in the determination of rates only to the
extent that the plans for which rates are being determined are plans for
which the permitted disparity of section 401(l) is available. Thus, for
example, if a section 401(k) plan is included in the testing group and
permitted disparity is imputed under Sec. 1.401(a)(4)-2(c)(iv), then
employee benefit percentages are determined by first calculating an
adjusted allocation rate (within the meaning of Sec. 1.401(a)(4)-
7(b)(1)) without regard to the amount of allocations under the section
401(k) plan and adding to it the allocation rate for the section 401(k)
plan. See Sec. 1.401(l)-1(a)(4) for a list of types of plans for which
permitted disparity is not available.
(7) Requirements for certain plans providing early retirement
benefits--(i) General rule. If any defined benefit plan in the testing
group provides for early retirement benefits in addition to normal
retirement benefits to any highly compensated employee, and the average
actuarial reduction for any one of these benefits commencing in the five
years prior to the plan's normal retirement age is less than four
percent per year, then the aggregate most valuable allocation rate,
equivalent most valuable allocation rate, aggregate most valuable
accrual rate, or most valuable accrual rate must be substituted for the
related normal rates in paragraph (d)(5) of this section.
(ii) Exception. Paragraph (d)(7)(i) of this section does not apply
if early retirement benefits with average actuarial reductions described
in that paragraph are currently available, within the meaning of
Sec. 1.401(a)(4)-4(b), under plans in the testing group to a percentage
of nonhighly compensated employees that is at least 70 percent of the
percentage of highly compensated employees to whom these benefits are
currently available.
(e) Additional optional rules--(1) Overview. This paragraph (e)
contains various alternative methods for determining employee benefit
percentages for a testing period.
(2) Determination of employee benefit percentages as the sum of
separately determined rates--(i) In general. Employee benefit
percentages may be determined as the sum of separately determined
employee benefit percentages for each of the plans in the testing group
that are aggregated under paragraphs (d)(5) (i) or (ii) of this section,
provided that these employee benefit percentages are determined on a
consistent basis for all of these plans pursuant to paragraph
(d)(5)(iii) of this section.
(ii) Exception from consistency requirement. The consistency
requirement of paragraph (e)(2)(i) of this section is not violated
merely because employee benefit percentages are not determined in a
consistent manner for all of the plans in the testing group and the
inconsistencies in determination of rates among plans are described in
paragraph (e)(2)(iii) of this section. The exception in this paragraph
(e)(2)(ii) applies only if it is reasonable to believe that the
inconsistencies do not result in an average benefit percentage that is
significantly higher than the average benefit percentage that would be
determined had employee benefit percentages been determined on a
consistent basis pursuant to paragraph (d)(5)(iii) of this section.
(iii) Permitted inconsistencies. The following inconsistencies
between plans are permitted under this paragraph (e)(2)--
(A) Use of different underlying definitions of section 414(s)
compensation in the determination of rates;
(B) Use of different definitions of average annual compensation;
(C) Use of different testing ages;
(D) Use of different fresh-start dates;
(E) Use of different actuarial assumptions for normalization; or
[[Page 502]]
(F) Disregard of actuarial increases after normal retirement age and
QPSA charges without regard to any requirement for uniformity in the
actuarial increases or QPSA charges.
(3) Determination of employee benefit percentages without regard to
plans of another type--(i) General rule. Employee benefit percentages
may be determined under plans of one type (i.e., defined benefit plans
or defined contribution plans) by treating all plans of the other type
(i.e., defined contribution plans or defined benefit plans,
respectively) as if they were not part of the testing group, using the
method provided in this paragraph (e)(3). If this method is used to
determine whether a defined contribution plan satisfies the average
benefit percentage test, employee benefit percentages under all defined
contribution plans in the testing group must be determined on a
contributions basis, and benefits under any defined benefit plans may
not be included in the employee benefit percentage. Similarly, if this
method is used to determine whether a defined benefit plan satisfies the
average benefit percentage test, employee benefit percentages under all
defined benefit plans in the testing group must be determined on a
benefits basis, and allocations under any defined contribution plans may
not be included in the employee benefit percentage.
(ii) Restriction on use of separate testing group determination
method. A plan does not satisfy the average benefit percentage test
using the method provided in this paragraph (e)(3) unless each of the
plans in the testing group of the other type (i.e., defined benefit plan
or defined contribution plan) than the plan being tested satisfies the
average benefit test of Sec. 1.410(b)-2(b)(3) using the method in this
paragraph (e)(3) or satisfies the ratio percentage test of
Sec. 1.410(b)-2(b)(2).
(iii) Treatment of permitted disparity. Although under the general
rule of this paragraph (e)(3) plans of another type are disregarded in
determining employee benefit percentages, the permitted disparity used
by those plans (including any permitted disparity that is used by those
plans to satisfy Sec. 1.401(a)(4)-1(b)(2)) is nonetheless taken into
account in determining the extent to which permitted disparity may be
used in determining employee benefit percentages.
(iv) Example. The following example illustrates the rules of this
paragraph (e)(3):
Example. Employer A maintains two defined benefit plans, neither of
which covers a group of employees that satisfies the ratio percentage
test of Sec. 1.410(b)-2(b)(2), and a profit-sharing plan and a section
401(k) plan, each of which benefits a group of employees that satisfies
the ratio percentage test of Sec. 1.410(b)-2(b)(2). The defined benefit
plans will satisfy the average benefit percentage test if the actual
benefit percentage of all nonexcludable nonhighly compensated employees,
computed on a benefits basis without regard to contributions under the
profit-sharing plan or the section 401(k) plan, is at least 70 percent
of the actual benefit percentage of all nonexcludable highly compensated
employees, computed on a benefits basis without regard to contributions
under the profit-sharing plan or the section 401(k) plan.
(4) Simplified method for determining employee benefit percentages
for certain defined benefit plans--(i) In general. An employee's
employee benefit percentage with respect to a plan may be determined
under the simplified method of paragraph (e)(4)(ii) of this section,
provided the following conditions are satisfied:
(A) The only plans included in the testing group are defined benefit
plans, and employee benefit percentages under these plans are determined
on a benefits basis.
(B) Employee benefit percentages under the plans in the testing
group are not required to be determined by taking into account early
retirement benefits under paragraph (d)(7) of this section.
(C) The plan is a safe harbor defined benefit plan described in
Sec. 1.401(a)(4)-3(b).
(ii) Simplified method--(A) Section 401(l) plans. Under the
simplified method of this paragraph (e)(4)(ii), an employee's employee
benefit percentage with respect to a section 401(l) plan described in
Sec. 1.401(a)(4)-3(b)(3) (i.e., a unit credit plan) may be deemed equal
to the employee's excess benefit percentage or gross benefit percentage
(as defined in Sec. 1.401(l)-1(c) (14) or (18), respectively), whichever
is applicable under the plan's benefit formula in the
[[Page 503]]
plan year. In the case of a section 401(l) plan described in
Sec. 1.401(a)(4)-3(b)(4) (i.e., a fractional accrual plan), an
employee's employee benefit percentage with respect to that plan may be
deemed equal to the rate at which the excess or gross benefit, whichever
is applicable, accrues for the employee in the plan year, taking into
account the plan's benefit formula and the employee's projected service
at normal retirement age. The use of this simplified method will be
treated as an imputation of permitted disparity. See paragraph (d)(6) of
this section for a restriction on multiple use of permitted disparity.
(B) Other plans. Under the simplified method of this paragraph
(e)(4)(ii), an employee's employee benefit percentage with respect to a
plan described in Sec. 1.401(a)(4)-3(b)(3) that is not a section 401(l)
plan and that is not imputing permitted disparity may be deemed equal to
the employee's benefit rate in the plan year under the plan's benefit
formula. In the case of a plan described in Sec. 1.401(a)(4)-3(b)(4)
that is not a section 401(l) plan and that is not imputing permitted
disparity, an employee's employee benefit percentage with respect to
that plan may be deemed equal to the rate at which the benefit accrues
for the employee in the plan year, taking into account the plan's
benefit formula and an employee's projected service at normal retirement
age.
(5) Three-year averaging period. An employee's employee benefit
percentage may be determined for a testing period as the average of the
employee's employee benefit percentages determined separately for the
testing period and for the immediately preceding one or two testing
periods (referred to in this section as an averaging period). Employee
benefit percentages of a particular employee that are averaged together
within an averaging period must be determined on a consistent basis for
all testing periods within the averaging period.
(6) Alternative methods of determining compensation. Employee
benefit percentages may be determined on the basis of any definition of
compensation that satisfies Sec. 1.414(s)-1(d) (without regard to
whether the definition satisfies Sec. 1.414(s)-1(d)(3)), provided that
the same definition is used for all employees and it is reasonable to
believe that the definition does not result in an average benefit
percentage that is significantly higher than the average benefit
percentage that would be determined had employee benefit percentages
been determined using a definition of compensation that also satisfies
Sec. 1.414(s)-1(d)(3).
(f) Special rule for certain collectively bargained plans. A plan
(as determined without regard to the mandatory disaggregation rule of
Sec. 1.410(b)-7(c)(5)) that benefits both collectively bargained
employees and noncollectively bargained employees is deemed to satisfy
the average benefit percentage test of this section if--
(1) The provisions of the plan applicable to each employee in the
plan are identical to the provisions of the plan applicable to every
other employee in the plan, including the plan benefit or allocation
formula, any optional forms of benefit, any ancillary benefit, and any
other right or feature under the plan, and
(2) The plan would satisfy the ratio percentage test of
Sec. 1.410(b)-2(b)(2), if Secs. 1.410(b)-6(d) and 1.410(b)-7(c)(5) (the
excludable employee and mandatory disaggregation rules for collectively
bargained and noncollectively bargained employees) did not apply.
[T.D. 8363, 56 FR 47646, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31,
1992, as amended by T.D. 8487, 58 FR 46840, Sept. 3, 1993]
Sec. 1.410(b)-6 Excludable employees.
(a) Employees--(1) In general. For purposes of applying section
410(b) with respect to employees, all employees of the employer, other
than the excludable employees described in paragraphs (b) through (i) of
this section, are taken into account. Excludable employees are not taken
into account with respect to a plan even if they are benefiting under
the plan, except as otherwise provided in paragraph (b) of this section.
(2) Rules of application. Except as specifically provided otherwise,
excludable employees are determined separately with respect to each plan
for purposes of testing that plan under section 410(b). Thus, in
determining whether a
[[Page 504]]
particular plan satisfies the ratio percentage test of Sec. 1.410(b)-
2(b)(2), paragraphs (b) through (i) of this section are applied solely
with reference to that plan. Similarly, in determining whether two or
more plans that are permissively aggregated and treated as a single plan
under Sec. 1.410(b)-7(d) satisfy the ratio percentage test of
Sec. 1.410(b)-2(b)(2), paragraphs (b) through (i) of this section are
applied solely with reference to the deemed single plan. In determining
whether a plan satisfies the average benefit percentage test of
Sec. 1.410(b)-5, the rules of this section are applied by treating all
plans in the testing group as a single plan.
(b) Minimum age and service exclusions--(1) 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, then all employees who fail
to satisfy those conditions are excludable employees with respect to
that plan. An employee is treated as meeting the age and service
requirements on the date that any employee with the same age and service
(including service permitted to be taken into account for purposes of
nondiscrimination testing under Sec. 1.401(a)(4)-11(d)(3)) would be
eligible to commence participation in the plan, as provided in section
410(b)(4)(C).
(2) Multiple age and service conditions. If a plan, including a plan
for which an employer chooses the treatment under paragraph (b)(3) of
this section, has two or more different sets of minimum age and service
eligibility conditions, those employees who fail to satisfy all of the
different sets of age and service conditions are excludable employees
with respect to the plan. Except as provided in paragraph (b)(3) of this
section, an employee who satisfies any one of the different sets of
conditions is not an excludable employee with respect to the plan.
Differences in the manner in which service is credited (e.g., hours of
service calculated in accordance with 29 CFR 2530.200b-2 for hourly
employees and elapsed time calculated in accordance with Sec. 1.410(a)-7
for salaried employees) for purposes of applying a service condition are
not taken into account in determining whether multiple age and service
eligibility conditions exist.
(3) Plans benefiting certain otherwise excludable employees--(i) In
general. 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. See
Sec. 1.410(b)-7(c)(3) regarding permissive disaggregation of plans
benefiting otherwise excludable employees. 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 available only if the plan
satisfies section 410(b) and Sec. 1.410(b)-2 with respect to these
otherwise excludable employees in the manner described in paragraph
(b)(3)(ii) of this section.
(ii) Testing portion of plan benefiting otherwise excludable
employees. In determining whether the plan that benefits employees who
would otherwise be excludable under paragraph (b)(1) of this section
(applied without regard to section 410(a)(1)(B)) satisfies section
410(b) and Sec. 1.410(b)-2, employees who have satisfied the greatest
permissible minimum age and service conditions with respect to the plan
are excludable employees. In addition, if the plan being tested applies
minimum age and service conditions and those conditions are less than
the maximum permissible minimum age and service conditions, employees
who have not satisfied the lower minimum age and service conditions
actually provided for in the plan are excludable employees. Thus, for
example, if the plan requires attainment of age 18 and 3 months of
service, employees who have not attained age 18 or 3 months of service
with the employer are excludable employees.
(4) Examples. The following examples illustrate the minimum age and
service condition rules of this paragraph (b). In each example, the
employer is not treated as operating qualified separate lines of
business under section 414(r).
Example 1. An employer maintains Plan A for hourly employees and
Plan B for salaried
[[Page 505]]
employees. Plan A has no minimum age or service condition. Plan B has no
minimum age condition and requires 1 year of service. The employer
treats Plans A and B as a single plan for purposes of section 410(b).
Because Plan A imposes no minimum age or service condition, all
employees of the employer automatically satisfy the minimum age and
service conditions of Plan A. Therefore, no employees are excludable
under this paragraph (b) in testing Plans A and B for purposes of
section 410(b).
Example 2. An employer maintains three plans. Plan C benefits
employees in Division C who satisfy the plan's minimum age and service
condition of age 21 and 1 year of service. Plan D benefits employees in
Division D who satisfy the plan's minimum age and service condition of
age 18 and 1 year of service. Plan E benefits employees in Division E
who satisfy the plan's minimum age and service condition of age 21 and 6
months of service. The employer treats Plans D and E as a single plan
for purposes of section 410(b). In testing Plan C under the ratio
percentage test or the nondiscriminatory classification test of section
410(b), employees who are not at least age 21 or who do not have at
least 1 year of service are excludable employees under paragraph (b)(1)
of this section. In testing Plans D and E, employees who do not satisfy
the age and service requirements of either of the two plans are
excludable employees under paragraph (b)(2) of this section. Thus, an
employee is excludable with respect to Plans D and E only if the
employee is not at least age 18 with at least 1 year of service or is
not at least age 21 with at least 6 months of service. Thus, an employee
who is 19 years old and has 11 months of service is excludable.
Similarly, an employee who is 17 years old and has performed 2 years of
service is also excludable.
Example 3. An employer maintains three plans. Plan F benefits all
employees in Division F (the plan does not apply any minimum age or
service condition). Plan G benefits employees in Division G who satisfy
the plan's minimum age and service condition of age 18 and 1 year of
service. Plan H benefits employees in Division H who satisfy the plan's
minimum age and service condition of age 21 and 6 months of service. In
testing the employer's plans under the average benefit percentage test
provided in Sec. 1.410(b)-5, Plans F, G, and H are treated as a single
plan and, as such, use the lowest minimum age and service condition
under the rule of paragraph (b)(2) of this section. Therefore, because
Plan F does not apply any minimum age or service condition, no employee
is excludable under this paragraph (b).
Example 4. An employer maintains Plan J, which does not apply any
minimum age or service conditions. Plan J benefits all employees in
Division 1 but does not benefit employees in Division 2. Although Plan J
has no minimum age or service condition, the employer wants to exclude
employees whose age and service is below the permissible minimums
provided in section 410(b)(1)(A). The employer has 110 employees who
either do not have 1 year of service or are not at least age 21. Of
these 110 employees, 10 are highly compensated employees and 100 are
nonhighly compensated employees. Five of these highly compensated
employees, or 50 percent, work in Division 1 and thus benefit under Plan
J. Thirty-five of these nonhighly compensated employees, or 35 percent,
work in Division 1 and thus benefit under Plan J. Plan J satisfies the
ratio percentage test of section 410(b) with respect to employees who do
not satisfy the greatest permissible minimum age and service requirement
because the ratio percentage of that group of employees is 70 percent.
Thus, in determining whether or not Plan J satisfies section 410(b), the
110 employees may be treated as excludable employees in accordance with
paragraph (b)(3)(i) of this section.
(c) Certain nonresident aliens--(1) General rule. An employee who is
a nonresident alien (within the meaning of section 7701(b)(1)(B)) and
who receives no 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 treated as an
excludable employee.
(2) 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 (c)(2) applies
only if all employees described in the preceding sentence are so
excluded.
(d) Collectively bargained employees--(1) General rule. A
collectively bargained employee is an excludable employee with respect
to a plan that benefits solely noncollectively bargained employees. If a
plan (within the meaning of Sec. 1.410(b)-7(b)) benefits both
collectively bargained employees and noncollectively bargained employees
for a
[[Page 506]]
plan year, Sec. 1.410(b)-7(c)(4) provides that the portion of the plan
that benefits the collectively bargained employees is treated as a
separate plan from the portion of the plan that benefits the
noncollectively bargained employees. Thus, a collectively bargained
employee is always an excludable employee with respect to the
mandatorily disaggregated portion of any plan that benefits
noncollectively bargained employees.
(2) Definition of collectively bargained employee--(i) In general. A
collectively bargained employee is an employee who is included in a unit
of employees covered by an agreement that the Secretary of Labor finds
to be a collective bargaining agreement between employee representatives
and one or more employers, provided that there is evidence that
retirement benefits were the subject of good faith bargaining between
employee representatives and the employer or employers. An employee is a
collectively bargained employee regardless of whether the employee
benefits under any plan of the employer. See section 7701(a)(46) and
Sec. 301.7701-17T of this chapter for additional requirements applicable
to the collective bargaining agreement. An employee who performs hours
of service during the plan year as both a collectively bargained
employee and a noncollectively bargained employee is treated as a
collectively bargained employee with respect to the hours of service
performed as a collectively bargained employee and a noncollectively
bargained employee with respect to the hours of service performed as a
noncollectively bargained employee. See Sec. 1.410(b)-7(c) for
disaggregation rules for plans benefiting collectively bargained and
noncollectively bargained employees.
(ii) Special rules for certain employees in multiemployer plans--(A)
In general. For purposes of this paragraph (d), in testing the
disaggregated portion of a multiemployer plan benefiting noncollectively
bargained employees, a noncollectively bargained employee who benefits
under the plan may be treated as a collectively bargained employee with
respect to all of the employee's hours of service under the rules of
paragraphs (d)(2)(ii) (B) through (E) of this section, if the employee
is or was a member of a unit of employees covered by a collective
bargaining agreement and that agreement or a successor agreement
provides for the employee to benefit under the plan in the current plan
year. For this purpose, provisions of a participation agreement or
similar document are taken into account in determining whether a
collective bargaining agreement provides for an employee to benefit
under a multiemployer plan.
(B) Employees who were collectively bargained employees during a
portion of the current plan year. An employee described in paragraph
(d)(2)(ii)(A) of this section who performs services for one or more
employers that are parties to the collective bargaining agreement, for
the plan, or for the employee representative both as a collectively
bargained employee and as a noncollectively bargained employee during a
plan year may be treated as a collectively bargained employee for the
plan year, provided that at least half of the employee's hours of
service during the plan year are performed as a collectively bargained
employee.
(C) Employees who were collectively bargained employees during the
collective bargaining agreement. An employee described in paragraph
(d)(2)(ii)(A) of this section who was a collectively bargained employee
with respect to all of the employee's hours of service during a plan
year (including employees who are treated as collectively bargained
employees with respect to all of their hours of service during a plan
year under paragraph (d)(2)(ii) (B) or (E) of this section) may be
treated as a collectively bargained employee with respect to all of the
employee's hours of service for the duration of the collective
bargaining agreement applicable for such plan year or, if later, until
the end of the following plan year. For this purpose, a collective
bargaining agreement is applicable for a plan year if it provided for
the employee to benefit in the plan and was effective for any portion of
that plan year. This paragraph (d)(2)(ii)(C) does not apply unless the
terms of the plan providing for benefit accruals treat the employee in a
manner that is generally no more favorable
[[Page 507]]
than similarly-situated employees who are collectively bargained
employees.
(D) Employees who previously were collectively bargained employees.
An employee who was treated as a collectively bargained employee
pursuant to paragraph (d)(2)(ii)(C) of this section may be treated as a
collectively bargained employee with respect to all of the employee's
hours of service after the end of the period described in paragraph
(d)(2)(ii)(C) of this section, provided that the employee is performing
services for one or more employers that are parties to the collective
bargaining agreement, for the plan, or for the employee representative.
This paragraph (d)(2)(ii)(D) does not apply unless the terms of the plan
providing for benefit accruals treat the employee in a manner that is
generally no more favorable than similarly-situated employees who are
collectively bargained employees, and no more than five percent of the
employees covered under the multiemployer plan are noncollectively
bargained employees (determined without regard to this paragraph
(d)(2)(ii)(D)). In determining whether more than five percent of the
employees covered under the multiemployer plan are noncollectively
bargained employees, those employees who are described in paragraphs
(d)(2)(ii) (B) and (C) of this section are treated as collectively
bargained employees.
(E) Transition rule. For a plan year beginning before the applicable
effective date of these regulations as set forth in Sec. 1.410(b)-10 (b)
or (d), any employee described in paragraph (d)(2)(ii)(A) of this
section may be treated as a collectively bargained employee with respect
to all of the employee's hours of service for that plan year.
(F) Consistency requirement. The rules in paragraphs (d)(2) (i) and
(ii) of this section must be applied to all employees on a reasonable
and consistent basis for the plan year.
(iii) Covered by a collective bargaining agreement--(A) General
rule. For purposes of paragraph (d)(2)(i) of this section, an employee
is included in a unit of employees covered by a collective bargaining
agreement if and only if the employee is represented by a bona fide
employee representative that is a party to the collective bargaining
agreement under which the plan is maintained. Thus, for example, an
employee of either a plan or the employee representative that is a party
to the collective bargaining agreement under which the plan is
maintained is not included in a unit of employees covered by the
collective bargaining agreement under which the plan is maintained
merely because the employee is covered under the plan pursuant to an
agreement entered into by the plan or employee representative on behalf
of the employee (other than in the capacity of an employee
representative with respect to the employee). This is the case even if
all of such employees benefiting under the plan constitute only a de
minimis percentage of the total employees benefiting under the plan.
(B) Plans covering professional employees--(1) In general. An
employee is not considered included in a unit of employees covered by a
collective bargaining agreement for a plan year for purposes of
paragraph (d)(2)(iii)(A) of this section if, for the plan year, more
than 2 percent of the employees who are covered pursuant to the
agreement are professionals. This rule applies to all employees under
the agreement, nonprofessionals as well as professionals. Thus, no
employees covered by such an agreement are excludable employees with
respect to employees who are not covered by a collective bargaining
agreement.
(2) Multiple collective bargaining agreements. This paragraph
(d)(2)(iii)(B) is applied separately with respect to each collective
bargaining agreement. Thus, for example, if a plan benefits two groups
of employees, one included in a unit of employees covered by collective
bargaining agreement X, more than 2 percent of whom are professionals,
and another included in a unit of employees covered by collective
bargaining agreement Y, none of whom are professionals, the group
covered by agreement X is not considered covered by a collective
bargaining agreement and the group covered by agreement Y is considered
covered by a collective bargaining agreement.
[[Page 508]]
(3) Application of minimum coverage tests. If a plan covers more
than 2 percent professional employees, no employees in the plan are
treated as covered by a collective bargaining agreement. A plan that
covers more than 2 percent professional employees must satisfy section
410(b) without regard to section 413(b) and the special rule in
Sec. 1.410(b)-2(b)(7) of this section (regarding collectively bargained
plans). In such cases, all nonexcludable employees must be taken into
account. For this purpose, employees included in other collective
bargaining units are excludable employees. However, the employees who
are not covered by a collective bargaining agreement and the employees
who are covered by an agreement that has more than 2 percent
professionals are not excludable employees.
(iv) Examples. The following examples illustrate the collective
bargaining unit rules of this section.
Example 1. An employer has 700 collectively bargained employees
(none of whom is a professional employee) and 300 noncollectively
bargained employees (200 of whom are highly compensated employees). For
purposes of applying the ratio percentage test of Sec. 1.410(b)-2(b)(2)
to Plan X, which benefits only the 300 noncollectively bargained
employees, the 700 collectively bargained employees are treated as
excludable employees pursuant to paragraph (d) of this section.
Example 2. (i) An employer has 1,500 employees in the following
categories:
------------------------------------------------------------------------
Noncollectively Collectively
bargained bargained Total
employees employees
------------------------------------------------------------------------
Highly compensated employees.... 100 100 200
Nonhighly compensated employees. 900 400 1,300
---------------------------------------
Total..................... 1,000 500 1,500
------------------------------------------------------------------------
The employer maintains Plan Y, which benefits 1,100 employees,
including all of the noncollectively bargained employees (except for 100
nonhighly compensated employees who are noncollectively bargained
employees), and 200 of the collectively bargained employees (including
the 100 highly compensated employees who are collectively bargained
employees). There are no professional employees covered by the
collective bargaining agreement. In accordance with Sec. 1.410(b)-
7(c)(4), the employer must apply the ratio percentage test of
Sec. 1.410(b)-2(b)(2) to Plan Y as if the plan were two separate plans,
one benefiting the noncollectively bargained employees and the other
benefiting the collectively bargained employees.
(ii) In testing the portion of Plan Y that benefits the
noncollectively bargained employees, the collectively bargained
employees are excludable employees. That portion's ratio percentage is
88.89 percent ([800/900] /[100/100] = 88.89%/100% =0.8889), and thus it
satisfies the ratio percentage test. The portion of Plan Y that benefits
collectively bargained employees automatically satisfies section 410(b)
under the special rule in Sec. 1.410(b)-2(b)(7).
(e) Employees of qualified separate lines of business. If an
employer is treated as operating qualified separate lines of business
for purposes of section 410(b) 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. The rule
in this paragraph (e) does not apply for purposes of satisfying the
nondiscriminatory classification requirement of section 410(b)(5)(B).
See Secs. 1.414(r)-1(c)(2) and 1.414(r)-8 (separate application of
section 410(b) to the employees of a qualified separate line of
business). In addition, the rule in this paragraph (e) does not apply to
a plan that is tested under the special rule for employer-wide plans in
Sec. 1.414(r)-1(c) (2) (ii) for a plan year.
(f) Certain terminating employees--(1) In general. An employee may
be treated as an excludable employee for a plan year with respect to a
particular plan if--
(i) The employee does not benefit under the plan for the plan year,
(ii) The employee is eligible to participate in the plan,
(iii) 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,
(iv) 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,
(v) The employee terminates employment during the plan year with no
[[Page 509]]
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
(f)(1)(v), 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
(vi) If this paragraph (f) 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.
(2) Hours of service. For purposes of this paragraph (f), the term
``hours of service'' has the same meaning as provided for such term by
29 CFR 2530.200b-2 under the general method of crediting service for 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.
(3) Examples. The following examples illustrate the provision of
this paragraph (f).
Example 1. An employer has 35 employees who are eligible to
participate under a defined contribution plan. The plan provides that an
employee will not receive an allocation of contributions for a plan year
unless the employee is employed by the employer on the last day of the
plan year. Only 30 employees are employed by the employer on the last
day of the plan year. Two of the five employees who terminated
employment before the last day of the plan year had 500 or fewer hours
of service during the plan year, and the remaining three had more than
500 hours of service during the year. Of the five employees who were no
longer employed on the last day of the plan year, the two with 500 hours
of service or less during the plan year are treated as excludable
employees for purposes of section 410(b), and the remaining three who
had over 500 hours of service during the plan year are taken into
account in testing the plan under section 410(b) but are treated as not
benefiting under the plan.
Example 2. An employer has 30 employees who are eligible to
participate under a defined contribution plan. The plan requires 1,000
hours of service to receive an allocation of contributions or
forfeitures. Ten employees do not receive an allocation because of their
failure to complete 1,000 hours of service. Three of the 10 employees
who failed to satisfy the minimum service requirement completed 500 or
fewer hours of service and terminated their employment. Two of the
employees completed more than 500, but fewer than 1,000 hours of service
and terminated their employment. The remaining five employees did not
terminate employment. Under the rule in paragraph (f) of this section,
the three terminated employees who completed 500 or fewer hours of
service are treated as excludable employees for the portion of the plan
year they are employed. The other seven employees who do not receive an
allocation are taken into account in testing the plan under section
410(b) but are treated as not benefiting under the plan.
Example 3. An employer maintains two plans, Plan A for salaried
employees and Plan B for hourly employees. Of the 100 salaried
employees, two do not receive an allocation under Plan A for the plan
year because they terminate employment before completing 500 hours of
service. Of the 300 hourly employees, 50 do not receive an allocation
under Plan B for the plan year because they terminate employment before
completing 500 hours. In applying section 410(b) to Plan A, the two
employees who did not receive an allocation under Plan A are excludable
employees, but the 50 who did not receive an allocation under Plan B are
not excludable employees, because they were not eligible to participate
under Plan A.
(g) Employees of certain governmental or tax-exempt entities
precluded from maintaining a section 401(k) plan. For purposes of
testing 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, an
employer may treat as excludable those employees of governmental or tax-
exempt entities who are precluded from being eligible employees under a
section 401(k) plan by reason of section 401(k)(4)(B), if more than 95
percent of the employees of the employer who are not precluded from
being eligible employees by section 401(k)(4)(B) benefit under the plan
for the plan year.
(h) Former employees--(1) In general. For purposes of applying
section 410(b) 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 (h)(2) or (h)(3) of this
section as an excludable former employee. If either (or both) of the
former employee exclusion rules under
[[Page 510]]
paragraphs (h)(2) and (h)(3) 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 (b) through (g) 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 (h)(3), the former employee is not taken into
account with respect to a plan even if the former employee is benefiting
under the plan.
(i) Former employees treated as employees. An employer may treat as
excludable employees all formerly nonhighly compensated employees who
are treated as employees of the employer under Sec. 1.410(b)-9 solely
because they have increases in accrued benefits under a defined benefit
plan that are based on ongoing service or compensation credits
(including imputed service or compensation) after they cease to perform
services for the employer.
[T.D. 8363, 56 FR 47652, Sept. 19, 1991, as amended by T.D. 8376, 56 FR
63433, Dec. 4, 1991; T.D. 8363, 57 FR 10817, Mar. 31, 1992; T.D. 8487,
58 FR 46842, Sept. 3, 1993; T.D. 8487, 59 FR 16984, Apr. 11, 1994; T.D.
8548, 59 FR 32914, June 27, 1994]
Sec. 1.410(b)-7 Definition of plan and rules governing plan disaggregation and aggregation.
(a) In general. This section provides a definition of ``plan.''
First, this section sets forth a definition of plan within the meaning
of section 401(a) or 403(a). Then certain mandatory disaggregation and
permissive aggregation rules are applied. The result is the definition
of plan that applies for purposes of sections 410(b) and 401(a)(4).
Thus, in general, the term ``plan'' as used in this section initially
refers to a plan described in section 414(l) and to an annuity plan
described in section 403(a), and the term ``plan'' as used in other
sections under these regulations means the plan determined after
application of this section. Paragraph (b) of this section provides that
each single plan under section 414(l) is treated as a single plan for
purposes of section 410(b). Paragraph (c) of this section describes the
rules for certain plans that must be treated as comprising two or more
separate plans, each of which is a single plan subject to section
410(b). Paragraph (d) of this section provides a rule permitting an
employer to aggregate certain separate plans to form a single plan for
purposes of section 410(b). Paragraph (e) of this section provides rules
for determining the testing group of plans taken into account in
determining whether a plan satisfies the average benefit percentage test
of Sec. 1.410(b)-5.
(b) Separate asset pools are separate plans. Each single plan within
the meaning of section 414(l) is a separate plan for purposes of section
410(b). See Sec. 1.414(l)-1(b). For example, if only a portion of the
assets under a defined benefit plan is available, on an ongoing basis,
to provide the benefits of certain employees, and the remaining assets
are available only in certain limited cases to provide such benefits
(but are available in all cases for the benefit of other employees),
there are two separate plans. Similarly, the defined contribution
portion of a plan described in section 414(k) is a separate plan from
the defined benefit portion of that same plan. A single plan under
section
[[Page 511]]
414(l) is a single plan for purposes of section 410(b), even though the
plan comprises separate written documents and separate trusts, each of
which receives a separate determination letter from the Internal Revenue
Service. A defined contribution plan does not comprise separate plans
merely because it includes more than one trust, or merely because it
provides for separate accounts and permits employees to direct the
investment of the amounts allocated to their accounts. Further, a plan
does not comprise separate plans merely because assets are separately
invested in individual insurance or annuity contracts for employees.
(c) Mandatory disaggregation of certain plans--(1) Section 401(k)
and 401(m) plans. The portion of a plan that is a section 401(k) plan
and the portion that is not a section 401(k) plan are treated as
separate plans for purposes of section 410(b). Similarly, the portion of
a plan that is a section 401(m) plan and the portion that is not a
section 401(m) plan are treated as separate plans for purposes of
section 410(b). Thus, a plan that consists of elective contributions
under a section 401(k) plan, employee and matching contributions under a
section 401(m) plan, and contributions other than elective, employee, or
matching contributions is treated as three separate plans for purposes
of section 410(b). In addition, the portion of a plan that consists of
contributions described in Sec. 1.401(k)-1(b)(4)(iv) (i.e.,
contributions that fail to satisfy the allocation or compensation
requirements applicable to elective contributions and are therefore
required to be tested separately) and the portion of the plan that does
not consist of such contributions are treated as separate plans for
purposes of section 410(b). Similarly, the portion of a plan that
consists of contributions described in Sec. 1.410(m)-1(b)(4)(ii) (i.e.,
matching contributions that fail to satisfy the allocation and other
requirements applicable to matching contributions and are therefore
required to be tested separately) and the portion of the plan that does
not consist of such contributions are treated as separate plans for
purposes of section 410(b).
(2) 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 410(b), except as otherwise permitted
under Sec. 54.4975-11(e) of this Chapter.
(3) Plans benefiting otherwise excludable employees. If an employer
applies section 410(b) 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 satisfied the
lower minimum age and service conditions 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. 410(b)-
6(b)(3)(ii) for rules about testing otherwise excludable employees.
(4) Plans benefiting certain disaggregation populations of
employees--(i) In general--(A) Single plan must be treated as separate
plans. If a plan (i.e., a single plan within the meaning of section
414(l)) benefits employees of more than one disaggregation population,
the plan must be disaggregated and treated as separate plans, each
separate plan consisting of the portion of the plan benefiting the
employees of each disaggregation population. See paragraph (c)(4)(ii) of
this section for the definition of disaggregation population.
(B) Benefit accruals or allocations attributable to current status.
Except as otherwise provided in paragraph (c)(4)(i)(C) of this section,
in applying the rule of paragraph (c)(4)(i)(A) of this section, the
portion of the plan benefiting employees of a disaggregation population
consists of all benefits accrued by, or all allocations made to,
employees while they were members of the disaggregation population.
(C) Exceptions for certain benefit accruals--(1) Attribution of
benefits to first disaggregation population. If employees benefiting
under a plan change from one disaggregation population to a second
disaggregation population, benefits
[[Page 512]]
they accrue while members of the second disaggregation population that
are attributable to years of service previously credited while the
employees were members of the first disaggregation population may be
treated as provided to them in their status as members of the first
disaggregation population and thus included in the portion of the plan
benefiting employees of the first disaggregation population. This
special treatment is available only if it is applied on a consistent
basis, if it does not result in significant discrimination in favor of
highly compensated employees, and if the plan provision providing the
additional benefits applies on the same terms to all similarly-situated
employees. For example, if all formerly collectively bargained employees
accrue additional benefits under a plan after becoming noncollectively
bargained employees, then those benefit increases may be treated as
included in the portion of the plan benefiting collectively bargained
employees if they are attributable to years of service credited while
the employees were collectively bargained (e.g., where the additional
benefits result from compensation increases that occur while the
employees are noncollectively bargained or from plan amendments
affecting benefits earned while collectively bargained that are adopted
while the employees are noncollectively bargained) and if such treatment
does not result in significant discrimination in favor of highly
compensated employees.
(2) Attribution of benefits to current disaggregation population. If
employees benefiting under a plan change from one disaggregation
population to another disaggregation population, benefits they accrue
while members of the first disaggregation population may be treated as
provided to them in their current status and thus included in the
portion of the plan benefiting employees of the disaggregation
population of which they are currently members. This special treatment
is available only if it is applied on a consistent basis and if it does
not result in significant discrimination in favor of highly compensated
employees.
(D) Change in disaggregation populations--(1) Reasonable treatment.
If, in previous years, the configuration of a plan's disaggregation
populations differed from their configuration for the current year, for
purposes of the benefits accrued by, or allocations made to, an employee
for those years, the employee's status as a member of a current
disaggregation population for those years must be determined on a
reasonable basis. A different configuration occurs, for example, if
disaggregation populations exist for the first time, such as when an
employer is first treated as operating qualified separate lines of
business, or if the existing disaggregation populations change, such as
when an employer redesignates its qualified separate lines of business.
(2) Example. The following example illustrates the application of
this paragraph (c)(4)(i)(D).
Example. (a) Employer X operates Divisions M and N, which are
treated as qualified separate lines of business for the first time in
1998. Thus, the disaggregation populations of employees of Division M
and employees of Division N exist for the first time. Since 1981
Employer X has maintained a defined benefit plan, Plan P, for employees
of Division M. Plan P provides a normal retirement benefit of one
percent of average annual compensation for each year of service up to
25. Employee A has worked for Division M since 1981 and has never worked
for Division N. Employee B has worked for Division N since 1989 and
worked for Division M from 1981 to 1988. Employee C has worked in the
headquarters of Employer X since 1981. For the period 1981 to 1988
Employee C was credited with years of service under Plan P.
(b) For purposes of the benefits accrued by Employee A under Plan P
during years 1981 through 1997, Employee A is reasonably treated as
having been a member of the Division M disaggregation population for
those years. For purposes of the benefits accrued by Employee B under
Plan P during years 1981 through 1988, Employee B is reasonably treated
as having been a member of the Division M disaggregation population for
1981 through 1988 and as having changed to the Division N disaggregation
population for 1989 through 1997. For purposes of the benefits accrued
by Employee C under Plan P during years 1981 through 1988, Employee C is
reasonably treated as having been a member of the Division M
disaggregation population for those years. Moreover, any benefit
accruals for Employee B and Employee C in years after 1988, that result
from increases in average annual compensation after 1988 and that are
attributable to years of service credited
[[Page 513]]
for 1981 through 1988, may be treated as provided to Employee B and
Employee C in their status as members of the Division M disaggregation
population if the requirements of paragraph (c)(4)(i)(C)(1) of this
section are otherwise met.
(ii) Definition of disaggregation population--(A) Plan benefiting
employees of qualified separate lines of business. If an employer is
treated as operating qualified separate lines of business for purposes
of section 410(b) in accordance with Sec. 1.414(r)-1(b), and a plan
benefits employees of more than one qualified separate line of business,
the employees of each qualified separate line of business are separate
disaggregation populations. In this case, the portion of the plan
benefiting the employees of each qualified separate line of business is
treated as a separate plan maintained by that qualified separate line of
business. However, employees of different qualified separate lines of
business who are benefiting under a plan that is tested under the
special rule for employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) for a
plan year are not separate disaggregation populations merely because
they are employees of different qualified separate lines of business.
(B) Plan benefiting collectively bargained employees. If a plan
benefits both collectively bargained employees and noncollectively
bargained employees, the collectively bargained employees are one
disaggregation population and the noncollectively bargained employees
are another disaggregation population. If the population of collectively
bargained employees includes employees covered under different
collective bargaining agreements, the population of employees covered
under each collective bargaining agreement is also a separate
disaggregation population.
(C) Plan maintained by more than one employer. If a plan benefits
employees of more than one employer, the employees of each employer are
separate disaggregation populations. In this case, the portion of the
plan benefiting the employees of each employer is treated as a separate
plan maintained by that employer, which must satisfy section 410(b) by
reference only to that employer's employees. However, for purposes of
this paragraph (c)(4)(ii)(C), if the plan of one employer (or, in the
case of a plan maintained by more than one employer, the plan provisions
applicable to the employees of one employer) treats compensation or
service with another employer as compensation or service with the first
employer, then the current accruals attributable to that compensation or
service are treated as provided to an employee of the first employer
under the plan of the first employer (or the portion of a plan
maintained by more than one employer benefiting employees of the first
employer), and the provisions of paragraph (c)(4)(i)(C) of this section
do not apply to those accruals. Thus, for example, if Plan A maintained
by Employer X imputes service or compensation for an employee of
Employer Y, then Plan A is not treated as benefiting the employees of
more than one employer merely because of this imputation.
(5) Additional rule for plans benefiting employees of more than one
qualified separate line of business. If a plan benefiting employees of
more than one qualified separate line of business satisfies the
reasonable classification requirement of Sec. 1.410(b)-4(b) before the
application of paragraph (c)(4) of this section, then any portion of the
plan that is treated as a separate plan as a result of the application
of paragraphs (c)(4)(i)(A) and (ii)(A) of this section is deemed to
satisfy that requirement.
(d) Permissive aggregation for ratio percentage and
nondiscriminatory classification tests--(1) In general. Except as
provided in paragraphs (d)(2) and (d)(3) of this section, for purposes
of applying the ratio percentage test of Sec. 1.410(b)-2(b)(2) or the
nondiscriminatory classification test of Sec. 1.410(b)-4, an employer
may designate two or more separate plans (determined after application
of paragraph (b) of this section) as a single plan. If an employer
treats two or more separate plans as a single plan under this paragraph,
the plans must be treated as a single plan for all purposes under
sections 401(a)(4) and 410(b).
(2) Rules of disaggregation. An employer may not aggregate portions
of a plan that are disaggregated under the rules of paragraph (c) of
this section. Similarly, an employer may not aggregate two or more
separate plans that
[[Page 514]]
would be disaggregated under the rules of paragraph (c) of this section
if they were portions of the same plan. In addition, an employer may not
aggregate an ESOP with another ESOP, except as permitted under
Sec. 54.4975-11(e) of this Chapter.
(3) Duplicative aggregation. A plan may not be combined with two or
more plans to form more than one single plan. Thus, for example, an
employer that maintains plans A, B, and C may not aggregate plans A and
B and plans A and C to form two single plans. However, the employer may
apply the permissive aggregation rules of this paragraph (d) to form any
one (and only one) of the following combinations: plan ABC, plans AB and
C, plans AC and B, or plans A and BC.
(4) Special rule for plans benefiting employees of a qualified
separate line of business. For purposes of paragraph (d)(1) of this
section, an employer that is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
Sec. 1.414(r)-1(b) is permitted to aggregate the portions of two or more
plans that benefit employees of the same qualified separate line of
business (regardless of whether the employer elects to aggregate the
portions of the same plans that benefit employees of the other qualified
separate lines of business of the employer), provided that none of the
plans is tested under the special rule for employer-wide plans in
Sec. 1.414(r)-1 (c)(2)(ii). Thus, the employer is permitted to apply
paragraph (d)(1) of this section with respect to two or more separate
plans determined after the application of paragraphs (b) and (c)(4) of
this section, but may not aggregate a plan that is tested under the
special rule for employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) for a
plan year with any portion of a plan that does not rely on that special
rule for the plan year. In all other respects, the provisions of this
paragraph (d) regarding permissive aggregation apply, including (but not
limited to) the disaggregation rules under paragraph (d)(2) of this
section (including the mandatory disaggregation rule of paragraph (c)(4)
of this section), and the prohibition on duplicative aggregation under
paragraph (d)(3) of this section. This paragraph (d)(4) applies only in
the case of an employer that is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
Sec. 1.414(r)-1(b). See Secs. l.414(r)-1(c)(2) and 1.414(r)-8 (separate
application of section 410(b) to the employees of a qualified separate
line of business).
(5) Same plan year requirement. Two or more plans may not be
aggregated and treated as a single plan under this paragraph (d) unless
they have the same plan year.
(e) Determination of plans in testing group for average benefit
percentage test--(1) In general. For purposes of applying the average
benefit percentage test of Sec. 1.410(b)-5 with respect to a plan, all
plans in the testing group must be taken into account. For this purpose,
the plans in the testing group are the plan being tested and all other
plans of the employer that could be permissively aggregated with that
plan under paragraph (d) of this section. Whether two or more plans
could be permissively aggregated under paragraph (d) of this section is
determined (i) without regard to the rule in paragraph (d)(4) of this
section that portions of two or more plans benefiting employees of the
same line of business may not be aggregated if any of the plans is
tested under the special rule for employer-wide plans in Sec. 1.414(r)-
1(c)(2)(ii), (ii) without regard to paragraph (d)(5) of this section,
and (iii) by applying paragraph (d)(2) of this section without regard to
paragraphs (c)(1) and (c)(2) of this section.
(2) Examples. The following example illustrates the rules of this
paragraph (e).
Example 1. Employer X is treated as operating two qualified separate
lines of business for purposes of section 410(b) in accordance with
section 414(r), QSLOB1 and QSLOB2. Employer X must apply the rules in
Sec. 1.414(r)-8 to determine whether its plans satisfy section 410(b) on
a qualified-separate-line-of-business basis. Employer X maintains the
following plans:
(a) Plan A, the portion of Employer X' s employer-wide section
401(k) plan that benefits all noncollectively bargained employees of
QSLOB1,
(b) Plan B, the portion of Employer X' s employer-wide section
401(k) plan that benefits all noncollectively bargained employees of
QSLOB2,
[[Page 515]]
(c) Plan C, a defined benefit plan that benefits all hourly
noncollectively bargained employees of QSLOB1,
(d) Plan D, a defined benefit plan that benefits all collectively
bargained employees of QSLOB1,
(e) Plan E, an ESOP that benefits all noncollectively bargained
employees of QSLOB1,
(f) Plan F, a profit-sharing plan that benefits all salaried
noncollectively bargained employees of QSLOB1.
Assume that Plan F does not satisfy the ratio percentage test of
Sec. 1.410(b)-2(b)(2) on a qualified-separate-line-of-business basis,
but does satisfy the nondiscriminatory classification test of
Sec. 1.410(b)-4 on both an employer-wide and a qualified-separate-line-
of-business basis. Therefore, to satisfy section 410(b), Plan F must
satisfy the average benefit percentage test of Sec. 1.410(b)-5 on a
qualifiedseparatelineofbu5ine55 basis. The plans in the testing group
used to determine whether Plan F satisfies the average benefit
percentage test of Sec. 1.4 10(b)-5 are Plans A, C, E, and F.
Example 2. The facts are the same as in Example 1, except that
Employer X applies the special rule for employer-wide plans in
Sec. 1.414(r)-1(c)(2)(ii) to its employer-wide section 401(k) plan. To
satisfy section 410(b), Plan F must satisfy the average benefit
percentage test of Sec. 1.4 10(b)-5. Since paragraph (c)(4) of this
section no longer applies to Plans A and B, they are treated as a single
plan (Plan AB). The plans in the testing group used to determine whether
Plan F satisfies the average benefit percentage test of Sec. 1.4 10(b)-5
are therefore Plans A, B, C, E, and F. However, the employees of QSLOB 2
continue to be excludable employees for purposes of determining whether
Plan F satisfies the average benefit percentage test. See Sec. 1.410(b)-
6(e).
(f) Section 403(b) plans. In determining whether a plan satisfies
section 410(b), a plan subject to section 403(b)(12)(A)(i) is
disregarded. However, in determining whether a plan subject to section
403(b)(12)(A)(i) satisfied section 410(b), plans that are not subject to
section 403(b)(12)(A)(i) may be taken into account.
[T.D. 8363, 56 FR 47655, Sept. 19, 1991, as amended by T.D. 8376, 56 FR
63433, Dec. 4, 1991; T.D. 8363, 57 FR 10819, 10954, Mar. 31, 1992; T.D.
8487, 58 FR 46843, Sept. 3, 1993; T.D. 8548, 59 FR 32914, June 27, 1994]
Sec. 1.410(b)-8 Additional rules.
(a) Testing methods--(1) In general. A plan must satisfy section
410(b) for a plan year using one of the testing options in paragraphs
(a)(2) through (a)(4) of this section. Whichever testing option is used
for the plan year must also be used for purposes of applying section
401(a)(4) to the plan for the plan year. The annual testing option in
paragraph (a)(4) of this section must be used in applying section 410(b)
to a section 401(k) plan or a section 401(m) plan, and in applying the
average benefit percentage test of Sec. 1.410(b)-5. For purposes of this
paragraph (a), the plan provisions and other relevant facts as of the
last day of the plan year regarding which employees benefit under the
plan for the plan year are applied to the employees taken into account
under the testing option used for the plan year. For this purpose,
amendments retroactively correcting a plan in accordance with
Sec. 1.401(a)(4)-11(g) are taken into account as plan provisions in
effect as of the last day of the plan year.
(2) Daily testing option. A plan satisfies section 410(b) for a plan
year if it satisfies Sec. 1.410(b)-2 on each day of the plan year,
taking into account only those employees (or former employees) who are
employees (or former employees) on that day.
(3) Quarterly testing option. A plan is deemed to satisfy section
410(b) for a plan year if the plan satisfies Sec. 1.410(b)-2 on at least
one day in each quarter of the plan year, taking into account for each
of those days only those employees (or former employees) who are
employees (or former employees) on that day. The preceding sentence does
not apply if the plan's eligibility rules or benefit formula operate to
cause the four quarterly testing days selected by the employer not to be
reasonably representative of the coverage of the plan over the entire
plan year.
(4) Annual testing option. A plan satisfies section 410(b) for a
plan year if it satisfies Sec. 1.410(b)-2 as of the last day of the plan
year, taking into account all employees (or former employees) who were
employees (or former employees) on any day during the plan year.
(5) Example. The following example illustrates this paragraph (a).
Example. Plan A is a defined contribution plan that is not a section
401(k) plan or a section 401(m) plan, and that conditions allocations on
an employee's employment on the last day of the plan year. Plan A is
being tested for the 1995 calendar plan year using
[[Page 516]]
the daily testing option in paragraph (a)(2) of this section. In testing
the plan for compliance with section 410(b) on March 11, 1995, Employee
X is taken into account because he was an employee on that day and was
not an excludable employee with respect to Plan A on that day. Employee
X was a participant in Plan A on March 11, 1995, was employed on
December 31, 1995, and received an allocation under Plan A for the 1995
plan year. Under these facts, Employee X is treated as benefiting under
Plan A on March 11, 1995, even though Employee X had not satisfied all
of the conditions for receiving an allocation on that day, because
Employee X satisfied all of those conditions as of the last day of the
plan year.
(b) Family member aggregation rule. For purposes of section 410(b),
and in accordance with section 414(q)(6), a highly compensated employee
who is a 5-percent owner or one of the ten most highly compensated
employees and any family member (or members) of such a highly
compensated employee who is also an employee of the employer are to be
treated as a single highly compensated employee. If any member of that
group is benefiting under a plan, the deemed single employee is treated
as benefiting under the plan. If no member of that group is benefiting
under a plan, the deemed single employee is treated as not benefiting
under the plan.
[T.D. 8363, 56 FR 47656, Sept. 19, 1991]
Sec. 1.410(b)-9 Definitions.
In applying this section and Secs. 1.410(b)-2 through 1.410(b)-10,
the definitions in this section govern unless otherwise provided.
Collectively bargained employee. Collectively bargained employee
means a collectively bargained employee within the meaning of
Sec. 1.410(b)-6(d)(2).
Defined benefit plan. Defined benefit plan means a defined benefit
plan within the meaning of section 414(j). The portion of a plan
described in section 414(k) that does not consist of separate accounts
is treated as a defined benefit plan.
Defined contribution plan. Defined contribution plan means a defined
contribution plan within the meaning of section 414(i). The portion of a
plan described in section 414(k) that consists of separate accounts is
treated as a defined contribution plan.
Employee. Employee means an individual who performs services for the
employer who is either a common law employee of the employer, a self-
employed individual who is treated as an employee pursuant to section
401(c)(1), or a leased employee (not excluded under section 414(n)(5))
who is treated as an employee of the employer-recipient under section
414(n)(2) or 414(o)(2). Individuals that an employer treats as employees
under section 414(n) pursuant to the requirements of section 414(o) are
considered to be leased employees for purposes of this rule. In
addition, an individual must be treated as an employee with respect to
allocations under a defined contribution plan taken into account under
Sec. 1.401(a)(4)-2(c)(ii) and with respect to increases in accrued
benefits (within the meaning of 411(a)(7)) under a defined benefit plan
that are based on ongoing service or compensation (including imputed
service or compensation) credits.
Employer. Employer means the employer maintaining the plan and those
employers required to be aggregated with the employer under sections
414(b), (c), (m), or (o). An individual who owns the entire interest of
an unincorporated trade or business is treated as an employer. Also, a
partnership is treated as the employer of each partner and each employee
of the partnership.
ESOP. ESOP or employee stock ownership plan 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 an individual who was, but
has ceased to be, an employee of the employer (i.e., the individual has
ceased performing services as an employee for the employer). An
individual is treated as a former employee beginning on the day after
the day on which the individual ceases performing services as an
employee for the employer. Thus, an individual who ceases performing
services as an employee for an employer during a plan year is both an
employee and a former employee for the plan year. Notwithstanding the
foregoing, an individual is an employee (and not a former employee) to
the extent that
[[Page 517]]
the individual is treated as an employee with respect to the plan for
the plan year under the definition of employee in this section.
Highly compensated employee. Highly compensated employee means an
employee who is a highly compensated employee within the meaning of
section 414(q) or a former employee treated as an employee under the
definition of employee in this section who is a highly compensated
former employee within the meaning of section 414(q).
Highly compensated former employee. Highly compensated former
employee means a former employee who is a highly compensated former
employee within the meaning of section 414(q).
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 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.
Plan year compensation. Plan year compensation means plan year
compensation within the meaning of Sec. 1.401(a)(4)-12.
Professional employee. Professional employee means any highly
compensated employee who, on any day of the plan year, performs
professional services for the employer as an actuary, architect,
attorney, chiropodist, chiropractor, dentist, executive, investment
banker, medical doctor, optometrist, osteopath, podiatrist,
psychologist, certified or other public accountant, stockbroker, or
veterinarian, or in any other professional capacity determined by the
Commissioner in a notice or other document of general applicability to
constitute the performance of services as a professional.
Ratio percentage. With respect to a plan for a plan year, a plan's
ratio percentage means the percentage (rounded to the nearest hundredth
of a percentage point) determined by dividing the percentage of the
nonhighly compensated employees who benefit under the plan by the
percentage of the highly compensated employees who benefit under the
plan. The percentage of the nonhighly compensated employees who benefit
under the plan is determined by dividing the number of nonhighly
compensated employees benefiting under the plan by the total number of
nonhighly compensated employees of the employer. The percentage of the
highly compensated employees who benefit under the plan is determined by
dividing the number of highly compensated employees benefiting under the
plan by the total number of highly compensated employees of the
employer.
Section 401(k) plan. Section 401(k) plan means a plan consisting of
elective contributions described in Sec. 1.40(k)-1(g)(3) under a
qualified cash or deferred arrangement described in Sec. 1.401(k)-
1(a)(4)(i). Thus, a section 401(k) plan does not include a plan (or
portion of a plan) that consists of contributions under a nonqualified
cash or deferred arrangement, or qualified nonelective or qualified
matching contributions treated as elective contributions under
Sec. 1.401(k)-1(b)(5).
Section 401( l) plan. Section 401( l) plan means a plan that--
(1) Provides for a disparity in employer-provided benefits or
contributions that satisfies section 401(l) in form, and
(2) Relies on one of the safe harbors of Sec. 1.401(a)(4)-2(b)(2),
1.401(a)(4)-3(b), 1.401(a)(4)-8(b)(3), or 1.401(a)(4)-8(c)(3)(iii)(B) to
satisfy section 401(a)(4).
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. 1.40(m)-1(f)(12), or both. Thus, a
section 401(m) plan does not include a plan (or portion of a plan) that
consists of elective contributions or qualified nonelective
contributions
[[Page 518]]
treated as matching contributions under Sec. 1.401(m)-1(b)(5).
[T.D. 8363, 56 FR 47657, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31,
1992, as amended by T.D. 8487, 58 FR 46843, Sept. 3, 1993]
Sec. 1.410(b)-10 Effective dates and transition rules.
(a) Statutory effective dates--(1) In general. Except as set forth
in paragraph (a)(2) of this section, the minimum coverage rules of
section 410(b) as amended by section 1112 of the Tax Reform Act of 1986
apply to plan years beginning on or after January 1, 1989.
(2) Special statutory effective date for collective bargaining
agreements--(i) In general. As provided for by section 1112(e)(2) of the
Tax Reform Act of 1986, 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,
the minimum coverage rules of section 410(b) as amended by section 1112
of the Tax Reform Act of 1986 do not apply to employees covered by any
such agreement in plan years beginning before the earlier of--
(A) January 1, 1991; or
(B) The later of January 1, 1989, or the date on which the last of
such collective bargaining agreements terminates (determined without
regard to any extension thereof after February 28, 1986). For purposes
of this paragraph (a)(2), 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.
(ii) Example. The following example illustrates this paragraph
(a)(2).
Example. Employer A maintains Plan 1 pursuant to a collective
bargaining agreement. Plan 1 covers 100 of Employer A's noncollectively
bargained employees and 900 of Employer A's collectively bargained
employees. Employer A also maintains Plan 2, which covers Employer A's
other 400 noncollectively bargained employees. The collective bargaining
agreement under which Plan 1 is maintained was entered into on January
1, 1986, and expires December 31, 1992. Because Plan 1 is a plan
maintained pursuant to a collective bargaining agreement, section 410(b)
applies to the first plan year beginning on or after January 1, 1991. In
applying section 410(b) to Plan 2, the 100 noncollectively bargained
employees in Plan 1 must be taken into account. The deferred effective
date for plans maintained pursuant to a collective bargaining agreement
is not applicable in determining how section 410(b) is applied to a plan
that is not maintained pursuant to a collective bargaining agreement.
(iii) Plan maintained pursuant to a collective bargaining agreement.
For purposes of this paragraph (a)(2), a plan is maintained pursuant to
one or more collective bargaining agreements between employee
representatives and one or more employers, if one or more of the
agreements were ratified before March 1, 1986. Only plans maintained
pursuant to agreements that the Secretary of Labor finds to be
collective bargaining agreements and that satisfy section 7701(a)(46)
are eligible for the deferred effective date under this paragraph
(a)(2). A plan will not be treated as a plan maintained pursuant to one
or more collective bargaining agreements eligible for the deferred
effective date under this paragraph (a)(2) unless the plan would be a
plan maintained pursuant to one or more collective bargaining agreements
under the principles applied under section 1017(c) of the Employee
Retirement Income Security Act of 1974. See H.R. Rep. No. 1280, 93rd
Cong. 2d Sess. 266 (1974).
(b) Regulatory effective dates--(1) In general. Except as otherwise
provided in this section, Secs. 1.410(b)-2 through 1.410(b)-9 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. 1.410(b)-2 through 1.410(b)-9 apply to plan years
beginning on or after January 1, 1996, to the extent such plans are
subject to section 410(b).
(c) Compliance during transition period. For plan years beginning
before the effective date of these regulations, as set forth in
paragraph (b) of this section, and on or after the statutory effective
date as set forth in paragraph (a) of this section, a plan must be
operated in accordance with a reasonable, good faith interpretation of
section 410(b).
[[Page 519]]
Whether a plan is operated in accordance with a reasonable, good faith
interpretation of section 410(b) 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. If a plan's
classification has been determined by the Commissioner to be
nondiscriminatory and there have been no significant changes in or
omissions of a material fact, the classification will be treated as
nondiscriminatory for the relevant plan year. A plan will be deemed to
be operated in accordance with a reasonable, good faith interpretation
of section 410(b) if it is operated in accordance with the terms of
Secs. 1.410(b)-2 through 1.410(b)-9.
(d) 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) Sec. 1.410(b)-2 through
Sec. 1.410(b)-10 apply to plan years beginning on or after 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 410(b) (and in the case of such
plans that are not subject to section 403(b)(12)(A)(i), section
401(a)(3) as in effect on September 1, 1974) for plan years before that
effective date. For purposes of this section, 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. See
Sec. 1.410(b)-2(d) and (e).
[T.D. 8487, 58 FR 46844, Sept. 3, 1993]
Sec. 1.410(d)-1 Election by church to have participation, vesting, funding, etc. provisions apply.
(a) In general. If a church or convention or association of churches
which maintains any church plan, as defined in section 414(e), makes an
election under this section, certain provisions of the Code and Title I
of the Employee Retirement Income Security Act of 1974 (the ``Act'')
shall apply to such church plan as if such plan were not a church plan.
The provisions of the Code referred to are section 410 (relating to
minimum participation standards), section 411 (relating to minimum
vesting standards), section 412 (relating to minimum funding standards),
section 4975 (relating to prohibited transactions), and paragraphs (11),
(12), (13), (14), (15), and (19) of section 401(a) (relating to joint
and survivor annuities, mergers and consolidations, assignment or
alienation of benefits, time of benefit commencement, certain social
security increases, and withdrawals of employee contributions,
respectively).
(b) Election is irrevocable. An election under this section with
respect to any church plan shall be binding with respect to such plan
and, once made, shall be irrevocable.
(c) Procedure for making election--(1) Time of election. An election
under this section may be made for plan years for which the provisions
of section 410(d) of the Code apply to the church plan. By reason of
section 1017(b) of the Act section 410(d) does not apply to a plan in
existence on January 1, 1974, for plan years beginning before January 1,
1976. Section 1017(d) of the Act permits a plan administrator to elect
to have certain provisions of the Code (including section 410(d)) apply
to a plan before the otherwise applicable effective dates of such
provisions. See Sec. 1.410(a)-2(d). Therefore, for a plan in existence
on Janurary 1, 1974, an election under section 410(d) of the Code may be
made for a plan year beginning before January 1, 1976, only if an
election has been made under section 1017(d) of the Act with respect to
that plan year.
(2) By whom election is to be made. The election provided by this
section may be made only by the plan administrator of the church plan.
(3) Manner of making election. The plan administrator may elect to
have the provisions of the Code described in paragraph (a) of this
section apply to the church plan as it is were not a church plan by
attaching the statement described in subparagraph (5) of this paragraph
to either (i) the annual return required under section 6058(a) (or an
amended return) with respect to the plan which is filed for the first
plan year for which the election is effective
[[Page 520]]
or (ii) a written request for a determination letter relating to the
qualification of the plan under section 401(a), 403(a), or 405(a) of the
Code and if trusteed, the exempt status under section 501(a) of the Code
of a trust constituting a part of the plan.
(4) Conditional election. If an 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 become irrevocable
upon issuance of such letter.
(5) Statement. The statement described in subparagraph (3) of this
paragraph shall indicate (i) that the election is made under section
410(d) of the Code and (ii) the first plan year for which it is
effective.
(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))
[T.D. 7508, 42 FR 47198, Sept. 20, 1977]
Sec. 1.411(a)-1 Minimum vesting standards; general rules.
(a) In general. A plan is not a qualified plan (and a trust forming
a part of such plan is not a qualified trust) unless--
(1) The plan provides that an employee's right to his normal
retirement benefit (see Sec. 1.411(a)-7(c)) is nonforfeitable (see
Sec. 1.411(a)-4) upon and after the attainment of normal retirement age
(see Sec. 1.411(a)-7(b)),
(2) The plan provides that an employee's rights in his accrued
benefit derived from his own contributions (see Sec. 1.411(c)-1) are
nonforfeitable at all times, and
(3) The plan satisfies the requirements of--
(A) Section 411(a)(2) and Sec. 1.411(a)-3 (relating to vesting in
accrued benefit derived from employer contributions), and
(B) In the case of a defined benefit plan, section 411(b)(1) and
Sec. 1.411(b)-1 (relating to accrued benefit).
(b) Organization of regulations relating to minimum vesting
standards--(1) General rules. This section prescribes general rules
relating to the minimum vesting standards provided by section 411.
(2) Effective dates. Section 1.411(a)-2 provides rules under section
1017 of the Employee Retirement Income Security Act of 1974 relating to
effective dates under section 411.
(3) Employer contributions. Section 1.411(a)-3 provides rules under
section 411(a)(2) relating to vesting in employer-derived accrued
benefits.
(4) Certain forfeitures. Section 1.411(a)-4 provides rules under
section 411(a)(3) relating to certain permitted forfeitures,
suspensions, etc. under qualified plans.
(5) Nonforfeitable percentage. Section 1.411(a)-5 provides rules
under section 411(a)(4) relating to service included in the
determination of an employee's nonforfeitable percentage under section
411(a)(2) and Sec. 1.411(a)-3.
(6) Years of service; break in service. Section 1.411(a)-6 provides
rules under section 411(a) (5) and (6) of the Internal Revenue Code of
1954 relating to years of service and breaks in service. Rules
prescribed by the Secretary of Labor, relating to years of service and
breaks in service under part 2 of subtitle B of title I of the Employee
Retirement Income Security Act of 1974 are provided under 29 CFR Part
2530 (Department of Labor regulations relating to minimum standards for
employee pension benefit plans).
(7) Definitions and special rules. Section 1.411(a)-7 provides
definitions and special rules under section 411(a) (7), (8), and (9),
for purposes of section 411 and the regulations thereunder.
(8) Changes in vesting schedule. Section 1.411(a)-8 provides rules
under section 411(a)(10) relating to changes in the vesting schedule of
a plan.
(9) Breaks in service. Section 1.411(a)-9 provides special rules
relating to breaks in service.
(10) Accrued benefits. See Sec. 1.411(b)-1 for rules under section
411(b) relating to accrued benefit requirements under defined benefit
plans.
(11) Allocation of accrued benefits. See Sec. 1.411(c)-1 for rules
under section 411(c) relating to allocation of accrued benefits between
employer and employee contributions.
(12) Discrimination, etc. See Sec. 1.411(d)-1 for rules relating to
the coordination of section 411 with section 401(a)(4) (relating to
discrimination) and other rules under section 411(d).
[[Page 521]]
(c) Application of standards to certain plans--(1) General rule.
Except as provided in subparagraph (2) of this paragraph, section 411
does not apply to--
(i) A governmental plan (within the meaning of section 414(d) and
the regulations thereunder),
(ii) A church plan (within the meaning of section 414(e) and the
regulations thereunder) which has not made the election provided by
section 410(d) and the regulations thereunder,
(iii) A plan which has not provided for employer contributions at
any time after September 2, 1974, and
(iv) A plan established and maintained by a society, order, or
association described in section 501(c) (8) or (9), if no part of the
contributions to or under such plan are made by employers of
participants in such plan.
(2) Vesting requirements. A plan described in subparagraph (1) of
this paragraph shall, for purposes of section 401(a), be treated as
meeting the requirements of section 411 if such plan meets the vesting
requirements resulting from the application of section 401(a)(4) and
section 401(a)(7) as in effect on September 1, 1974.
(d) Supersession. Sections 11.411(a)-1 through 11.411(d)-3,
inclusive, of the Temporary Income Tax Regulations under the Employee
Retirement Income Security Act of 1974 are superseded by this section
and Secs. 1.411(a)-2 through 1.411(d)-3.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42324, Aug. 23, 1977]
Sec. 1.411(a)-2 Effective dates.
(a) Plan not in existence on January 1, 1974. Under section 1017(a)
of the Employee Retirement Income Security Act of 1974, in the case of a
plan which was not in existence on January 1, 1974, section 411 and the
regulations thereunder apply for plan years beginning after September 2,
1974. See paragraph (c) of this section for time plan is considered in
existence.
(b) Plans in existence on January 1, 1974. Under section 1017(b) of
the Employee Retirement Income Security Act of 1974, in the case of a
plan which was in existence on January 1, 1974, section 411 and the
regulations thereunder apply for plan years beginning after December 31,
1975. See paragraph (c) of this section for time plan is considered to
be in existence.
(c) Time of plan existence--(1) General rule. For purposes of this
section, a plan is considered to be in existence on a particular day if-
-
(i) The plan on or before that day was reduced to writing and
adopted by the employer (including, in the case of a corporate employer,
formal approval by the employer's board of directors and, if required,
shareholders), even though no amounts had been contributed under the
plan as of such day, and
(ii) The plan was not terminated on or before that day.
For example, if a plan was adopted on January 2, 1974, effective as of
January 1, 1974, the plan is not considered to have been in existence on
January 1, 1974, because it was not both adopted and in writing on
January 1, 1974.
(2) Collectively-bargained plan. Notwithstanding paragraph (c) (1)
of this section, a plan described in section 413 (a), relating to a plan
maintained pursuant to a collective-bargaining agreement, is considered
to be in existence on a particular day if--
(i) On or before that day there is a legally enforceable agreement
to establish such a plan signed by the employer, and
(ii) The employer contributions to be made to the plan are set forth
in the agreement.
(3) Special rule. If a plan is considered to be in existence under
subparagraph (1) of this paragraph, any other plan with which such
existing plan is merged or consolidated shall also be considered to be
in existence on such date.
(d) Existing plans under collective-bargaining agreements. For a
special effective date rule for certain plans maintained pursuant to a
collective bargaining agreement, see section 1017(c)(1) of the Employee
Retirement Income Security Act of 1974 (88 Stat. 932).
(e) Certain existing plans may elect new provisions. The plan
administrator may elect to have the provisions of the Code relating to
participation, vesting, funding, and form of benefit apply to a selected
plan year. See Sec. 1.410(a)-2(d) for rules relating to such an
election.
[[Page 522]]
(f) Application of rules. The requirements of section 411 do not
apply to employees who separate from service with the employer prior to
the first plan year to which such requirements apply and who never
return to service with the employer in a plan year to which section 411
applies.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42325, Aug. 23, 1977]
Sec. 1.411(a)-3 Vesting in employer-derived benefits.
(a) In general--(1) Alternative requirements. A plan is not a
qualified plan (and a trust forming a part of such plan is not a
qualified trust) unless the plan satisfies the requirements of section
411(a)(2) and this section. A plan satisfies the requirements of this
section if is satisfies the requirements of paragraph (b), (c), or (d)
of this section.
(2) Composite arrangements. A plan will not be considered to satisfy
the requirements of paragraph (b), (c), or (d) of this section unless it
satisfies all requirements of a particular one of such paragraphs with
respect to all of an employee's years of service. A plan which, for
example, satisfies the requirements of paragraph (b) (but not (c) or
(d)) for an employee's first 9 years of service and satisfies the
requirements of paragraph (c) (but not (b)) for all of his remaining
years of service, does not satisfy the requirements of this section. A
plan is not precluded from satisfying the requirement of one such
paragraph with respect to one group of employees and another such
paragraph with respect to another group provided that the groups are not
so structured as to evade the requirements of this paragraph. For
example, if plan A provides that employees who commence participation
before age 30 are subject to the ``rule of 45'' vesting schedule and
employees who commence participation after age 30 are subject to the
full vesting after 10 years schedule, plan A would be so structured as
to evade the requirements of this paragraph.
(3) Plan amendments. A plan which satisfies the requirements of a
particular one of such paragraphs for each of an employee's years of
service and which is amended so that, as amended, it satisfies the
requirements of another such paragraph for all such years of service,
satisfies the requirements of this section even though, as amended, it
does not satisfy the requirements of the paragraph which were satisfied
prior to the amendment. See Sec. 1.411(a)-8 for rules relating to
employee election where the vesting schedule is amended.
(b) 10-year vesting. A plan satisfies the requirements of section
411(a)(2) (A) and this paragraph if an employee who has completed 10
years of service has a nonforfeitable right to 100 percent of his
accrued benefit derived from employer contributions.
(c) 5- to 15-year vesting. A plan satisfies the requirements of
section 411(a)(2) (B) and this paragraph if an employee who has
completed at least 5 years of service has a nonforfeitable right to a
percentage of his accrued benefit derived from employer contribution
which percentage is not less than the nonforfeitable percentage
determined under the following table:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
5....................................................... 25
6....................................................... 30
7....................................................... 35
8....................................................... 40
9....................................................... 45
10...................................................... 50
11...................................................... 60
12...................................................... 70
13...................................................... 80
14...................................................... 90
15 or more.............................................. 100
------------------------------------------------------------------------
(d) Rule of 45. A plan satisfies the requirements of section
411(a)(2)(C) and this paragraph if an employee is entitled to the
greater of the two percentages determined under paragraph (d) (1) or (2)
of this section.
(1) Age and service test. An employee who is not separated from the
service, who has completed at least 5 years of service, and with respect
to whom the sum of his age and years of service equals of exceeds 45,
has a nonforfeit- able right to a percentage of his accrued benefit
derived from employer contributions which is not less than the
nonforfeitable percentage corresponding to his number of completed years
of service to to the sum of his age and completed years of service
[[Page 523]]
(whichever percentage is the lesser) determined under the following
table:
------------------------------------------------------------------------
Sum of age and Nonforfeitable
Completed years of service service percentage
------------------------------------------------------------------------
5................................. 45 or 46............ 50
6................................. 47 or 48............ 60
7................................. 49 or 50............ 70
8................................. 51 or 52............ 80
9................................. 53 or 54............ 90
10 or more........................ 55 or more.......... 100
------------------------------------------------------------------------
(2) Service test. An employee who has completed at least 10 years of
service has a nonforfeitable right to a percentage of his accrued
benefit derived from employer contributions determined under the
following table:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
10...................................................... 50
11...................................................... 60
12...................................................... 70
13...................................................... 80
14...................................................... 90
15...................................................... 100
------------------------------------------------------------------------
(3) Computation of age. For purposes of subparagraph (1) of this
paragraph, the age of an employee is his age on his last birthday.
(e) Examples. The rules provided by this section are illustrated by
the following examples:
Example (1). Plan B provides that each employee's rights to his
employer-derived accrued benefit are nonforfeitable as follows:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
2 or less............................................... 0
3....................................................... 30
4....................................................... 35
5....................................................... 40
6....................................................... 45
7....................................................... 50
8....................................................... 55
9....................................................... 60
10...................................................... 65
11...................................................... 70
12...................................................... 75
13...................................................... 80
14...................................................... 85
15...................................................... 100
------------------------------------------------------------------------
Plan B does not satisfy the requirements of paragraph (c) of this
section (relating to 5-15-year vesting) because the nonforfeitable
percentage provided by the plan after completion of 14 years of service
(85 percent) is less than the percentage required by paragraph (c) of
this section at that time (90 percent). The fact that the nonforfeitable
percentage provided by the plan for years prior to the 13th year of
service is greater than the percentage required under paragraph (c) of
this section is immaterial. The plan fails to satisfy the requirements
of paragraph (c) of this section even if it is demonstrated that the
value of the vesting provided by the plan to the employee is at least
equal to the value of the vesting rate required by that paragraph.
Example (2). Plan C provides for plan participation after the
completion of 1 year of service. The plan provides that each employee's
rights to his employer-derived accrued benefit are 100 percent
nonforfeitable after 10 years of plan participation rather than service.
The plan does not satisfy the requirements of paragraph (b) of this
section because, under the plan, an employee obtains a 100 percent
nonforfeitable right to his employer-derived accrued benefit only after
completion of more than 10 years of service.
Example (3). Plan D provides that each employee's rights to his
employer-derived accrued benefit are nonforfeitable in accordance with
the following schedule:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
0-9..................................................... 0
10...................................................... 50
11...................................................... 60
12...................................................... 70
13...................................................... 80
14...................................................... 90
15...................................................... 100
------------------------------------------------------------------------
The plan does not satisfy the requirements of paragraph (b) of this
section after the 9th year of service. It does not satisfy the
requirements of paragraph (c) of this section for years prior to the
10th year of service. It does not satisfy the requirements of paragraph
(d)(1) of this section for any year of service prior to the 10th year.
The plan does not satisfy the requirements of this section because it
does not satisfy the requirements of a particular one of the three
paragraphs for each of an employee's years of service.
Example (4). Plan G provides that each employee's rights to his
employer-derived accrued benefit are 100 percent nonforfeitable upon
completion of 5 years of service. The plan satisfies the requirements of
paragraphs (b), (c), and (d) of this section and, because it satisfies
the requirements of at least one of such paragraphs for all of an
employee's years of service, it satisfies the requirements of this
section.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42325, Aug. 23, 1977]
[[Page 524]]
Sec. 1.411(a)-3T Vesting in employer-derived benefits (temporary).
(a) In general--(1) [Reserved]
(2) Composite arrangements. A plan will not be considered to satisfy
the requirements of paragraph (b), (c), or (d) of this section unless it
satisfies all requirements of a particular one of such paragraphs with
respect to all of an employee's years of service. A plan which, for
example, satisfies the requirements of paragraph (b) (but not (c) or
(d)) for an employee's first 4 years of service and satisfies the
requirements of paragraph (c) (but not (b)) for all of his remaining
years of service does not satisfy the requirements of this section. A
plan is not precluded from satisfying the requirements of one such
paragraph with respect to one group of employees and another such
paragraph with respect to another group provided that the groups are not
so structured as to evade the requirements of this paragraph.
(b) 5-year vesting. A plan satisfies the requirements of section
411(a)(2)(A) and this paragraph if an employee who has completed 5 years
of service has a nonforfeitable right to 100 percent of his or her
accrued benefits derived from employer contributions.
(c) 3- to 7-year vesting. A plan satisfies the requirements of
section 411(a)(2)(B) and this paragraph if an employee who has completed
at least 3 years of service has a nonforfeitable right to a percentage
of his accrued benefit derived from employer contributions, which
percentage is not less than the nonforfeitable percentage determined
under the following table:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
3....................................................... 20
4....................................................... 40
5....................................................... 60
6....................................................... 80
7 or more............................................... 100
------------------------------------------------------------------------
(d) Multiemployer plans. A plan satisfies the requirements of
section 411(a)(2)(C) and this paragraph if--
(1) The plan is a multiemployer plan (within the meaning of section
414(f)), and
(2) Under the plan--
(i) An employee who is covered pursuant to a collective bargaining
agreement described in section 414(f)(1)(B) has a nonforfeitable right
to 100 percent of the employee's accrued benefit derived from employer
contributions not later than upon completion of 10 years of service, and
(ii) The requirements of paragraph (b) or (c) of this section are
met with respect to employees who are not covered pursuant to a
collective bargaining agreement described in section 414(f)(1)(B).
(iii) For purposes of this provision, an employee is not covered
pursuant to a collective bargaining agreement unless the employee is
represented by a bona fide employee representative that is a party to
the collective bargaining agreement pursuant to which the multiemployer
plan is maintained. Thus, for example, an employee of either the
multiemployer plan or the employee representative is not covered
pursuant to the collective bargaining agreement under which the plan is
maintained even if the employee is covered pursuant to an agreement
entered into by the multiemployer plan or employee representative on
behalf of the employee and even if all such employees covered under the
plan constitute only a de minimis percentage of the total employees
covered under the plan.
(e) Effective date. (1) The provisions of this section apply to all
employees who have one hour of service in any plan year beginning after-
-
(i) December 31, 1988, or
(ii) 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, for employees
covered by any such agreement, the earlier of--
(A) The later of--
(1) January 1, 1989, or
(2) The date on which the last of such collective bargaining
agreements terminates (determined without regard to any extension
thereof after February 28, 1986), or
(B) January 1, 1991.
(2) For employees not described in paragraph (e)(1), above, the
regulations in effect prior to January 1, 1989, shall be applied to
determine the requirements of this section.
[[Page 525]]
(f) Examples. The rules provided by this section are illustrated by
the following examples:
Example (1). Plan B provides that each employee's rights to his
employer-derived accrued benefit are nonforfeitable as follows:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
1....................................................... 0
2....................................................... 10
3....................................................... 25
4....................................................... 45
5....................................................... 65
6....................................................... 75
7....................................................... 100
------------------------------------------------------------------------
Plan B does not satisfy the requirements of paragraph (c) of this
section (relating to 3- to 7-year vesting) because the nonforfeitable
percentage provided by the plan after completion of 6 years of service
(75 percent) is less than the percentage required by paragraph (c) of
this section at that time (80 percent). The fact that the nonforfeitable
percentage provided by the plan for years prior to the 6th year of
service is greater than the percentage required under paragraph (c) of
this section is immaterial. The plan fails to satisfy the requirements
of paragraph (c) of this section even if it is demonstrated that the
value of the vesting provided by the plan to the employees is at least
equal to the value of the vesting rate required by this paragraph.
Example (2). Plan C provides for plan participation after the
completion of 1 year of service. The plan provides that each employee's
rights to his employer-derived accrued benefits are 100 percent
nonforfeitable after 5 years of plan participation rather than service.
The plan does not satisfy the requirements of paragraph (b) of this
section because, under the plan, an employee obtains a 100 percent
nonforfeitable right to his or her employer-derived accrued benefit only
after completion of more than 5 years of service.
Example (3). Plan D provides that each employee's rights to his
employer-derived accrued benefits are nonforfeitable in accordance with
the following schedule:
------------------------------------------------------------------------
Nonforfeitable
Completed years of service percentage
------------------------------------------------------------------------
0 to 4.................................................. 0
5....................................................... 60
6....................................................... 80
7....................................................... 100
------------------------------------------------------------------------
The plan does not satisfy the requirements of paragraph (b) of this
section after the 4th year of service. It does not satisfy the
requirements of paragraph (c) of this section for years prior to the 5th
year of service. The plan does not satisfy the requirements of this
section because it does not satisfy the requirements of a particular one
of the two paragraphs for each of an employee's years of service.
Example (4). Plan G provides that each employee's rights to his
employer-derived accrued benefit are 100 percent nonforfeitable upon
completion of 3 years of service. The plan satisfies the requirements of
paragraphs (b) and (c) of this section and, because it satisfies the
requirements of at least one of such paragraphs for all of an employee's
years of service, it satisfies the requirements of this section.
[T.D. 8170, 53 FR 240, Jan. 6, 1988]
Sec. 1.411(a)-4 Forfeitures, suspensions, etc.
(a) Nonforfeitability. Certain rights in an accrued benefit must be
nonforfeitable to satisfy the requirements of section 411(a). This
section defines the term ``nonforfeitable'' for purposes of these
requirements. For purposes of section 411 and the regulations
thereunder, a right to an accrued benefit is considered to be
nonforfeitable at a particular time if, at that time and thereafter, it
is an unconditional right. Except as provided by paragraph (b) of this
section, a right which, at a particular time, is conditioned under the
plan upon a subsequent event, subsequent performance, or subsequent
forbearance which will cause the loss of such right is a forfeitable
right at that time. Certain adjustments to plan benefits such as
adjustments in excess of reasonable actuarial reductions, can result in
rights being forfeitable. Rights which are conditioned upon a
sufficiency of plan assets in the event of a termination or partial
termination are considered to be forfeitable because of such condition.
However, a plan does not violate the nonforfeitability requirements
merely because in the event of a termination an employee does not have
any recourse toward satisfaction of his nonforfeitable benefits from
other than the plan assets or the Pension Benefit Guaranty Corporation.
Furthermore, nonforfeitable rights are not considered to be forfeitable
by reason of the fact that they may be reduced to take into account
benefits which are provided under the Social Security Act or under any
other Federal or State law and which are taken
[[Page 526]]
into account in determining plan benefits. To the extent that rights are
not required to be nonforfeitable to satisfy the minimum vesting
standards, or the nondiscrimination requirements of section 401(a)(4),
they may be forfeited without regard to the limitations on
forfeitability required by this section. The right of an employee to
repurchase his accrued benefit for example under section 411(a)(3)(D),
is an example of a right which is required to satisfy such standards.
Accordingly, such a right is subject to the limitations on
forfeitability. Rights which are required to be prospectively
nonforfeitable under the vesting standards are nonforfeitable and may
not be forfeited until it is determined that such rights are, in fact,
in excess of the vesting standards. Thus, employees have a right to vest
in the accrued benefits if they continue in employment of employers
maintaining the plan unless a forfeitable event recognized by section
411 occurs. For example, if a plan covered employees in Division A of
Corporation X under a plan utilizing a 10-year 100 percent vesting
schedule, the plan could not forfeit employees' rights on account of
their moving to service in Division B of Corporation X prior to
completion of 10 years of service even though employees are not vested
at that time.
(b) Special rules. For purposes of paragraph (a) of this section a
right is not treated as forfeitable--
(1) Death--(i) General rule. In the case of a participant's right to
his employer-derived accrued benefit, merely because such accrued
benefit is forfeitable by the participant to the extent it has not been
paid or distributed to him prior to his death. This subparagraph shall
not apply to a benefit which must be paid to a survivor in order to
satisfy the requirements of section 401(a)(11).
(ii) Employee contributions. A participant's right in his accrued
benefit derived from his own contributions must be nonforfeitable at all
times. Such a right is not treated as forfeitable merely because, after
commencement of annuity or pension payments in a benefit form provided
under the plan, the participant dies without receiving payments equal in
amount to his nonforfeitable accrued benefit derived from his
contributions determined at the time of commencement.
(2) Suspension of benefits upon reemployment of retiree. In the case
of certain suspensions of benefits under section 411(a)(3)(B), see
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530
(Department of Labor regulations relating to minimum standards for
employee pension benefit plans).
(3) Retroactive plan amendment. In the case of a participant's right
to his employer-derived accrued benefit, merely because such benefit is
subject to reduction to the extent provided by a plan amendment
described in section 412(c)(8) and the regulations thereunder, which
amendment is given retroactive effect in accordance with such section.
(4) Other forfeiture rules--(i) Withdrawal of mandatory
contributions. For rules allowing forfeitures on account of the
withdrawal of mandatory contributions, see Sec. 1.411(a)-7(d) (2) and
(3).
(ii) Class year plans. For forfeiture rules pertaining to class year
plans, see Sec. 1.411(d)-3(b).
(iii) Additional requirements. For additional requirements relating
to nonforfeitability of benefits in the event of a withdrawal by the
employee, see section 401(a)(19) and Sec. 1.401(a)-19.
(5) Multiemployer plan. In the case of a multiemployer plan
described in section 414(f), merely because an employee's accrued
benefit which results from service with an employer before such employer
was required to contribute to the plan is forfeitable on account of the
cessation of contributions by the employer of the employee. This
subparagraph shall not apply to an employee's accrued benefit with
respect to an employer which accrued under a plan maintained by that
employer prior to the adoption by that employer of the multiemployer
plan.
(6) Lost beneficiary; escheat. In the case of a benefit which is
payable, merely because the benefit is forfeitable on account of the
inability to find the participant or beneficiary to whom payment is due,
provided that the plan provides for reinstatement of the benefit if a
claim is made by the participant or beneficiary for the forfeited
benefit. In addition, a benefit which is
[[Page 527]]
lost by reason of escheat under applicable state law is not treated as a
forfeiture.
(7) Certain matching contributions. A matching contribution (within
the meaning of section 401(m)(4)(A) and Sec. 1.40l(m)-1(f)(12)) is not
treated as forfeitable even if under the plan it may be forfeited under
Sec. 1.401(m)-1(e)(1) because the contribution to which it relates is
treated as an excess contribution (within the meaning of Sec. 1.402(k)-
1(f)(2) and (g)(7)), excess deferral (within the meaning of
Sec. 1.402(g)-1(e)(1)(iii)), or excess aggregate contribution (within
the meaning of Sec. 1.401(m)-1(f)(8)).
(c) Examples. The rules of this section are illustrated by the
following examples:
Example (1). Corporation A's plan provides that an employee is fully
vested in his employer-derived accrued benefit after completion of 5
years of service. The plan also provides that, if an employee works for
a competitor he forfeits his rights in the plan. Such provision could
result in the forfeiture of an employee's rights which are required to
be nonforfeitable under section 411 and therefore the plan would not
satisfy the requirements of section 411. If the plan limited the
forfeiture to employees who completed less than 10 years of service, the
plan would not fail to satisfy the requirements of section 411 because
the forfeitures under this provision are limited to rights which are in
excess of the minimum required to be nonforfeitable under section
411(a)(2)(A).
Example (2). Plan B provides that if an employee does not apply for
benefits within 5 years after the attainment of normal retirement age,
the employee loses his plan benefits. Such a plan provision could result
in forfeiture of an employee's rights which are required to be
nonforfeitable under section 411 and, therefore, the plan would not
satisfy the requirements of section 411.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42326, Aug. 23, 1977, as amended by T.D. 8357, 56 FR
40549, Aug. 15, 1991]
Sec. 1.411(a)-4T Forfeitures, suspensions, etc. (temporary).
(a) Nonforfeitability. Certain rights in an accrued benefit must be
nonforfeitable to satisfy the requirements of section 411(a). This
section defines the term ``nonforfeitable'' for purposes of these
requirements. For purposes of section 411 and the regulations
thereunder, a right to an accrued benefit is considered to be
nonforfeitable at a particular time if, at that time and thereafter, it
is an unconditional right. Except as provided by paragraph (b) of this
section, a right which, at a particular time, is conditioned under the
plan upon a subsequent event, subsequent performance, or subsequent
forbearance which will cause the loss of such right is a forfeitable
right at that time. Certain adjustments to plan benefits, such as
adjustments in excess of reasonable actuarial reductions, can result in
rights being forfeitable. Rights which are conditioned upon a
sufficiency of plan assets in the event of a termination or partial
termination are considered to be forfeitable because of such condition.
However, a plan does not violate the nonforfeitability requirements
merely because in the event of a termination an employee does not have
any recourse toward satisfaction of his nonforfeitable benefits from
other than the plan assets, the Pension Benefit Guaranty Corporation, or
a trust established and maintained pursuant to sections 4041(c)(3)(B)
(ii) or (iii) and section 4049 of ERISA with respect to the plan.
Furthermore, nonforfeitable rights are not considered to be forfeitable
by reason of the fact that they may be reduced as allowed under sections
401(a)(5) and 401(l). To the extent that rights are not required to be
nonforfeitable to satisfy the minimum vesting standards, or the
nondiscrimination requirements of section 401(a)(4), they may be
forfeited without regard to the limitations on forfeitability required
by this section. The right of an employee to repurchase his accrued
benefit for example under section 411(a)(3)(D), is an example of a right
which is required to satisfy such standards. Accordingly, such a right
is subject to the limitations on forfeitability. Rights which are
required to be prospectively nonforfeitable under the vesting standards
are nonforfeitable and may not be forfeited until it is determined that
such rights are, in fact, in excess of the vesting standards. Thus,
employees have a right to vest in the accrued benefits if they continue
in employment of employers maintaining the plan unless a forfeitable
event recognized by section 411 occurs. For example, if a plan covered
employees in
[[Page 528]]
Division A of Corporation X under a plan utilizing a 5-year 100 percent
vesting schedule, the plan could not forfeit employees' rights on
account of their moving to service in Division B of Corporation X prior
to completion of 5 years of service even though employees are not vested
at that time.
(b) [Reserved]
(c) Examples. The rules of this section ae illustrated by the
following examples:
Example (1). Corporation A's plan provides that an employee is fully
vested in his employer-derived accrued benefit after completion of 3
years of service. The plan also provides that if the employee works for
a competitor he forfeits his rights in the plan. Such provision could
result in the forfeiture of an employee's rights which are required to
be nonforfeitable under section 411 and therefore the plan would not
satisfy the requirements of section 411. If the plan limited the
forfeiture to employees who completed less than 5 years of service, the
plan would not fail to satisfy the requirements of section 411 because
the forfeitures under this provision are limited to rights which are in
excess of the minimum required to be nonforfeitable under section
411(a)(2)(A).
[T.D. 8170, 53 FR 241, Jan. 6, 1988]
Sec. 1.411(a)-5 Service included in determination of nonforfeitable percentage.
(a) In general. Under section 411(a)(4), for purposes of determining
the nonforfeitable percentage of an employee's right to his employer-
derived accrued benefit under section 411(a)(2) and Sec. 1.411(a)-3, all
of an employee's years of service with an employer or employers
maintaining the plan shall be taken into account except that years of
service described in paragraph (b) of this section may be disregarded.
(b) Certain service. For purposes of paragraph (a) of this section,
the following years of service may be disregarded:
(1) Service before age 22. (i) In the case of a plan which satisfies
the requirements of section 411(a)(2) (A) or (B) (relating to 10-year
vesting and 5-15-year vesting, respectively), a year of service
completed by an employee before he attains age 22.
(ii) In the case of a plan which does not satisfy the requirements
of section 411(a)(2) (A) or (B), a year of service completed by an
employee before he attains age 22 if the employee is not a participant
(for purposes of section 410) in the plan at any time during such year.
(iii) For purposes of this subparagraph in the case of a plan
utilizing computation periods, service during a computation period
described in section 411(a)(5)(A) within which the employee attains age
22 may not be disregarded. In the case of a plan utilizing the elapsed
time method described in Sec. 1.410(a)-7, service on or after the date
on which the employee attains age 22 may not be disregarded.
(2) Contributory plans. In the case of a plan utilizing computation
periods, a year of service completed by an employee under a plan which
requires mandatory contributions (within the meaning of section
411(c)(2)(C) and Sec. 1.411(c)-1(c)(4)) to be made by the employee for
such year, if the employee does not participate for such year solely
because of his failure to make all mandatory contributions to the plan
for such year. If the employee contributes any part of the mandatory
contributions for the year, such year may not be excluded by reason of
this subparagraph. In the case of a plan utilizing the elapsed time
method described in Sec. 1.410(a)-7, the service which may be
disregarded is the period with respect to which the mandatory
contribution is not made.
(3) Plan not maintained--(i) In general. An employee's years of
service with an employer during any period for which the employer did
not maintain the plan or a predecessor plan may be disregarded for
purposes of section 411(a)(2). Paragraph (b)(3)(ii) of this section
provides rules regarding the period prior to the adoption of a plan.
Paragraph (b)(3)(iii) of this section provides rules regarding the
period after the termination of a plan. Paragraph (b)(3)(iv) of this
section provides rules regarding employers who have certain
relationships with other employers maintaining the plan.
(ii) Period prior to adoption. The period for which a plan is not
maintained by an employer includes the period before the plan was
established. For purposes of this subdivision, a plan is established on
the first day of the plan
[[Page 529]]
year in which the plan is adopted even though the plan is adopted after
such first day. Except as provided in paragraph (b)(3)(iv) of this
section if an employer adopts a plan which has previously been
established by another employer or group of employers, the plan is not
maintained by the adopting employer prior to the first day of the plan
year in which the plan is adopted by the adopting employer. In the case
of a transfer of assets or liabilities (including a merger or
consolidation) involving two plans maintained by a single employer, the
successor (or transferee) plan is treated as if it was established at
the same time as the date of the establishment of the earliest component
plan. In the case of a plan merger, consolidation, or transfer of plan
assets or liabilities involving plans of two or more employers, the
successor plan is treated as if it were established on each of the
separate dates on which such component plan was established for the
employees of each employer. Thus, for example, if employer A establishes
a plan January 1, 1970, and employer B establishes a plan January 1,
1980, and the plans were subsequently merged, then the merged plan would
be treated as if it were in existence on January 1, 1970, with respect
to A's employees and as if it were in existence on January 1, 1980, with
respect to B's employees.
(iii) Period after termination or withdrawal. The period for which a
plan is not maintained by an employer includes the period after the plan
is terminated. For purposes of this section, a plan is terminated at the
date there is a termination of the plan within the meaning of section
411(d)(3)(A) and the regulations thereunder. Notwithstanding the
preceding sentence, if contributions to or under a plan are made after
termination, the plan is treated as being maintained until such
contributions cease, whether or not accruals are made after such
termination. If, after termination of a plan in circumstances under
which the employer may be liable to the Pension Benefit Guaranty
Corporation under section 4062 of the Act, employer contributions are
made to or under the plan to fund benefits accrued at the time of
termination, such contributions shall, for purposes of this paragraph,
be deemed to be payments in satisfaction of employer liability to such
Corporation rather than contributions to or under the plan. In the case
of a plan maintained by more than one employer, the period for which the
plan is not maintained by the withdrawing employer includes the period
after the withdrawal from the plan.
(iv) Certain employers. For purposes of this subparagraph--
(A) Predecessor employers. Service with a predecessor employer who
maintained the plan of the current employer is treated as service with
such current employer (see section 414(a)(1) and the regulations
thereunder), and certain service with a predecessor employer who did not
maintain the plan of the current employer is treated as service with the
current employer (see section 414(a)(2) and the regulations thereunder).
(B) Related employers. Service with an employer is treated as
service for certain related employers for the period during which the
employers are related. These related employers include members of a
controlled group of corporations (within the meaning of section 1563(a),
determined without regard to subsections (a)(4) and (e)(3) (C) thereof)
and trades or businesses (whether or not incorporated) which are under
common control (see section 414 (b) and (c) and 29 CFR Part 2530,
Department of Labor regulations relating to minimum standards for
employee pension benefits plans).
(C) Plan maintained by more than one employer. Service with an
employer who maintains a plan is treated as service for each other
employer who maintains that plan for the period during which the
employers are maintaining the plan (see section 413 (b)(4) and (c)(3)
and 29 CFR Part 2530, Department of Labor regulations relating to
minimum standards for employee pension benefit plans).
(v) Predecessor plan--(A) General rule. In the case of an employee
who was covered by a predecessor plan, the time the successor of such
plan is maintained for such employee includes the time the predecessor
plan was maintained if, as of the later of the time the predecessor plan
is terminated or the
[[Page 530]]
successor plan is established, the employee's years of service under the
predecessor plan are not equalled or exceeded by the aggregate number of
consecutive 1-year breaks in service occuring after such years of
service. Years of service and breaks in service, without regard to
whether the employee has nonforfeitable rights under the predecessor
plan, are determined under section 411(a) (5) and (6) except that years
between the termination date of the predecessor plan and the date of
establishment of the successor plan do not count as years of service.
(B) Definition of predecessor plan. For purposes of this section,
if--
(1) An employer establishes a retirement plan (within the meaning of
section 7476(d)) qualified under subchapter D of chapter 1 of the Code
within the 5-year period immediately preceding or following the date
another such plan terminates, and
(2) The other plan is terminated during a plan year to which this
section applies.
The terminated plan is a predecessor plan with respect to such other
plan.
(C) Example. The rules provided by this subparagraph are illustrated
by the following example:
Example. (1) Employer X's qualified plan A terminated on January 1,
1977, Employer X established qualified plan B on January 1, 1981. Under
paragraph (b)(3)(v)(B) of this section, plan A is a predecessor plan
with respect to plan B because plan B is established within the 5-year
period immediately following the date plan A terminated.
(2) Employee C was not covered by the A plan. Under the general rule
in subdivision (v)(A) of this subparagraph, plan B is not maintained
until January 1, 1981, with respect to Employee C.
(3) Employee D was covered by the A plan. On December 31, 1976, D
had 4 years of service. D had 4 consecutive 1-year breaks in service
because, during the years between the termination of plan A and the
establishment of plan B, he did not have more than 500 hours of service
in any applicable computation period. Because D's consecutive 1-year
breaks (4) equal his years of service prior to his breaks (4), plan B is
not maintained until January 1, 1981, with respect to employee D.
(4) Employee E was covered by the A plan. On December 31, 1975, E
had 6 years of service. E had a 1-year break in service in 1976. E also
had 4 consecutive 1-year breaks in service for the period between plan
A's termination and plan B's establishment. Because E's years of service
(6) are not less than his consecutive 1-year breaks (5), plan B is
maintained for E as of the establishment date of plan A.
(4) Break in service. A year of service which is not required to be
taken into account by reason of a break in service (within the meaning
of section 411(a)(6) and Sec. 1.411(a)-6)).
(5) Service before January 1, 1971. A year of service completed by
an employee prior to January 1, 1971, unless the employee completes at
least 3 years of service at any time after December 31, 1970. For
purposes of determining if an employee completes 3 years of service,
whether or not consecutive, the exceptions of section 411(a)(4) are not
applicable. For the meaning of the term ``year of service'', see
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530,
relating to minimum standards for employee pension benefit plans.
(6) Service before effective date. A year of service completed
before the first plan year for which this section applies to the plan,
if such service would have been disregarded under the plan rules
relating to breaks in service (whether or not such rules are so
designated in the plan) as such rules were in effect from time to time
under the plan. For this purpose, plan rules which result in the loss of
prior vesting or benefit accruals of an employee, or which deny an
employee eligibility to participate, by reason of separation or failure
to complete a required period of service within a specified priod of
time (e.g., 300 hours in one year) will be considered break in service
rules See Sec. 1.411(a)-9 for requirements relating to certain
amendments to the break in service rules of a plan.
(i) [Reserved]
(ii) Examples. The rules of this subparagraph are illustrated by the
following examples:
Example 1. The A plan in 1971 provides for immediate participation
and vesting at normal retirement age. Employees accrue a unit benefit
based on their compensation in each year. The plan provides that if an
employee is not employed on the last day of the calendar year, he loses
all accrued benefits. The requirement of employment on the last day of
the year is a break in service rule because employees can lose benefits
by reason of
[[Page 531]]
their separation. Accordingly, in the case of employees who separate and
do not return by the close of the year, service which is completed prior
to separation may be disregarded.
Example 2. The B plan in 1971 excludes from plan participation
employees who work less than 1,200 hours per year. Because years of less
than 1,200 hours are not taken into account under the B plan for
eligibility to participate, such years are excluded under rules relating
to breaks in service. Therefore, the years can be disregarded under this
subparagraph.
Example 3. The C plan in 1971 provides for immediate participation
and provides accruals and vesting credit for 1,200 hours or more in a
given year. The plan provides that if a participant works less than 300
hours in a given year, he loses all prior vesting and benefit credits.
The 300 hour rule is a break in service rule because the failure to
complete 300 hours results in the loss of vesting and prior service
credit. The 1,200 hour requirement is not a break in service rule
because even though employees do not increase vesting or accrue benefits
for service between 300 and 1,200 hours, they cannot lose prior vesting
or benefits for such service. Accordingly, the C plan can disregard
completed years only on account of less than 300 hours of service by an
employee.
(c) Special continuity rule for certain plans. For special rules for
computing years of service in the case of a plan maintained by more than
one employer, see 29 CFR Part 2530 (Department of Labor regulations
relating to minimum standards for employee pension benefit plans).
(Sec. 411 (88 Stat. 901, 26 U.S.C. 411))
[T.D. 7501, 42 FR 42327, Aug. 23, 1977, as amended by T.D. 7703, 45 FR
40985, June 17, 1980]
Sec. 1.411(a)-6 Year of service; hours of service; breaks in service.
(a) Year of service. Under section 411 (a)(5)(A), for purposes of
the regulations thereunder, the term ``year of service'' is defined in
regulations prescribed by the Secretary of Labor under section
203(b)(2)(A) of the Employee Retirement Income Security Act of 1974. For
special rules applicable to seasonal industries and maritime industries,
see regulations prescribed by the Secretary of Labor under subparagraphs
(C) and (D) of section 203(b)(2) of the Employee Retirement Income
Security Act of 1974.
(b) Hours of service. Under section 411(a)(5)(B), for purposes of
the regulations thereunder, the term ``hours of service'' has the
meaning provided by section 410(a)(3)(C). See regulations prescribed by
the Secretary of Labor under 29 CFR Part 2530, relating to minimum
standards for employee pension benefit plans.
(c) Breaks in service. Under section 411(a)(6), for purposes of
Sec. 1.411(a)-5(b)(4) and of this paragraph--
(1) In general--(i) Year of service after 1-year break in service.
In the case of any employee who has incurred a 1-year break in service,
years of service completed before such break are not required to be
taken into account until the employee has completed one year of service
after his return to service.
(ii) Defined contribution plan. In the case of a participant in a
defined contribution plan or in an insured defined benefit plan (which
plan satisfies the requirements of section 411 (b)(1)(F) and
Sec. 1.411(b)-1) who has incurred a 1-year break in service, years of
service completed after such break are not required to be taken into
account for purposes of determining the nonforfeitable percentage of the
participant's right to employer-derived benefits which accrued before
such break. This subdivision does not permit years of service completed
before a 1-year break in service to be disregarded in determining the
nonforfeitable percentage of a participant's right to employer-derived
benefits which accrue after such break.
(iii) Nonvested participants. In the case of an employee who is a
nonvested participant in employer-derived benefits at the time he incurs
a 1-year break in service, years of service completed by such
participant before such break are not required to be taken into account
for purposes of determining the nonforfeitable percentage of his right
to employer-derived benefits if at such time the number of consecutive
1-year breaks in service included in his most recent break in service
equals or exceeds the aggregate number of his years of service, whether
or not consecutive, completed before such break. In the case of a plan
utilizing the elapsed time method described in
[[Page 532]]
Sec. 1.410(a)-7, the condition in the preceding sentence shall be
satisfied if the period of severance is at least one year and the
consecutive period of severance equals or exceeds his prior period of
service, whether or not consecutive, completed before such period of
severance. In computing the aggregate number of years of service prior
to such break, years of service which could have been disregarded under
this subdivision by reason of any prior break in service may be
disregarded.
(2) One-year break in service defined. The term ``1-year break in
service'' means a calendar year, plan year, or other 12-consecutive
month period designated by a plan (and not prohibited under regulations
prescribed by the Secretary of Labor) during which the participant has
not completed more than 500 hours of service. In the case of a plan
utilizing the elapsed time method, the term ``1-year break in service''
means a 12-consecutive month period beginning on the severance from
service date or any anniversary thereof and ending on the next
succeeding anniversary of such date; provided, however, that the
employee during such 12-consecutive-month period does not complete any
hours of service within the meaning of 29 CFR Part 2530.200b-2(a) for
the employer or employers maintaining the plan. See regulations
prescribed by the Secretary of Labor under 29 CFR Part 2530, relating to
minimum standards for employee pension benefit plans.
(d) Examples. The rules provided by this section are illustrated by
the following examples:
Example (1). (i) X Corporation maintains a defined contribution plan
to which section 411 applies. The plan uses the calendar year as the
vesting computation period. In 1980, Employee A, who was hired at age
35, separates from the service of X Corporation after completing 4 years
of service. At the time of his separation, Employee A had a
nonforfeitable right to 25 percent of his employer-derived accrued
benefit which was not distributed. In 1985, after incurring 5
consecutive one-year breaks in service. Employee A is re-employed by X
Corporation and becomes an active participant in the plan. The plan
provides that, for 1985 and all subsequent years, Employee A's previous
years of service will not be taken into account for purposes of
computing the nonforfeitable percentage of his employer-derived accrued
benefit, solely because of his break in service.
(ii) The plan fails to satisfy section 411. Section 411(a)(6)(B)
would permit the plan to disregard Employee A's prior service for
purposes of computing his nonforfeitable percentage in 1985 only, but
such service must be taken into account in subsequent years unless there
is another break in service. Under section 411(a)(6)(C), the plan is not
required to take Employee A's post-break service into account for
purposes of computing his nonforfeitable right to his prebreak employer-
derived accrued benefits. This provision, however, would not permit the
plan to disregard pre-break service in determining his nonforfeitable
right to his benefit accrued after the break. The exception provided by
section 411(a)(6)(D) does not apply in the case of a participant who has
any nonforfeitable right to his accrued benefit derived from employer
contributions.
Example (2). (i) X Corporation maintains a qualified plan to which
sections 410 and 411 (relating to minimum participation standards and
minimum vesting standards, respectively) apply. The plan permits
participation upon completion of a year of service and provides that
100% of an employee's employer-derived accrued benefit vests after 10
years of service. The plan uses the calendar year as the vesting
computation period. The plan provides that an employee who completes at
least 1,000 hours of service in a 12-month period is credited with a
year of service for participation and vesting purposes. The plan also
provides that an employee who does not complete more than 500 hours of
service in that 12-month period incurs a one-year break in service. The
plan includes the rule described in section 411 (a)(6)(D) for
participation and vesting purposes. Under this rule, an employee's years
of service prior to a break in service may be disregarded under certain
circumstances if he has no vested right to any employer-derived benefit
under the plan. The plan does not contain the rule described in section
411(a)(6)(B) (relating to the requirement of one year of service after a
one-year break in service).
(ii) Employee A commences employment with the X Corporation on
January 1, 1977. Employee A's employment history for 1977 through 1989
is as follows:
------------------------------------------------------------------------
Hours of
Year ending December 31 service
completed
------------------------------------------------------------------------
1977....................................................... 1,000
1978....................................................... 800
1979....................................................... 1,000
1980....................................................... 400
1981....................................................... 1,000
1982....................................................... 0
1983....................................................... 400
1984....................................................... 1,000
1985....................................................... 0
1986....................................................... 0
[[Page 533]]
1987....................................................... 500
1988....................................................... 200
1989....................................................... 1,000
------------------------------------------------------------------------
Employee A's status as a participant during this period is determined as
follows:
1978: Employee A was a plan participant on January 1, 1978, because
he completed a year of service (1,000 hours) in 1977. He did not
complete a year of service in 1978 because he completed fewer than 1,000
hours in that year. Because he completed more than 500 hours of service
in 1978, however, Employee A did not incur a one-year break in service
that year.
1979: Employee A completes a year of service in 1979. Because he did
not incur a one-year break in service in 1978, the plan may not
disregard his 1977 service for purposes of determining his years of
service as of January 1, 1979.
1980: Employee A incurs a one-year break in service in 1980.
1981: Because Employee A had completed 2 years of service prior to
1981 and had incurred one 1-year break in service prior to 1981, under
section 411(a)(6)(D), the plan may not disregard his pre-1980 service in
1981. Employee A completes a year of service in 1981.
1982: Employee A incurs a one-year break in service in 1982.
1983: Employee A incurs a one-year break in service in 1983. As of
the end of 1983, he has completed 3 years of service and has incurred 2
consecutive one-year breaks in service.
1984: Employee A completes a year of service in 1984. Under section
411(a)(6)(D), his pre-1982 service may not be disregarded in 1984
because, as of the beginning of 1984, his pre-1984 years of service (3)
exceed his consecutive one-year breaks in service (2).
1984-1988: Employee A incurs 4 consecutive one-year breaks in
service during the years 1985 through 1988.
1989: Employee A's pre-1989 service is disregarded in 1989 and all
subsequent plan years because his years of service as of January 1,
1989, equal the number of consecutive one-year breaks he has incurred as
of that date. Therefore, as of the beginning of 1989, Employee A is not
a plan participant. Employee A completes a year of service in 1989.
(Although section 411(a)(6)(D) does not prohibit the plan provision
under which Employee A's pre-1989 service is disregarded, that section
does not require such a provision in a qualified plan.)
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42329, Aug. 23, 1977, as amended by T.D. 7703, 45 FR
40985, June 17, 1980]
Sec. 1.411(a)-7 Definitions and special rules.
(a) Accrued benefit. For purposes of section 411 and the regulations
thereunder, the term ``accrued benefit'' means--
(1) Defined benefit plan. In the case of a defined benefit plan--
(i) If the plan provides an accrued benefit in the form of an annual
benefit commencing at normal retirement age, such accrued benefit, or
(ii) If the plan does not provide an accured benefit in the form
described in subdivision (i) of this subparagraph, an annual benefit
commencing at normal retirement age which is the actuarial equivalent
(determined under section 411(c)(3) and Sec. 1.411(c)-(5) of the accrued
benefit determined under the plan. In general, the term ``accrued
benefits'' refers only to pension or retirement benefits. Consequently,
accrued benefits do not include ancillary benefits not directly related
to retirement benefits such as payment of medical expenses (or insurance
premiums for such expenses), disability benefits not in excess of the
qualified disability benefit (see section 411(a)(9) and paragraph (c)(3)
of this section), life insurance benefits payable as a lump sum,
incidental death benefits, current life insurance protection, or medical
benefits described in section 401(h). For purposes of this paragraph a
subsidized early retirement benefit which is provided by a plan is not
taken into account, except to the extent of determining the normal
retirement benefit under the plan (see section 411(a)(9) and paragraph
(c) of this section). The accrued benefit includes any optional
settlement at normal retirement age under actuarial assumptions no less
favorable than those which would be applied if the employee were
terminating his employment at normal retirement age. The accrued benefit
does not include any subsidized value in a joint and survivor annuity to
the extent that the annual benefit of the joint and survivor annuity
does not exceed the annual benefit of a single life annuity.
(2) Defined contribution plan. In the case of a defined contribution
plan, the balance of the employee's account held under the plan.
[[Page 534]]
(b) Normal retirement age--(1) General rule. For the purposes of
section 411 and the regulations thereunder, the term ``normal retirement
age'' means the earlier of--
(i) The time specified by a plan at which a plan participant attains
normal retirement age, or
(ii) The later of--
(A) The time the plan participant attains age 65, or
(B) The 10th anniversary of the date the plan participant commences
participation in the plan.
If a plan, or the employer sponsoring the plan, imposes a requirement
that an employee retire upon reaching a certain age, the normal
retirement age may not exceed that mandatory retirement age. The
preceding sentence will apply if the employer consistently enforces a
mandatory retirement age rule, whether or not set forth in the plan or
any related document. For purposes of subdivision (i) of this
subparagraph, if an age is not specified by a plan as the normal
retirement age then the normal retirement age under the plan is the
earliest age beyond which the participant's benefits under the plan are
not greater solely on account of his age or service. For purposes of
paragraph (b)(1)(ii)(B) of this section, participation commences on the
first day of the first year in which the participant commenced his
participation in the plan, except that years which may be disregarded
under section 410(a)(5)(D) may be disregarded in determining when
participation commenced.
(2) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A defines normal retirement age as age 65. Under
the plan, benefits payable to participants who retire at or after age 60
are not reduced on account of early retirement. For purposes of section
411 and the vesting regulations, normal retirement age under Plan A is
age 65 (determined under subparagraph (1)(i) of this paragraph). This is
true even if in operation all participants retire at age 60.
Example (2). Plan B does not specify any age as the normal
retirement age. Under the plan, participants who have attained age 55
are entitled to benefits commencing upon retirement but the benefits of
participants who retire before attaining age 70 are subject to reduction
on account of early retirement. For purposes of section 411 and the
vesting regulations the normal retirement age under Plan B is the later
of (i) age 65, or (ii) the 10th anniversary of the date a plan
participant commences participation in the plan (assuming such date is
prior to age 70).
Example (3). The facts are the same as in example (2). Employee X
first became a participant in Plan B on January 1, 1980 at age 53. His
participation continued until December 31, 1980, when he separated from
the service with no vested benefits. After incurring 5 consecutive 1-
year breaks in service, Employee X again becomes an employee and a plan
participant on January 1, 1986, at age 59. For purposes of section 411,
Employee X's normal retirement age under Plan B is age 69, the 10th
anniversary of the date on which his year of plan participation
commenced. His participation in 1980 may be disregarded under the last
sentence of paragraph (b)(1) of this section.
(c) Normal retirement benefit--(1) In general. For purposes of
section 411 and the regulations thereunder, the term ``normal retirement
benefit'' means the periodic benefit under the plan commencing upon
early retirement (if any) or at normal retirement age, whichever benefit
is greater.
(2) Periodic benefit. For purposes of subparagraph (1) of this
paragraph--
(i) In the case of a plan under which a benefit is payable as an
annuity in the same form upon early retirement and at normal retirement
age, the greater benefit is determined by comparing the amount of such
annuity payments.
(ii) In the case of a plan under which an annuity benefit payable
upon early retirement is not in the same form as an annuity benefit
payable at normal retirement age, the greater benefit is determined by
converting the annuity benefit payable upon early retirement age into
the same form of annuity benefit as is payable at normal retirement age
and by comparing the amount of the converted early retirement benefit
payment with the amount of the normal retirement benefit payment.
(iii) In the case of a plan which is integrated with the Social
Security Act or any other Federal or State law, the periodic benefit
payable upon and after early retirement age is adjusted for any
increases in such benefits occurring on or after early retirement age
which are taken into account under the
[[Page 535]]
plan. See however, section 401(a)(15) and the regulations thereunder.
(3) Benefits included. For purposes of this paragraph, the normal
retirement benefit under a plan shall be determined without regard to
ancillary benefits not directly related to retirement benefits such as
medical benefits or disability benefits not in excess of the qualified
disability benefit; see section 411(a)(7) and paragraph (a)(1) of this
section. For this purpose, a qualified disability benefit is a
disability benefit which is not in excess of the amount of the benefit
which would be payable to the participant if he separated from service
at normal retirement age.
(4) Early retirement benefit; social security supplement. (i) For
purposes of this paragraph, the early retirement benefit under a plan
shall be determined without regard to any social security supplement.
(ii) For purposes of this subparagraph, a social security supplement
is a benefit for plan participants which--
(A) Commences before the age and terminates before the age when
participants are entitled to old-age insurance benefits, unreduced on
account of age, under title II of the Social Security Act, as amended
(see section 202 (a) and (g) of such Act), and
(B) Does not exceed such old-age insurance benefit.
(5) Special limitation. If a defined benefit plan bases its normal
retirement benefits on employee compensation, the compensation must
reflect the compensation which would have been paid for a full year of
participation within the meaning of section 411(b)(3). If an employee
works less than a full year of participation, the compensation used to
determine benefits under the plan for such year of participation must be
multiplied by the ratio of the number of hours for a complete year of
participation to the number of hours worked in such year. A plan whose
benefit formula is computed on a computation base which cannot decrease
is not required to adjust employee compensation in the manner described
in the previous sentence. Thus, for example, if a plan provided a
benefit based on an employee's compensation for his highest five
consecutive years or a separate benefit for each year of participation
based on the employee's compensation for such year the plan would not
have to so adjust compensation. However, if a plan provided a benefit
based on an employee's compensation for the employee's last five years
or the five highest consecutive years out of the last 10 years, the
compensation, would have to be so adjusted. For special rules for
applying the limitations on proration of a year of participation for
benefit accrual, see regulations prescribed by the Secretary of Labor
under 29 CFR Part 2530, relating to minimum standards for employee
pension benefit plans.
(6) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A provides for a benefit equal to 1% of high 5
years compensation for each year of service and a normal retirement age
of 65. The plan also provides for a full unreduced accrued benefit
without any actuarial reduction for any employee at age 55 with 30 years
of service. Even though the actuarial value of the early retirement
benefit could exceed the value of the benefit at the normal retirement
age, the normal retirement benefit would not include the greater value
of the early retirement benefit because actuarial subsidies are ignored.
Example (2). Plan B provides the following benefits: (1) at normal
retirement age 65, $300/mo. for life and (2) at early retirement age 60,
$400/mo. for life. The normal retirement benefit is $400/mo., the
greater of the benefit payable at normal retirement age ($300) or early
retirement ($400).
Example (3). Assume the same facts as example (2) except that the
early retirement benefit of $400 is reduced to $300 upon attainment of
age 65. If each employee's social security benefit at age 65 is not less
than $100, the $100 would be considered to be a social security
supplement and would therefore be ignored. Consequently, the normal
retirement benefit would be $300.
Example (4). Plan C provides a benefit at normal retirement age
equal to 1% per year of service, multiplied by the participant's
compensation averaged over the 5 years immediately prior to retirement.
An early retirement benefit is provided upon attainment of age 60 equal
to the benefit accrued to date of early retirement reduced by 4 percent
for each year by which the early retirement date precedes the normal
retirement age of 65. Employee A was hired at age 30, participated
immediately, and retired at age 65. Employee A's annual compensation was
$50,000 between ages 55-60 and was reduced to $33,000 after age 60. The
following table indicates the amount of annual benefit that
[[Page 536]]
would have been provided by the plan formula if the employee retired at
or after age 60:
------------------------------------------------------------------------
Final Percent
Age average accrued Reduction Annual
computated benefit benefit
------------------------------------------------------------------------
(1)-- (2)-- (3)-- (4)--
------------------------------------------------------------------------
60........................... $50,000 30 0.80 *$12,000
61........................... 46,600 31 .84 12,135
62........................... 43,200 32 .88 12,165
63........................... 39,800 33 .92 12,083
64........................... 36,400 34 .96 11,881
65........................... 33,000 35 1.00 11,550
Note.-- Col. (1) times col. (2) times col. (3) equals col. (4).
The normal retirement benefit is the greater of the benefit payable at
normal retirement age or the early retirment benefit. Employee A's
normal retirement benefit is $12,165, the greatest annual benefit
Employee A would be entitled to.
(d) Rules relating to certain distributions and cash-outs of accrued
benefits--(1) In general. This paragraph sets forth vesting rules
applicable to certain distributions from qualified plans and their
related trusts (other than class year plans). Subparagraphs (2) and (3)
set forth the exceptions to nonforfeitability on account of withdrawal
of mandatory contributions provided by section 411(a)(3)(D). When a plan
utilizes these exceptions with respect to a given participant's accrued
benefit, such accrued benefit is not subject to the cash-out rules or
vesting rules of subparagraphs (4) or (5), respectively. Section 411
prescribes certain requirements with respect to accrued benefits under a
qualified plan. These requirements would generally not be satisfied if
the plan disregarded service in computing accrued benefits even though
amounts were distributed on account of such service. Subparagraph (4) of
this paragraph sets forth rules under section 411(a)(7)(B) which allow a
plan to make distributions and compute accrued benefits without regard
to the accrued benefit attributable to the distribution. When a defined
contribution plan utilizes this exception with respect to an accrued
benefit, the plan is not required to satisfy the rules of subparagraph
(5) of this paragraph. Subparagraph (5) of this paragraph sets forth a
vesting requirement applicable to certain distributions from defined
contribution plans. Subparagraph (6) sets forth other rules which
pertain to the distribution rules of this paragraph.
(2) Withdrawal of mandatory contribution--(i) General rule. In the
case of a participant's right to his employer-derived accrued benefit, a
right is not treated as forfeitable merely because all or a portion of
such benefit may be forfeited on account of the withdrawal by the
participant of any amount attributable to his accrued benefit derived
from his mandatory contributions (within the meaning of section
411(c)(2)(C) and Sec. 1.411(c)-1) before he has become a 50 percent
vested participant (within the meaning of Sec. 1.401(a)-19(b)(2)). For
purposes of determining the vested percentage, the plan may disregard
service after the withdrawal. For example, assume that a plan utilizes
1000 hours for computing years of service and that for the computation
period employee A had 1000 hours of service. If A was 40 percent vested
at the beginning of the period but only had 800 hours at the time of the
withdrawal, the plan could treat A as only 40 percent vested because
service after the withdrawal can be disregarded. On the other hand, if A
had 1000 hours at the time of the withdrawal, he must receive a year of
service for the computation period, even though service is not taken
into account until the end of such period.
(ii) Plan repayment provision. (A) Subdivision (i) of this
subparagraph shall not apply unless, at the time the amount described in
such subdivision is withdrawn by the participant, the plan provides the
employee with a right to restoration of his employer-derived accrued
benefit to the extent forfeited in accordance with such subdivision upon
repayment to the plan of the full amount of the withdrawal.
(B) In the case of a defined benefit plan (as defined in section
414(j)) the restoration of the employee's employer-derived accrued
benefit may be conditioned upon repayment of interest on the full amount
of the distribution. Such interest shall be computed on the amount of
the distribution from the date of such distribution to the date of
repayment, compounded annually from the date of distribution, at the
rate determined under section 411(c)(2)(C) in
[[Page 537]]
effect on the date of repayment. A plan may provide for repayment of
interest which is less than the amount determined under the preceding
sentence.
(C) In the case of both defined benefit plans and defined
contribution plans, the plan repayment provision described in this
subparagraph may provide that the employee must repay the full amount of
the distribution in order to have the forfeited benefit restored. The
plan provision may not require that such repayment be made sooner than
the time described in paragraph (d)(2)(ii)(D) of this section.
(D)(1) If a distribution is on account of separation from service,
the time for repayment may not end before the earlier of--
(i) 5 years after the first day the employee is subsequently
employed, or
(ii) The close of the first period of consecutive 1-year breaks in
service commencing after the distribution.
If the distribution occurs for any other reason, the time for repayment
may not end earlier than 5 years after the date of distribution.
Nevertheless, a plan provision may provide for a longer period in which
the employee may repay. For example, a plan could allow repayments to be
made at any time before normal retirement age.
(2) In the case of a plan utilizing the elapsed time method,
described in Sec. 1.410(a)-7, the minimum time for repayment shall be
determined as in paragraph (d)(2)(ii)(D)(1) of this section except as
provided in this subdivision. The 5 consecutive 1-year break periods
shall be determined by substituting the term ``1-year period of
severance'' for the term ``1-year break in service''. Also, the
repayment period both commences and closes in a manner determined by the
Commissioner that is consistent with the rules in Sec. 1.410(a)-7 and
the substitution in section 411(a)(6) (C) and (D) of a 5-year break-in-
service rule for the former 1-year break-in-service rule.
(E) A defined benefit plan using the break-in-service rule described
in section 410(a)(5)(D) or a defined contribution plan using the break-
in-service rule described in section 411(a)(6)(C) for determining
employees' accrued benefits is not required to provide for repayment by
an employee whose accrued benefit is disregarded by reason of a plan
provision using these rules.
(iii) Computation of benefit. In the case of a defined contribution
plan, the employer-derived accrued benefit required to be restored by
this subparagraph shall not be less than the amount in the account
balance of the employee which was forfeited, unadjusted by any
subsequent gains or losses.
(iv) Delayed forfeiture. A defined contribution plan may, in lieu of
the forfeiture and restoration described in this subparagraph, provide
that the forfeiture does not occur until the expiration of the time for
repayment described in subdivision (ii) of this subparagraph provided
that the conditions of this subparagraph are satisfied.
(3) Withdrawal of mandatory contributions; accruals before September
2, 1974--(i) General rule. In the case of a participant's right to the
portion of the employer-derived benefit which accrued prior to September
2, 1974, a right is not treated as forfeitable merely because all or
part of such portion may be forfeited on account of the withdrawal by
the participant of an amount attributable to his benefit derived from
mandatory contributions (within the meaning of section 411(c)(2)(C) and
Sec. 1.411(c)-1(c)(4)) made by the participant before September 2, 1974,
if the amount so subject to forfeiture is no more than proportional to
such amounts withdrawn. This subparagraph shall not apply to any plan to
which any mandatory contribution (within the meaning of section
411(c)(2)(C) and Sec. 1.411(c)-1(c)(4)) is made after September 2, 1974.
(ii) Defined contribution plan. In the case of a defined
contribution plan, the portion of a participant's employer-derived
benefit which accrued prior to September 2, 1974, shall be determined on
the basis of a separate accounting between benefits accruing before and
after such date. Gains, losses, withdrawals, forfeitures, and other
credits or charges must be separately allocated to such benefits. Any
allocation made on a reasonable and consistent basis prior to September
1, 1977, shall satisfy the requirements of this subdivision.
[[Page 538]]
(iii) Defined benefit plan. In the case of a defined benefit plan,
the portion of a participant's employer-derived benefit which accrued
prior to September 2, 1974, shall be determined in a manner consistent
with the determination of an accrued benefit under section 411(b)(1)(D)
(see Sec. 1.411(b)-1(c)). Any method of determining such accrued benefit
which the Commissioner finds to be reasonable shall satisfy the
requirements of this subdivision.
(4) Certain cash-outs of accrued benefits--(i) Involuntary cash-
outs. For purposes of determining an employee's right to an accrued
benefit derived from employer contributions under a plan, the plan may
disregard service performed by the employee with respect to which--
(A) The employee receives a distribution of the present value of his
entire nonforfeitable benefit at the time of the distribution;
(B) The requirements of section 411(a)(11) are satisfied at the time
of the distribution;
(C) The distribution is made due to the termination of the
employee's participation in the plan; and
(D) The plan has a repayment provision which satisfies the
requirements of paragraph (d)(4)(iv) of this section in effect at the
time of the distribution.
(ii) Voluntary cash-outs. For purposes of determining an employee's
accrued benefit derived from employer contributions under a plan, the
plan may disregard service performed by the employee with respect to
which--
(A) The employee receives a distribution of the present value of his
nonforfeitable benefit attributable to such service at the time of such
distribution,
(B) The employee voluntarily elects to receive such distribution,
(C) The distribution is made on termination of the employee's
participation in the plan, and
(D) The plan has a repayment provision in effect at the time of the
distribution which satisfies the requirements of subdivision (iv) of
this subparagraph.
A distribution shall be deemed to be made on termination of
participation in the plan if it is made not later than the close of the
second plan year following the plan year in which such termination
occurs. For purposes of determining the nonforfeitable benefit, the plan
may disregard service after the distribution as illustrated in
subparagraph (2)(i) of this subparagraph.
(iii) Disregard of service. Service of an employee permitted to be
disregarded under subdivision (i) or (ii) of the subparagraph is not
required to be taken into account in computing the employee's accrued
benefit under the plan. In the case of a voluntary distribution
described in subdivision (ii) of this subparagraph which is less than
the present value of the employee's total nonforfeitable benefit
immediately prior to the distribution, the accrued benefit not required
to be taken into account is such total accrued benefit multiplied by a
fraction, the numerator of which is the amount of the distribution and
the denominator of which is the present value of his total
nonforfeitable benefit immediately prior to such distribution. For
example, A who is 50 percent vested in an account balance of $1,000
receives a voluntary distribution of $250. The accrued benefit which can
be disregarded equals $1,000 times $250/$500, or $500. However, such
service may not by reason of this paragraph be disregarded for purposes
of determining an employee's years of service under sections 410(a)(3)
and 411(a)(4).
(iv) Plan repayment provision. (A) A plan repayment provision
satisfies the requirements of this subdivision if, under the provision,
the accrued benefit of an employee that is disregarded by a plan under
this subparagraph is restored upon repayment to the plan by the employee
of the full amount of the distribution. An accrued benefit is not
restored unless all of the optional forms of benefit and subsidies
relating to such benefit are also restored. A plan is not required to
provide for repayment of an accrued benefit unless the employee--
(1) Received a distribution that is in a plan year to which section
411 applies (see Sec. 1.411(a)-2), which distribution is less than the
amount of his accrued benefit determined under the same optional form of
benefit as the distribution was made, and
[[Page 539]]
(2) Resumes employment covered under the plan.
(B) Example. Plan A provides a single sum distribution equal to the
present value of the normal form of the accrued benefit payable at
normal retirement age which is a single life annuity. Plan A also
provides a subsidized joint and survivor annuity and a subsidized early
retirement annuity benefit. A participant who is fully vested and
receives a single sum distribution equal to the present value of the
single life annuity normal retirement benefit is not required to be
provided the right under the plan to repay the distribution upon
subsequent reemployment even though the participant received a
distribution that did not reflect the value of the subsidy in the joint
and survivor annuity or the value of the early retirement annuity
subsidy. This is true whether or not the participant had satisfied at
the time of the distribution all of the conditions necessary to receive
the subsidies. However, if a participant does not receive his total
accrued benefit in the optional form of benefit under which his benefit
was distributed, the plan must provide for repayment. If the employee
repays the distribution in accordance with section 411(a)(7), the plan
must restore the employee's accrued benefit which would include the
right to receive the subsidized joint and survivor annuity and the
subsidized early retirement annuity benefit.
(C) A plan may impose the same conditions on repayments for the
restoration of employer-derived accrued benefits that are allowed as
conditions for restoration of employer-derived accrued benefits upon
repayment of mandatory contributions under paragraphs (d)(2)(ii) (B),
(C), (D) and (E) of this section.
