[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2016 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 26
Internal Revenue
________________________
Part 1 (Sec. Sec. 1.401 to 1.409)
Revised as of April 1, 2015
Containing a codification of documents of general
applicability and future effect
As of April 1, 2015
Published by the Office of the Federal Register
National Archives and Records Administration as
Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
As of April 1, 2015
Title 26, Part 1 (Sec. Sec. 1.401-1.440)
Revised as of April 1, 2015
Is Replaced by
Title 26, Part 1 (Sec. Sec. 1.401-1.409)
and
Title 26, Part 1 (Sec. Sec. 1.410-1.440)
[[Page v]]
Table of Contents
Page
Explanation................................................. vii
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 727
Alphabetical List of Agencies Appearing in the CFR...... 747
Table of OMB Control Numbers............................ 757
List of CFR Sections Affected........................... 775
[[Page vi]]
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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.
----------------------------
[[Page vii]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
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evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
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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 viii]]
Many agencies have begun publishing numerous OMB control numbers as
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alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page ix]]
An index to the text of ``Title 3--The President'' is carried within
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available at www.ecfr.gov.
Amy P. Bunk,
Acting Director,
Office of the Federal Register.
April 1, 2015.
[[Page xi]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty-two volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2015. The first fifteen volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1.60;
Sec. Sec. 1.61-1.139; Sec. Sec. 1.140-1.169; Sec. Sec. 1.170-1.300;
Sec. Sec. 1.301-1.400; Sec. Sec. 1.401-1.409; Sec. Sec. 1.410-1.440;
Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640; Sec. Sec. 1.641-1.850;
Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000; Sec. Sec. 1.1001-
1.1400; Sec. Sec. 1.1401-1.1550; and Sec. 1.1551 to end of part 1. The
sixteenth volume containing parts 2-29, includes the remainder of
subchapter A and all of Subchapter B--Estate and Gift Taxes. The last
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and
Collection of Income Tax at Source); parts 40-49; parts 50-299
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Michele Bugenhagen was Chief Editor. The Code of
Federal Regulations publication program is under the direction of John
Hyrum Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. Sec. 1.401 to 1.409)
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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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SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes (Continued).................... 5
Supplementary Publications: 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 (CONTINUED)--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)-21 Rules relating to the use of an electronic medium to provide
applicable notices and to make participant elections.
1.401(a)-30 Limit on elective deferrals.
1.401(a)-50 Puerto Rican trusts; election to be treated as a domestic
trust.
1.401(a)(2)-1 Refund of mistaken employer contributions and withdrawal
liability payments to multiemployer plans.
1.401(a)(4)-0 Table of contents.
1.401(a)(4)-1 Nondiscrimination requirements of section 401(a)(4).
1.401(a)(4)-2 Nondiscrimination in amount of employer contributions
under a defined contribution plan.
1.401(a)(4)-3 Nondiscrimination in amount of employer-provided benefits
under a defined benefit plan.
1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights, and
features.
1.401(a)(4)-5 Plan amendments and plan terminations.
1.401(a)(4)-6 Contributory defined benefit plans.
1.401(a)(4)-7 Imputation of permitted disparity.
1.401(a)(4)-8 Cross-testing.
1.401(a)(4)-9 Plan aggregation and restructuring.
1.401(a)(4)-10 Testing of former employees.
1.401(a)(4)-11 Additional rules.
1.401(a)(4)-12 Definitions.
1.401(a)(4)-13 Effective dates and fresh-start rules.
1.401(a)(5)-1 Special rules relating to nondiscrimination requirements.
1.401(a)(9)-0 Required minimum distributions; table of contents.
1.401(a)(9)-1 Minimum distribution requirement in general.
1.401(a)(9)-2 Distributions commencing during an employee's lifetime.
1.401(a)(9)-3 Death before required beginning date.
1.401(a)(9)-4 Determination of the designated beneficiary.
1.401(a)(9)-5 Required minimum distributions from defined contribution
plans.
1.401(a)(9)-6 Required minimum distributions for defined benefit plans
and annuity contracts.
1.401(a)(9)-7 Rollovers and transfers.
1.401(a)(9)-8 Special rules.
1.401(a)(9)-9 Life expectancy and distribution period tables.
1.401(a)(17)-1 Limitation on annual compensation.
1.401(a)(26)-0 Table of contents.
[[Page 6]]
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(a)(35)-1 Diversification requirements for certain defined
contribution plans.
1.401(b)-1 Certain retroactive changes in plan.
1.401(e)-1 Definitions relating to plans covering self-employed
individuals.
1.401(e)-2 General rules relating to plans covering self-employed
individuals.
1.401(e)-3 Requirements for qualification of trusts and plans benefiting
owner-employees.
1.401(e)-4 Contributions for premiums on annuity, etc., contracts and
transitional rule for certain excess contributions.
1.401(e)-5 Limitation of contribution and benefit bases to first
$100,000 of annual compensation in case of plans covering
self-employed individuals.
1.401(e)-6 Special rules for shareholder-employers.
1.401(f)-1 Certain custodial accounts and annuity contracts.
1.401(k)-0 Table of contents.
1.401(k)-1 Certain cash or deferred arrangements.
1.401(k)-2 ADP test.
1.401(k)-3 Safe harbor requirements.
1.401(k)-4 SIMPLE 401(k) plan requirements.
1.401(k)-5 Special rules for mergers, acquisitions and similar events.
[Reserved]
1.401(k)-6 Definitions.
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 Table of contents.
1.401(m)-1 Employee contributions and matching contributions.
1.401(m)-2 ACP test.
1.401(m)-3 Safe harbor requirements.
1.401(m)-4 Special rules for mergers, acquisitions and similar events.
[Reserved]
1.401(m)-5 Definitions.
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.
1.402(g)-2 Increased limit for catch-up contributions.
1.402(g)(3)-1 Employer contributions to purchase a section 403(b)
contract under a salary reduction agreement.
1.402A-1 Designated Roth Accounts.
1.402A-2 Reporting and recordkeeping requirements with respect to
designated Roth accounts.
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)-0 Taxability under an annuity purchased by a section 501(c)(3)
organization or a public school.
1.403(b)-1 General overview of taxability under an annuity contract
purchased by a section 501(c)(3) organization or a public
school.
1.403(b)-2 Definitions.
1.403(b)-3 Exclusion for contributions to purchase section 403(b)
contracts.
1.403(b)-4 Contribution limitations.
1.403(b)-5 Nondiscrimination rules.
1.403(b)-6 Timing of distributions and benefits.
1.403(b)-7 Taxation of distributions and benefits.
1.403(b)-8 Funding.
1.403(b)-9 Special rules for church plans.
1.403(b)-10 Miscellaneous provisions.
1.403(b)-11 Applicable dates.
1.403(c)-1 Taxability of beneficiary under a nonqualified annuity.
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.
[[Page 7]]
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 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)
1.404(k)-3 Disallowance of deduction for reacquisition payments.
1.405-1 Qualified bond purchase plans.
1.405-2 Deduction of contributions to qualified bond purchase plans.
1.405-3 Taxation of retirement bonds.
1.406-1 Treatment of certain employees of foreign subsidiaries as
employees of the domestic corporation.
1.407-1 Treatment of certain employees of domestic subsidiaries engaged
in business outside the United States as employees of the
domestic parent corporation.
1.408-1 General rules.
1.408-2 Individual retirement accounts.
1.408-3 Individual retirement annuities.
1.408-4 Treatment of distributions from individual retirement
arrangements.
1.408-5 Annual reports by trustees or issuers.
1.408-6 Disclosure statements for individual retirement arrangements.
1.408-7 Reports on distributions from individual retirement plans.
1.408-8 Distribution requirements for individual retirement plans.
1.408-11 Net income calculation for returned or recharacterized IRA
contributions.
1.408(q)-1 Deemed IRAs in qualified employer 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.
1.408A-10 Coordination between designated Roth accounts and Roth IRAs.
1.409-1 Retirement bonds.
1.409A-0 Table of contents.
1.409A-1 Definitions and covered plans.
1.409A-2 Deferral elections.
1.409A-3 Permissible payments
1.409A-4 Calculation of income inclusion [Reserved]
1.409A-5 Funding [Reserved]
1.409A-6 Application of section 409A and effective dates.
1.409(p)-1 Prohibited allocation of securities in an S corporation.
[[Page 8]]
1.409(p)-1T Prohibited allocation of securities in an S corporation
(temporary)
Authority: 26 U.S.C. 401(m)(9) and 26 U.S.C. 7805.
Section 1.401-12 also issued under 26 U.S.C. 401(d)(1).
Section 1.401(a)-1 also issued under 26 U.S.C. 401
Section 1.401(a)(2)-1 also issued under Multiemployer Pension Plan
Amendments Act, Public Law 96-364, 410, (94 Stat. 1208, 1308)(1980).
Section 1.401(a)(5)-1 also issued under 26 U.S.C. 401(a)(5).
Section 1.401(a)(9)-1 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-2 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-3 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-4 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-5 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-6 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-7 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-8 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(9)-9 also issued under 26 U.S.C. 401(a)(9).
Section 1.401(a)(17)-1 also issued under 26 U.S.C. 401(a)(17).
Sections 1.401(a)(26)-1 through (a)(26)-9 also issued under 26
U.S.C. 401(a)(26).
Section 1.401(a)(35)-1 is also issued under 26 U.S.C. 401(a)(35).
Section 1.401(a)-21 also issued under 26 U.S.C. 401 and section 104
of the Electronic Signatures in Global and National Commerce Act, Public
Law 106-229 (114 Stat. 464).
Section 1.401(b)-1 also issued under 26 U.S.C. 401(b).
Section 1.401(k)-3 is also issued under 26 U.S.C. 401(m)(9).
Section 1.401(l)-0 through 1.401(l)-6 also issued under 26 U.S.C.
401(l).
Section 1.402A-1 is also issued under 26 U.S.C. 402A
Section 1.403(b)-6 also issued under 26 U.S.C. 403(b)(10).
Section 1.408-2 also issued under 26 U.S.C. 408(a) and 26 U.S.C.
408(q).
Section 1.404(k)-3 is also issued under sections 26 U.S.C. 162(k)
and 404(k)(5)(A).
Section 1.408-4 also issued under 26 U.S.C. 408.
Section 1.408-8 also issued under 26 U.S.C. 408(a)(6) and (b)(3).
Section 1.408-11 also issued under 26 U.S.C. 408.
Section 1.408(q)-1 also issued under 26 U.S.C. 408(q).
Section 1.408A-1 also issued under 26 U.S.C. 408A.
Section 1.408A-2 also issued under 26 U.S.C. 408A.
Section 1.408A-3 also issued under 26 U.S.C. 408A.
Section 1.408A-4 also issued under 26 U.S.C. 408A.
Section 1.408A-5 also issued under 26 U.S.C. 408A.
Section 1.408A-6 also issued under 26 U.S.C. 408A.
Section 1.408A-7 also issued under 26 U.S.C. 408A.
Section 1.408A-8 also issued under 26 U.S.C. 408A.
Section 1.408A-9 also issued under 26 U.S.C. 408A.
Section 1.409(p)-1 is also issued under 26 U.S.C. 409(p)(7).
DEFERRED COMPENSATION, ETC.
Pension, Profit-Sharing, Stock Bonus Plans, etc.
Sec. 1.401-0 Scope and definitions.
(a) In general. Sections 1.401 through 1.401-14 (inclusive) reflect
the provisions of section 401 prior to amendment by the Employee
Retirement Income Security Act of 1974. The sections following Sec.
1.401-14 and preceding Sec. 1.402(a)-1 (hereafter referred to in this
section as the ``Post-ERISA Regulations'') reflect the provisions of
section 401 after amendment by such Act.
(b) Definitions. For purposes of the Post-ERISA regulations--
(1) Qualified plan. The term ``qualified plan'' means a plan which
satisfies the requirements of section 401(a).
(2) Qualified trust. The term ``qualified trust'' means a trust
which satisfies the requirements of section 401(a).
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42320, Aug. 23, 1977]
Sec. 1.401-1 Qualified pension, profit-sharing, and stock bonus
plans.
(a) Introduction. (1) Sections 401 through 405 relate to pension,
profit- sharing, stock bonus, and annuity 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
[[Page 9]]
written program and arrangement which is communicated to the employees
and which is established and maintained by an employer--
(i) In the case of a pension plan, to provide for the livelihood of
the employees or their beneficiaries after the retirement of such
employees through the payment of benefits determined without regard to
profits (see paragraph (b)(1)(i) of this section);
(ii) In the case of a profit-sharing plan, to enable employees or
their beneficiaries to participate in the profits of the employer's
trade or business, or in the profits of an affiliated employer who is
entitled to deduct his contributions to the plan under section
404(a)(3)(B), pursuant to a definite formula for allocating the
contributions and for distributing the funds accumulated under the plan
(see paragraph (b)(1)(ii) of this section); and
(iii) In the case of a stock bonus plan, to provide employees or
their beneficiaries benefits similar to those of profit-sharing plans,
except that such benefits are distributable in stock of the employer,
and that the contributions by the employer are not necessarily dependent
upon profits. If the employer's contributions are dependent upon
profits, the plan may enable employees or their beneficiaries to
participate not only in the profits of the employer, but also in the
profits of an affiliated employer who is entitled to deduct his
contributions to the plan under section 404(a)(3)(B) (see paragraph
(b)(1)(iii) of this section).
(3) In order for a trust forming part of a pension, profit-sharing,
or stock bonus plan to constitute a qualified trust under section
401(a), the following tests must be met:
(i) It must be created or organized in the United States, as defined
in section 7701(a)(9), and it must be maintained at all times as a
domestic trust in the United States;
(ii) It must be part of a pension, profit-sharing, or stock bonus
plan established by an employer for the exclusive benefit of his
employees or their beneficiaries (see paragraph (b)(2) through (5) of
this section);
(iii) It must be formed or availed of for the purpose of
distributing to the employees or their beneficiaries the corpus and
income of the fund accumulated by the trust in accordance with the plan,
and, in the case of a plan which covers (as defined in paragraph (a)(2)
of Sec. 1.401-10) any self-employed individual, the time and method of
such distribution must satisfy the requirements of section 401(a)(9)
with respect to each employee covered by the plan (see paragraph (e) of
Sec. 1.401-11);
(iv) It must be impossible under the trust instrument at any time
before the satisfaction of all liabilities with respect to employees and
their beneficiaries under the trust, for any part of the corpus or
income to be used for, or diverted to, purposes other than for the
exclusive benefit of the employees or their beneficiaries (see Sec.
1.401-2);
(v) It must be part of a plan which benefits prescribed percentages
of the employees, or which benefits such employees as qualify under a
classification set up by the employer and found by the Commissioner not
to be discriminatory in favor of certain specified classes of employees
(see Sec. 1.401-3 and, in addition, see Sec. 1.401-12 for special
rules as to plans covering owner-employees);
(vi) It must be part of a plan under which contributions or benefits
do not discriminate in favor of certain specified classes of employees
(see Sec. 1.401-4);
(vii) It must be part of a plan which provides the nonforfeitable
rights described in section 401(a)(7) (see Sec. 1.401-6);
(viii) If the trust forms part of a pension plan, the plan must
provide that forfeitures must not be applied to increase the benefits
any employee would receive under such plan (see Sec. 1.401-7);
(ix) It must, if the plan benefits any self-employed individual who
is an owner-employee, satisfy the additional requirements for
qualification contained in section 401(a)(10) and (d).
(4) For taxable years beginning after December 31, 1962, self-
employed individuals may be included in qualified plans. See Sec. Sec.
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
[[Page 10]]
for life, after retirement. Retirement benefits generally are measured
by, and based on, such factors as years of service and compensation
received by the employees. The determination of the amount of retirement
benefits and the contributions to provide such benefits are not
dependent upon profits. Benefits are not definitely determinable if
funds arising from forfeitures on termination of service, or other
reason, may be used to provide increased benefits for the remaining
participants (see Sec. 1.401-7, relating to the treatment of
forfeitures under a qualified pension plan). A plan designed to provide
benefits for employees or their beneficiaries to be paid upon retirement
or over a period of years after retirement will, for the purposes of
section 401(a), be considered a pension plan if the employer
contributions under the plan can be determined actuarially on the basis
of definitely determinable benefits, or, as in the case of money
purchase pension plans, such contributions are fixed without being
geared to profits. A pension plan may provide for the payment of a
pension due to disability and may also provide for the payment of
incidental death benefits through insurance or otherwise. However, a
plan is not a pension plan if it provides for the payment of benefits
not customarily included in a pension plan such as layoff benefits or
benefits for sickness, accident, hospitalization, or medical expenses
(except medical benefits described in section 401(h) as defined in
paragraph (a) of Sec. 1.401-14).
(ii) A profit-sharing plan is a plan established and maintained by
an employer to provide for the participation in his profits by his
employees or their beneficiaries. The plan must provide a definite
predetermined formula for allocating the contributions made to the plan
among the participants and for distributing the funds accumulated under
the plan after a fixed number of years, the attainment of a stated age,
or upon the prior occurrence of some event such as layoff, illness,
disability, retirement, death, or severance of employment. A formula for
allocating the contributions among the participants is definite if, for
example, it provides for an allocation in proportion to the basic
compensation of each participant. A plan (whether or not it contains a
definite predetermined formula for determining the profits to be shared
with the employees) does not qualify under section 401(a) if the
contributions to the plan are made at such times or in such amounts that
the plan in operation discriminates in favor of officers, shareholders,
persons whose principal duties consist in supervising the work of other
employees, or highly compensated employees. For the rules with respect
to discrimination, see Sec. Sec. 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. See Sec. Sec. 1.72-15, 1.72-16, and 1.402(a)-1(e)
for rules regarding the tax treatment of 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
[[Page 11]]
whom discrimination is prohibited under section 401(a). The permanency
of the plan will be indicated by all of the surrounding facts and
circumstances, including the likelihood of the employer's ability to
continue contributions as provided under the plan. In the case of a
profit-sharing plan, other than a profit-sharing plan which covers
employees and owner-employees (see section 401(d)(2)(B)), it is not
necessary that the employer contribute every year or that he contribute
the same amount or contribute in accordance with the same ratio every
year. However, merely making a single or occasional contribution out of
profits for employees does not establish a plan of profit-sharing. To be
a profit-sharing plan, there must be recurring and substantial
contributions out of profits for the employees. In the event a plan is
abandoned, the employer should promptly notify the district director,
stating the circumstances which led to the discontinuance of the plan.
(3) If the plan is so designed as to amount to a subterfuge for the
distribution of profits to shareholders, it will not qualify as a plan
for the exclusive benefit of employees even though other employees who
are not shareholders are also included under the plan. The plan must
benefit the employees in general, although it need not provide benefits
for all of the employees. Among the employees to be benefited may be
persons who are officers and shareholders. However, a plan is not for
the exclusive benefit of employees in general if, by any device
whatever, it discriminates either in eligibility requirements,
contributions, or benefits in favor of employees who are officers,
shareholders, persons whose principal duties consist in supervising the
work of other employees, or the highly compensated employees. See
section 401(a) (3), (4), and (5). Similarly, a stock bonus or profit-
sharing plan is not a plan for the exclusive benefit of employees in
general if the funds therein may be used to relieve the employer from
contributing to a pension plan operating concurrently and covering the
same employees. All of the surrounding and attendant circumstances and
the details of the plan will be indicative of whether it is a bona fide
stock bonus, pension, or profit-sharing plan for the exclusive benefit
of employees in general. The law is concerned not only with the form of
a plan but also with its effects in operation. For example, section
401(a)(5) specifies certain provisions which of themselves are not
discriminatory. However, this does not mean that a plan containing these
provisions may not be discriminatory in actual operation.
(4) A plan is for the exclusive benefit of employees or their
beneficiaries even though it may cover former employees as well as
present employees and employees who are temporarily on leave, as, for
example, in the Armed Forces of the United States. A plan covering only
former employees may qualify under section 401(a) if it complies with
the provisions of section 401(a)(3)(B), with respect to coverage, and
section 401(a)(4), with respect to contributions and benefits, as
applied to all of the former employees. The term ``beneficiaries'' of an
employee within the meaning of section 401 includes the estate of the
employee, dependents of the employee, persons who are the natural
objects of the employee's bounty, and any persons designated by the
employee to share in the benefits of the plan after the death of the
employee.
(5)(i) No specific limitations are provided in section 401(a) with
respect to investments which may be made by the trustees of a trust
qualifying under section 401(a). Generally, the contributions may be
used by the trustees to purchase any investments permitted by the trust
agreement to the extent allowed by local law. However, such a trust will
be subject to tax under section 511 with respect to any ``unrelated
business taxable income'' (as defined in section 512) realized by it
from its investments.
(ii) Where the trust funds are invested in stock or securities of,
or 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
[[Page 12]]
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 Sec. Sec. 1.6033-1 and 1.6033-
2(a)(3). In case such a trust realizes any unrelated business taxable
income, as defined in section 512, such trust is also required to file a
return with respect to such income. See paragraph (e) of Sec. 1.6012-2
and paragraph (a)(5) of Sec. 1.6012-3 for requirements with respect to
such returns. For information required to be furnished periodically by
an employer with respect to the qualification of a plan, see Sec. Sec.
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; T.D.
9665, 79 FR 26842, May 12, 2014]
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
[[Page 13]]
an ``erroneous actuarial computation'' is the surplus arising because
actual requirements differ from the expected requirements even though
the latter were based upon previous actuarial valuations of liabilities
or determinations of costs of providing pension benefits under the plan
and were made by a person competent to make such determinations in
accordance with reasonable assumptions as to mortality, interest, etc.,
and correct procedures relating to the method of funding. For example, a
trust has accumulated assets of $1,000,000 at the time of liquidation,
determined by acceptable actuarial procedures using reasonable
assumptions as to interest, mortality, etc., as being necessary to
provide the benefits in accordance with the provisions of the plan. Upon
such liquidation it is found that $950,000 will satisfy all of the
liabilities under the plan. The surplus of $50,000 arises, therefore,
because of the difference between the amounts actuarially determined and
the amounts actually required to satisfy the liabilities. This $50,000,
therefore, is the amount which may be returned to the employer as the
result of an erroneous actuarial computation. If, however, the surplus
of $50,000 had been accumulated as a result of a change in the benefit
provisions or in the eligibility requirements of the plan, the $50,000
could not revert to the employer because such surplus would not be the
result of an erroneous actuarial computation.
(2) The term ``liabilities'' as used in section 401(a)(2) includes
both fixed and contingent obligations to employees. For example, if
1,000 employees are covered by a trust forming part of a pension plan,
300 of whom have satisfied all the requirements for a monthly pension,
while the remaining 700 employees have not yet completed the required
period of service, contingent obligations to such 700 employees have
nevertheless arisen which constitute ``liabilities'' within the meaning
of that term. It must be impossible for the employer (or other non
employee) to recover any amounts other than such amounts as remain in
the trust because of ``erroneous actuarial computations'' after the
satisfaction of all fixed and contingent obligations. Furthermore, the
trust instrument must contain a definite affirmative provision to this
effect, irrespective of whether the obligations to employees have their
source in the trust instrument itself, in the plan of which the trust
forms a part, or in some collateral instrument or arrangement forming a
part of such plan, and regardless of whether such obligations are,
technically speaking, liabilities of the employer, of the trust, or of
some other person forming a part of the plan or connected with it.
[T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6722, 29 FR
5072, Apr. 14, 1964; T.D. 7748, 46 FR 1695, Jan. 7, 1981]
Sec. 1.401-3 Requirements as to coverage.
(a)(1) In order to insure that stock bonus, pension, and profit-
sharing plans are utilized for the welfare of employees in general, and
to prevent the trust device from being used for the principal benefit of
shareholders, officers, persons whose principal duties consist in
supervising the work of other employees, or highly paid employees, or as
a means of tax avoidance, a trust will not be qualified unless it is
part of a plan which satisfies the coverage requirements of section
401(a)(3). However, if the plan covers any individual who is an owner-
employee, as defined in section 401(c)(3), the requirements of section
401(a)(3) and this section are not applicable to such plan, but the plan
must satisfy the requirements of section 401(d) (see Sec. 1.401-12).
(2) The percentage requirements in section 401(a)(3)(A) refer to a
percentage of all the active employees, including employees temporarily
on leave, such as those in the Armed Forces of the United States, if
such employees are eligible under the plan.
(3) The application of section 401(a)(3)(A) may be illustrated by
the following example:
Example. A corporation adopts a plan at a time when it has 1,000
employees. The plan provides that all full-time employees who 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
[[Page 14]]
two years. Fifty of the employees were seasonal employees whose
customary employment did not exceed five months in any calendar year.
Twenty-five of the employees were part-time employees whose customary
employment did not exceed 20 hours in any one week. One hundred and
fifty of the full-time employees who had been employed for two years or
more had not yet reached age 30. The requirements of section
401(a)(3)(A) will be met if 540 employees are covered by the plan, as
shown by the following computation:
(i) Total employees with respect to whom the percentage 825
requirements are applicable (1,000 minus 175 (100 plus 50
plus 25))...................................................
(ii) Employees not eligible to participate because of age 150
requirements................................................
----------
(iii) Total employees eligible to participate................ 675
(iv) Percentage of employees in item (i) eligible to 81+%
participate.................................................
(v) Minimum number of participating employees to qualify the 540
plan (80 percent of 675)....................................
If only 70 percent, or 578, of the 825 employees satisfied the age and
service requirements, then 462 (80 percent of 578) participating
employees would satisfy the percentage requirements.
(b) If a plan fails to qualify under the percentage requirements of
section 401(a)(3)(A), it may still qualify under section 401(a)(3)(B)
provided always that (as required by section 401(a) (3) and (4)) the
plan's eligibility conditions, benefits, and contributions do not
discriminate in favor of employees who are officers, shareholders,
persons whose principal duties consist in supervising the work of other
employees, or the highly compensated employees.
(c) Since, for the purpose of section 401, a profit-sharing plan is
a plan which provides for distributing the funds accumulated under the
plan after a fixed number of years, the attainment of a stated age, or
upon the prior occurrence of some event such as illness, disability,
retirement, death, layoff, or severance of employment, employees who
receive the amounts allocated to their accounts before the expiration of
such a period of time or the occurrence of such a contingency shall not
be considered covered by a profit-sharing plan in determining whether
the plan meets the coverage requirements of section 401(a)(3) (A) and
(B). Thus, in case a plan permits employees to receive immediately the
amounts allocated to their accounts, or to have such amounts paid to a
profit- sharing plan for them, the employees who receive the shares
immediately shall not, for the purpose of section 401, be considered
covered by a profit-sharing plan.
(d) Section 401(a)(5) sets out certain classifications that will not
in themselves be considered discriminatory. However, those so designated
are not intended to be exclusive. Thus, plans may qualify under section
401(a)(3)(B) even though coverage thereunder is limited to employees who
have either reached a designated age or have been employed for a
designated number of years, or who are employed in certain designated
departments or are in other classifications, provided the effect of
covering only such employees does not discriminate in favor of officers,
shareholders, employees whose principal duties consist in supervising
the work of other employees, or highly compensated employees. For
example, if there are 1,000 employees, and the plan is written for only
salaried employees, and consequently only 500 employees are covered,
that fact alone will not justify the conclusion that the plan does not
meet the coverage requirements of section 401(a)(3)(B). Conversely, if a
contributory plan is offered to all of the employees but the
contributions required of the employee participants are so burdensome as
to make the plan acceptable only to the highly paid employees, the
classification will be considered discriminatory in favor of such highly
paid employees.
(e)(1) Section 401(a)(5) contains a provision to the effect that a
classification shall not be considered discriminatory within the meaning
of section 401(a)(3)(B) merely because all employees whose entire annual
remuneration constitutes ``wages'' under section 3121(a)(1) (for
purposes of the Federal Insurance Contributions Act, chapter 21 of the
Code) are excluded from the plan. A reference to section 3121(a)(1) for
years after 1954 shall be deemed a reference to section 1426(a)(1) of
the Internal Revenue Code of 1939 for years 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
[[Page 15]]
U.S.C. ch. 7). Thus, a classification which excludes all employees whose
entire remuneration constitutes ``wages'' under section 3121(a)(1), will
not be considered discriminatory merely because of such exclusion.
Similarly, a plan which includes all employees will not be considered
discriminatory solely because the contributions or benefits based on
that part of their remuneration which is excluded from wages under
section 3121(a)(1) differ from the contributions or benefits based on
that part of their remuneration which is not so excluded. However, in
making his determination with respect to discrimination in
classification under section 401(a)(3)(B), the Commissioner will
consider whether the total benefits resulting to each employee under the
plan and under the Social Security Act, or under the Social Security Act
only, establish an integrated and correlated retirement system
satisfying the tests of section 401(a). If, therefore, a classification
of employees under a plan results in relatively or proportionately
greater benefits for employees earning above any specified salary amount
or rate than for those below any such salary amount or rate, it may be
found to be discriminatory within the meaning of section 401(a)(3)(B).
If, however, the relative or proportionate differences in benefits which
result from such classification are approximately offset by the old-age,
survivors, and disability insurance benefits which are provided by the
Social Security Act and which are not attributable to employee
contributions under the Federal Insurance Contributions Act, the plan
will be considered to be properly integrated with the Social Security
Act and will, therefore, not be considered discriminatory.
(2)(i) For purposes of determining whether a plan is properly
integrated with the Social Security Act, the amount of old-age,
survivors, and disability insurance benefits which may be considered as
attributable to employer contributions under the Federal Insurance
Contributions Act is computed on the basis of the following:
(A) The rate at which the maximum monthly old-age insurance benefit
is provided under the Social Security Act is considered to be the
average of (1) the rate at which the maximum benefit currently payable
under the Act (i.e., in 1971) is provided to an employee retiring at age
65, and (2) the rate at which the maximum benefit ultimately payable
under the Act (i.e., in 2010) is provided to an employee retiring at age
65. The resulting figure is 43 percent of the average monthly wage on
which such benefit is computed.
(B) The total old-age, survivors, and disability insurance benefits
with respect to an employee is considered to be 162 percent of the
employee's old-age insurance benefits. The resulting figure is 70
percent of the average monthly wage on which it is computed.
(C) In view of the fact that social security benefits are funded
through equal contributions by the employer and employee, 50 percent of
such benefits is considered attributable to employer contributions. The
resulting figure is 35 percent of the average monthly wage on which the
benefit is computed.
Under these assumptions, the maximum old-age, survivors, and disability
insurance benefits which may be attributed to employer contributions
under the Federal Insurance Contributions Act is an amount equal to 35
percent of the earnings on which they are computed. These computations
take into account all amendments to the Society Security Act through the
Social Security Amendments of 1971 (85 Stat. 6). It is recognized,
however, that subsequent amendments to this Act may increase the
percentages described in (A) or (B) of this subdivision (i), or both. If
this occurs, the method used in this subparagraph for determining the
integration formula may result in a figure under (C) of this subdivision
(i) which is greater than 35 percent and a plan could be amended to
adopt such greater figure in its benefit formula. In order to minimize
future plan amendments of this nature, an employer may anticipate future
changes in the Social Security Act by immediately utilizing such a
higher figure, but not in excess of 37\1/2\ percent, in developing its
benefit formula.