(v) In the case of a defined contribution plan, the employer-derived
accrued benefit required to be restored by this subparagraph shall not
be less than the amount in the account balance of the employee, both the
amount distributed and the amount forfeited, unadjusted by any
subsequent gains or losses. Thus, for example, if an employee received a
distribution of $250 when he was 25 percent vested in an account balance
of $1,000, upon repayment of $250 the account balance may not be less
than $1,000 even if, because of plan losses, the account balance, if not
distributed, would have been reduced to $500.
(vi) For purposes of paragraph (d)(4)(i) of this section, a
distribution shall be deemed to be made due to the termination of an
employee's participation in the plan if it is made no later than the
close of the second plan year following the plan year in which such
termination occurs, or if such distribution would have been made under
the plan by the close of such second plan year but for the fact that the
present value of the nonforfeitable accrued benefit then exceeded the
cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii). For purposes
of determining the entire nonforfeitable benefit, the plan may disregard
service after the distribution, as illustrated in paragraph (d)(2)(i) of
this section.
(vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this section
apply to distributions made on or after March 22, 1999. However, an
employer is permitted to apply paragraphs (d)(4)(i) and (vi) of this
section to plan years beginning on or after August 6, 1997. Otherwise,
for distributions prior to March 22, 1999, Secs. 1.411(a)-7 and
1.411(a)-7T, in effect prior to October 17, 2000 (as contained in 26 CFR
part 1, revised as of April 1, 2000) apply.
(5) Vesting requirement for defined contribution plans--(i)
Application. The requirements of this subparagraph apply to a defined
contribution plan which makes distributions to employees from their
accounts attributable to employer contributions at a time when--
(A) Employees are less than 100 percent vested in such accounts, and
(B) Under the plan, employees can increase their percentage of
vesting in such accounts after the distributions.
(ii) Requirements. In order for a plan, to which this subparagraph
applies, to satisfy the vesting requirements of section 411, account
balances under the plan (with respect to which percentage vesting can
increase) must be computed in a manner which satisfies either
subdivision (iii) (A) or (B) of this subparagraph.
(iii) Permissible methods. A plan many provide for either of the
following methods, but not both, for computing account balances with
respect to which percentage vesting can increase and from which
distributions are made:
(A)(1) A separate account is established for the employee's interest
in the plan as of the time of the distribution, and
[[Page 540]]
(2) At any relevant time the employee's vested portion of the
separate account is not less than an amount (``X'') determined by the
formula: X=P(AB+(RxD))-(RxD). For purposes of applying the formula: P is
the vested percentage at the relevant time; AB is the account balance at
the relevant time; D is the amount of the distribution; R is the ratio
of the account balance at the relevant time to the account balance after
distribution; and the relevant time is the time at which, under the
plan, the vested percentage in the account cannot increase.
A plan is not required to provide for separate accounts provided that
account balances are maintained under a method that has the same effect
as under this subdivision.
(B) At any relevant time the employee's vested portion is not less
than an amount (``X'') determined by the formula: X=P(AB+D)-D. For
purposes of applying the formula, the terms have the same meaning as
under subdivision (iii)(A)(2) of this subparagraph.
(C) An application of the methods described in subdivisions (iii)
(A) and (B) of this subparagraph is illustrated by the following
examples:
Example (1). The X defined contribution plan uses the method
described in subdivision (iii)(A) of this subparagraph for computing
account balances and the break in service rule described in section
411(a)(6)(C) (service after a 1-year break does not increase the vesting
percentage in account balances accrued prior to the break). The plan
distributes $250 to A when A's account balance prior to the distribution
equals $1,000 and he is 25 percent vested. At the time of the
distribution, A has not incurred a 1-year break so that his vesting
percentage can increase. Six years later, when A is 60 percent vested,
he incurs a 1-year break so that his vesting percentage cannot increase.
At this time his separate account balance equals $1,500. R=$1,500/$750
or 2. A's separate account must equal 60 percent ($1,500+(2x$250))-
(2x$250) or 60 percent ($1,500+$500)-$500, or $1,200-$500 equals $700.
Example (2). The Y defined contribution plan uses the method
descirbed in subdivision (iii)(B) of this subparagraph for computing
account balances and the break in service rule described in section
411(a)(6)(C). The plan distributes $250 to B when B's account balance
prior to the distribution equals $1,000 and he is 25 percent vested. At
the time of the distribution, B has not incurred a 1-year break so that
his vesting percentage can increase. Six years later, when A is 60
percent vested, he incurs a 1-year break so that his vesting percentage
cannot increase. At this time his account balance equals $1,500. B's
separate account must equal 60 percent ($1,500+$250)-$250, 60% of
$1,750-$250 equals $800.
(6) Other rules--(i) Distributions on separation or other event.
None of the rules of this paragraph preclude distributions to employees
upon separation from service or any other event recognized by the plan
for commencing distributions. Such a distribution must, of course,
satisfy the applicable qualification requirements pertaining to such
distributions. For example, a profitsharing plan could pay the vested
portion of an account balance to an employee when he separated from
service, but in order to satisfy section 411 the plan might not be able
to forfeit the nonvested account balance until the employee has a 1-year
break in service. Similarly, the fact that a plan cannot disregard an
accrued benefit attributable to service for which an employee has
received a distribution because the plan does not satisfy the cash-out
requirements of subparagraph (4) of this paragraph does not mean that
the employee's accrued benefit (computed by taking into account such
service) cannot be offset by the accrued benefit attributable to the
distribution.
(ii) Joint and survivor requirements. See Sec. 1.401(a)-11(a)(2)
(relating to joint and survivor annuities) for special rules applicable
to certain distributions described in this paragraph.
(iii) Plan repayments. (A) Under subparagraphs (2) and (4) of this
paragraph, a plan may be required to restore accrued benefits in the
event of repayment by an employee.
(B) For purposes of applying the limitations of section 415 (c) and
(e), in the case of a defined contribution plan, the repayment by the
employee and the restoration by the employer shall not be treated as
annual additions.
(C) In the case of a defined contribution plan, the permissible
sources for restoration of the accrued benefit are: income or gain to
the plan, forfeitures, or employer contributions. Notwithstanding the
provisions of Sec. 1.401-1(b)(1)(ii), contributions may be made for such
an accrued benefit by a profit-
[[Page 541]]
sharing plan even though there are no profits. In order for such a plan
to be qualified, account balances (accrued benefits) generally must
correspond to assets in the plan. Accordingly, there cannot be an
unfunded account balance. However, an account balance will not be deemed
to be unfunded in the case of a restoration if assets for the restored
benefit are provided by the end of the plan year following the plan year
in which the repayment occurs.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42329, Aug. 23, 1977, as amended by T.D. 8038, 50 FR
29374, July 19, 1985; T.D. 8219, 53 FR 31852, Aug. 22, 1988; 53 FR
48534, Dec. 1, 1988; T.D. 8794, 63 FR 70337, Dec. 21, 1998; T.D. 8891,
65 FR 44681, July 19, 2000]
Sec. 1.411(a)-8 Changes in vesting schedule.
(a) Requirement of prior schedule. Under section 411(a)(10)(A), for
plan years for which section 411 applies, a plan will be treated as not
meeting the minimum vesting standards of section 411(a)(2) if the plan
does not satisfy the requirements of this paragraph. If the vesting
schedule of a plan is amended, then as of the date such amendment is
adopted, the plan satisfies the requirements of this paragraph if, under
the plan as amended, in the case of an employee who is a participant on-
-
(1) The date the amendment is adopted, or
(2) The date the amendment is effective, if later.
The nonforfeitable percentage (determined as of such date) of such
employee's right to his employer-derived accrued benefit is not less
than his percentage computed under the plan without regard to such
amendment.
(b) Election of former schedule--(1) In general. Under section 411
(a)(10)(B), for plan years for which section 411 applies, if the vesting
schedule of a plan is amended, the plan will not be treated as meeting
the minimum vesting standards of section 411 (a)(2) unless the plan as
amended, provides that each participant whose nonforfeitable percentage
of his accrued benefit derived from employer contributions is determined
under such schedule, and who has completed at least 5 years of service
with the employer, may elect, during the election period, to have the
nonforfeitable percentage of his accrued benefit derived from employer
contributions determined without regard to such amendment.
Notwithstanding the preceding sentence, no election need be provided for
any participant whose nonforfeitable percentage under the plan, as
amended, at any time cannot be less than such percentage determined
without regard to such amendment.
(2) Election period. For purposes of subparagraph (1) of this
paragraph, the election period under the plan must begin no later than
the date the plan amendment is adopted and end no earlier than the
latest of the following dates:
(i) The date which is 60 days after the day the plan amendment is
adopted,
(ii) The date which is 60 days after the day the plan amendment
becomes effective, or
(iii) The date which is 60 days after the day the participant is
issued written notice of the plan amendment by the employer or plan
administrator.
(3) Service requirement. For purposes of subparagraph (1) of this
paragraph, a participant shall be considered to have completed 5 years
of service if such participant has completed 5 years of service, whether
or not consecutive, without regard to the exceptions of section
411(a)(4) prior to the expiration of the election period described in
subparagraph (2) of this paragraph. For the meaning of the term ``year
of service'', see regulations prescribed by the Secretary of Labor under
29 CFR Part 2530, relating to minimum standards for employee pension
benefit plans.
(4) Election only by participant. The election described in
subparagraph (1) of this paragraph is available only to an individual
who is a participant in the plan at the time such election is made.
(5) Election may be irrevocable. A plan, as amended, shall not fail
to meet the minimum vesting standards of section 411(a)(2) by reason of
section 411(a)(10)(B) merely because such plan provides that the
election described in subparagraph (1) of this paragraph is irrevocable.
(6) Relationship with section 411(a)(2). The election described in
subparagraph
[[Page 542]]
(1) of this paragraph is available for a vesting schedule which does not
satisfy the requirements of section 411(a)(2) only if under such
schedule all participants have a 50 percent nonforfeitable right after
10 years of service, and a 100 percent nonforfeitable right after 15
years of service, in their employer-derived accrued benefit. If the
vesting schedule provides less vesting than the percentages required by
the preceding sentence, the plan can be amended to provide for such
vesting.
(c) Special rules--(1) Amendment of vesting schedule. For purposes
of this section, an amendment of a vesting schedule is each plan
amendment which directly or indirectly affects the computation of the
nonforfeitable percentage of employees' rights to employer-derived
accrued benefits. Consequently, such an amendment, for example, includes
each change in the plan which affects either the plan's computation of
years of service or of vesting percentages for years of service.
(2) Aggregation of amendments. All plan amendments which are: (i)
amendments of a vesting schedule within the meaning of subparagraph (1)
of this paragraph and (ii) adopted and effective at the same time, shall
be deemed to be a single amendment for purposes of applying the rules in
paragraphs (a) and (b) of this section.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42333, Aug. 23, 1977]
Sec. 1.411(a)-8T Changes in vesting schedule (temporary).
(a) [Reserved]
(b) Election of former schedule--(1) In general. Under section
411(a)(10)(B), for plan years for which section 411 applies, if the
vesting schedule of a plan is amended, the plan will not be treated as
meeting the minimum vesting standards of section 411(a)(2) unless the
plan as amended provides that each participant whose nonforfeitable
percentage of his accrued benefit derived from employer contributions is
determined under such schedule, and who has completed at least 3 years
of service with the employer, may elect, during the election period, to
have the nonforfeitable percentage of his accrued benefit derived from
employer contributions determined without regard to such amendment.
Notwithstanding the preceding sentence, no election need be provided for
any participant whose nonforfeitable percentage under the plan, as
amended, at any time cannot be less than such percentage determined
without regard to such amendment. For employees not described in
Sec. 1.411(a)-3T(e)(1), this section shall be applied by substituting
``5 years of service'' for ``3 years of service'' where such language
appears.
(2) Election period. For purposes of subparagraph (1) of this
paragraph, the election period under the plan must begin no later than
the date the plan amendment is adopted and end no earlier than the
latest of the following dates:
(i) The date which is 60 days after the day the plan amendment is
adopted,
(ii) The date which is 60 days after the day the plan amendment
becomes effective, or
(iii) The date which is 60 days after the day the participant is
issued written notice of the plan amendment by the employer or plan
administrator.
(3) Service requirement. For purposes of subparagraph (1) of this
paragraph, a participant shall be considered to have completed 3 years
of service if such participant has completed 3 years of service, whether
or not consecutive, without regard to the exceptions of section
411(a)(4) prior to the expiration of the election period described in
subparagraph (2) of this paragraph. For the meaning of the term ``year
of service'', see regulations prescribed by the Secretary of Labor under
29 CFR Part 2530, relating to minimum standards for employee pension
benefit plans.
[T.D. 8170, 53 FR 241, Jan. 6, 1988]
Sec. 1.411(a)-9 Amendment of break in service rules; transitional period.
(a) In general. Under section 1017(f)(2) of the Employee Retirement
Income Security Act of 1974, a plan is not a qualified plan (and a trust
forming a part of such plan is not a qualified trust) if the rules of
the plan relating to breaks in service are amended, and--
(1) Such amendment is effective after January 1, 1974, and before
the effective date of section 411, and
[[Page 543]]
(2) Under such amendment, the nonforfeitable percentage of any
employee's right to his employer-derived accrued benefit is less than
the lesser of the nonforfeitable percentage of such employee's right to
such benefit--
(i) Under the break in service rules provided by section 411(a)(6)
and Sec. 1.411(a)-6(c), or
(ii) The greatest such percentage under the plan as in effect on or
after January 1, 1974 (provided the break in service rules of the plan
were not in violation of any law or rule of law on January 1, 1974).
(b) Break in service rules. For purposes of paragraph (a), the term
``break in service rules'' means the rules provided by a plan relating
to circumstances under which a period of an employee's service or plan
participation is disregarded, for purposes of determining the extent to
which his rights to his accrued benefit under the plan are
unconditional, if under such rules such service is disregarded by reason
of the employee's failure to complete a required period of service
within a specified period of time. For this purpose, plan rules which
result in the loss of prior vesting or benefit accruals of an employee,
or which deny an employee eligibility to participate, by reason of
separation or failure to complete a required period of service within a
specified period of time (e.g., 300 hours in one year) will be
considered break in service rules. For purposes of section 411(b)(3),
service described under the plan's break in service rules, as in effect
before the effective date of section 411, need not be counted.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42333, Aug. 23, 1977]
Sec. 1.411(a)-11 Restriction and valuation of distributions.
(a) Scope--(1) In general. Section 411(a)(11) restricts the ability
of a plan to distribute any portion of a participant's accrued benefit
without the participant's consent. Section 411(a)(11) also restricts the
ability of defined benefit plans to distribute any portion of a
participant's accrued benefit in optional forms of benefit without
complying with specified valuation rules for determining the amount of
the distribution. If the consent requirements or the valuation rules of
this section are not satisfied, the plan fails to satisfy the
requirements of section 411(a).
(2) Accrued benefit. For purposes of this section, an accrued
benefit is valued taking into consideration the particular optional form
in which the benefit is to be distributed. The value of an accrued
benefit is the present value of the benefit in the distribution form
determined under the plan. For example, a plan that provides a
subsidized early retirement annuity benefit may specify that the
optional single sum distribution form of benefit available at early
retirement age is the present value of the subsidized early retirement
annuity benefit. In this case, the subsidized early retirement annuity
benefit must be used to apply the valuation requirements of this section
and the resulting amount of the single sum distribution. However, if a
plan that provides a subsidized early retirement annuity benefit
specifies that the single sum distribution benefit available at early
retirement age is the present value of the normal retirement annuity
benefit, then the normal retirement annuity benefit is used to apply the
valuation requirements of this section and the resulting amount of the
single sum distribution available at early retirement age.
(b) General consent rules. A plan must satisfy the participant
consent requirement with respect to the distribution of a participant's
nonforfeitable accrued benefit with a present value in excess of the
cash-out limit in effect under paragraph (c)(3)(ii) of this section. See
paragraphs (c) (3) and (4) for situations where no consent is required.
(c) Consent, etc. requirements--(1) General rule. If an accrued
benefit is immediately distributable, section 411(a)(11) permits plans
to provide for the distribution of any portion of a participant's
nonforfeitable accrued benefits only if the applicable consent
requirements are satisfied.
(2) Consent. (i) No consent is valid unless the participant has
received a general description of the material features of the optional
forms of benefit available under the plan. In addition,
[[Page 544]]
so long as a benefit is immediately distributable, a participant must be
informed of the right, if any, to defer receipt of the distribution.
Furthermore, consent is not valid if a significant detriment is imposed
under the plan on any participant who does not consent to a
distribution. Whether or not a significant detriment is imposed shall be
determined by the Commissioner by examining the particular facts and
circumstances.
(ii) Consent of the participant to the distribution must not be made
before the participant receives the notice of his or her rights
specified in this paragraph (c)(2) and must not be made more than 90
days before the date the distribution commences.
(iii) A plan must provide a participant with notice of the rights
specified in this paragraph (c)(2) at a time that satisfies either
paragraph (c)(2)(iii)(A) or (B) of this section:
(A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides
a participant with notice of the rights specified in this paragraph
(c)(2) no less than 30 days and no more than 90 days before the date the
distribution commences. However, if the participant, after having
received this notice, affirmatively elects a distribution, a plan will
not fail to satisfy the consent requirement of section 411(a)(11) merely
because the distribution commences less than 30 days after the notice
was provided to the participant, provided the plan administrator clearly
indicates to the participant that the participant has a right to at
least 30 days to consider whether to consent to the distribution.
(B) This paragraph (c)(2)(iii)(B) is satisfied if the plan--
(1) Provides the participant with notice of the rights specified in
this paragraph (c)(2);
(2) Provides the participant with a summary of the notice within the
time period described in paragraph (c)(2)(iii)(A) of this section; and
(3) If the participant so requests after receiving the summary
described in paragraph (c)(2)(iii)(B)(2) of this section, provides the
notice to the participant without charge and no less than 30 days before
the date the distribution commences, subject to the rules for the
participant's waiver of that 30-day period. The summary described in
paragraph (c)(2)(iii)(B)(2) of this section must advise the participant
of the right, if any, to defer receipt of the distribution, must set
forth a summary of the distribution options under the plan, must refer
the participant to the most recent version of the notice (and, in the
case of a notice provided in any document containing information in
addition to the notice, must identify that document and must provide a
reasonable indication of where the notice may be found in that document,
such as by index reference or by section heading), and must advise the
participant that, upon request, a copy of the notice will be provided
without charge.
(iv) For purposes of satisfying the requirements of this paragraph
(c)(2), the plan administrator may substitute the annuity starting date,
within the meaning of Sec. 1.401(a)-20, Q&A-10, for the date the
distribution commences.
(v) See Sec. 1.401(a)-20, Q&A-24 for a special rule applicable to
consents to plan loans.
(3) Cash-out limit. (i) Written consent of the participant is
required before the commencement of the distribution of any portion of
an accrued benefit if the present value of the nonforfeitable total
accrued benefit is greater than the cash-out limit in effect under
paragraph (c)(3)(ii) of this section on the date the distribution
commences. The consent requirements are deemed satisfied if such value
does not exceed the cash-out limit, and the plan may distribute such
portion to the participant as a single sum. Present value for this
purpose must be determined in the same manner as under section 417(e);
see Sec. 1.417(e)-1(d).
(ii) The cash-out limit in effect for a date is the amount described
in section 411(a)(11)(A) for the plan year that includes that date. The
cash-out limit in effect for dates in plan years beginning on or after
August 6, 1997, is $5,000. The cash-out limit in effect for dates in
plan years beginning before August 6, 1997, is $3,500.
(iii) Effective date. Paragraphs (c)(3)(i) and (ii) of this section
apply to distributions made on or after October 17, 2000. However, an
employer is permitted to apply the $5,000 cash-out limit described in
paragraph (c)(3)(ii) of
[[Page 545]]
this section to plan years beginning on or after August 6, 1997.
Otherwise, for distributions prior to October 17, 2000, Secs. 1.411(a)-
11 and 1.411(a)-11T in effect prior to October 17, 2000 (as contained in
26 CFR Part 1 revised as of April 1, 2000) apply.
(4) Immediately distributable. Participant consent is required for
any distribution while it is immediately distributable, i.e., prior to
the later of the time a participant has attained normal retirement age
(as defined in section 411(a)(8)) or age 62. Once a distribution is no
longer immediately distributable, a plan may distribute the benefit in
the form of a QJSA in the case of a benefit subject to section 417 or in
the normal form in other cases without consent.
(5) Death of participant. The consent requirements of section
411(a)(11) do not apply after the death of the participant.
(6) QDROs. The consent requirements of section 411(a)(11) do not
apply to payments to an alternate payee, defined in section 414(p)(8),
except as provided in a qualified domestic relations order pursuant to
section 414(p).
(7) Section 401(a)(9), etc. The consent requirements of section
411(a)(11) do not apply to the extent that a distribution is required to
satisfy the requirements of section 401(a)(9) or 415. See section
401(a)(9) and the regulations thereunder and Sec. 1.401(a)-20 Q&A 23 for
guidance on these requirements. Notwithstanding any provision to the
contrary in section 401(a)(14) or Sec. 1.401(a)-14, a plan may not
distribute a participant's nonforfeitable accrued benefit with a present
value in excess of the cash-out limit in effect under paragraph
(c)(3)(ii) of this section while the benefit is immediately
distributable unless the participant consents to such distribution. The
failure of a participant to consent is deemed to be an election to defer
commencement of payment of the benefit for purposes of section
401(a)(14) and Sec. 1.401(a)-14.
(8) Delegation to Commissioner. The Commissioner, in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin, may modify, or provide additional guidance with respect to,
the notice and consent requirements of this section. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(d) Distribution valuation requirements. In determining the present
value of any distribution of any accrued benefit from a defined benefit
plan, the plan must take into account specified valuation rules. For
this purpose, the valuation rules are the same valuation rules for
valuing distributions as set forth in section 417(e); see Sec. 1.417(e)-
1(d). This paragraph (d) applies both before and after the participant's
death regardless of whether the accrued benefit is immediately
distributable. This paragraph also applies whether or not the
participant's consent is required under paragraphs (b) and (c) of this
section.
(e) Special rules--(1) Plan termination. The requirements of this
section apply before, on and after a plan termination. If a defined
contribution plan terminates and the plan does not offer an annuity
option (purchased from a commercial provider), then the plan may
distribute a participant's accrued benefit without the participant's
consent. The preceding sentence does not apply if the employer, or any
entity within the same controlled group as the employer, maintains
another defined contribution plan, other than an employee stock
ownership plan (as defined in section 4975(e)(7)). In such a case, the
participant's accrued benefit may be transferred without the
participant's consent to the other plan if the participant does not
consent to an immediate distribution from the terminating plan. See
section 411(d)(6) and the regulations thereunder for other rules
applicable to transferee plans and plan terminations.
(2) ESOP dividends. The requirements of this section do not apply to
any distribution of dividends to which section 404(k) applies.
(3) Other rules. See Sec. 1.401(a)-20 Q&As 14, 17 and 24 for other
rules that apply to the section 411(a)(11) requirements.
(f) Medium for notice and consent--(1) Notice. The notice of a
participant's rights described in paragraph (c)(2) of this section or
the summary of that notice described in paragraph (c)(2)(iii)(B)(2) of
this section may be provided either on a written paper document or
through an electronic medium reasonably accessible to the participant. A
notice or summary provided
[[Page 546]]
through an electronic medium must be provided under a system that
satisfies the following requirements:
(i) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the participant than a
written paper document.
(ii) At the time the notice or summary is provided, the participant
must be advised that he or she may request and receive the notice on a
written paper document at no charge, and, upon request, that document
must be provided to the participant at no charge.
(2) Consent. The consent described in paragraphs (c)(2) and (3) of
this section may be given either on a written paper document or through
an electronic medium reasonably accessible to the participant. A consent
given through an electronic medium must be given under a system that
satisfies the following requirements:
(i) The system must be reasonably designed to preclude any
individual other than the participant from giving the consent.
(ii) The system must provide the participant with a reasonable
opportunity to review and to confirm, modify, or rescind the terms of
the distribution before the consent to the distribution becomes
effective.
(iii) The system must provide the participant, within a reasonable
time after the consent is given, a confirmation of the terms (including
the form) of the distribution either on a written paper document or
through an electronic medium under a system that satisfies the
requirements of paragraph (f)(1) of this section.
(g) Examples. The provisions of paragraph (f) of this section are
illustrated by the following examples:
Example 1. (i) A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A's system for such
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match that
in Plan A's records in order for the transaction to proceed. If a
participant requests a distribution from Plan A by e-mail, the plan
administrator provides the participant with a section 411(a)(11) notice
by e-mail. The plan administrator also advises the participant by e-mail
that he or she may request the section 411(a)(11) notice on a written
paper document and that, if the participant requests the notice on a
written paper document, it will be provided at no charge. To proceed
with the distribution by e-mail, the participant must acknowledge
receipt, review, and comprehension of the section 411(a)(11) notice and
must consent to the distribution within the time required under section
411(a)(11). Within a reasonable time after the participant's consent by
e-mail, the plan administrator, by e-mail, sends confirmation of the
terms (including the form) of the distribution to the participant and
advises the participant that he or she may request the confirmation on a
written paper document that will be provided at no charge.
(ii) In this Example 1, Plan A does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
Example 2. (i) Same facts as Example 1, except that, instead of
sending a confirmation of the distribution by e-mail, the plan
administrator, within a reasonable time after the participant's consent,
sends the participant an account statement for the period that includes
information reflecting the terms of the distribution.
(ii) In this Example 2, Plan A does not fail to satisfy the consent
requirement of section 411(a)(11) merely because the consent is provided
other than through a written paper document.
Example 3. (i) A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B's system for such transactions, a participant
must enter his or her account number and personal identification number
(PIN); this information must match that in Plan B's records in order for
the transaction to proceed. A participant may request a distribution
from Plan B by following the applicable instructions on the Plan B web
site. After the participant has requested a distribution, the
participant is automatically shown a page on the web site containing a
section 411(a)(11) notice. Although this page of the web site may be
printed, the page also advises the participant that he or she may
request the section 411(a)(11) notice on a written paper document by
calling a telephone number indicated on the web page and that, if the
participant requests the notice on a written paper document, it will be
provided at no charge. To proceed with the distribution by e-mail, the
participant must acknowledge receipt, review, and comprehension of the
section 411(a)(11) notice and must consent to the distribution within
the time required under section 411(a)(11). The web site requires the
participant to review and confirm the terms (including the form) of the
distribution before
[[Page 547]]
the transaction is completed. After the participant has given consent
via e-mail, the Plan B web site confirms the distribution to the
participant and advises the participant that he or she may request the
confirmation on a written paper document that will be provided at no
charge.
(ii) In this Example 3, Plan B does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
Example 4. (i) A qualified plan (Plan C) permits participants to
request distributions through Plan C's automated telephone system. Under
Plan C's system for such transactions, a participant must enter his or
her account number and personal identification number (PIN); this
information must match that in Plan C's records in order for the
transaction to proceed. Plan C provides only the following distribution
options: a lump sum and annual installments over 5, 10, or 20 years. A
participant may request a distribution from Plan C by following the
applicable instructions on the automated telephone system. After the
participant has requested a distribution, the automated telephone system
reads the section 411(a)(11) notice to the participant. The automated
telephone system also advises the participant that he or she may request
the notice on a written paper document and that, if the participant
requests the notice on a written paper document, it will be provided at
no charge. Before proceeding with the distribution transaction, the
participant must acknowledge receipt, review, and comprehension of the
section 411(a)(11) notice and must consent to the distribution within
the time required under section 411(a)(11). The automated telephone
system requires the participant to review and confirm the terms
(including the form) of the distribution before the transaction is
completed. After the participant has given consent, the automated
telephone system confirms the distribution to the participant and
advises the participant that he or she may request the confirmation on a
written paper document that will be provided at no charge. Because Plan
C has relatively few and simple distribution options, the provision of
the section 411(a)(11) notice over the automated telephone system is no
less understandable to the participant than a written paper notice.
(ii) In this Example 4, Plan C does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
Example 5. (i) Same facts as Example 4, except that, pursuant to
Plan C's system for processing such transactions, a participant who so
requests is transferred to a customer service representative whose
conversation with the participant is recorded. The customer service
representative provides the section 411(a)(11) notice from a prepared
text and processes the participant's distribution in accordance with
predetermined instructions of the plan administrator.
(ii) In this Example 5, Plan C does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
Example 6. (i) Same facts as Example 1, except that Participant D
requested a distribution by e-mail, then terminated employment and,
following the termination, no longer has access to e-mail.
(ii) In this Example 6, Plan A does not satisfy the notice or
consent requirement of section 411(a)(11) because the electronic medium
through which the notice is provided is not reasonably accessible to
Participant D. Plan A must provide Participant D the section 411(a)(11)
notice in a written paper document or by an electronic means that is
reasonably accessible to Participant D.
[T.D. 8219, 53 FR 31853, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as
amended by T.D. 8620, 60 FR 49221, Sept. 22, 1995; T.D. 8796, 63 FR
70011, Dec. 18, 1998; T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8873,
65 FR 6006, Feb. 8, 2000; T.D. 8891, 65 FR 44681, 44682, July 19, 2000]
Sec. 1.411(b)-1 Accrued benefit requirements.
(a) Accrued benefit requirements--(1) In general. Under section
411(b), for plan years beginning after the applicable effective date of
section 411, rules are provided for the determination of the accrued
benefit to which a participant is entitled under a plan. Under a defined
contribution plan, a participant's accrued benefit is the balance to the
credit of the participant's account. Under a defined benefit plan, a
participant's accrued benefit is his accrued benefit determined under
the plan. A defined benefit plan is not a qualified plan unless the
method provided by the plan for determining accrued benefits satisfies
at least one of the alternative methods (described in paragraph (b) of
this section) for determining accrued benefits with respect to all
active participants under the plan. A defined benefit plan may provide
that accrued benefits for participants are determined under more than
one plan formula. In such a case, the accrued benefits under all such
formulas must be aggregated in order to determine whether or not the
accrued benefits under the plan for
[[Page 548]]
participants satisfy one of the alternative methods. A plan may satisfy
different methods with respect to different classifications of
employees, or separately satisfy one method with respect to the accrued
benefits for each such classification, provided that such
classifications are not so structured as to evade the accrued benefit
requirements of section 411(b) and this section. (For example, if a plan
provides that employees who commence participation at or before age 40
accrue benefits in a manner which satisfies the 133\1/3\ percent method
of determining accrued benefits and employees who commence participation
after age 40 accrue benefits in a manner which satisfies the 3 percent
method of determining accrued benefits, the plan would be so structured
as to evade the requirements of section 411(b).) A defined benefit plan
does not satisfy the requirements of section 411(b) and this section
merely because the accrued benefit is defined as the ``reserve under the
plan''. Special rules are provided for the first two years of service by
a participant, certain insured defined benefit plans, and certain
reductions in accrued benefits due to increasing age or service. In
addition, a special rule is provided with respect to accruals for
service before the effective date of section 411.
(2) Cross references--(i) 3 percent method. For rules relating to
the 3 percent method of determining accrued benefits, see paragraph
(b)(1) of this section.
(ii) 133\1/3\ percent method. For rules relating to the 133\1/3\
percent method of determining accrued benefits, see paragraph (b)(2) of
this section.
(iii) Fractional method. For rules relating to the fractional method
of determining accrued benefits, see paragraph (b)(3) of this section.
(iv) Accruals before effective date. For rules relating to accruals
for service before the effective date of section 411, see paragraph (c)
of this section.
(v) First 2 years of service. For special rules relating to
determination of accrued benefit for first 2 continuous years of
service, see paragraph (d)(1) of this section.
(vi) Certain insured plans. For special rules relating to
determination of accrued benefit under a defined benefit plan funded
exclusively by insurance contracts, see paragraph (d)(2) of this
section.
(vii) Accruals decreased by increasing age or service. For special
rules relating to prohibition of decrease in accrued benefit on account
of increasing age or service, see paragraph (d)(3) of this section.
(viii) Separate accounting. For rules relating to requirements for
separate accounting, see paragraph (e) of this section.
(ix) Year of participation. For definition of ``year of
participation'', see paragraph (f) of this section.
(b) Defined benefit plans. A defined benefit plan satisfies the
requirements of section 411(b)(1) and this paragrah for a plan year to
which section 411 and this section apply if it satisfies the
requirements of subparagraph (1), (2), or (3) of this paragraph for such
year.
(1) 3 percent method--(i) General rule. A defined benefit plan
satisfies the requirements of this paragraph for a plan year if, as of
the close of the plan year, the accrued benefit to which each
participant is entitled, computed as if the participant separated from
the service as of the close of such plan year, is not less than 3
percent of the 3 percent method benefit, multiplied by the number of
years (not in excess of 33\1/3\) of his participation in the plan
including years after his normal retirement age. For purposes of this
subparagraph, the ``3 percent method benefit'' is the normal retirement
benefit to which the participant would be entitled if he commenced
participation at the earliest possible entry age for any individual who
is or could be a participant under the plan and if he served
continuously until the earlier of age 65 or the normal retirement age
under the plan.
(ii) Special rules--(A) Compensation. In the case of a plan
providing a retirement benefit based upon compensation during any
period, the normal retirement benefit to which a participant would be
entitled is determined as if he continued to earn annually the average
rate of compensation which he earned during consecutive years of
service, not in excess of 10, for which his compensation was the
highest. For purposes of
[[Page 549]]
this subdivision (A), the number of consecutive years of service used in
computing average compensation shall be the number of years of service
specified under the plan (not in excess of 10) for computing normal
retirement benefits.
(B) Social security, etc. For purposes of this subparagraph, for any
plan year, social security benefits and all relevant factors used to
compute benefits, e.g., consumer price index, are treated as remaining
constant as of the beginning of the current plan year for all subsequent
plan years.
(C) Computation in certain cases. In the case of any plan to which
the provisions of section 411(b)(1)(D) and paragraph (c) of this section
are applicable, for any plan year the accrued benefit of any participant
shall not be less than the accrued benefit otherwise determined under
this subparagraph, reduced by the excess of the accrued benefit
determined under this subparagraph as of the first day of the first plan
year to which section 411 applies over the accrued benefit determined
under section 411(b)(1)(D) and paragraph (c) of this section and
increased by the amount determined under paragraph (c)(2)(v) of this
section.
(iii) Examples. The application of this subparagraph is illustrated
by the following examples.
Example (1). The M Corporation's defined benefit benefit plan
provides an annual retirement benefit commencing at age 65 or $4 per
month for each year of participation. As a condition of participation,
the plan requires that an employee have attained age 25. The normal
retirement age specified under the plan is age 65. The plan provides for
no limit on the number of years of credited service. A, age 40, is a
participant in the M Corporation's plan.
A has completed 12 years of participation in the plan of the M
Corporation as of the close of the plan year. Under subdivision (i) of
this subparagraph, the normal retirement benefit commencing at age 65 to
which a participant would be entitled if he commenced participation at
the earliest possible entry age (25) under the plan and served
continuously until normal retirement age (65) is an annual benefit of
$1,920 [40x(12x$4)]. Under paragraph (b)(1)(i) of this section, the plan
does not satisfy the requirements of this subparagraph unless A has
accrued an annual benefit of at least $691 [0.03x($1,920x12)] as of the
close of the plan year. Under the M Corporation plan, A is entitled to
an accrued benefit of $576 [(12x12)x$4] as of the close of the plan
year. Thus, with respect to A, the accrued benefit provided under the M
Corporation plan does not satisfy the requirements of this subparagraph.
Example (2). Assume the same facts as in example (1) except that the
M Corporation's plan provides that only the first 30 years of
participation are taken into account. Under subdivision (i) of this
subparagraph, the normal retirement benefit commencing at age 65 to
which a participant would be entitled if he commenced participation at
the earliest possible entry age under the plan (25) and served
continuously until normal retirement age (65) is an annual benefit of
$1.440 [30x$48]. Under paragraph (b)(1)(i) of this section, the plan
does not satisfy the requirements of this subparagraph unless A has
accrued an annual benefit of at least $518 [0.03x($1,440x12)] as of the
close of the plan year. Under the M Corporation plan, A is entitled to
an accrued benefit of $576 [(12x$48]. Thus, with respect to A, the
accrued benefit provided under the M Corporation plan satisfies the
requirements of this subparagraph.
Example (3). The N Corporation's defined benefit plan provides an
annual retirement benefit commencing at age 65 of 50 percent of average
compensation for the highest 3 consecutive years of compensation for an
employee with 25 years of participation. A participant who separates
from service before age 65 is entitled to 2 percent of average
compensation for the highest 3 consecutive years of compensation for
each year of participation not in excess of 25. The plan has no minimum
age or service requirement for participation. The normal retirement age
specified under the plan is age 65. On December 31, 1990, B, age 40, is
a participant in the N Corporation's plan. B began employment with the N
Corporation and became a participant in the N Corporation's plan on
January 1, 1980. Under this subparagraph, the normal retirement benefit
to which a participant would be entitled if he commenced participation
at the earliest possible entry age (0) under the plan and served
continuously until normal retirement age (65) is 50 percent of average
compensation for the highest 3 consecutive years of compensation per
year commencing at age 65. Under this subparagraph, B must have accrued
an annual benefit of at least 16.5 percent of his highest 3 consecutive
years of compensation per year commencing at age 65 [0.03x50 percent of
average compensation for the highest 3 consecutive years of
compensationx11] as of the close of the plan year. Under the N
Corporation plan, B has accrued an annual benefit of 22 percent of
average compensation for his highest 3 consecutive years of compensation
per year commencing at age 65. Thus, with respect to B, the accrued
benefit under the N Corporation plan satisfies the requirements of this
subparagraph.
[[Page 550]]
Example (4). The P Corporation's defined benefit plan provides an
annual retirement benefit commencing at age 65 of 50 percent of average
compensation for the 3 consecutive years of compensation from the P
Corporation next preceding normal retirement age. The plan has no
minimum age or service requirement for participation. The normal
retirement age under the plan is age 65. On December 31, 1990, C, age
55, separates from service with the P Corporation. C began employment
with the P Corporation and became a participant in the P Corporation's
plan on January 1, 1980. As of December 31, 1990. C's average
compensation for the 3 consecutive years preceding his separation from
service is $15,000. Under this subparagraph, the normal retirement
benefit to which a participant would be entitled if he commenced
participation at the earliest possible entry age (0) under the plan and
served continuously until normal retirement age (65) is an annual
benefit of 50 percent of average compensation for the 3 consecutive
years of compensation from the P Corporation next preceding normal
retirement age commencing at age 65. C must have accrued an annual
benefit of at least $2,475 commencing at age 65
[0.03x(0.050x$15,000)x11] as of his separation from the service with the
P Corporation in order for the P Corporation's plan to satisfy the
requirements of this subparagraph with respect to C.
Example (5). On December 31, 1985, the R Corporation's defined
benefit plan provided an annual retirement benefit commencing at age 65
of $100 for each year of participation, not to exceed 30. As a condition
of participation, the plan requires that an employee have attained age
25. The normal retirement age specified under the plan is age 65. The
appropriate computation period is the calendar year. On January 1, 1986,
the plan is amended to provide an annual retirement benefit commencing
at age 65 of $200 for each year of participation (before and after the
amendment), not to exceed 30. B, age 40, is a participant in the R
Corporation's plan. B has completed 15 years of participation in the
plan of the R Corporation as of December 31, 1990. Under paragraph
(b)(1)(i) of this section, the normal retirement benefit commencing at
age 65 to which a participant would be entitled if he commenced
participation at the earliest possible entry age (25) under the plan an
served continuously until normal retirement age (65) is an annual
benefit of $6,000 [30x200]. Under subdivision (i) of this subparagraph,
the plan does not satisfy the requirements of this subparagraph unless B
has accrued an annual benefit of at least $2,700 [0.03x$6,000x15] as of
December 31, 1990. Under the R Corporation plan, B is entitled to an
accrued benefit of $3,000 [$200x15] as of December 31, 1990. Thus, with
respect to B, the accrued benefit provided under the R Corporation plan
satisfies the requirements of this subparagraph.
Example (6). On December 31, 1995, the J Corporation's defined
benefit plan provided an annual retirement benefit commencing at age 65
of $4,800 after 30 years of participation. The normal retirement age
specified under the plan is age 65. The appropriate computation period
is the calendar year. On January 1, 1996, the plan is amended to provide
an annual retirement benefit commencing at age 65 of $6,000. A, age 40,
is a participant in the J Corporation's plan since its adoption on
January 1, 1986. Under paragraph (b)(1)(i) of this section, on December
31, 1995, the normal retirement benefit commencing at age 5 to which a
participant would be entitled if he commenced participation at the
earliest possible entry age (0) under the plan and served continuously
until normal retirement age (65) is an annual benefit of $4,800. Under
paragraph (b)(1)(i) of this section, on January 1, 1996, the normal
retirement benefit commencing at age 65 to which a participant would be
entitled if he commenced participation at the earliest possible entry
age (0) under the plan and served continuously until normal retirement
age (65) is an annual benefit of $6,000. Under subdivision (i) of this
subparagraph, the plan does not satisfy the requirements of this
subparagraph unless A has an accrued benefit on December 31, 1995 of at
least $1,440 [$4,800x0.02x10] and an accrued benefit on January 1, 1996
of at least $1,800 [$6,000x0.03x10].
Example (7). The X Company's defined benefit plan provides an annual
retirement benefit commencing at age 65 of $4 per month for each year of
participation (not to exceed 30). As a condition of participation, the
plan requires that an employee have attained age 25. The normal
retirement age specified under the plan is age 65. D, age 68, is a
participant in the X Company's plan. D has completed 20 years of
participation in the X Company plan as of the close of the plan year.
Under paragraph (b)(1)(i) of this section, the normal retirement benefit
commencing at age 65 to which a participant would be entitled if he
commenced participation at the earliest possible entry age (25) under
the plan and served continuously until normal retirement age (65) is an
annual benefit, commencing at age 65, of $1,440 [30x$48]. Under
paragraph (b)(1)(i) of this section, the plan does not satisfy the
requirements of this subparagraph unless D has accrued an annual
benefit, commencing at age 65, of $864 [0.03x$1,440x20] as of the close
of the plan year. Under the X Company plan, D has accrued an annual
benefit, commencing at age 65, of $960 [20x$48]. Thus, with respect to D
the accrued benefit provided under the X Company plan satisfies the
requirements of this subparagraph.
[[Page 551]]
Example (8). Assume the same facts as in example (7) except that for
purposes of determining accrued benefits under the plan the X Company's
plan disregards all years of participation after normal retirement age.
Under paragraph (b)(1)(i) of this section, the normal retirement benefit
commencing at age 65 to which a participant would be entitled if he
commenced participation at the earliest possible entry age (25) under
the plan and served continuously until normal retirement age (65) is an
annual benefit of $1,440 [30x$48]. Under paragraph (b)(1)(i) of this
section the plan does not satisfy the requirements of this subparagraph
unless D has accrued an annual benefit, commencing at age 65, of $864
[0.03x$1,440x20] as of the close of the plan year. Under the X Company's
plan D has accrued an annual benefit commencing at age 65, of $816
[17x$48]. Thus, with respect to D, the accrued benefit provided under
the X Company plan does not satisfy the requirements of this
subparagraph.
(2) 133\1/3\ percent rule--(i) General rule. A defined benefit plan
satisfies the requirements of this subparagraph for a particular plan
year if--
(A) Under the plan the accrued benefit payable at the normal
retirement age (determined under the plan) is equal to the normal
retirement benefit (determined under the plan), and
(B) The annual rate at which any individual who is or could be a
participant can accrue the retirement benefits payable at normal
retirement age under the plan for any later plan year cannot be more
than 133\1/3\ percent of the annual rate at which he can accrue benefits
for any plan year beginning on or after such particular plan year and
before such later plan year.
(ii) Special rules. For purposes of this subparagraph--
(A) Plan amendments. Any amendment to the plan which is in effect
for the current plan year shall be treated as if it were in effect for
all other plan years.
(B) Change in accrual rate. Any change in an accrual rate which
change does not apply to any individual who is of could be a participant
in the plan year is disregarded. Thus, for example, if for its plan year
beginning January 1, 1980, a defined benefit plan provides an accrued
benefit in plan year 1980 of 2 percent of a participant's average
compensation for his highest 3 years of compensation for each year of
service and provides that in plan year 1981 the accrued benefit will be
3 percent of such average compensation, the plan will not be treated as
failing to satisfy the requirements of this subparagraph for plan year
1980 because in plan year 1980 the change in the accrual rate does not
apply to any individual who is or could be a participant in plan year
1980. However, if, for example, a defined benefit plan provided for an
accrued benefit of 1 percent of a participant's average compensation for
his highest 3 years of compensation for each of the first 10 years of
service and 1.5 percent of such average compensations for each year of
service thereafter, the plan will be treated as failing to satisfy the
requirements of this subparagraph for the plan year even though no
participant is actually accruing at the 1.5 percent rate because an
individual who could be a participant and who had over 10 years of
service would accrue at the 1.5 percent rate, which rate exceeds 133\1/
3\ percent of the 1 percent rate.
(C) Early retirement benefits. The fact that certain benefits under
the plan may be payable to certain participants before normal retirement
age is disregarded. Thus, the requirements of subdivision (i) of this
subparagraph must be satisfied without regard to any benefit payable
prior to the normal retirement benefit (such as an early retirement
benefit which is not the normal retirement benefit (see Sec. 1.411(a)-
7(c).
(D) Social security, etc. For purposes of this paragraph, for any
plan year, social security benefits and all relevant factors used to
compute benefits, e.g., consumer price index, are treated as remaining
constant as of the beginning of the current plan year for all subsequent
plan years.
(E) Postponed retirement. A plan shall not be treated as failing to
satisfy the requirements of this subparagraph for a plan year merely
because no benefits under the plan accrue to a participant who continues
service with the employer after such participant has attained normal
retirement age.
(F) Computation of benefit. A plan shall not satisfy the
requirements of this subparagraph if the base for the computation of
retirement benefits changes solely by reason of an increase
[[Page 552]]
in the number of years of participation. Thus, for example, a plan will
not satisfy the requirements of this subparagraph if it provides a
benefit, commencing at normal retirement age, of the sum of (1) 1
percent of average compensation for a participant's first 3 years of
participation multiplied by his first 10 years of participation (or, if
less than 10 his total years of participation) and (2) 1 percent of
average compensation for a participant's 3 highest years of
participation multiplied by each year of participation subsequent to the
10th year.
(iii) Examples. The application of this subparagraph is illustrated
by the following examples:
Example (1). On January 1, 1980, the R Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of 5
consecutive years of participation for which his compensation is the
highest. The percentage is 2 percent for each of the first 20 years of
participation and 1 percent per year thereafter. The appropriate
computation period is the calendar year. The R Corporation's plan
satisfies the requirements of this subparagraph because the 133\1/3\
percent rule does not restrict subsequent accrual rate decreases.
Example (2). On January 1, 1980, the J Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of his
final 5 consecutive years of participation. The percentage is 1 percent
for each of the first 5 years of participation; 1\1/3\ percent for each
of the next 5 years of participation; and 1\7/9\ percent for each year
thereafter. The appropriate computation period is the calendar year.
Even though no single accrual rate under the J Corporation's plan
exceeds 133\1/3\ percent of the immediately preceding accrual rate, the
J Corporation's plan does not satisfy the requirements of this
subparagraph because the rate of accrual for all years of participation
in excess of 10 (1\7/9\ percent) exceeds 133\1/3\ percent of the rate of
accrual for any of the first 5 years of participation (1 percent).
Example (3). On January 1, 1980, the C Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of 3
consecutive years of participation for which his compensation is the
highest. The percentage is 2 percent for each of the first 5 years of
participation; 1 percent for each of the next 5 years of participation;
and 1\1/2\ percent for each year thereafter. The appropriate computation
period is the calendar year. Even though the average rate of accrual
under the C Corporation's plan is not less rapidly than ratably, the C
Corporation's plan does not satisfy the requirements of this
subparagraph because the rate of accrual for all years of participation
in excess of 10 (1\1/2\ percent) for any employee who is actually
accruing benefits or who could accrue benefits exceeds 133\1/3\ percent
of the rate of accrual for the sixth through tenth years of
participation, respectively (1 percent).
(3) Fractional rule--(i) In general. A defined benefit plan
satisfies the requirements of this paragraph if the accrued benefit to
which any participant is entitled is not less than the fractional rule
benefit multiplied by a fraction (not exceeding 1)--
(A) The numerator of which is his total number of years of
participation in the plan, and
(B) The denominator of which is the total number of years he would
have participated in the plan if he separated from the service at the
normal retirement age under the plan.
(ii) Special rules. For purposes of this subparagraph--
(A) Fractional rule benefit. The ``fractional rule benefit'' is the
annual benefit commencing at the normal retirement age under the plan to
which a participant would be entitled if he continued to earn annually
until such normal retirement age the same rate of compensation upon
which his normal retirement benefit would be computed. Such rate of
compensation shall be computed on the basis of compensation taken into
account under the plan (but taking into account average compensation for
no more than the 10 years of service immediately preceding the
determination). For purposes of this subdivision (A), the normal
retirement benefit shall be determined as if the participant had
attained normal retirement age on the date any such determination is
made.
(B) Social security, etc. For purposes of this subparagraph, for any
plan year, social security benefits and all relevant factors used to
compute benefits, e.g., consumer price index, are treated as remaining
constant as of the beginning of the current plan year for all subsequent
plan years.
(C) Postponed retirement. A plan shall not be treated as failing to
satisfy the requirements of this subparagraph
[[Page 553]]
merely because no benefits under the plan accrue to a participant who
continues service with the employer after such participant has attained
normal retirement age under the plan.
(D) Computation in certain cases. In the case of any plan to which
the provisions of section 411(b)(1)(D) and paragraph (c) of this section
are applicable, for any plan year the accrued benefit of any participant
shall not be less than the accrued benefit otherwise determined under
this subparagraph, reduced by the excess of the accrued benefit
determined under this subparagraph as of the first day of the first plan
year to which section 411 applies over the accrued benefit determined
under section 411(b)(1)(D) and paragraph (c) of this section and
increased by the amount determined under paragraph (c)(2)(v) of this
section.
(iii) Examples. The application of this subparagraph is illustrated
by the following examples:
Example (1). The R Corporation's defined benefit plan provides an
annual retirement benefit commencing at age 65 of 30 percent of a
participant's average compensation for his highest 3 consecutive years
of participation. If a participant separates from service prior to
normal retirement age, the R Corporation's plan provides a benefit equal
to an amount which bears the same ratio to 30 percent of such average
compensation as the participant's actual number of years of
participation in the plan bears to the number of years the participant
would have participated in the plan had he separated from service at age
65. The plan further provides that normal retirement age is age 65. A,
age 55, is a participant in the R Corporation's plan for the current
year, and A has 15 years of participation in the R Corporation's plan.
As of the current year, A's average compensation for his highest 3 years
of compensation is $20,000. The R Corporation's plan satisfies the
requirements of this subparagraph because if A separates from the
service in the current year he will be entitled to an annual benefit of
$3,600 commencing at age 65 [0.3x$20,000x15/25].
Example (2). The J Corporation's defined benefit plan provides a
normal retirement benefit of 1 percent per year of a participant's
average compensation from the employer. In the case of a participant who
separates from service prior to normal retirement age (65), the plan
provides that the annual benefit is an amount which is equal to 1
percent of such compensation multiplied by the number of years of plan
participation actually completed by the participant. The plan year of
the J Corporation's plan is the calendar year. B, age 55, is a
participant in the J Corporation's plan for the current year. B became a
participant in the J Corporation's plan on January 1, 1980. As of
December 31, 1990, B's compensation history is as follows:
------------------------------------------------------------------------
Year Compensation
------------------------------------------------------------------------
1980................................................... $17,000
1981................................................... 18,000
1982................................................... 20,000
1983................................................... 20,000
1984................................................... 21,000
1985................................................... 22,000
1986................................................... 23,000
1987................................................... 25,000
1988................................................... 26,000
1989................................................... 29,000
1990................................................... 32,000
------------------------------------------------------------------------
If B separates from service on December 31, 1990, he would be entitled
to an annual benefit of $2,530 commencing at age 65. Because the J
Corporation's plan does not limit the number of years of compensation to
be taken into account in determining the normal retirement benefit, B's
rate of compensation for purposes of determining his normal retirement
benefit is $23,600 [$18,000 + $20,000 + $20,000 + $21,000 + $22,000 +
$23,000 + $25,000 + $26,000 + $29,000 + $32,000]/10.
Under this subparagraph, B's accrued benefit under the J Corporation's
plan as of December 31, 1990 must be not less than $2,561 per year
commencing at age 65 [0.01 x ($17,000 + $18,000 + $20,000 + $20,000 +
$21,000 + $22,000 + $23,000 + $25,000 + $26,000 + $29,000 + $32,000 +
($23,600 x 10)) x 11/21]. Thus, the J Corporation's plan would not
satisfy the requirements of this subparagraph.
(c) Accruals for service before effective date--(1) General rule.
For a plan year to which section 411 applies, a defined benefit plan
does not satisfy the requirements of section 411(b)(1) and this section
unless, under the plan, the accrued benefit of each participant for plan
years beginning before section 411 applies is not less than the greater
of--
(i) Such participant's accrued benefit (as of the day before section
411 applies) determined under the plan as in effect from time to time
prior to September 2, 1974 (without regard to any amendment adopted
after such date), or
(ii) One-half of the accrued benefit that would be determined with
respect to the participant as of the day before section 411 applies if
the participant's accrued benefit were computed for such prior plan
years under a method which satisfies the requirements of section
[[Page 554]]
411(b)(1) (A), (B), or (C) and paragraph (b) (1), (2), or (3) of this
section. See 29 CFR Part 2530, Department of Labor regulations relating
to minimum standards for employee pension benefit plans, for time
participation deemed to begin.
(2) Special rules--(i) A plan shall not be deemed to fail to satisfy
the requirements of section 411(b) and this section merely because the
method for computing the accrued benefit of a participant for years of
participation prior to the first plan year for which section 411 is
effective with respect to the plan is not the same method for computing
the accrued benefit of a participant for years of participation
subsequent to such plan year.
(ii) For purposes of paragraph (c)(1)(ii) of this section, section
411(b)(1)(A) and paragraph (b)(1) of this section shall be applied as if
the participant separated from service with the employer on the day
before the first day of the first plan year to which section 411
applies.
(iii) For purposes of paragraph (c)(1)(ii) of this section, section
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied in
the following manner:
(A) Except as provided in (c)(2)(iii)(B) of this section, section
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied as if
the participant separated from service with the employer on the day
before the first day of the first plan year to which section 411
applies.
(B) In the case that the plan does not satisfy the requirements of
section 411(b)(1)(B) and paragraph (b)(2) of this section at any time
prior to the day specified in (c)(2)(iii)(A) of this section, the plan
shall be deemed revised to the extent necessary to satisfy the
requirements of section 411(b)(1)(B) and paragraph (b)(2) of this
section for all plan years beginning before the applicable effective
date of section 411 and this section. For purposes of the preceding
sentence, a plan shall not be deemed revised to the extent necessary to
satisfy the requirements of section 411(b)(1)(B) and paragraph (b)(2) of
this section for a plan year if the benefit a participant would receive
if he were employed until normal retirement age is reduced by such
revision or if the revised rate of accrual with respect to such accrued
benefit does not otherwise satisfy the requirements of section
411(b)(1)(B) and paragraph (b)(2) of this section.
(iv) For purposes of paragraph (c)(1)(ii) of this section, section
411(b)(1)(C) and paragraph (b)(3) of this section shall be applied as if
the participant separated from service on the day before the first day
of the first plan year to which section 411 applies.
(v) The excess of the accrued benefit payable at normal retirement
age of any participant determined under section 411(b)(1) (A), (B), or
(C) (without regard to section 411(b)(1)(D)), and paragraph (b)(1), (2),
or (3) of this section (without regard to this paragraph) as of the day
before the first day of the first plan year to which section 411 and
this section applies over the accrued benefit determined under paragraph
(c)(1) of this section shall be accrued in accordance with the
provisions of the plan as in effect after the applicable effective date
of section 411, as if the plan had been initially adopted on such
effective date.
(d) Special rules--(1) First 2 years of service. Notwithstanding
paragraphs (1), (2), and (3) of paragraph (b) of this section, under
section 411(b)(1)(E) and this subparagraph, a plan shall not be treated
as failing to satisfy the requirements of paragraph (b) of this section
solely because the accrual of benefits under the plan does not become
effective until the employee has completed 2 continuous years of
service. For purposes of this subparagraph, continuous years of service
are years of service (within the meaning of section 410(a)(3)((A)) which
are not separated by a break in service (within the meaning of section
410(a)(5)). For years of service beginning after such 2 years of
service, the accrued benefit of an employee shall not be less than that
to which the employee would be entitled if section 411(b)(1)(E) and this
subparagraph did not apply. Thus, for example, a plan which otherwise
satisfies the requirements of paragraph (b)(2) of this section provides
for a rate of accrual of 1 percent of average compensation for the
highest 3 years of compensation beginning with the third year of service
of a participant shall not be treated as
[[Page 555]]
satisfying paragraph (b)(2) of this section because as of the time the
employee completes 3 continuous years of service there is no accrual
during the first 2 years of service. In addition, a plan which otherwise
satisfies the requirements of paragraph (b)(1) of this section and which
requires that an employee must attain age 25 and complete 1 year of
service prior to becoming a participant will not satisfy the
requirements of paragraph (b)(1) of this section if an employee who
completes 2 years of service prior to attaining age 25 does not begin
accruals immediately upon commencement of participation in the plan. For
rules relating to years of service, see 29 CFR part 2530, Department of
Labor regulations relating to minimum standards for employee pension
benefit plans.
(2) Certain insured defined benefit plans. Notwithstanding
paragraphs (b) (1), (2), and (3) of this section, a defined benefit plan
satisfies the requirements of paragraph (b) of this section if such plan
is funded exclusively by the purchase of contracts from a life insurance
company and such contracts satisfy the requirements of sections 412(i)
(2) and (3) and the regulations thereunder. The preceding sentence is
applicable only if an employee's accrued benefit as of any applicable
date is not less than the cash surrender value such employee's insurance
contracts would have on such applicable date if the requirements of
section 412(i) (4), (5), and (6) and the regulations thereunder were
satisfied.
(3) Accrued benefit may not decrease on account of increasing age or
service. Notwithstanding paragraphs (b) (1), (2), and (3) of this
section and paragraphs (d) (1) and (2) of this section, a defined
benefit plan shall be treated as not satisfying the requirements of
paragraphs (b) and (d) of this section if the participant's accrued
benefit is reduced on account of any increase in his age or years of
service. The preceding sentence shall not apply to social security
supplements described in Sec. 1.411(a)-7(c)(4).
(e) Separate accounting. A plan satisfies the requirements of this
paragraph if the requirements of paragraph (e) (1) or (2) of this
paragraph are met.
(1) Defined benefit plan. In the case of a defined benefit plan, the
requirements of this paragraph are satisfied if the plan requires
separate accounting for the portion of each employee's accrued benefit
derived from any voluntary employee contributions permitted under the
plan. For purposes of this subparagraph the term ``voluntary employee
contributions'' means all employee contributions which are not mandatory
contributions within the meaning of section 411(c)(2)(C) and the
regulations thereunder. See Sec. 1.411(c)-1(b)(1) for rules requiring
the determination of such an accrued benefit by the use of a separate
account.
(2) Defined contribution plan. In the case of a defined contribution
plan, the requirements of this paragraph are not satisfied unless the
plan requires separate accounting for each employee's accrued benefit.
If a plan utilizes the break in service rule of section 411(a)(6)(C), an
employee could have different percentages of vesting between pre-break
and post-break accrued benefits. In such a case, the requirements of
this paragraph are not satisfied unless the plan computes accrued
benefits in a manner which takes into account different percentages. A
plan which provides separate accounts for pre-break and post-break
accrued benefits will be deemed to compute benefits in a reasonable
manner.
(f) Year of participation--(1) In general. This paragraph is
inapplicable to a defined contribution plan. For purposes of determining
an employee's accrued benefit, a ``year of participation'' is a period
of service determined under regulations prescribed by the Secretary of
Labor in 29 CFR Part 2530, relating to minimum standards for employee
pension benefit plans.
(2) Additional rule relating to year of participation. A trust shall
not constitute a qualified trust if the plan of which such trust is a
part provides for the crediting of a year of participation, or part
thereof, and such credit results in the discrimination prohibited by
section 401(a)(4).
(g) Additional illustrations. The application of this section may be
illustrated by the following example:
Example. (i) The S Corporation established a defined benefit plan on
January 1, 1980. The
[[Page 556]]
plan provides a minimum age for participation of age 25. The normal
retirement age under the plan is age 65. The appropriate computation
periods are the calendar year. The plan provides an annual benefit,
commencing at age 65, equal to $96 per year of service for the first 25
years of service, and $48 per year of service for each additional year
of service.
(ii) The plan of the S Corporation does not satisfy the requirements
of section 411(b)(1)(A) and paragraph (b)(1) of this section because the
accrued benefit under the plan at some point will be less than the
accrued benefit required under section 411(b)(1)(A) and paragraph (b)(1)
of this section (i.e., 3 percent x normal retirement benefit x years of
participation).
(iii) The plan of the S Corporation does satisfy the requirements of
section 411(b)(1)(B) and paragraph (b)(2) of this section because the
rate of benefit accrual is equal in each of the first 25 years of
service and the rate decreases thereafter.
(iv) The plan of the S Corporation does satisfy the requirements of
section 411(b)(1)(C) and paragraph (b)(3) of this section because the
accrued benefit under the plan will equal or exceed the normal
retirement benefit multiplied by the fraction described in paragraph
(b)(3)(i) of this section.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42334, Aug. 23, 1977]
Sec. 1.411(c)-1 Allocation of accrued benefits between employer and employee contributions.
(a) Accrued benefit derived from employer contributions. For
purposes of section 411 and the regulations thereunder, under section
411(c)(1), an employee's accrued benefit derived from employer
contributions under a plan as of any applicable date is the excess, if
any, of--
(1) The total accrued benefit under the plan provided for the
employee as of such date, over
(2) The accrued benefit provided for the employee, derived from
contributions made by the employee under the plan as of such date.
For computation of accrued benefit derived from employee
contributions to a defined contribution plan or from voluntary employee
contributions to a defined benefit plan, see paragraph (b) of this
section. For computation of accrued benefit derived from mandatory
employee contributions to a defined benefit plan, see paragraph (c) of
this section.
(b) Accrued benefit derived from employee contribution to defined
contribution plan, etc. For purposes of section 411 and the regulations
thereunder, under section 411(c)(2)(A) the accrued benefit derived from
employee contributions to a defined contribution plan is determined
under paragraph (b) (1) or (2) of this section, whichever applies. Under
section 411(d)(5), the accrued benefit derived from voluntary employee
contributions to a defined benefit plan is determined under paragraph
(b)(1) of this section.
(1) Separate accounts maintained. If a separate account is
maintained with respect to an employee's contributions and all income,
expenses, gains, and losses attributable thereto, the accrued benefit
determined under this subparagraph as of any applicable date is the
balance of such account as of such date.
(2) Separate accounts not maintained. If a separate account is not
maintained with respect to an employee's contributions and the income,
expenses, gains, and losses attributable thereto, the accrued benefit
determined under this subparagraph is the employee's total accrued
benefit determined under the plan multiplied by a fraction--
(i) The numerator of which is the total amount of the employee's
contributions under the plan less withdrawals, and
(ii) The denominator of which is the sum of (A) the amount described
in paragraph (b)(2)(i) of this section, and (B) the total contributions
made under the plan by the employer on behalf of the employee less
withdrawals.
For purposes of this subparagraph, contributions include all amounts
which are contributed to the plan even if such amounts are used to
provide ancillary benefits, such as incidental life insurance, health
insurance, or death benefits, and withdrawals include only amounts
distributed to the employee and do not reflect the cost of any death
benefits under the plan.
(c) Accrued benefit derived from mandatory employee contributions to
a defined benefit plan--(1) General rule. In the case of a defined
benefit plan (as defined in section 414(j)) the accrued benefit derived
from contributions made by an employee under the plan as of
[[Page 557]]
any applicable date is an annual benefit, in the form of a single life
annuity (without ancillary benefits) commencing at normal retirement
age, equal to the amount of the employee's accumulated contributions
(determined under paragraph (c)(3) of this section) multiplied by the
appropriate conversion factor (determined under paragraph (c)(2) of this
section). Paragraph (e) of this section provides rules for actuarial
adjustments where the benefit is to be determined in a form other than
the form described in this paragraph.
(2) Appropriate conversion factor. For purposes of this paragraph,
the term ``appropriate conversion factor'' means the factor necessary to
convert an amount equal to the accumulated contributions to a single
life annuity (without ancillary benefits) commencing at normal
retirement age and shall be 10 percent for a normal retirement age of 65
years. For other normal retirement ages the appropriate conversion
factor shall be the factor as determined by the Commissioner.
(3) Accumulated contributions. For purposes of section 411(c) and
this section, the term ``accumulated contributions'' means the total of-
-
(i) All mandatory contributions made by the employee (determined
under paragraph (c)(4) of this section),
(ii) Interest (if any) on such contributions, computed at the rate
provided by the plan to the end of the last plan year to which section
411(a)(2) does not apply (by reason of the applicable effective date),
and
(iii) Interest on the sum of the amounts determined under paragraphs
(c)(3)(i) and (ii) of this section compounded annually at the rate of 5
percent per annum from the beginning of the first plan year to which
section 411(a)(2) applies (by reason of the applicable effective date)
to the date on which the employee would attain normal retirement age.
For example, if under section 1017 of the Employee Retirement Income
Security Act of 1974, section 411(a)(2) of the Code applies for plan
years beginning after December 31, 1975, and for plan years beginning
before 1975, the plan provided for 3 percent interest on employee
contributions, an employee's accumulated contributions would be computed
by crediting interest at the rate provided by the plan (3 percent) for
plan years beginning before 1976 and by crediting interest at the rate
of 5 percent (or another rate prescribed under section 411(c)(2)(D))
thereafter. Section 1017 of the Employee Retirement Income Security Act
of 1974 and Sec. 1.411(a)-2 provide the effective dates for the
application of section 411(a)(2).
(4) Mandatory contributions. For purposes of section 411(c) and this
section the term ``mandatory contributions'' means amounts contributed
to the plan by the employee which are required as a condition of his
employment, as a condition of his participation in the plan, or as a
condition of obtaining benefits (or additional benefits) under the plan
attributable to employer contributions. For example, if the benefit
derived from employer contributions depends upon a specified level of
employee contributions, employee contributions up to that level would be
treated as mandatory contributions. Mandatory contributions, otherwise
satisfying the requirements of this subparagraph, include amounts
contributed to the plan which are used to provide ancillary benefits
such as incidental life insurance, health insurance, or death benefits.
(d) Limitation on accrued benefit. The accrued benefit derived from
mandatory employee contributions under a defined benefit plan
(determined under paragraph (c) of this section) shall not exceed the
greater of--
(1) The accrued benefit of the employee under the plan, or
(2) The accrued benefit derived from employee contributions
determined without regard to any interest under section 411(c)(2)(C)
(ii) and (iii) and under paragraphs (c)(3) (ii) and (iii) of this
section.
(e) Actuarial adjustments for defined benefit plans--(1) Accrued
benefit. In the case of a defined benefit plan (as defined in section
414(j)) if an employee's accrued benefit is to be determined as an
amount other than an annual benefit commencing at normal retirement age,
such benefit (determined under section 411(c)(1) and paragraph (a) of
this section) shall be the actuarial
[[Page 558]]
equivalent of such benefit, as determined by the Commissioner.
(2) Accrued benefit derived from employee contributions. In the case
of a defined benefit plan (as defined in section 414(j) if the accrued
benefit derived from mandatory contributions made by an employee is to
be determined with respect to a benefit other than an annual benefit in
the form of a single life annuity (without ancillary benefits)
commencing at normal retirement age, such benefit shall be the actuarial
equivalent of such benefit (determined under section 411(c)(2)(B) and
paragraph (c) of this section) as determined by the Commissioner.
(f) Suspension of benefits, etc.--(1) Suspensions. No adjustment to
an accrued benefit is required on account of any suspension of benefits
if such suspension is permitted under section 203(a)(3)(B) of the
Employee Retirement Income Security Act of 1974 (88 Stat. 855) (Code
section 411(a)(3)(B)).
(2) Employment after retirement. No actuarial adjustment to an
accrued benefit is required on account of employment after normal
retirement age. For example, if a plan with a normal retirement age of
65 provides a benefit of $400 a month payable at age 65 the same $400
benefit (with no upward adjustment) could be paid to an employee who
retires at age 68.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42338, Aug. 23, 1977]
Sec. 1.411(d)-1 Coordination of vesting and discrimination requirements. [Reserved]
Sec. 1.411(d)-2 Termination or partial termination; discontinuance of contributions.
(a) General rule--(1) Required nonforfeitability. A plan is not a
qualified plan (and a trust forming a part of such plan is not a
qualified trust) unless the plan provides that--
(i) Upon the termination or partial termination of the plan, or
(ii) In addition, in the case of a plan to which section 412
(relating to minimum funding standards) does not apply, upon the
complete discontinuance of contributions under the plan,
the rights of each affected employee to benefits accrued to the date of
such termination or partial termination (or, in the case of a plan to
which section 412 does not apply, discontinuance), to the extent funded,
or the rights of each employee to the amounts credited to his account at
such time, are nonforfeitable (within the meaning of Sec. 1.411(a)-4.
(2) Required allocation. (i) A plan is not a qualified plan (and a
trust forming a part of such plan is not a qualified trust) unless the
plan provides for the allocation of any previously unallocated funds to
the employes covered by the plan upon the termination or partial
termination of the plan (or, in the case of a plan to which section 412
does not apply, upon 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 or partial
termination of the plan for the discontinuance of contributions
thereunder. In the case of a defined contribution plan under which
unallocated forfeitures are held in a suspense account in order to
satisfy the requirements of section 415, this subdivision shall not
require such plan to provide for allocations from the suspense account
to the extent that such allocations would result in annual additions to
participants' accounts in excess of amounts permitted under section 415
for the year for which such allocations would be made.
(ii) Any provision for the allocation of unallocated funds which is
found by the Secretary of Labor or the Pension Benefit Guaranty
Corporation (whichever is appropriate) to satisfy the requirements of
section 4044 or section 403(d)(1) of the Employee Retirement Income
Security Act of 1974 is acceptable if it specifies the method to be used
and does not conflict with the provisions of section 401(a)(4) of the
Internal Revenue Code of 1954 and the regulations thereunder. Any
allocation of funds required by paragraph (1), (2), (3), or (4)(A) of
section 4044(a) of such Act shall be deemed not to result in
discrimination prohibited by section 401(a)(4) of the Code (see,
however, paragraph (e) of this section). Notwithstanding the preceding
sentence, in the
[[Page 559]]
case of a plan which establishes subclasses or categories pursuant to
section 4044(b)(6) of such Act, the allocation of funds by the use of
such subclasses or categories shall not be deemed not to result in
discrimination prohibited by the Code. The allocation of unallocated
funds may be in cash or in the form of other benefits provided under the
plan. However, the allocation of the funds contributed by the employer
among the employees need not necessarily benefit all the employees
covered by the plan.
(iii) Paragraphs (a)(2) (i) and (ii) of this section 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) Partial termination--(1) General rule. Whether or not a partial
termination of a qualified plan occurs (and the time of such event)
shall be determined by the Commissioner with regard to all the facts and
circumstances in a particular case. Such facts and circumstances
include: the exclusion, by reason of a plan amendment or severance by
the employer, of a group of employees who have previously been covered
by the plan; and plan amendments which adversely affect the rights of
employees to vest in benefits under the plan.
(2) Special rule. If a defined benefit plan ceases or decreases
future benefit accruals under the plan, a partial termination shall be
deemed to occur if, as a result of such cessation or decrease, a
potential reversion to the employer, or employers, maintaining the plan
(determined as of the date such cessation or decrease is adopted) is
created or increased. If no such reversion is created or increased, a
partial termination shall be deemed not to occur by reason of such
cessation or decrease. However, the Commissioner may determine that a
partial termination of such a plan occurs pursuant to subparagraph (1)
of this paragraph for reasons other than such cessation or decrease.
(3) Effect of partial termination. If a termination of a qualified
plan occurs, the provisions of section 411(d)(3) apply only to the part
of the plan that is terminated.
(c) Termination--(1) Application. This paragraph applies to a plan
other than a plan described in section 411(e)(1) (relating to
governmental, certain church plans, etc.).
(2) Plans subject to termination insurance. For purposes of this
section, a plan to which title IV of the Employee Retirement Income
Security Act of 1974 applies is considered terminated on a particular
date if, as of that date--
(i) The plan is voluntarily terminated by the plan administrator
under section 4041 of the Employee Retirement Income Security Act of
1974, or
(ii) The Pension Benefit Guaranty Corporation terminates the plan
under section 4042 of the Employee Retirement Income Security Act of
1974.
For purposes of this subparagraph, the particular date of termination
shall be the date of termination determined under section 4048 of such
Act.
(3) Other plans. In the case of a plan not described in paragraph
(c)(2) of this section, a plan is considered terminated on a particular
date if, as of that date, the plan is voluntarily terminated by the
employer, or employers, maintaining the plan.
(d) Complete discontinuance--(1) General rule. For purposes of this
section, a complete discontiuance 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. Among the factors to be considered in determining
whether a suspension constitutes a discontinuance are:
[[Page 560]]
(i) Whether the employer may merely be calling an actual
discontinuance of contributions a suspension of such contributions in
order to avoid the requirement of full vesting as in the case of a
discontinuance, or for any other reason;
(ii) Whether contributions are recurring and substantial; and
(iii) Whether there is any reasonable probability that the lack of
contributions will continue indefinitely.
(2) Time of discontinuance. In any case in which a suspension of a
profit-sharing plan maintained by a single employer 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. In the case of a profit-sharing plan
maintained by more than one employer, the discontinuance becomes
effective not later than the last day of the plan year following the
plan year within which any employer made a substantial contribution
under the plan.
(e) Contributions or benefits which remain forfeitable. Under
section 411 (d) (2) and (3), section 411(a) and this section do not
apply to plan benefits which may not be provided for designated
employees in the event of early termination of the plan under provisions
of the plan adopted pursuant to regulations prescribed by the Secretary
or his delegate to preclude the discrimination prohibited by section
401(a)(4). Accordingly, in such a case, plan benefits may be required to
be reallocated without regard to this section. See Sec. 1.401-4(c).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42339, Aug. 23, 1977]
Sec. 1.411(d)-3 Other special rules.
(a) Class year plans--(1) General rule. Under section 411(d)(4), the
requirements of section 411(a)(2) for a class year plan shall be deemed
to be satisfied if such plan provides that each employee's rights to or
derived from employer contributions on his behalf for any plan year are
nonforfeitable no later than the end of the 5th plan year following the
plan year for which such contributions were made. For purposes of
section 411 and the regulations thereunder, the term ``class year plan''
means a profit-sharing, stock bonus, or money purchase plan which
provides that the nonforfeitable rights of employees to or derived from
employer contributions are determined separately for each plan year.
``See Sec. 1.411(d)-5 for rules that apply to class year plans for
contributions made for plan years beginning after October 22, 1986.''
(2) Other rules--(i) Prohibited forfeiture on withdrawals. In the
case of a class year plan, section 401(a)(19) and the regulations
thereunder shall be applied separately to each plan year.
(ii) Distribution rules. The rules of Sec. 1.411(a)-7(d) apply to a
class year plan. For example, under the rule in Sec. 1.411(a)-
7(d)(2)(ii)(D), a class year plan would be permitted to limit the time
of repayment to a 5-year period beginning on the date of withdrawal, or
under the rule in Sec. 1.411(a)-7(d)(2)(iii), a class year plan would
restore the amount of the forfeited account balance in the event of
repayment. For purposes of applying subparagraphs (2) and (3) of
Sec. 1.411(a)-7(d), relating to withdrawal of mandatory contributions, a
withdrawal of employee contributions shall be treated as a withdrawal of
such contributions on a plan year by plan year basis in succeeding order
of time. Any repayments shall be treated as being on account of plan
years in succeeding order of time. For purposes of applying any rule of
such paragraph (e.g., paragraph (d)(2)(ii)(C)) the term ``one-year break
in service'' means any plan year in which under subparagraph (1) of this
paragraph a class year plan may forfeit an employee's rights.
(iii) Computation of years for withdrawals. In applying the
requirement of paragraph (a)(1) of this section that rights must be
nonforfeitable no later than the end of the fifth plan year following
the plan year for which contributions are made, any plan year for which
there has been a withdrawal of contributions and no repayment of such
contributions (determined as of the last day of the plan year) is not
required to count toward the five years. For example, assume that
contributions are made for A in 1981 to a calendar year plan. Under the
general rule
[[Page 561]]
of paragraph (a)(1) of this section, the contributions must be
nonforfeitable on December 31, 1986. If in 1982, A withdraws the
contributions for 1981, and repays these contributions in 1984, 1982 and
1983 are not required to be counted toward the five years because at the
end of each year there is a withdrawal and no repayment of such
withdrawal. Accordingly, the plan must provide that A's interest in the
contribution for 1981 will be vested on December 31, 1988.
(b) Prohibition against accrued benefit decrease. Under section
411(d)(6) a plan is not a qualified plan (and a trust forming a part of
such plan is not a qualified trust) if a plan amendment decreases the
accrued benefit of any plan participant, unless the plan amendment
satisfies the requirements of section 412(c)(8) (relating to certain
retroactive amendments) and the regulations thereunder. For purposes of
determining whether or not any participant's accrued benefit is
decreased, all the provisions of a plan affecting directly or indirectly
the computation of accrued benefits which are amended with the same
adoption and effective dates shall be treated as one plan amendment.
Plan provisions indirectly affecting accrued benefits include, for
example, provisions relating to years of service and breaks in service
for determining benefit accrual, and to actuarial factors for
determining optional or early retirement benefits.
(c) Rules applicable to section 414(k) plan. For special rules
applicable to defined benefit plans which provide a benefit derived from
employer contributions which is based partly on a participant's separate
account, see section 414(k) and the regulations thereunder.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by T.D. 8038, 50 FR
29375, July 19, 1985; T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR
48534, Dec. 1, 1988]
Sec. 1.411(d)-4 Section 411(d)(6) protected benefits.
Q-1: What are ``section 411(d)(6) protected benefits''?
A-1: (a) In general. The term ``section 411(d)(6) protected
benefit'' includes any benefit that is described in one or more of the
following categories--
(1) Benefits described in section 411(d)(6)(A),
(2) Early retirement benefits and retirement-type subsidies
described in section 411(d)(6)(B)(i), including qualified social
security supplements as defined in Sec. 1.401(a)(4)-12, and
(3) Optional forms of benefit described in section 411(d)(6)(B)(ii).
Such benefits, to the extent they have accrued, are subject to the
protection of section 411(d)(6) and, where applicable, the definitely
determinable requirement of section 401(a) (including section
401(a)(25)) and cannot, therefore, be reduced, eliminated, or made
subject to employer discretion except to the extent permitted by
regulations.
(b) Optional forms of benefit--(1) In general. An ``optional form of
benefit'' is a distribution form with respect to an employee's benefit
(described in paragraph (a)(1) and/or (a)(2) of this Q&A-1) that is
available under the plan and is identical with respect to all features
relating to the distribution form, including the payment schedule,
timing, commencement, medium of distribution (e.g., in cash or in-kind),
the portion of the benefit to which such distribution features apply and
the election rights with respect to such optional forms. To the extent
there are any differences in such features, the plan provides separate
optional forms of benefit. Differences in amounts of benefits, methods
of calculation, or values of distribution forms do not result in
optional forms of benefit for purposes of this rule. However, such
amounts, methods of calculation, or values may be protected benefits
within section 411(d)(6)(A) and/or section 411(d)(6)(B)(i). See
Sec. 1.401(a)-4 for further discussion and examples relating to optional
forms of benefits. See Sec. 1.401(a)(4)-4(e)(1) for the definition of an
optional form of benefit for plan years beginning on or after January 1,
1994 (or January 1, 1996, 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)).
(2) Examples. The following examples illustrate the meaning of the
term
[[Page 562]]
``optional form of benefit.'' Other issues, such as the requirement that
the optional forms satisfy section 401(a)(4), are not addressed in these
examples and no inferences are intended with respect to such
requirements. Assume that the distribution forms, including those not
described in these examples, provided under the plan in each of the
following examples are identical in all respects not described.
Example 1. A plan permits each participant to receive his benefit
under the plan as a single sum distribution; a level monthly
distribution schedule over 15 years; a single life annuity; a joint and
50 percent survivor annuity; a joint and 75 percent survivor annuity; a
joint and 50 percent survivor annuity with a benefit increase for the
participant if the beneficiary dies before a specified date; and joint
and 50 percent survivor annuity with a 10 year certain feature. Each of
these benefit distribution options is an optional form of benefit
(without regard to whether the values of these options are actuarially
equivalent).
Example 2. A plan permits each participant to receive his benefit
under the plan as a single life annuity commencing at termination from
employment; a joint and 50 percent survivor annuity commencing at
termination from employment; a single sum distribution that is
actuarially equivalent to the single life annuity determined by using a
specified interest rate (X percent) for the employees of division A; and
a single sum distributions that is actuarially equivalent to the single
life annuity determined by using an interst rate that is 80 percent of X
percent for employees of Division B. This plan provides three optional
forms of benefit. While the interest rates used to determine the single
sum distributions available to the employees of Divisions A and the
employees of Division B respectively differ, this difference does not
result in two single sum optional forms of benefit.
Example 3. A plan permits each participant who is employed by
division A to receive his benefit in a single sum distribution payable
upon termination from employment and each participant who is employed by
division B in a single sum distribution payable upon termination from
employment on or after the attainment of age 50. This plan provides two
single sum optional forms of benefit.
Example 4. A plan permits each participant to receive his benefit in
a single life annuity that commences in the month after the
participant's termination from employment or in a single life annuity
that commences upon the completion of five consecutive one year breaks
in service. These are two optional forms of benefit.
Example 5. A profit-sharing plan permits each participant who is
employed by division A to receive an in-service distribution upon the
satisfaction of objective criteria set forth in the plan designed to
determine whether the participant has a heavy and immediate financial
need, and each participant who is employed by division B to receive an
in-service distribution upon the satisfaction of objective criteria set
forth in the plan designed to determine whether the participant has a
heavy and immediate financial need attributable to extraordinary medical
expenses. These in-service distribution options are two optional forms
of benefits.
Example 6. A profit-sharing plan permits each participant who is
employed by division A to receive an in-service distribution up to
$5,000 and each participant who is employed by division B to receive an
in-service distribution of up to his total benefit. These in-service
distribution options differ as to the portion of the accrued benefit
that may be distributed in a particular form and are, therefore, two
optional forms of benefit.
Example 7. A profit-sharing plan provides for a single sum
distribution on termination of employment. The plan is amended in 1991
to eliminate the single sum optional form of benefit with respect to
benefits accrued after the date of amendment. This single sum optional
form of benefit continues to be a single optional form of benefit
although, over time, the percentage of various employees' accrued
benefits that are potentially payable under this single sum may vary
because the form is only available with respect to benefits accrued up
to and including the date of the amendment.
Example 8. A profit-sharing plan permits each participant to receive
a single sum distribution of his benefit in cash or in the form of a
specified class of employer stock. This plan provides two single sum
distribution optinal forms of benefit.
Example 9. A stock bonus plan permits each participant to receive a
single sum distribution of his benefit in cash or in the form of the
property in which such participant's benefit was invested prior to the
distribution. This plan's single sum distribution option provides two
optional forms of benefit.
Example 10. A defined benefit plan provides for an early retirement
benefit payable upon termination of employment after attainment of age
55 and either after ten years of service or, if earlier, upon plan
termination to employees of Division A and provides for an identical
early retirement benefit payable on the same terms with the exception of
payment on plan termination to employees of Division B. The plan
provides for two optional forms of benefit.
Example 11. A profit-sharing plan provides for loans secured by an
employee's account balance. In the event of default on such a loan,
there is an execution on such account
[[Page 563]]
balances. Such execution is a distribution of the employee's accrued
benefits under the plan. A distribution of an accrued benefit contingent
on default under a plan loan secured by such accrued benefits is an
optional form of benefit under the plan.
(c) Plan terms--(1) General rule. Generally, benefits described in
section 411(d)(6)(A), early retirement benefits, retirement-type
subsidies, and optional forms of benefit are section 411(d)(6) protected
benefits only if they are provided under the terms of a plan. However,
if an employer establishes a pattern of repeated plan amendments
providing for similar benefits in similar situations for substantially
consecutive, limited periods of time, such benefits will be treated as
provided under the terms of the plan, without regard to the limited
periods of time, to the extent necessary to carry out the purposes of
section 411(d)(6) and, where applicable, the definitely determinable
requirement of section 401(a), including section 401(a)(25). A pattern
of repeated plan amendments providing that a particular optional form of
benefit is available to certain named employees for a limited period of
time is within the scope of this rule and may result in such optional
form of benefit being treated as provided under the terms of the plan to
all employees covered under the plan without regard to the limited
period of time and the limited group of named employees.
(2) Effective date. The provisions of paragraph (c)(1)of this Q&A-1
are effective as of July 11, 1988. Thus, patterns or repeated plan
amendments adopted and effective before July 11, 1988 will be
disregarded in determining whether such amendments have created an
ongoing optional form of benefit under the plan.
(d) Benefits that are not section 411(d)(6) protected benefits. The
following benefits are examples of items that are not section 411(d)(6)
protected benefits:
(1) Ancillary life insurance protection;
(2) Accident or health insurance benefits;
(3) Social security supplements described in section 411(a)(9),
except qualified social security supplements as defined in
Sec. 1.401(a)(4)-12;
(4) The availability of loans (other than the distribution of an
employee's accrued benefit upon default under a loan);
(5) The right to make after-tax employee contributions or elective
deferrals described in section 402(g)(3);
(6) The right to direct investments;
(7) The right to a particular form of investment (e.g., investment
in employer stock or securities or investment in certain types of
securities, commercial paper, or other investment media);
(8) The allocation dates for contributions, forfeitures, and
earnings, the time for making contributions (but not the conditions for
receiving an allocation of contributions or forfeitures for a plan year
after such conditions have been satisfied), and the valuation dates for
account balances;
(9) Administrative procedures for distributing benefits, such as
provisions relating to the particular dates on which notices are given
and by which elections must be made; and
(10) Rights that derive from administrative and operational
provisions, such as mechanical procedures for allocating investment
experience among accounts in defined contribution plans.
Q-2: To what extent may section 411(d)(6) protected benefits under a
plan be reduced or eliminated?
A-2: (a) Reduction or elimination of section 411(d)(6) protected
benefits--(1) In general. A plan may not be amended to eliminate or
reduce a section 411(d)(6) protected benefit that has already accrued,
except as provided in sections 412(c)(8) and 4281, and in this section.
This is generally the case even if such elimination or reduction is
contingent upon the employee's consent. However, a plan may be amended
to eliminate or reduce section 411(d)(6) protected benefits with respect
to benefits not yet accrued as of the later of the amendment's adoption
date or effective date without violating section 411(d)(6).
(2) Selection of optional forms of benefit--(i) General rule. A plan
may treat a participant as receiving his entire nonforfeitable accrued
benefit under the plan if the participant receives his benefit in an
optional form of benefit in an amount determined under the plan that is
at least the actuarial
[[Page 564]]
equivalent of the employee's nonforfeitable accrued benefit payable at
normal retirement age under the plan. This is true even though the
participant could have elected to receive an optional form of benefit
with a greater actuarial value than the value of the optional form
received, such as an optional form including retirement-type subsidies,
and without regard to whether such other, more valuable optional form
could have commenced immediately or could have become available only
upon the employee's future satisfaction of specified eligibility
conditions.
(ii) Election of an optional form. Except as provided in paragraph
(a)(2)(iii) of this Q&A-2, a plan does not violate section 411(d)(6)
merely because an employee's election to receive a portion of his
nonforfeitable accrued benefit in one optional form of benefit precludes
the employee from receiving that portion of his benefit in another
optional form of benefit. Such employee retains all 411(d)(6) protected
rights with respect to the entire portion of such employee's
nonforfeitable accrued benefit for which no distribution election was
made. For purposes of this rule, an elective transfer of an otherwise
distributable benefit is treated as the selection of an optional form of
benefit. See Q&A-3 of this section.
(iii) Buy-back rule. Notwithstanding paragraph (a)(2)(ii) of this
Q&A-2, an employee who received a distribution of his nonforfeitable
benefit from a plan that is required to provide a repayment opportunity
to such employee if he returns to service within the applicable period
pursuant to the requirements of section 411(a)(7) and who, upon
subsequent reemployment, repays the full amount of such distribution in
accordance with section 411(a)(7)(C) must be reinstated in the full
array of section 411(d)(6) protected benefits that existed with respect
to such benefit prior to distribution.
(iv) Examples. The rules in this paragraph (a)(2) can be illustrated
by the following examples:
Example 1. Defined benefit plan X provides, among its optional forms
of benefit, for a subsidized early retirement benefit payable in the
form of an annuity and available to employees who terminate from
employment on or after their 55th birthdays. In addition plan X provides
for a single sum distribution available on termination from employment
or termination of the plan. The single sum distribution is determined on
the basis of the present value of the accrued normal retirement benefit
and does not take the early retirement subsidy into account. Plan X is
terminated December 31, 1991. Employees U, age 47, V, age 55, and W, age
47, all continue in the service of the employer. Employees X, age 47, Y,
age 55 and Z, age 47, terminate from employment with the employer during
1991. Employees U and V elect to take the single sum optional form of
distribution at the time of plan termination. Employees X and Y elect to
take the single sum distribution on termination from employment with the
employer. The elimination of the subsidized early retirement benefit
with respect to employees U, V, X and Y does not result in a violation
of section 411(d)(6). This is the result even though employees U and X
had not yet satisfied the conditions for the subsidized early retirement
benefit. Because employees W and Z have not selected an optional form of
benefit, they continue to have a 411(d)(6) protected right to the full
array of section 411(d)(6) protected benefits provided under the plan,
including the single sum distribution form and the subsidized early
retirement benefit.
Example 2. A partially vested employee receives a single sum
distribution of the present value of his entire nonforfeitable benefit
on account of separation from service under a defined benefit plan
providing for a repayment provision. Upon reemployment with the employer
such employee makes repayment in the required amount in accordance with
section 411(a)(7). Such employee may, upon subsequent termination of
employment, elect to take such repaid benefits in any optional form
provided under the plan as of the time of the employee's initial
separation from service. If the plan was amended prior to such
repayment, to eliminate the single sum optional form of benefit with
respect to benefits accrued after the date of the amendment, such
participant has a 411(d)(6) protected right to take distribution of the
repaid benefit in the form of a single sum distribution.
(3) Certain transactions--(i) Plan mergers and benefit transfers.
The prohibition against the reduction or elimination of section
411(d)(6) protected benefits already accrued applies to plan mergers,
spinoffs, transfers, and transactions amending or having the effect of
amending a plan or plans to transfer plan benefits. Thus, for example,
if plan A, a profit-sharing plan that provides for distribution of plan
benefits in annual installments over ten or
[[Page 565]]
twenty years, is merged with plan B, a profit-sharing plan that provides
for distribution of plan benefits in annual installments over life
expectancy at time of retirement, the merged plan must retain the ten or
twenty year installment option for participants with respect to benefits
already accrued under plan A as of the merger and the installments over
life expectancy for participants with benefits already accrued under
plan B. Similarly, for example, if an employee's benefit under a defined
contribution plan is transferred to another defined contribution plan
(whether or not of the same employer), the optional forms of benefit
available with respect to the employee's benefit accrued under the
transferor plan may not be eliminated or reduced except as otherwise
permitted under this regulation. See Q&A-3 of this section with respect
to the transfer of benefits between and among defined benefit and
defined contribution plans.
(ii) Annuity contracts--(A) General rule. The right of a participant
to receive a benefit in the form of cash payments from the plan and the
right of a participant to receive that benefit in the form of the
distribution of an annuity contract that provides for cash payments that
are identical in all respects to the cash payments from the plan except
with respect to the source of the payments are not separate optional
forms of benefit. Therefore, for example, if a plan includes an optional
form of benefit under which benefits are distributed in the medium of an
annuity contract that provides for cash payments, that optional form of
benefit may be modified by a plan amendment that substitutes cash
payments from the plan for the annuity contract, where those cash
payments from the plan are identical to the cash payments payable from
the annuity contract in all respects except with respect to the source
of the payments. The protection provided by section 411(d)(6) may not be
avoided by the use of annuity contracts. Thus, section 411(d)(6)
protected benefits already accrued may not be eliminated or reduced
merely because a plan uses annuity contracts to provide such benefits,
without regard to whether the plan, a participant, or a beneficiary of a
participant holds the contract or whether such annuity contracts are
purchased as a result of the termination of the plan. However, to the
extent that an annuity contract constitutes payment of benefits in a
particular optional form elected by the participant, the plan does not
violate section 411(d)(6) merely because it provides that other optional
forms are no longer available with respect to such participant. See
paragraph (a)(2) of this Q&A-2.
(B) Examples. The provisions of this paragraph (a)(3)(ii) can be
illustrated by the following examples:
Example 1. A profit-sharing plan that is being terminated satisfies
section 411(d)(6) only if the plan makes available to participants
annuity contracts that provide for all section 411(d)(6) protected
benefits under the plan that may not otherwise be reduced or eliminated
pursuant to this Q&A-2. Thus, if such a plan provided for a single sum
distribution upon attainment of early retirement age, and a provision
for payment in the form of 10 equal annual installments, the plan would
satisfy section 411(d)(6) only if the participants had the opportunity
to elect to have their benefits provided under an annuity contract that
provided for the same single sum distribution upon the attainment of the
participant's early retirement age and the same 10 year installment
optional form of benefit.
Example 2. A defined benefit plan permits each participant who
separates from service on or after age 62 to receive a qualified joint
and survivor annuity or a single life annuity commencing 45 days after
termination from employment. For a participant who separates from
service before age 62, payments under these optional forms of benefit
commence 45 days after the participant's 62nd birthday. Under the plan,
a participant is to elect among these optional forms of benefit during
the 90-day period preceding the annuity starting date. However, during
such period, a participant may defer both benefit commencement and the
election of a particular benefit form to any later date, subject to
section 401(a)(9). In January 1990, the employer decides to terminate
the plan as of July 1, 1990. The plan will fail to satisfy section
411(d)(6) unless the optional forms of benefit provided under the plan
are preserved under the annuity contract purchased on plan termination.
Thus, such annuity contract must provide a participant the same optional
benefit commencement rights that the plan provided. In addition, such
contract must provide the same election rights with respect to such
benefit options. This is the case even if, for example, in conjunction
with the termination, the employer amended
[[Page 566]]
the plan to permit participants to elect a qualified joint and survivor
annuity, single life annuity, or single sum distribution commencing on
July 1, 1990.
(4) Benefits payable to a spouse or beneficiary. Section 411(d)(6)
protected benefits may not be eliminated merely because they are payable
with respect to a spouse or other beneficiary.
(b) Section 411(d)(6) protected benefits that may be eliminated or
reduced only as permitted by the Commissioner--(1) In general. The
Commissioner may, consistent with the provisions of this section,
provide for the elimination or reduction of section 411(d)(6) protected
benefits that have already accrued only to the extent that such
elimination or reduction does not result in the loss to plan
participants of either a valuable right or an employer-subsidized
optional form of benefit where a similar optional form of benefit with a
comparable subsidy is not provided or to the extent such elimination or
reduction is necessary to permit compliance with other requirements of
section 401(a) (e.g., sections 401(a)(4), 401(a)(9) and 415). The
Commissioner may exercise this authority only through the publication of
revenue rulings, notices, and other documents of general applicability.
(2) Section 411(d)(6) protected benefits that may be eliminated or
reduced. The elimination or reduction of certain section 411(d)(6)
protected benefits that have already accrued in the following situations
does not violate section 411(d)(6). The rules with respect to
permissible eliminations and reductions provided in this paragraph
(b)(2) generally are effective January 30, 1986; however, the rules of
paragraphs (b)(2)(iii) (A) and (B) and (b)(2)(viii) of this Q&A-2 are
effective for plan amendments that are adopted and effective on or after
September 6, 2000. These exceptions create no inference with respect to
whether any other applicable requirements are satisfied (for example,
requirements imposed by section 401(a)(9) and section 401(a)(14)).
(i) Change in statutory requirement. A plan may be amended to
eliminate or reduce a section 411(d)(6) protected benefit if the
following three requirements are met: the amendment constitutes timely
compliance with a change in law affecting plan qualification; there is
an exercise of section 7805(b) relief by the Commissioner; and the
elimination or reduction is made only to the extent necessary to enable
the plan to continue to satisfy the requirements for qualified plans. In
general, the elimination or reduction of a section 411(d)(6) protected
benefit will not be treated as necessary if it is possible through other
modifications to the plan (e.g., by expanding the availability of an
optional form of benefit to additional employees) to satisfy the
applicable qualification requirement.
(ii) Joint and survivor annuity. A plan that provides a range of
three or more actuarially equivalent joint and survivor annuity options
may be amended to eliminate any of such options, other than the options
with the largest and smallest optional survivor payment percentages,
even if the effect of such amendment is to change which of the options
is the qualified joint and survivor annuity under section 417. Thus, for
example, if a money purchase pension plan provides three joint and
survivor annuity options with survivor payments of 50%, 75% and 100%,
respectively, that are uniform with respect to age and are actuarially
equivalent, then the employer may eliminate the option with the 75%
survivor payment, even if this option had been the qualified joint and
survivor annuity under the plan.
(iii) In-kind distributions--(A) In-kind distributions payable under
defined contribution plans in the form of marketable securities other
than employer securities. If a defined contribution plan includes an
optional form of benefit under which benefits are distributed in the
form of marketable securities, other than securities of the employer,
that optional form of benefit may be modified by a plan amendment that
substitutes cash for the marketable securities as the medium of
distribution. For purposes of this paragraph (b)(2)(iii)(A) and
paragraph (b)(2)(iii)(B) of this Q&A-2, the term marketable securities
means marketable securities as defined in section 731(c)(2), and the
term securities of the employer means securities of the employer as
defined in section 402(e)(4)(E)(ii).
[[Page 567]]
(B) Amendments to defined contribution plans to specify medium of
distribution. If a defined contribution plan includes an optional form
of benefit under which benefits are distributable to a participant in a
medium other than cash, the plan may be amended to limit the types of
property in which distributions may be made to the participant to the
types of property specified in the amendment. For this purpose, the
types of property specified in the amendment must include all types of
property (other than marketable securities that are not securities of
the employer) that are allocated to the participant's account on the
effective date of the amendment and in which the participant would be
able to receive a distribution immediately before the effective date of
the amendment if a distributable event occurred. In addition, a plan
amendment may provide that the participant's right to receive a
distribution in the form of specified types of property is limited to
the property allocated to the participant's account at the time of
distribution that consists of property of those specified types.
(C) In-kind distributions after plan termination. If a plan includes
an optional form of benefit under which benefits are distributed in
specified property, that optional form of benefit may be modified for
distributions after plan termination by substituting cash for the
specified property as the medium of distribution to the extent that, on
plan termination, an employee has the opportunity to receive the
optional form of benefit in the form of the specified property. This
exception is not available, however, if the employer that maintains the
terminating plan also maintains another plan that provides an optional
form of benefit under which benefits are distributed in the specified
property.
(D) Examples. The following examples illustrate the application of
this paragraph (b)(2)(iii):
Example 1. (i) An employer maintains a profit-sharing plan under
which participants may direct the investment of their accounts. One
investment option available to participants is a fund invested in common
stock of the employer. The plan provides that the participant has the
right to a distribution in the form of cash upon termination of
employment. In addition, the plan provides that, to the extent a
participant's account is invested in the employer stock fund, the
participant may receive an in-kind distribution of employer stock upon
termination of employment. On October 18, 2000, the plan is amended,
effective on January 1, 2001, to remove the fund invested in employer
common stock as an investment option under the plan and to provide for
the stock held in the fund to be sold. The amendment permits
participants to elect how the sale proceeds are to be reallocated among
the remaining investment options, and provides for amounts not so
reallocated as of January 1, 2001, to be allocated to a specified
investment option.
(ii) The plan does not fail to satisfy section 411(d)(6) solely on
account of the plan amendment relating to the elimination of the
employer stock investment option, which is not a section 411(d)(6)
protected benefit. See paragraph (d)(7) of Q&A-1 of this section.
Moreover, because the plan did not provide for distributions of employer
securities except to the extent participants' accounts were invested in
the employer stock fund, the plan is not required operationally to offer
distributions of employer securities following the amendment. In
addition, the plan would not fail to satisfy section 411(d)(6) on
account of a further plan amendment, effective after the plan has ceased
to provide for an employer stock fund investment option (and
participants' accounts have ceased to be invested in employer
securities), to eliminate the right to a distribution in the form of
employer stock. See paragraph (b)(2)(iii)(B) of this Q&A-2.
Example 2. (i) An employer maintains a profit-sharing plan under
which a participant, upon termination of employment, may elect to
receive benefits in a single-sum distribution either in cash or in kind.
The plan's investments are limited to a fund invested in employer stock,
a fund invested in XYZ mutual funds (which are marketable securities),
and a fund invested in shares of PQR limited partnership (which are not
marketable securities).
(ii) The following alternative plan amendments would not cause the
plan to fail to satisfy section 411(d)(6):
(A) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership. See paragraph
(b)(2)(iii)(A) of this Q&A-2.
(B) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership, and that also provides that
only participants with employer stock allocated to their accounts as of
the effective date of the amendment have the right to distributions in
the form of employer stock, and that
[[Page 568]]
only participants with shares of PQR limited partnership allocated to
their accounts as of the effective date of the amendment have the right
to distributions in the form of shares of PQR limited partnership. To
comply with the plan amendment, the plan administrator retains a list of
participants with employer stock allocated to their accounts as of the
effective date of the amendment, and a list of participants with shares
of PQR limited partnership allocated to their accounts as of the
effective date of the amendment. See paragraphs (b)(2)(iii) (A) and (B)
of this Q&A-2.
(C) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership to the extent that those
assets are allocated to the participant's account at the time of the
distribution. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
(D) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership, and that provides that only
participants with employer stock allocated to their accounts as of the
effective date of the amendment have the right to distributions in the
form of employer stock, and that only participants with shares of PQR
limited partnership allocated to their accounts as of the effective date
of the amendment have the right to distributions in the form of shares
of PQR limited partnership, and that further provides that the
distribution of that stock or those shares is available only to the
extent that those assets are allocated to those participants' accounts
at the time of the distribution. To comply with the plan amendment, the
plan administrator retains a list of participants with employer stock
allocated to their accounts as of the effective date of the amendment,
and a list of participants with shares of PQR limited partnership
allocated to their accounts as of the effective date of the amendment.
See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
Example 3. (i) An employer maintains a stock bonus plan under which
a participant, upon termination of employment, may elect to receive
benefits in a single-sum distribution in employer stock. This is the
only plan maintained by the employer under which distributions in
employer stock are available. The employer decides to terminate the
stock bonus plan.
(ii) If the plan makes available a single-sum distribution in
employer stock on plan termination, the plan will not fail to satisfy
section 411(d)(6) solely because the optional form of benefit providing
a single-sum distribution in employer stock on termination of employment
is modified to provide that such distribution is available only in cash.
See paragraph (b)(2)(iii)(C) of this Q&A-2.
(iv) Coordination with diversification requirement. A tax credit
employee stock ownership plan (as defined in section 409(a)) or an
employee stock ownership plan (as defined in section 4975(e)(7)) may be
amended to provide that a distribution is not available in employer
securities to the extent that an employee elects to diversify benefits
pursuant to section 401(a)(28).
(v) Involuntary distributions. A plan may be amended to provide for
the involuntary distribution of an employee's benefit to the extent such
involuntary distribution is permitted under sections 411(a)(11) and
417(e). Thus, for example, an involuntary distribution provision may be
amended to require that an employee who terminates from employment 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, by
substituting the cash-out limit in effect under Sec. 1.411(a)-
11(c)(3)(ii) for $3,500, without violating section 411(d)(6). In
addition, for example, the employer may amend the plan to reduce the
involuntary distribution threshold from the cash-out limit in effect
under Sec. 1.411(a)-11(c)(3)(ii) to any lower amount and to eliminate
the involuntary single sum option for employees with benefits between
the cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii) and such
lower amount without violating section 411(d)(6). This rule does not
permit a plan provision permitting employer discretion with respect to
optional forms of benefit for employees the present value of whose
benefit is less than the cash-out limit in effect under Sec. 1.411(a)-
11(c)(3)(ii).
(vi) Distribution exception for certain profit-sharing plans--(A) In
general. If a defined contribution plan that is not subject to section
412 and does not provide for an annuity option is terminated, the plan
may be amended to provide for the distribution of a participant's
accrued benefit upon termination in a single sum optional form without
the participant's consent. The preceding sentence does not apply if the
employer maintains any other defined contribution plan (other than an
[[Page 569]]
employee stock ownership plan as defined in section 4975(e)(7)).
(B) Examples. The provisions of this paragraph (b)(2)(vi) can be
illustrated by the following examples:
Example 1. Employer X maintains a defined contribution plan that is
not subject to section 412. The plan provides for distribution in the
form of equal installments over five years or equal installments over
twenty years. X maintains no other defined contribution plans. X
terminates its defined contribution plan after amending the plan to
provide for the distribution of all participants' accrued benefits in
the form of single sum distributions, without obtaining participant
consent. Pursuant to the rule in this paragraph (b)(2)(iv), this
amendment does not violate the requirements of section 411(d)(6).
Example 2. Corporations X and Y are members of controlled group
employer XY. Both X and Y maintain defined contribution plans. X's plan,
which is not subject to section 412, covers only employees working for
X. Y's plan, which is subject to section 412, covers only employees
working for Y. X terminates its defined contribution plan. Because
employer XY maintains another defined contribution plan, plan X may not
provide for the distribution of participants' accrued benefits upon
termination without a participants' consent.
(vii) Distribution of benefits on default of loans. Notwithstanding
that the distribution of benefits arising from an execution on an
account balance used to secure a loan on which there has been a default
is an optional form of benefit, a plan may be amended to eliminate or
change a provision for loans, even if such loans would be secured by an
employee's account balance.
(viii) Provisions for transfer of benefits between and among defined
contribution plans and defined benefit plans. A plan may be amended to
eliminate provisions permitting the transfer of benefits between and
among defined contribution plans and defined benefit plans.
(ix) De minimis change in the timing of an optional form of benefit.
A plan may be amended to modify an optional form of benefit by changing
the timing of the availability of such optional form if, after the
change, the optional form is available at a time that is within two
months of the time such optional form was available before the
amendment. To the extent the optional form of benefit is available prior
to termination of employment, six months may be substituted for two
months in the prior sentence. Thus, for example, a plan that makes in-
service distributions available to employees once every month may be
amended to make such in-service distributions available only once every
six months. This exception to section 411(d)(6) relates only to the
timing of the availability of the optional form of benefit. Other
aspects of an optional form of benefit may not be modified and the value
of such optional form may not be reduced merely because of an amendment
permitted by this exception.
(x) Amendment of hardship distribution standards. A qualified cash
or deferred arrangement that permits hardship distributions under
Sec. 1.401(k)-1(d)(2) may be amended to specify or modify
nondiscriminatory and objective standards for determining the existence
of an immediate and heavy financial need, the amount necessary to meet
the need, or other conditions relating to eligibility to receive a
hardship distribution. For example, a plan will not be treated as
violating section 411(d)(6) merely because it is amended to specify or
modify the resources an employee must exhaust to qualify for a hardship
distribution or to require employees to provide additional statements or
representations to establish the existence of a hardship. A qualified
cash or deferred arrangement may also be amended to eliminate hardship
distributions. The provisions of this paragraph also apply to profit-
sharing or stock bonus plans that permit hardship distributions, whether
or not the hardship distributions are limited to those described in
Sec. 1.401(k)-1(d)(2).
(xi) Section 415 benefit limitations. Accrued benefits under a plan
as of the first day of the first limitation year beginning after
December 31, 1986, that exceed the benefit limitations under section 415
(b) or (e), effective on the first day of the plan's first limitation
year beginning after December 31, 1986, because of a change in the terms
and conditions of the plan made after May 5, 1986, or the establishment
of a plan after that date, may be reduced to the
[[Page 570]]
level permitted under section 415 (b) or (e).
(c) Serial amendments. A plan amendment that modifies an optional
form of benefit with respect to benefits already accrued will be
evaluated in light of previous amendments. Thus, for example, amendments
made at different times that, when taken together, constitute the
elimination or reduction of a valuable right, will be treated as the
impermissible elimination or reduction of an optional form of benefit
even though each amendment, considered alone, may otherwise be
permissible.
(d) ESOP and stock bonus plan exception--(1) In general. Subject to
the limitations in paragraph (d)(2) of this Q&A-2, a tax credit employee
stock ownership plan (as defined in section 409(a)) or an employee stock
ownership plan (as defined in section 4975(e)(7)) will not be treated as
violating the requirements of section 411(d)(6) merely because of any of
the circumstances described in paragraphs (d)(1)(i) through (d)(1)(iv)
of this Q&A-2. In addition, a stock bonus plan that is not an employee
stock ownership plan will not be treated as violating the requirements
of section 411(d)(6) merely because of any of the circumstances
described in paragraphs (d)(1)(ii) and (d)(1)(iv) of this Q&A-2.
(i) Single sum or installment optional forms of benefit. The
employer eliminates, or retains the discretion to eliminate, with
respect to all participants, a single sum optional form or installment
optional form with respect to benefits that are subject to section
409(h)(1)(B), provided such elimination or retention of discretion is
consistent with the distribution and payment requirements otherwise
applicable to such plans (e.g., those required by section 409).
(ii) Employer becomes substantially employee-owned or is an S
corporation. The employer eliminates, or retains the discretion to
eliminate, with respect to all participants, optional forms of benefit
by substituting cash distributions for distributions in the form of
employer stock with respect to benefits subject to section 409(h) in the
circumstances described in paragraph (d)(1)(ii)(A) or (B) of this Q&A-2,
but only if the employer otherwise meets the requirements of section
409(h)(2)--
(A) The employer becomes substantially employee-owned; or
(B) For taxable years of the employer beginning after December 31,
1997, the employer is an S corporation as defined in section 1361.
(iii) Employer securities become readily tradable. The employer
eliminates, or retains the discretion to eliminate, with respect to all
participants, in cases in which the employer securities become readily
tradable, optional forms of benefit by substituting distributions in the
form of employer securities for distributions in cash with respect to
benefits that are subject to section 409(h).
(iv) Employer securities cease to be readily tradable or certain
sales. The employer eliminates, or retains the discretion to eliminate,
with respect to all participants, optional forms of benefit by
substituting cash distributions for distributions in the form of
employer stock with respect to benefits that are subject to section
409(h) in the following circumstances:
(A) The employer stock ceases to be readily tradable;
(B) The employer stock continues to be readily tradable but there is
a sale of substantially all of the stock of the employer or a sale of
substantially all of the assets of a trade or business of the employer
and, in either situation, the purchasing employer continues to maintain
the plan.
In the situation described in paragraph (d)(1)(iv)(B) of this Q&A-2, the
employer may also substitute distributions in the purchasing employer's
stock for distributions in the form of employer stock of the predecessor
employer.
(2) Limitations on ESOP and stock bonus plan exceptions--(i)
Nondiscrimination requirement. Plan amendments and the retention and
exercise of discretion permitted under the exceptions in paragraph
(d)(1) must meet the nondiscrimination requirements of section
401(a)(4).
(ii) ESOP investment requirement. Except as provided in paragraph
(d)(2)(iii) of this Q&A-2, benefits provided by employee stock ownership
plans will not
[[Page 571]]
be eligible for the exceptions in paragraph (d)(1) of this Q&A-2 unless
the benefits have been held in a tax credit employee stock ownership
plan (as defined in section 409 (a)) or an employee stock ownership plan
(as defined in section 4975 (e)(7)) subject to section 409 (h) for the
five-year period prior to the exercise of employer discretion or any
amendment affecting such benefits and permitted under paragraph (d)(1)
of this Q&A-2. For purposes of the preceding sentence, if benefits held
under an employee stock ownership plan are transferred to a plan that is
an employee stock ownership plan at the time of transfer, then the
consecutive periods under the transferor and transferee employee stock
ownership plans may be aggregated for purposes of meeting the five-year
requirement. If the benefits are held in an employee stock ownership
plan throughout the entire period of their existence, and such total
period of existence is less than five years, then such lesser period may
be substituted for the five year requirement.
(3) Effective date. The provisions of this paragraph (d) are
effective beginning with the first day of the first plan year commencing
on or after January 1, 1989. Prior to this effective date the reduction
or elimination of a section 411(d)(6) protected benefit by a tax credit
employee stock ownership plan (as defined in section 409(a)) or an
employee stock ownership plan (as defined in section 4975(e)(7)) will
not be treated as violating the requirements of section 411(d)(6) if
such reduction or elimination reflects a reasonable interpretation of
the statutory language of section 411(d)(6)(C).
(4) Additional exceptions and requirements. The Commissioner may, in
revenue rulings, notices or other documents of general applicability,
prescribe such additional rules and exceptions, consistent with the
purposes of this section, as may be necessary or appropriate.
(e) Permitted plan amendments affecting alternative forms of payment
under defined contribution plans--(1) General rule. A defined
contribution plan does not violate the requirements of section 411(d)(6)
merely because the plan is amended to eliminate or restrict the ability
of a participant to receive payment of accrued benefits under a
particular optional form of benefit if--
(i) After the plan amendment is effective with respect to the
participant, the alternative forms of payment available to the
participant include payment in a single-sum distribution form that is
otherwise identical to the optional form of benefit that is being
eliminated or restricted; and
(ii) The amendment does not apply to the participant with respect to
any distribution with an annuity starting date that is earlier than the
earlier of--
(A) The 90th day after the date the participant has been furnished a
summary that reflects the amendment and that satisfies the requirements
of 29 CFR 2520.104b-3 (relating to a summary of material modifications)
for pension plans; or
(B) The first day of the second plan year following the plan year in
which the amendment is adopted.
(2) Otherwise identical single-sum distribution. For purposes of
this paragraph (e), a single-sum distribution form is otherwise
identical to an optional form of benefit that is eliminated or
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the
single-sum distribution form is identical in all respects to the
eliminated or restricted optional form of benefit (or would be identical
except that it provides greater rights to the participant) except with
respect to the timing of payments after commencement. For example, a
single-sum distribution form is not otherwise identical to a specified
installment form of benefit if the single-sum distribution form is not
available for distribution on the date on which the installment form
would have been available for commencement, is not available in the same
medium of distribution as the installment form, or imposes any condition
of eligibility that did not apply to the installment form. However, an
otherwise identical distribution form need not retain rights or features
of the optional form of benefit that is eliminated or restricted to the
extent that those rights or features would not be protected from
elimination or restriction under section 411(d)(6) or this section.
[[Page 572]]
(3) Examples. The following examples illustrate the application of
this paragraph (e):
Example 1. (i) P is a participant in Plan M, a qualified profit-
sharing plan with a calendar plan year that is invested in mutual funds.
The distribution forms available to P under Plan M include a
distribution of P's vested account balance under Plan M in the form of
distribution of various annuity contract forms (including a single life
annuity and a joint and survivor annuity). The annuity payments under
the annuity contract forms begin as of the first day of the month
following P's termination of employment (or as of the first day of any
subsequent month, subject to the requirements of section 401(a)(9)). P
has not previously elected payment of benefits in the form of a life
annuity, and Plan M is not a direct or indirect transferee of any plan
that is a defined benefit plan or a defined contribution plan that is
subject to section 412. Plan M provides that distributions on the death
of a participant are made in accordance with section
401(a)(11)(B)(iii)(I). On May 15, 2001, Plan M is amended so that, after
the amendment is effective, P is no longer entitled to any distribution
in the form of the distribution of an annuity contract. However, after
the amendment is effective, P is entitled to receive a single-sum cash
distribution of P's vested account balance under Plan M payable as of
the first day of the month following P's termination of employment (or
as of the first day of any subsequent month, subject to the requirements
of section 401(a)(9)). The amendment does not apply to P if P elects to
have annuity payments begin before the earlier of January 1, 2003, or 90
days after the date on which the plan administrator of Plan M furnishes
P with a summary that reflects the amendment and that satisfies the
requirements of 29 CFR 2520.104b-3. On December 14, 2001, the plan
administrator of Plan M furnishes P with a summary plan description that
reflects the amendment and that satisfies the requirements of 29 CFR
2520.104b-3.
(ii) Plan M does not violate the requirements of section 411(d)(6)
(or section 401(a)(11)) merely because, as of March 14, 2002, the plan
amendment has eliminated P's option to receive a distribution in any of
the various annuity contract forms previously available.
Example 2. (i) P is a participant in Plan M, a qualified profit-
sharing plan to which section 401(a)(11)(A) does not apply. Upon
termination of employment, P is entitled to receive cash distributions
from Plan M, payable as of the first day of the month following P's
termination of employment (or as of the first day of any subsequent
month, subject to the requirements of section 401(a)(9)), in the form of
a single-sum distribution, or in substantially equal monthly installment
payments over either 5, 10, 15, or 20 years. On May 15, 2001, Plan M is
amended so that, after the amendment is effective, P is no longer
entitled to receive a distribution in the form of substantially equal
monthly installment payments over 5, 10, 15, or 20 years. However, after
the amendment is effective, P continues to be entitled to receive cash
distributions from Plan M, payable as of the first day of the month
following P's termination of employment (or as of the first day of any
subsequent month, subject to the requirements of section 401(a)(9)), in
the form of a single-sum distribution. The amendment does not apply to P
if P elects to have annuity payments begin before January 1, 2002. On
September 20, 2001, the plan administrator of Plan M furnishes P with a
summary of material modifications that reflects the amendment and that
satisfies the requirements of 29 CFR 2520.104b-3.
(ii) Plan M does not violate the requirements of section 411(d)(6)
merely because, as of January 1, 2002, the plan amendment has eliminated
P's option to receive a distribution in the form of substantially equal
monthly installment payments over 5, 10, 15, or 20 years.
(4) Effective date. This paragraph (e) applies to plan amendments
that are adopted on or after September 6, 2000.
Q-3 Does the transfer of benefits between and among defined benefit
plans and defined contribution plans (or similar transactions) violate
the requirements of section 411(d)(6)?
A-3 (a) Transfers and similar transactions--(1) General rule.
Section 411(d)(6) protected benefits may not be eliminated by reason of
transfer or any transaction amending or having the effect of amending a
plan or plans to transfer benefits. Thus, for example, except as
otherwise provided in this section, an employer who maintains a money
purchase pension plan that provides for a single sum optional form of
benefit may not establish another plan that does not provide for this
optional form of benefit and transfer participants' account balances to
such new plan.
(2) Defined benefit feature and separate account feature. The
defined benefit feature of an employee's benefit under a defined benefit
plan and the separate account feature of an employee's benefit under a
defined contribution plan are section 411(d)(6) protected benefits.
Thus, for example, the elimination of
[[Page 573]]
the defined benefit feature of an employee's benefit under a defined
benefit plan, through transfer of benefits from a defined benefit plan
to a defined contribution plan or plans, will violate section 411(d)(6).
(3) Waiver prohibition. In general, except as provided in paragraph
(b) of this Q&A-3, a participant may not elect to waive section
411(d)(6) protected benefits. Thus, for example, the elimination of the
defined benefit feature of a participant's benefit under a defined
benefit plan by reason of a transfer of such benefits to a defined
contribution plan pursuant to a participant election, at a time when the
benefit is not distributable to the participant, violates section
411(d)(6).
(4) Direct rollovers. A direct rollover described in Q&A-3 of
Sec. 1.401(a)(31)-1 that is paid to a qualified plan is not a transfer
of assets and liabilities that must satisfy the requirements of section
414(l), and is not a transfer of benefits for purposes of applying the
requirements under section 411(d)(6) and paragraph (a)(1) of this Q&A-3.
Therefore, for example, if such a direct rollover is made to another
qualified plan, the receiving plan is not required to provide, with
respect to amounts paid to it in a direct rollover, the same optional
forms of benefit that were provided under the plan that made the direct
rollover. See Sec. 1.401(a)(31)-1, Q&A-14.
(b) Elective transfers of benefits between defined contribution
plans--(1) General rule. A transfer of a participant's entire benefit
between qualified defined contribution plans (other than any direct
rollover described in Q&A-3 of Sec. 1.401(a)(31)-1) that results in the
elimination or reduction of section 411(d)(6) protected benefits does
not violate section 411(d)(6) if the following requirements are met--
(i) Voluntary election. The plan from which the benefits are
transferred must provide that the transfer is conditioned upon a
voluntary, fully-informed election by the participant to transfer the
participant's entire benefit to the other qualified defined contribution
plan. As an alternative to the transfer, the participant must be offered
the opportunity to retain the participant's section 411(d)(6) protected
benefits under the plan (or, if the plan is terminating, to receive any
optional form of benefit for which the participant is eligible under the
plan as required by section 411(d)(6)).
(ii) Types of plans to which transfers may be made. To the extent
the benefits are transferred from a money purchase pension plan, the
transferee plan must be a money purchase pension plan. To the extent the
benefits being transferred are part of a qualified cash or deferred
arrangement under section 401(k), the benefits must be transferred to a
qualified cash or deferred arrangement under section 401(k). To the
extent the benefits being transferred are part of an employee stock
ownership plan as defined in section 4975(e)(7), the benefits must be
transferred to another employee stock ownership plan. Benefits
transferred from a profit-sharing plan other than from a qualified cash
or deferred arrangement, or from a stock bonus plan other than an
employee stock ownership plan, may be transferred to any type of defined
contribution plan.
(iii) Circumstances under which transfers may be made. The transfer
must be made either in connection with an asset or stock acquisition,
merger, or other similar transaction involving a change in employer of
the employees of a trade or business (i.e., an acquisition or
disposition within the meaning of Sec. 1.410(b)-2(f)) or in connection
with the participant's change in employment status to an employment
status with respect to which the participant is not entitled to
additional allocations under the transferor plan.
(2) Applicable qualification requirements. A transfer described in
this paragraph (b) is a transfer of assets or liabilities within the
meaning of section 414(l)(1) and, thus, must satisfy the requirements of
section 414(l). In addition, this paragraph (b) only provides relief
under section 411(d)(6); a transfer described in this paragraph must
satisfy all other applicable qualification requirements. Thus, for
example, if the survivor annuity requirements of sections 401(a)(11) and
417 apply to the plan from which the benefits are transferred, as
described in this paragraph (b), but do not otherwise
[[Page 574]]
apply to the receiving plan, the requirements of sections 401(a)(11) and
417 must be met with respect to the transferred benefits under the
receiving plan. In addition, the vesting provisions under the receiving
plan must satisfy the requirements of section 411(a)(10) with respect to
the amounts transferred.
(3) Status of elective transfer as other right or feature. A right
to a transfer of benefits from a plan pursuant to the elective transfer
rules of this paragraph (b) is an other right or feature within the
meaning of Sec. 1.401(a)(4)-4(e)(3), the availability of which is
subject to the nondiscrimination requirements of section 401(a)(4) and
Sec. 1.401(a)(4)-4. However, for purposes of applying the rules of
Sec. 1.401(a)(4)-4, the following conditions are to be disregarded in
determining the employees to whom the other right or feature is
available--
(i) A condition restricting the availability of the transfer to
benefits of participants who are transferred to a different employer in
connection with a specified asset or stock disposition, merger, or other
similar transaction involving a change in employer of the employees of a
trade or business (i.e., a disposition within the meaning of
Sec. 1.410(b)-2(f)), or in connection with any such disposition, merger,
or other similar transaction.
(ii) A condition restricting the availability of the transfer to
benefits of participants who have a change in employment status to an
employment status with respect to which the participant is not entitled
to additional allocations under the transferor plan.
(c) Elective transfers of certain distributable benefits between
qualified plans--(1) In general. A transfer of a participant's benefits
between qualified plans that results in the elimination or reduction of
section 411(d)(6) protected benefits does not violate section 411(d)(6)
if--
(i) The transfer occurs at a time at which the participant's
benefits are distributable (within the meaning of paragraph (c)(3) of
this Q&A-3);
(ii) For a transfer that occurs on or after January 1, 2002, the
transfer occurs at a time at which the participant is not eligible to
receive an immediate distribution of the participant's entire
nonforfeitable accrued benefit in a single-sum distribution that would
consist entirely of an eligible rollover distribution within the meaning
of section 401(a)(31)(C);
(iii) The voluntary election requirements of paragraph (b)(1)(i) of
this Q&A-3 are met;
(iv) The participant is fully vested in the transferred benefit in
the transferee plan;
(v) In the case of a transfer from a defined contribution plan to a
defined benefit plan, the defined benefit plan provides a minimum
benefit, for each participant whose benefits are transferred, equal to
the benefit, expressed as an annuity payable at normal retirement age,
that is derived solely on the basis of the amount transferred with
respect to such participant; and
(vi) The amount of the benefit transferred, together with the amount
of any contemporaneous section 401(a)(31) direct rollover to the
transferee plan, equals the entire nonforfeitable accrued benefit under
the transferor plan of the participant whose benefit is being
transferred, calculated to be at least the greater of the single-sum
distribution provided for under the plan for which the participant is
eligible (if any) or the present value of the participant's accrued
benefit payable at normal retirement age (calculated by using interest
and mortality assumptions that satisfy the requirements of section
417(e) and subject to the limitations imposed by section 415).
(2) Treatment of transfer--(i) In general. A transfer of benefits
pursuant to this paragraph (c) generally is treated as a distribution
for purposes of section 401(a). For example, the transfer is subject to
the cash-out rules of section 411(a)(7), the early termination
requirements of section 411(d)(2), and the survivor annuity requirements
of sections 401(a)(11) and 417. A transfer pursuant to the elective
transfer rules of this paragraph (c) is not treated as a distribution
for purposes of the minimum distribution requirements of section
401(a)(9).
(ii) Status of elective transfer as optional form of benefit. A
right to a transfer of benefits from a plan pursuant to
[[Page 575]]
the elective transfer rules of this paragraph (c) is an optional form of
benefit under section 411(d)(6), the availability of which is subject to
the nondiscrimination requirements of section 401(a)(4) and
Sec. 1.401(a)(4)-4.
(3) Distributable benefits. For purposes of paragraph (c)(1)(i) of
this Q&A-3, a participant's benefits are distributable on a particular
date if, on that date, the participant is eligible, under the terms of
the plan from which the benefits are transferred, to receive an
immediate distribution of these benefits (e.g., in the form of an
immediately commencing annuity) from that plan under provisions of the
plan not inconsistent with section 401(a).
(d) Effective date. This Q&A-3 is applicable for transfers made on
or after September 6, 2000.
Q-4: May a plan provide that the employer may, through the exercise
of discretion, deny a participant a section 411(d)(6) protected benefit
for which the participant is otherwise eligible?
A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of
this section with respect to certain employee stock ownership plans, a
plan that permits the employer, either directly or indirectly, through
the exercise of discretion, to deny a participant a section 411(d)(6)
protected benefit provided under the plan for which the participant is
otherwise eligible (but for the employer's exercise of discretion)
violates the requirements of section 411(d)(6). A plan provision that
makes a section 411(d)(6) protected benefit available only to those
employees as the employer may designate is within the scope of this
prohibition. Thus, for example, a plan provision under which only
employees who are designated by the employer are eligible to receive a
subsidized early retirement benefit constitutes an impermissible
provision under section 411(d)(6). In addition, a pension plan that
permits employer discretion to deny the availability of a section
411(d)(6) protected benefit violates the definitely determinable
requirement of section 401(a), including section 401(a)(25). See
Sec. 1.401-1(b)(1)(i). This is the result even if the plan specifically
limits the employer's discretion to choosing among section 411(d)(6)
protected benefits, including optional forms of benefit, that are
actuarially equivalent. In addition, the provisions of sections
411(a)(11) and 417(e) that allow a plan to make involuntary
distributions of certain amounts are not excepted from this limitation
on employer discretion. Thus, for example, a plan may not permit
employer discretion with respect to whether benefits will be distributed
involuntarily in the event that the present value of the employee's
benefit is not more than the cash-out limit in effect under
Sec. 1.411(a)-11(c)(3)(ii) within the meaning of sections 411(a)(11) and
417(e). (An exception is provided for such provisions with respect to
the nondiscrimination requirements of section 401(a)(4). See
Sec. 1.401(a)(4)-4(b)(2)(ii)(C).)
(b) Exception for administrative discretion. A plan may permit
limited discretion with respect to the ministerial or mechanical
administration of the plan, including the application of objective plan
criteria specifically set forth in the plan. Such plan provisions do not
violate the requirements of section 411(d)(6) or the definitely
determinable requirement of section 401(a), including section
401(a)(25). For example, these requirements are not violated by the
following provisions that permit limited administrative discretion:
(1) Commencement of benefit payments as soon as administratively
feasible after a stated date or event;
(2) Employer authority to determine whether objective criteria
specified in the plan (e.g., objective criteria designed to identify
those employees with a heavy and immediate financial need or objective
criteria designed to determine whether an employee has a permanent and
total disability) have been satisfied; and
(3) Employer authority to determine, pursuant to specific guidelines
set forth in the plan, whether the participant or spouse is dead or
cannot be located.
Q-5: When will the exercise of discretion by some person or persons,
other than the employer, be treated as employer discretion?
A-5: For purposes of applying the rules of this section and
Sec. 1.401(a)-4, the term ``employer'' includes plan administrator,
fiduciary, trustee, actuary,
[[Page 576]]
independent third party, and other persons. Thus, if a plan permits any
person, other than the participant (and other than the participant's
spouse), the discretion to deny or limit the availability of a section
411(d)(6) protected benefit for which the employee is otherwise eligible
under the plan (but for the exercise of such discretion), such plan
violates the requirements of sections 401(a), including section
411(d)(6) and, where applicable, the definitely determinable requirement
of section 401(a), including section 401(a)(25).
Q-6: May a plan condition the availability of a section 411(d)(6)
protected benefit on the satisfaction of objective conditions that are
specifically set forth in the plan?
A-6: (a) Certain objective conditions permissible--(1) In general.
The availability of a section 411(d)(6) protected benefit may be limited
to employees who satisfy certain objective conditions provided the
conditions are ascertainable, clearly set forth in the plan and not
subject to the employer's discretion except to the extent reasonably
necessary to determine whether the objective conditions have been met.
Also, the availability of the section 411(d)(6) protected benefit must
meet the nondiscrimination requirements of section 401(a)(4). See
Sec. 1.401(a)-4.
(2) Examples of permissible conditions. The following examples
illustrate of permissible objective conditions: a plan may deny a single
sum distribution form to employees for whom life insurance is not
available at standard rates as defined under the terms of the plan at
the time the single sum distribution would otherwise be payable; a plan
may provide that a single sum distribution is available only if the
employee is in extreme financial need as defined under the terms of the
plan at the time the single sum distribution would otherwise be payable;
a plan my condition the availability of a single sum distribution on the
execution of a covenant not to compete, provided that objective
conditions with respect to the terms of such covenant and the employees
and circumstances requiring execution of such covenant are set forth in
the plan.