[[Page 16]]
(ii) Under the rules provided in this subparagraph, a classification
of employees under a noncontributory pension or annuity plan which
limits coverage to employees whose compensation exceeds the applicable
integration level under the plan will not be considered discriminatory
within the meaning of section 401(a)(3)(B), where:
(A) The integration level applicable to an employee is his covered
compensation, or is (1) in the case of an active employee, a stated
dollar amount uniformly applicable to all active employees which is not
greater than the covered compensation of any active employee, and (2) in
the case of a retired employee an amount which is not greater than his
covered compensation. (For rules relating to determination of an
employee's covered compensation, see subdivision (iv) of this
subparagraph.)
(B) The rate at which normal annual retirement benefits are provided
for any employee with respect to his average annual compensation in
excess of the plan's integration level applicable to him does not exceed
37\1/2\ percent.
(C) Average annual compensation is defined to mean the average
annual compensation over the highest 5 consecutive years.
(D) There are no benefits payable in case of death before
retirement.
(E) The normal form of retirement benefits is a straight life
annuity, and if there are optional forms, the benefit payments under
each optional form are actuarially equivalent to benefit payments under
the normal form.
(F) In the case of any employee who reaches normal retirement age
before completion of 15 years of service with the employer, the rate at
which normal annual retirement benefits are provided for him with
respect to his average annual compensation in excess of the plan's
integration level applicable to him does not exceed 2\1/2\ percent for
each year of service.
(G) Normal retirement age is not lower than age 65.
(H) Benefits payable in case of retirement or any other severance of
employment before normal retirement age cannot exceed the actuarial
equivalent of the maximum normal retirement benefits, which might be
provided in accordance with (A) through (G) of this subdivision (ii),
multiplied by a fraction, the numerator of which is the actual number of
years of service of the employee at retirement or severance, and the
denominator of which is the total number of years of service he would
have had if he had remained in service until normal retirement age. A
special disabled life mortality table shall not be used in determining
the actuarial equivalent in the case of severance due to disability.
(iii) (A) If a plan was properly integrated with old-age and
survivors insurance benefits on July 5, 1968 (hereinafter referred to as
an ``existing plan''), then, notwithstanding the fact that such plan
does not satisfy the requirements of subdivision (ii) of this
subparagraph, it will continue to be considered properly integrated with
such benefits until January 1, 1972. Such plan will be considered
properly integrated after December 31, 1971, so long as the benefits
provided under the plan for each employee equal the sum of--
(1) The benefits to which he would be entitled under a plan which,
on July 5, 1968, would have been considered properly integrated with
old-age and survivors insurance benefits, and under which benefits are
provided at the same (or a lesser) rate with respect to the same portion
of compensation with respect to which benefits are provided under the
existing plan, multiplied by the percentage of his total service with
the employer performed before a specified date not later than January 1,
1972; and
(2) The benefits to which he would be entitled under a plan
satisfying the requirements of subdivision (ii) of this subparagraph,
multiplied by the percentage of his total service with the employer
performed on and after such specified date.
(B) A plan which, on July 5, 1968, was properly integrated with old-
age and survivors insurance benefits will not be considered not to be
properly integrated with such benefits thereafter merely because such
plan provides a minimum benefit for each employee (other than an
employee who owns, directly or indirectly, stock possessing more than 10
percent of the total combined voting power or value of all
[[Page 17]]
classes of stock of the employer corporation) equal to the benefit to
which he would be entitled under the plan as in effect on July 5, 1968,
if he continued to earn annually until retirement the same amount of
compensation as he earned in 1967.
(C) If a plan was properly integrated with old-age and survivors
insurance benefits on May 17, 1971, notwithstanding the fact that such
plan does not satisfy the requirements of subdivision (ii) of this
subparagraph, it will continue to be considered properly integrated with
such benefits until January 1, 1972.
(iv) For purposes of this subparagraph, an employee's covered
compensation is the amount of compensation with respect to which old-age
insurance benefits would be provided for him under the Social Security
Act (as in effect at any uniformly applicable date occurring before the
employee's separation from the service) if for each year until he
attains age 65 his annual compensation is at least equal to the maximum
amount of earnings subject to tax in each such year under the Federal
Insurance Contributions Act. A plan may provide that an employee's
covered compensation is the amount determined under the preceding
sentence rounded to the nearest whole multiple of a stated dollar amount
which does not exceed $600.
(v) In the case of an integrated plan providing benefits different
from those described in subdivision (ii) or (iii) (whichever is
applicable) of this subparagraph, or providing benefits related to years
of service, or providing benefits purchasable by stated employer
contributions, or under the terms of which the employees contribute, or
providing a combination of any of the foregoing variations, the plan
will be considered to be properly integrated only if, as determined by
the Commissioner, the benefits provided thereunder by employer
contributions cannot exceed in value the benefits described in
subdivision (ii) or (iii) (whichever is applicable) of this
subparagraph. Similar principles will govern in determining whether a
plan is properly integrated if participation therein is limited to
employees earning in excess of amounts other than those specified in
subdivision (iv) of this subparagraph, or if it bases benefits or
contributions on compensation in excess of such amounts, or if it
provides for an offset of benefits otherwise payable under the plan on
account of old-age, survivors, and disability insurance benefits.
Similar principles will govern in determining whether a profit-sharing
or stock bonus plan is properly integrated with the Social Security Act.
(3) A plan supplementing the Social Security Act and excluding all
employees whose entire annual remuneration constitutes ``wages'' under
section 3121(a)(1) will not, however, be deemed discriminatory merely
because, for administrative convenience, it provides a reasonable
minimum benefit not to exceed $20 a month.
(4) Similar considerations, to the extent applicable in any case,
will govern classifications under a plan supplementing the benefits
provided by other Federal or State laws. See section 401(a)(5).
(5) If a plan provides contributions or benefits for a self-employed
individual, the rules relating to the integration of such a plan with
the contributions or benefits under the Social Security Act are set
forth in paragraph (c) of Sec. 1.401-11 and paragraph (h) of Sec.
1.401-12.
(6) This paragraph (e) does not apply to plan years beginning on or
after January 1, 1989.
(f) An employer may designate several trusts or a trust or trusts
and an annuity plan or plans as constituting one plan which is intended
to qualify under section 401(a)(3), in which case all of such trusts and
plans taken as a whole may meet the requirements of such section. The
fact that such combination of trusts and plans fails to qualify as one
plan does not prevent such of the trusts and plans as qualify from
meeting the requirements of section 401(a).
(g) It is provided in section 401(a)(6) that a plan will satisfy the
requirements of section 401(a)(3), if on at least one day in each
quarter of the taxable year of the plan it satisfies such requirements.
This makes it possible for a new plan requiring contributions from
employees to qualify if by the end of the quarter-year in which the plan
is
[[Page 18]]
adopted it secures sufficient contributing participants to meet the
requirements of section 401(a)(3). It also affords a period of time in
which new participants may be secured to replace former participants, so
as to meet the requirements of either subparagraph (A) or (B) of section
401(a)(3).
[T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6675, 28 FR
10119, Sept. 17, 1963; T.D. 6982, 33 FR 16499, Nov. 13, 1968; T.D. 7134,
36 FR 13592, July 22, 1971; 36 FR 13990, July 29, 1971; T.D. 8359, 56 FR
47614, Sept. 19, 1991]
Sec. 1.401-4 Discrimination as to contributions or benefits
(before 1994).
(a)(1)(i) In order to qualify under section 401(a), a trust must not
only meet the coverage requirements of section 401(a)(3), but, as
provided in section 401(a)(4), it must also be part of a plan under
which there is no discrimination in contributions or benefits in favor
of officers, shareholders, employees whose principal duties consist in
supervising the work of other employees, or highly compensated employees
as against other employees whether within or without the plan.
(ii) Since, for the purpose of section 401, a profit-sharing plan is
a plan which provides for distributing the funds accumulated under the
plan after a fixed number of years, the attainment of a stated age, or
upon the prior occurrence of some event such as illness, disability,
retirement, death, layoff, or severance of employment, any amount
allocated to an employee which is withdrawn before the expiration of
such a period of time or the occurrence of such a contingency shall not
be considered in determining whether the contributions under the plan
discriminate in favor of officers, shareholders, employees whose
principal duties consist in supervising the work of other employees, or
highly compensated employees. Thus, in case a plan permits employees to
receive immediately the whole or any part of the amounts allocated to
their accounts, or to have the whole or any part of such amounts paid to
a profit-sharing plan for them, any amounts which are received
immediately shall not, for the purpose of section 401, be considered
contributed to a profit-sharing plan.
(iii) Funds in a stock bonus or profit-sharing plan arising from
forfeitures on termination of service, or other reason, must not be
allocated to the remaining participants in such a manner as will effect
the prohibited discrimination. With respect to forfeitures in a pension
plan, see Sec. 1.401-7.
(2)(i) Section 401(a)(5) sets out certain provisions which will not
in and of themselves be discriminatory within the meaning of section 401
a) (3) or (4). See Sec. 1.401-3. Thus, a plan will not be considered
discriminatory merely because the contributions or benefits bear a
uniform relationship to total compensation or to the basic or regular
rate of compensation, or merely because the contributions or benefits
based on that part of the annual compensation of employees which is
subject to the Federal Insurance Contributions Act (chapter 21 of the
Code) differ from the contributions or benefits based on any excess of
such annual compensation over such part. With regard to the application
of the rules of section 401(a)(5) in the case of a plan which benefits a
self-employed individual, see paragraph (c) of Sec. 1.401-11.
(ii) The exceptions specified in section 401(a)(5) are not an
exclusive enumeration, but are merely a recital of provisions frequently
encountered which will not of themselves constitute forbidden
discrimination in contributions or benefits.
(iii) Variations in contributions or benefits may be provided so
long as the plan, viewed as a whole for the benefit of employees in
general, with all its attendant circumstances, does not discriminate in
favor of employees within the enumerations with respect to which
discrimination is prohibited. Thus, benefits in a stock bonus or profit-
sharing plan which vary by reason of an allocation formula which takes
into consideration years of service, or other factors, are not
prohibited unless they discriminate in favor of such employees.
(b) A plan which excludes all employees whose entire remuneration
constitutes wages under section 3121(a)(1) (relating to the Federal
Insurance Contributions Act), or a plan under which
[[Page 19]]
the contributions or benefits based on that part of an employee's
remuneration which is excluded from ``wages'' under such act differs
from the contributions or benefits based on that part of the employee's
remuneration which is not so excluded, or a plan under which the
contributions or benefits differ because of any retirement benefit
created under State or Federal law, will not be discriminatory because
of such exclusion or difference, provided the total benefits resulting
under the plan and under such law establish an integrated and correlated
retirement system satisfying the tests of section 401(a).
(c)(1) Although a qualified plan may provide for termination at will
by the employer or discontinuance of contributions thereunder, this will
not of itself prevent a trust from being a qualified trust. However, a
qualified pension plan must expressly incorporate provisions which
comply with the restrictions contained in subparagraph (2) of this
paragraph at the time the plan is established, unless (i) it is
reasonably certain at the inception of the plan that such restrictions
would not affect the amount of contributions which may be used for the
benefit of any employee, or (ii) the Commissioner determines that such
provisions are not necessary to prevent the prohibited discrimination
that may occur in the event of any early termination of the plan.
Although these provisions are the only provisions required to be
incorporated in the plan to prevent the discrimination that may arise
because of an early termination of the plan, the plan may in operation
result in the discrimination prohibited by section 401(a)(4), unless
other provisions are later incorporated in the plan. Any pension plan
containing a provision described in this paragraph shall not fail to
satisfy section 411(a), (d)(2) and (d)(3) merely by reason of such a
plan provision. Paragraph (c)(7) of this section sets forth special
early termination rules applicable to certain qualified defined benefit
plans for plan years affected by the Employee Retirement Income Security
Act of 1974 (``ERISA''). Paragraph (c)(7) of this section does not
contain all the rules required by the enactment of ERISA.
(2)(i) If employer contributions under a qualified pension plan may
be used for the benefit of an employee who is among the 25 highest paid
employees of the employer at the time the plan is established and whose
anticipated annual pension under the plan exceeds $1,500, such plan must
provide that upon the occurrence of the conditions described in
subdivision (ii) of this subparagraph, the employer contributions which
are used for the benefit of any such employee are restricted in
accordance with subdivision (iii) of this subparagraph.
(ii) The restrictions described in subdivision (iii) of this
subparagraph become applicable if--
(A) The plan is terminated within 10 years after its establishment,
(B) The benefits of an employee described in subdivision (i) of this
subparagraph become payable within 10 years after the establishment of
the plan, or
(C) The benefits of an employee described in subdivision (i) of this
subparagraph become payable after the plan has been in effect for 10
years, and the full current costs of the plan for the first 10 years
have not been funded. In the case of an employee described in (B) of
this subdivision, the restrictions will remain applicable until the plan
has been in effect for 10 years, but if at that time the full current
costs have been funded the restrictions will no longer apply to the
benefits payable to such an employee. In the case of an employee
described in (B) or (C) of this subdivision, if at the end of the first
10 years the full current costs are not met, the restrictions will
continue to apply until the full current costs are funded for the first
time.
(iii) The restrictions required under subdivision (i) of this
subparagraph must provide that the employer contributions which may be
used for the benefit of an employee described in such subdivision shall
not exceed the greater of $20,000, or 20 percent of the first $50,000 of
the annual compensation of such employee multiplied by the number of
years between the date of the establishment of the plan and--
(A) The date of the termination of the plan,
[[Page 20]]
(B) In the case of an employee described in subdivision (ii)(B) of
this subparagraph, the date the benefit of the employee becomes payable,
if before the date of the termination of the plan, or
(C) In the case of an employee described in subdivision (ii)(C) of
this subparagraph, the date of the failure to meet the full current
costs of the plan. However, if the full current costs of the plan have
not been met on the date described in (A) or (B) of this subdivision,
whichever is applicable, then the date of the failure to meet such full
current costs shall be substituted for the date referred to in (A) or
(B) of this subdivision. For purposes of determining the contributions
which may be used for the benefit of an employee when (b) of this
subdivision applies, the number of years taken into account may be
recomputed for each year if the full current costs of the plan are met
for such year.
(iv) For purposes of this subparagraph, the employer contributions
which, at a given time, may be used for the benefits of an employee
include any unallocated funds which would be used for his benefits if
the plan were then terminated or the employee were then to withdraw from
the plan, as well as all contributions allocated up to that time
exclusively for his benefits.
(v) The provisions of this subparagraph apply to a former or retired
employee of the employer, as well as to an employee still in the
employer's service.
(vi) The following terms are defined for purposes of this
subparagraph--
(A) The term ``benefits'' includes any periodic income, any
withdrawal values payable to a living employee, and the cost of any
death benefits which may be payable after retirement on behalf of an
employee, but does not include the cost of any death benefits with
respect to an employee before retirement nor the amount of any death
benefits actually payable after the death of an employee whether such
death occurs before or after retirement.
(B) The term full current costs means the normal cost, as defined in
Sec. 1.404(a)-6, for all years since the effective date of the plan,
plus interest on any unfunded liability during such period.
(C) The term annual compensation of an employee means either such
employee's average regular annual compensation, or such average
compensation over the last five years, or such employee's last annual
compensation if such compensation is reasonably similar to his average
regular annual compensation for the five preceding years.
(3) The amount of the employer contributions which can be used for
the benefit of a restricted employee may be limited either by limiting
the annual amount of the employer contributions for the designated
employee during the period affected by the limitation, or by limiting
the amount of funds under the plan which can be used for the benefit of
such employee, regardless of the amount of employer contributions.
(4) The restrictions contained in subparagraph (2) of this paragraph
may be exceeded for the purpose of making current retirement income
benefit payments to retired employees who would otherwise be subject to
such restrictions, if--
(i) The employer contributions which may be used for any such
employee in accordance with the restrictions contained in subparagraph
(2) of this paragraph are applied either (A) to provide level amounts of
annuity in the basic form of benefit provided for under the plan for
such employee at retirement (or, if he has already retired, beginning
immediately), or (B) to provide level amounts of annuity in an optional
form of benefit provided under the plan if the level amount of annuity
under such optional form of benefit is not greater than the level amount
of annuity under the basic form of benefit provided under the plan;
(ii) The annuity thus provided is supplemented, to the extent
necessary to provide the full retirement income benefits in the basic
form called for under the plan, by current payments to such employee as
such benefits come due; and
(iii) Such supplemental payments are made at any time only if the
full current costs of the plan have then been met, or the aggregate of
such supplemental payments for all such employees does not exceed the
aggregate employer contributions already made
[[Page 21]]
under the plan in the year then current.
If disability income benefits are provided under the plan, the plan may
contain like provisions with respect to the current payment of such
benefits.
(5) If a plan has been changed so as to increase substantially the
extent of possible discrimination as to contributions and as to benefits
actually payable in event of the subsequent termination of the plan or
the subsequent discontinuance of contributions thereunder, then the
provisions of this paragraph shall be applied to the plan as so changed
as if it were a new plan established on the date of such change.
However, the provision in subparagraph (2)(iii) of this paragraph that
the unrestricted amount of employer contributions on behalf of any
employee is at least $20,000 is applicable to the aggregate amount
contributed by the employer on behalf of such employee from the date of
establishment of the original plan, and, for purposes of determining if
the employee's anticipated annual pension exceeds $1,500, both the
employer contributions on the employee's behalf prior to the date of the
change in the plan and those expected to be made on his behalf
subsequent to the date of the change (based on the employee's rate of
compensation on the date of the change) are to be taken into account.
(6) This paragraph shall apply to taxable years of a qualified plan
commencing after September 30, 1963. In the case of an early termination
of a qualified pension plan during any such taxable year, the employer
contributions which may be used for the benefit of any employee must
conform to the requirements of this paragraph. However, any pension plan
which is qualified on September 30, 1963, will not be disqualified
merely because it does not expressly include the provisions prescribed
in this paragraph.
(7)(i) A qualified defined benefit plan subject to section 412
(without regard to section 412(h)(2)) shall not be required to contain
the restriction described in paragraph (c)(2)(ii)(c) of this section
applicable to an employee in a plan whose full current costs for the
first 10 years have not been funded.
(ii) A qualified defined benefit plan covered by section 4021(a) of
ERISA (``qualified title IV plan'') shall satisfy the restrictions in
paragraph (c)(2) of this section only if the plan satisfies this
paragraph (c)(7). A plan satisfies this paragraph (c)(7) by providing
that employer contributions which may be used for the benefit of an
employee described in paragraph (c)(2) of this section who is a
substantial owner, as defined in section 4022(b)(5) of ERISA, shall not
exceed the greater of the dollar amount described in paragraph
(c)(2)(iii) of this section or a dollar amount which equals the present
value of the benefit guaranteed for such employee under section 4022 of
ERISA, or if the plan has not terminated, the present value of the
benefit that would be guaranteed if the plan terminated on the date the
benefit commences, determined in accordance with regulations of the
Pension Benefit Guaranty Corporation (``PBGC'').
(iii) A plan satisfies this paragraph (c)(7) by providing that
employer contributions which may be used for the benefit of all
employees described in paragraph (c)(2) of this section (other than an
employee who is a substantial owner as defined in section 4022(b)(5) of
ERISA) shall not exceed the greater of the dollar amount described in
paragraph (c)(2)(iii) of this section or a dollar amount which equals
the present value of the maximum benefit described in section
4022(b)(3)(B) of ERISA (determined on the date the plan terminates or on
the date benefits commence, whichever is earlier and determined in
accordance with regulations of PBGC) without regard to any other
limitations in section 4022 of ERISA.
(iv) A plan provision satisfying this paragraph (c)(7) may be
adopted by amendment or by incorporation at the time of establishment.
Any allocation of assets attributable to employer contributions to an
employee which exceeds the dollar limitation in this paragraph (c)(7)
may be reallocated to prevent prohibited discrimination.
(v) The early termination rules in the preceding subparagraphs (1)
through (6) apply to a qualified title IV plan except where such rules
are determined by the Commissioner to be inconsistent with
[[Page 22]]
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 Sec. Sec. 1.401(a)(4)-1 through
1.401(a)(4)-13.
(2) In the case of plans maintained by organizations exempt from
income taxation under section 501(a), including plans subject to section
403(b)(12)(A)(i) (nonelective plans), the provisions of this section do
not apply to plan years beginning on or after January 1, 1996. For rules
applicable to plan years beginning on or after January 1, 1996, see
Sec. Sec. 1.401(a)(4)-1 through 1.401(a)(4)-13.
(Secs. 411 (d)(2) and (3) and 7805 of the Internal Revenue Code of 1954
(68A Stat. 917, 88 Stat. 912; 26 U.S.C. 411(d)(2) and (3) and 7805))
[T.D. 6500, 25 FR 11674, Nov. 26, 1960, as amended by T.D. 6675, 28 FR
10119, Sept. 17, 1963; T.D. 7934, 49 FR 1183, Jan. 10, 1984; 49 FR 2104,
Jan. 18, 1984; T.D. 8360, 56 FR 47536, Sept. 19, 1991; T.D. 8485, 58 FR
46778, Sept. 3, 1993]
Sec. 1.401-5 Period for which requirements of section 401(a) (3),
(4), (5), and (6) are applicable with respect to plans put into
effect before September 2,
1974.
A pension, profit-sharing, stock bonus, or annuity plan shall be
considered as satisfying the requirements of section 401(a) (3), (4),
(5), and (6) for the period beginning with the date on which it was put
into effect and ending with the 15th day of the third month following
the close of the taxable year of the employer in which the plan was put
into effect, if all the provisions of the plan which are necessary to
satisfy such requirements are in effect by the end of such period and
have been made effective for all purposes with respect to the whole of
such period. Thus, if an employer in 1954 adopts such a plan as of
January 1, 1954, and makes a return on the basis of the calendar year,
he will have until March 15, 1955, to amend his plan so as to make it
satisfy the requirements of section 401(a) (3), (4), (5), and (6) for
the calendar year 1954 provided that by March 15, 1955, all provisions
of such plan necessary to satisfy such requirements are in effect and
have been made retroactive for all purposes to January 1, 1954, the
effective date of the plan. If an employer is on a fiscal year basis,
for example, April 1 to March 31, and in 1954 adopts such a plan
effective as of April 1, 1954, he will have until June 15, 1955, to
amend his plan so as to make it satisfy the requirements of section
401(a) (3), (4), (5), and (6) for the fiscal year beginning April 1,
1954, provided that by June 15, 1955, all provisions of such plan
necessary to satisfy such requirements are in effect and have been made
retroactive for all purposes to April 1, 1954, the effective date of the
plan. It should be noted that under section 401(b) the period in which a
plan may be amended to qualify under section 401(a) ends before the date
on which taxpayers other than corporations are required to file income
tax returns. See section 6072. This section shall not apply to any
pension, profit-sharing, stock bonus, or annuity plan put into effect
after September 1, 1974, and shall not apply with respect to any
disqualifying provision to which Sec. 1.401(b)-1 applies.
[T.D. 6500, 25 FR 11674, Nov. 26, 1960; as amended by T.D. 7436, 41 FR
42653, Sept. 28, 1976]
Sec. 1.401-6 Termination of a qualified plan.
(a) General rules. (1) In order for a pension, profit-sharing, or
stock bonus trust to satisfy the requirements of section 401, the plan
of which such trust forms a part must expressly provide that, upon the
termination of the
[[Page 23]]
plan or upon the complete discontinuance of contributions under the
plan, the rights of each employee to benefits accrued to the date of
such termination or discontinuance, to the extent then funded, or the
rights of each employee to the amounts credited to his account at such
time, are nonforfeitable. As to what constitutes nonforfeitable rights
of an employee, see paragraph (a)(2) of Sec. 1.402(b)-1.
(2)(i) A qualified plan must also provide for the allocation of any
previously unallocated funds to the employees covered by the plan upon
the termination of the plan or the complete discontinuance of
contributions under the plan. Such provision may be incorporated in the
plan at its inception or by an amendment made prior to the termination
of the plan or the discontinuance of contributions thereunder.
(ii) Any provision for the allocation of unallocated funds is
acceptable if it specifies the method to be used and does not conflict
with the provisions of section 401(a)(4) and the regulations thereunder.
The allocation of unallocated funds may be in cash or in the form of
other benefits provided under the plan. However, the allocation of the
funds contributed by the employer among the employees need not
necessarily benefit all the employees covered by the plan. For example,
an allocation may be satisfactory if priority is given to benefits for
employees over the age of 50 at the time of the termination of the plan,
or those who then have at least 10 years of service, if there is no
possibility of discrimination in favor of employees who are officers,
shareholders, employees whose principal duties consist in supervising
the work of other employees, or highly compensated employees.
(iii) Subdivisions (i) and (ii) of this subparagraph do not require
the allocation of amounts to the account of any employee if such amounts
are not required to be used to satisfy the liabilities with respect to
employees and their beneficiaries under the plan (see section
401(a)(2)).
(b) Termination defined. (1) Whether a plan is terminated is
generally a question to be determined with regard to all the facts and
circumstances in a particular case. For example, a plan is terminated
when, in connection with the winding up of the employer's trade or
business, the employer begins to discharge his employees. However, a
plan is not terminated, for example, merely because an employer
consolidates or replaces that plan with a comparable plan. Similarly, a
plan is not terminated merely because the employer sells or otherwise
disposes of his trade or business if the acquiring employer continues
the plan as a separate and distinct plan of its own, or consolidates or
replaces that plan with a comparable plan. See paragraph (d)(4) of Sec.
1.381(c)(11)-1 for the definition of comparable plan. In addition, the
Commissioner may determine that other plans are comparable for purposes
of this section.
(2) For purposes of this section, the term termination includes both
a partial termination and a complete termination of a plan. Whether or
not a partial termination of a qualified plan occurs when a group of
employees who have been covered by the plan are subsequently excluded
from such coverage either by reason of an amendment to the plan, or by
reason of being discharged by the employer, will be determined on the
basis of all the facts and circumstances. Similarly, whether or not a
partial termination occurs when benefits or employer contributions are
reduced, or the eligibility or vesting requirements under the plan are
made less liberal, will be determined on the basis of all the facts and
circumstances. However, if a partial termination of a qualified plan
occurs, the provisions of section 401(a)(7) and this section apply only
to the part of the plan that is terminated.
(c) Complete discontinuance defined. (1) For purposes of this
section, a complete discontinuance of contributions under the plan is
contrasted with a suspension of contributions under the plan, which is
merely a temporary cessation of contributions by the employer. A
complete discontinuance of contributions may occur although some amounts
are contributed by the employer under the plan if such amounts are not
substantial enough to reflect the intent on the part of the employer to
continue to maintain the
[[Page 24]]
plan. The determination of whether a complete discontinuance of
contributions under the plan has occurred will be made with regard to
all the facts and circumstances in the particular case, and without
regard to the amount of any contributions made under the plan by
employees.
(2) In the case of a pension plan, a suspension of contributions
will not constitute a discontinuance if--
(i) The benefits to be paid or made available under the plan are not
affected at any time by the suspension, and
(ii) The unfunded past service cost at any time (which includes the
unfunded prior normal cost and unfunded interest on any unfunded cost)
does not exceed the unfunded past service cost as of the date of
establishment of the plan, plus any additional past service or
supplemental costs added by amendment.
(3) In any case in which a suspension of a profit-sharing plan is
considered a discontinuance, the discontinuance becomes effective not
later than the last day of the taxable year of the employer following
the last taxable year of such employer for which a substantial
contribution was made under the profit-sharing plan.
(d) Contributions or benefits which remain forfeitable. The
provisions of this section do not apply to amounts which are reallocated
to prevent the discrimination prohibited by section 401(a)(4) (see
paragraph (c) of Sec. 1.401-4).
(e) Effective date. This section shall apply to taxable years of a
qualified plan commencing after September 30, 1963. In the case of the
termination or complete discontinuance (as defined in this section) of
any qualified plan during any such taxable year, the rights accorded to
each employee covered under the plan must conform to the requirements of
this section. However, a plan which is qualified on September 30, 1963,
will not be disqualified merely because it does not expressly include
the provisions prescribed by this section.
[T.D. 6675, 28 FR 10120, Sept. 17, 1963]
Sec. 1.401-7 Forfeitures under a qualified pension plan.
(a) General rules. In the case of a trust forming a part of a
qualified pension plan, the plan must expressly provide that forfeitures
arising from severance of employment, death, or for any other reason,
must not be applied to increase the benefits any employee would
otherwise receive under the plan at any time prior to the termination of
the plan or the complete discontinuance of employer contributions
thereunder. The amounts so forfeited must be used as soon as possible to
reduce the employer's contributions under the plan. However, a qualified
pension plan may anticipate the effect of forfeitures in determining the
costs under the plan. Furthermore, a qualified plan will not be
disqualified merely because a determination of the amount of forfeitures
under the plan is made only once during each taxable year of the
employer.
(b) Examples. The rules of paragraph (a) of this section may be
illustrated by the following examples:
Example 1. The B Company Pension Trust forms a part of a pension
plan which is funded by individual level annual premium annuity
contracts. The plan requires ten years of service prior to obtaining a
vested right to benefits under the plan. One of the company's employees
resigns his position after two years of service. The insurance company
paid to the trustees the cash surrender value of the contract--$750. The
B Company must reduce its next contribution to the pension trust by this
amount.
Example 2. The C Corporation's trusteed pension plan has been in
existence for 20 years. It is funded by individual contracts issued by
an insurance company, and the premiums thereunder are paid annually.
Under such plan, the annual premium accrued for the year 1966 is due and
is paid on January 2, 1966, and on July 1 of the same year the plan is
terminated due to the liquidation of the employer. Some forfeitures were
incurred and collected by the trustee with respect to those participants
whose employment terminated between January 2 and July 1. The plan
provides that the amount of such forfeitures is to be applied to provide
additional annuity benefits for the remaining employees covered by the
plan. The pension plan of the C Corporation satisfies the provisions of
section 401(a)(8). Although forfeitures are used to increase benefits in
this case, this use of forfeitures is permissible since no further
contributions will be made under the plan.
[[Page 25]]
(c) Effective date. This section applies to taxable years of a
qualified plan commencing after September 30, 1963. However, a plan
which is qualified on September 30, 1963, will not be disqualified
merely because it does not expressly include the provisions prescribed
by this section.
[T.D. 6675, 28 FR 10121, Sept. 17, 1963]
Sec. 1.401-8 Custodial accounts prior to January 1, 1974.