(b) Conditions based on factors within employer's discretion
generally impermissible. A plan may not limit the availability of
section 411(d)(6) protected benefits permitted under the plan on
objective conditions that are within the employer's discretion. For
example, the availability of section 411(d)(6) protected benefits in a
plan may not be conditioned on a determination with respect to the level
of the plan's funded status, because the amount of plan funding is
within the employer's discretion. However, for example, although
conditions based on the plan's funded status are impermissible, a plan
may limit the availability of a section 411(d)(6) protected benefit
(e.g., a single sum distribution) in an objective manner, such as the
following:
(1) Single sum distributions of $25,000 and less are available
without limit; and
(2) Single sum distributions in excess of $25,000 are available for
a year only to the extent that the total amount of such single sum
distributions for the year is not greater than $5,000,000; and
(3) An objective and nondiscriminatory method for determining which
particular single sum distributions will not be available during a year
in order for the $5,000,000 limit to be satisfied is set forth in the
plan.
Q-7: May a plan be amended to add employer discretion or conditions
restricting the availability of a section 411(d)(6) protected benefit?
A-7: No. The addition of employer discretion or objective conditions
with respect to a section 411(d)(6) protected benefit that has already
accrued violates section 411(d)(6). Also, the addition of conditions
(whether or not objective) or any change to existing conditions with
respect to section 411(d)(6) protected benefits that results in any
further restriction violates section 411(d)(6). However, the addition of
objective conditions to a section 411(d)(6) protected benefit may be
made with respect to benefits accrued after the later of the adoption or
effective date of the amendment. In addition, objective conditions may
be imposed on section 411(d)(6) protected benefits accrued as of the
date of an amendment where permitted under the transitional rules of
Sec. 1.401(a)-4 Q&A-5 and Q&A-8 of this
[[Page 577]]
section. Finally, objective conditions may be imposed on section
411(d)(6) protected benefits to the extent permitted by the permissible
benefit cutback provisions of Q&A-2 of this section.
Q-8: If a plan contains an impermissible employer discretion
provision with respect to a section 411(d)(6) protected benefit, what
acceptable alternative exist for amending the plan without violating the
requirements of section 411(d)(6)?
A-8: (a) In general. The following rules apply for purposes of
making necessary amendments to existing plans (as defined in Q&A-9 of
this section) that contain discretion provisions with respect to the
availability of section 411(d)(6) protected benefits that violate the
requirements of section 401(a), including sections 401(a)(25) and
411(d)(6), and this section. These transitional rules are provided under
the authority of section 411(d)(6) and section 7805(b).
(b) Transitional alternatives. If the availability of an optional
forms of benefit, early or late retirement benefit, or retirement-type
subsidy under an existing plan is conditioned on the exercise of
employer discretion, the plan must be amended either to eliminate the
optional form of benefit, early or late retirement benefit, or
retirement-type subsidy to make such benefit available to all
participants without limitation, or to apply objective and
nondiscriminatory conditions to the availability of the optional form of
benefit, early or later retirement benefit, or retirement-type subsidy.
See paragraph (d) of this Q&A-8 for rules limiting the period during
which section 411(d)(6) protected benefits 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 (as determined under Q&A-9 of this section), the plan sponsor
must select one of the alternatives permitted under paragraph (b) of the
Q&A-8 with respect to each affected section 411(d)(6) protected benefit
and the plan must be operated in accordance with this selection. This is
an operational requirement and does not require a plan amendment prior
to the period set forth in paragraph (c)(2) of this Q&A-8. There are no
special reporting requirements under the Code or this section with
respect to this selection.
(2) Deferred amendment date. If paragraph (c)(1) of this Q&A-8 is
satisfied, a plan amendment conforming the plan to the particular
alternative selected under paragraph (b) of this Q&A-8 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. The plan amendment
to conform the plan to these regulations may be made at an earlier date.
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 any existing calendar year noncollectively bargained defined benefit
plan has a single sum distribution option that is subject to employer
discretion as of August 1, 1986, and such employer makes one or more
single sum distributions available on or after January 1, 1989 and
before the effective date by which plan amendment is required pursuant
to this section, then such employer may not adopt a plan amendment
eliminating the single sum distribution, but rather must adopt an
amendment eliminating the discretion provision. Any objective conditions
that are adopted as part of such amendment must not be inconsistent 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 section 411(d)(6) protected 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 section
411(d)(6) protected benefits are only permissible until the applicable
effective date for the plan (see Q&A-9 of this section). After the
applicable effective date, any amendment (other than one permitted under
paragraph (c)(2) of this Q&A-8) that eliminates or reduces a section
411(d)(6) protected benefit or imposes new objective
[[Page 578]]
conditions on the availability of such benefit will fail to qualify for
the exception to section 411(d)(6) provided in this Q&A-8. This is the
case without regard to whether the section 411(d)(6) protected benefit
is subject to employer discretion.
Q-9: What are the applicable effective date rules for purposes of
this section?
A-9: (a) General effective date. Except as otherwise provided in
this section, the provisions of this section are effective January 30,
1986.
(b) New plans--(1) In general. Unless otherwise provided in
paragraph (b)(2) of this Q&A-9, plans that are either adopted or made
effective on or after August 1, 1986, are ``new plans''. With respect to
such new plans, this section is effective August 1, 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-9; under which the
availability of a section 411(d)(6) protected benefit is subject to
employer discretion; 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 section 411(d)(6) protected 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-8 of this section.
(c) Existing plans--(1) In general. Plans, including plans that are
adoptions of master or prototype plans, that are both adopted and in
effect prior to August 1, 1986, are ``existing plans'' for purposes of
this section. In addition, a plan that is established after July 31,
1986, but before January 1, 1989, as an initial adoption of a master or
prototype plan for which a favorable opinion letter was issued by the
Service after July 18, 1985 and before January 1, 1989, will be deemed
to be an existing plan for purposes of this section. See sections 4.01
and 4.02 of Rev. Proc. 84-23, 1984-1 C.B. 457, 459, for the definitions
of master prototype plans. However, if such plan ceases to be covered
under an opinion letter of the type described above, as a result of
amendment of the plan or adoption of a new plan, prior to the first day
of the first plan year beginning on or after January 1, 1989, then the
effective date for such plan will be determined as though the plan were
a new plan initially adopted as of the date of such amendment or
adoption of a new plan. Finally, new plans described in paragraph (b)(2)
of this Q&A-9 are treated as existing plans with respect to certain
section 411(d)(6) protected benefits. Subject to the limitations in
paragraph (c) of this Q&A-9, the effective dates set forth in paragraphs
(c)(2), (c)(3), and (c)(4) of this Q&A-9 apply to these existing plans
for purposes of this section:
(2) Existing noncollectively bargained plans. With respect to
existing plans other than collectively 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.
(4) Existing master and prototype plans. With respect to existing
plans that are adoptions of master or prototype plans the effective date
will be the first day of the first plan year commencing on or after
January 1, 1989.
(d) Delayed effective date not applicable to new alternatives or
conditions--(1) In general. The delayed effective dates in paragraphs
(c)(2) and (c)(3) of this Q&A-9 for existing plans are only applicable
with respect to a section 411(d)(6) protected benefit if both the
section 411(d)(6) protected benefit and the condition providing employer
discretion as to the availability of such benefit are both adopted and
in effect prior to August 1, 1986. If the preceding sentence is not
satisfied with respect to a particular section 411(d)(6) protected
benefit, this section is effective with respect to such section
411(d)(6) protected benefit as if the plan were a new plan.
[[Page 579]]
(2) Addition of discretion on or after January 30, 1986. The delayed
effective dates in paragraphs (c)(2) and (c)(3) of this Q&A-9 are not
available with respect to any section 411(d)(6) protected benefit if the
section 411(d)(6) protected benefit was provided for in the plan prior
to January 30, 1986, and the availability of such benefit was made
subject to the exercise of employer discretion on or after January 30,
1986. If the conditions set forth in this paragraph are not satisfied
with respect to a particular section 411(d)(6) protected benefit, this
section is effective with respect to such section 411(d)(6) protected
benefit as if the plan were a new plan. A limited exception is provided
with respect to existing plans that provided a particular section
411(d)(6) protected benefit prior to January 30, 1986, and then amended
the plan after January 30, 1986, and before August 1, 1986, to add a
provision for employer discretion with respect to the availability of
such benefit. Such plans are required to have been amended retroactively
by December 31, 1987, to remove such provision for employer discretion,
and, if the benefit made subject to such discretion was subsequently
eliminated, the plan is required to have been further amended, by the
same date, to retroactively reinstate the benefit.
(3) Exception for certain amendments covered by a favorable
determination letter. If an amendment adding a section 411(d)(6)
protected benefit subject to employer discretion was adopted or made
effective after August 1, 1986, and the plan receives a favorable
determination letter covering such provision with respect to an
application for such letter made prior to July 11, 1988, then the
effective date for purposes of amending such provision under the
transitional rules is the applicable effective date determined under the
rules with respect to existing plans.
(e) Transitional rule effective date. The transitional rule provided
in Q&A-8 of this section is effective January 30, 1986.
Q-10: If a plan provides for an age 70\1/2\ distribution option that
commences prior to retirement from employment with the employer
maintaining the plan, to what extent may the plan be amended to
eliminate this distribution option?
A-10: (a) In general. The right to commence benefit distributions in
a particular form and at a particular time prior to retirement from
employment with the employer maintaining the plan is a separate optional
form of benefit within the meaning of section 411(d)(6)(B) and Q&A-1 of
this section, even if the plan provision creating this right was
included in the plan solely to comply with section 401(a)(9), as in
effect for years before January 1, 1997. Therefore, except as otherwise
provided in paragraph (b) of this Q&A-10 or any other Q&A in this
section, a plan amendment violates section 411(d)(6) if it eliminates an
age 70\1/2\ distribution option (within the meaning of paragraph (c) of
this Q&A-10) to the extent that it applies to benefits accrued as of the
later of the adoption date or effective date of the amendment.
(b) Permitted elimination of age 70\1/2\ distribution option. An
amendment of a plan will not violate the requirements of section
411(d)(6) merely because the amendment eliminates an age 70\1/2\
distribution option to the extent that the option provides for
distribution to an employee prior to retirement from employment with the
employer maintaining the plan, provided that--
(1) The amendment eliminating this optional form of benefit applies
only to benefits with respect to employees who attain age 70\1/2\ in or
after a calendar year, specified in the amendment, that begins after the
later of--
(i) December 31, 1998; or
(ii) The adoption date of the amendment;
(2) The plan does not, except to the extent required by section
401(a)(9), preclude an employee who retires after the calendar year in
which the employee attains age 70\1/2\ from receiving benefits in any of
the same optional forms of benefit (except for the difference in the
timing of the commencement of payments) that would have been available
had the employee retired in the calendar year in which the employee
attained age 70\1/2\; and
(3) The amendment is adopted no later than--
(i) The last day of the remedial amendment period that applies to
the
[[Page 580]]
plan for changes under the Small Business Job Protection Act of 1996
(110 Stat. 1755); or
(ii) Solely 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 September 3, 1998, the last day of
the twelfth month beginning after the date on which the last of such
collective bargaining agreements terminates (determined without regard
to any extension thereof on or after September 3, 1998), if later than
the date described in paragraph (b)(3)(i) of this Q&A-10. For purposes
of this paragraph (b)(3)(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 September 3, 1998
is substituted for March 1, 1986, as the date before which the
collective bargaining agreements must be ratified.
(c) Age 70\1/2\ distribution option. For purposes of this Q&A-10, an
age 70\1/2\ distribution option is an optional form of benefit under
which benefits payable in a particular distribution form (including any
modifications that may be elected after benefit commencement) commence
at a time during the period that begins on or after January 1 of the
calendar year in which an employee attains age 70\1/2\ and ends April 1
of the immediately following calendar year.
(d) Examples. The provisions of this Q&A-10 are illustrated by the
following examples:
Example 1. Plan A, a defined benefit plan, provides each participant
with a qualified joint and survivor annuity (QJSA) that is available at
any time after the later of age 65 or retirement. However, in accordance
with section 401(a)(9) as in effect prior to January 1, 1997, Plan A
provides that if an employee does not retire by the end of the calendar
year in which the employee attains age 70\1/2\, then the QJSA commences
on the following April 1. On October 1, 1998, Plan A is amended to
provide that, for an employee who is not a 5-percent owner and who
attains age 70\1/2\ after 1998, benefits may not commence before the
employee retires but must commence no later than the April 1 following
the later of the calendar year in which the employee retires or the
calendar year in which the employee attains age 70\1/2\. This amendment
satisfies this Q&A-10 and does not violate section 411(d)(6).
Example 2. Plan B, a money purchase pension plan, provides each
participant with a choice of a QJSA or a single sum distribution
commencing at any time after the later of age 65 or retirement. In
addition, in accordance with section 401(a)(9) as in effect prior to
January 1, 1997, Plan B provides that benefits will commence in the form
of a QJSA on April 1 following the calendar year in which the employee
attains age 70\1/2\, except that, with spousal consent, a participant
may elect to receive annual installment payments equal to the minimum
amount necessary to satisfy section 401(a)(9) (calculated in accordance
with a method specified in the plan) until retirement, at which time a
participant may choose between a QJSA and a single sum distribution
(with spousal consent). On June 30, 1998, Plan B is amended to provide
that, for an employee who is not a 5-percent owner and who attains age
70\1/2\ after 1998, benefits may not commence prior to retirement but
benefits must commence no later than April 1 after the later of the
calendar year in which the employee retires or the calendar year in
which the employee attains age 70\1/2\. The amendment further provides
that the option described above to receive annual installment payments
prior to retirement will not be available under the plan to an employee
who is not a 5-percent owner and who attains age 70\1/2\ after 1998.
This amendment satisfies this Q&A-10 and does not violate section
411(d)(6).
Example 3. Plan C, a profit-sharing plan, contains two distribution
provisions. Under the first provision, in any year after an employee
attains age 59\1/2\, the employee may elect a distribution of any
specified amount not exceeding the balance of the employee's account. In
addition, the plan provides a section 401(a)(9) override provision under
which, if, during any year following the year that the employee attains
age 70\1/2\, the employee does not elect an amount at least equal to the
minimum amount necessary to satisfy section 401(a)(9) (calculated in
accordance with a method specified in the plan), Plan C will distribute
the difference by December 31 of that year (or for the year the employee
attains age 70\1/2\, by April 1 of the following year). On December 31,
1996, Plan C is amended to provide that, for an employee other than an
employee who is a 5-percent owner in the year the employee attains age
70\1/2\, in applying the section 401(a)(9) override provision, the later
of the year of retirement or year of attainment of age 70\1/2\, is
substituted for the year of attainment of age 70\1/2\. After the
amendment, Plan C still permits each employee to elect to receive the
same amount as was available before the amendment. Because this
amendment does not eliminate an optional form of benefit, the amendment
does not violate section 411(d)(6). Accordingly, the amendment is not
required
[[Page 581]]
to satisfy the conditions of paragraph (b) of this Q&A-10.
(e) Effective date. This Q&A-10 applies to amendments adopted and
effective after June 5, 1998.
Q-11: To what extent may a plan amendment that is made pursuant to
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111 Stat.
788), reduce or eliminate section 411(d)(6) protected benefits?
A-11: A plan amendment does not violate the requirements of section
411(d)(6) merely because the plan amendment reduces or eliminates
section 411(d)(6) protected benefits as of the effective date of the
plan amendment, provided that--
(a) The plan amendment is made pursuant to an amendment made by
title XV, or subtitle H of title X, of TRA '97; and
(b) The plan amendment is adopted no later than the last day of any
remedial amendment period that applies to the plan pursuant to
Secs. 1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.
[53 FR 26058, July 11, 1988, as amended by T.D. 8360, 56 FR 47602, Sept.
19, 1991; T.D. 8357, 56 FR 40549, Aug. 15, 1991; T.D. 8360, 57 FR 4721,
Feb. 7, 1992; T.D. 8485, 58 FR 46828, Sept. 3, 1993; T.D. 8581, 59 FR
66180, Dec. 23, 1994; T.D. 8769, 63 FR 30623, June 5, 1998; T.D. 8781,
63 FR 47173, Sept. 4, 1998; T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D.
8806, 64 FR 1126, Jan. 8, 1999; T.D. 8806, 64 FR 38826, July 20, 1999;
T.D. 8891, 65 FR 44682, July 19, 2000; T.D. 8900, 65 FR 53906, Sept. 6,
2000]
Sec. 1.411(d)-5 Class year plans; plan years beginning after October 22, 1986.
(a) Plan years beginning prior to 1989. (1) The requirements of
section 411(a)(2) shall be treated as satisfied in the case of a class-
year plan if such plan provides that 100 percent of each employee's
right to or derived from the contributions of the employer on the
employee's behalf with respect to any plan year is nonforfeitable not
later than when such participant was performing services for the
employer as of the close of each of 5 plan years (whether or not
consecutive) after the plan year for which the contributions were made.
(2) For purposes of paragraph (a)(1) of this section if--
(i) Any contributions are made on behalf of a participant with
respect to any plan year, and
(ii) Before such participant meets the requirements of paragraph
(a)(1) of this section, such participant was not performing services for
the employer as of the close of each of any 5 consecutive plan years
after such plan year, then the plan may provide that the participant
forfeits any right to or derived from the contributions made with
respect to such plan year.
(3) This paragraph (a) applies to contributions made for plan years
beginning after October 22, 1986.
(b) Plan years beginning after 1988. (1) The special class year
vesting rule in section 411(d)(4) was repealed by section 1113(b) of the
Tax Reform Act of 1986 (1986 Act). The repeal is generally effective for
plan years beginning after December 31, 1988. See section 1111(e) of the
1986 Act for a special effective date rule applicable to certain plans
maintained pursuant to collective bargaining agreements.
(2)(i) This subparagraph (2) provides a special rule for class year
plans that were in compliance with section 411(d)(4) immediately before
the first plan year beginning after section 411(d)(4) is repealed. These
plans are not required to retroactively compute years of service under
the general section 411(a)(2) rules. Instead, a participant must receive
a year of service for each such prior plan year if the employee was
performing services on the last day of such year. Similarly, if the
participant was not performing services on the last day of such years,
the participant will be treated as if a one-year break- in-service
occurred for such plan year. This subdivision (i) applies to plan years
to which this section applies.
(ii) In the case of a plan year to which Sec. 1.411(d)-3 applied, a
class year plan must compute years of service and breaks in service in a
manner consistent with the rules in this paragraph (b)(2)(i), giving
appropriate regard to the statutory changes made to section 411(d)(4).
[T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]
[[Page 582]]
Sec. 1.411(d)-6 Section 204(h) notice.
Q-1: What are the requirements of section 204(h) of the Employee
Retirement Income Security Act of 1974, as amended (ERISA) (29 U.S.C
1054(h))?
A-1: (a) Requirements of section 204(h). Section 204(h) of ERISA
(``section 204(h)'') generally requires written notice of an amendment
to certain plans that provides for a significant reduction in the rate
of future benefit accrual. Section 204(h) generally requires the notice
to be provided to plan participants, alternate payees, and employee
organizations. The plan administrator must provide the notice after
adoption of the plan amendment and not less than 15 days before the
effective date of the plan amendment.
(b) Other notice requirements. Other provisions of law may require
that certain parties be notified of a plan amendment. See, for example,
sections 102 and 104 of ERISA, and the regulations thereunder, for
requirements relating to summary plan descriptions and summaries of
material modifications.
Q-2: To which plans does section 204(h) apply?
A-2: Section 204(h) applies to defined benefit plans that are
subject to part 2 of subtitle B of title I of ERISA and to individual
account plans that are subject to both such part 2 and the funding
standards of section 302 of ERISA. Accordingly, individual account plans
that are not subject to the funding standards of section 302, such as
profit-sharing and stock bonus plans, are not subject to section 204(h).
Q-3: What is ``section 204(h) notice''?
A-3: ``Section 204(h) notice'' is notice that complies with section
204(h) and the rules in this section.
Q-4: For which amendments is section 204(h) notice required?
A-4: (a) In general. Section 204(h) notice is required for an
amendment to a plan described in Q&A-2 of this section that provides for
a significant reduction in the rate of future benefit accrual.
(b) Delegation of authority to Commissioner. The Commissioner of
Internal Revenue may provide through publication in the Internal Revenue
Bulletin of revenue rulings, notices, or other documents (see
Sec. 601.601(d)(2) of this chapter) that section 204(h) notice need not
be provided for plan amendments otherwise described in paragraph (a) of
this Q&A-4 that the Commissioner determines to be necessary or
appropriate, as a result of changes in the law, to maintain compliance
with the requirements of the Internal Revenue Code of 1986, as amended
(Code) (including requirements for tax qualification), ERISA, or other
applicable federal law.
Q-5: What is an amendment that affects the rate of future benefit
accrual for purposes of section 204(h)?
A-5: (a) In general--(1) Defined benefit plans. For purposes of
section 204(h), an amendment to a defined benefit plan affects the rate
of future benefit accrual only if it is reasonably expected to change
the amount of the future annual benefit commencing at normal retirement
age. For this purpose, the annual benefit commencing at normal
retirement age is the benefit payable in the form in which the terms of
the plan express the accrued benefit (or, in the case of a plan in which
the accrued benefit is not expressed in the form of an annual benefit
commencing at normal retirement age, the benefit payable in the form of
a single life annuity commencing at normal retirement age that is the
actuarial equivalent of the accrued benefit expressed under the terms of
the plan, as determined in accordance with the principles of section
411(c)(3) of the Code).
(2) Individual account plans. For purposes of section 204(h), an
amendment to an individual account plan affects the rate of future
benefit accrual only if it is reasonably expected to change the amounts
allocated in the future to participants' accounts. Changes in the
investments or investment options under an individual account plan are
not taken into account for this purpose.
(b) Determination of rate of future benefit accrual. In accordance
with paragraph (a) of this Q&A-5, the rate of future benefit accrual is
determined without regard to optional forms of benefit (other than the
annual benefit described in paragraph (a) of this Q&A-5), early
retirement benefits, or retirement-type subsidies, within the meaning of
such terms as used in section
[[Page 583]]
411(d)(6) of the Code (section 204(g) of ERISA). The rate of future
benefit accrual is also determined without regard to ancillary benefits
and other rights or features as defined in Sec. 1.401(a)(4)-4(e).
(c) Examples. These examples illustrate the rules in this Q&A-5:
Example 1. A plan is amended with respect to future benefit accruals
to eliminate a right to commencement of a benefit prior to normal
retirement age. Because the amendment does not change the annual benefit
commencing at normal retirement age, it does not reduce the rate of
future benefit accrual for purposes of section 204(h).
Example 2. A plan is amended to modify the actuarial factors used in
converting an annuity form of distribution to a single sum form of
distribution. The use of these modified assumptions results in a lower
single sum. Because the amendment does not affect the annual benefit
commencing at normal retirement age, it does not change the rate of
future benefit accrual for purposes of section 204(h).
Q-6: What plan provisions are taken into account in determining
whether there has been a reduction in the rate of future benefit
accrual?
A-6: (a) Plan provisions taken into account. All plan provisions
that may affect the rate of future benefit accrual of participants or
alternate payees must be taken into account in determining whether an
amendment provides for a significant reduction in the rate of future
benefit accrual. Such provisions include, for example, the dollar amount
or percentage of compensation on which benefit accruals are based; in
the case of a plan using permitted disparity under section 401(l) of the
Code, the amount of disparity between the excess benefit percentage or
excess contribution percentage and the base benefit percentage or base
contribution percentage (all as defined in section 401(l)); the
definition of service or compensation taken into account in determining
an employee's benefit accrual; the method of determining average
compensation for calculating benefit accruals; the definition of normal
retirement age in a defined benefit plan; the exclusion of current
participants from future participation; benefit offset provisions;
minimum benefit provisions; the formula for determining the amount of
contributions and forfeitures allocated to participants' accounts in an
individual account plan; and the actuarial assumptions used to determine
contributions under a target benefit plan (as defined in
Sec. 1.401(a)(4)-8(b)(3)(i)).
(b) Plan provisions not taken into account. Plan provisions that do
not affect the rate of future benefit accrual of participants or
alternate payees are not taken into account in determining whether there
has been a reduction in the rate of future benefit accrual. For example,
provisions such as vesting schedules or optional forms of benefit (other
than the annual benefit described in Q&A-5(a) of this section) are not
taken into account.
(c) Examples. The following example illustrates the rules in this
Q&A-6:
Example. A defined benefit plan provides a normal retirement benefit
equal to 50% of final average compensation times a fraction (not in
excess of one), the numerator of which equals the number of years of
participation in the plan and the denominator of which is 20. A plan
amendment that changes the numerator or denominator of that fraction
must be taken into account in determining whether there has been a
reduction in the rate of future benefit accrual.
Q-7: What is the basic principle used in determining whether an
amendment provides for a significant reduction in the rate of future
benefit accrual for purposes of section 204(h)?
A-7: Whether an amendment provides for a significant reduction in
the rate of future benefit accrual for purposes of section 204(h) is
determined based on reasonable expectations taking into account the
relevant facts and circumstances at the time the amendment is adopted.
For a defined benefit plan this is done by comparing the amount of the
annual benefit commencing at normal retirement age as determined under
Q&A-5(a)(1) under the terms of the plan as amended, with the amount of
the annual benefit commencing at normal retirement age as determined
under Q&A-5(a)(1) under the terms of the plan prior to amendment. For an
individual account plan, this is done in accordance with Q&A-5(a)(2) by
comparing the amounts to be allocated in the future to participants'
accounts under the terms of the plan as
[[Page 584]]
amended, with the amounts to be allocated in the future to participants'
accounts under the terms of the plan prior to amendment.
Q-8: Are employees who have not yet become participants in a plan at
the time an amendment to the plan is adopted taken into account in
applying section 204(h) with respect to the amendment?
A-8: No. Employees who have not yet become participants in a plan at
the time an amendment to the plan is adopted are not taken into account
in applying section 204(h) with respect to the amendment. Thus, if
section 204(h) notice is required with respect to an amendment, the plan
administrator need not provide section 204(h) notice to such employees.
Q-9: If section 204(h) notice is required with respect to an
amendment, must such notice be provided to participants or alternate
payees whose rate of future benefit accrual is not reduced by the
amendment?
A-9: (a) In general. A plan administrator need not provide section
204(h) notice to any participant whose rate of future benefit accrual is
reasonably expected not to be reduced by the amendment, nor to any
alternate payee under an applicable qualified domestic relations order
whose rate of future benefit accrual is reasonably expected not to be
reduced by the amendment. A plan administrator need not provide section
204(h) notice to an employee organization unless the employee
organization represents a participant to whom section 204(h) notice is
required to be provided.
(b) Facts and circumstances test. Whether a participant or alternate
payee is described in paragraph (a) of this Q&A-9 is determined based on
all relevant facts and circumstances at the time the amendment is
adopted.
(c) Examples. The following examples illustrate the rules in this
Q&A-9:
Example 1. Plan A is amended to reduce significantly the rate of
future benefit accrual of all current employees who are participants in
the plan. It is reasonable to expect based on the facts and
circumstances that the amendment will not reduce the rate of future
benefit accrual of former employees who are currently receiving benefits
or that of former employees who are entitled to vested benefits.
Accordingly, the plan administrator is not required to provide section
204(h) notice to such former employees.
Example 2. The facts are the same as in Example 1 except that Plan A
also covers two groups of alternate payees. The alternate payees in the
first group are entitled to a certain percentage or portion of the
former spouse's accrued benefit, and for this purpose the accrued
benefit is determined at the time the former spouse begins receiving
retirement benefits under the plan. The alternate payees in the second
group are entitled to a certain percentage or portion of the former
spouse's accrued benefit, and for this purpose the accrued benefit was
determined at the time the qualified domestic relations order was issued
by the court. It is reasonable to expect that the benefits to be
received by the second group of alternate payees will not be affected by
any reduction in a former spouse's rate of future benefit accrual.
Accordingly, the plan administrator is not required to provide section
204(h) notice to the alternate payees in the second group.
Example 3. Plan B covers hourly employees and salaried employees.
Plan B provides the same rate of benefit accrual for both groups. The
employer amends Plan B to reduce significantly the rate of future
benefit accrual of the salaried employees only. At that time, it is
reasonable to expect that only a small percentage of hourly employees
will become salaried in the future. Accordingly, the plan administrator
is not required to provide section 204(h) notice to the participants who
are currently hourly employees.
Example 4. Plan C covers employees in Division M and employees in
Division N. Plan C provides the same rate of benefit accrual for both
groups. The employer amends Plan C to reduce significantly the rate of
future benefit accrual of employees in Division M. At that time, it is
reasonable to expect that in the future only a small percentage of
employees in Division N will be transferred to Division M. Accordingly,
the plan administrator is not required to provide section 204(h) notice
to the participants who are employees in Division N.
Example 5. The facts are the same facts as in Example 4, except that
at the time the amendment is adopted, it is expected that soon
thereafter Division N will be merged into Division M in connection with
a corporate reorganization (and the employees in Division N will become
subject to the plan's amended benefit formula applicable to the
employees in Division M). In this instance, the plan administrator must
provide section 204(h) notice to the participants who are employees in
Division M and to the participants who are employees in Division N.
[[Page 585]]
Q-10: Does a notice fail to comply with section 204(h) if it
contains a summary of the amendment and the effective date, without the
text of the amendment itself?
A-10: No, the notice does not fail to comply with section 204(h)
merely because the notice contains a summary of the amendment, rather
than the text of the amendment, if the summary is written in a manner
calculated to be understood by the average plan participant and contains
the effective date. The summary need not explain how the individual
benefit of each participant or alternate payee will be affected by the
amendment.
Q-11: How may section 204(h) notice be provided?
A-11: A plan administrator (including a person acting on behalf of
the plan administrator such as the employer or plan trustee) may use any
method reasonably calculated to ensure actual receipt of the section
204(h) notice. First class mail to the last known address of the party
is an acceptable delivery method. Likewise, hand delivery is acceptable.
Section 204(h) notice may be enclosed with or combined with other notice
provided by the employer or plan administrator. For example, a notice of
intent to terminate under title IV of ERISA or a notice to interested
parties of the application for a determination letter may also serve as
section 204(h) notice if it otherwise meets the requirements of this
section.
Q-12: How may the 15-day notice requirement be satisfied?
A-12: (a) Generally. A section 204(h) notice is deemed to have been
provided at least 15 days before the effective date of the amendment if
it has been provided by the end of the 15th day before the effective
date. When notice is delivered by first class mail, the notice is
considered provided as of the date of the United States postmark stamped
on the cover in which the document is mailed.
(b) Example. The following example illustrates the provisions of
this Q&A-12:
Example. Plan A is amended to reduce significantly the rate of
future benefit accruals effective December 1, 1999. The plan
administrator causes section 204(h) notice to be mailed to all affected
participants. The mailing is postmarked November 16, 1999. Accordingly,
the section 204(h) notice is considered to be given not less than 15
days before the effective date of the plan amendment.
Q-13: If a plan administrator fails to provide section 204(h) notice
to some participants or alternate payees, will the plan administrator be
considered to have complied with section 204(h) with respect to
participants and alternate payees who were provided with section 204(h)
notice?
A-13: The plan administrator will be considered to have complied
with section 204(h) with respect to a participant to whom section 204(h)
notice is required to be provided if the participant and any employee
organization representing the participant were provided with section
204(h) notice, and if the plan administrator has made a good faith
effort to comply with the requirements of section 204(h). The plan
administrator will be considered to have complied with section 204(h)
with respect to an alternate payee to whom section 204(h) notice is
required to be provided if the alternate payee was provided with section
204(h) notice, and if the plan administrator made a good faith effort to
comply with the requirements of section 204(h). If these conditions are
satisfied the amendment will become effective in accordance with its
terms with respect to the participants and alternate payees to whom
section 204(h) notice was provided. Except to the extent provided in
Q&A-14, the amendment will not become effective with respect to those
participants and alternate payees who were not provided with section
204(h) notice.
Q-14: Will a plan be considered to have complied with section 204(h)
if the plan administrator provides section 204(h) notice to all but a de
minimis percentage of participants and alternate payees to whom section
204(h) notice must be provided?
A-14: The plan will be considered to have complied with section
204(h) and the amendment will become effective in accordance with its
terms with respect to all parties to whom section 204(h) notice was
required to be provided (including those who did not receive notice
prior to discovery of the omission), if the plan administrator--
[[Page 586]]
(a) Has made a good faith effort to comply with the requirements of
section 204(h);
(b) Has provided section 204(h) notice to each employee organization
that represents any participant to whom section 204(h) notice is
required to be provided;
(c) Has failed to provide section 204(h) notice to no more than a de
minimis percentage of participants and alternate payees to whom section
204(h) notice is required to be provided; and
(d) Provides section 204(h) notice to those participants and
alternate payees promptly upon discovering the oversight.
Q-15: How does section 204(h) apply to the sale of a business?
A-15: (a) Generally. Whether section 204(h) notice is required in
connection with the sale of a business depends on whether a plan
amendment is adopted that significantly reduces the rate of future
benefit accrual.
(b) Examples. The following examples illustrate the rules of this
Q&A-15:
Example 1. Corporation Q maintains Plan A, a defined benefit plan
that covers all employees of Corporation Q, including employees in its
Division M. Plan A provides that participating employees cease to accrue
benefits when they cease to be employees of Corporation Q. On January 1,
2000, Corporation Q sells all of the assets of Division M to Corporation
R. Corporation R maintains Plan B, which covers all of the employees of
Corporation R. Under the sale agreement, employees of Division M become
employees of Corporation R on the date of the sale (and cease to be
employees of Corporation Q), Corporation Q continues to maintain Plan A
following the sale, and the employees of Division M become participants
in Plan B. In this Example, no section 204(h) notice is required because
no plan amendment was adopted that reduced the rate of future benefit
accrual. The employees of Division M who become employees of Corporation
R ceased to accrue benefits under Plan A because their employment with
Corporation Q terminated.
Example 2. Subsidiary Y is a wholly owned subsidiary of Corporation
S. Subsidiary Y maintains Plan C, a defined benefit plan that covers
employees of Subsidiary Y. Corporation S sells all of the stock of
Subsidiary Y to Corporation T. At the effective date of the sale of the
stock of Subsidiary Y, in accordance with the sale agreement between
Corporation S and Corporation T, Subsidiary Y amends Plan C so that all
benefit accruals cease. In this Example, section 204(h) notice is
required to be provided because Subsidiary Y adopted a plan amendment
that significantly reduced the rate of future benefit accrual in Plan C.
Example 3. Corporation U maintains two plans: Plan D covers
employees of Division N and Plan E covers the rest of the employees of
Corporation U. Plan E provides a significantly lower rate of future
benefit accrual than Plan D. Plan D is merged with Plan E, and all of
the employees of Corporation U will accrue benefits under the merged
plan in accordance with the benefit formula of former Plan E. In this
Example, section 204(h) notice is required.
Example 4. Corporation V maintains several plans, including Plan F,
which covers employees of Division P. Plan F provides that participating
employees cease to accrue further benefits under the plan when they
cease to be employees of Corporation V. Corporation V sells all of the
assets of Division P to Corporation W, which maintains Plan G for its
employees. Plan G provides a significantly lower rate of future benefit
accrual than Plan F. Plan F is merged with Plan G as part of the sale,
and employees of Division P who become employees of Corporation W will
accrue benefits under the merged plan in accordance with the benefit
formula of former Plan G. In this Example, no section 204(h) notice is
required because no plan amendment was adopted that reduced the rate of
future benefit accrual. Under the terms of Plan F as in effect prior to
the merger, employees of Division P cease to accrue any further benefits
under Plan F after the date of the sale because their employment with
Corporation V terminated.
Q-16: How are amendments to cease accruals and terminate a plan
treated under section 204(h)?
A-16: (a) General rule--(1) Rule. An amendment providing for the
cessation of benefit accruals on a specified future date and for the
termination of a plan is subject to section 204(h).
(2) Example. The following example illustrates the rule of paragraph
(a)(1) of this Q&A-16:
Example. (i) An employer adopts an amendment that provides for the
cessation of benefit accruals under a defined benefit plan on December
31, 2001, and for the termination of the plan pursuant to title IV of
ERISA as of a proposed termination date that is also December 31, 2001.
As part of the notice of intent to terminate required under title IV in
order to terminate the plan, the plan administrator gives section 204(h)
notice of the amendment ceasing accruals, which states
[[Page 587]]
that benefit accruals will cease ``on December 31, 2001.'' However,
because all the requirements of title IV for a plan termination are not
satisfied, the plan cannot be terminated until a date that is later than
December 31, 2001.
(ii) Nonetheless, because section 204(h) notice was given stating
that the plan was amended to cease accruals on December 31, 2001,
section 204(h) does not prevent the amendment to cease accruals from
being effective on December 31, 2001. The result would be the same had
the section 204(h) notice informed the participants that the plan was
amended to provide for a proposed termination date of December 31, 2001,
and to provide that ``benefit accruals will cease on the proposed
termination date whether or not the plan is terminated on that date.''
However, the cessation of accruals would not be effective on December
31, 2001, had the section 204(h) notice merely stated that benefit
accruals would cease ``on the termination date or on the proposed
termination date.
(b) Terminations in accordance with title IV of ERISA. A plan that
is terminated in accordance with title IV of ERISA is deemed to have
satisfied section 204(h) not later than the termination date (or date of
termination, as applicable) established under section 4048 of ERISA.
Accordingly, section 204(h) would in no event require that any
additional benefits accrue after the effective date of the termination.
(c) Amendment effective before termination date of a plan subject to
title IV of ERISA. To the extent that an amendment providing for a
significant reduction in the rate of future benefit accrual has an
effective date that is earlier than the termination date (or date of
termination, as applicable) established under section 4048 of ERISA,
that amendment is subject to section 204(h). Accordingly, the plan
administrator must provide section 204(h) notice (either separately or
with or as part of the notice of intent to terminate) with respect to
such an amendment.
Q-17: When does section 204(h) become effective?
A-17: (a) Statutory effective date. With respect to defined benefit
plans, section 204(h) generally applies to plan amendments adopted on or
after January 1, 1986. With respect to individual account plans, section
204(h) applies to plan amendments adopted on or after October 22, 1986.
(b) Regulatory effective date--(1) General regulatory effective
date. This section is applicable for amendments adopted on or after
December 12, 1998.
(2) Special rule for amendments adopted under the temporary
regulations. Whether an amendment that is adopted on or after December
15, 1995 and before December 12, 1998 complies with section 204(h) is
determined under the rules of Sec. 1.411(d)-6T in effect prior to
December 14, 1998 (See 1.411(d)-6T in 26 CFR part 1 revised as of April
1, 1998).
[T.D. 8795, 63 FR 68680, Dec. 14, 1998]
Sec. 1.412(b)-2 Amortization of experience gains in connection with certain group deferred annuity contracts.
(a) Experience gain treatment. Dividends, rate credits, and credits
for forfeitures arising in a plan described in paragraph (b) of this
section are experience gains described in section 412(b)(3)(B)(ii)
(relating to the amortization of experience gains).
(b) Plan. A plan is described in this paragraph (b) if--
(1) The plan is funded solely through a group deferred annuity
contract,
(2) The annual single premium required under the contract for the
purchase of the benefits accruing during the plan year is treated as the
normal cost of the plan for that year, and
(3) The amount necessary to pay in equal annual installments, over
the appropriate amortization period, an amount equal to the single
premium necessary to provide all past service benefits not initially
funded, together with interest thereon, is treated as the annual
amortization amount determined under section 412(b)(2)(B) (i), (ii) or
(iii).
(c) Effective date. This section applies for the first plan year to
which section 412 applies that begins after May 22, 1981.
[T.D. 7764, 46 FR 6923, Jan. 22, 1981]
Sec. 1.412(b)-5 Election of the alternative amortization method of funding.
(a) Alternative amortization method in general. Section 1013(d) of
the Employee Retirement Income Security Act of 1974 provides an
alternative method which may be used by certain multiemployer plans (as
defined in section
[[Page 588]]
414(f)) which were in existence on January 1, 1974, for funding certain
unfunded past service liability. The multiemployer plans which may elect
to use this alternative method are those plans (1) under which, on
January 1, 1974, contributions were based on a percentage of pay, (2)
which use actuarial assumptions with respect to pay that are reasonably
related to past and projected experience, and (3) which use rates of
interest that are determined on the basis of reasonable acturial
assumptions. The unfunded past service liability to which this method
applies is that amount existing as of the date 12 months after the date
on which section 412 first applies to the plan. The alternative method
allows the plan to fund this liability over a period of 40 plan years by
charging the funding standard account with an equal annual percentage of
the aggregate pay of all participants in the plan instead of the level
dollar charges required under section 412(b)(2)(B). Paragraphs (b), (c),
(d) and (e) of this section contain procedural rules for electing this
alternative method.
(b) Election procedure. To elect the alternative amortization
method, a multiemployer plan must attach a statement to the annual
report required under section 6058(a) for the plan year for which the
election is made, stating that the alternative method for funding
unfunded past service liability is being adopted. Advance approval from
the Internal Revenue Service is not required. The alternative method
must be adopted on or before the last day prescribed for filing the
annual report corresponding to the last plan year beginning before
January 1, 1982.
(c) Charges to which the alternative amortization method is
applicable. Once elected, the alternative amortization method is
applicable to the unfunded past service liability existing as of the
date 12 months after the date on which section 412 first applies to the
plan. This results in charges to the funding standard account which are
in lieu of--
(1) Charges required under clause (i) of section 412(b)(2)(B), and
(2) Charges required under clause (iii) of section 412(b)(2)(B) if
the plan amendments referred to in such clause result in a net increase
in the unfunded past service liability existing as of the date 12 months
after the date on which section 412 first applies to the plan. Such
charges generally will arise only with respect to plan amendments
adopted in the first plan year to which section 412 applies.
If the election is made on an annual report corresponding to a plan year
after the first plan year to which section 412 applies, recomputation of
the contributions due in the prior years (to which section 412 applied)
will be necessary.
(d) Limitation. The sum of the charges described in this paragraph
may not be less than the interest on the unfunded past service
liabilities described in section 412(b)(2)(B) (i) and (iii), determined
as of the date 12 months after the date on which section 412 first
applies to the plan.
(e) Reporting requirements. Each annual report required by section
6058(a) and periodic report of the actuary required by section 6059 must
include all additional information relevant to the use of the
alternative amortization method as may be required by the applicable
forms and the instructions for such forms.
[T.D. 7702, 45 FR 40113, June 13, 1980]
Sec. 1.412(c)(1)-1 Determinations to be made under funding method--terms defined.
(a) Actuarial cost method and funding method. Section 3 (31) of the
Employee Retirement Income Security Act of 1974 (``ERISA'') provides
certain acceptable (and unacceptable) actuarial cost methods which may
(or may not) be used by employee plans. The term ``funding method'' when
used in section 412 has the same meaning as the term ``actuarial cost
method'' in section 3 (31) of ERISA. For shortfall method for certain
collectively bargained plans, see Sec. 1.412(c)(1)-2; for principles
applicable to funding methods in general, see regulations under section
412(c)(3).
(b) Computations included in funding method. The funding method of a
plan includes not only the overall funding method used by the plan but
also each specific method of computation used in applying the overall
method. However, the choice of which actuarial assumptions are
appropriate to the overall
[[Page 589]]
method or to the specific method of computation is not a part of the
funding method. For example, the decision to use or not to use a
mortality factor in the funding method of a plan is not a part of such
funding method. Similarly, the specific mortality rate determined to be
applicable to a particular plan year is not part of the funding method.
See section 412(c)(5) for the requirement of approval to change the
funding method used by a plan.
[T.D. 7733, 45 FR 75202, Nov. 14, 1980]
Sec. 1.412(c)(1)-2 Shortfall method.
(a) In general--(1) Shortfall method. The shortfall method is a
funding method that adapts a plan's underlying funding method for
purposes of section 412. As such, the use of the shortfall method is
subject to section 412(c)(3). A plan described in paragraph (a)(2) of
this section may elect to determine the charges to the funding standard
account required by section 412(b) under the shortfall method. These
charges are computed on the basis of an estimated number of units of
service or production (for which a certain amount per unit is to be
charged). The difference between the net amount charged under this
method and the net amount that otherwise would have been charged under
section 412 for the same period is a shortfall loss (gain) and is to be
amortized over certain subsequent plan years.
(2) Eligibility for use of shortfall. No plan may use the shortfall
method unless--
(i) The plan is a collectively bargained plan described in section
413(a), and
(ii) Contributions to the plan are made at a rate specified under
the terms of a legally binding agreement applicable to the plan.
For purposes of this section, a plan maintained by a labor organization
which is exempt from tax under section 501(c)(5) is treated as a
collectively bargained plan and the governing rules of the organization
(such as its constitution, bylaws, or other document that can be altered
only through action of a convention of the organization) are treated as
a collectively bargained agreement.
(b) Computation and effect of net shortfall charge--(1) In general.
The ``net shortfall charge'' to the funding standard account under the
shortfall method is the product of (i) the estimated unit charge
described in paragraph (c) of this section that applies for a particular
plan year, multiplied by (ii) the actual number of base units (for
example, units of service or production) which occurred during that plan
year. When the shortfall method is used, the net shortfall charge is a
substitute for the specific charges and credits to the funding standard
account described in section 412 (b)(2) and (3)(B).
(2) Example. Paragraph (b)(1) of this section may be illustrated by
the following example:
Example. A pension plan uses the calendar year as the plan year and
the shortfall method. Its estimated unit charge applicable to 1980 is 80
cents per hour of covered employment. During 1980, there were 125,000
hours of covered employment. The net shortfall charge for the plan year
is $100,000 (i.e., 125,000x$.80), regardless of the amount which would
be charged and credited to the funding standard account under section
412 (b)(2) and (3)(B) had the shortfall method not applied. The funding
standard account for 1980 will be separately credited for the amount
considered contributed for the plan year under section 412 (b)(3)(A).
The other items which may be credited, if applicable, are a waived
funding deficiency and the alternative minimum funding standard credit
adjustment under section 412(b)(3)(C) and (D) because these items are
not credits under section 412(b)(3)(B).
(3) Plans with more than one contract, contribution rate, employer,
or benefit level--(i) General rule. A single plan with more than one
contract, contribution rate, employer, or benefit level may compute a
separate net shortfall charge for each contract, contribution rate, each
employer, or each benefit level. The sum of these charges is the plan's
total net shortfall charge. under Sec. 1.412(c)(1)-1(b), the use of
separate computations would be a specific method of computation used in
applying the overall funding method. See also paragraph (f)(5) of this
section.
(ii) Single valuation. Only one actuarial valuation shall be made
for the single plan on each actuarial valuation date.
(iii) Reasonableness test. The specific method of computation of the
net
[[Page 590]]
shortfall charge must be reasonable, determined in the light of the
facts and circumstances.
(c) Estimated unit charge. The estimated unit charge is the annual
computation charge described in paragraph (d) of this section divided by
the estimated base units of service or production described in paragraph
(e) of this section.
(d) Annual computation charge. The annual computation charge for a
plan year is the sum of the following amounts:
(1) The net charges and credits which, but for using the shortfall
method, would be made under section 412 (b)(2) and (b)(3)(B).
(2) The amount described in paragraph (g)(3) of this section, if
applicable, for amortization of shortfall gain or loss.
(e) Estimated base units--(1) In general. The estimated base units
are the expected units of service or production for a plan year (hours,
days, tons, dollars of compensation, etc.), determined as of the base
unit estimation date for that plan year under paragraph (f) of this
section. This estimate must be based on the past experience of the plan
and the reasonable expectations of the plan for the plan year. The
specific type of unit used must be described in the statement of funding
method for the plan year. (See paragraph (i)(3) of this section for
reporting requirements.)
(2) Reasonable expectations. The reasonableness of expectations used
under paragraph (e)(1) of this section is determined under the facts and
circumstances of the plan for each plan year as of the relevant base
unit estimation date. Expectations will be considered unreasonable if,
for example, they do not reflect a consistent and substantial decline or
growth in actual base units that has occurred over the course of recent
years and that is likely to continue beyond the base unit estimation
date. This determination of reasonableness is independent of
determinations made under section 412(c)(3) of the reasonableness of
actuarial assumptions.
(f) Base unit estimation date--(1) In general. The base unit
estimation date for the current plan year is determined under this
paragraph (f). This date shall be an actuarial valuation date no earlier
than the last actuarial valuation date occurring at least one year
before the earliest date any current collectively bargained agreement in
existence during the plan year came into effect.
(2) Four-month rule. For purposes of this paragraph (f), a current
collectively bargained agreement is one in effect during at least four
months of the current plan year.
(3) Effective date of agreement. For purposes of this paragraph (f),
a collectively bargained agreement shall be deemed to have come into
effect on the effective date of the agreement containing the currently
effective provision for contributions to the plan or the benefits
provided under the plan.
(4) Long-term contract rule. The effective date of a collectively
bargained agreement shall be deemed not to occur prior to the first day
of the third plan year preceding the current year.
(5) Special rule for plans computing separate net shortfall charge.
A plan that computes a separate net shortfall charge for each contract,
contribution rate, employer, or benefit level under paragraph (b)(3) of
this section shall determine the base unit estimation date for each
separate charge without regard to any collectively bargained agreement
that does not relate to that contract, contribution rate, employer, or
benefit level. If a collective bargaining agreement requiring
contributions by a certain employer, or prescribing a certain benefit
level, is in effect on December 31, 1980, the preceding sentence shall
not apply to the computation of a separate net shortfall charge for that
employer or benefit level until the earlier of--
(i) The first plan year beginning after the date on which expires
the collective bargaining agreement requiring contributions by that
employer (or the last collective bargaining agreement relating to that
benefit level), or
(ii) The first plan year beginning after December 31, 1983.
(6) Example. The rules contained in paragraph (f) of this section
are illustrated by the following table. In the table, ``V'' signifies
actuarial valuation date (January 1 in each case shown);
[[Page 591]]
``B'' signifies beginning of a contract; and ``E'' signifies end of a
contract. The table shows the resulting earliest base unit estimation
date with respect to the following assumed items:
Computation of Earliest Base Unit Estimation Date
----------------------------------------------------------------------------------------------------------------
Plan year (calendar year basis)
Example -----------------------------------------------------------------------------------
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
----------------------------------------------------------------------------------------------------------------
Plan A...................... V ..... ..... V ..... ..... V ..... ..... V
Contract 1................ ..... ..... E/B ..... ..... E/B ..... E/B ..... ..... ..... E/B
Base unit estimation date ..... ..... ..... 1973 1973 1973 1976 1976 1979 1979 1979 1979
\1\......................
----------------------------------------------------------------------------------------------------------------
Plan B...................... V ..... ..... V ..... ..... V ..... ..... V
Contract 2................ \2\ \2\ \2\ B* ..... E/B ..... ..... ..... E/B* ..... .....
Contract 3................ E/B ..... ..... E/B ..... ..... E/B ..... ..... E/B ..... .....
Base unit estimation date ..... ..... ..... 1973 1973 1973 1976 1976 1976 1976 1979 1979
\1\......................
----------------------------------------------------------------------------------------------------------------
Plan C...................... V V V V V V V V V V V V
Contract 4................ ..... ..... E/B ..... ..... E/B* ..... ..... ..... E/B* ..... .....
Contract 5................ ..... ..... E/B ..... ..... E/B* ..... ..... ..... ..... E/B* .....
Base unit estimation date ..... ..... ..... 1974 1974 1977 1977 1977 1977 1978 1979 1981
\1\......................
----------------------------------------------------------------------------------------------------------------
\1\ The base unit estimation date may be on or any time after the actuarial valuation date in the year indicated
on this line.
\2\ No contract.
* Denotes that a prior contract ends and a new contract begins prior to the fifth month of a plan year.
(g) Amortization of shortfall gain or loss--(1) Definition. The
shortfall gain for a plan is the excess for the plan year of--
(i) The net shortfall charge computed under paragraph (b) of this
section over
(ii) The annual computation charge described in paragraph (d) of
this section.
The shortfall loss for a plan is the excess for the plan year of the
annual computation charge over the net shortfall charge.
(2) Shortfall amortization period--(i) First year. The plan year in
which the amortization of a shortfall gain or loss must begin is the
earlier of two years: the fifth plan year following the plan year in
which the shortfall gain or loss arose, or the first plan year beginning
after the latest scheduled expiration date of a collectively bargained
agreement in effect with respect to the plan during the plan year in
which the shortfall gain or loss arose. For purposes of this
subparagraph, a contract expiring on the last day of a plan year shall
be deemed to be renewed on such last day for the same period of years as
the contract that succeeds the expiring contract.
(ii) Last year. The plan year in which the amortization of a
shortfall gain or loss must end is the 15th plan year following the plan
year in which the shortfall gain or loss arose. For a multiemployer plan
described in section 414(f), the amortization must end with the 20th
plan year instead of the 15th.
(3) Annual amortization amount. The shortfall gain or loss must be
amortized in equal annual installments. The total amount to be amortized
must be adjusted for interest at the rate used for determining the
plan's normal cost.
(4) Shortfall gain or loss under spread gain type of funding method-
-(i) In general. A spread gain type of funding method spreads experience
gains and losses over future periods as part of a plan's normal cost.
(Examples of spread gain types of funding methods are the aggregate cost
method, the frozen initial liability method, and the attained age normal
method.) However, a shortfall gain or loss is not an experience gain or
loss. Therefore, a plan using a spread gain type of funding method
together with the shortfall method must amortize shortfall gains and
losses and otherwise meet the requirements of paragraph (g) of this
section.
(ii) Asset adjustment for aggregate method. A plan using the
shortfall method with the aggregate cost method of funding must adjust
its plan assets for a shortfall gain or loss in calculating normal cost.
The unamortized
[[Page 592]]
portion of any shortfall gain is subtracted from plan assets. The
unamortized portion of any shortfall loss is added to plan assets.
(5) Reconciliation of shortfall gain or loss with funding standard
account. At the beginning of each year, the actual unfunded liability
under the method used by the plan must equal the outstanding balance of
all amortization bases, including bases for shortfall gains and losses,
less the credit balance under the funding standard account at the end of
the prior year.
(6) Example. This paragraph is illustrated by the following
examples:
Example (1). A multiemployer plan described in section 414 (f) is
maintained with the calendar year as the plan year and uses the
shortfall method. The plan uses the frozen initial liability funding
method. A five percent interest assumption is used by the plan, with
payments computed as of the first day of each plan year for all items.
The expiration dates of contracts in effect during plan years 1976,
1977, and 1978 are such that the amortization of gains or losses for
each year must begin in the fifth following plan year. The assumed plan
costs and estimated base units for selected years, and the computations
under this section which follow from such assumptions are shown in the
following table. In the table, ``*'' denotes an assumed item. The
remaining figures have been calculated on the basis of these
assumptions.
(A) Computation of Net Shortfall Charge and Shortfall Gain or Loss
------------------------------------------------------------------------
Plan year 1976 1977 1978
------------------------------------------------------------------------
1. Normal cost*.................. $100,000 $100,000 $100,000
2. Amortization of unfunded 50,000 50,000 50,000
liability*......................
--------------------------------------
3. Total annual computation $150,000 $150,000 $150,000
charges.........................
4. Estimated base units*......... 100,000 100,000 100,000
5. Estimated unit charge (line 3/ $1.50 $1.50 $1.50
line 4).........................
6. Actual units during year*..... 80,000 90,000 110,000
7. Net shortfall charge for year 120,000 135,000 165,000
(line 5xline 6).................
8. Shortfall (gain) or loss (line 30,000 15,000 ($15,000)
3-line 7).......................
------------------------------------------------------------------------
(B) Annual Amortization Amount
9. Year of shortfall gain or loss 1976 1977 1978
10. First year of amortization... 1981 1982 1983
11. Last year of amortization.... 1996 1997 1998
12. (Gain) or loss adjusted for $38,288 $19,144 ($19,144)
interest to year amortization
begins (1-1-76 to 1-1-81, etc.).
13. Annual amortization (16 $3,364 $1,682 ($1,682)
years)..........................
(C) Computation of Net Shortfall Charges for Selected Years (Including
Shortfall Amortization)
------------------------------------------------------------------------
Plan year 1981 1982 1983
------------------------------------------------------------------------
14. Normal cost*................. $120,000 $125,000 $130,000
15. Amortization of unfunded 50,000 50,000 50,000
liability*......................
16. Shortfall amortization (see
line 13) from:
1976......................... 3,364 3,364 3,364
1977......................... ........... 1,682 1,682
1978......................... ........... ........... (1,682)
--------------------------------------
17. Total annual computation 173,364 180,046 183,364
charges.........................
18. Estimated base units*........ 110,000 110,000 110,000
19. Estimated unit charge (line 1.576 1.637 1.667
17/line 18).....................
20. Actual units during year*.... 105,000 110,000 105,000
21. Net shortfall charge for year 165,480 180,070 175,035
(line 19xline 20)...............
22. Shortfall (gain) loss (line 7,884 (24) 8,329
17-line 21).....................
------------------------------------------------------------------------
The amounts in line 22 will be amortized beginning 1986, 1987, and
1988, respectively. The $24 gain in 1982 results from rounding the
estimated unit charge.
Example (2). Assume the facts in Example (1). Also assume that the
plan uses the frozen initial liability funding method, that the unfunded
liability as of January 1, 1976 (corresponding to a 40-year charge of
$50,000 due at the beginning of the year) is $900,850, and that actual
contributions at the rate of $1.75 per unit are paid at mid-year in
1976.
(A) Computation of the Unfunded Liability as of December 31, 1976
1. Unfunded liability as of 1/1/76......................... $900,850
2. Normal cost (that used in the calculation of the total 100,000
annual computation charges)...............................
[[Page 593]]
3. Interest at 5% due on items 1 and 2..................... 50,043
4. Contribution with interest: $1.75x80,000x1.025 (actual 143,500
contribution rate times acutal base units times interest
adjustment from mid-year).................................
------------
5. Unfunded liability as of 12/31/76: item 1+item 2+item 3 - 907,393
item 4....................................................
(B) Computation of the Outstanding Balance of the Bases as of December
31, 1976
1. Original base: ($900,850-$50,000)x1.05.................. $893,393
2. Shortfall loss $30,000x1.05............................. 31,500
------------
3. Total................................................... 924,893
(C) Computation of the Credit Balance as of December 31, 1976
1. Net shortfall charge (Sec. 1.412 (c) (1)-2 (b)) $126,000
adjusted for interest: $120,000x1.05......................
2. Actual contributions with interest...................... 143,500
------------
3. Credit balance as of 12/31/76: item 2-item 1............ 17,500
(D) Reconciliation of computations
As of January 1, 1977, the unfunded liability ($907,393) equals the
outstanding balance of the bases minus the credit balance ($924,893-
$17,500=$907,393).
(h) Amortization of experience gain or loss--(1) General rule. In
the case of a plan using an immediate gain type of funding method, an
experience gain or loss shall be amortized pursuant to section 412
(b)(2)(B)(iv) or (b)(3)(B)(ii). (Examples of the immediate gain type of
funding method are the unit credit method, the entry age normal cost
method, and the individual level premium cost method.) For purposes of
this section, a shortfall gain or loss is not an experience gain or
loss. The amount of the experience gain or loss must be adjusted for
interest at the rate used for determining the plan's normal cost.
(2) Experience amortization period under shortfall method--(i) First
year. The plan year in which the amortization of an experience gain or
loss must begin in the case of a plan using the shortfall method is the
earlier of two years: the fifth plan year following the plan year in
which the experience gain or loss arose, or the first plan year
beginning after the last scheduled expiration date of a contract in
effect during the plan year in which the experience gain or loss arose.
For purposes of this subparagraph a contract expiring on the last day of
the plan year shall be deemed to be renewed on such last day for the
same period of years as the contract that succeeds the expiring
contract.
(ii) Last year. The plan year in which the amortization of an
experience gain or loss must end in the case of a plan using the
shortfall method is the 15th plan year following the plan year in which
the experience gain or loss arose. For a multi-employer plan described
in section 414 (f), the amortization must end with the 20th plan year
instead of the 15th.
(3) Use of annual computation charge in determining experience gain
or loss. In the case of a plan using an immediate gain type of funding
method, an experience gain or loss is the difference between the
expected unfunded liability and the actual unfunded liability under the
plan. The expected unfunded liability as of the end of a plan year
equals the actual unfunded liability as of the beginning of the year
plus normal cost, minus contributions, all adjusted for interest. If the
plan adopts the shortfall method, the expected unfunded liability is
computed by using the normal cost applicable for the plan year in
determining the annual computation charge under paragraph (d) of this
section. The same normal cost is used in computing the unfunded
liability under the frozen initial liability funding method.
(4) Example. This paragraph is illustrated by the following example:
Example. Assume the facts in Example (2) from paragraph (g) (6) of
this section, except that the entry age normal funding method is used.
Also assume that as of December 31, 1976, the actual unfunded liability
is $900,000.
(A) Computation of Expected Unfunded Liability
1. Actual unfunded liability as of 1-1-76.................. $900,850
2. Normal cost portion of annual computation charge as of 1- 100,000
1-76......................................................
3. Interest at 5% due on items 1 and 2..................... 50,043
4. Contribution received with interest: $1.75 x 80,000 x 143,500
1.025 (actual contribution rate times actual base units
times interest adjustment at mid-year)....................
------------
5. Expected unfunded liability as of 12-31-76 (item 1 + 907,393
item 2 + item 3 - item 4).................................
[[Page 594]]
(B) Computation of Gain or Loss
1. Expected unfunded liability as of 12-31-76.............. $907,393
2. Actual unfunded liability as of 12-31-76................ 900,000
------------
3. Gain (or loss) (item 1 - item 2)........................ 7,393
(i) Election procedure--(1) In general. To elect the shortfall
method, a collectively bargained plan must attach a statement to the
annual report required under section 6058 (a) for the first plan year to
which it is applied. The statement shall state that the shortfall method
is adopted, beginning with the plan year covered by such report. Advance
approval from the Internal Revenue Service is not required if the
shortfall method is first adopted on or before the later of--
(i) The first plan year to which section 412 applies or
(ii) The last plan year commencing before December 31, 1981.
However, approval must be received pursuant to section 412(c)(5) prior
to the adoption of the shortfall method at a later time, or the
discontinuance of such method, once adopted.
(2) Use of specific computation method. A specific method of
computation under the shortfall method is described in paragraph (b)(3)
of this section, regarding the treatment of more than one contract,
employer, or benefit level under the plan. This specific method may be
adopted with respect to any plan year to which the shortfall method
applies. Approval from the Commissioner must be received under section
412(c)(5) prior to the adoption of this specific computation method for
a plan year subsequent to the first plan year to which the shortfall
method applies, or prior to the discontinuance of a specific computation
method, once adopted.
(3) Reporting requirements. Each annual report required by section
6058(a) and periodic report of the actuary required by section 6059 must
include all additional information relevant to the use of the shortfall
method as may be required by the applicable forms and the instructions
for such forms.
(j) Transitional rule. In lieu of paragraphs (g)(2) and (h)(2) of
this section relating to the amortization period for shortfall and
experience gains and losses, for gains and losses arising in plan years
beginning before January 1, 1981, a plan may rely on the prior published
position of the Internal Revenue Service with respect to the
amortization period for shortfall and experience gains and losses.
(k) Supersession. This section and Sec. 1.412 (c) (1)-1 supersede
Secs. 11.412 (c) (1)-1 and (c) (1)-2 of the Temporary Income Tax
Regulations Under the Employee Retirement Income Security Act of 1974.
(Secs. 412, 7805, Internal Revenue Code of 1954 (88 Stat. 914 and 68A
Stat. 917; (26 U.S.C. 412 and 7805)), and sec. 3 (31) of the Employee
Retirement Income Security Act of 1974 (88 Stat. 837; (29 U.S.C. 1002)))
[T.D. 7733, 45 FR 75202, Nov. 14, 1980]
Sec. 1.412(c)(1)-3 Applying the minimum funding requirements to restored plans.
(a) In general--(1) Restoration method. The restoration method is a
funding method that adapts the underlying funding method of section 412
in the case of certain plans that are or have been terminated and are
later restored by the Pension Benefit Guaranty Corporation (PBGC). The
normal operation of the funding standard account, and all other
provisions of section 412 and the regulations thereunder, are unchanged
except as provided in this Sec. 1.412(c)(1)-3. Under the restoration
method, the PBGC shall determine a restoration payment schedule,
extending over no more than 30 years, that replaces all charges and
credits to the funding standard account attributable to pre-restoration
amortization bases. The restoration payment schedule is determined on
the basis of an actuarial valuation of the accrued liability of the plan
on the initial post-restoration valuation date less the actuarial value
of the plan assets on that date. The initial post-restoration valuation
date is the date of the valuation that falls in the first plan year
beginning on or after the date of the restoration order.
(2) Applicability of restoration method. A plan must use the
restoration method if, and only if--
(i) The plan is being or has been terminated pursuant to section
4041(c) or section 4042 of the Employee Retirement Income Security Act
of 1974 (ERISA); and
[[Page 595]]
(ii) The plan has been restored by the PBGC pursuant to its
authority under section 4047 of ERISA.
(b) Computation and effect of the initial restoration amortization
base--(1) In general. The initial restoration amortization base is
determined under the underlying funding method used by the plan. When
the plan uses a spread gain funding method that does not maintain an
unfunded liability, the plan must change either to an immediate gain
method that directly calculates an accrued liability or to a spread gain
method that maintains an unfunded liability. A plan may adopt any cost
method that satisfies this requirement and that is acceptable under
section 412 and the regulations thereunder, provided that the plan
administrator follows the procedures established by the Commissioner for
changes in funding methods. The initial restoration amortization base is
determined using the valuation for the plan year in which the initial
post-restoration valuation date falls. The initial restoration
amortization base equals the accrued liability with respect to plan
benefit liabilities returned by the PBGC less the value of the plan
assets returned by the PBGC. The initial restoration amortization base
replaces all prior amortization bases including those under section
412(b)(2) (B), (C), and (D) and under section 412(b)(3)(B). Any base
resulting from a change in funding method, including a change required
under this paragraph, is treated as a prior amortization base within the
meaning of this paragraph (b). Any accumulated funding deficiency or
credit balance in the funding standard account is set equal to zero when
the initial restoration amortization base is established.
(2) Example. The following example illustrates the provisions of
this paragraph (b):
Example. A pension plan uses the calendar year as its plan year,
makes its annual periodic valuation as of January 1, and uses the unit
credit actuarial cost method for funding purposes. The plan is in the
process of being terminated. By order of the PBGC the plan is restored
as of July 1, 1991. The initial post-restoration valuation date is
January 1, 1992, and a restoration payment schedule order is issued on
October 31, 1992. If, as of January 1, 1992, the accrued liability of
the plan is $1,000,000 and the value of the plan assets is $200,000, the
initial restoration amortization base is $800,000.
(c) Establishment of a restoration payment schedule--(1)
Certification requirement. When the PBGC establishes a restoration
payment schedule, the Executive Director of the PBGC must certify to the
PBGC's Board of Directors, and to the Internal Revenue Service, that the
PBGC has reviewed the funding of the plan, the financial condition of
the plan sponsor and its controlled group members, the payments required
under the restoration payment schedule (taking into account the
availability of deferrals authorized under paragraph (c)(4) of this
section), and any other factor that the PBGC deems relevant, and, based
on that review, determines that it is in the best interests of
participants and beneficiaries of the plan and the pension insurance
program that the restored plan not be reterminated.
(2) Requirements for restoration payment schedule--(i) Amortization
of base over period of no more than 30 years. The restoration payment
schedule must be prescribed in an order requiring the employer to make
stated contributions to the plan sufficient to amortize the initial
restoration amortization base over a period extending not more than 30
years after the initial post-restoration valuation date (the restoration
payment period). Payments included in the restoration payment schedule
order are charged to the funding standard account of the plan at the end
of each plan year in accordance with paragraph (d) of this section. The
restoration payment schedule must provide for total charges that are
sufficient to amortize the entire amount of the initial restoration
amortization base by the end of the restoration payment period. The
scheduled charges need not be in level amounts, but the present value of
the prescribed charges on the initial post-restoration valuation date,
computed with interest at the valuation rate, must equal the initial
restoration amortization base.
(ii) Minimum annual charge. The restoration payment schedule must
prescribe annual charges that are sufficient to prevent the outstanding
balance of the initial restoration amortization base from exceeding
whichever
[[Page 596]]
of the following amounts is applicable--
(A) During the first 10 plan years on the restoration payment
schedule, the amount of the initial restoration amortization base on the
date the base was established; or
(B) During plan years 11 through 20 on the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the tenth plan year, as
calculated under paragraph (c)(2)(iii) of this section; or
(C) During plan years 21 through the end of the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the twentieth plan year, as
calculated under paragraph (c)(2)(iii) of this section.
(iii) Interim amortization requirements. The restoration payment
schedule must provide for sufficient periodic charges so that the
outstanding balance of the initial restoration amortization base at the
end of the tenth plan year and at the end of the twentieth plan year of
the restoration payment period will not be larger than the outstanding
balance that would have remained at the end of the tenth plan year and
at the end of the twentieth plan year, respectively, if the initial
restoration amortization base had been amortized in level annual amounts
over the restoration payment period at the valuation rate.
(3) Amendments to the restoration payment schedule. The order
establishing the restoration payment schedule may be amended by the PBGC
from time to time with respect to any remaining payments, provided that
no amendment may extend the restoration payment period beyond 30 years
from the initial post-restoration valuation date, and provided further
that the restoration payment schedule, as amended, satisfies the
requirements of paragraph (c)(2) of this section.
(4) Deferral of minimum scheduled annual payment amounts--(i)
Authority to grant deferral. Not later than 2\1/2\ months following the
end of the plan year, the PBGC may grant a deferral of the charges
required in the restoration payment schedule for that plan year if the
requirements in paragraph (c)(4)(ii) of this section are satisfied. The
PBGC may require the plan sponsor and its controlled group members to
provide security to the plan as a condition to granting a deferral.
(ii) Determination of business hardship. Before granting a deferral
under this paragraph (c)(4), the PBGC must make a determination that the
granting of the deferral is in the best interests of plan participants
and the plan termination insurance system, and that the plan sponsor and
its controlled group members are unable to make the scheduled
restoration payments without experiencing temporary substantial business
hardship. In making these determinations, the factors the PBGC shall
consider, include, but are not limited to, the following--
(A) Whether the plan sponsor and its controlled group members are
operating at an economic loss;
(B) Whether there is substantial unemployment or underemployment in
the trades or businesses of the plan sponsor and its controlled group
members;
(C) Whether the sales and profits of the industry or industries are
depressed or declining; and
(D) Whether it is reasonable to expect that the plan termination
insurance system will suffer a greater loss if the plan is terminated
than if it is continued as a restored plan.
(iii) Amount of deferral. The amount of the deferral for any
particular plan year may not exceed the lesser of the amount that would
have been required to be contributed under the restoration payment
schedule for that year or interest at the valuation rate on the
outstanding balance of the initial restoration amortization base for
that year. An amortization payment for a deferral granted for a prior
plan year may not be deferred. No deferral may extend the overall
restoration payment period beyond 30 years.
(iv) Modification of payment schedule. The restoration payment
schedule must be adjusted to reflect any deferral granted for a plan
year in the manner prescribed in this paragraph (c). The charge
otherwise specified in the schedule is reduced by the amount of any
deferral. The charges under the
[[Page 597]]
restoration payment schedule for the subsequent plan years are increased
by the amounts in paragraph (c)(4)(v) of this section.
(v) Amortization of deferred amount. The amount of any deferral
granted by the PBGC for any plan year must be amortized in level amounts
over five years or such shorter period as may be prescribed by the PBGC,
at the valuation rate, beginning with the plan year following the year
of the deferral.
(vi) Number of deferrals permitted. The PBGC may not grant more than
five deferrals of the minimum scheduled payments as required by this
section during the restoration payment period and no more than three of
these deferrals may be granted during the first ten years of that
period.
(vii) Deferrals override minimum annual charges and interim
amortization requirements. In determining the minimum annual charge
under paragraph (c)(2)(ii) of this section and in applying the interim
amortization requirements of paragraph (c)(2)(iii) of this section, the
unamortized balances of any deferrals granted by the PBGC under this
paragraph shall be added to the outstanding balance of the initial
restoration amortization base otherwise allowable.
(d) Charging the scheduled restoration payments to the funding
standard account. In addition to any other charges and credits
prescribed in the normal operation of the funding standard account under
section 412, the amount of each payment specified in the restoration
payment schedule shall be charged against the funding standard account
of the plan for the plan year to which that payment is attributed in the
restoration payment schedule. To the extent that the restoration payment
schedule provides for payments before the end of the plan year, the
annual charge to the funding standard account attributable to the
restoration payment schedule is equal to the sum of the periodic
payments for the plan year accumulated with interest at the valuation
rate to the last day of the plan year.
(e) Changes in actuarial assumptions or methods. The plan
administrator must notify the PBGC of any changes in the actuarial
assumptions or methods used by the plan. Upon notification of any such
change, the PBGC may make any changes to the restoration payment
schedule that it deems appropriate.
(f) Change to restoration method. A plan that has been restored must
use the restoration method until the initial restoration amortization
base has been fully amortized. The use of this method does not require
prior approval from the Commissioner. A plan using the restoration
method must compute the charges to the funding standard account to
amortize the initial restoration amortization base in accordance with
the order of the PBGC and in accordance with this section.
(g) Deficit reduction contribution--(1) Calculation of deficit
reduction contribution. For any plan using the restoration method, the
deficit reduction contribution under section 412(l)(2) is equal to the
sum of--
(i) The unfunded section 412(l) restoration liability amount; plus
(ii) The unfunded new liability amount.
(2) Unfunded section 412(l) restoration liability amount. The
unfunded section 412(l) restoration liability amount is the amount
necessary to amortize fully the unfunded section 412(l) restoration
liability in installments, as prescribed by the PBGC, over not more than
30 years. The annual amount need not be level, but at all times the
present value of the future amortization charges prescribed under the
restoration payment schedule, at the current liability interest rate,
must equal the outstanding balance of the unfunded section 412(l)
restoration liability and the schedule must provide that at the end of
no more than 30 years the entire amount of the unfunded section 412(l)
restoration liability base will have been fully amortized. The schedule
prescribed for amortization of the unfunded section 412(l) restoration
liability must comply with the requirements imposed in paragraph (c) of
this section on the restoration payment schedule, except as provided in
paragraph (g)(7) of this section and except that the maximum permitted
outstanding balance of the unfunded section 412(l) restoration liability
at the end of the tenth plan year must not be greater than the
outstanding balance of the section 412(l)
[[Page 598]]
restoration liability that would have remained at the end of the tenth
plan year if the unfunded section 412(l) restoration liability had been
amortized in level amounts over the restoration payment period at the
actual current liability interest rate for each year, increased by the
current liability interest rate differential as defined under paragraph
(g)(7) of this section. The unfunded section 412(l) restoration
liability amount for the tenth plan year otherwise prescribed under the
restoration payment schedule is increased by any outstanding current
liability interest rate differential. By issuing an appropriate order,
the PBGC may permit the outstanding current liability interest rate
differential to be amortized over the tenth through the fourteenth plan
years. If the PBGC permits the amortization of the outstanding current
liability interest rate differential, then the unfunded section 412(l)
restoration liability amount for each year to which an amortization
payment is attributed under the order shall be increased by such
payment. The outstanding balance otherwise required by paragraph (g)(2)
of this section is increased by the outstanding balance, if any, of the
base resulting from the amortization of the current liability interest
rate differential. The PBGC may amend the amortization schedule for the
unfunded section 412(l) restoration liability subject to the limits on
amendments to the amortization schedule prescribed for the initial
restoration amortization base.
(3) Establishment of unfunded section 412(l) restoration liability.
In the plan year in which the initial post-restoration valuation date
falls, the unfunded section 412(l) restoration liability is equal to the
unfunded current liability of the plan.
(4) Unfunded new liability amount. In the case of a plan using the
restoration method, the unfunded new liability amount is the applicable
percentage, as defined in section 412(l)(4)(C), of the unfunded new
liability determined under paragraph (g)(5) of this section.
(5) Unfunded new liability. The unfunded new liability of a plan
using the restoration method is the excess, if any, of the unfunded
current liability of the plan, within the meaning of section
412(l)(8)(A) for the plan year (determined without taking into account
any unpredictable contingent event benefits, even if the event has
occurred) over the outstanding balance of the unfunded section 412(l)
restoration liability determined under paragraph (g)(3) of this section.
(6) Offset of amortization charges. The amounts charged to the
funding standard account pursuant to the restoration payment schedule in
order to amortize the initial restoration base, as described in
paragraph (d) of this section, must be offset against the deficit
reduction contribution in paragraph (g)(1) of this section along with
any other applicable amounts provided in section 412(l)(1)(A)(ii).
(7) Interest rate differential. During the first 10 plan years after
the initial post-restoration valuation date, the restoration payment
schedule must prescribe an unfunded section 412(l) restoration liability
amount for each plan year that is sufficient to prevent the outstanding
balance of the unfunded section 412(l) restoration liability from
exceeding the initial amount of the unfunded section 412(l) restoration
liability increased by the current liability interest rate differential.
The current liability interest rate differential at any point during the
first ten years of the restoration payment period is the excess, if any,
of the outstanding balance of the unfunded section 412(l) restoration
liability determined using the actual current liability interest rate
for each year, taking into account the charges described in paragraph
(d) of this section, over the outstanding balance of the unfunded
section 412(l) restoration liability determined using the lowest, for
each year, of the initial current liability interest rate, the current
liability interest rate for the computation year, and the valuation
interest rate, taking into account the charges described in paragraph
(d) of this section.
(h) Election of the alternative minimum funding standard. A plan
using the restoration method may not elect the alternative minimum
funding standard under section 412(g).
(i) Funding review by the PBGC. The PBGC must review the funding of
any plan using the restoration method at
[[Page 599]]
least once in each plan year. As a result of a funding review, the PBGC
may amend the restoration payment schedule as provided in paragraph
(c)(3) of this section. As part of the funding review, the Executive
Director of the PBGC must certify to the PBGC's Board of Directors, and
to the Internal Revenue Service, that the PBGC has reviewed the funding
of the plan, the financial condition of the plan sponsor and its
controlled group members, the payments required under the restoration
payment schedule (taking into account the availability of deferrals
authorized under paragraph (c)(4) of this section), and any other factor
that the PBGC deems relevant, and, based on that review, determines that
it is in the best interests of participants and beneficiaries of the
plan and the pension insurance program that the restored plan not be
reterminated.
[T.D. 8494, 58 FR 54491, Oct. 22, 1993]
Sec. 1.412(c)(1)-3T Applying the minimum funding requirements to restored plans (temporary).
(a) In general--(1) Restoration method. The restoration method is a
funding method that adapts the underlying funding method of section 412
in the case of certain plans that are or have been terminated and are
later restored by the Pension Benefit Guaranty Corporation. The normal
operation of the funding standard account, and all other provisions of
section 412 and the regulations thereunder, are unchanged except as
provided in this Sec. 1.412(c)(1)-3T. Under the restoration method, the
Pension Benefit Guaranty Corporation shall determine a restoration
payment schedule, extending over no more than 30 years, that replaces
all charges and credits to the funding standard account attributable to
pre-restoration amortization bases. The restoration payment schedule is
determined on the basis of an actuarial valuation of the accrued
liability of the plan on the initial post-restoration valuation date
less the actuarial value of the plan assets on that date. The initial
post-restoration valuation date is the date of the first valuation that
falls in the first plan year beginning on or after the later of October
23, 1990, or the date of the restoration order.
(2) Applicability of restoration method. A plan must use the
restoration method if, and only if:
(i) The plan is being or has been terminated pursuant to section
4041(c) or section 4042 of the Employee Retirement Income Security Act
of 1974 (ERISA), and
(ii) The plan has been restored by the Pension Benefit Guaranty
Corporation pursuant to its authority under section 4047 of ERISA.
(b) Computation and effect of the initial restoration amortization
base--(1) In general. The initial restoration amortization base is
determined under the underlying funding method used by the plan. When
the plan uses a spread gain funding method that does not maintain an
unfunded liability, the plan must change either to an immediate gain
method that directly calculates an accrued liability or to a spread gain
method that maintains an unfunded liability. A plan may adopt any cost
method that satisfies this requirement and that is acceptable under
section 412 and the regulations thereunder, provided that the plan
follows the procedures established by the Commissioner for changes in
funding methods. The initial restoration amortization base is determined
using the valuation for the plan year in which the initial post-
restoration valuation date falls. The initial restoration amortization
base equals the accrued liability with respect to plan benefit
liabilities returned by the Pension Benefit Guaranty Corporation less
the value of the plan assets returned by the Pension Benefit Guaranty
Corporation. The initial restoration amortization base replaces all
prior amortization bases including those under subparagraphs (B), (C),
and (D) of section 412(b)(2) and under subparagraph (B) of section
412(b)(3). Any base resulting from a change in funding method is treated
as a prior amortization base within the meaning of this paragraph (b).
Any accumulated funding deficiency or credit balance in the funding
standard account is set equal to zero when the initial restoration
amortization base is established.
(2) Example. A pension plan uses the calendar year as its plan year,
makes
[[Page 600]]
its annual periodic valuation as of January 1, and uses the unit credit
actuarial cost method for funding purposes. The plan is in the process
of being terminated. By order of the Pension Benefit Guaranty
Corporation the plan is restored as of July 1, 1991, and a restoration
payment schedule order issued on October 31, 1992. The initial post-
restoration valuation date is January l, 1993. If, as of that date, the
accrued liability of the plan is $1,000,000 and the value of the plan
assets is $200,000, the initial restoration amortization base is
$800,000.
(c) Establishment of a restoration payment schedule--(1)
Certification requirement. When the PBGC establishes a restoration
payment schedule, the Executive Director of the PBGC must certify to the
Corporation's Board of Directors, and to the Internal Revenue Service,
that the Corporation has reviewed the funding of the plan, the financial
condition of the plan sponsor and its controlled group members, the
payments required under the restoration payment schedule (taking into
account the availability of deferrals authorized under paragraph (c)(4)
of this section), and any other factor that the Corporation deems
relevant, and, based on that review, determines that it is in the best
interests of participants and beneficiaries of the plan and the pension
insurance program that the restored plan not be reterminated.
(2) Requirements for restoration payment schedule--(i) Amortization
of base over period of no more than 30 years. The restoration payment
schedule must be prescribed in an order requiring the employer to make
stated contributions to the plan sufficient to amortize the initial
restoration amortization base over a period extending not more than 30
years after the initial post-restoration valuation date (the restoration
payment period). The restoration payment schedule must be sufficient to
amortize the entire amount of the initial restoration amortization base
by the end of the restoration payment period. The scheduled charges need
not be in level amounts, but the present value of the prescribed charges
on the initial post-restoration valuation date, computed with interest
at the valuation rate, must equal the initial restoration amortization
base.
(ii) Minimum annual charge. The restoration payment schedule must
require annual charges that are sufficient to prevent the outstanding
balance of the initial restoration amortization base from exceeding
whichever of the following amounts is applicable:
(A) During the first 10 plan years on the restoration payment
schedule, the amount of the initial restoration amortization base on the
date the base was established, or
(B) During plan years 11 through 20 on the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the tenth plan year, as
calculated under paragraph (c)(2)(iii) below, or
(C) During plan years 21 through the end of the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the twentieth plan year, as
calculated under paragraph (c)(2)(iii) below.
(iii) Interim amortization requirements. The restoration payment
schedule must provide for sufficient periodic charges so that the
outstanding balance of the initial restoration amortization base at the
end of the tenth plan year and at the end of the twentieth plan year of
the restoration payment period will not be larger than the outstanding
balance that would have remained at the end of the tenth plan year and
at the end of the twentieth plan year, respectively, if the initial
restoration amortization base had been amortized in level amounts over
the restoration payment period at the valuation rate.
(3) Amendments to the restoration payment schedule. The order
establishing the restoration payment schedule may be amended by the
Pension Benefit Guaranty Corporation from time to time with respect to
any remaining payments, provided that no amendment may extend the
restoration payment period beyond 30 years from the initial post-
restoration valuation date, and provided further that the restoration
payment schedule, as amended, satisfies the requirements of paragraph
(c)(2) of this section.
[[Page 601]]
(4) Deferral of minimum scheduled annual payment amounts--(i)
Authority to grant deferral. Not later than 2\1/2\ months following the
end of the plan year, the Pension Benefit Guaranty Corporation may grant
a deferral of the charges required in the restoration payment schedule
for that plan year if the requirements in paragraph (c)(4)(ii) of this
section are satisfied. The Pension Benefit Guaranty Corporation may
require the plan sponsor and its controlled group members to provide
security to the plan as a condition to granting a deferral.
(ii) Determination of business hardship. Before granting a deferral
under this paragraph (c)(4), the Pension Benefit Guaranty Corporation
must make a determination that the granting of the deferral is in the
best interests of plan participants and the plan termination insurance
system, and that the plan sponsor and its controlled group members are
unable to make the scheduled restoration payments without experiencing
temporary substantial business hardship. In making these determinations,
the factors the Pension Benefit Guaranty Corporation shall consider,
include, but are not limited to, the following:
(A) Whether the plan sponsor and its controlled group members are
operating at an economic loss,
(B) Whether there is substantial unemployment or underemployment in
the trades or businesses of the plan sponsor and its controlled group
members,
(C) Whether the sales and profits of the industry or industries are
depressed or declining, and
(D) Whether it is reasonable to expect that the plan termination
insurance system will suffer a greater loss if the plan is terminated
than if it is continued as a restored plan.
(iii) Amount of deferral. The amount of the deferral for any
particular plan year may not exceed the lesser of the amount that would
have been required to be contributed under the restoration payment
schedule for that year or interest on the outstanding balance of the
initial restoration amortization base for that year. An amortization
payment for a deferral granted for a prior plan year may not be
deferred. No deferral may extend the overall restoration payment period
beyond 30 years.
(iv) Modification of payment schedule. The restoration payment
schedule must be adjusted to reflect any deferral granted for a plan
year in the manner prescribed in this paragraph (c). The charge
otherwise specified in the schedule is reduced by the amount of any
deferral. The charges under the restoration payment schedule for the
subsequent plan years are increased by the amounts in paragraph
(c)(4)(v) of this section.
(v) Amortization of deferred amount. The amount of any deferral
granted by the Pension Benefit Guaranty Corporation for any plan year
must be amortized in level amounts over five years or such shorter
period as may be prescribed by the Pension Benefit Guaranty Corporation,
at the valuation rate, beginning with the plan year following the year
of the deferral.
(vi) Number of deferrals permitted. The Pension Benefit Guaranty
Corporation may not grant more than five deferrals of the minimum
scheduled payments as required by this section during the restoration
payment period and no more than three of these deferrals may be granted
during the first ten years of that period.
(d) Charging the scheduled restoration charges to the funding
standard account. In addition to any other charges and credits
prescribed in the normal operation of the funding standard account under
section 412, the amount of each charge specified in the restoration
payment schedule shall be charged against the funding standard account
of the plan for the plan year to which that payment is attributed in the
restoration payment schedule.
(e) Changes in actuarial assumptions. If changes in actuarial
assumptions increase or decrease the charges that would be required to
amortize the outstanding balance of the initial restoration amortization
base over the remaining years of the restoration payment schedule, the
plan must notify the Pension Benefit Guaranty Corporation of the changes
so that it may make appropriate changes to the restoration payment
schedule.
[[Page 602]]
(f) Change to restoration method. A plan that has been restored must
use the restoration method until the initial restoration amortization
base has been fully amortized. The use of this method does not require
prior approval from the Commissioner. A plan using the restoration
method must compute the charges and credits to the initial restoration
amortization base in accordance with the order of the Pension Benefit
Guaranty Corporation and in accordance with this section.
(g) Deficit reduction contribution--(1) Calculation of deficit
reduction contribution. For any plan using the restoration method, the
deficit reduction contribution under section 412(l)(2) is equal to the
sum of--
(i) The unfunded section 412(l) restoration liability amount, plus
(ii) The unfunded new liability amount.
(2) Unfunded section 412(l) restoration liability amount. The
unfunded section 412(l) restoration liability amount is the amount
necessary to amortize fully the unfunded section 412(l) restoration
liability in installments, as prescribed by the Pension Benefit Guaranty
Corporation, over not more than 30 years. The annual amount need not be
level, but at all times the present value of the future amortization
charges under the restoration payment schedule, at the current liability
interest rate, must equal the outstanding balance of the unfunded
section 412(l) restoration liability and the schedule must provide that
at the end of no more than 30 years the entire amount of the unfunded
section 412(l) restoration liability base will have been fully
amortized. The schedule prescribed for amortization of the unfunded
section 412(l) restoration liability must comply with the requirements
imposed in paragraph (c) of this section on the restoration payment
schedule, except as provided in paragraph (g)(7) of this section and
except that the maximum permitted outstanding balance of the unfunded
section 412(l) restoration liability at the end of the tenth plan year
must not be greater than the outstanding balance of the section 412(l)
restoration liability that would have remained at the end of the tenth
plan year if the unfunded section 412(l) restoration liability had been
amortized in level amounts over the restoration payment period at the
current liability interest rate, increased by the current liability
interest rate differential as defined under paragraph (g)(7) of this
section. The Pension Benefit Guaranty Corporation may amend the
amortization schedule for the unfunded section 412(l) restoration
liability subject to the limits on amendments to the amortization
schedule prescribed for the initial restoration amortization base.
(3) Establishment of unfunded section 412(l) restoration liability.
In the plan year in which the initial post-restoration valuation date
falls, the unfunded section 412(l) restoration liability is equal to the
unfunded current liability of the plan.
(4) Unfunded new liability amount. In the case of a plan using the
restoration method, the unfunded new liability amount is the applicable
percentage, as defined in section 412(l)(4)(C), of the unfunded new
liability determined under paragraph (g)(5) of this section.
(5) Unfunded new liability. The unfunded new liability of a plan
using the restoration method is the unfunded current liability of the
plan for the plan year less the outstanding balance of the unfunded
section 412(l) restoration liability determined under paragraph (g)(3)
of this section and less any unpredictable contingent event benefit
liabilities (without regard to whether or not the event has occurred).
(6) Offset of amortization charges. The charges specified in the
restoration payment schedule to amortize the initial restoration
amortization base, must be offset against the deficit reduction
contribution in paragraph (g)(1) of this section along with any other
applicab1e amounts provided in section 412 (l)(1)(A)(ii).
(7) Interest rate differential. During the first 10 plan years after
the initial post-restoration valuation date, the unfunded section 412(l)
restoration liability amount for the plan as determined for purposes of
this section must be sufficient to prevent the outstanding balance of
the unfunded section 412(l) restoration liability from exceeding the
initial amount of the unfunded section 412(l) restoration liability
increased by the current liability
[[Page 603]]
interest rate differential. The current liability interest rate
differential at any point during the first ten years of the restoration
payment period is the excess if any of the accumulated interest on the
unfunded section 412(l) restoration liability computed at the current
liability interest rate over the accumulated interest on the unfunded
section 412(l) restoration liability computed at the least of the
valuation rate, the current liability interest rate and current
liability interest rate for the plan year in which the initial post
restoration valuation date falls. The current liability interest rate
differential is charged to the funding standard account at the end of
the tenth plan year, but the Pension Benefit Guaranty Corporation may,
as part of the restoration payment schedule order, or a modification to
that order, direct that the charging of this amount must be spread over
not more than 5 years, beginning with the eleventh plan year.
(h) Election of the alternative minimum funding standard. A plan
using the restoration method may not elect the alternative minimum
funding standard under section 412(g).
(i) Funding review by the Pension Benefit Guaranty Corporation. The
Pension Benefit Guaranty Corporation must review the funding of any plan
using the restoration method at least once in each plan year. As a
result of a funding review, the Pension Benefit Guaranty Corporation may
amend the restoration payment schedule as provided in paragraph (c)(3)
of this section. As part of the funding review, the Executive Director
of the PBGC must certify to the Corporation's Board of Directors, and to
the Internal Revenue Service, that the Corporation has reviewed the
funding of the plan, the financial condition of the plan sponsor and its
controlled group members, the payments required under the restoration
payment schedule (taking into account the availability of deferrals
authorized under paragraph (c)(4) of this section), and any other factor
that the Corporation deems relevant, and, based on that review,
determines that it is in the best interests of participants and
beneficiaries of the plan and the pension insurance program that the
restored plan not be reterminated.
[T.D. 8317, 55 FR 42707, Oct. 23, 1990; 56 FR 19038, Apr. 25, 1991]
Sec. 1.412(c)(2)-1 Valuation of plan assets; reasonable actuarial valuation methods.
(a) Introduction--(1) In general. This section prescribes rules for
valuing plan assets under an actuarial valuation method which satisfies
the requirements of section 412(c)(2)(A). An actuarial valuation method
is a funding method within the meaning of section 412(c)(3) and the
regulations thereunder. Therefore, certain changes affecting the
actuarial valuation method are identified in this section as changes in
a plan's funding method.
(2) Exception for certain bonds, etc. The rules of this section do
not apply to bonds or other evidences of indebtedness for which the
election described in section 412(c)(2)(B) has been made, nor are such
assets counted in applying paragraphs (b) or (c) of this section. Also,
an election under section 412(c)(2)(B) is not a change in funding method
within the meaning of section 412(c)(5).
(3) Money purchase pension plan. A money purchase pension plan must
value assets for the purpose of satisfying the requirements of section
412(c)(2)(A) solely on the basis of their fair market value (under
paragraph (c) of this section).
(4) Defined benefit plans. (i) To satisfy the requirements of
section 412(c)(2)(A), an actuarial method valuing assets of a defined
benefit plan must meet the requirements of paragraph (b) of this
section.
(ii) In general, the purpose of paragraph (b) of this section is to
permit use of reasonble actuarial valuation methods designed to mitigate
short-run changes in the fair market value of plan assets. The funding
of plan benefits and the charges and credits to the funding standard
account required by section 412 are generally based upon the assumption
that the defined benefit plan will be continued by the employer. Thus,
short-run changes in the value of plan assets presumably will offset one
another in the long term. Accordingly,
[[Page 604]]
in the determination of the amount required to be contributed under
section 412 it is generally not necessary to recognize fully each change
in fair market value of the assets in the period in which it occurs.
(iii) The asset valuation rules contained in paragraph (b) produce a
``smoothing'' effect. Thus, investment performance, including
appreciation or depreciation in the market value of the assets occurring
in each plan year, may be recognized gradually over several plan years.
This ``smoothing'' is in addition to the ``smoothing'' effect which
results, for example, from amortizing experience losses and gains over
15 or 20 years under section 412(b)(2 (B)(iv) and (3)(B)(ii).
(b) Asset valuation method requirements--(1) Consistent basis. (i)
The actuarial asset valuation method must be applied on a consistent
basis. Any change in meeting the requirements of this paragraph (b) is a
change in funding method subject to section 412(c)(5).
(ii) A method may satisfy the consistency requirement even though
computations are based only on the period elapsed since the adoption of
the method or on asset values occurring during that period.
(2) Statement of plan's method. The method of determining the
actuarial value (but not fair market value) of the assets must be
specified in the plan's actuarial report (required under section 6059).
The method must be described in sufficient detail so that another
actuary employing the method described would arrive at a reasonably
similar result. Whether a deviation from the stated actuarial valuation
method is a change in funding method is to be determined in accordance
with section 412(c)(5) and the regulations thereunder. A deviation to
include a type of asset not previously held by the plan would not be a
change in funding method.
(3) Consistent valuation dates. The same day or days (such as the
first or the last day of a plan year) must be used for all purposes to
value the plan's assests for each plan year, or portion of plan year,
for which a valuation is made. For purposes of this section, each such
day is a valuation date. A change in the day or days used is a change in
funding method.
(4) Reflect fair market value. The valuation method must take into
account fair market value by making use of the--
(i) Fair market value (determined under paragraph (c) of this
section), or
(ii) Average value (determined under paragraph (b)(7) of this
section) of the plan's assets as of the applicable asset valuation date.
This is done either directly in the computation of their actuarial value
or indirectly in the computation of upper or lower limits placed on that
value.
(5) Results above and below fair market or average value. A method
will not satisfy the requirements of this paragraph (b) if it is
designed to produce a result which will be consistently above or below
the values described in paragraph (b)(4) (i) and (ii). However, a method
designed to produce a result which consistently falls between fair
market value and average value will satisfy this requirement. See
Example (5) in paragraph (b)(9) of this section for an illustration of a
method described in the preceding sentence.
(6) Corridor limits. (i) Regardless of how the method reflects fair
market value under paragraph (b)(4), the method must result in an
actuarial value of the plan's assets which is not less than a minimum
amount and not more than a maximum amount. The minimum amount is the
lesser of 80 percent of the current fair market value of plan assets as
of the applicable asset valuation date or 85 percent of the average
value (as described in subparagraph (7)) of plan assets as of that date.
The maximum amount is the greater of 120 percent of the current fair
market value of plan assets as of the applicable asset valuation date or
115 percent of the average value of plan assets as of that date.
(ii) Under a plan's method, a preliminary computation of the
expected actuarial value may fall outside the prescribed corridor. A
method meets the requirements of paragraph (b)(6)(i) of this section is
such a case only by adjusting the expected actuarial value to the
nearest corridor limit applicable under the method. A plan may use an
[[Page 605]]
actuarial valuation method with a narrower corridor than the general
corridor required under paragraph (b)(6)(i). The adjustment to the
nearest corridor limit of such a method for purposes of this subdivision
(ii) would be determined by the narrower corridor stated in the
description of the plan's method.
(7) Average value. the average value of plan assets is computed by--
(i) Determining the fair market value of plan assets at least
annually,
(ii) Adding the current fair market value of the assets (as of the
applicable valuation date) and their adjusted values (as described in
paragraph (b)(8) of this section) for a stated period not to exceed the
five most recent plan years (including the current year), and
(iii) Dividing this sum by the number of values (including the
current fair market value) considered in computing the sum described in
subdivision (ii).
(8) Adjusted value. (i) the adjusted value of plan assets for a
prior valuation date is their fair market value on that date with
certain positive and negative adjustments. These adjustments reflect
changes that occur between the prior asset valuation date and the
current valuation date. However, no adjustment is made for increases or
decreases in the total value of plan assets that result from the
purchase, sale, or exchange of plan assets or from the receipt of
payment on a debt obligation held by the plan.
(ii) In determining the adjusted value of plan assets for a prior
valuation date, there is added to the fair market value of the plan
assets of that date the sum of all additions to the plan assets since
that date, excluding appreciation in the fair market value of the
assets. The additions would include, for example, any contribution to
the plan; any interest or dividend paid to the plan; and any asset not
taken into account in a prior valuation of assets, but taken into
account for the current year, in computing the fair market value of plan
assets under paragraph (c) of this section.
(iii) In determining the adjusted value of plan assets for a prior
valuation date, there is subtracted from the fair market value of the
plan assets on that date the sum of all reductions in plan assets since
that date, excluding depreciation in the fair market value of the
assets. The reductions would include, for example, any benefit paid from
plan assets; any expense paid from plan assets; and any asset taken into
account in a prior valuation of assets but not taken into account for
the current year, in computing the fair market value of plan assets
under paragraph (c) of this section.
(9) Examples. This paragraph (b) may be illustrated by the following
examples. In each example, assume that the pension plan uses a
consistent actuarial method of valuing its assets within the meaning of
paragraph (b)(1), (2), and (3) of this section.
Example (1). Plan A considers the value of its assets to be initial
cost, increased by an assumed rate of growth of X percent annually.
Under the circumstances, the X-percent factor used by the plan is a
reasonable assumption. Thus, this method is not designed to produce
results consistently above or below fair market value as prohibited by
paragraph (b)(5) of this section. Also, the method requires that the
actuarial value be adjusted as required to fall within the corridor
under paragraph (b) (6) and (7) of this section. Therefore, the method
reflects fair market value as required by paragraph (b)(4) of this
section.
Example (2). Plan B computes the actuarial value of its assets as
follows: It determines the fair market value of the plan assets. Then
the fair market value is adjusted to the extent necessary to make the
actuarial value fall within a ``5 percent'' corridor. This corridor is
plus or minus 5 percent of the following amount: the fair market value
of the assets at the beginning of the valuation period plus an assumed
annual growth of 4 percent with adjustments for contributions and
benefit payments during the period. This method reflects fair market
value in a manner prescribed by paragraph (b)(4) of this section. If the
4 percent factor used by the plan is a reasonable assumption, this
method is not designed to produce results consistently above or below
fair market value, and thus it satisfies paragraph (b)(5). However, this
method is unacceptable because in some instances it may result in an
actuarial value outside the corridor described in paragraph (b)(6) of
this section. This method would be permitted if a second corridor were
imposed which would adjust the value of the total plan assets to the
corridor limits as required by paragraph (b)(6).
Example (3). Plan C values its assets by multiplying their fair
market value by an index number. The use of the index results in the
hypothetical average value that plan assets present on the valuation
date would
[[Page 606]]
have had if they had been held during the current and four preceding
years, and had appreciated or depreciated at the actual yield rates
including appreciation and depreciation experienced by the plan during
that period. However, the method requires an adjustment to the extent
necessary to bring the resulting actuarial value of the assets inside
the corridor described in the statement of the plan's actuarial
valuation method. In this case, the stated corridor is 90 to 110 percent
of fair market value, a corridor narrower than that described in
paragraph (b)(7) of this section. This method is permitted.
Example (4). Plan D values its assets by multiplying their fair
market value by 95 percent. Although the method reflects fair market
value and the results of this method will always be within the required
corridor, it is not acceptable because it will consistently result in a
value less than fair market value.
Example (5). Plan E values its assets by using a five-year average
method with appropriate adjustments for the period. Under the particular
method used by Plan E, assets are not valued below 80 percent of fair
market value or above 100 percent of fair market value. If the average
produces a value that exceeds 100 percent of fair market value, the
excess between 100 and 120 percent is recorded in a ``value reserve
account.'' In years after one in which the average exceeds 100 percent
of fair market value, amounts are subtracted from this account and
added, to the extent necessary, to raise the value produced by the
average for that year to 100 percent of fair market value. This method
is permitted because it reflects fair market value under paragraph
(b)(4) of this section by appropriately computing an average value, it
satisfies paragraph (b)(5) by producing a result that falls consistently
between fair market value and average value, and it properly reflects
the corridor described in paragraph (b)(7).
Example (6). All assets of Plan F are invested in a trust fund and
the plan year is the calendar year. The actuarial value is determined by
averaging fair market value over 4 years. An actuarial valuation is
performed as of December 31, 1988.
(i) The average value as of December 31, 1988, is computed as
follows:
----------------------------------------------------------------------------------------------------------------
1986 1986 1987 1987 1988 1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Jan. 1............... .......... $150,000 .......... $196,500 .......... $238,000
Contributions......................... $65,000 .......... $62,000 .......... $66,000 ..........
Benefit payments...................... (22,000) .......... (24,000) .......... (25,000) ..........
Expenses.............................. (6,500) .......... (7,000) .......... (7,500) ..........
Interest and dividends................ 8,000 44,500 7,500 38,500 7,000 240,500
Net realized gains (losses)............. .......... (2,000) .......... 6,000 .......... (8,000)
Balancing item \1\...................... .......... 4,000 .......... (3,000) .......... (42,000)
-----------------------------------------------------------------------
Fair market value: Dec. 31.............. .......... 196,500 .......... 238,000 .......... 228,000
----------------------------------------------------------------------------------------------------------------
\1\ This equals the increase (decrease) in unrealized appreciation.
----------------------------------------------------------------------------------------------------------------
Adjusted values 1985 1986 1987 1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Dec. 31...................... $150,000 $196,500 $238,000 $228,000
Net adjustments:
1988.......................................... 40,500 40,500 40,500 ..............
1987.......................................... 38,500 38,500 .............. ..............
1986.......................................... 44,500 .............. .............. ..............
---------------------------------------------------------------
Total........................................ 273,500 275,500 278,500 228,000
===============================================================
Average value: 1988=$273,500 + $275,500 + $278,500 + $228,000 / 4=$263,875
----------------------------------------------------------------------------------------------------------------
(ii) Plan F properly determines an average value under paragraph
(b)(7) of this section for use as an actuarial value. Therefore, the
valuation method meets the requirements of this section.
Example (7). Plan G computes the actuarial value of the plan assets
as follows: The current fair market value of the plan assets is averaged
with the most recent prior adjusted actuarial value. This average value
is adjusted up or down toward the current fair market value by 20
percent of the difference between it and the current fair market value
of the assets. This value is further adjusted to the extent necessary to
fall within the corridor described in the statement of the plan's
actuarial valuation method. The lower end of the corridor is the lesser
of 80 percent of the fair market value of the plan assets or 85 percent
of the average value of the plan assets. The higher end of the corridor
is the greater of 120 percent of the fair market value of plan assets or
115 percent of the average value of plan assets. Average value for
purposes of the corridor is determined under paragraph (b)(7) of this
section. Assuming
[[Page 607]]
the numerical data of Example (6), the application of the corridor is as
follows. The actuarial asset value as of December 31, 1988, must not be
less than $182,400 (80 percent of current fair market value, $228,000)
nor greater than $303,456 (115 percent of average value, 263,875). This
method is permitted because it reflects fair market value in a manner
permitted by paragraph (b)(4) of this section, it produces an actuarial
value which is neither consistently above nor consistently below fair
market or average value to satisfy paragraph (b)(5), and it is
appropriately limited by the corridor described in paragraph (b)(6).
(c) Fair market value of assets--(1) General rules. Except as
otherwise provided in this paragraph (c), the fair market value of a
plan's assets for purposes of this section is the price at which the
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts.
(d) Methods for taking into account the fair market value of certain
agreements. [Reserved]
(e) Effective date and transition rules--(1) Effective date. This
section applies to plan years to which section 412, or section 302 of
the Employee Retirement Income Security Act of 1974, applies.
(2) Special rule for certain plan years. For plan years beginning
prior to November 12, 1980, the amounts required to be determined under
section 412 may be computed on the basis of any reasonable actuarial
method of asset valuation which takes into account the fair market value
of the plan's assets, even if the method does not meet all of the
requirements of paragraphs (a) through (c) of this section.
(3) Plan years beginning on or after November 12, 1980. Paragraphs
(a) through (c) of this section apply beginning with the first valuation
of plan assets made for a plan year to which section 412 applies that
begins on or after November 12, 1980. The statement of the plan's
actuarial asset valuation method required by paragraph (b)(2) of this
section must be included with the plan's actuarial report for that year,
in addition to any subsequent reports.
(4) Effect of change of asset valuation method. A plan which is
required to change its asset valuation method to comply with paragraphs
(a) through (c) of this section must make the change no later than the
time when the plan is first required to comply with this section under
paragraph (e)(3). A method of adjustment must be used to take account of
any difference in the actuarial value of the plan's assets based on the
old and new valuation methods. The plan may use either--
(i) A method of adjustment described in paragraph (e)(5) or (e)(6)
of this section without prior approval by the Commissioner, or
(ii) Any other method of adjustment if the Commissioner gives prior
approval under section 412(c)(5).
(5) Retroactive recomputation method. (i) Under this method of
adjustment, the plan recomputes the balance of the funding standard
account as of the beginning of the first plan year for which it uses its
new asset valuation method to comply with paragraphs (a) through (c) of
this section. This new balance is recomputed by retroactively applying
the plan's new method as of the first day of the first plan year to
which section 412 applies.
(ii) Beginning with the first plan year for which it uses its new
method, the plan computes the normal cost and amortization charges and
credits to the funding standard account based on the retroactive
application of its new method as of the first day of the first plan year
to which section 412 applies.
(iii) If the recomputed aggregate charges exceed the recomputed
aggregate credits to the funding standard account as of the end of the
first plan year for which the plan uses its new method, an additional
contribution to the plan may be necessary to avoid an accumulated
funding deficiency in that year. The use of the retroactive
recomputation method may also result in an accumulated funding
deficiency for years prior to that first year. In such cases, the rules
of section 412(c)(10), relating to the time when certain contributions
are deemed to have been made, apply.
(6) Prospective gain or loss adjustment method. (i) Under this
method of adjustment the plan values its assets under its new method no
later than the valuation date for the first plan year beginning after
[the publication date of this section]
[[Page 608]]
(ii) Regardless of the type of funding method used by a plan, the
difference in the value of the assets under the old and the new asset
valuation methods may be treated as arising from an experience loss or
gain; or alternatively it may be treated as arising from a change in
actuarial assumptions.
(iii) The treatment of this difference as an experience gain or loss
or as a change in actuarial assumptions must be consistent with the
treatment of such gains, losses, or changes under the funding method
used by the plan. Thus, if a plan uses a spread gain type funding method
other than the aggregate cost method, the difference in the value of
assets under the old and the new asset valuation methods may be either
amortized or spread over future periods as a part of normal cost.
Examples of this type of funding method are the frozen initial liability
cost method and the attained age normal cost method. With an aggregate
method, the difference in the value of assets under the old and the new
asset valuation methods must be spread over future periods as a part of
normal cost.
(Secs. 412(c)(2) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
916 and 68A Stat. 917; 26 U.S.C. 412(c)(2) and 7805))
[T.D. 7734, 45 FR 74718, Nov. 12, 1980]
Sec. 1.412(c)(3)-1 Reasonable funding methods.
(a) Introduction--(1) In general. This section prescribes rules for
determining whether or not, in the case of an ongoing plan, a funding
method is reasonable for purposes of section 412(c)(3). A method is
unreasonable only if it is found to be inconsistent with a rule
prescribed in this section. The term ``reasonable funding method'' under
this section has the same meaning as the term ``acceptable actuarial
cost method'' under section 3(31) of the Employee Retirement Income
Security Act of 1974 (ERISA).
(2) Computations included in method. See Sec. 1.412(c)(1)-1(b) for a
discussion of matters that are, and are not, included in the funding
method of a plan.
(3) Plans using shortfall. The shortfall method is a method of
determining charges to the funding standard account by adapting the
underlying funding method of certain collectively bargained plans in the
manner described in Sec. 1.412(c)(1)-2. As such, the shortfall method is
a funding method. The underlying method of a plan that uses the
shortfall method must be a reasonable funding method under this section.
The rules contained in this section, relating to cost under a reasonable
funding method, apply in the shortfall method to the annual computation
charge under Sec. 1.412(c)(1)-2(d).
(4) Scope of funding method. Except for the shortfall method, a
reasonable funding method is applied to the computation of--
(i) The normal cost of a plan for a plan year; and, if applicable,
(ii) The bases established under section 412(b)(2)(B), (C), and (D),
and (3) (B) (``amortizable bases'').
(b) General rules for reasonable funding methods--(1) Basic funding
formula. At any time, except as provided by the Commissioner, the
present value of future benefits under a reasonable funding method must
equal the sum of the following amounts:
(i) The present value of normal costs (taking into account future
mandatory employee contributions, within the meaning of section
411(c)(2)(C), in the case of a contributory plan) over the future
working lifetime of participants;
(ii) The sum of the unamortized portions of amortizable bases, if
any, treating credit bases under section 412(b)(3)(B) as negative
numbers; and
(iii) The plan assets, decreased by a credit balance (and increased
by a debit balance) in the funding standard account under section
412(b).
(2) Normal cost. Normal cost under a reasonable funding method must
be expressed as--
(i) A level dollar amount, or a level percentage of pay, that is
computed from year to year on either an individual basis or an aggregate
basis; or
(ii) An amount equal to the present value of benefits accruing under
the method for a particular plan year.
(3) Application to shortfall. Paragraph (b)(2) will not fail to be
satisfied merely because an amount described in (i) or (ii) is expressed
as permitted under the shortfall method.
(c) Additional requirements--(1) Inclusion of all liabilities. Under
a reasonable
[[Page 609]]
funding method, all liabilities of the plan for benefits, whether vested
or not, must be taken into account.
(2) Production of experience gains and losses. If each actuarial
assumption is exactly realized under a reasonable funding method, no
experience gains or losses are produced.
(3) Plan population--(i) In general. Under a reasonable funding
method, the plan population must include three classes of individuals:
participants currently employed in the service of the employer; former
participants who either terminated service with the employer, or
retired, under the plan; and all other individuals currently entitled to
benefits under the plan. See Sec. 1.412(c)(3)-1(d)(2) for rules
concerning anticipated future participants.
(ii) Limited exclusion for certain recent participants. Under a
reasonable funding method, certain individuals may be excluded from the
first class of individuals described in paragraph (c)(3)(i) of this
section unless otherwise provided by the Commissioner. The excludable
individuals are participants who would be excluded from participation by
the minimum age or service requirement of section 410 but who, under the
terms of the plan, participate immediately upon entering the service of
the employer.
(iii) Special exclusion for ``rule of parity'' cases. Under a
reasonable funding method, certain individuals may be excluded from the
second class of individuals described in paragraph (c)(3)(i) of this
section. The excludable individuals are those former participants who
have terminated service with the employer without vested benefits and
whose service might be taken into account in future years because the
``rule of parity'' of section 411(a)(6)(D) does not permit that service
to be disregarded. However if the plan's experience as to separated
employees' returning to service has been such that the exclusion
described in this subparagraph would be unreasonable, the exclusion
would no longer apply.
(4) Use of salary scale--(i) General acceptability. The use of a
salary scale assumption is not inappropriate merely because of the
funding method with which it is used. Therefore, in determining whether
actuarial assumptions are reasonable, a salary scale will not be
considered to be prohibited merely because a particular funding method
is being used.
(ii) Projection to appropriate salary. Under a reasonable funding
method, salary scales reflected in projected benefits must be the
expected salary on which benefits would be based under the plan at the
age when the receipt of benefits is expected to begin.
(5) Treatment of allocable items. Under a reasonable funding method
that allocates assets to individual participants to determine costs, the
allocation of assets among participants must be reasonable. An initial
allocation of assets among participants will be considered reasonable
only if it is in proportion to related liabilities. However, the
Commissioner may determine, based on the facts and circumstances, that
it is unreasonable to continue to allocate assets on this basis beyond
the initial year. Under a reasonable funding method that allocates
liabilities among different elements of past and future service, the
allocation of liabilities must be reasonable.
(d) Prohibited considerations under a reasonable funding method--(1)
Anticipated benefit changes--(i) In general. Except as otherwise
provided by the Commissioner, a reasonable funding method does not
anticipate changes in plan benefits that become effective, whether or
not retroactively, in a future plan year or that become effective after
the first day of, but during, a current plan year.
(ii) Exception for collectively bargained plans. A collectively
bargained plan described in section 413(a) may on a consistent basis
anticipate benefit increases scheduled to take effect during the term of
the collective-bargaining agreement applicable to the plan. A plan's
treatment of benefit increases scheduled in a collective bargaining
agreement is part of its funding method. Accordingly, a change in a
plan's treatment of such benefit increases (for example, ignoring
anticipated increases after taking them into account) is a change of
funding method.
(2) Anticipated future participants. A reasonable funding method
must not anticipate the affiliation with the plan of future participants
not employed in the service of the employer on the plan
[[Page 610]]
valuation date. However, a reasonable funding method may anticipate the
affiliation with the plan of current employees who have not satisfied
the participation requirements of the plan.
(e) Special rules for certain funding methods--(1) Applicability of
special rules. Paragraph (e) of this section applies to a funding method
that determines normal cost under paragraph (b)(2)(ii) of this section.
(2) Use of salary scale. For rules relating to use of a salary scale
assumption, see paragraph (c)(4) of this section.
(3) Allocation of liabilities. In determining a plan's normal cost
and accrued liability for a particular plan year, the projected benefits
of the plan must be allocated between past years and future years.
Except in the case of a career average pay plan, this allocation must be
in proportion to the applicable rates of benefit accrual under the plan.
Thus, the allocation to past years is effected by multiplying the
projected benefit by a fraction. The numerator of the fraction is the
participant's credited years of service. The denominator is the
participant's total credited years of service at the anticipated benefit
commencement date. Adjustments are made to account for changes in the
rate of benefit accrual. An allocation based on compensation is not
permitted. In the case of a career average pay plan, an allocation
between past and future service benefits must be reasonable.
(f) Treatment of ancillary benefit costs--(1) General rule. Under a
reasonable funding method, except as otherwise provided by this
paragraph (f), ancillary benefit costs must be computed by using the
same method used to compute retirement benefit costs under a plan.
(2) Ancillary benefit defined. For purposes of this paragraph an
ancillary benefit is a benefit that is paid as a result of a specified
event which--
(i) Occurs not later than a participant's separation from service,
and
(ii) Was detrimental to the participant's health.
Thus, for example, benefits payable if a participant dies or becomes
disabled prior to separation from service are ancillary benefits because
the events giving rise to the benefits are detrimental to the
participant's health. However, an early retirement benefit, a social
security supplement (as defined in Sec. 1.411(a)-7(c)(4)(ii)), and the
vesting of plan benefits (even if more rapid than is required by section
411) are not ancillary benefits because those benefits do not result
from an event which is detrimental to the participant's health.
(3) Exception for certain insurance contracts. Under a reasonable
funding method, regardless of the method used to compute retirement
benefit costs, the cost of an ancillary benefit may equal the premium
paid for that benefit under an insurance contract if--
(i) The ancillary benefit is provided under the contract, and
(ii) The benefit is guaranteed under the contract.
(4) Exception for 1-year term funding and other approved methods.
[Reserved]
(5) Section 401(h) benefits. Section 412 does not apply to benefits
that are described in section 401(h) and for which a separate account is
maintained.
(g) Examples. The principles of this section are illustrated by the
following examples:
Example (1). Assume that a plan, using funding method A, is in its
first year. No contributions have been made to the plan, other than a
nominal contribution to establish a corpus for the plan's trust. There
is no past service liability, and the normal cost is a constant
percentage of an annually determined amount. The constant percentage is
99 percent, and the annually determined amount is the excess of the
present value of future benefits over plan assets. The present value of
future benefits is $10,000. Under paragraph (b)(1) of this section, the
present value of future benefits must equal the present value of future
normal costs plus plan assets. (No amortizable bases exist, nor are
there credit or debit balances.) Under method A, the present value of
future normal costs would equal the sum of a series of annually
decreasing amounts. Because of the constant percentage factor, the
present value of future normal costs over the years can never equal
$10,000, the present value of future benefits. In effect, then, assets
under method A can never equal the present value of future benefits if
all assumptions are exactly realized. Therefore, method A is not a
reasonable funding method.
Example (2). Assume that a plan, using funding method B, determines
normal cost by computing the present value of benefits expected to be
accrued under the plan by the
[[Page 611]]
end of 10 years after the valuation date and adding to this the present
value of benefits expected to be paid within these 10 years. Plan assets
are subtracted from the sum of the two present value amounts. The
difference then is divided by the present value of salaries projected
over the 10 years. Under paragraph (c)(1) of this section, all
liabilities of a plan must be taken into account. Because method B takes
into account only benefits paid or accrued by the end of 10 years, it is
not a reasonable funding method.
Example (3). Assume that a plan, using funding method C, determines
normal cost as a constant percentage of compensation. (This percentage
is determined as follows: The excess of projected benefits over accrued
benefits is computed. Then the present value of this excess is divided
by the present value of future salaries.) However, the accrued liability
is computed each year as the present value of accrued benefits. (This
computation does not reflect normal cost as a constant percentage of
compensation. Thus, normal cost under the plan does not link accrued
liabilities under the plan for consecutive years as would be the case,
for example, under a unit credit cost method.) In determining gains and
losses, method C compares the actual unfunded liability (the accrued
liability less assets) with the expected unfunded liability (the sum of
the actual unfunded liability in the previous year and the normal cost
for the previous year less the contribution made for the previous year,
all adjusted for interest). Under paragraph (c)(2) of this section, if
actuarial assumptions are exactly realized, experience gains and losses
must not be produced. Under method C, the use of a constant percentage
in computing normal cost (and the expected unfunded liability) coupled
with the manner of computing the accrued liability (and the actual
unfunded liability) generally produces gains in the earlier years and
losses in the later years if each actuarial assumption is exactly
realized. Therefore, method C is not a reasonable funding method.
Example (4). Assume that a plan, using funding method D, bases
benefits on final average pay. Under method D, the past service
liability on any date equals the present value of the accrued benefit on
that date based on compensation as of that date. The normal cost for any
year equals the present value of a certain amount. That amount is the
excess of the projected accrued benefit as of the end of the year over
the actual accrued benefit at the beginning of the year. Accrued
benefits, projected as of the end of a year, reflect a 1-year salary
projection. Under paragraph (c)(4) of this section, salary scales
reflected in projected benefits must project salaries to the salary on
which benefits would be based under the plan at the age when the receipt
of benefits under the plan is expected to begin. Because the plan is not
a career average pay plan and compensation is projected only 1 year,
method D is not a reasonable funding method. (Under paragraph (c)(4) of
this section, the use of a salary scale assumption could be required
with a unit credit method if, without the use of a salary scale,
assumptions in the aggregate are unreasonable.)
Example (5). Assume that a plan, using method E, a unit credit
funding method, calculates a participant's accrued benefit according to
the following formula: 2 percent of final salary for the first 10 years
of service and 1 percent of final salary for the years of service in
excess of 10. Under the plan, no employee may be credited with more than
25 years of service. The actuarial assumptions for the valuation include
a salary scale of 5 percent per year. For a participant at age 40 with
15 years of service, a current salary of $20,000 and a normal retirement
age of 65, the accrued liability for the retirement benefit is the
present value of an annuity of $16,932 per year, commencing at age 65.
The $16,932 is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.161
(3.3864 is 1.05 raised to the 25th power; the 25th power reflects the
difference between normal retirement age and attained age (65-40).)
Salary under this method is projected to the age when the receipt of
benefits is expected to begin. Therefore, method E meets the requirement
of paragraph (c)(4) of this section. Also, the allocation of benefits
under method E between past and future years of service meets the
requirements of paragraph (e)(3) of this section.
Example (6). Assume that a plan that has two participants and that
previously used the unit credit cost method wishes to change the funding
method at the beginning of the plan year to funding method F, a
modification of the aggregate cost method. The modification involves
determining normal cost for each of the two participants under the plan.
Therefore, it requires an allocation of assets to each participant for
valuation purposes. The actuary proposes to allocate the assets on hand
at the beginning of the plan
[[Page 612]]
year of the change in funding method in proportion to the accrued
liabilities calculated under the unit credit cost method. The relevant
results of the calculations are shown below:
------------------------------------------------------------------------
Employees
---------------- Totals
M N
------------------------------------------------------------------------
Accrued Liabilities (unit credit method):
Dollar amount................................ 15,670 906 16,576
Per cent of total............................ 94.53 5.47 100.00
Assets:
Dollar amount................................ 7,835 453 8,288
per cent of total............................ 94.53 5.47 100.00
------------------------------------------------------------------------
The proposed allocation in proportion to the accrued liabilities
under the unit credit cost method satisfies the requirements of
paragraph (c)(5) of this section at the beginning of the first plan year
for which the new method is used.
Example (7). The facts are the same as in Example (6). However, the
actuary proposes to allocate all the assets to employee M, the older
employee. Method F, under these facts, is not an acceptable funding
method because the allocation is not in proportion to related
liabilities as required under paragraph (c)(5) of this section.
[T.D. 7746, 45 FR 86430, Dec. 31, 1980]
Sec. 1.412(c)(3)-2 Effective dates and transitional rules relating to reasonable funding methods.
(a) Introduction. This section prescribes effective dates for rules
relating to reasonable funding methods, under section 412(c)(3) and
Sec. 1.412(c)(3)-1. Also, this section sets forth rules concerning
adjustments to a plan's funding standard account that are necessitated
by a change in funding method, and a provision setting forth procedural
requirements for use of an optional phase-in of required changes.
(b) Effective date--(1) General rule. Except as otherwise provided
by subparagraph (2) of this paragraph, Sec. 1.412(c)(3)-1 applies to any
valuation of a plan's liabilities (within the meaning of section
412(c)(9)) as of a date after April 30, 1981.
(2) Exception. If a collective bargaining agreement which determines
contributions to a plan is in effect on April 30, 1981, then
Sec. 1.412(c)(3)-1 applies to any valuation of that plan's liabilities
as of a date after the earlier of the date on which the last such
collective bargaining agreement expires or April 30, 1984.
(3) Transitional rule. The reasonableness of a funding method used
in making a valuation of a plan's liability as of a date before the
effective date determined under subparagraph (1) or (2) of this
paragraph is determined on the basis of such published guidance as was
available on the date as of which the valuation was made.
(c) Change of funding method without approval--(1) In general. A
plan that is required to change its funding method to comply with
Sec. 1.412(c)(3)-1 is not required to submit the change of funding
method for approval as otherwise required by section 412(c)(5). However,
this change must be described on Form 5500, Schedule B for the plan year
with respect to which the change is first effective.
(2) Amortization base. An amortization base must be established in
the plan year of the change in method equal to the change in the
unfunded liability due to the change (where both unfunded liabilities
are based on the same actuarial assumptions). Such a base must be
amortized over 30 years in determining the charges or credits to the
funding standard account, unless the Commissioner upon application
permits amortization over a shorter period.
(d) Phase-in of additional funding required by new method--(1) In
general. A plan that is required to change its funding method to comply
with Sec. 1.412(c)(3)-1 may elect to charge and credit the funding
standard account as provided in this paragraph. An election under this
paragraph shall be irrevocable.
(2) Credit in year of change. In the plan year of the change in
method the funding standard account may be credited with an amount not
in excess of 0.8 multiplied by the excess (if any) of--
(i) The normal cost under the new method plus the amortization
charge (or minus the amortization credit) computed as described in
Sec. 1.412(c)(3)-2(c)(2), over
(ii) The normal cost under the prior method, for the plan year of
the change in method.
(3) Credits in the next three years. In the three years following
the year of the change the funding standard account may be credited with
an amount
[[Page 613]]
not in excess of 0.6, 0.4, and 0.2 respectively in the first, second,
and third years, multiplied by either of the following amounts, computed
as of the last day of the year of credit--
(i) The excess described in Sec. 1.412(c)(3)-2(d)(2) multiplied by a
fraction (not greater than 1), the numerator of which is the number of
participants in the year of the credit and the denominator of which is
the number of participants in the year of the change, or, at the option
of the plan,
(ii) The excess (if any) in the year of credit of--
(A) The net charge to the funding standard account based on the new
method, over
(B) The net charge to the funding standing account based on the
prior method.
(4) Computational rules. For purposes of the calculation described
in Sec. 1.412(c)(3)-2(d)(3)(ii), the net charge is the excess of charges
under section 412(b)(2) (A) and (B) over the credits under section
412(b)(3)(B) (including the charge or credit described in
Sec. 1.412(c)(3)-2(c)) which would be required using the actuarial
assumptions and plan benefit structure in effect on the last day of the
plan year of change.
(5) Fifteen-year amortization of credits. The funding standard
account shall be charged with 15-year amortization of each credit
described in Sec. 1.412(c)(3)-2(d) (2) and (3) beginning in the year
following each such credit.
(6) Manner of election. An election under this paragraph shall be
made by the claiming of the credits described in Sec. 1.412(c)(3)-2(d)
(2) and (3) on Schedule B to Form 5500 and by filing such other
information as may be required by the Commissioner.
(e) Effect on shortfall method. The charges and credits described in
this section apply in the shortfall method to the annual computation
charge described in Sec. 1.412(c)(1)-2(d). The amounts described in
Sec. 1.412(c)(3)-2(d) shall be determined before the application of the
shortfall method.
(Sec. 3(31) of the Employee Retirement Income Security Act of 1974 (88
Stat. 837; 29 U.S.C. 1002) and sec. 7805 of the Internal Revenue Code of
1954 (68A Stat. 917; 26 U.S.C. 7805))
[T.D. 7746, 45 FR 86432, Dec. 31, 1980]
Sec. 1.412(i)-1 Certain insurance contract plans.
(a) In general. Under section 412(h)(2) of the Internal Revenue Code
of 1954, as added by section 1013(a) of the Employee Retirement Income
Security Act of 1974 (88 Stat. 914) (hereinafter referred to as ``the
Act''), an insurance contract plan described in section 412(i) for a
plan year is not subject to the minimum funding requirements of section
412 for that plan year. Consequently, if an individual or group
insurance contract plan satisfies all of the requirements of paragraph
(b)(2) or (c)(2) of this section, whichever are applicable, for the plan
year, the plan is not subject to the requirements of section 412 for
that plan year. The effective date for section 412 of the Code is
determined under section 1017 of the Act. In general, in the case of a
plan which was not in existence on January 1, 1974, this section applies
for plan years beginning after September 2, 1974, and in the case of a
plan in existence on January 1, 1974, to plan years beginning after
December 31, 1975.
(b) Individual insurance contract plans. (1) An individual insurance
contract plan is described in section 412(i) during a plan year if the
plan satisfies the requirements of paragraph (b)(2) of this section for
the plan year.
(2) The requirements of this paragraph are:
(i) The plan must be funded exclusively by the purchase from an
insurance company or companies (licensed under the law of a State or the
District of Columbia to do business with the plan) of individual annuity
or individual insurance contracts, or a combination thereof. The
purchase may be made either directly by the employer or through the use
of a custodial account or trust. A plan shall not be considered to be
funded otherwise than exclusively by the purchase of individual annuity
or individual insurance contracts merely because the employer makes a
payment necessary to comply with the provisions of section 411(c)(2)
(relating to accrued benefit from employee contributions).
(ii) The individual annuity or individual insurance contracts issued
under the plan must provide for level annual, or more frequent, premium
[[Page 614]]
payments to be paid under the plan for the period commencing with the
date each individual participating in the plan became a participant and
ending not later than the normal retirement age for that individual or,
if earlier, the date the individual ceases his participation in the
plan. Premium payments may be considered to be level even though items
such as experience gains and dividends are applied against premiums. In
the case of an increase in benefits, the contracts must provide for
level annual payments with respect to such increase to be paid for the
period commencing at the time the increase becomes effective. If payment
commences on the first payment date under the contract occurring after
the date an individual becomes a participant or after the effective date
of an increase in benefits, the requirements of this subdivision will be
satisfied even though payment does not commence on the date on which the
individual's participation commenced or on the effective date of the
benefit increase, whichever is applicable. If an individual accrues
benefits after his normal retirement age, the requirements of this
subdivision are satisfied if payment is made at the time such benefits
accrue. If the provisions required by this subdivision are set forth in
a separate agreement with the issuer of the individual contracts, they
need not be included in the individual contracts.
(iii) The benefits provided by the plan for each individual
participant must be equal to the benefits provided under his individual
contracts at his normal retirement age under the plan provisions.
(iv) The benefits provided by the plan for each individual
participant must be guaranteed by the life insurance company, described
in paragraph (b)(2)(i) of this section, issuing the individual contracts
to the extent premiums have been paid.
(v) Except as provided in the following sentence, all premiums
payable for the plan year, and for all prior plan years, under the
insurance or annuity contracts must have been paid before lapse. If the
lapse has occurred during the plan year, the requirements of this
subdivision will be considered to have been met if reinstatement of the
insurance policy, under which the individual insurance contracts are
issued, occurs during the year of the lapse and before distribution is
made or benefits commence to any participant whose benefits are reduced
because of the lapse.
(vi) No rights under the individual contracts may have been subject
to a security interest at any time during the plan year. This
subdivision shall not apply to contracts which have been distributed to
participants if the security interest is created after the date of
distribution.