(a) Treatment of a custodial account as a qualified trust. For
taxable years of a plan beginning after December 31, 1962, a custodial
account may be used, in lieu of a trust, under any pension, profit-
sharing, or stock bonus plan, described in section 401 if the
requirements of paragraph (b) of this section are met. A custodial
account may be used under such a plan, whether the plan covers common-
law employees, self-employed individuals who are treated as employees by
reason of section 401(c), or both. The use of a custodial account as
part of a plan does not preclude the use of a trust or another custodial
account as part of the same plan. A plan under which a custodial account
is used may be considered in connection with other plans of the employer
in determining whether the requirements of section 401 are satisfied.
For regulations relating to the period after December 31, 1973, see
Sec. 1.401(f)-11.
(b) Rules applicable to custodial accounts. (1) A custodial account
shall be treated for taxable years beginning after December 31, 1962, as
a qualified trust under section 401 if such account meets the following
requirements described in subdivisions (i) through (iii) of this
subparagraph:
(i) The custodial account must satisfy all the requirements of
section 401 that are applicable to qualified trusts. See subparagraph
(2) of this paragraph.
(ii) The custodian of the custodial account must be a bank.
(iii) The custodial agreement provides that the investment of the
funds in the account is to be made--
(A) Solely in stock of one or more regulated investment companies
which is registered in the name of the custodian or its nominee and with
respect to which an employee who is covered by the plan is the
beneficial owner, or
(B) Solely in annuity, endowment, or life insurance contracts,
issued by an insurance company and held by the custodian until
distributed pursuant to the terms of the plan. For purposes of the
preceding sentence, a face-amount certificate described in section
401(g) and Sec. 1.401-9 is treated as an annuity issued by an insurance
company.
See subparagraphs (3) and (4) of this paragraph.
(2) As a result of the requirement described in subparagraph (1)(i)
of this paragraph (relating to the requirements applicable to qualified
trusts), the custodial account must, for example, be created pursuant to
a written agreement which constitutes a valid contract under local law.
In addition, the terms of the contract must make it impossible, prior to
the satisfaction of all liabilities with respect to the employees and
their beneficiaries covered by the plan, for any part of the funds of
the custodial account to be used for, or diverted to, purposes other
than for the exclusive benefit of the employees or their beneficiaries
as provided for in the plan (see paragraph (a) of Sec. 1.401-2).
(3) The requirement described in subparagraph (1)(iii) of this
paragraph, relating to the investment of the funds of the plan, applies,
for example, to the employer contributions under the plan, any employee
contributions under the plan, and any earnings on such contributions.
Such requirement also applies to capital gains realized upon the sale of
stock described in (A) of such subdivision, to any capital gain
dividends received in connection with such stock, and to any refunds
described in section 852(b)(3)(D)(ii) (relating to undistributed capital
gains of a regulated investment company) which is received in connection
with such stock. However, since such requirement relates only to the
investment of the funds of the plan, the custodian may deposit funds
with a bank, in either a checking or savings account, while accumulating
sufficient funds to make additional investments or while awaiting an
appropriate time to make additional investments.
(4) The requirement in subparagraph (1)(iii)(A) of this paragraph
that an employee covered by the plan be the beneficial owner of the
stock does not mean
[[Page 26]]
that the employee who is the beneficial owner must have a nonforfeitable
interest in the stock. Thus, a plan may provide for forfeitures of an
employee's interest in such stock in the same manner as plans which use
a trust. In the event of a forfeiture of an employee's beneficial
ownership in the stock of a regulated investment company, the beneficial
ownership of such stock must pass to another employee covered by the
plan.
(c) Effects of qualification. (1) Any custodial account which
satisfies the requirements of section 401(f) shall be treated as a
qualified trust for all purposes of the Internal Revenue Code of 1954.
Accordingly, such a custodial account shall be treated as a separate
legal person which is exempt from the income tax by section 501(a). On
the other hand, such a custodial account is required to file the returns
described in sections 6033 and 6047 and to supply any other information
which a qualified trust is required to furnish.
(2) In determining whether the funds of a custodial account are
distributed or made available to an employee or his beneficiary, the
rules which under section 402(a) are applicable to trusts will also
apply to the custodial account as though it were a separate legal person
and not an agent of the employee.
(d) Effect of loss of qualification. If a custodial account which
has qualified under section 401 fails to qualify under such section for
any taxable year, such custodial account will not thereafter be treated
as a separate legal person, and the funds in such account shall be
treated as made available within the meaning of section 402(a)(1) to the
employees for whom they are held.
(e) Definitions. For purposes of this section--
(1) The term bank means a bank as defined in section 401(d)(1).
(2) The term regulated investment company means any domestic
corporation which issues only redeemable stock and is a regulated
investment company within the meaning of section 851(a) (but without
regard to whether such corporation meets the limitations of section
851(b)).
(Secs. 401(f)(2), 7805, Internal Revenue Code of 1954 (88 Stat. 939 and
68A Stat. 917; 26 U.S.C. 401(f)(2), 7805))
[T.D. 6675, 28 FR 10121, Sept. 17, 1963, as amended by T.D. 7565, 43 FR
41204, Sept. 15, 1978. Redesignated and amended by T.D. 7748, 46 FR
1695, Jan. 7, 1981]
Sec. 1.401-9 Face-amount certificates--nontransferable annuity
contracts.
(a) Face-amount certificates treated as annuity contracts. Section
401(g) provides that a face-amount certificate (as defined in section
2(a)(15) of the Investment Company Act of 1940 (15 U.S.C. sec. 80a-2))
which is not transferable within the meaning of paragraph (b)(3) of this
section shall be treated as an annuity contract for purposes of sections
401 through 404 for any taxable year of a plan subject to such sections
beginning after December 31, 1962. Accordingly, there may be established
for any such taxable year a qualified plan under which such face-amount
certificates are purchased for the participating employees without the
creation of a trust or custodial account. However, for such a plan to
qualify, the plan must satisfy all the requirements applicable to a
qualified annuity plan (see section 403(a) and the regulations
thereunder).
(b) Nontransferability of face-amount certificates and annuity
contracts. (1)(i) Section 401(g) provides that, in order for any face-
amount certificate, or any other contract issued after December 31,
1962, to be subject to any provision under sections 401 through 404
which is applicable to annuity contracts, as compared to other forms of
investment, such certificate or contract must be nontransferable at any
time when it is held by any person other than the trustee of a trust
described in section 401(a) and exempt under section 501(a). Thus, for
example, in order for a group or individual retirement income contract
to be treated as an annuity contract, if such contract is not held by
the trustee of an exempt employees' trust, it must satisfy the
requirements of this section. Furthermore, a face-
[[Page 27]]
amount certificate or an annuity contract will be subject to the tax
treatment under section 403(b) only if it satisfies the requirements of
section 401(g) and this section. Any certificate or contract in order to
satisfy the provisions of this section must expressly contain the
provisions that are necessary to make such certificate or contract not
transferable within the meaning of this paragraph.
(ii) In the case of any group contract purchased by an employer
under a plan to which sections 401 through 404 apply, the restriction on
transferability required by section 401(g) and this section applies to
the interest of the employee participants under such group contract but
not to the interest of the employer under such contract.
(2) If a trust described in section 401(a) which is exempt from tax
under section 501(a) distributes any annuity, endowment, retirement
income, or life insurance contract, then the rules relating to the
taxability of the distributee of any such contract are set forth in
paragraph (a)(2) of Sec. 1.402(a)-1.
(3) A face-amount certificate or an annuity contract is transferable
if the owner can transfer any portion of his interest in the certificate
or contract to any person other than the issuer thereof. Accordingly,
such a certificate or contract is transferable if the owner can sell,
assign, discount, or pledge as collateral for a loan or as security for
the performance of an obligation or for any other purpose his interest
in the certificate or contract to any person other than the issuer
thereof. On the other hand, for purposes of section 401(g), a face-
amount certificate or annuity contract is not considered to be
transferable merely because such certificate or contract, or the plan of
which it is a part, contains a provision permitting the employee to
designate a beneficiary to receive the proceeds of the certificate or
contract in the event of his death, or contains a provision permitting
the employee to elect to receive a joint and survivor annuity, or
contains other similar provisions.
(4) A material modification in the terms of an annuity contract
constitutes the issuance of a new contract regardless of the manner in
which it is made.
(c) Examples. The rules of this section may be illustrated by the
following examples:
Example 1. The P Employees' Annuity Plan is a nontrusteed plan which
is funded by individual annuity contracts issued by the Y Insurance
Company. Each annuity contract issued by such company after December 31,
1962, provides, on its face, that it is ``not transferable''. The terms
of each such contract further provide that, ``This contract may not be
sold, assigned, discounted, or pledged as collateral for a loan or as
security for the performance of an obligation or for any other purpose,
to any person other than this company.'' The annuity contracts of the P
Employees' Annuity Plan satisfy the requirements of section 401(g) and
this section.
Example 2. The R Company Pension Trust forms a part of a pension
plan which is funded by individual level premium annuity contracts. Such
contracts are purchased by the trustee of the R Company Pension Trust
from the Y Insurance Company. The trustee of the R Company Pension Trust
is the legal owner of each such contract at all times prior to the
distribution of such contract to a qualifying annuitant. The trustee
purchases such a contract on January 3, 1963, in the name of an employee
who qualifies on that date for coverage under the plan. At the time such
contract is purchased, and while the contract is held by the trustee of
the R Company Pension Trust, the contract does not contain any
restrictions with respect to its transferability. The annuity contract
purchased by the trustee of the R Company Pension Trust satisfies the
requirements of section 401(g) and this section while it is held by the
trustee.
Example 3. A is the trustee of the X Corporation's Employees'
Pension Trust. The trust forms a part of a pension plan which is funded
by individual level premium annuity contracts. The trustee is the legal
owner of such contracts, but the employees covered under the plan obtain
beneficial interests in such contracts after ten years of service with
the X Corporation. On January 15, 1980, A distributes to D an annuity
contract issued to A in D's name on June 25, 1959, and distributes to E
an annuity contract issued to A in E's name on September 30, 1963. The
contract issued to D need not be nontransferable, but the contract
issued to E must be nontransferable in order to satisfy the requirements
of section 401(g) and this section.
Example 4. The corpus of the Y Corporation's Employees' Pension Plan
consists of individual insurance contracts in the names of the covered
employees and an auxiliary fund which is used to convert such policies
to annuity contracts at the time a beneficiary of such trust retires. F
retires on June 15, 1963, and the trustee converts the individual
insurance contract on F's life to a
[[Page 28]]
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 Sec. Sec. 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 Sec. Sec.
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 Sec. Sec.
1.401-11 through 1.401-13 are applicable to taxable years beginning
after December 31, 1962.
(2) A self-employed individual is covered under a qualified plan
during the period beginning with the date a contribution is first made
by, or for, him under the qualified plan and ending when there are no
longer funds under the plan which can be used to provide him or his
beneficiaries with benefits.
(b) Treatment of a self-employed individual as an employee. (1) For
purposes of section 401, a self-employed individual who receives earned
income from an employer during a taxable year of such employer beginning
after December 31, 1962, shall be considered an employee of such
employer for such taxable year. Moreover, such an individual will be
considered an employee for a taxable year if he would otherwise be
treated as an employee but for the fact that the employer did not have
net profits for that taxable year. Accordingly, the employer may cover
such an individual under a qualified plan during years of the plan
beginning with or within a taxable year of the employer beginning after
December 31, 1962.
(2) If a self-employed individual is engaged in more than one trade
or business, each such trade or business shall be considered a separate
employer for purposes of applying the provisions of sections 401 through
404 to such individual. Thus, if a qualified plan is established for one
trade or business but not the others, the individual will be considered
an employee only if he received earned income with respect to such trade
or business and only the amount of such earned income derived from that
trade or business shall be taken into account for purposes of the
qualified plan.
(3)(i) The term employee, for purposes of section 401, does not
include a self-employed individual when the term ``common-law'' employee
is used or when the context otherwise requires that the term
``employee'' does not include a self-employed individual. The term
``common- law'' employee also includes an individual who is treated as
an employee for purposes of section 401 by reason of the provisions of
section 7701(a)(20), relating to the treatment of certain full-time life
insurance salesmen as employees. Furthermore, an individual who is a
common-law employee is not a self-employed individual with respect to
income attributable to such employment, even though such income
constitutes net earnings from self-employment as defined in section
1402(a). Thus, for example, a minister who is a common-law employee is
not a self-employed individual with respect to income attributable to
such employment, even though such income constitutes net earnings from
self-employment as defined in section 1402(a).
(ii) An individual may be treated as an employee within the meaning
of section 401(c)(1) of one employer even though such individual is also
a common-law employee of another employer. For example, an attorney who
[[Page 29]]
is a common-law employee of a corporation and who, in the evenings
maintains an office in which he practices law as a self-employed
individual is an employee within the meaning of section 401(c)(1) with
respect to the law practice. This example would not be altered by the
fact that the corporation maintained a qualified plan under which the
attorney is benefited as a common-law employee.
(4) For the purpose of determining whether an employee within the
meaning of section 401(c)(1) satisfies the requirements for eligibility
under a qualified plan established by an employer, such an employer may
take into account past services rendered by such an employee both as a
self-employed individual and as a common-law employee if past services
rendered by other employees, including common-law employees, are
similarly taken into account. However, an employer cannot take into
account only past services rendered by employees within the meaning of
section 401(c)(1) if past services rendered to such employer by
individuals who are, or were, common-law employees are not taken into
account. Past service as described in this subparagraph may be taken
into account for the purpose of determining whether an individual who
is, or was, an employee within the meaning of section 401(c)(1)
satisfies the requirements for eligibility even if such service was
rendered prior to January 1, 1963. On the other hand, past service
cannot be taken into account for purposes of determining the
contributions which may be made on such an individual's behalf under a
qualified plan.
(c) Definition of earned income--(1) General rule. For purposes of
section 401 and the regulations thereunder, ``earned income'' means, in
general, net earnings from self-employment (as defined in section
1402(a)) to the extent such net earnings constitute compensation for
personal services actually rendered within the meaning of section
911(b).
(2) Net earnings from self-employment. (i) The computation of the
net earnings from self-employment shall be made in accordance with the
provisions of section 1402(a) and the regulations thereunder, with the
modifications and exceptions described in subdivisions (ii) through (iv)
of this subparagraph. Thus, an individual may have net earnings from
self-employment, as defined in section 1402(a), even though such
individual does not have self-employment income, as defined in section
1402(b), and, therefore, is not subject to the tax on self-employment
income imposed by section 1401.
(ii) Items which are not included in gross income for purposes of
chapter 1 of the Code and the deductions properly attributable to such
items must be excluded from the computation of net earnings from self-
employment even though the provisions of section 1402(a) specifically
require the inclusion of such items. For example, if an individual is a
resident of Puerto Rico, so much of his net earnings from self-
employment as are excluded from gross income under section 933 must not
be taken into account in computing his net earnings from self-employment
which are earned income for purposes of section 401.
(iii) In computing net earnings from self-employment for the purpose
of determining earned income, a self-employed individual may disregard
only deductions for contributions made on his own behalf under a
qualified plan. However, such computation must take into account the
deduction allowed by section 404 or 405 for contributions under a
qualified plan on behalf of the common-law employees of the trade or
business.
(iv) For purposes of determining whether an individual has net
earnings from self-employment and, thus, whether he is an employee
within the meaning of section 401(c)(1), the exceptions in section
1402(c) (4) and (5) shall not apply. Thus, certain ministers, certain
members of religious orders, doctors of medicine, and Christian Science
practitioners are treated for purposes of section 401 as being engaged
in a trade or business from which net earnings from self-employment are
derived. In addition, the exceptions in section 1402(c)(2) shall not
apply in the case of any individual who is treated as an employee under
section 3121(d)(3) (A), (C), or (D). Therefore, such individuals are
treated, for purposes of section 401, as being engaged in a trade or
business
[[Page 30]]
from which net earnings from self-employment may be derived.
(3) Compensation for personal services actually rendered. (i) For
purposes of section 401, the term ``earned income'' includes only that
portion of an individual's net earnings from self-employment which
constitutes earned income as defined in section 911(b) and the
regulations thereunder. Thus, such term includes only professional fees
and other amounts received as compensation for personal services
actually rendered by the individual. There is excluded from ``earned
income'' the amount of any item of income, and any deduction properly
attributable to such item, if such amount is not received as
compensation for personal services actually rendered. Therefore, an
individual who renders no personal services has no ``earned income''
even though such an individual may have net earnings from self-
employment from a trade or business.
(ii) If a self-employed individual is engaged in a trade or business
in which capital is a material income-producing factor, then, under
section 911(b), his earned income is only that portion of the net
profits from the trade or business which constitutes a reasonable
allowance as compensation for personal services actually rendered.
However, such individual's earned income cannot exceed 30 percent of the
net profits of such trade or business. The net profits of the trade or
business is not necessarily the same as the net earnings from self-
employment derived from such trade or business.
(4) Minimum earned income when both personal services and capital
are material income-producing factors. (i) If a self-employed individual
renders personal services on a full-time, or substantially full-time,
basis to only one trade or business, and if with respect to such trade
or business capital is a material income-producing factor, then the
amount of such individual's earned income from the trade or business is
considered to be not less than so much of his share in the net profits
of such trade or business as does not exceed $2,500.
(ii) If a self-employed individual renders substantial personal
services to more than one trade or business, and if with respect to all
such trades or businesses such self-employed individual actually renders
personal services on a full-time, or substantially full-time, basis,
then the earned income of the self-employed individual from trades or
businesses for which he renders substantial personal services and in
which both personal services and capital are material income-producing
factors is considered to be not less than--
(A) So much of such individual's share of the net profits from all
trades or businesses in which he renders substantial personal services
as does not exceed $2,500, reduced by.
(B) Such individual's share of the net profits of any trade or
business in which only personal services is a material income-producing
factor.
However, in no event shall the share of the net profits of any trade or
business in which capital is a material income-producing factor be
reduced below the amount which would, without regard to the provisions
of this subdivision, be treated as the earned income derived from such
trade or business under section 911(b). In making the computation
required by this subdivision, any trade or business with respect to
which the individual renders substantial personal services shall be
taken into account irrespective of whether a qualified plan has been
established by such trade or business.
(iii) If the provisions of subdivision (ii) of this subparagraph
apply in determining the earned income of a self-employed individual,
and such individual is engaged in two or more trades or businesses in
which capital and personal services are material income-producing
factors, then the total amount treated as the earned income shall be
allocated to each such trade or business for which he performs
substantial personal services in the same proportion as his share of net
profits from each such trade or business bears to his share of the total
net profits from all such trades or businesses. Thus, in such case, the
amount of earned income attributable to any such trade or business is
computed by multiplying the total earned income as determined under
subdivision (ii) of this subparagraph by the individual's net profits
[[Page 31]]
from such trade or business and dividing that product by the
individual's total net profits from all such trades or businesses.
(iv) For purposes of this subparagraph, the determination of whether
an individual renders personal services on a full-time, or substantially
full-time, basis is to be made with regard to the aggregate of the
trades and businesses with respect to which the employee renders
substantial personal services as a common-law employee or as a self-
employed individual. However, for all other purposes in applying the
rules of this subparagraph, a trade or business with respect to which an
individual is a common-law employee shall be disregarded.
(d) Definition of owner-employee. For purposes of section 401 and
the regulations thereunder, the term ``owner-employee'' means a
proprietor of a proprietorship, or, in the case of a partnership, a
partner who owns either more than 10 percent of the capital interest, or
more than 10 percent of the profits interest, of the partnership. Thus,
an individual who owns only 2 percent of the profits interest but 11
percent of the capital interest of a partnership is an owner-employee. A
partner's interest in the profits and the capital of the partnership
shall be determined by the partnership agreement. In the absence of any
provision regarding the sharing of profits, the interest in profits of
the partners will be determined in the same manner as their distributive
shares of partnership taxable income. However, a guaranteed payment (as
described in section 707(c)) is not considered a distributive share of
partnership income for such purpose. See section 704(b), relating to the
determination of the distributive share by the income or loss ratio, and
the regulations thereunder. In the absence of a provision in the
partnership agreement, a partner's capital interest in a partnership
shall be determined on the basis of his interest in the assets of the
partnership which would be distributable to such partner upon his
withdrawal from the partnership, or upon liquidation of the partnership,
whichever is the greater.
(e) Definition of employer. (1) For purposes of section 401, a sole
proprietor is considered to be his own employer, and the partnership is
considered to be the employer of each of the partners. Thus, an
individual partner is not an employer who may establish a qualified plan
with respect to his services to the partnership.
(2) Regardless of the provision of local law, a partnership is
deemed, for purposes of section 401, to be continuing until such time as
it is terminated within the meaning of section 708, relating to the
continuation of a partnership.
[T.D. 6675, 28 FR 10123, Sept. 17, 1963]
Sec. 1.401-11 General rules relating to plans covering self-employed
individuals.
(a) Introduction. This section provides certain rules which
supplement, and modify, the rules of Sec. Sec. 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-
[[Page 32]]
law employees covered under the plan is related to the earned income of
a self-employed individual and thereby to the profits of the trade or
business. On the other hand, for example, a plan which defines the
compensation of any self-employed individual as his earned income and
which provides that the employer will contribute 10 percent of the
compensation of each employee covered under the plan is a pension plan
since the contribution on behalf of common-law employees is fixed
without regard to whether the self-employed individual has earned income
or the amount thereof.
(2) The Self-Employed Individuals Tax Retirement Act of 1962 (76
Stat. 809) permits self-employed individuals to be treated as employees
and therefore included in qualified plans, but it is clear that such law
requires such self-employed individuals to provide benefits for their
employees on a nondiscriminatory basis. Self-employed individuals will
not be considered as providing contributions or benefits for an employee
to the extent that the wages or salary of the employee covered under the
plan are reduced at or about the time the plan is adopted.
(3) In addition to permitting self-employed individuals to
participate in qualified plans, the Self-Employed Individuals Tax
Retirement Act of 1962 extends to such individuals some of the tax
benefits allowed common-law employee-participants in such plans.
However, the tax benefits allowed a self-employed individual are
restricted by the limits which are placed on the deductions allowed for
contributions on such an individual's behalf. In view of these
restrictions on the tax benefits extended to any self-employed
individual, a self-employed individual participating in a qualified plan
may not participate in any forfeitures. Therefore, in the case of a
qualified plan which covers any self-employed individual, a separate
account must be established for each self-employed individual to which
no forfeitures can be allocated.
(c) Requirements as to coverage. (1) In general, section 401(a)(3)
and the regulations thereunder prescribe the coverage requirements which
a qualified plan must satisfy. However, if such a plan covers self-
employed individuals who are not owner-employees, it must, in addition
to satisfying such requirements, satisfy the requirements of this
paragraph. If any owner-employee is covered under a qualified plan, the
provisions of this paragraph do not apply, but the provisions of section
401(d), including section 401(d)(3), do apply (see Sec. 1.401-12).
(2)(i) Section 401(a)(3)(B) provides that a plan may satisfy the
coverage requirements for qualification if it covers such employees as
qualify under a classification which is found not to discriminate in
favor of employees who are officers, shareholders, persons whose
principal duties consist in supervising the work of other employees, or
highly compensated employees. Section 401(a)(5) sets forth certain
classifications that will not in themselves be considered
discriminatory. Under such section, a classification which excludes all
employees whose entire remuneration constitutes ``wages'' under section
3121(a)(1), will not be considered discriminatory merely because of such
exclusion. Similarly, a plan which includes all employees will not be
considered discriminatory solely because the contributions or benefits
based on that part of their remuneration which is excluded from
``wages'' under section 3121(a)(1) differ from the contributions or
benefits based on that part of their remuneration which is not so
excluded. However, in determining if a classification is discriminatory
under section 401(a)(3)(B), consideration will be given to whether the
total benefits resulting to each employee under the plan and under the
Social Security Act, or under the Social Security Act only, establish an
integrated and correlated retirement system satisfying the tests of
section 401(a). A plan which covers self-employed individuals, none of
whom is an owner-employee, may also be integrated with the contributions
or benefits under the Social Security Act. In such a case, the portion
of the earned income (as defined in section 401(c)(2)) of such an
individual which does not exceed the maximum amount which 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
[[Page 33]]
established, shall be treated as ``wages'' under section 3121(a)(1)
subject to the tax imposed by section 3111 (relating to the tax on
employers) for purposes of applying the rules of paragraph (e)(2) of
Sec. 1.401-3, relating to the determination of whether a plan is
properly integrated. However, if the plan covers an owner-employee, the
rules relating to the integration of the plan with the contributions or
benefits under the Social Security Act contained in paragraph (b) of
Sec. 1.401-12 apply.
(ii) Certain of the classifications enumerated in section 401(a)(5)
do not apply to plans which provide contributions or benefits for any
self-employed individual. Since self-employed individuals are not
salaried or clerical employees, the provision in section 401(a)(5)
permitting a plan, in certain cases to cover only this type of employee
is inapplicable to plans which cover any self-employed individual.
(iii) The classifications enumerated in section 401(a)(5) are not
exclusive, and it is not necessary that a qualified plan cover all
employees or all full-time employees. Plans may qualify even though
coverage is limited in accordance with a particular classification
incorporated in the plan, provided the effect of covering only such
employees as satisfy such eligibility requirement does not result in the
prohibited discrimination.
(d) Discrimination as to contributions or benefits--(1) In general.
In order for a plan to be qualified, there must be no discrimination in
contributions or benefits in favor of employees who are officers,
shareholders, supervisors, or highly compensated, as against other
employees whether within or without the plan. A self-employed
individual, by reason of the contingent nature of his compensation, is
considered to be a highly-compensated employee, and thus is a member of
the group in whose favor discrimination is prohibited. In determining
whether the prohibited discrimination exists, the total employer
contribution on behalf of a self-employed individual shall be taken into
account regardless of the fact that only a portion of such contribution
is allowed as a deduction. For additional rules relating to
discrimination as to contributions or benefits with regard to plans
covering any owner-employee, see Sec. 1.401-12.
(2) Base for computing contributions or benefits. (i) A plan which
is otherwise qualified is not considered discriminatory merely because
the contributions or benefits provided under the plan bear a uniform
relationship to the total compensation, basic compensation, or regular
rate of compensation of the employees, including self-employed
individuals, covered under the plan.
(ii) In the case of a self-employed individual who is covered under
a qualified plan, the total compensation of such individual is the
earned income (as defined in section 401(c)(2)) which such individual
derives from the employer's trade or business, or trades or businesses,
with respect to which the qualified plan is established. Thus, for
example, in the case of a partner, his total compensation includes both
his distributive share of partnership income, whether or not
distributed, and guaranteed payments described in section 707(c) made to
him by the partnership establishing the plan, to the extent that such
income constitutes earned income as defined in section 401(c)(2).
(iii)(A) The basic or regular rate of compensation of any self-
employed individual is that portion of his earned income which bears the
same ratio to his total earned income derived from the trade or
business, or trades or businesses, with respect to which the qualified
plan is established as the aggregate basic or regular compensation of
all common-law employees covered under the plan bears to the aggregate
total compensation of such employees derived from such trade or
business, or trades or businesses.
(B) If an employer establishes two or more plans which satisfy the
requirements of section 401(a) separately, and only one such plan covers
a self-employed individual, the determination of the basic or regular
rate of compensation of such self-employed individual is made with
regard to the compensation of common-law employees covered 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
[[Page 34]]
together in order to satisfy the requirements of section 401(a), the
computation of the basic or regular rate of compensation of a self-
employed individual must be made with regard to the compensation of the
common-law employees covered by so many of such plans as are required to
be taken together in order to satisfy the qualification requirements of
section 401(a).
(3) Discriminatory contributions. If a discriminatory contribution
is made by, or for, a self-employed individual who is an employee within
the meaning of section 401(c)(1) because of an erroneous assumption as
to the earned income of such individual, the plan will not be considered
discriminatory if adequate adjustment is made to remove such
discrimination. In the case of any self-employed individual who is an
owner-employee, the amount of any excess contribution to be returned and
the manner in which it is to be repaid are determined by the provisions
of section 401(d)(8) and (e). However, if any self-employed individual,
including any owner-employee, has not made the full contribution
permitted to be made on his behalf as an employee, then, if the plan
expressly provides, so much of any excess contribution by such self-
employed individual's employer as may, under the provisions of the plan,
be treated as a contribution made by such individual as an employee can
be so treated.
(e) Distribution of entire interest. (1) If a trust forms part of a
plan which covers a self-employed individual, such trust shall
constitute a qualified trust under section 401 only if the plan of which
such trust is a part expressly provides that the entire interest of each
employee, including any common-law employee, will be distributed in
accordance with the provisions of subparagraph (2) or (3) of this
paragraph.
(2) Unless the provisions of subparagraph (3) of this paragraph
apply, the entire interest of each employee (including contributions he
has made on his own behalf, contributions made on his behalf by his
employer, and interest thereon) must be actually distributed to such
employee--
(i) In the case of an employee, other than an individual who is, or
has been, an owner-employee under the plan, not later than the last day
of the taxable year of such employee in which he attains the age of
70\1/2\, or not later than the last day of the taxable year in which
such employee retires, whichever is later, and
(ii) In the case of an employee who is, or has been, an owner-
employee under the plan, not later than the last day of the taxable year
in which he attains the age of 70\1/2\.
(3) In lieu of distributing an employee's entire interest in a
qualified plan as provided in subparagraph (2) of this paragraph, such
interest may be distributed commencing no later than the last taxable
year described in such subparagraph (2). In such case, the plan must
expressly provide that the entire interest of such an employee shall be
distributed to him and his beneficiaries, in a manner which satisfies
the requirements of subparagraph (5) of this paragraph, over any of the
following periods (or any combination thereof)--
(i) The life of the employee, or
(ii) The lives of the employee and his spouse, or
(iii) A period certain not longer than the life expectancy of the
employee, or
(iv) A period certain not longer than the joint life and last
survivor expectancy of the employee and his spouse.
(4) For purposes of subparagraphs (3) and (5) of this paragraph, the
determination of the life expectancy of the employee or the joint life
and last survivor expectancy of the employee and his spouse is to be
made either (i) only once, at the time the employee receives the first
distribution of his entire interest under the plan, or (ii)
periodically, in a consistent manner. Such life expectancy or joint life
and last survivor expectancy cannot exceed the period computed by the
use of the expected return multiples in Sec. 1.72-9, or, in the case of
payments under a contract issued by an insurance company, the period
computed by use of the life expectancy tables of such company.
(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
[[Page 35]]
employee under the plan at the time the distribution is made (expressed
in either dollars or units) by the life expectancy of the employee, or
joint life and last survivor expectancy of the employee and his spouse
(whichever is applicable), determined in accordance with the provisions
of subparagraph (4) of this paragraph. However, no distribution need be
made in any year, or a lesser amount may be distributed, if the
aggregate amounts distributed by the end of that year are at least equal
to the aggregate of the minimum amounts required by this subparagraph to
have been distributed by the end of such year.
(6) If an employee's entire interest is distributed in the form of
an annuity contract, then the requirements of section 401(a)(9) are
satisfied if the distribution of such contract takes place before the
end of the latest taxable year described in subparagraph (2) of this
paragraph, and if the employee's interest will be paid over a period
described in subparagraph (3) of this paragraph and at a rate which
satisfies the requirements of subparagraph (5) of this paragraph.
(7) The requirements of section 401(a)(9) do not preclude
contributions from being made on behalf of an owner-employee under a
qualified plan subsequent to the taxable year in which the distribution
of his entire interest is required to commence. Thus, if all other
requirements for qualification are satisfied, a qualified plan may
provide contributions for an owner-employee who has already attained age
70\1/2\. However, a distribution of benefits attributable to
contributions made on behalf of an owner-employee in a taxable year
beginning after the taxable year in which he attains the age of 70\1/2\
must satisfy the requirements of subparagraph (3) of this paragraph.
Thus, if an owner-employee has already attained the age of 70\1/2\ at
the time the first contribution is made on his behalf, the distribution
of his entire interest must commence in the year in which such
contribution is first made on his behalf.
(8) This paragraph shall not apply and an otherwise qualified trust
will not be disqualified if the method of distribution under the plan is
one which was designated by a common-law employee prior to October 10,
1962, and such method of distribution is not in accordance with the
provisions of section 401(a)(9). Such exception applies regardless of
whether the actual distribution of the entire interest of an employee
making such a designation, or any portion of such interest, has
commenced prior to October 10, 1962.
[T.D. 6675, 28 FR 10124, Sept. 17, 1963, as amended by T.D. 6982, 33 FR
16500, Nov. 13, 1968]
Sec. 1.401-12 Requirements for qualification of trusts and plans
benefiting owner-employees.
(a) Introduction. This section prescribes the additional
requirements which must be met for qualification of a trust forming part
of a pension or profit-sharing plan, or of an annuity plan, which covers
any self-employed individual who is an owner-employee as defined in
section 401(c)(3). However, to the extent that the provisions of Sec.
1.401-11 are not modified by the provisions of this section, such
provisions are also applicable to a plan which covers an owner-employee.
The provisions of this section apply to taxable years beginning after
December 31, 1962. Except as otherwise provided, paragraphs (b) through
(m) of this section apply to taxable years beginning after December 31,
1962. Paragraph (n) of this section applies to plan years determined in
accordance with paragraph (n)(1) of the section.
(b) General rules. (1) The qualified plan and trust of an
unincorporated trade or business does not have to satisfy the additional
requirements for qualification merely because an owner-employee derives
earned income (as defined in section 401(c)(2)) from the trade or
business with respect to which the plan is established. Such additional
requirements need be satisfied only if an owner-employee is actually
covered under the plan of the employer. An owner-employee may only be
covered 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
[[Page 36]]
is considered to have impliedly consented to being covered under the
plan.
(2) A qualified plan covering an owner-employee must be a definite
written program and arrangement setting forth all provisions essential
for qualification at the time such plan is established. Therefore, for
example, even though the owner-employee is the only employee covered
under the plan at the time the plan is established, the plan must
incorporate all the provisions relating to the eligibility and benefits
of future employees.
(c) Bank trustee. (1)(i) If a trust created after October 9, 1962,
is to form a part of a qualified pension or profit-sharing plan covering
an owner-employee, or if a trust created before October 10, 1962, but
not exempt from tax on October 9, 1962, is to form part of such a plan,
the trustee of such trust must be a bank as defined in paragraph (c)(2)
of this section, unless an exception contained in paragraph (c)(4) of
this section applies, or paragraph (n) of this section applies.
(ii) The provisions of this paragraph do not apply to an employees'
trust created prior to October 10, 1962, if such trust was exempt from
tax on October 9, 1962, even though the plan of which such trust forms a
part is amended after December 31, 1962, to cover any owner-employee.
Although the trustee of a trust described in the preceding sentence need
not be a bank, all other requirements for the qualification of such a
trust must be satisfied at the time an owner-employee is first covered
under such plan.
(2) The term bank as used in this paragraph means--
(i) A bank as defined in section 581;
(ii) A corporation which, under the laws of the State of its
incorporation or under the laws of the District of Columbia, is subject
to both the supervision of, and examination by, the authority in such
jurisdiction in charge of the administration of the banking laws;
(iii) In the case of a trust created or organized outside of the
United States, that is, outside the States and the District of Columbia,
a bank or trust company, wherever incorporated, exercising fiduciary
powers and subject to both supervision and examination by governmental
authority;
(iv) Beginning on January 1, 1974, an insured credit union (within
the meaning of section 101 (6) of the Federal Credit Union Act, 12
U.S.C. 1752 (6)).
(3) Although a bank is required to be the trustee of a qualified
trust, another person, including the employer, may be granted the power
in the trust instrument to control the investment of the trust funds
either by directing investments, including reinvestments, disposals, and
exchanges, or by disapproving proposed investments, including
reinvestments, disposals, or exchanges.
(4)(i) This paragraph does not apply to a trust created or organized
outside the States and the District of Columbia before October 10, 1962,
if, on October 9, 1962, such trust is described in section 402(c) as an
organization treated as if it was a trust exempt from tax under section
501(a).
(ii) In addition, the requirement that the trustee must be a bank
does not apply to a qualified trust forming a part of a pension or
profit-sharing plan if--
(A) The investments of all the funds in such trust are in annuity,
endowment, or life insurance contracts, issued by a company which is a
life insurance company as defined in section 801(a) during the taxable
year immediately preceding the year that such contracts are originally
purchased;
(B) All the proceeds which are, or may become, payable under the
contract are payable directly to the employee or his beneficiary;
(C) The plan contains a provision to the effect that the employer is
to substitute a bank as a trustee or custodian of the contracts if the
employer is notified by the district director that such substitution is
required because the trustee is not keeping such records, or making such
returns, or rendering such statements, as are required by forms or
regulations.
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
[[Page 37]]
trust or trusts and an annuity plan or plans as constituting parts of a
single plan which is intended to satisfy the requirements for
qualification. However, each trust (or custodial account) so designated
which is part of a plan covering an owner-employee must satisfy the
requirements of this paragraph. Thus, for example, if all other
requirements for qualification are satisfied by the plan, a qualified
profit-sharing plan may provide that a portion of the contributions
under the plan will be paid to a custodial account, the custodian of
which is a bank, for investment in stock of a regulated investment
company, and the remainder of such contributions will be paid to a
trust, the trustee of which is not a bank, for investment in annuity
contracts.
(d) Profit-sharing plan. (1) A profit-sharing plan, as defined in
paragraph (b)(1)(ii) of Sec. 1.401-1, which covers any owner-employee
must contain a definite formula for determining the contributions to be
made by the employer on behalf of employees, other than owner-employees.
A formula to be definite must specify the portion of profits to be
contributed to the trust and must also define profits for plan purposes.
A definite formula may contain a variable factor, if the value of such
factor may not vary at the discretion of the employer. For example, the
percentage of profits to be contributed each year may differ depending
on the amount of profits. On the other hand, a formula which, for
example, specifies that profits for plan purposes are not to exceed the
cash on hand at the time the employer contribution is made is not a
definite formula. The requirement that the plan formula be definite is
satisfied if such formula limits the amount to be contributed on behalf
of all employees covered under the plan to the amount which permits
self-employed individuals to obtain the maximum deduction under section
404(a). However, even though the plan formula is definite, the plan must
satisfy all the other requirements for qualification, including the
requirement that the contributions under the plan not discriminate in
favor of any self-employed individual, and the requirement that the plan
be for the exclusive benefit of the employees in general.
(2) A definite contribution formula constitutes an integral part of
a qualified profit-sharing plan and may not be amended except for a
valid business reason.
(3) The requirement that a profit-sharing plan contain a definite
formula for determining the amount of contributions to be made on behalf
of employees does not apply to contributions which are made on behalf of
owner-employees. However, such contributions are subject to the
requirement that they be nondiscriminatory with respect to other
employees and must not exceed the limitations on allowable and
deductible contributions which may be made by owner-employees.
(e) Requirements as to coverage--(1) Coverage of all employees. The
coverage requirements contained in section 401(a)(3) do not apply to a
plan which covers any owner-employee. However, such a plan must satisfy
the coverage requirements of section 401(d), including section
401(d)(3). Accordingly, a plan which covers an owner-employee must
benefit each employee of the trade or business (other than any owner-
employee who does not consent to be covered under the plan) whose
customary period of employment has been for more than 20 hours a week
for more than five months during each of three consecutive periods of
twelve calendar months. Therefore, a plan may not provide, for example,
that an employee, other than an owner-employee, is ineligible to
participate because he does not consent to be a participant or because
he does not consent to make reasonable contributions under the plan.
(2) Period of service. (i) In determining whether an employee
renders service to the same employer, and, therefore, must be covered
under the plan of such employer, a partnership is considered to be one
employer during the entire 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,
[[Page 38]]
his period of employment is the aggregate of his service as a common-law
employee and an employee within the meaning of section 401(c)(1).
(iii) In determining whether any employee, including any owner-
employee, has three years of service, past service of any such employee
may be taken into account as provided in paragraph (b) of Sec. 1.401-
10. Thus, if an employer takes into account past service for any owner-
employee, he must take into account the past service of all his other
employees to the same extent. However, a plan may provide for coverage
after a period of service which is shorter than three years, but in no
case may the plan require a waiting period for employees which is longer
than that required for the owner-employees.
(f) Discrimination in contributions or benefits. (1) Variations in
contributions or benefits may be provided under the plan so long as the
plan does not discriminate, either as to contributions or benefits, in
favor of officers, employees whose principal duties consist in
supervising the work of other employees, or highly compensated
employees, as against other employees (see Sec. 1.401-4). For the
purpose of determining whether the provisions of a plan which provide
contributions or benefits for an owner-employee result in the prohibited
discrimination, an owner-employee, like other self-employed individuals,
is considered a highly compensated employee (see paragraph (d) of Sec.
1.401-11). Whether or not a plan is discriminatory is determined by the
actual operation of the plan as well as by its formal provisions.
(2) The provisions of section 401(a)(5), relating to certain plan
provisions which will not in and of themselves be considered
discriminatory, are not applicable to any plan which covers any owner-
employee. Such a plan must, instead, satisfy the requirements of section
401(a)(10) and section 401(d)(6). Accordingly, a plan is not
discriminatory within the meaning of section 401(a)(4) merely because
the contributions or benefits provided for the employees covered under
the plan bear a uniform relationship to the total compensation, or to
the basic or regular rate of compensation, of such employees. The total
compensation or the basic or regular rate of compensation of an owner-
employee is computed in accordance with the provisions of paragraph
(d)(2) of Sec. 1.401-11.
(3) Even though the contributions under the plan do not bear a
uniform relationship to the total compensation, or the basic or regular
rate of compensation, of the employees covered thereunder and the plan
would otherwise be considered discriminatory within the meaning of
section 401(a)(4), the plan shall not be considered discriminatory if
such variation is due to employer contributions on behalf of any owner-
employee which are required, under the plan, to be applied to pay
premiums or other consideration on one or more level premium contracts
described in section 401(e)(3)(A). In a taxable year to which the
foregoing exception applies and, therefore, one in which the
contributions under the plan would otherwise be discriminatory, the
employer contributions to pay such premiums or other consideration must
be the only employer contributions made for the owner-employee, and the
contributions for such taxable year under such plan must not be in
excess of the amount permitted to be paid toward the purchase of such a
contract under the provisions of section 401(e)(3). Furthermore, the
exception described in this subparagraph only applies to contributions
made under a plan which otherwise satisfies the requirements of section
401(a)(4) and the regulations thereunder. Thus, if a plan provides for
the purchase, in accordance with section 401(e)(3), of a level premium
contract for an owner-employee, then such plan must provide either that
the benefits for all employees are nondiscriminatory or, in the case of
a money-purchase type of plan, that the contributions for all employees
are based on compensation determined in a non-discriminatory manner. For
example, since the contributions on behalf of the owner-employee are
based on his earned income during the 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.
[[Page 39]]
(4) In the case of a plan which covers any owner-employee, the
contributions or benefits provided under the plan cannot vary with
respect to years of service except as provided in subparagraph (5) of
this paragraph.
(5) The provisions of section 401(d)(3) do not preclude the coverage
of employees with less than three years of service if such coverage is
provided on a nondiscriminatory basis. However, a plan will not be
disqualified merely because the contributions or benefits for employees
who have less than three years of service are not as favorable as the
contributions or benefits for employees having more than three years of
service.
(g) Nonforfeitable rights. (1)(i) Except as provided in subparagraph
(2) of this paragraph, if an owner-employee is covered under the plan of
his employer, each employee's rights to the contributions, or to the
benefits derived from the contributions, of such employer must be
nonforfeitable at the time such contributions are paid to, or under, the
plan. The employees who must obtain such nonforfeitable rights include
the self-employed individuals who are covered under the plan. As to what
constitutes nonforfeitable rights of an employee, see paragraph (a)(2)
of Sec. 1.402(b)-1.
(ii) Under section 401(d)(2), it is necessary that each employee
obtain nonforfeitable rights to the employer contributions under the
plan on his behalf from the time such contributions are paid. Thus, each
employee must have a nonforfeitable interest to the portion of the funds
under the plan which is allocable to the employer contributions made
under the plan on his behalf.
(2) The provisions of subparagraph (1) of this paragraph do not
apply to the extent that employer contributions on behalf of any
employee must remain forfeitable in order to satisfy the requirements of
paragraph (c) of Sec. 1.401-4. However, employer contributions on
behalf of employees whose rights are required to remain forfeitable to
satisfy such requirements must be nonforfeitable except for such
contingency.
(h) Integration with social security. (1) If a qualified plan covers
any owner-employee, then the rules relating to the integration of such
plan with the contributions or benefits under the Social Security Act
are provided in this paragraph. Accordingly, the provisions of paragraph
(e) of Sec. 1.401-3 and paragraph (c) of Sec. 1.401-11 do not apply to
such a plan. In the case of a plan which provides contributions or
benefits for any owner-employee, integration of the plan with the Social
Security Act for any taxable year of the employer can take place only if
not more than one-third of the employer contributions under the plan
which are deductible under section 404 for that year are made on behalf
of the owner-employees. If such requirement is satisfied, then the plan
may be integrated with the contributions or benefits under the Social
Security Act in accordance with the rules of subparagraph (3) of this
paragraph.
(2)(i) For purposes of subparagraph (1) of this paragraph, in
determining the total amount of employer contributions which are
deductible under section 404, the provisions of section 404(a),
including the provisions of section 404(a)(9) (relating to plans
benefiting self-employed individuals), and section 404(e) (relating to
the special limitations for self-employed individuals) are taken into
account, but the provisions of section 404(a)(10) (relating to the
special limitation on the amount allowed as a deduction for self-
employed individuals) are not taken into account.
(ii) The amount of deductible employer contributions which are made
on behalf of all owner-employees for the year is compared with the
amount of deductible employer contributions for the year made on behalf
of all employees covered under the plan (including self-employed
individuals who are not owner-employees and owner-employees) for the
purpose of determining whether the deductible contributions by the
employer on behalf of owner-employees are not more than one-third of the
total deductible contributions.
(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--
[[Page 40]]
(i) The employer contributions under the plan on behalf of any
owner-employee shall be reduced by an amount determined by multiplying
the earned income of such owner-employee which is derived from the trade
or business with respect to which the plan is established and which does
not exceed the maximum amount which may be treated as self-employment
income under section 1402(b)(1), by the rate of tax imposed under
section 1401(a); and
(ii) The employer contributions under the plan on behalf of any
employee other than an owner-employee may be reduced by an amount not in
excess of the amount determined by multiplying the employee's wages
under section 3121(a)(1) by the rate of tax imposed under section
3111(a). For purposes of this subdivision, the earned income of a self-
employed individual which is derived from the trade or business with
respect to which the plan is established and which is treated as self-
employment income under section 1402(b)(1), shall be treated as
``wages'' under section 3121(a)(1).
(4) A money purchase pension plan or a profit-sharing plan may
provide that such plan will be integrated with the Social Security Act
only for such taxable years of the employer in which the requirements
for integration are satisfied. However, a qualified plan cannot provide
that employer contributions are only to be made for taxable years in
which the integration requirements are satisfied.
(i) Limit on contributions on behalf of an owner-employee. (1)
Section 401(d)(5) requires that a plan which covers any owner-employee
must contain provisions which restrict the employer contributions that
may be made on behalf of any owner-employee for each taxable year to an
amount no greater than that which is deductible under section 404. In
computing the amount deductible under section 404 for purposes of
section 401(d)(5) and this paragraph, the limitations contained in
section 404(a)(9) and (e), relating to special limitations for self-
employed individuals, are taken into account, but such amount is
determined without regard to section 404(a)(10), relating to the special
limitation on the amount allowed as a deduction for self-employed
individuals. Accordingly, a qualified plan which covers any owner-
employee cannot permit employer contributions to be made on behalf of
such owner-employee in excess of 10 percent of the earned income which
is derived by such owner-employee from the trade or business with
respect to which the plan is established, or permit the employer to
contribute more than $2,500 on behalf of any such owner-employee for any
taxable year.
(2)(i) In determining whether the plan permits contributions to be
made in excess of the limitations of subparagraph (1) of this paragraph,
employer contributions under the plan which are allocable to the
purchase of life, accident, health, or other insurance are not to be
taken into account. To determine the amount of employer contributions
under the plan which are allocable to the purchase of life, accident,
health, or other insurance, see paragraph (f) of Sec. 1.404(e)-1 and
paragraph (b) of Sec. 1.72-16. However, contributions for such
insurance can be made only to the extent otherwise permitted under
sections 401 through 404 and the regulations thereunder.
(ii) A further exception to the limit on the amount of contributions
which an employer may make under the plan on behalf of an owner-employee
is made in the case of contributions which are required, under the plan,
to be applied to pay premiums or other consideration for one or more
annuity, endowment, or life insurance contracts described in section
401(e)(3) (see section 401(e)(3) and the regulations thereunder).
(j) Excess contributions. The provisions of section 401(e) define
the term ``excess contribution'' and indicate the consequences of making
such a contribution (see Sec. 1.401-13). However, section 401(d)(8)
provides that a qualified plan which provides contributions or benefits
for any owner-employee must contain certain provisions which complement
the rules contained in section 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
[[Page 41]]
the net income earned on such excess contribution;
(2) For each taxable year for which the trust is considered to be a
nonqualified trust with respect to an owner-employee under section
401(e)(2) because the net amount of an excess contribution and the
earnings thereon have not been returned to such owner-employee, the
income of the trust for that taxable year attributable to the interest
of such owner-employee is to be paid to him.
(3) If an excess contribution is determined to be willfully made
(within the meaning of section 401(e)(2)(E)), the entire interest of the
owner-employee on whose behalf such contribution was made is required to
be distributed to such owner-employee. Furthermore, the plan must
require the distribution of an owner-employee's entire interest under
the plan if a willful excess contribution is determined to have been
made under any other plan in which the owner-employee is covered as an
owner-employee.
(k) Contributions of property under a qualified plan. (1) The
contribution of property, other than money, prior to January 1, 1975, by
the person who is the employer (within the meaning of section 401(c)(4))
to a qualified trust forming a part of a plan which covers employees
some or all of whom are owner-employees who control (within the meaning
of section 401(d)(9)(B) and the regulations thereunder) the trade or
business with respect to which the plan is established is a prohibited
transaction between such trust and the employer-grantor of such trust
(see section 503(g) prior to its repeal by sec. 2003(b)(5) of the
Employee Retirement Income Security Act of 1974 (88 Stat. 978)).
(2) A contribution of property, other than money, prior to January
1, 1975, to a qualified trust by an owner-employee who controls, or a
member of a group of owner-employees who together control, the trade or
business with respect to which the plan is established, or a
contribution of property, other than money, to a qualified trust by a
member of such an owner-employee's family (as defined in section
267(c)(4)), is a prohibited transaction. (See section 503(g) prior to
its repeal by section 2003(b)(5) of the Employee Retirement Income
Security Act of 1974 (88 Stat. 978)).
(3) See section 4975 and the regulations thereunder with respect to
rules relating to the contribution of property, other than money, made
after December 31, 1974.
(l) Controlled trades or businesses--(1) Plans covering an owner-
employee who controls another trade or business. (i) A plan must not
cover any owner-employee, or group of two or more owner-employees, if
such owner-employee, or group of owner-employees, control (within the
meaning of subparagraph (3) of this paragraph) any other trade or
business, unless the employees of such other trade or business
controlled by such owner-employee, or such group of owner-employees, are
included in a plan which satisfies the requirements of section 401(a),
including the qualification requirements of section 401(d). The
employees who must be covered under the plan of the trade or business
which is controlled include the self-employed individuals who are not
owner-employees and the owner-employees who consent to be covered by
such plan. Accordingly, the employer must determine whether any owner-
employee, or group of owner-employees, who may participate in the plan
which is established by such employer controls any other trade or
business, and whether the requirements of this subparagraph are
satisfied with respect to the plan established in such other trade or
business. The plan of an employer may exclude an owner-employee who
controls another trade or business from coverage under the plan even
though such owner-employee consents to be covered, if a plan which
satisfies the requirements of subdivision (ii) of this subparagraph has
not been established in the trade or business which such owner-employee
controls.
(ii) The qualified plan which the owner-employee, or owner-
employees, 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
[[Page 42]]
not control. Thus, for example, if the contributions or benefits for the
owner-employee under the plan of the trade or business which he does not
control are computed on the basis of his total (as compared to basic or
regular rate) of compensation, then the contributions or benefits for
employees covered under the plan of the trade or business which the
owner controls must be computed on the basis of their total
compensation. However, the requirements of this subdivision cannot be
satisfied if the benefits and contributions provided under the plan for
the employees of the trade or business which is controlled are not
comparable to those provided under the plan covering the owner-employee,
or group of owner-employees, in the trade or business which they do not
control. Thus, for example, if the owner-employee is covered by a
pension plan in the trade or business which he does not control, he may
not satisfy the requirements of this subdivision by establishing a
profit-sharing plan in the trade or business which he does control.
(iii) If an individual is covered as an owner-employee under the
plans of two or more trades or businesses which he does not control and
such individual controls a trade or business, then the contributions or
benefits of the employees under the plan of the trade or business which
he does control must be as favorable as those provided for him under the
most favorable plan of the trade or business which he does not control.
(2) Owner-employees who control more than one trade or business. If
the plan provides contributions or benefits for an owner-employee who
controls, or group of owner-employees who together control, the trade or
business with respect to which the plan is established, and such owner-
employee, or group of owner-employees, also control as owner-employees
one or more other trades or businesses, plans must be established with
respect to such controlled trades or businesses so that when taken
together they form a single plan which satisfies the requirements of
section 401 (a) and (d) with respect to the employees of all the
controlled trades or businesses.
(3) Control defined. (i) For purposes of this paragraph, an owner-
employee, or a group of two or more owner-employees, shall be considered
to control a trade or business if such owner-employee, or such group of
two or more owner-employees together--
(A) Own the entire interest in an unincorporated trade or business,
or
(B) In the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in such partnership.
In determining whether an owner-employee, or group of owner-employees,
control a trade or business within the meaning of the preceding
sentence, it is immaterial whether or not such individuals could be
covered under a plan established with respect to the trade or business.
For example, if an individual who is an owner-employee has a 60-percent
capital interest in another trade or business, such individual controls
such trade or business and the provisions of this paragraph apply even
though the individual derives no earned income, as defined in section
401(c)(2), from the controlled trade or business. For purposes of
determining the ownership interest of an owner-employee, or group of
owner-employees, an owner-employee, or group of owner-employees, is
treated as owning any interest in a partnership which is owned, directly
or indirectly, by a partnership controlled by such owner-employee, or
group of owner-employees.
(ii) The provisions of subparagraphs (1) and (2) of this paragraph
apply only if the owner-employee who controls, or the group of owner-
employees who control, a trade or business, or trades or businesses,
within the meaning of subdivision (i) of this subparagraph is the same
owner-employee, or group of owner-employees, covered under the plan
intended to satisfy the requirements for qualification. Thus, for
example, if A is a 50-percent partner in both the AB and AC partnership,
and if the AB partnership wishes to establish 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.
[[Page 43]]
(m) Distribution of benefits. (1)(i) Section 401(d)(4)(B) requires
that a qualified plan which provides contributions or benefits for any
owner-employee must not provide for the payment of benefits to such
owner-employee at any time before he has attained age 59\1/2\. An
exception to the foregoing rule permits a qualified plan to provide for
the distribution of benefits to an owner-employee prior to the time he
attains age 59\1/2\ if he is disabled. For taxable years beginning after
December 31, 1966, see section 72(m)(7) and paragraph (f) of Sec. 1.72-
17 for the meaning of disabled. For taxable years beginning before
January 1, 1967, see section 213(g)(3) for the meaning of disabled. In
general, both sections 72(m)(7) and 213(g)(3) provide that an individual
is considered disabled if he is unable to engage in any substantial
gainful activity because of a medically determinable physical or mental
impairment which can be expected to result in death or to be of long-
continued and indefinite duration. In addition, section 401(d)(4)(B)
does not preclude the distribution of benefits to the estate or other
beneficiary of a deceased owner-employee prior to the time the owner-
employee would have attained age 59\1/2\ if he had lived.
(ii) A qualified plan must provide that if, despite the restrictions
in the plan to the contrary, an amount is prematurely distributed, or
made available, to a participant in such plan who is, or has been, an
owner-employee, then no contribution shall be made under the plan by, or
for, such individual during any of the 5 taxable years of the plan
beginning after the distribution is made.
(2)(i) The provisions of subparagraph (1) of this paragraph preclude
an owner-employee who is a participant in a qualified pension or profit-
sharing plan of his employer from withdrawing any part of the funds
accumulated on his behalf except as provided in such subparagraph (1).
However, the distribution of an owner-employee's interest, or any
portion of such interest, after he attains age 59\1/2\ is determined by
the provisions of the plan. Thus, for example, if a qualified pension
plan provides that the normal retirement age under the plan is age 65,
an owner-employee would not be entitled to a distribution of an amount
under the plan merely because he attained age 59\1/2\.
(ii) The provisions of subparagraph (1) of this paragraph do not
preclude the establishment of a profit-sharing plan which provides for
the distribution of all, or part, of participants' accounts after a
fixed number of years. However, such a plan must not permit a
distribution of any amount to any owner-employee prior to the time the
owner-employee has attained age 59\1/2\ or becomes disabled within the
meaning of section 72(m)(7) or section 213(g)(3), whichever is
applicable. On the other hand, if a distribution would have been made
under the plan to an owner-employee but for the fact that he had not
attained age 59\1/2\, then the amount of such distribution (including
any increment earned on such amount) must be distributed to such owner-
employee at such time as he attains age 59\1/2\.
(3) A qualified pension, annuity, or profit-sharing plan which
covers an owner-employee must provide that the distribution of an owner-
employee's entire interest under the plan must begin prior to the end of
the taxable year in which he attains the age of 70\1/2\, and such
distribution must satisfy the requirements of section 401(a)(9) and
paragraph (e) of Sec. 1.401-11. Furthermore, section 401(d)(7) provides
that, if an owner-employee dies prior to the time his entire interest
has been distributed to him, such owner-employee's entire remaining
interest under the plan must, in general, either be distributed to his
beneficiary, or beneficiaries, within 5 years, or be used within that
period to purchase an immediate annuity for his beneficiary, or
beneficiaries. However, a distribution within 5 years of the death of
the owner-employee is not required if the distribution of his interest
has commenced and such distribution is for a term certain over a period
not extending beyond the joint life and survivor 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
[[Page 44]]
10 years is a distribution which is payable over a period which does not
exceed the joint life and survivor expectancy of the owner-employee and
his spouse if such expectancy is at least 10 years at the time the
distribution first commences.
[T.D. 6675, 28 FR 10126, Sept. 17, 1963, as amended by T.D. 6982, 33 FR
16500, Nov. 13, 1968; T.D. 6985, 33 FR 19815, Dec. 27, 1968; T.D. 7428,
41 FR 34619, Aug. 16, 1976; T.D. 7611, 44 FR 23520, Apr. 20, 1979; T.D.
8635, 60 FR 65549, Dec. 20, 1995]
Sec. 1.401-13 Excess contributions on behalf of owner-employees.
(a) Introduction. (1) The provisions of this section prescribe the
rules relating to the treatment of excess contributions made under a
qualified pension, annuity, or profit-sharing plan on behalf of a self-
employed individual who is an owner-employee (as defined in paragraph
(d) of Sec. 1.401-10). Paragraph (b) of this section defines the term
``excess contribution''. Paragraph (c) of this section describes an
exception to the definition of an excess contribution in the case of
contributions which are applied to pay premiums on certain annuity,
endowment, or life insurance contracts. Paragraph (d) of this section
describes the effect of making an excess contribution which is not
determined to have been willfully made, and paragraph (e) of this
section describes the effect of making an excess contribution which is
determined to have been willfully made.
(2) Under section 401(c)(1), certain self-employed individuals are
treated as employees for purposes of section 401. In addition, under
section 401(c)(4), a proprietor is treated as his own employer, and the
partnership is treated as the employer of the partners. Under section
404, certain contributions on behalf of a self-employed individual are
treated as deductible and taken into consideration in determining the
amount allowed as a deduction under section 404(a). Such contributions
are treated under section 401 and the regulations thereunder as employer
contributions on behalf of the self-employed individual. However, in
some cases, additional contributions may be made on behalf of a self-
employed individual. Such contributions are not taken into consideration
in determining the amount deductible under section 404 and are not taken
into consideration in computing the amount allowed as a deduction under
section 404(a). For purposes of section 401 and the regulations
thereunder, such contributions are treated as employee contributions by
the self-employed individual. If a self-employed individual is an owner-
employee within the meaning of section 401(c)(3) and paragraph (d) of
Sec. 1.401-10, then this section prescribes the rules applicable if
contributions are made in excess of those permitted to be made under
section 401.
(b) Excess contributions defined. (1)(i) Except as provided in
paragraph (c) relating to contributions which are applied to pay
premiums on certain annuity, endowment, or life insurance contracts, an
excess contribution is any amount described in subparagraphs (2) through
(4) of this paragraph.
(ii) For purposes of determining if the amount of any contribution
made under the plan on behalf of an owner-employee is an excess
contribution, the amount of any contribution made under the plan which
is allocable to the purchase of life, accident, health, or other
insurance is not taken into account. The amount of any contribution
which is allocable to the cost of insurance protection is determined in
accordance with the provisions of paragraph (f) of Sec. 1.404 (e)-1 and
paragraph (b) of Sec. 1.72-16.
(2)(i) In the case of a taxable year of the plan for which employer
contributions are made on behalf of only owner-employees, an excess
contribution is the amount of any contribution for such taxable year on
behalf of such owner-employee which is not deductible under section 404
(determined without regard to section 404(a)(10)). This rule applies
irrespective of whether the plan provides for contributions on behalf of
common-law employees, or self-employed individuals who are not owner-
employees, when such employees or individuals become eligible for
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.