(vii) No policy loans, including loans to individual participants,
on any of the individual contracts may be outstanding at any time during
the plan year. This subdivision shall not apply to contracts which have
been distributed to participants if the loan is made after the date of
distribution. An application of funds by the issuer to pay premiums due
under the contracts shall be deemed not to be a policy loan if the
amount of the funds so applied, and interest thereon, is repaid during
the plan year in which the funds are applied and before distribution is
made or benefits commence to any participant whose benefits are reduced
because of such application.
(c) Group insurance contract plans. (1) A group insurance contract
plan is described in section 412(i) during a plan year if the plan
satisfies the requirements of subparagraph (2) for the plan year.
(2) The requirements of this subparagraph are:
(i) The plan must be funded exclusively by the purchase from an
insurance company or companies, described in paragraph (b)(2)(i) of this
section, of group annuity or group insurance contracts, or a combination
thereof. The purchase may be made either directly by the employer or
through the use of a custodial account or trust. A plan shall not be
considered to be funded otherwise than exclusively by the purchase of
group annuity or group insurance contracts merely because the employer
makes a payment necessary to comply with the provisions of section 411
(c)(2) (relating to accrued benefit derived from employee
contributions).
[[Page 615]]
(ii) In the case of a plan funded by a group insurance contract or a
group annuity contract the requirements of paragraph (b)(2)(ii) of this
section must be satisfied by the group contract issued under the plan.
Thus, for example, each individual participant's benefits under the
group contract must be provided for by level annual, or more frequent,
payments equivalent to the payments required to satisfy such paragraph.
The requirements of this subdivision will not be satisfied if benefits
for any individual are not provided for by level payments made on his
behalf under the group contract.
(iii) The group annuity or group insurance contract must satisfy the
requirements of clauses (iii), (iv), (v), (vi), and (vii) of paragraph
(b)(2). Thus, for example, each participant's benefits provided by the
plan must be equal to his benefits provided under the group contract at
his normal retirement age.
(iv)(A) If the plan is funded by a group annuity contract, the value
of the benefits guaranteed by the insurance company issuing the contract
under the plan with respect to each participant under the contract must
not be less than the value of such benefits which the cash surrender
value would provide for that participant under any individual annuity
contract plan satisfying the requirements of paragraph (b) and approved
for sale in the State where the principal office of the plan is located.
(B) If the plan is funded by a group insurance contract, the value
of the benefits guaranteed by the insurance company issuing the contract
under the plan with respect to each participate under the contract must
not be less than the value of such benefits which the cash surrender
value would provide for that participant under any individual insurance
contract plan satisfying the requirements of paragraph (b) and approved
for sale in the State where the principal office of the plan is located.
(v) Under the group annuity or group insurance contract, premiums or
other consideration received by the insurance company (and, if a
custodial account or trust is used, the custodian or trustee thereof)
must be allocated to purchase individual benefits for participants under
the plan. A plan which maintains unallocated funds in an auxiliary trust
fund or which provides that an insurance company will maintain
unallocated funds in a separate account, such as a group deposit
administration contract, does not satisfy the requirements of this
subdivision.
(d) Combination of plans. A plan which is funded by a combination of
individual contracts and a group contract shall be treated as a plan
described in section 412 (i) for the plan year if the combination, in
the aggregate, satisfies the requirements of this section for the plan
year.
[T.D. 7746, 45 FR 47676, July 16, 1980; 45 FR 50563, July 30, 1980]0
Sec. 1.413-1 Special rules for collectively bargained plans.
(a) Application of section 413(b) to certain collectively bargained
plans--(1) In general. Section 413(b) sets forth special rules
applicable to certain pension, profit-sharing, and stock bonus plans
(and each trust which is a part of such a plan), hereinafter referred to
as ``section 413(b) plans'', described in paragraph (a)(2) of this
section. Notwithstanding any other provision of the Code, a section
413(b) plan is subject to the special rules of section 413(b) (1)
through (8) and paragraphs (b) through (i) of this section.
(2) Requirements. Section 413(b) applies to a plan (and each trust
which is a part of such plan) if the plan is a single plan which is
maintained pursuant to one or more agreements which the Secretary of
Labor finds to be a collective bargaining agreement between employee
representatives and one or more employers. A plan which provides
benefits for employees of more than one employer is considered a single
plan subject to the requirements of section 413(b) and this section if
the plan is considered a single plan for purposes of applying section
414(l) (see Sec. 1.414(l)-1(b)(1)). For purposes of determining whether
one or more plans (or agreements) are a single plan, under sections
413(a) and 414(l), it is irrelevant that there are in form two or more
separate plans (or agreements). For example, a single plan will be
considered to exist
[[Page 616]]
where agreements are entered into separately by a national labor
organization (or one or more local units of such organization), on one
hand, and individual employers, on the other hand, if the plan is
considered a single plan for purposes of applying section 414(l).
(3) Additional rules and effective dates. (i) If a plan is a section
413(b) plan at a relevant time, the rules of section 413(b) and this
section apply, and the rules of section 413(c) and Sec. 1.413-2 do not
apply to the plan.
(ii) The qualification of a section 413(b) plan, at any relevant
time, under section 401(a), 403(a), or 405(a), as modified by sections
413(b) and this section, is determined with respect to all employers
maintaining the plan. Consequently, the failure by one employer
maintaining the plan (or by the plan itself) to satisfy an applicable
qualification requirement will result in the disqualification of the
plan for all employers maintaining the plan.
(iii) Except as otherwise provided, section 413 (a) and (b) and this
section apply to a plan for plan years beginning after December 31,
1953.
(b) Participation. Section 410 and the regulations thereunder shall
be applied as if all employees of each of the employers who are parties
to the collective-bargaining agreement and all such employees who are
subject to the same benefit computation formula under the plan were
employed by a single employer.
(c) Discrimination, etc.--(1) General rule. Section 401(a)(4)
(relating to prohibited discrimination) and section 411(d)(3) (relating
to vesting required on termination, partial termination, or
discontinuance of contributions) shall be applied as if all the
participants in the plan, who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement, are employed by a single employer.
(2) Application of discrimination rules. Under section 401(a)(4) and
the regulations thereunder a plan is not qualified unless the
contributions or benefits provided under the plan do not discriminate in
favor of officers, shareholders or highly compensated employees
(hereinafter referred to collectively as ``the prohibited group''). The
presence or absence of such discrimination under a plan to which this
section applies at any time shall not be determined on an employer-by-
employer basis, but rather by testing separately each group of employees
who are subject to the same benefit computation formula to determine if
there is discrimination within such group. Consequently, discrimination
in contributions or benefits among two or more different groups or among
employees in different groups covered by the plan may be present without
causing the plan to be disqualified. However, the presence of prohibited
discrimination within one such group will result in the disqualification
of the plan for all groups. Section 401(a)(4) and the regulations
thereunder provide rules relating to the determination of which
employees are members of the prohibited group and to the determination
of discrimination in contributions or benefits which are applicable to a
plan to which this section applies. The determination of whether or not
an individual employee is a highly compensated employee shall be based
on the relationship of the compensation of the employee to the
compensation of all the other employees of all employers who are
maintaining the plan and have employees covered under the same benefit
computation formula, whether or not such other employees are covered by
the plan or are covered under the same benefit computation formula,
rather than to the compensation of all the other employees of the
employer of such individual employee.
(3) Application of termination, etc. rules. Section 411(d)(3) and
the regulations thereunder (relating to vesting required in the case of
a termination, partial termination, or complete discontinuance of
contributions) apply to a plan subject to the provisions of this
section. The requirements of section 411(d)(3) shall be applied as if
all participants in the plan who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement are employed by a single employer.
The determination of whether or not there is a termination,
[[Page 617]]
partial termination, or complete discontinuance of contributions shall
be made separately for each such group of participants who are treated
as employed by a single employer. Consequently, if there are two or more
groups of participants, a termination, partial termination, or complete
discontinuance can take place under a plan with respect to one group of
participants but not with respect to another such group of participants
or for the entire plan. See Sec. 1.411(d)-2 for rules prescribed under
section 411(d)(3).
(4) Effective dates and transitional rules. (i) Section 413(b)(2)
and this paragraph apply to a plan for plan years beginning after
December 31, 1953.
(ii) In applying the rules of this paragraph to a plan for plan
years to which section 411 does not apply, section 401(a)(7) (as in
effect on September 1, 1974) shall be substituted for section 411(d)(3).
See Sec. 1.401-6 for rules prescribed under section 401(a)(7) as in
effect on September 1, 1974. See Sec. 1.411(a)-2 for the effective dates
of section 411.
(5) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A is a defined benefit plan subject to the
provisions of this section and covers two groups of participants, local
unions 1 and 2. Each local union has negotiated its own bargaining
agreement with employers X, Y, and Z to provide its own benefit
computation formula. The following table indicates the composition of
the plan A participants:
------------------------------------------------------------------------
Employer Employer Employer
X Y Z Total
------------------------------------------------------------------------
Local union 1............... 20 10 70 100
Local union 2............... 30 70 100 200
------------------------------------------------------------------------
Under the rules of subparagraph (2) of this paragraph, the determination
of whether contributions or benefits provided under the plan
discriminate in favor of the prohibited group is made by applying the
rules of section 401(a)(4) separately to participants who are members of
local union 1 and local union 2. Thus, plan A will satisfy the
qualification requirements of section 401(a)(4) if, within local union 1
and local union 2, respectively, plan benefits do not discriminate in
favor of participants who are prohibited group employees within local
union 1 and local union 2. Under the rules of subparagraph (2) of this
paragraph, the determination under section 401(a)(4) of whether or not
any individual employee, included within the 300 participants in plan A,
is a highly compensated employee is based on the relationship of the
compensation of such individual employee to the compensation of all the
employees of Employers X, Y, and Z, whether or not such employees are
participants in plan A. Thus, if there are 20 participants who are
prohibited group employees within the 100 participants of local union 1,
discrimination is determined by comparing the benefits of the 20
prohibited group participants to the benefits of the other 80
participants within local union 1. The same comparison would have to be
made for the local union 2 participants between the prohibited group
participants and the other participants in local union 2. Discrimination
in benefits, if any, between the participants in local union 1 and local
union 2, or among the employees of X, Y, or Z, would not affect the
qualification of plan A under section 401(a)(4).
Example (2). Assume the same facts as in example (1). Employer X
withdraws from the plan. Under subparagraph (3) of this paragraph,
whether or not as a result of the withdrawal there is a partial
termination under section 411(d)(3) is to be determined by applying the
requirements of such section separately to the local union 1 and local
union 2 participants. See Sec. 1.411(d)-2 for the requirements relating
to partial terminations. The application of such requirements raises the
following possibilities with respect to the plan: (1) A partial
termination as to local union 1, (2) a partial termination as to local
union 2, (3) a partial termination as to both local unions 1 and 2, or
(4) no partial termination for either local union.
Example (3). Assume the same facts as in example (1). Plan A is
amended to cease future benefit accruals under the plan for local union
1 participants. Under subparagraph (3) of the paragraph, whether or not
as a result of the cessation there is a partial termination under
section 411(d)(3) is to be determined by applying the requirements of
such section separately to the local union 1 and local union 2
participants.
Example (4). Plan A is a defined benefit plan that provides for two
normal retirement benefits, X and 2X. A participant receives benefit X
if the collective bargaining agreement covering his employment provides
for a contribution rate, M. If such agreement provides for a
contribution rate of N, the participant receives benefit 2X. Benefit X
and benefit 2X constitute separate benefit computation formulas.
Example (5). Plan B is a defined benefit plan that provides for a
normal retirement benefit, X. Benefit X is provided for all plan
participants even though there are two collective bargaining agreements
providing for different contribution rates, M and N. Plan B has a single
benefit computation formula,
[[Page 618]]
even though there are two contribution rates.
(d) Exclusive benefit. Under section 401(a), a plan is not qualified
unless the plan is for the exclusive benefit of the employees (and their
beneficiaries) of the employer establishing and maintaining the plan.
Other qualification requirements under section 401(a) require the
application of the exclusive benefit rule (for example, section
401(a)(2), which precludes diversion of plan assets). For purposes of
applying the requirements of section 401(a) in determining whether a
plan subject to this section is, with respect to each employer
establishing and maintaining the plan, for the exclusive benefit of its
employees (and their beneficiaries), all of the employees participating
in the plan shall be treated as employees of each such employer. Thus,
for example, contributions by employer A to a plan subject to this
section could be allocated to employees of other employers maintaining
the plan without violating the requirements of section 401(a)(2),
because all the employees participating in the plan are deemed to be
employees of A.
(e) Vesting. Section 411 (other than section 411(d)(3) relating to
termination or partial termination; discontinuance of contributions) and
the regulations thereunder shall be applied as if all employers who have
been parties to the collective-bargaining agreement constituted a single
employer. The application of any rules with respect to breaks in service
under section 411 shall be made under regulations prescribed by the
Secretary of Labor. Thus, for example, all the hours which an employee
worked for each employer in a collectively-bargained plan would be
aggregated in computing the employee's hours of service under the plan.
See also 29 CFR Part 2530 (Department of Labor regulations relating to
minimum standards for employee pension benefit plans.)
(f)-(h) [Reserved]
(i) Employees of labor unions--(1) General rule. For purposes of
section 413(b) and this section, employees of employee representatives
shall be treated as employees of an employer establishing and
maintaining a plan to which section 413(b) and this section apply if,
with respect to the employees of such representatives, the plan
satisfies the nondiscrimination requirements of section 401(a)(4)
(determined without regard to section 413(b)(2)) and the minimum
participation and coverage requirements of section 410 (determined
without regard to section 413(b)(1)). For purposes of the preceding
sentence, the plan and any affiliated employee health or welfare plan
shall be deemed to be an employee representative. If employees of
employee representatives, the plan, or an affiliated employee health or
welfare plan are covered by the plan and are not treated as employees of
an employer establishing and maintaining the plan under the provisions
of this paragraph, the plan fails to satisfy the qualification
requirements of section 401(a). In addition, in order for such a plan to
be qualified, the plan must satisfy the requirements of section 413(b)
(1) and (2), relating to participation and discrimination, respectively;
see paragraphs (b) and (c) of this section. For purposes of this
paragraph, an affiliated health or welfare plan is a health or welfare
plan that is maintained under the same collective bargaining agreement
or agreements, and that covers the same membership.
(2) Effective dates and transitional rules. (i) Section 413(b)(8)
and this paragraph apply to a plan for plan years beginning after
December 31, 1953.
(ii) In applying the rules of this paragraph to a plan for plan
years to which section 410 does not apply, section 401(a)(3) (as in
effect on September 1, 1974) shall be substituted for section 410. See
Sec. 1.401-3 for rules prescribed under section 401(a)(3) as in effect
on September 1, 1974. See Sec. 1.410(a)-2 for the effective dates of
section 410.
(3) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A is a defined benefit plan, maintained pursuant
to a collective bargaining agreement between employers, X, Y, and Z and
labor union, L, which covers members of L employed by X, Y, and Z. In
1978, plan A is amended to cover, under the same benefit formula, all
five employees of L who have satisfied the minimum age and service
requirements of the plans (age 25 and
[[Page 619]]
1 year of service). Assume that plan A is subject to section 413(b) and
satisfies the requirements of section 413(b) (1) and (2). Assume further
that with respect to employees of L, plan A (i) satisfies the
nondiscrimination requirements of section 401(a)(4), (ii) meets the
minimum participation requirements of section 410(a), and (iii) meets
the minimum coverage requirements of section 410(b)(1)(A). Under the
rules of subparagraph (1) of this paragraph, because such requirements
are all satisfied, the employees of L are treated as employees of an
employer establishing and maintaining plan A.
Example (2). Assume the same facts as example (1), except that plan
A is amended to cover only one of the five employees of L, none of whom
is covered by any other plan. Assume further that, under plan A, L does
not satisfy the minimum percentage coverage requirement of section
410(b)(1)(A) with respect to employees of L. Assume further that the
compensation of the one L employee who is covered by the plan is such
that he is highly compensated relative to the four employees of L not
covered by the plan. Consequently, L does not satisfy the minimum
coverage requirements of section 410(b)(1)(B), with respect to employees
of L. Under the rules of subparagraph (1) of this paragraph, the
employees of L cannot be treated as employees of an employer
establishing and maintaining the A plan because such coverage
requirements are not satisfied by L. Consequently, the A plan fails to
satisfy the qualification requirements of section 401(a).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept.
20, 1977; T.D. 7654, 44 FR 65063, Nov. 9, 1979]
Sec. 1.413-2 Special rules for plans maintained by more than one employer.
(a) Application of section 413(c)--(1) In general. Section 413(c)
describes certain plans (and each trust which is a part of any such
plan) hereinafter referred to as ``section 413(c) plans.'' A plan (and
each trust which is a part of such plan) is deemed to be a section
413(c) plan if it is described in subparagraph (2) of this paragraph.
Notwithstanding any other provision of the code (not specifically in
conflict with the special rules hereinafter mentioned), a section 413(c)
plan is subject to the special rules of section 413(c) (1) through (6)
and paragraphs (b) through (g) of this section.
(2) Section 413(c) plan. A plan (and each trust which is a part of
such plan) is a section 413(c) plan if--
(i) The plan is a single plan, within the meaning of section 413(a)
and Sec. 1.413-1(a)(2), and
(ii) The plan is maintained by more than one employer.
For purposes of subdivision (ii) of this subparagraph, the number of
employers maintaining the plan is determined by treating any employers
described in section 414(b) (relating to a controlled group of
corporations) or any employers described in section 414(c) (relating to
trades or businesses under common control), whichever is applicable, as
if such employers are a single employer. See Sec. 1.411(a)-5(b)(3) for
rules relating to the time when an employer maintains a plan. A master
or prototype plan is not a section 413(c) plan unless such a plan is
described in this subparagraph. Similarly, the mere fact that a plan, or
plans, utilizes a common trust fund or otherwise pools plan assets for
investment purposes does not, by itself, result in a particular plan
being treated as a section 413(c) plan.
(3) Additional rules. (i) If a plan is a collectively bargained plan
described in Sec. 1.413-1(a), the rules of section 413(c) and this
section do not apply, and the rules of section 413(b) and Sec. 1.413-1
do apply to the plan.
(ii) The special rules of section 413(b)(1) and Sec. 1.413-1(b)
relating to the application of section 410, other than the rules of
section 410(a), do not apply to a section 413(c) plan. Thus, for
example, the minimum coverage requirements of section 410(b) are
generally applied to a section 413(c) plan on an employer-by-employer
basis, taking into account the generally applicable rules such as
section 401(a)(5) and section 414 (b) and (c).
(iii) The special rules of section 413(b)(2) and Sec. 1.413-1(c)
(relating to (A) section 401(a)(4) and prohibited discrimination, and
(B) 411(d)(3) and vesting required on termination, partial termination,
or discontinuance of contributions) do not apply to a section 413(c)
plan. Thus, for example, the determination of whether or not there is a
termination, within the meaning of section 411(d)(3), of a section
413(c) plan is made solely by reference to the rules of sections
411(d)(3) and 413(c)(3).
[[Page 620]]
(iv) The qualification of a section 413(c) plan, at any relevant
time, under section 401(a), 403(a) or 405(a), as modified by section
413(c) and this section, is determined with respect to all employers
maintaining the section 413(c) plan. Consequently, the failure by one
employer maintaining the plan (or by the plan itself) to satisfy an
applicable qualification requirement will result in the disqualification
of the section 413(c) plan for all employers maintaining the plan.
(4) Effective dates. Except as otherwise provided, section 413(c)
and this section apply to a plan for plan years beginning after December
31, 1953.
(b) Participation. Section 410(a) and the regulations thereunder
shall be applied as if all employees of each of the employers who
maintain the plan were employed by a single employer.
(c) Exclusive benefit. In the case of a plan subject to this
section, the exclusive benefit requirements of section 401(a) shall be
applied to the plan in the same manner as under section 413(b)(3) and
Sec. 1.413-1(d).
(d) Vesting. Section 411 and the regulations thereunder shall be
applied as if all employers who maintain the plan constituted a single
employer. The application of any rules with respect to breaks in service
under section 411 shall be made under regulations prescribed by the
Secretary of Labor. Thus, for example, all the hours which an employee
worked for each employer maintaining the plan would be aggregated in
computing the employee's hours of service under the plan. See also 29
CFR Part 2530 (Department of Labor regulations relating to minimum
standards for employee pension benefit plans).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept.
20, 1977; T.D. 7654, 44 FR 65065, Nov. 9, 1979]
Sec. 1.414(b)-1 Controlled group of corporations.
(a) Defintion of controlled group of corporations. For purposes of
this section, the term ``controlled group of corporations'' has the same
meaning as is assigned to the term in section 1563(a) and the
regulations thereunder, except that (1) the term ``controlled group of
corporations'' shall not include an ``insurance group'' described in
section 1563(a)(4), and (2) section 1563(e)(3)(C) (relating to stock
owned by certain employees' trusts) shall not apply. For purposes of
this section, the term ``members of a controlled group'' means two or
more corporations connected through stock ownership described in section
1563(a) (1), (2), or (3), whether or not such corporations are
``component members of a controlled group'' within the meaning of
section 1563(b). Two or more corporations are members of a controlled
group at any time such corporations meet the requirements of section
1563(a) (as modified by this paragraph). For purposes of this section,
if a corporation is a member of more than one controlled group of
corporations, such corporation shall be treated as a member of each
controlled group.
(b) Single plan adopted by two or more members. If two or more
members of a controlled group of corporations adopt a single plan for a
plan year, then the minimum funding standard provided in section 412,
the tax imposed by section 4971, and the applicable limitations provided
by section 404(a) shall be determined as if such members were a single
employer. In such a case, the amount of such items and the allocable
portion attributable to each member shall be determined in the manner
provided in regulations under sections 412, 4971, and 404(a).
(c) Cross reference. For rules relating to the application of
sections 401, 408(k), 410, 411, 415, and 416 with respect to two or more
trades or businesses which are under common control, see section 414(c)
and the regulations thereunder.
[T.D. 8179, 53 FR 6605, Mar. 2, 1988]
Sec. 1.414(c)-1 Commonly controlled trades or businesses.
For purposes of applying the provisions of sections 401 (relating to
qualified pension, profit-sharing, and stock bonus plans), 408(k)
(relating to simplified employee pensions), 410 (relating to minimum
participation standards), 411 (relating to minimum vesting standards),
415 (relating to limitations on benefits and contributions under
qualified plans), and 416 (relating to
[[Page 621]]
top-heavy plans), all employees of two or more trades or businesses
under common control within the meaning of Sec. 1.414(c)-2 for any
period shall be treated as employed by a single employer. See sections
401, 408(k), 410, 411, 415, and 416 and the regulations thereunder for
rules relating to employees of trades or businesses which are under
common control. See Sec. 1.414(c)-5 for effective date.
[T.D. 8179, 53 FR 6606, Mar. 2, 1988]
Sec. 1.414(c)-2 Two or more trades or businesses under common control.
(a) In general. For purposes of this section, the term ``two or more
trades or businesses under common control'' means any group of trades or
businesses which is either a ``parent-subsidiary group of trades or
businesses under common control'' as defined in paragraph (b) of this
section, a ``brother-sister group of trades or businesses under common
control'' as defined in paragraph (c) of this section, or a ``combined
group of trades or businesses under common control'' as defined in
paragraph (d) of this section. For purposes of this section and
Secs. 1.414(c)-3 and 1.414(c)-4, the term ``organization'' means a sole
proprietorship, a partnership (as defined in section 7701(a)(2)), a
trust, an estate, or a corporation.
(b) Parent-subsidiary group of trades or businesses under common
control--(1) In general. The term ``parent-subsidiary group of trades or
businesses under common control'' means one or more chains of
organizations conducting trades or businesses connected through
ownership of a controlling interest with a common parent organization
if--
(i) A controlling interest in each of the organizations, except the
common parent organization, is owned (directly and with the application
of Sec. 1.414(c)-4(b)(1), relating to options) by one or more of the
other organizations; and
(ii) The common parent organization owns (directly and with the
application of Sec. 1.414(c)-4(b)(1), relating to options) a controlling
interest in at least one of the other organizations, excluding, in
computing such controlling interest, any direct ownership interest by
such other organizations.
(2) Controlling interest defined--(i) Controlling interest. For
purposes of paragraphs (b) and (c) of this section, the phrase
``controlling interest'' means:
(A) In the case of an organization which is a corporation, ownership
of stock possessing at least 80 percent of total combined voting power
of all classes of stock entitled to vote of such corporation or at least
80 percent of the total value of shares of all classes of stock of such
corporation;
(B) In the case of an organization which is a trust or estate,
ownership of an actuarial interest of at least 80 percent of such trust
or estate;
(C) In the case of an organization which is a partnership, ownership
of at least 80 percent of the profits interest or capital interest of
such partnership; and
(D) In the case of an organization which is a sole proprietorship,
ownership of such sole proprietorship.
(ii) Actuarial interest. For purposes of this section, the actuarial
interest of each beneficiary of trust or estate shall be determined by
assuming the maximum exercise of discretion by the fiduciary in favor of
such beneficiary. The factors and methods prescribed in Sec. 20.2031-7
or, for certain prior periods, Sec. 20.2031-7A (Estate Tax Regulations)
for use in ascertaining the value of an interest in property for estate
tax purposes shall be used for purposes of this subdivision in
determining a beneficiary's actuarial interest.
(c) Brother-sister group of trades or businesses under common
control--(1) In general. The term ``brother-sister group of trades or
businesses under common control'' means two or more organizations
conducting trades or businesses if (i) the same five or fewer persons
who are individuals, estates, or trusts own (directly and with the
application of Sec. 1.414(c)-4) a controlling interest in each
organization, and (ii) taking into account the ownership of each such
person only to the extent such ownership is identical with respect to
each such organization, such persons are in effective control of each
organization. The five or fewer persons whose ownership is considered
for purposes of the controlling interest requirement for each
organization must be the same
[[Page 622]]
persons whose ownership is considered for purposes of the effective
control requirement.
(2) Effective control defined. For purposes of this paragraph,
persons are in ``effective control'' of an organization if--
(i) In the case of an organization which is a corporation, such
persons own stock possessing more than 50 percent of the total combined
voting power of all classes of stock entitled to vote or more than 50
percent of the total value of shares of all classes of stock of such
corporation;
(ii) In the case of an organization which is a trust or estate, such
persons own an aggregate actuarial interest of more than 50 percent of
such trust or estate;
(iii) In the case of an organization which is a partnership, such
persons own an aggregate of more than 50 percent of the profits interest
or capital interest of such partnership; and
(iv) In the case of an organization which is a sole proprietorship,
one of such persons owns such sole proprietorship.
(d) Combined group of trades or businesses under common control. The
term ``combined group of trades or businesses under common control''
means any group of three or more organizations, if (1) each such
organization is a member of either a parent-subsidiary group of trades
or businesses under common control or a brother-sister group of trades
or businesses under common control, and (2) at least one such
organization is the common parent organization of a parent-subsidiary
group of trades or businesses under common control and is also a member
of a brother-sister group of trades or businesses under common control.
(e) Examples. The definitions of parent-subsidiary group of trades
or businesses under common control, brother-sister group of trades or
businesses under common control, and combined group of trades or
businesses under common control may be illustrated by the following
examples.
Example (1). (a) The ABC partnership owns stock possessing 80
percent of the total combined voting power of all classes of stock
entitled to voting of S corporation. ABC partnership is the common
parent of a parent-subsidiary group of trades or businesses under common
control consisting of the ABC partnership and S Corporation.
(b) Assume the same facts as in (a) and assume further that S owns
80 percent of the profits interest in the DEF Partnership. The ABC
Partnership is the common parent of a parent-subsidiary group of trades
or businesses under common control consisting of the ABC Partnership, S
Corporation, and the DEF Partnership. The result would be the same if
the ABC Partnership, rather than S, owned 80 percent of the profits
interest in the DEF Partnership.
Example (2). L Corporation owns 80 percent of the only class of
stock of T Corporation, and T, in turn, owns 40 percent of the capital
interest in the GHI Partnership. L also owns 80 percent of the only
class of stock of N Corporation and N, in turn, owns 40 percent of the
capital interest in the GHI Partnership. L is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of L Corporation, T Corporation, N Corporation, and the GHI
Partnership.
Example (3). ABC Partnership owns 75 percent of the only class of
stock of X and Y Corporations; X owns all the remaining stock of Y, and
Y owns all the remaining stock of X. Since interorganization ownership
is excluded (that is, treated as not outstanding) for purposes of
determining whether ABC owns a controlling interest of at least one of
the other organizations, ABC is treated as the owner of stock possessing
100 percent of the voting power and value of all classes of stock of X
and of Y for purposes of paragraph (b)(1)(ii) of this section.
Therefore, ABC is the common parent of a parent-subsidiary group of
trades or businesses under common control consisting of the ABC
Partnership, X Corporation, and Y Corporation.
Example (4). Unrelated individuals A, B, C, D, E, and F own an
interest in sole proprietorship A, a capital interest in the GHI
Partnership, and stock of corporations M, W, X, Y, and Z (each of which
has only one class of stock outstanding) in the following proportions:
Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individuals A GHI M W X Y Z
--------------------------------------------------------------------------------------------------------------------------------------------------------
A..................................................... 100% 50% 100% 60% 40% 20% 60%
B..................................................... -- 40% -- 15% 40% 50% 30%
C..................................................... -- -- -- -- 10% 10% 10%
D..................................................... -- -- -- 25% -- 20% --
[[Page 623]]
E..................................................... -- 10% -- -- 10% -- --
-------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under these facts the following four brother-sister groups of trades
or businesses under common control exist: GHI, X and Z; X, Y and Z; W
and Y; A and M. In the case of GHI, X, and Z, for example, A and B
together have effective control of each organization because their
combined identical ownership of GHI, X and Z is greater than 50%. (A's
identical ownership of GHI, X and Z is 40% because A owns at least a 40%
interest in each organization. B's identical ownership of GHI, X and Z
is 30% because B owns at least a 30% interest in each organization.) A
and B (the persons whose ownership is considered for purposes of the
effective control requirement) together own a controlling interest in
each organization because they own at least 80% of the capital interest
of partnership GHI and at least 80% of the total combined voting power
of corporations X and Z. Therefore, GHI, X and Z comprise a brother-
sister group of trades or businesses under common control. Y is not a
member of this group because neither the effective control requirement
nor the 80% controlling interest requirement are met. (The effective
control requirement is not met because A's and B's combined identical
ownership in GHI, X, Y and Z (20% for A and 30% for B) does not exceed
50%. The 80% controlling interest test is not met because A and B
together only own 70% of the total combined voting power of the stock of
Y.) A and M are not members of this group because B owns no interest in
either organization and A's ownership of GHI, X and Z, considered alone,
is less than 80%.
Example (5). The outstanding stock of corporations U and V, which
have only one class of stock outstanding, is owned by the following
unrelated individuals:
Corporations
------------------------------------------------------------------------
U V
Individuals -----------------------------
(percent) (percent)
------------------------------------------------------------------------
A......................................... 12 12
B......................................... 12 12
C......................................... 12 12
D......................................... 12 12
E......................................... 13 13
F......................................... 13 13
G......................................... 13 13
H......................................... 13 13
-----------------------------
100 100
------------------------------------------------------------------------
Any group of five of the shareholders will own more than 50 percent of
the stock in each corporation, in identical holdings. However, U and V
are not members of a brother-sister group of trades or businesses under
common control because at least 80 percent of the stock of each
corporation is not owned by the same five or fewer persons.
Example (6). A, an individual, owns a controlling interest in ABC
Partnership and DEF Partnership. ABC, in turn, owns a controlling
interest in X Corporation. Since ABC, DEF, and X are each members of
either a parent-subsidiary group or a brother-sister group of trades or
businesses under common control, and ABC is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of ABC and X, and also a member of a brother-sister group of
trades or businesses under common control consisting of ABC and DEF, ABC
Partnership, DEF Partnership, and X Corporation are members of the same
combined group of trades or businesses under common control.
[T.D. 8179, 53 FR 6606, Mar. 2, 1988, as amended by T.D. 8540, 59 FR
30102, June 10, 1994]
Sec. 1.414(c)-3 Exclusion of certain interests or stock in determining control.
(a) In general. For purposes of Sec. 1.414(c)-2 (b)(2)(i) and
(c)(2), the term ``interest'' and the term ``stock'' do not include an
interest which is treated as not outstanding under paragraph (b) of this
section in the case of a parent-subsidiary group of trades or businesses
under common control or under paragraph (c) of this section in the case
of a brother-sister group of trades or businesses under common control.
In addition, the term ``stock'' does not include treasury stock or
nonvoting stock which is limited and preferred as to dividends. For
definitions of certain terms used in this section, see paragraph (d) of
this section.
(b) Parent-subsidiary group of trades or businesses under common
control--(1) In general. If an organization (hereinafter in this section
referred to as ``parent organization'') owns (within the meaning of
paragraph (b)(2) of this section)--
[[Page 624]]
(i) In the case of a corporation, 50 percent or more of the total
combined voting power of all classes of stock entitled to vote or 50
percent or more of the total value of shares of all classes of stock of
such corporation.
(ii) In the case of a trust or an estate, an actuarial interest
(within the meaning of Sec. 1.414(c)-2(b)(2)(ii)) of 50 percent or more
of such trust or estate, and
(iii) In the case of a partnership, 50 percent or more of the
profits or capital interest of such partnership, then for purposes of
determining whether the parent organization or such other organization
(hereinafter in this section referred to as ``subsidiary organization'')
is a member of a parent-subsidiary group of trades or businesses under
common control, an interest in such subsidiary organization excluded
under paragraph (b) (3), (4), (5), or (6) of this section shall be
treated as not outstanding.
(2) Ownership. For purposes of paragraph (b)(1) of this section, a
parent organization shall be considered to own an interest in or stock
of another organization which it owns directly or indirectly with the
application of Sec. 1.414(c)-4(b)(1) and--
(i) In the case of a parent organization which is a partnership, a
trust, or an estate, with the application of paragraphs (b) (2), (3),
and (4) of Sec. 1.414(c)-4, and
(ii) In the case of a parent organization which is a corporation,
with the application of Sec. 1.414(c)-4(b)(4).
(3) Plan of deferred compensation. An interest which is an interest
in or stock of the subsidiary organization held by a trust which is part
of a plan of deferred compensation (within the meaning of section
406(a)(3) and the regulations thereunder) for the benefit of the
employees of the parent organization or the subsidiary organization
shall be excluded.
(4) Principal owners, officers, etc. An interest which is an
interest in or stock of the subsidiary organization owned (directly and
with the application of Sec. 1.414(c)-4) by an individual who is a
principal owner, officer, partner, or fiduciary of the parent
organization shall be excluded.
(5) Employees. An interest which is an interest in or stock of the
subsidiary organization owned (directly and with the application of
Sec. 1.414(c)-4) by an employee of the subsidiary organization shall be
excluded if such interest or such stock is subject to conditions which
substantially restrict or limit the employee's right (or if the employee
constructively owns such interest or such stock, the direct or record
owner's right) to dispose of such interest or such stock and which run
in favor of the parent or subsidiary organization.
(6) Controlled exempt organization. An interest which is an interest
in or stock of the subsidiary organization shall be excluded if owned
(directly and with the application of Sec. 1.414(c)-4) by an
organization (other than the parent organization):
(i) To which section 501 (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by the parent organization or
subsidiary organization, by an individual, estate, or trust that is a
principal owner of the parent organization, by an officer, partner, or
fiduciary of the parent organization, or by any combination thereof.
(c) Brother-sister group of trades or businesses under common
control--(1) In general. If five or fewer persons (hereinafter in this
section referred to as ``common owners'') who are individuals, estates,
or trusts own (directly and with the application of Sec. 1.414(c)-4)--
(i) In the case of a corporation, 50 percent or more of the total
combined voting power of all classes of stock entitled to vote or 50
percent or more of the total value of shares of all classes of stock or
such corporation,
(ii) In the case of a trust or an estate, an actuarial interest
(within the meaning of Sec. 1.414(c)-2(b)(2)(ii)) of 50 percent or more
of such trust or estate, and
(iii) In the case of a partnership, 50 percent or more of the
profits or capital interest of such partnership, then for purposes of
determining whether such organization is a member of a
[[Page 625]]
brother-sister group of trades or businesses under common control, an
interest in such organization excluded under paragraph (c) (2), (3), or
(4) of this section shall be treated as not outstanding.
(2) Exempt employees' trust. An interest which is an interest in or
stock of such organization held by an employees' trust described in
section 401(a) which is exempt from tax under section 501(a) shall be
excluded if such trust is for the benefit of the employees of such
organization.
(3) Employees. An interest which is an interest in or stock of such
organization owned (directly and with the application of Sec. 1.414(c)-
4) by an employee of such organization shall be excluded if such
interest or stock is subject to conditions which run in favor of a
common owner of such organization or in favor of such organization and
which substantially restrict or limit the employee's right (or if the
employee constructively owns such interest or stock, the direct or
record owner's right) to dispose of such interest or stock.
(4) Controlled exempt organization. An interest which is an interest
in or stock of such organization shall be excluded if owned (directly
and with the application of Sec. 1.414(c)-4) by an organization:
(i) To which section 501(c)(3) (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by such organization, by an
individual, estate, or trust that is a principal owner of such
organization, by an officer, partner, or fiduciary of such organization,
or by any combination thereof.
(d) Definitions--(1) Employee. For purposes of this section, the
term ``employee'' has the same meaning such term is given in section
3306(i) of the Code (relating to definitions for purposes of the Federal
Unemployment Tax Act).
(2) Principal owner. For purposes of this section, the term
``principal owner'' means a person who owns (directly and with the
application of Sec. 1.414(c)-4)--
(i) In the case of a corporation, 5 percent or more of the total
combined voting power of all classes of stock entitled to vote in such
corporation or 5 percent of more of the total value of shares of all
classes of stock of such corporation;
(ii) In the case of a trust or estate, an actuarial interest of 5
percent or more of such trust or estate; or
(iii) In the case of a partnership, 5 percent or more of the profits
or capital interest of such partnership.
(3) Officer. For purposes of this section, the term ``officer''
includes the president, vice-presidents, general manager, treasurer,
secretary, and comptroller of a corporation, and any other person who
performs duties corresponding to those normally performed by persons
occupying such positions.
(4) Partner. For purposes of this section, the term ``partner''
means any person defined in section 7701(a)(2) (relating to definitions
of partner).
(5) Fiduciary. For purposes of this section and Sec. 1.414(c)-4, the
term ``fiduciary'' has the same meaning as such term is given in section
7701(a)(6) and the regulations thereunder.
(6) Substantial conditions. (i) In general. For purposes of this
section, an interest in or stock of an organization is subject to
conditions which substantially restrict or limit the right to dispose of
such interest or stock and which run in favor of another person if the
condition extends directly or indirectly to such person preferential
rights with respect to the acquisition of the direct owner's (or the
record owner's) interest or stock. For a condition to be in favor of
another person it is not necessary that such person be extended a
discriminatory concession with respect to price. A right of first
refusal with respect to an interest or stock in favor of another person
is a condition which substantially restricts or limits the direct or
record owner's right of disposition which runs in favor of such person.
Further, any legally enforceable condition which prohibits the direct or
record owner from disposing of his or her interest or stock without the
consent of another person will be considered to be a substantial
limitation running in favor of such person.
[[Page 626]]
(ii) Special rule. For purposes of paragraph (c)(3) of this section
only, if a condition which restricts or limits an employee's right (or
direct or record owner's right) to dispose of his or her interest or
stock also applies to the interest or stock in such organization held by
a common owner pursuant to a bonafide reciprocal purchase arrangement,
such condition shall not be treated as a substantial limitation or
restriction. An example of a reciprocal purchase arrangement is an
agreement whereby a common owner and the employee are given a right of
first refusal with respect to stock of the employer corporation owned by
the other party. If, however, the agreement also provides that the
common owner has the right to purchase the stock of the employer
corporation owned by the employee in the event the corporation should
discharge the employee for reasonable cause, the purchase arrangement
would not be reciprocal within the meaning of this subdivision.
(7) Control. For purposes of paragraphs (b)(6) and (c)(4) of this
section, the term ``control'' means control in fact. The determination
of whether there exists control in fact will depend upon all of the
facts and circumstances of each case, without regard to whether such
control is legally enforceable and irrespective of the method by which
such control is exercised or exercisable.
(e) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). ABC Partnership owns 70 percent of the capital interest
and of the profits interest in the DEF Partnership. The remaining
capital interest and profits interest in DEF is owned as follows: 4
percent by A (a general partner in ABC), and 26 percent by D (a limited
partner in ABC). ABC satisfies the 50-percent capital interest or
profits interest ownership requirement of paragraph (b)(1)(iii) of this
section with respect to DEF. Since A and D are partners of ABC, under
paragraph (b)(4) of this section the capital and profits interests in
DEF owned by A and D are treated as not outstanding for purposes of
determining whether ABC and DEF are members of a parent-subsidiary group
of trades or businesses under common control under Sec. 1.414 (c)-2(b).
Thus, ABC is considered to own 100 percent (70/70) of the capital
interest and profits interest in DEF. Accordingly, ABC and DEF are
members of a parent-subsidiary group of trades or businesses under
common control.
Example (2). Assume the same facts as in example (1) and assume
further that A owns 15 shares of the 100 shares of the only class of
stock of S Corporation and DEF Partner-ship owns 75 shares of such
stock. ABC satisfies the 50 percent stock requirement of paragraph
(b)(1)(i) of this section with respect to S since ABC is considered as
owning 52.5 percent (70 percentx75 percent) of the S stock with the
application of Sec. 1.414 (c)-4(b)(2). Since A is a partner of ABC, the
S stock owned by A is treated as not outstanding for purposes of
determining whether S is a member of a parent-subsidiary group of trades
or businesses under common control. Thus, DEF Partnership is considered
to own stock possessing 88.2 percent (75/85) of the voting power and
value of the S stock. Accordingly, ABC Partnership, DEF Partnership, and
S Corporation are members of a parent-subsidiary group of trades or
businesses under common control.
Example (3). ABC Partnership owns 60 percent of the only class of
stock of Corporation Y. D, the president of Y, owns the remaining 40
percent of the stock of Y. D has agreed that if she offers her stock in
Y for sale she will first offer the stock to ABC at a price equal to the
fair market value of the stock on the first date the stock is offered
for sale. Since D is an employee of Y within the meaning of section
3306(i) of the Code and her stock in Y is subject to a condition which
substantially restricts or limits her right to dispose of such stock and
runs in favor of ABC Partnership, under paragraph (b)(5) of this section
such stock is treated as not outstanding for purposes of determining
whether ABC and Y are members of a parent-subsidiary group of trades or
businesses under common control. Thus, ABC Partnership is considered to
own stock possessing 100 percent of the voting power and value of the
stock of Y. Accordingly, ABC Partnership and Y Corporation are members
of a parent-subsidiary group of trades or businesses under common
control. The result would be the same if D's husband, instead of D,
owned directly the 40 percent stock interest in Y and such stock was
subject to a right of first refusal running in favor of ABC Partnership.
(f) Exception--(1) In general. If an interest in an organization
(including stock of a corporation) is owned by a person directly or with
the application of the rules of paragraph (b) of Sec. 1.414 (c)-4 and
such ownership results in the membership of that organization in a group
of two or more trades or businesses under common control for any period,
then the interest will not be treated as an excluded interest under
[[Page 627]]
paragraph (b) or (c) of this section if the result of applying such
provisions is that the organization is not a member of a group of two or
more trades or businesses under common control for the period.
(2) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. Corporation P owns directly 50 of the 100 shares of the
only class of stock of corporation S. A, an officer of P, owns directly
30 shares of S stock which P has an option to acquire. If, under
paragraph (b)(4) of this section, the 30 shares owned directly by A are
treated as not outstanding, P would be treated as owning stock
possessing only 71 percent (50/70) of the total voting power and value
of S stock, and S should not be a member of a parent-subsidiary group of
trades or businesses under common control. However, because the 30
shares owned by A that P has an option to purchase are considered as
owned by P under paragraph (b)(2) of this section, and that ownership
plus P's direct ownership of 50 shares result in S's membership in a
parent-subsidiary group of trades or businesses under common control for
1985, the provisions of this paragraph apply. Therefore, A's stock is
not treated as an excluded interest and S is a member of a parent-
subsidiary group consisting of P and S.
[T.D. 8179, 53 FR 6607, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988]
Sec. 1.414(c)-4 Rules for determining ownership.
(a) In general. In determining the ownership of an interest in an
organization for purposes of Sec. 1.414(c)-2 and Sec. 1.414(c)-3, the
constructive ownership rules of paragraph (b) of this section shall
apply, subject to the operating rules contained in paragraph (c). For
purposes of this section the term ``interest'' means: in the case of a
corporation, stock; in the case of a trust or estate, an actuarial
interest; in the case of a partnership, an interest in the profits or
capital; and in the case of a sole proprietorship, the proprietorship.
(b) Constructive ownership--(1) Options. If a person has an option
to acquire any outstanding interest in an organization, such interest
shall be considered as owned by such person. For this purpose, an option
to acquire an option, and each one of a series of such options shall be
considered as an option to acquire such interest.
(2) Attribution from partnerships--(i) General. An interest owned,
directly or indirectly, by or for a partnership shall be considered as
owned by any partner having an interest of 5 percent or more in either
the profits or capital of the partnership in proportion to such
partner's interest in the profits or capital, whichever such proportion
is greater.
(ii) Example. The provisions of paragraph (b)(2)(i) of this section
may be illustrated by the following example:
Example. A, B, and C, unrelated individuals, are partners in the ABC
Partnership. The partners' interest in the capital and profits of ABC
are as follows:
(In percent)
------------------------------------------------------------------------
Partner Capital Profits
------------------------------------------------------------------------
A......................................... 36 25
B......................................... 60 71
C......................................... 4 4
------------------------------------------------------------------------
The ABC Partnership owns the entire outstanding stock (100 shares)
of X Corporation. Under paragraph (b)(2)(i) of this section, A is
considered to own the stock of X owned by the partnership in proportion
to his interest in capital (36 percent) or profits (25 percent),
whichever such proportion is greater. Therefore, A is considered to own
36 shares of X stock. Since B has a greater interest in the profits of
the partnership than in the capital, B is considered to own X stock in
proportion to his interest in such profits. Therefore, B is considered
to own 71 shares of X stock. Since C does not have an interest of 5
percent or more in either the capital or profits of ABC, he is not
considered to own any shares of X stock.
(3) Attribution from estates and trusts--(i) In general. An interest
in an organization (hereinafter called an ``organization interest'')
owned, directly or indirectly, by or for an estate or trust shall be
considered as owned by any beneficiary of such estate or trust who has
an actuarial interest of 5 percent or more in such organization
interest, to the extent of such actuarial interest. For purposes of this
subparagraph, the actuarial interest of each beneficiary shall be
determined by assuming the maximum exercise of discretion
[[Page 628]]
by the fiduciary in favor of such beneficiary and the maximum use of the
organization interest to satisfy the beneficiary's rights. A beneficiary
of an estate or trust who cannot under any circumstances receive any
part of an organization interest held by the estate or trust, including
the proceeds from the disposition thereof, or the income therefrom, does
not have an actuarial interest in such organization interest. Thus,
where stock owned by a decedent's estate has been specifically
bequeathed to certain beneficiaries and the remainder of the estate has
been specifically bequeathed to other beneficiaries, the stock is
attributable only to the beneficiaries to whom it is specifically
bequeathed. Similarly a remainderman of a trust who cannot under any
circumstances receive any interest in the stock of a corporation which
is a part of the corpus of the trust (including any accumulated income
therefrom or the proceeds from a disposition thereof) does not have an
actuarial interest in such stock. However, an income beneficiary of a
trust does have an actuarial interest in stock if he has any right to
the income from such stock even though under the terms of the trust
instrument such stock can never be distributed to him. The factors and
methods prescribed in Sec. 20.2031-7 or, for certain prior periods,
Sec. 20.2031-7A (Estate Tax Regulations) for use in ascertaining the
value of an interest in property for estate tax purposes shall be used
for purposes of this subdivision in determining a beneficiary's
actuarial interest in an organization interest owned directly or
indirectly by or for an estate or trust.
(ii) Special rules for estates. (A) For purposes of this paragraph
(b)(3) with respect to an estate, property of a decedent shall be
considered as owned by his or her estate if such property is subject to
administration by the executor or administrator for the purposes of
paying claims against the estate and expenses of administration
notwithstanding that, under local law, legal title to such property
vests in the decedent's heirs, legatees or devisees immediately upon
death.
(B) For purposes of this paragraph (b)(3) with respect to an estate,
the term ``beneficiary'' includes any person entitled to receive
property of a decedent pursuant to a will or pursuant to laws of descent
and distribution.
(C) For purposes of this paragraph (b)(3) with respect to an estate,
a person shall no longer be considered a beneficiary of an estate when
all the property to which he or she is entitled has been received by him
or her, when he or she no longer has a claim against the estate arising
out of having been a beneficiary, and when there is only a remote
possibility that it will be necessary for the estate to seek the return
of property from him or her or to seek payment from him or her by
contribution or otherwise to satisfy claims against the estate or
expenses of administration.
(iii) Grantor trusts, etc. An interest owned, directly or
indirectly, by or for any portion of a trust of which a person is
considered the owner under subpart E, part I, subchapter J of the Code
(relating to grantors and others treated as substantial owners) is
considered as owned by such person.
(4) Attribution from corporations--(i) General. An interest owned,
directly or indirectly, by or for a corporation shall be considered as
owned by any person who owns (directly and, in the case of a parent-
subsidiary group of trades or businesses under common control, with the
application of paragraph (b)(1) of this section, or in the case of a
brother-sister group of trades or business under common control, with
the application of this section), 5 percent or more in value of the
stock in that proportion which the value of the stock which such person
so owns bears to the total value of all the stock in such corporation.
(ii) Example. The provisions of paragraph (b)(4)(i) of this section
may be illustrated by the following example:
Example. B, an individual, owns 60 of the 100 shares of the only
class of outstanding stock of corporation P. C, an individual, owns 4
shares of the P stock, and corporation X owns 36 shares of the P stock.
Corporation P owns, directly and indirectly, 50 shares of the stock of
corporation S. Under this subparagraph, B is considered to own 30 shares
of the S stock (60/100x50), and X is considered to own 18 shares of S
stock (36/100x50). Since C does not own 5 percent or more in the value
of P stock, he is not considered as owning any of the S stock owned by
P. If in this
[[Page 629]]
example, C's wife had owned directly 1 share of the P stock, C and his
wife would each be considered as owning 5 shares of the P stock, and
therefore C and his wife would be considered as owning 2.5 shares of the
S stock (5/100x50).
(5) Spouse--(i) General rule. Except as provided in paragraph
(b)(5)(ii) of this section, an individual shall be considered to own an
interest owned, directly or indirectly, by or for his or her spouse,
other than a spouse who is legally separated from the individual under a
decree of divorce, whether interlocutory or final, or a decree of
separate maintenance.
(ii) Exception. An individual shall not be considered to own an
interest in an organization owned, directly or indirectly, by or for his
or her spouse on any day of a taxable year of such organization,
provided that each of the following conditions are satisfied with
respect to such taxable year:
(A) Such individual does not, at any time during such taxable year,
own directly any interest in such organization;
(B) Such individual is not a member of the board of directors, a
fiduciary, or an employee of such organization and does not participate
in the management of such organization at any time during such taxable
year;
(C) Not more than 50 percent of such organization's gross income for
such taxable year was derived from royalties, rents, dividends,
interest, and annuities; and
(D) Such interest in such organization is not, at any time during
such taxable year, subject to conditions which substantially restrict or
limit the spouse's right to dispose of such interest and which run in
favor of the individual or the individual's children who have not
attained the age of 21 years. The principles of Sec. 1.414(c)-3(d)(6)(i)
shall apply in determining whether a condition is a condition described
in the preceding sentence.
(iii) Definitions. For purposes of paragraph (b)(5)(ii)(C) of this
section, the gross income of an organization shall be determined under
section 61 and the regulations thereunder. The terms ``interest'',
``royalties'', ``rents'', ``dividends'', and ``annuities'' shall have
the same meaning such terms are given for purposes of section 1244(c)
and Sec. 1.1244(c)-1(e)(1).
(6) Children, grandchildren, parents, and grandparents--(i) Children
and parents. An individual shall be considered to own an interest owned,
directly or indirectly, by or for the individual's children who have not
attained the age of 21 years, and if the individual has not attained the
age of 21 years, an interest owned, directly or indirectly, by or for
the individual's parents.
(ii) Children, grandchildren, parents, and grandparents. If an
individual is in effective control (within the meaning of Sec. 1.414(c)-
2(c)(2)), directly and with the application of the rules of this
paragraph without regard to this subdivision, of an organization, then
such individual shall be considered to own an interest in such
organization owned, directly or indirectly, by or for the individual's
parents, grandparents, grandchildren, and children who have attained the
age of 21 years.
(iii) Adopted children. For purposes of this section, a legally
adopted child of an individual shall be treated as a child of such
individual.
(iv) Example. The provisions of this subparagraph (6) may be
illustrated by the following example:
Example: (A) Facts. Individual F owns directly 40 percent of the
profits interest of the DEF Partnership. His son, M, 20 years of age,
owns directly 30 percent of the profits interest of DEF, and his son, A,
30 years of age, owns directly 20 percent of the profits interest of
DEF. The 10 percent remaining of the profits interest and 100 percent of
the capital interest of DEF is owned by an unrelated person.
(B) F's ownership. F owns 40 percent of the profits interest in DEF
directly and is considered to own the 30 percent profits interest owned
directly by M. Since, for purposes of the effective control test
contained in paragraph (b)(6)(ii) of this section, F is treated as
owning 70 percent of the profits interest of DEF, F is also considered
as owning the 20 percent profits interest of DEF owned by his adult son,
A. Accordingly, F is considered as owning a total of 90 percent of the
profits interest in DEF.
(C) M's ownership. Minor son, M. owns 30 percent of the profits
interest in DEF directly, and is considered to own the 40 percent
profits interest owned directly by his father, F. However, M is not
considered to own the 20 percent profits interest of DEF
[[Page 630]]
owned directly by his brother, A, and constructively by F, because an
interest constructively owned by F by reason of family attribution is
not considered as owned by him for purposes of making another member of
his family the constructive owner of such interest. (See paragraph
(c)(2) of this section.) Accordingly, M is considered as owning a total
of 70 percent of the profits interest of the DEF Partnership.
(D) A's ownership. Adult son, A, owns 20 percent of the profits
interest in DEF directly. Since, for purposes of determining whether A
effectively controls DEF under paragraph (b)(6)(ii) of this section, A
is treated as owning only the percentage of profits interest he owns
directly, he does not satisfy the condition precedent for the
attribution of the DEF profits interest from his father. Accordingly, A
is considered as owning only the 20 percent profits interest in DEF
which he owns directly.
(c) Operating rules--(1) In general. Except as provided in paragraph
(c)(2) of this section, an interest constructively owned by a person by
reason of the application of paragraph (b) (1), (2), (3), (4), (5), or
(6) of this section shall, for the purposes of applying such paragraph,
be treated as actually owned by such person.
(2) Members of family. An interest constructively owned by an
individual by reason of the application of paragraph (b) (5) or (6) of
this section shall not be treated as owned by such individual for
purposes of again applying such subparagraphs in order to make another
the constructive owner of such interest.
(3) Precedence of option attribution. For purposes of this section,
if an interest may be considered as owned under paragraph (b)(1) of this
section (relating to option attribution) and under any other
subparagraph of paragraph (b) of this section, such interest shall be
considered as owned by such person under paragraph (b)(1) of this
section.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). A, 30 years of age, has a 90 percent interest in the
capital and profits of DEF Partnership. DEF owns all the outstanding
stock of corporation X and X owns 60 shares of the 100 outstanding
shares of corporation Y. Under paragraph (c)(1) of this section, the 60
shares of Y constructively owned by DEF by reason of paragraph (b)(4) of
this section are treated as actually owned by DEF for purposes of
applying paragraph (b)(2) of this section. Therefore, A is considered as
owning 54 shares of the Y stock (90 percent of 60 shares).
Example (2). Assume the same facts as in example (1). Assume further
that B, who is 20 years of age and the brother of A, directly owns 40
shares of Y stock. Although the stock of Y owned by B is considered as
owned by C (the father of A and B) under paragraph (b)(6)(i) of this
section, under paragraph (c)(2) of this section such stock may not be
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of
this section in order to make A the constructive owner of such stock.
Example (3). Assume the same facts as in example (2), and further
assume that C has an option to acquire the 40 shares of Y stock owned by
his son, B. The rule contained in paragraph (c)(2) of this section does
not prevent the reattribution of such 40 shares to A because, under
paragraph (c)(3) of this section, C is considered as owning the 40
shares by reason of option attribution and not by reason of family
attribution. Therefore, since A is in effective control of Y under
paragraph (b)(6)(ii) of this section, the 40 shares of Y stock
constructively owned by C are reattributed to A. A is considered as
owning a total of 94 shares of Y stock.
[T.D. 8179, 53 FR 6609, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988, as
amended by T.D. 8540, 59 FR 30102, June 10, 1994]
Sec. 1.414(c)-5 Effective date.
(a) General rule. Except as provided in paragraph (b), (c), (e), or
(f) of this section, the provisions of Sec. 1.414(b)-1 and
Secs. 1.414(c)-1 through 1.414 (c)-4 shall apply for plan years
beginning after September 2, 1974.
(b) Existing plans. In the case of a plan in existence on January 1,
1974, unless paragraph (c) of this section applies, the provisions of
``Sec. 1.414 (b)-1 and Secs. 1.414(c)-1 through 1.414(c)-4 shall apply
for plan years beginning after December 31, 1975. For definition of the
term ``existing plan'', see Sec. 1.410(a)-2(c).
(c) Existing plans electing new provisions. In the case of a plan in
existence on January 1, 1974, for which the plan administrator makes an
election under Sec. 1.410 (a)-2(d), the provisions of Sec. 1.414(b)-1
and Secs. 1.414 (c)-1 through 1.414(c)-4 shall apply to the plan years
elected under Sec. 1.410 (a)-2 (d).
(d) Application. For purposes of the Employee Retirement Income
Security Act of 1974, the provisions of Sec. 1.414(b)-1 and
Secs. 1.414(c)-1 through 1.414(c)-4 do
[[Page 631]]
not apply for any period of time before the plan years described in
paragraph (a), (b), or (c) of this section, whichever is applicable.
(e) Special rule. Notwithstanding paragraph (a), (b), or (c) of this
section, Sec. 1.414(c)-3 (f) is effective April 1, 1988.
(f) Transitional rule--(1) In general. The amendments made by T.D.
8179 apply to the plan years or period described in paragraphs (a), (b),
or (c) of this section, whichever is applicable.
(2) Exception. In the case of a plan year or period beginning before
March 2, 1988, if an organization--
(i) Is a member of a brother-sister group of trades or businesses
under common control under Sec. 11.414(c)-2(c), as in effect before
removal by T.D. 8179 (``old group''), for such plan year or period, and
(ii) Is not such a member for such plan year or period because of
the amendments made by such Treasury decision,
such member (whether or not a corporation) nevertheless will be treated
as a member of such old group for purposes of section 414(c) for that
plan year or period to the extent provided in Sec. 1.1563-1 (d)(2).
Also, such member will be treated as a member of an old group for all
purposes of the Code for such plan year or period if all the
organizations (whether or not corporations) that are members of the old
group meet all the requirements of Sec. 1.1563-1 (d)(3) with respect to
such plan year or period.
[T.D. 8179, 53 FR 6611, Mar. 2, 1988]
Sec. 1.414(e)-1 Definition of church plan.
(a) General rule. For the purposes of part I of subchapter D of
chapter 1 of the Code and the regulations thereunder, the term ``church
plan'' means a plan established and at all times maintained for its
employees by a church or by a convention or association of churches
(hereinafter included within the term ``church'') which is exempt from
tax under section 501(a), provided that such plan meets the requirements
of paragraphs (b) and (if applicable) (c) of this section. If at any
time during its existence a plan is not a church plan because of a
failure to meet the requirements set forth in this section, it cannot
thereafter become a church plan.
(b) Unrelated businesses--(1) In general. A plan is not a church
plan unless it is established and maintained primarily for the benefit
of employees (or their beneficiaries) who are not employed in connection
with one or more unrelated trades or businesses (within the meaning of
section 513).
(2) Establishment or maintenance of a plan primarily for persons not
employed in connection with one or more unrelated trades or businesses.
(i) (A) A plan, other than a plan in existence on September 2, 1974, is
established primarily for the benefit of employees (or their
beneficiaries) who are not employed in connection with one or more
unrelated trades or businesses if on the date the plan is established
the number of employees employed in connection with the unrelated trades
or businesses eligible to participate in the plan is less than 50
percent of the total number of employees of the church eligible to
participate in the plan.
(B) A plan in existence on September 2, 1974, is to be considered
established as a plan primarily for the benefit of employees (or their
beneficiaries) who are not employed in connection with one or more
unrelated trades or businesses if it meets the requirements of both
paragraphs (b)(2)(ii) (A) and (B) (if applicable) in either of its first
2 plan years ending after September 2, 1974.
(ii) For plan years ending after September 2, 1974, a plan will be
considered maintained primarily for the benefit of employees of a church
who are not employed in connection with one or more unrelated trades or
businesses if in 4 out of 5 of its most recently completed plan years--
(A) Less than 50 percent of the persons participating in the plan
(at any time during the plan year) consist of and in the same year
(B) Less than 50 percent of the total compensation paid by the
employer during the plan year (if benefits or contributions are a
function of compensation) to employees participating in the plan is paid
to,
employees employed in connection with an unrelated trade or business.
The determination that the plan is not a church plan will apply to the
second
[[Page 632]]
year (within a 5 year period) for which the plan fails to meet paragraph
(b)(2)(ii) (A) or (B) (if applicable) and to all plan years thereafter
unless, taking into consideration all of the facts and circumstances as
described in paragraph (b)(2)(iii) of this section, the plan is still
considered to be a church plan. A plan that has not completed 5 plan
years ending after September 2, 1974, shall be considered maintained
primarily for the benefit of employees not employed in connection with
an unrelated trade or business unless it fails to meet paragraphs
(b)(2)(ii) (A) and (B) in at least 2 such plan years.
(iii) Even though a plan does not meet the provisions of paragraph
(b)(2)(ii) of this section, it nonetheless will be considered maintained
primarily for the benefit of employees who are not employed in
connection with one or more unrelated trades or businesses if the church
maintaining the plan can demonstrate that based on all of the facts and
circumstances such is the case. Among the facts and circumstances to be
considered in evaluating each case are:
(A) The margin by which the plan fails to meet the provisions of
paragraph (b)(2)(ii) of this section, and
(B) Whether the failure to meet such provisions was due to a
reasonable mistake as to what constituted an unrelated trade or business
or whether a particular person or group of persons were employed in
connection with one or more unrelated trades or businesses.
(iv) For purposes of this section, an employee will be considered
eligible to participate in a plan if such employee is a participant in
the plan or could be a participant in the plan upon making mandatory
employee contributions to the plan.
(3) Employment in connection with one or more unrelated trades or
businesses. An employee is employed in connection with one or more
unrelated trades or businesses of a church if a majority of such
employee's duties and responsibilities in the employ of the church are
directly or indirectly related to the carrying on of such trades or
businesses. Although an employee's duties and responsibilities may be
insignificant with respect to any one unrelated trade or business, such
employee will nonetheless be considered as employed in connection with
one or more unrelated trades or businesses if such employee's duties and
responsibilities with respect to all of the unrelated trades or
businesses of the church represent a majority of the total of such
person's duties and responsibilities in the employ of the church.
(c) Plans of two or more employers. The term ``church plan'' does
not include a plan which, during the plan year, is maintained by two or
more employers unless--
(1) Each of the employers is a church that is exempt from tax under
section 501(a), and
(2) With respect to the employees of each employer, the plan meets
the provisions of paragraph (b)(2)(ii) of this section or would be
determined to be a church plan based on all the facts and circumstances
described in paragraph (b)(2)(iii) of this section.
Thus, if with respect to a single employer the plan fails to meet any
provision of this paragraph, the entire plan ceases to be a church plan
unless that employer ceases maintaining the plan for all plan years
beginning after the plan year in which it receives a final notification
from the Internal Revenue Service that it does not meet the provisions
of this paragraph. If the employer does cease maintaining the plan in
accordance with this paragraph, the fact that the employer formerly did
maintain the plan will not prevent the plan from being a church plan for
prior years.
(d) Special rule. (1) Notwithstanding paragraph (c)(1) of this
section, a plan maintained by a church and one or more agencies of such
church for the employees of such church and of such agency or agencies,
that is in existence on January 1, 1974, shall be treated as a church
plan for plan years ending after September 2, 1974, and beginning before
January 1, 1983, provided that the plan is described in paragraph (c) of
this section without regard to paragraph (c)(1) of this section, and the
plan is not maintained by an agency which did not maintain the plan on
January 1, 1974.
(2) For the purposes of section 414(e) and this section, an agency
of a church means an organization which is exempt
[[Page 633]]
from tax under section 501 and which is either controlled by, or
associated with, a church. For example, an organization, a majority of
whose officers or directors are appointed by a church's governing board
or by officials of a church, is controlled by a church within the
meaning of this paragraph. An organization is associated with a church
if it shares common religious bonds and convictions with that church.
(e) Religious orders and religious organizations. For the purpose of
this section the term ``church'' includes a religious order or a
religious organization if such order or organization (1) is an integral
part of a church, and (2) is engaged in carrying out the functions of a
church, whether as a civil law corporation or otherwise.
(f) Separately incorporated fiduciaries. A plan which otherwise
meets the provisions of this section shall not lose its status as a
church plan because of the fact that it is administered by a separately
incorporated fiduciary such as a pension board or a bank.
(g) Cross reference. (1) For rules relating to treatment of church
plans, see section 410(c), 411(e), 412(h), 4975(g), and the regulations
thereunder.
(2) For rules relating to church plan elections, see section 410(d)
and the regulations thereunder.
[T.D. 7688, 45 FR 20797, Mar. 31, 1980]
Sec. 1.414(f)-1 Definition of multiemployer plan.
(a) General rule. For purposes of part I of subchapter D of chapter
1 of the Code and the regulations thereunder, a plan is a multiemployer
plan for a plan year if all of the following requirements are satisfied:
(1) Number of contributing employers. More than one employer is
required by the plan instrument or other agreement to contribute (or to
have contributions made on its behalf) to the plan for the plan year.
(2) Collective bargaining agreement. The plan is maintained for the
plan year pursuant to one or more collective bargaining agreements
between employee representatives and more than one employer.
(3) Amount of contributions. Except as provided by paragraph (c) of
this section (relating to the special rule for contributions exceeding
50 percent), the amount of contributions made under the plan for the
plan year by or on behalf of each employer is less than 50 percent of
the total amount of contributions made under the plan for such plan year
by or on behalf of all employers.
(4) Benefits. The plan provides that the amount of benefits payable
with respect to each employee participating in the plan is determined
without regard to whether or not his employer continues as a member of
the plan. If benefits accrued as a result of the participant's service
with his employer during a period before such employer was a member of
the plan, this requirement does not apply to the amount of those
benefits, except that this requirement does apply to the amount of those
benefits (i) which are accrued benefits derived from employee
contributions, or (ii) which are accrued under a plan maintained by an
employer prior to the time such employer became a member of the plan to
which the requirements of this paragraph (a) are applied.
(5) Other requirements. The plan satisfies such other requirements
as the Secretary of Labor by regulations prescribes under the authority
of section 414(f)(1)(E) of the Code and section 3(37) of the Employee
Retirement Income Security Act of 1974 (Pub. L. 93-406, 88 Stat. 839).
See 29 CFR 2510.3-37.
(b) Special rules--(1) Amount of contributions. For purposes of
paragraphs (a)(3) and (c) of this section, the amount of contributions
made under the plan for the plan year by or on behalf of each employer
shall be the sum of such contributions made on or before the last day of
the plan year. For purposes of determining whether contributions are
made on or before the last day of the plan year, the rule of section
412(c)(10) and the regulations thereunder (relating to the treatment of
certain contributions made after the last day of the plan year as made
on such last day) shall apply.
(2) Benefits. (i) For purposes of paragraph (a)(4) of this section,
certain benefit amounts are treated as accrued as a result of the
participant's service with an employer during a period before such
employer was a member of
[[Page 634]]
the plan. The amount of such a benefit so treated is the difference (if
any) between two calculated amounts. The first calculated amount is the
participant's total accrued benefit calculated under the plan as of the
date the employer ceased to be a member of the plan. The second
calculated amount is the participant's accrued benefit calculated
without regard to his service with such employer during the period
before such employer was a member of the plan. However, under a special
limitation, this difference may not exceed the benefit a participant
accrued from service before his employer became a member of the plan.
For purposes of this limitation, this benefit is the benefit accrued as
of the date the employer ceases to be a member of the plan. An employer
shall be deemed to be a member of the plan in a plan year if the
employer is required by the plan instrument or other agreement to
contribute (or to have contributions made on its behalf) to the plan for
such plan year or if an employee of the employer accrues a benefit, on
account of service with the employer during such plan year, under the
plan for that plan year.
(ii) The provisions of paragraphs (a)(4) and (b)(2)(i) of this
section are illustrated by the following example:
Example. On January 1, 1976, employer W became a member of the
noncontributory XYZ pension plan which uses the calendar year as the
plan year. W did not maintain any plan prior to that date. The plan
provided for benefits of $4 per month per year of service (including
service with W before January 1, 1976). On January 1, 1980, following
adoption of a new collective bargaining agreement, the benefits were
increased to $12 per month per year of service for all years of service
(including service with W before January 1, 1976). On January 1, 1991, W
ceased to be a member of the plan.
A, an employee of W, had 15 years of service before January 1, 1976,
4 years of service between January 1, 1976, and December 31, 1979, and
11 years of service between January 1, 1980, and December 31, 1990. On
December 31, 1990, A's accrued benefit was $360 per month ($12 per month
x 30). On January 1, 1991, the portion of A's accrued benefit retained
and the portion forfeited under the terms of the XYZ pension plan were
determined as follows:
----------------------------------------------------------------------------------------------------------------
Monthly accrued benefit Monthly accrued benefit
Years retained forfeited
----------------------------------------------------------------------------------------------------------------
Before Jan. 1, 1976......................................... ........................ $12x15 years=$180
Jan. 1, 1976 to Dec. 31, 1979............................... $4x4 years=$16 $8x4 years=$32
Jan. 1, 1980 to Dec. 31, 1990............................... $12x11 years=$132 ........................
---------------------------------------------------
Total..................................................... $148 $212
----------------------------------------------------------------------------------------------------------------
The XYZ plan does not satisfy the requirements of paragraphs (a)(4)
and (b)(2)(i) of this section because no benefit can be forfeited with
respect to service after W began participating in the plan. Thus, the
maximum accrued benefit that may be forfeited is $180 per month (the
accrued benefit with respect to A's service prior to January 1, 1976).
Therefore, in order for the plan to meet the requirements of paragraphs
(a)(4) and (b)(2)(i) of this section, the plan must provide for A's
accrued benefit after W ceased to be a member of the plan to be at least
$180 per month ($360 per month total accrued benefit less $180 per month
benefit accrued for service prior to W's membership in the plan).
(iii) For purposes of paragraphs (a)(4) and (b)(2) of this section,
if an employer for a period employs two or more individuals who, solely
by reason of their employment, are participants in the plan and who do
not belong to the same collective bargaining unit, the dates on which
the employer became and ceased to be a member of the plan shall be
determined separately on a class basis for individuals who belong to
separate collective bargaining units, as separate classes, and for
individuals who do not belong to a collective bargaining unit, as a
further single separate class. Thus, such dates shall be determined with
respect to individuals as a class who belong to the same collective
bargaining unit (or who do not belong to a collective bargaining unit)
without consideration of the employment by the employer of, or the
participation in the plan by, other individuals (who do not belong to
such collective bargaining unit and who may belong to another collective
bargaining unit) or whether the employer is a member of the plan with
respect to such other individuals. In no event,
[[Page 635]]
however, may service not attributable to service with a particular
collective bargaining unit be disregarded under paragaphs (a)(4) and
(b)(2) of this section merely because the employer ceases to maintain
the plan with respect to such unit. Thus, for example, paragraphs (a)(4)
and (b)(2) of this section do not permit the disregard of a period of
service of an individual belonging to a collective bargaining unit prior
to the time the employer became a member of the plan with respect to
such unit to the extent that, during such period of service, the
individual belonged to another collective bargaining unit with respect
to which the employer was a member of the plan.
(3) Controlled groups. For purposes of section 414(f) and this
section, all corporations which are members of a controlled group of
corporations (within the meaning of section 1563(a) and the regulations
thereunder, but determined without regard to section 1563(e)(3)(C) and
the regulations thereunder) are deemed to be one employer.
(c) Contributions exceeding 50 percent. If a plan was a
multiemployer plan as defined in this section for any plan year
(including plan years ending prior to September 3, 1974), ``75 percent''
shall be substituted for ``50 percent'' in applying paragraph (a)(3) of
this section for subsequent plan years until the first plan year
following a plan year in which the amount contributed by or on behalf of
one employer is 75 percent or more of the total amount of contributions
made under the plan for that plan year by or on behalf of all of the
employers making contributions. In such case ``75 percent'' shall not
again be substituted for ``50 percent'' until the plan has met the
requirements of paragraph (a) of this section (determined without regard
to this paragraph) for one plan year.
(d) Examples. The application of this section is illustrated by the
following examples. For purposes of these examples, assume that the plan
meets the requirements of paragraphs (a) (1), (2), (4), and (5) of this
section for each plan year.
Example (1). On January 1, 1970, U, V, and W, three employers none
of which is a member of a controlled group of corporations with any of
the other two employers, establish a plan with a plan year corresponding
to the calendar year. U, V, and W each contribute less than one-half of
the total contributions made under the plan for each of the years 1970,
1971, and 1972. For the years 1973, 1974, and 1975, U contributes 70
percent and V and W each contribute 15 percent of the total
contributions made under the plan for each year. The plan is a
multiemployer plan under section 414(f) and this section for 1975
because no employer has contributed 75 percent or more of the total
amount contributed for each of the plan years subsequent to 1972.
Example (2). (i) First plan year. On January 1, 1975, X, Y, and Z,
three employers none of which is a member of a controlled group of
corporations with any of the other two employers, establish a plan with
a plan year corresponding to the calendar year. X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan for 1975. The plan is a multiemployer plan for 1975 because it
meets the 50 percent contribution requirement of paragraph (a)(3) of
this section.
(ii) Second plan year. For the second plan year, 1976, X contributes
70 percent and Y and Z each contribute 15 percent of the total
contributions made under the plan. The plan is a multiemployer plan for
1976 because it was a multiemployer plan for the preceding plan year and
satisfies the 75 percent contribution requirement of paragraph (c) of
this section.
(iii) Third plan year. For the third plan year, 1977, X contributes
80 percent and Y and Z each contribute 10 percent of the total
contributions made under the plan. The plan is not a multiemployer plan
for 1977 because it fails to satisfy the 75 percent contribution
requirement of paragraph (c) of this section.
(iv) Fourth plan year. For the fourth plan year, 1978, Y contributes
60 percent and X and Z each contribute 20 percent of the total
contributions made under the plan. The 75 percent contribution
requirement of paragraph (c) of this section does not apply. The plan is
not a multiemployer plan for 1978 because it fails to satisfy the 50
percent contribution requirement of paragraph (a)(3) of this section.
(v) Fifth plan year. For the fifth plan year, 1979, X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan. The 75 percent contribution requirement of paragraph (c) of this
section does not apply. The plan is a multiemployer plan for 1979
because it again meets the 50 percent contribution requirement of
paragraph (a)(3) of this section.
(vi) Sixth plan year. For the sixth plan year, 1980, the plan will
continue to be a multiemployer plan, provided that no employer
contributes 75 percent or more of the total amount of contributions made
under the plan for the plan year.
[[Page 636]]
(e) Retention of records. (1) For plan years ending prior to
September 3, 1974, a plan may be required to furnish proof that it met
the requirements of section 414(f) and this section for each plan year
ending prior to that date to the extent necessary to show the
applicability of the 75 percent test provided in paragraph (c) of this
section.
(2) For plan years ending after September 2, 1974, a plan may be
required to furnish proof that it met the requirements of section 414(f)
and this section for 6 immediately preceding plan years.
(Secs. 414(f) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 26 U.S.C. 414(f); 68A Stat. 917; 26 U.S.C. 7805))
[T.D. 7552, 43 FR 29940, July 12, 1978]
Sec. 1.414(g)-1 Definition of plan administrator.
(a) In general. For purposes of part I of subchapter D of chapter 1
of the Code and the regulations thereunder, if the instrument under
which the plan is operated for a plan year specifically designates a
person or a group of persons as plan administrator, the person or group
of persons collectively is the plan administrator for the plan year. The
instrument may specifically designate a plan administrator--
(1) By name,
(2) By reference to the person or group of persons holding a named
position or positions,
(3) By reference to a procedure established under the terms of the
instrument pursuant to which a plan administrator is designated, or
(4) By reference to the person or group of persons charged with
specific responsibilities of plan administrator. Consistent with the
provisions of section 405 (c) (1) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1105 (c) (1)), a plan may provide for
the allocation of specific responsibilities of plan administrator among
named persons and for named persons to designate others to carry out
such responsibilities. A person or group of persons may be designated as
plan administrator in accordance with the rules of this paragraph even
though the person or group of persons does not carry the specific title
``plan administrator''. In the absence of a person or group of persons
designated as the plan administrator (individually, collectively, or by
designation of different specific administrative responsibilities), the
plan administrator for the plan year is the person or group of persons
specified in paragraph (b) of this section.
(b) Plan administrator not specifically designated. If no person or
group of persons is specifically designated as the plan administrator
for a plan year by the instrument under which the plan is operated, the
plan administrator for such year is the person or group of persons
determined under the following rules:
(1) Single employer. In the case of a plan maintained by a single
employer, the employer is the plan administrator. If the employer is a
corporation, the corporation is the plan administrator. However, the
corporation's board of directors may authorize a person or group of
persons to fulfill responsibilities of the corporation as plan
administrator. In the absence of such authorization, any corporate
officer authorized under law, corporate by-laws, or resolution of the
board of directors to act on behalf of the corporation with respect to
contracts of a value equivalent to the fair market value of the assets
of the plan shall be presumed to have authority to fulfill
responsibilities of the corporation as plan administrator. For purposes
of this paragraph (b) (1), ``employer'' means the ``employer'' as
defined in section 3 (5) of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1003 (5)).
(2) Employee organization. In the case of a plan maintained by an
employee organization, the employee organization is the plan
administrator.
(3) Group representing the parties. In the case of a plan maintained
by two or more employers, or jointly by one or more employers and one or
more employee organizations, the association, committee, joint board of
trustees, or other similar group of representatives of the parties who
maintain the plan, as the case may be, is the plan administrator. For
purposes of this subparagraph (3), a plan shall be considered maintained
by two or more employers or jointly by one or more employers
[[Page 637]]
and one or more employee organizations only if none of the parties has
the express power, under the terms of the instrument under which the
plan is operated, to terminate the plan unilaterally.
(4) Person in control of assets. In any case where a plan
administrator may not be determined by application of paragraphs (a) and
(b), (1), (2), and (3) of this section, the plan administrator is the
person or persons actually responsible, whether or not under the terms
of the plan, for the control, disposition, or management of the cash or
property received by or contributed to the plan, irrespective of whether
such control, disposition, or management is exercised directly by such
person or persons or indirectly through an agent or trustee designated
by such person or persons.
(Secs. 414(g) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 68A Stat 917; 26 U.S.C. 414(g), 7805))
[T.D. 7618, 44 FR 27657, May 11, 1979]
Sec. 1.414(l)-1 Mergers and consolidations of plans or transfers of plan assets.
(a) In general--(1) Scope of the regulations. Sections 401(a)(12)
and 414(l) apply only to plans to which section 411 applies without
regard to section 411(e)(2). Thus, for example, these sections do 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(d) to have the
participation, vesting, funding, etc. requirements apply; or a plan
which at no time after September 2, 1974, provided for employer
contributions.
(2) General rule. Under section 414(l),
(i) A trust which forms a part of a plan will not constitute a
qualified trust under section 401, and
(ii) A plan will not be treated as being qualified under section 403
(a) and 405 (a), unless, in the case of a merger or consolidation (as
defined in paragraph (b)(2) of this section), or a transfer of assets or
liabilities (as defined in paragraph (b)(3) of this section), the
following condition is satisfied. This condition requires that each
participant receive benefits on a termination basis (as defined in
paragraph (b)(5) of this section) from the plan immediately after the
merger, consolidation or transfer which are equal to or greater than the
benefits the participant would receive on a termination basis
immediately before the merger, consolidation, or transfer.
(b) Definitions. For purposes of this section:
(1) Single plan. A plan is a ``single plan'' if and only if, on an
ongoing basis, all of the plan assets are available to pay benefits to
employees who are covered by the plan and their beneficiaries. For
purposes of the preceding sentence, all the assets of a plan will not
fail to be available to provide all the benefits of a plan merely
because the plan is funded in part or in whole with allocated insurance
instruments. A plan will not fail to be a single plan merely because of
the following:
(i) The plan has several distinct benefit structures which apply
either to the same or different participants,
(ii) The plan has several plan documents,
(iii) Several employers, whether or not affiliated, contribute to
the plan,
(iv) The assets of the plan are invested in several trusts or
annuity contracts, or
(v) Separate accounting is maintained for purposes of cost
allocation but not for purposes of providing benefits under the plan.
However, more than one plan will exist if a portion of the plan assets
is not available to pay some of the benefits. This will be so even if
each plan has the same benefit structure or plan document, or if all or
part of the assets are invested in one trust with separate accounting
with respect to each plan.
(2) Merger or consolidation. The terms ``merger'' or
``consolidation'' means the combining of two or more plans into a single
plan. A merger or consolidation will not occur merely because one or
more corporations undergo a reorganization (whether or not taxable).
Furthermore, a merger or consolidation will not occur if two plans are
not combined into a single plan, such as by using one trust which limits
the availability of assets of one plan to provide benefits to
participants and beneficiaries of only that plan.
[[Page 638]]
(3) Transfer of assets or liabilities. A ``transfer of assets or
liabilities'' occurs when there is a diminution of assets or liabilities
with respect to one plan and the acquisition of these assets or the
assumption of these liabilities by another plan. For example, the
shifting of assets or liabilities pursuant to a reciprocity agreement
between two plans in which one plan assumes liabilities of another plan
is a transfer of assets or liabilities. However, the shifting of assets
between several funding media used for a single plan (such as between
trusts, between annuity contracts, or between trusts and annuity
contracts) is not a transfer of assets or liabilities.
(4) Spinoff. The term ``spinoff'' means the splitting of a single
plan into two or more plans.
(5) Benefits on a termination basis. (i) The term ``benefits on a
termination basis'' means the benefits that would be provided
exclusively by the plan assets pursuant to section 4044 of the Employee
Retirement Income Security Act of 1974 (``ERISA'') and the regulations
thereunder if the plan terminated. Thus, the term does not include
benefits that are guaranteed by the Pension Benefit Guaranty
Corporation, but not provided by the plan assets.
(ii) For purposes of determining the benefits on a termination
basis, the allocation of assets to various priority categories under
section 4044 of ERISA must be made on the basis of reasonable actuarial
assumptions. The assumptions used by the Pension Benefit Guaranty
Corporation as of the date of the merger or spinoff are deemed
reasonable for this purpose.
(iii) If a change in the benefit structure of a plan in conjunction
with a merger, consolidation, or transfer of assets or liabilities
alters the benefits on a termination basis, the change should be
designated, at the time the merger, consolidation, or transfer occurs,
to be effective either immediately before or immediately after that
occurrence. In the event that no designation is made, the change in the
benefit structure will be deemed to occur immediately after the merger,
consolidation, or transfer of assets or liabilities.
(6) Lower funded plan. (i) The term ``lower funded plan'' generally
means the plan which, immediately prior to the merger, would have its
assets exhausted in a higher priority category than the other plan.
(ii) Where two plans, immediately prior to the merger, would have
their assets exhausted in the same priority category of section 4044 of
ERISA in the event of termination, the lower funded plan is the one in
which the assets would satisfy a lesser proportion of the liability
allocated to that priority category.
(7) Priority category. The term ``priority category'' means the
category of benefits described in each paragraph of section 4044(a) of
ERISA. References to higher or highest priority categories refer to
those priority categories which receive the first allocation of asserts,
i.e. the lowest paragraph numbers in section 4044(a).
(8) Separate accounting of assets. The term ``separate accounting of
assets'' means the maintenance of an asset account with respect to a
given group of participants which is:
(i) Credited with contributions made to the plan on behalf of the
participants and with its allocable share of investment income, if any,
and
(ii) Charged with benefits paid to the participants, and with its
allocable share of investment losses or expenses.
(9) Present value of accrued benefit. For purposes of this section,
the present value of an accrued benefit must be determined on the basis
of reasonable actuarial assumptions. For this purpose, the assumptions
used by the Pension Benefit Guaranty Corporation as of the date of the
merger or spinoff are deemed reasonable.
(10) Valuation of plan assets. In determining the value of a plan's
assets, the standards set forth in regulations prescribed by the Pension
Benefit Guaranty Corporation (29 CFR Part 2611) shall be applied.
(11) Date of merger or spinoff. The actual date of a merger or
spinoff shall be determined on the basis of the facts and circumstances
of the particular situation. For purposes of this determination, the
following factors, none of which is necessarily controlling, are
relevant:
(i) The date on which the affected employees stop accruing benefits
under
[[Page 639]]
one plan and begin coverage and benefit accruals under another plan.
(ii) The date as of which the amount of assets to be eventually
transferred is calculated.
(iii) If the merger or spinoff agreement provides that interest is
to accrue from a certain date to the date of actual transfer, the date
from which such interest will accrue.
(c) Application of section 414(l)--(1) Two or more plans. (i)
Section 414(l) does not apply unless more than a single plan is
involved. It also does not apply unless at least a single plan assumes
liabilities from another plan or obtains assets from another plan (as in
a merger or spinoff). For purposes of section 414(l), a transfer of
assets or liabilities will not be deemed to occur merely because a
defined contribution plan is amended to become a defined benefit plan.
This rule will apply even if, under the facts and circumstances of a
particular case, a termination of the defined contribution plan will be
considered to have occurred for purposes of other provisions of the
Code.
(ii) The requirements of this subparagraph may be illustrated as
follows:
Example. After acquiring Corporation B, Corporation A amends
Corporation B's defined benefit plan (Plan B) to provide the same
benefits as Corporation A's defined benefit plan (Plan A). The assets of
Plan B are transferred to the trust containing the assets of Plan A in
such a manner that the assets of each plan: (1) are separately accounted
for, and (2) are not available to pay benefits of the other plan.
Because of condition (2) there are still two plans and, therefore, a
merger did not occur. As a result, section 414(l) does not apply. If at
some later date Corporation A were to sell Corporation B and transfer
the assets of Plan B that were separately accounted for to another trust
or to an annuity contract solely for the purpose of providing Plan B's
benefits, this transfer would also not involve section 414(l). This is
so because Plan B was a separate plan before the entire transaction and
because no plan assumed liabilities or obtained assets from another
plan. If, on the other hand, Corporation A merged Plan A and Plan B at
the time of the acquisition of Corporation B by deleting condition (2)
above, then section 414(l) would apply both to the merger of Plan A and
Plan B and to the spinoff of Plan B from the merged plan. The spinoff
would have to satisfy the requirements of paragraph (n) of this section,
even if the assets attributable to Plan A and Plan B were separately
accounted for in order to allocate funding costs.
(2) Multiemployer plans. Except to the extent provided by
regulations of the Pension Benefit Guaranty Corporation, section 114(l)
does not apply to any transaction to the extent that participants either
before or after that transaction are covered under a multiemployer plan
within the meaning of section 414(f). Until these regulations are
issued, section 414(l) does not apply to any of the following
situations:
(i) A multiemployer plan is split into two or more plans, one or
more of which are not multiemployer plans, or (ii) A single employer
plan is merged into a multiemployer plan.
Therefore, if some (but not all) of the participants in a single
employer plan become participants in a multiemployer plan under an
agreement in which the multiemployer plan assumes all the liabilities of
the single employer plan with respect to these participants and in which
some or all of the assets of the single employer plan are transferred to
the multiemployer plan, section 414(l) applies, but only with respect to
the participants in the single employer plan who did not transfer to the
multiemployer plan.
(d) Merger of defined contribution plans. In the case of a merger of
two or more defined contribution plans, the requirements of section
414(l) will be satisfied if all of the following conditions are met:
(1) The sum of the account balances in each plan equals the fair
market value (determined as of the date of the merger) of the entire
plan assets.
(2) The assets of each plan are combined to form the assets of the
plan as merged.
(3) Immediately after the merger, each participant in the plan as
merged has an account balance equal to the sum of the account balances
the participant had in the plans immediately prior to merger.
(e) Merger of defined benefit plans--(1) General rule. Section
414(l) compares the benefits on a termination basis before and after the
merger. If the sum of the assets of all plans is not less than the sum
of the present values of the accrued benefit (whether or not vested) of
all plans, the requirements of section
[[Page 640]]
414(l) will be satisfied merely by combining the assets and preserving
each participant's accrued benefits. This is so because all the accrued
benefits of the plan as merged are provided on a termination basis by
the plan as merged. However, if the sum of the assets of all plans is
less than the sum of the present values of the accrued benefits (whether
or not vested) in all plans, the accrued benefits in the plan as merged
are not provided on a termination basis.
(2) Special schedule of benefits. Generally, for some participants,
the benefits provided on a termination basis for the plan as merged
would be different from the benefits provided on a termination basis in
the plans prior to merger if the assets were merely combined and if each
participant retained his accrued benefit. Some participants would,
therefore, receive greater benefits on a termination basis as a result
of the merger and some other participants would receive smaller
benefits. Accordingly, the requirements of section 414(l) would not be
satisfied unless the distribution on termination were modified in some
manner to prevent any participant from receiving smaller benefits on a
termination basis as a result of the merger. This is accomplished
through modifying the application of section 4044 of ERISA by inserting
a special schedule of benefits.
(f) Operational rules for the special schedule. The application of
section 4044 of ERISA as modified by the schedule of benefits is
accomplished by the following steps:
(1) Section 4044 is applied in the plan as merged through the
priority categories fully satisfied by the assets of the lower funded
plan immediately prior to the merger.
(2) The assets in the plan as merged are then allocated to the next
priority category as a percentage of the value of the benefits that
would otherwise be allocated to that priority category. That percentage
is the ratio of (i) the assets allocated to the first priority category
not fully satisfied by the lower funded plan immediately prior to the
merger to (ii) the assets that would have been allocated had that
priority category been fully satisfied.
(3) A schedule of benefits is formed listing participants and
scheduled accrued benefits. The scheduled accrued benefit is the excess
of the benefits provided on a termination basis with respect to any
participant from the plans immediately prior to the merger, over the
benefits provided on a termination basis in subparagraphs (1) and (2) of
this paragraph immediately after the merger. After allocating the assets
in accordance with subparagraph (2) of this paragraph, the assets are
allocated to the schedule of benefits as follows:
(i) First the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided in subparagraph
(4) of this paragraph if there were no scheduled benefits.
(ii) Then the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided pursuant to
subparagraph (5) of this paragraph if there were no scheduled benefits.
These assets should be allocated first to those scheduled benefits that
are in the highest priority category under section 4044.
(4) The assets are then allocated to those benefits in the priority
category described in subparagraph (2) of this paragraph with respect to
which assets were not allocated. This allocation is made to the extent
that these benefits are not associated with benefits in the schedule.
(5) Finally, the assets are allocated in accordance with section
4044 with respect to priority categories lower than the priority
category described in subparagraph (4) of this paragraph. This
allocation is made to the extent that these benefits are not associated
with benefits in the schedule.
(g) Successive mergers--(1) In general. In the case of a current
merger of a defined benefit plan with another defined benefit plan which
as a result of a previous merger has a special schedule, the rules of
paragraphs (e) and (f) of this section apply as if the schedule were
considered a category described in section 4044 of ERISA. Thus, a second
schedule may be formed as a result of
[[Page 641]]
the current merger. The second schedule will be inserted in the priority
category of section 4044 described in paragraph (f)(2) of this section
as of the date of the current merger. This priority category may be
higher, lower, or within the schedule of benefits existing on account of
a previous merger. If this priority schedule is inserted within a
schedule of benefits, a new single schedule of benefits replacing the
old schedule of benefits would in effect be created.
(2) Allocation of assets. Assets in the new schedule of benefits are
allocated as follows:
(i) First to the benefits remaining in the old schedule to the
extent that there are assets immediately prior to the second merger to
satisfy the original benefits,
(ii) Then to the benefits provided on a termination basis from the
plans immediately prior to the second merger to the extent that they are
not provided before the schedule after the second merger or in
subdivision (i) of this subparagraph,
(iii) Then to benefits remaining in the original schedule not
included in subdivision (i) of this subparagraph.
(h) De minimis rule for merger of defined benefit plan--(1) In
general. In the case of a merger of a defined benefit plan (``smaller
plan'') whose liabilities (i.e., the present value of accrued benefits,
whether or not vested) are less than 3 percent of the assets of another
defined benefit plan (``larger plan'') as of at least one day in the
larger plan's plan year in which the merger of the two plans occurs,
section 414(l) will be deemed to be satisfied if the following condition
is met. The condition requires that a special schedule of benefits
(consisting of all the benefits that would be provided by the smaller
plan on a termination basis just prior to the merger) be payable in a
priority category higher than the highest priority category in section
4044 of ERISA. Assets will be allocated to that schedule in accordance
with the allocation of assets to scheduled benefits in paragraph (f)(3)
of this section.
(2) Application to a series of mergers. In the case of a series of
such mergers in a given plan year of the larger plan, the rule described
in subparagraph (1) of this paragraph will apply only if the sum of the
liabilities (whether or not vested) assumed by the larger plan are less
than 3 percent of the assets of the larger plan as of at least one day
in the plan year of the larger plan in which the mergers occurred.
(3) Application to a merger occurring over more than one plan year.
In the case of a merger of a smaller plan or a portion thereof with a
larger plan designed to occur in steps over more than one plan year of
the larger plan, the entire transaction will be deemed to occur in the
plan year of the larger plan which contains the first of these steps.
(4) Liabilities of the smaller plan. For purposes of subparagraphs
(2) and (3) of this paragraph, mergers satisfying paragraphs (e), (f) or
(g) of this section will be ignored in determining the sum of the
liabilities assumed by the larger plan.
(i) Data maintenance--(1) Alternative to the special schedule. In
the case of a merger which would require the creation of a special
schedule in order to satisfy section 414(l), the schedule need not be
created at the time of the merger if data sufficient to create the
schedule is maintained. The schedule would only have to be created in
the event of a subsequent plan termination or a subsequent spinoff. In
that case the schedule must be determined as of the date of the merger.
(2) Required data. The data that must be maintained depends on the
plan, and care should be taken to ensure that all necessary data is
maintained. Furthermore, in order to take advantage of the data
maintenance alternative provided in this paragraph, an enrolled actuary
must certify to the plan administrator that each element of data
necessary to determine the schedule as of the date of the merger is
maintained. This certification must be based either upon the enrolled
actuary's independent examination of the data, or upon his reliance,
which under the circumstances of the particular situation must be
reasonable, upon a written statement of the plan administrator
concerning what data is actually being maintained.
(j) Five year rule--(1) Limitation on the required use of the
special schedule. A
[[Page 642]]
plan will not fail to satisfy the requirements of section 414(l) merely
because the effects of the special schedule created pursuant to
paragraphs (e)(2) or (h) of this section are ignored 5 years after the
date of a merger. Furthermore, the date maintained pursuant to paragraph
(i) of this section need not be maintained for more than 5 years after
the merger, if the plan does not have a spinoff or a termination within
5 years.
(2) Illustration. If Plans A and B merge to form Plan AB and if Plan
AB merges with Plan C 3 years later to form Plan ABC and if Plan ABC
terminates 4 years later, the data relating to the merger of Plans A and
B need not be maintained for more than 5 years after the merger of Plans
A and B. In addition, after 5 years have elapsed after the merger of
Plans A and B, the effect of any special schedule created by the merger
of Plans A and B on the schedule created by the merger of Plans AB and C
may be ignored in determining the later schedule.
(k) Examples. The provisions of paragraphs (e) through (j) of this
section may be illustrated by the following examples:
Example (1). Plan A, whose assets are $220,000, is to be merged with
Plan B, whose assets are $200,000. Plan A has three employees. Plan B
has two employees. If Plans A and B were to terminate just prior to the
merger, the benefits provided on a termination basis would be as
follows:
[[Page 643]]
Plan A
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1)--Annual accrued benefits (2)--Present value of accrued (3)--Fair (4)--Benefits on a termination basis
--------------------------------- benefits market value --------------------------------------
--------------------------------------- of assets
Priority category of section 4044 of ERISA allocated to
EE1 EE2 EE3 EE1 EE2 EE3 priority EE1 EE2 EE3
category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3................................................................ $10,000 ......... ......... $120,000 ........... ........... $120,000 $10,000 ........... ...........
4................................................................ 2,000 $4,000 ......... 24,000 $44,000 ........... 68,000 2,000 $4,000 ...........
5................................................................ ......... 3,000 $4,000 ........... 33,000 $40,000 32,000 ........... \1\ 1,315 \2\ $1,753
6................................................................ ......... ......... 1,000 ........... ........... 10,000 .............. ........... ........... ...........
------------------------------------------------------------------------------------------------------------------------------
Total......................................................... ......... ......... ......... ........... ........... ........... 220,000 12,000 5,315 1,753
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ $3,000 x $32,000 / $73,000 i.e. accrued benefit x assets available for priority category 5--Total present value of accrued benefits in category 5.
\2\ $4,000 x $32,000 / $73,000.
Plan B
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1)--Annual accrued benefits (2)--Present value of accrued benefits (3)--Fair (4)--Benefits on a termination
----------------------------------------------------------------------------------- market basis
value of ------------------------------------
Priority category of section 4044 of ERISA assets
EE1 EE2 EE3 EE4 EE5 EE1 EE2 EE3 EE4 EE5 allocated
to priority EE1 EE2 EE3 EE4 EE5
category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3.......................................................... ... ... ... $15,000 ......... ... ... ... $195,000 .............. $195,000 ... ... ... $15,000 .......
4.......................................................... ... ... ... ........... $5,000 ... ... ... ........... $50,000 5,000 ... ... ... ........... \1\ $50
0
5.......................................................... ... ... ... ........... 8,000 ... ... ... ........... 80,000 ........... ... ... ... ........... .......
------------------------------------------------------------------------------------------------------------------------------------
Total...................................................... ... ... ... ........... ......... ... ... ... ........... .............. 200,000 ... ... ... 15,000 500
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ $5,000 / $5,000 x $50,000.
[[Page 644]]
Because Plan B's assets are exhausted in a higher priority category
than Plan A's assets, Plan B is the lower funded plan. A schedule will,
therefore, be inserted in Priority Category 4 of the plan as merged
after providing 10% of the benefits provided in category 4, i.e. the
ratio of $5,000 assets in Plan B allocated to category 4 to the $50,000
liability in category 4. The schedule would be constructed as follows:
----------------------------------------------------------------------------------------------------------------
(2)--Benefits
(1)--Benefits provided from (3)--10% of (4)--Benefits
on a priority benefits provided (5)--Schedule
EE termination categories provided in before of benefits
basis before higher than priority schedule (2) + (1) - (4)
merger Category 4 Category 4 (3)
----------------------------------------------------------------------------------------------------------------
1............................... $12,000 $10,000 $200 $10,200 $1,800
2............................... 5,315 .............. 400 400 4,915
3............................... 1,753 .............. .............. .............. 1,753
4............................... 15,000 15,000 .............. 15,000 ..............
5............................... 500 .............. 500 500 ..............
----------------------------------------------------------------------------------------------------------------
Example (2). The facts are the same as in Example (1). The plan,
however, terminates one year later. Furthermore, no employee has accrued
additional benefits during the year except that the $2,000 benefit for
EE1, that was originally in category 4 is now in category 3.
The assets would be allocated to the priority categories to the extent
that there are assets to cover the following benefits.
----------------------------------------------------------------------------------------------------------------
Priority termination category EE1 EE2 EE3 EE4 EE5
----------------------------------------------------------------------------------------------------------------
3............................................................. $12,000 ........ ........ $15,000 ........
10% of 4...................................................... ........ $400 ........ ........ $500
Schedule of benefits included in balance of Category 4........ ........ 3,600 ........ ........ ........
Schedule of benefits included in Category 5................... ........ 1,315 $1,753 ........ ........
Schedule of benefits included in Category 6................... ........ ........ ........ ........ ........
Balance of Category 4 not included in schedule................ ........ ........ ........ ........ 4,500
Balance of Category 5 not included in schedule................ ........ 1,685 2,247 ........ 8,000
Balance of Category 6 not included in schedule................ ........ ........ 1,000 ........ ........
----------------------------------------------------------------------------------------------------------------
(l) Merger of defined benefit and defined contribution plan. In the
case of a merger of a defined benefit plan with a defined contribution
plan, one of the plans before the merger should be converted into the
other type of plan (i.e., the defined benefit converted into a defined
contribution or the defined contribution converted into a defined
benefit) and either paragraph (d) or paragraphs (e) through (j) of this
section, whichever is appropriate, should be applied.
(m) Spinoff of a defined contribution plan. In the case of a spinoff
of a defined contribution plan, the requirements of section 414(l) will
be satisfied if after the spinoff--
(1) The sum of the account balances for each of the participants in
the resulting plans equals the account balance of the participant in the
plan before the spinoff, and
(2) The assets in each of the plans immediately after the spinoff
equals the sum of the account balances for all participants in that
plan.
(n) Spinoff of a defined benefit plan--(1) General rule. In the case
of a spinoff of a defined benefit plan, the requirements of section
414(l) will be satisfied if--
(i) All of the accrued benefits of each participant are allocated to
only one of the spun off plans, and
(ii) The value of the assets allocated to each of the spun off plans
is not less than the sum of the present value of the benefits on a
termination basis in the plan before the spin off for all participants
in that spun off plan.
(2) De minimis rule. In the case of a spin off the requirements of
section 414(l) will be deemed to be satisfied if the value of the assets
spun off--
(i) Equals the present value of the accrued benefits spun off
(whether or not vested), and
(ii) In conjunction with other assets spun off during the plan year
in which the spinoff occurs in accordance with this subparagraph, is
less than 3 percent of the assets as of at least one day in that year.
[[Page 645]]
Spinoffs occurring in previous or subsequent plan years are ignored if
they are not part of a single spinoff designed to occur in steps over
more than one plan year.
(3) Special temporary rule. In the case of a defined benefit plan
maintained for different groups of employees, which is a single plan (as
defined in paragraph (b)(l) of this section) and under which there has
been separate accounting of assets for each group, a spinoff of the plan
on or before July 1, 1978, into a separate plan for each group will be
deemed to satisfy section 414 (l) if--
(i) All the liabilities with respect to each group of employees are
allocated to a separate plan for that group of employees, and
(ii) The assets that are separately accounted for with respect to
each group of employees are allocated to the separate plan for that
group of employees.
For purposes of this subparagraph, a separate accounting of assets will
not be considered to have occurred to the extent that the assets
allocated to each single plan are determined by an historical re-
creation of benefits, contributions, investment gains, etc.
(o) Transfers of assets or liabilities. Any transfer of assets or
liabilities will for purposes of section 414 (l) be considered as a
combination of separate mergers and spinoffs using the rules of
paragraphs (d), (e) through (j), (l), (m), or (n) of this section,
whichever is appropriate. Thus, for example, if in accordance with the
transfer of one or more employees, a block of assets and liabilities are
transferred from Plan A to Plan B, each of which is a defined benefit
plan, the transaction will be considered as a spinoff from Plan A and a
merger of one of the spinoff plans with Plan B. The spinoff and merger
described in the previous sentence would be subject to the requirements
of paragraphs (n) and (e) through (j) of this section respectively.
[T.D. 7638, 44 FR 48195, Aug. 17, 1979]
Sec. 1.414(q)-1 Highly compensated employee.
Q&A-1--Q&A-8: [Reserved]. See Sec. 1.414(q)-1T, Q&A-1 through Q&A-8
for further guidance.
Q-9: How is the top-paid group determined?
A-9: (a) [Reserved]. See Sec. 1.414(q)-1T, Q&A-9(a) for further
guidance.
(b) Number of employees in the top-paid group--(1) Exclusions. The
number of employees who are in the top-paid group for a year is equal to
20 percent of the total number of active employees of the employer for
such year. However, solely for purposes of determining the total number
of active employees in the top-paid group for a year, the employees
described in Sec. 1.414(q)-1T, A-9(b)(1) (i), (ii) and (iii)(B) are
disregarded. Paragraph (g) of this A-9 provides rules for determining
those employees who are excluded for purposes of applying section
414(r)(2)(A), relating to the 50-employee requirement applicable to a
qualified separate line of business.
(i)-(iii) [Reserved]. See Sec. 1.414(q)-1T, Q&A-9(b)(1) (i) through
(iii) for further guidance.
(2) Alternative exclusion provisions--(i)-(ii) [Reserved]. See
Sec. 1.414(q)-1T, Q&A-9(b)(2) (i) and (ii) for further guidance.
(iii) Method of election. The elections in this paragraph (b)(2)
must be provided for in all plans of the employer and must be uniform
and consistent with respect to all situations in which the section
414(q) definition is applicable to the employer. Thus, with respect to
all plan years beginning in the same calendar year, the employer must
apply the test uniformly for purposes of determining its top-paid group
with respect to all its qualified plans and employee benefit plans. If
either election is changed during the determination year, no
recalculation of the look-back year based on the new election is
required, provided the change in election does not result in
discrimination in operation.
(c)-(f) [Reserved]. See Sec. 1.414(q)-1T, Q&A-9 (c) through (f) for
further guidance.
(g) Excluded employees under section 414(r)(2)(A)--(1) In general.
This paragraph (g) provides the rules for determining which employees
are excluded employees for purposes of applying section 414(r)(2)(A),
relating to the 50-employee requirement applicable to a qualified
separate line of business.
[[Page 646]]
(2) Excluded employees--(i) Age and service exclusion. All employees
are excluded who are described in Sec. 1.414(q)-1T, A-9(b)(1)(i)
(relating to exclusions based on age or service). For this purpose, the
rules in Sec. 1.414(q)-1T, A-9 (e) and (f) (relating respectively to the
17\1/2\-hour rule and the 6-month rule) apply. However, the election in
Sec. 1.414(q)-1T, A-9(b)(2)(i) (permitting the employer to elect reduced
minimum age or service requirements) does not apply.
(ii) Nonresident alien exclusion. All employees are excluded who are
described in Sec. 1.414(q)-1T, A-9(b)(1)(ii) (relating to the exclusion
of nonresident aliens with no U.S.- source income from the employer).
(iii) Inclusion of employees covered under a collective bargaining
agreement. All employees are included who are described in
Sec. 1.414(q)-1T, A-9(b)(1)(iii)(A) (relating to employees covered under
a collective bargaining agreement) and who are not otherwise described
in paragraph (g)(2) (i) or (ii) of this A-9. For this purpose, the
exclusion in Sec. 1.414(q)-1T, A- 9(b)(1)(iii)(B) and the related
election in Sec. 1.414(q)-1T, A- 9(b)(2)(ii) do not apply.
(3) Applicable period. The determination of which employees are
excluded employees is made on the basis of the testing year specified in
the regulations under section 414(r) and not on the basis of the
determination year or the look-back year under section 414(q).
(h) Effective date. The provisions of this A-9 apply to plan years
and testing years beginning on or after January 1, 1994.
Q&A-10 through Q&A-15: [Reserved]. See Sec. 1.414(q)-1T, Q&A-10
through Q&A-15 for further guidance.
[T.D. 8548, 59 FR 32915, June 27, 1994]
Sec. 1.414(q)-1T Highly compensated employee (temporary).
The following questions and answers relate to the definition of
``highly compensated employee'' provided in section 414(q). The
definitions and rules provided in these questions and answers are
provided solely for purposes of determining the group of highly
compensated employees.
Table of contents.
Q&A-1 General applicability of section 414(q).
Q&A-2 Definition of highly compensated employees.
Q&A-3 Definition of highly compensated active employees.
Q&A-4 Definition of highly compensated former employees.
Q&A-5 Definition of separation year.
Q&A-6 Definition of employer.
Q&A-7 Definition of employee.
Q&A-8 Definition of 5-percent owner.
Q&A-9 Definition of top-paid group.
Q&A-10 Definition of officer and rules on inclusion of officers in
highly compensated group.
Q&A-11 Rules with respect to family aggregation.
Q&A-12 Definition of family member.
Q&A-13 Definition of compensation.
Q&A-14 Rules with respect to the relevant determination periods.
Q&A-15 Transition rule applicable to plan years beginning in 1987 and
1988 for certain employers that have plans that must comply
with the provisions of section 401(k)(3) or 401(m)(2).
Q-1: To what employee benefit plans and statutory provisions is the
definition of highly compensated employee contained in section 414(q)
applicable?
A-1: (a) In general. This definition is applicable to statutory
provisions that incorporate the definition by reference.
(b) Qualified retirement plans--(1) In general. Generally, this
definition is incorporated in many of the nondiscrimination requirements
applicable to pension, profit-sharing, and stock bonus plans qualified
under section 401(a). See, e.g., the nondiscrimination provisions of
sections 401(a) (4) and (5), 401(k)(3), 401(l), 401(m), 406(b), 407(b),
408(k), 410(b) and 411(d)(1). The definition is also incorporated by
certain other provisions with respect to such plans, including the
aggregation rules of section 414(m) and section 4975 (tax on prohibited
transactions).
(2) Not applicable where not incorporated by reference. This
definition is not applicable to qualified plan provisions that do not
incorporate it. See, e.g., section 415 (limitations on contributions and
benefits), with the exception of section 415(c)(3)(C) and 415(c)(6)
(special rules for permanent and total disability and employee stock
ownership plans respectively).
[[Page 647]]
(c) Other employee benefit plans or arrangements. This definition is
incorporated by various sections relating to employee benefit
provisions. See, e.g., section 89 (certain other employee benefit
plans), section 106 (accident and health plans), 117(d) (qualified
tuition reduction), section 125 (cafeteria plans), section 129
(dependent care assistance programs), section 132 (certain fringe
benefits), section 274 (certain entertainment, etc. expenses), section
423(b) (employee stock purchase plan provisions), section 501(c) (17)
and (18) (certain exempt trusts providing benefits to employees), and
section 505 (certain exempt organizations or trusts providing benefits
to individuals). See the respective sections for the applicable
effective dates.
(d) ERISA. This definition is not determinative with respect to any
provisions of Title I of the Employee Retirement Income Security Act of
1974 (ERISA), unless it is explicitly incorporated by reference (e.g.,
section 408(b)(1)(B)).
Q-2: Who is a highly compensated employee?
A-2: The group of employees (including former employees) who are
highly compensated employees consists of both highly compensated active
employees (see A-3 of this Sec. 1.414(q)-1T) and highly compensated
former employees (see A-4 of this Sec. 1.414(q)-1T). In many
circumstances, highly compensated active employees and highly
compensated former employees are considered separately in applying the
provisions for which the definition of highly compensated employees in
section 414(q) is applicable. Specific rules with respect to the
treatment of highly compensated active employees and highly compensated
former employees will be provided in the regulations with respect to the
sections to which the definition of highly compensated employees is
applicable.
Q-3: Who is a highly compensated active employee?
A-3: (a) General rule. For purposes of the year for which the
determination is being made (the determination year), a highly
compensated active employee is any employee who, with respect to the
employer, performs services during the determination year and is
described in any one or more of the following groups applicable with
respect to the look-back year calculation and/or determination year
calculation for such determination year. See A-14 for rules relating to
the periods for which the look-back year calculation and determination
year calculation are to be made.
(1) Look-back year calculation.
(i) 5-percent owner. The employee is a 5-percent owner at any time
during the look-back year (i.e., generally, the 12-month period
immediately preceding the determination year; see A-14. (See A-8 of this
Sec. 1.414(q)-1T.)
(ii) Compensation above $75,000. The employee receives compensation
in excess of $75,000 during the look-back year.
(iii) Compensation above $50,000 and top-paid group. The employee
receives compensation in excess of $50,000 during the look-back year and
is a member of the top-paid group for the look-back year. (See A-9 of
this Sec. 1.414(q)-1T.)
(iv) Officer. The employee is an ``includible officer'' during the
look-back year. (See A-10 of this Sec. 1.414(q)-1T.)
(2) Determination year calculation.
(i) 5-percent owner. The employee is a 5-percent owner at any time
during the determination year. (See A-8 of this Sec. 1.414(q)-1T.)
(ii) Top-100 employees. The employee is both (A) described in
paragraph (a)(1)(i), (ii) and/or (iv) of this A-3, when such paragraphs
are modified to substitute the determination year for the look-back
year, and (B) one of the 100 employees who receive the most compensation
from the employer during the determination year.
(b) Rounding and tie-breaking rules. In making the look-back year
and determination year calculations for a determination year, it may be
necessary for an employer to adopt a rule for rounding calculations
(e.g., in determining the number of employees in the top-paid group). In
addition, it may be necessary to adopt a rule breaking ties among two or
more employees (e.g., in identifying those particular employees who are
in the top-paid group or who are among the 100 most highly compensated
employees). In such cases, the employer may adopt any rounding or tie-
breaking rules it desires, so long as
[[Page 648]]
such rules are reasonable, nondiscriminatory, and uniformly and
consistently applied.
(c) Adjustments to dollar thresholds--(1) Indexing of dollar
thresholds. The dollar amounts in paragraph (a)(1) (i) and (ii) of this
A-3 are indexed at the same time and in the same manner as the section
415(b)(1)(A) dollar limitation for defined benefit plans.
(2) Applicable dollar threshold. The applicable dollar amount for a
particular determination year or look-back year is the dollar amount for
the calendar year in which such determination year or look-back year
begins. Thus, the dollar amount for purposes of determining the highly
compensated active employees for a particular look-back year is based on
the calendar year in which such look-back year begins, not the calendar
year in which such look-back year ends or in which the determination
year with respect to such look-back year begins.
(d) Employees described in more than one group. An individual who is
a highly compensated active employee for a determination year, by reason
of being described in one group in paragraph (a) of this A-3, under
either the look-back year calculation or the determination year
calculation, is not disregarded in determining whether another
individual is a highly compensated active employee by reason of being
described in another group under paragraph (a). For example, an
individual who is a highly compensated active employee for a
determination year, by reason of being a 5-percent owner during such
year, who receives compensation in excess of $50,000 during both the
look-back year and the determination year, is taken into account in
determining the group of employees who are highly compensated active
employees for such determination year by reason of receiving more than
$50,000, and being in the top-paid group under either or both the look-
back year calculation or determination year calculation for such
determination year.
(e) Examples. The following examples, in which the determination
year and look-back year are the calendar year, are illustrative of the
rules in paragraph (a) of this A-3. For purposes of these examples, the
threshold dollar amounts in paragraph (a)(1) (ii) and (iii) of this A-3
are not increased pursuant to paragraph (c) of this A-3.
Example (1). Employee A, who is not at any time a 5-percent owner,
an officer, or a member of the top-100 within the meaning of paragraph
(a)(1) (i), or (iv), or (a)(2) (i) or (ii), but who was a member of the
top-paid group for each year, is included in or excluded from the highly
compensated groups as specified below for the following years:
------------------------------------------------------------------------
Year Compensation Status Comments
------------------------------------------------------------------------
1986.......... $45,000 N/A........... Although prior to
414(q) effective date,
1986 constitutes the
look-back year for
purposes of
determining the highly
compensated group for
the 1987 determination
year.
1987.......... 80,000 Excl.......... Excluded because A was
not an employee
described in paragraph
(a)(1) (ii) or (iii)
of this A-3 for the
look-back year (1986).
1988.......... 80,000 Incl.......... Included because A was
an employee described
in paragraph (a)(1)
(ii) or (iii) of this
A-3 for the look-back
year (1987).
1989.......... 45,000 Incl.......... Included because A was
an employee described
in paragraph (a)(1)
(ii) or (iii) of this
A-3 for the look-back
year (1988).
1990.......... 45,000 Excl.......... Excluded because A was
not an employee
described in paragraph
(a)(1) (ii) or (iii)
of this A-3 for the
look-back year (1989).
------------------------------------------------------------------------
Example (2). Assuming the same facts as those given in Example (1),
except that A is a member of the top-100 employees within the meaning of
paragraph (a)(2)(ii) of this A-3 for the 1987 year and 1990 year, the
results are as follows:
------------------------------------------------------------------------
Year Compensation Status Comments
------------------------------------------------------------------------
1986.......... $45,000 N/A........... Although prior to
414(q) effective date,
1986 constitutes the
look-back year for
purposes of
determining the highly
compensated group for
the 1987 determination
year.
1987.......... 80,000 Incl.......... Included because A was
an employee described
in paragraph
(a)(1)(ii) or (iii) of
this A-3 for the
determination year
(1987) and was
described in paragraph
(a)(2)(ii) of this A-3
in that year.
[[Page 649]]
1988.......... 80,000 Incl.......... Included because A was
an employee described
in paragraph
(a)(1)(ii) or (iii) of
this A-3 for the look-
back year (1987).
1989.......... 45,000 Incl.......... Included because A was
an employee described
in paragraph
(a)(1)(ii) or (iii) of
this A-3 for the look-
back year (1988).
1990.......... 45,000 Excl.......... Excluded even though in
top-100 employees
during 1990
determination year
because A was not an
employee described in
paragraph (a)(1)(ii)
or (iii) of this A-3
for the look-back year
(1989) or for the
determination year
(1990).
------------------------------------------------------------------------
A-4: Who is a highly compensated former employee?
Q-4: (a) General rule. Except to the extent provided in paragraph
(d) of this A-4, a highly compensated former employee for a
determination year is any former employee who, with respect to the
employer, had a separation year (as defined in A-5 of this
Sec. 1.414(q)-1T) prior to the determination year and was a highly
compensated active employee as defined in A-3 of this Sec. 1.414(q)-1T
for either such employee's separation year or any determination year
ending on or after the employee's 55th birthday. Thus, for example, an
employee who is a highly compensated active employee for such employee's
separation year, by reason of receiving over $75,000 during the look-
back year, is a highly compensated former employee for determination
years after such employee's separation year.
(b) Special rule for employees who perform no services for the
employer in the determination year. For purposes of this rule, employees
who perform no services for an employer during a determination year are
treated as former employees. Thus, for example, an employee who
performed no services for the employer during a determination year, by
reason of a leave of absence during such year, is treated as a former
employee for such year.
(c) Dollar amounts for pre-1987 determination years. For
determination years beginning before January 1, 1987, the dollar amounts
in paragraph (a)(1)(B) and (C) of A-2 of this Sec. 1.414(q)-1T are
$75,000 and $50,000 respectively.
(d) Special rule for employees who separated from service before
January 1, 1987--(1) Election of special rule. Employers may elect to
apply paragraph (d)(2) of this A-4 in lieu of paragraph (a) of this A-4
in determining whether former employees who separated from service prior
to January 1, 1987, are highly compensated former employees. If this
election is made with respect to any qualified plan, it must be provided
for in the plan. If the employer makes this election with respect to any
employee benefit plan, such election must be used uniformly for all
purposes for which the section 414(q) definition is applicable. The
election, once made, cannot be changed without the consent of the
Commissioner.
(2) Special definition of highly compensated former employee. A
highly compensated former employee includes any former employee who
separated from service with the employer prior to January 1, 1987, and
was described in any one or more of the following groups during either
the employee's separation year (or the year preceding such separation
year) or any year ending on or after such individual's 55th birthday (or
the last year ending before such employee's 55th birthday):
(i) 5-percent owner. The employee was a 5-percent owner of the
employer at any time during the year.
(ii) Compensation amount. The employee received compensation is
excess of $50,000 during the year.
The determinations provided for in this paragraph (b)(2) may be made
on the basis of the calendar year, the plan year, or any other twelve
month period selected by the employer and applied on a reasonable and
consistent basis.
(e) Rules with respect to former employees--(1) In general. For
specific provisions with respect to the treatment of former employees
and of highly compensated former employees, refer to the rules with
respect to which the section 414(q) definition of highly compensated
employee is applicable.
(2) Former employees excluded in determining top-paid group, top-100
employees and includible officers. Former employees are not included in
the top-paid group, the group of the top-100 employees, or the group of
includible officers for purposes of applying section 414(q)
[[Page 650]]
to active employees. In addition, former employees are not counted as
employees for purposes of determining the number of employees in the
top-paid group.
Q-5: What is a separation year for purposes of section 414(q)?
A-5: (a) Separation year--(1) In general. The separation year
generally is the determination year during which the employee separates
from service with the employer. For purposes of this rule, an employee
who performs no services for the employer during a determination year
will be treated as having separated from service with the employer in
the year in which such employee last performed services for the
employer. Thus, for example, an employee who performs no services for
the employer by reason of being on a leave of absence throughout the
determination year is considered to have separated from service with the
employer in the year in which such employee last performed services
prior to beginning the leave of absence.
(2) Deemed separation. An employee who performs services for the
employer during a determination year may be deemed to have separated
from service with the employer during such year pursuant to the rules in
paragraph (a)(3) of this A-5. Such deemed separation year is relevant
for purposes of determining whether such employee is a highly
compensated former employee after such employee actually separates from
service, not for purposes of identifying such employee as either an
active or former employee. Because employees to whom the provisions of
paragraph (a)(2) of this A-5 apply are still performing services for the
employer during the determination year, they are treated as active
employees. Thus, for example, an employee who has a deemed separation
year in 1989, a year during which he was a highly compensated employee,
who continues to work for the employer until he retires from employment
in 1995, is an active employee of the employer until 1995 and is either
highly compensated or not highly compensated for any determination year
during such period based on the rules with respect to highly compensated
active employees. For determination years after the year of such
employee's retirement, such employee is a highly compensated former
employee because such employee was a highly compensated active employee
for the deemed separation year.
(3) Deemed separation year. An employee will be deemed to have a
separation year if, in a determination year prior to attainment of age
55, the employee receives compensation in an amount less than 50% of the
employee's average annual compensation for the three consecutive
calendar years preceding such determination year during which the
employee received the greatest amount of compensation from the employer
(or the total period of the employee's service with the employer, if
less).
(4) Leave of absence. The deemed separation rules contained in
paragraph (a)(2) and (3) of this A-5 apply without regard to whether the
reduction in compensation occurs on account of a leave of absence.
(b) Deemed resumption of employment. An employee who is treated as
having a deemed separation year by reason of the provisions of paragraph
(a) of this A-5 will not be treated as a highly compensated former
employee (by reason of such deemed separation year) after such employee
actually separates from service with the employer if, after such deemed
separation year, and before the year of actual separation, such
employee's services for and compensation from the employer for a
determination year increase significantly so that such employee is
treated as having a deemed resumption of employment. The determination
of whether an employee who has incurred a deemed separation year has an
increase in services and compensation sufficient to result in a deemed
resumption of employment will be made on the basis of all the
surrounding facts and circumstances pertaining to each individual case.
At a minimum, there must be an increase in compensation from the
employer to the extent that such compensation would not result in a
deemed separation year under the tests in paragraph (a)(2) of this A-5
using the same three-year period taken into account in such paragraph.
[[Page 651]]
(c) Examples. Paragraphs (a) and (b) of this A-5 are illustrated by
the following examples based on calendar years. For purposes of these
examples the threshold dollar amounts in A-5(a) of this Sec. 1.414(q)-1T
have not been increased pursuant to A-5(b) of this Sec. 1.414(q)-1T.
Example (1). Assume that in 1990 A is a highly compensated employee
of X by reason of having earned more than $75,000 during the 1989 look-
back year. In 1987, 1988 and 1989, A's years of greatest compensation
received from X, A received $76,000, $80,000 and $79,000 respectively.
In February of 1990, A received $30,000 in compensation. Because A's
compensation during the 1990 determination year is less than 50% of A's
average annual compensation from X during A's high three prior
determination years, A is deemed to have a separation year during the
1990 determination year pursuant to the provisions of paragraph (a) of
this A-5. Since A is a highly compensated employee for X in 1990, A's
deemed separation year, A will be treated as a highly compensated former
employee after A actually separates from service with the employer
unless A experiences a deemed resumption of employment within the
meaning of paragraph (b) of this A-5.
Example (2). Assume that in 1990 A is a highly compensated employee
by reason of having been an officer (with annual compensation in excess
of the section 415(c)(1)(A) dollar limitation) during the 1989 look-back
year. A's compensation from X during 1990 is $37,000. A's average
compensation from X for the three-year period ending with or within
January, 1990, was $60,000. A's compensation during the 1990
determination year is not less than 50% of the compensation earned
during the test period. Therefore, A is not deemed to have a separation
year under paragraph (a)(2)(i) of this A-5.
Example (3). Assume that in 1990 C is 35 and a highly compensated
employee of Z for the reasons given in Example (1) with the same
compensation set forth in that example. During 1990, C leaves C's 40
hour a week position as director of the actuarial division of Z and
starts working as an actuary for the same division, producing actuarial
reports approximately 15 to 20 hours a week, approximately half of these
hours at home. C contemplates returning to full-time employment with Z
when C's child enters school. During the 1990 determination year, C's
compensation is less than 50% of C's compensation during her high three
preceding determination years. Therefore, C has a deemed separation year
during the 1990 determination year. In 1991 C commences working 32 hours
a week for X at X's place of business and receives compensation in an
amount equal to 80 percent of her average annual compensation during her
high three prior determination years. The C's increased compensation,
considered in conjunction with the reasons for the reduction in service,
the nature and extent of the services performed before and after the
reduction in services, and the lack of proximity of C's age to age 55 at
the time of the reduction are sufficient to establish that C has a
deemed resumption of employment within the meaning of paragraph (b) of
this A-5. Therefore, when C separates from service with the employer, C
will not be treated as a highly compensated former employee by reason of
C's deemed separation year in 1990.
Q-6: Who is the employer?
A-6: (a) Aggregation of certain entities. The employer is the entity
employing the employees and includes all other entities aggregated with
such employing entity under the aggregation requirements of section
414(b), (c), (m) and (o). Thus, the following entities must be taken
into account as a single employer for purposes of determining the
employees who are ``highly compensated employees'' within the meaning of
section 414(q):
(1) All corporations that are members of a controlled group of
corporations (as defined in section 414(b)) that includes the employing
entity.
(2) All trades or businesses (whether or not incorporated) that are
under common control (as defined in section 414(c)) which group includes
the employing entity.
(3) All organizations (whether or not incorporated) that are members
of an affiliated service group (as defined in section 414(m)) that
includes the employing entity.
(4) Any other entities required to be aggregated with the employing
entity pursuant to section 414(o) and the regulations thereunder.
(b) Priority of aggregation provisions. The aggregation requirements
of paragraph (a) of this A-6 and of A-7(b) of this section with respect
to leased employees are applied before the application of any of the
other provisions of section 414(q) and this section.
(c) Line of business rules. The section 414(r) rules with respect to
separate lines of business are not applicable in determining the group
of highly compensated employees.
Q-7: Who is an employee for purposes of section 414(q)?
[[Page 652]]
A-7: (a) General rule. Except as provided in paragraph (b) of this
A-7, the term ``employee'' for purposes of section 414(q) refers to
individuals who perform services for the employer and are either common-
law employees of the employer or self-employed individuals who are
treated as employees pursuant to section 401(c)(1). This rule with
respect to the inclusion of certain self-employed individuals in the
group of highly compensated employees is applicable whether or not such
individuals are eligible to participate in the plan or benefit
arrangement being tested.
(b) Leased employees--(1) In general. The term ``employee'' includes
a leased employee who is treated as an employee of the recipient
pursuant to the provisions of section 414(n)(2) or 414(o)(2). Employees
that an employer treats as leased employees under section 414(n),
pursuant to the requirements of section 414(o), are considered to be
leased employees for purposes of this rule.
(2) Safe-harbor exception. For purposes of qualified retirement
plans, if an employee who would be a leased employee within the meaning
of section 414(n)(2) is covered in a safe-harbor plan described in
section 414(n)(5) (a qualified money purchase pension plan maintained by
the leasing organization), and not otherwise covered under a qualified
retirement plan of the employer, then such employee is excluded from the
term ``employee'' unless the employer elects to include such employee
pursuant to the provisions of paragraph (4) of this paragraph (b).
(3) Other employee benefit plans. The exception in paragraph (b)(2)
of this A-7 is not applicable to the determination of the highly
compensated employee group for purposes of the sections enumerated in
section 414(n)(3)(C). Thus, for example, a leased employee covered by a
safe-harbor plan is considered to be an employee in applying the
nondiscrimination provisions of section 89 to statutory benefit plans.
Consequently, an employer with leased employees covered in a safe-harbor
plan may have 2 groups of highly compensated employees, one with respect
to its retirement plans and another with respect to its statutory
benefit plans.
(4) Election with respect to leased employee exclusion. An employer
may elect to include the employees excepted under the provisions of
paragraph (b)(2) of this A-7 in determining the highly compensated group
with respect to an employer's retirement plans. Thus, for example, by
electing to forego the exception in paragraph (b)(2) of this A-7, an
employer may achieve more uniform highly compensated employee groups for
purposes of its retirement plans and welfare benefit plans. The election
to include such employees must be made on a reasonable and consistent
basis and must be provided for in the plan.
Q-8: Who is a 5-percent owner of the employer?
A-8: An employee is a 5-percent owner of the employer for a
particular year if, at any time during such year, such employee is a 5-
percent owner as defined in section 416(i)(B)(i) and Sec. 1.416-1 A T-
17&18. Thus, if the employer is a corporation, a 5-percent owner is any
employee who owns (or is considered as owning within the meaning of
section 318) more than 5 percent of the value of the outstanding stock
of the corporation or stock possessing more than 5 percent of the total
combined voting power of all stock of the corporation. If the employer
is not a corporation, a 5-percent owner is any employee who owns more
than 5 percent of the capital or profits interest in the employer. The
rules of subsections (b), (c), and (m) of section 414 do not apply for
purposes of determining who is a 5-percent owner. Thus, for example, an
individual who is a 5-percent owner of a subsidiary corporation that is
part of a controlled group of corporations within the meaning of section
414(b) is treated as a 5-percent owner for purposes of these rules.
Q-9: How is the ``top-paid group'' determined?
A-9: (a) General rule. An employee is in the top-paid group of
employees for a particular year if such employee is in the group
consisting of the top 20 percent of the employer's employees when ranked
on the basis of compensation received from the employer during such
year. The identification of the
[[Page 653]]
particular employees who are in the top-paid group for a year involves a
two-step procedure:
(1) The determination of the number of employees that corresponds to
20 percent of the employer's employees, and
(2) The identification of the particular employees who are among the
number of employees who receive the most compensation during this year.
Employees who perform no services for the employer during a year are not
included in making either of these determinations for such year.
(b) Number of employees in the top-paid group--(1) Exclusions.
[Reserved]. See Sec. 1.414(q)-1, Q&A-9(b)(1) for further information.
(i) Age and service exclusion. The following employees are excluded
on the basis of age or service absent an election by the employer
pursuant to the rules in paragraph (b)(2) of this A-9:
(A) Employees who have not completed 6 months of service by the end
of such year. For purposes of this paragraph (A), an employee's service
in the immediately preceding year is added to service in the current
year in determining whether the exclusion is applicable with respect to
a particular employee in the current year. For example, given a plan
with a calendar determination year, if employee A commences work August
1, 1989, and terminates employment May 31, 1990, A may be excluded under
this paragraph (b)(1)(i)(A) in 1989 because A completed only 5 months of
service by December 31, 1989. However, A cannot be excluded pursuant to
this rule in 1990 because A has completed 10 months of service, for
purposes of this rule, by the end of 1990.
(B) Employees who normally work less than 17\1/2\ hours per week as
defined in paragraph (d) of this A-9 for such year.
(C) Employees who normally work during less than 6 months during any
year as defined in paragraph (e) of this A-9 for such year.
(D) Employees who have not had their 21st birthdays by the end of
such year.
(ii) Nonresident alien exclusion. Employees who are nonresident
aliens and who receive no 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)) are
excluded.
(iii) Collective bargaining exclusion--(A) In general. Except as
provided in paragraph (B) of this paragraph (b)(1)(iii), employees who
are included in a unit of employees covered by an agreement that the
Secretary of Labor finds to be a collective bargaining agreement between
employee representatives and the employer, which agreement satisfies
section 7701(a)(46) and Sec. 301.7701-17T (Temporary), are included in
determining the number of employees in the top-paid group.
(B) Percentage exclusion provision. If 90 percent or more of the
employees of the employer are covered under collective bargaining
agreements that the Secretary of Labor finds to be collective bargaining
agreements between employee representatives and the employer, which
agreements satisfy section 7701(a)(46) and Sec. 301.7701-17T
(Temporary), and the plan being tested covers only employees who are not
covered under such agreements, then the employees who are covered under
such collective bargaining agreements are not counted in determining the
number of noncollective bargaining employees who will be included in the
top-paid group for purposes of testing such plan. In addition, such
employees are not included in the top-paid group for such purposes.
Thus, if the conditions of this paragraph (b)(1)(iii)(B) are satisfied,
a separate calculation is required to determine the number and identity
of noncollective bargaining employees who will be highly compensated
employees by reason of receiving over $50,000 and being in the top-paid
group of employees for purposes of testing those plans that cover only
noncollective bargaining employees.
(2) Alternative exclusion provisions--(i) Age and service exclusion
election. An employer may elect, on a consistent and uniform basis, to
modify the permissible exclusions set forth in paragraph (b)(1)(i) (A),
(B), (C), and (D) of this A-9 by substituting any shorter period of
service or lower age than that specified in such paragraph. These
exclusions may be modified to substitute a zero service or age
requirement.
[[Page 654]]
(ii) Election not to apply percentage exclusion provision. An
employer may elect not to exclude employees under the rules in paragraph
(b)(1)(iii)(B) of this A-9.
(iii) Method of election. [Reserved]. See Sec. 1.414(q)-1, Q&A-
9(b)(2)(iii) for further information.
(c) Identification of top-paid group members. With the exception of
the paragraph (b)(1)(iii) of this A-9 exclusion for certain employees
covered by collective bargaining agreements, the exclusions in paragraph
(b)(1) of this A-9 are not applicable for purposes of identifying the
particular employees in the top-paid group. Thus, for example, even if
an employee who normally works for less than 17\1/2\ hours is excluded
in determining the number of employees in the top-paid group such
employee may be a member of the top-paid group. Similarly, if during a
determination year, employee A receives over $75,000 and is one of the
top-100 employees ranked by compensation, then employee A is a highly
compensated active employee for such determination year. This is true
even though employee A has worked less than six months and thus may be
excluded in determining the number of persons in the top-paid group for
the determination year.
(d) Example. Paragraphs (b) and (c) of this A-9 are illustrated by
the following example:
Example. Employer X has 200 active employees during the 1989
determination year, 100 of whom normally work less than 17\1/2\ hours
per week during such year and 80 of whom normally work less than 15
hours per week during such year. X elects to exclude all employees who
normally work less than 15 hours per week in determining the number of
employees in the top-paid group. Thus, X excludes 80 employees in
determining the number of employees in the top-paid group. X's top-paid
group for the 1989 determination year consists of 20% of 120 or 24
employees. All 200 of X's employees must then be ranked in order by
compensation received during the year, and the 24 employees X paid the
greatest amount of compensation during the year are top-paid employees
with respect to X for the 1989 determination year.
(e) 17\1/2\ hour rule--(1) In general. The determination of whether
an employee normally works less than 17\1/2\ hours per week is made
independently for each year based on the rules in paragraph (e)(2) and
(3) of this A-9. In making this determination, weeks during which the
employee did not work for the employer are not considered. Thus, for
example, if an employee normally works twenty hours a week for twenty-
five weeks during the fall and winter school quarters, 10 hours a week
for the 12 week spring quarter, and does not work for the employer
during the three-month summer quarter, such employee is treated as
normally working more than 17\1/2\ hours per week under the rule of this
paragraph (e).
(2) Deemed above 17\1/2\. An employee who works 17\1/2\ hours a week
or more, for more than fifty percent of the total weeks worked by such
employee during the year, is deemed to normally work more than 17\1/2\
hours a week for purposes of this rule.
(3) Deemed below 17\1/2\. An employee who works less than 17\1/2\
hours a week for fifty percent or more of the total weeks worked by such
employee during the year is deemed to normally work less than 17\1/2\
hours a week for purposes of this rule.
(4) Application. The determination provided for in paragraph (e)(1),
(2), and (3) of this A-9 may be made separately with respect to each
employee, or on the basis of groups of employees who fall within
particular job categories as established by the employer on a reasonable
basis. For example, under the rule of this paragraph (e)(4) an employer
may exclude all office cleaning personnel if, for the year in question,
the employees performing this function normally work less than 17\1/2\
hours a week. This is true even though one or more employees within this
group normally work in excess of 17\1/2\ hours. The election to make
this determination on the basis of individuals or groups is operational
and does not require a plan provision.
(5) Application based on groups. (i) Groups of employees who perform
the same job are not required to be considered as one category for
purposes of the rule in paragraph (e)(4) of this A-9. Thus, for example,
an employer supermarket may determine its highly compensated employees
by excluding part-time grocery checkers if such personnel normally work
less than 17\1/2\
[[Page 655]]
hours a week while continuing to include full-time personnel performing
this function. In general, 80 percent of the positions within a
particular job category must be filled by employees who normally work
less than 17\1/2\ hours a week before any employees may be excluded
under this rule on the basis of their membership in that job category.
(ii) Alternatively, an employer may exclude employees who are
members of a particular job category if the median number of hours of
service credited to employees in that category during a determination or
look-back year is 500 or less.
(f) 6-month rule--(1) In general. The determination of whether
employees normally work during not more than 6 months in any year is
made on the basis of the facts and circumstances of the particular
employer as evidenced by the employer's customary experience in the
years preceding the determination year. An employee who works on one day
during a month is deemed to have worked during that month.
(2) Application of prior year experience. In making the
determination under this paragraph (f), the experience for years
immediately preceding the determination year will generally be weighed
more heavily than that of earlier years. However, this emphasis on more
recent years is not appropriate if the data for a particular year
reflects unusual circumstances. For example, if fishermen working for
employer X worked 9 months in 1987 and 1988, 8 months in 1989, and then,
because of abnormal ice conditions, worked only 5 months in 1990, such
fishermen could not be excluded under this rule in 1990. Furthermore,
the data with respect to 1990 would not be weighed more heavily in
making a determination with respect to subsequent years.
(3) Individual or group basis. This determination may be made
separately with respect to each employee or on the basis of groups of
employees who fall within particular job categories in the manner set
forth in paragraph (e)(4) of this A-8.
Q-10. For purposes of determining the group of highly compensated
employees, which employees are officers and which officers must be
included in the highly compensated group?
A-10: (a) In general. Subject to the limitations set forth in
paragraph (b) of this A-10 and the top-100 employee rule set forth in A-
2, an employee is an includible officer for purposes of this section and
is a member of the group of highly compensated employees if such
employee is an officer of the employer (within the meaning of section
416(i) and Sec. 1.416-1 A-T 13 & A-T 15) at any time during the
determination year or look-back year and receives compensation during
such year that is greater than 150 percent of the dollar limitation in
effect under section 415(c)(1)(A) for the calendar year in which the
determination or look-back year begins. In addition, an officer who does
not meet the 415(c)(1)(A) dollar limitation requirement may be an
includible officer based on the minimum inclusion rules set forth in
paragraph (c) of this A-10.
(b) Maximum limitation--(1) In general. Nor more than 50 employees
(or, if lesser, the greater of 3 employees or 10 percent of the
employees without regard to any exclusions) shall be treated as officers
for purposes of this provision in determining the group of highly
compensated employees for any determination year or look-back year.
(2) Total number of employees. The total number of employees for
purposes of the limitation in this paragraph (b) is the number of
employees the employer has during the particular determination year or
look-back year. For purposes of this A-10, employees include only those
individuals who perform services for the employer during the
determination or look-back year. The exclusions applicable for purposes
of determining the number of employees in the top-paid group are not
applicable for purposes of the limitations in this paragraph (b).
(3) Inclusion ranking. If the number of the employer's officers who
satisfy paragraph (a) of this A-10 during either the determination year
or the look-back year exceeds the limitation under this paragraph (b),
then the officers who will be considered as includible officers for
purposes of this rule are those who receive the greatest compensation
from the employer during such determination or look-back year.
[[Page 656]]
The definition of compensation in A-13 is to be used for this purpose.
(c) Minimum inclusion rule. This paragraph (c) is applicable when no
officer of the employer satisfies the compensation requirements of
paragraph (a) of this A-10 during either a determination year or look-
back year. In such case, the highest paid officer of the employer for
such year is treated as a highly compensated employee by reason of being
an officer, without regard to the amount of compensation paid to such
officer in relation to the section 415(c)(1)(A) dollar amount for the
year. This is true whether or not such employee is also a highly
compensated employee on any other basis. Thus, for example, if no
officer of employer X meets the compensation requirements of paragraph
(a) of this A-10 during the 1989 look-back year, and employee A is both
the highest paid officer during such year and a 5-percent owner,
employee A is treated as an includible officer satisfying the minimum
inclusion rules of this paragraph.
(d) Separate application. The maximum and minimum officer inclusion
rules of paragraphs (b) and (c) of this A-10 apply separately with
respect to the determination year calculation and the look-back year
calculation. Thus, for example, if no officer of employer X receives
compensation above the threshold amount in paragraph (a) of this A-10
during either the determination year or look-back year, application of
the minimum inclusion rule would result in the officer of employer X who
received the greatest compensation during the look-back year being
treated as a highly compensated employee and, in addition, the officer
of employer X who receives the most compensation during the
determination year would be included in the highly compensated group if
such officer is also in the top-100 employees of employer X for such
year. Thus, two officers may be treated as highly compensated active
employees for a determination year by reason of the provisions of the
minimum inclusion rule.
Q-11: To what extent must family members who are employed by the
same employer be aggregated for purposes of section 414(q)?
A-11: (a) Family aggregation--(1) In general. Aggregation is
required with respect to an employee who is, during a particular
determination year or look-back year, a family member (as defined in A-
12) of either (i) a 5-percent owner who is an active or former employee
or (ii) a highly compensated employee who is one of the ten most highly
compensated employees ranked on the basis of compensation paid by the
employer during such year.
(2) Aggregation of contributions or benefits. As prescribed in
regulations under the provisions to which section 414(q) is applicable,
a family member and a 5-percent owner or top-10 highly compensated
employee aggregated under this rule are generally treated as a single
employee receiving an amount of compensation and a plan contribution or
benefit that is based on the compensation, contributions, and benefits
of such family member and 5-percent owner or top-10 highly compensated
employee.
(b) Exclusion status irrelevant. Family members are subject to this
aggregation rule whether or not they fall within the categories of
employees that may be excluded for purposes of determining the number of
employees in the top-paid group and whether or not they are highly
compensated employees when considered separately.
(c) Order of determination--(1) Determination of highly compensated
employees. The determination of which employees are highly compensated
employees and which highly compensated employees are among the ten most
highly compensated employees in making the look-back year calculation or
the determination year calculation for a determination year will be made
prior to the application of the rules in paragraph (a) of this A-11.
(2) Determination of top-paid group and top-100 employees. The
determination of the number and identity of employees in the top-paid
group under the look-back year calculation or the determination year
calculation for a determination year and the identity of individuals in
the top-100 employees under the determination year calculation for a
determination year is made prior to application of the rules in
paragraph (a) of this A-11.
[[Page 657]]
(d) Determination period. The rules under paragraph (a) of this A-11
apply separately to the determination year and the look-back year. Thus,
assuming there are no 5-percent owners, if employees A, B, C, D, E, F,
G, H, I and J are the top 10 highly compensated employees in the 1988
look-back year, and employees F, G, H, I, J, K, L, M, N and O are the
top 10 highly compensated employees in the 1989 determination year, then
family aggregation would be required with respect to all fifteen of such
employees (i.e. employees A, B, C, D, E, F, G, H, I, J, K, L, M, N, and
O).
Q-12: Which individuals are family members for purposes of the
aggregation rules in section 414(a)(6)(A) and A-11?
A-12: (a) Definition of family member. Individuals who are family
members for purposes of these provisions include, with respect to any
employee or former employee, such employee's or former employee's spouse
and lineal ascendants or descendants and the spouses of such lineal
ascendants and descendants. In determining whether an individual is a
family member with respect to an employee or former employee, legal
adoptions shall be taken into account.
(b) Test period. If an individual is a family member with respect to
an employee or former employee on any day during the year, such
individual is treated as a family member for the entire year. Thus, for
example, if an individual is a family member with respect to an employee
on the first day of a year, such individual continues to be a family
member with respect to such employee throughout the year even though
their relationship changes as a result of death or divorce.
Q-13: How is ``compensation'' determined for purposes of determining
the group of ``highly compensated employees.''
A-13: (a) In general. For purposes of section 414(q), the term
``compensation'' means compensation within the meaning of section
415(c)(3) without regard to sections 125, 402(a)(8), and 402(h)(1)(B)
and, in the case of employer contributions made pursuant to a salary
reduction agreement, without regard to section 403(b). Thus,
compensation includes elective or salary reduction contributions to a
cafeteria plan, cash or deferred arrangement or tax-sheltered annuity.
(b) Determination period. For purposes of determining the group of
highly compensated employees, compensation must be calculated on the
basis of the applicable period for the determination year and look-back
year respectively.
(c) Compensation taken into account. Only compensation received by
an employee during the determination year or during the look-back year
is considered in determining whether such employee is a highly
compensated active employee under either the look-back year calculation
or determination year calculation for such determination year. Thus,
compensation is not annualized for purposes of determining an employee'
compensation in the determination year or the look-back year in applying
the rules of paragraph (a) of this A-13.
Q-14: What periods must be used for determining who is a highly
compensated employee for a determination year?
A-14: (a) Determination year and look-back year--(1) In general. For
purposes of determining the group of highly compensated employees for a
determination year, the determination year calculation is made on the
basis of the applicable year of the plan or other entity for which a
determination is being made and the look-back year calculation is made
on the basis of the twelve month period immediately preceding such year.
Thus, in testing plans X and Y of an employer, if plan X has a calendar
year plan year and plan Y has a July 1 to June 30 plan year, the
determination year calculation and look-back year calculation for plan X
must be made on the basis of the calendar year. Similarly, the
determination year calculation and look-back year calculation for plan Y
must be made on the basis of the July 1 to June 30 year.
(2) Applicable year. For purposes of this A-14, the applicable year
is the plan year of the qualified plan or other employee benefit
arrangement to which the definition of highly compensated employees is
applicable as defined in the written plan document or
[[Page 658]]
otherwise identified in regulations pursuant to sections to which the
definition of highly compensated employees is applicable. To the extent
that the definition of highly compensated employees is applicable to
entities of other arrangements that do not have an otherwise identified
plan year, then either the calendar year of the employer's fiscal year
may be treated as the plan year.
(3) Look-back year. The look-back year is never less than a twelve
month period.
(b) Calendar year calculation election--(1) In general. An employer
may elect to make the look-back year calculation for a determination
year on the basis of the calendar year ending with or within the
applicable determination year (or, in the case of a determination year
that is shorter than twelve months, the calendar year ending with or
within the twelve-month period ending with the end of the applicable
determination year). In such case, the employer must make the
determination year calculation for the determination year on the basis
of the period (if any) by which the applicable determination year
extends beyond such calendar year (i.e., the lag period). If the
applicable year for which the determination is being made is the
calendar year, the employer still may elect to make the calendar year
calculation election under this A-14(b). In such case, the look-back
year calculation is made on the basis of the calendar year determination
year and, because there is no lag period, a separate determination year
calculation under A-3(a)(2) of this Sec. 1.414(q)-1 is not required.
(2) Lag period calculation. In making the determination year
calculation under A-3(a)(2) of this Sec. 1.414(q)-1 on the basis of the
lag period, the dollar amounts applicable under A-3(a)(1) (B) and (C) of
this Sec. 1.414(q)-1 are to be adjusted by multiplying such dollar
amounts by a fraction, the numerator of which is the number of calendar
months that are included in the lag period and the denominator of which
is twelve.
(3) Determination of active employees. An employee will be
considered an active employee for purposes of a determination year for
which the calendar year calculation election is in effect so long as
such employee performs services for the employer during the applicable
year for which the determination is being made. This is the case even if
such employee does not perform services for the employer during the lag-
period for such determination year.
(4) Election requirement. If the employer elects to make the
calendar year calculation election with respect to one plan, entity, or
arrangement, such election must apply with respect to all plans,
entities, and arrangements of the employer. In addition, such election
must be provided for in the plan.
(c) Change in applicable years. Where there is a change in the
applicable year for which a determination is being made with respect to
a plan entity, or other arrangement that is not subject to the calendar
year calculation election, the look-back year calculation for the short
applicable year is to be made on the basis of the twelve month period
preceding the short applicable year (i.e., generally, the old applicable
year) and the determination year calculation for the short applicable
year is to be made on the basis of the short applicable year. In
addition, the dollar amounts under A-3(a)(1) (B) and (C) are to be
adjusted for such determination year calculation as if the short
applicable year were a lag period under paragraph (b)(2) of this A-14.
(d) Example. The following examples illustrates the rules of this A-
14:
Example 1. Employer X has a single plan (Plan A) with an April 1 to
March 31 plan year. Employer X makes no election to use the calendar
year for the determination period. Therefore, in determining the group
of highly compensated employees for the April 1, 1989 to March 31, 1990
plan year, the determination year is the plan year ending March 31, 1990
and the look-back year is the plan year ending March 31, 1989.
Example 2. Assume the same facts given above. With respect to the
plan year beginning in 1990, employer X elects to use the calendar year
for the determination period. Therefore, in determining the group of
highly compensated employees for the April 1, 1990 to March 31, 1991
plan year, the lag-period determination year is the period from January
1, 1991, through March 31, 1991, and the applicable look-back year is
the 1990 calendar year.
[[Page 659]]
Example 3. Employer Y has a single plan (Plan B) with a calendar
plan year. With respect to the plan year beginning in 1990, employer Y
elects to make the look-back year calculation for the 1990 determination
year on the basis of the calendar year ending with or within the 1990
determination year. Because employer Y's determination year is the 1990
calendar year there is no lag period and employer Y determines the group
of highly compensated employees for purposes of the 1990 calendar plan
year on the basis of such plan year alone.
Q-15: Is there any transition rule in determining the group of
highly compensated employees for 1987 and 1988?
A-15: (a) In general. Solely for purposes of section 401(k)(3) and
(m)(2) and solely for twelve-month plan years beginning in 1987 and
1988, an eligible employer may elect to define the group of highly
compensated employees as the group consisting of 5-percent owners of the
employer at any time during the plan year and employees who receive
compensation in excess of $50,000 during the plan year. This rule would
apply in lieu of the look-back year calculation and determination year
calculation otherwise applicable under A-3(a) of this Sec. 1.44(q)-1. In
addition, an eligible employer may elect to make the determinations
permitted under this transition rule on the basis of the calendar year
ending in the plan year and the period by which such plan year extends
beyond such calendar year, in accordance with the rules of A-14(b), in
lieu of making the determinations under this transition rule on the
basis of the plan year for which the determinations are being made.
(b) Eligible employers. An employer is an eligible employer under
this A-15 if such employer satisfies both of the following requirements:
(1) The employer does not maintain any top-heavy plan within the
meaning of section 416 at any time during 1987 and 1988; and
(2) Under each plan of the employer to which section 401(k)(3) or
401(m)(2) is applicable, the group of eligible employees that comprises
the highest 25% of eligible employees ranked on the basis of
compensation includes at least one employee whose compensation is
$50,000 or below. This requirement must be met separately with respect
to each such plan of the employer.
(c) Uniformity requirement. An eligible employer may not make the
election under paragraph (a) of this A-15 unless the election applies to
all of the plans maintained by the employer to which section 401(k)(3)
or 401(m)(2) applies.
(d) Election requirements. This election is operational and does not
require a plan provision.
[T.D. 8173, 53 FR 4967, Feb. 19, 1988, as amended by T.D. 8334, 56 FR
3977, Feb. 1, 1991; T.D. 8548, 59 FR 32916, June 27, 1994]
Sec. 1.414(r)-0 Table of contents.
(a) In general. Sections 1.414(r)-1 through 1.414(r)-11 provide
rules for determining whether an employer is treated as operating
qualified separate lines of business under section 414(r) of the
Internal Revenue Code of 1986 as added to the Code by section 1115(a) of
the Tax Reform Act of 1986 (Pub. L. No. 99-514), as well as rules for
applying the requirements of sections 410(b), 401(a)(26), and 129(d)(8)
separately with respect to the employees of each qualified separate line
of business of an employer. Paragraph (b) of this section contains a
listing of the headings of Secs. 1.414(r)-1 through 1.414(r)-11.
Paragraph (c) of this section provides a flowchart showing how the major
provisions of Secs. 1.414(r)-1 through 1.414(r)-6 are applied.
(b) Table of contents. The following is a listing of the headings of
Secs. 1.414(r)-1 through 1.414(r)-11.
Sec. 1.414(r)-1 Requirements applicable to qualified separate lines of
business.
(a) In general.
(b) Conditions under which an employer is treated as operating qualified
separate lines of business.
(1) In general.
(2) Qualified separate line of business.
(i) In general.
(ii) Line of business.
(iii) Separate line of business.
(iv) Qualified separate line of business.
(A) In general.
(B) Fifty-employee requirement.
(C) Notice requirement.
(D) Requirement of administrative scrutiny.
(3) Determining the employees of a qualified separate line of
business.
(c) Separate application of certain Code requirements to employees of a
qualified separate line of business.
(1) In general.
(2) Separate application of section 410(b).
[[Page 660]]
(i) General rule.
(ii) Special rule for employer-wide plans.
(3) Separate application of section 401(a)(26).
(i) General rule.
(ii) Special rule for employer-wide plans.
(4) Separate application of section 129(d)(8). [Reserved]
(5) Separate application of other Code requirements.
(d) Application of requirements.
(1) In general.
(2) Interpretation.
(3) Separate operating units.
(4) Certain mergers and acquisitions.
(5) Governmental and tax-exempt employers.
(i) General rule.
(ii) Additional rules. [Reserved]
(6) Testing year basis of application.
(i) Section 414(r).
(ii) Sections 410(b), 401(a)(26), and 129(d)(8).
(7) Averaging rules.
(8) Definitions.
(9) Effective dates.
(i) General rule.
(ii) Reasonable compliance.
(A) In general.
(B) Determination of reasonable compliance.
(C) Effect on other plans.
(e) Additional rules.
Sec. 1.414(r)-2 Line of business.
(a) General rule.
(b) Employer determination of its lines of business.
(1) In general.
(2) Property and services provided to customers.
(i) In general.
(ii) Timing of provision of property or services.
(3) Employer designation.
(i) In general.
(ii) Ability to combine unrelated types of property or services in a
single line of business.
(iii) Ability to separate related types of property or services into
two or more lines of business.
(iv) Affiliated service groups.
(c) Examples.
(1) In general.
(2) Examples illustrating employer designation.
(3) Examples illustrating property and services provided to
customers.
Sec. 1.414(r)-3 Separate line of business.
(a) General rule.
(b) Separate organization and operation.
(1) In general.
(2) Separate organizational unit.
(3) Separate financial accountability.
(4) Separate employee workforce.
(5) Separate management.
(c) Supplementary rules.
(1) In general.
(2) Determination of separate employee workforce.
(3) Determination of separate management.
(4) Employees taken into account.
(5) Services taken into account.
(i) Provision of services to a separate line of business.
(ii) Period for which services are provided.
(iii) Optional rule for employees who change status.
(A) In general.
(B) Change in employee's status.
(6) Examples of the separate employee workforce requirement.
(7) Examples of the separate management requirement.
(d) Optional rule for vertically integrated lines of business.
(1) In general.
(2) Requirements.
(3) Optional rule.
(i) Treatment of employees.
(ii) Purposes for which optional rule applies.
(4) Examples.
Sec. 1.414(r)-4 Qualified separate line of business--fifty-employee and
notice requirements.
(a) In general.
(b) Fifty-employee requirement.
(c) Notice requirement.
(1) General rule.
(2) Effect of notice.
Sec. 1.414(r)-5 Qualified separate line of business--administrative
scrutiny requirement--safe harbors.
(a) In general.
(b) Statutory safe harbor.
(1) General rule.
(2) Highly compensated employee percentage ratio.
(3) Employees taken into account.
(4) Ten-percent exception.
(5) Determination based on preceding testing year.
(6) Examples.
(c) Safe harbor for separate lines of business in different industries.
(1) In general.
(2) Optional rule for foreign operations.
(3) Establishment of industry categories.
(4) Examples.
(d) Safe harbor for separate lines of business that are acquired through
certain mergers and acquisitions.
(1) General rule.
(2) Employees taken into account.
(3) Transition period.
(4) Examples.
(e) Safe harbor for separate lines of business reported as industry
segments.
[[Page 661]]
(1) In general.
(2) Reported as an industry segment in conformity with Form 10-K or
Form 20-F.
(3) Timely filing of Form 10-K or 20-F.
(4) Examples.
(f) Safe harbor for separate lines of business that provide same average
benefits as other separate lines of business.
(1) General rule.
(2) Separate lines of business benefiting disproportionate number of
nonhighly compensated employees.
(i) Applicability of safe harbor.
(ii) Requirement.
(3) Separate lines of business benefiting disproportionate number of
highly compensated employees.
(i) Applicability of safe harbor.
(ii) Requirement.
(4) Employees taken into account.
(5) Example.
(g) Safe harbor for separate lines of business that provide minimum or
maximum benefits.
(1) In general.
(2) Minimum benefit required.
(i) Applicability.
(ii) Requirement.
(iii) Defined benefit minimum.
(A) In general.
(B) Normal form and equivalent benefits.
(C) Compensation definition.
(D) Average compensation requirement.
(E) Special rules.
(iv) Defined contribution minimum.
(A) In general.
(B) Modified allocation definition for averaging.
(3) Maximum benefit permitted.
(i) Applicability.
(ii) Requirement.
(iii) Defined benefit maximum.
(A) In general.
(B) Determination of defined benefit maximum.
(C) Adjustment for different compensation definitions.
(D) Adjustment for certain subsidies.
(iv) Defined contribution maximum.
(4) Duplication of benefits or contributions.
(i) Plans of the same type.
(ii) Plans of different types.
(iii) Special rule for floor-offset arrangements.
(5) Certain contingency provisions ignored.
(6) Employees taken into account.
Sec. 1.414(r)-6 Qualified separate line of business--administrative
scrutiny requirement--individual determinations.
(a) In general.
(b) Authority to establish procedures.
Sec. 1.414(r)-7 Determination of the employees of an employer's
qualified separate lines of business.
(a) Introduction.
(1) In general.
(2) Purposes for which this section applies.
(b) Assignment procedure.
(1) In general.
(2) Assignment for the first testing day.
(3) Assignment of new employees for subsequent testing days.
(4) Special rule for employers using annual option under section
410(b).
(c) Assignment and allocation of residual shared employees.
(1) In general.
(2) Dominant line of business method of allocation.
(i) In general.
(ii) Dominant line of business.
(iii) Employee assignment percentage.
(A) Determination of percentage.
(B) Employees taken into account.
(iv) Option to apply reduced percentage.
(v) Examples.
(3) Pro-rata method of allocation.
(i) In general.
(ii) Allocation procedure.
(iii) Examples.
(4) HCE percentage ratio method of allocation.
(i) In general.
(ii) Highly compensated employee percentage assignment ratio.
(iii) Allocation procedure.
(5) Small group method.
(i) In general.
(ii) Size of group.
(iii) Composition of qualified separate line of business.
(iv) Reasonable allocation.
Sec. 1.414(r)-8 Separate application of section 410(b).
(a) General rule.
(b) Rules of separate application.
(1) In general.
(2) Satisfaction of section 410(b)(5)(B) on an employer-wide basis.
(i) General rule.
(ii) Application of facts and circumstances requirements under
nondiscriminatory classification test.
(iii) Modification of unsafe harbor percentage for plans satisfying
ratio percentage test at 90 percent level.
(A) General Rule.
(B) Facts and circumstances alternative.
(3) Satisfaction of section 410(b) on a qualified-separate-line-of-
business basis.
(4) Examples.
(c) Coordination of section 401(a)(4) with section 410(b).
(1) General rule.
(2) Examples.
(d) Supplementary rules.
[[Page 662]]
(1) In general.
(2) Definition of plan.
(3) Employees of a qualified separate line of business.
(4) Consequences of failure.
Sec. 1.414(r)-9 Separate application of section 401(a)(26).
(a) General rule.
(b) Requirements applicable to a plan.
(c) Supplementary rules.
(1) In general.
(2) Definition of plan.
(3) Employees of a qualified separate line of business.
(4) Consequences of failure.
Sec. 1.414(r)-10 Separate application of section 129(d)(8). [Reserved]
Sec. 1.414(r)-11 Definitions and special rules.
(a) In general.
(b) Definitions.
(1) In general.
(2) Substantial-service employee.
(3) Top-paid employee.
(4) Residual shared employee.
(5) Testing year.
(6) Testing day.
(7) First testing day.
(8) Section 401(a)(26) testing day.
(c) Averaging rules.
(1) In general.
(2) Specified provisions.
(3) Averaging of large fluctuations not permitted.
(4) Consistency requirements.
(c) Flowchart. The following is a flowchart showing how the major
provisions of Secs. 1.414(r)-1 through 1.414(r)-6 are applied.
[[Page 663]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.015
[T.D. 8376, 56 FR 63434, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32916, June 27, 1994]
Sec. 1.414(r)-1 Requirements applicable to qualified separate lines of business.
(a) In general. Section 414(r) prescribes the conditions under which
an employer is treated as operating qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business under section 414(r), certain requirements under the
Code may be applied separately with respect to the employees of
[[Page 664]]
each qualified separate line of business. These requirements are limited
to the minimum coverage requirements of section 410(b) (including the
nondiscrimination requirements of section 401(a)(4)), the minimum
participation requirements of section 401(a)(26), and the 55-percent
average benefits test of section 129(d)(8). This section provides the
exclusive rules for determining whether an employer is treated as
operating qualified separate lines of business under section 414(r), as
well as rules for applying the requirements of sections 410(b),
401(a)(26), and 129(d)(8) separately with respect to the employees of a
qualified separate line of business.
(b) Conditions under which an employer is treated as operating
qualified separate lines of business--(1) In general. An employer is
treated as operating qualified separate lines of business under section
414(r) only if all property and services provided by the employer to its
customers are provided exclusively by qualified separate lines of
business. Thus, once an employer has determined its qualified separate
lines of business under paragraph (b)(2) of this section, no portion of
the employer may remain that is not included in a qualified separate
line of business. In addition, once the employer has determined the
employees of its qualified separate lines of business under paragraph
(b)(3) of this section, every employee must be treated as an employee of
a qualified separate line of business, and no employee may be treated as
an employee of more than one qualified separate line of business.
(2) Qualified separate line of business--(i) In general. A qualified
separate line of business is a portion of the employer that is a line of
business within the meaning of paragraph (b)(2)(ii) of this section,
that is also a separate line of business within the meaning of paragraph
(b)(2)(iii) of this section, and, finally, that satisfies the
requirements of section 414(r)(2) in accordance with paragraph
(b)(2)(iv) of this section.
(ii) Line of business. A line of business is a portion of an
employer that is identified by the property or services it provides to
customers of the employer. For this purpose, the employer is permitted
to determine the lines of business it operates by designating the
property and services that each of its lines of business provides to
customers of the employer. Rules for determining an employer's lines of
business are provided in Sec. 1.414(r)-2.
(iii) Separate line of business. A separate line of business is a
line of business that is organized and operated separately from the
remainder of the employer. The determination of whether a line of
business is organized and operated separately from the remainder of the
employer is made on the basis of objective criteria. These criteria
generally require that the line of business be organized into one or
more separate organizational units (e.g., corporations, partnerships, or
divisions), that the line of business constitute one or more distinct
profit centers within the employer, and that no more than a moderate
overlap exist between the employee workforce and management employed by
the line of business and those employed by the remainder of the
employer. Rules for determining whether a line of business is organized
and operated separately from the remainder of the employer and thus
constitutes a separate line of business are provided in Sec. 1.414(r)-3.
These rules include an optional rule for vertically integrated lines of
business.
(iv) Qualified separate line of business--(A) In general. A
qualified separate line of business must satisfy the three statutory
requirements in section 414(r)(2). A separate line of business that
satisfies these three statutory requirements in accordance with
paragraphs (b)(2)(iv)(B) through (b)(2)(iv)(D) of this section
constitutes a qualified separate line of business.
(B) Fifty-employee requirement. Under section 414(r)(2)(A), a
separate line of business must have at least 50 employees. Rules for
determining whether this requirement is satisfied are provided in
Sec. 1.414(r)-4(b).
(C) Notice requirement. Under section 414(r)(2)(B), the employer
must notify the Secretary that it treats itself as operating qualified
separate lines of business under section 414(r) for purposes of applying
the requirements of section 410(b), 401(a)(26), or 129(d)(8) separately
with respect to the employees of the separate line of business.
[[Page 665]]
Rules and procedures for complying with this requirement are provided in
Sec. 1.414(r)-4(c).
(D) Requirement of administrative scrutiny. Under section
414(r)(2)(C), a separate line of business must pass administrative
scrutiny. A separate line of business may satisfy this requirement in
one of two ways. First, a separate line of business that satisfies any
of the safe harbors in Sec. 1.414(r)-5 satisfies the requirement of
administrative scrutiny. These safe harbors implement the statutory safe
harbor of section 414(r)(3) as well as the guidelines prescribed under
section 414(r)(2)(C). Second, a separate line of business that does not
satisfy any of the safe harbors in Sec. 1.414(r)-5 nonetheless satisfies
the requirement of administrative scrutiny if the employer requests and
receives an individual determination from the Commissioner that the
separate line of business satisfies the requirement of administrative
scrutiny. Rules and procedures applicable to requesting and receiving an
individual determination are provided in Sec. 1.414(r)-6. A separate
line of business is permitted to satisfy the requirement of
administrative scrutiny in any manner permitted under this paragraph
(b)(2)(iv)(D), regardless of how any other separate line of business of
the employer satisfies the requirement.
(3) Determining the employees of a qualified separate line of
business. In order to apply certain provisions under these regulations,
it is necessary to determine the employees of a qualified separate line
of business. For these purposes, the employees of a qualified separate
line of business consist of all employees who are substantial-service
employees with respect to the qualified separate line of business, and
all other employees who are assigned to the qualified separate line of
business. Rules for making these determinations are provided in
Sec. 1.414(r)-7. These rules apply solely for the purposes specified in
these regulations (see Sec. 1.414(r)-7(a)(2) for a comprehensive listing
of these purposes). These rules do not apply for any other purpose
(e.g., the determination under Sec. 1.414(r)-3 of whether a line of
business is organized and operated separately from the remainder of the
employer).
(c) Separate application of certain Code requirements to employees
of a qualified separate line of business--(1) In general. If an employer
is treated as operating qualified separate lines of business under
section 414(r) in accordance with paragraph (b) of this section, the
requirements of sections 410(b), 401(a)(26), and 129(d)(8) may be
applied separately with respect to the employees of each qualified
separate line of business. Paragraphs (c)(2) through (c)(4) of this
section provide for the separate application of these requirements. In
general, the requirements of a Code section are applied separately with
respect to the employees of a qualified separate line of business by
treating those employees as if they were the only employees of the
employer. Paragraph (c)(5) of this section prescribes the limited
conditions under which other Code requirements may be applied separately
with respect to the employees of a qualified separate line of business.
(2) Separate application of section 410(b)--(i) General rule. Except
as provided in paragraph (c)(2)(ii) of this section, an employer is
permitted to apply the requirements of section 410(b) separately with
respect to the employees of each qualified separate line of business
operated by the employer only if the employer does so with respect to
all its plans, all its employees, and all its qualified separate lines
of business. For this purpose, the requirements of section 410(b)
encompass the requirements of section 401(a)(4) (including, but not
limited to, the permitted disparity rules of section 401(l), the actual
deferral percentage test of section 401(k)(3) and the actual
contribution percentage test of section 401(m)(2)). Rules for applying
section 410(b) separately with respect to the employees of a qualified
separate line of business are provided in Sec. 1.414(r)-8. An employer
may apply the rules of section 414(r) for purposes of section 410(b)
even if it does not apply the rules of section 414(r) for purposes of
section 401(a)(26).
(ii) Special rule for employer-wide plans. Notwithstanding paragraph
(c)(2)(i) of this section, an employer that is treated as operating
qualified
[[Page 666]]
separate lines of business for purposes of section 410(b) in accordance
with paragraph (b) of this section may apply the requirements of section
410(b) on an employer-wide rather than a qualified-separate-line-of-
business basis with respect to any plan (within the meaning of
Sec. 1.414(r)-8(d)(2), but without regard to the mandatory
disaggregation rule of Sec. 1.410(b)-7(c)(4) for portions of a plan that
benefit employees of different qualified separate lines of business)
that benefits a group of employees that satisfies the percentage test of
section 410(b)(1)(A) (i.e., benefits at least 70 percent of the
employer's nonexcludable nonhighly compensated employees). If section
401(a)(4) requires that a group of employees under the plan described in
the preceding sentence satisfy section 410(b) for purposes of satisfying
section 401(a)(4), the percentage test of section 410(b)(1)(A) must be
satisfied by each such group of employees. See Sec. 1.414(r)-8(c). The
rules of this paragraph (c)(2)(ii) are illustrated by the following
example.
Example. Employer A maintains a single profit-sharing plan, Plan W,
and three pension plans, Plans X, Y and Z, each benefiting employees of
a different one of Employer A's three qualified separate lines of
business. Contributions to the profit-sharing plan are made pursuant to
a cash or deferred arrangement in which all employees of Employer A are
eligible to participate. Assume that, as a result, Plan W satisfies the
requirements to be tested under this paragraph (c)(2)(ii). None of the
pension plans benefits more than 70 percent of the nonexcludable
nonhighly compensated employees of Employer A. Employer A is treated as
operating qualified separate lines of business for purposes of applying
section 410(b) to its qualified plans. The requirements of sections
410(b) and 401(a)(4) must therefore be applied to Plans X, Y and Z
separately with respect to the employees of each of the three qualified
separate line of business operated by Employer A. Since Plan W benefits
at least 70 percent of the nonexcludable nonhighly compensated employees
of Employer A, however, the requirements of sections 410(b) and
401(a)(4) (including section 401(k)) may be applied to Plan W on an
employer-wide basis.
(3) Separate application of section 401(a)(26)--(i) General rule.
Except as provided in paragraph (c)(3)(ii) of this section, an employer
is permitted to apply the requirements of section 401(a)(26) separately
with respect to the employees of each qualified separate line of
business operated by the employer only if the employer does so with
respect to all its plans, all its employees, and all its qualified
separate lines of business. Rules for applying the requirements of
section 401(a)(26) separately with respect to the employees of a
qualified separate line of business are provided in Sec. 1.414(r)-9. An
employer may apply the rules of section 414(r) for purposes of section
401(a)(26) even if it does not apply the rules of section 414(r) for
purposes of section 410(b).
(ii) Special rule for employer-wide plans. Notwithstanding the first
sentence of paragraph (c)(3)(i) of this section, an employer that is
treated as operating qualified separate lines of business in accordance
with paragraph (b) of this section for purposes of both sections 410(b)
and 401(a)(26) may apply the requirements of section 401(a)(26) on an
employer-wide rather than a qualified-separate-line-of-business basis
with respect to any plan (within the meaning of Sec. 1.414(r)-9(c)(2),
but without regard to the mandatory disaggregation rule of
Sec. 1.401(a)(26)-2(d)(1)(iv) for portions of a plan that benefit
employees of different qualified separate lines of business), but only
if the special rule for employer-wide plans in paragraph (c)(2)(ii) of
this section is applied to the same plan for the same plan year.
(4) Separate application of section 129(d)(8). [Reserved]
(5) Separate application of other Code requirements. Under no
circumstance may the requirements of any section of the Code (other than
a section described in paragraphs (c)(2) through (c)(4) of this section)
be applied separately with respect to the employees of a qualified
separate line of business unless the section specifically cross-
references, or is specifically cross-referenced by, section 414(r). The
Code sections whose requirements may not be applied separately with
respect to the employees of a qualified separate line of business
include, but are not limited to, sections 79(d)(3), 105(h), 117(d)(3),
120(c)(2), 125(g)(3), 127(b)(2), 129(d)(3), 132, 195, 401(a)(3) (as in
effect on September 1, 1974), 414(q)(4),
[[Page 667]]
501(c)(17)(A)(ii), 501(c)(17)(B)(iii), 501(c)(18)(B), and 505(b)(1)(A).
(d) Application of requirements--(1) In general. The requirements of
paragraphs (b) and (c) of this section must be applied in accordance
with the rules in this paragraph (d).
(2) Interpretation. The provisions of this section and of
Secs. 1.414(r)-2 through 1.414(r)-11 are to be interpreted in a
reasonable manner consistent with the purpose of section 414(r) to
recognize an employer's operation of qualified separate lines of
business for bona fide business reasons and not for reasons of evading
the requirements of any section of the Code, including sections 410(b),
401(a)(26), and 129(d)(8). See section 414(r)(1) and (r)(7). Thus, for
example, an employer is not permitted to apply these regulations in a
manner that may literally comply with the other provisions of this
section and of Secs. 1.414(r)-2 through 1.414(r)-11, but that does not
reflect the employer's operation of qualified separate lines of business
for bona fide business reasons.
(3) Separate operating units. No additional requirements beyond
those provided in these regulations apply to a separate operating unit.
Thus, a separate operating unit that satisfies the requirements of
paragraph (b)(2) of this section is deemed to satisfy the geographic
separation requirement of section 414(r)(7) and accordingly is treated
as a qualified separate line of business for all purposes under this
section, including the separate application of section 401(a)(26).
(4) Certain mergers and acquisitions. A portion of an employer that
is acquired in a transaction described in section 410(b)(6)(C) and
Sec. 1.410(b)-2(f) (i.e., an asset or stock acquisition, merger, or
other similar transaction involving a change in the employer of the
employees of a trade or business) is deemed to satisfy the requirements
to be a qualified separate line of business, other than the 50-employee
requirement and the notice requirement of pararaphs (b)(2)(iv)(R) and
(b)(2)(iv)(C) of this section, respectively. In addition, the acquired
employees are not taken into account, and the property and services
provided by the acquired portion to customers of the employer are
disregarded, for purposes of determining whether the employer's
remaining lines of business satisfy the requirements of Secs. 1.414(r)-3
through 1.414(r)-6. The rules in this paragraph (d)(4) apply only for
those testing years with first testing days that fall within the
transition period described in section 410(b)(6)(C). For this purpose,
the transition period described in section 410(b)(6)(C) lasts only for
so long as the conditions in that section are satisfied. For the
definition of ``first testing day,'' see Sec. 1.414(r)-11(b)(7). See
Sec. 1.414(r)-5(d)(4), Example 1, for an example of the application of
the rule in this paragraph (d)(4). See also Sec. 1.414(r)-5(d) for an
administrative scrutiny safe harbor applicable to certain separate lines
of business acquired in a transaction described in this section.
(5) Governmental and tax-exempt employers--(i) General rule. Except
as provided in paragraph (d)(5)(ii) of this section, the rules of this
section are applicable in determining whether section 401(a)(26) is
satisfied by a plan maintained by an employer that is exempt from tax
under Subtitle A of the Internal Revenue Code (including a governmental
plan within the meaning of section 414(d)). Similarly, except as
provided in paragraph (d)(5)(ii) of this section, the rules of this
section are applicable in determining whether section 410(b) is
satisfied by a plan that is subject to section 410(b) (including by
virtue of Sec. 1410(b)-2(e)) and is maintained by an employer that is
exempt from tax under Subtitle A of the Internal Revenue Code (including
a governmental plan within the meaning of section 414(d)).
(ii) Additional rules. [Reserved]
(6) Testing year basis of application--(i) Section 414(r). Whether
an employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with paragraph (b) of this section is
determined on a year-by-year basis with respect to the testing year. It
is therefore possible for an employer to satisfy paragraph (b) of this
section for one testing year and to fail to satisfy it for another
testing year. It is also possible for an employer to satisfy paragraph
(b) of this section for two testing years but to have designated its
lines of business differently in each of those two testing years. In
determining
[[Page 668]]
whether an employer satisfies paragraph (b) of this section for a
testing year, the requirements of that paragraph are applied solely with
respect to the testing year. Thus, all property and services provided by
the employer to its customers during the testing year must be provided
exclusively by portions of the employer that for the testing year
constitute qualified separate lines of business. Furthermore, each
employee of the employer must respectively be treated as an employee of
one and only one of those qualified separate lines of business for all
purposes with respect to the testing year.
(ii) Sections 410(b), 401(a)(26), and 129(d)(8). For purposes of
paragraph (c) of this section, relating to the separate application of
sections 410(b), 401(a)(26), and 129(d)(8) to the employees of a
qualified separate line of business, the determination whether an
employer operates qualified separate lines of business in accordance
with paragraph (b) of this section for a testing year generally applies
for all plan years beginning in the testing year. Rules for the separate
application of sections 410(b), 401(a)(26), and 129(d)(8) are
respectively provided in Secs. 1.414(r)-8, 1.414(r)-9, and 1.414(r)-10.
(7) Averaging rules. The employer is permitted to apply certain
provisions of these regulations on the basis of a consecutive-year
average (not to exceed five consecutive years) under the averaging rules
of Sec. 1.414(r)-11(c).
(8) Definitions. In applying the provisions of this section and of
Sec. Sec. 1.414(r)-2 through 1.414(r)-11, the definitions in
Secs. 1.414(r)-11(b) and 1.410(b)-9 govern, unless otherwise provided.
(9) Effective--(i) General rule. The provisions of this section and
of Sec. Sec. 1.414(r)-2 through 1.414(r)-11 apply to plan years and
testing years beginning on or after January 1, 1994 (or January 1, 1996,
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)).
(ii) Reasonable compliance--(A) In general. With respect to plan
years beginning before the date on which the Commissioner begins issuing
determinations under section 414(r)(2)(C), and on or after the first day
of the first plan year to which section 414(r) applies under section
1112(a) of the Tax Reform Act of 1986, an employer is treated as
operating qualified separate lines of business if the employer
reasonably determines that it meets the requirements of section 414(r)
(other than the requirement of administrative scrutiny under section
414(r)(2)(C)).
(B) Determination of reasonable compliance. Whether an employer
reasonably determines that it meets the requirements of section 414(r)
generally will be determined on the basis of all relevant facts and
circumstances, including the extent to which the employer has resolved
unclear issues in its favor. For the period described in paragraph
(d)(9)(ii)(A) of this section, the Internal Revenue Service will
consider the employer's compliance with the terms of these final
regulations (other than the requirement of administrative scrutiny under
paragraph (b)(2)(iv)(D) of this section) to constitute a reasonable
determination that the employer neets tge reqyurements of section 414(r)
(other than the requirement of administrative scrutiny under section
414(r)(2)(C)).
(C) Effect on other plans. If an employer sponsors a plan that has a
plan year beginning within the period decribed in paragraph
(d)(9)(ii)(A) of this section, the employer's reasonable determination
of its qualified separate lines of business for the testing year in
which that plan year begins, and the allocation of employees to those
qualified separate lines of business, must also be used for purposes of
applying Sec. 1.414(r)-8 and Sec. 1.414(r)-9 for plan years that begin
in that testing year but after the end of the period described in
paragraph (d)(9)(ii)(A) of this section.
(e) 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
qualified separate line of business requirements of section 414(r).
These additional rules may include, for example, new safe harbors in
Sec. 1.414(r)-5.
[T.D. 8376, 56 FR 63437, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32916, June 27, 1994]
[[Page 669]]
Sec. 1.414(r)-2 Line of business.
(a) General rule. A line of business is a portion of an employer
that is identified by the property or services it provides to customers
of the employer. For this purpose, an employer is permitted to determine
its lines of business by designating the property or services that each
of its lines of business provides to customers of the employer.
Paragraph (b) of this section explains how an employer determines its
lines of business for a testing year. Paragraph (c) of this section
provides examples illustrating the application of this section.
(b) Employer determination of its lines of business--(1) In general.
An employer determines its lines of business for a testing year first by
identifying all the property and services it provides to its customers
during the testing year, and then by designating which portion of the
property and services is provided by each of its lines of business.
(2) Property and services provided to customers--(i) In general.
Property, whether real or personal, tangible or intangible, is provided
by an employer to a customer if the employer provides the property to or
on behalf of the customer for consideration. Similarly, services are
provided by an employer to a customer if the employer renders the
services to or on behalf of the customer for consideration. An
individual item of property or service is taken into account under this
paragraph (b)(2) only if the employer provides the item to a person
other than the employer in the ordinary course of a trade or business
conducted by the employer and the person to whom the employer provides
the item is acting in the capacity of a customer of the employer. A type
of tangible property is deemed to be provided to customers of the
employer for purposes of this section if, with respect to a business
that produces or manufactures that type of tangible property, the
employer satisfies the special rule in Sec. 1.414(r)-3(d)(2)(iii)(B) for
vertically integrated businesses.
(ii) Timing of provision of property or services. Generally an
employer determines its lines of business on the basis of the property
and services it provides to its customers for consideration during the
testing year. However, it is not necessary both that property or
services actually be provided, and that consideration for the property
or services actually be paid, during the current testing year. For an
employer to be considered to provide property or services to customers
for consideration during a testing year under this paragraph (b)(2), it
is sufficient that the property or services actually be provided to
customers during the testing year, the consideration actually be paid
during the testing year, or the employer actually incur significant
costs during the testing year associated with the provision of the
property or services to a specified customer or specified customers.
(3) Employer designation--(i) In general. Once the employer has
identified all the property and services it provides to its customers
during the testing year under paragraph (b)(2) of this section, the
employer determines its lines of business for the testing year by
designating which portion of those property and services is provided by
each of its lines of business. For this purpose, the employer must
apportion all the property and services identified under paragraph
(b)(2) of this section among its lines of business. An employer
generally is not required to designate its lines of business for the
testing year in the same manner as it designates its lines of business
for any other testing year.
(ii) Ability to combine unrelated types of property or services in a
single line of business. For purposes of this paragraph (b)(3), there is
no requirement that a line of business provide only one type of property
or service, or only related types of property or services. Nor is there
any requirement that a line of business provide solely property or
solely services. Thus, the employer is permitted to combine in a single
line of business dissimilar types of property or services that are
otherwise unrelated to one another.
(iii) Ability to separate related types of property or services into
two or more lines of business. For purposes of this paragraph (b)(3),
there is no requirement that all property or services of related types
or the same type be provided by a single line of business. Thus, the
employer is permitted to designate two or
[[Page 670]]
more lines of business that provide related types of property or
services, or the same type of property or service. An employer might
designate two or more lines of business that provide property or
services of related types or the same type, for example, where the lines
of business manufacture, prepare, or provide the property or services in
different geographic areas (e.g., in different regions of the country or
the world), or at different levels in the chain of commercial
distribution (e.g., wholesale versus retail), or in different types of
transactions (e.g, sale versus lease), or for different types of
customers (e. g., governmental versus private), or subject to different
legal constraints (e. g., regulated versus unregulated), or if the lines
of business have developed differently (e.g., one line of business was
acquired while another line of business developed internally).
Notwithstanding the foregoing, an employer is not permitted to designate
two or more lines of business that provide property or services of
related types or the same type, if the employer's designation is
unreasonable. An employer's designation would be unreasonable, for
example, if the designation separated two types of property or services
in different lines of business, but the employer did not provide those
types of property or services separately from one another to its
customers. Similarly, an employer's designation would be unreasonable if
it separated two types of property or services in different lines of
business, but the provision of one type of property or service was
merely ancillary or incidental to, or regularly associated with, the
provision of the other type of property or service. See generally
Sec. 1.414(r)-1(d)(2) (requiring an employer's operation of qualified
separate lines of business to be for bona fide business reasons).
(iv) Affiliated service groups. An employer is not permitted to
designate its lines of business in a manner that results in separating
employees of an affiliated service group (within the meaning of section
414(m)) from other employees of the employer. See section 414(r)(8).
(c) Examples--(1) In general. Paragraphs (c)(2) and (c)(3) of this
section provide examples that illustrate the application of this
section.
(2) Examples illustrating employer designation. The following
examples illustrate the application of paragraph (b)(3) of this section
relating to an employer's designation of the property or services
provided to customers by each of its lines of business.
Example 1. Employer A is a domestic conglomerate engaged in the
manufacture and sale of consumer food and beverage products and the
provision of data processing services to private industry. Employer A
provides no other property or services to its customers. Pursuant to
paragraph (b)(3) of this section, Employer A apportions all the property
and services it provides to its customers among three lines of business,
one providing all its consumer food products, a second providing all its
consumer beverage products, and a third providing all its data
processing services. Employer A has three lines of business for purposes
of this section.
Example 2. The facts are the same as in Example 1, except that
Employer A determines that neither the consumer food products line of
business nor the consumer beverage products line of business would
satisfy the separateness criteria of Sec. 1.414(r)-3 for recognition as
a separate line of business. Accordingly, pursuant to paragraph (b)(3)
of this section, Employer A apportions all the property and services it
provides to its customers between only two lines of business, one
providing all its consumer food and beverage products, and a second
providing all its data processing services. Employer A has two lines of
business for purposes of this section.
Example 3. The facts are the same as in Example 2, except that
Employer A also owns and operates a regional commuter airline, a
professional basketball team, a pharmaceutical manufacturer, and a
leather tanning company. Pursuant to paragraph (b)(3) of this section,
Employer A apportions all the property and services it provides to its
customers among three lines of business, one providing all its consumer
food and beverage products, a second providing all its data processing
services, and a third providing all the other property and services
provided to customers through Employer A's regional commuter airline,
professional basketball team, pharmaceutical manufacturer, and leather
tanning company. Even though the third line of business includes
dissimilar types of property and services that are otherwise unrelated
to one another, paragraph (b)(3)(ii) of this section permits Employer A
to combine these property and services in a single line of business.
Employer A has three lines of business for purposes of this section.
Example 4. The facts are the same as in Example 2, except that
Employer A has recently
[[Page 671]]
acquired Corporation L, whose only product is a well-known brand of
gourmet ice cream. Although Employer A manufactures and sells other ice
cream products, it does not manufacture or market the newly acquired
brand of gourmet ice cream except through Corporation L. Pursuant to
paragraph (b)(3) of this section, Employer A apportions all the property
and services it provides to its customers among three lines of business,
one providing only the newly acquired brand of gourmet ice cream, a
second providing all its other consumer food and beverage products
(including the other ice cream products manufactured and sold by
Employer A) and a third providing all its data processing services. Even
though the gourmet ice cream line of business provides the same type of
property as the consumer food and beverage line of business (i.e., ice
cream), paragraph (b)(3)(iii) of this section permits Employer A to
separate its ice cream products between two different lines of business.
Employer A has three lines of business for purposes of this section.
Example 5. The facts are the same as in Example 2, except that
Employer A operates the data processing services portion of its business
in two separate subsidiaries, one serving customers in the eastern half
of the United States and the other serving customers in the western half
of the United States. Pursuant to paragraph (b)(3) of this section,
Employer A apportions all the property and services it provides to its
customers among three lines of business, one providing all its consumer
food and beverage products, a second providing data processing services
to customers in the eastern half of the United States, and a third
providing data processing services to customers in the western half of
the United States. Even though the second and third lines of business
provide the same type of service (i.e., data processing services),
paragraph (b)(3)(iii) of this section permits Employer A to separate its
data processing services into two lines of business. Employer A has
three lines of business for purposes of this section.
Example 6. Employer B is a diversified engineering firm offering
civil, chemical, and aeronautical engineering services to government and
private industry. Employer B provides no other property or services to
its customers. Employer B operates the aeronautical engineering services
portion of its business as two separate divisions, one serving federal
government customers and the other serving customers in private
industry. Pursuant to paragraph (b)(3) of this section, Employer B
apportions all the property and services it provides to its customers
among four lines of business, one providing all its civil engineering
services, a second providing all its chemical engineering services, a
third providing aeronautical engineering services to federal government
customers, and a fourth providing aeronautical engineering services to
customers in private industry. Even though the third and fourth lines of
business include the same type of service (i.e., aeronautical
engineering services), paragraph (b)(3)(iii) of this section permits
Employer B to separate its aeronautical engineering services into two
lines of business. Employer B has four lines of business for purposes of
this section.
Example 7. Among its other business activities, Employer C
manufacturers industrial diesel generators. At no additional cost to its
buyers, Employer C warrants the proper functioning of its diesel
generators for a one-year period following sale. Pursuant to its
warranty, Employer C provides labor and parts to repair or replace any
components that malfunction within the one-year warranty period. Because
Employer C does not provide the industrial diesel generators, on the one
hand, and the warranty repair services and replacement parts, on the
other hand, separately from one another to its customers, under
paragraph (b)(3)(iii) of this section it would be unreasonable for
Employer C to separate these property and services in different lines of
business.
Example 8. Among its other business activities, Employer D leases
office photocopying equipment. Employer D also provides photo-copying
supplies and repair services to its lessees for a separate charge.
Employer D generally does not provide such supplies and repair services
to persons other than its lessees. Lessees of Employer D's equipment are
permitted to use photo-copying supplies and repair services from
suppliers other than Employer D. Because the provision of the photo-
copying supplies and repair services are merely ancillary or incidental
to the provision of the leased photo-copiers, under paragraph
(b)(3)(iii) of this section it would be unreasonable for Employer D to
separate these property and services in different lines of business.
Example 9. Employer E operates a medical clinic. The employees of
the clinic include physicians, nurses, and laboratory technicians, all
of whom participate in providing medical and related services to
patients of the clinic. Under paragraph (b)(3)(iii) of this section, it
would be unreasonable for Employer E to separate the services of the
physicians, nurses, and laboratory technicians in different lines of
business.
Example 10. Employer F is a law firm. The employees of the firm
include lawyers, paralegals, and secretaries, all of whom participate in
renderlng legal and related services to clients of the firm. Under
paragraph (b)(3)(iii) of this section, it would be unreasonable for
Employer F to separate the services of the lawyers, paralegals, and
secretaries in different lines of business.
Example 11. Employer G is a management consulting firm. The
employees of the firm
[[Page 672]]
include management consultants, secretaries, and other support staff
personnel, all of whom participate in rendering management consulting
and related services to clients of the firm. Under paragraph (b)(3)(iii)
of this section, it would be unreasonable for Employer G to separate the
services of the management consultants, secretaries, and other support
staff personnel in different lines of business.
(3) Examples illustrating property and services provided to
customers. The following examples illustrate the application of
paragraph (b)(2) of this section relating to property and services
provided to customers of the employer.
Example 1. Employer H operates several dairy farms and dairy product
processing plants. The dairy farms provide part of their output of milk
and milk by-products to Employer H's dairy product processing plants and
also sell part to retail distributors unrelated to Employer H. The dairy
farms' provision of milk and milk by-products to Employer H's dairy
product processing plants does not constitute the provision of property
or services to customers of Employer H because the milk and milk by-
products are not provided to a person other than employer H. However,
the dairy farms' provision of milk and milk by-products to independent
retail distributors does constitute the provision of property or
services to customers of Employer H under paragraph (b)(2) of this
section.
Example 2. The facts are the same as in Example 1, except that the
dairy farms provide their entire output of milk and milk by-products to
Employer H's dairy product processing plants. The dairy farms' provision
of milk and milk by-products to the dairy product processing plants
generally does not constitute the provision of property or services to
customers of Employer H because the milk and milk by-products are not
provided to a person other than Employer H. However, paragraph (b)(2)(i)
of this section provides a special rule for vertically integrated
businesses that satisfy Sec. 1.414(r)-3(d)(2)(iii)(B). If Sec. 1.414(r)-
3(d)(2)(iii)(B) is satisfied, then, under the special rule of paragraph
(b)(2)(i) of this section, the milk and milk by-products are deemed to
be provided to customers of Employer H.
Example 3. Among its other business activities, Employer J
manufactures automobiles. Employer J operates a cafeteria at one of its
automobile manufacturing facilities. The cafeteria is intended primarily
for use by employees of Employer J, but nonemployees are not prohibited
from using the cafeteria. The cafeteria charges the same prices to
employees and non-employees. Under paragraph (b)(2) of this section, the
provision of cafeteria services to employees of Employer J does not
constitute the provision of property or services to customers of
Employer J, because the cafeteria services are provided to the employees
in their capacity as employees of Employer J and not as customers of
Employer J.
Example 4. Employer K sells books and periodicals to members of the
public and provides telecommunications services to private industry.
Employer K periodically acquires and disposes of businesses in both
asset and stock transactions. In addition, for its own investment
purposes, Employer K acquires and disposes of corporate and other
securities. Under paragraph (b)(2) of this section, the sale by Employer
K of businesses and investment securities does not constitute the
provision of property or services to customers of Employer K, because
the sales are not made in the ordinary course of a trade or business
conducted by Employer K. However, the sale of published materials and
the provision of telecommunications services to persons unrelated to
Employer K does constitute the provision of property or services to
customers of Employer K.
Example 5. Employer L is active in the financial services industry.
Subsidiary 1 of Employer L is a brokerage firm that is regulated as a
broker-dealer under applicable federal and state law. In its capacity as
a dealer, Subsidiary 1 holds in its own inventory securities of
unrelated corporations and regularly sells these securities to unrelated
persons. Under paragraph (b)(2) of this section, the sale by Subsidiary
1 of the securities to unrelated persons constitutes the provision of
property or services to customers of Employer L, because the sales are
made in the ordinary course of Subsidiary 1's trade or business as a
broker-dealer.
Example 6. The facts are the same as in Example 5. Subsidiary 2 of
Employer L is an insurance company that is regulated under applicable
state insurance laws. In managing its investments, Subsidiary 2
regularly makes use of the brokerage services of Subsidiary 1 (which
Subsidiary 1 regularly provides to unrelated persons as well). Under
paragraph (b)(2) of this section, Subsidiary 1's provision of brokerage
services to Subsidiary 2 does not constitute the provision of property
or services to customers of Employer L, because the brokerage services
are not provided to a person other than Employer L. However, Subsidiary
1's provision of brokerage services to unrelated persons does constitute
the provision of property or services to customers of Employer L.
Example 7. Employer M is a shipbuilder. In a testing year, Employer
M enters into a contract with a customer to construct a new cargo ship
for delivery two years later. Employer M incurs significant costs
designing and planning for the production of the new ship during the
testing year, but receives no payments from the customer during that
[[Page 673]]
year. Under paragraph (b)(2) of this section, Employer M is treated as
providing the cargo ship to the customer during the testing year.
Example 8. The facts are the same as in Example 7, except that,
pursuant to a request from the customer, Employer M also incurred
significant costs developing a prototype and submitting a bid on the new
cargo ship in the prior testing year, and that these costs were not
reimbursed by the customer. Under paragraph (b)(2) of this section,
Employer M is also treated as providing the cargo ship to the customer
in the prior testing year.
[T.D. 8376, 56 FR 63439, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32917, June 27, 1994]
Sec. 1.414(r)-3 Separate line of business.
(a) General rule. A separate line of business is a line of business
(as determined under Sec. 1.414(r)-2) that is organized and operated
separately from the remainder of the employer. Paragraph (b) of this
section sets forth the rules for determining whether a line of business
is organized and operated separately from the remainder of the employer.
Paragraph (c) of this section provides certain supplementary rules
necessary to apply the requirements of paragraph (b) of this section, as
well as examples illustrating the application of those requirements.
Paragraph (d) of this section provides an optional rule for lines of
business that are vertically integrated.
(b) Separate organization and operation--(1) In general. A line of
business is organized and operated separately from the remainder of the
employer for a testing year only if it satisfies all the requirements of
paragraphs (b)(2) through (b)(5) of this section for the testing year.
(2) Separate organizational unit. The line of business must be
formally organized as a separate organizational unit or group of
separate organizational units within the employer. For this purpose, an
organizational unit is a corporation, partnership, division, or other
unit having a similar degree of organizational formality. This
requirement must be satisfied on every day of the testing year.
(3) Separate financial accountability. The line of business must be
a separate profit center or group of separate profit centers within the
employer. This requirement must be satisfied on every day of the testing
year. In addition, the employer must maintain books and records that
provide separate revenue and expense information that is used for
internal planning and control with respect to each profit center
comprising the line of business.
(4) Separate employee workforce. The line of business must have its
own separate employee workforce. A line of business has its own separate
workforce only if at least 90 percent of the employees who provide
services to the line of business, and who are not substantial-service
employees with respect to any other line of business, are substantial-
service employees with respect to the line of business. See paragraph
(c)(2) of this section to determine how the percentage in the preceding
sentence is calculated for the testing year.
(5) Separate management. The line of business must have its own
separate management. A line of business has its own separate management
only if at least 80 percent of the employees who are top-paid employees
with respect to the line of business are substantial-service employees
with respect to the line of business. See paragraph (c)(3) of this
section to determine how the percentage in the preceding sentence is
calculated for the testing year.
(c) Supplementary rules--(1) In general. This paragraph (c) provides
certain supplementary rules necessary to apply the requirements of
paragraph (b) of this section, as well as examples illustrating the
application of those requirements.
(2) Determination of separate employee workforce. The percentage in
paragraph (b)(4) of this section is the fraction (expressed as a
percentage)--
(i) The numerator of which is the number of substantial-service
employees with respect to the line of business within the meaning of
Sec. 1.414(r)-11(b)(2); and
(ii) The denominator of which is the total number of employees who
provide services to the line of business within the meaning of paragraph
(c)(5) of this section and who are not substantial-service employees
with respect to any other line of business.
(3) Determination of separate management. The percentage in
paragraph
[[Page 674]]
(b)(5) of this section is the fraction (expressed as a percentage)--
(i) The numerator of which is the number of employees who are both
top-paid employees and substantial-service employees with respect to the
line of business within the meaning of Sec. 1.414(r)-11(b)(3) and (2),
respectively; and
(ii) The denominator of which is the total number of top-paid
employees with respect to the line of business within the meaning of
Sec. 1.414(r)-11(b)(3).
(4) Employees taken into account. For purposes of applying this
paragraph (c), only employees who are employees on the first testing day
are taken into account. For this purpose, there are no excludable
employees except nonresident aliens described in section 410(b)(3)(C).
Consequently, all other employees who are employees on the first testing
day are taken into account, including collectively bargained employees.
For the definition of first testing day, see Sec. 1.414(r)-11(b)(7).
(5) Services taken into account--(i) Provision of services to a line
of business. An employee provides services to a line of business if more
than a negligible portion of the employee's services contributes to
providing the property or services provided by the line of business to
customers of the employer. All of the services of each employee who
provides services to the employer contribute, whether directly or
indirectly, to the provision of property or services to customers of the
employer, and therefore each employee who provides services to the
employer must be treated as providing more than a negligible portion of
the employee's services to one or more lines of business operated by the
employer.
(ii) Period for which services are provided. Only services performed
by an employee during the testing year that contribute to providing the
property or services provided by a line of business to customers are
taken into account. An employee's services during the testing year are
considered to contribute to providing the property or services provided
by a line of business to customers of the employer if--
(A) The employee's services during the testing year contribute to
providing such property or services to customers of the employer during
the testing year; or
(B) It is reasonably anticipated that the employee's services during
the testing year will contribute to providing such property and services
to customers of the employer after the close of the testing year.
(iii) Optional rule for employees who change status--(A) In general.
Solely for purposes of the separateness rules of this section and the
assignment rules of Sec. 1.414(r)-7, if an employee changes status as
described in paragraph (c)(5)(iii)(B) of this section, an employer may,
for up to three consecutive testing years after the base year (within
the meaning of paragraph (c)(5)(iii)(B) (1) or (2) of this section),
treat the employee as providing the same level of service to its lines
of business as the employee provided in the base year.
(B) Change in employee's status. An employee changes status as
described in this paragraph (c)(5)(iii)(B) if--
(1) For a testing year (the base year), the employee was a
substantial-service employee with respect to a qualified separate line
of business of the employer (prior line of business) and, for the
immediately succeeding testing year, the employee is not a substantial-
service employee with respect to that prior line of business; or
(2) For a testing year (the base year), the employee was a residual
shared employee and, for the immediately succeeding testing year, the
employee is a substantial-service employee with respect to a qualified
separate line of business.
(6) Examples of the separate employee workforce requirement. The
following examples illustrate the application of the separate employee
workforce requirement in paragraph (b)(4) of this section and the
supplementary rules of this paragraph (c). Unless otherwise specified,
it is assumed that the employees and their services described in these
examples are taken into account under paragraphs (c) (4) and (5) of this
section for the testing year and that the employer does not use the
option under Sec. 1.414(r)-11(b)(2) to treat employees who provide less
than 75 percent of their services to a line of business as
[[Page 675]]
substantial-service employees with respect to the line of business.
Example 1. Employer A operates three lines of business as determined
under Sec. 1.414(r)-2. One of Employer A's lines of business
manufactures and sells tires and other automotive products. Employee M
is a tire press operator in Employer A's tire factory. Employee N is the
manager of the tire factory. Under these facts, the services of
Employees M and N contribute to providing tires to customers of Employer
A. Both employees therefore provide services to Employer A's tire and
automotive products line of business within the meaning of paragraph
(c)(5) of this section.
Example 2. The facts are the same as in Example 1. In addition, none
of the services of Employees M and N that contribute to providing
property or services to customers contribute to providing any property
or service other than tires to customers of Employer A. Under these
facts, Employees M and N provide at least 75 percent of their respective
services to Employer A's tire and automotive products line of business.
Therefore Employees M and N are substantial-service employees with
respect to Employer A's tire and automotive products line of business
within the meaning of Sec. 1.414(r)-11(b)(2), and do not provide any
services within the meaning of paragraph (c)(5) of this section to any
of Employer A's other lines of business. Moreover, because Employees M
and N provide at least 75 percent of their services to Employer A's tire
and automotive products line of business and are substantial-service
employees with respect to that line, they are disregarded in applying
paragraph (b)(4) of this section to any other line of business, even if
they provide services to the other line.
Example 3. The facts are the same as in Example 2. Employer A's
second line of business manufactures and sells construction machinery,
and Employer A's third line of business manufactures and sells
agricultural equipment. As part of these lines of business, Employer A
operates a construction machinery factory and an agricultural equipment
factory on the same site as the tire factory described in Example 2.
Employer A's facilities at the site include a health clinic and a
fitness center that serve the employees of the construction machinery
factory, the agricultural equipment factory, and the tire factory.
Employee O is a nurse in the health clinic, and Employee P is a fitness
instructor in the fitness center. Both employees therefore provide
services within the meaning of paragraph (c)(5) of this section to
Employer A's tire and automotive products line of business, construction
machinery line of business, and agricultural equipment line of business.
In addition, under these facts, Employer A determines that approximately
33 percent of the services of Employees O and P are provided to each of
Employer A's three lines of business. As a result, neither Employee O or
P provide at least 75 percent of their respective services to any of
Employer A's lines of business. Therefore, Employees O and P are not
substantial-service employees with respect to any of Employer A's three
lines of business within the meaning of Sec. 1.414(r)-11(b)(2).
Example 4. The facts are the same as in Example 3. Employee Q is the
president and chief executive officer of Employer A and is responsible
for reviewing the performance of all Employer A's lines of business.
Under these facts, the services of Employee Q contributes to providing
property and services to customers of each of Employer A's three lines
of business. Employee Q therefore provides services to each of these
three lines of business. Employer A determines that Employee Q provides
the following percentages of his services to Employer A's three lines of
business: tire and automotive products--40 percent; construction
machinery--40 percent, and agricultural equipment--20 percent. Employee
Q does not provide at least 75 percent of his services to any of
Employer A's lines of business. Therefore, Employee Q is not a
substantial-service employee with respect to any of Employer A's three
lines of business within the meaning of Sec. 1.414(r)-11(b)(2).
Example 5. The facts are the same as in Example 4, except that
Employer A also owns 75 percent of Corporation X. Corporation X is not
treated as part of Employer A within the meaning of Sec. 1.410(b)-9.
Employee R is an accountant in the accounting department of Employer A.
Employee R devotes all of his time to maintaining the accounting books
and records of the tire and automotive products line of business of
Employer A and the accounting books and records of Corporation X.
Employer A determines that Employee R provides 40 percent of his
services directly to the tire and automotive products line of business.
Employer A also determines that Employee R provides the following
percentages of the remainder of Employee R's services (i.e., his
provision of services of maintaining the accounting books and records of
Corporation X) indirectly to Employer A's three lines of business by
virtue of the services he provides to Corporation X: tire and automotive
products--25 percent; construction machinery--20 percent, and
agricultural equipment--15 percent. Therefore, Employee R provides 65
percent of his services to the tire and automotive products line of
business of Employer A (i.e., 40 percent directly and 25 percent
indirectly). Under the definition of substantial-service employee in
Sec. 1.414(r)-11(b)(2), Employer A may treat Employee R as a
substantial-service employee with respect to the tire and automotive
products line of business because Employee R provides at least 50
percent of his services to that
[[Page 676]]
line. In that case, Employee R would be disregarded in applying
paragraph (b)(4) of this section to the construction machinery and
agricultural equipment lines of business.
Example 6. The facts are the same as in Example 5. Employee S is a
lawyer in the legal department located at the headquarters who devotes
all her time to product liability suits filed against the construction
machinery line of business. Under these facts, the services of Employee
S contribute to providing property and services to customers of Employer
A in the construction machinery line of business, and therefore Employee
S provides services to that line of business. Because Employee S's
services do not contribute to providing property or services in any
other of Employer A's lines of business within the meaning of paragraph
(c)(5) of this section, Employee S provides more than 75 percent of her
services to the construction machinery line of business and therefore is
a substantial-service employee with respect to Employer A's construction
machinery line of business within the meaning of Sec. 1.414(r)-11(b)(2).
Example 7. The facts are the same as in Example 6. Employer A also
maintains a separate facility that houses a centralized procurement,
marketing, and billing operation for all of its lines of business. None
of the procurement, marketing, or billing employees specializes in any
particular line of business. Under these facts, the services of the
procurement, marketing, and billing employees contribute to providing
property and services to customers of Employer A in each of Employer A's
three lines of business. Employer A determines that each of the
procurement, marketing, and billing employees provides approximately an
equal proportion of their services to each of Employer A's three lines
of business. These employees therefore provide services to all of
Employer A's lines of business within the meaning of paragraph (c)(5) of
this section. However, none of them provides at least 75 percent of his
services to any line of business. Therefore, these employees are not
substantial-service employees with respect to any of Employer A's three
lines of business within the meaning of Sec. 1.414(r)-11(b)(2).
Example 8. The facts are the same as in Example 7. Employee T works
for the construction machinery line of business. During the testing
year, he is temporarily detailed to the agricultural equipment line of
business. His temporary detail lasts for one week, after which he
returns to his regular duties with the construction machinery line of
business. Under these facts, Employee T does not provide more than a
negligible portion of his services during the testing year to the
agricultural equipment line of business. Accordingly, Employee T does
not provide services to the agricultural equipment line of business
within the meaning of paragraph (c)(5) of this section. In addition,
because Employee T provides at least 75 percent of his services to the
construction machinery line of business, Employee T is a substantial-
service employee with respect to Employer A's agricultural equipment
line of business within the meaning of Sec. 1.414(r)-11(b)(2).
Example 9. The facts are the same as in Example 8, except that,
during the testing year but before the first testing day, Employee T
retires from employment with Employer A. Under paragraph (c)(5)(ii) of
this section, Employee T is not taken into account in determining
whether Employer A's construction machinery line of business has its own
separate employee workforce within the meaning of paragraph (b)(4) of
this section.
Example 10. Employer B is a multinational controlled group of
corporations that engages in the exploration, production, refining, and
marketing of petrochemical products. Employer B operates two lines of
business as determined under Sec. 1.414(r)-2. The first line of business
(the ``exploration, production, and refining line of business'')
provides lubricating oil, gasoline, and other petrochemical products to
wholesale customers of Employer B as well as to the second line of
business. The wholesale customers of Employer B include independent
jobbers, independent franchisees that operate retail filling stations
under Employer B's trademark and tradename, as well as chemical and
plastics manufacturers. The second line of business (the ``retail
marketing line of business'') provides lubricating oil and gasoline
products to retail customers of Employer B through filling stations
owned and operated by Employer B. Employee U is an attendant at a
filling station owned and operated by Employer B. Employee U performs no
other services for Employer B, Under these facts, Employee U provides at
least 75 percent of his services to Employer B's retail marketing line
of business and therefore is a substantial-service employee with respect
to that line of business within the meaning of Sec. 1.414(r)-11(b)(2),
and does not provide any services within the meaning of paragraph (c)(5)
of this section to any of Employer B's other lines of business.
Example 11. The facts are the same as in Example 10. Employer B
operates a refinery that produces lubricating oil, gasoline, and other
petrochemical products. Employee V is an operating engineer at the
refinery who is involved at a stage in the refining process before
lubricating oil and gasoline products have been separated from other
types of petrochemical products. Employee V performs no other services
for Employer B. Under these facts, Employee V's services contribute to
providing property and services to customers of Employer B in both the
exploration, production, and refining line of business and the retail
marketing line of business. Employee V therefore provides services
[[Page 677]]
to both lines of business within the meaning of paragraph (c)(5) of this
section. See paragraph (d) of this section, however, for an optional
rule for vertically integrated lines of business.
Example 12. The facts are the same as in Example 11. Employee W is a
petroleum engineer who conducts geological studies of potential future
drilling sites. Although Employee W's services during the testing year
will not contribute to providing lubricating oil, gasoline, and other
petrochemical products to customers of Employer B during the testing
year, it is reasonably anticipated (in accordance with paragraph
(c)(5)(ii)(B) of this section) that her services during the testing year
will contribute to providing such products to customers of Employer B
after the close of the testing year. Under these facts, Employee W
provides her services to both of Employer B's lines of business within
the meaning of paragraph (c)(5) of this section.
(7) Examples of the separate management requirement. The following
examples illustrate the application of the separate management
requirement in paragraph (b)(5) of this section and the supplementary
rules of this paragraph (c). Unless otherwise specified, it is assumed
that employees who provide services to a line of business are not
substantial-service employees with respect to any other line of business
and that, in determining the top-paid employees with respect to a line
of business, the employer is using the option under Sec. 1.414(r)-
11(b)(3) to disregard all employees who provide less than 25 percent of
their services to that line of business.
Example 1. (a) Employer C operates three lines of business as
determined under Sec. 1.414(r)-2. One of its lines of business is the
operation of a chain of athletic equipment and apparel stores. Of
Employer C's total workforce, 12,000 employees provide more than a
negligible amount of the services they provide to Employer C to the
athletic equipment and apparel stores line of business, within the
meaning of paragraph (c)(5) of this section. Of the 1,200 employees who
constitute the top ten percent by compensation of those 12,000
employees, 930 are substantial-service employees with respect to that
line of business. Because 930 is 77.5 percent of 1,200, less than 80
percent of the top-paid employees with respect to the line of business
are substantial-service employees with respect to that line of business.
Therefore, Employer C's athletic equipment and apparel stores line of
business does not have its own separate management under paragraph
(b)(5) of this section.
(b) Assume that, in determining the top-paid employees with respect
to the athletic equipment and apparel stores line of business, Employer
C chooses to disregard all employees who provide less than 25 percent of
their services to the line of business as permitted under the definition
in Sec. 1.414(r)-11(b)(3). Of the 12,000 employees who provide more than
a negligible amount of their services to the athletic equipment and
apparel stores line of business, 10,000 provide at least 25 percent of
their services to that line. Of the 1,000 employees who constitute the
top ten percent by compensation of those 10,000 employees, 930 are
substantial-service employees with respect to the athletic equipment and
apparel stores line of business. Because 930 is 93 percent of 1,000, at
least 80 percent of the top-paid employees with respect to the line of
business are substantial-service employees with respect to that line of
business. Therefore, Employer C's athletic equipment and apparel stores
line of business has its own separate management and satisfies the
requirement of paragraph (b)(5) of this section.
Example 2. The facts are the same as in Example 1. Employee X is a
vice president of the accounting department located at the headquarters,
who devotes all of his time supervising the staff of Employer C's
accounting department. Employer C determines that 10 percent of Employee
X's services contribute to providing property and services to customers
of Employer C's athletic equipment and apparel stores line of business
and 45 percent of Employee X's services contribute to providing property
and services to customers to each of Employer C's other two lines of
business. Because Employee X does not provide at least 25 percent of his
services to Employer C's athletic equipment and apparel stores line of
business, Employee X is not one of the 10,000 employees described in
Example 1 and therefore cannot be a top-paid employee within the meaning
of Sec. 1.414(r)-11(b)(3) with respect to the athletic equipment and
apparel stores line of business. Therefore, Employee X is not taken into
account in determining whether the athletic equipment and apparel stores
line of business satisfies the separate management requirement of
paragraph (b)(5) of this section.
Example 3. The facts are the same as in Example 2 except that
Employee X provides 60 percent of his services to Employer C's second
line of business, an athletic equipment factory, and 30 percent of his
service to Employer C's third line of business, a fast-food chain.
Because Employee X provides at least 50 percent of his services to the
athletic equipment factory line of business, Employer C chooses to treat
him as a substantial- service employee with respect to that line of
business, as permitted under
[[Page 678]]
Sec. 1.414(r)-11(b)(2). Thus, Employee X is taken into account as a
substantial-service employee with respect to the athletic equipment
factory line of business and is disregarded in applying the separate
workforce and separate management requirements under paragraphs (b) (4)
and (5) to the fast-food chain line of business.
Example 4. Employer D operates four lines of business as determined
under Sec. 1.414(r)-2. One of its lines of business is a machine tool
shop. Sixty of Employer D's employees provide at least 25 percent of
their services to the machine tool shop line of business. Of the six
employees who constitute the top 10 percent by compensation of those 60
employees, four are substantial-service employees with respect to the
line of business. Because four is 67 percent of six, 80 percent of the
top-paid employees with respect to the machine tool shop line of
business are not substantial-service employees with respect to that line
of business. Therefore the machine tool shop line of business does not
satisfy the separate management requirement of paragraph (b)(5) of this
section.
Example 5. The facts are the same as in Example 4, except that, in
addition, another of Employer D's lines of business is an automotive
repair shop, and 80 of Employer D's employees provide at least 25
percent of their services to that line of business. Employer D combines
the machine shop line of business with the automotive repair shop line
of business and treats them as a single line of business. As a result,
Employer D has three lines of business as determined under
Sec. 1.414(r)-2. Assume that 150 of Employer D's employees provide more
than 25 percent of their services to the machine tool shop/automotive
repair shop line of business within the meaning of paragraph (c)(5) of
this section. Of the 15 employees who constitute the top 10 percent by
compensation of these 150 employees, 12 are substantial-service
employees with respect to that line of business. Because 12 is 80
percent of 15, at least 80 percent of the top-paid employees with
respect to the machine tool shop/automotive repair shop line of business
are substantial-service employees with respect to that line of business.
Therefore, the machine tool shop/automotive repair shop line of business
satisfies the separate management requirement of paragraph (b)(5) of
this section.
(d) Optional rule for vertically integrated lines of business--(1)
In general. If two lines of business satisfy the requirements of this
paragraph (d) with respect to a type of property or service for a
testing year, the employer is permitted to apply the optional rule in
this paragraph (d) for the testing year.
(2) Requirements. Two lines of business satisfy the requirements of
this paragraph (d) with respect to a type of property or service only
if--
(i) One of the lines of business (the upstream line of business)
provides a type of property or service to the other line of business
(the downstream line of business);
(ii) The downstream line of business either--
(A) Uses, consumes, or substantially modifies the property or
service in the course of itself providing property or services to
customers of the employer; or
(B) Provides the same property or service to customers of the
employer at a different level in the chain of commercial distribution
from the upstream line of business (e.g., retail versus wholesale); and
(iii) The upstream line of business either--
(A) Provides the same type of property or service to customers of
the employer, and at least 25 percent of the total number of units of
the same type of property or service provided by the upstream line of
business to all persons (including customers of the employer, the
downstream line of business, and all other lines of business of the
employer) are provided to customers of the employer by the upstream line
of business, when measured on a uniform basis; or
(B) Provides to the downstream line of business property consisting
primarily of a type of tangible property (i.e., goods, not services)
that it produces or manufactures, and some entities outside the
employer's controlled group that are engaged in a similar business as
the upstream line of business provide the same type of tangible property
to unrelated customers (i.e., customers outside those entities'
respective controlled groups).
(3) Optional rule--( i) Treatment of employees. For purposes of
determining the lines of business to which an employee provides services
under paragraph (c)(5) of this section, an employee is not treated as
providing services to the downstream line of business if--
(A) The employee is considered to provide services to the downstream
line of business under paragraph (c)(5) of this section (applied without
regard
[[Page 679]]
to the optional rule in this paragraph (d)); and
(B) The employee is so considered solely because the employee's
services contribute to providing the property or service from the
upstream line of business to the downstream line of business.
(ii) Purposes for which optional rule applies. If an employee
applies the optional rule in this paragraph (d), the treatment specified
in paragraphs (d)(3)(i) (A) and (B) of this section applies for all the
following purposes and only for the following purposes--
(A) The separate employee workforce and separate management
requirements of paragraphs (b)(4) and (b)(5) of this section;
(B) The 50-employee requirement of Sec. 1.414(r)-4(b); and
(C) The determination of the employees of a qualified separate line
of business under Sec. 1.414(r)-7.
(4) Examples. The following examples illustrate the application of
the optional rule in this paragraph (d).
Example 1. Employer E operates two lines of business as determined
under Sec. 1.414(r)-2, one engaged in upholstery textile manufacturing
and the other in furniture manufacturing. During the testing year, the
upholstery textile line of business provides its entire output of
upholstery textiles to the furniture line of business. The furniture
line of business uses the upholstery textiles in the manufacture of
upholstered furniture for sale to customers of Employer E. The furniture
line of business thus substantially modifies the upholstery textiles
provided to it by the upholstery textile line of business in providing
upholstered furniture products to customers of Employer E. In addition,
although the upholstery textile line of business does not provide
upholstery textiles to customers of Employer E, some entities engaged in
upholstery textile manufacturing provide upholstery textiles to
customers outside their controlled groups. Under these facts, Employer
E's two lines of business satisfy the requirements of this paragraph (d)
with respect to upholstery textiles for the testing year.
Example 2. Employer B is a multinational controlled group of
corporations that engages in the exploration, production, refining, and
marketing of petrochemical products. See Example 10 under paragraph
(c)(7) of this section. Employer B operates two lines of business as
determined under Sec. 1.414(r)-(2). The first line of business (``the
exploration, production, and refining line of business'') provides
lubricating oil, gasoline, and other petrochemical products to wholesale
customers of Employee B as well as the second line of business. The
wholesale customers of Employee B include independent jobbers,
independent franchisees that operate retail filling stations under
Employee B's trademark and tradename, as well as chemical and plastics
manufacturers. The second line of business (the ``retail marketing line
of business'') provides lubricating oil and gasoline products to retail
customers of Employee B through filing stations owned and operated by
Employee B. During the testing year, the exploration, production and
refining line of business provides 25,000 gallons of lubricating oil,
100,000 gallons of unleaded and 150,000 gallons of leaded gasoline to
the retail marketing line of business, and 75,000 gallons of lubricating
oil, 500,000 gallons of unleaded gasoline and 15,000 gallons of leaded
gasoline to wholesale customers of Employer B. Thus, the exploration,
production, and refining line of business provides 75 percent of its
output of lubricating oil during the testing year to wholesale customers
of Employer B. In addition, because unleaded and leaded gasoline is the
same type of property (i.e., gasoline), the exploration, production, and
refining line of business provides 67 percent of its output of gasoline
products during the testing year to wholesale customers of Employer B.
Furthermore, the retail line of business provides lubricating oil and
gasoline products to customers of Employer B at different levels in the
chain of commercial distribution than the exploration, production, and
refining line of business. Under these facts, Employer B's two lines of
business satisfy the requirements of this paragraph (d) with respect to
both lubricating oil and gasoline products for the testing year.
Example 3. The facts are the same as in Example 2. Employer B
operates a refinery that produces lubricating oil, gasoline, and other
petrochemical products. Employee V is an operating engineer at the
refinery who is involved at a stage in the refining process before
lubricating oil and gasoline products have been separated from other
types of petrochemical products. Employee V performs no other services
for Employer B. Absent application of the optional rule in this
paragraph (d), Employee V would be considered to provide services to
both of Employer B's lines of business. See Example 11 under paragraph
(c)(7) of this section. However, because Employee V's services to the
retail marketing line of business contribute solely to providing
lubricating oil and gasoline products from the exploration, production,
and refining line of business to the retail marketing line of business,
under the optional rule in paragraph (d)(3)(i) of this section Employee
V is not treated as providing services to the retail marketing line of
business.
Example 4. The facts are the same as in Example 3. Employee W is a
petroleum engineer
[[Page 680]]
who conducts geological studies of potential future drilling sites.
Employee W performs no other services for Employer B. Absent application
of the optional rule in this paragraph (d), Employee W would be
considered to provide services to both of Employer B's lines of
business. See Example 12 under paragraph (c)(7) of this Section.
However, because Employee W's services to the retail marketing line of
business contribute solely to providing lubricating oil and gasoline
products from the exploration, production, and refining line of business
to the retail marketing line of business, under the optional rule in
paragraph (d)(3)(i) of this section Employee W is not treated as
providing services to the retail marketing line of business.
Example 5. The facts are the same as in Example 4. Employee Y is a
vice president in Employer B's home office. As part of his senior
management responsibilities, Employee Y helps to set the rate of
production at Employer B's refineries in the United States and also
helps to set the price charged at the pump at the retail filling
stations owned and operated by Employer B in this country. Absent
application of the optional rule in this paragraph (d), Employee X would
be considered to provide services to both of Employer B's lines of
business within the meaning of paragraph (c)(5) of this section for
purposes of satisfying the separate workforce requirement of paragraph
(b)(4) of this section. Because Employee X helps to set the price
charged at the pump by Employer B's retail marketing line of business,
Employee X's services to the retail marketing line of business are not
limited to contributing solely to providing lubricating oil and gasoline
products from the exploration, production, and refining line of business
to the retail marketing line of business, as required under paragraph
(d)(3)(i)(B) of this section. Accordingly, even though Employer B's two
lines of business satisfy the requirements of this paragraph (d) with
respect to both lubricating oil and gasoline products for the testing
year, and even though Employer B applies the optional rule in this
paragraph (d), Employee X is still considered to provide services to
both of Employer B's lines of business.
[T.D. 8376, 56 FR 63442, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32917, June 27, 1994]
Sec. 1.414(r)-4 Qualified separate line of business--fifty-employee and notice requirements.
(a) In general. This section sets forth the rules for determining
whether a separate line of business (as determined under Sec. 1.414(r)-
3) satisfies the 50-employee and notice requirements of Sec. 1.414(r-
1(b)(2)(iv) (B) and (C), respectively.
(b) Fifty-employee requirement. A separate line of business
satisfies the 50-employee requirement of Sec. 1.414(r)-1(b)(2)(iv)(B)
for a testing year only if on each day of the testing year there are at
least 50 employees who provide services to the separate line of business
for the testing year and do not provide services to any other separate
line of business of the employer for the testing year within the meaning
of Sec. 1.414(r)-3(c)(5). For this purpose, all employees of the
employer are taken into account (including collectively bargained
employees), except employees described in Sec. 1.414(q)-1, Q&A-
9(g)(i.e., the same employees, subject to certain modifications, who are
excluded in determining the number of employees in the top-paid group
under section 414(q)(4)).
(c) Notice requirement--(1) General rule. A separate line of
business satisfies the notice requirement of Sec. 1.414(r)-
1(b)(2)(iv)(C) for a testing year only if the employer notifies the
Secretary that it treats itself as operating qualified separate lines of
business for the testing year in accordance with Sec. 1.414(r)-1(b). The
employer's notice for the testing year must specify each of the
qualified separate lines of business operated by the employer and the
section or sections of the Code to be applied on a qualified-separate-
line-of-business basis. See Sec. 1.414(r)-1(c). The employer's notice
must take the form, must be filed at the time and the place, and must
contain any additional information prescribed by the Commissioner in
revenue procedures, notices, or other guidance of general applicability.
No other notice, whether actual or constructive, satisfies the
requirement of this paragraph (c).
(2) Effect of notice. Once an employer has provided the notice
prescribed in this paragraph (c) for a testing year, and the time for
filing the notice for the testing year has expired without its being
modified, withdrawn, or revoked, the employer is deemed to have
irrevocably elected to apply the requirements of the section or sections
of the Code specified in the notice separately with respect to the
employees of each qualified separate line of business
[[Page 681]]
specified in the notice for all plan years that begin in the testing
year. The Commissioner may, in revenue procedures, notices, or other
guidance of general applicability, provide for exceptions to the rule in
this paragraph (c)(2) as well as for the effect that will be given to
the employer's notice for purposes of any future testing year.
[T.D. 8376, 56 FR 63446, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32919, June 27, 1994]
Sec. 1.414(r)-5 Qualified separate line of business--administrative scrutiny requirement--safe harbors.
(a) In general. A separate line of business (as determined under
Sec. 1.414(r)-3 satisfies the administrative scrutiny requirement of
Sec. 1.414(r)-1(b)(2)(iv)(D) for a testing year if the separate line of
business satisfies any of the safe harbors in paragraphs (b) through (g)
of this section for the testing year. The safe harbor in paragraph (b)
of this section implements the statutory safe harbor of section
414(r)(3). The safe harbors in paragraphs (c) through (g) of this
section constitute the guidelines provided for under section
414(r)(2)(C). A separate line of business that does not satisfy any of
the safe harbors in this section nonetheless satisfies the requirement
of administrative scrutiny if the employer requests and receives an
individual determination from the Commissioner under Sec. 1.414(r)-6
that the separate line of business satisfies the requirement of
administrative scrutiny.
(b) Statutory safe harbor--(1) General rule. A separate line of
business satisfies the safe harbor in this paragraph (b) for the testing
year only if the highly compensated employee percentage ratio of the
separate line of business is--
(i) At least 50 percent; and
(ii) Non more than 200 percent.
(2) Highly compensated employee percentage ratio. For purposes of
this paragraph (b), the highly compensated employee percentage ratio of
a separate line of business is the fraction (expressed as a percentage),
the numerator of which is the percentage of the employees of the
separate line of business who are highly compensated employees, and the
denominator of which is the percentage of all employees of the employer
who are highly compensated employees.
(3) Employees taken into account. For purposes of this paragraph
(b), the employees taken into account are the same employees who are
taken into account for purposes of applying section 410(b) with respect
to the first testing day. For this purpose, employees described in
section 410 (b)(3) and (b)(4) are excluded. However, section 410(b)(4)
is applied with reference to the lowest minimum age requirement
applicable under any plan of the employer, and with reference to the
lowest service requirement applicable under any plan of the employer, as
if all the plans were a single plan under Sec. 1.410(b)-6(b)(2). The
employees of the separate line of business are determined by applying
Sec. 1.414(r)-7 to the employees taken into account under this paragraph
(b)(3). An employee is treated as a highly compensated employee for
purposes of this paragraph (b) if the employee is treated as a highly
compensated employee for purposes of applying section 410(b) with
respect to the first testing day. For the definition of ``first testing
day,'' see Sec. 1.414(r)-11(b)(7).
(4) Ten-percent exception. A separate line of business is deemed to
satisfy paragraph (b)(1)(i) of this section for the testing year if at
least 10 percent of all highly compensated employees of the employer
provide services to the separate line of business during the testing
year and do not provide services to any other separate line of business
of the employer during the testing year within the meaning of
Sec. 1.414(r)-3(c)(5).
(5) Determination based on preceding testing year. A separate line
of business that satisfied this safe harbor for the immediately
preceding testing year (without taking into account the special rule in
this paragraph (b)(5)) is deemed to satisfy the safe harbor for the
current testing year. The preceding sentence applies to a separate line
of business only if the employer designated the same line of business in
the immediately preceding testing year as in the current testing year
and either--
(i) The highly compensated employee percentage ratio of the separate
line of business for the current testing year
[[Page 682]]
does not deviate by more than 10 percent (not 10 percentage points) from
the highly compensated employee percentage ratio of the separate line of
business for the immediately preceding testing year; or
(ii) No more than five percent of the employees of the separate line
of business for the current testing year were employees of a different
separate line of business for the immediately preceding testing year,
and no more than five percent of the employees of the separate line of
business for the immediately preceding testing year are employees of a
different separate line of business for the current testing year.
(6) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (b).
Example 1. (i) Employer A operates three separate lines of business
as determined under Sec. 1.414(r)-3, that respectively consist of a
railroad, an insurance company, and a newspaper. Employer A employs a
total of 400 employees, 100 of whom are highly compensated employees.
Thus, the percentage of all employees of Employer A who are highly
compensated employees in 25 percent. After applying Sec. 1.414(r)-7, the
distribution of highly and nonhighly compensated employees among
Employer A's separate lines of business is as follows:
----------------------------------------------------------------------------------------------------------------
Employer- Insurance
wide Railroad company Newspaper
----------------------------------------------------------------------------------------------------------------
Number of Employees......................................... 400 100 150 150
Number of HCEs.............................................. 100 20 50 30
Number of Non-HCEs.......................................... 300 80 100 120
HCE Percentage.............................................. 25% 20% 33% 20%
(100/400) (20/100) (50/150) (30/150)
HCE Percentage Ratio........................................ N/A 80% 133% 80%
........... (20%/25%) (33%/25%) (20%/25%)
----------------------------------------------------------------------------------------------------------------
(ii) Because the highly compensated employee percentage ratio of
each separate line of business is at least 50 percent and no more than
200 percent, each of Employer A's separate lines of business satisfies
the requirements of the safe harbor in this paragraph (b).
Example 2. (i) Employer B operates three separate lines of business
as determined under Sec. 1.414(r)-3, that respectively consist of a
dairy products manufacturer, a candy manufacturer, and a chain of
housewares stores. Employer B employs a total of 1,000 employees, 100 of
whom are highly compensated employees. Thus, the percentage of all
employees of Employer B who are highly compensated employees is 10
percent. After applying Sec. 1.414(r)-7, the distribution of highly and
nonhighly compensated employees among Employer B's separate lines of
business is as follows:
----------------------------------------------------------------------------------------------------------------
Employer- Dairy Housewares
wide products Candy stores
----------------------------------------------------------------------------------------------------------------
Number of Employees......................................... 1,000 200 500 300
Number of HCEs.............................................. 100 5 50 45
Number of Non-HCEs.......................................... 900 195 450 255
HCE Percentage.............................................. 10% 2.5% 10% 15%
(100/1,000) (5/200) (50/500) (45/300)
HCE Percentage Ratio........................................ N/A 25% 100% 150%
........... (2.5%/10%) (10%/10%) (15%/10%)
----------------------------------------------------------------------------------------------------------------
(ii) Because the highly compensated employee percentage ratio for
the dairy products line of business is less than 50 percent, it does not
satisfy the requirements of the statutory safe harbor in this paragraph
(b). However, because Employer B's other two separate lines of business
(candy manufacturing and housewares stores) each has a highly
compensated employee percentage ratio that is no less than 50 percent
and no greater than 200 percent, they each satisfy the statutory safe
harbor in this paragraph (b).
Example 3. (i) The facts are the same as in Example 2, except that
Employer B operates only two separate lines of business as determined
under Sec. 1.414(r)-3, one consisting of the dairy products manufacturer
and the candy manufacturer, and the other consisting of the chain of
housewares stores. After applying Sec. 1.414(r)-7, the distribution of
highly and nonhighly compensated employees among
[[Page 683]]
Employer B's separate lines of business is as follows:
----------------------------------------------------------------------------------------------------------------
Candy/Dairy Housewares
Employer-Wide Products Stores
----------------------------------------------------------------------------------------------------------------
Number of Employees............................................. 1,000 700 300
Number of HCEs.................................................. 100 55 45
Number of Non-HCEs.............................................. 900 645 255
HCE Percentage.................................................. 10% 7.9% 15%
(100/1,000) (55/700) (45/300)
HCE Percentage Ratio............................................ N/A 79% 150%
.............. (7.9%/10%) (15%/10%)
----------------------------------------------------------------------------------------------------------------
(ii) Because the highly compensated employee percentage ratio for
both of Employer B's separate lines of business is at least 50 percent
and no more than 200 percent, they each satisfy the requirements of the
statutory safe harbor in this paragraph (b).
(c) Safe harbor for separate lines of business in different
industries--(1) In general. A separate line of business satisfies the
safe harbor in this paragraph (c) for the testing year if it is in a
different industry or industries from every other separate line of
business of the employer. For this purpose, a separate line of business
is in a different industry or industries from every other separate line
of business of the employer only if--
(i) The property or services provided to customers of the employer
by the separate line of business (as designated by the employer for the
testing year under Sec. 1.414(r)-2) fall exclusively within one or more
industry categories established by the Commissioner for purposes of this
paragraph (c); and
(ii) None of the property or services provided to customers of the
employer by any of the employer's other separate lines of business (as
designated by the employer for the testing year under Sec. 1.414(r)-2)
falls within the same industry category or categories.
(2) Optional rule for foreign operations. For purposes of satisfying
this paragraph (c), an employer is permitted to disregard any property
or services provided to customers of the employer during the testing
year by a foreign corporation or foreign partnership (as defined in
section 7701(a)(5)), to the extent that income from the provision of the
property or services is not effectively connected with the conduct of
the trade or business within the United States within the meaning of
section 864(c). Thus, for example, an employer is permitted to take into
account only property and services provided to customers of the employer
by its domestic subsidiaries and property and services provided by its
foreign subsidiaries that generate income effectively connected with the
conduct of a trade or business within the United States in determining
whether the property or services provided to customers of the employer
by a separate line of business fall exclusively within one or more
industry categories and also whether the property or services provided
by any other separate line of business fall within the same industry
category or categories.
(3) Establishment of industry categories. The Commissioner shall, by
revenue procedure or other guidance of general applicability, establish
industry categories for purposes of this paragraph (c).
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (c). For purposes of these examples,
it is assumed that, pursuant to paragraph (c)(3) of this section, the
Commissioner has established the following industry categories (among
others): transportation equipment and services; banking, insurance, and
finance; machinery and electronics; and entertainment, sports, and
hotels.
Example 1. Among its other business activities, Employer C operates
a commercial airline that constitutes a separate line of business under
Sec. 1.414(r)-3. In addition, no other separate line of business of
Employer C provides to customers of Employer C any property or services
in the transportation equipment and services industry category. Under
these facts, the separate line of business described in this example
satisfies the safe harbor in this paragraph (c).
[[Page 684]]
Example 2. The facts are the same as in Example 1, except that
Employer C also operates a trucking company that constitutes another
separate line of business of Employer C under Sec. 1.414(r)-3. Because
the commercial airline and the trucking company both provide to
customers of Employer C services in the transportation equipment and
services industry category, neither separate line of business satisfies
the safe harbor in this paragraph (c).
Example 3. Among its other business activities, Employer D operates
a commercial bank and luxury hotel that together constitute a single
separate line of business under Sec. 1.414(r)-3. No other separate line
of business of employer D provides to customers of Employer D property
or services in either the banking, insurance, or financial industry
category, or the entertainment, sports, or hotel industry category.
Under these facts, the separate line of business described in this
example satisfies the safe harbor in this paragraph (c).
Example 4. The facts are the same as in Example 3, except that
Employer D also manufactures computers in the United States and abroad.
Employer D apportions its computer operations by designating these
operations between two separate lines of business, one consisting of its
domestic operations located in the United States and the second
consisting of its foreign operations by a foreign subsidiary. Because
both lines of business provide property and services in the machinery
and electronics industry category to customers of Employer D, neither
separate line of business would satisfy the safe harbor in this
paragraph (c). However, pursuant to the optional rule in paragraph
(c)(2) of his section, Employer D disregards the property and services
provided by its foreign computer subsidiary. As a result, no other
separate line of business of Employer D provides to customers of
Employer D any property or services in the machinery and electronics
industry category. Under these facts, Employer D's domestic computer
operations separate line of business satisfies the safe harbor in this
paragraph (c).
(d) Safe harbor for separate lines of business that are acquired
through certain mergers and acquisitions--(1) General rule. A portion of
the employer that is acquired through a transaction described in section
410(b)(6)(C) and Sec. 1.410(b)-2(f) (i.e., an asset or stock
acquisition, merger, or other similar transaction involving a change in
the employer of the employees of a trade or business) (the ``acquired
line of business'') satisfies the safe harbor in this paragraph (d) for
each testing year in the transition period provided in paragraph (d)(3)
of this section if each of the following requirements is satisfied--
(i) For each testing year within the transition period the employer
designates the acquired line of business as a line of business within
the meaning of Sec. 1.414(r)-2;
(ii) On the first testing day in each testing year in the transition
period:
(A) The acquired line of business constitutes a separate line of
business within the meaning of Sec. 1.414(r)-3 (taking into account
Sec. 1.414(r)-1(d)(4));
(B) No more than 10 percent of the employees who are substantial-
service employees with respect to the acquired line of business were
substantial-service employees with respect to a different separate line
of business for the immediately preceding testing year; and
(C) No more than 10 percent of the employees who were substantial-
service employees with respect to the acquired line of business for the
immediately preceding testing year are substantial-service employees
with respect to a different separate line of business in the respective
testing year.
(iii) If the transaction described in paragraph (d)(1) of this
section occurs after the first testing day in a testing year, the
determinations required by paragraphs (d)(1)(ii) (B) and (C) of this
section with respect to that testing year are made as of the date of the
transaction.
(2) Employees taken into account. For purposes of this paragraph
(d), the employees taken into account are the same employees who are
taken into account for purposes of applying section 410(b) with respect
to the first testing day. For this purpose, employees described in
section 410(b)(3) and (b)(4) are excluded. However, section 410(b)(4) is
applied with reference to the lowest minimum age requirement, and with
reference to the lowest service requirement applicable under any plan of
the employer that benefits employees of the separate line of business,
as if all the plans were a single plan under Sec. 1.410(b)-6(b)(2). The
employees of the separate line of business are determined by applying
Sec. 1.414(r)-7 to the employees taken into account under this paragraph
(d)(2).
[[Page 685]]
(3) Transition period. The transition period for purposes of this
safe harbor is the period that begins with the first testing year
beginning after the date that the transaction described in paragraph
(d)(1) of this section occurs. The employer is permitted, but not
required, to extend the transition period to include one, two, or three
of the testing years immediately succeeding that first testing year.
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (d).
Example 1. Employer E is treated as operating three qualified
separate lines of business pursuant to Sec. 1.414(r)-1(b). In 1996,
Employer E acquires a company that employs 4,000 employees who
manufacture and sell pharmaceutical supplies, and designates that
portion as a line of business under Sec. 1.414(r)-2. Under
Sec. 1.414(r)-1(d)(4), the pharmaceutical supplies line of business is
deemed to satisfy the requirements to be a qualified separate line of
business (other than the 50-employee and notice requirements) for
testing year 1996. In addition, the determination of whether Employer
E's remaining three lines of business constitute qualified separate
lines of business for testing year 1996 is made without taking into
account the acquired employees and by disregarding the property and
services provided to customers of Employer E by the pharmaceutical
supplies line of business.
Example 2. The facts are the same as in Example 1 except that, by
the first testing day in 1997 (Transition Year 1), there are 300
additional substantial-service employees with respect to the
pharmaceutical supplies line of business, increasing the total number to
4,300. Of those 300 employees, 250 were substantial-service employees
with respect to a different separate line of business for testing year
1996 and 50 are new hires. Assume that, on the first testing day in
Transition Year 1, the pharmaceutical supplies line of business
satisfies the requirements of Sec. 1.414(r)-3 (taking into account
Sec. 1.414(r)-1(d)(4)) and therefore constitutes a separate line of
business. Because 250 is 6 percent of 4,300, no more than ten percent of
the employees who are substantial-service employees with respect to the
pharmaceutical supplies line of business were substantial- service
employees with respect to a different separate line of business for the
immediately preceding testing year. The 50 newly hired employees are
disregarded in making this determination. Under these facts, the
pharmaceutical supplies separate line of business satisfies the safe
harbor in this paragraph (d) for Transition Year 1.
Example 3. The facts are the same as in Example 2, except that,
before the first day of the next testing year (``Transition Year 2''),
Employer E permanently transfers 200 of the 4,300 employees who were
substantial-service employees with respect to the pharmaceutical line of
business on the first testing day in Transition Year 1 to a different
line of business and does not hire any additional employees for the
pharmaceutical supplies line of business. Therefore, by the first
testing day in Transition Year 2, the number of employees who are
substantial-service employees with respect to the pharmaceutical line of
business of Employer E has decreased from 4,300 to 4,100. Assume that,
on that first testing day in Transition Year 2, the pharmaceutical
supplies line of business constitutes a separate line of business within
the meaning of Sec. 1.414(r)-3. Because 200 is approximately 5 percent
of 4,300, no more than 10 percent of the employees who were substantial-
service employees of the pharmaceutical line of business for Transition
Year 1 are not substantial-service employees of the pharmaceutical line
of business in Transition Year 2. Under these facts, the pharmaceutical
supplies separate line of business continues to satisfy the safe harbor
in this paragraph (d) for Transition Year 2.
(e) Safe harbor for separate lines of business reported as industry
segments--(1) In general. A separate line of business satisfies the safe
harbor in this paragraph (e) for the testing year if, for the employer's
fiscal year ending latest in the testing year, the separate line of
business is reported as one or more industry segments on its annual
report required to be filed in conformity with either--
(i) Form 10-K, annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (``Form 10-K''); or
(ii) Form 20-F, Annual Report Pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 with Item 18 financials (``Form 20-
F''), and the employer timely files either the Form 10-K or Form 20-F
with the Securities and Exchange Commission (``SEC'').
(2) Reported as an industry segment in conformity with Form 10-K or
Form 20-F. For purposes of this paragraph (e), a separate line of
business is reported as one or more industry segments in conformity with
either Form 10-K or Form 20-F only if--
(i) The separate line of business consists of one or more industry
segments within the meaning of paragraphs 10(a),
[[Page 686]]
11(b), and 12 through 14 of the Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business
Enterprise (``FAS 14''); and
(ii) The property or services provided to customers of the employer
by the separate line of business (as designated by the employer for the
testing year under Sec. 1.414(r)-2) is identical to the property or
services provided to customers of the employer by the industry segment
or segments (as determined under paragraphs 10(a), 11(b), and 12 through
14 of FAS 14).
(3) Timely filing of Form 10-K or Form 20-F. For purposes of this
paragraph (e), a Form 10-K of Form 20-F is timely filed with the SEC if
it is filed within the required period as provided under 17 CFR 240.12b-
25(b)(2)(ii). Therefore, the required period for timely filing of the
Form 10-K is the 90-day period after the end of the fiscal year covered
by the annual report (including the 15-day extension), and the required
period for timely filing of the Form 20-F is the 6-month period after
the end of the fiscal year covered by the annual report (including the
15-day extension).
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (e).
Example 1. Among its other business activities, Employer F operates
a bearing manufacturing firm that constitutes a separate line of
business under Sec. 1.414(r)-3. Employer F is required to file an annual
Form 10-K with the SEC. On its timely filed Form 10-K, Employer F
reports its bearing manufacturing operations as an industry segment in
accordance of FAS 14 (as determined under paragraphs 10(a), 11(b), and
12 through 14 of FAS 14). The group of bearing products provided by the
separate line of business (as designated by Employer F under
Sec. 1.414(r)-2) is identical to the group of bearing products provided
by the industry segment (as determined under paragraphs 10(a), 11(b),
and 12 through 14 of FAS 14). Under these facts, the separate line of
business described in this example satisfies the safe harbor in this
paragraph (e).
Example 2. The facts are the same as in Example 1, except that
Employer F has apportioned its bearing manufacturing operations between
two separate lines of business as determined under Sec. 1.414(r)-3, one
engaged in the manufacture of bearings for use in the automotive
industry, and a second engaged in the manufacture of bearings for use in
the aerospace industry. Because neither separate line of business
provides a group of property or services to customers of Employer F that
is identical to the group of bearing products provided by the industry
segment reported on Employer F's annual Form 10-K, neither separate line
of business described in this example satisfies the safe harbor in this
paragraph (e).
(f) Safe harbor for separate lines of business that provide the same
average benefits as other separate lines of business--(1) General rule.
A separate line of business satisfies the safe harbor in this paragraph
(f) for the testing year only if the level of benefits provided to
employees of the separate line of business satisfies paragraph (f)(2) or
(f)(3) of this section, whichever is applicable.
(2) Separate lines of business with a disproportionate number of
nonhighly compensated employees--(i) Applicability of safe harbor. This
paragraph (f)(2) applies to a separate line of business that for the
testing year has a highly compensated employee percentage ratio of less
than 50 percent (as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (f)(2) only if the actual benefit percentage of the group of
nonhighly compensated employees of the separate line of business for the
testing period that ends with or within the testing year is at least as
great as the actual benefit percentage of the group of all other
nonhighly compensated employees of the employer for the same testing
period. See Sec. 1.410 (b)-5(c) and (d)(3)(ii) for the definitions of
actual benefit percentage and testing period, respectively. In
determining actual benefit percentages for purposes of this paragraph
(f)(2)(ii), the special rule in Sec. 1.410(b)-5(e)(3) (permitting an
employer to determine employee benefit percentages separately for
defined contribution and defined benefit plans) may not be used.
(3) Separate lines of business with a disproportionate number of
highly compensated employees--(i) Applicability of safe harbor. This
paragraph (f)(3) applies to a separate line of business that for the
testing year has a highly compensated employee percentage ratio of more
than 200 percent (as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (f)(3) only if the actual benefit percentage of
[[Page 687]]
the group of highly compensated employees of the separate line of
business for the testing period that ends with or within the testing
year is no greater than the actual benefit percentage of the group of
all other highly compensated employees of the employer for the same
testing period. See Sec. 1.410 (b)-5(c) and (d)(3)(ii) for the
definitions of actual benefit percentage and testing period,
respectively. In determining actual benefit percentages for purposes of
this paragraph (f)(3)(ii), the special rule in Sec. 1.410(b)-5(e)(3)
(permitting an employer to determine employee benefit percentages
separately for defined contribution and defined benefit plans) may not
be used.
(4) Employees taken into account. An employee of a separate line of
business (as determined under Sec. 1.414(r)-7 is taken into account for
a testing period for purposes of this paragraph (f) only if the employee
is an employee of the separate line of business on the first testing
day, and would not be an excludable employee for purposes of applying
the average benefit percentage test of Sec. 1.410(b)-5 to a plan for a
plan year included in that testing period. In determining whether an
employee is an excludable employee for purposes of the average benefit
percentage test, the employer is assumed not to be operating qualified
separate lines of business under Sec. 1.414(r)-1(b). An employee is
treated as a highly compensated employee for purposes of this paragraph
(f) if the employee is treated as a highly compensated employee for
purposes of applying section 410(b) on the first testing day. See
Sec. 1.414(r)-11(b)(7) for the definition of ``first testing day''.
(5) Example. The rules of this paragraph (f) are illustrated by the
following example.
Example. (i) Employer G is treated as operating two separate lines
of business, Line 1 and Line 2, in accordance with Sec. 1.414(r)-1(b).
Employer G maintains three qualified plans. Plan A is a calendar-year
profit-sharing plan that benefits all employees of Employer G. Plan B is
a defined benefit plan with a plan year ending March 31 that benefits
all employees of Line 1. Plan C is a defined benefit plan with a plan
year ending November 30 that benefits all employees of Line 2.
(ii) In 1995, Line 1 has a highly compensated employee percentage
ratio of 25 percent. Employer G's first testing day is March 31. After
applying the rules of Sec. 1.414(r)-7, the nonhighly compensated
employees of Line 1 and Line 2 on March 31, 1995, are N1-N80 and N81-
N100, respectively. N1 is an excludable employee under Sec. 1.410(b)-6
for purposes of the average benefit percentage test during the testing
period that includes the plan years of Plans A, B, and C that end in
1995 (the ``1995 testing period''), and would therefore not be taken
into account in determining whether any of those plans satisfied the
average benefit percentage test of Sec. 1.410(b)-5 for plan years
included in that testing period, because N1 does not satisfy the minimum
age and service conditions under any plan of the employer. All other
employees of Line 1 and Line 2 on March 31, 1995 are nonexcludable
employees for purposes of the average benefit percentage test during the
1995 testing period.
(iii) In order for Line 1 to satisfy the requirements of this
paragraph (f) for 1995, the actual benefit percentage of N2-N80 for the
1995 testing period under Plans A, B and C must be at least as great as
the actual benefit percentage of N81-N100 for the same testing period
under the same plans. N1 is not taken into account because N1 is an
excludable employees for purposes of the average benefit percentage test
for the 1995 testing period. Any other employees who were taken into
account for purposes of the average benefit percentage test for the 1995
testing period are excluded because they are not employees of Line 1 or
Line 2 on March 31, 1995.
(g) Safe harbor for separate lines of business that provide minimum
or maximum benefits. --(1) In general. A separate line of business
satisfied the safe harbor in this paragraph (g) for the testing only if
the level of benefits provided to employees of the separate line of
business satisfies paragraph (g)(2) or (g)(3) of this section, whichever
is applicable. For this purpose, the level of benefits is determined
with respect to all qualified plans of the employer that benefit
employees of the separate line of business for plan years that begin in
the testing year.
(2) Minimum benefit required--(i) Applicability. This paragraph
(g)(2) applies to a separate line of business that for the test year has
a highly compensated employee percentage ratio of less than 50 percent
(as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (g)(2) only if one of the following requirements is satisfied-
-
(A) At least 80 percent of all nonhighly compensated employees of
the
[[Page 688]]
separate line of business either accrue a benefit for the plan year that
equals or exceeds the defined benefit minimum in paragraph (g)(2)(iii)
of this section, receive all allocation for the plan year that equal or
exceeds the defined contribution minimum in paragraph (g)(2)(iv) of this
section, or accrue a benefit and receive an allocation that together
equal or exceed the combined plan minimum in paragraph (g)(4) of this
section. The defined benefit minimum must be provided in a defined plan,
and the defined contribution minimum must be provided in a defined
contribution plan.
(B) The separate line of business would satisfy the requirements of
paragraph (g)(2)(ii)(A) of this section if the 80 percent threshold were
reduced to 60 percent, and the average of the accrual rates or
allocation rates of all nonhighly compensated employees in the separate
line of business equals or exceeds the minimum amount described for each
individual employee in paragraph (g)(2)(ii)(A) of this section.
(iii) Defined benefit minimum--(A) In general. The defined benefit
minimum for a plan year is the employer-derived accrual that would
result in a normal accrual rate for the plan year equal to 0.75 percent
of compensation. For purposes of this paragraph (g)(2)(iii), the normal
accrual rate is the percentage (not less than 0) determined by
subtracting the employee's normalized accrued benefit as of the end of
the prior plan year (expressed as a percentage of average annual
compensation as of the end of the prior plan year) from the employee's
normalized accrued benefit as of the end of the plan year (expressed as
a percentage of average annual compensation as of the end of the plan
year).
(B) Normal form and equivalent benefits. The benefit that is tested
for purposes of this paragraph (g)(2)(iii) is the accrued retirement
benefit commencing at normal retirement age. If the normal form of
benefit for a plan being tested is other than a straight life annuity
beginning at a normal retirement age of 65, the benefit must be
normalized (within the meaning of Sec. 1.401(a)(4)-12) to a straight
life annuity commencing at age 65. No adjustment is permitted for early
retirement benefits or for any ancillary benefit, including disability
benefits.
(C) Compensation definition. The underlying definition of
compensation used for purposes of determining accrual rates under this
paragraph (g)(2)(iii) must be a definition of compensation that
automatically satisfies section 414(s) without a test for
nondiscrimination (see Sec. 1.414(s)-1(c)).
(D) Average compensation requirement. For purposes of determining
accrual rates, compensation must be average annual compensation within
the meaning of Sec. 1.401(a)(4)-3(e)(2) determined using a five-year
averaging period. The compensation history to be taken into account are
all years beginning with the first year in which the employee benefits
under the plan, and ending with the last plan year in which the employee
participates in the plan. However, a plan may disregard in a reasonable
and consistent manner: years before the effective date of these
regulations as set forth in Sec. 1.414(r)-1(d)(9)(i), years more than 10
years preceding the current plan year, and years for which the employer
does not use this paragraph (g)(2) to satisfy this safe harbor with
respect to the separate line of business. If a plan provides a defined
benefit minimum that uses three consecutive years (in lieu of five) for
calculating average annual compensation, the 0.75 percent annual accrual
in paragraph (g)(2)(iii)(A) of this section is multiplied by 93.3
percent, resulting in a normal accrual rate equal to 0.70 percent. If a
plan provides a defined benefit minimum that uses more than five
consecutive years for calculating average annual compensation or the
plan is an accumulation plan as defined in Sec. 1.401(a)(4)-12, the 0.75
percent annual accrual rate in paragraph (g)(2)(iii)(A) of this section
is multiplied by 133.3 percent, resulting in a normal accrual rate equal
to 1.0 percent.
(E) Special rules. The special rules of Sec. 1.401(a)(4)-3(f) apply
for purposes of determining whether a benefit accrual satisfies the
minimum benefit requirement. For example, benefits may be determined on
other than a plan year basis as permitted by Sec. 1.401(a)(4)-3(f)(6). A
plan described in section 412(i)
[[Page 689]]
may be used to provide the defined benefit minimum described in this
paragraph (g)(2). In such case, the rules in Sec. 1.416-1, M-17, apply
to such a plan. For purposes of this paragraph (g)(2)(iii) an employee
is treated as accruing a benefit equal to the minimum benefit in
paragraph (g)(2)(iii)(A) of this section if the reason that the employee
does not accrue such a benefit is either--
(1) The application of a plan provision that applies uniformly to
all employees in the plan and limits the service used for purposes of
benefit accrual to a specified maximum no less than 25 years, or
(2) The employee has attained normal retirement age and fails to
accrue a benefit solely because of the provisions of section
411(b)(1)(H)(iii) regarding adjustments for delayed retirement.
(iv) Defined contribution minimum--(A) In general. The defined
contribution minimum for a plan year is an allocation that results in an
allocation rate for the plan year (within the meaning of
Sec. 1.401(a)(4)-2(c)) equal to three percent of an employee's plan year
compensation. Plan year compensation must be based on a definition of
compensation that automatically satisfies section 414(s) without a test
for nondiscrimination (see Sec. 1.414(s)-1(c)). For this purpose,
allocations that are taken into account to do not include matching
contributions described in Sec. 1.401(m)-1(f)(12), elective
contributions described in Sec. 1.401(k)-1(g)(3), any adjustment in
allocation rates permitted under section 401(l) or imputed disparity
under Sec. 1.401(a)(4)-7.
(B) Modified allocation definition for averaging. For purposes of
determining whether the average allocation rates for all nonhighly
compensated employees of the separate line of business satisfy the
minimum benefit requirement in paragraph (g)(2)(ii)(B) of this section,
matching contributions described in Sec. 1.401(m)-1(f)(12) are treated
as employer allocations.
(3) Maximum benefit permitted--( i) Applicability. This paragraph
(g)(3) applies to a separate line of business that for the testing year
has a highly compensated employee percentage ratio that exceeds 200
percent (as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (g)(3) only if one of the following requirements is satisfied-
-
(A) No highly compensated employee of the separate line of business
accrues a benefit for the plan year that results in an accrual rate that
exceeds the defined benefit maximum in paragraph (g)(3)(iii) of this
section, receives an allocation that exceeds the defined contribution
maximum in paragraph (g)(3)(iv) of this section, or accrues a benefit
and receives an allocation that together exceed the combined plan
maximum in paragraph (g)(4) of this section. All benefits provided by
qualified defined benefit plans are subject to the defined benefit
maximum, and all benefits provided by qualified defined contribution
plans are subject to the defined contribution maximum.
(B) The average of the accrual rates or allocation rates of all
highly compensated employees of the separate line of business is no more
than 80 percent of the maximum amount described for any individual
employee in paragraph (g)(3)(ii)(A) of this section.
(iii) Defined benefit maximum--(A) In general. The defined benefit
maximum is the employer-derived accrued benefit that would result from
calculating a normal accrual rate equal to 2.5 percent of compensation.
(B) Determination of defined benefit maximum. The accrual rate used
for the defined benefit maximum is determined in the same manner as the
normal accrual rate used for the defined benefit minimum is determined
under paragraph (g)(2)(iii) of this section, except as provided below.
Thus, a defined benefit plan may provide, in addition to the defined
benefit maximum, any benefit the value of which is not taken into
account under paragraph (g)(2)(iii) of this section. For example, a plan
may provide qualified disability benefits described in section 411(a)(9)
or ancillary benefits described in Sec. 1.401(a)(4)-4(e)(2).
(C) Adjustment for different compensation definitions. If a plan
subject to the defined benefit maximum determines accrual rates by using
three consecutive years (in lieu of five) for purposes
[[Page 690]]
of determining average annual compensation, the 2.5 percent annual
accrual rate in paragraph (g)(3)(iii)(B) of this section is multiplied
by 93.3 percent, resulting in a maximum accrual rate equal to 2.33
percent. Compensation may be less inclusive than the compensation
described in paragraph (g)(2)(iii)(C) of this section. However, no
adjustment is made to the maximum normal accrual rate because of the use
of a definition of compensation that is less inclusive than the
compensation described in paragraph (g)(2)(iii)(C) of this section. In
addition, no adjustment is made to the maximum normal accrual rate
because the plan uses more than five consecutive years for calculating
average annual compensation or the plan is an accumulation plan as
defined in Sec. 1.401(a)(4)-12.
(D) Adjustment for certain subsidies. If the plan provides
subsidized optional forms of benefit, the accrual rate for purposes of
this paragraph (g)(3) must be determined by taking those subsidies into
account. An optional form of benefit is considered subsidized if the
normalized optional form of benefit is larger than the normalized normal
retirement benefit under the plan. In the case of a plan with subsidized
optional forms, the determination of accrual rate for the plan year
under paragraph (g)(2)(iii)(A) of this section is the percentage (not
less than 0) determined by subtracting the largest of the sums of the
employee's normalized QJSAs and QSUPPs determined for each age under
Sec. 1.401(a)(4)-3(d)(1)(ii) as of the end of the prior plan year
(expressed as a percentage of average annual compensation as of the end
of the prior plan year) from the largest of the sums of the employee's
normalized QJSAs and QSUPPs determined for each age under
Sec. 1.401(a)(4)-3(d)(1)(ii) as of the end of the plan year (expressed
as a percentage of average annual compensation as of the end of the plan
year).
(iv) Defined contribution maximum. The defined contribution maximum
is an allocation that results in an allocation rate for the plan year
(within the meaning of Sec. 1.401(a)(4)-2(c)) equal to 10 percent of an
employee's plan year compensation. Compensation may be less inclusive
than the compensation described in paragraph (g)(2)(iv)(A) of this
section. However, no adjustment is made to the defined contribution
maximum because of the use of a definition of compensation that is less
inclusive than the compensation described in paragraph (g)(2)(iv)(A) of
this section. For this purpose, allocations that are taken into account
do not include elective contributions described in Sec. 1.401(K)-
1(g)(3), any adjustment in allocation rates permitted under section
401(l) or imputed disparity under Sec. 1.401(a)(4)-7 but do include
employer matching contributions under Sec. 1.401(m)-1(f)(12).
(4) Duplication of benefits or contributions--(i) Plans of the same
type. In the case of an employee who benefits under more than one
defined benefit plan, the defined benefit minimum required or the
defined benefit maximum permitted under this paragraph (g) is determined
by reference to the employee's aggregate employer-provided benefit under
all qualified defined benefit plans of the employer. In the case of an
employee who benefits under more than one defined contribution plan, the
defined contribution minimum required or the defined contribution
maximum permitted under this paragraph (g) is determined by reference to
the employee's aggregate employer-provided allocations under all
qualified defined contribution plans of the employer.
(ii) Plans of different types. In the case of an employee who
benefits under both a defined benefit plan and a defined contribution
plan, a percentage of the minimum benefit required or the maximum
benefit permitted under this paragraph (g) may be provided in each type
of plan as long as the combined percentage equals at least 100 percent
in the case of the minimum benefit required and does not exceed 100
percent in the case of the maximum benefit permitted. Thus, for example,
if a highly compensated employee benefits under both types of plans and
accrues an aggregate adjusted normal accrual rate equal to 1.25 percent
of average annual compensation under all defined benefit plans of the
employer (i.e, 50 percent of the defined benefit maximum described in
paragraph (g)(3)(iii)
[[Page 691]]
of this section), in order to comply with the maximum benefit safe
harbor, the employee may not receive an aggregate allocation under all
defined contribution plans of the employer in excess of five percent of
plan year compensation (i.e., 50 percent of the defined contribution
maximum described in paragraph (g)(3)(iv) of this section).
(iii) Special rule for floor-offset arrangements. In the case of a
floor-offset arrangement (as described in Sec. 1.401(a)(4)-8(d)), the
minimum or maximum benefit rules are applied to each plan as if the
other plan did not exist. Thus, the defined benefit plan must provide at
least 100 percent of the defined benefit minimum (or no more than 100
percent of the defined benefit maximum) based on the gross benefit prior
to offset, and the defined contribution plan must provide at least 100
percent of the defined contribution minimum (or no more than 100 percent
of the defined contribution maximum).
(5) Certain contingency provisions ignored. For purposes of this
paragraph (g), an employee's accrual or allocation rate is determined
without regard to any minimum benefit or any maximum benefit limitation
that is applicable to the employee only if the separate line of business
fails otherwise to satisfy the requirement of administrative scrutiny.