[[Page 45]]
(ii) In the case of a taxable year of the plan for which employer
contributions are made on behalf of both owner-employees and either
common-law employees or self-employed individuals who are not owner-
employees, an excess contribution is the amount of any employer
contribution on behalf of any owner-employee for such taxable year which
exceeds the amount deductible under section 404 (determined without
regard to section 404(a)(10)) unless such amount may be treated as an
employee contribution under the plan in accordance with the rules of
paragraph (d)(3) of Sec. 1.401-11 and is a permissible employee
contribution under subparagraph (3) of this paragraph.
(3)(i) In the case of a taxable year of the plan for which employer
contributions are made on behalf of both an owner-employee and either
common-law employees or self-employed individuals who are not owner-
employees, employee contributions on behalf of an owner-employee may be
made for such taxable year of the plan. How-ever, the amount of such
contributions, if any, which is described in subdivisions (ii), (iii),
or (iv) of this subparagraph is an excess contribution.
(ii) An excess contribution is the amount of any employee
contribution made on behalf of any owner-employee during a taxable year
of the plan at a rate in excess of the rate of contributions which may
be made as employee contributions by common-law employees, or by self-
employed individuals who are not owner-employees, during such taxable
year of the plan.
(iii) An excess contribution is the amount of any employee
contribution made on behalf of an owner-employee which exceeds the
lesser of $2,500 or 10 percent of the earned income (as defined in
paragraph (c) of Sec. 1.401-10) of such owner-employee for his taxable
year in which such contributions are made.
(iv) In the case of a taxable year of an owner-employee in which
contributions are made on behalf of such owner-employee under more than
one plan, an excess contribution is the amount of any employee
contribution made on behalf of such owner-employee under all such plans
during such taxable year which exceeds $2,500. If such an excess
contribution is made, the amount of the excess contribution made on
behalf of the owner-employee with respect to any one of such plans is
the amount by which the employee contribution on his behalf under such
plan for the year exceeds an amount which bears the same ratio to $2,500
as the earned income of the owner-employee derived from the trade or
business with respect to which the plan is established bears to his
earned income derived from the trades or businesses with respect to
which all such plans are established.
(4) An excess contribution is the amount of any contribution on
behalf of an owner-employee for any taxable year of the plan with
respect to which the plan is treated, under section 401(e)(2), as not
meeting the requirements of section 401(d) with respect to such owner-
employee.
(c) Contributions for premiums on certain annuity, endowment, or
life insurance contracts. (1) The term ``excess contribution'' does not
include the amount of any employer contributions on behalf of an owner-
employee which, under the provisions of the plan, is expressly required
to be applied (either directly or through a trustee) to pay the premiums
or other consideration for one or more annuity, endowment, or life
insurance contracts, if--
(i) The employer contributions so applied meet the requirements of
subparagraphs (2) through (4) of this paragraph, and
(ii) The total employer contributions required to be applied
annually to pay premiums on behalf of any owner-employee for contracts
described in this paragraph do not exceed $2,500. For purposes of
computing such $2,500 limit, the total employer contributions includes
amounts which are allocable to the purchase of life, accident, health,
or other insurance.
(2)(i) The employer contributions must be paid under a plan which
satisfies all the requirements for qualification. Accordingly, for
example, contributions can be paid under the plan for life insurance
protection only to the extent otherwise permitted under sections 401
through 404 and the regulations thereunder. However, certain of the
requirements for qualification are
[[Page 46]]
modified with respect to a plan described in this paragraph (see section
401(a)(10)(A)(ii) and (d)(5)).
(ii) A plan described in this paragraph is not disqualified merely
because a contribution is made on behalf of an owner-employee by his
employer during a taxable year of the employer for which the owner-
employee has no earned income. On the other hand, a plan will fail to
qualify if a contribution is made on behalf of an owner-employee which
results in the discrimination prohibited by section 401(a)(4) as
modified by section 401(a)(10)(A)(ii) (see paragraph (f)(3) of Sec.
1.401-12).
(3) The employer contributions must be applied to pay premiums or
other consideration for a contract issued on the life of the owner-
employee. For purposes of this subparagraph, a contract is not issued on
the life of an owner-employee unless all the proceeds which are, or may
become, payable under the contract are payable directly, or through a
trustee of a trust described in section 401(a) and exempt from tax under
section 501(a), to the owner-employee or to the beneficiary named in the
contract or under the plan. Accordingly, for example, a nontransferable
face-amount certificate (as defined in section 401(g) and the
regulations thereunder) is considered an annuity on the life of the
owner-employee if the proceeds of such contract are payable only to the
owner-employee or his beneficiary.
(4)(i) For any taxable year of the employer, the amount of
contributions by the employer on behalf of the owner-employee which is
applied to pay premiums under the contracts described in this paragraph
must not exceed the average of the amounts deductible under section 404
(determined without regard to section 404(a)(10)) by such employer on
behalf of such owner-employee for the most recent three taxable years of
the employer (ending prior to the date the latest contract was entered
into or modified to provide additional benefits), in which the owner-
employee derived earned income from the trade or business with respect
to which the plan is established. However, if such owner-employee has
not derived earned income for at least three taxable years preceding
such date, then, in determining the ``average of the amounts
deductible'', only so many of such taxable years as such owner-employee
was engaged in such trade or business and derived earned income
therefrom are taken into account.
(ii) For the purpose of making the computation described in
subdivision (i) of this subparagraph, the taxable years taken into
account include those years in which the individual derived earned
income from the trade or business but was not an owner-employee with
respect to such trade or business. Furthermore, taxable years of the
employer preceding the taxable year in which a qualified plan is
established are taken into account. If such taxable years began prior to
January 1, 1963, the amount deductible is determined as if section 404
included section 404(a) (8), (9), (10), and (e).
(5) The amount of any employer contribution which is not deductible
but which is not treated as an excess contribution because of the
provisions of this paragraph shall be taken into account as an employee
contribution made on behalf of the owner-employee during the owner-
employee's taxable year with, or within which, the taxable year of the
person treated as his employer under section 401(c)(4) ends. However,
such contribution is only treated as an employee contribution made on
behalf of the owner-employee for the purpose of determining whether any
other employee contribution made on behalf of the owner-employee during
such period is an excess contribution described in paragraph (b)(3) of
this section.
(d) Effect of an excess contribution which is not willfully made.
(1) If an excess contribution (as defined in paragraph (b) of this
section) is made on behalf of an owner-employee, and if such
contribution is not willfully made, then the provisions of this
paragraph describe the effect of such an excess contribution. However,
if the excess contribution made on behalf of an owner-employee is
determined to have 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
[[Page 47]]
defined in subparagraph (4) of this paragraph) and the net income
attributable to such amount are repaid to the owner-employee on whose
behalf the excess contribution was made at any time before the end of
six months beginning on the day on which the district director sends
notice (by certified or registered mail) of the amount of the excess
contribution to the trust, insurance company, or other person to whom
such excess contribution was paid. The net income attributable to the
net amount of the excess contribution is the aggregate of the amounts of
net income attributable to the net amount of the excess contribution for
each year of the plan beginning with the taxable year of the plan within
which the excess contribution is made and ending with the close of the
taxable year of the plan immediately preceding the taxable year of the
plan in which the net amount of the excess contribution is repaid. The
amount of net income attributable to the net amount of the excess
contribution for each year is the amount of net income earned under the
plan during the year which is allocated in a reasonable manner to the
net amount of the excess contribution. For example, the amount of net
income earned under the plan for the year which is attributable to the
net amount of an excess contribution can be computed as the amount which
bears the same ratio to the amount of the ``net income attributable to
the interest of the owner-employee under the plan'' for such taxable
year (determined in accordance with the provisions of subparagraph
(5)(ii) of this paragraph) as the net amount of the excess contribution
bears to the aggregate amount standing to the account of the owner-
employee at the end of that year (including the net amount of any excess
contribution).
(ii) The notice described in subdivision (i) of this subparagraph
shall not be mailed prior to the time that the amount of the tax under
chapter 1 of the Code of the owner-employee to whom the excess
contribution is to be repaid has been finally determined for his taxable
year in which such excess contribution was made. For purposes of this
subdivision, a final determination of the amount of tax liability of the
owner-employee includes--
(A)1 A decision by the Tax Court of the United States, or a
judgment, decree, or other order by any court of competent jurisdiction,
which has become final;
(B) A closing agreement authorized by section 7121; or
(C) The expiration of the period of limitation on suits by the
taxpayer for refund, unless suit is instituted prior to the expiration
of such period.
(iii) For purposes of this subparagraph, an amount is treated as
repaid to an owner-employee if an adequate adjustment is made to the
account of the owner-employee. An adequate adjustment is made to the
account of an owner-employee, for example, if the amount of the excess
contribution (without any reduction for any loading or other
administrative charge) and the net income attributable to such amount is
taken into account as a contribution under the plan for the current
year. In such a case, the gross income of the owner-employee for his
taxable year in which such adjustment is made includes the amount of the
net income attributable to the excess contribution.
(iv) If the net amount of the excess contribution and the net income
attributable thereto is repaid, within the period described in
subdivision (i) of this subparagraph, to the owner-employee on whose
behalf such contribution was made, then the net income attributable to
the excess contribution is, pursuant to section 61(a), includible in the
gross income of the owner-employee for his taxable year in which such
amount is distributed, or made available, to him. However, such amount
is not a distribution to which section 402 or 403 and section 72 apply
(see subparagraph (6) of this paragraph).
(3)(i) If the net amount of any excess contribution (as defined in
subparagraph (4) of this paragraph) and the net income attributable to
that excess contribution are not repaid to the owner-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,
[[Page 48]]
the plan under which the excess contribution has been made is
considered, for purposes of section 404, as not satisfying the
requirements for qualification with respect to such owner-employee for
all taxable years of the plan described in subdivision (ii) of this
subparagraph. However, such disqualification only applies to the
interest of the owner-employee on whose behalf an excess contribution
has been made and does not disqualify the plan with respect to the other
participants thereunder.
(ii) The taxable years referred to in subdivision (i) of this
subparagraph include the taxable year of the plan within which the
excess contribution is made and each succeeding taxable year of the plan
until the beginning of the taxable year of the plan in which the trust,
insurance company, or other person to whom such excess contribution was
paid repays to such owner-employee--
(A) The net amount of the excess contribution, and
(B) The amount of income attributable to his interest under the plan
which is includible in his gross income for any taxable year by reason
of the provisions of subparagraph (5) of this paragraph.
(4) For purposes of this paragraph, the net amount of an excess
contribution is the amount of such excess contribution, as defined in
paragraph (b) of this section, reduced by the amount of any loading
charge or other administrative charge ratably allocable to such excess
contribution.
(5)(i) If a plan is considered as not meeting the requirements for
qualification with respect to an owner-employee by reason of the
provisions of subparagraph (3) of this paragraph for any taxable year of
the plan, such owner-employee's gross income for any of his taxable
years with or within which such taxable year of the plan ends shall, for
purposes of chapter 1 of the Code, include the portion of the net income
earned under the plan for such taxable year of the plan which is
attributable to the interest of the owner-employee under the plan.
(ii) For purposes of this subparagraph, the term ``net income''
means the net income earned under the plan determined in accordance with
generally accepted accounting principles consistently applied, and the
``net income attributable to the interest of the owner-employee under
the plan'' is the amount which bears the same ratio to the aggregate
amount of net income earned under the plan for the taxable year of the
plan as the amount standing to the account of the owner-employee at the
end of that year (including the amount of any excess contribution which
is credited to his account) bears to the aggregate amount of all funds
under the plan for all employees at the end of that year (including the
aggregate amount of excess contributions credited to the accounts of all
owner-employees for that year).
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. A is an owner-employee covered under the X Employees'
Pension Trust who files his return on the basis of a calendar year. An
excess contribution was made on behalf of A during the plan year
beginning on January 1, 1966. The net amount of the excess contribution
and the net income attributable thereto was not repaid to A before the
end of the six-month period described in subparagraph (2)(i) of this
paragraph. Accordingly, the net income earned under the plan during 1966
which is attributable to A's interest is to be included in his gross
income for 1966. Assume that the trust which forms a part of the pension
plan of the X Company also files its returns on a calendar year basis,
and that during 1966 the trust had a gross income of $4,000 (including a
long-term capital gain of $2,500) and expenses of $500. Assume, further,
that the amount standing to A's account on December 31, 1966 (including
the amount of the excess contribution), was $20,000, and that on that
date the amount funded under the plan for all employees (including A) is
$140,000. Then the net income of the trust for 1966 is $3,500 ($4,000-
$500). The net income attributable to the interest of A under the plan
is $500 (the amount which bears the same ratio to $3,500 as $20,000
bears to $140,000). Accordingly, $500 is included in A's gross income in
accordance with the provisions of section 401(e)(2)(B) as the ``net
income attributable to the interest of the owner-employee under the
plan''.
(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
[[Page 49]]
72(m)(5)(A)(i), relating to amounts subject to the penalty tax imposed
by section 72(m), do not apply to the amount of the net income
attributable to the interest of an owner-employee (as defined in
subparagraph (5)(ii) of this paragraph) which is includible in his gross
income. Furthermore, in such a case, the provisions of section
401(d)(5)(C) do not apply to such amount.
(7) Certain adjustments will be required with respect to the
interest of an owner-employee after any amount previously allocated to
his account has been returned to him pursuant to the provisions of this
paragraph. For example, if the determination of whether life insurance
benefits provided under the plan are incidental is made, in part, with
regard to the contributions allocated to the accounts of the
participants covered under the plan, an adjustment may have to be made
with respect to the life insurance purchased under the plan for any
owner-employee after any amount previously allocated to his account has
been repaid to him. Furthermore, if, for example, an owner-employee has
received annuity payments which were taxable under the exclusion ratio
rule of section 72, and if such exclusion ratio took into account any
amount credited to the account of the owner-employee which is
subsequently repaid to him, then such exclusion ratio must be recomputed
after the adjustment in such owner-employee's account has taken place.
(8) Notwithstanding any other provision of law, in any case in which
the plan is treated as not satisfying the requirements for qualification
with respect to any owner-employee by reason of the provisions of
section 401(e), the period for assessing, with respect to such owner-
employee, any deficiency arising by reason of--
(i) The disallowance of any deduction under section 404 by reason of
the provisions of subparagraph (3) of this paragraph, or
(ii) The inclusion of amounts in the gross income of the owner-
employee by reason of the provisions of subparagraph (5) of this
paragraph,
shall not expire prior to 18 months after the day the district director
mails the notice with respect to the excess contribution (described in
subparagraph (2)(i) of this paragraph) which gives rise to such
disallowance or inclusion. Thus, for example, notwithstanding the
provisions of section 6212(c) (relating to the restriction on the
determination of additional deficiencies), if, after a final
determination by the Tax Court of the income tax liability of an owner-
employee for a taxable year in which an excess contribution was made,
the amount of such excess contribution and the net income attributable
thereto is not paid to the owner-employee before the end of the six-
month period described in subparagraph (2)(i) of this paragraph, an
additional deficiency assessment may be made for such taxable year with
respect to such excess contribution.
(e) Effect of an excess contribution which is determined to have
been willfully made. If an excess contribution (as defined in paragraph
(b) of this section) on behalf of an owner-employee is determined to
have been willful ly made, then--
(1) Only the provisions of this paragraph apply to such
contribution;
(2) There shall be distributed to the owner-employee on whose behalf
such contribution was willfully made his entire interest in all plans in
which he is a participant as an owner-employee;
(3) The amount distributed under each such plan is an amount to
which section 72 does apply (see section 72(m)(5)(A)(iii)); and
(4) For purposes of section 404, no plan in which such individual is
covered as an owner-employee shall be considered as meeting the
requirements for qualification with respect to such owner-employee for
any taxable year of the plan beginning with or within the calendar year
in which it is determined that the excess contribution has been
willfully made and with or within the five calendar years following such
year.
(f) Years to which this section applies. This section applies to
contributions 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
[[Page 50]]
years beginning on or after such date. However, in such a case, because
the application of paragraph (e)(4) of this section affects
contributions made in taxable years of employers beginning on or after
January 1, 1976, paragraph (e)(4) of this section does not apply to such
taxable years; see paragraph (c) of Sec. 1.401(e)-4 (relating to
transitional rules for excess contributions).
[T.D. 6676, 28 FR 10139, Sept. 17, 1963; as amended by T.D. 7636, 44 FR
47053, Aug. 10, 1979]
Sec. 1.401-14 Inclusion of medical benefits for retired employees
in qualified pension or annuity plans.
(a) Introduction. Under section 401(h) a qualified pension or
annuity plan may make provision for the payment of sickness, accident,
hospitalization, and medical expenses for retired employees, their
spouses, and their dependents. The term ``medical benefits described in
section 401(h)'' is used in this section to describe such payments.
(b) In general--(1) Coverage. Under section 401(h), a qualified
pension or annuity plan may provide for the payment of medical benefits
described in section 401(h) only for retired employees, their spouses,
or their dependents. To be ``retired'' for purposes of eligibility to
receive medical benefits described in section 401(h), an employee must
be eligible to receive retirement benefits provided under the pension
plan, or else be retired by an employer providing such medical benefits
by reason of permanent disability. For purposes of the preceding
sentence, an employee is not considered to be eligible to receive
retirement benefits provided under the plan if he is still employed by
the employer and a separation from employment is a condition to
receiving the retirement benefits.
(2) Discrimination. A plan which provides medical benefits described
in section 401(h) must not discriminate in favor of officers,
shareholders, supervisory employees, or highly compensated employees
with respect to coverage and with respect to the contributions or
benefits under the plan. The determination of whether such a plan so
discriminates is made with reference to the retirement portion of the
plan as well as the portion providing the medical benefits described in
section 401(h). Thus, for example, a plan will not be qualified under
section 401 if it discriminates in favor of employees who are officers
or shareholders with respect to either portion of the plan.
(3) Funding medical benefits. Contributions to provide the medical
benefits described in section 401(h) may be made either on a
contributory or noncontributory basis, without regard to whether the
contributions to fund the retirement benefits are made on a similar
basis. Thus, for example, the contributions to fund the medical benefits
described in section 401(h) may be provided for entirely out of employer
contributions even though the retirement benefits under the plan are
determined on the basis of both employer and employee contributions.
(4) Definitions. For purposes of section 401(h) and this section:
(i) The term dependent shall have the same meaning as that assigned
to it by section 152, and
(ii) The term medical expense means expenses for medical care as
defined in section 213(e)(1).
(c) Requirements. The requirements which must be met for a qualified
pension or annuity plan to provide medical benefits described in section
401(h) are set forth in subparagraphs (1) through (5) of this paragraph.
(1) Benefits. (i) The plan must specify the medical benefits
described in section 401(h) which will be available and must contain
provisions for determining the amount which will be paid. Such benefits,
when added to any life insurance protection provided for under the plan,
must be subordinate to the retirement benefits provided by such plan.
For purposes of this section, life insurance protection includes any
benefit paid under the plan on behalf of an employee-participant as a
result of the employee-participant's death to the extent such payment
exceeds the amount of the reserve to provide the 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
[[Page 51]]
the date on which the plan first includes such medical benefits) to
provide such medical benefits and any life insurance protection does not
exceed 25 percent of the aggregate contributions (made after such date)
other than contributions to fund past service credits.
(ii) The meaning of the term subordinate may be illustrated by the
following example:
Example. The X Corporation amends its qualified pension plan to
provide medical benefits described in section 401(h) effective for the
taxable year 1964. The total contributions under the plan (excluding
those for past service credits) for the taxable year 1964 are $125,000,
allocated as follows: $100,000 for retirement benefits, $10,000 for life
insurance protection, and $15,000 for medical benefits described in
section 401(h). The medical benefits described in section 401(h) are
considered subordinate to the retirement benefits since the portion of
the contributions allocated to the medical benefits described in section
401(h) ($15,000) and to life insurance protection after such medical
benefits were included in the plan ($10,000), or $25,000, does not
exceed 25 percent of $125,000. For the taxable year 1965, the X
Corporation contributes $140,000 (exclusive of contributions for past
service credits) allocated as follows: $100,000 for retirement benefits,
$10,000 for life insurance protection, and $30,000 for medical benefits
described in section 401(h). The medical benefits described in section
401(h) are considered subordinate to the retirement benefits since the
aggregate contributions allocated to the medical benefits described in
section 401(h) ($45,000) and to life insurance protection after such
medical benefits were included in the plan ($20,000) or $65,000 does not
exceed 25 percent of $265,000, the aggregate of the contributions made
in 1964 and 1965.
(2) Separate accounts. Where medical benefits described in section
401(h) are provided for under a qualified pension or annuity plan, a
separate account must be maintained with respect to contributions to
fund such benefits. The separation required by this section is for
recordkeeping purposes only. Consequently, the funds in the medical
benefits account need not be separately invested. They may be invested
with funds set aside for retirement purposes without identification of
which investment properties are allocable to each account. However,
where the investment properties are not allocated to each account, the
earnings on such properties must be allocated to each account in a
reasonable manner.
(3) Reasonable and ascertainable. Section 401(h) further requires
that amounts contributed to fund medical benefits therein described must
be reasonable and ascertainable. For the rules relating to the deduction
of such contributions, see paragraph (f) of Sec. 1.404(a)-3. The
employer must, at the time he makes a contribution, designate that
portion of such contribution allocable to the funding of medical
benefits.
(4) Impossibility of diversion prior to satisfaction of all
liabilities. Section 401(h) further requires that it must be impossible,
at any time prior to the satisfaction of all liabilities under the plan
to provide for the payment of medical benefits described in section
401(h), for any part of the corpus or income of the medical benefits
account to be (within the taxable year or thereafter) used for, or
diverted to, any purpose other than the providing of such benefits.
Consequently, a plan which, for example, under its terms, permits funds
in the medical benefits account to be used for any retirement benefit
provided under the plan does not satisfy the requirements of section
401(h) and will not qualify under section 401(a). However, the payment
of any necessary or appropriate expenses attributable to the
administration of the medical benefits account does not affect the
qualification of the plan.
(5) Reversion upon satisfaction of all liabilities. The plan must
provide that any amounts which are contributed to fund medical benefits
described in section 401(h) and which remain in the medical benefits
account upon the satisfaction of all liabilities arising out of the
operation of the medical benefits portion of the plan are to be returned
to the employer.
(6) Forfeitures. The plan must expressly provide that in the event
an individual's interest in the medical benefits account is forfeited
prior to termination of the plan an amount equal to the amount of the
forfeiture must be applied as soon as possible to reduce employer
contributions to fund the medical benefits described in section 401(h).
[[Page 52]]
(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 or attainment of normal
retirement age (subject to paragraph (b)(2) of this section). A plan
does not fail to satisfy this paragraph (b)(1)(i) merely because the
plan provides, in accordance with section 401(a)(36), that a
distribution may be made from the plan to an employee who has attained
age 62 and who is not separated from employment at the time of such
distribution.
(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(a)-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.
(2) Normal retirement age--(i) General rule. The normal retirement
age under a plan must be an age that is not earlier than the earliest
age that is reasonably representative of the typical retirement age for
the industry in which the covered workforce is employed.
(ii) Age 62 safe harbor. A normal retirement age under a plan that
is age 62 or later is deemed to be not earlier than the earliest age
that is reasonably representative of the typical retirement age for the
industry in which the covered workforce is employed.
(iii) Age 55 to age 62. In the case of a normal retirement age that
is not earlier than age 55 and is earlier than age 62, whether the age
is not earlier than the earliest age that is reasonably representative
of the typical retirement age for the industry in which the covered
workforce is employed is based on all of the relevant facts and
circumstances.
(iv) Under age 55. A normal retirement age that is lower than age 55
is presumed to be earlier than the earliest age that is reasonably
representative of the typical retirement age for the industry in which
the covered workforce is employed, unless the Commissioner determines
that under the facts and circumstances the normal retirement age is not
earlier than the earliest age that is reasonably representative of the
typical retirement age for the industry in which the covered workforce
is employed.
(v) Age 50 safe harbor for qualified public safety employees. A
normal retirement age under a plan that is age 50 or later is deemed to
be not earlier than the earliest age that is reasonably representative
of the typical retirement age for the industry in which the covered
workforce is employed if substantially all of the participants in the
plan are qualified public safety employees (within the meaning of
section 72(t)(10)(B)).
(3) Benefit distribution prior to retirement. For purposes of
paragraph (b)(1)(i) of this section, retirement does not include a mere
reduction in the number of hours that an employee works. Accordingly,
benefits may not be distributed prior to normal retirement age solely
due to a reduction in the number of hours that an employee works.
(4) Effective date. Except as otherwise provided in this paragraph
(b)(4), paragraphs (b)(2) and (3) of this section are effective May 22,
2007. In the case of a
[[Page 53]]
governmental plan (as defined in section 414(d)), paragraphs (b)(2) and
(3) of this section are effective for plan years beginning on or after
January 1, 2009. In the case of a plan maintained pursuant to one or
more collective bargaining agreements that have been ratified and are in
effect on May 22, 2007, paragraphs (b)(2) and (3) of this section do not
apply before the first plan year that begins after the last of such
agreements terminate determined without regard to any extension thereof
(or, if earlier, May 24, 2010. See Sec. 1.411(d)-4, A-12, for a special
transition rule in the case of a plan amendment that increases a plan's
normal retirement age pursuant to paragraph (b)(2) of this section.
[T.D. 7748, 46 FR 1695, Jan. 7, 1981, as amended by T.D. 9319, 72 FR
16894, Apr. 5, 2007; T.D. 9325, 72 FR 28606, May 22, 2007]
Sec. 1.401(a)-2 Impossibility of diversion under qualified plan or
trust.
(a) General rule. Section 401(a)(2) requires that in order for a
trust to be qualified, it must be impossible under the trust instrument
(in the taxable year and at any time thereafter before the satisfaction
of all liabilities to employees or their beneficiaries covered by the
trust) for any part of the trust corpus or income to be used for, or
diverted to, purposes other than for the exclusive benefit of those
employees or their beneficiaries. Section 1.401-2, a pre-ERISA
regulation, provides rules under section 401(a)(2) and that regulation
is applicable except as otherwise provided.
(b) Section 415 suspense account. Notwithstanding paragraph (a) of
this section, a plan, or trust forming part of a plan, may provide for
the reversion to the employer, upon termination of the plan, of amounts
contributed to the plan that exceed the limitations imposed under
section 415(c), to the extent set forth in rules prescribed by the
Commissioner in revenue rulings, notices, or other guidance published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
[T.D. 7748, 46 FR 1696, Jan. 7, 1981, as amended by T.D. 9319, 72 FR
16894, Apr. 5, 2007]
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
[[Page 54]]
limit, the availability of a single sum distribution of an employee's
benefit in a manner that impermissibly favors the highly compensated
group.
(b) Highly compensated group. For plan years commencing prior to the
applicable effective date for the amendment made to section 401(a)(4) by
section 1114 of the Tax Reform Act of 1986 (TRA '86), the highly
compensated group consists of those employees who are officers,
shareholders, or highly compensated. For plan years beginning on or
after the applicable effective date of the amendments to section
401(a)(4) made by TRA '86, the highly compensated group consists of
those employees who are highly compensated within the meaning of section
414(q). The amendment to section 401(a)(4) made by section 1114 of TRA
'86 is generally effective for plan years commencing after December 31,
1988. See section 1114(a) of TRA '86.
Q-2: How is it determined whether an optional form of benefit
satisfies the nondiscrimination requirements of section 401(a)(4)?
A-2: (a) Nondiscrimination requirement--(1) In general. An optional
form of benefit under a plan is nondiscriminatory under section
401(a)(4) only if the requirements of paragraphs (a)(2) and (a)(3) of
this Q&A-2 are satisfied with respect to such optional form. The
determination of whether an optional form of benefit satisfies these
requirements is made by reference to the availability of the optional
form, and not by reference to the utilization or actual receipt of such
optional form. Thus, an optional form of benefit that satisfies the
requirements of paragraphs (a)(2) and (a)(3) of this Q&A-2 is
nondiscriminatory under section 401(a)(2) even though the highly
compensated group disproportionately utilizes such optional form.
However, the composition of the group of employees who actually receive
benefits in an optional form may be relevant in determining whether such
optional form satisfies the requirement of paragraph (a)(3) of this Q&A-
2 with respect to effective availability.
(2) Current availability--(i) Plan years prior to TRA '86 effective
date. Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for
plan years prior to the effective date of the amendments made to section
401(b) by section 1112(a) of TRA '86, the requirement of this paragraph
(a)(2) is satisfied only if the group of employees to whom the optional
form is currently available satisfies either the seventy percent test of
section 410(b)(1)(A) or the nondiscriminatory classification test of
section 410(b)(1)(B).
(ii) Plan years commencing on or after TRA '86 effective date.
Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for plan
years commencing on or after the effective date on which the amendments
made to section 410(b) by section 1112(a) of TRA '86 first apply to a
plan, the requirement of this paragraph (a)(2) is satisfied only if the
group of employees to whom the optional form is currently available
satisfies either the percentage test set forth in section 410(b)(1)(A),
the ratio test set forth in section 410(b)(1)(B), or the
nondiscriminatory classification test set forth in section
410(b)(2)(A)(i). The employer need not satisfy the average benefit
percentage test in section 410(b)(2)(A)(ii) in order for the optional
form to be currently available to a nondiscriminatory group of
employees.
(iii) Special rule for certain governmental or church plans. Plans
described in section 410(c) will be treated as satisfying the current
availability test of this paragraph (a)(2) if the group of employees
with respect to whom the optional form is currently available satisfies
the requirements of section 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
[[Page 55]]
to such employees is to be made immediately prior to the elimination.
Accordingly, if, as of the later of the adoption date or effective date
of an amendment eliminating an optional form with respect to future
benefit accruals, the current availability of such optional form
immediately prior to such amendment satisfies this paragraph (a)(2),
then the optional form will be treated as satisfying this paragraph
(a)(2) for all subsequent years.
(B) Example. A profit-sharing plan that provides for a single sum
distribution available to all employees on termination of employment is
amended January 1, 1990, to eliminate such single sum optional form of
benefit with respect to benefits accrued after January 1, 1991. As of
January 1, 1991, the single sum optional form of benefit is available to
a group of employees that satisfies the percentage test of section
410(b)(1)(A). As of January 1, 1995, all nonhighly compensated employees
who were entitled to the single sum optional form of benefit have
terminated from employment with the employer and taken a distribution of
their benefits. The only remaining employees who have a right to take a
portion of their benefits in the form of a single sum distribution on
termination of employment are highly compensated employees. Because the
availability of the single sum optional form of benefit satisfied the
current availability test as of January 1, 1991, the availability of
such optional form of benefit is deemed to continue to satisfy the
current availability test of this paragraph (a)(2).