(6) Employees taken into account. For purposes of this paragraph
(g), an employee is taken into account if the employee is taken into
account for purposes of applying section 410(b) with respect to any
testing day for the testing year. For this purpose, employees described
in section 410 (b)(3) and (b)(4) are excluded. However, section
410(b)(4) is applied with reference to the lowest minimum age
requirement applicable, and with reference to the lowest service
requirement applicable under any plan of the employer that benefits
employees of the separate line of business, as if all the plans were a
single plan under Sec. 1.410(b)-6(b)(2). For purposes of the minimum
benefit requirement of paragraph (g)(2) of this section, section
410(b)(4) may be applied with reference to the lowest minimum age
requirement, and with reference to the lowest minimum service
requirement, applicable under any plan of the employer that benefits
highly compensated employees of the separate line of business, as if all
the plans were a single plan under Sec. 1.410(b)-6(b)(2), or, if no plan
of the employer benefits highly compensated employees of the separate
line of business, with reference to the greatest age and service
requirements permitted under section 410(a)(1)(A). The employees of the
separate line of business are determined by applying Sec. 1.414(r)-7 to
the employees taken into account under this paragraph (g)(6). An
employee is treated as a highly compensated employee for purposes of
this paragraph (g) if the employee is treated as a highly compensated
employee for purposes of applying section 410(b) on any testing day for
the testing year. For the definition of ``testing day,'' see
Sec. 1.414(r)-11(b)(6).
[T.D. 8376, 56 FR 63446, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32919, June 27, 1994]
Sec. 1.414(r)-6 Qualified separate line of business--administrative scrutiny requirement--individual determinations.
(a) In general. A separate line of business (as determined under
Sec. 1.414(r)-3) that does not satisfy any of the safe harbors in
Sec. 1.414(r)-5 for a testing year nonetheless satisfies the
administrative scrutiny requirement of Sec. 1.414(r)-1(b)(2)(iv)(D) if
the employer requests and receives from the Commissioner an individual
determination under this section that the separate line of business
satisfies the requirement of administrative scrutiny for the testing
year. This section implements the individual determinations provided for
under section 414(r)(2)(C). The Commissioner shall issue such an
individual determination only when it is consistent with the purpose of
section 414(r), taking into account the nondiscrimination requirements
of sections 401(a)(4) and 410(b). Paragraph (b) of this section
authorizes the Commissioner to establish procedures for requesting and
granting individual determinations.
(b) Authority to establish procedures. The Commissioner may, in
revenue rulings and procedures, notices, and other guidance, published
in the Internal Revenue Bulletin (see
[[Page 692]]
Sec. 601.601(d)(2)(ii)(b) of this chapter), provide any additional
guidance that may be necessary or appropriate for requesting and
granting individual determinations under this section. For example, such
guidance may specify the circumstances in which an employer may request
an individual determination and factors to be taken into account in
deciding whether to grant a favorable individual determination. In
addition, such guidance may describe situations that automatically fail
the administrative scrutiny requirement.
[T.D. 8376, 56 FR 63452, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32920, June 27, 1994]
Sec. 1.414(r)-7 Determination of the employees of an employer's qualified separate lines of business.
(a) Introduction--(1) In general. This section provides the rules
for determining the employees of each qualified separate line of
business operated by an employer. Paragraph (a)(2) of this section lists
the specific provisions of the regulations for which these rules apply.
Paragraph (b) of this section provides the procedure for assigning the
employees of the employer among the qualified separate lines of business
of the employer and for determining the day or days on which such
assignments must be made. Under this procedure, each employee (i.e., a
substantial-service employee or a residual shared employee as defined in
Sec. 1.414(r)-11(b)(2) and (4)) is assigned to a single qualified
separate line of business in a consistent manner for all purposes listed
in paragraph (a)(2) of this section with respect to the testing year and
plan years beginning within the testing year. Paragraph (c) of this
section provides methods for allocating residual shared employees among
qualified separate lines of business.
(2) Purposes for which this section applies. This section applies
solely for purposes of determining whether--
(i) A separate line of business satisfies the statutory safe harbor
of Sec. 1.414(r)-5(b) for a testing year (see Sec. 1.414(r)-5(b)(3) for
the employees taken into account for this purpose);
(ii) A separate line of business satisfies the merger and
acquisition safe harbor of Sec. 1.414(r)-5(d) for a testing year (see
Sec. 1.414(r)-5(d)(2) for the employees taken into account for this
purpose);
(iii) A separate line of business satisfies the average benefits
safe harbor of Sec. 414(r)-5(f) for a testing year (see Sec. 414(r)-
5(f)(4) for the employees taken into account for this purpose);
(iv) A separate line of business satisfies the minimum or maximum
benefits safe harbor of Sec. 414(r)-5(g) for a testing year (see
Sec. 1.414(r)-5(g)(6) for the employees taken into account for this
purpose);
(v) A plan of the employer satisfies sections 410(b) and 401(a)(4)
for a plan year (see Sec. 414(r)-8(d)(3) for the employees taken into
account for this purpose); or
(vi) A plan of the employer satisfies section 401(a)(26) for a plan
year (see Sec. 414(r)-9(c)(3) for the employees taken into account for
this purpose).
(b) Assignment procedure--(1) In general. To apply the provisions
listed in paragraph (a)(2) of this section with respect to a testing
year or plan year, as the case may be, each of the employees taken into
account under that provision must be assigned to a qualified separate
line of business of the employer on one or more testing days (or section
401(a)(26) testing days) during the year. The first day for which this
assignment procedure is required for a testing year is the first testing
day. See Sec. 414(r)-11(b)(6), (7) and (8) (definitions of ``testing
day'', ``first testing day'' and ``section 401(a)(26) testing day'').
Section Sec. 414(r)-8 may require that the assignment procedure be
repeated for testing days that fall after the first testing day
(including testing days that fall after the close of the testing year in
a plan year that begins in the testing year). Accordingly, new employees
may be taken into account for the first time on these later testing days
who were not taken into account on the first testing day. Section
Sec. 414(r)-9 may have the same effect with respect to section
401(a)(26) testing days that fall after the first testing day.
(2) Assignment for the first testing day. The employees taken into
account under a provision described in paragraph (a)(2) of this section
with respect to the first testing day for a testing
[[Page 693]]
year are assigned among the employer's qualified separate lines of
business by applying the following procedure to each of those employees-
-
(i) An employee who is a substantial-service employee with respect
to a qualified separate line of business within the meaning of
Sec. 414(r)-11(b)(2) must be assigned to that qualified separate line of
business;
(ii) An employee who is a residual shared employee within the
meaning of Sec. 414(r)-11(b)(4) must be assigned to a qualified separate
line of business under paragraph (c) of this section.
Each employee assigned to a qualified separate line of business under
paragraph (b)(2)(i) of this section or this paragraph (b)(2)(ii) remains
assigned to the same qualified separate line of business for all
purposes with respect to the testing year listed in paragraph (a)(2) of
this section and for all plan years beginning in that testing year. Once
an employee is assigned to a qualified separate line of business with
respect to a particular testing day or section 401(a)(26) testing day,
that employee remains assigned to that qualified separate line of
business after the employee terminates employment. However, after the
employee terminates employment, that employee will in most cases not be
taken into account with respect to a subsequent testing day or section
401(a)(26) testing day for purposes of applying one or more of the
provisions in paragraph (a)(2) of this section.
(3) Assignment of new employees for subsequent testing days. After
the first testing day for the testing year, the employees taken into
account under a provision described in paragraph (a)(2) of this section
with respect to a subsequent testing day (or a section 401(a)(26)
testing day) for the testing year may include one or more employees who
previously have not been assigned to a qualified separate line of
business for any purpose listed in paragraph (a)(2) of this section with
respect to the testing year. An employee may not previously have been
assigned to a qualified separate line of business for any purpose with
respect to the testing year if, for example, the employee has just been
hired or has just become a nonexcludable employee. Previously unassigned
employees are assigned among the employer's qualified separate lines of
business by applying the procedure in paragraph (b)(2) of this section
to those employees. In determining whether an employee who is not
employed by the employer during the testing year is a substantial-
service or a residual shared employee with respect to a qualified
separate line of business, Sec. 414(r)-3(c)(5) is applied with reference
to services performed by the employee during a period in the immediately
succeeding testing year that are reasonably representative of the
employee's services for the employer.
(4) Special rule for employers using annual option under section
410(b). Notwithstanding the fact that paragraphs (b)(1) through (b)(3)
of this section generally only require employees to be assigned on
testing days beginning with the first testing day, if a plan is tested
under section 410(b) using the annual option of Sec. 410(b)-8(a)(4)
(including for purposes of the average benefit percentage test),
employees must be assigned on every day of the plan year of that plan
for purposes of this paragraph (b). Thus, all employees who provide
services at any time during the plan year of a plan that is tested using
the annual option of Sec. 1.410(b)-8(a)(4) must be assigned to a line of
business even if they terminate employment before the first testing day
within the meaning of Sec. 414(r)-11(b)(7) of the testing year in which
the plan year begins.
(c) Assignment and allocation of residual shared employees--(1)In
general. All residual shared employees must be allocated among an
employer's qualified separate lines of business under one of the
allocation methods provided in paragraphs (c)(2) through (5) of this
section. An employer is permitted to select which method of allocation
to apply for the testing year to residual shared employees. However, the
same allocation method must be used for all of the employer's residual
shared employees and for all purposes listed in paragraph (a)(2) of this
section with respect to the testing year.
(2) Dominant line of business method of allocation--(i) In general.
Under the method of allocation in this paragraph (c)(2), all residual
shared employees are allocated to the employer's dominant
[[Page 694]]
line of business. This method does not apply unless the employer has a
dominant line of business within the meaning of paragraph (c)(2)(ii) or
(c)(2)(iv) of this section. If an employer has more than one dominant
line of business under this paragraph (c), the employer must select
which qualified separate lines of business is its dominant line of
business.
(ii) Dominant line of business. An employer's dominant line of
business is that qualified separate line of business that has an
employee assignment percentage of at least 50 percent.
(iii) Employee assignment percentage--(A) Determination of
percentage. The employee assignment percentage of a qualified separate
line of business is the fraction (expressed as a percentage)--
(1) The numerator of which is the number of substantial-service
employees with respect to the qualified separate line of business who
are assigned to that line of business under paragraph (b) of this
section; and
(2) The denominator of which is the total number of substantial-
service employees who are assigned to all qualified separate lines of
business of the employer under paragraph (b) of this section.
(B) Employees taken into account. The employee assignment percentage
is calculated solely with respect to employees who are taken into
account for purposes of satisfying section 410(b) with respect to the
first testing day. Therefore, this percentage is calculated only once
for all purposes with respect to a testing year. The employees described
in section 410(b)(3) and (4) are excluded. However, section 410(b)(4) is
applied with reference to the lowest minimum age requirement applicable
under any plan of the employer, and with reference to the lowest service
requirement applicable under any plan of the employer, as if all the
plans were a single plan under Sec. 1.410(b)-6(b)(2).
(iv) Option to apply reduced percentage. An employer is permitted to
determine whether it has a dominant line of business by substituting 25
percent for 50 percent in paragraph (c)(2)(ii) of this section. This
option is available for a testing year only if the qualified separate
line of business satisfies one of the following requirements:
(A) The qualified separate line of business accounts for at least 60
percent of the employer's gross revenues for the employer's latest
fiscal year ending in the testing year.
(B) The employee assignment percentage of the qualified separate
line of business would be at least 60 percent if collectively bargained
employees were taken into account.
(C) Each qualified separate line of business of the employer
satisfies the statutory safe harbor of Sec. 1.414(r)-5(b), the average
benefits safe harbor of Sec. 1.414(r)-5(f), or the minimum or maximum
benefits safe harbor of Sec. 1.414(r)-5(g). Whether a qualified separate
line of business satisfies one of these safe harbors is determined after
the application of this section, including the assignment of all
residual shared employees under this paragraph (c)(2).
(D) The employee assignment percentage of the qualified separate
line of business is at least twice the employee assignment percentages
of each of the employer's other qualified separate lines of business.
(v) Examples. The following examples illustrate the application of
the method of allocation in this paragraph (c)(2).
Example 1. (i) Employer A operates four qualified separate lines of
business as determined under Sec. 1.414(r)-1(b) for the testing year,
consisting of a software developer, a health food products supplier, a
real estate developer, and a ski equipment manufacturer. In applying
this section for the first testing day with respect to the testing year,
Employer A determines that it has a total of 21,000 employees, of whom
10,000 are substantial-service employees not excludable under section
410(b)(3) or (b)(4). Pursuant to paragraph (b) of this section, these
10,000 employees are assigned among Employer A's qualified separate
lines of business as follows:
----------------------------------------------------------------------------------------------------------------
Software Ski
developer Health food Real estate equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees............................... 2,500 1,000 2,500 4,000
Percentage Assigned to QSLOB................................ 25% 10% 25% 40%
----------------------------------------------------------------------------------------------------------------
[[Page 695]]
(ii) Under these facts, Employer A is not permitted to apply the
method of allocation in paragraph (c)(2)(ii) of this section, because
none of its qualified separate lines of business satisfies the 50
percent requirement in paragraph (c)(3)(ii) of this section.
Example 2. The facts are the same as in Example 1, except that,
after allocating all residual shared employees to the ski equipment line
of business, the software, ski equipment and health food supplier lines
of business each would satisfy the statutory safe harbor of
Sec. 1.414(r)-5(b), and that the real estate development line of
business would satisfy the minimum or maximum benefits safe harbor of
Sec. 1.414(r)-5(g). Under these facts, Employer A is permitted to apply
the method of allocation in this paragraph (c)(2) to allocate all its
residual shared employees to the ski equipment line of business, because
the employee assignment percentage of the ski equipment line of business
exceeds 25 percent and each qualified separate line of business
satisfies either the statutory safe harbor of Sec. 1.414(r)-5(b) or the
minimum or maximum benefits safe harbor of Sec. 1.414(r)-5(g).
Example 3. (i) The facts are the same as in Example 1, except that,
Employer A chooses not to satisfy the minimum or maximum benefits safe
harbor of Sec. 1.414(r)-5(g). Instead, Employer A combines the real
estate developer and ski equipment manufacturer into a single line of
business. As a result, Employer A has three qualified separate lines of
business as determined under Sec. 1.414(r)-1(b). Assume that no residual
shared employee becomes a substantial-service employee as a result of
the new combination. Employer A's substantial-service employees are
assigned among Employer A's qualified separate lines of business as
follows:
----------------------------------------------------------------------------------------------------------------
Real estate/
Software Health food ski
developer equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees......................................... 2,500 1,000 6,500
Percentage Assigned to QSLOB.......................................... 25% 10% 65%
----------------------------------------------------------------------------------------------------------------
(ii) Under these facts, Employer A is permitted to apply the method
of allocation in this paragraph (c)(2) to allocate all its residual
shared employees to the combined real estate development and ski
equipment manufacturing line of business, because more than 50 percent
of Employer A's substantial-service employees that are taken into
account for the first testing day are assigned to that qualified
separate line of business.
Example 4. (i) The facts are the same as in Example 1, except that,
of the remaining 11,000 employees of Employer A, 10,000 employees are
substantial-service employees who are collectively bargained employees.
Pursuant to paragraph (b) of this section, the 10,000 substantial-
service employees and the 10,000 substantial-service employees who are
collectively bargained employees are assigned among Employer A's
qualified separate lines of business as follows:
----------------------------------------------------------------------------------------------------------------
Software Ski
developer Health food Real estate equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees........................... 2,500 1,000 2,500 4,000
Percentage of total substantial-service employees 25% 10% 25% 40%
assigned to QSLOB......................................
Substantial-Service Employees (including collectively 2,500 1,000 2,500 14,000
bargained employees)...................................
Percentage of total employees (including collectively 12.5% 5% 12.5% 70%
bargained employees) assigned to QSLOB.................
----------------------------------------------------------------------------------------------------------------
(ii) Thus, the ski equipment line of business satisfies the 25-
percent threshold in paragraph (c)(2)(iv) of this section. In addition,
the ski equipment's percentage of substantial-service employees is at
least 60 percent when taking into account substantial-service employees
who are collectively bargained employees and therefore satisfies the
requirement under paragraph (c)(2)(iv)(B) of this section. Under these
facts, Employer A is permitted to apply the method of allocation in this
paragraph (c)(2) to allocate all its residual shared employees to the
ski equipment line of business.
(3) Pro-rata method of allocation--(i) In general. Under the method
of allocation in this paragraph (c)(3), all residual shared employees
are allocated among an employer's qualified separate lines of business
in proportion to the employee assignment percentage of each qualified
separate line of business, as determined under paragraph (c)(2)(iii) of
this section.
[[Page 696]]
(ii) Allocation procedure. The procedure for allocating residual
shared employees under the method in this paragraph (c)(3) is as
follows--
(A) The number of highly compensated residual shared employees who
are allocated to each qualified separate line of business is equal to
the product determined by multiplying the total number of highly
compensated residual shared employees of the employer by the employee
assignment percentage determined with respect to the qualified separate
line of business under paragraph (c)(3)(i) of this section;
(B) The number of nonhighly compensated residual shared employees
who are allocated to each qualified separate line of business is equal
to the product determined by multiplying the total number of nonhighly
compensated residual shared employees of the employer by the employee
assignment percentage determined with respect to the qualified separate
line of business under paragraph (c)(3)(i) of this section;
(C) For purposes of this procedure, the employer is permitted to
determine which highly compensated residual shares employees and which
nonhighly compensated residual shared employees are allocated to each
qualified separate line of business, provided that the required number
of highly and nonhighly compensated residual shared employees are
allocated to each qualified separate line of business.
(iii) Examples. The following example illustrates the application of
the method of allocation in this paragraph (c)(4).
Example 1. The facts that are the same as in Example 1 under
paragraph (c)(2)(v) of this section except that there are no additional
residual shared employees after the first testing day. Of Employer A's
1,000 residual shared employees, 800 are highly compensated employees
and 200 are nonhighly compensated employees. Employer A applies the pro-
rata method of allocation in this paragraph (c)(3). Under these facts,
the 1,000 residual shared employees are allocated among Employer A's
qualified separate lines of business as follows:
----------------------------------------------------------------------------------------------------------------
Software
developer Health food Real estate Ski equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees................... 2,500 1,000 2,500 4,000
Percentage Assigned to QSLOB (``employee 25% 10% 25% 40%
assignment percentage'').......................
Residual Shared HCEs............................ 200 80 200 320
Allocated to QSLOB.............................. (25%X800) (10%X800) (25%X800) (40%X200)
Residual Shared NHCEs........................... 50 20 50 80
Allocated to QSLOB.............................. (25%X200) (10%X200) (25%X200) (40%X200)
----------------------------------------------------------------------------------------------------------------
(4) HCE percentage ratio method of allocation--(i) In general. Under
the method of allocation in this paragraph (c)(4), all residual shared
employees are allocated among an employer's qualified separate lines of
business according to the highly compensated employee percentage
assignment ratio of each qualified separate line of business.
(ii) Highly compensated employee percentage assignment ratio. For
purposes of this paragraph (c)(4), the highly compensated employee
percentage assignment ratio of a qualified separate line of business is
the fraction expressed as a percentage)--
(A) The numerator of which is the percentage of all employees who
have previously been assigned to the qualified separate line of business
under this section with respect to the testing year who are highly
compensated employees; and
(B) The denominator of which is the percentage of all employees who
have previously been assigned to any qualified separate line of business
under this section with respect to the testing year who are highly
compensated employees.
Thus, the highly compensated employee percentage assignment ratio of
each of the employer's qualified separate lines of business is
recalculated each time a residual shared employee is allocated to a
qualified separate line of business under this paragraph (c)(5).
(iii) Allocation procedure. The procedure for allocating all
residual shared
[[Page 697]]
employees under the method in this paragraph (c)(4) is as follows--
(A) If there are any qualified separate lines of business with a
highly compensated employee percentage assignment ratio of less than 50
percent (as determined immediately before the employee is allocated to a
qualified separate line of business), the highly compensated residual
shared employee must be allocated to one of these qualified separate
lines of business;
(B) If there are any qualified separate lines of business with a
highly compensated employee percentage assignment ratio of greater than
200 percent (as determined immediately before the employee is allocated
to a qualified separate line of business), the nonhighly compensated
residual shared employee must be allocated to one of these qualified
separate lines of business;
(C) If there are no qualified separate lines of business with a
highly compensated employee percentage assignment ratio less than 50
percent, a highly compensated residual shared employee may be allocated
to any qualified separate line of business with a highly compensated
employee percentage assignment ratio of no more than 200 percent,
provided that the employee's allocation to the qualified separate line
of business does not cause its highly compensated employee percentage
assignment ratio to exceed 200 percent (as determined immediately after
the employee is allocated to the qualified separate line of business);
(D) If there are no qualified separate lines of business with a
highly compensated employee percentage assignment ratio greater than 200
percent, a nonhighly compensated residual shared employee may be
allocated to any qualified separate line of business with a highly
compensated employee percentage assignment ratio of no less than 50
percent, provided that the employee's allocation to the qualified
separate line of business does not cause its highly compensated employee
percentage assignment ratio to fall below 50 percent (as determined
immediately after the employee is allocated to the qualified separate
line of business);
(E) For purposes of this procedure, the employer is permitted to
determine which highly compensated residual shared employees and which
nonhighly compensated residual shared employees are allocated to each
qualified separate line of business, provided that the requirements of
this paragraph (c)(4)(iii) are satisfied.
(5) Small group method--(i) In general. Under the method of
allocation provided for in this paragraph (c)(5), each residual shared
employee is allocated to a qualified separate line of business chosen by
the employer. This method does not apply unless all of the requirements
of paragraphs (c)(5)(ii), (iii), and (iv) of this section are satisfied.
(ii) Size of group. The total number of the employer's residual
shared employees allocated under this paragraph (c) must not exceed
three percent of all of the employer's employees. For this purpose, the
employer's employees include only those employees taken into account
under paragraph (c)(2)(iii)(B) of this section.
(iii) Composition of qualified separate line of business. The
qualified separate line of business to which the residual shared
employee is allocated must have an employee assignment percentage under
paragraph (c)(2)(iii) of this section of at least ten percent. In
addition, the qualified separate line of business to which the residual
shared employee is allocated must satisfy the statutory safe harbor
under Sec. 1.414(r)-5(b) after the employee is so allocated.
(iv) Reasonable allocation. The allocation of residual shared
employees under the small group method provided for in this paragraph
(c)(5) must be reasonable. Reasonable allocations generally include
allocations that are based on the level of services that the residual
shared employees provide to the employer's qualified separate lines of
business, the similar treatment of similarly situated residual shared
employees, and other bona fide business criteria; in contrast, an
allocation that is designed to maximize benefits for select employees is
not considered a reasonable allocation. For example, allocation of all
residual shared employees who work in the same department, or at the
same location, to the same qualified separate line of business would be
an indication of reasonableness. However, allocation of a group of
[[Page 698]]
similarly situated residual shared employees to a qualified separate
line of business for which they provide minimal services might not be
considered reasonable. In addition, the allocation of the professional
employees of a department to one qualified separate line of business and
the allocation of the support staff of the same department to a
different qualified separate line of business would not be reasonable.
[T.D. 8376, 56 FR 63453, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32920, June 27, 1994]
Sec. 1.414(r)-8 Separate application of section 410(b).
(a) General rule. If an employer is treated as operating qualified
separate lines of business for purposes of section 410(b) in accordance
with Sec. 1.414(r)-1(b) for a testing year, the requirements of section
410(b) must be applied in accordance with this section separately with
respect to the employees of each qualified separate line of business for
purposes of testing all plans of the employer for plan years that begin
in the testing year (other than a plan tested under the special rule for
employer-wide plans in Sec. 1.414(r)-(c)(2)(ii) for such a plan year).
Conversely, if an employer is not treated as operating qualified
separate lines of business for purposes of section 410(b) in accordance
with Sec. 1.414(r)-1(b) for a testing year, the requirements of section
410(b) must be applied on an employer-wide basis for purposes of testing
all plans of the employer for plan years that begin in the testing year.
See Sec. 1.414(r)-1(c)(2) and (d)(6). Paragraph (b) of this section
explains how the requirements of section 410(b) are applied separately
with respect to the employees of a qualified separate line of business
for purposes of testing a plan. Paragraph (c) of this section explains
the coordination between sections 410(b) and 401(a)(4). Paragraph (d) of
this section provides certain supplementary rules necessary for the
application of this section.
(b) Rules of separate application--(1) In general. If the
requirements of section 410(b) are applied separately with respect to
the employees of each qualified separate line of business operated by
the employer for a testing year, a plan (other than a plan that is
tested under the special rule for employer-wide plans in Sec. 1.414(r)-
1(c)(2)(ii) for a plan year) satisfies the requirements of section
410(b) only if--
(i) The plan satisfies section 410(b)(5)(B) of an employer-wide
basis; and
(ii) The plan satisfies section 410(b) on a qualified-separate-line-
of-business basis.
(2) Satisfaction of section 410(b)(5)(B) on an employer-wide basis--
(i) General rule. Section 410(b)(5)(B) provides that a plan is not
permitted to be tested separately with respect to the employees of a
qualified separate line of business unless the plan benefits a
classification of employees found by the Secretary to be
nondiscriminatory. A plan satisfies this requirement only if the plan
satisfies either the ratio percentage test of Sec. 1.410(b)-2(b)(2) or
the nondiscriminatory classification test of Sec. 1.410(b)-4 (without
regard to the average benefit percentage test of Sec. 1.410(b)-5),
taking into account the other applicable provisions of Secs. 1.410(b)-1
through 1.410(b)-10. For this purpose, the nonexcludable employees of
the employer taken into account in testing the plan under section 410(b)
are determined under Sec. 1.410(b)-6, without regard to the exclusion in
Sec. 1.410(b)-6(e) for employees of other qualified separate lines of
business of the employer. Thus, in testing a plan separately with
respect to the employees of one qualified separate line of business
under this paragraph (b)(2), the otherwise nonexcludable employees of
the employer's other qualified separate lines of business are not
treated as excludable employees. However, under the definition of
``plan'' in paragraph (d)(2) of this section, these employees are not
treated as benefiting under the plan for purposes of applying this
paragraph (b)(2).
(ii) Application of facts and circumstances requirements under
nondiscriminatory classification test. The fact that an employer has
satisfied the qualified-separate-line-of-business requirements in
Secs. 1.414(r)-1 through 1.414(r)-7 is taken into account in determining
whether a classification of employees benefiting under a plan that falls
between the safe and unsafe harbors satisfies Sec. 1.410(b)-4(c)(3)
(facts and circumstances requirements). Except
[[Page 699]]
in unusual circumstances, this fact will be determinative.
(iii) Modification of unsafe harbor percentage for plans satisfying
ratio percentage test at 90 percent level--(A) General rule. If a plan
benefits a group of employees for a plan year that would satisfy the
ratio percentage test of Sec. 1.410(b)-2(b)(2) on a qualified-separate-
line-of-business basis under paragraph (b)(3) of this section if the
percentage in Sec. 1.410(b)-2(b)(2) were increased to 90 percent, the
unsafe harbor percentage in Sec. 1.410(b)-4(c)(4)(ii) for the plan is
reduced by five percentage points (not five percent) for the plan year
and is applied without regard to the requirement that the unsafe harbor
percentage not be less than 20 percent. Thus, if the requirements of
this paragraph (b)(2)(iii)(A) are satisfied, the unsafe harbor
percentage in Sec. 1.410(b)-4(c)(4)(ii) is treated as 35 percent,
reduced by \3/4\ of a percentage point for each whole percentage point
by which the nonhighly compensated employee concentration percentage
exceeds 60 percent.
(B) Facts and circumstances alternative. If a plan satisfies the
requirements of paragraph (b)(2)(iii)(A) of this section, but has a
ratio percentage on an employer-wide basis that falls below the unsafe
harbor percentage determined under paragraph (b)(2)(iii)(A) of this
section, the plan nonetheless is deemed to satisfy section 410(b)(5)(B)
on an employer-wide basis if the Commissioner determines that, on the
basis of all of the relevant facts and circumstances, the plan benefits
such employees as qualify under a classification of employees that does
not discriminate in favor of highly compensated employees.
(3) Satisfaction of section 410(b) on a qualified-separate-line-of-
business basis. A plan satisfies section 410(b) on a qualified-separate-
line-of-business basis only if the plan satisfies either the ratio
percentage test of Sec. 1.410(b)-2(b)(2) or the average benefit test of
Sec. 1.410(b)-2(b)(3) (including the nondiscriminatory classification
test of Sec. 1.410(b)-4 and the average benefit percentage test of
Sec. 1.410(b)-5), taking into account the other applicable provisions of
Secs. 1.410(b)-1 through 1.410(b)-10. For this purpose, the non-
excludable employees of the employer taken into account in testing the
plan under section 40(b) are determined under Sec. 1.410(b)-6, taking
into account the exclusion in Sec. 1.410(b)-6(e) for employees of other
qualified separate lines of business of the employer. Thus, in testing a
plan separately with respect to the employees of one qualified separate
line of business under this paragraph (b)(3), all employees of the
employer's other qualified separate lines of business are treated as
excludable employees.
(4) Examples. The following examples illustrate the application of
this paragraph (b).
Example 1. (i) Employer A is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
Sec. 1.414(r)-1(b) for the 1994 testing year with respect to all of its
plans. Employer A operates two qualified separate lines of business as
determined under Sec. 1.414(r)-1(b)(2), Line 1 and Line 2. Employer A
maintains only two plans, Plan X which benefits solely employees of Line
1, and Plan Y which benefits solely employees of Line 2. In testing Plan
X under section 410(b) with respect to the first testing day for the
plan year of Plan X beginning in the 1994 testing year, it is determined
that Employer A has 2,100 nonexcludable employees, of whom 100 are
highly compensated employees and 2,000 are nonhighly compensated
employees. After applying Sec. 1.414(r)-7 to these employees, 50 of the
highly compensated employees and 100 of the nonhighly compensated
employees are treated as employees of Line 2, and the remaining 50
highly compensated employees and the remaining 1,900 nonhighly
compensated employees are treated as employees of Line 1.
(ii) All of the highly compensated employees and 1,300 of the
nonhighly compensated employees who are treated as employees of Line 1
benefit under Plan X. Thus, on an employer-wide basis, Plan X benefits
50 percent of all Employer A's highly compensated employees (50 out of
100) and 65 percent of all Employer A's nonhighly compensated employees
(1,300 out of 2,000). Plan X consequently has a ratio percentage
determined on an employer-wide basis of 130 percent (65%/50%), see
Sec. 1.410(b)-9, and could satisfy section 410(b) under the ratio
percentage test of Sec. 1.410(b)-2(b)(2) if that section were applied on
an employer-wide basis without regard to the provisions of this
paragraph (b). Under paragraph (a) of this section, however, the
requirements of section 410(b) must be applied separately with respect
to the employees of each qualified separate line of business operated by
Employer A for all plans of Employer A for plan years that begin in the
1994 testing year. This rule does
[[Page 700]]
not apply to plans tested under the special rule for employer-wide plans
in Sec. 1.414(r)-1(c)(2)(ii). Plan X benefits only 65 percent of the
nonhighly compensated employees of Employer A, however, and therefore
cannot satisfy the 70 percent requirement necessary to be tested under
that rule. As a result, for the plan year of Plan X beginning in the
1994 testing year, Plan X is not permitted to satisfy section 410(b) on
an employer-wide basis and, instead, is only permitted to satisfy
section 410(b) separately with respect to the employees of each
qualified separate line of business operated by Employer A, in
accordance with paragraphs (b)(2) and (b)(3) of this section.
Example 2. The facts are the same as in Example 1. All of the 50
highly compensated employees treated as employees of Line 2 benefit
under Plan Y, and 80 of the 100 nonhighly compensated employees treated
as employees of Line 2 benefit under Plan Y. Thus, Plan Y benefits 50
percent of all Employer A's highly compensated employees (50 out of 100)
and only 4 percent of all Employer A's nonhighly compensated employees
(80 out of 2,000). Thus, while Plan Y has a ratio percentage of 80
percent (80%/100%) on a qualified-separate-line-of-business basis, it
has a ratio percentage of only 8 percent (4%/50%) on an employer-wide
basis. See Sec. 1.410(b)-9. Under Sec. 1.410(b)-4(c)(4)(iii), the
nonhighly compensated employee concentration percentage is 2,000/2,100
or 95 percent. Because 8 percent is less than 20 percent (the unsafe
harbor percentage applicable to Employer A under Sec. 1.410(b)-
4(c)(4)(ii)), Plan Y does not satisfy the nondiscriminatory
classification test of Sec. 1.410(b)-4 on an employer-wide basis. Nor
does Plan Y satisfy the ratio percentage test of Sec. 1.410(b)-2(b)(2)
on an employer-wide basis, since 8 percent is less than 70 percent.
Under these facts, Plan Y does not satisfy section 410(b)(5)(B) on an
employer-wide basis in accordance with paragraph (b)(2) of this section
for the plan year of Plan Y beginning in the 1994 testing year, and
therefore fails to satisfy section 410(b) for that year. This is true
even though Plan Y satisfies section 410(b) on a qualified-separate-
line-of-business basis in accordance with paragraph (b)(3) of this
section.
Example 3. The facts are the same as in Example 2, except that all
of the employees treated as employees of Line 2 benefit under Plan Y.
Thus, Plan Y benefits 50 percent of all of Employer A's highly
compensated employees (50 out of 100) and 5 percent of all of Employer
A's nonhighly compensated employees (100 out of 2,000). Plan Y therefore
has a ratio percentage of 100 percent (100%/100%) on a qualified-
separate-line-of-business basis and a ratio percentage of 10 percent
(5%/50%) on an employer-wide basis. Because Plan Y has a ratio
percentage of at least 90 percent on a qualified-separate-line-of-
business basis, a reduced unsafe harbor percentage applies to Plan Y
under paragraph (b)(2)(iii)(A) of this section. The reduced unsafe
harbor percentage applicable to Plan Y is 8.75 percent because Employer
A's nonhighly compensated employee concentration percentage is 95
percent. Plan Y's employer-wide ratio percentage of 10 percent therefore
exceeds the unsafe harbor percentage. Plan Y thus satisfies section
410(b)(5)(B) on an employer-wide basis in accordance with paragraph
(b)(2) of this section for the plan year of Plan Y beginning in the 1994
testing year. Plan Y also satisfies section 410(b) on a qualified-
separate-line-of-business basis in accordance with paragraph (b)(3) of
this section.
Example 4. The facts are the same as in Example 3, except that
Employer A's total nonexcludable nonhighly compensated employees are
2,500 (rather than 2,000), of whom 100 are treated as employees of Line
2 and of whom 90 benefit under Plan Y. Plan Y has a ratio percentage of
90 percent (90%/100%) on a qualified-separate-line-of-business basis,
and Employer A's nonhighly compensated employee concentration percentage
is 2,500/2,600 or 96 percent. Thus, the reduced unsafe harbor percentage
applicable to Plan Y under paragraph (b)(2)(iii)(A) of this section is 8
percent. Plan Y benefits 50 percent of all of Employer A's highly
compensated employees (50 out of 100) and 3.6 percent of all of Employer
A's nonhighly compensated employees (90 out of 2,500). Plan Y therefore
has a ratio percentage of only 7.2 percent (3.6%/50%) on an employer-
wide basis, which falls below the reduced unsafe harbor percentage of 8
percent. Nonetheless, under paragraph (b)(2)(iii)(B) of this section,
Plan Y will be deemed to satisfy section 410(b)(5)(B) on an employer-
wide basis if the Commissioner determines that, on the basis of all of
the relevant facts and circumstances, the plan benefits such employees
as qualify under a classification of employees that does not
discriminate in favor of highly compensated employees.
Example 5. (i) The facts are the same as in Example 1, except that
Plan X benefits only 950 of the employees of Line 1. Assume Plan X
satisfies the reasonable classification requirement of Sec. 1.410(b)-
4(b) on an employer-wide basis. Plan X benefits 50 percent of all
Employer A's highly compensated employees (50 out 100) and 47.5 percent
of all Employer A's nonhighly compensated employees (950 out of 2,000).
Plan X consequently has a ratio percentage determined on an employer-
wide basis of 95 percent (47.5%/50%), see Sec. 1.410(b)-9, and thus
satisfies section 410(b)(5)(B) on an employer-wide basis.
(ii) Plan X has a ratio percentage determined on a qualified-
separate-line-of-business basis of 50 percent (50% / 100%). Because 50
percent is less than 70 percent, Plan X must satisfy the
nondiscriminatory classification test of Sec. 1.410(b)-4 and the average
[[Page 701]]
benefit percentage test of Sec. 1.410(b)-5 on a qualified-separate-line-
of-business basis in order to satisfy the other requirements of section
410(b). Plan X satisfies the nondiscriminatory classification
requirement of Sec. 1.410(b)-4(c) on a qualified-separate-line-of-
business because its ratio percentage determined on a qualified-
separate-line-of-business basis is more than 22.25 percent, the safe
harbor percentage applicable to Line 1 under Sec. 1.410(b)-4(c)(4)(i).
Because Plan X satisfies the reasonable classification requirement of
Sec. 1.410(b)-4(b) on an employer-wide basis, it is also deemed to
satisfy this requirement on a qualified-separate-line-of-business basis.
See Sec. 1.410(b)-7(c)(5). In determining whether Plan X satisfies the
average benefit percentage test of Sec. 1.410(b)-5, only Plan X and only
employees of Line 1 are taken into account. See Secs. 1.410(b)-6(e) and
1.410(b)-7(e).
Example 6. The facts are the same as in Example 2, except that,
prior to the 1994 testing year, Employer A merges Plan X and Plan Y so
that they form a single plan within the meaning of section 414(l). Under
the definition of ``plan'' in paragraph (d)(2) of this section, however,
the portion of the newly merged plan that benefits employees of Line 2
(former Plan Y) is still treated as a separate plan from the portion of
the newly merged plan that benefits employees of Line 1 (former Plan X).
The portion of the newly merged plan that benefits employees of Line 2
(former Plan Y) fails to satisfy section 410(b) for the reasons stated
in Example 2. Under these facts, because the portion of the newly merged
plan that benefits employees of Line 2 fails to satisfy section 410(b),
the entire newly merged plan fails to satisfy section 410(b) for the
plan year of the newly merged plan that begins in the 1994 testing year.
See paragraph (d)(5) of this section.
(c) Coordination of section 401(a)(4) with section 410(b)--(1)
General rule. For purposes of these regulations, the requirements of
section 410(b) encompass the requirements of section 401(a)(4)
(including, but not limited to, the permitted disparity rules of section
401(l), the actual deferral percentage test of section 401(k)(3), and
the actual contribution percentage test of section 401(m)(2)).
Therefore, if the requirements of section 410(b) are applied separately
with respect to the employees of each qualified separate line of
business of an employer for purposes of testing one or more plans of the
employer for plan years that begin in a testing year, the requirements
of section 401(a)(4) must also be applied separately with respect to the
employees of the same qualified separate lines of business for purposes
of testing the same plans for the same plan years. Furthermore, if
section 401(a)(4) requires that a group of employees under the plan
satisfy section 410(b) for purposes of satisfying section 401(a)(4),
section 410(b) must be applied for this purpose in the same manner
provided in paragraph (b) of this section. See, for example,
Secs. 1.401(a)(4)-2(c)(1) and 1.401(a)(4)-3(c)(1) (requiring each rate
group of employees under a plan to satisfy section 410(b)),
Sec. 1.401(a)(4)-4(b) (requiring the group of employees to whom each
benefit, right, or feature is currently available under a plan to
satisfy section 410(b)), and Sec. 1.401(a)(4)-9(c)(1) (requiring the
group of employees included in each component plan into which a plan is
restructured to satisfy section 410(b)). Thus, the group of employees
must satisfy section 410(b)(5)(B) on an employer-wide basis in
accordance with paragraph (b)(2) of this section and also must satisfy
section 410(b) on a qualified-separate-line-of-business basis in
accordance with paragraph (b)(3) of this section, in both cases as if
the group of employees were the only employees benefiting under the
plan.
(2) Examples. The following examples illustrate the application of
the rule in this paragraph (c).
Example 1. Employer B is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
Sec. 1.414(r)-1(b) for the 1993 testing year. Employer B operates two
qualified separate lines of business as determined under Sec. 1.414(r)-
1(b)(2), Line 1 and Line 2. Employer B maintains Plan Z, which benefits
employees in both Line 1 and Line 2. Under the definition of ``plan'' in
paragraph (d)(2) of this section, the portion of Plan Z that benefits
employees of Line 1 is treated as a separate plan from the portion of
Plan Z that benefits employees of Line 2. Under this paragraph (c), this
result applies for purposes of both section 410(b) and section
401(a)(4).
Example 2. The facts are the same as in Example 1, except that Plan
Z benefits solely employees of Line 1. In testing Plan Z under section
401(a)(4) for the plan year of Plan Z beginning in the 1993 testing
year, Employer B restructures Plan Z into several component plans
(within the meaning of Sec. 1.401(a)(4)-9(c)). Under Sec. 1.401(a)(4)-
9(c)(1), each of these component plans is required to satisfy section
410(b). This paragraph (c) requires that each of the component plans be
[[Page 702]]
tested separately with respect to the employees of each qualified
separate line of business operated by Employer B. This testing must be
done in accordance with paragraph (b) of this section. Consequently,
each component plan must satisfy section 410(b)(5)(B) on an employer-
wide basis in accordance with paragraph (b)(2) of this section and must
also satisfy section 410(b) on a qualified-separate-line-of-business
basis in accordance with paragraph (b)(3) of this section.
Example 3. The facts are the same as in Example 1, except that Plan
Z is a profit-sharing plan, and contributions to Plan Z are made
pursuant to cash or deferred arrangement in which all employees of
Employer B are eligible to participate. Assume that, as a result, Plan Z
satisfies the requirements to be tested under the special rule for
employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii). Under these facts, the
requirements of sections 410(b), 401(a)(4) and 401(k), including the
actual deferral percentage test of section 401(k)(3) and Sec. 1.401(k)-
1(b), would generally be required to be applied separately to the
portions of Plan Z that benefit the employees of Line 1 and Line 2,
respectively. However, if Plan Z is tested under the special rule in
Sec. 1.414(r)-1(c)(2)(ii), these requirements must be applied on an
employer-wide basis.
(d) Supplementary rules--(1) In general. This paragraph (d) provides
certain supplementary rules necessary for the application of this
section.
(2) Definition of plan. For purposes of this section, the term 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)
(including the mandatory disaggregation rule for portions of a plan that
benefit employees of different qualified separate lines of business) and
the permissive aggregation rules of Sec. 1.410(b)-7(d). Thus, for
purposes of this section, the portion of a plan that benefits employees
of one qualified separate line of business is treated as a separate plan
from the other portions of the same plan that benefit employees of other
qualified separate lines of business of the employer, unless the plan is
tested under the special rule for employer-wide plans in Sec. 1.414(r)-
1(c)(2)(ii) for the plan year.
(3) Employees of a qualified separate line of business. For purposes
of applying paragraph (b) of this section with respect to a testing day,
the employees of each qualified separate line of business of the
employer are determined by applying Sec. 1.414(r)-7 to the employees of
the employer otherwise taken into account under section 410(b) for the
testing day. For purposes of applying paragraph (c) of this section with
respect to a testing day, the employees of each qualified separate line
of business of the employer are determined by applying Sec. 1.414(r)-7
to the employees of the employer otherwise taken into account under
section 410(a)(4) for the testing day. For the definition of testing
day, see Sec. 1.414(r)-11(b)(6).
(4) Consequences of failure. If a plan fails to satisfy either
paragraph (b)(2), (b)(3), or (c)(1) of this section, the plan (and any
plan of which it constitutes a portion) fails to satisfy section 401(a).
However, this failure alone does not cause the employer to fail to be
treated as operating qualified separate lines of business in accordance
with Sec. 1.414(r)-1(b), unless the employer is relying on benefits
provided under the plan to satisfy the minimum benefit portion of the
safe harbor in Sec. 1.414(r)-5(g)(2) with respect to at least one of its
qualified separate lines of business.
[T.D. 8376, 56 FR 63457, Dec. 4, 1991, as amended by T.D. 8376, 57 FR
52591, Nov. 4, 1992; T.D. 8548, 59 FR 32921, June 27, 1994]
Sec. 1.414(r)-9 Separate application of section 401(a)(26).
(a) General rule. 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) for a testing year, the requirements
of section 401(a)(26) must be applied separately with respect to the
employees of each qualified separate line of business for purposes of
testing all plans of the employer for plan years that begin in the
testing year (other than a plan tested under the special rule for
employer-wide plans in Sec. 1.414(r)-1(c)(3)(ii) for such a plan year).
Conversely, if an employer is not treated as operating qualified
separate lines of business for purposes of section 401(a)(26) in
accordance with Sec. 1.414(r)-1(b) for a testing year, the requirements
of section 401(a)(26) must be applied on an employer-wide basis for
purposes of testing all plans of the employer for plan years that begin
in the
[[Page 703]]
testing years. See Sec. 1414(r)-1(c)(3) and (d)(6). Paragraph (b) of
this section explains how the requirements of section 401(a)(26) are
applied separately with respect to the employees of a qualified separate
line of business for purposes of testing a plan. Paragraph (c) of this
section provides certain supplementary rules necessary for the
application of this section.
(b) Requirements applicable to a plan. If the requirements of
section 401(a)(26) are applied separately with respect to the employees
of a qualified separate line of business for a testing year, a plan
(other than 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) satisfies
section 401(a)(26) only if it satisfies the requirements of
Secs. 1.401(a)(26)-1 through 1.401(a)(26)-9 on a qualified-separate-
line-of-business basis. For this purpose, the nonexcludable employees of
the employer taken into account in testing the plan under section
401(a)(26) are determined under Sec. 1.401(a)(26)-6(b), taking into
account the exclusion in Sec. 1.401(a)(26)-6(b)(8) for employees of
other qualified separate lines of business of the employer. Thus, in
testing a plan separately with respect to the employees of one qualified
separate line of business under this paragraph (b), all employees of the
employer's other qualified separate lines of business are treated as
excludable employees.
(c) Supplementary rules--(1) In general. This paragraph (c) provides
certain supplementary rules necessary for the application of this
section.
(2) Definition of plan. For purposes of this section, the term plan
mean a plan within the meaning of Sec. 1.401(a)(26)-2(c) and (d),
including the mandatory disaggregation rule of Sec. 1.401(a)(26)-2(d)(6)
for portions of a plan that benefit employees of different qualified
separate lines of business. Thus, for purposes of this section, the
portion of a plan that benefits employees of one qualified separate line
of business is treated as a separate plan from the other portions of the
same plan that benefit employees of other qualified separate lines of
business of the employer, unless the plan is tested under the special
rule for employer-wide plans in Sec. 1.414(r)-1(c)(3)(ii) for the plan
year.
(3) Employees of a qualified separate line of business. For purposes
of applying paragraph (b)(2) of this section with respect to a section
401(a)(26) testing day, the employees of each qualified separate line of
business of the employer are determined by applying Sec. 1.414(r)-7 to
the employees of the employer otherwise taken into account under section
401(a)(26) for the section 401(a)(26) testing day. For the definition of
section 401(a)(26) testing day, see Sec. 1.414(r)-11(b)(8).
(4) Consequences of failure. If a plan fails to satisfy paragraph
(b)(2) of this section, the plan (and any plan of which it constitutes a
portion) fails to satisfy section 401(a). However, this failure alone
would not cause the employer to fail to be treated as operating
qualified separate lines of business in accordance with Sec. 1.414(r)-
1(b), unless the employer is relying on benefits provided under the plan
to satisfy the minimum benefit portion of the safe harbor in
Sec. 1.414(r)-5(g)(2) with respect to at least one of its qualified
separate lines of business.
[T.D. 8376, 56 FR 63459, Dec. 4, 1991]
Sec. 1.414(r)-10 Separate application of section 129(d)(8). [Reserved]
Sec. 1.414(r)-11 Definitions and special rules.
(a) In general. This section contains certain definitions and
special rules applicable under these regulations. Paragraph (b) of this
section provides certain definitions that apply for purposes of these
regulations. Paragraph (c) of this section provides averaging rules
under which certain provisions of these regulations may be applied on
the basis of a two-year or a three-year average.
(b) Definitions--(1) In general. In applying the provisions of this
section and of Secs. 1.414(r)-1 through 1.414(r)-10, unless otherwise
provided, the definitions in this paragraph (b) govern in addition to
the definitions in Sec. 1.410(b)-9.
[[Page 704]]
(2) Substantial-service employee. An employee is a substantial-
service employee with respect to a line of business for a testing year
if at least 75 percent of the employee's services are provided to that
line of business for that testing year within the meaning of
Sec. 1.414(r)-3(c)(5). In addition, if an employee provides at least 50%
and less than 75% of the employee's services to a line of business for
the testing year within the meaning of Sec. 1.414(r)-3(c)(5), the
employer may treat that employee as a substantial-service employee with
respect to that line of business provided the employee is so treated for
all purposes of these regulations. The employer may choose such
treatment separately with respect to each employee.
(3) Top-paid employee. Generally, an employee is a top-paid employee
with respect to a line of business for a testing year if the employee is
among the top 10 percent by compensation of those employees who provide
services to that line of business for that testing year within the
meaning of Sec. 1.414(r)-3(c)(5) and who are not substantial-service
employees within the meaning of paragraph (b)(2) of this section with
respect to any other line of business. In addition, in determining the
group of top-paid employees, the employer may choose to disregard all
employees who provide less than 25 percent of their services to the line
of business. For purposes of this paragraph (b)(3), an employee's
compensation is the compensation used to determine the employee's status
as a highly or nonhighly compensated employee under section 414(q) for
purposes of applying section 410(b) with respect to the first testing
day. For this purpose, only compensation received during the
determination year (within the meaning of Sec. 1.414(q)-1T, Q&A-13) is
taken into account. See Sec. 1.414(r)-3(c)(7) for examples of the
determination of top-paid employee.
(4) Residual shared employee. An employee is a residual shared
employee for a testing year if the employee is not a substantial-service
employee with respect to any line of business for the testing year.
(5) Testing year. The term testing year means the calendar year.
(6) Testing day. The term testing day means any day on which
Sec. 1.410(b)-8(a)(1) requires any plan (within the meaning of
Sec. 1.414(r)-8(d)(2)) of the employer actually to satisfy section
410(b) with respect to plan year that begins in the testing year. Thus,
if a plan is required to satisfy section 410(b) on one day within each
quarter of the plan year under the quarterly testing option of
Sec. 1.410(b)-8(a)(3), each of those four days is a testing day.
Similarly, if a plan is required to satisfy section 410(b) on every day
of the plan year under the daily testing option of Sec. 1.410(b)-
8(a)(2), every day of the plan year is a testing day.
(7) First testing day. The term first testing day means the testing
day that occurs earliest in time of all the testing days under all plans
of the employer with respect to the testing year. If a plan is tested
under the annual testing option of Sec. 1.410(b)-8(a)(4) (other than for
purposes of the average benefit percentage test of Sec. 1.410(b)-5) for
a plan year that begins in a testing year, then, solely for purposes of
determining the first testing day in a testing year, the employer may
treat any day in the plan year as a testing day, provided that the
coverage of each plan of the employer on the day selected is reasonably
representative of the coverage of the plan over the entire plan year.
The first testing day with respect to a testing year must fall within
that testing year.
(8) Section 401(a)(26) testing day. The term section 401(a)(26)
testing day means any day on which Sec. 1.401(a)(26)-7(a) or (b)
requires any plan of the employer actually to satisfy section 401(a)(26)
with respect to a plan year that begins in the testing year. In no event
may a section 401(a)(26) testing day with respect to a testing year fall
before the first testing day for that testing year. For purposes of this
paragraph (b)(8), the term plan has the same meaning as in Sec. 1.414(r-
9(c)(2).
(c) Averaging rules--(1) In general. The provisions specified in
this paragraph (c) are permitted to be applied based on the average of
the percentages for the current testing year and the consecutive testing
years (not to exceed four consecutive testing years) immediately
preceding the current testing year.
[[Page 705]]
(2) Specified provisions. The provisions specified in this paragraph
(c) are--
(i) The 90-percent separate employee workforce requirement of
Sec. 1.414(r)-3(b)(4);
(ii) The 80-percent separate management requirement of
Sec. 1.414(r)-3(b)(5);
(iii) The 25-percent provision-to-customers requirement of
Sec. 1.414(r)-3(d)(2)(iii);
(iv) The minimum and maximum highly compensated employee percentage
ratios under the statutory safe harbor of Sec. 1.414(r)-5(b)(1)(i) and
(ii) (50 percent and 200 percent, respectively), but not the 10-percent
exception in Sec. 1.414(r)-5(b)(4);
(v) The employee assignment percentage applied for purposes of the
dominant line of business method of allocating residual shared employees
under Sec. 1.414(r)-7(c)(2) and the pro-rata method for allocating
residual shared employees under Sec. 1.414(r)-7(c)(3).
(3) Averaging of large fluctuations not permitted. A provision is
not permitted to be applied based on an average determined under this
paragraph (c) if the percentage for any testing year taken into account
in calculating the average falls below a mimimum percentage, or exceeds
a maximum percentage, by more than 10 percent (not 10 percentage points)
of the respective minimum or maximum percentage. Thus, for example, the
statutory safe harbor of Sec. 1.414(r)-5(b) is not permitted to be
applied based on an average determined under this paragraph (c) if the
percentage for any testing year taken into account in calculating the
average falls below 45 percent (which is 10 percent below the 50-percent
minimum) or exceeds 220 percent (which is 10 percent above the 200-
percent maximum).
(4) Consistency requirements. A provision is permitted to be applied
on an averaging basis under this paragraph (c) regardless of how any
other provision is applied, except in the case of the separate employee
workforce and separate management requirements of Sec. 1.414(r)-3(b)(4)
and (5), which each must be applied on the same basis as the other. A
provision is also permitted to be applied on an averaging basis under
this paragraph (c) for a testing year, regardless of how the provision
is applied for any other testing year. However, once a provision is
applied on an averaging basis under this paragraph (c) for a testing
year, it must be applied on the same basis to all the employer's lines
of business to which the provision is applied for the testing year. The
percentage for a preceding testing year may be taken into account under
this paragraph (c) only if--
(i) The employer calculates the percentage for the preceding testing
year in the same manner as the employer calculates the percentage for
the current testing year;
(ii) The employer is treated as operating qualified separate lines
of business in accordance with Sec. 1.414(r)-1(b) for the preceding
testing year; and
(iii) The employer designated the same lines of business in the
preceding testing year as in the current testing year.
[T.D. 8376, 56 FR 63460, Dec. 4, 1991, as amended by T.D. 8548, 59 FR
32922, June 27, 1994]
Sec. 1.414(s)-1 Definition of compensation.
(a) Introduction--(1) In general. Section 414(s) and this section
provide rules for defining compensation for purposes of applying any
provision that specifically refers to section 414(s) or this section.
For example, section 414(s) is referred to in many of the
nondiscrimination provisions applicable to pension, profit-sharing, and
stock bonus plans qualified under section 401(a). In accordance with
section 414(s)(1), this section defines compensation as compensation
within the meaning of section 415(c)(3). It also implements the election
provided in section 414(s)(2) to treat certain deferrals as compensation
and exercises the authority granted to the Secretary in section
414(s)(3) to prescribe alternative nondiscriminatory definitions of
compensation.
(2) Limitations on scope of section 414(s). Section 414(s) and this
section do not apply unless a provision specifically refers to section
414(s) or this section. For example, even though a definition of
compensation permitted under section 414(s) must be used in determining
whether the contributions or
[[Page 706]]
benefits under a pension, profit-sharing, or stock bonus plan satisfy a
certain applicable provision (such as section 401(a)(4)), except as
otherwise specified, the plan is not required to use a definition of
compensation that satisfies section 414(s) in calculating the amount of
contributions or benefits actually provided under the plan.
(3) Overview. Paragraph (b) of this section provides rules of
general application that govern a definition of compensation that
satisfies section 414(s). Paragraph (c) of this section contains
specific definitions of compensation that satisfy section 414(s) without
satisfying any additional nondiscrimination requirement under section
414(s). Paragraph (d) of this section provides rules permitting the use
of alternative definitions of compensation that satisfy section 414(s)
as long as the nondiscrimination requirement and other requirements
described in paragraph (d) of this section are satisfied. Paragraph (e)
and (f) of this section provide special rules permitting the use of rate
of compensation, or prior-employer compensation or imputed compensation,
rather than actual compensation, under a definition of compensation that
satisfies section 414(s). Paragraph (g) of this section provides other
special rules, including a special rule for determining the compensation
of a self-employed individual under an alternate definition of
compensation. Paragraph (h) of this section provides definitions for
certain terms used in this section.
(b) Rules of general application--(1) Use of a definition. Any
definition of compensation that satisfies section 414(s) may be used
when a provision explicitly refers to section 414(s) unless the
reference or this section specifically indicates otherwise.
(2) Consistency rule.--(i) General rule. A definition of
compensation selected by an employer for use in satisfying an applicable
provision must be used consistently to define the compensation of all
employees taken into account in satisfying the requirements of the
applicable provision for the determination period. For example, although
any definition of compensation that satisfies section 414(s) may be used
for section 401(a)(4) purposes, the same definition of compensation
generally must be used consistently to define the compensation of all
employees taken into account in determining whether a plan satisfies
section 401(a)(4). Furthermore, a different definition of compensation
that satisfies section 414(s) is permitted to be used to determine
whether another plan maintained by the same employer separately
satisfies the requirements of section 401(a)(4). Although a definition
of compensation must be used consistently, an employer may change its
definition of compensation for a subsequent determination period with
respect to the applicable provision. Rules provided under any applicable
provision may modify the consistency requirements of this paragraph
(b)(2).
(ii) Scope of consistency rule. Compensation will not fail to be
defined consistently for a group of employees merely because some
employees do not receive one or more of the types of compensation
included in the definition. For example, a definition of compensation
that includes salary, regular or scheduled pay, overtime, and specified
types of bonuses will not fail to define compensation consistently
merely because only salaried employees receive salary and these
specified types of bonuses and only hourly employees receive regular or
scheduled pay and overtime.
(3) Self-employed individuals. Notwithstanding paragraph (b)(1) of
this section, self-employed individuals' compensation can only be
determined under paragraph (c)(2) of this section (with or without the
modification permitted by paragraph (c)(4) of this section or a
modification permitted by paragraph (c)(5) of this section) or by using
an equivalent alternative compensation amount determined in accordance
with paragraph (g)(1) of this section. These limitations on self-
employed individuals do not affect their common-law employees. Thus, the
compensation of common-law employees of a partnership or sole
proprietorship may be defined using an alternative definition, provided
the definition otherwise satisfies paragraph (c)(3), (d), (e), or (f) of
this section. If an alternative definition of compensation under
paragraph (c)(3), (d), (e), or
[[Page 707]]
(f) of this section is used for other employees to satisfy an applicable
provision, the consistency requirement is only met if paragraph (g) of
this section is used for the self-employed individuals.
(c) Specific definitions of compensation that satisfy section
414(s)--(1) General rules. The definitions of compensation provided in
paragraphs (c)(2) and (c)(3) of this section satisfy section 414(s) and
need not satisfy any additional requirements under section 414(s).
Paragraph (c)(2) of this section describes definitions of compensation
within the meaning of section 415(c)(3). Paragraph (c)(3) of this
section provides a safe harbor alternative definition that excludes
certain additional items of compensation. Paragraph (c)(4) of this
section permits any definition provided in paragraph (c)(2) or (c)(3) of
this section to include certain types of elective contributions and
deferred compensation. Paragraph (c)(5) of this section permits certain
modifications to a definition otherwise provided under this paragraph
(c).
(2) Compensation within the meaning of section 415(c)(3). A
definition of compensation that includes all compensation within the
meaning of section 415(c)(3) and excludes all other compensation
satisfies section 414(s). Sections 1.415-2(d)(2) and (d)(3) provide
rules for determining items of compensation included in and excluded
from compensation within the meaning of section 415(c)(3). In addition,
section 414(s) is satisfied by the safe harbor definitions provided in
Sec. 1.415-2(d)(10) and (d)(11) and any additional definitions of
compensation prescribed by the Commissioner under the authority provided
in Sec. 1.415-2(d)(13) that are treated as satisfying section 415(c)(3).
(3) Safe harbor alternative definition. Under the safe harbor
alternative definition in this paragraph (c)(3), compensation is
compensation as defined in paragraph (c)(2) of this section, reduced by
all of the following items (even if includible in gross income):
reimbursements or other expense allowances, fringe benefits (cash and
noncash), moving expenses, deferred compensation, and welfare benefits.
(4) Inclusion of certain deferrals in compensation. Any definition
of compensation provided in paragraph (c)(2) or (c)(3) of this section
satisfies section 414(s) even though it is modified to include all of
the following types of elective contributions and all of the following
types of deferred compensation--
(i) Elective contributions that are made by the employer on behalf
of its employees that are not includible in gross income under section
125, section 402(e)(3), section 402(h), and section 403(b);
(ii) Compensation deferred under an eligible deferred compensation
plan within the meaning of section 457(b) (deferred compensation plans
of state and local governments and tax-exempt organizations); and
(iii) Employee contributions (under governmental plans) described in
section 414(h)(2) that are picked up by the employing unit and thus are
treated as employer contributions.
(5) Exclusions applicable solely to highly compensated employees.
Any definition of compensation that satisfies paragraph (c)(2) or (c)(3)
of this section, with or without the modification permitted by paragraph
(c)(4) of this section, may be modified to exclude any portion of the
compensation of some or all of the employer's highly compensated
employees (including, for example, any one or more of the types of
elective contributions or deferred compensation described in paragraph
(c)(4) of this section).
(d) Alternative definitions of compensation that satisfy section
414(s)--(1) General rule. In addition to the definitions provided in
paragraph (c) of this section, any definition of compensation satisfies
section 414(s) with respect to employees (other than self-employed
individuals treated as employees under section 401(c)(1)) if the
definition of compensation does not by design favor highly compensated
employees, is reasonable within the meaning of paragraph (d)(2) of this
section, and satisfies the nondiscrimination requirement in paragraph
(d)(3) of this section.
(2) Reasonable definition of compensation--(i) General rule. An
alternative definition of compensation under this paragraph (d) is
reasonable under section 414(s) if it is a definition of compensation
provided in paragraph (c) of
[[Page 708]]
this section, modified to exclude all or any portion of one or more of
the types of compensation described in paragraph (d)(2)(ii) of this
section. See paragraph (e) of this section, however, for special rules
that permit definitions of compensation based on employees' rates of
compensation and paragraph (f) of this section for special rules that
permit definitions of compensation that include prior-employer
compensation or imputed compensation.
(ii) Items that may be excluded. A reasonable definition of
compensation is permitted to exclude, on a consistent basis, all or any
portion of irregular or additional compensation, including (but not
limited to) one or more of the following: Any type of additional
compensation for employees working outside their regularly scheduled
tour of duty (such as overtime pay, premiums for shift differential, and
call-in premiums), bonuses, or any one or more of the types of
compensation excluded under the safe harbor alternative definition in
paragraph (c)(3) of this section. Whether a type of compensation is
irregular or additional is determined based on all the relevant facts
and circumstances. A reasonable definition is also permitted to include,
on a consistent basis, all or any portion of the types of elective
contributions or deferred compensation described in paragraph (c)(4) of
this section and, thus, need not include all those types of elective
contributions or deferred compensation as otherwise required under
paragraph (c)(4) of this section.
(iii) Limits on the amount excluded from compensation. A definition
of compensation is not reasonable if it provides that each employee's
compensation is a specified portion of the employee's compensation
measured for the otherwise applicable determination period under another
definition. For example, a definition of compensation that specifically
limits each employee's compensation for a determination period to 95
percent of the employee's compensation using a definition provided in
paragraph (c) of this section is not reasonable. Similarly, a definition
of compensation that limits each employee's compensation used to satisfy
an applicable provision with a 12-month determination period to
compensation under a definition provided in paragraph (c) of this
section for one month is not a reasonable definition of compensation.
However, a definition of compensation is not unreasonable merely because
it excludes all compensation in excess of a specified dollar amount.
(3) Nondiscrimination requirement--(i) In general. An alternative
definition of compensation under this paragraph (d) is nondiscriminatory
under section 414(s) for a determination period if the average
percentage of total compensation included under the alternative
definition of compensation for an employer's highly compensated
employees, as a group for the determination period does not exceed by
more than a de minimis amount the average percentage of total
compensation included under the alternative definition for the
employer's nonhighly compensated employees as a group.
(ii) Total compensation--(A) General rule. For purposes of this
paragraph (d)(3), total compensation must be determined using a
definition of compensation provided in paragraph (c)(2) of this section,
either with or without the modification permitted by paragraph (c)(4) of
this section. Thus, total compensation does not include prior-employer
compensation or imputed compensation described in paragraph (f)(1) of
this section (including imputed compensation for a period during which
an employee performs services for another employer). Total compensation
taken into account for each employee (including, if added, the elective
contributions and deferred compensation described in paragraph (c)(4) of
this section) may not exceed the annual compensation limit of section
401(a)(17).
(B) Alternative definitions with exclusions applicable solely to
highly compensated employees. If an alternative definition of
compensation contains a provision that excludes amounts from
compensation and, as described in paragraph (c)(5) of this section, the
provision only applies in defining the compensation of some highly
compensated employees, then, for purposes of this paragraph (d)(3), the
total compensation of any highly compensated
[[Page 709]]
employee subject to the provision must be reduced by any amount excluded
from the employee's compensation as a result of the provision. However,
if the provision applies consistently in defining the compensation of
all highly compensated employees, this adjustment to total compensation
is not required.
(iii) Employees taken into account--(A) General rule. In applying
the requirement of this paragraph (d)(3), the employees taken into
account are the same employees taken into account in satisfying the
requirements of the applicable provision for the determination period.
For example, in determining whether a plan satisfies section 401(a)(4),
an alternative definition must satisfy this paragraph (d)(3) taking into
account all employees who benefit under the plan for the plan year
(within the meaning of Sec. 1.410(b)-3(a)). If an employer is using the
same alternative definition of compensation to determine whether more
than one separate plan satisfies section 401(a)(4), the employer is
permitted to take into account all the employees who benefit under all
of those plans for the plan year in determining whether the alternative
definition of compensation being used satisfies this paragraph (d)(3).
(B) Exclusion of self-employed individuals. In applying the
requirement of this paragraph (d)(3), self-employed individuals are
disregarded.
(C) Certain employees disregarded. If an employee's total
compensation for the determination period, determined under paragraph
(d)(3)(ii) and (d)(3)(vi)(B) of this section, is zero, the employee is
disregarded in determining whether the nondiscrimination requirement of
paragraph (d)(3) of this section is satisfied for that determination
period. For example, an employee who does not receive any actual
compensation during a determination period because the employee is on
unpaid leave of absence for the entire period, but who is credited with
imputed compensation described in paragraph (f)(1) of this section, is
disregarded in determining whether the nondiscrimination requirement of
this paragraph (d)(3) is satisfied for that determination period.
(iv) Calculation of average percentages--(A) General rule. To
determine the average percentages described in paragraph (d)(3)(i) of
this section, an individual compensation percentage must be calculated
for each employee in a group, and then the average of the separately
calculated compensation percentages for each employee in the group must
be determined. The individual compensation percentage for an employee is
calculated by dividing the amount of the employee's compensation that is
included under the alternative definition by the amount of the
employee's total compensation.
(B) Other reasonable methods. Notwithstanding paragraph
(d)(3)(iv)(A) of this section, any other reasonable method is permitted
to be used to determine the average percentages described in paragraph
(d)(3)(i) of this section for either or both of the groups (i.e., highly
compensated employees and nonhighly compensated employees), provided
that the method cannot reasonably be expected to create a significant
variance from the average percentage for that group determined using the
individual-percentage method provided in paragraph (d)(3)(iv)(A) of this
section. The same method is not required to be used for calculating the
two average percentages. For example, to determine the average
percentage for nonhighly compensated employees as a group, an employer
may calculate an aggregate compensation percentage by dividing the
aggregate amount of compensation of nonhighly compensated employees that
are included under the alternative definition by the aggregate amount of
total compensation of nonhighly compensated employees, provided the
resulting percentage is not reasonably expected to vary significantly
from the average percentage produced using the individual-percentage
method provided in paragraph (d)(3)(iv)(A) of this section because of
the extra weight given employees with higher compensation.
(v) Facts and circumstances determination. The determination of
whether the average percentage of total compensation included for the
employer's highly compensated employees as a group for a determination
period exceeds by more than a de minimis amount the
[[Page 710]]
average percentage of total compensation included for the employer's
nonhighly compensated employees as a group is based on all the relevant
facts and circumstances. The differences between the percentages for
prior determination periods may be considered in determining whether the
amount of the difference between the percentages is more than de
minimis. In addition, an isolated instance of a more than de minimis
difference between the compensation percentages that is due to an
extraordinary unforeseeable event (such as overtime payments to
employees of a public utility due to a major hurricane) will be
disregarded if the amount of the difference in prior determination
periods was de minimis.
(vi) Special rules for definitions of compensation based on rate of
compensation or that include prior-employer or imputed compensation--(A)
Special rule for determining compensation included under an alternative
definition. If an alternative definition uses rate of compensation or
includes prior-employer compensation or imputed compensation, the amount
of each employee's compensation for a determination period that is
treated as included under the alternative definition for purposes of
determining the average percentages for the nondiscrimination
requirement (i.e. the amount used in the numerator) must not be more
than 100 percent of the employee's total compensation for that period,
determined under paragraph (d)(3)(ii) and (d)(3)(vi)(B) of this section.
This limit on the amount of compensation treated as included under the
alternative definition applies even if the amount of compensation
actually credited to the employee for the determination period under the
definition and, thus, used as compensation within the meaning of section
414(s), exceeds the employee's total compensation for the period.
(B) Special rule for determining total compensation. If an
alternative definition uses rate of compensation or includes prior-
employer compensation or imputed compensation, each employee's total
compensation for purposes of determining the average percentages for the
nondiscrimination requirement (i.e. the amount used in the denominator)
must include all the types of elective contributions and deferred
compensation described in paragraph (c)(4) of this section.
(e) Rate of compensation--(1) General rule. A definition of
compensation satisfies section 414(s) as a reasonable definition of
compensation even though it defines the amount of each employee's basic
or regular compensation using the employee's basic or regular rate of
compensation rather than using the employee's actual basic or regular
compensation from the employer if the definition satisfies the
requirements specified in paragraph (e)(3) of this section and otherwise
satisfies the requirements of paragraph (d) of this section, including
the nondiscrimination test in paragraph (d)(3) of this section. For this
purpose, the employee's rate of compensation must be determined using an
hourly pay scale, weekly salary, or similar unit of basic or regular
compensation applicable to the employee. A definition will not fail to
satisfy the requirements of this paragraph (e) merely because it defines
compensation as including each employee's basic or regular compensation,
the amount of which is determined using each employee's basic or regular
rate of compensation, plus actual amounts of irregular or additional
compensation, such as overtime or bonuses. In addition, a definition of
compensation will not fail to satisfy section 414(s) merely because it
defines compensation for each employee as the greater of the employee's
actual compensation, the amount of which is determined using a
definition that would otherwise satisfy paragraph (c) or (d)(2) of this
section, or the employee's basic or regular compensation, the amount of
which is determined using the employee's basic or regular rate of
compensation.
(2) Not applicable to certain contributions. This paragraph (e) does
not apply to a definition of compensation used in determining whether
elective deferrals (as defined in section 402(g)(3)), matching
contributions (as defined in section 401(m)(4)), or employee
contributions subject to section 401(m) satisfy any applicable
provision. Thus, for example, a definition of compensation that defines
compensation based on each employee's basic or regular rate of
compensation may not be used to
[[Page 711]]
measure compensation for purposes of determining if a qualified cash or
deferred arrangement satisfies the actual deferral percentage test in
section 401(k)(3).
(3) Requirements for definitions of compensation based on rate of
compensation--(i) Benefit determination. The definition of compensation
must actually be used to calculate the benefits, contributions, or other
amounts, that are subject to the applicable provision. For example, a
definition of compensation that defines compensation based on each
employee's basic or regular rate of compensation may not be used to
determine whether a plan satisfies section 401(a)(4) unless the
benefits, contributions, or other amounts for each employee in the plan
are determined using that definition of compensation.
(ii) Period for determining compensation. The amount of each
employee's basic or regular compensation for the determination period
must be determined using the employee's basic or regular rate of
compensation as of a designated date in the determination period. For
example, if the determination period is a calendar year, this
requirement would be satisfied if the amount of each employee's basic or
regular compensation for the calendar year is determined using the
employee's basic or regular rate of compensation as of January 1 of the
calendar year. Alternatively, the amount of each employee's basic or
regular compensation for a determination period can be the sum of the
amounts separately determined for shorter specified periods (e.g., weeks
or months) within the determination period provided the amount of each
employee's basic or regular compensation for each specified period is
determined using the employee's basic or regular rate of compensation as
of a designated date within the specified period.
(iii) Dates for determining rate of compensation. One or more dates
may be used to determine employees' rates of compensation for a
determination period or specified period provided that, if the same date
is not used for all employees, the dates selected are designed to
determine the rates of compensation for that period on a consistent
basis for all employees taken into account for the determination period.
For example, if annual compensation increases are provided to different
groups of employees on different dates during the year, it would be
consistent to choose a different date for each group in order to include
the annual increase in the employees' rates of compensation for the
determination period. In addition, the date or dates selected, by
themselves, must not cause the portion of total compensation included to
vary significantly among employees.
(iv) Periods without compensation or with reduced compensation. An
employee's compensation may generally only be determined using the
employee's rate of compensation for employment periods during which the
employer actually compensates the employee. However, if an employee
terminates employment or otherwise stops performing services (such as
for a leave of absence, layoff or similar event) either without
compensation or with reduced compensation during a determination period,
the employer may continue to credit the employee with compensation based
on the employee's rate of compensation for a period of up to 31 days
after the event, but not beyond the end of the determination period.
Paragraph (f) of this section contains special rules for crediting
imputed compensation for periods extending beyond 31 days during which
an employee is not compensated or an employee's compensation is reduced.
See also the definition of Section 414(s) compensation in
Sec. 1.401(a)(4)-12 that, for purposes of satisfying section 401(a)(4),
permits adjustments to compensation 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).
(f) Prior-employer compensation and imputed compensation--(1)
General rule. Solely for purposes of determining whether a defined
benefit plan, as defined in Sec. 1.410(b)-9, satisfies section 401(a)(4)
or 410(b), an alternative definition that includes prior-employer
compensation or imputed compensation satisfies section 414(s) as a
reasonable alternative definition if the definition satisfies the
requirements specified in
[[Page 712]]
paragraphs (f) (2) and (3) of this section. For this purpose, prior-
employer compensation is compensation from an employer other than the
employer (determined at the time that the compensation is paid)
maintaining the plan that is credited for periods prior to the
employee's employment with the employer maintaining the plan and during
which the employee performed services for the other employer. For this
purpose, imputed compensation is compensation credited for periods after
an employee has commenced or recommenced participation in a plan while
the employee is not compensated by the employer maintaining the plan or
is compensated at a reduced rate by that employer because 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 because the employee has a reduced work
schedule.
(2) Requirements for definitions of compensation crediting prior-
employer compensation or imputed compensation--(i) General requirement.
The definition must otherwise be described in paragraph (c) of this
section or must otherwise satisfy the requirements of paragraph (d) or
(e) of this section for alternative definitions of compensation,
including the nondiscrimination requirement in paragraph (d)(3) of this
section.
(ii) Benefit determination. A definition of compensation that
credits prior-employer compensation or imputed compensation must
actually be used to calculate the benefits under the plan. For example,
the definition may not be used to determine whether a defined benefit
plan satisfies section 401(a)(4) unless the benefits for each employee
in the plan are determined using that definition of compensation.
(iii) Provision applied to all similarly-situated employees. A
provision in a plan's definition of compensation crediting prior-
employer compensation or imputed compensation must apply on the same
terms to all similarly-situated employees in the plan. The criteria for
determining whether employees are similarly situated for this purpose
are the same as the criteria for determining whether a plan provision
crediting pre-participation or imputed service satisfies the
requirements of Sec. 1.401(a)(4)-11(d)(3)(iii)(A).
(iv) Legitimate business purpose. There must be a legitimate
business purpose, based on all of the relevant facts and circumstances,
for crediting prior-employer compensation or imputed compensation to an
employee for the period being credited. The standard for determining
whether crediting prior-employer compensation or imputed compensation
satisfies this requirement is the same as the standard for determining
whether crediting pre-participation or imputed service under a plan
satisfies the requirements of Sec. 1.401(a)(4)-11(d)(3)(iii)(B) and
whether crediting imputed service satisfies the additional requirements
of Sec. 1.401(a)(4)-11(d)(3)(iv)(A). However, if the legitimate business
reason for crediting imputed compensation relates to the services the
employee is performing for another employer and the reason satisfies the
standard in Sec. 1.401(a)(4)-11(d)(3)(iii)(B), the additional
requirements of Sec. 1.401(a)(4)-11(d)(3)(iv)(A) are deemed to be
satisfied. For example, if an employee becomes employed by another
employer as a result of a merger, acquisition or similar transaction
with the other employer and imputed compensation is credited to the
employee while the employee is performing services for the other
employer, the crediting of imputed compensation to the employee
satisfies the standard in Sec. 1.401(a)(4)-11(d)(3)(iii)(B). Thus, under
that example, crediting the imputed compensation to the employee is
deemed to satisfy the additional requirements of Sec. 1.401(a)(4)-
11(d)(3)(iv)(A), even if the employee is not performing those services
under an arrangement that provides an ongoing business benefit to the
employer maintaining the plan.
(v) No significant discrimination. Based on all of the relevant
facts and circumstances, crediting prior-employer compensation or
imputed compensation must not by design or in operation discriminate
significantly in favor of highly compensated employees. The standard for
determining whether crediting prior-employer compensation or imputed
compensation satisfies this requirement is the same as the standard
[[Page 713]]
for determining whether crediting pre-participation or imputed service
satisfies the requirement in Sec. 1.401(a)(4)-11(d)(3)(iii)(C) and
whether crediting imputed service satisfies the additional requirement
of Sec. 1.401(a)(4)-11(d)(3)(iv)(B).
(3) Reasonable method--(i) General rule. Any reasonable method may
be used to determine the amount of prior-employer compensation or
imputed compensation provided that the requirements of paragraph (f)(3)
(ii) or (iii) of this section are satisfied, whichever is applicable.
(ii) Requirements for prior-employer compensation. Prior-employer
compensation credited to an employee for a period that an employee is
performing services for another employer must be compensation for the
employee from the other employer (or be based on the employee's basic or
regular rate of compensation from the other employer) for that period.
In addition, prior employer compensation credited to an employee must
not exceed the amount of compensation from the other employer that would
have been included under the definition of compensation in effect for
that period for compensation from the employer maintaining the plan.
Reasonable assumptions may be made in determining the amount of
compensation received from another employer for a period that would have
been included under the definition of compensation in effect for that
period for compensation from the employer maintaining the plan.
(iii) Requirements for imputed compensation--(A) General rule. The
amount of imputed compensation credited to an employee during any
period, when combined with the amount of any actual compensation being
included, must not exceed an amount that, based on all of the relevant
facts and circumstances, is reasonably representative of the amount of
compensation that the employee would have received and that would have
been included under the definition of compensation in effect for the
period if the employee had continued to perform services for the
employer during that period at the same level as the employee was
performing before the employee stopped performing services or changed to
a reduced work schedule. The relevant facts and circumstances include
the compensation that the employee was receiving immediately before the
employee stopped performing services or changed to a reduced work
schedule, and, if applicable, the rate of compensation in effect while
the employee is not performing services or has a reduced work schedule
that is applicable to the employee's specific job grade immediately
before the change occurred.
(B) Imputed compensation from another employer. Imputed compensation
credited for a period that an employee is performing services for
another employer is deemed to satisfy paragraph (f)(3)(iii)(A) of this
section if the amount of compensation credited satisfies the
requirements of paragraph (f)(3)(ii) of this section for prior-employer
compensation. Thus, for example, the amount of imputed compensation
credited to an employee for a period that the employee is performing
services for another employer is deemed to satisfy paragraph
(f)(3)(iii)(A) of this section if the amount credited is compensation
for the employee from the other employer (or is based on the employee's
basic or regular rate of compensation from the other employer) for that
period, and the amount credited does not exceed the compensation from
the other employer that would be included for the employee under the
definition of compensation in effect for that period for compensation
from the employer maintaining the plan.
(4) Special nondiscrimination rule for safe harbor definitions. If a
definition of compensation crediting prior-employer or imputed
compensation is otherwise described in paragraph (c) of this section,
and the prior-employer compensation or imputed compensation credited
satisfies the requirements of paragraphs (f) (1), (2), and (3) of this
section, then the definition is deemed to satisfy paragraph (d) of this
section (i.e., it is deemed to be nondiscriminatory).
(g) Special rules--(1) Self-employed individuals--(i) General rule.
If an alternative definition of compensation under paragraph (c)(3),
(d), (e), or (f) of this section is used to satisfy an applicable
provision, an equivalent alternative compensation amount must be
[[Page 714]]
determined for any self-employed individual who is in the group of
employees for whom paragraph (b) of this section requires a single
definition of compensation to be used. This equivalent alternative
compensation amount is determined by multiplying the self-employed
individual's total earned income (as defined in section 401 (c)(2)) for
the determination period by the percentage of total compensation (as
defined in paragraph (d)(3)(ii) of this section) included under the
alternative definition for the employer's nonhighly compensated common-
law employees as a group (determined in a manner consistent with the
rules in paragraph (d)(3)(iii) of this section and, if applicable,
paragraph (d)(3)(vi) of this section). Thus, for purposes of this
determination, highly compensated common-law employees must be
disregarded. This equivalent alternative compensation amount will be
treated as the self-employed individual's compensation under the
alternative definition of compensation for the determination period.
(ii) Inclusion of elective contributions. If the alternative
definition of compensation includes any types of elective contributions
described in paragraph (c)(4) of this section, the self-employed
individual's earned income for this determination must be increased by
the amount of elective contributions made by the employer on behalf of
the self-employed individual, and the definition of total compensation
for this determination must include all the types of elective
contributions described in paragraph (c)(4) of this section made by the
employees (other than highly compensated employees.
(iii) Reductions in equivalent alternative compensation amount
applicable only to highly compensated employees. An alternative
definition of compensation may provide that compensation under the
alternative definition for some or all self-employed individuals who are
highly compensated employees is a specified portion of, rather than
equal to, the equivalent compensation amount determined under paragraph
(g)(1)(i).
(2) Leased employees. [Reserved]
(h) Definitions. The following definitions apply for purposes of
this section:
(1) Applicable provision. Applicable provision means a provision
that specifically refers to section 414(s) or this section.
(2) Determination period. Determination period means a period during
which the amount of compensation is measured for use in determining
whether the requirements of an applicable provision are satisfied. If no
period is provided under the applicable provision for measuring
compensation, the determination period is the period for which the
applicable provision must be satisfied. The applicable provision may
provide additional rules concerning the determination period to be used
for satisfying the nondiscrimination requirement in paragraph (d) of
this section.
(3) Employee. Employee means employee within the meaning of
Sec. 1.410(b)-9.
(4) Highly compensated employee. Highly compensated employee means
highly compensated employee within the meaning of Sec. 1.410(b)-9.
(5) Nonhighly compensated employee. Nonhighly compensated employee
means nonhighly compensated employee within the meaning of
Sec. 1.410(b)-9.
(6) Self-employed individual. Self-employed individual means self-
employed individual within the meaning of section 401(c)(1).
(i) Additional rules. The Commissioner may in revenue rulings,
notices, and other guidance of general applicability provide additional
rules for defining compensation within the meaning of section 414(s),
including additional definitions of compensation that satisfy section
414(s).
(j) Effective date and transition rules--(1) Statutory effective
date. Section 414(s) applies to years beginning on or after January 1,
1987.
(2) Regulatory effective date--(i) In general. Except as otherwise
provided in paragraph (j)(2)(ii) of this section, Sec. 1.414(s)-1 (a)
through (i) apply to years beginning on or after January 1, 1994.
(ii) Plans of tax-exempt organizations. In the case of a plan
maintained by an organization that is exempt from income taxation
pursuant to section 501(a), including plans subject to section
403(b)(12)(A)(i) (nonelective plans),
[[Page 715]]
Sec. 1.414(s)-1 (a) through (i) 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 (j)(2) of this section, and on or after the statutory
effective date as set forth in paragraph (j)(1) of this section, a plan
must be operated in accordance with a reasonable, good faith
interpretation of section 414(s). Whether a plan is operated in
accordance with a reasonable, good faith interpretation of section
414(s) will generally be determined based on all 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
414(s)(1) and (2) if it is operated in accordance with the terms of
Sec. 1.414(s)-1 (a) through (i). For years beginning on or after the
statutory effective date and before the effective date of these
regulations, a definition of compensation is also deemed to satisfy
section 414(s) as an alternative method of determining compensation
under section 414(s)(3) if the definition satisfies the requirements of
Sec. 1.414(s)-1 (a) through (i) or if the definition satisfies the prior
regulation provisions of Sec. 1.414(s)-1T. (See Sec. 1.414(s)-1T as
contained in the CFR edition revised as of April 1, 1991.) In addition,
for those transition years, a definition of compensation is deemed to
satisfy section 414(s) as an alternative method of determining
compensation under section 414(s)(3) if, based on all the relevant facts
and circumstances in effect for the year, use of the definition does not
cause discrimination in favor of highly compensated employees.
[T.D. 8361, 56 FR 47662, Sept. 19, 1991; 57 FR 10815, 10953, Mar. 31,
1992, as amended by T.D. 8488, 58 FR 47063, Sept. 7, 1993]
Sec. 1.415-1 General rules with respect to limitations on benefits and contributions under qualified plans.
(a) Trusts. Under sections 415 and 401(a)(16), a trust which forms
part of a pension, profit-sharing or stock bonus plan will not be
qualified under section 401(a) if any one of the following conditions
exists:
(1) The annual benefits under a defined benefit plan with respect to
any participant for any limitation year exceed the limitations of
section 415(b) and Sec. 1.415-3.
(2) The contributions and other additions credited under a defined
contribution plan with respect to any participant for any limitation
year exceed the limitations of section 415(c) and Sec. 1.415-6.
(3) Where an individual has at any time participated in a defined
benefit plan and also has at any time participated in a defined
contribution plan maintained by the same employer, the trust has been
disqualifed under section 415(g) and Sec. 1.415-9.
(b) Certain annuities and accounts--(1) In general. Except as
provided in paragraph (c) of this section, an annuity, account, etc.,
listed in section 415(a)(2) will not be considered to be described in
the otherwise applicable section unless--
(i) It satisfies the requirements of Sec. 1.415-3 (relating to
limitations on benefits), Sec. 1.415-6 (relating to limitations on
contributions and other additions) or Sec. 1.415-7 (relating to
limitations where an individual has at any time participated in a
defined contribution plan and also has at any time participated in a
defined benefit plan maintained by the same employer), whichever is
applicable, and
(ii) It has not been disqualifed under Sec. 1.415-9 (relating to
disqualification of plans and trusts).
(2) Special rule for section 403(b) annuity contracts. (i) With
respect to an annuity contract described in section 403(b), the
provisions of subparagraph (1) of this paragraph apply only to that
portion of the contract which exceeds the limitations of Sec. 1.415-3,
Sec. 1.415-6 and Sec. 1.415-7, whichever is applicable.
(ii) In addition, where the amount of the contribution under the
section 403(b) annuity contract exceeds the applicable limitation, the
exclusion allowance described in section 403(b)(2)(A) is reduced in the
manner described in Sec. 1.415-6(e)(1)(ii).
(3) Cross references to additional rules for section 403(b) annuity
contracts. For
[[Page 716]]
additional rules relating to section 403(b) annuity contracts, see--
(i) Section 1.415-1(f)(2) (relating to the plan year for such
annuity contracts),
(ii) Section 1.415-2(b)(7) (relating to the limitation year for such
annuity contracts),
(iii) Section 1.415-6(e) (relating to the applicability of the
alternative limitations described in section 415(c)(4) to such annuity
contracts),
(iv) Sections 1.415-7(c)(2) and 1.415-7(h) (relating to rules for
such annuity contracts for purposes of computing the defined
contribution plan fraction),
(v) Section 1.415-8(d) (relating to rules for such annuity contracts
for purposes of combining plans), and
(vi) Section 1.415-9(c) (relating to rules for such annuity
contracts for purposes of determining the amount of a disqualified
contribution to the annuity contract).
(c) Certain accounts, annuities and bonds established for non-
employed spouse. Paragraph (b) of this section is not applicable to an
account, annuity or bond as described in section 408(a), 408(b) or 409,
respectively established for the benefit of the spouse of the individual
who contributes to it for any year for which a deduction is allowable
for the individual under section 220. For a special effective date with
respect to this paragraph, see paragraph (f)(3) of this section.
(d) Plan provisions--(1) In general. Although no specific plan
provision is required under section 415 in order for a plan to establish
or maintain its qualification, the plan provisions must preclude the
possibility that the limitations imposed by section 415 will be
exceeded. For example, a plan may include provisions which automatically
freeze or reduce the rate of benefit accrual (in the case of a defined
benefit plan) or the annual addition (in the case of a defined
contribution plan) to a level necessary to prevent the limitations from
being exceeded with respect to any participant. For rules relating to
this type of plan provision and the definitely determinable benefit
requirement for pension plans, see Sec. 1.401(a)-1(b)(1).
(2) Special rule for profit-sharing and stock bonus plans. The use
of a plan provision by a profit-sharing or stock bonus plan which
automatically freezes or reduces the amount of annual additions to
insure that the limitations of section 415 will not be exceeded must
comply with the requirement set forth in Sec. 1.401-1(b)(1) (ii) and
(iii) that such plans provide a definite predetermined formula for
allocating the contributions made to the plan among the participants.
Thus, if the operation of this provision involves discretionary action
on the part of the employer, the definite predetermined allocation
formula requirement will be violated. For example, if two defined
contribution plans of one employer otherwise provide for aggregate
contributions which may exceed the limits of section 415(c), the plan
provisions must specify (without involving employer discretion) which
plan will reduce contributions and allocations to prevent an excess
annual addition and how the reduction will occur.
(e) Rules for plans maintained by more than one employer--(1) Plans
described in section 413(b) or section 413(c). This subparagraph
provides for participants of a plan described in section 413(c) or
section 413(b) (other than a plan described in section 414(f)). For
purposes of applying the limitations of section 415 with respect to a
participant of an employer maintaining the plan, benefits or
contributions attributable to such participant from all of the employers
maintaining the plan must be taken into account. Furthermore, in
applying the limitations of section 415 with respect to such a
participant, the total compensation received by the participant from all
of the employers maintaining the plan may be taken into account.
(2) Plans described in section 414(f). (i) This subparagraph
provides rules for participants of a multiemployer plan described in
section 414(f). For purposes of applying the limitations of section 415
with respect to a participant of an employer maintaining the plan, only
the benefits or contributions provided by the employer of such
participant shall be taken into account. The benefits provided by an
employer under such a plan shall equal the excess of the plan benefit
over the plan benefit
[[Page 717]]
computed as if the participant had no covered service with that
employer.
(ii) As an alternative to applying the limitations of section 415
with respect to a participant of an employer maintaining the
multiemployer plan in the manner described in subdivision (i) of this
subparagaph, the rules described in subparagraph (1) of this paragraph
may be used for purposes of applying the section 415 limitations in
connection with that participant.
(iii) For rules relating to the limitation year for a multiemployer
plan, see Sec. 1.415-2(b)(6). See also Sec. 1.415-8(e) for a special
rule relating to the aggregation of multiemployer plans.
(f) Rules relating to the effective date of section 415--(1) In
general. Except as otherwise provided in this paragraph, Secs. 1.415-1
through 1.415-10 are applicable for plan years beginning after 1975 and
for limitation years ending with or within plan years beginning after
1975. However, for all such plan years and limitation years through the
plan year beginning before January 7, 1981, a reasonable interpretation
of the rules set forth in section 415 of the Code and in Rev. Rul. 75-
481, 1975-2 C.B. 188, may be relied upon.
(2) Plan year for certain annuity contracts and individual
retirement plans. For purposes of section 415 and Secs. 1.415-1 through
1.415-10--
(i) An annuity contract described in section 403(b) shall be
considered to have a plan year coinciding with the taxable year of the
individual on whose behalf the contract has been purchased, and
(ii) An individual retirement plan (as described in section
7701(a)(37)) shall be considered to have a plan year coinciding with the
taxable year of the individual on whose behalf the plan is maintained,
unless the individual demonstrates to the satisfaction of the
Commissioner that a different 12 month period should be considered to be
the plan year.
(3) Special effective date for certain accounts, annuities and bonds
established for non-employed spouse. Nothwithstanding subparagraph (1)
of this paragraph, the provisions of section 415(a)(3) and paragraph (c)
of this section are not applicable until taxable years beginning after
December 31, 1976.
(4) Special rules for certain defined contribution plans with
respect to the first limitation year to which section 415 applies. In
the case of a defined contribution plan whose plan year does not
coincide with the limitation year, the rules of this subparagraph shall
be effective with respect to applying the limitations described in
section 415(c) and Sec. 1.415-6 for the first limitation year to which
section 415 and Secs. 1.415-1 through 1.415-10 apply.
(i) Annual additions (as defined in section 415(c)(2) and
Sec. 1.415-6(b)) which are allocated under the plan prior to the first
day of the first plan year to which section 415 and Secs. 1.415-1
through 1.415-10 are effective do not have to be taken into account.
(ii) The amount of compensation (as defined in Sec. 1.415-2(d))
taken into account in applying the limitations may include compensation
for the entire limitation year.
(5) Special effective date for special benefit limitation with
respect to certain collectively bargained plans. Notwithstanding
subparagraph (1) of this paragraph, section 415(b)(7) is not applicable
until limitation years beginning after December 31, 1978.
(6) Special effective date for excess contributions to section
403(b) annuity contracts. (i) Notwithstanding subparagraph (1) of this
paragraph, the provisions of Sec. 1.415-6(e)(1)(ii) (relating to the
manner in which contributions to a section 403(b) annuity contract which
exceed the limitations of section 415(c)(1) are treated) are only
applicable to taxable years beginning after January 24, 1980.
(ii) For all prior taxable years for which the limitations of
section 415 are applicable to section 403(b) annuity contracts, any
contribution to the account of an individual under a section 403(b)
annuity contract for a taxable year which exceeds the limitations of
section 415(c)(1), instead of being treated in the manner described in
Sec. 1.415-6(e)(1)(ii), shall reduce the exclusion allowance under
section 403(b)(2) for such taxable year to the extent of the excess.
[[Page 718]]
(7) Special effective date for rules relating to change of
limitation year. Notwithstanding subparagraph (1) of this paragraph, the
provisions of Sec. 1.415-2(b)(4) (relating to the effect of a change of
the limitation year) are required to be applied only for changes in
limitation years which occur after January 7, 1981. These provisions may
also be used for all prior changes in limitation years. However, if the
provisions of Sec. 1.415-2(b)(4) are not used for changes in limitation
years which occur prior to January 7, 1981, the requirements of
Sec. 2.01(4) of Rev. Rul. 75-481, 1975-2 C.B. 188, shall be applicable
with respect to such changes.
(8) Special effective date for TRASOP's. The limitations of section
415 apply to an Employee Stock Ownership Plan under section 301(d) of
the Tax Reduction Act of 1975 (``TRASOP''). The earliest date on which
the first plan year of a TRASOP may begin is January 22, 1974.
Therefore, notwithstanding subparagraph (1) of this paragraph, the
limitations of section 415 are applicable for TRASOP plan years
beginning before 1975 and for limitation years ending with or within
plan years beginning before 1975. However, the aggregation rules of
Sec. 1.415-8 do not apply to a limitation year of a TRASOP ending with
or within a plan year beginning before 1975.
(9) Transitional rules. For special transitional rules, see--
(i) Section 1.415-4 (relating to a transitional rule for defined
benefit plans),
(ii) Section 1.415-7(b)(2) (relating to the defined benefit plan
fraction applicable to certain participants),
(iii) Section 1.415-7(d) (relating to transitional rules for the
defined contribution plan fraction), and
(iv) Section 1.415-7(g) (relating to a special rule for certain
plans in effect on September 2, 1974).
(g) Supersession. Section 11.415(c)(4)-1 (relating to special
elections for section 403(b) annuity contracts purchased by educational
organizations, hospitals and home health service agencies) of the
Temporary Income Tax Regulations under the Employee Retirement Income
Security Act of 1974 is superseded by this section and Secs. 1.415-2
through 1.415-10.
[T.D. 7748, 46 FR 1697, Jan. 7, 1981]
Sec. 1.415-2 Definitions and special rules.
(a) General application. Unless otherwise provided in the
appropriate section, for purposes of Secs. 1.415-1 through 1.415-10, the
following definitions and special rules shall apply.
(b) Limitation year--(1) In general. (i) Unless the election
described in subdivision (ii) of this subparagraph is made, the
limitation year, with respect to any qualified plan maintained by the
employer, is the calendar year.
(ii) Instead of using the calendar year, an employer may elect to
use any other consecutive twelve month period as the limitation year.
This includes a fiscal year with an annual period varying from 52 to 53
weeks, so long as the fiscal year satisfies the requirements of section
441(f). If the case of a group of employers which constitute either a
controlled group of corporations (within the meaning of section 414(b)
as modified by section 415(h)) or trades or businesses (whether or not
incorporated) which are under common control (within the meaning of
section 414(c) as modified by section 45(h)), the election to use a
consecutive twelve month period other than the calendar year as the
limitation year must be made by all members of the group that maintain a
qualified plan.
(2) Method of election to use a limitation year other than the
calendar year or to change limitation year. (i) The election described
in subparagraph (1)(ii) of this paragraph shall be made by the adoption
of a written resolution by the employer. This requirement is satisfied
if the election is made in connection with the adoption, by the
employer, of the plan or any amendments to such plan.
(ii) This resolution will not be considered a change of the
limitation year, if it is adopted or modified on or before the later of
the adoption date of the first amendment conforming an existing plan to
the Employee Retirement Income Security Act of 1974, or December 31,
1976.
(3) Election of multiple limitation years. Any employer that
maintains more than one qualified plan may elect to use different
limitation years for each such plan in accordance with rules determined
by the Commissioner. The rule described in this subparagraph
[[Page 719]]
also applies to a controlled group of employers (within the meaning of
section 414 (b) or (c), as modified by section 415(h)).
(4) Effect of change of limitation year. (i) Once established, the
limitation year may be changed only by making the election in the manner
described in subparagraph (2) of this paragraph.
(ii) Any change in the limitation year must be a change to a twelve-
month period commencing with any day within the current limitation year.
(iii) For purposes of this paragraph, the limitations of section 415
are to be applied in the normal manner to the new limitation year.
Moreover, the limitations of section 415 are to be separately applied to
a ``limitation period'' which begins with the first day of the current
limitation year and which ends on the day before the first day of the
first limitation year for which the change is effective. The dollar
limitation with respect to this limitation period is determined by
multiplying (A) the applicable dollar limitation for the calendar year
in which the limitation period ends by (B) a fraction, the numerator of
which is the number of months (including any fractional parts of a
month) in the limitation period, and the denominator of which is 12.
This adjustment of the dollar limitation only applies to a defined
contribution plan.
(iv) For a special effective date with respect to this paragraph,
see Sec. 1.415-1(f)(7).
(v) The provisions of this subparagraph may be illustrated by the
following example:
Example. In 1981, an employer with a qualified defined contribution
plan using the calendar year as the limitation year elects to change the
limitation year to a period beginning July 1 and ending June 30. Because
of this change, the plan must satisfy the limitations of section 415(c)
for the limitation period beginning January 1, 1981 and ending June 30
of that year. In applying the limitations of section 415(c) to this
limitation period, the amount of compensation taken into account may
only include compensation for this period. Furthermore, the dollar
limitation for this period is the otherwise applicable dollar limitation
for calendar year 1981, multiplied by \6/12\.
(5) Limitation year for years prior to effective date. The
limitation year for all years prior to the effective date of section 415
is the consecutive twelve-month period which corresponds to the first
limitation year of a plan after the effective date of section 415. (See
paragraph (b)(1) of this section for rules relating to the determination
of a plan's limitation year.)
(6) Limitation year for multiemployer plans. In the case of a
multiemployer plan (as defined in section 414(f)), the limitation year
is the calendar year unless the plan administrator elects otherwise
under paragraph (b)(2) of this section.
(7) Limitation year for individuals on whose behalf section 403(b)
annuity contracts have been purchased. (i) The limitation year of an
individual on whose behalf a section 403(b) annuity contract has been
purchased by an employer is determined in the following manner.
(ii) If the individual is not in control (within the meaning of
section 414 (b) or (c) as modified by section 415(h)) of any employer,
the limitation year is the calendar year. However, the individual may
elect to change the limitation year to another twelve-month period. To
do this, the individual must attach a statement to his income tax return
filed for the taxable year in which the change is made. Any change in
the limitation year must comply with the rules set forth in paragraph
(b)(4) of this section.
(iii) If the individual is in control (within the meaning of section
414 (b) or (c) as modified by section 415(h)) of an employer, the
limitation year is to be the limitation year of that employer.
(8) Limitation year for individuals on whose behalf individual
retirement plans are maintained. The limitation year of an individual on
whose behalf an individual retirement plan (as described in section
7701(a)(37)) is maintained shall be determined in the manner described
in paragraph (b)(7) of this section.
(c) Defined benefit and defined contribution plan--(1) Defined
benefit plan. A ``defined benefit plan'' means a plan described in
section 414(j).
(2) Defined contribution plan. A ``defined contribution plan'' means
a plan described in section 414(i). It includes a money purchase pension
plan (as described in Sec. 1.401-1(b)(1)(i)), such as a
[[Page 720]]
target benefit plan (as described in Sec. 1.410(a)-4(a)(1)). A hybrid
plan (as defined in section 414(k)) is to be treated as a defined
contribution plan to the extent that benefits payable under the plan are
based upon the individual account of the participant.
(d) Compensation--(1) General definition. Except as otherwise
provided, compensation within the meaning of section 415(c)(3) includes
all remuneration described in paragraph (d)(2) of this section and
excludes all other forms of remuneration. Paragraph (d)(3) of this
section provides examples of types of remuneration not includible in
compensation within the meaning of section 415(c)(3). Paragraphs (d)(4)
and (d)(5) of this section provide rules regarding the payment of
compensation in the limitation year. Paragraph (d)(6) of this section
provides a special rule for determining the compensation of employees of
controlled groups or affiliated service groups. Paragraph (d)(7) of this
section provides a special rule for applying the limitations of section
415(c) when a section 403(b) annuity is aggregated with a qualified plan
of a controlled employer. Paragraphs (d)(8) and (d)(9) of this section
are reserved for special rules for leased employees and for permanent
and total disability, respectively. Paragraphs (d)(10) and (d)(11) of
this section provide additional definitions of compensation that are
treated as satisfying section 415(c)(3). Paragraph (d)(12) of this
section permits optional use of prior regulations. Paragraph (d)(13) of
this section provides authority to the Commissioner to provide further
additional definitions of compensation that satisfy section 415(c)(3).
(2) Items includible as compensation. For purposes of applying the
limitations of section 415, the term ``compensation'' includes all of
the following--
(i) The employee's wages, salaries, fees for professional services,
and other amounts received (without regard to whether or not an amount
is paid in cash) for personal services actually rendered in the course
of employment with the employer maintaining the plan to the extent that
the amounts are includible in gross income (including, but not limited
to, commissions paid salesmen, compensation for services on the basis of
a percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements or other expense allowances
under a nonaccountable plan (as described in Sec. 1.62-2(c)).
(ii) In the case of an employee who is an employee within the
meaning of section 401(c)(1) and the regulations thereunder, the
employee's earned income (as described in section 401(c)(2) and the
regulations thereunder).
(iii) Amounts described in sections 104(a)(3), 105(a), and 105(h),
but only to the extent that these amounts are includible in the gross
income of the employee.
(iv) Amounts paid or reimbursed by the employer for moving expenses
incurred by an employee, but only to the extent that at the time of the
payment it is reasonable to believe that these amounts are not
deductible by the employee under section 217.
(v) The value of a non-qualified stock option granted to an employee
by the employer, but only to the extent that the value of the option is
includible in the gross income of the employee for the taxable year in
which granted.
(vi) The amount includible in the gross income of an employee upon
making the election described in section 83(b).
Paragraphs (d)(2)(i) and (d)(2)(ii) of this section include foreign
earned income (as defined in section 911(b)), whether or not excludable
from gross income under section 911. Compensation described in paragraph
(d)(2)(i) of this section is to be determined without regard to the
exclusions from gross income in sections 931 and 933. Similar principles
are to be applied with respect to income subject to sections 931 and 933
in determining compensation described in paragraph (d)(2)(ii) of this
section.
(3) Items not includible as compensation. The term ``compensation''
does not include items such as--
(i) Contributions made by the employer to a plan of deferred
compensation to the extent that, before the application of the section
415 limitations to that plan, the contributions are not includible in
the gross income of the employee for the taxable year in which
[[Page 721]]
contributed. In addition, employer contributions made on behalf of an
employee to a simplified employee pension described in section 408(k)
are not considered as compensation for the taxable year in which
contributed. Additionally, any distributions from a plan of deferred
compensation are not considered as compensation for section 415
purposes, regardless of whether such amounts are includible in the gross
income of the employee when distributed. However, any amounts received
by an employee pursuant to an unfunded nonqualified plan is permitted to
be considered as compensation for section 415 purposes in the year the
amounts are includible in the gross income of the employee.
(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an employee
either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture (see section 83 and the regulations
thereunder).
(iii) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option.
(iv) Other amounts which receive special tax benefits, such as
premiums for group-term life insurance (but only to the extent that the
premiums are not includible in the gross income of the employee), or
contributions made by an employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract
described in section 403(b) (whether or not the contributions are
excludable from the gross income of the employee).
(4) Compensation in limitation year. The compensation (as defined in
paragraph (d)(2) of this section) actually paid or made available to an
employee within the limitation year is the compensation used for
purposes of applying the limitations of section 415.
(5) Election to use compensation accrued during limitation year--(i)
Years beginning after December 31, 1991. For limitation years beginning
after December 31, 1991, an employer may not use accrued compensation.
Any election previously made to use accrued compensation is not valid
for limitation years beginning after December 31, 1991.
(ii) De minimis accrued compensation. Notwithstanding paragraph
(d)(5)(i) of this section, an employer may include in compensation
amounts earned but not paid in a year because of the timing of pay
periods and pay days if these amounts are paid during the first few
weeks of the next year, the amounts are included on a uniform and
consistent basis with respect to all similarly situated employees, and
no compensation is included in more than one limitation period. No
formal election is required to include the accrued compensation
permitted under this de minimis rule. The rule described in this
paragraph (d)(5)(ii) does not apply to a section 403(b) annuity contract
or to an individual retirement plan (as defined in section 7701(a)(37)).
(iii) Years beginning before January 1, 1992. For limitation years
beginning before January 1, 1992, instead of using the compensation
actually paid or made available to an employee during the limitation
year, an employer may elect to use the compensation accrued for an
entire limitation year for purposes of applying the limitations of
section 415. In the case of a group of employers that constitute either
a controlled group of corporations (within the meaning of section 414(b)
as modified by section 415(h)) or trades or businesses (whether or not
incorporated) that are under common control (within the meaning of
section 414(c) as modified by section 415(h)), the election to use
accrued compensation must be made by all members of the group that
maintain a qualified plan. Once an election is made, it remains in
effect until it is revoked by the employer or group of employers. The
rule described in this paragraph (d)(5)(iii) does not apply to a section
403(b) annuity contract or to an individual retirement plan (as defined
in section 7701(a)(37)). If, in a particular limitation year beginning
before January 1, 1992, a previously effective election to use accrued
compensation is revoked or an election to use accrued compensation is
made, any amounts taken into account for compensation purposes for any
preceding limitation year may not
[[Page 722]]
be counted again in determining compensation for the particular
limitation year.
(6) Special rule for employees of controlled groups of corporations,
etc. In the case of an employee of two or more corporations which are
members of a controlled group of corporations (as defined in section
414(b) as modified by section 415(h)), the term ``compensation'' for
such employee includes compensation from all employers that are members
of the group, regardless of whether the employee's particular employer
has a qualified plan. This special rule is also applicable to an
employee of two or more trades or businesses (whether or not
incorporated) that are under common control (as defined in section
414(c) as modified by section 415(h)), to an employee of two or more
members of an affiliated service group as defined in section 414(m), and
to an employee of two or more members of any group of employers who must
be aggregated and treated as one employer pursuant to section 414(o).
(7) Special rule when section 403(b) annuity is aggregated with
qualified plan of controlled employer. If a section 403(b) annuity
contract is combined or aggregated with a qualified plan of a controlled
employer in accordance with either Sec. 1.415-7(h)(2)(i) or Sec. 1.415-
8(d)(2), the following rules apply:
(i) In applying separately the limitations of section 415 (b) or (c)
to the qualified plan and the limitations of section 415(c) and the
exclusion allowance of section 403(b)(2)(A) to the section 403(b)
annuity, compensation from the controlled employer may not be aggregated
with compensation from the employer purchasing the section 403(b)
annuity.
(ii) However, in applying the limitations of section 415(c) in
connection with the combining of the section 403(b) annuity with a
qualified defined contribution plan or section 415(e) in connection with
the aggregating of the section 403(b) annuity with a qualified defined
benefit plan, the total compensation from both employers may be taken
into account.
(8) Special rules for leased employees. [Reserved]
(9) Special rules for permanent and total disability. [Reserved]
(10) Safe harbor rule with respect to plan's definition of
compensation. If a plan defines compensation for purposes of applying
the limitations of section 415 to include only those items specified in
paragraph (d)(2)(i) of this section and to exclude all those items
listed in paragraph (d)(3) of this section, if applicable, the plan will
automatically be considered to be using a definition of compensation
which satisfies section 415(c)(3).
(11) Alternative definition of compensation. In lieu of defining
compensation in accordance with paragraphs (d)(2) and (d)(3) of this
section, for purposes of applying the limitations of section 415 in the
case of employees other than self-employed individuals treated as
employees within the meaning of section 401(c)(1), a plan may define
compensation using either of the following definitions used for wage
reporting purposes, as modified herein, and the definition will be
considered automatically to satisfy section 415(c)(3):
(i) Information required to be reported under sections 6041, 6051
and 6052. Compensation is defined as wages within the meaning of section
3401(a) and all other payments of compensation to an employee by his
employer (in the course of the employer's trade or business) for which
the employer is required to furnish the employee a written statement
under sections 6041(d), 6051(a)(3), and 6052. See Secs. 1.6041-1(a),
1.6041-2(a)(1), 1,6052-1, and 1.6052-2, and also see Sec. 31.6051-
1(a)(1)(i)(C) of this chapter. This definition of compensation may be
modified to exclude amounts paid or reimbursed by the employer for
moving expenses incurred by an employee, but only to the extent that at
the time of the payment it is reasonable to believe that these amounts
are deductible by the employee under section 217. Compensation under
this paragraph (d)(11)(i) must be determined without regard to any rules
under section 3401(a) that limit the remuneration included in wages
based on the nature or location of the employment or the services
performed (such as the exception for agricultural labor in section
3401(a)(2)).
[[Page 723]]
(ii) Section 3401(a) wages. Compensation is defined as wages within
the meaning of section 3401(a) (for purposes of income tax withholding
at the source) but determined without regard to any rules that limit the
remuneration included in wages based on the nature or location of the
employment or the services performed (such as the exception for
agricultural labor in section 3401(a)(2)).
(12) Optional use of prior regulations. For years beginning before
September 19, 1991, employers are permitted, in defining compensation
for purposes of section 415(c)(3), to comply with either the provisions
of this Sec. 1.415-2(d) or the prior regulation provisions of
Sec. 1.415-2(d). See Sec. 1.415-2(d) as contained in the CFR edition
revised as of April 1, 1991.
(13) Additional rules. The Commissioner may in revenue rulings,
notices, and other guidance of general applicability provide additional
definitions of compensation that are treated as satisfying section
415(c)(3).
[T.D. 7748, 46 FR 1698, Jan. 7, 1981, as amended by T.D. 8361, 56 FR
47667, Sept. 19, 1991; 57 FR 10815, 10953, Mar. 31, 1992]
Sec. 1.415-3 Limitations for defined benefit plans.
(a) General rules--(1) Maximum limitations. Under section 415(b) and
this section, to satisfy the provisions of section 415(a) for any
limitation year, the annual benefit (as defined in paragraph (b)(1)(i)
of this section) to which a participant is entitled at any time under a
defined benefit plan may not, during the limitation year, exceed the
lesser of--
(i) $75,000, or
(ii) 100 percent of the participant's average compensation for his
high 3 years of service.
As required in Sec. 1.415-1(d), in order to satisfy the limitations on
benefits of this section, the plan provisions must preclude the
possibility that any annual benefit exceeding these limitations will be
payable at any time. Thus, a plan may fail to satisfy the limitations of
this section even though no participant has actually accrued a benefit
in excess of these limitations.
(2) Adjustment to dollar limitation. The dollar limitation described
in section 415(b)(1)(A) and paragraph (a)(1)(i) of this section is
adjusted for cost of living increases under section 415(d) and
Sec. 1.415-5(a). The adjusted figure is effective as of January 1 of
each calendar year and is applicable to limitation years that end during
that calendar year.
(3) Average compensation for high 3 years of service. For purposes
of applying the limitation on benefits described in this section, a
participant's high 3 years of service is the period of 3 consecutive
calendar years (or, the actual number of consecutive years of employment
for those employees who are employed for less than 3 consecutive years
with the employer) during which the employee had the greatest aggregate
compensation (as defined in Sec. 1.415-2(d)) from the employer. For
purposes of this subparagraph, in determining a participant's high 3
years, the plan may use any 12 month period instead of the calendar year
provided that it is uniformly and consistently applied.
(b) Definitions of terms--(1) Annual benefit. (i) The term ``annual
benefit'' means a benefit which is payable annually in the form of a
straight life annuity under a plan. Such benefit does not include any
benefits attributable to either employee contributions or rollover
contributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3)
and 409(b)(3)(C)). Additionally, in applying the limitations on benefits
described in paragraph (a)(1) of this section to the annual benefit of a
participant, it is immaterial if the participant works beyond the normal
retirement age as determined under the terms of the plan. Thus, for
example, if an individual, who is subject to the dollar limitation of
section 415(b)(1)(A) ($110,625 for 1980), retires in 1980 after working
past the plan's normal retirement age of 65, the plan may only provide
such individual with an annual benefit of $110,625 in 1980 and not the
actuarial equivalent of the amount the individual would have been
entitled to receive at age 65 in order to comply with the section 415(b)
limitations.
(ii) If the plan provides for a benefit which is not payable in the
form of a straight life annuity, the benefit is adjusted in accordance
with paragraph (c) of this section for purposes of applying
[[Page 724]]
the limitations on benefits described in paragraph (a)(1) of this
section.
(iii) If rollover contributions are made to the plan, the annual
benefit attributable to these contributions is determined on the basis
of reasonable actuarial assumptions. See paragraph (d) of this section
for rules relating to employee contributions.
(iv) For purposes of this paragraph, when there is a transfer of
assets or liabilities from one qualified plan to another, the annual
benefit attributable to the assets transferred does not have to be taken
into account by the transferee plan in applying the limitations of
section 415. The annual benefit payable on account of the transfer for
any individual that is attributable to the assets transferred will be
equal to the annual benefit transferred on behalf of such individual
multiple by a fraction, the numerator of which is the total assets
transferred and the denominator of which is the total liabilities
transferred.
(2) Retirement benefit. For purposes of this section, the term
``retirement benefit'' means a benefit provided under the terms of a
defined benefit plan which is subject to the limitations of section
415(b) and this section.
(c) Adjustment where form of benefit is other than straight life
annuity--(1) In general. (i) Where a defined benefit plan provides a
retirement benefit in any form other than a straight life annuity, the
plan benefit is adjusted to a straight life annuity beginning at the
same age which is the actuarial equivalent of such benefit in accordance
with rules determined by the Commissioner. This adjustment is for
purposes of applying the limitations on benefits described in paragraph
(a)(1) of this section to the annual benefit of the participant.
(ii) Examples of benefits that are not in the form of a straight
life annuity are an annuity which includes a post-retirement death
benefit and an annuity providing for a guaranteed number of payments.
(2) Certain beneifts to which no adjustment is required. For
purposes of the adjustment described in subparagraph (1) of this
paragraph, the following values are not taken into account:
(i) The value of a qualified joint and survivor annuity (as defined
in section 401(a)(11)(G)(iii) and the regulations thereunder) provided
by the plan to the extent that such value exceeds the sum of (A) the
value of a straight life annuity beginning on the same date and (B) the
value of any post-retirement death benefits which would be payable even
if the annuity was not in the form of a joint and survivor annuity.
(ii) The value of benefits that are not directly related to
retirement benefits (such as pre-retirement disability and death
benefits and post-retirement medical benefits).
(iii) The value of benefits provided by the plan which reflect post-
retirement cost of living increases to the extent that such increases
are in accordance with section 415(d) and Sec. 1.415-5.
(3) Examples. The provisions of subparagraph (2)(i) of this
paragraph may be illustrated by the following examples:
Example (1). (i) Corporation ABC maintains a defined benefit plan
that provides a benefit in the form of a joint and 100% suvivor annuity
with a 10 year certain feature. The value of this benefit is equal to
126% of the value of the same amount payable as a straight life annuity
beginning on the same date. If the benefit were payable in the form of a
joint and 100% survivor annuity, without a 10 year certain feature, its
value would be equal to only 123% of the value of the same amount
payable as a straight life annuity beginning on the same date. If the
benefit were payable with a 10 year certain feature, but without the
joint and 100% survivor aspect, its value would equal 110% of the value
of the same amount payable as a straight life annuity beginning on the
same date. Thus, the value of the postretirement death benefits which
would be payable even if the annuity were not in the form of a joint and
survivor annuity is 10%.
(ii) Under subparagraph (2)(i) of this paragraph, the values which
may be excluded for purposes of the adjustment required by subparagraph
(1) of this paragraph are as follows: The value of the joint and
survivor annuity provided by the plan (126%) to the extent that such
value exceeds the sum of, the value of the straight life annuity
beginning on the same date (100%) and the value of the post-retirement
death benefits (10%). Therefore, the value of the joint and survivor
annuity provided by the plan exceeds the value of the straight life
annuity with the 10 year certain feature by 16% (126%-110%).
(iii) Although 16% of the excess benefit attributable to the annity
provided by this
[[Page 725]]
plan may, consequently, be ignored (because this represents the value
added to the 10 year certain and life annuity benefit by the joint
survivor feature), 10% of such excess benefit (the value added to the
straight life annuity benefit by the 10 year certain feature) must be
taken into account for purposes of adjusting the benefit under the plan
to an actuarially equivalent straight life annuity. Thus, for example,
if ABC Corporation were to provide a benefit equal to 95% of a
participant's compensation for the high three years of service, the
limitation of section 415(b)(1)(B) would be exceeded because the benefit
under the plan would be the actuarial equivalent of a straight life
annuity equal to 105% of a participant's compensation for the high three
years.
Example (2). Corporation XYZ maintains a nondiscriminatory defined
benefit plan that provides a benefit which is equal to 100% of a
participant's compensation for his high 3 years of service. For married
participants, the benefit is payable in the form of a joint and 100%
survivor annuity. While for participants who are not married, the
benefit is payable in the form of a straight life annuity. The plan also
provides that married participants can elect to receive their benefits
in the form of a lump sum distribution which is the actuarial equivalent
of a joint and 100% survivor annuity. The special rule set forth in
subparagraph (2)(i) of this paragraph only applies, however, if the
benefit is payable in the form of a qualified joint and survivor
annuity. Any other forms of optional benefits must be adjusted to a
straight life annuity in accordance with subparagraph (1) of this
paragraph. Accordingly, because the benefit payable under the plan in
the form of a lump sum distribution is the actuarial equivalent of a
straight life annuity which is greater than 100% of a participant's
compensation for his high 3 years, the limitation of section
415(b)(1)(B) has been exceeded.
(d) Employee contributions--(1) Mandatory contributions. Where a
defined benefit plan provides for mandatory employee contributions (as
defined in section 411(c)(2)(C)), the annual benefit attributable to
such contributions is not taken into account for purposes of applying
the limitations on benefits described in paragraph (a) of this section.
The annual benefit attributable to mandatory contributions is determined
by using the factors described in section 411(c)(2)(B) and the
regulations thereunder, regardless of whether section 411 applies to
that plan.
However, the mandatory employee contributions are considered a
separate defined contribution plan maintained by the employer that is
subject to the limitations on contributions and other additions
described in Sec. 1.415-6. (See Sec. 1.415-7 for provisions relating to
the limitations applicable where an employer maintains a defined benefit
and defined contribution plan for the same employee.)
(2) Voluntary contributions. Where a defined benefit plan provides
for voluntary employee contributions, these contributions are considered
a separate defined contribution plan maintained by the employer which is
subject to the limitations on contributions and other additions
described in Sec. 1.415-6. (See Sec. 1.415-7 for provisions relating to
the limitations applicable where an employer maintains a defined benefit
and defined contribution plan for the same employee.)
(3) Example: The provisions of this paragraph may be illustrated by
the following example:
Example. A is a participant in a defined benefit plan maintained by
his employer. Under the terms of the plan A must make contributions to
the plan in a stated amount to accrue benefits derived from employer
contributions. These contributions are mandatory employee contributions
within the meaning of section 411(c)(2)(C) and, thus, the annual benefit
attributable to these contributions does not have to be taken into
account for purposes of testing the annual benefit derived from employer
contributions against the applicable limitation on benefits. However,
these contributions are considered a separate defined contribution plan
maintained by A's employer. Accordingly, with respect to the current
limitation year: (1) the limitation on benefits (as described in
paragraph (a)(1) of this section) is applicable to the annual benefit
attributable to employer contributions to the defined benefit plan; (2)
the limitation on contributions and other additions (as described in
Sec. 1.415-6) is applicable to the defined contribution plan consisting
of A's mandatory contributions; and (3) the provisions of Sec. 1.415-7
(relating to the limitations where the employer maintains a defined
benefit and defined contribution plan for the same employee) are
applicable to the defined benefit and defined contribution plan in which
A participates. These same limitations would also apply. If, instead of
providing for mandatory employee contributions the plan permitted
voluntary employee contributions, since both voluntary and mandatory
employee contributions are treated as separate defined contribution
plans maintained by the employer.
[[Page 726]]
(e) Adjustment where benefit begins before age 55. Where a defined
benefit plan provides a retirement benefit beginning before age 55, the
plan benefit is adjusted to the actuarial equivalent of a benefit
beginning at age 55 in accordance with rules determined by the
Commissioner. This adjustment is only for purposes of applying the
dollar limitation described in section 415(b)(1)(A) to the annual
benefit of the participant.
(f) Total annual benefits not in excess of $10,000--(1) In general.
The annual benefit (without regard to the age at which benefits
commence) payable with respect to a participant under any defined
benefit plan is not considered to exceed the limitations on benefits
described in section 415(b)(1) and in paragraph (a)(1) of this section
if--
(i) The retirement benefits derived from employer contributions
payable with respect to the participant under the plan and all other
defined benefit plans of the employer do not in the aggregate exceed
$10,000 for the limitation year, or for any prior limitation year, and
(ii) The employer has not at any time, either before or after the
effective date of section 415, maintained a defined contribution plan in
which the participant participated.
(2) Special rule with respect to participants in multiemployer
plans. The special $10,000 exception set forth in subparagraph (1) of
this paragraph is applicable to a participant in a multiemployer plan
described in section 414(f) without regard to whether that participant
ever participated in one or more other plans maintained by an employer
who also maintains the multiemployer plan, provided that none of such
other plans were maintained as a result of collective bargaining
involving the same employee representative as the multiemployer plan.
(3) Special rule with respect to employee contributions. For
purposes of subparagraph (1)(ii) of this paragraph, if a defined benefit
plan provides for employee contributions, whether voluntary or
mandatory, these contributions will not be considered a separate defined
contribution plan maintained by the employer. Thus, a contributory
defined benefit plan may utilize the special dollar limitation provided
for in this paragraph.
(4) Computation of $10,000 amount. For purposes of subparagraph
(1)(i) of this paragraph, the value of the retirement benefit payable
under the plan is not adjusted upward for early retirement provisions
and benefits which are not in the form of a straight life annuity
(whether or not directly related to retirement benefits).
(5) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). B is a participant in a defined benefit plan maintained
by this employer, X Corporation, which provides for a benefit payable in
the form of a straight life annuity beginning at age 65. B's
compensation for his high 3 years of service is $6,000. The plan does
not provide for employee contributions and at no time has B been a
participant in a defined contribution plan maintained by X. With respect
to the current limitation year, B's retirement benefit under the plan is
$9,500. Because B's retirement benefit does not exceed $10,000 and
because B has at no time participated in a defined contribution plan
maintained by X, the benefits payable under the plan are not considered
to exceed the limitation on benefits otherwise applicable to B ($6,000).
This result would remain the same, even if, under the terms of the plan,
B's normal retirement age were age 50 or if the plan provided for
employee contributions.
Example (2). Assume the same facts as in example (1), except that
the plan provides for a benefit payable in the form of a life annuity
with a 10 year certain feature. Assume that after the adjustment
described in paragraph (c) of this section, B's annual benefit under the
plan for the current limitation year is $10,500. However, for purposes
of applying the special rule provided in this paragraph for total
benefits not in excess of $10,000, there is no adjustment required if
the retirement benefit payable under the plan is not in the form of a
straight life annuity. Therefore, because B's retirement benefit does
not exceed $10,000, B may receive the full $9,500 benefit without the
otherwise applicable benefit limitations of this section being exceeded.
(g) Special rule for service of less than 10 years--(1) In general.
Where a participant has less than 10 years of service with the employer
at the time the participant begins to receive retirement benefits under
the plan, the benefit limitations described in section 415(b) (1) and
(4) and paragraphs (a)(1) and (f)(1) of this section are to be reduced
[[Page 727]]
by multiplying the otherwise applicable limitation by a fraction--
(i) The numerator of which is the number of years of service with
the employer as of, and including, the current limitation year, and
(ii) The denominator of which is 10. For purposes of this
subparagraph, the term ``year of service'' is to be determined on a
reasonable and consistent basis.
(2) Examples. The provision of this paragraph may be illustrated by
the following examples:
Example (1). C begins employment with Acme Corporation on January 1,
1977, at the age of 58. Acme maintains only a noncontributory defined
benefit plan which provides for a straight life annuity beginning at age
65 and uses the calendar year for the limitation and plan year. Acme has
never maintained a defined contribution plan. C becomes a participant in
Acme's plan on January 1, 1978 and works through December 31, 1983, when
he is age 65. C begins to receive benefits under the plan in 1984. C's
average compensation for his high 3 years of service is $20,000.
Furthermore, under the terms of Acme's plan, for purposes of computing
C's nonforfeitable percentage in his accrued benefit derived from
employer contributions, C has only 7 years of service with Acme (1977-
1983). Therefore, because C has less than 10 years of service with Acme
at the time he begins to receive benefits under the plan, the maximum
permissible annual benefit payable with respect to C is only $14,000
($20,000x7/10).
Example (2). Assume the same facts as in example (1), except that
C's average compensation for his high 3 years is $8,000. Because C has
less than 10 years of service with Acme at the time he begins to receive
benefits, the maximum benefit payable with respect to C would be reduced
to $5,600 ($8,000 x 7/10). However, the special rule for total benefits
not in excess of $10,000, provided in paragraph (f) of this section, is
applicable in this case. Accordingly, C may receive an annual benefit of
$7,000 ($10,000 x 7/10) without the benefit limitations of this section
being exceeded.
Example (3). ABC corporation maintains a defined benefit plan.
Instead of adjusting the benefit limitations in accordance with the
method described in subparagraph (1) of this paragraph, the plan
provides that the plan administrator may make the necessary adjustment
by multiplying the otherwise applicable limitation by a fraction--(1)
the numerator of which is the number of completed months of service with
the employer, and (2) the denominator of which is 120. The plan further
provides that a completed month of service with the employer is any
calendar month in which the employee is credited with at least 83 hours
of service. Provided that an hour of service is determined in a manner
that is reasonable and consistent, the plan may use this alternative
rule for making the adjustment required when a participant has less than
10 years of service with the employer at the time he begins to receive
benefits under the plan.
(h) Benefits under certain collectively bargained plans. For a
special rule affecting the compensation limitation described in section
415(b)(1)(B) and paragraph (a)(1)(ii) of this section, see section
415(b)(7). For a special effective date with respect to this rule, see
Sec. 1.415-1(f)(5).
[T.D. 7748, 46 FR 1700, Jan. 7, 1981]
Sec. 1.415-4 Transitional rule for defined benefit plans.
(a) In general. If all of the conditions described in paragraph (b)
of this section are satisfied, the annual benefit payable to an
individual who was a participant in a defined benefit plan at any time
before October 3, 1973, will not be considered to exceed the limitations
of section 415(b) and Sec. 1.415-3(a). In the case of an individual who
was a participant in more than one defined benefit plan at any time
before October 3, 1973, the annual benefit payable to that individual
from each plan will be deemed not to exceed the limitations of section
415(b) and Sec. 1.415-3(a) if the benefit from each plan satisfies all
of the conditions described in paragraph (b) of this section.
(b) Conditions for application of transitional rule. The conditions
are--
(1) The annual benefit payable to the participant does not exceed
100 percent of that participant's annual rate of compensation (as
defined in paragraph (c) of this section) on October 2, 1973, or, if
earlier, as of the date the participant separated from the service of
the employer.
(2) The annual benefit payable to the participant does not exceed
the annual benefit which would have been payable to the participant at
any time if--
(i) All the terms and conditions of the plan which were actually in
effect on October 2, 1973 (or if earlier, on the date the participant
separated from the
[[Page 728]]
service of the employer) had remained in effect, and
(ii) The participant's compensation taken into account for
determining benefits under the plan for any period after October 2,
1973, did not exceed his annual rate of compensation (as defined in
paragraph (c) of this section) on that date.
(3) The annual benefit payable to a participant who separated from
the service of the employer before October 2, 1973, does not exceed the
participant's nonforfeitable accrued benefit under the plan as of the
date he separated from service.
(c) Special rules--(1) Annual rate of compensation. For purposes of
this section, a participant's annual rate of compensation for a
particular calendar year shall be the greater of--
(i) The participant's compensation for that calendar year as
determined in accordance with the rules provided in Sec. 1.415-2(d), or
(ii) The compensation which would be used to determine benefits
under the plan if the employee separated from the service of the
employer on October 2, 1973, or, if earlier, the employee's actual date
of separation from the service of the employer.
(2) Cost-of-living adjustments. (i) If the plan, as in existence on
October 2, 1973, provided for a post-retirement cost of living
adjustment to benefits, the adjustment may be taken into account in
determining the participant's allowable benefit under paragraph (b) of
this section. However, under paragraph (b)(2) of this section, if a plan
is amended after October 2, 1973 to provide for cost-of-living benefit
increases for retired participants, the transitional rule of this
section will not apply to any increased benefit attributable to the
amendment.
(ii) Any cost-of-living increase in the dollar limitation described
in section 415(b)(1)(A) under section 415(d) and Sec. 1.415-5(a) may be
taken advantage of by an individual who is otherwise using the
transitional rule set forth in this section. Thus, for example, if, due
to cost-of-living increases under section 415(d) and Sec. 1.415-5(a),
the dollar limitation for 1981 is greater than $110,625, to the extent
allowed under section 415(b), a plan may provide that an individual who
is otherwise receiving a benefit of $110,625 per year under the
transitional rule of this section, may receive the greater amount in
1981.