(3) Effective availability--(i) In general. The requirement of this
paragraph (a)(3) is satisfied only if, based on the facts and
circumstances, the group of employees to whom the optional form is
effectively available does not substantially favor the highly
compensated group. This is the case even if the optional form is, or has
been, currently available to a group of employees that satisfies the
applicable requirements in paragraph (a)(2) (i) or (ii) of this Q&A-2.
(ii) Examples. The provisions of paragraph (a)(3)(i) of this Q&A-2
can be illustrated by the following examples:
Example 1. Employer X maintains a defined benefit plan that covers
both of the 2 highly compensated employees of the employer and 8 of the
twelve nonhighly compensated employees of the employer. Plan X provides
for a normal retirement benefit payable as an annuity and based on a
normal retirement age of 65, and an early retirement benefit payable
upon termination in the form of an annuity to employees who terminate
from service with the employer on or after age 55 with 30 or more years
of service. Each of the 2 employees of employer X who are in the highly
compensated group currently meet the age and service requirement, or
will have 30 years of service by the time they reach age 55. All but 2
of the 8 nonhighly compensated employees of employer X who are covered
by the plan were hired on or after age 35 and thus, cannot qualify for
the early retirement benefit provision. Even though the group of
employees to whom the early retirement benefit is currently available
does not impermissibly favor the highly compensated group by reason of
disregarding age and service, these facts and circumstances indicate
that the effective availability of the early retirement benefit in plan
X substantially favors the highly compensated group.
Example 2. Assume the same facts as in Example 1 except that the
early retirement benefit is added by a plan amendment first adopted,
announced and effective December 1, 1991, and is available only to
employees who terminate from employment with the employer prior to
December 15, 1991. Further assume that all employees were hired prior to
attaining age 25, and that the group of employees who have, or will have
attained age 55 with 30 years of service, by December 15, 1991,
satisfies the ratio test of section 410(b)(1)(B). Finally, assume that
the only employees who terminate from employment with the employer
during the two week period in which the early retirement benefit is
available are employees in the highly compensated group. These facts and
circumstances indicate that the effective availability of the early
retirement benefit substantially favors the highly compensated 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
[[Page 56]]
be disregarded in determining whether the current availability of such
optional form of benefit is discriminatory. However, these facts and
circumstances indicate that the effective availability of the optional
form of benefit substantially favors the highly compensated group.
Example 4. Employer Z maintains a money purchase pension plan that
covers all employees of the employer. The plan provides for distribution
in the form of a joint and survivor annuity, a life annuity, or equal
installments over 10 years. During the 1992 calendar year the employer
winds up his business. In December of 1992, only two employees remain in
the employment of the employer, both of whom are highly compensated.
Employer Z then amends the plan to provide for a single sum distribution
to employees who terminate from employment on or after the date of the
amendment. Both highly compensated employees terminate from employment
on December 31, 1992, taking a single sum distribution of their
benefits. These facts and circumstances indicate that the effective
availability of the single sum optional form of benefit substantially
favors the highly compensated group.
(b) Application of tests--(1) Current availability--(i) In general.
Except as otherwise provided in this paragraph (b), in determining
whether an optional form of benefit that is subject to specified
eligibility conditions is currently available to an employee for
purposes of paragraph (a) of this Q&A-2, the determination of current
availability generally is to be based on the current facts and
circumstances with respect to the employee (e.g., the employee's current
compensation or the employee's current net worth). Thus, for example,
the fact that an employee may, in the future, satisfy an eligibility
condition generally does not cause an optional form of benefit to be
treated as currently available to such employee.
(ii) Exceptions for age, service, employment termination and certain
other conditions--(A) Age and service conditions. For purposes of
applying paragraph (a)(2) of this Q&A-2, except as provided in paragraph
(b)(1)(ii)(B) of this Q&A-2, an age condition, a service condition, or
both are to be disregarded. For example, an employer that maintains a
plan that provides for an early retirement benefit payable as an annuity
for employees in division A, subject to a requirement that the employee
has attained his or her 55th birthday and has at least twenty years of
service with the employer, is to disregard the age and service
conditions in determining the group of employees to whom the early
retirement annuity benefit is currently available. Thus, the early
retirement annuity benefit is treated as currently available to all
employees of division A, without regard to their ages or years of
service and without regard to whether they could potentially meet the
age and service conditions prior to attaining the plan's normal
retirement age.
(B) Exception for certain age and service conditions. Age and
service conditions that must be satisfied within a specified period of
time may not be disregarded pursuant to paragraph (b)(1)(ii)(A) of this
Q&A-2. However, in determining the current availability of an optional
form of benefit subject to such an age condition, service condition, or
both, an employer may project the age and service of employees to the
last date on which the optional form of benefit subject to the age
condition or service condition (or both) is available under the plan. An
employer's ability to protect age and service to the last date on which
the optional form of benefit is available under the plan is not cut off
by a plan termination occurring prior to that date. Thus, for example,
assume that an employer maintaining a plan that permits employees
terminating from employment on or after age 55 between June 1, 1991 to
May 31, 1992, to elect a single sum distribution, decides to terminate
the plan on December 31, 1991. In determining the group of employees to
whom the single 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.
[[Page 57]]
(2) Employees taken into account. For purposes of applying paragraph
(a) of this Q&A-2, the tests are to be applied on the basis of the
employer's nonexcludable employees (whether or not they are participants
in the plan) in the same manner as such tests would be applied in
determining whether the plan providing the optional form of benefit
satisfies the tests under section 410(b).
(3) Definition of ``plan''. For purposes of applying paragraph (a)
of this Q&A-2, the term ``plan'' has the meaning that such term has for
purposes of determining whether the amount of contributions or benefits
and whether other benefits, rights, and features are nondiscriminatory
under section 401(a)(4).
(4) Restructuring optional forms of benefit--(i) In general. For
purposes of applying paragraph (a) of this Q&A-2, the availability of
two or more optional forms of benefit under a plan may be tested by
restructuring such benefits into two or more restructured optional forms
of benefit and testing the availability of such restructured optional
forms of benefit. If two or more optional forms of benefit under a plan
contain both common and distinct components, such optional forms of
benefit may be restructured as a single optional form of benefit
comprising the common component, and one or more optional forms of
benefit comprising each distinct component. Components of optional forms
of benefit may be treated as common only if they are identical with
respect to all characteristics taken into account under Q&A-1(b) of
Sec. 1.411(d)-4. The availability of each restructured optional form of
benefit must satisfy the applicable nondiscrimination requirements of
paragraph (a) of this Q&A-2.
(ii) Example. A profit-sharing plan covering all the employees of an
employer provides a single sum distribution option upon termination from
employment for all employees earning less than $50,000 and a single sum
distribution option upon termination from employment after the
attainment of age 55 for all employees earning $50,000 or more. These
distribution options are identical in all other respects. For purposes
of applying section 401(a)(4), such optional forms of benefit may be
restructured into two different optional forms of benefit: (A) a single
sum distribution option upon termination from employment after the
attainment of age 55 for all employees (i.e., the common component), and
(B) a single sum distribution option upon termination from employment
before the attainment of age 55 for all employees earning less than
$50,000. The availability of each of these restructured optional forms
of benefit must satisfy section 401(a)(4).
(c) Commissioner may provide additional tests. The Commissioner may
provide such additional factors, tests, and safe harbors as are
necessary or appropriate for purposes of determining whether the
availability of an optional form of benefit is discriminatory under
section 401(a)(4). In addition, the Commissioner may provide that
additional eligibility conditions not related directly or indirectly to
compensation or wealth may be disregarded under paragraph (b)(1)(ii)(C)
of this Q&A-2 in determining the current availability of an optional
form of benefit. The Commissioner may provide such additional guidance
only through the publication of revenue rulings, notices or other
documents of general applicability.
Q-3: May a plan condition the availability of an optional form of
benefit on employer discretion?
A-3: No. Even if the availability of an optional form of benefit
that is conditioned on employer discretion satisfies the
nondiscrimination requirements of section 401(a)(4), the plan providing
the optional form of benefit will fail to satisfy certain other
requirements of section 401(a), including, in applicable circumstances,
the definitely determinable requirement of section 401(a) and the
requirements of section 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)?
[[Page 58]]
A-4: No. A plan will not be treated as discriminatory under section
401(a)(4) merely because the plan mandates a single sum distribution
when the present value of an employee's benefit is not more than $3,500,
as permitted by sections 411(a)(11) and 417(e). This is an exception to
the general principles of this section. (No similar provision exists
excepting such single sum distributions from the limits on employer
discretion under section 411(d)(6). See Sec. 1.411(d)-4 Q&A-4.)
Q-5: If the availability of an optional form of benefit
discriminates, or may reasonably be expected to discriminate, in favor
of the highly compensated group, what acceptable alternatives exist for
amending the plan without violating section 411(d)(6)?
A-5: (a) Transitional rules--(1) In general. The following rules
apply for purposes of making necessary amendments to existing plans (as
defined in Q&A-6 of this section) under which the availability of an
optional form of benefit violates the nondiscrimination requirements of
section 401(a)(4) or may reasonably be expected to violate such
requirements. These transitional rules are provided under the authority
of section 411(d)(6), which allows the elimination of certain optional
forms of benefit if permitted by regulations, and section 7805(b).
(2) Nondiscrimination--(i) In general. The determination of whether
the availability of an optional form of benefit violates section
401(a)(4) is to be made in accordance with Q&A-2 of this section. In
addition, the availability of a particular optional form of benefit may
reasonably be expected to violate the nondiscrimination requirements of
section 401(a)(4) if, under the applicable facts and circumstances,
there is a significant possibility that the current availability of such
optional form of benefit will impermissibly favor the highly compensated
group. This determination must be made on the basis of the seventy
percent test of section 410(b)(1)(A) or the nondiscriminatory
classification test of section 410(b)(1)(B) as such tests existed prior
to the effective date of the amendments made to section 410(b) by
section 1112(a) of TRA '86. Thus, a condition may not reasonably be
expected to discriminate for purposes of these rules merely because it
results in a significant possibility that discrimination will result
because of the amendments made to section 410(b) by section 1112(a) of
TRA '86. In addition, the availability of an optional form of benefit
may not reasonably be expected to discriminate merely because of an age
or service condition that may be disregarded in determining the current
availability of such optional form of benefit under paragraph
(b)(1)(ii)(A) of Q&A-2 of this section. Similarly, the availability of
an optional form of benefit may not reasonably be expected to
discriminate merely because of an age or service condition that, after
permitted projection, does not cause such optional form to fail to
satisfy the requirement of this paragraph (a)(2).
(ii) Examples. The provisions of paragraph (a)(2)(i) of this Q&A-5
can be illustrated by the following examples:
Example 1. A plan provides that a single sum distribution option is
available only to (A) employees earning $50,000 or more in the final
year of employment, (B) employees who furnish evidence that they have a
net worth above a certain specified amount, and (C) employees who
present a letter from an accountant or attorney declaring that it is in
the employee's best interest to receive a single sum distribution.
Whether the availability of such optional form of benefit discriminates
depends on whether it meets the requirements of Q&A-2 of this Sec.
1.401(a)-4. However, each of the specified conditions limiting the
availability of the optional form of benefit may reasonably be expected
to discriminate in favor of the highly compensated group in operation
because of the likelihood of a significant positive correlation between
the ability to meet any of the specified conditions and membership in
the highly compensated group.
Example 2. A plan limits the availability of a single sum
distribution option to employees employed in one particular division of
the employer's company. All the employees of the company are
participants in the 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
[[Page 59]]
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
existing plan, the availability of an optional form of benefit may
reasonably be expected to discriminate, the plan may be amended in the
same manner permitted where the availability of an optional form of
benefit is discriminatory. See paragraph (d) of this Q&A-5 for rules
limiting the period during which the availability of optional forms of
benefit may be eliminated or reduced under this paragraph.
(c) Compliance and amendment date provisions--(1) Operational
compliance requirement. On or before the applicable effective date for
the plan (see Q&A-6 of this section), the plan sponsor must select one
of the alternatives permitted under paragraph (b) of this Q&A-5 with
respect to each affected optional form of benefit and the plan must be
operated in accordance with this selection. This is an operational
requirement and does not require a plan amendment prior to the period
set forth in paragraph (c)(2) of this Q&A-5. There is no special
reporting requirement under the Code or this section with respect to
this selection.
(2) Deferred amendment date. If paragraph (c)(1) of this Q&A-5 is
satisfied, a plan amendment conforming the plan to the particular
alternative selected under paragraph (b) of this Q&A-5 must be adopted
within the time period permitted for amending plans in order to meet the
requirements of section 410(b) as amended by TRA '86. Such conforming
amendment must be consistent with the sponsor's selection as reflected
by plan practice during the period from the effective date to the date
the amendment is adopted. Thus, for example, if an existing calendar
year noncollectively bargained defined benefit plan has a single sum
distribution form subject to a discriminatory condition, that was
available as of January 30, 1986 (subject to such condition), and such
employer makes one or more single sum distributions available on or
after the first day of the first plan year commencing on or after
January 1, 1989, and before the plan amendment, then such employer may
not adopt a plan amendment eliminating the single sum distribution form.
Instead, such employer must adopt an amendment making the distribution
form available to a nondiscriminatory group of employees while retaining
the availability of such distribution form with respect to the group of
employees to whom the benefit is already available. Similarly, any
objective criteria that are adopted as part of such amendment must be
consistent with the plan practice for the applicable period prior to the
amendment. A conforming amendment under this paragraph (c)(2) must be
made with respect to each optional form of benefit for which such
amendment is required and must be retroactive to the applicable
effective date.
(d) Limitation on transitional alternatives. The transitional
alternatives permitting the elimination or reduction of optional forms
of benefit will not violate section 411(d)(6) during the period prior to
the applicable effective date for the plan (see Q&A-6 of this section).
After the applicable effective date, any amendment (other than one
described in paragraph (c)(2) of this Q&A-5) that eliminates or reduces
an 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.
[[Page 60]]
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 Sec. Sec. 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 Sec. Sec.
1.401(a)(4)-1 through 1.401(a)(4)-13.
(b) New plans--(1) In general. Unless otherwise provided in
paragraph (b)(2) of this Q&A-6, plans that are either adopted or made
effective on or after January 30, 1986, are ``new plans''. With respect
to such new plans, this section is effective January 30, 1986. This
effective date is applicable to such plans whether or not they are
collectively bargained.
(2) Exception with respect to certain new plans. Plans that are new
plans as defined in paragraph (b)(1) of this Q&A-6, under which the
availability of an optional form of benefit is discriminatory or may
reasonably be expected to be discriminatory, and that receive a
favorable determination letter that covered such plan provisions with
respect to an application submitted prior to July 11, 1988, will be
treated as existing plans with respect to such optional form of benefit
for purposes of the transitional rules of this section. Thus, such plans
are eligible for the compliance and amendment alternatives set forth in
the transitional rule in Q&A-5 of this section.
(c) Existing plans--(1) In general. Plans that are both adopted and
in effect prior to January 30, 1986, are ``existing plans''. In
addition, new plans described in paragraph (b)(2) of this Q&A-6 are
treated as existing plans with respect to certain forms of benefit.
Subject to the limitations in paragraph (d) of this Q&A-6, the effective
dates set forth in paragraphs (c)(2) and (c)(3) of this Q&A-6 apply to
these existing plans for purposes of this section.
(2) Existing noncollectively bargained plans. With respect to
existing noncollectively bargained plans, this section is effective for
the first day of the first plan year commencing on or after January 1,
1989.
(3) Existing collectively bargained plans. With respect to existing
collectively bargained plans, this section is effective for the later of
the first day of the first plan year commencing on or after January 1,
1989, or the first day of the first plan year that the requirements of
section 410(b) as amended by TRA '86 apply to such plan.
(d) Delayed effective dates not applicable to new optional forms of
benefit or conditions--(1) In general. The delayed effective dates in
paragraph (c) (2) and (3) of this Q&A-6 for existing plans are
applicable with respect to an optional form of benefit only if both the
optional form of benefit and any applicable condition either causing the
availability of such optional form of benefit to be discriminatory or
making it reasonable to expect that the availability of such optional
form will be discriminatory were both adopted and in effect prior to
January 30, 1986. If the preceding sentence is not satisfied with
respect to an optional form of benefit, this section is effective with
respect to such optional form of benefit as if the plan were a new plan.
(2) Exception for certain amendments covered by a favorable
determination letter. If a condition causing the availability of an
optional form of benefit to be discriminatory, or to be reasonably
expected to discriminate, was adopted or made effective on or after
January 30, 1986, and a favorable determination 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.
[[Page 61]]
(e) Transitional rule effective date. The transitional rule provided
in Q&A-5 of this section is effective January 30, 1986.
[53 FR 26054, July 11, 1988, as amended by T.D. 8360, 56 FR 47536, Sept.
19, 1991; T.D. 8485, 58 FR 46778, Sept. 3, 1993; T.D. 8212, 61 FR 14247,
Apr. 1, 1996]
Sec. 1.401(a)-11 Qualified joint and survivor annuities.
(a) General rule--(1) Required provisions. A trust, to which section
411 (relating to minimum vesting standards) applies without regard to
section 411(e)(2), which is a part of a plan providing for the payment
of benefits in any form of a life annuity (as defined in paragraph
(b)(1) of this section), shall not constitute a qualified trust under
section 401(a)(11) and this section unless such plan provides that:
(i) Unless the election provided in paragraph (c)(1) of this section
has been made, life annuity benefits will be paid in a form having the
effect of a qualified joint and survivor annuity (as defined in
paragraph (b)(2) of this section) with respect to any participant who--
(A) Begins to receive payments under such plan on or after the date
the normal retirement age is attained, or
(B) Dies (on or after the date the normal retirement age is
attained) while in active service of the employer maintaining the plan,
or
(C) In the case of a plan which provides for the payment of benefits
before the normal retirement age, begins to receive payments under such
plan on or after the date the qualified early retirement age (as defined
in paragraph (b)(4) of this section) is attained, or
(D) Separates from service on or after the date the normal
retirement age (or the qualified early retirement age) is attained and
after satisfaction of eligibility requirements for the payment of
benefits under the plan (except for any plan requirement that there be
filed a claim for benefits) and thereafter dies before beginning to
receive life annuity benefits;
(ii) Any participant may elect, as provided in paragraph (c)(1) of
this section, not to receive life annuity benefits in the form of a
qualified joint and survivor annuity; and
(iii) If the plan provides for the payment of benefits before the
normal retirement age, any participant may elect, as provided in
paragraph (c)(2) of this section, that life annuity benefits be payable
as an early survivor annuity (as defined in paragraph (b)(3) of this
section) upon his death in the event that he--
(A) Attains the qualified early retirement age (as defined in
paragraph (b)(4) of this section), and
(B) Dies on or before the day normal retirement age is attained
while employed by an employer maintaining the plan.
(2) Certain cash-outs. A plan will not fail to satisfy the
requirements of section 401(a)(11) and this section merely because it
provides that if the present value of the entire nonforfeitable benefit
derived from employer contributions of a participant at the time of his
separation from service does not exceed $1,750 (or such smaller amount
as the plan may specify), such benefit will be paid to him in a lump
sum.
(3) Illustrations. The provisions of subparagraph (1) of this
paragraph may be illustrated by the following examples:
Example 1. The X Corporation Defined Contribution Plan was
established in 1960. As in effect on January 1, 1974, the plan provided
that, upon the participant's retirement, the participant may elect to
receive the balance of his account in the form of (1) a single-sum cash
payment, (2) a single-sum distribution consisting of X Corporation
stock, (3) five equal annual cash payments, (4) a life annuity, or (5) a
combination of options (1) through (4). The plan also provided that, if
a participant did not elect another form of distribution, the balance of
his account would be distributed to him in the form of a single-sum cash
payment upon his retirement. Assume that section 401(a)(11) and this
section became applicable to the plan as of its plan year beginning
January 1, 1976, with respect to persons who were active participants in
the plan as of such date (see 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
[[Page 62]]
provide that, if no election is made, the balance will be paid as a
single-sum cash payment. If the trust is not so amended, it will fail to
qualify under section 401(a).
Example 2. The Corporation Retirement Plan provides that plan
benefits are payable only in the form of a life annuity and also
provides that a participant may retire before the normal retirement age
of 65 and receive a benefit if he has completed 30 years of service.
Under this plan, an employee who begins employment at the age of 18 will
be eligible to receive retirement benefits at the age of 48 if he then
has 30 years of service. This plan must allow a participant to elect in
the time and manner prescribed in paragraph (c)(2) of this section an
early survivor annuity (defined in paragraph (b)(3) of this section) to
be payable on the death of the participant if death occurs while the
participant is in active service for the employer maintaining the plan
and on or after the date the participant reaches the qualified early
retirement age of 55 (the later of the date the participant reaches the
earliest retirement age (age 48) or 10 years before normal retirement
age (age 55)) but before the day after the day the participant reaches
normal retirement age (age 65).
Example 3. Assume the same facts as in Example 2. A, B, and C began
employment with Y Corporation when they each attained age 18. A retires
and begins to receive benefit payments at age 48 after completing 30
years of service. The plan is not required to pay a qualified joint and
survivor annuity to A and his spouse at any time. B does not elect an
early survivor annuity at age 55, but retires at age 57 after completing
39 years of service. Unless B makes an election under subparagraph
(1)(ii) of this paragraph, the plan is required to pay a qualified joint
and survivor annuity to B and his spouse. C makes no elections described
in subparagraph (1) of this paragraph, and dies while in active service
at age 66 after completing 48 years of service. The plan is required to
pay a qualified survivor annuity to C's spouse.
(b) Definitions. As used in this section--(1) Life annuity. (i) The
term ``life annuity'' means an annuity that provides retirement payments
and requires the survival of the participant or his spouse as one of the
conditions for any payment or possible payment under the annuity. For
example, annuities that make payments for 10 years or until death,
whichever occurs first or whichever occurs last, are life annuities.
(ii) However, the term ``life annuity'' does not include an annuity,
or that portion of an annuity, that provides those benefits which, under
section 411(a)(9), would not be taken into account in the determination
of the normal retirement benefit or early retirement benefit. For
example, ``social security supplements'' described in the fourth
sentence of section 411(a)(9) are not considered to be life annuities
for the purposes of this section, whether or not an early retirement
benefit is provided under the plan.
(2) Qualified joint and survivor annuity. The term ``qualified joint
and survivor annuity'' means an annuity for the life of the participant
with a survivor annuity for the life of his spouse which is neither (i)
less than one-half of, nor (ii) greater than, the amount of the annuity
payable during the joint lives of the participant and his spouse. For
purposes of the preceding sentence, amounts described in Sec. 1.401(a)-
11(b)(1)(ii) may be disregarded. A qualified joint and survivor annuity
must be at least the actuarial equivalent of the normal form of life
annuity or, if greater, of any optional form of life annuity offered
under the plan. Equivalence may be determined, on the basis of
consistently applied reasonable actuarial factors, for each participant
or for all participants or reasonable groupings of participants, if such
determination does not result in discrimination in favor of employees
who are officers, shareholders, or highly compensated. An annuity is not
a qualified joint and survivor annuity if payments to the spouse of a
deceased participant are terminated, or reduced, because of such
spouse's remarriage.
(3) Early survivor annuity. The term ``early survivor annuity''
means an annuity for the life of the participant's spouse the payments
under which must not be less than the payments which would have been
made to the spouse under the joint and survivor annuity if the
participant had made the election described in paragraph (c)(2) of this
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
[[Page 63]]
spouse is entitled to a payment of at least $40 per month. However, the
payments may be reduced to reflect the number of months of coverage
under the survivor annuity pursuant to paragraph (e) of this section.
(4) Qualified early retirement age. The term ``qualified early
retirement age'' means the latest of--
(i) The earliest date, under the plan, on which the participant
could elect (without regard to any requirement that approval of early
retirement be obtained) to receive retirement benefits (other than
disability benefits).
(ii) The first day of the 120th month beginning before the
participant reaches normal retirement age, or
(iii) The date on which the participant begins participation.
(5) Normal retirement age. The term ``normal retirement age'' has
the meaning set forth in section 411(a)(8).
(6) Annuity starting date. The term ``annuity starting date'' means
the first day of the first period with respect to which an amount is
received as a life annuity, whether by reason of retirement or by reason
of disability.
(7) Day. The term ``day'' means a calendar day.
(c) Elections--(1) Election not to take joint and survivor annuity
form--(i) In general. (A) A plan shall not be treated as satisfying the
requirements of this section unless it provides that each participant
may elect, during the election period described in subdivision (ii) of
this subparagraph, not to receive a qualified joint and survivor
annuity. However, if a plan provides that a qualified joint and survivor
annuity is the only form of benefit payable under the plan with respect
to a married participant, no election need be provided.
(B) The election shall be in writing and clearly indicate that the
participant is electing to receive all or, if permitted by the plan,
part of his benefits under the plan in a form other than that of a
qualified joint and survivor annuity. A plan will not fail to meet the
requirements of this section merely because the plan requires the
participant to obtain the written approval of his spouse in order for
the participant to make this election or if the plan provides that such
approval is not required.
(ii) Election period. (A) For purposes of the election described in
paragraph (c)(1)(i) of this section, the plan shall provide an election
period which shall include a period of at least 90 days following the
furnishing of all of the applicable information required by subparagraph
(3)(i) of this paragraph and ending prior to commencement of benefits.
In no event may the election period end earlier than the 90th day before
the commencement of benefits. Thus, for example, the commencement of
benefits may be delayed until the end of such election period because
the amount of payments to be made to a participant cannot be ascertained
before the end of such period; see Sec. 1.401(a)-14(d).
If a participant makes a request for additional information as provided
in subparagraph (3)(iii) of this paragraph on or before the last day of
the election period, the election period shall be extended to the extent
necessary to include at least the 90 calendar days immediately following
the day the requested additional information is personally delivered or
mailed to the participant. Notwithstanding the immediately preceding
sentence, a plan may provide in cases in which the participant has been
furnished by mail or personal delivery all of the applicable information
required by subparagraph (3)(i) of this paragraph, that a request for
such additional information must be made on or before a date which is
not less than 60 days from the date of such mailing or delivery; and if
the plan does so provide, the election period shall be extended to the
extent necessary to include at least the 60 calendar days following the
day the requested additional information is personally delivered or
mailed to the participant.
(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,
[[Page 64]]
if applicable, for payments received, prior to the exercise of such
election, in the form of a qualified joint and survivor annuity) in a
form other than that of a qualified joint and survivor annuity. The
provisions of paragraph (c)(1)(ii)(A) shall apply except that in no
event shall the election period end before the 90th day after the date
on which notice of the availability of such election and the applicable
information required by subparagraph (3)(i) of this paragraph is given
directly to the participant. If such notice and information is given by
mail, it shall be treated as given on the date of mailing. If such
participant has died, such election shall be made available to such
participant's personal representative.
(2) Election of early survivor annuity--(i) In general. (A) A plan
described in subparagraph (a)(1)(iii) of this section shall not be
treated as satisfying the requirements of this section unless it
provides that each participant may elect, during the period described in
subdivision (ii) of this subparagraph, an early survivor annuity as
described in paragraph (a)(1)(iii) of this section. Breaks in service
after the participant has attained the qualified early retirement age
neither invalidate a previous election or revocation nor prevent an
election from being made or revoked during the election period.
(B) The election shall be in writing and clearly indicate that the
participant is electing the early survivor annuity form.
(C) A plan is not required to provide an election under this
subparagraph if--
(1) The plan provides that an early survivor annuity is the only
form of benefit payable under the plan with respect to a married
participant who dies while employed by an employer maintaining the plan,
(2) In the case of a defined contribution plan, the plan provides a
survivor benefit at least equal in value to the vested portion of the
participant's account balance, if the participant dies while in active
service with an employer maintaining the plan, or
(3) In the case of a defined benefit plan, the plan provides a
survivor benefit at least equal in value to the present value of the
vested portion of the participant's normal form of the accrued benefit
payable at normal retirement age (determined immediately prior to
death), if the participant dies while in active service with an employer
maintaining the plan. Any present values must be determined in
accordance with either the actuarial assumptions or factors specified in
the plan, or a variable standard independent of employer discretion for
converting optional benefits specified in the plan.
(ii) Election period. (A) For purposes of the election described in
paragraph (c)(2)(i) of this section the plan shall provide an election
period which, except as provided in the following sentence, shall begin
not later than the later of either the 90th day before a participant
attains the qualified early retirement age or the date on which his
participation begins, and shall end on the date the participant
terminates his employment. If such a plan contains a provision that any
election made under this subparagraph does not become effective or
ceases to be effective if the participant dies within a certain period
beginning on the date of such election, the election period prescribed
in this subdivision (ii) shall begin not later than the later of (1) a
date which is 90 days plus such certain period before the participant
attains the qualified early retirement age or (2) the date on which his
participation begins. For example, if a plan provides that an election
made under this subparagraph does not become effective if the
participant dies less than 2 years after the date of such election, the
period for making an election under this subparagraph must begin not
later than the later of (1) 2 years and 90 days before the participant
attains the qualified 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
[[Page 65]]
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. For rules regarding the
information required to be provided with respect to the election to
waive a QJSA or a QPSA, see Sec. 1.417(a)(3)-1.
(4) Election is revocable. A plan to which this section applies must
provide that any election made under this paragraph may be revoked in
writing during the specified election period, and that after such
election has been revoked, another election under this paragraph may be
made during the specified election period.
(5) Election by surviving spouse. A plan will not fail to meet the
requirements of section 401(a)(11) and this section merely because it
provides that the spouse of a deceased participant may elect to have
benefits paid in a form other than a survivor annuity. If the plan
provides that such a spouse may make such an election, the plan
administrator must furnish to this spouse, within a reasonable amount of
time after a written request has been made by this spouse, a written
explanation in non-technical language of the survivor annuity and any
other form of payment which may be selected. This explanation must state
the financial effect (in terms of dollars) of each form of payment. A
plan need not respond to more than one such request.
(d) Permissible additional plan provisions--(1) In general. A plan
will not fail to meet the requirements of section 401(a)(11) and this
section merely because it contains one or more of the provisions
described in paragraphs (d)(2) through (5) of this section.
(2) Claim for benefits. A plan may provide that as a condition
precedent to the payment of benefits, a participant must express in
writing to the plan administrator the form in which he prefers benefits
to be paid and provide all the information reasonably necessary for the
payment of such benefits. However, if a participant files a claim for
benefits with the plan administrator and provides the plan administrator
with all the information necessary for the payment of benefits but does
not indicate a preference as to the form for the payment of benefits,
benefits must be paid in the form of a qualified joint and survivor
annuity if the participant has attained the qualified early retirement
age unless such participant has made an effective election not to
receive benefits in such form. For rules relating to provisions in a
plan to the effect that a claim for benefits must be filed before the
payment of benefits will commence, see Sec. 1.401(a)-14.