(3) Retirement benefit beginning before age 55. If a defined benefit
plan provides a retirement benefit beginning before age 55, no actuarial
adjustment of the benefit which can be provided under the transitional
rule of this section is required to be made.
(4) Retirement benefit payable in a form other than a straight life
annuity. If a defined benefit plan, as in existence on October 2, 1973,
provided a retirement benefit in a form other than a straight life
annuity, no actuarial adjustment (as otherwise required under
Sec. 1.415-3(c)) of the benefit which can be provided under the
transitional rule of this section is required to be made. However, if
the plan is amended after October 2, 1973, to provide a benefit of
greater value than the benefit provided under the plan as of October 2,
1973, the transitional rule of this section will not apply to the
increase in the value of the benefit attributable to the amendment. (See
paragraph (b)(2)(i) of this section.)
(d) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). N, a participant in a noncontributory defined benefit
plan maintained by his employer, retired on February 17, 1969, and
became eligible to receive benefits under the plan. At that time, N had
attained age 65, the normal retirement age under the plan. N's annual
rate of compensation on February 17, 1969, was $90,000. Under the terms
of the plan, as in effect on February 17, 1969, N was entitled to an
annual benefit of $86,000, which was N's accrued nonforfeitable benefit
as of that date. Because the annual benefit payable with respect to N
(i) does not exceed 100 percent of N's compensation on February 17,
1969, (ii) does not exceed the annual benefit to which N was entitled on
retirement, and (iii) did not exceed N's nonforfeitable accrued benefit
on retirement, the plan may provide an annual benefit of $86,000 with
respect to N for limitation years to which section 415 applies without
violating the limitations imposed by section 415(b) and Sec. 1.415-3.
Example (2). Assume the same facts as in example (1) except that on
February 17, 1969, when N retired and became eligible to receive
benefits under the plan, N had not attained the age of 55. Because the
adjustment
[[Page 729]]
required under section 415(b)(2)(C) for retirement benefits beginning
before age 55 is only applicable to the dollar limitation described in
section 415(b)(1)(A), under paragraph (c)(3) of this section, no
actuarial adjustment of the annual benefit of $86,000 payable with
respect to N is required to be made. Therefore, the plan may pay annual
benefits of $86,000 to N, even though N retires and is eligible to
receive benefits before age 55.
[T.D. 7748, 46 FR 1703, Jan. 7, 1981]
Sec. 1.415-5 Cost of living adjustments for defined benefit plans.
(a) Dollar limitation--(1) In general. Under section 415(d)(1)(A),
the dollar limitation described in section 415(b)(1)(A) applicable to
defined benefit plans for limitation years to which section 415 applies
is adjusted annually to take into account increases in the cost of
living. The adjustment of the dollar limitation is made by multiplying
an annual adjustment factor by $75,000. For purposes of this paragraph,
the annual adjustment factor is to be determined by the Commissioner.
(2) Effective date of adjustment. The adjusted dollar limitation
applicable to defined benefit plans is effective as of January 1 of each
calendar year and applies with respect to limitation years ending with
or within that calendar year.
(3) Application of adjusted figure. The adjusted dollar limitation
is applicable to employees who are participants in a defined benefit
plan and to employees who have retired or otherwise terminated their
service under the plan with a nonforfeitable right to accrued benefits,
regardless of whether they have actually begun to receive such benefits.
However, for purposes of this subparagraph, the annual benefit payable
to a terminated participant, which is otherwise limited by the dollar
limitation, may only be increased in accordance with cost-of-living
adjustments of the dollar limitation if the plan specifically provides
for such post-retirement adjustments.
(b) Average compensation for high 3 years of service limitation--(1)
In general. Under section 415(d)(1)(C), with regard to participants who
have separated from service with a nonforfeitable right to an accrued
benefit, the compensation limitation described in section 415(b)(1)(B)
applicable to limitation years to which section 415 applies may be
adjusted annually to take into account increases in the cost of living.
For any limitation year beginning after the separation occurs, the
adjustment of the compensation limitation is made by multiplying the
annual adjustment factor (as defined in paragraph (b)(2) of this
section) by the compensation limitation applicable to the participant in
the limitation year he separated from the service of the employer. In
the case of a participant who has separated from service prior to the
first limitation year to which section 415 applies, the cost-of-living
adjustment of the compensation limitation under this paragraph for all
limitation years prior to the effective date of section 415 is to be
determined as provided by the Commissioner. For purposes of the
adjustment described in this subparagraph, the annual benefit payable to
a terminated participant, which is otherwise limited by the compensation
limitation, may only be increased in accordance with cost-of-living
adjustments of the compensation limitation if the plan specifically
provides for such post-retirement adjustments.
(2) Annual adjustment factor for compensation limitation. For any
limitation year beginning after the separation occurs, the annual
adjustment factor is a fraction, the numerator of which is the adjusted
dollar limitation for the limitation year in which the compensation
limitation is being adjusted and the denominator of which is the
adjusted dollar limitation for the limitation year in which the
participant separated from service. In determining the adjusted dollar
limitation for purposes of computing the annual adjustment factor under
this subparagraph, the rule provided in paragraph (a)(2) of this section
(relating to the effective date of the adjusted dollar limitation) shall
be applicable.
(3) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. X is a participant in a qualified defined benefit plan
maintained by his employer. The plan has a calendar year limitation
year. Under the terms of the plan, X is entitled to a benefit consisting
of a straight life annuity equal to 100 percent of X's compensation for
his high 3 years of service. X's average compensation for his high 3
years is
[[Page 730]]
$20,000. X separates from the service of his employer on October 3,
1980, with a nonforfeitable right to his accrued benefit, and begins to
receive benefit payments on November 1, 1980. Assume that the adjusted
dollar limitation for 1980 is $100,000 and that the adjusted dollar
limitation for 1981 is $110,000. For the limitation year beginning
January 1, 1981 (the first limitation year beginning after X separates
from service), the compensation limitation applicable to X may be
adjusted for cost of living increases by multiplying the annual
adjustment factor by $20,000. The annual adjustment factor for this
limitation year is a fraction, the numerator of which is $110,000 (the
adjusted dollar limitation for the limitation year in which the
compensation limitation is being adjusted) and the denominator of which
is $100,000 (the adjusted dollar limitation for the limitation year in
which X separates from service). Thus, for the limitation year beginning
January 1, 1981, if the plan provides for post-retirement cost of living
adjustments, X's maximum annual benefit could be increased to $22,000
($110,000/$100,000 x $20,000).
(c) Automatic cost of living adjustments of dollar limitation--(1)
General rule. A defined benefit plan may include a provision which
provides for an annual automatic cost-of-living adjustment of the dollar
limitation described in section 415(b)(1)(A) in accordance with
paragraph (a) of this section. However, the provision may only provide
for scheduled annual increases in the dollar limitation which become
effective no sooner than the date determined in accordance with
paragraph (a)(2) of this section.
(2) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. Plan A is a defined benefit plan. Effective January 1,
1976, the plan was amended to limit all participants' annual plan
benefits, determined on a straight life annuity basis, to $75,000. The
amendment also provides that, ``as of January 1 of each calendar year,
the dollar limitation as determined by the Commissioner of Internal
Revenue for that calendar year will become effective as the Maximum
Permissible Dollar Amount of the plan for that calendar year. The
Maximum Permissible Dollar Amount for a calendar year applies to
limitation years ending with or within that calendar year.'' The
amendment providing for an automatic cost-of-living adjustment of the
dollar limitation of Plan A is an example of a provision which satisfies
the requirements of subparagraph (1) of this paragraph.
[T.D. 7748, 46 FR 1704, Jan. 7, 1981]
Sec. 1.415-6 Limitation for defined contribution plans.
(a) General rules--(1) Maximum limitations. Under section 415(c) and
this section, to satisfy the provisions of section 415(a) for any
limitation year, the annual additions (as defined in paragraph (b) of
this section credited to the account of a participant in a defined
contribution plan (as defined in section 414(i))) for the limitation
year may not exceed the lesser of--
(i) $25,000, or
(ii) 25 percent of the participant's compensation (as defined in
subparagraph (3) of this paragraph) for the limitation year.
(2) Adjustment to dollar limitation. The dollar limitation described
in section 415(c)(1)(A) and subparagraph (1)(i) of this paragraph is
adjusted for cost of living increases under section 415(d) and paragraph
(d) of this section. The adjusted figure is effective as of January 1 of
each calendar year and applies to limitation years that end during that
calendar year.
(3) Participant's compensation. For purposes of this section, the
term ``participant's compensation'' for any limitation year has the same
meaning as set forth in Sec. 1.415-2(d). The term ``participant's
compensation'' includes all compensation actually paid or made available
to the individual for the entire limitation year even though the
individual may not have been a participant for the entire limitation
year.
(4) Section 403(b) annuity contracts. For special rules with respect
to section 403(b) annuity contracts purchased by educational
organizations, hospitals and home health service agencies, see paragrpah
(e) of this section.
(b) Annual additions--(1) In general--(i) Limitation years beginning
after December 31, 1986. For limitation years beginning after December
31, 1986, or such later date provided in paragraph (b)(1)(iii) of this
section, the term ``annual addition'' means, for purposes of this
section, the sum, credited to a participant's account for any limitation
year, of:
(A) Employer contributions;
(B) Employee contributions; and
(C) Forfeitures.
[[Page 731]]
Contributions do not fail to be annual additions merely because they are
excess deferrals, excess contributions, or excess aggregate
contributions or merely because excess contributions or excess aggregate
contributions are corrected through distribution or recharacterization.
Excess deferrals that are distributed in accordance with Sec. 1.402(g)-
1(e) (2) or (3) are not annual additions.
(ii) Limitation years beginning before January 1, 1987. For
limitation years beginning before January 1, 1987, or such later date
provided in paragraph (b)(1)(iii) of this section, the term ``annual
addition'' means, for purposes of this section, the sum, credited to a
participant's account for any limitation year, of:
(A) Employer contributions;
(B) The lesser of the amount of employee contributions in excess of
6 percent of compensation (as defined in paragraph (a)(3) of this
section) for the limitation year, or one-half of the employee
contributions for that year; and
(C) Forfeitures.
(iii) Certain 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, for contributions or benefits pursuant to a
collective bargaining agreement, the date specified in this paragraph
is:
(A) September 31, 1991, in the case of paragraph (b)(1)(i) of this
section; and
(B) October 1, 1991, in the case of paragraph (b)(1)(ii) of this
section.
(2) Employer contributions. (i) For purposes of paragraph (b)(1)(i)
of this section, the term ``annual additions'' includes employer
contributions which are made under the plan. Furthermore, the
Commissioner may in an appropriate case, considering all of the facts
and circumstances treat transactions between the plan and the employer
or certain allocations to participants' accounts as giving rise to
annual additions.
(ii) If, in a particular limitation year, an employer contributes an
amount to a participant's account because of an erroneous forfeiture in
a prior limitation year, or because of an erroneous failure to allocate
amounts in a prior limitation year, the contribution will not be
considered an annual addition with respect to the participant for that
particular limitation year, but will be considered an annual addition
for the limitation year to which it relates. An example of a situation
in which an employer contribution might occur under the circumstances
described in the preceding sentence is a retroactive crediting of
service for an employee under 29 CFR 2530.200(b)-2(a)(3) (regulations
promulgated by the Department of Labor) in accordance with an award of
back pay. For purposes of this subdivision, if the amount so contributed
in the particular limitation year takes into account actual investment
gains attributable to the period subsequent to the year to which the
contribution relates, the portion of the total contribution which
consists of such gains is not considered as an annual addition for any
limitation year. The rule described in this subdivision is only
applicable for purposes of applying the limitations of section 415.
(iii) The restoration of an employee's accrued benefits by the
employer in accordance with section 411(a)(3)(D) or section 411(a)(7)(C)
will not be considered an annual addition for the limitation year in
which the restoration occurs. (See Sec. 1.411(a)-7(d)(6)(iii)(B).)
(iv) The transfer of funds from one qualified plan to another will
not be considered an annual addition for the limitation year in which
the transfer occurs.
(v) In the case of a defined contribution plan (such as a money
purchase pension plan) to which an employer makes a contribution in
order to reduce an accumulated funding deficiency (as defined in section
412(a)), the contribution will be considered an annual addition for the
limitation year when the contribution was otherwise required to have
been made. The special rule provided in the preceding sentence is
available however, only if the contribution is allocated to those
participants who would have received an addition if the contribution had
been timely made. For purposes of determining the amount of the annual
addition under this subdivision, any reasonable amount of interest paid
by the employer is disregarded. However, any
[[Page 732]]
interest paid by the employer that is in excess of a reasonable amount,
as determined by the Commissioner, is taken into account as an annual
addition for the limitation year when the contribution was otherwise
required to have been made.
(vi) In the case of a defined contribution plan (such as a money
purchase pension plan) for which there has been a waiver of the minimum
funding standard in a prior limitation year in accordance with section
412(d), that portion of an employer contribution in a subsequent
limitation year which, if not for the waiver, would have otherwise been
required in the prior limitation year under section 412(a) will be
considered an annual addition for the prior limitation year. For
purposes of determining the amount of such annual addition for the prior
limitation year, any reasonable amount of interest paid by the employer
in addition to the actual make-up contribution is disregarded. However,
any interest paid by the employer that is in excess of a reasonable
amount, as determined by the Commissioner, is taken into account as an
annual addition for the prior limitation year.
(3) Employee contributions. For purposes of paragraph (b)(1)(ii) of
this section, the term ``annual additions'' includes, to the extent
employee contributions would otherwise be taken into account under this
section as an annual addition, mandatory employee contributions (as
defined in section 411(c)(2)(C) and the regulations thereunder) as well
as voluntary employee contributions. The term ``annual additions'' does
not include--
(i) Rollover contributions (as defined in section 402(a)(5),
403(a)(4), 408(d)(3) and 409(b)(3)(C)),
(ii) Repayments of loans made to a participant from the plan,
(iii) Repayments of amounts described in section 411(a)(7)(B) (in
accordance with section 411(a)(7)(C)) and section 411(a)(3)(D) (see
Sec. 1.411(a)-7(d)(6)(iii)(B)),
The direct transfer of employee contributions from one qualified
plan to another.
However, the Commissioner may in an appropriate case, considering all of
the facts and circumstances, treat transactions between the plan and the
employee or certain allocations to participants' accounts as giving rise
to annual additions.
(4) Contributions other than cash. For purposes of this paragraph, a
contribution by the employer or employee of property other than cash
will be considered to be a contribution in an amount equal to the fair
market value (as defined in Sec. 20.2031-1 of the Estate Tax
Regulations) of the property on the date the contribution is made. The
contribution described in this subparagraph may, however, constitute a
prohibited transaction within the meaning of section 4975(c)(1).
(5) Forfeitures. With respect to a particular limitation year,
forfeitures (as well as any income attributable to the forfeiture) will
be considered to be an annual addition to the plan if such forfeitures
are allocated to the account of the participant as of any day within
that limitation year.
(6) Excess annual additions. If, as a result of the allocation of
forfeitures, a reasonable error in estimating a participant's annual
compensation, a reasonable error in determining the amount of elective
deferrals (within the meaning of section 402(g)(3)) that may be made
with respect to any individual under the limits of section 415, or under
other limited facts and circumstances that the Commissioner finds
justify the availability of the rules set forth in this paragraph
(b)(6), the annual additions under the terms of a plan for a particular
participant would cause the limitations of section 415 applicable to
that participant for the limitation year to be exceeded, the excess
amounts shall not be deemed annual additions in that limitation year if
they are treated in accordance with any one of the following:
(i) The excess amounts in the participant's account must be
allocated and reallocated to other participants in the plan. However, if
the allocation or reallocation of the excess amounts pursuant to the
provisions of the plan causes the limitations of section 415 to be
exceeded with respect to each plan participant for the limitation year,
then these amounts must be held unallocated in a suspense account. If a
suspense account is in existence at any
[[Page 733]]
time during a particular limitation year, other than the limitation year
described in the preceding sentence, all amounts in the suspense account
must be allocated and reallocated to participants' accounts (subject to
the limitations of section 415) before any employer contributions and
employee contributions which would constitute annual additions may be
made to the plan for that limitation year.
(ii) The excess amounts in the paticipant's account must be used to
reduce employer contributions for the next limitation year (and
succeeding limitation years, as necessary) for that participant if that
participant is covered by the plan of the employer as of the end of the
limitation year. However, if that participant is not covered by the plan
of the employer as of the end of the limitation year, then the excess
amounts must be held unallocated in a suspense account for the
limitation year and allocated and reallocated in the next limitation
year to all of the remaining participants in the plan in accordance with
the rules set forth in paragraph (b)(6)(i) of this section. Furthermore,
the excess amounts must be used to reduce employer contributions for the
next limitation year (and succeeding limitation years, as necessary) for
all of the remaining participants in the plan. For purposes of this
subdivision, excess amounts may not be distributed to participants or
former participants.
(iii) The excess amounts in the participant's account must be held
unallocated in a suspense account for the limitation year and allocated
and reallocated in the next limitation year to all of the participants
in the plan in accordance with the rules provided in paragraph (b)(6)(i)
of this section. The excess amounts must be used to reduce employer
contributions for the next limitation year (and succeeding limitation
years, as necessary) for all of the participants in the plan. For
purposes of this subdivision, excess amounts may not be distributed to
participants or former participants.
(iv) Notwithstanding paragraph (b)(6) (i), (ii), or (iii) of this
section, the plan may provide for the distribution of elective deferrals
(within the meaning of section 402(g)(3)) or the return of employee
contributions (whether voluntary or mandatory), and for the distribution
of gains attributable to those elective deferrals and employee
contributions, to the extent that the distribution or return would
reduce the excess amounts in the participant's account. These
distributed or returned amounts are disregarded for purposes of section
402(g), the actual deferral percentage test of section 401(k)(3), and
the actual contribution percentage test of section 401(m)(2). However,
the return of mandatory employee contributions may result in
discrimination in favor of highly compensated employees. If the plan
does not provide for the return of gains attributable to the returned
employee contributions, such earnings will be considered as an employee
contribution for the limitation year in which the returned contribution
was made. For limitation years beginning after December 31, 1995, if a
plan does not provide for the distribution of gains attributable to the
distributed elective deferrals, such earnings will be considered as an
employer contribution for the limitation year in which the distributed
elective deferral was made. If a suspense account is in existence at any
time during the limitation year in accordance with this subparagraph,
investment gains and losses and other income may, but need not, be
allocated to the suspense account. To the extent that investment gains
or other income or investment losses are allocated to the suspense
account, the entire amount allocated to participants from the suspense
account, including any such gains or other income or less any such
losses, is considered as the annual addition. See Sec. 1.401(a)-2(b) for
provisions relating to the disposition of a suspense account in
existence upon termination of a plan.
(7) Time when annual additions credited. (i) For purposes of this
paragraph, an annual addition is credited to the account of a
participant for a particular limitation year if it is allocated to the
participant's account under the terms of the plan as of any date within
that limitation year. However, an amount is not deemed allocated as of
any date within a limitation year if
[[Page 734]]
such allocation is dependent upon participation in the plan as of any
date subsequent to such date.
(ii) For purposes of this subparagraph, employer contributions shall
not be deemed credited to a participant's account for a particular
limitation year, unless the contributions are actually made to the plan
no later than 30 days after the end of the period described in section
404(a)(6) applicable to the taxable year with or within which the
particular limitation year ends. If, however, contributions are made by
an employer exempt from Federal income tax under section 501(a), the
contributions must be made to the plan no later than the 15th day of the
sixth calendar month following the close of the taxable year (or fiscal
year, if no taxable year) with or within which the particular limitation
year ends.
(iii) For purposes of this subparagraph, employee contributions,
whether voluntary or mandatory, shall not be deemed credited to a
participant's account for a particular limitation year, unless the
contributions are actually made to the plan no later than 30 days after
the close of that limitation year. However, in the case of employee
contributions to an employee stock ownership plan which meets the
requirements of either section 301(d) of the Tax Reduction Act of 1975
(89 Stat. 38, Sec. 1.46-7) and the regulations thereunder (Sec. 1.46-8)
or section 409A and the regulations thereunder, such contributions shall
be deemed credited to a participant's account in the limitation year for
which the contribution is allocated to that account under the terms of
the plan, provided that the contributions, or pledges to make the
contributions, are actually made no later than the period described in
section 404(a)(6) applicable to the taxable year with or within which
the particular limitation year ends.
(iv) For purposes of this paragraph, amounts contributed to an
individual retirement plan (as described in section 7701(a)(37)) are
treated as allocated to the individual's account as of the last day of
the limitation year ending with or within the taxable year for which the
contribution is made.
(c) Examples. The provisions of paragraphs (a) and (b) of this
section may be illustrated by the following examples:
Example (1). P is a participant in a qualified profit-sharing plan
maintained by his employer, ABC Corporation. The limitation year for the
plan is the calendar year. P's compensation (as defined in paragraph
(a)(3) of this section) for the current limitation year is $20,000
consisting exclusively of salary. Because the compensation limitation
described in section 415(c)(1)(B) applicable to P for the current
limitation year is lower than the dollar limitation described in section
415(c)(1)(A) (as adjusted for cost of living increases), the maximum
annual addition which can be allocated to P's account for the current
limitation year is $5,000 (25 percent of $20,000).
Example (2). Assume the same facts as in Example (1), except that
P's compensation for the current limitation year is $140,000. The
maximum amount of annual additions that may be allocated to P's account
in the current limitation year may not exceed the lesser of $35,000 (25
percent of $140,000) or the dollar limitation as in effect as of January
1 of the calendar year in which the current limitation year ends.
Example (3). Assume the same facts as in Example (1), except that
P's compensation for the current limitation year consists of $20,000
salary and a bonus which is paid to P after the end of the current
limitation year. Because the bonus was not actually paid or made
available to P within the current limitation year, P's compensation for
that year, for purposes of computing the compensation limitation
described in section 415(c)(1)(B), may not include the bonus. However,
if ABC Corporation had elected under Sec. 1.415-2(d)(4) to use the
compensation accrued for the current limitation year, then the amount of
the bonus which accrued within the current limitation year could have
been taken into account.
Example (4). Employer N maintains a qualified profit-sharing plan
which uses the calendar year as its plan year and its limitation year.
N's taxable year is a fiscal year beginning June 1 and ending May 31.
Under the terms of the profit-sharing plan maintained by N, employer
contributions are made to the plan two months after the close of N's
taxable year and are allocated as of the last day of the plan year
ending within the taxable year. Thus, employer contributions for the
1977 calendar year limitation year are made on July 31, 1978 (the date
that is two months after the close of N's taxable year ending May 31,
1978) and are allocated as of December 31, 1977. Because the employer
contributions are actually made to the plan no later than 30 days after
the end of the period described in section 404(a)(6) with respect to
[[Page 735]]
N's taxable year ending May 31, 1978, the contributions will be
considered annual additions for the 1977 calendar year limitation year.
Example (5). Assume the same facts as in example (4), except that
the plan year for the profit-sharing plan maintained by N is the 12-
month period beginning on March 1 and ending on February 28. Under the
terms of the plan, an employer contribution which is made to the plan on
July 31, 1978, is allocated to participants' accounts as of February 28,
1978. Because the last day of the plan year is in the 1978 calendar year
limitation year, and because, under the terms of the plan, employer
contributions are allocated to participants' accounts as of the last day
of the plan year, the contributions are considered annual additions for
the 1978 calendar year limitation year.
Example (6). XYZ Corporation maintains a profit-sharing plan to
which a participant may make voluntary employee contributions for any
year not to exceed 10 percent of the participant's compensation for the
year. The plan permits a participant to make retroactive make-up
contributions for any year for which he contributed less than 10 percent
of compensation. XYZ uses the calendar year as the plan year and the
limitation year. Under the terms of the plan, voluntary employee
contributions are credited to a participant's account for a particular
limitation year if such contributions are allocated to the participant's
account as of any date within that limitation year. Participant A's
compensation is as follows:
Limitation year and compensation
1976.............................................................$10,000
1977.............................................................$12,000
1978.............................................................$14,000
1979.............................................................$16,000
Participant A makes no voluntary employee contributions during
limitation years 1976, 1977 and 1978. On October 1, 1979, participant A
makes a voluntary employee contribution of $5,200 (10 percent of A's
aggregate compensation for limitation years 1976, 1977, 1978 and 1979 of
$52,000). Under the terms of the plan, $1,000 of this 1979 contribution
is allocated to A's account as of limitation year 1976; $1,200 is
allocated to A's account of limitation year 1977; $1,400 is allocated to
A's account as of limitation year 1978, and $1,600 is allocated to A's
account as of limitation year 1979. However, under the rule set forth in
paragraph (b)(7)(iii) of this section, employee contributions will not
be considered credited to a participant's account for a particular
limitation year for section 415 purposes unless the contributions are
actually made to the plan no later than 30 days after the close of that
limitation year. Thus, A's voluntary employee contribution of $5,200
made on October 1, 1979 would be considered as credited to A's account
only for the 1979 calendar year limitation year, notwithstanding the
plan provisions. (See section 415(c)(2)(B) and paragraph (b)(1)(ii) of
this section for provisions relating to the amount of A's contribution
that would be considered an annual addition to A's account for the 1979
calendar year limitation year.)
(d) Cost-of-living adjustment for defined contribution plans--(1) In
general. Under section 415(d)(1)(B), the dollar limitation described in
section 415(c)(1)(A) applicable to limitation years to which section 415
applies is adjusted annually to take into account increases in the cost
of living. See Sec. 1.415-5(a) for the procedure for making this
adjustment and the effective date of the adjusted dollar limitation.
(2) Automatic adjustments with respect to dollar limitation. A
defined contribution plan may include a provision which provides for an
annual automatic cost of living adjustment of the dollar limitation
described in section 415(c)(1)(A).
(e) Special election for section 403(b) contracts purchased by
educational organizations, hospitals and home health service agencies--
(1) In general. (i) An annuity contract described in section 403(b) is
treated as a defined contribution plan for purposes of the limitations
on contributions imposed by section 415. Thus, section 403(b) annuity
contracts are subject to the rules regarding the amount of annual
additions which may be made to a participant's account for any
limitation year under section 415(C)(1) and paragraph (a)(1) of this
section. Section 403(b) annuity contracts are also subject to the
limitations imposed by section 403(b)(2)(A) with respect to the amount
of employer contributions for the purchase of an annuity contract that
may be excluded from the gross income of the employee on whose behalf
the annuity contract is purchased. Therefore, unless a special election
has been made as described in section 415(c)(4) and subparagraph (2) of
this paragraph, the excludable amount of a contribution toward the
purchase of a section 403(b) annuity contract for a particular taxable
year is the lesser of the exclusion allowance computed under section
403(b)(2)(A) for that taxable year or the limitation imposed by section
415(c)(1)
[[Page 736]]
for the limitation year ending with or within that taxable year.
(ii) If the amount of contributions for an individual under a
section 403(b) annuity contract for a taxable year exceeds the
limitation of section 415(c)(1), then for purposes of computing the
exclusion allowance under section 403(b)(2)(A) for future taxable years,
the excess contribution is considered as an amount contributed by the
employer for an annuity contract which was excludable from the
employee's gross income for a prior taxable year under section
403(b)(2)(A)(ii). Thus, for future taxable years the exclusion allowance
under section 403(b)(2)(A) is reduced by the amount of the excess
contribution even though that amount was not excludable from the
employee's gross income in the taxable year when it was made. For a
special effective date for the rule provided in this subdivision, see
Sec. 1.415-1(f)(6).
(iii) For purposes of the limitation imposed by section 415(c)(1),
the amount contributed toward the purchase of a section 403(b) annuity
contact is treated as allocated to the employee's account as of the last
day of the limitation year ending with or within the taxable year during
which the contribution is made.
(iv) For rules relating to the limitation year applicable to an
individual on whose behalf a section 403(b) annuity contract has been
purchased, see Sec. 1.415-2(b)(7).
(2) Alternative limitations. (i) Under section 415(c)(4) and this
paragraph, a special election is permitted with respect to section
403(b) annuity contracts (including custodial accounts treated as
section 403(b) annuity contracts) purchased by educational organizations
(as described in section 170(b)(1)(A)(ii)), home health service agencies
(as described in paragraph (e)(2)(vi) of this section) and hospitals.
Instead of the compensation limitation described in section 415(c)(1)(B)
otherwise applicable to the amount of annual additions that may be made
to the account of a participant in a defined contribution plan in any
limitation year, an individual on whose behalf a section 403(b) annuity
contract has been purchased may elect to have substituted for such
limitation the amounts described in subparagraph (3) (``(A) election
limitation'') or (4) (``(B) election limitation'') of this paragraph.
Instead of the exclusion allowance determined under section 403(b)(2)(A)
otherwise applicable for the taxable year with or within which the
limitation year ends to an individual on whose behalf a section 403(b)
annuity contract has been purchased, an individual may elect to have
substituted for such exclusion allowance the amount described in
paragraph (e)(5) (``(C) election limitation'') of this section. The
election shall be made at the time and in the manner prescribed in
subparagraph (6) of this paragraph.
(ii) With respect to any limitation or taxable year, an election by
an individual to have any one of the alternative limitations described
in paragraph (e) (3), (4) or (5) of this section apply to contributions
made on his behalf by the employer with respect to any section 403(b)
annuity contract precludes an election to have any other of the
alternative limitations apply for any future limitation or taxable year
with respect to any section 403(b) annuity contract purchased by any
employer of such individual.
(iii) With respect to any limitation year, an election by an
individual to have paragraph (e)(3) of this section (``(A) election
limitation'') apply to contributions made on his behalf by the employer
with respect to any section 403(b) annuity contract precludes an
election to have any of the alternative limitations apply for any future
limitation or taxable year with respect to any section 403(b) annuity
contract purchased by any employer of such individual.
(iv) Any election made under this paragraph is irrevocable.
(v) The election made by the individual under this paragraph shall
be controlling for all prior taxable years in which, in accordance with
Sec. 11.415(c)(4)-1(b), the individual had taken advantage of an
alternative limitation, even if inconsistent with the alternative
limitation used in determining income tax liability for those taxable
years under that section. An individual, who took advantage of an
alternative limitation under Sec. 11.415(c)(4)-1(b) which is
inconsistent
[[Page 737]]
with the one finally elected, may correct this inconsistency for each
prior open taxable year in either of two ways. The individual may
redetermine income tax liability as though none of the alternative
limitations applied for that taxable year. Alternatively, the individual
may recompute income tax liability for the particular taxable year in a
manner consistent with the alternative limitation elected by the
individual under this paragraph rather than the limitation originally
used in accordance with Sec. 11.415(c)(4)-1(b). Furthermore, if an
individual, who had taken advantage of an alternative limitation in
prior taxable years under Sec. 11.415(c)(4)-1(b), elects under this
paragraph not to have any of the alternative limitations apply, the
individual, will, nevertheless, be considered to have elected the
alternative limitation used under Sec. 11.415(c)(4)-1(b). However, the
rule described in the preceding sentence is not applicable if the
individual recomputes income tax liability for all prior open taxable
years in which an alternate limitation was taken advantage of under
Sec. 11.415(c)(4)-1(b) as though none of the alternative limitations
applied for those taxable years. For purposes of section 6654 (relating
to the failure of an individual to pay estimated tax), a difference in
tax for such years resulting from a difference in these limitations is
not treated as an underpayment. This rule only applies to the extent the
difference in tax is due to the election of one of the alternative
limitations or to a final election not to use one of the alternative
limitations.
(vi) For purposes of this paragraph, a home health service agency is
an organization described in section 501(c)(3) which is exempt from tax
under section 501(a) and which has been determined by the Secretary of
Health, Education and Welfare to be a home health service agency under
section 1395x(o) of Title 42 of the United States Code.
(3) ``(A) election limitation.'' For the limitation year that ends
with or within the taxable year in which an individual eligible to make
a special election separates from the service of his employer (and only
for that limitation year), the ``(A) election limitation'' is the
exclusion allowance computed under section 403(b)(2)(A) for the
individual's taxable year in which the separation occurs (without regard
to section 415). However, in determining this limitation, there may only
be taken into account the individual's years of service for the employer
(as defined in section 403(b)(4) and the regulations thereunder) and
contributions made by the employer (as described in section
403(b)(2)(A)(ii) and regulations thereunder) during the period of years
(not exceeding 10) ending on the date of separation. For purposes of
this subparagraph, all service for the employer performed within the
period beginning ten years before the date of separation and ending on
the separation date must be taken into account. However, the ``(A)
election limitation'' may not exceed the dollar limitation described in
section 415(c)(1)(A) (as adjusted for cost-of-living increases under
section 415(d)(1) and paragraph (d) of this section) applicable to the
individual for the limitation year.
(4) ``(B) election limitation.'' For any limitation year with
respect to an individual eligible to make a special election, the ``(B)
election limitation'' is equal to the least of the following amounts--
(i) $4,000, plus 25 percent of the participant's includible
compensation (as defined in section 403(b)(3) and the regulations
thereunder) for the taxable year with or within which the limitation
year ends.
(ii) The amount of the exclusion allowance determined under section
403(b)(2)(A) and the regulations thereunder for the taxable year with or
within which the limitation year ends.
(iii) $15,000.
(5) ``(C) election limitation.'' For any taxable year with respect
to an individual eligible to make a special election, the ``(C) election
limitation'' is the lesser of the dollar limitation described in section
415(c)(1)(A) (as adjusted for cost-of-living increases under section
415(d)(1) and paragraph (d) of this section) or the compensation
limitation described in section 415(c)(1)(B) applicable to the
individual for the limitation year ending with or within that taxable
year. For purposes of determining the compensation limitation under this
subparagraph for a
[[Page 738]]
particular limitation year, the term ``compensation'' has the same
meaning as set forth in Sec. 1.415-2(d).
(6) Time and method of making election. (i) With respect to any
taxable year, an election by an individual to take advantage of any of
the alternative limitations described in subparagraphs (3), (4) or (5)
of this paragraph is made by determining income tax liability for that
taxable year in a way which is consistent with one of the alternative
limitations. However, an individual is only considered to have made an
election for a taxable year when the use of one of the alternative
limitations is necessary to support the exclusion from gross income
reflected in the individual's income tax return for that taxable year.
(ii) In the case of an individual who, in accordance with
Sec. 11.415(c)(4)-1(b), took advantage of one of the alternative
limitations for prior taxable years, the election described in this
paragraph to take advantage of an alternative limitation will be
effective only if the following two conditions are satisfied. The first
condition is that the election must be made (in the manner described in
subdivision (i) of this subparagraph) in the individual's income tax
return for the taxable year immediately following the taxable year in
which final regulations under section 415 are published in the Federal
Register. The second condition is that if the individual's election is
different from the limitation used under Sec. 11.415(c)(4)-1(b) in
determining income tax liability for prior taxable years, the individual
must correct this inconsistency by recomputing income tax liability for
all such prior open taxable years in accordance with paragraph (e)(2)(v)
of this section. See paragraph (e)(2)(v) of this section for rules
relating to an individual who had taken advantage of an alternative
limitation in prior taxable years under Sec. 11.415(c)(4)-1(b) but does
not elect any of the alternative limitations for the taxable year
immediately following the taxable yar in which final regulations under
section 415 are published in the Federal Register.
(iii) This subdivision provides a special rule for those individuals
who, in accordance with Sec. 11.415(c)(4)-1(b), took advantage of one of
the alternative limitations for prior taxable years, but who are not
participating in a section 403(b) annuity program in the taxable year
following the taxable year in which final regulations under section 415
are published in the Federal Register. In such a situation, the election
described in this paragraph to take advantage of an alternative
limitation (or, alternatively, not to elect any of the alternative
limitations) is made by the individual by attaching a statement to the
income tax return for the taxable year following the taxable year in
which final section 415 regulations are published in the Federal
Register. The statement must include the individual's name, address,
Social Security number, the name of the section 403(b) annuity program
in which the individual participated and a statement indicating the
election being made. See paragraph (e)(2)(v) of this section for rules
relating to the situation where the individual described in this
subdivision chooses not to elect any of the alternative limitations.
(7) Examples: The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Doctor M is an employee of H Hospital (an organization
described in section 501(c)(3) and exempt from taxation under section
501(a)) for the entire 1976 calendar year. M is not in control of any
employer within the meaning of section 414 (b) or (c), as modified by
section 415(h). M uses the calendar year as the taxable year and
limitation year. M has includable compensation (as defined in section
403(b)(3) and the regulations thereunder) and compensation (as defined
in paragraph (a)(3) of this section) for taxable year 1976 of $30,000,
and M has 4 years of service (as defined in Sec. 1.403(b)-1(f)) with H
as of December 31, 1976. During M's prior service with H, H had
contributed a total of $12,000 on M's behalf for annuity contracts
described in section 403(b), which amount was excludable from M's gross
income for such prior years. Thus, for the limitation year ending with
or within taxable year 1976, M's exclusion allowance determined under
section 403(b)(2)(A) is $12,000 ((.20 x $30,000 4) -- $12,000). The
limitation imposed by section 415(c)(1) that is applicable to M for
limitation year 1976 is the lesser of $26,825 (the amount described in
section 415(c)(1)(A) adjusted under section 415(d)(1)(b) for limitation
year 1976) or $7,500 (the amount described in section 415(c)(1)(B)).
Absent the special elections provided in section
[[Page 739]]
415(c)(4) and this paragraph, $7,500 would be the maximum contribution H
could make for annuity contracts described in section 403(b) on M's
behalf for limitation year 1976 without increasing M's gross income for
taxable year 1976. However, because H is an organization described in
section 415(c)(4), M may make a special election with respect to amounts
contributed by H on M's behalf for section 403(b) annuity contracts for
1976. Assume that M does not separate from the service of H during 1976
and that, therefore, the ``(A) election limitation'' described in
section 415(c)(4)(A) and subparagraph (3) of this paragraph is not
available to M. If M elects the ``(B) election limitation'' for 1976, H
could contribute $11,500 on M's behalf for annuity contracts described
in section 403(b) for that year (the least of $11,500 (the amount
described in section 415(c)(4)(B)(i))); $12,000 (the amount described in
section 415(c)(4)(B)(ii)); and $15,000 (the amount described in section
415(c)(4)(B)(iii)). If M elects the ``(C) election limitation'' for
1976, H could only contribute up to $7,500 (the lower of the amounts
described in section 415(c)(1) (A) or (B)) for section 403(b) annuity
contracts on M's behalf for 1976 without increasing M's gross income for
that year.
Example (2). Assume the same facts as in example (1) except that H
had contributed a total of $18,000 on M's behalf for annuity contracts
in prior years, which amount was excludable from M's gross income for
such prior years. Accordingly, for 1976, M's exclusion allowance
determined under section 403(b)(2)(A) is $6,000 ((.20 x $30,000 x 4)--
$18,000). The limitation imposed by section 415(c)(1) applicable to M
for 1976 is $7,500 (the lesser of the amount described in section
415(c)(1) (A) or (B)). Absent the special elections provided in section
415(c)(4) and this paragraph, $6,000 would be the maximum amount H could
contribute for annuity contracts described in section 403(b) on M's
behalf for 1976 without increasing M's gross income for that year.
However, if M elects the ``(c) election limitations'' for 1976, H may
contribute up to $7,500 without increasing M's gross income for that
year.
Example (3). G, a teacher, is an employee of E, an educational
organization described in section 170(b)(1)(A)(ii). G uses the calendar
year as the taxable year and G uses the 12-month consecutive period
beginning July 1 as the limitation year. G has includible compensation
(as defined in section 403(b)(3) and the regulations thereunder) for
taxable year 1976 of $12,000 and G has compensation (as defined in
paragraph (a)(3) of this section) for the limitation year ending with or
within taxable year 1976 of $12,000. G has 20 years of service (as
defined in Sec. 1.403(b)-1(f)) as of May 30, 1976, the date G separates
from the service of E. During G's service with E before taxable year
1976, E had contributed $34,000 toward the purchase of a section 403(b)
annuity contract on G's behalf, which amount was excludable from G's
gross income for such prior years. Of this amount, $19,000 was so
contributed and excluded during the 10 year period ending on May 30,
1976. For the taxable year 1976, G's exclusion allowance determined
under section 403(b)(2)(A) is $14,000 ((.20 x $12,000 x 20) -- $34,000).
Absent the special elections described in section 415(c)(4) and this
paragraph, $3,000 (the lesser of G's exclusion allowance for taxable
year 1976 or the section 415(c)(1) limitation applicable to G for the
limitation year ending with or within such taxable year) would be the
maximum excludable contribution E could make for section 403(b) annuity
contracts on G's behalf for the limitation year ending with or within
taxable year 1976. However, because E is an organization described in
section 415(c)(4), G may make a special election with respect to amounts
contributed on G's behalf by E for section 403(b) annuity contracts for
the limitation year ending with or within taxable year 1976.
Because G has separated from the service of E during such taxable year,
G may elect the ``(A) election limitation'' as well as the ``(B)
election limitation'' or the ``(C) election limitation.'' If G elects
the ``(A) election limitation'' for the limitation year ending with or
within taxable year 1976, E could contribute up to $5,000 ((.20 x
$12,000 x 10) -$19,000) on G's behalf for section 403(b) annuity
contracts for such limitation year without increasing G's gross income
for the taxable year with or within which such limtation year ends. If G
elects the ``(B) election limitation'' for such limitation year, E could
contribute $7,000 (the least of $7,000 (the amount described in section
415(c)(4)(B)(i)); $14,000 (the amount described in section
415(c)(4)(B)(ii)); and $15,000 (the amount described in section
415(c)(4)(B)(iii)). If G elects the ``(C) election limitation'' for
taxable year 1976, E could contribute $3,000 (the lesser of the amounts
described in section 415(c)(1) (A) or (B)).
(f) Special rules with respect to the application of section
415(c)(1)(B) with section 404(e)(4). For special rules relating to the
application of the compensation limitation described in section
415(c)(1)(B) with the minimum allowable deduction described in section
404(e)(4) in the case of a plan which provides contributions for
employees, some or all of whom are employees within the meaning of
section 401(c)(1), see the regulations under section 404(e).
(g) Special rules for employee stock ownership plans--(1) General
definitions. For purposes of this paragraph--(i) An employee stock
ownership plan is a
[[Page 740]]
plan which meets the requirements of either section 4975(e)(7) and the
regulations thereunder, or whichever of the following is applicable:
section 301(d) of the Tax Reduction Act of 1975 (89 Stat. 38, 26 CFR
1.46-7) and the regulations thereunder (26 CFR 1.46-8) or section 409A
and the regulations thereunder.
(ii) The term ``employer securities'' means, in the case of an
employee stock ownership plan within the meaning of section 4975(e)(7)
and the regulations thereunder, qualifying employer securities within
the meaning of section 4975(e)(8), that are also described in section
301(d)(9)(A) of the Tax Reduction Act of 1975 and the regulations
thereunder or section 409A(l) and the regulations thereunder, whichever
is applicable. In the case of an employee stock ownership plan described
in section 301(d)(2) of the Tax Reductions Act of 1975 or section 409A,
whichever is applicable, such term means employer securities within the
meaning of section 301(d)(9)(A) of that Act and the regulations
thereunder or section 409A(l) and the regulations thereunder, which ever
is applicable.
(iii) An individual is considered to own more than 10 percent of the
employer's stock if, without regard to stock held under the employee
stock ownership plan, the individual owns (after application of section
1563(e), relating to constructive ownership of stock) more than 10
percent of the total combined voting power of all classes of stock
entitled to vote or more than 10 percent of the total value of shares of
all classes of stock.
(2) Special dollar limitation. In the case of an employee stock
ownership plan which meets the requirements of paragraph (g)(3) of this
section, the applicable dollar limitation for a limitation year equals
the sum of--
(i) The dollar amount described in section 415(c)(1)(A) (as so
adjusted for that limitation year), and
(ii) The lesser of the amount determined under paragraph (g)(2)(i)
of this section or the amount of employer securities within the meaning
of paragraph (g)(1)(ii) of this section contributed to the employee
stock ownership plan.
(3) Employee stock ownership plans to which the special dollar
limitation applies. For purposes of this paragraph, the special dollar
limitation is only applicable to an employee stock ownership plan for a
particular limitation year for which no more than one-third of the
employer contributions for the limitation year are allocated to
employees who are officers, shareholders owning more than 10 percent of
the employer's stock (as determined under subparagraph (1)(iii) of this
paragraph), or whose compensation for the limitation year exceeds twice
the dollar amount described in section 415(c)(1)(A) (as adjusted for
cost-of-living increases under section 415(d)(1) and paragraph (d) of
this section).
(4) Cash contributions treated as contributions of employer
securities. For purposes of the special dollar limitation--
(i) In the case of an employee stock ownership plan in which the
employer makes cash contributions which are used in a direct acquisition
of employer securities, the cash contributions are treated as a
contribution of employer securities for the limitation year, provided
that the securities are employer securities within the meaning of
paragraph (g)(1)(ii) of this section and are allocated to participants
under the terms of the plan as of any date within that limitation year.
However, this subdivision is not applicable unless the following two
conditions are satisfied. The first condition is that the employer must
contribute the cash to the plan no later than 30 days after the end of
the period described in section 404(a)(6) applicable to the taxable year
with or within which the particular limitation year ends. The second
condition is that the employer securities must be purchased no later
than 60 days after the end of the period described in the preceding
sentence.
(ii) In the case of an employee stock ownership plan to which an
exempt loan as described in Sec. 54.4975-7(b) has been made, the
employer's contribution of both principal and interest used to repay the
exempt loan for the limitation year will be treated as a contribution of
employer securities for that limitation year, provided that the
securities allocated to participants are employer securities within the
meaning of paragraph (g)(1)(ii) of this section.
[[Page 741]]
(5) Amounts considered as annual additions. For purposes of applying
the limitations of section 415(c)(1) and this section and for the
special dollar limitation, in the case of an employee stock ownership
plan to which an exempt loan as described in Sec. 54.4975-7(b) has been
made, the amount of employer contributions which is considered an annual
addition for the limitation year is calculated with respect to employer
contributions of both principal and interest used to repay the exempt
loan for that limitation year.
(6) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Employee N is a participant in an employee stock
ownership plan maintained by his employer, M Corporation, which meets
the requirements of section 4975(e)(7) and the regulations thereunder.
The plan also meets the requirements set forth in subparagraph (3) of
this paragraph. M does not maintain any other qualified plan. The
limitation year for the plan is the calendar year. For 1977, N has
compensation (as defined in paragraph (a)(3) of this section) of
$160,000. Without the special dollar limitation described in
subparagraph (2) of this paragraph, under section 415(c)(1), N could
only have annual additions of $28,175 (the lesser of the dollar
limitation described in section 415(c)(1)(A) as adjusted for cost of
living increases ($28,175) or the compensation limitation described in
section 415(c)(1)(B) (25% of $160,000=$40,000)) made to his account for
the 1977 limitation year. Under the special dollar limitation, N would
be able to have annual additions of $56,350 ($28,175x2) made to his
account for the 1977 limitation year, provided that amounts contributed
in excess of $28,175 consist solely of employer securities. However, N
is also subject to the compensation limitation described in section
415(c)(1)(B). Therefore, even under the special dollar limitation, N may
only have annual additions of $40,000 made to his account for the 1977
limitation year: Provided, That amounts contributed in excess of $28,175
consist solely of employer securities within the meaning of paragraph
(g)(1)(ii) of this section.
Example (2). Assume the same facts as in example (1), except that
N's compensation for 1977 is $300,000. Because the compensation
limitation (25% of $300,000=$75,000) is greater than the special dollar
limitation of $56,350, N can have annual additions of $56,350 made to
his account for the 1977 limitation year, provided that amounts
contributed in excess of $28,175 consist solely of employer securities.
(h) Special rules for level premium annuity contracts under plans
benefiting owner-employees--(1) In general. The compensation limitation
described in section 415(c)(1)(B) will not be less than the contribution
described in section 401(e) which is made for the benefit of an owner-
employee (within the meaning of section 401(c)(3)) for a limitation year
provided that--
(i) The annual additions with respect to such owner-employee for the
limitation year consist solely of the contributions described in this
paragraph, and
(ii) The owner-employee is not a participant at any time during the
limitation year in a defined benefit plan maintained by the employer.
(2) Application of the non-discrimination rules. In the case of a
plan which provides contributions for employees who are not owner-
employees, that plan will not be treated as failing to satisfy the non-
discrimination rules of section 401(a)(4) merely because contributions
made on behalf of employees who are not owner-employees are not
permitted to exceed the compensation limitation described in section
415(c)(1)(B).
(3) Additional rules. For additional rules concerning contributions
described in section 401(e), see Sec. 1.401(e)-4.
[T.D. 7748, 46 FR 1705, Jan. 7, 1981, as amended by T.D. 8357, 56 FR
40549, Aug. 15, 1991; 57 FR 10290, Mar. 25, 1992; T.D. 8581, 59 FR
66181, Dec. 23, 1994]
Sec. 1.415-7 Limitation in case of defined benefit and defined contribution plan for same employee.
(a) Overall limitation--(1) In general. Under section 415(e) and
this section, in any case in which an individual has at any time
participated in a defined benefit plan and also has at any time
participated in a defined contribution plan maintained by the same
employer, to satisfy the provisions of section 415(a), the sum of the
defined benefit plan fraction (as defined in paragraph (b) of this
section) and the defined contribution plan fraction (as defined in
paragraph (c) of this section) with respect to that participant for any
limitation year may not exceed 1.4.
[[Page 742]]
(2) Application of overall limitation to employee stock ownership
plan. An employee stock ownership plan which qualifies for, and takes
advantage of, the special dollar limitation provided in section
415(c)(6) and Sec. 1.415-6(g) is still subject to the 1.4 limitation of
paragraph (a)(1) of this section.
(b) Defined benefit plan fraction--(1) In general. For purposes of
paragraph (a) of this section, the defined benefit plan fraction
applicable to a participant for any limitation year is a fraction--
(i) The numerator of which is the projected annual benefit (as
defined in subparagraph (3) of this paragraph) of the participant under
the plan (determined as of the close of the limitation year), and
(ii) The denominator of which is the projected annual benefit (as
defined in subparagraph (3) of this paragraph) of the participant under
the plan (determined as of the close of the limitation year) if the plan
provided such participant the maximum benefit allowable under
Sec. 1.415-3.
In the event a participant has participated in more than one defined
benefit plan maintained by the employer, the numerator of the defined
benefit plan fraction is the sum of the projected annual benefits under
all of the defined benefit plans.
(2) Participants described in section 2004(d)(2) of the Employee
Retirement Income Security Act of 1974. For purposes of this paragraph,
in the case of a participant described in section 2004(d)(2) of the
Employee Retirement Income Security Act of 1974 (Pub. L. 93-406, 88
Stat. 987), the defined benefit plan fraction applicable to such
participant is deemed not to exceed 1.0 for any limitation year to which
section 415 and this section apply.
(3) Projected annual benefit. For purposes of this section, a
participant's ``projected annual benefit'' is equal to the annual
benefit (as defined in Sec. 1.415-3(b)(1)(i)) to which a participant in
a defined benefit plan would be entitled under the terms of the plan
based upon the following assumptions:
(i) The participant will continue employment until reaching normal
retirement age as determined under the terms of the plan (or current
age, if that is later).
(ii) The participant's compensation for the limitation year under
consideration will remain the same until the date the participant
attains the age described in subdivision (i) of this subparagraph.
(iii) All other relevant factors used to determine benefits under
the plan for the limitation year under consideration will remain
constant for all future limitation years.
(c) Defined contribution plan fraction--(1) In general. For purposes
of paragraph (a) of this section, the defined contribution plan fraction
applicable to a participant for any limitation year is a fraction--
(i) The numerator of which is the sum of the annual additions to the
participant's account as of the close of the limitation year and for all
prior limitation years, and
(ii) The denominator of which is the sum of the maximum amount of
annual additions which could have been made under section 415(c)
Sec. 1.1415-6(a) (determined without regard to the special dollar
limitation provided for employee stock ownership plans under section
415(c)(6) and Sec. 1.415-6(g)) for the limitation year and for each
prior limitation year of the participant's service with the employer
(regardless of whether a plan was in existence during those years).
For purposes of this paragraph, the term ``annual additions'' has the
same meaning as set forth in Sec. 1.415-6(b).
(2) Special rules for certain annuity contracts and individual
retirement plans. (i) Except as provided in subdivision (ii) of this
subparagraph, in computing the defined contribution plan fraction
applicable to an individual on whose behalf a section 403(b) annuity
contract has been purchased, the amount which is included in the
denominator of such fraction for a particular limitation year is the
maximum amount which could have been contributed under the limitations
of section 415(c) and Sec. 1.415-6(a) applicable to the individual for
the particular limitation year. However, if the individual elects an
alternative limitation described in either section 415(c)(4)(A) or
section 415(c)(4)(B) for a particular limitation year, the denominator
of the fraction for such limitation year is the maximum amount
[[Page 743]]
which could have been contributed under the applicable limitations of
section 415(c) and Sec. 1.415-6(a), as modified by the alternative
limitation elected.
(ii) This subdivision provides a rule for computing the defined
contribution plan fraction with respect to an individual on whose behalf
a section 403(b) annuity has been purchased prior to commencing
employment with an employer which the individual controls (within the
meaning of section 414 (b) or (c), as modified by section 415(h)) and
which maintains a defined benefit plan. In this situation, the
controlled employer is considered to be maintaining the section 403(b)
annuity contract as a defined contribution plan under the rules of
paragraph (h)(2)(i) of this section. However, for all years prior to
commencing employment with the controlled employer, the individual does
not have any years of service (within the meaning of subparagraph
(1)(ii) of this paragraph) with that employer. Thus, for each limitation
year in which such individual did not have a year of service with the
controlled employer, the denominator of the defined contribution plan
fraction applicable to the individual is deemed to equal the numerator
of that fraction.
(iii) The rules described in this paragraph also apply to an
individual on whose behalf an individual retirement plan (as described
in section 7701(a)(37)) has been maintained.
(iv) See paragraph (h)(4) of this section for special rules relating
to the aggregation of a section 403(b) annuity contract and a qualified
plan.
(d) Special transitional rules for defined contribution plan
fraction. For purposes of determining the defined contribution plan
fraction under paragraph (c) of this section for any limitation year
beginning after December 31, 1975, the following rules shall apply with
respect to limitation years before the first limitation year to which
section 415 and this section apply.
(1) The aggregate amount taken into account under paragraph
(c)(1)(i) of this section in determining the numerator of the defined
contribution plan fraction is deemed not to exceed the aggregate amount
taken into account under paragraph (c)(1)(ii) of this section in
determining the denominator of the fraction. Thus, for example, if the
aggregate amount of actual annual additions to the plan for all such
limitation years is $500,000, while the aggregate amount in the
denominator is $250,000, under the rule set forth in this subparagraph,
the defined contribution plan fraction is $250,000 divided by $250,000,
or 100 percent.
(2) The amount taken into account under section 415(c)(2)(B)(i) for
each such limitation year is an amount equal to--
(i) The amount by which the aggregate amount of employee
contributions (whether voluntary or mandatory) for all limitation years
beginning before January 1, 1976, during which the employee was a
participant in the plan exceeds 10 percent of the employee's aggregate
compensation from the employer for all such limitation years, divided by
(ii) The number of full limitation years (counting any part of a
limitation year as a full limitation year) beginning before January 1,
1976, during which the employee was a participant in the plan.
Therefore, for purposes of computing the numerator of a participant's
defined contribution plan fraction for limitation years beginning after
December 31, 1975, no employee contributions made to the plan before the
first limitation year to which section 415 and this section apply are
taken into account as annual additions if the aggregate amount of the
contributions does not exceed 10 percent of the employee's aggregate
compensation from the employer for all limitation years prior to the
first such limitation year.
(3) The special transitional rule concerning employee contributions
provided for in paragraph (d)(2) of this section does not apply to any
employee contributions (whether voluntary or mandatory) made on or after
October 2, 1973, to the extent that these contributions exceed the
maximum amount of employee contributions permitted under the plan as in
effect on October 2, 1973. For purposes of the preceding sentence, plan
amendments approved by the Internal Revenue Service before October 2,
1973, and actually put into effect before January 1, 1974, are
considered in effect on October 2, 1973.
[[Page 744]]
Therefore, for purposes of computing the numerator of the defined
contribution plan fraction for limitation years beginning after December
31, 1975, employee contributions made between October 2, 1973 and prior
to the first limitation year to which section 415 and this section apply
which exceed the maximum amount the employee was permitted to contribute
under the provisions of the plan as in effect on October 2, 1973, are
taken into account as annual additions (within the meaning of
Sec. 1.415-6(b)(1)(ii)).
(4) For purposes of this paragraph, the participant's aggregate
compensation for all years (whichever are applicable under either
paragraph (d)(1) or (2) of this section) with the employer before the
first limitation year to which section 415 applies equals the product of
the participant's compensation during the first limitation year to which
section 415 applies times the number of such applicable years. However,
this special rule is available only if records necessary for the
determination of the participant's aggregate compensation for all such
applicable years with the employer before the first limitation year to
which section 415 applies are not available.
(e) Examples. The provisions of paragraphs (a) through (d) of this
section may be illustrated by the following examples:
Example (1). (i) S is an employee of T Corporation and is a
participant in both the noncontributory defined benefit plan and
noncontributory defined contribution plan maintained by the corporation.
S became an employee of T on July 1, 1966. S became a participant in the
defined benefit plan maintained by T on January 1, 1968 and he became a
participant in the defined contribution plan maintained by T on January
1, 1970. T uses the calendar year as the limitation year for both plans.
The current limitation year is 1978. S's compensation (as defined in
Sec. 1.415-2(d)) from T is as follows:
------------------------------------------------------------------------
Limitation year Compensation
------------------------------------------------------------------------
1966.................................................... $3,000
1967.................................................... 6,000
1968.................................................... 6,000
1969.................................................... 8,000
1970.................................................... 8,000
1971.................................................... 8,000
1972.................................................... 9,000
1973.................................................... 10,000
1974.................................................... 10,000
1975.................................................... 11,000
1976.................................................... 11,000
1977.................................................... 12,000
1978.................................................... 12,000
------------------------------------------------------------------------
(ii) S's projected annual benefit (as defined in paragraph (b)(3) of
this section) as of the close of the current limitation year under the
terms of the plan is $9,000. S's compensation for the current limitation
year is $12,000. Therefore, the defined benefit plan fraction applicable
to S for the current limitation year is .75 or 75 percent (9,000 /
12,000). S's defined contribution compensation limitation (as described
in section 415(c)(1)(B)) for the current limitation year is $3,000 (25
percent of $12,000). For all limitation years beginning before January
1, 1978, the maximum aggregate amount of annual additions which could
have been allocated to S's account under the defined contribution plan
is $25,500 (aggregate compensation of $102,000 for all years of service
with T Corporation x 25 percent). Assume that annual additions totaling
$11,400 have been allocated to S's account as of the end of the current
limitation year. Therefore, S's defined contribution plan fraction as of
the end of the current limitation year equals
[GRAPHIC] [TIFF OMITTED] TC14NO91.162
Because the sum (115 percent) of the defined benefit plan fraction (75
percent) and the defined contribution plan fraction (40 percent)
applicable to S for the current limitation year does not exceed 140
percent, the limitations of section 415(e) and this section are not
exceeded.
Example (2). Assume the same facts as in example (1) except that the
defined contribution plan maintained by T Corporation provides for
mandatory employee contributions of 6% of compensation and voluntary
employee contributions of 10% of compensation. Assume further that S
made the maximum allowable employee contributions under the plan for
each limitation year (including the current limitation year) during
which he was a participant. For limitation years beginning
[[Page 745]]
before January 1, 1976, S made total employee contributions of $8,960.
However, because of the special transitional rule applicable to the
defined contribution plan fraction with respect to employee
contributions for limitation years beginning before January 1, 1976 (as
described in paragraph (d)(2) of this section), only $560 of the total
employee contributions of $8,960 made by S will be considered an annual
addition for each of those limitation years in which S was a participant
in the plan total employee contributions for limitation years in which S
participated in the plan beginning before January 1, 1976 of $8,960
minus $5,600 (10 percent of total compensation of $56,000 for such
years) divided by 6 (the number of such years in which S was a
participant in the plan). Thus, in determining the numerator of the
defined contribution plan fraction applicable to S, because S was a
participant in the plan for 6 limitation years beginning before January
1, 1976, the total amount of employee contributions that must be taken
into account as annual additions for such limitation years is $3,360
($560 x 6). For limitation years beginning after January 1, 1976, S made
contributions of $1,760 (for limitation year 1976), $1,920 (for
limitation year 1977) and $1,920 (for limitation year 1978, the current
limitation year). The amount of annual additions attributable to such
contributions under section 415(c)(2)(B) is $880 (for limitation year
1976), $960 (for limitation year 1977) and $960 (for the current
limitation year), for a total of $2,800. Thus, the defined contribution
plan fraction applicable to S for the current limitation year is
[GRAPHIC] [TIFF OMITTED] TC14NO91.163
Because the sum (137 percent) of the defined benefit plan fraction (75
percent) and the defined contribution plan fraction (62 percent)
applicable to S for the current limitation year does not exceed 140
percent, the limitations of section 415(e) and this section are not
exceeded.
Example (3). (i) A is an employee of M Corporation and is a
participant in both the noncontributory defined benefit plan and
noncontributory defined contribution plan maintained by the corporation.
A became an employee of M on January 1, 1969 and immediately became a
participant in both plans. M uses the calendar year as the limitation
year for both plans. The current limitation year is 1978. A's
compensation (as defined in Sec. 1.415-2(d)) from M is as follows:
------------------------------------------------------------------------
Limitation year Compensation
------------------------------------------------------------------------
1969.................................................... $100,000
1970.................................................... 120,000
1971.................................................... 130,000
1972.................................................... 160,000
1973.................................................... 200,000
1974.................................................... 240,000
1975.................................................... 280,000
1976.................................................... 320,000
1977.................................................... 400,000
1978.................................................... 460,000
------------------------------------------------------------------------
(ii) A is a participant described in section 2004(d)(2) of the
Employee Retirement Income Security Act of 1974. A's projected annual
benefit (as defined in paragraph (b)(3) of this section) as of the close
of the current limitation year under the terms of the defined benefit
plan is $100,000. The defined benefit dollar limitation (as described in
section 415(b)(1)(A)) applicable to A for the current limitation year is
$90,150. Absent the provisions of paragraph (b)(2) of this section, the
defined benefit plan fraction applicable to A for the current limitation
year would be 1.11 or 111 percent. However, under the provisions of
paragraph (b)(2) of this section, for purposes of computing the overall
1.4 limitation imposed by section 415(e) and this section applicable to
A for the current limitation year and all future limitation years, A's
defined benefit plan fraction is considered to equal 1.0 or 100 percent.
(iii) A's defined contribution dollar limitation (as described in
section 415(c)(1)(A)) for the current limitation year is $30,050. For
the 9 limitation years ending before January 1, 1978, the maximum amount
of annual additions which could have been allocated to A's account under
the defined contribution plan is $230,000 ($25,000 x 7, plus $26,825
(adjusted figure for 1976) and $28,175 (adjusted figure for 1977)).
Assume that annual additions totaling $60,000 ($10,000 of this amount
being attributable to the current limitation year) have been allocated
to A's account as of the close of the current limitation year. A's
defined contribution plan fraction computed as of the end of the current
limitation year is .23 or 23 percent
[GRAPHIC] [TIFF OMITTED] TC14NO91.164
Because the sum (123 percent) of the defined benefit plan fraction (1.0
or 100 percent) and the defined contribution plan fraction (.23 or 23
percent) for the current limitation year
[[Page 746]]
does not exceed 1.4 or 140 percent, the limitations of section 415(e)
and this section are not violated.
Example (4). (i) J is an employee of M Corporation and is the only
participant in the defined contribution plan maintained by the
corporation. M uses the calendar year as the limitation year for the
plan. The current limitation year is 1980. For all limitation years
prior to 1980, the maximum allowable contribution was made to the plan.
Thus, J's defined contribution plan fraction as of the end of 1979 is
1.0 or 100 percent. In 1980, before any contributions had been made to
the defined contribution plan, the defined contribution plan is
converted into a defined benefit plan. The defined benefit plan provides
a benefit in the form of a straight life annuity equal to 50% of a
participant's compensation for the high 3 years of service, but not less
than the amount purchasable by J's account balance. J's average
compensation for the high 3 years is $50,000.
(ii) As a result of the conversion of the defined contribution plan
into the defined benefit plan, J becomes subject to the 1.4 limitation
of section 415(e) and this section because he has at one time
participated in a defined contribution plan and has at one time
participated in a defined benefit plan maintained by M. Although the
defined contribution plan is no longer in existence, J must still take
the defined contribution plan fraction into account. A defined
contribution plan fraction must continue to be taken into account
regardless of whether the plan has been converted into another plan or
whether the plan is terminated and distributions are made to
participants.
(iii) Even though J is subject to the limitations of section 415(e)
and this section, in computing the defined benefit plan fraction, the
special rule set forth in Sec. 1.415-3(b)(1)(iv) is applicable based on
the facts of this example. That rule provides that when there is a
transfer of assets or liabilities from one qualified plan to another,
the annual benefit attributable to the assets transferred does not have
to be taken into account by the transferee plan in applying the
limitations of section 415. (For purposes of section 415, a conversion
of a defined contribution plan into a defined benefit plan is considered
such a transfer.) Assume that one-half of J's annual benefit under the
defined benefit plan is attributable to the assets transferred from the
defined contribution plan. This means that by applying the special rule
set forth in Sec. 1.415-3(b)(1)(iv), only one-half of J's projected
annual benefit must be taken into account in computing J's defined
benefit plan fraction. Accordingly, because J's defined benefit plan
fraction is only 25 percent (\1/2\ of 50% of high 3 years of
compensation ($12,500) divided by 100% of high 3 years of compensation
($50,000)) and not 50 percent (which would have been the case absent the
special rule of Sec. 1.415-3(b)(1)(iv), the 140 percent limitation of
section 415(e) and this section is not violated.
(f) Special rules where records are not available for past periods--
(1) In general. The rules described in paragraph (f) (2) and (3) of this
section apply only if the plan is unable to compute the defined
contribution plan fraction because of the unavailability of records with
respect to limitation years ending before the first limitation year to
which section 415 applies to the plan.
(2) Defined contribution plan fraction for first limitation year to
which section 415 applies to a plan. For purposes of paragraph (c) of
this section, the defined contribution plan fraction for the first
limitation year to which section 415 and this section apply to a plan
equals the following fraction:
(i) The numerator of the fraction is the sum of the participant's
account balance as of the valuation date under the plan immediately
preceding November 2, 1975, plus any additions to the participant's
account made subsequent to that valuation date and through the end of
the first limitation year to which section 415 applies to the plan. In
determining the participant's account balance as of the valuation date
under the plan immediately preceding November 2, 1975, for purposes of
this subdivision, one-half of all employee contributions (whether
voluntary or mandatory) are not taken into account.
(ii) The denominator of the fraction is the sum of the maximum
allowable annual additions under section 415(c) and Sec. 1.415-6 for
each limitation year, including the first limitation year to which
section 415 applies to the plan, in which the participant had a year of
service with the employer (see Sec. 1.415-3(g)(1) for rules relating to
the determination of a year of service). In determining the maximum
allowable annual additions for purposes of this subdivision, the
compensation limitation (as described in section 415(c)(1)(B)) taken
into account for all of such limitation years is the applicable
compensation limitation for the first limitation year to which section
415 applies to the plan and the dollar limitation taken into account for
each such limitation year is the dollar limitation described in
[[Page 747]]
section 415(c)(1)(A), as adjusted for cost-of-living increases under
section 415(d)(1)(B).
(3) Defined contribution plan fraction for future limitation years.
For purposes of paragraph (c) of this section, with respect to all
limitation years after the first limitation year to which section 415
applies to the plan, the defined contribution plan fraction for the
current limitation year equals a fraction. The numerator of the fraction
is the amount determined under paragraph (g)(2)(i) of this section, plus
any subsequent annual additions made to the participant's account
through the end of the current limitation year. The denominator of the
fraction equals the sum of--
(i) The amount determined under subparagraph (2)(ii) of this
paragraph, plus
(ii) The sum of the maximum allowable annual additions under section
415(c) and Sec. 1.415-6 for the current limitation year and all prior
limitation years beginning after the end of the first limitation year to
which section 415 applies to the plan.
(g) Special rule for certain plans in effect on date of enactment.
In the case of an individual who, on September 2, 1974, was a
participant in a defined benefit and defined contribution plan
maintained by the same employer and with respect to whom the sum of the
defined benefit plan fraction and the defined contribution plan fraction
for the limitation year during which such date falls (determined as of
the close of that limitation year) exceeded 140 percent, the sum of such
fractions may continue to exceed 140 percent for any particular future
limitation year, but only if the conditions set forth in paragraph (g)
(1) and (2) of this section are satisfied:
(1) The defined benefit plan fraction of the participant computed as
of the close of the particular limitation year does not exceed such
fraction computed as of the close of the limitation year during which
September 2, 1974, falls.
(2) After September 2, 1974,
(i) No employer contributions are allocated to the participant's
account under any defined contribution plan,
(ii) No forfeitures arising under any defined contribution plan are
allocated to the participant's account,
(iii) No voluntary employee contributions are made by the
participant under any defined contribution or defined benefit plan, and
(iv) No mandatory employee contributions are made by the participant
under any defined contribution plan.
(h) Special rules for section 403(b) annuity contracts--(1) In
general. For purposes of section 415, the following rules shall apply:
(i) In the case of an annuity contract described in section 403(b),
the participant, on whose behalf the annuity contract is purchased, is
considered to have exclusive control of the annuity contract.
Accordingly, the participant, and not the participant's employer who
purchased the section 403(b) annuity contract, is deemed to maintain the
annuity contract.
(ii) Any contributions by the employer for an annuity contract
described in this subparagraph are not taken into account in computing
the defined contribution plan fraction applicable to the participant for
the limitation year.
(2) Special rules under which the employer is deemed to maintain the
annuity contract. (i) The provisions of this paragraph and not paragraph
(h)(1) of this section apply for a particular limitation year with
respect to a participant on whose behalf a section 403(b) annuity
contract is purchased, if that participant is in control of any employer
within the meaning of section 414 (b) or (c), as modified by section
415(h). Under these circumstances, the section 403(b) annuity contract
for the benefit of the participant is treated as a defined contribution
plan maintained by both the controlled employer and the participant for
that limitation year.
(ii) The provisions of this paragraph also apply for a particular
limitation year if a participant on whose behalf a section 403(b)
annuity contract is purchased has elected, under section 415(c)(4)(D)
and Sec. 1.415-6(e)(6), to have the provisions of section 415(c)(4)(C)
and Sec. 1.415-6(e)(5) apply for the taxable year with or within which
such limitation year ends. In such a case, the exclusion allowance
determined under
[[Page 748]]
section 403(b)(2)(A) is not applicable to the annuity contract for the
particular limitation year, and the annuity contract is treated as a
defined contribution plan maintained by both the employer and the
participant for that limitation year.
(iii) For purposes of the limitations of section 415(e) and this
section, where a section 403(b) annuity contract is treated as a defined
contribution plan maintained by the employer under this subparagraph,
any contributions made for the annuity contract for a participant are
taken into account in computing the defined contribution plan fraction
applicable to that participant for the limitation year. Thus, for
example, if a doctor is employed by an educational organization which
provides him with a section 403(b) annuity contract and also maintains a
private practice as a shareholder owning more than 50 percent of a
professional corporation, any qualified defined benefit plan of the
professional corporation must be aggregated with the section 403(b)
annuity contract for purposes of applying the limitations of section
415(e) and this section.
(3) Special rule with respect to salary reduction agreements. The
rules provided in this paragraph are applicable whether or not the
section 403(b) annuity contract is purchased in connection with a salary
reduction agreement between the employer and participant.
(4) Special rules relating to the aggregation of the annuity
contract with a qualified plan. (i) Where a section 403(b) annuity
contract is aggregated with a qualified defined benefit plan in a
limitation year because of the application of the rules of paragraph
(h)(2) of this section, all contributions made to the annuity contract
for a participant in prior limitation years shall be taken into account
in computing the participant's defined contribution plan fraction.
However, the rule described in the preceding sentence is not applicable
if the aggregation is solely attributable to the participant's election
to have the provisions of section 415(c)(4)(C) apply. Accordingly, in
any case in which aggregation is required as a result of the application
of paragraph (h)(2)(ii) of this section, all contributions made to the
annuity contract for a participant in prior limitation years in which
paragraph (h)(1) of this section was applicable do not have to be taken
into account in computing the defined contribution plan fraction
applicable to the participant.
(ii) Any contributions made to a section 403(b) annuity contract for
a participant in any limitation year in which the rules of paragraph
(h)(2)(ii) of this section are applicable shall be taken into account in
subsequent limitation years even though the rules of such paragraph are
no longer applicable.
(iii) See paragraph (c)(2) of this section for special rules
relating to the defined contribution plan fraction for a participant on
whose behalf a section 403(b) annuity contract has been purchased.
(5) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). A is employed by a hospital which is described in
section 501(c)(3) and exempt from tax under section 501(a). The hospital
purchases an annuity contract described in section 403(b) on A's behalf
for the current limitation year. The hospital also maintains a qualified
defined benefit plan during the current limitation year in which A is a
participant, but it does not maintain a qualified defined contribution
plan during that limitation year. With respect to the annuity contract.
A does not elect to have the provisions of section 415(c)(4)(C) apply
for the current limitation year. Also, A is not in control of any
employer within the meaning of section 414 (b) or (c), as modified by
section 415(h). For purposes of section 415, under subparagraph (1) of
this paragraph, A is considered to have exclusive control of the annuity
contract. Therefore, because A (and not the hospital) is treated as
maintaining the annuity contract and because the hospital does not
maintain any defined contribution plan, the limitations of section
415(e) and this section are not applicable to A for either the annuity
contract or the hospital's defined benefit plan for the current
limitation year.
Example (2). Assume the same facts as in example (1), except that
the hospital also maintains a qualified defined contribution plan during
the limitation year in which A is a participant. Because the hospital is
not considered to be maintaining the section 403(b) annuity contract,
contributions made to the annuity contract on behalf of A during the
current limitation year by the hospital are not taken into account in
computing the defined contribution plan fraction
[[Page 749]]
applicable to A for the plans maintained by the hospital for that
limitation year.
Example (3). Assume the same facts as in example (1), except that A
has elected to have the provisions of section 415(c)(4)(C) apply to the
annuity contract for the current limitation year. Under the special
rules contained in subparagraph (2) of this paragraph, the annuity
contract is treated as a defined contribution plan maintained by the
hospital as well as a defined contribution plan maintained by A.
Accordingly, because the hospital is also maintaining a qualified
defined benefit plan, the limitations of section 415(e) and this section
are applicable to A for the annuity contract and the defined benefit
plan maintained by the hospital in the current limitation year.
Example (4). J is employed by a hospital which is described in
section 501(c)(3) and exempt from tax under section 501(a). The hospital
purchases an annuity contract described in section 403(b) on J's behalf
for the current limitation year. The hospital does not maintain any
qualified plans during that limitation year. However, for the limitation
year, J is in control (within the meaning of section 414 (b) or (c), as
modified by section 415(h)) of employer M. M maintains a qualified
defined benefit plan during that limitation year. Under the special
rules contained in subparagraph (2) of this paragraph, the annuity
contract is treated as a defined contribution plan maintained by M (the
controlled employer) as well as a defined contribution plan maintained
by J. Therefore, because M is also maintaining a qualified defined
benefit plan, the limitations of section 415(e) and this section are
applicable to J for the annuity contract and the defined benefit plan
maintained by M in the current limitation year.
(i) Special rules for individual retirement plans. For purposes of
section 415, an individual on whose behalf an individual retirement plan
(as described in section 7701(a)(37)) is maintained is considered to
have exclusive control of such plan. Therefore, the individual is
treated as maintaining such plan. However, if that individual is in
control of any employer within the meaning of section 414 (b) or (c), as
modified by section 415(h), the individual retirement plan for the
benefit of such individual is treated as a defined contribution plan
maintained by both the controlled employer and such individual.
[T.D. 7748, 46 FR 1711, Jan. 7, 1981]
Sec. 1.415-8 Combining and aggregating plans.
(a) In general. Under section 415(f) and this section, for purposes
of applying the limitations of section 415 (b), (c), and (e) applicable
to a participant for a particular limitation year--
(1) All qualified defined benefit plans (without regard to whether a
plan has been terminated) ever maintained by the employer will be
treated as one defined benefit plan, and
(2) All qualified defined contribution plans (without regard to
whether a plan has been terminated) ever maintained by the employer will
be treated as one defined contribution plan.
(b) Annual compensation taken into account where employer maintains
more than one defined benefit plan. If more than one qualified defined
benefit plan is being aggregated under paragraph (a) of this section for
a particular limitation year, in applying the defined benefit
compensation limitation (as described in section 415(b)(1)(B)) to the
annual benefit of a participant under each plan, the participant's high
3 years of compensation is determined in accordance with Sec. 1.415-
3(a)(3).
(c) Affiliated employers. Any qualified defined benefit plan or
qualified defined contribution plan maintained by any member of a
controlled group of corporations (within the meaning of section 414(b)
as modified by section 415(h)) or by any trade or business (whether or
not incorporated) under common control (within the meaning of section
414(c) as modified by section 415(h)) is deemed maintained by all such
members or such trades or businesses.
(d) Section 403(b) annuity contracts--(1) In general. In the case of
an annuity contract described in section 403(b), except as provided in
subparagraph (2) of this paragraph, the participant on whose behalf the
annuity contract is purchased is considered to have exclusive control of
the annuity contract. Accordingly, the participant, and not the
participant's employer who purchased the section 403(b) annuity
contract, is deemed to maintain the annuity contract.
(2) Special rules under which the employer is deemed to maintain the
annuity
[[Page 750]]
contract. If a participant on whose behalf a section 403(b) annuity
contract is purchased has elected to have the provisions of section
415(c)(4)(C) and Sec. 1.415-6(e)(5) apply for a taxable year, the
annuity contract is treated as a defined contribution plan maintained by
both the employer that purchased the annuity contract and the
participant on whose behalf it was purchased for the limitation year
which ends during such taxable year. Even if the election under section
415(c)(4)(C) is not made, where a participant, on whose behalf a section
403(b) annuity contract is purchased, is in control of any employer
within the meaning of section 414 (b) or (c) as modified by section
415(h) for a limitation year, the annuity contract for the benefit of
the participant is treated as a defined contribution plan maintained by
both the controlled employer and the participant for that limitation
year. Thus, for example, if a doctor is employed by an educational
organization which provides him with a section 403(b) annunity contract
and also maintains a private practice as a shareholder owning more than
50 percent of a professional corporation, any qualified defined
contribution plan of the professional corporation must be combined with
the section 403(b) annuity contract for purposes of applying the
limitations of section 415(c) and Sec. 1.415-6. For purposes of this
paragraph, it is immaterial whether the section 403(b) annuity contract
is purchased as a result of a salary reduction agreement between the
employer and the participant.
(e) Multiemployer plans. Multiemployer plans, as defined in section
414(f), shall not be aggregated with other multiemployer plans. However,
where an employer maintains both a plan which is not a multiemployer
plan and a multiemployer plan, the plan which is not a multiemployer
plan shall be aggregated (based on its limitation year) with the
multiemployer plan to the extent that benefits provided under the
multiemployer plan are provided by such employer with respect to a
common participant. See Sec. 1.415-1(e)(2) for a rule relating to the
computation of the benefits provided by an employer under a section
414(f) multiemployer plan.
(f) Special rules for combining certain plans, etc. If a plan,
annuity contract or arrangement is subject to a special limitation in
addition to, or instead of, the regular limitations described in section
415 (b) or (c), and is combined under this section with a plan which is
subject only to the regular section 415 (b) or (c) limitations, the
following rules shall apply:
(1) Each plan, annuity contract or arrangement which is subject to a
special limitation must meet its own applicable limitation and each plan
subject to the regular limitations of section 415 must meet its
applicable limitation.
(2) The combined limitations shall be the larger of the applicable
limitations.
(g) Special priority rule for TRASOP's. For a special rule
concerning allocations to a participant's account under an Employee
Stock Ownership Plan under section 301(d) of the Tax Reduction Act of
1975, see Sec. 1.46-6(d)(6)(v).
(h) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). M is an employee of ABC Corporation and XYZ
Corporation. ABC maintains a qualified noncontributory defined benefit
plan in which M participates and XYZ maintains a qualified defined
contribution plan in which M participates. ABC Corporation and XYZ
Corporation are members of a controlled group of corporations within the
meaning of section 414(b) as modified by section 415(h). Because ABC
Corporation and XYZ Corporation are members of a controlled group of
corporations within the meaning of section 414(b) as modified by section
415(h), M is treated as being employed by a single employer. Thus, M's
annual benefit under the defined benefit plan maintained by ABC may not
exceed the limitations of section 415(b) and Sec. 1.415-3; the annual
additions to M's account under the defined contribution plan maintained
by XYZ may not exceed the limitations of section 415(c) and Sec. 1.415-
6; and, in addition, the two plans may not exceed the limitations of
section 415(e) and Sec. 1.415-7.
Example (2). Assume the same facts as in example (1), except that
the qualified defined benefit plan maintained by ABC Corporation
provides for employee contributions (whether mandatory or voluntary).
Under Sec. 1.415-3(d), ABC Corporation will be considered to be
maintaining a defined contribution plan consisting of M's contributions
to the defined benefit plan. For purposes of applying the limitations of
section 415(e) and Sec. 1.415-7, the qualified defined benefit plan
maintained
[[Page 751]]
by ABC must be combined with the defined contribution plan which ABC is
considered to maintain. In addition, because corporations ABC and XYZ
are members of a controlled group of corporations (within the meaning of
section 414(b), as modified by section 415(h)), for purposes of applying
the limitations of section 415(c) and Sec. 1.415-6, the qualified
defined contribution plan maintained by XYZ must be combined with the
define contribution plan which ABC is considered to be maintaining and
the defined contribution plans (as combined) must be aggregated with the
qualified defined benefit plan maintained by ABC for purposes of the
limitations imposed by section 415(e) and Sec. 1.415-7.
[T.D. 7748, 46 FR 1715, Jan. 7, 1981]
Sec. 1.415-9 Disqualification of plans and trusts.
(a) In general. Under section 415(g) and this section, with respect
to a particular limitation year, a plan (and the trust forming part of
the plan) is disqualified in accordance with the rules provided in
paragraph (b) of this section, if any of the following conditions exist:
(1) Annual additions (as defined in Sec. 1.415-6(b)) with respect to
the account of any participant in a qualified defined contribution plan
maintained by the employer exceed the limitations of section 415(c) and
Sec. 1.415-6.
(2) The annual benefit (as defined in Sec. 1.415-3(b)(1)) of a
participant in a qualifed defined benefit plan maintained by the
employer exceeds the limitations of section 415(b) and Sec. 1.415-3.
(3) The combination of annual additions with respect to the account
of any participant in a qualified defined contribution plan and the
projected annual benefit payable with respect to such participant in a
qualified defined benefit plan maintained by the employer exceeds the
limitations of section 415(e) and Sec. 1.415-7.
For purposes of this paragraph, the determination of whether a plan or a
combination of plans exceeds the limitations imposed by section 415 for
a particular limitation year is, except as otherwise provided, made by
taking into account the aggregation of plan rules provided in sections
415(f) and 414 (b) and (c) (as modified by section 415(h)).
(b) Rules for disqualification of plans and trusts--(1) In general.
Any plan (including a trust which forms part of such plan) that is
disqualified in a particular limitation year under the rules set forth
in this paragraph, shall be disqualified as of the first day of the
first plan year containing any portion of the particular limitation
year.
(2) Single plan. In the case of a single qualified defined benefit
plan maintained by the employer that provides an annual benefit (as
defined in Sec. 1.415-3(b)(1)) in excess of the limitations of section
415(b) and Sec. 1.415-3 for any particular limitation year, such plan is
disqualifed in that limitation year. Similarly, if the employer only
maintains a single defined contribution plan under which annual
additions (as defined in Sec. 1.415-6(b)) allocated to the account of
any participant exceed the limitations of section 415(c) and Sec. 1.415-
6 for any particular limitation year, such plan is also disqualifed in
that limitation year.
(3) More than one plan. In the event that the limitations of section
415(b) and Sec. 1.415-3, or section 415(c) and Sec. 1.415-6 are exceeded
for a particular limitation year with respect to any participant because
of the application of the aggregation rules of section 415(f)(1) or
section 414 (b) or (c), as modified by section 415(h), one or more of
the plans shall be disqualifed in accordance with the rules set forth in
this subparagraph. Similarly, if the limitations of section 415(e) and
Sec. 1.415-7 are exceeded for a particular limitation year with respect
to any participant because of the application of such aggregation rules
(although if an individual participates in a defined contribution and
defined benefit plan maintained by the same employer, these limitations
may be exceeded even without the application of such aggregation rules),
one or more of the plans shall be disqualified in accordance with the
following rules:
(i) If there are two plans and one of the plans has been terminated
at any time including the last day of the particular limitation year,
the plan which has not been so terminated (whether or not that plan is a
multiemployer plan described in section 414(f)) is disqualified in that
limitation year.
[[Page 752]]
(ii) If there are two plans and neither plan has been terminated at
any time including the last day of the particular limitation year, and
if one of the plans is a multiemployer plan described in section 414(f),
the plan which is not a multiemployer plan is disqualified in that
limitation year. For purposes of the preceding sentence, the
determination of whether a plan is a multiemployer plan described in
section 414(f) is made as of the last day of the particular limitation
year.
(iii) If there are two plans of an employer and neither plan has
either been terminated at any time including the last day of the
particular limitation year or determined to be a multiemployer plan
described in section 414(f) as of such day, the employer may elect, in a
manner determined by the Commissioner, the plan that is disqualified. If
the two plans described in this subdivision are involved because of the
application of section 414 (b) or (c), as modified by section 415(h),
the employers of the controlled group may elect, in a manner determined
by the Commissioner, the plan that is disqualified. However, the
election described in the preceding sentence is not effective unless
made by all of the employers within the controlled group. For purposes
of this subdivision, the elected plan is disqualified in the particular
limitation year.
(iv) If the election described in subdivision (b)(3)(iii) of this
paragraph is not made with respect to the two plans described in such
subdivision, the Commissioner, taking into account all of the facts and
circumstances, shall have the discretion to determine the plan that is
disqualified in the particular limitation year. In making this
determination, some of the factors that will be taken into account
include, but are not limited to, the number of participants in each plan
and the amount of benefits provided on an overall basis by each plan.
(v) If more than two plans are involved, a plan or plans shall be
disqualified in the particular limitation year in accordance with the
principles contained in this subparagraph.
(4) Special rules for simplified employee pension. If there are two
or more plans and if one of the plans is a simplified employee pension
(as defined in section 408(k)), the simplified employee pension shall
not be disqualified until all of the other plans have been disqualified.
However, if one of the plans has been terminated, the simplified
employee pension shall be disqualified before the terminated plan. For
purposes of this subparagraph, the disqualification of a simplified
employee pension means that the simplified employee pension is no longer
described under section 408(k).
(c) Special rules concerning section 403(b) annuity contracts--(1)
In general. If aggregating or combining a section 403(b) annuity
contract and a qualified plan causes the applicable limitations of
section 415 to be exceeded, the exclusion allowance under section
403(b)(2) shall be adjusted first to the extent necessary to satisfy
such limitations.
(2) Aggregating section 403(b) annuity contract and qualified
defined benefit plan. In the event that aggregating a section 403(b)
annuity contract and a qualified defined benefit plan causes the
limitations of section 415(e) and Sec. 1.415-7 to be exceeded with
respect to a participant for a particular limitation year, the amount of
the contribution to the annuity contract in excess of such limitations
is treated as a disqualified contribution and therefore includable in
the gross income of the participant for the taxable year with or within
which that limitation year ends. Furthermore, for purposes of computing
the exclusion allowance under section 403(b)(2)(A) for future taxable
years with respect to such participant, the disqualified contribution is
treated as an amount contributed by the employer for an annuity contract
which was excludable from the participant's gross income under section
403(b)(2)(A)(ii). Thus, for future taxable years, the exclusion
allowance will be reduced by the amount of the disqualified contribution
even though such amount was not excludable from the participant's gross
income in the taxable year when it was made. See Sec. 1.415-7(c)(2) for
special rules relating to the defined contribution plan fraction
applicable to an individual on whose behalf a section 403(b) annuity
contract has been purchased.
[[Page 753]]
(3) Combining section 403(b) annuity contract and qualified defined
contribution plan. In the event that combining a section 403(b) annuity
contract and a qualified defined contribution plan under the provisions
of section 415(f)(1)(B) causes the limitations of section 415(c) and
Sec. 1.415-6 applicable to a participant under the defined contribution
plan to be exceeded for a particular limitation year, the excess of the
contributions to the annuity contract plus the annual additions to the
plan over such limitations is treated as a disqualified contribution to
the annuity contract and therefore includable in the gross income of the
participant for the taxable year with or within which that limitation
year ends. Furthermore, for purposes of computing the exclusion
allowance under section 403(b)(2)(A) for future taxable years with
respect to such participant, the disqualified contribution is treated as
an amount contributed by the employer for an annuity contract which was
excludable from the participant's gross income under section
403(b)(2)(A)(ii). Thus, for future taxable years, the exclusion
allowance will be reduced by the amount of the disqualified contribution
even though such amount was not excludable from the participant's gross
income in the taxable year when it was made.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). N is employed by a hospital which purchases an annuity
contract described in section 403(b) on N's behalf for the current
limitation year. The current limitation year is N's first year of
service with the hospital. Solely for the purpose of illustrating the
rules set forth in this paragraph, assume that N is in control of the
hospital within the meaning of section 414 (b) or (c), as modified by
section 415(h). Therefore, under section 415(e)(5), the section 403(b)
annuity contract is treated as a defined contribution plan maintained by
the hospital and N. The hospital also maintains a qualified defined
contribution plan during the current limitation year in which N
participates, but it does not maintain any other qualified plan. N's
compensation (within the meaning of Sec. 1.415-2(d)) from the hospital
for the current limitation year is $20,000. N does not elect any of the
alternative limitations provided in section 415(c)(4) for the section
403(b) annuity contract. For the current limitation year, the hospital
contributes $3,000 for the section 403(b) annuity contract on N's
behalf, which is within the limitations applicable to N under the
annuity contract (i.e., the lesser of the exclusion allowance under
section 403(b)(2)(A) ($4,000) or the limitations of section 415(c)(1)
($5,000)). The hospital also contributes $3,000 to the qualified plan on
N's behalf for the current limitation year (which represents the only
annual additions allocated to N's account under the plan for such year),
which is within the $5,000 limitation of section 415(c)(1) applicable to
N under the plan. However, under section 415(f)(1)(B), for purposes of
applying the limitations of section 415(c) and Sec. 1.415-6, the
hospital is considered to maintain only one defined contribution plan
and thus, all contributions to the annuity contract and to the regular
plan must be combined. Because the total combined contributions ($6,000)
exceed the section 415(c) limitation applicable to N under the plan
($5,000), under the special rules contained in this paragraph, $1,000 of
the $3,000 contributed to the section 403(b) annuity contract is
considered a disqualified contribution and therefore currently
includable in N's gross income. Furthermore, in computing N's exclusion
allowance for the section 403(b) annuity contract for future taxable
years, besides the $3,000 contributed to the qualified plan, the $3,000
contributed for the section 403(b) annuity contract is also considered
an amount contributed by the employer and excludable from N's gross
income for purposes of section 403(b)(2)(A)(ii), even though only $2,000
of this amount was excludable from N's gross income.
Example (2). Assume the same facts as in example (1), except that
instead of the defined contribution plan the hospital maintains a
qualified defined benefit plan during the current limitation year in
which N participates. Because the hospital is considered to be
maintaining a defined contribution plan (in the form of a section 403(b)
annuity contract) in addition to its defined benefit plan, the
limitations of section 415(e) and Sec. 1.415-7 are applicable to N for
the current limitation year. If N's defined benefit plan fraction for
the current limitation year is 1.0, then to satisfy the limitations of
section 415(e) and Sec. 1.415-7, N's defined contribution plan fraction
may not exceed .4 for the current limitation year. This means that only
$2,000 (i.e. 40% of $5,000--the applicable limitation to N for the
annuity contract under the special rule set forth in Sec. 1.415-
7(c)(2)(i)) could have been contributed to the annuity contract on N's
behalf for the current limitation year without violating the 1.4
limitation of section 415(e) and Sec. 1.415-7. However, because the
hospital contributed $3,000 to the section 403(b) annuity contract on
N's behalf, under the special rules contained in this
[[Page 754]]
paragraph, $1,000 of this amount is considered a disqualified
contribution and therefore currently includable in N's gross income.
Furthermore, in computing N's exclusion allowance for the section 403(b)
annuity contract for future taxable years, the $3,000 contributed to the
annuity contract is considered the amount contributed by the employer
and excludable from N's gross income for purposes of section
403(b)(2)(A)(ii), even through only $2,000 of this amount was excludable
from N's gross income.
[T.D. 1716, 46 FR 1716, Jan. 7, 1981]
Sec. 1.415-10 Special aggregation rules.
(a) General rules relating to aggregation of plans during limitation
year--(1) Scope of aggregation rules. This section provides rules for
those situations in which two or more existing plans, which previously
were unaggregated, are aggregated during a particular limitation year on
or after the effective date of section 415 and these regulations, and as
a result, the limitations of section 415 (b), (c) or (e) are exceeded
for that limitation year. The rules described in this section are also
applicable with respect to the aggregation of benefits under a
multiemployer plan described in section 414(f) that previously were not
required to be aggregated.
(2) Controlling date of aggregation. For purposes of this section,
plans which are not aggregated as of the first day of a limitation year
will not be considered aggregated for that limitation year.
Notwithstanding the preceding sentence, if a section 403(b) annuity
contract is aggregated with a qualified plan because of the election by
the individual on whose behalf the annuity contract is purchased to have
the provisions of section 415(c)(4)(C) apply for the taxable year, the
annuity contract and the plan are deemed to be aggregated as of the
first day of the limitation year ending with or within such taxable
year.
(3) Aggregation of additions and benefits. If plans are aggregated
under this section, the following rules shall apply:
(i) All annual additions credited to a participant's account under a
defined contribution plan prior to the aggregation of such plan shall be
taken into account in computing the participant's defined contribution
plan fraction for purposes of applying the limitations of section 415(e)
to the aggregated plans.
(ii) The annual benefit or projected annual benefit (whichever is
applicable) of a participant under a defined benefit plan prior to the
aggregation of such plan shall be taken into account for purposes of
applying the limitations of section 415(b) or section 415(e) to the
aggregated plans.
(iii) For a special rule relating to the aggregation of
contributions to a section 403(b) annuity contract upon the aggregation
of the annuity contract with a qualified plan, see Sec. 1.415-
7(h)(4)(i).
(b) Aggregation of defined benefit plans. In the case of an
individual who is a participant in two or more defined benefit plans and
with respect to whom the limitations of section 415(b) and Sec. 1.415-3
are exceeded for a particular limitation year because of the aggregation
of the plans for that limitation year, the limitations of section 415(b)
and Sec. 1.415-3 may be exceeded for that limitation year and for future
limitation years provided that there is no increase in the participant's
accrued benefit derived from employer contributions during the period
within which these limitations are being exceeded.
(c) Aggregation of defined benefit and defined contribution plan. In
the case of an individual who has at any time participated in a defined
benefit plan and also has at any time participated in a defined
contribution plan and with respect to whom the limitations of section
415(e) and Sec. 1.415-7 are exceeded for a particular limitation year
because of the aggregation of the plans for that limitation year, the
limitations of section 415(e) and Sec. 1.415-7 may be exceeded for that
limitation year and for future limitation years provided that the
following conditions are complied with during that period:
(1) The participant's accrued benefit derived from employer
contributions in the defined benefit plan is not increased.
(2) No employer contributions are allocated to the participant's
account under any defined contribution plan.
(3) No forfeitures arising under any defined contribution plan are
allocated to the participant's account.
[[Page 755]]
(4) No voluntary employee contributions are made by the participant
under any defined benefit or defined contribution plan.
(5) No mandatory employee contributions are made by the participant
under any defined contribution plan.
(d) Limitation year for aggregated plans. If the plans which are
aggregated under this section have different limitation years,
subparagraph (1) or (2) of this paragraph must be complied with.
(1) The relevant employer or employers must elect the limitation
year that is to be controlling. This election shall be made by the
adoption of a written resolution by the employer or employers. See
Sec. 1.415-2(b)(4) for rules relating to a change in the limitation
year.
(2) The employer or employers may continue to use different
limitation years for each plan in accordance with rules determined by
the Commissioner.
If, in accordance with paragraph (d)(1) of this section, one limitation
year is elected, and if the plans which are aggregated covered at least
one common participant prior to being aggregated, that limitation year
shall be applicable for past years for purposes of computing the defined
contribution fraction for those years. For special rules relating to the
computation of the defined contribution plan fraction where records are
not available for past periods, see Sec. 1.415-7(f).
(e) The provisions of this section may be illustrated by the
following examples:
Example (1). J is an employee of two unrelated corporations, N and
M. Each corporation has a qualified defined benefit plan in which J
participates. Each plan provides a benefit which is equal to 75 percent
of a participant's average compensation for his high 3 years of service
and is payable in the form of a straight life annuity beginning at age
65. J's average compensation (within the meaning of Sec. 1.415-2(d)) for
his high three years of service from each corporation is $80,000. Each
plan uses the calendar year for the limitation and plan year. In July,
1978, N Corporation becomes a wholly owned subsidiary of M Corporation,
and as a result, J is treated as being employed by a single employer
under section 414(b). Therefore, because section 415(f)(1)(A) requires
that all defined benefit plans of an employer be treated as one defined
benefit plan, the two plans must be aggregated for purposes of applying
the limitations of section 415. (Although, under paragraph (a)(2) of
this section, since the plans were not aggregated as of the first day of
the 1978 limitation year (January 1, 1978), they will not be considered
aggregated until the limitation year beginning January 1, 1979.) As a
result of such aggregation, J becomes entitled to a combined benefit
which is equal to $120,000, which is in excess of the section 415(b)
dollar limitation for 1979 of $98,100. However, under paragraph (b) of
this section, the limitations of section 415(b) and Sec. 1.415-3
applicable to J may be exceeded in this situation without plan
disqualification, so long as J's accrued benefit derived from employer
contributions is not increased during the period within which the
limitations are being exceeded.
Example (2). A, age 30, owns all of the stock of X Corporation and
also owns 10 percent of the stock of Z Corporation. F, A's father,
directly owns 75 percent of the stock of Z corporation. Both
corporations have qualified defined contribution plans in which A
participates and both plans use the calendar year for the limitation and
plan year. A's compensation (within the meaning of Sec. 1.415-6(a)(3))
for 1976 is $40,000 from Z Corporation and $150,000 from X Corporation.
During 1976, annual additions of $10,000 are credited to A's account
under the plan of Z Corporation, while annual additions of $26,825 are
credited to A's account under the plan of X Corporation. In both
instances, the amount of annual additions represent the maximum
allowable under section 415(c) and Sec. 1.415-6. On July 15, 1976, F
dies, and A inherits all of F's stock in Z in 1976. Because under
section 414(b), A is considered to be in control of X and Z
Corporations, the two plans must be aggregated for purposes of applying
the limitations of section 415. However, even though A's total annual
additions for 1976 are $36,825, the limitations of section 415(c) and
Sec. 1.415-6 are not violated for 1976, because, under paragraph (a)(2)
of this section, the two plans are considered separate plans for that
year since they were not aggregated as of the first day of that year.
[T.D. 1718, 46 FR 1718, Jan. 7, 1981]
Sec. 1.416-1 Questions and answers on top-heavy plans.
The following questions and answers relate to special rules for top-
heavy plans under section 416 of the Internal Revenue Code of 1954, as
added by section 240 of the Tax Equity and Fiscal Responsibility Act of
1982 (Pub. L. 97-248) (TEFRA), and amended by sections 524 and 713(f) of
the Tax Reform Act of 1984 (Pub. L. 98-369):
Table of Contents
G--General Provisions
[[Page 756]]
T--Top-Heaviness Determinations
V--Vesting Rules for Top-Heavy Plans
M--Minimum Benefits Under Top-Heavy Plans
G. General Provisions
G-1 Q. What requirement plans are subject to the top-heavy rules
added to the Code by the Tax Equity and Fiscal Responsibility Act and
amended by the Tax Reform Act of 1984?
A. All stock bonus, pension, or profit-sharing plans intended to
qualify under section 401(a), annuity contracts described in section
403(a), and simplified employee pensions described in section 408(k) are
subject to the new top-heavy rules added to the Code by the Tax Equity
and Fiscal Responsibility Act and amended by the Tax Reform Act
(``TRA'') of 1984.
G-2 Q. Is a multiple employer plan subject to the top-heavy
requirements of section 416?
A. A multiple employer plan is subject to the requirements of
section 416, but only with respect to each individual employer. Thus, if
twelve employers contribute to a multiple employer plan and the accrued
benefits for the key employees of one employer exceed 60 percent of the
accrued benefits of all employees for such employer, the plan is top-
heavy with respect to that employer. A failure by the multiple employer
plan to satisfy section 416 with respect to the employees of such
employer means that all employers are maintaining a plan that is not a
qualified plan.
G-3 Q. As of what date must plan amendments to comply with top-heavy
rules be effective?
A. Amendments required to comply with the top-heavy rules must be
effective as of the first day of the first plan year which begins after
1983. See Sec. 1.401(b)-1 for the date by which such amendments must be
adopted.
T. Top-Heaviness Determinations
T-1 Q. What factors must be considered in determining whether a plan
is top-heavy?
A. (a) In order to determine whether a plan is top-heavy for a plan
year, it is necessary to determine which employers will be treated as a
single employer for purposes of section 416; what the determination date
is for the plan year; which employees are or formerly were key
employees; which former employees have not performed any service for the
employer maintaining the plan at any time during the five-year period
ending on the determination date; which plans of such employers are
required or permitted to be aggregated to determine top-heavy status;
and the present value of the accrued benefits (including distributions
made during the plan year containing the determination date and the four
preceding plan years) of key employees, former key employees, and non-
key employees.
(b) All employers that are aggregated under section 414 (b), (c),
and (m) must be taken into account as a single employer for the plan
year in question, and those employees in all plans maintained by the
employers that are aggregated must be categorized as key employees, as
former key employees, or as non-key employees. See Question and Answer
T-12 for the determination of which employees are or were key employees.
All plans maintained by the employers in which a key employee
participates, and certain other plans, must then be aggregated (the
required aggregation group). See Question and Answer T-6 for rules
concerning required aggregation. Other plans may in some cases be
aggregated with the required aggregation group. See Question and Answer
T-7 for rules concerning such permissive aggregation.
(c) Once aggregated, all plans that are required to be aggregated
will either be top-heavy or not top-heavy, depending upon whether the
aggregation group is top-heavy. A plan or aggregation group will be
considered top-heavy if the sum of the present value of the accrued
benefits for key employees is more than 60 percent of the sum of the
present value of accrued benefits of all employees.
(d) Except as otherwise stated, for purposes of section 416(g), an
employee is an individual currently or formerly employed by an employer.
Former key employees are non-key employees and are excluded entirely
from the calculation to determine top-heaviness. In all
[[Page 757]]
cases, the present value of accrued benefits includes distributions made
during the plan year containing the determination date and the preceding
four plan years. See Questions and Answers T-24 and T-25 for rules
concerning the account balances and present value of accrued benefits.
For plan years beginning after December 31, 1984, the accrued benefit of
an employee who has not performed any sevice for the employer
maintaining the plan at any time during the five-year period ending on
the determination date is excluded from the calculation to determine
top-heaviness. However, if an employee performs no services for five
years and then performs sevices, such employee's total accrued benefit
is included in the calculation for top-heaviness.
T-2 Q. To what extent are multiemployer plans and multiple employer
plans to which an employer makes contributions on behalf of its
employees treated as plans of that employer for top-heavy purposes?
A. Multiemployer plans described in section 414(f) and multiple
employer plans described in section 413(c) to which an employer makes
contributions on behalf of its employees are treated as plans of that
employer to the extent that benefits under the plan are provided to
employees of the employer because of service with that employer.
T-3 Q. Must a collectively-bargained plan be aggregated with other
plans of the employer to determine whether some or all of the employer's
plans are top-heavy?
A. A collectively-bargained plan that includes a key employee of an
employer must be included in the required aggregation group for that
employer. See Question and Answer T-6 for rules concerning required
aggregation. A collectively-bargained plan that does not include a key
employee may be included in a permissive aggregation group. See Question
and Answer T-7 for rules concerning permissive aggregation. However, the
special rules in section 416 (b), (c), or (d) applicable to top-heavy
plans do not apply with respect to any employee included in a unit of
employees covered by an agreement which the Secretary of Labor finds to
be a collective-bargaining agreement between employee representatives
and one or more employers if there is evidence that retirement benefits
were the subject of good faith bargaining between such employee
representatives and such employer or employers. In determining whether
there is a collective-bargaining agreement between employee
representatives and one or more employers, the additional condition of
section 7701(a)(46) must be satisfied after March 31, 1984.
T-4 Q. How is a terminated plan treated for purposes of the top-
heavy rules?
A. A terminated plan is treated like any other plan for purposes of
the top-heavy rules. For purposes of section 416, a terminated plan is
one that has been formally terminated, has ceased crediting service for
benefit accruals and vesting, and has been or is distributing all plan
assets to participants or their beneficiaries as soon as
administratively feasible. Such a plan must be aggregated with other
plans of the employer if it was maintained within the last five years
ending on the determination date for the plan year in question and
would, but for the fact that it terminated, be part of a required
aggregation group for such plan year. Distributions which have taken
place within the five years ending on the determination date must be
accounted for in accordance with section 416(g)(3). No additional
vesting, benefit accruals or contributions must be provided for
participants in a terminated plan.
T-5 Q. How are frozen plans treated for purposes of the top-heavy
rules?
A. For purposes of section 416, a frozen plan is one in which
benefit accruals have ceased but all assets have not been distributed to
participants or their beneficiaries. Such plans are treated, for
purposes of the top-heavy rules, as any non-frozen plan. That is, such
plans must provide minimum contributions or benefit accruals, limit the
amount of compensation which can be taken into account in providing
benefits, and provide top-heavy vesting. A frozen defined contribution
plan may not be required to provide additional contributions because of
the rule in section 416(c)(2)(B).
[[Page 758]]
T-6 Q. What is a required aggregation group?
A. For purposes of determining whether the plans of an employer are
top-heavy for a particular plan year, the required aggregation group
includes each plan of the employer in which a key employee participates
in the plan year containing the determination date, or any of the four
preceding plan years. In addition, each other plan of the employer
which, during this period, enables any plan in which a key employee
participates to meet the requirements of section 401(a)(4) or 410 is
part of the required aggregation group. This concept may be illustrated
by the following examples:
Example (1). An employer maintains two plans. Key employees
participate in one plan, but not in the other. If the plan containing
key employees independently satisfies the coverage and non-
discrimination rules of sections 410 and 401(a)(4), it may be tested
independently to determine whether it is top-heavy. Also, the plan not
covering key employees would not be part of a required aggregation group
and would not need to be tested to determine whether it is top-heavy.
However, if the plan containing key employees satisfies the coverage
requirements of section 410(b) or the non-discrimination requirements of
section 401(a)(4) only when it is considered together with the other
plan in accordance with Sec. 1.410(b)-1(d)(3), the plan not covering key
employees would be part of the required aggregation group.
Example (2). A sole proprietor terminated a Keogh plan in 1981. In
1982, the sole proprietor incorporated and established a corporate plan
with a calendar-year plan year. For purposes of determining whether the
corporate plan is top-heavy for its 1984 plan year, the terminated Keogh
plan and the corporate plan would be part of a required aggregation
group. The sole proprietor and the corporation would be treated as a
single employer under section 414(c). Under Question and Answer T-4, the
terminated plan would be aggregated with the corporate plan because it
was maintained within the five-year period ending on the determination
date for the 1984 plan year and because, but for the fact that it
terminated, it would be aggregated with the corporate plan because it
covered a key employee.
T-7 Q. What is a permissive aggregation group?
A. A permissive aggregation group consists of plans of the employer
that are required to be aggregated, plus one or more plans of the
employer that are not part of a required aggregation group but that
satisfy the requirements of sections 401(a)(4) and 410 when considered
together with the required aggregation group. This concept may be
illustrated by the following examples:
Example (1). (a) An employer maintains two plans:
1. Plan A covers key employees and independently satisfies the
requirements of sections 410 and 401(a)(4).
2. Plan B covers no key employees. It also independently satisfies
the requirements of sections 410 and 401(a)(4).
(b) As indicated in Question and Answer T-6, Plan B is not required
to be aggregated with Plan A. Further, if Plan B provided contributions
or benefits that were not at least comparable to the contributions or
benefits provided under Plan A, then Plan B could not be permissively
aggregated with Plan A because the contributions and benefits would
discriminate if the two plans were considered as a unit. However, if the
benefits or contributions under Plan B were comparable to those under
Plan A, the two plans would be permitted to be aggregated to determine
whether or not the group consisting of both plans is top-heavy. If Plan
A and Plan B are permitted to be aggregated, and if the permissive
aggregation group is not top-heavy, then neither Plan A nor Plan B would
be considered top-heavy.
Example (2). (a) Employer W maintains two plans.
1. Plan C covers salaried employees and independently satisfies the
requirements of sections 410 and 401(a)(4).
2. Plan D covers employees who are included in a unit of employees
covered by an agreement which the Secretary of Labor has found to be a
collective-bargaining agreement between employee representatives and the
employer and retirement benefits were bargained for between employee
representatives and the employer.
(b) The fact that Plan D is a collectively-bargained plan does not
necessarily mean that it may be permissively aggregated with Plan C. In
order to be permissively aggregated with Plan C, Plan D must provide
contributions or benefits with respect to service with Employer W that
are at least comparable to the contributions or benefits provided under
Plan C.
T-8 Q. May an employer permissively aggregate multiemployer plans,
multiple employer plans and simplified employee pension plans to which
the employer contributes with a plan covering key employees or a
required aggregated group?
[[Page 759]]
A. Yes. Multiemployer plans, multiple employer plans and simplified
employee pensions to which an employer makes contributions may be
permissively aggregated with a plan covering key employees or with a
required aggregation group if the contributions or benefits provided
under the multiemployer plan, multiple employer plan or simplified
employee pension by the employer are comparable to the contributions or
benefits provided under the plan covering key employees or the plans in
the required aggregation group. In making this determination, only the
employer's contribution to the simplified employee pension may be used.
T-9 Q. What plans will be treated as top-heavy if they are part of a
required aggregation group that is top-heavy?
A. In the case of plans that are required to be aggregated, each
plan in the required aggregation group will be top-heavy if the group is
top-heavy. No plan in the required aggregation group will be top-heavy
if the group is not top-heavy.
T-10 Q. If a required aggregation group is top-heavy, and one plan
of the group satisfies the requirements of sections 416 (b), (c), and
(d), may other plans in the group include provisions which do not
satisfy sections 416 (b), (c) and (d)?
A. No. Each plan in a required aggregation group is top-heavy if the
group is top-heavy. Thus, each plan must contain provisions satisfying
the requirements of sections 416 (b) and (d). If all the plans are
defined contribution plans, only one plan need satisfy the requirements
of section 416(c)(2) with respect to any non-key employee who
participates in more than one of the plans. If all the plans are defined
benefit plans, only one plan need satisfy the requirements of section
416(c)(1) with respect to any non-key employee who participates in more
than one of the plans. However, in the case of non-key employees who do
not participate in more than one plan, each plan must separately provide
the applicable minimum contribution or benefit with respect to each such
employee. See Question and Answer M-12 in the case of employees who are
covered under both a defined benefit and a defined contribution plan.
T-11 Q. What plans will be treated as top-heavy if a permissive
aggregation group is top-heavy?
A. If a permissive aggregation group is top-heavy, only those plans
that are part of the required aggregation group will be subject to the
requirements of section 416 (b), (c) and (d). Plans that are not part of
the required aggregation group will not be subject to these
requirements. Thus, if an employer wishes to demonstrate that the plans
maintained by the employer are not top-heavy, the employer need consider
only the required aggregation group. If, after considering the required
aggregation group, it is determined that the plans are not top-heavy,
the requirements of section 416 (b), (c) and (d) will not apply to any
of the plans. If, on the other hand, the plans required to be aggregated
are top-heavy, the employer may wish to determine whether there are any
plans that may be permissively aggregated to demonstrate that the plans
are not top-heavy. Assuming that there are plans that are eligible for
permissive aggregation, the employer may take these plans into
consideration. If, after taking such plans into consideration, the net
result is that the entire group is not top-heavy, the top-heavy
requirements do not apply to any plan in the group.
T-12 Q. For purposes of determining whether a plan is top-heavy for
a plan year, who is a key employee?
A. Under section 416(i)(1), a key employee is any employee
(including any deceased employee) who at any time during the plan year
containing the determination date for the plan year in question or the
four preceding plan years (including plan years before 1984) is:
1. An officer of the employer having annual compensation from the
employer for a plan year greater than 150 percent of the dollar
limitation in effect under section 415(c)(1)(A) for the calendar year in
which such plan year ends (see Questions and Answers T-13, T-14, and T-
15),
2. One of the ten employees having annual compensation from the
employer for a plan year greater than the
[[Page 760]]
dollar limitation in effect under section 415(c)(1)(A) for the calendar
year in which such plan year ends and owning (or considered as owning
within the meaning of section 318) both more than a \1/2\ percent
interest and the largest interests in the employer (see Question and
Answer T-19),
3. A 5-percent owner of the employer, or
4. A 1-percent owner of the employer having annual compensation from
the employer for a plan year more than $150,000 (see Questions and
Answers T-16 and T-21).
An individual may be considered a key employee in a plan year for
more than one reason. For example, an individual may be both an officer
and one of the ten largest owners. However, in testing whether a plan or
group is top-heavy, an individual's accrued benefit is counted only
once. The terms key employee, former key employee, and non-key employee
include the beneficiaries of such individuals. This Question and Answer
is illustrated by the following examples:
Example (1). An employer maintains a calendar-year plan. An
individual who was an employee of the employer and a 5-percent owner of
the employer in 1986 was neither an employee nor an owner in 1987 or
thereafter. Even though the individual is no longer an employee or owner
of the employer, the individual would be treated as a key employee for
purposes of determining whether the plan is top-heavy for each plan year
through the 1991 plan year. However, for purposes of determining whether
the plan is top-heavy for the 1992 plan year and for subsequent plan
years, the individual would be treated as a former key employee.
Example (2). The facts are the same as in example (1), except that
the individual died in early 1987 and his total benefit under the plan
was distributed to his beneficiary in 1987. Such distribution would be
treated as the accrued benefit of the individual for each year through
the 1991 plan year. However, such individual would be treated as a
former key employee for purposes of determining whether the plan is top-
heavy for the 1992 plan year and for subsequent plan years. The
conclusions are not affected by whether the beneficiary of the
individual is a non-key employee or a key employee of the employer.
T-13 Q. For purposes of defining a key employee, who is an officer?
A. Whether an individual is an officer shall be determined upon the
basis of all the facts, including, for example, the source of his
authority, the term for which elected or appointed, and the nature and
extent of his duties. Generally, the term officer means an
administrative executive who is in regular and continued service. The
term officer implies continuity of service and excludes those employed
for a special and single transaction. An employee who merely has the
title of an officer but not the authority of an officer is not
considered an officer for purposes of the key employee test. Similarly,
an employee who does not have the title of an officer but has the
authority of an officer is an officer for purposes of the key employee
test. In the case of one or more employers treated as a single employer
under sections 414(b), (c), or (m), whether or not an individual is an
officer shall be determined based upon his responsibilities with respect
to the employer or employers for which he is directly employed, and not
with respect to the controlled group of corporations, employers under
common control or affiliated service group. A partner of a partnership
will not be treated as an officer for purposes of the key employee test
merely because he owns a capital or profits interest in the partnership,
exercises his voting rights as a partner, and may, for limited purposes,
be authorized and does in fact act as an agent of the partnership.
T-14 Q. For purposes of determining whether a plan is top-heavy for
a plan year, how many officers must be taken into account?
A. There is no minimum number of officers that must be taken into
account. Only individuals who are in fact officers within the meaning of
Question and Answer T-13 must be considered. For example, a corporation
with only one officer and two employees would have only one officer for
purposes of section 416(i)(1)(A)(i). After aggregating all employees
(including leased employees within the meaning of section 414(n)) of
employers required to be aggregated under section 414(b), (c) or (m),
there is a maximum limit to the number of officers that are to be taken
into account as officers for the entire
[[Page 761]]
group of employers that are so aggregated. The number of employees an
employer (including all employers required to be aggregated under
section 414(b), (c), or (m)) has for the plan year containing the
determination date is the greatest number of employees it had during
that plan year or any of the four preceding plan years. For purposes of
this Question and Answer, employees include only those individuals who
perform services for the employer during a plan year. If the number of
employees (including part-time employees) of all the employers
aggregated under section 414(b), (c) or (m) is less than 30 employees,
no more than three individuals shall be treated as key employees for the
plan year containing the determination date by reason of being officers.
If the number of employees of all organizations aggregated under section
414(b), (c) or (m) is greater than 30 but less than 500, no more than
10% of the number of employees will be treated as key employees by
reason of being officers. (If 10% of the number of employees is not an
integer, the maximum number of individuals to be treated as key
employees by reason of being officers shall be increased to the next
integer). If the number of employees of employers aggregated under
section 414 (b), (c) and (m) exceeds 500, no more than 50 employees are
to be considered as key employees by reason of being officers. This
limited number of officers is comprised of the individual officers,
selected from the group of all individuals who were officers in the plan
year containing the determination date or any one of the four preceding
plan years, who had annual plan year compensation (in the officer year)
in excess of 150 percent of the dollar limitation in effect under
section 415(c)(1)(A) for the calendar year in which the plan year ends
and who had the largest annual plan-year compensation in that five-year
period. (The definition of compensation contained in Question and Answer
T-21 is to be used for this purpose.) In determining the officers of an
employer, an employee who is an officer shall be counted as an officer
for key employee purposes without regard to whether the employee is a
key employee for any other reason. However, in testing whether the
plan(s) is top-heavy, an individual's present value of accrued benefits
is counted only once.
Example. A company is testing to see if its plan is top-heavy for
the 1985 plan year. In each year from 1980 through 1984 it has more than
500 employees. Assume that (1) because of rapid turnover among officers,
the individuals who are officers each year are different from the
individuals who are officers in any preceding year, and (2) the annual
plan year compensation of each officer exceeds 150 percent of the dollar
limitation in effect under section 415(c)(1)(A) for the calendar year in
which the plan year ends. Under the limitations, only a total of 50
individuals would be considered to be key employees by virtue of being
officers in testing for top-heaviness for the 1985 plan year. Further,
the 50 individuals considered as key employees under this test would be
determined by selecting the 50 out of 250 individuals (50 different
officers each year) who had the highest annual plan-year compensation
during the 1980-1984 period (while officers).
T-15 Q. For purposes of section 416, do organizations other than
corporations have officers?
A. Yes. For purposes of the top-heavy rules, sole proprietorships,
partnerships, associations, trusts, and labor organizations may have
officers. This rule is effective for purposes of determining whether a
plan is top-heavy for plan years which begin after February 28, 1985.
T-16 Q. Who is a 1-percent owner of the employer?
A. (a) If the employer is a corporation, a 1-percent owner is any
employee who owns (or is considered as owning within the meaning of
section 318) more than 1 percent of the value of the outstanding stock
of the corporation or stock possessing more than 1 percent of the total
combined voting power of all stock of the corporation. If the employer
is not a corporation, a 1-percent owner is any employee who owns more
than 1 percent of the capital or profits interest in the employer. The
rules of subsections (b), (c), and (m) of section 414 do not apply for
purposes of determining who is a 1-percent owner.
(b) For purposes of determining who is a 1-percent owner, 5-percent
owner, or top-ten owner, value means fair market value taking into
account all facts and circumstances.
T-17 Q. Who is a 5-percent owner of the employer?
[[Page 762]]
A. If the employer is a corporation, a 5-percent owner is any
employee who owns (or is considered as owning within the meaning of
section 318) more than 5 percent of the value of the outstanding stock
of the corporation or stock possessing more than 5 percent of the total
combined voting power of all stock of the corporation. If the employer
is not a corporation, a 5-percent owner is any employee who owns more
than 5 percent of the capital or profits interest in the employer. The
rules of subsections (b), (c), and (m) of section 414 do not apply for
purposes of determining who is a 5-percent owner.
T-18 Q. How do the rules of section 318 apply for purposes of
determining ownership in an entity other than a corporation?
A. For purposes of determining ownership is an entity other than a
corporation, the rules of section 318 apply in a manner similar to the
way in which they apply for purposes of determining ownership in a
corporation. For non-corporate interests, capital or profits interest
must be substituted for stock.
T-19 Q. Which employees will be considered one of the top ten
owners?
A. (a) For purposes of determining whether a plan is top-heavy for a
plan year, the top ten owners are the ten employees who (1) own (or are
considered as owning within the meaning of section 318) during the plan
year containing the determination date or any of the four preceding plan
years both more than a \1/2\ percent ownership interest in value and the
largest percentage ownership interests in value of any of the employers
required to be aggregated under section 414(b), (c), or (m), and (2)
have during the plan year of ownership annual plan year compensation
from the employer more than the limitation in effect under section
415(c)(1)(A) for the calendar year in which such plan year ends. The
five years for which the test is made will be referred to as the
``testing period.'' An employee whose annual plan year compensation
exceeds the section 415(c)(1)(A) limit in effect for the calendar year
in which a plan year in the testing period ends who has an ownership
interest greater than \1/2\ percent in that plan year is considered to
be one of the top ten owners unless at least ten other employees own a
greater interest in the employer during any year of the testing period
and have annual plan year compensation during such plan year of
ownership greater than the section 415(c)(1)(A) limit in effect for the
calendar year in which such plan year ends. Ownership each plan year is
determined on the basis of percentage of ownership interest in total
ownership value and not dollar amounts. Thus, an employee whose stock
interest is valued at 15 percent of the total stock value of a
corporation in year one that was worth $15,000 is ranked higher than an
employee whose stock interest is valued at 5 percent of the total stock
value of the same corporation in year three which is now worth $50,000.
(b) If an employee's ownership interest changes during a plan year,
his ownership interest for the year is the largest interest owned at any
time during the year. If two employees have the same ownership interest
in the employer during the testing period, the employee having the
largest annual compensation from the employer for the plan year during
any part of which that ownership interest existed shall be treated as
having a larger interest. Thus, if 25 employees each own 4 percent in
value of the employer during the testing period, the 10 employees with
the largest single plan year compensation during this period will be
considered the top ten owners. For purposes of this Question and Answer,
compensation has the meaning set forth in Question and Answer T-21. This
Question and Answer is illustrated by the following examples:
Example 1. Corporation K maintains a calendar year defined
contribution plan. On January 1, 1986, Corporation K has five owners who
owned the following value percentages of K stock: A=50%, B=20%, C=15%,
D=10%, and E=5%. On June 30, 1987, the five owners of Corporation K sold
all of their shares of stock. The new owners and their respective
ownership percentages were: F=40%, G=30%, H=10%, I=10%, and J=10%.
Assume that, for 1986, A, B, C, D, and E had annual compensation from
Corporation K greater than the section 415(c)(1)(A) limit and that, for
1987, F, G, H, I, and J also had compensation from Corporation K greater
than the section 415(c)(1)(A) limit. For purposes of determining whether
the plan is top-heavy for
[[Page 763]]
the 1991 plan year, the top ten owners will include A, B, C, D, E, F, G,
H, I, and J because no 10 individuals during the testing period, 1986-
1990, had a greater ownership interest than these individuals.
Example 2. Assume the same facts in Example 1, except that on June
1, 1988, F, G, H, I, and J sold their interests to new owners, K, L, M,
N, and O. K, L, M, N, and O owned, respectively, 30%, 30%, 30%, 5% and
5% of the value of the shares of X. Assume also that for 1988 K, L, M,
N, and O earned more than the section 415(c)(1)(A) limitation. For
purposes of determining whether the plan is top-heavy for the 1991 plan
year, the top ten owners will include: A, B, F, K, G, L, M, and C
because these eight individuals owned the highest value percentages of
the Corporation K stock. Since D, H, I, and J owned equal 10% interests
in value, the two employees of this group who had the largest annual
plan year compensation during the plan years of their ownership will be
the last 2 top ten owners.
T-20 Q. For purposes of determining whether an employee is a key
employee under section 416(i)(1)(A), what aggregation rules apply?
A. In the case of ownership percentages, each employer that would
otherwise be aggregated under section 414 (b), (c) and (m) is treated as
a separate employer. (See section 416(i)(1)(C).) However, for purposes
of determining whether an individual has compensation of $150,000, or
whether an individual is a key employee by reason of being an officer or
a top ten owner, compensation from each entity required to be aggregated
under sections 414 (b), (c) and (m) is taken into account. These rules
may be illustrated by the following example:
Example. An individual owns two percent of the value of a
professional corporation, which in turn owns a \1/10\th of 1 percent
interest in a partnership. The entities must be aggregated in accordance
with section 414(m). The individual performs services for the
professional corporation and for the partnership. The individual
receives compensation of $125,000 from the professional corporation and
$26,000 from the partnership. The individual is considered to be a key
employee with respect to the employer that comprises both the
professional corporation and the partnership because he has a two
percent interest in the professional corporation and because his
combined compensation from both the professional corporation and the
partnership is more than $150,000.
T-21 Q. For purposes of testing whether an individual has
compensation of more than $150,000, what definition of compensation must
be used?
A. The definition of compensation to be used is the definition in
Sec. 1.415-2(d). In the case of an individual, including a self-employed
individual, Sec. 1.415-2(d)(2)(i) excludes from compensation amounts
contributed to a plan of deferred compensation. Alternatively,
compensation that would be stated on an employee's Form W-2 for the
calendar year that ends with or within the plan year may be used. A plan
must use the same definition of compensation for all top-heavy purposes
for which the definition in this Question and Answer must be used.
T-22 Q. In the case of an employer who maintains a single plan, when
must the determination whether the plan is top-heavy be made?
A. Whether a plan is top-heavy for a particular plan year is
determined as of the determination date for such plan year. The
determination date with respect to a plan year is defined in section
416(g)(4)(C) as (1) the last day of the preceding plan year, or (2) in
the case of the first plan year, the last day of such plan year.
Distributions made and the present value of accrued benefits are
generally determined as of the determination date. (See Questions and
Answers T-24 and T-25 for more specific rules.)
T-23 Q. In the case of an aggregation group, when must the
determination whether the group is top-heavy be made?
A. When two or more plans constitute an aggregation group in
accordance with section 416(g)(2), the following procedures are used to
determine whether the plans are top-heavy for a particular plan year.
First, the present value of the accrued benefits (including
distributions for key employees and all employees) is determined
separately for each plan as of each plan's determination date. The plans
are then aggregated by adding together the results for each plan as of
the determination dates for such plans that fall within the same
calendar year. The combined results will indicate whether or not the
plans so aggregated are top-heavy. These rules may
[[Page 764]]
be illustrated by the following example:
Example. An employer maintains Plan A and Plan B, each containing a
key employee. Plan A's plan year commences July 1 and ends June 30. Plan
B's plan year is the calendar year. For Plan A's plan year commencing
July 1, 1984, the determination date is June 30, 1984. For Plan B's plan
year in 1985, the determination date is December 31, 1984. These plans
are required to be aggregated. For each of these plans as of their
respective determination dates, the present value of the accrued
benefits for key employees and all employees are separately determined.
The two determination dates, June 30, 1984, and December 31, 1984, fall
within the same calendar year. Accordingly, the present values of
accrued benefits as of each of these determination dates are combined
for purposes of determining whether the group is top-heavy. If, after
combining the two present values, the total results show that the group
is top-heavy, Plan A will be top-heavy for the plan year commencing July
1, 1984, and Plan B will be top-heavy for the 1985 calendar year.
T-24 Q. How is the present value of an accrued benefit determined in
a defined contribution plan?
A. The present value of accrued benefits as of the determination
date for any individual is the sum of (a) the account balance as of the
most recent valuation date occurring within a 12-month period ending on
the determination date, and (b) an adjustment for contributions due as
of the determination date. In the case of a plan not subject to the
minimum funding requirements of section 412, the adjustment in (b) is
generally the amount of any contributions actually made after the
valuation date but on or before the determination date. However, in the
first plan year of the plan, the adjustment in (b) should also reflect
the amount of any contributions made after the determination date that
are allocated as of a date in that first plan year. In the case of a
plan that is subject to the minimum funding requirements, the account
balance in (a) should include contributions that would be allocated as
of a date not later than the determination date, even though those
amounts are not yet required to be contributed. Thus, the account
balance will include contributions waived in prior years as reflected in
the adjusted account balance and contributions not paid that resulted in
a funding deficiency. The adjusted account balance is described in Rev.
Rul. 78-223, 1978-1 C.B. 125. Also, the adjustment in (b) should reflect
the amount of any contribution actually made (or due to be made) after
the valuation date but before the expiration of the extended payment
period in section 412(c)(10).
T-25. Q. How is the present value of an accrued benefit determined
in a defined benefit plan?
A. The present value of an accrued benefit as of a determination
date must be determined as of the most recent valuation date which is
within a 12-month period ending on the determination date. In the first
plan year of a plan, the accrued benefit for a current employee must be
determined either (i) as if the individual terminated service as of the
determination date or (ii) as if the individual terminated service as of
the valuation date, but taking into account the estimated accrued
benefit as of the determination date. For the second plan year of a
plan, the accrued benefit taken into account for a current participant
must not be less than the accrued benefit taken into account for the
first plan year unless the difference is attributable to using an
estimate of the accrued benefit as of the determination date for the
first plan year and using the actual accrued benefit as of the
determination date for the second plan year. For any other plan year,
the accrued benefit for a current employee must be determined as if the
individual terminated service as of such valuation date. For this
purpose, the valuation date must be the same valuation date for
computing plan costs for minimum funding, regardless of whether a
valuation is performed that year.
T-26. Q. What actuarial assumptions are used for determining the
present value of accrued benefits for defined benefit plans?
A. (a) There are no specific prescribed actuarial assumptions that
must be used for determining the present value of accrued benefits. The
assumptions used must be reasonable and need not relate to the actual
plan and investment experience. The assumptions need not be the same as
those used for
[[Page 765]]
minimum funding purposes or for purposes of determining the actuarial
equivalence of optional benefits under the plan. The accrued benefit for
each current employee is computed as if the employee voluntarily
terminated service as of the valuation date. The present value must be
computed using an interest and a post-retirement mortality assumption.
Pre-retirement mortality and future increases in cost of living (but not
in the maximum dollar amount permitted by section 415) may also be
assumed. However, assumptions as to future withdrawals or future salary
increases may not be used. In the case of a plan providing a qualified
joint and survivor annuity within the meaning of section 401(a)(11) as a
normal form of benefit, for purposes of determining the present value of
the accrued benefit, the spouse of the participant may be assumed to be
the same age as the participant.