(3) Marriage requirements. A plan may provide that a joint and
survivor annuity will be paid only if--
(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
[[Page 66]]
or ceases to be effective if the participant dies within a period, not
in excess of 2 years, beginning on the date of such election or
revocation. However, a plan containing a provision described in the
preceding sentence shall not satisfy the requirements of this section
unless it also provides that any such election or any revocation of any
such election will be given effect in any case in which--
(i) The participant dies from accidental causes,
(ii) A failure to give effect to the election or revocation would
deprive the participant's survivor of a survivor annuity, and
(iii) Such election or revocation is made before such accident
occurred.
(5) Benefit option approval by third party. (i) A plan may provide
that an optional form of benefit elected by a participant is subject to
the approval of an administrative committee or similar third party.
However, the administrative committee cannot deny a participant any of
the benefits required by section 401(a)(11). For example, if a plan
offers a life annuity option, the committee may deny the participant a
qualified joint and survivor annuity only by denying the participant
access to all life annuity options without knowledge of whether the
participant wishes to receive a qualified joint and survivor annuity.
Alternatively, if the committee knows which form of life annuity the
participant has chosen before the committee makes its decision, the
committee cannot withhold its consent for payment of a qualified joint
and survivor annuity event though it denies all other life annuity
options. This subparagraph (5) only applies before the effective date of
the amendment made to section 411(d)(6) by section 301 of the Retirement
Equity Act of 1984. See section 411(d)(6) and the regulations thereunder
for rules limiting employer discretion.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. In 1980 plan M provides that the automatic form of benefit
is a single sum distribution. The plan also permits, subject to approval
by the administrative committee, the election of several optional forms
of life annuity. On the election form that is reviewed by the
administrative committee the participant indicates whether any life
annuity option is preferred, without indicating the particular life
annuity chosen. Thus, the committee approves or disapproves the election
without knowledge of whether a qualified joint and survivor annuity will
be elected. The administrative committee approval provision in Plan M
does not cause the plan to fail to satisfy this section. On the other
hand, if the form indicates which form of life annuity is preferred,
committee disapproval of any election of the qualified joint and
survivor annuity would cause the plan to fail to satisfy this section.
(e) Costs of providing qualified joint and survivor annuity form or
early survivor annuity form. A plan may take into account in any
equitable manner consistent with generally accepted actuarial principles
applied on a consistent basis any increased costs resulting from
providing qualified joint and survivor annuity and early survivor
annuity benefits. A plan may give a participant the option of paying
premiums only if it provides another option under which an out-of-pocket
expense by the participant is not required.
(f) Application and effective date. Section 401(a)(11) and this
section shall apply to a plan only with respect to 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
[[Page 67]]
individual annuity contracts, the annuity starting date will be
considered for purposes of this paragraph to fall within a plan year
beginning before January 1, 1976, with respect to any such individual
contract that was distributed to the participant during a plan year
beginning before January 1, 1976, if no premiums are paid with respect
to such contract during a plan year beginning after December 31, 1975.
In the case of individual annuity contracts that are distributed to
participants before January 1, 1978, and which contain an option to
provide a qualified joint and survivor annuity, the requirements of this
section will be considered to have been satisfied if, not later than
January 1, 1978, holders of individual annuity contracts who are
participants described in the first sentence of this paragraph are given
an opportunity to have such contracts amended, so as to provide for a
qualified joint and survivor annuity in the absence of a contrary
election, within a period of not less than one year from the date such
opportunity was offered. In no event, however, shall the preceding
sentence apply with respect to benefits attributable to premiums paid
after December 31, 1977.
(g) Effect of REA 1984--(1) In general. The Retirement Equity Act of
1984 (REA 1984) significantly changed the qualified joint and survivor
annuity rules generally effective for plan years beginning after
December 31, 1984. The new survivor annuity rules are primarily in
sections 401(a)(11) and 417 as revised by REA 1984 and Sec. Sec.
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, as
amended by T.D. 7510, 42 FR 53956, Oct. 4, 1977; T.D. 8219, 53 FR 31841,
Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988; T.D. 9099, 68 FR 70144, Dec.
17, 2003]
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
[[Page 68]]
not apply to a governmental plan, within the meaning of section 414(d);
a church plan, within the meaning of section 414(e), for which there has
not been made the election under section 410(a) to have the
participation, vesting, funding, etc. requirements apply; or a plan
which at no time after September 2, 1974, provided for employer
contributions.
(b) No assignment or alienation--(1) General rule. Under section
401(a)(13), a trust will not be qualified unless the plan of which the
trust is a part provides that benefits provided under the plan may not
be anticipated, assigned (either at law or in equity), alienated or
subject to attachment, garnishment, levy, execution or other legal or
equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying
the requirements of subparagraph (1) of this paragraph shall not
preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section
6331.
(ii) The collection by the United States on a judgment resulting
from an unpaid tax assessment.
(c) Definition of assignment and alienation--(1) In general. For
purposes of this section, the terms ``assignment'' and ``alienation''
include--
(i) Any arrangement providing for the payment to the employer of
plan benefits which otherwise would be due the participant under the
plan, and
(ii) Any direct or indirect arrangement (whether revocable or
irrevocable) whereby a party acquires from a participant or beneficiary
a right or interest enforceable against the plan in, or to, all or any
part of a plan benefit payment which is, or may become, payable to the
participant or beneficiary.
(2) Specific arrangements not considered an assignment or
alienation. The terms ``assignment'' and ``alienation'' do not include,
and paragraph (e) of this section does not apply to, the following
arrangements:
(i) Any arrangement for the recovery of amounts described in section
4045(b) of the Employee Retirement Income Security Act of 1974, 88 Stat.
1027 (relating to the recapture of certain payments),
(ii) Any arrangement for the withholding of Federal, State or local
tax from plan benefit payments,
(iii) Any arrangement for the recovery by the plan of overpayments
of benefits previously made to a participant,
(iv) Any arrangement for the transfer of benefit rights from the
plan to another plan, or
(v) Any arrangement for the direct deposit of benefit payments to an
account in a bank, savings and loan association or credit union,
provided such arrangement is not part of an arrangement constituting an
assignment or alienation. Thus, for example, such an arrangement could
provide for the direct deposit of a participant's benefit payments to a
bank account held by the participant and the participant's spouse as
joint tenants.
(d) Exceptions to general rule prohibiting assignments or
alienations--(1) Certain voluntary and revocable assignments or
alienations. Not withstanding paragraph (b)(1) of this section, a plan
may provide that once a participant or beneficiary begins receiving
benefits under the plan, the participant or beneficiary may assign or
alienate the right to future benefit payments provided that 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
[[Page 69]]
loan from a party other than the plan, regardless of whether these
benefits are nonforfeitable within the meaning of section 411 and the
regulations thereunder.
(iii) The loan, if made to a participant or beneficiary who is a
disqualified person (within the meaning of section 4975(e)(2)), must be
exempt from the tax imposed by section 4975 (relating to the tax imposed
on prohibited transactions) by reason of section 4975(d)(1). If the loan
is made to a participant or beneficiary who is not a disqualified
person, the loan must be one which would the exempt from the tax imposed
by section 4975 by reason of section 4975(d)(1) if the loan were made to
a disqualified person.
(e) Special rule for certain arrangements--(1) In general. For
purposes of this section and notwithstanding paragraph (c)(1) of this
section, an arrangement whereby a participant or beneficiary directs the
plan to pay all, or any portion, of a plan benefit payment to a third
party (which includes the participant's employer) will not constitute an
``assignment or alienation'' if--
(i) It is revocable at any time by the participant or beneficiary;
and
(ii) The third party files a written acknowledgement with the plan
administrator pursuant to subparagraph (2) of this paragraph.
(2) Acknowledgement requirement for third party arrangements. In
accordance with paragraph (e)(1)(ii) of this section, the third party is
required to file a written acknowledgement with the plan administrator.
This acknowledgement must state that the third party has no enforceable
right in, or to, any plan benefit payment or portion thereof (except to
the extent of payments actually received pursuant to the terms of the
arrangement). A blanket written acknowledgement for all participants and
beneficiaries who are covered under the arrangement with the third party
is sufficient. The written acknowledgement must be filed with the plan
administrator no later than the later of--
(i) August 18, 1978; or
(ii) 90 days after the arrangement is entered into.
(f) Effective date. Section 401(a)(13) is applicable as of January
1, 1976, and the plan provision required by this section must be
effective as of that date. However, regardless of when the provision is
adopted, it will not affect--
(1) Attachments, garnishments, levies, or other legal or equitable
process permitted under the plan that are made before January 1, 1976;
(2) Assignments permitted under the plan that are irrevocable on
December 31, 1975, including assignments made before January 1, 1976, as
security for loans to a participant or beneficiary from a party other
than the plan; and
(3) Renewals or extensions of loans described in subparagraph (2) of
this paragraph, if--
(i) The principal amount of the obligation outstanding on December
31, 1975 (or, if less, the principal amount outstanding on the date of
renewal or extension), is not increased;
(ii) The loan, as renewed or extended, does not bear a rate of
interest in excess of the rate prevailing for similar loans at the time
of the renewal or extensions; and
(iii) With respect to loans that are renewed or extended to bear a
variable 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.
[[Page 70]]
(3) Waiver of distribution requirements. A plan shall not be treated
as failing to satisfy the requirements of sections 401 (a) and (k) and
409(d) solely because of a payment to an alternate payee pursuant to a
QDRO. This is the case even if the plan provides for payments pursuant
to a QDRO to an alternate payee prior to the time it may make payments
to a participant. Thus, for example, a pension plan may pay an alternate
payee even though the participant may not receive a distribution because
he continues to be employed by the employer.
(4) Coordination with section 417--(i) Former spouse. (A) In
general. Under section 414(p)(5), a QDRO may provide that a former
spouse shall be treated as the current spouse of a participant for all
or some purposes under sections 401(a)(11) and 417.
(B) Consent. (1) To the extent a former spouse is treated as the
current spouse of the participant by reason of a QDRO, any current
spouse shall not be treated as the current spouse. For example, assume H
is divorced from W, but a QDRO provides that H shall be treated as W's
current spouse with respect to all of W's benefits under a plan. H will
be treated as the surviving spouse under the QPSA and QJSA unless W
obtains H's consent to waive the QPSA or QJSA or both. The fact that W
married S after W's divorce from H is disregarded. If, however, the QDRO
had provided that H shall be treated as W's current spouse only with
respect to benefits that accrued prior to the divorce, then H's consent
would be needed by W to waive the QPSA or QJSA with respect to benefits
accrued before the divorce. S's consent would be required with respect
to the remainder of the benefits.
(2) In the preceding examples, if the QDRO ordered that a portion of
W's benefit (either through separate accounts or a percentage of the
benefit) must be distributed to H rather than ordering that H be treated
as W's spouse, the survivor annuity requirements of sections 401(a)(11)
and 417 would not apply to the part of W's benefit awarded H. Instead,
the terms of the QDRO would determine how H's portion of W's accrued
benefit is paid. W is required to obtain S's consent if W elects to
waive either the QJSA or QPSA with respect to the remaining portion of
W's benefit.
(C) Amount of the QPSA or QJSA. (1) Where, because of a QDRO, more
than one individual is to be treated as the surviving spouse, a plan may
provide that the total amount to be paid in the form of a QPSA or
survivor portion of a QJSA may not exceed the amount that would be paid
if there were only one surviving spouse. The QPSA or survivor portion of
the QJSA, as the case may be, payable to each surviving spouse must be
paid as an annuity based on the life of each such spouse.
(2) Where the QDRO splits the participant's accrued benefit between
the participant and a former spouse (either through separate accounts or
percentage of the benefit), the surviving spouse of the participant is
entitled to a QPSA or QJSA based on the participant's accrued benefit as
of the date of death or the annuity starting date, less the separate
account or percentage that is payable to the former spouse. The
calculation is made as if the separate account or percentage had been
distributed to the participant prior to the relevant date.
(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.
[[Page 71]]
(C) If the former spouse who is treated as a current spouse dies
prior to the participant's annuity starting date, then any actual
current spouse of the participant is treated as the current spouse,
except as otherwise provided in a QDRO.
(iv) Section 415 requirements. Even though a participant's benefits
are awarded to an alternate payee pursuant to a QDRO, the benefits are
benefits of the participant for purposes of applying the limitations of
section 415 to the participant's benefits.
[T.D. 7534, 43 FR 6943, Feb. 17, 1978, as amended by T.D. 8219, 53 FR
31850, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]
Sec. 1.401(a)-14 Commencement of benefits under qualified trusts.
(a) In general. Under section 401(a)(14), a trust to which section
411 applies (without regard to section 411(e)(2) is not qualified under
section 401 unless the plan of which such trust is a part provides that
the payment of benefits under the plan to the participant will begin not
later than the 60th day after the close of the plan year in which the
latest of the following events occurs--
(1) The attainment by the participant of age 65, or, if earlier, the
normal retirement age specified under the plan,
(2) The 10th anniversary of the date on which the participant
commenced participation in the plan,
(3) The termination of the participant's service with the employer,
or
(4) The date specified in an election made pursuant to paragraph (b)
of this section.
Notwithstanding the preceding sentence, a plan may require that a
participant file a claim for benefits before payment of benefits will
commence.
(b) Election of later date--(1) General rule. A plan may permit a
participant to elect that the payment to him of any benefit under a plan
will commence at a date later than the dates specified under paragraphs
(a)(1), (2), and (3) of this section.
(2) Manner of election. A plan permitting an election under this
paragraph shall require that such election must be made by submitting to
the plan administrator a written statement, signed by the participant,
which describes the benefit and the date on which the payment of such
benefit shall commence.
(3) Restriction. An election may not be made pursuant to a plan
provision permitted by this paragraph if the exercise of such election
will cause benefits payable under the plan with respect to the
participant in the event of his death to be more than ``incidental''
within the meaning of paragraph (b)(1)(i) of Sec. 1.401-1.
(c) Special early retirement rule--(1) Separation prior to early
retirement age. A trust forming part of a plan which provides for the
payment of an early retirement benefit is not qualified under section
401 unless, upon satisfaction of the age requirement for such early
retirement benefit, a participant who--
(i) Satisfied the service requirements for such early retirement
benefit, but
(ii) Separated from service (with any nonforfeitable right to an
accrued benefit) before satisfying such age requirement,
is entitled to receive not less than the reduced normal retirement
benefit described in paragraph (c)(2) of this section. A plan may
establish reasonable 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:
[[Page 72]]
Example. The X Corporation Defined Benefit Plan provides that a
normal retirement benefit will be payable to a participant upon
attainment of age 65. The plan also provides that an actuarially reduced
retirement benefit will be payable, upon application, to any participant
who has completed 10 years of service with the X Corporation and
attained age 60. When he is 55 years of age and has completed 10 years
of service with X Corporation, A, a participant in the plan, leaves the
service of X Corporation and does not return. The plan will not be
qualified under section 401 unless, upon attainment of age 60 and
application for benefits, A is entitled to receive a reduced normal
retirement benefit described in subparagraph (2) of this paragraph.
(d) Retroactive payment rule. If the amount of the payment required
to commence on the date determined under this section cannot be
ascertained by such date, or if it is not possible to make such payment
on such date because the plan administrator has been unable to locate
the participant after making reasonable efforts to do so, a payment
retroactive to such date may be made no later than 60 days after the
earliest date on which the amount of such payment can be ascertained
under the plan or the date on which the participant is located
(whichever is applicable).
(e) Effective date. This section shall apply to a plan for those
plan years to which section 411 of the Code applies without regard to
section 411(e)(2).
(Secs. 401(a)(14), 7805, Internal Revenue Code of 1954 (88 Stat. 937,
68A Stat. 917; 26 U.S.C. 401(a)(14), 7805))
[T.D. 7436, 41 FR 42651, Sept. 28, 1976; 41 FR 44690, Oct. 12, 1976]
Sec. 1.401(a)-15 Requirement that plan benefits are not decreased
on account of certain Social Security increases.
(a) In general. Under section 401(a)(15), a trust which is part of a
plan to which section 411 applies (without regard to section 411(e)(2))
is not qualified under section 401 unless, under the plan of which such
trust is a part:
(1) Benefit being received by participant or beneficiary. A benefit
(including a death or disability benefit) being received under the plan
by a participant or beneficiary (other than a participant to whom
subparagraph (2)(ii) of this paragraph applies, or a beneficiary of such
a participant) is not decreased by reason of any post-separation social
security benefit increase effective after the later of--
(i) September 2, 1974, or
(ii) The date of first receipt of any retirement benefit, death
benefit, or disability benefit under the plan by the participant or by a
beneficiary of the participant (whichever receipt occurs first).
(2) Benefit to which participant separated from service has
nonforfeitable right. In the case of a benefit to which a participant
has a nonforfeitable right under such plan--
(i) If such participant is separated from service and does not
subsequently return to service and resume participation in the plan,
such benefit is not decreased by reason of any post-separation social
security benefit increase effective after the later of September 2,
1974, or separation from service, or
(ii) If such participant is separated from service and subsequently
returns to service and resumes participation in the plan, such benefit
is not decreased by reason of any post-separation social 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
[[Page 73]]
of a stated benefit formula amount less a specified percentage of the
primary insurance amount payable under title II of the Social Security
Act. The plan provides no early retirement benefits. In the case of a
participant who separates from service before age 65 with a
nonforfeitable right to a benefit under the plan, the plan defines the
primary insurance amount as the amount which the participant is entitled
to receive under title II of the Social Security Act at age 65,
multiplied by the ratio of the number of years of service with the
employer to the number of years of service the participant would have
had if he had worked for the employer until age 65. The plan does not
satisfy the requirements of section 401(a)(15), because social security
increases that occur after a participant's separation from service will
reduce the benefit the participant will receive under the plan.
Example 2. A plan to which section 401(a)(15) applies provides an
annual benefit at the normal retirement age, 65, in the form of a stated
benefit formula amount less a specified percentage of the primary
insurance amount payable under title II of the Social Security Act. The
plan provides no early retirement benefits. In the case of a participant
who separates from service before age 65 with a nonforfeitable right to
a benefit under the plan, the plan defines the primary insurance amount
as the amount which the participant is entitled to receive under title
II of the Social Security Act at age 65 based upon the assumption that
he will continue to receive until reaching age 65 compensation which
would be treated as wages for purposes of the Social Security Act at the
same rate as he received such compensation at the time he separated from
service, but determined without regard to any post-separation social
security benefit increase, multiplied by the ratio of the number of
years of service with the employer to the number of years of service the
participant would have had if he had worked for the employer until age
65. The plan satisfies the requirements of section 401(a)(15), because
social security increases that occur after a participant's separation
from service will not reduce the benefit the participant will receive
under the plan.
(d) Other Federal or State laws. To the extent applicable, the rules
discussed in this section will govern classifications under a plan
supplementing the benefits provided by other Federal or State laws, such
as the Railroad Retirement Act of 1937. See section 206(b) of the
Employee Retirement Income Security Act of 1974 (Public Law 93-406, 88
Stat. 864).
(e) Effect on prior law. Nothing in this section shall be construed
as amending or modifying the rules applicable to post-separation social
security increases prior to September 2, 1974. See paragraph (e) of
Sec. 1.401-3.
(f) Effective date. Section 401(a)(15) and this section shall apply
to a plan only with respect to plan years to which section 411 (relating
to minimum vesting standards) is applicable to the plan without regard
to section 411(e)(2).
[T.D. 7434, 41 FR 42650, Sept. 28, 1976]
Sec. 1.401(a)-16 Limitations on benefits and contributions under
qualified plans.
A trust will not be a qualified trust and a plan will not be a
qualified plan if the plan provides for benefits or contributions which
exceed the limitations of section 415. Section 415 and the regulations
thereunder provide rules concerning these limitations on benefits and
contributions.
[T.D. 7748, 46 FR 1696, Jan. 7, 1981]
Sec. 1.401(a)-19 Nonforfeitability in case of certain withdrawals.
(a) Application of section. Section 401(a)(19) and this section
apply to a 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
[[Page 74]]
to his total employer-derived accrued benefit under the plan.
(3) Certain forfeitures. Paragraph (b)(1) of this section does not
apply in the case of a forfeiture permitted by section 411(a)(3)(D)(iii)
and Sec. 1.411(a)-7(d)(3) (relating to forfeitures of certain benefits
accrued before September 2, 1974).
(c) Supersession. Section 11.401(a)-(19) of the Temporary Income Tax
Regulations under the Employee Retirement Income Security Act of 1974 is
superseded by this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42320, Aug. 23, 1977]
Sec. 1.401(a)-20 Requirements of qualified joint and survivor
annuity and qualified preretirement survivor annuity.
Q-1: What are the survivor annuity requirements added to the Code by
the Retirement Equity Act of 1984 (REA 1984)?
A-1: REA 1984 replaced section 401(a)(11) with a new section
401(a)(11) and added section 417. Plans to which new section 401(a)(11)
applies must comply with the requirements of sections 401(a)(11) and 417
in order to remain qualified under sections 401(a) or 403(a). In
general, these plans must provide both a qualified joint and survivor
annuity (QJSA) and a qualified preretirement survivor annuity (QPSA) to
remain qualified. These survivor annuity requirements are applicable to
any benefit payable under a plan, including a benefit payable to a
participant under a contract purchased by the plan and paid by a third
party.
Q-2: Must annuity contracts purchased and distributed to a
participant or spouse by a plan subject to the survivor annuity
requirements of sections 401(a)(11) and 417 satisfy the requirements of
those sections?
A-2: Yes. Rights and benefits under section 401(a)(11) or 417 may
not be eliminated or reduced because the plan uses annuity contracts to
provide benefits merely because (a) such a contract is held by a
participant or spouse instead of a plan trustee, or (b) such contracts
are distributed upon plan termination. Thus, the requirements of
sections 401(a)(11) and 417 apply to payments under the annuity
contracts, not to the distributions of the contracts.
Q-3: What plans are subject to the survivor annuity requirements of
section 401(a)(11)?
A-3: (a) Section 401(a)(11) applies to any defined benefit plan and
to any defined contribution plan that is subject to the minimum funding
standards of section 412. This section also applies to any participant
under any other defined contribution plan unless all of the following
conditions are satisfied--
(1) The plan provides that the participant's nonforfeitable accrued
benefit is payable in full, upon the participant's death, to the
participant's surviving spouse (unless the participant elects, with
spousal consent that satisfies the requirements of section 417(a)(2),
that such benefit be provided instead to a designated beneficiary);
(2) The participant does not elect the payment of benefits in the
form of a life annuity; and
(3) With respect to the participant, the plan is not a transferee or
an offset plan. (See Q&A 5 of this section.)
(b) A defined contribution plan not subject to the minimum funding
standards of section 412 will not be treated 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
[[Page 75]]
losses occurring after the participant's death in accordance with plan
rules governing the adjustment of account balances for other plan
distributions. Thus, for example, the plan may not provide for
distributions of an account balance to a surviving spouse determined as
of the last day of the quarter in which the participant's death occurred
with no adjustments of an account balance for gains or losses after
death if the plan provides for such adjustments for a participant who
separates from service within a quarter.
(c) For purposes of determining the extent to which section
401(a)(11) applies to benefits under an employee stock ownership plan
(as defined in section 4975(e)(7)), the portion of a participant's
accrued benefit that is subject to section 409(h) is to be treated as
though such benefit were provided under a defined contribution plan not
subject to section 412.
(d) The requirements set forth in section 401(a)(11) apply to other
employee benefit plans that are covered by applicable provisions under
title I of the Employee Retirement Income Security Act of 1974. For
purposes of applying the regulations under sections 401(a)(11) and 417,
plans subject to ERISA section 205 are treated as if they were described
in section 401(a). For example, to the extent that section 205 covers
section 403(b) contracts and custodial accounts they are treated as
section 401(a) plans. Individual retirement plans (IRAs), including IRAs
to which contributions are made under simplified employee pensions
described in section 408(k) and IRAs that are treated as plans subject
to title I, are not subject to these requirements.
Q-4: What rules apply to a participant who elects a life annuity
option under a defined contribution plan not subject to section 412?
A-4: If a participant elects at any time (irrespective of the
applicable election period defined in section 417(a)(6)) a life annuity
option under a defined contribution plan not subject to section 412, the
survivor annuity requirements of sections 401(a)(11) and 417 will always
thereafter apply to all of the participant's benefits under such plan
unless there is a separate accounting of the account balance subject to
the election. A plan may allow a participant to elect an annuity option
prior to the applicable election period described in section 417(a)(6).
If a participant elects an annuity option, the plan must satisfy the
applicable written explanation, consent, election, and withdrawal rules
of section 417, including waiver of the QJSA within 90 days of the
annuity starting date. If a participant selecting such an option dies,
the surviving spouse must be able to receive the QPSA benefit described
in section 417(c)(2) which is a life annuity, the actuarial equivalent
of which is not less than 50 percent of the nonforfeitable account
balance (adjusted for loans as described in Q&A 24(d) of this section).
The remaining account balance may be paid to a designated nonspouse
beneficiary.
Q-5: How do sections 401(a)(11) and 417 apply to transferee plans
which are defined contribution plans not subject to section 412?
A-5: (a) Transferee plans. Although the survivor annuity
requirements of sections 401(a)(11) and 417 generally do not apply to
defined contribution plans not subject to section 412, such plans 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,
[[Page 76]]
e.g., section 411(d)(6) and the regulations thereunder. A transfer made
before January 1, 1985, and any rollover contribution made at any time,
are not transactions that subject the transferee plan to the survivor
annuity requirements with respect to a participant. If a plan is a
transferee plan with respect to a participant, the survivor annuity
requirements do not apply with respect to other plan participants solely
because of the transfer. Any plan that would not otherwise be subject to
the survivor annuity requirements of sections 401(a)(11) and 417 whose
benefits are used to offset benefits in a plan subject to such
requirements is subject to the survivor annuity requirements with
respect to those participants whose benefits are offset. Thus, if a
stock bonus or profit-sharing plan offsets benefits under a defined
benefit plan, such a plan is subject to the survivor annuity
requirements.
(b) Benefits covered. The survivor annuity requirements apply to all
accrued benefits held for a participant with respect to whom the plan is
a transferee plan unless there is an acceptable separate accounting
between the transferred benefits and all other benefits under the plan.
A separate accounting is not acceptable unless gains, losses,
withdrawals, contributions, forfeitures, and other credits or charges
are allocated on a reasonable and consistent basis between the accrued
benefits subject to the survivor annuity requirements and other
benefits. If there is an acceptable separate accounting between
transferred benefits and any other benefits under the plan, only the
transferred benefits are subject to the survivor annuity requirements.
Q-6: Is a frozen or terminated plan required to satisfy the survivor
annuity requirements of sections 401(a)(11) and 417?
A-6: In general, benefits provided under a plan that is subject to
the survivor annuity requirements of sections 401(a)(11) and 417 must be
provided in accordance with those requirements even if the plan is
frozen or terminated. However, any plan that has a termination date
prior to September 17, 1985, and that distributed all remaining assets
as soon as administratively feasible after the termination date, is not
subject to the survivor annuity requirements. The date of termination is
determined under section 411(d)(3) and Sec. 1.411(d)-2(c).
Q-7: If the Pension Benefit Guaranty Corporation (PBGC) is
administering a plan, are benefits payable in the form of a QPSA or
QJSA-
A-7: Yes, the PBGC will pay benefits in such forms.
Q-8: How do the survivor annuity requirements of sections 401(a)(11)
and 417 apply to participants?
A-8: (a) If a participant dies before the annuity starting date with
vested benefits attributable to employer or employee contributions (or
both), benefits must be paid to the surviving spouse in the form of a
QPSA. If a participant survives until the annuity starting date with
vested benefits attributable to employer or employee contributions (or
both), benefits must be provided to the participant in the form of a
QJSA.
(b) A participant may waive the QPSA or the QJSA (or both) if the
applicable notice, election, and spousal consent requirements of section
417 are satisfied.
(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
[[Page 77]]
portion in the form of a QJSA (unless the plan satisfies the applicable
consent requirements of section 417 (a) and (e) with respect to such
portion of the participant's benefit). This rule applies even if the
distribution is merely an in-service distribution attributable to
voluntary employee contributions and regardless of whether the
participant has attained the normal retirement age under the plan. The
QJSA requirements apply to such a distribution because the annuity
starting date has occurred with respect to this portion of the
participant's benefit. In the event of a participant's death following
the commencement of a distribution in the form of a QJSA, the remaining
payments must be made to the surviving spouse under the QJSA. In
addition, the plan must satisfy the QPSA requirements with respect to
any portion of the participant's benefits for which the annuity starting
date had not yet occurred.
(b) Example. Assume that participant A has a $100,000 account
balance in a money purchase pension plan. A makes an in-service
withdrawal of $20,000 attributable to voluntary employee contributions.
The QJSA requirements apply to A's withdrawal of the $20,000.
Accordingly, unless the QJSA form is properly waived such amount must be
distributed in the form of a QJSA. A's remaining account balance
($80,000) remains subject to the QPSA requirements because the annuity
starting date has not occurred with respect to the $80,000. (If A
survives until the annuity starting date, the $80,000 would be subject
to the QJSA requirements.) If A died on the day following the annuity
starting date for the withdrawal, A's spouse would be entitled to a QPSA
with a value equal to at least $40,000 with respect to the $80,000
account balance, in addition to any survivor benefit without respect to
the $20,000. If the $20,000 payment to A had been the first payment of
an annuity purchased with the entire $100,000 account balance rather
than an in-service distribution, then the QJSA requirements would apply
to the entire account balance at the time of the annuity starting date.
In such event, the plan would have no obligation to provide A's spouse
with a QPSA benefit upon A's death. Of course, A's spouse would receive
the QJSA benefit (if the QJSA had not been waived) based on the full
$100,000.
Q-10: What is the relevance of the annuity starting date with
respect to the survivor benefit requirements?
A-10: (a) Relevance. The annuity starting date is relevant to
whether benefits are payable as either a QJSA or QPSA, or other selected
optional form of benefit. If a participant is alive on the annuity
starting date, the benefits must be payable as a QJSA. If the
participant is not alive on the annuity starting date, the surviving
spouse must receive a QPSA. The annuity starting date is also used to
determine when a spouse may consent to and a participant may waive a
QJSA. A waiver is only effective if it is made 90 days before the
annuity starting date. Thus, a deferred annuity cannot be selected and a
QJSA waived until 90 days before payments commence under the deferred
annuity. In some cases, the annuity starting date will have occurred
with respect to a portion of the participant's accrued benefit and will
not have occurred with respect to the remaining portion. (See Q&A-9.)
(b) Annuity starting date--(1) General rule. For purposes of
sections 401(a)(11), 411(a)(11) and 417, the annuity starting date is
the first day of the first period for which an amount is paid as an
annuity or any other form.
(2) Annuity payments. The annuity starting date is the first date
for which 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.
[[Page 78]]
(3) Administrative delay. A payment shall not be considered to occur
after the annuity starting date merely because actual payment is
reasonably delayed for calculation of the benefit amount if all payments
are actually made.