(b) Except in the case where the plan provides for a nonproportional
subsidy, the present value should reflect a benefit payable commencing
at normal retirement age (or attained age, if later). Thus, benefits not
relating to retirement benefits, such as pre-retirement death and
disability benefits and post-retirement medical benefits, must not be
taken into account. Further, subsidized early retirement benefits and
subsidized benefit options must not be taken into account unless they
are nonproportional subsidies. See Question and Answer
T-27.
(c) Where the plan provides for a nonproportional subsidy, the
benefit should be assumed to commence at the age at which the benefit is
most valuable. In the case of two or more defined benefit plans which
are being tested for determining whether an aggregation group is top-
heavy, the actuarial assumptions used for all plans within the group
must be the same. Any assumptions which reflect a reasonable mortality
experience and an interest rate not less than five percent or greater
than six percent will be considered as reasonable. Plans, however, are
not required to use an interest rate in this range.
T-27 Q. In determining the present value of accrued benefits in a
defined benefit plan, what standards are applied toward determining
whether a subsidy is nonproportional?
A. A subsidy is nonproportional unless the subsidy applies to a
group of employees that would independently satisfy the requirements of
section 410(b). If two or more plans are considered as a unit for
comparability purposes under Sec. 1.410(b)-1(d)(3), subsidies may be
necessary in both plans or else the subsidy may be nonproportional.
Thus, for example, in the case of a plan which provides an early
retirement benefit after age 55 and 20 years of service equal to the
normal retirement benefit without actuarial reduction and if the
employees who may conceivably reach age 55 with 20 years of service
would, as a group, satisfy the requirements of section 410(b), that
subidy is proportional. However, in contrast, consider a plan that
provides an early retirement benefit that is the actuarial equivalent of
the normal retirement benefit. In determining the early retirement
benefit, the plan imposes the section 415 limits only on the early
retirement benefit (not on the normal retirement benefit before applying
the early retirement reduction factors). In such a plan, a participant
with a normal retirement benefit (before limitation by section 415) in
excess of the section 415 limits will receive a subsidized early
retirement benefit, whereas a participant with a lower normal retirement
benefit will not. Thus, such a benefit would be a nonproportional
subsidy if the group of individuals who are limited by the limitations
under section 415 do not, by themselves, constitute a cross section of
employees that could satisfy section 410(b).
T-28 Q. For purposes of determining the present value of accrued
benefits in either a defined benefit or defined contribution plan, are
the accrued benefits attributable to employee contributions considered
to be part of the accrued benefits?
A. The accrued benefits attributable to employee contributions are
considered to be part of the accrued benefits without regard to whether
such contributions are mandatory or voluntary. However, the amounts
attributable to deductible employee contributions (as
[[Page 766]]
defined in section 72(o)(5)(A)) are not considered to be part of the
accrued benefits.
T-29 Q. How are plans described in section 401(k) treated for
purposes of the top-heavy rules?
A. No special top-heavy rules are provided for plans described in
section 401(k), except a transitional rule. For plan years beginning
after December 31, 1984, amounts which an employee elects to defer are
treated as employer contributions for purposes of determining minimum
required contributions under section 416(c)(2). However, for plan years
beginning prior to January 1, 1985, amounts which an employee elects to
have contributed to a plan described in section 401(k) are not treated
as employer contributions for these purposes. A plan described in
section 401(k) which is top-heavy must provide minimum contributions by
the employer and limit the amount of compensation which can be taken
into account in providing benefits under the plan.
T-30 Q. What distributions are added to the present value of accrued
benefits in determining whether a plan is top-heavy for a particular
plan year?
A. Under section 416(g)(3)(A), distributions made within the plan
year that includes the determination date and within the four preceding
plan years are added to the present value of accrued benefits of key
employees and non-key employees in testing for top-heaviness. However,
in the case of distributions made after the valuation date and prior to
the determination date, such distributions are not included as
distributions in section 416(g)(3)(A) to the extent that such
distributions are included in the present value of the accrued benefits
as of the valuation date. In the case of the distribution of an annuity
contract, the amount of such distribution is deemed to be the current
actuarial value of the contract, determined on the date of the
distribution. Certain distributions that are rolled over by the employee
are not included as distributions. See Question and Answer T-32. A
distribution will not fail to be considered in determining the present
value of accrued benefits merely because it was made before the
effective date of section 416. For purposes of this question and answer,
distributions mean all distributions made by a plan, including all
distributions of employee contributions made during and before the plan
year.
T-31 Q. Are benefits paid on account of death treated as
distributions for purposes of section 416(g)(3)?
A. Benefits paid on account of death are treated as distributions
for purposes of section 416(g)(3) to the extent such benefits do not
exceed the present value of accrued benefits existing immediately prior
to death; benefits paid on account of death are not treated as
distributions for purposes of section 416(g)(3) to the extent such
benefits exceed the present value of accrued benefits existing
immediately prior to death. The distribution from a defined contribution
plan (including the cash value of life insurance policies) of a
participant's account balance on account of death will be treated as a
distribution for purposes of section 416(g)(3).
T-32 Q. How are rollovers and plan-to-plan transfers treated in
testing whether a plan is top-heavy?
A. The rules for handling rollovers and transfers depend upon
whether they are unrelated (both initiated by the employee and made from
a plan maintained by one employer to a plan maintained by another
employer) or related (a rollover or transfer either not initiated by the
employee or made to a plan maintained by the same employer). Generally,
a rollover or transfer made incident to a merger or consolidation of two
or more plans or the division of a single plan into two or more plans
will not be treated as being initiated by the employee. The fact that
the employer initiated the distribution does not mean that the rollover
was not initiated by the employee. For purposes of determining whether
two employers are to be treated as the same employer, all employers
aggregated under section 414(b), (c) or (m) are treated as the same
employer. In the case of unrelated rollovers and transfers, (1) the plan
making the distribution or transfer is to count the distribution as a
distribution under section 416(g)(3), and (2) the plan accepting the
rollover or transfer is not to consider the rollover or transfer as
[[Page 767]]
part of the accrued benefit if such rollover or transfer was accepted
after December 31, 1983, but is to consider it as part of the accrued
benefit if such rollover or transfer was accepted prior to January 1,
1984. In the case of related rollovers and transfers, the plan making
the distribution or transfer is not to count the distribution or
transfer under section 416(g)(3) and the plan accepting the rollover or
transfer counts the rollover or transfer in the present value of the
accrued benefits. Rules for related rollovers and transfers do not
depend on whether the rollover or transfer was accepted prior to January
1, 1984.
T-33 Q. How are the aggregate defined benefit and defined
contribution limits under section 415(e) affected by the top-heavy
rules?
A. Section 416(h) modifies the aggregate limits in section 415(e)
for super top-heavy plans and for top-heavy plans that are not super
top-heavy but do not provide for an additional minimum contribution or
benefit. A plan is a super top-heavy plan if the present value of
accrued benefits for key employees exceeds 90% of the present value of
the accrued benefits for all employees. In the case of a top-heavy
aggregation group, the test is applied to all plans in the group as a
whole. These present values are computed using the same rules as are
used for determining whether the plan is top-heavy. In the case of a
super top-heavy plan, in computing the denominators of the defined
benefit and defined contribution fractions under section 415(e), a
factor of 1.0 is used instead of 1.25 for all employees. In the case of
a top-heavy plan that is not super top-heavy, the same rule applies
unless each non-key employee who is entitled to a minimum contribution
or benefit receives an additional minimum contribution or benefit. In
the case of a defined benefit plan, the additional minimum benefit is
one percentage point (up to a maximum of ten percentage points) for each
year of service described in Question and Answer M-2 of the
participant's average compensation for the years described in Question
and Answer M-2. In the case of a defined contribution plan, the
additional minimum contribution is one percent of the participant's
compensation. If a plan does not provide the applicable additional one
percent minimum or if a plan is super top-heavy, the factor of 1.25 may
be used for an individual only if there are both no further accruals for
that individual under any defined benefit plan and no further annual
additions for that individual under any defined contribution plan until
the combined fraction satisfies the rules of section
415(e) using the 1.0 factor for that individual. The rules contained in
this Question and Answer apply for each limitation year that contains
any portion of a plan year for which the plan is top-heavy. This
Question and Answer may be illustrated by the following example:
Example. A Corporation maintains a profit-sharing plan and a defined
benefit plan, and these plans constitute a required aggregation group.
Both plans use the calendar year for the plan year and the limitation
year under section 415. The plans were determined to be top-heavy for
plan year 1986. The plans use the 1.25 factor under section 415(e), and
non-key employees covered by both the profit-sharing and the defined
benefit plan accrue, under the defined benefit plan, 3% of compensation
for each year of service (up to a maximum of 30%). The plans become
super top-heavy for the 1990 plan year. In order to satisfy section 415,
no further accruals and no further annual additions may take place for
any employee covered by both plans until the combined defined benefit-
defined contribution fraction for such employee is less than 1.0, using
the 1.0 factor in place of 1.25.
T-34 Q. May plans be permissively aggregated to avoid being super
top-heavy?
A. Yes, plans may be permissively aggregated to avoid being super
top-heavy.
T-35 Q. What provisions must be contained in a plan to comply with
the top-heavy requirements?
A. Section 401(a)(10)(B) provides that a plan will qualify only if
it contains provisions which will take effect if the plan becomes top-
heavy and which meet the requirements of section 416. See Questions and
Answers T-39 and T-40 for rules on what provisions must be included.
Under section 401(a)(10)(B)(ii), regulations may waive this requirement
for some plans. See Question and Answer T-38 for a description of plans
that need not include such provisions.
[[Page 768]]
T-36 Q. For an employer who has no employee who has participated or
is eligible to participate in both a defined benefit and defined
contribution plan (or a simplified employee pension, ``SEP'') of that
employer, what provisions must be in the plan(s) to comply with the top-
heavy requirements?
A. (a) If the defined benefit plan has no participants who are or
could be participants in a defined contribution plan of the employer (or
vice versa), the defined benefit plan (or defined contribution plan)
need not include provisions describing the defined benefit or defined
contribution fractions for purposes of section 415 and, thus, the plan
need not contain provisions to determine whether the plan is super top-
heavy or to change any plan provisions if the plan becomes super top-
heavy. Furthermore, if the plan contains a single benefit structure that
satisfies the requirements of section 416 (b), (c), and (d) for each
plan year without regard to whether the plan is top-heavy for such year,
the plan need not include separate provisions to determine whether the
plan is top-heavy or that apply if the plan is top-heavy. If the plan's
single benefit structure does not assure that section 416 (b), (c), and
(d) will be satisfied in all cases, then the plan must include three
types of provisions.
(b) First, the plan must contain provisions describing how to
determine whether the plan is top-heavy. These provisions must include
(1) the criteria for determining which employees are key employees (or
non-key employees), (2) in the case of a defined benefit plan, the
actuarial assumptions and benefits considered to determine the present
value of accrued benefits, (3) a description of how the top-heavy ratio
is computed, (4) a description of what plans (or types of plans) will be
aggregated in testing whether the plan is top-heavy, and (5) a
definition of the determination date and the valuation date applicable
to the determination date. These determinations must be based on
standards that are uniformly and consistently applied and that satisfy
the rules set forth in section 416 and these Questions and Answers. The
provisions in (1) and (3) above may be incorporated in the plan by
reference to the applicable sections of the Internal Revenue Code
without adversely affecting the qualification of the plan. However, the
plan must state the definition of compensation for purposes of
determining who is a key employee.
(c) Second, the plan must specifically contain the following
provisions that will become effective if the plan becomes top-heavy:
vesting that satisfies the minimum vesting requirements of section
416(b), benefits that will not be less than the minimum benefits set
forth in section 416(c), and the compensation limitation described in
section 416(d). The compensation limitation described in section 416(d)
may be incorporated by reference. If a plan always meets the
requirements of either section 416(b), (c) or (d), the plan need not
include additional provisions to meet any such requirements.
(d) Third, the plan must include provisions insuring that any change
in the plan's benefit structure (including vesting schedules) resulting
from a change in the plan's top-heavy status will not violate section
411(a)(10). Thus, if a plan ceases being top-heavy, certain restrictions
apply with respect to the change in the applicable vesting schedule.
T-37 Q. For an employer who maintains or has maintained both a
defined benefit and a defined contribution plan (or a simplified
employee pension, ``SEP'') and some participants do or could participate
in both types of plan, what provisions must be in the plans to comply
with the top-heavy requirements?
A. If an employer maintains (or has maintained) both a defined
benefit plan and a defined contribution plan (or SEP), and the plans
have or could have participants who participate in both types of plans,
then the plans must contain more provisions than those described in
Question and Answer T-36. First, the plans may exclude rules to
determine whether the plan is top-heavy (or to apply when the plan is
top-heavy) only if both plans contain a single benefit structure that
satisfies sections 416 (b), (c), and (d) without regard to whether the
plans are top-heavy. Second, unless the plans always satisfy the
requirements of section 415(e) using the 1.0 factor in the defined
[[Page 769]]
benefit and defined contribution fractions as described in section
416(h)(i), the plans must include provisions similar to those in
Question and Answer T-36 (for top-heavy) to determine whether the plan
is super top-heavy and to satisfy section 416(h) if it is.
T-38 Q. Are any plans exempted from including top-heavy provisions?
A. Section 401(a)(10)(B) exempts governmental plans (as defined in
section 414(d)) from the top-heavy requirements and provides that
regulations may exempt certain plans from including the top-heavy
provisions. A plan need not include any top-heavy provisions if the
plan: (1) is not top-heavy, and (2) covers only employees who are
included in a unit of employees covered by a collective-bargaining
agreement (if retirement benefits were the subject of good faith
bargaining) or employees of employee representatives. The requirement
set forth in section 7701(a)(46) must be met before an agreement will be
considered a collective-bargaining agreement after March 31, 1984.
T-39 Q. Must ratios be computed each year to determine whether a
plan is top-heavy?
A. No. In order to administer the plan, the plan administrator must
know whether the plan is top-heavy. However, precise top-heavy ratios
need not be computed every year. If, on examination, the Internal
Revenue Service requests a demonstration as to whether the plan is top-
heavy (or super top-heavy; see Question and Answer T-33) the employer
must demonstrate to the Service's satisfaction that the plan is not
operating in violation of section 401(a)(10)(B). For purposes of any
demonstration, the employer may use computations that are not precisely
in accordance with this section but which mathematically prove that the
plan is not top-heavy. For example, if the employer determined the
present value of accrued benefits for key employees in a simplified
manner which overstated that value, determined the present value for
non-key employees in a simplified manner which understated that value,
and the ratio of the key employee present value divided by the sum of
the present values was less than 60 percent, the plan would not be
considered top-heavy. This would be a sufficient demonstration because
the simplified fraction could be shown to be greater than the exact
fraction and, thus, the exact fraction must also be less than 60
percent.
Several methods that may be used to simplify the determinations are
indicated below.
(1) If the top-heavy ratio, computed considering all the key
employees and only some of the non-key employees, is less than 60
percent, then it is not necessary to accumulate employee data on the
remaining non-key employees. Inclusion of additional non-key employees
would only further decrease the ratio.
(2) If the number of key employees is known but the identity of the
key employees is not known (i.e. if the only key employees are officers
and the limit on officers is applicable), the numerator may be
determined by using a hypothetical ``worst case'' basis. Thus, in the
case of a defined benefit plan, if the numerator of the top-heavy ratio
were determined assuming each key employee's present value of accrued
benefits were equal to the maximum section 415 benefits at the age that
would maximize such present value, that assumption would only overstate
the present value of accrued benefits for key employees. Thus, if that
ratio is less than 60 percent, the plan is not top-heavy and accurate
data on the key employees need not be collected.
(3) If the employer has available present value of accrued benefit
computations for key and non-key employees in a defined benefit plan,
and these values differ from those that would be produced under Question
and Answer T-25 only by inclusion of a withdrawal assumption, the
present value for the key employees (but not the non-key employees) may
be adjusted to a ``worst case'' value by dividing by the lowest possible
probability of not withdrawing from plan participation before normal
retirement age. If the top-heavy ratio based on this inflated key
employee value is less than 60 percent, the present value need not be
recomputed without the withdrawal assumption. The methods set forth in
this answer may also be used to determine whether a plan is super top-
heavy by
[[Page 770]]
inserting ``90%'' for ``60%'' in the appropriate places.
T-40 Q. Will a plan fail to qualify if it provides that the $200,000
maximum amount of annual compensation taken into account under section
416(d) for any plan year that the plan is top-heavy may be automatically
increased in accordance with regulations under section 416?
A. No.
T-41 Q. If a plan provides benefits based on compensation in excess
of $200,000 and the plan becomes top-heavy, must any accrued benefits
attributable to this excess compensation be eliminated?
A. No. For any year that a plan is top-heavy, section 416(d)
provides that compensation in excess of $200,000 must not be taken into
account. However, a top-heavy plan may continue to provide for any
benefits attributable to compensation in excess of $200,000 to the
extent such benefits were accrued before the plan was top-heavy.
Furthermore, section 411(d)(6) will be violated if any individual's pre-
top-heavy benefit is reduced by either (1) a plan amendment adding the
$200,000 restriction, or (2) an automatic change in the plan benefits
structure imposing the $200,000 restriction due to the plan's becoming
top-heavy.
T-42 Q. Under a top-heavy defined benefit plan, are the requirements
of section 416(d) satisfied if the annual compensation of an employee
taken into account to determine plan benefits is limited to the amount
currently described in section 416(d) for years during which the plan is
top-heavy but higher compensation is taken into account for years before
the plan became top-heavy?
A. No. For the top-heavy plan to meet the requrements of section
416(d), compensation for all years, including years before the plan
became top-heavy, that is taken into account to determine plan benefits
must not exceed the amount currently described in section 416(d).
However, if the accrued benefit as of the end of the last plan year
before the plan became top-heavy (ignoring any plan amendments after
that date) is greater than the accrued benefit determined by limiting
compensation in accordance with section 416(d), that higher accrued
benefit as of the end of the last plan year before the plan became top-
heavy must not be reduced. Providing such higher accrued benefit will
not cause the plan to violate section 416(d).
T-43 Q. What happens to an individual who has ceased employment
before a plan becomes top-heavy?
A. If an individual has ceased employment before a plan becomes top-
heavy, such individual would not be required to receive any additional
benefit accruals, contributions, or vesting, unless the individual
returned to employment with the employer. See Questions and Answers V-3,
M-4, and M-10. In addition, if the individual is receiving benefits
based on annual compensation greater than $200,000, such benefits cannot
be decreased.
V. Vesting Rules for Top-Heavy Plans
V-1 Q. What vesting must be provided under a top-heavy plan?
A. Under section 416(b), the accrued benefits attributable to
employer contributions must be nonforfeitable in accordance with one of
two statutory standards. Either such accrued benefits must be
nonforfeitable after 3 years of service or the nonforfeitable portion of
accrued benefits must be at least 20 percent after 2 years of service,
40 percent after 3 years of service, 60 percent after 4 years of
service, 80 percent after 5 years of service, and 100 percent after 6
years of service. The accrued benefits attributable to employer
contributions has the same meaning as under section 411(c) of the Code.
As under section 411(a), the accrued benefits attributable to employee
contributions must be nonforfeitable at all times.
V-2 Q. What service must be counted in determining vesting
requirements?
A. All service required to be counted under section 411(a) must be
counted for these purposes. All service permitted to be disregarded
under section 411(a)(4) may similarly be disregarded under the schedules
of section 416(b).
V-3 Q. What benefits must be subject to the minimum vesting schedule
of section 416(b)?
A. All accrued benefits within the meaning of section 411(a)(7) must
be
[[Page 771]]
subject to the minimum vesting schedule. These accrued benefits include
benefits accrued before the effective date of section 416 and benefits
accrued before a plan becomes top-heavy. However, when a plan becomes
top-heavy, the accrued benefits of any employee who does not have an
hour of service after the plan becomes top-heavy are not required to be
subject to the minimum vesting schedule. Accrued benefits which have
been forfeited before a plan becomes top-heavy need not vest when a plan
becomes top-heavy.
V-4 Q. May a top-heavy plan provide a minimum eligibility
requirement of the later of age 21 or the completion of 3 years of
service and provide that all benefits are nonforfeitable when accrued?
A. Yes. For plan years which begin after December 31, 1984, a top-
heavy plan may provide a minimum eligibility requirement of the later of
age 21, or the completion of 3 years of service, and provide that all
benefits are nonforfeitable when accrued. For plan years which begin
before January 1, 1985, ``25'' may be substituted for ``21'' in the
preceding sentence.
V-5 Q. What does nonforfeitable mean?
A. In general, nonforfeitable has the same meaning as in section
411(a). However, the minimum benefits required under section 416 (to the
extent required to be nonforfeitable under section 416(b)) may not be
forfeited under section 411(a)(3) (B) or (D). Thus, if benefits are
suspended (ceased) during a period of reemployment, the benefit payable
upon the subsequent resumption of payments must be actuarially increased
to reflect the nonpayment of benefits during such period of re-
employment.
V-6 Q. Will a class-year plan automatically satisfy the minimum
vesting requirements in section 416(b) if it provides that contributions
with respect to any plan year become nonforfeitable no later than the
end of the third plan year following the plan year for which the
contribution was made?
A. No. Although this vesting schedule is similar to the 3-year
minimum vesting schedule permitted by section 416(b)(1)(A), it does not
satisfy that minimum. The 3-year vesting schedule in section
416(b)(1)(A) requires that, after completion of 3 years of service, the
entire accrued benefit of a participant be nonforfeitable. Under the
class-year vesting schedule described above, a portion of a
participant's accrued benefit (that portion attributable to
contributions for the prior 3 years) is forfeitable regardless of the
participant's years of service.
V-7 Q. When a top-heavy plan ceases to be a top-heavy, may the
vesting schedule be altered to a vesting schedule permitted without
regard to section 416?
A. When a top-heavy plan ceases to be top-heavy, the vesting
schedule may be changed to one that would otherwise be permitted.
However, in changing the vesting schedule, the rules described in
section 411(a)(10) apply. Thus, the nonforfeitable percentage of the
accrued benefit before the plan ceased to be top-heavy must not be
reduced; also, any employee with five or more years of service must be
given the option of remaining under the prior (i.e., top-heavy) vesting
schedule.
M. Minimum Benefits under Top-heavy Plans
M-1 Q. Which employees must receive minimum contributions or
benefits in a top-heavy plan?
A. Generally, every non-key employee who is a participant in a top-
heavy plan must receive minimum contributions or benefits under such
plan. However, see Questions and Answers M-4 and M-10 for certain
exceptions. Different minimums apply for defined benefit and defined
contribution plans.
M-2 Q. What is the defined benefit minimum?
A. (a) The defined benefit minimum requires that the accrued benefit
at any point in time must equal at least the product of (i) an
employee's average annual compensation for the period of consecutive
years (not exceeding five) when the employee had the highest aggregate
compensation from the employer and (ii) the lesser of 2% per year of
service with the employer or 20%.
(b) For purposes of the defined benefit minimum, years of service
with the employer are generally determined under the rules of section
411(a) (4), (5)
[[Page 772]]
and (6). However, a plan may disregard any year of service if the plan
was not top-heavy for any plan year ending during such year of service,
or if the year of service was completed in a plan year beginning before
January 1, 1984.
(c) In determining the average annual compensation for a period of
consecutive years during which the employee had the largest aggregate
compensation, years for which the employee did not earn a year of
service under the rules of section 411(a) (4), (5), and (6) are to be
disregarded. Thus, if an employee has received compensation from the
employer during years one two, and three, and for each of these years
the employee earned a year of service, then the employee's average
annual compensation is determined by dividing the employee's aggregate
compensation for these three years by three. If the employee fails to
earn a year of service in the next year, but does earn a year of service
in the fifth year, the employee's average annual compensation is
calculated by dividing the employee's aggregate compensation for years
one, two, three, and five by four. The compensation required to be taken
into account is the compensation described in Question and Answer T-21.
In addition, compensation received for years ending in plan years
beginning before January 1, 1984, and compensation received for years
beginning after the close of the last plan year in which the plan is
top-heavy may be disregarded.
(d) The defined benefit minimum is expressed as a life annuity (with
no ancillary benefits) commencing at normal retirement age. Thus, if
post-retirement death benefits are also provided, the 2% minimum annuity
benefit may be adjusted. (See Question and Answer M-3.) The 2% minimum
annuity benefit may not be adjusted due to the provision of pre-
retirement ancillary benefits. Normal retirement age has the same
meaning as under section 411(a)(8).
(e) Any accruals of employer-derived benefits, whether or not
attributable to years for which the plan is top-heavy, may be used to
satisfy the defined benefit minimums. Thus, if a non-key employee had
already accrued a benefit of 20 percent of final average pay at the time
the plan became top-heavy, no additional minimum accruals are required
(although the accrued benefit would increase as final average pay
increased). Accrued benefits attributable to employee contributions must
be ignored. Accrued benefits attributable to employer and employee
contributions have the same meaning as under section 411(c).
M-3 Q. What defined benefit minimum must be received if an employee
receives a benefit in a form other than a single life annuity or a
benefit other than at normal retirement age?
A. If the form of benefit is other than a single life annuity, the
employee must receive an amount that is the actuarial equivalent of the
minimum single life annuity benefit. If the benefit commences at a date
other than at normal retirement age, the employee must receive at least
an amount that is the acturial equivalent of the minimum single life
annuity benefit commencing at normal retirement age. Thus, the employee
may receive a lower benefit if the benefit commences before the normal
retirement age and the employee must receive a higher benefit if the
benefit commences after the normal retirement age. No specific actuarial
assumptions are mandated providing different actuarial equivalents.
However, the assumptions must be reasonable.
M-4 Q. Which employees must accrue a minimum benefit in a top-heavy
defined benefit plan?
A. Each non-key employee who is a participant in a top-heavy defined
benefit plan and who has at least one thousand hours of service (or
equivalent service as determined under Department of Labor regulations,
29 CFR 2530.200b-3) for an accrual computation period must accrue a
minimum benefit in a top-heavy defined benefit plan for that accrual
computation period. If the accrual computation period does not coincide
with the plan year, a minimum benefit must be provided, if required, for
both accrual periods within the top-heavy plan year. For a top-heavy
plan that does not base accruals on accrual computation periods, minimum
benefits must be credited for all periods of service required to be
credited for benefit accrual. (See Sec. 1.410(a)-
[[Page 773]]
7). A non-key employee may not fail to accrue a minimum benefit merely
because the employee was not employed on a specified date. Similarly, a
non-key employee may not fail to accrue a minimum benefit because either
(1) an employee is excluded from participation (or accrues no benefit)
merely because the employee's compensation is less than a stated amount,
or (2) the employee is excluded from participation (or accrues no
benefit) merely because of a failure to make mandatory employee
contributions.
M-5 Q. Would the defined benefit minimum be satisfied if the plan
provides a normal retirement benefit equal to the greater of the plan's
projected formula or the projected minimum benefit and if benefits
accrue in accordance with the fractional rule described in section
411(b)(1)(C)?
A. No. The fact that this fractional rule would not satisfy the
defined benefit minimum may be illustrated by the following example.
Consider a non-key employee, age 25, entering a top-heavy plan in which
the projected minimum for the employee is greater than the projected
benefit under the normal formula. Under the fractional rule, the
employee's accrued benefit ten years later at age 35 would be 5% (20%
x(10/40)). Under section 416, the employee's minimum accrued benefit
after ten years of service must be at least 20%. Thus, because the 5%
benefit is less than the 20% benefit required under section 416, such
benefit would not satisfy the required minimum.
M-6 Q. What benefit must an employer provide in a top-heavy defined
benefit employee pay-all plan?
A. The defined benefit minimum in an employee pay-all top-heavy plan
is the same as that for a plan which has employer contributions. That
is, the employer must provide the benefits specified in Question and
Answer M-2.
M-7 Q. What is the defined contribution minimum?
A. The sum of the contributions and forfeitures allocated to the
account of any non-key employee who is a participant in a top-heavy
defined contribution plan must equal at least 3% of such employee's
compensation (see Question and Answer T-21 for the definition of
compensation) for that plan year or for the calendar year ending within
the plan year. However, a lower minimum is permissible where the largest
contribution made or required to be made for key employees is less than
3%. The preceding sentence does not apply to any plan required to be
included in an aggregation group if such plan enables a defined benefit
plan required to be included in such group to meet the requirements of
section 401(a)(4) or 410. The contribution made or required to be made
on behalf of any key employee is equal to the ratio of the sum of the
contributions made or required to be made and forfeitures allocated for
such key employee divided by the compensation (not in excess of
$200,000) for such key employee. Thus, the defined contribution minimum
that must be provided for any non-key employee for a top-heavy plan year
is the largest percentage of compensation (not in excess of $200,000)
provided on behalf of any key employee for that plan year (if the
largest percentage of compensation provided on behalf of any key
employee for that plan year is less than 3%).
M-8 Q. If an employer maintains two top-heavy defined contribution
plans, must both plans provide the defined contribution minimum for each
non-key employee who is a participant in both plans?
A. No. If one of the plans provides the defined contribution minimum
for each non-key employee who participates in both plans, the other plan
need not provide an additional contribution for such employees. However,
the other plan must provide the vesting required by section 416(b) and
must limit compensation (based on all compensation from all aggregated
employers) in providing benefits as required by section 416(d).
M-9 Q. In the case of the waiver of minimum funding standards of
section 412(d), how does section 416 treat the defined contribution
minimum?
A. For purposes of determining the contribution that is required to
be made on behalf of a key employee, a waiver of the minimum funding
requirements is disregarded. Thus, if a defined contribution plan
receives a
[[Page 774]]
waiver of the minimum funding requirement, and if the minimum
contribution required under the plan without regard to the waiver
exceeds 3%, the exception described in Question and Answer M-7 does not
apply even though no key employee receives a contribution in excess of
3% and even though the amount required to be contributed on behalf of
the key employee has been waived. Also, a waiver of the minimum funding
requirements will not alter the requirements of section 416. Thus, in
the case of the top-heavy defined contribution plan in which the non-key
employee must receive an allocation, a waiver of the minimum funding
requirements may eliminate a funding violation and such waiver will
preclude a violation under section 416 even though the required
contribution is not made. However, the adjusted account balance (as
described in Rev. Rul. 78-223, 1978-1 C.B. 125) of the non-key employees
must reflect the required minimum contribution even though such
contribution was not made.
M-10 Q. Which employees must receive the defined contribution
minimum?
A. Those non-key employees who are participants in a top-heavy
defined contribution plan who have not separated from service by the end
of the plan year must receive the defined contribution minimum. Non-key
employees who have become participants but who subsequently fail to
complete 1,000 hours of service (or the equivalent) for an accrual
computation period must receive the defined contribution minimum. A non-
key employee may not fail to receive a defined contribution minimum
because either (1) the employee is excluded from participation (or
accrues no benefit) merely because the employee's compensation is less
than a stated amount, or (2) the employee is excluded from participation
(or accrues no benefit) merely because of a failure to make mandatory
employee contributions or, in the case of a cash or deferred
arrangement, elective contributions.
M-11 Q. May either the defined benefit minimum or the defined
contribution minimum be integrated with social security?
A. No.
M-12 Q. What minimum contribution or benefit must be received by a
non-key employee who participates in a top-heavy plan?
A. In the case of an employer maintaining only one plan, if such
plan is a defined benefit plan, each non-key employee covered by that
plan must receive the defined benefit minimum. If such plan is a defined
contribution plan (including a target benefit plan), each non-key
employee covered by the plan must receive the defined contribution
minimum. In the case of an employer who maintains more than one plan,
employees covered under only the defined benefit plan must receive the
defined benefit minimum. Employees covered under only the defined
contribution plan must receive the defined contribution minimum. In the
case of employees covered under both defined benefit and defined
contribution plans, the rules are more complicated. Section 416(f)
precludes, in the case of employees covered under both defined benefit
and defined contribution plans, either required duplication or
inappropriate omission. Therefore, such employees need not receive both
the defined benefit and the defined contribution minimums.
There are four safe harbor rules a plan may use in determining which
minimum must be provided to a non-key employee who is covered by both
defined benefit and defined contribution plans. Since the defined
benefit minimums are generally more valuable, if each employee covered
under both a top-heavy defined benefit plan and a top-heavy defined
contribution plan receives the defined benefit minimum, the defined
benefit and defined contribution minimums will be satisfied. Another
approach that may be used is a floor offset approach (see Rev. Rul. 76-
259, 1976-2 C.B. 111) under which the defined benefit minimum is
provided in the defined benefit plan and is offset by the benefits
provided under the defined contribution plan. Another approach that may
be used in the case of employees covered under both defined benefit and
defined contribution plans is to prove, using a comparability analysis
(see Rev. Rul. 81-202, 1981-2 C.B. 93) that the plans are providing
[[Page 775]]
benefits at least equal to the defined benefit minimum. Finally, in
order to preclude the cost of providing the defined benefit minimum
alone, the complexity of a floor offset plan and the annual fluctuation
of a comparability analysis, a safe haven minimum defined contribution
is being provided. If the contributions and forfeitures under the
defined contribution plan equal 5% of compensation for each plan year
the plan is top-heavy, such minimum will be presumed to satisfy the
section 416 minimums.
M-13 Q. An employer maintains a defined benefit plan and a profit-
sharing plan. Both plans are top-heavy and are members of a required
aggregation group. In order to meet the minimum contribution/minimum
benefit requirements, the employer decides to contribute 5% of
compensation to the profit-sharing plan. What happens if for a
particular plan year there are no profits out of which to make
contributions to the profit-sharing plan?
A. In this particular situation, in order to satisfy the
requirements of section 416(c), the employer must provide the defined
contribution minimum, 5% of compensation. This rule is an exception to
the general rule that an employer cannot make a contribution to a
profit-sharing plan if there are no profits. Alternatively, the employer
may provide the defined benefit minimum for this year.
M-14 Q. What minimum contribution or benefit must be received by a
non-key employee when he is covered under both a defined benefit plan
and defined contribution plan (both of which are top-heavy) of an
employer and the employer desires to use a factor of 1.25 in computing
the denominators of the defined benefit and defined contribution
fractions under section 415(e)?
A. In this particular situation, the employer may use one of the
four rules set forth in Question and Answer M-12, subject to the
following modifications. The defined benefit minimum must be increased
by one percentage point (up to a maximum of ten percentage points) for
each year of service described in Question and Answer M-2 of the
participant's average compensation for the years described in Question
and Answer M-2. The defined contribution minimum is increased to 7\1/2\
percent of compensation. If the floor offset or comparability analysis
approach is used, the defined benefit minimum must be increased by one
percentage point (up to a maximum of ten percentage points) for each
year of service described in Question and Answer M-2 of the
participant's average compensation for the years described in Question
and Answer M-2.
M-15 Q. May an employer use a different method each year to meet the
requirements of Question and Answer M-12 or Question and Answer M-14
without amending the plans each year?
A. No. An employer must set forth in the plan document the method he
will use to meet the requirements of Question and Answer M-12 or M-14,
as the case may be. If an employer desires to change the method, the
plan document must be amended.
M-16 Q. Will target benefit plans be treated as defined benefit or
defined contribution plans for purposes of the top-heavy rules?
A. Target benefit plans will be treated as defined contribution
plans for purposes of the top-heavy rules.
M-17 Q. Can a plan described in section 412(i) (funded exclusively
by level premium insurance contracts) also satisfy the minimum benefit
requirements of section 416?
A. The accrued benefits provided for a non-key employee under most
level premium insurance contracts might not provide a benefit satisfying
the defined benefit minimum because of the lower cash values in early
years under most level premium insurance contracts, and because such
contracts normally provide for level premiums until normal retirement
age. However, a plan will not be considered to violate the requirements
of section 412(i) merely because it funds certain benefits through
either an auxiliary fund or deferred annuity contracts, if the following
conditions are met:
(1) The targeted benefit at normal retirement age under the level
premium insurance contract is determined, taking into account the
defined benefit minimum that would be required assuming the current top-
heavy (or non top-heavy) status of the plan continues until normal
retirement age; and
[[Page 776]]
(2) The benefits provided by the auxiliary fund or deferred annuity
contracts do not exceed the excess of the defined benefit minimum
benefits over the benefits provided by the level premium insurance
contract.
If the above conditions are satisfied, then the plan is still exempt
from the minimum funding requirements under section 412 and may still
utilize the special accrued benefit rule in section 411(b)(1)(F) subject
to the following modifications: Although the portion of the plan funded
by the level premium annuity contract is exempt from the minimum funding
requirements, the portion funded by an auxiliary fund is subject to
those requirements. (Thus, a funding standard account must be maintained
and a Schedule B must be filed with the annual report). The accrued
benefit for any participant may be determined using the rule in section
411(b)(1)(F) but must not be less than the defined benefit minimum.
M-18 Q. May qualified nonelective contributions described in section
401(m)(4)(C) be treated as employer contributions for purposes of the
minimum contribution or benefit requirement of section 416?
A. Yes. This is the case even if the qualified nonelective
contributions are taken into account under the actual deferral
percentage test of Sec. 1.401(k)-1(b)(2) or under the actual
contribution percentage test of Sec. 1.401(m)-1(b).
M-19 Q. May matching contributions described in section 40l(m)(4)(A)
be treated as employer contributions for purposes of the minimum
contribution or benefit requirement of section 416?
A. Matching contributions allocated to key employees are treated as
employer contributions for purposes of determining the minimum
contribution or benefit under section 416. However, if a plan uses
contributions allocated to employees other than key employees on the
basis of employee contributions or elective contributions to satisfy the
minimum contribution requirement, these contributions are not treated as
matching contributions for purposes of applying the requirements of
sections 401(k) and 401(m) for plan years beginning after December 31,
1988. Thus these contributions must meet the nondiscrimination
requirements of section 401(a)(4) without regard to section 401(m). See
Sec. 1.401(m)-1(f)(12)(iii).
M-20 Q. May elective contributions be treated as employer
contributions for purposes of satisfying the minimum contribution or
benefit requirement of section 416(c)(2)?
A. Elective contributions on behalf of key employees are taken into
account in determining the minimum required contribution under section
416(c)(2). However, elective contributions on behalf of employees other
than key employees may not be treated as employer contributions for
purposes of the minimum contribution or benefit requirement of section
416. See section 401(k)(4)(C) and the regulations thereunder. This
Question and Answer is effective for plan years beginning after December
31, 1988.
[T.D. 7997, 49 FR 50646, Dec. 31, 1984, as amended by T.D. 8357, 56 FR
40550, Aug. 15, 1991]
Sec. 1.417(e)-1 Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417.
(a) Scope--(1) In general. A plan does not satisfy the requirements
of sections 401(a)(11) and 417 unless it satisfies the consent
requirements, the determination of present value requirements and the
other requirements set forth in this section. See section 401(a)(11) and
Sec. 1.401(a)-20 for other rules regarding the survivor annuity
requirements.
(2) Additional requirements. See Sec. 1.411(a)-11 for other rules
applicable to the consent requirements.
(3) Accrued benefit. The definition of ``accrued benefit'' in
Sec. 1.411(a)-11 applies when that term is used in this section.
(b) Consent, etc. requirements--(1) General rule. Generally plans
may not commence the distribution of any portion of a participant's
accrued benefit in any form unless the applicable consent requirements
are satisfied. No consent of the participant or spouse is needed for
distribution of a QJSA or QPSA after the benefit is no longer
immediately distributable (after the participant attains (or would have
attained if not dead) the later of normal retirement age (as defined in
section 411(a)(8)) or age 62). No consent of the
[[Page 777]]
spouse is needed for distribution of a QJSA at any time. After the
participant's death, a benefit may be paid to a nonspouse beneficiary
without the beneficiary's consent. A distribution cannot be made at any
time in a form other than a QJSA unless such QJSA has been waived by the
participant and such waiver has been consented to by the spouse. A QJSA
is an annuity that commences immediately. Thus, for example, a plan may
not offer a participant separating from service at age 45 a choice only
between a single sum distribution at separation of service and a joint
and survivor annuity that satisfies all the requirements of a QJSA
except that it commences at normal retirement age rather than
immediately. To satisfy this section, the plan must also offer a QJSA
(i.e., an annuity that satisfies all the requirements for a QJSA
including the requirement that it commences immediately).
(2) Consent. (i) Written consent of the participant and, if the
participant is married at the annuity starting date and the benefit is
to be paid in a form other than a QJSA, the participant's spouse (or, if
either the participant or the spouse has died, the survivor) is required
before the commencement of the distribution of any part of an accrued
benefit if the present value of the nonforfeitable benefit is greater
than the cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii). No
consent is valid unless the participant has received a general
description of the material features, and an explanation of the relative
values of, the optional forms of benefit available under the plan in a
manner which would satisfy the notice requirements of section 417(a)(3).
See Sec. 1.401(a)-20 Q&A 36. No consent is required before the annuity
starting date if the present value of the nonforfeitable benefit is not
more than the cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii).
After the annuity starting date, consent is required for the immediate
distribution of the present value of the accrued benefit being
distributed in any form, including a qualified joint and survivor
annuity or a qualified preretirement survivor annuity, regardless of the
amount of such present value.
(ii) In determining the present value of any nonforfeitable accrued
benefit, a defined benefit plan is limited by the interest rate
restriction as set forth in paragraph (d) of this section.
(iii) Paragraph (b)(2)(i) of this section applies to distributions
made on or after October 17, 2000. For distributions prior to October
17, 2000, Sec. 1.417(e)-1(b)(2)(i) in effect prior to October 17, 2000
(as contained in 26 CFR part 1 revised as of April 1, 2000) applies.
(3) Time of consent. (i) Written consent of the participant and the
participant's spouse to the distribution must be made not more than 90
days before the annuity starting date.
(ii) A plan must provide participants with the written explanation
of the QJSA required by section 417(a)(3) no less than 30 days and no
more than 90 days before the annuity starting date (except as otherwise
provided by section 417(a)(7) for plan years beginning after December
31, 1996). However, if the participant, after having received the
written explanation of the QJSA, affirmatively elects a form of
distribution and the spouse consents to that form of distribution (if
necessary), a plan will not fail to satisfy the requirements of section
417(a) merely because the annuity starting date is less than 30 days
after the written explanation was provided to the participant, provided
that the following requirements are met:
(A) The plan administrator provides information to the participant
clearly indicating that (in accordance with the first sentence of this
paragraph (b)(3)(ii)) the participant has a right to at least 30 days to
consider whether to waive the QJSA and consent to a form of distribution
other than a QJSA.
(B) The participant is permitted to revoke an affirmative
distribution election at least until the annuity starting date, or, if
later, at any time prior to the expiration of the 7-day period that
begins the day after the explanation of the QJSA is provided to the
participant.
(C) The annuity starting date is after the date that the explanation
of the QJSA is provided to the participant (except as otherwise provided
by section 417(a)(7) for plan years beginning after December 31, 1996).
However, the
[[Page 778]]
plan may permit the annuity starting date to be before the date that any
affirmative distribution election is made by the participant and before
the date that the distribution is permitted to commence under paragraph
(b)(3)(ii)(D) of this section.
(D) Distribution in accordance with the affirmative election does
not commence before the expiration of the 7-day period that begins the
day after the explanation of the QJSA is provided to the participant.
(iii) The following example illustrates the provisions of this
paragraph (b)(3):
Example. Employee E, a married participant in a defined benefit plan
who has terminated employment, is provided with the explanation of the
QJSA on November 28.
Employee E elects (with spousal consent) on December 2 to waive the
QJSA and receive an immediate distribution in the form of a single life
annuity. The plan may permit Employee E to receive payments with an
annuity starting date of December 1, provided that the first payment is
made no earlier than December 6 and the participant does not revoke the
election before that date. The plan can make the remaining monthly
payments on the first day of each month thereafter in accordance with
its regular payment schedule.
(iv) The additional rules of this paragraph (b)(3) concerning the
notice and consent requirements of section 417 apply to distributions on
or after September 22, 1995. For distributions before September 22,
1995, the additional rules concerning the notice and consent
requirements of section 417 in Sec. 1.417(e)-1(b)(3) in effect prior to
September 22, 1995 (see Sec. 1.417(e)-1 (b)(3) in 26 CFR Part 1 revised
as of April 1, 1995) apply.
(4) Delegation to Commissioner. The Commissioner, in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin, may modify, or provide additional guidance with respect to,
the notice and consent requirements of this section. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(c) Permitted distributions. A plan may not require that a
participant or surviving spouse begin to receive benefits without
satisfying paragraph (b) of this section while such benefits are
immediately distributable, (see paragraph (b)(1) of this section). Once
benefits are no longer immediately distributable, all benefits that the
plan requires to begin must be provided in the form of a QJSA and QPSA
unless the applicable written explanation, election and consent
requirements of section 417 are satisfied.
(d) Present value requirement--(1) General rule. A defined benefit
plan must provide that the present value of any accrued benefit and the
amount (subject to sections 411(c)(3) and 415) of any distribution,
including a single sum, must not be less than the amount calculated
using the applicable interest rate described in paragraph (d)(3) of this
section (determined for the month described in paragraph (d)(4) of this
section) and the applicable mortality table described in paragraph
(d)(2) of this section. The present value of any optional form of
benefit cannot be less than the present value of the normal retirement
benefit determined in accordance with the preceding sentence. The same
rules used for the plan under this paragraph (d) must also be used to
compute the present value of the benefit for purposes of determining
whether consent for a distribution is required under paragraph (b) of
this section.
(2) Applicable mortality table. The applicable mortality table is
the mortality table based on the prevailing commissioners' standard
table (described in section 807(d)(5)(A)) used to determine reserves for
group annuity contracts issued on the date as of which present value is
being determined (without regard to any other subparagraph of section
807(d)(5)), that is prescribed by the Commissioner in revenue rulings,
notices, or other guidance published in the Internal Revenue Bulletin
(see Sec. 601.601(d)(2)(ii)(b) of this chapter). The Commissioner may
prescribe rules that apply in the case of a change to the prevailing
commissioners' standard table (described in section 807(d)(5)(A)) used
to determine reserves for group annuity contracts, in revenue rulings,
notices, or other guidance published in the Internal Revenue Bulletin
(see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(3) Applicable interest rate--(i) General rule. The applicable
interest rate for a month is the annual interest rate on 30-year
Treasury securities as specified
[[Page 779]]
by the Commissioner for that month in revenue rulings, notices or other
guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2)(ii)(b) of this chapter).
(ii) Example. This example illustrates the rules of this paragraph
(d)(3):
Example. Plan A is a calendar year plan. For its 1995 plan year,
Plan A provides that the applicable mortality table is the table
described in Rev. Rul. 95-6 (1995-1 C.B. 80), and that the applicable
interest rate is the annual interest rate on 30-year Treasury securities
as specified by the Commissioner for the first full calendar month
preceding the calendar month that contains the annuity starting date.
Participant P is age 65 in January 1995, which is the month that
contains P's annuity starting date. P has an accrued benefit payable
monthly of $1,000 and has elected to receive a distribution in the form
of a single sum in January 1995. The annual interest rate on 30-year
Treasury securities as published by the Commissioner for December 1994
is 7.87 percent. To satisfy the requirements of section 417(e)(3) and
this paragraph (d), the single sum received by P may not be less than
$111,351.
(4) Time for determining interest rate--(i) General rule. Except as
provided in paragraph (d)(4)(iv) or (v) of this section, the applicable
interest rate to be used for a distribution is the rate determined under
paragraph (d)(3) of this section for the applicable lookback month. The
applicable lookback month for a distribution is the lookback month (as
described in paragraph (d)(4)(iii) of this section) for the month (or
other longer stability period described in paragraph (d)(4)(ii) of this
section) that contains the annuity starting date for the distribution.
The time and method for determining the applicable interest rate for
each participant's distribution must be determined in a consistent
manner that is applied uniformly to all participants in the plan.
(ii) Stability period. A plan must specify the period for which the
applicable interest rate remains constant. This stability period may be
one calendar month, one plan quarter, one calendar quarter, one plan
year, or one calendar year.
(iii) Lookback month. A plan must specify the lookback month that is
used to determine the applicable interest rate. The lookback month may
be the first, second, third, fourth, or fifth full calendar month
preceding the first day of the stability period.
(iv) Permitted average interest rate. A plan may apply the rules of
paragraph (d)(4)(i) of this section by substituting a permitted average
interest rate with respect to the plan's stability period for the rate
determined under paragraph (d)(3) of this section for the applicable
lookback month for the stability period. For this purpose, a permitted
average interest rate with respect to a stability period is an interest
rate that is computed by averaging the applicable interest rates
determined under paragraph (d)(3) of this section for two or more
consecutive months from among the first, second, third, fourth, and
fifth calendar months preceding the first day of the stability period.
For this paragraph (d)(4)(iv) to apply, a plan must specify the manner
in which the permitted average interest rate is computed.
(v) Additional determination dates. The Commissioner may prescribe,
in revenue rulings, notices or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b)), other times that a
plan may provide for determining the applicable interest rate.
(vi) Example. This example illustrates the rules of this paragraph
(d)(4):
Example. Employer X maintains Plan A, a calendar year plan. Employer
X wishes to amend Plan A so that the applicable interest rate will
remain fixed for each plan quarter, and so that the applicable interest
rate for distributions made during each plan quarter can be determined
approximately 80 days before the beginning of the plan quarter. To
comply with the provisions of this paragraph (d)(4), Plan A is amended
to provide that the applicable interest rate is the annual interest rate
on 30-year Treasury securities as specified by the Commissioner for the
fourth calendar month preceding the first day of the plan quarter during
which the annuity starting date occurs.
(5) Use of alternative interest rate and mortality table. If a plan
provides for use of an interest rate or mortality table other than the
applicable interest rate or the applicable mortality table, the plan
must provide that a participant's benefit must be at least as great as
the benefit produced by using the applicable interest rate and the
applicable mortality table. For example, if a plan provides for use of
an interest rate of
[[Page 780]]
7% and the UP-1984 Mortality Table (see Sec. 1.401(a)(4)-12, Standard
mortality table) in calculating single-sum distributions, the plan must
provide that any single-sum distribution is calculated as the greater of
the single-sum benefit calculated using 7% and the UP-1984 Mortality
Table and the single-sum benefit calculated using the applicable
interest rate and the applicable mortality table.
(6) Exceptions. This paragraph (d) (other than the provisions
relating to section 411(d)(6) requirements in paragraph (d)(10) of this
section) does not apply to the amount of a distribution paid in the form
of an annual benefit that--
(i) Does not decrease during the life of the participant, or, in the
case of a QPSA, the life of the participant's spouse; or
(ii) Decreases during the life of the participant merely because of-
-
(A) The death of the survivor annuitant (but only if the reduction
is to a level not below 50% of the annual benefit payable before the
death of the survivor annuitant); or
(B) The cessation or reduction of Social Security supplements or
qualified disability benefits (as defined in section 411(a)(9)).
(7) Defined contribution plans. Because the accrued benefit under a
defined contribution plan equals the account balance, a defined
contribution plan is not subject to the requirements of this paragraph
(d), even though it is subject to section 401(a)(11).
(8) Effective date--(i) In general. This paragraph (d) is effective
for distributions with annuity starting dates in plan years beginning
after December 31, 1994.
(ii) Optional delayed effective date of Retirement Protection Act of
1994 (RPA '94)(108 Stat. 5012) rules for plans adopted and in effect
before December 8, 1994. For a plan adopted and in effect before
December 8, 1994, the application of the rules relating to the
applicable mortality table and applicable interest rate under paragraphs
(d)(2) through (4) of this section is delayed to the extent provided in
this paragraph (d)(8)(ii), if the plan provisions in effect on December
7, 1994, met the requirements of section 417(e)(3) and Sec. 1.417(e)-
1(d) as in effect on December 7, 1994 (as contained in 26 CFR part 1
revised April 1, 1995). In the case of a distribution from such a plan
with an annuity starting date that precedes the optional delayed
effective date described in paragraph (d)(8)(iv) of this section, and
that precedes the first day of the first plan year beginning after
December 31, 1999, the rules of paragraph (d)(9) of this section (which
generally apply to distributions with annuity starting dates in plan
years beginning before January 1, 1995) apply in lieu of the rules of
paragraphs (d)(2) through (4) of this section. The interest rate under
the rules of paragraph (d)(9) of this section is determined under the
provisions of the plan as in effect on December 7, 1994, reflecting the
interest rate or rates published by the Pension Benefit Guaranty
Corporation (PBGC) and the provisions of the plan for determining the
date on which the interest rate is fixed. The above described interest
rate or rates published by the PBGC are those determined by the PBGC
(for the date determined under those plan provisions) pursuant to the
methodology under the regulations of the PBGC for determining the
present value of a lump sum distribution on plan termination under 29
CFR part 2619 that were in effect on September 1, 1993 (as contained in
29 CFR part 2619 revised July 1, 1994).
(iii) Optional accelerated effective date of RPA '94 rules. This
paragraph (d) is also effective for a distribution with an annuity
starting date after December 7, 1994, during a plan year beginning
before January 1, 1995, if the employer elects, on or before the annuity
starting date, to make the rules of this paragraph (d) effective with
respect to the plan as of the optional accelerated effective date
described in paragraph (d)(8)(iv) of this section. An employer is
treated as making this election by making the plan amendments described
in paragraph (d)(8)(iv) of this section.
(iv) Determination of delayed or accelerated effective date by plan
amendment adopting RPA '94 rules. The optional delayed effective date of
paragraph (d)(8)(ii) of this section, or the optional accelerated
effective date of paragraph (d)(8)(iii) of this section, whichever is
[[Page 781]]
applicable, is the date plan amendments applying both the applicable
mortality table of paragraph (d)(2) of this section and the applicable
interest rate of paragraph (d)(3) of this section are adopted or, if
later, are made effective.
(9) Plan years beginning before January 1, 1995--(i) Interest rate.
(A) For distributions made in plan years beginning after December 31,
1986, and before January 1, 1995, the following interest rate described
in paragraph (d)(9)(i)(A)(1) or (2) of this section, whichever applies,
is substituted for the applicable interest rate for purposes of this
section--
(1) The rate or rates that would be used by the PBGC for a trusteed
single-employer plan to value the participant's (or beneficiary's)
vested benefit (PBGC interest rate) if the present value of such benefit
does not exceed $25,000; or
(2) 120 percent of the PBGC interest rate, as determined in
accordance with paragraph (d)(9)(i)(A)(1) of this section, if such
present value exceeds $25,000. In no event shall the present value
determined by use of 120 percent of the PBGC interest rate result in a
present value less than $25,000.
(B) The PBGC interest rate may be a series of interest rates for any
given date. For example, the PBGC interest rate for immediate annuities
for November 1994 is 6%, and the PBGC interest rates for the deferral
period for that month are as follows: 5.25% for the first 7 years of the
deferral period, 4% for the following 8 years of the deferral period,
and 4% for the remainder of the deferral period. For November 1994, 120
percent of the PBGC interest rate is 7.2% (1.2 times 6%) for an
immediate annuity, 6.3% (1.2 times 5.25%) for the first 7 years of the
deferral period, 4.8% (1.2 times 4%) for the following 8 years of the
deferral period, and 4.8% (1.2 times 4%) for the remainder of the
deferral period. The PBGC interest rates are the interest rates that
would be used (as of the date of the distribution) by the PBGC for
purposes of determining the present value of that benefit upon
termination of an insufficient trusteed single employer plan. Except as
otherwise provided by the Commissioner, the PBGC interest rates are
determined by PBGC regulations. See subpart B of 29 CFR part 4044 for
the applicable PBGC rates.
(ii) Time for determining interest rate. (A) Except as provided in
paragraph (d)(9)(ii)(B) of this section, the PBGC interest rate or rates
are determined on either the annuity starting date or the first day of
the plan year that contains the annuity starting date. The plan must
provide which date is applicable.
(B) The plan may provide for the use of any other time for
determining the PBGC interest rate or rates provided that such time is
not more than 120 days before the annuity starting date if such time is
determined in a consistent manner and is applied uniformly to all
participants.
(C) The Commissioner may, in revenue rulings, notices or other
guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2)(ii)(b), prescribe other times for determining the
PBGC interest rate or rates.
(iii) No applicable mortality table. In the case of a distribution
to which this paragraph (d)(9) applies, the rules of this paragraph (d)
are applied without regard to the applicable mortality table described
in paragraph (d)(2) of this section.
(10) Relationship with section 411(d)(6)--(i) In general. A plan
amendment that changes the interest rate, the time for determining the
interest rate, or the mortality assumptions used for the purposes
described in paragraph (d)(1) of this section is subject to section
411(d)(6). But see Sec. 1.411(d)-4, Q&A-2(b)(2)(v) (regarding plan
amendments relating to involuntary distributions). In addition, a plan
amendment that changes the interest rate or the mortality assumptions
used for the purposes described in paragraph (d)(1) of this section
merely to eliminate use of the interest rate described in paragraph
(d)(3) or paragraph (d)(9) of this section, or the applicable mortality
table, with respect to a distribution form described in paragraph (d)(6)
of this section, for distributions with annuity starting dates occurring
after a specified date that is after the amendment is adopted, does not
violate the requirements of section 411(d)(6) if the amendment is
adopted on or before the
[[Page 782]]
last day of the last plan year ending before January 1, 2000.
(ii) Section 411(d)(6) relief for change in time for determining
interest rate. Notwithstanding the general rule of paragraph (d)(10)(i)
of this section, if a plan amendment changes the time for determining
the applicable interest rate (including an indirect change as a result
of a change in plan year), the amendment will not be treated as reducing
accrued benefits in violation of section 411(d)(6) merely on account of
this change if the conditions of this paragraph (d)(10)(ii) are
satisfied. If the plan amendment is effective on or after the adoption
date, any distribution for which the annuity starting date occurs in the
one-year period commencing at the time the amendment is effective must
be determined using the interest rate provided under the plan determined
at either the date for determining the interest rate before the
amendment or the date for determining the interest rate after the
amendment, whichever results in the larger distribution. If the plan
amendment is adopted retroactively (that is, the amendment is effective
prior to the adoption date), the plan must use the interest rate
determination date resulting in the larger distribution for the period
beginning with the effective date and ending one year after the adoption
date.
(iii) Section 411(d)(6) relief for plan amendments pursuant to
changes to section 417 made by RPA '94 providing for statutory interest
rate determination date. Notwithstanding the general rule of paragraph
(d)(10)(i) of this section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not
considered to be reduced in violation of section 411(d)(6) merely
because of a plan amendment that changes any interest rate or mortality
assumption used to calculate the present value of a participant's
benefit under the plan, if the following conditions are satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate used
under the plan in determining the present value of a participant's
benefit under this paragraph (d); and
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate for the first full calendar month preceding the calendar
month that contains the annuity starting date.
(iv) Section 411(d)(6) relief for plan amendments pursuant to
changes to section 417 made by RPA '94 providing for prior determination
date or up to two months earlier. Notwithstanding the general rule of
paragraph (d)(10)(i) of this section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not
considered to be reduced in violation of section 411(d)(6) merely
because of a plan amendment that changes any interest rate or mortality
assumption used to calculate the present value of a participant's
benefit under the plan, if the following conditions are satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate used
under the plan in determining the present value of a participant's
benefit under this paragraph (d); and
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate, but only if the applicable interest rate is the annual
interest rate on 30-year Treasury securities for the calendar month that
contains the date as of which the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) was determined
immediately before the amendment, or for one of the two calendar months
immediately preceding such month.
(v) Section 411(d)(6) relief for plan amendments pursuant to changes
to section 417 made by RPA '94 providing for other interest rate
determination date. Notwithstanding the general rule of paragraph
(d)(10)(i) of this section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not
considered to be reduced in violation of section 411(d)(6) merely
because of a plan
[[Page 783]]
amendment that changes any interest rate or mortality assumption used to
calculate the present value of a participant's benefit under the plan,
if the following conditions are satisfied--
(A) The amendment replaces the PBGC interest rate (or an interest
rate or rates based on the PBGC interest rate) as the interest rate used
under the plan in determining the present value of a participant's
benefit under this paragraph (d);
(B) After the amendment is effective, the present value of a
participant's benefit under the plan cannot be less than the amount
calculated using the applicable mortality table and the applicable
interest rate; and
(C) The plan amendment satisfies either the condition of paragraph
(d)(10)(ii) of this section (determined using the interest rate provided
under the terms of the plan after the effective date of the amendment)
or the special early transition interest rate rule of paragraph
(d)(10)(vi)(C) of this section.
(vi) Special rules--(A) Provision of temporary additional benefits.
A plan amendment described in paragraph (d)(10)(iii), (iv), or (v) of
this section is not considered to reduce a participant's accrued benefit
in violation of section 411(d)(6) even if the plan amendment provides
for temporary additional benefits to accommodate a more gradual
transition from the plan's old interest rate to the new rules.
(B) Replacement of non-PBGC interest rate. The section 411(d)(6)
relief provided in paragraphs (d)(10)(iii) through (v) of this section
does not apply to a plan amendment that replaces an interest rate other
than the PBGC interest rate (or an interest rate or rates based on the
PBGC interest rate) as an interest rate used under the plan in
determining the present value of a participant's benefit under this
paragraph (d). Thus, the accrued benefit determined using that interest
rate and the associated mortality table is protected under section
411(d)(6). For purposes of this paragraph (d), an interest rate is based
on the PBGC interest rate if the interest rate is defined as a specified
percentage of the PBGC interest rate, the PBGC interest rate minus a
specified number of basis points, or an average of such interest rates
over a specified period.
(C) Special early transition interest rate rule for paragraph
(d)(10)(v). A plan amendment satisfies the special rule of this
paragraph (d)(10)(vi)(C) if any distribution for which the annuity
starting date occurs in the one-year period commencing at the time the
plan amendment is effective is determined using whichever of the
following two interest rates results in the larger distribution--
(1) The interest rate as provided under the terms of the plan after
the effective date of the amendment, but determined at a date that is
either one month or two months (as specified in the plan) before the
date for determining the interest rate used under the terms of the plan
before the amendment; or
(2) The interest rate as provided under the terms of the plan after
the effective date of the amendment, determined at the date for
determining the interest rate after the amendment.
(vii) Examples. The provisions of this paragraph (d)(10) are
illustrated by the following examples:
Example 1. On December 31, 1994, Plan A provided that all single-sum
distributions were to be calculated using the UP-1984 Mortality Table
and 100% of the PBGC interest rate for the date of distribution. On
January 4, 1995, and effective on February 1, 1995, Plan A was amended
to provide that all single-sum distributions are calculated using the
applicable mortality table and the annual interest rate on 30-year
Treasury securities for the first full calendar month preceding the
calendar month that contains the annuity starting date. Pursuant to
paragraph (d)(10)(iii) of this section, this amendment of Plan A is not
considered to reduce the accrued benefit of any participant in violation
of section 411(d)(6).
Example 2. On December 31, 1994, Plan B provided that all single-sum
distributions were to be calculated using the UP-1984 Mortality Table
and an interest rate equal to the lesser of 100% of the PBGC interest
rate for the date of distribution, or 6%. On January 4, 1995, and
effective on February 1, 1995, Plan B was amended to provide that all
single-sum distributions are calculated using the applicable mortality
table and the annual interest rate on 30-year Treasury securities for
the second full calendar month preceding the calendar month that
contains the annuity starting date. Pursuant to paragraph
[[Page 784]]
(d)(10)(iv) of this section, this amendment of Plan B is not considered
to reduce the accrued benefit of any participant in violation of section
411(d)(6) merely because of the replacement of the PBGC interest rate.
However, under paragraph (d)(10)(vi)(B) of this section, the section
411(d)(6) relief provided in paragraphs (d)(10)(iii) through (v) of this
section does not apply to a plan amendment that replaces an interest
rate other than the PBGC interest rate (or a rate based on the PBGC
interest rate). Therefore, pursuant to paragraph (d)(10)(vi)(B) of this
section, to satisfy the requirements of section 411(d)(6), the plan must
provide that the single-sum distribution payable to any participant must
be no less than the single-sum distribution calculated using the UP-1984
Mortality Table and an interest rate of 6%, based on the participant's
benefits under the plan accrued through January 31, 1995, and based on
the participant's age at the annuity starting date.
Example 3. On December 31, 1994, Plan C, a calendar year plan,
provided that all single sum distributions were to be calculated using
the UP-1984 Mortality Table and an interest rate equal to the PBGC
interest rate for January 1 of the plan year. On March 1, 1995, and
effective on July 1, 1995, Plan C was amended to provide that all
single-sum distributions are calculated using the applicable mortality
table and the annual interest rate on 30-year Treasury securities for
August of the year before the plan year that contains the annuity
starting date. The plan amendment provides that each distribution with
an annuity starting date after June 30, 1995, and before July 1, 1996,
is calculated using the 30-year Treasury rate for August of the year
before the plan year that contains the annuity starting date, or the 30-
year Treasury rate for January of the plan year that contains the
annuity starting date, whichever produces the larger benefit. Pursuant
to paragraph (d)(10)(v) of this section, the amendment of Plan C is not
considered to have reduced the accrued benefit of any participant in
violation of section 411(d)(6).
Example 4. (a) Employer X maintains Plan D, a calendar year plan. As
of December 7, 1994, Plan D provided for single-sum distributions to be
calculated using the PBGC interest rate as of the annuity starting date
for distributions not greater than $25,000, and 120% of that interest
rate (but not an interest rate producing a present value less than
$25,000) for distributions over $25,000. Employer X wishes to delay the
effective date of the RPA '94 rules for a year, and to provide for an
extended transition from the use of the PBGC interest rate to the new
applicable interest rate under section 417(e)(3). On December 1, 1995,
and effective on January 1, 1996, Employer X amends Plan D to provide
that single-sum distributions are determined as the sum of--
(i) The single-sum distribution calculated based on the applicable
mortality table and the annual interest rate on 30-year Treasury
securities for the first full calendar month preceding the calendar
month that contains the annuity starting date; and
(ii) A transition amount.
(b) The amendment provides that the transition amount for
distributions in the years 1996-99 is a transition percentage of the
excess, if any, of the amount that the single-sum distribution would
have been under the plan provisions in effect prior to this amendment
over the amount of the single sum described in paragraph (a)(i) of this
Example 4. The transition percentages are 80% for 1996, decreasing to
60% for 1997, 40% for 1998 and 20% for 1999. The amendment also provides
that the transition amount is zero for plan years beginning on or after
the year 2000. Pursuant to paragraphs (d)(10)(iii) and (vi)(A) of this
section, the amendment of Plan D is not considered to have reduced the
accrued benefit of any participant in violation of section 411(d)(6).
Example 5. On December 31, 1994, Plan E, a calendar year plan,
provided that all single-sum distributions were to be calculated using
the UP-1984 Mortality Table and an interest rate equal to the PBGC
interest rate for January 1 of the plan year. On March 1, 1995, and
effective on July 1, 1995, Plan E was amended to provide that all
single-sum distributions are calculated using the applicable mortality
table and the annual interest rate on 30-year Treasury securities for
August of the year before the plan year that contains the annuity
starting date. The plan amendment provides that each distribution with
an annuity starting date after June 30, 1995, and before July 1, 1996,
is calculated using the 30-year Treasury rate for August of the year
before the plan year that contains the annuity starting date, or the 30-
year Treasury rate for November of the plan year preceding the plan year
that contains the annuity starting date, whichever produces the larger
benefit. Pursuant to paragraphs (d)(10)(v) and (vi)(C) of this section,
the amendment of Plan E is not considered to have reduced the accrued
benefit of any participant in violation of section 411(d)(6).
(e) Special rules for annuity contracts--(1) General rule. Any
annuity contract purchased by a plan subject to section 401(a)(11) and
distributed to or owned by a participant must provide that benefits
under the contract are provided in accordance with the applicable
consent, present value, and other requirements of sections 401(a)(11)
and 417 applicable to the plan.
(2) [Reserved]
(f) Effective dates--(1) Annuity contracts. (i) Paragraph (e) of
this section
[[Page 785]]
does not apply to contracts distributed to or owned by a participant
prior to September 17, 1985, unless additional contributions are made
under the plan by the employer with respect to such contracts.
(ii) In the case of a contract owned by the employer or distributed
to or owned by a participant prior to the first plan year beginning
after December 31, 1988, paragraph (e) of this section shall be
satisfied if the annuity contracts described therein satisfy the
requirements in Secs. 1.401(a)-11T and 1.417(e)-1T. The preceding
sentence shall not apply if additional contributions are made under the
plan by the employer with respect to such contracts on or after the
beginning of the first plan year beginning after December 31, 1988.
(2) Interest rates. (i) A plan that uses the PBGC immediate interest
rate as required by Sec. 1.417(e)-1T(e) for distributions commencing in
plan years beginning before January 1, 1987, shall be deemed to satisfy
paragraph (d) of this section for such years.
(ii) For a special exception to the requirements of section
411(d)(6) for certain plan amendments that incorporate applicable
interest rates, see section 1139(d)(2) of the Tax Reform Act of 1986.
(3) Other effective dates and transitional rules. (i) Except as
otherwise provided, a plan will be treated as satisfying sections
401(a)(11) and 417 for plan years beginning before the first plan year
that the requirements of section 410(b) as amended by TRA 86 apply to
such plan, if the plan satisfied the requirements in Secs. 1.401(a)-11T
and 1.417(e)-1T.
(ii) See Sec. 1.401(a)-20 for other effective dates and transitional
rules that apply to plans subject to sections 401(a)(11) and 417.
[T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as
amended by T.D. 8591, 60 FR 17219, Apr. 5, 1995; T.D. 8620, 60 FR 49221,
Sept. 22, 1995; T.D. 8768, 63 FR 16898, Apr. 7, 1998; T.D. 8796, 63 FR
70011, Dec. 18, 1998; T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891,
65 FR 44681, 44682, July 19, 2000]
Sec. 1.417(e)-1T Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417. (Temporary)
(a) [Reserved]
(b) Consent, etc. requirements--(1) General rule. [Reserved]
(2) Consent. [Reserved]
(c) [Reserved]
(d) For rules regarding the present value of a participant's accrued
benefit and related matters, see Sec. 1.417(e)-1(d).
[T.D. 8591, 60 FR 17219, Apr. 5, 1995, as amended by T.D. 8620, 60 FR
49221, Sept. 22, 1995; T.D. 8768, 63 FR 16902, Apr. 7, 1998; T.D. 8796,
63 FR 70012, Dec. 18, 1998]
Sec. 1.419-1T Treatment of welfare benefit funds. (Temporary)
Q-1: What does section 419 of the Internal Revenue Code provide?
A-1: Section 419 prescribes limitations upon deductions for
contributions paid or accrued with respect to a welfare benefit fund.
Under section 419 (a) and (b), an employer's contributions to a welfare
benefit fund are not deductible under section 162 (relating to trade or
business expenses) or section 212 (relating to expenses for production
of income) but, if the requirements of section 162 or 212 are otherwise
met, are deductible under section 419 for the taxable year of the
employer in which paid to the extent of the welfare benefit fund's
qualified cost (within the meaning of section 419(c)(1)) for the taxable
year of the fund that relates to such taxable year of the employer.
Under section 419(g), section 419 and this section shall also apply to
the deduction by a taxpayer of contributions with respect to a fund that
would be a welfare benefit fund but for the fact that there is no
employer-employee relationship between the person providing the services
and the person for whom the services are provided. Contributions paid to
a welfare benefit fund after section 419 becomes effective with respect
to such contributions are deemed to relate, first, to amounts accrued
and deducted (but not paid) by the employer with respect to such fund
before section 419 becomes effective with respect to such contributions
and thus shall not be treated as satisfying the payment requirement of
section 419. See paragraph (b) of Q&A-5 for special deduction limits
applicable to employer contributions to welfare benefit funds with
excess reserves.
[[Page 786]]
Q-2: When do the deduction rules of section 419, as enacted by the
Tax Reform Act of 1984, become effective?
A-2: (a) Section 419 generally applies to contributions paid or
accrued with respect to a welfare benefit fund after December 31, 1985,
in taxable years of employers ending after that date. See Q&A-9 of this
regulation for special rules relating to the deduction limit for the
first taxable year of a fiscal year employer ending after December 31,
1985.
(b) In the case of a welfare benefit fund which is part of a plan
maintained pursuant to one or more collective bargaining agreements (1)
between employee representatives and one or more employers, and (2) that
are in effect on July 1, 1985 (or ratified on or before such date),
sections 419 shall not apply to contributions paid or accrued in taxable
years beginning before the termination of the last of the collective
bargaining agreements pursuant to which the plan is maintained
(determined without regard to any extension thereof agreed to after July
1, 1985). For purposes of the preceding sentence, any plan amendment
made pursuant to a collective bargaining agreement relating to the plan
which amends the plan solely to conform to any requirement added under
section 511 of the Tax Reform Act of 1984 (i.e., requirements under
sections 419, 419A, 512(a)(3)(E), and 4976) shall not be treated as a
termination of such collective bargaining agreement. See Sec. 1.419A-2T
for special rules relating to the application of section 419 to
collectively bargained welfare benefit funds.
(c) Notwithstanding paragraphs (a) and (b), section 419 applies to
any contribution of a facility to a welfare benefit fund (or other
contribution, such as cash, which is used to acquire, construct, or
improve such a facility) after June 22, 1984, unless such facility is
placed in service by the fund before January 1, 1987, and either (1) is
acquired or improved by the fund (or contributed to the fund) pursuant
to a binding contract in effect on June 22, 1984, and at all times
thereafter, or (2) the construction of which was begun by or for the
welfare benefit fund before June 22, 1984. See Q&A-11 of this regulation
for special rules relating to the application of section 419 to the
contribution of a facility to a welfare benefit fund (and to the
contribution of other amounts, such as cash, used to acquire, construct,
or improve such a facility) before section 419 generally becomes
effective with respect to contributions to the fund.
Q-3. What is a ``welfare benefit fund'' under section 419?
A-3. (a) A ``welfare benefit fund'' is any fund which is part of a
plan, or method or arrangement, of an employer and through which the
employer provides welfare benefits to employees or their beneficiaries.
For purposes of this section, the term ``welfare benefit'' includes any
benefit other than a benefit with respect to which the employer's
deduction is governed by section 83(h), section 404 (determined without
regard to section 404(b)(2)), section 404A, or section 463.
(b) Under section 419(e)(3) (A) and (B), the term ``fund'' includes
any organization described in section 501(c) (7), (9), (17) or (20), and
any trust, corporation, or other organization not exempt from tax
imposed by chapter 1, subtitle A, of the Internal Revenue Code. Thus, a
taxable trust or taxable corporation that is maintained for the purpose
of providing welfare benefits to an employer's employees is a ``welfare
benefit fund.''
(c) Section 419(e)(3)(C) also provides that the term ``fund''
includes, to the extent provided in regulations, any account held for an
employer by any person. Pending the issuance of further guidance, only
the following accounts, and arrangements that effectively constitute
accounts, as described below, are ``funds'' within section 419(e)(3)(C).
A retired lives reserve or a premium stabilization reserve
maintained by an insurance company is a ``fund,'' or part of a ``fund,''
if it is maintained for a particular employer and the employer has the
right to have any amount in the reserve applied against its future
years' benefit costs or insurance premiums. Also, if an employer makes a
payment to an insurance company under an ``administrative services
only'' arrangement with respect to which the life insurance company
maintains a separate account to provide benefits, then the arrangement
[[Page 787]]
would be considered to be a ``fund.'' Finally, an insurance or premium
arrangement between an employer and an insurance company is a ``fund''
if, under the arrangement, the employer has a right to a refund, credit,
or additional benefits (including upon termination of the arrangement)
based on the benefit or claims experience, administrative cost
experience, or investment experience attributable to such employer.
However, an arrangement with an insurance company is not a ``fund''
under the previous sentence merely because the employer's premium for a
renewal year reflects the employer's own experience for an earlier year
if the arrangement is both cancellable by the insurance company and
cancellable by the employer as of the end of any policy year and, upon
cancellation by either of the parties, neither of the parties can
receive a refund or additional amounts or benefits and neither of the
parties can incur a residual liability beyond the end of the policy year
(other than, in the case of the insurer, to provide benefits with
respect to claims incurred before cancellation). The determination
whether either of the parties can receive a refund or additional amounts
or benefits or can incur a residual liability upon cancellation of an
arrangement will be made by examining both the contractual rights and
obligations of the parties under the arrangement and the actual practice
of the insurance company (and other insurance companies) with respect to
other employers upon cancellation of similar arrangements. Similarly, a
disability income policy does not constitute a ``fund'' under the
preceding provisions merely because, under the policy, an employer pays
an annual premium so that employees who became disabled in such year may
receive benefit payments for the duration of the disability.
Q-4: For purposes of determining the section 419 limit on the
employer's deduction for contributions to the fund for a taxable year of
the employer, which taxable year of the welfare benefit fund is related
to the taxable year of the employer?
A-4: The amount of an employer's deduction for contributions to a
welfare benefit fund for a taxable year of the employer is limited to
the ``qualified cost'' of the welfare benefit fund for the taxable year
of the fund that is related to such taxable year of the employer. The
taxable year of the welfare benefit fund that ends with or within the
taxable year of the employer is the taxable year of the fund that is
related to the taxable year of the employer. Thus, for example, if an
employer has a calendar taxable year and it makes contributions to a
fund having a taxable year ending June 30, the ``qualified cost'' of the
fund for the taxable year of the fund ending on June 30, 1986, applies
to limit the employer's deduction for contributions to the fund in the
employer's 1986 taxable year. In the case of employer contributions paid
directly to an account or arrangement with an insurance company that is
treated as a welfare benefit fund for the purposes of section 419, the
policy year will be treated as the taxable year of the fund. See Q&A-7
of this regulation for special section 419 rules relating to the
coordination of taxable years for the taxable year of the employer in
which a welfare benefit fund is established and for the next following
taxable year of the employer.
Q-5: What is the ``qualified cost'' of a welfare benefit fund for a
taxable year under section 419?
A-5: (a) Under section 419(c), the ``qualified cost'' of a welfare
benefit fund for a taxable year of the fund is the sum of: (1) The
``qualified direct cost'' of such fund for such taxable year of the
fund, and (2) the amount that may be added to the qualified asset
account for such taxable year of the fund to the extent that such
addition does not result in a total amount of such account as of the end
of such taxable year of the fund that exceeds the applicable account
limit under section 419A(c). However, in calculating the qualified cost
of a welfare benefit fund for a taxable year of the fund, this sum is
reduced by the fund's ``after-tax income'' (as defined in section
419(c)(4)) for such taxable year of the fund. Also, the qualified cost
of a welfare benefit fund is reduced further under the provisions of
paragraph (b) of this Q&A.
(b)(1) Pursuant to section 419A(i), notwithstanding section 419 and
Sec. 1.419-1T, contributions to a welfare benefit
[[Page 788]]
fund during any taxable year of the employer beginning after December
31, 1985, shall not be deductible for such taxable year to the extent
that such contributions result in the total amount in the fund as of the
end of the last taxable year of the fund ending with or within such
taxable year of the employer exceeding the account limit applicable to
such taxable year of the fund (as adjusted under section 419A(f)(7)).
Solely for purposes of this subparagraph, (i) contributions paid to a
welfare benefit fund during the taxable year of the employer but after
the end of the last taxable year of the fund that relates to such
taxable year of the employer, and (ii) contributions accrued with
respect to a welfare benefit fund during the taxable year of the
employer or during any prior taxable year of the employer (but not
actually paid to such fund on or before the end of a taxable year of the
employer) and deducted by the employer for such or any prior taxable
year of the employer, shall be treated as an amount in the fund as of
the end of the last taxable year of the fund that relates to the taxable
year of the employer. Contributions that are not deductible under this
subparagraph are in excess of the qualified cost of the welfare benefit
fund for the taxable year of the fund that relates to the taxable year
of the employer and thus are treated as contributed to the fund on the
first day of the employer's next taxable year.
(2) Paragraph (b)(1) of this section shall not apply to
contributions with respect to a collectively bargained welfare benefit
fund within the meaning of Sec. 1.419A-2T. In addition, paragraph (b)(1)
of this section shall not apply to any taxable year of an employer
beginning after the end of the earlier of the following taxable years:
(i) the first taxable year of the employer beginning after December 31,
1985, for which the employer's deduction limit under section 419 (after
the application of paragraph (b)(1) of this section) is at least equal
to the qualified direct cost of the fund for the taxable year (or years)
of the fund that relates to such first taxable year of the employer, or
(ii) the first taxable year of the employer beginning after December 31,
1985, with or within which ends the first taxable year of the fund with
respect to which the total amount in the fund as of the end of such
taxable year of the fund does not exceed the account limit for such
taxable year of the fund (as adjusted under section 419A(f)(7)).
(3) For example, assume an employer with a taxable year ending June
30 and a welfare benefit fund with a taxable year ending January 31.
During its taxable year ending June 30, 1987, and on or before January
31, 1987, the employer contributes $250,000 to the fund, and during the
remaining portion of its taxable year ending June 30, 1987, the employer
contributes $200,000. The qualified direct cost of the fund for its
taxable year ending January 31, 1987, is $500,000, the account limit
applicable to such taxable year (after the adjustment under section
419A(f)(7)) is $750,000, and the total amount in the fund as of January
31, 1987, is $800,000. Before the application of this paragraph, the
employer may deduct the entire $450,000 contribution for its taxable
year ending June 30, 1987. However, under this paragraph, the excess of
(i) the sum of the total amount in the fund as of January 31, 1987
($800,000), and employer contributions to the fund after January 31,
1987, and on or before June 30, 1987 ($200,000), over (ii) the account
limit applicable to the fund for its taxable year ending January 31,
1987 ($750,000), is $250,000. Thus, under this paragraph, only $200,000
of the $450,000 contribution the employer made during its taxable year
ending June 30, 1987, is deductible for such taxable year. If the excess
were $450,000 or greater, no portion of the $450,000 contribution would
be deductible by the employer for its taxable year ending June 30, 1987.
Such nondeductible contributions are in excess of the fund's qualified
cost for the taxable year related to the employer's taxable year and
thus are deemed to be contributed on the first day of the employer's
next taxable year.
(c) See Q&A-7 of this regulation for special rules relating to the
calculation of the qualified cost of a welfare benefit fund for an
Initial Fund Year and an Overlap Fund Year (as defined
[[Page 789]]
in Q&A-7). See Q&A-11 of this regulation for special rules relating to
the application of section 419 to the contribution to a welfare benefit
fund of a facility (and to the contribution of other amounts, such as
cash, used to acquire, construct, or improve a facility) before section
419 generally becomes effective with respect to contributions to the
fund. See Sec. 1.419A-2T for special rules relating to certain
collectively bargained welfare benefit funds.
Q-6: What is the ``qualified direct cost'' of a welfare benefit fund
under section 419(c)(3)?
A-6: (a) Under section 419(c)(3), the ``qualified direct cost'' of a
welfare benefit fund for any taxable year of the fund is the aggregate
amount which would have been allowable as a deduction to the employer
for benefits provided by such fund during such year (including insurance
coverage for such year) if (1) such benefits were provided directly by
the employer and (2) the employer used the cash receipts and
disbursements method of accounting and had the same taxable year as the
fund. In this regard, a benefit is treated as provided when such benefit
would be includible in the gross income of the employee if provided
directly by the employer (or would be so includible but for a provision
of chapter 1, subtitle A, of the Internal Revenue Code excluding it from
gross income). Thus, for example, if a calendar year welfare benefit
fund pays an insurance company in July 1986 the full premium for
coverage of its current employees under a term health insurance policy
for the twelve month period ending June 30, 1987, the insurance coverage
will be treated as provided by the fund over such twelve month period.
Accordingly, only the portion of the premium for coverage during 1986
will be treated as a ``qualified direct cost'' of the fund for 1986; the
remaining portion of the premium will be treated as a ``qualified direct
cost'' of the fund for 1987. The ``qualified direct cost'' for a taxable
year of the fund includes the administrative expenses incurred by the
welfare benefit fund in delivering the benefits for such year.
(b) If, in a taxable year of a welfare benefit fund, the fund holds
an asset with a useful life extending substantially beyond the end of
the taxable year (e.g., buildings, vehicles, tangible assets, and
licenses) and, for such taxable year of the fund, the asset is used in
the provision of welfare benefits to employees, the ``qualified direct
cost'' of the fund for such taxable year of the fund includes the amount
that would have been allowable to the employer as a deduction under the
applicable Code provisions (e.g., sections 168 and 179) with respect to
the portion of the asset used in the provision of welfare benefits for
such year if the employer had acquired and placed in service the asset
at the same time the fund received and placed in service the asset, and
the employer had the same taxable year as the fund. This rule applies
regardless of whether the fund received the asset through a contribution
of the asset by the employer or through an acquisition or the
construction by the fund of the asset. For example, assume that in 1986
a calendar year employer contributes recovery property under section
168(c) to a welfare benefit fund with a calendar taxable year to be used
in the provision of welfare benefits. The employer will be treated as
having sold the property in such year and thus will recognize gain to
the extent that the fair market value of the property exceeds the
employer's adjusted basis in the property. In this regard, see section
1239(d). Also, the employer will be treated as having made a
contribution to the fund in such year equal to the fair market value of
the property. Finally, the qualified direct cost of the welfare benefit
fund for 1986 will include the amount that the employer could have
deducted in 1986 with respect to the portion of the property used in the
provision of welfare benefits if the employer had acquired the property
in 1986 and had placed the property in service when the fund actually
placed the property in service. Similarly, for example, assume that in
1986 a welfare bendfit fund purchases and places in service a facility
to be used in the provision of welfare benefits. The qualified direct
cost of the fund for 1986 will include the amount that the employer
could have deducted with respect to such facility if the employer had
purchased and placed in service the facility at the same time
[[Page 790]]
that the fund purchased and placed in service the facility.
(c) The qualified direct cost of a welfare benefit fund does not
include expenditures by the fund that would not have been deductible if
they had been made directly by the employer. For example, a fund's
purchase of land in a year for an employee recreational facility will
not be treated as a qualified direct cost because, if made directly by
the employer, the purchase would not have been deductible under section
263. See also sections 264 and 274.
(d) Notwithstanding the preceding paragraphs, the qualified direct
cost of a welfare benefit fund with respect to that portion of a child
care facility used in the provision of welfare benefits for a year will
include the amount that would have been allowable to the employer as a
deduction for the year under a straight-line depreciation schedule for a
period of 60 months beginning with the month in which the facility is
placed in service under rules similar to those provided for section 188
property under Sec. 1.188-1(a). For purposes of this section, a ``child
care facility'' is tangible property of a character subject to
depreciation that is located in the United States and specifically used
as an integral part of a ``qualified child care center facility'' within
the meaning of Sec. 1.188-1(d)(4).
(e) See Q&A-7 of this regulation for special section 419 rules
relating to the calculation of the qualified direct cost of a welfare
benefit fund for an Initial Fund Year and an Overlap Fund Year (as
defined in Q&A-7). See Q&A-11 of this regulation for special rules
relating to the contribution to a welfare benefit fund of a facility
(and to the contribution of other amounts, such as cash, used to
acquire, construct, or improve a facility) before section 419 generally
becomes effective with respect to contributions to the fund.
Q-7: What special rules apply for purposes of determining the
section 419 limit on the employer's deduction for contributions to a
welfare benefit fund for the taxable year of the employer in which the
fund is established and for the next following taxable year of the
employer?
A-7: (a) If the taxable year of a welfare benefit fund is the same
as the taxable year of the employer, there are no special rules that
apply for purposes of determining the section 419 limit on an employer's
deduction for contributions to the fund for either the taxable year of
the employer in which the fund is established or the next following
taxable year of the employer. However, if the taxable year of a welfare
benefit fund is different from the taxable year of the employer, the
general section 419 rules are modified by the special rules set forth
below for purposes of determining the section 419 deduction limit for
the taxable year of the employer in which a fund is established and for
the next following taxable year of the employer.
(b) If a welfare benefit fund is established after December 31,
1985, during a taxable year of an employer and either (i) the first
taxable year of the fund ends after the close of such taxable year of
the employer, or (ii) the first taxable year of the fund is six months
or less and ends before the close of such taxable year of the employer
and the second taxable year of the fund begins before and ends after the
close of such taxable year of the employer, the taxable year of the fund
that contains the closing day of such taxable year of the employer will
be treated as an ``Overlap Fund Year.'' For purposes of determining the
limit on the employer's deduction for contributions to a welfare benefit
fund for the taxable year of the employer in which the fund was
established, the period between the beginning of the fund's Overlap Fund
Year and the end of the employer's taxable year in which the Overlap
Fund Year began will be treated as a taxable year of the fund (``Initial
Fund Year'').
(c) The qualified cost of a welfare benefit fund for its Initial
Fund Year will be equal to the qualified direct cost of the fund for
such Initial Fund Year. The qualified cost of a fund for its Overlap
Fund Year will be determined under the general rules of Q&A-5 of this
regulation and section 419(c), with the exception that such qualfied
cost will be reduced by the employer contributions made during the
Initial Fund Year and deductible by the employer for the taxable year of
the employer in which the Overlap Fund Year of the fund begins.
[[Page 791]]
(d) Assume that an employer with a calendar taxable year establishes
on July 1, 1986, a welfare benefit fund with a taxable year ending on
June 30. The fund's first taxable year from July 1, 1986, to June 30,
1987, is an Overlap Fund Year. The employer contributes $1,000 to the
fund during its taxable year ending December 31, 1986 (i.e., during the
period between July 1, 1986, and December 31, 1986, which is also the
Initial Fund Year) and another $1,500 to the fund during its taxable
year ending December 31, 1987. Assume further that the qualified direct
cost of the fund for the Initial Fund Year is $900 and that the
qualified cost for the Overlap Fund Year is $2,500 (prior to the
reduction required by paragraph (c) of this Q&A). Under the special
rules of paragraphs (b) and (c), the employer may deduct $900 for its
taxable year ending on December 31, 1986, and $1,600 for its taxable
year ending on December 31, 1987. If the qualified direct cost of the
fund for the Initial Fund Year had been $1,050 and the qualified cost
for the Overlap Fund Year had been $2,500 (prior to the reduction
required by paragraph (c) of this Q&A), the employer's deduction for its
taxable year ending December 31, 1986, would have been $1,000 and its
deduction for its taxable year ending December 31, 1987, would have been
$1,500.
(e) Assume that an employer with a calendar taxable year establishes
on March 1, 1986, a welfare benefit fund with a taxable year ending June
30. Thus, the fund has a short first taxable year ending June 30, 1986,
an Overlap Fund Year from July 1, 1986, until June 30, 1987, and an
ongoing June 30 taxable year. The employer contributes $1,750 to the
fund during the employer's taxable year ending December 31, 1986--$750
during the short first taxable year of the fund and $1,000 during the
Initial Fund Year (i.e., the period between July 1, 1986, and December
31, 1986)--and $1,500 to the fund during its taxable year ending
December 31, 1987. Assume that the qualified cost of the fund for the
short first taxable year of the fund is $800, the qualified direct cost
for the Initial Fund Year is $900, and the qualified cost for the
Overlap Fund Year is $2,500 (prior to the reduction required by
paragraph (c) of this Q&A). Under the special rules of paragraphs (b)
and (c), the employer may deduct $1,700 for its taxable year ending
December 31, 1986, and $1,550 for its taxable year ending December 31,
1987.
Q-8: How does section 419 treat an employer's contribution with
respect to a welfare benefit fund in excess of the applicable deduction
limit for a taxable year of the employer?
A-8: (a) If an employer makes contributions to a welfare benefit
fund in a taxable year of the employer and such contributions (when
combined with prior contributions that are deemed under the rule of this
Q&A and section 419(d) to have been made in such taxable year) exceed
the section 419 deduction limit for such taxable year of the employer,
the excess amounts are deemed to be contributed to the fund on the first
day of the next taxable year of the employer. Such deemed contributions
are combined with amounts actually contributed by the employer to the
fund during the next taxable year and may be deductible for such year,
subject to the otherwise applicable section 419 deduction limit for such
year.
(b) Contributions to a welfare benefit fund on or before December
31, 1985, that were not deductible by the employer for any taxable year
of the employer ending on or before December 31, 1985, or for the first
taxable year of the employer ending after December 31, 1985, as pre-1986
contributions (see Q&A-9 of this regulation) are deemed to be
contributed to the fund on January 1, 1986, However, see Q&A-11 of this
regulation for special rules relating to the contribution to a welfare
benefit fund of amounts (such as cash) used to acquire, construct, or
improve a facility before section 419 generally becomes effective with
respect to contributions to the fund. Generally, such contributions (to
the extent that they were made after June 22, 1984 and on or before
December 31, 1985) are treated as nondeductible pre-1986 contributions
and are deemed to be contributed in the form of a facility at the same
time as when the facility is placed in service by the fund.
Q-9: How does an employer with a fiscal taxable year calculate its
deduction limit for contributions with respect to
[[Page 792]]
a welfare benefit fund for the first taxable year of the employer ending
after December 31, 1985?
A-9: (a) If the first taxable year of an employer ending after
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of
this section, the first taxable year of an employer beginning after
termination of the last of the collective bargaining agreements pursuant
to which the fund is maintained) is a fiscal year, the employer's
deduction for such taxable year for contributions to a welfare benefit
fund that is not a collectively bargained welfare benefit fund under
Sec. 1.419A-2T is limited to the greater of the following two amounts:
(1) The contributions paid to the fund during such first taxable year up
to the qualified cost of the welfare benefit fund for the taxable year
of the fund that relates to such taxable year of the employer, and (2)
the contributions paid to the fund during the 1985 portion of such first
taxable year of the employer (``the pre-1986 contributions'') to the
extent that such pre-1986 contributions are deductible under the rules
governing the deduction of such contributions before section 419
generally becomes effective (including the rules set forth in Q&A-10 of
this regulation, modified for purposes of this Q&A-9 by substituting
``December 31, 1986'' for ``December 31, 1985'' in paragraph (c)). See
Q&A-11 of this regulation for special rules relating to the contribution
to a welfare benefit fund of a facility (and to the contribution of
other amounts, such as cash, used to acquire, construct, or improve such
a facility) before section 419 generally becomes effective with respect
to contributions to such fund.
(b) For example, assume that an employer with a taxable year ending
June 30, contributes to a welfare benefit fund with a taxable year
ending January 31. This employer contributes $1,000 to the fund between
July 1, 1985, and December 31, 1985, and an additional $500 to the fund
between January 1, 1986, and June 30, 1986. Assume further that the
qualified direct cost of the fund for the taxable year of the fund
ending January 31, 1986, is $500 and that the qualified cost for such
taxable year is $800. Under the deduction rule set forth above, the
employer's deduction for its taxable year ending June 30, 1986, is the
greater of two amounts: (1) The contributions made during such full
taxable year ($1,500) up to the qualifed cost of the fund with respect
to such taxable year ($800), and (2) the pre-1986 contributions ($1,000)
to the extent that such pre-1986 contributions are deductible under the
pre-section 419 rules. In determining the extent to which the pre-1986
contributions are deductible under the pre-section 419 rules, the rules
contained in Q&A-10 apply as though December 31, 1985, in paragraph (c)
were December 31, 1986. Assuming that only $875 is deductible under the
pre-section 419 rules, because $875 is greater than $800, this employer
may deduct $875 for its first taxable year ending after December 31,
1985. This full $875 deduction for 1985 is deemed to consist entirely of
pre-1986 contributions.
Q-10: How do the rules of sections 263, 446(b), 461(a), and 461(h)
apply in determining whether contributions with respect to a welfare
benefit fund are deductible for a taxable year?
A-10: (a) Both before and after the effective date of section 419
(see Q&A-2 of this regulation), an employer is allowed a deduction for
taxable year for contributions paid or accrued with respect to a
``welfare benefit fund'' (as defined in Q&A-3 of this regulation and
section 419(e)) only to the extent that such contributions satisfy the
requirements of section 162 or 212. These requirements must be satisfied
after the effective date of section 419 because 419 requires that (among
other requirements) contributions to a welfare benefit fund satisfy the
requirements of section 162 or 212.
(b) Except as provided in paragraphs (c) and (d), in determinig the
extent to which contributions paid or accrued with respect to welfare
benefit fund satisfy the requirements of section 162 or 212 for a
taxable year (both before and after section 419 generally becomes
effective with respect to such contributions), the rules of sections
263, 446(b), 461(a) (including the rules that relate to the creation of
an asset with a useful life extending substantially beyond the close of
the taxable year), and 461(h) (to the extent that such section
[[Page 793]]
is effective with respect to such contributions) are are generally
applicable.
(c) Notwithstanding paragraph (b), under the authority of section
7805(b), the rules of sections 263, 446(b), and 461(a) shall not be
applied in determining the extent to which an employer's contribution
with respect to a welfare benefit fund is deductible under section 162
or 212 with respect to any taxable year of the employer ending on or
before December 31, 1985, to the extent that, for such taxable year, (1)
the contribution was made pursuant to a bona fide collective bargaining
agreement requiring fixed and determinable contributions to a
collectively bargained welfare benefit fund (as defined in Sec. 1.419A-
2T), or (2) the contribution was not in excess of the amount deductible
under the principles of Revenue Rulings 69-382, 1969-2 C.B. 28; 69-478,
1969-2 C.B. 29; and 73-599, 1973-2 C.B. 40, modified as appropriate for
benefits for active employees.
(d) Notwithstanding paragraph (b), in determining the extent to
which contributions paid or accrued with respect to a welfare benefit
fund are deductible under section 419, the rules of sections 263,
446(b), and 461(a) will be treated as having been satisfied to the
extent that such contributions satisfy the otherwise applicable rules of
section 419. Thus, for example, contributions to a welfare benefit fund
will not fail to be deductible under section 419 merely because they
create an asset with a useful life extending substantially beyoud the
close of the taxable year if such contributions satisfy the otherwise
applicable requirements of section 419.
(e) In determining the extent to which contributions with respect to
a welfare benefit fund satisfy the requirements of section 461(h) for
any taxable year for which section 461(h) is effective, pursuant to the
authority under section 461(h)(2), economic performance occurs as
contributions to the welfare benefit fund are made. Solely for purposes
of section 461(h), in the case of an employer's taxable year ending on
or after July 18, 1984, and on or before March 21, 1986, contributions
made to the welfare benefit fund after the end of such taxable year and
on or before March 21, 1986 shall be deemed to have been made on the
last day of such taxable year.
Q-11: What special section 419 rules apply to the payment or accrual
with respect to a welfare benefit fund of a facility (and the payment or
accrual of other amounts, such as cash, used to acquire, construct, or
improve such a facility)?
A-11: (a)(1) In the case of an employer's payment or accrual with
respect to a welfare benefit fund after June 22, 1984, and on or before
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of
this regulation, before section 419 generally becomes effective with
respect to contributions to such fund), of a facility, the rules of
section 419, Sec. 1.419-1T, and Sec. 1.419A-2T generally apply to
determine the extent to which such contribution is deductible by the
employer for its taxable year of contribution. For this purpose,
however, the facility is to be treated as the only contribution made to
the fund and the qualified cost of the fund for the taxable year of the
fund in which the facility was contributed is to be equal to the
qualified direct cost directly attributable to the facility (as
determined under Q&A-6 of this regulation). Also, for this purpose, the
welfare benefit fund to which the facility was contributed may not be
aggregated with any other fund. For purposes of this Q&A, ``facility''
means any tangible asset with a useful life extending substantially
beyond the end of the taxable year (e.g., vehicles, buildings) and any
intangible asset (e.g., licenses) related to a tangible asset, whether
or not such asset is used in the provision of welfare benefits. See,
however, paragraph (c) of Q&A-2 of this regulation for a binding
contract exception.
(2) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and that, during 1985, the employer
contributes to the fund $200,000 in cash and a facility with a fair
market value of $100,000. Such facility is used in the provision of
welfare benefits under the fund. The employer is treated as having sold
the facility in such year and thus will recognize gain to the extent
that the fair market value of the facility exceeds the employer's
adjusted basis in the facility. In this regard, see section
[[Page 794]]
1239(d). The extent to which the facility contribution is deductible by
the employer for its 1985 taxable year is determined as though it were
the only contribution made by the employer to the fund during such year
and the qualified cost of the fund for the taxable year of the fund in
which the contribution was made (i.e., the 1985 taxable year) were equal
to the amount that would have been allowable to the employer as a
deduction for such year under the applicable Code provisions with
respect to the portion of the facility used in the provision of welfare
benefits for such year if the employer had placed in service the
facility at the time the fund placed in service the facility and if the
employer had the same taxable year as the fund. If, under these
assumptions, the employer would have been allowed a $10,000 deduction
with respect to the facility for the 1985 taxable year, the fund's
qualified cost for its 1985 taxable year would be only $10,000. Thus,
only $10,000 of the $100,000 facility contribution would be deductible
by the employer for its 1985 taxable year (i.e., the taxable year of the
employer with or within which the applicable taxable year of the fund
ends). However, in determining the extent to which the $200,000 in cash
is deductible by the employer for its 1985 taxable year, the $100,000
facility is not to be disregarded. Thus, if under the applicable pre-
section 419 rules the employer is allowed for 1985 a total deduction of
only $175,000, the employer would be permitted a deduction for 1985 of
$175,000 ($10,000 with respect to the facility and $165,000 of the cash
contribution). The nondeductible portion of the cash contribution is to
be treated as contributed to the fund on the first day of the next
taxable year of the employer. If under the applicable pre-section 419
rules the employer were allowed a total deduction of $300,000 for 1985,
the employer would be permitted a deduction for 1985 of only $210,000
($10,000 with respect to the facility and the full $200,000 cash
contribution).
(3) For example, assume that an employer has a June 30 taxable year
and maintains a welfare benefit fund with a taxable year ending January
31. During the 1985 portion of its taxable year ending June 30, 1986,
the employer contributes $50,000 in cash and a facility with a fair
market value of $100,000; and during the 1986 portion of such taxable
year, the employer contributes another $75,000 in cash to the fund. The
facility is used in the provision of welfare benefits under the fund.
Under the rules of Q&A-9 of this regulation, the employer's deduction
for its June 30, 1986, taxable year is limited to the greater of the
following two amounts: (i) The contributions paid to the fund during
such taxable year ($225,000) up to the qualified cost of the fund for
the taxable year of the fund ending January 31, 1986, and (ii) the
contributions paid to the fund during the 1985 portion of the employer's
taxable year ending June 30, 1986 (``the pre-1986 contributions'')
($150,000) to the extent that such pre-1986 contributions are deductible
under the rules governing the deduction of such contributions before
section 419 is generally effective with respect to the fund. For
purposes of this rule, the contribution of the facility on or before
December 31, 1985, is to be treated as a pre-1986 contribution and the
rules of section 419 and this Q&A are to be treated as rules governing
the deduction of such contribution before section 419 generally becomes
effective with respect to the fund. Thus, in determining the extent to
which the facility is deductible as a pre-1986 contribution under the
rules before section 419 generally becomes effective, the facility is
treated as the only contribution to the welfare benefit fund and the
qualified cost of such fund for the taxable year of the fund in which
the facility was contributed is the amount that would have been
allowable to the employer as a deduction with respect to the portion of
the facility used in the provision of welfare benefits if the employer
had placed in service the facility at the same time that the fund placed
in service the facility and the employer's taxable year ended on January
31, 1986.
(b)(1) The preceding rules shall also apply for purposes of
determining when and the extent to which an employer may deduct
contributions or other items and amounts after June 22, 1984 and on or
before December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2
of this regulation, before section 419 generally becomes effective
[[Page 795]]
with respect to contributions to the fund) that are not facilities
(e.g., cash contributions) to a welfare benefit fund that are used by
the fund to acquire, construct, or improve a facility. The most recent
non-facility contributions made to a welfare benefit fund before the
facility in question is placed in service by the fund (up to the fair
market value of the facility at such time) are to be treated as used by
the fund for the acquisition, construction, or improvement (as the case
may be) of such facility. To the extent that contributions before such a
facility is placed in service are not at least equal to the value of the
facility at such time, contributions after such date (up to the value of
the facility at the time it is placed in service) are treated as used
for acquisition, construction, or improvement of the facility. Such non-
facility contributions, to the extent that they were made after June 22,
1984, and on or before December 31, 1985 (or, if applicable under
paragraph (b) of Q&A-2 of this regulation, before section 419 generally
becomes effective with respect to contributions to the fund), are not
deductible by the employer as non-facility contributions for any year.
Instead, the employer is permitted a deduction with respect to such
contributions only under the rules of this Q&A as though the employer
had contributed a facility to the fund at the same time that the fund
placed in service the facility in question and, at such time, the
facility had a fair market value equal to the total of such non-facility
contributions.
(2) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and during 1985 the fund acquired and
placed in service a facility with a fair market value of $100,000 to be
used in the provision of welfare benefits. Further, during July 1984 the
employer contributed $150,000 in cash to the fund and, during the
portion of 1985, before the facility was placed in service by the fund,
the employer contributed another $75,000 in cash to the fund; during the
remaining portion of 1985, the employer contributed $125,000 in cash.
The facility is used in the provision of welfare benefits under the
fund. Because $25,000 of the employer's 1984 contribution is treated
under this rule as used for the acquisition of a facility, such $25,000
is not deductible by the employer for 1984. For purposes of determining
the employer's deduction for 1985, the employer will be treated as
having contributed $125,000 in cash and a facility with a fair market
value of $100,000. The employer's deduction for its 1985 taxable year
will be determined under the rules relating to the contribution of a
facility after June 22, 1984, and on or before December 31, 1985.
(3) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and during 1986 the fund placed in
service a facility with a fair market value of $100,000 to be used in
the provision of welfare benefits. During 1985, the employer contributed
$125,000 in cash to the fund. During the portion of 1986 before the
facility was placed in service, the employer contributed $60,000 in
cash, and during the remaining portion of 1986, the employer contributed
another $75,000 in cash. The facility is used in the provision of
welfare benefits under the fund. Because $40,000 of its 1985 cash
contribution is treated under this rule as used for the acquisition of
the facility, such $40,000 is not deductible by the employer for 1985.
For purposes of determining the employer's deduction for 1986, the
employer will be treated as though it had contributed a $40,000 facility
to the fund at the time the fund placed the facility in service.
(c) For purposes of calculating the ``existing excess reserve
amount'' under Q&A-1 of Sec. 1.419A-1T and the ``existing reserves for
post-retirement medical or life insurance benefits'' under Q&A-4 of
Sec. 1.512(a)-5T (but not the exempt function income under Q&A-3 of
Sec. 1.512(a)-5T), the amount set aside as of any applicable date is to
be reduced to the extent that contributions originally included in such
amount are subsequently treated under this Q&A as used for the
acquisition, construction, or improvement of an asset excluded from the
calculation of the total amount set aside under paragraph (b) of
Sec. 1.512(a)-5T (or would be so treated under this Q&A if it applied to
such asset). The reduction required
[[Page 796]]
under this paragraph applies for purposes of calculating the ``existing
excess reserve amount'' and the ``existing reserves for post-retirement
medical or life insurance benefits'' for all taxable years of the
welfare benefit fund.
[T.D. 8073, 51 FR 4323, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986; 51 FR
11303, Apr. 2, 1986]
Sec. 1.419A-1T Qualified asset account limitation of additions to account. (Temporary)
Q-1: What does the transition rule under section 419A(f)(7) provide?
A-1: Section 419A(f)(7) provides that, in the case of a welfare
benefit fund that was in existence on July 18, 1984, the account limit
(as determined under section 419A(c)) for each of the first four taxable
years of the fund that relate to taxable years of the employer ending
after December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2
of Sec. 1.419-1T, taxable years of the employer beginning after the
termination of the last of the collective bargaining agreements pursuant
to which the plan is maintained) shall be increased by the following
percentages of the ``existing excess reserve amount'':
Percent
First taxable year............................................ 80
Second taxable year........................................... 60
Third taxable year............................................ 40
Fourth taxable year........................................... 20
For purposes of this section, the ``existing excess reserve amount''
for any taxable year of a fund is the excess of (a) the assets actually
set aside for purposes described in section 419A(a) at the close of the
first taxable year of the fund ending after July 18, 1984 (calculated in
the manner set forth in Q&A-3 of Sec. 1.512(a)-3T, and adjusted under
paragraph (c) of Q&A-11 of Sec. 1.419-1T), reduced by employer
contributions to the fund before the close of such first taxable year to
the extent that such contributions are not deductible for the taxable
year of the employer with or within which such taxable year of the fund
ends and for any prior taxable year of the employer, over (b) the
account limit which would have applied to the taxable year of the fund
for which the excess is being computed (without regard to this
transition rule). A welfare benefit fund is treated as in existence on
July 18, 1984, for purposes of this transition rule only if amounts were
actually set aside in such fund on such date to provide welfare benefits
enumerated under section 419A.
[T.D. 8073, 51 FR 4329, Feb. 4, 1986, as amended at 51 FR 11303, Apr. 2,
1986]
Sec. 1.419A-2T Qualified asset account limitation for collectively bargained funds. (Temporary)
Q-1: What account limits apply to welfare benefit funds that are
maintained pursuant to a collective bargaining agreement?
A-1: Contributions to a welfare benefit fund maintained pursuant to
one or more collective bargaining agreements and the reserves of such a
fund generally are subject to the rules of sections 419, 419A, and 512.
However, neither contributions to nor reserves of such a collectively
bargained welfare benefit fund shall be treated as exceeding the
otherwise applicable limits of section 419(b), 419A(b), or 512(a)(3)(E)
until the earlier of: (i) The date on which the last of the collective
bargaining agreements relating to the fund in effect on, or ratified on
or before, the date of issuance of final regulations concerning such
limits for collectively bargained welfare benefit funds terminates
(determined without regard to any extension thereof agreed to after the
date of issuance of such final regulations), or (ii) the date 3 years
after the issuance of such final regulations.
Q-2: What is a welfare benefit fund maintained pursuant to a
collective bargaining agreement for purposes of Q&A-1?
A-2: (1) For purposes of Q&A-1, a collectively bargained welfare
benefit fund is a welfare benefit fund that is maintained pursuant to an
agreement which the Secretary of Labor determines to be a collective
bargaining agreement and which meets the requirements of the Secretary
of the Treasury as set forth in paragraph 2 below.
(2) Notwithstanding a determination by the Secretary of Labor that
an agreement is a collective bargaining agreement, a welfare benefit
fund is
[[Page 797]]
considered to be maintained pursuant to a collective bargaining
agreement only if the benefits provided through the fund were the
subject of arms-length negotiations between employee representatives and
one or more employers, and if such agreement between employee
representatives and one or more employers satisfies section 7701(a)(46)
of the Code. Moreover, the circumstances surrounding a collective
bargaining agreement must evidence good faith bargaining between adverse
parties over the welfare benefits to be provided through the fund.
Finally, a welfare benefit fund is not considered to be maintained
pursuant to a collective bargaining agreement unless at least 50 percent
of the employees eligible to receive benefits under the fund are covered
by the collective bargaining agreement.
(3) In the case of a collectively bargained welfare benefit fund,
only the portion of the fund (as determined under allocation rules to be
provided by the Commissioner) attributable to employees covered by a
collective bargaining agreement, and from which benefits for such
employees are provided, is considered to be maintained pursuant to a
collective bargaining agreement.
(4) Notwithstanding the preceding paragraphs and pending the
issuance of regulations setting account limits for collectively
bargained welfare benefit funds, a welfare benefit fund will not be
treated as a collectively bargained welfare benefit fund for purposes of
Q&A-1 if and when, after July 1, 1985, the number of employees who are
not covered by a collective bargaining agreement and are eligible to
receive benefits under the fund increases by reason of an amendment,
merger, or other action of the employer or the fund. In addition,
pending the issuance of such regulations, for purposes of applying the
50 percent test of paragraph (2) to a welfare benefit fund that is not
in existence on July 1, 1985, ``90 percent'' shall be substituted for
``50 percent''.
[T.D. 8034, 50 FR 27428, July 3, 1985]
Sec. 1.420-1 Significant reduction in retiree health coverage during the cost maintenance period.
(a) In general. Notwithstanding section 420(c)(3)(A), the minimum
cost requirements of section 420(c)(3) are not met if the employer
significantly reduces retiree health coverage during the cost
maintenance period.
(b) Significant reduction--(1) In general. An employer significantly
reduces retiree health coverage during the cost maintenance period if,
for any taxable year beginning on or after January 1, 2002, that is
included in the cost maintenance period, either --
(i) The employer-initiated reduction percentage for that taxable
year exceeds 10 percent; or
(ii) The sum of the employer-initiated reduction percentages for
that taxable year and all prior taxable years during the cost
maintenance period exceeds 20 percent.
(2) Employer-initiated reduction percentage. The employer-initiated
reduction percentage for any taxable year is the fraction B/A, expressed
as a percentage, where:
A = The total number of individuals (retired employees plus their
spouses plus their dependents) receiving coverage for
applicable health benefits as of the day before the first day
of the taxable year.
B = The total number of individuals included in A whose coverage for
applicable health benefits ended during the taxable year by
reason of employer action.
(3) Special rules for taxable years beginning before January 1,
2002. The following rules apply for purposes of computing the amount in
paragraph (b)(1)(ii) of this section if any portion of the cost
maintenance period precedes the first day of the first taxable year
beginning on or after January 1, 2002--
(i) Aggregation of taxable years. The portion of the cost
maintenance period that precedes the first day of the first taxable year
beginning on or after January 1, 2002 (the initial period) is treated as
a single taxable year and the employer-initiated reduction percentage
for the initial period is computed as set forth in paragraph (b)(2) of
this section,
[[Page 798]]
except that the words ``initial period'' apply instead of ``taxable
year.''
(ii) Loss of coverage. If coverage for applicable health benefits
for an individual ends by reason of employer action at any time during
the initial period, an employer may treat that coverage as not having
ended if the employer restores coverage for applicable health benefits
to that individual by the end of the initial period.
(4) Employer action--(i) General rule. For purposes of paragraph
(b)(2) of this section, an individual's coverage for applicable health
benefits ends during a taxable year by reason of employer action, if on
any day within the taxable year, the individual's eligibility for
applicable health benefits ends as a result of a plan amendment or any
other action of the employer (e.g., the sale of all or part of the
employer's business) that, in conjunction with the plan terms, has the
effect of ending the individual's eligibility. An employer action is
taken into account for this purpose regardless of when the employer
action actually occurs (e.g., the date the plan amendment is executed),
except that employer actions occurring before the later of December 18,
1999, and the date that is 5 years before the start of the cost
maintenance period are disregarded.
(ii) Special rule. Notwithstanding paragraph (b)(4)(i) of this
section, coverage for an individual will not be treated as having ended
by reason of employer action merely because such coverage ends under the
terms of the plan if those terms were adopted contemporaneously with the
provision under which the individual became eligible for retiree health
coverage. This paragraph (b)(4)(ii) does not apply with respect to plan
terms adopted contemporaneously with a plan amendment that restores
coverage for applicable health benefits before the end of the initial
period in accordance with paragraph (b)(3)(ii) of this section.
(iii) Sale transactions. If a purchaser provides coverage for
retiree health benefits to one or more individuals whose coverage ends
by reason of a sale of all or part of the employer's business, the
employer may treat the coverage of those individuals as not having ended
by reason of employer action. In such a case, for the remainder of the
year of the sale and future taxable years of the cost maintenance period
--
(A) For purposes of computing the applicable employer cost under
section 420(c)(3), those individuals are treated as individuals to whom
coverage for applicable health benefits was provided (for as long as the
purchaser provides retiree health coverage to them), and any amounts
expended by the purchaser of the business to provide for health benefits
for those individuals are treated as paid by the employer;
(B) For purposes of determining whether a subsequent termination of
coverage is by reason of employer action under this paragraph (b)(4),
the purchaser is treated as the employer. However, the special rule in
paragraph (b)(4)(ii) of this section applies only to the extent that any
terms of the plan maintained by the purchaser that have the effect of
ending retiree health coverage for an individual are the same as terms
of the plan maintained by the employer that were adopted
contemporaneously with the provision under which the individual became
eligible for retiree health coverage under the plan maintained by the
employer.
(c) Definitions. The following definitions apply for purposes of
this section:
(1) Applicable health benefits. Applicable health benefits means
applicable health benefits as defined in section 420(e)(1)(C).
(2) Cost maintenance period. Cost maintenance period means the cost
maintenance period as defined in section 420(c)(3)(D).
(3) Sale. A sale of all or part of an employer's business means a
sale or other transfer in connection with which the employees of a trade
or business of the employer become employees of another person. In the
case of such a transfer, the term purchaser means a transferee of the
trade or business.
(d) Examples. The following examples illustrate the application of
this section:
Example 1. (i) Employer W maintains a defined benefit pension plan
that includes a 401(h) account and permits qualified transfers that
satisfy section 420. The number of individuals receiving coverage for
applicable health benefits as of the day before the first
[[Page 799]]
day of Year 1 is 100. In Year 1, Employer W makes a qualified transfer
under section 420. There is no change in the number of individuals
receiving health benefits during Year 1. As of the last day of Year 2,
applicable health benefits are provided to 99 individuals, because 2
individuals became eligible for coverage due to retirement and 3
individuals died in Year 2. During Year 3, Employer W amends its health
plan to eliminate coverage for 5 individuals, 1 new retiree becomes
eligible for coverage and an additional 3 individuals are no longer
covered due to their own decision to drop coverage. Thus, as of the last
day of Year 3, applicable health benefits are provided to 92
individuals. During Year 4, Employer W amends its health plan to
eliminate coverage under its health plan for 8 more individuals, so that
as of the last day of Year 4, applicable health benefits are provided to
84 individuals. During Year 5, Employer W amends its health plan to
eliminate coverage for 8 more individuals.
(ii) There is no significant reduction in retiree health coverage in
either Year 1 or Year 2, because there is no reduction in health
coverage as a result of employer action in those years.
(iii) There is no significant reduction in Year 3. The number of
individuals whose health coverage ended during Year 3 by reason of
employer action (amendment of the plan) is 5. Since the number of
individuals receiving coverage for applicable health benefits as of the
last day of Year 2 is 99, the employer-initiated reduction percentage
for Year 3 is 5.05 percent (5/99), which is less than the 10 percent
annual limit.
(iv) There is no significant reduction in Year 4. The number of
individuals whose health coverage ended during Year 4 by reason of
employer action is 8. Since the number of individuals receiving coverage
for applicable health benefits as of the last day of Year 3 is 92, the
employer-initiated reduction percentage for Year 4 is 8.70 percent (8/
92), which is less than the 10 percent annual limit. The sum of the
employer-initiated reduction percentages for Year 3 and Year 4 is 13.75
percent, which is less than the 20 percent cumulative limit.
(v) In Year 5, there is a significant reduction under paragraph
(b)(1)(ii) of this section. The number of individuals whose health
coverage ended during Year 5 by reason of employer action (amendment of
the plan) is 8. Since the number of individuals receiving coverage for
applicable health benefits as of the last day of Year 4 is 84, the
employer-initiated reduction percentage for Year 5 is 9.52 percent (8/
84), which is less than the 10 percent annual limit. However, the sum of
the employer-initiated reduction percentages for Year 3, Year 4, and
Year 5 is 5.05 percent + 8.70 percent + 9.52 percent = 23.27 percent,
which exceeds the 20 percent cumulative limit.
Example 2. (i) Employer X, a calendar year taxpayer, maintains a
defined benefit pension plan that includes a 401(h) account and permits
qualified transfers that satisfy section 420. X also provides lifetime
health benefits to employees who retire from Division A as a result of a
plant shutdown, no health benefits to employees who retire from Division
B, and lifetime health benefits to all employees who retire from
Division C. In 2000, X amends its health plan to provide coverage for
employees who retire from Division B as a result of a plant shutdown,
but only for the 2-year period coinciding with their severance pay. Also
in 2000, X amends the health plan to provide that employees who retire
from Division A as a result of a plant shutdown receive health coverage
only for the 2-year period coinciding with their severance pay. A plant
shutdown that affects Division A and Division B employees occurs in
2000. The number of individuals receiving coverage for applicable health
benefits as of the last day of 2001 is 200. In 2002, Employer X makes a
qualified transfer under section 420. As of the last day of 2002,
applicable health benefits are provided to 170 individuals, because the
2-year period of benefits ends for 10 employees who retired from
Division A and 20 employees who retired from Division B as a result of
the plant shutdown that occurred in 2000.
(ii) There is no significant reduction in retiree health coverage in
2002. Coverage for the 10 retirees from Division A who lose coverage as
a result of the end of the 2-year period is treated as having ended by
reason of employer action, because coverage for those Division A
retirees ended by reason of a plan amendment made after December 17,
1999. However, the terms of the health plan that limit coverage for
employees who retired from Division B as a result of the 2000 plant
shutdown (to the 2-year period) were adopted contemporaneously with the
provision under which those employees became eligible for retiree
coverage under the health plan. Accordingly, under the rule provided in
paragraph (b)(4)(ii) of this section, coverage for those 20 retirees
from Division B is not treated as having ended by reason of employer
action. Thus, the number of individuals whose health benefits ended by
reason of employer action in 2002 is 10. Since the number of individuals
receiving coverage for applicable health benefits as of the last day of
2001 is 200, the employer-initiated reduction percentage for 2002 is 5
percent (10/200), which is less than the 10 percent annual limit.
(e) Regulatory effective date. This section is applicable to
transfers of excess pension assets occurring on or after December 18,
1999.
[T.D. 8948, 66 FR 32900, June 19, 2001]
[[Page 800]]
Certain Stock Options
Sec. 1.421-1 Effective dates and meaning and use of certain terms.
(a) Option. (1) For the purpose of section 421, the term ``option''
includes the right or privilege of an individual to purchase stock from
a corporation by virtue of an offer of the corporation continuing for a
stated period of time, whether or not irrevocable, to sell such stock at
a price determined under paragraph (d) of this section, such individual
being under no obligation to purchase. Such right or privilege, when
granted, must be evidenced in writing. The individual who has such right
or privilege is referred to as the optionee and the corporation offering
to sell stock under such an arrangement is referred to as the optionor.
While no particular form of words is necessary, the written option
should express, among other things, an offer to sell at the option price
and the period of time during which the offer shall remain open.
(2) An option may be granted as part of or in conjunction with an
employee stock purchase plan or subscription contract.
(3) An arrangement between a corporation and an employee may involve
more than one option. For example, if a corporation on June 1, 1954,
grants to an employee the right to purchase 1,000 shares of its stock on
or after June 1, 1955, another 1,000 shares on or after June 1, 1956,
and a further 1,000 shares on or after June 1, 1957, all shares to be
purchased before June 1, 1958, provided the employee at the time of
exercise of any of the purchase rights is employed by the corporation,
such an arrangement will be construed as the grant to the employee on
June 1, 1954, of three options, each for the purchase of 1,000 shares.
Similarly, if a corporation grants to an employee on January 1, 1955,
the right to purchase 1,000 shares of its stock at $85 per share during
1955, or at $75 per share during 1956, or at $65 per share during 1957,
such an arrangement will be construed as the grant to the employee on
January 1, 1955, of three alternative options, one option for the
purchase of 1,000 shares at $85 per share during 1955, an alternative
option for the purchase of 1,000 shares at $75 per share during 1956,
and a third alternative option for the purchase of 1,000 shares at $65
per share during 1957.
(b) Time and date of granting of option. (1) For the purpose of
section 421, the words ``the date of the granting of the option'' and
``the time such option is granted'', and similar phrases refer to the
date or time when the corporation completes the corporate action
constituting an offer of stock for sale to an individual under the terms
and conditions of a restricted stock option. Ordinarily, if the
corporate action contemplates an immediate offer of stock for sale to an
individual or to a class including such individual, or contemplates a
particular date on which such offer is to be made, the time or date of
the granting of the option is the time or date of such corporate action
if the offer is to be made immediately, or the date contemplated as the
date of the offer, as the case may be. However, an unreasonable delay in
the giving of notice of such offer to the individual or to the class
will be taken into account as indicating that the corporation
contemplated that the offer was to be made at the subsequent date on
which such notice is given.
(2) If the corporation imposes conditions on the granting of an
option (as distinguished from conditions governing the exercise of the
option), such conditions shall be given effect in accordance with the
intent of the corporation. A special rule is provided by section
421(d)(5) for options subject to stockholder approval. If the grant of
an option is subject to approval by stockholders, the date of grant of
the option shall be determined as if the option had not been subject to
such approval. A condition which does not require corporate action, such
as the approval of some regulatory or governmental agency, for example,
a stock exchange or the Securities and Exchange Commission, is
ordinarily considered a condition upon the exercise of the option unless
the corporate action clearly indicates that the option is not to be
granted until such condition is satisfied. If an option is granted to an
individual upon the condition that such individual will become an
employee of the corporation granting the option or of its parent or
subsidiary corporation, such option is not granted prior to the
[[Page 801]]
date the individual becomes such an employee.
(3) In general, conditions imposed upon the exercise of an option
will not operate to make ineffective the granting of the option. For
example, on June 1, 1954, the A Corporation grants to X, an employee, an
option to purchase 5,000 shares of the corporation stock, exercisable by
X on or after June 1, 1955, provided he is employed by the corporation
on June 1, 1955. Such an option is granted to X on June 1, 1954.
(c) Stock. For the purpose of section 421, the term ``stock'' means
capital stock of any class, including voting or nonvoting common or
preferred stock. The term includes both treasury stock and stock of
original issue. Special classes of stock authorized to be issued to and
held by employees are within the scope of the term ``stock'' as used in
section 421, provided such stock otherwise possesses the rights and
characteristics of capital stock.
(d) Option price. (1) For the purpose of section 421, the term
``option price'' or ``price paid under the option'' means the
consideration in money or property which, pursuant to the terms of the
option, is the price at which the stock subject to the option is
purchased.
(2) (i) With respect to its option price, a restricted stock option
must, when granted, meet either of the following requirements:
(A) The option price must be fixed or determinable at the time the
option is granted; or
(B) In the case of an option exercised during any taxable year of
the optionee which begins after December 31, 1953, and ends after August
16, 1954, the option price must be determinable under a variable price
option as defined in subdivision (ii) of this subparagraph.
An option which does not meet the requirements of either (A) or (B) of
this subdivision when granted will not be treated as a restricted stock
option unless it is subsequently changed to meet such requirements. In
case of such a change, see paragraph (c)(2) of Sec. 1.421-4.
(ii)(A) The term ``variable price option'' means an option under
which the option price is determined by a formula in which the only
variable is the fair market value of the stock at any time during a
period of six consecutive months which includes the day on which such
option is exercised. Except as provided in (b) of this subdivision, such
formula may provide for determining such price by reference to such
value on any particular day in such 6-month period, or by reference to
an average value of the stock over either the whole of such 6-month
period or over any shorter period included in such 6-month period. Such
6-month period may begin with, end with, or in any other manner span the
day on which such option is exercised. Such formula may also depend upon
factors other than such value of the stock, but such other factors must
not be variable and must be fixed in the option when granted. For
example, such formula may provide that the option price shall be 85
percent of the value of the stock on the day the option is exercised,
but such price shall not be less than $85, nor more than $110. Another
example of a formula which meets the requirements of this subdivision is
a provision that the option price shall be 95 percent of the fair market
value of the stock on the day the option is exercised but not more than
$95. However, the requirements of this subdivision are not met by a
formula which provides that if the profits of the employer for the year
do not exceed $100,000, the option price shall be $15 under the fair
market value of the stock at the time the option is exercised, but if
such profits exceed $100,000, the option price shall be $20 under such
value of the stock. For an example of how to determine whether an option
which contains a formula meeting the requirements of this subdivision
also meets the requirement that the option price must be at least 85
percent of the fair market value of the stock at the time the option is
granted, see paragraph (a)(1) of Sec. 1.421-2.
(B) In the case of an option granted after September 30, 1958, the
term ``variable price option'' does not include any option in which the
formula provides for determining the option price by reference to the
fair market value of the stock at any time before the option is
exercised if such value may be greater than the average fair market
value of the stock during the calendar month in which the option is
[[Page 802]]
exercised. Whether an option meets the requirement of this subdivision
shall be determined solely by reference to the terms of the option, and
the circumstances existing at the time the option is granted or
exercised are immaterial. Thus, an option, granted after September 30,
1958, and containing a pricing formula which takes into consideration
the value of the stock at any time before the option is exercised, is
subject to the new limitation and does not meet the requirement of this
subdivision, even though the option price is not actually based upon
such prior fair market value either at the time the option is exercised
or at the time the option price is computed as if it were exercised for
the purpose of applying the 85 percent test of section 421(d)(1)(A). For
example, a formula which provides that the option price is to be 45
percent of the fair market value of the stock 30 days before the date on
which the option is exercised, but not more than $85, will not qualify
under this subdivision since under this formula the price may be
determinable by reference to a higher prior value. On the other hand, a
formula which provides that the option price is to be 90 percent of the
average value of the stock during the month the option is exercised or
the average value of the stock during the preceding month, whichever is
lower, will qualify. In the case of an option granted after September
30, 1958, the only way that a formula which provides for determining the
option price by reference to the fair market value of the stock at a
time before the option is exercised can come within the requirement of
this subdivision is to provide that the option price is to be determined
by reference to such fair market value only if such fair market value is
not greater than the average fair market value of the stock during the
month in which the option is exercised. If under the terms of an option
the price is to be determined by reference to the fair market value of
the stock at a time before the option is exercised, whether such value
is higher or lower than the average fair market value of the stock
during the month the option is exercised, such option will not be
considered a restricted stock option since the option price may be based
upon the prior value of the stock when such value exceeds the average
fair market value of the stock during the month the option is exercised.
However, if an option provides for determining the option price by
reference to a prior fair market value of the stock only when such value
is lower than such average value of the stock, such option can qualify
as a restricted stock option. The average fair market value of the stock
during the month in which the option is exercised means such value
during the calendar month the option is exercised and not merely during
a 30- or 31-day period including the time the option is exercised. To
compute the average fair market value of the stock for the month, it
will be necessary to ascertain the fair market value of the stock for
each day during the month, including those days which are not business
days. In ascertaining the fair market value of the stock for each day,
the generally accepted principles for ascertaining such value will be
applied.
(e) Exercise. For the purpose of section 421, the term ``exercise'',
when used in reference to an option, means the act of acceptance by the
optionee of the offer to sell contained in the option. In general, the
time of exercise is the time when there is a sale or a contract to sell
between the corporation and the individual. An agreement or undertaking
by the employee to make payments under a stock purchase plan does not
constitute the exercise of an option so long as the payments made remain
subject to withdrawal by the employee.
(f) Transfer. For the purpose of section 421, the term ``transfer'',
when used in reference to the transfer to an individual of a share of
stock pursuant to his exercise of a restricted stock option, means the
transfer of ownership of such share, or the transfer of substantially
all the rights of ownership. Such transfer must, within a reasonable
time, be evidenced on the books of the corporation.
(g) Effective dates. Sections 1.421-1 through 1.421-5 are applicable
only to options granted after February 26, 1945, and before January 1,
1964, and all references therein to sections of the Code are to the
Internal Revenue Code of
[[Page 803]]
1954, before the amendments made by section 221 of the Revenue Act of
1964 (78 Stat. 63). Section 1.421-6 is applicable only to options
granted on or after February 26, 1945, and all references to sections of
the Code are to the Internal Revenue Code of 1954, as amended. Sections
1.421-7 and 1.421-8 are applicable only to options granted after
December 31, 1963, and all references therein to sections of the Code
are to the Internal Revenue Code of 1954, as amended.
[T.D. 6500, 25 FR 11692, Nov. 26, 1960, as amended by T.D. 6527, 26 FR
410, Jan. 19, 1961, T.D. 6887, 31 FR 8786, June 24, 1966]