(4) Forfeitures on death. Prior to the annuity starting date,
section 411(a)(3)(A) allows a plan to provide for a forfeiture of a
participant's benefit, except in the case of a QPSA or a spousal benefit
described in section 401(a)(11)(B)(iii)(I). Once the annuity starting
date has occurred, even if actual payment has not yet been made, a plan
must pay the benefit in the distribution form elected.
(5) Surviving spouses, alternate payees, etc. The definition of
``annuity starting date'' for surviving spouses, other beneficiaries and
alternate payees under section 414(p) is the same as it is for
participants.
(c) Disability auxiliary benefit--(1) General rule. The annuity
starting date for a disability benefit is the first day of the first
period for which the benefit becomes payable unless the disability
benefit is an auxiliary benefit. The payment of any auxiliary disability
benefits is disregarded in determining the annuity starting date. A
disability benefit is an auxiliary benefit if upon attainment of early
or normal retirement age, a participant receives a benefit that
satisfies the accrual and vesting rules of section 411 without taking
into account the disability benefit payments up to that date.
Example. (i) Assume that participant A at age 45 is entitled to a
vested accrued benefit of $100 per month commencing at age 65 in the
form of a joint and survivor annuity under Plan X. If prior to age 65 A
receives a disability benefit under Plan X and the payment of such
benefit does not reduce the amount of A's retirement benefit of $100 per
month commencing at age 65, any disability benefit payments made to A
between ages 45 and 65 are auxiliary benefits. Thus, A's annuity
starting date does not occur until A attains age 65. A's surviving
spouse B would be entitled to receive a QPSA if A died before age 65. B
would be entitled to receive the survivor portion of a QJSA (unless
waived) if A died after age 65. The QPSA payable to B upon A's death
prior to age 65 would be computed by reference to the QJSA that would
have been payable to A and B had A survived to age 65.
(ii) If in the above example A's benefit payable at age 65 is
reduced to $99 per month because a disability benefit is provided to A
prior to age 65, the disability benefit would not be an auxiliary
benefit. The benefit of $99 per month payable to A at age 65 would not,
without taking into account the disability benefit payments to A prior
to age 65, satisfy the minimum vesting and accrual rules of section 411.
Accordingly, the first day of the first period for which the disability
payments are to be made to A would constitute A's annuity starting date,
and any benefit paid to A would be required to be paid in the form of a
QJSA (unless waived by A with the consent of B).
(d) Other rules--(1) Suspension of benefits. If benefit payments are
suspended after the annuity starting date pursuant to a suspension of
benefits described in section 411(a)(3)(B) after an employee separates
from service, the recommencement of benefit payments after the
suspension is not treated as a new annuity starting date unless the plan
provides otherwise. In such case, the plan administrator is not required
to provide new notices nor to obtain new waivers for the recommenced
distributions if the form of distribution is the same as the form that
was appropriately selected prior to the suspension. If benefits are
suspended for an employee who continues in service without a separation
and who never receives payments, the commencement of payments after the
period of suspension is treated as the annuity starting date unless the
plan provides otherwise.
(2) Additional accruals. In the case of an annuity starting date
that occurs on 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?
[[Page 79]]
A-11: Yes. The survivor annuity benefit requirements apply to
benefits derived from both employer and employee contributions. Benefits
are not required to be paid in the form of a QPSA or a QJSA if the
participant was vested only in employee contributions at the time of
death or distribution and such death or distribution occurred before
October 22, 1986. All benefits provided under a plan, including benefits
attributable to rollover contributions, are subject to the survivor
annuity requirements.
Q-12: To what benefits do the survivor annuity requirements of
sections 401(a)(11) and 417 apply?
A-12: (a) Defined benefit plans. Under a defined benefit plan,
sections 401(a)(11) and 417 apply only to benefits in which a
participant was vested immediately prior to death. They do not apply to
benefits to which a participant's beneficiary becomes entitled by reason
of death or to the proceeds of a life insurance contract to the extent
such proceeds exceed the present value of the participant's
nonforfeitable benefits that existed immediately prior to death.
(b) Defined contribution plans. Sections 401(a)(11) and 417 apply to
all nonforfeitable benefits which are payable under a defined
contribution plan, whether nonforfeitable before or upon death,
including the proceeds of insurance contracts.
Q-13: Does the rule of section 411(a)(3)(A) which permits
forfeitures on account of death apply to a QPSA or the spousal benefit
described in section 401(a)(11)(B)(iii)?
A-13: No. Section 411(a)(3)(A) permits forfeiture on account of
death prior to the time all the events fixing payment occur. However,
this provision does not operate to deprive a surviving spouse of a QPSA
or the spousal benefit described in section 401(a)(11)(B)(iii).
Therefore, sections 401(a)(11) and 417 apply to benefits that were
nonforfeitable immediately prior to death (determined without regard to
section 411(a)(3)(A)). Thus, in the case of the death of a married
participant in a defined contribution plan not subject to section 412
which provides that, upon a participant's death, the entire
nonforfeitable accrued benefit is payable to the participant's spouse,
the nonforfeitable benefit is determined without regard to the
provisions of section 411(a)(3)(A).
Q-14: Do sections 411(a)(11), 401(a)(11) and 417 apply to
accumulated deductible employee contributions, as defined in section
72(o)(5)(B) (Accumulated DECs)?
A-14: (a) Employee consent, section 411. The requirements of section
411(a)(11) apply to Accumulated DECs. Thus, Accumulated DECs may not be
distributed without participant consent unless the applicable exemptions
apply.
(b) Survior requirements. Accumulated DECs are treated as though
held under a separate defined contribution plan that is not subject to
section 412. Thus, section 401(a)(11) applies to Accumulated DECs only
as provided in section 401(a)(11)(B)(iii). All Accumulated DECs are
treated in this manner, including Accumulated DECs that are the only
benefit held under a plan and Accumulated DECs that are part of a
defined benefit or a defined contribution plan.
(c) Effective date. Sections 401(a)(11) and 411(a)(11) shall not
apply to distributions of accumulated DECs until the first plan year
beginning after December 31, 1988.
Q-15: How do the survivor annuity requirements of sections
401(a)(11) and 417 apply to a defined benefit plan that includes an
accrued benefit based upon a contribution to a separate account or
mandatory employee contributions?
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
[[Page 80]]
survivor annuity requirements of sections 401(a)(11) and 417 and the
special QPSA rules in section 417(c)(2).
(2) Mandatory. In the case of a defined benefit plan providing for
mandatory employee contributions, the entire accrued benefit is subject
to the survivor annuity requirements of sections 401(a)(11) and 417 as a
defined benefit plan.
(c) Accumulated DECs. See Q&A 14 of this section for the rule
applicable to accumulated deductible employee contributions.
Q-16: Can a plan provide a benefit form more valuable than the QJSA
and if a plan offers more than one annuity option satisfying the
requirements of a QJSA, is spousal consent required when the participant
chooses among the various forms?
A-16: In the case of an unmarried participant, the QJSA may be less
valuable than other optional forms of benefit payable under the plan. In
the case of a married participant, the QJSA must be at least as valuable
as any other optional form of benefit payable under the plan at the same
time. Thus, if a plan has two joint and survivor annuities that would
satisfy the requirements for a QJSA, but one has a greater actuarial
value than the other, the more valuable joint and survivor annuity is
the QJSA. If there are two or more actuarially equivalent joint and
survivor annuities that satisfy the requirements for a QJSA, the plan
must designate which one is the QJSA and, therefore, the automatic form
of benefit payment. A plan, however, may allow a participant to elect
out of such a QJSA, without spousal consent, in favor of another
actuarially equivalent joint and survivor annuity that satisfies the
QJSA conditions. Such an election is not subject to the requirement that
it be made within the 90-day period before the annuity starting date.
For example, if a plan designates a joint and 100% survivor annuity as
the QJSA and also offers an actuarially equivalent joint and 50%
survivor annuity that would satisfy the requirements of a QJSA, the
participant may elect the joint and 50% survivor annuity without spousal
consent. The participant, however, does need spousal consent to elect a
joint and survivor annuity that was not actuarially equivalent to the
automatic QJSA. A plan does not fail to satisfy the requirements of this
Q&A-16 merely because the amount payable under an optional form of
benefit that is subject to the minimum present value requirement of
section 417(e)(3) is calculated using the applicable interest rate (and,
for periods when required, the applicable mortality table) under section
417(e)(3).
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
[[Page 81]]
plan. If the participant dies or separates from service before such age,
then only the participant's actual years of service at the time of the
participant's separation from service or death are taken into account.
Thus, in the case of a plan under which benefits are not payable until
the attainment of age 65, or upon attainment of age 55 and completion of
10 years of service, the earliest retirement age of a participant who
died or separated from service with 8 years of service is when the
participant would have attained age 65 (if the participant had
survived). On the other hand, if a participant died or separated from
service after 10 years of service, the earliest retirement age is when
the participant would have attained age 55 (if the participant had
survived).
Q-18: What is a qualified preretirement survivor annuity (QPSA) in a
defined benefit plan?
A-18: A QPSA is an immediate annuity for the life of the surviving
spouse of a participant. Each payment under a QPSA under a defined
benefit plan is not to be less than the payment that would have been
made to the survivor under the QJSA payable under the plan if (a) in the
case of a participant who dies after attaining the earliest retirement
age under the plan, the participant had retired with a QJSA on the day
before the participant's death, and (b) in the case of a participant who
dies on or before the participant's earliest retirement age under the
plan, the participant had separated from service at the earlier of the
actual time of separation or death, survived until the earliest
retirement age, retired at that time with a QJSA, and died on the day
thereafter. If the participant elects before the annuity starting date a
form of joint and survivor annuity that satisfies the requirements for a
QJSA and dies before the annuity starting date, the elected form is
treated as the QJSA and the QPSA must be based on such form.
Q-19: What rules apply in determining the amount and forfeitability
of a QPSA?
A-19: The QPSA is calculated as of the earliest retirement age if
the participant dies before such time, or at death if the participant
dies after the earliest retirement age. The plan must make reasonable
actuarial adjustments to reflect a payment earlier or later than the
earliest retirement age. A defined benefit plan may provide that the
QPSA is forfeited if the spouse does not survive until the date
prescribed under the plan for commencement of the QPSA (i.e., the
earliest retirement age). Similarly, if the spouse survives past the
participant's earliest retirement age (or other earlier QPSA
distribution date under the plan) and elects after the death of the
participant to defer the commencement of the QPSA to a later date, a
defined benefit plan may provide for a forfeiture of the QPSA benefit if
the spouse does not survive until the deferred commencement date. The
account balance in a defined contribution plan may not be forfeited even
though the spouse does not survive until the time the account balance is
used to purchase the QPSA. See Q&A-17 of this section for the meaning of
earliest retirement age.
Q-20: What preretirement survivor annuity benefits must a defined
contibution plan subject to the survivor annuity requirements of
sections 401(a)(11) and 417 provide?
A-20: A defined contribution plan that is subject to the survivor
annuity requirements of sections 401(a)(11) and 417 must provide a
preretirement survivor annuity with a value which is not less than 50
percent of the nonforfeitable account balance of the participant as of
the date of the participant's death. If a contributory defined
contribution plan has a forfeiture provision permitted by section
411(a)(3)(A), not more than a proportional percent of the account
balance attributable to contributions that may not be forfeited at death
(for example, employee and section 401(k) contributions) may be used to
satisfy the QPSA benefit. Thus, for example, if the QPSA benefit is to
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
[[Page 82]]
the ability to waive the QPSA, a defined benefit plan may not charge the
participant for the cost of the QPSA by reducing the participant's plan
benefits or by any other method. The preceding sentence does not apply
to any charges prior to the first plan year beginning after December 31,
1988. Once the participant is given the opportunity to waive the QPSA or
the notice of the QPSA is later, the plan may charge the participant for
the cost of the QPSA. A charge for the QPSA that reasonably reflects the
cost of providing the QPSA will not fail to satisfy section 411 even if
it reduces the accrued benefit.
Q-22: When must distributions to a surviving spouse under a QPSA
commence?
A-22: (a) In the case of a defined benefit plan, the plan must
permit the surviving spouse to direct the commencement of payments under
QPSA no later than the month in which the participant would have
attained the earliest retirement age. However, a plan may permit the
commencement of payments at an earlier date.
(b) In the case of a defined contribution plan, the plan must permit
the surviving spouse to direct the commencement of payments under the
QPSA within a reasonable time after the participant's death.
Q-23: Must a defined benefit plan obtain the consent of a
participant and the participant's spouse to commence payments in the
form of a QJSA in order to avoid violating section 415 or 411(b)?
A-23: No. A defined benefit plan may commence distributions in the
form of a QJSA without the consent of the participant and spouse, even
if consent would otherwise be required (see Sec. 1.417(e)-1(b)), to the
extent necessary to avoid a violation of section 415 or 411(b). For
example, assume a plan has a normal retirement age of 55. A is a married
participant, age 55, and has accrued a $75,000 joint and 100 percent
survivor annuity that satisfies section 415. If an actuarial increase
would be required under section 411 because of deferred commencement and
the increase would cause the benefit to exceed the applicable limit
under section 415, the plan may commence payment of a QJSA at age 55
without the participant's election or consent and without the spouse's
concent.
Q-24: What are the rules under sections 401(a)(11) and 417
applicable to plan loans?
A-24: (a) Consent rules. (1) A plan does not satisfy the survivor
annuity requirements of sections 401(a)(11) and 417 unless the plan
provides that, at the time the participant's accrued benefit is used as
security for a loan, spousal consent to such use is obtained. Consent is
required even if the accrued benefit is not the primary security for the
loan. No spousal consent is necessary if, at the time the loan is
secured, no consent would be required for a distribution under section
417(a)(2)(B). Spousal consent is not required if the plan or the
participant is not subject to section 401(a)(11) at the time the accrued
benefit is used as security, or if the total accrued benefit subject to
the security is not in excess of the cash-out limit in effect under
Sec. 1.411(a)-11(c)(3)(ii). The spousal consent must be obtained no
earlier than the beginning of the 90-day period that ends on the date on
which the loan is to be so secured. The consent is subject to the
requirements of section 417(a)(2). Therefore, the consent must be in
writing, must acknowledge the effect of the loan and must be witnessed
by a plan representative or a notary public.
(2) Participant consent is deemed obtained at the time the
participant agrees to use his accrued benefit as security for a loan for
purposes of satisfying the requirements for participant consent under
sections 401(a)(11), 411(a)(11) and 417.
(b) Change in status. If spousal consent is obtained or is not
required under paragraph (a) of this Q&A 24 at the time the benefits are
used as security, spousal consent is not required at the time of any
setoff of the loan against the accrued benefit resulting 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.
[[Page 83]]
(c) Renegotiation. For purposes of obtaining any required spousal
consent, any renegotiation, extension, renewal, or other revision of a
loan shall be treated as a new loan made on the date of the
renegotiation, extension, renewal, or other revision.
(d) Effect on benefits. For purposes of determining the amount of a
QPSA or QJSA, the accrued benefit of a participant shall be reduced by
any security interest held by the plan by reason of a loan outstanding
to the participant at the time of death or payment, if the security
interest is treated as payment in satisfaction of the loan under the
plan. A plan may offset any loan outstanding at the participant's death
which is secured by the participant's account balance against the
spousal benefit required to be paid under section 401(a)(11)(B)(iii).
(e) Effective date. Loans made prior to August 19, 1985, are deemed
to satisfy the consent requirements of paragraph (a) of this Q&A 24.
Q-25: How do the survivor annuity requirements of sections
401(a)(11) and 417 apply with respect to participants who are not
married or to surviving spouses and participants who have a change in
marital status?
A-25: (a) Unmarried participant rule. Plans subject to the survivor
annuity requirements of sections 401(a)(11) and 417 must satisfy those
requirements applicable to QJSAs with respect to participants who are
not married. A QJSA for a participant who is not married is an annuity
for the life of the participant. Thus, an unmarried participant must be
provided the written explanation described in section 417(a)(3)(A) and a
single life annuity unless another form of benefit is elected by the
participant. An unmarried participant is deemed to have waived the QPSA
requirements. This deemed waiver is null and void if the participant
later marries.
(b) Marital status change--(1) Remarriage. If a participant is
married on the date of death, payments to a surviving spouse under a
QPSA or QJSA must continue even if the surviving spouse remarries.
(2) One-year rule. (i) A plan is not required to treat a participant
as married unless the participant and the participant's spouse have been
married throughout the one-year period ending on the earlier of (A) the
participant's annuity starting date or (B) the date of the participant's
death. Nevertheless, for purposes of the preceding sentence, a
participant and the participant's spouse must be treated as married
throughout the one-year period ending on the participant's annuity
starting date even though they are married to each other for less than
one year before the annuity starting date if they remain married to each
other for at least one year. See section 417(d)(2). If a plan adopts the
one-year rule provided in section 417(d), the plan must treat the
participant and spouse who are married on the annuity starting date as
married and must provide benefits which are to commence on the annuity
starting date in the form of a QJSA unless the participant (with spousal
consent) elects another form of benefit. The plan is not required to
provide the participant with a new or retroactive election or the spouse
with a new consent when the one-year period is satisfied. If the
participant and the spouse do not remain married for at least one year,
the plan may treat the participant as having not been married on the
annuity starting date. In such event, the plan may provide that the
spouse loses any survivor benefit right; further, no retroactive
correction of the amount paid the participant is required.
(ii) Example. Plan X provides that participants who are married on
the annuity starting date for less than one year are treated as
unmarried participants. Plan X provides benefits in the form of a QJSA
or an optional single sum distribution. Participant A was married 6
months prior to the annuity starting date. Plan X must treat A as
married and must commence payments to A in the form of a QJSA unless
another form of benefit is elected by A with spousal consent. If a QJSA
is paid and A is divorced from his spouse S, within the first year of
the marriage, S will no longer have any survivor rights under the
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.
[[Page 84]]
(3) Divorce. If a participant divorces his spouse prior to the
annuity starting date, any elections made while the participant was
married to his former spouse remain valid, unless otherwise provided in
a QDRO, or unless the participant changes them or is remarried. If a
participant dies after the annuity starting date, the spouse to whom the
participant was married on the annuity starting date is entitled to the
QJSA protection under the plan. The spouse is entitled to this
protection (unless waived and consented to by such spouse) even if the
participant and spouse are not married on the date of the participant's
death, except as provided in a QDRO.
Q-26: In the case of a defined contribution plan not subject to
section 412, does the requirement that a participant's nonforfeitable
accrued benefit be payable in full to a surviving spouse apply to a
spouse who has been married to the participant for less than one year?
A-26: A plan may provide that a spouse who has not been married to a
participant throughout the one-year period ending on the earlier of (a)
the participant's annuity starting date or (b) the date of the
participant's death is not treated as a surviving spouse and is not
required to receive the participant's account balance. The special
exception described in section 417(d)(2) and Q&A 25 of this section does
not apply.
Q-27: Are there circumstances when spousal consent to a
participant's election to waive the QJSA or the QPSA is not required?
A-27: Yes. If it is established to the satisfaction of a plan
representative that there is no spouse or that the spouse cannot be
located, spousal consent to waive the QJSA or the QPSA is not required.
If the spouse is legally incompetnent to give consent, the spouse's
legal guardian, even if the guardian is the participant, may give
consent. Also, if the participant is legally separated or the
participant has been abandoned (within the meaning of local law) and the
participant has a court order to such effect, spousal consent is not
required unless a QDRO provides otherwise. Similar rules apply to a plan
subject to the requirements of section 401(a)(11)(B)(iii)(I).
Q-28: Does consent contained in an antenuptial agreement or similar
contract entered into prior to marriage satisfy the consent requirements
of sections 401(a)(11) and 417?
A-28: No. An agreement entered into prior to marriage does not
satisfy the applicable consent requirements, even if the agreement is
executed within the applicable election period.
Q-29: If a participant's spouse consents under section 417(a)(2)(A)
to the participant's waiver of a survivor annuity form of benefit, is a
subsequent spouse of the same participant bound by the consent?
A-29: No. A consent under section 417(a)(2)(A) by one spouse is
binding only with respect to the consenting spouse. See Q&A-24 of this
section for an exception in the case of plan benefits securing plan
loans.
Q-30: Does the spousal consent requirement of section 417(a)(2)(A)
require that a spouse's consent be revocable?
A-30: No. A plan may preclude a spouse from revoking consent once it
has been given. Alternatively, a plan may also permit a spouse to revoke
a consent after it has been given, and thereby to render ineffective the
participant's prior election not to receive a QPSA or QJSA. A
participant must always be allowed to change his election during the
applicable election period. Spousal consent is required in such cases to
the extent provided in Q&A 31, except that spousal consent is never
required for a QJSA or QPSA.
Q-31: What rules govern a participant's waiver of a QPSA or QJSA
under section 417(a)(2)?
A-31: (a) Specific beneficiary. Both the participant's waivers of a
QPSA and QJSA and the spouse's consents thereto must state the specific
nonspouse beneficiary (including any class of beneficiaries or any
contingent beneficiaries) who will receive the benefit. Thus, for
example, if spouse B consents to participant A's election to waive a
QPSA, and to have any benefits payable upon A's death before the annuity
starting date paid to A's children, A
[[Page 85]]
may not subsequently change beneficiaries without the consent of B
(except if the change is back to a QPSA). If the designated beneficiary
is a trust, A's spouse need only consent to the designation of the trust
and need not consent to the designation of trust beneficiaries or any
changes of trust beneficiaries.
(b) Optional form of benefit--(1) QJSA. Both the participant's
waiver of a QJSA (and any required spouse's consent thereto) must
specify the particular optional form of benefit. The participant who has
waived a QJSA with the spouse's consent in favor of another form of
benefit may not subsequently change the optional form of benefit without
obtaining the spouse's consent (except back to a QJSA). Of course, the
participant may change the form of benefit if the plan so provides after
the spouse's death or a divorce (other than as provided in a QDRO). A
participant's waiver of a QJSA (and any required spouse's consent
thereto) made prior to the first plan year beginning after December 31,
1986, is not required to specify the optional form of benefit.
(2) QPSA. A participant's waiver of a QPSA and the spouse's consent
thereto are not required to specify the optional form of any
preretirement benefit. Thus, a participant who waives the QPSA with
spousal consent may subsequently change the form of the preretirement
benefit, but not the nonspouse beneficiary, without obtaining the
spouse's consent.
(3) Change in form. After the participant's death, a beneficiary may
change the optional form of survivor benefit as permitted by the plan.
(c) General consent. In lieu of satisfying paragraphs (a) and (b) of
this Q&A 31, a plan may permit a spouse to execute a general consent
that satisfies the requirements of this paragraph (c). A general consent
permits the participant to waive a QPSA or QJSA, and change the
designated beneficary or the optional form of benefit payment without
any requirement of further consent by such spouse. No general consent is
valid unless the general consent acknowledges that the spouse has the
right to limit consent to a specific beneficiary and a specific optional
form of benefit, where applicable, and that the spouse voluntarily
elects to relinquish both of such rights. Notwithstanding the previous
sentence, a spouse may execute a general consent that is limited to
certain beneficiaries or forms of benefit payment. In such case,
paragraphs (a) and (b) of this Q&A 31 shall apply to the extent that the
limited general consent is not applicable and this paragraph (c) shall
apply to the extent that the limited general consent is applicable. A
general consent, including a limited general consent, is not effective
unless it is made during the applicable election period. A general
consent executed prior to October 22, 1986 does not have to satisfy the
specificity requirements of this Q&A 31.
Q-32: What rules govern a participant's waiver of the spousal
benefit under section 401(a)(11)(B)?
A-32: (a) Application. In the case of a defined contribution plan
that is not subject to the survivor annuity requirements of sections
401(a)(11) and 417, a participant may waive the spousal benefit of
section 401(a)(11)(B)(iii) if the conditions of paragraph (b) are
satisfied. In general, a spousal benefit is the nonforfeitable account
balance on the participant's date of death.
(b) Conditions. In general, the same conditions, other than the age
35 requirement, that apply to the participant's waiver of a QPSA and the
spouse's consent thereto apply to the participant's waiver of the
spousal benefit and the spouse's consent thereto. See Q&A-31. Thus, the
participant's waiver of the spousal benefit must state the specific
nonspouse beneficiary who will receive such benefit. The waiver is not
required to specify the optional form of benefit. The participant may
change the optional form of benefit, but not the nonspouse beneficiary,
without obtaining the spouse's consent.
Q-33: When and in what manner, may a participant waive a spousal
benefit or a QPSA?
A-33: (a) Plans not subject to section 401(a)(11). A participant in
a plan that is not subject to the survivor annuity requirements of
section 401(a)(11) (because of subparagraph (B)(iii) thereof) may waive
the spousal benefit at any
[[Page 86]]
time, provided that no such waiver shall be effective unless the spouse
has consented to the waiver. The spouse may consent to a waiver of the
spousal benefit at any time, even prior to the participant's attaining
age 35. No spousal consent is required for a payment to the participant
or the use of the accrued benefit as security for a plan loan to the
participant.
(b) Plans subject to section 401(a)(11). A participant in a plan
subject to the survivor annuity requirements of section 401(a)(11)
generally may waive the QPSA benefit (with spousal consent) only on or
after the first day of the plan year in which the participant attains
age 35. However, a plan may provide for an earlier waiver (with spousal
consent), provided that a written explanation of the QPSA is given to
the participant and such waiver becomes invalid upon the beginning of
the plan year in which the participant's 35th birthday occurs. If there
is no new waiver after such date, the participant's spouse must receive
the QPSA benefit upon the participant's death.
Q-34: Must the written explanations required by section 417(a)(3) be
provided to nonvested participants?
A-34: Such written explantions must be provided to nonvested
participants who are employed by an employer maintaining the plan. Thus,
they are not required to be provided to those nonvested participants who
are no longer employed by such an employer.
Q-35: When must a plan provide the written explanation, required by
section 417(a)(3)(B), of the QPSA to a participant?
A-35: (a) General rule. A plan must provide the written explanation
of the QPSA to a participant within the applicable period. Except as
provided in paragraph (b), the applicable period means, with respect to
a participant, whichever of the following periods ends last:
(1) The period beginning with the first day of the plan year in
which the participant attains age 32 and ending with the close of the
plan year preceding the plan year in which the participant attains age
35.
(2) A reasonable period ending after the individual becomes a
participant.
(3) A reasonable period ending after the QPSA is no longer fully
subsidized.
(4) A reasonable period ending after section 401(a)(11) first
applies to the participant. Section 401(a)(11) would first apply when a
benefit is transferred from a plan not subject to the survivor annuity
requirements of section 401(a)(11) to a plan subject to such section or
at the time of an election of an annuity under a defined contribution
plan described in section 401(a)(11)(B)(iii).
(b) Pre-35 separations. In the case of a participant who separates
from service before attaining age 35, the applicable period means the
period beginning one year before the separation from service and ending
one year after such separation. If such a participant returns to
service, the plan must also comply with pragraph (a).
(c) Reasonable period. For purposes of applying paragraph (a), a
reasonable period ending after the enumerated events described in
paragraphs (a) (2), (3) and (4) is the end of the one-year period
beginning with the date the applicable event occurs. The applicable
period for such events begins one year prior to the occurrence of the
enumerated events.
(d) Transition rule. In the case of an individual who was a
participant in the plan on August 23, 1984, and, as of that date had
attained age 34, the plan will satisfy the requriement of section
417(a)(3)(B) if it provided the explanation not later than December 31,
1985.
Q-36: How do plans satisfy the requirements of providing
participants explanations of QPSAs and QJSAs?
A-36. For rules regarding the explanation of QPSAs and QJSAs
required under section 417(a)(3), see Sec. 1.417(a)(3)-1. However, the
rules of Sec. 1.401(a)-20, Q&A-36, as it appeared in 26 CFR part 1
revised April 1, 2003, apply to the explanation of a QJSA under section
417(a)(3) for an annuity starting date prior to February 1, 2006.
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)?
[[Page 87]]
A-37: If a plan fully subsidizes a QJSA or QPSA in accordance with
section 417(a)(5) and does not allow a participant to waive such QJSA or
QPSA or to select a nonspouse beneficiary, the plan is not required to
provide the written explanation required by section 417(a)(3). However,
if the plan offers an election to waive the benefit or designate a
beneficiary, it must satisfy the election, consent, and notice
requirements of section 417(a) (1), (2), and (3), with respect to such
subsidized QJSA or QPSA, in accordance with section 417(a)(5).
Q-38: What is a fully subsidized benefit?
A-38: (a) QJSA--(1) General rule. A fully subsidized QJSA is one
under which no increase in cost to, or decrease in actual amounts
received by, the participant may result from the participant's failure
to elect another form of benefit.
(2) Examples.
Example 1. . If a plan provides a joint and survivor annuity and a
single sum option, the plan does not fully subsidize the joint and
survivor annuity, regardless of the actuarial value of the joint and
survivor annuity because, in the event of the participant's early death,
the participant would have received less under the annuity than he would
have received under the single sum option.
Example 2. . If a plan provides for a life annuity of $100 per month
and a joint and 100% survivor benefit of $99 per month, the plan does
not fully subsidize the joint and survivor benefit.
(b) QPSA. A QPSA is fully subsidized if the amount of the
participant's benefit is not reduced because of the QPSA coverage and if
no charge to the participant under the plan is made for the coverage.
Thus, a QPSA is fully subsidized in a defined contribution plan.
Q-39: When do the survivor annuity requirements of sections
401(a)(11) and 417 apply to plans?
A-39: Sections 401(a)(11) and 417 generally apply to plan years
beginning after December 31, 1984. Sections 302 and 303 of REA 1984
provide specific effective dates and transitional rules under which the
QJSA or QPSA (or pre-REA 1984 section 401(a)(11)) requirements may be
applicable to particular plans or with respect to benefits provided to
(as amended by REA 1984) particular participants. In general, the
section 401(a)(11) (as amended by REA 1984) survivor annuity
requirements do not apply with respect to a participant who does not
have at least one hour of service or one hour of paid leave under the
plan after August 22, 1984.
Q-40: Are there special effective dates for plans maintained
pursuant to collective bargaining agreements?
A-40: Yes. Section 302(b) of REA 1984 as amended by section 1898(g)
of the Tax Reform Act of 1986 provides a special deferred effective date
for such plans. Whether a plan is described in section 302(b) of REA
1984 is determined under the principles applied under section 1017(c) of
the Employee Retirement Income Security Act of 1974. See H.R. Rep. No.
1280, 93d Cong., 2d Sess. 266 (1974). In addition, a plan will not be
treated as maintained under a collective bargaining agreement unless the
employee representatives satisfy section 7701(a)(46) of the Internal
Revenue Code after March 31, 1984. See Sec. 301.7701-17T for other
requirements for a plan to be considered to be collectively bargained.
Nothing in section 302(b) of REA 1984 denies a participant or spouse the
rights set forth in sections 303(c)(2), 303(c)(3), 303(e)(1), and
303(e)(2) of REA 1984.
Q-41: What is one hour of service or paid leave under the plan for
purposes of the transition rules in section 303 of REA 1984?
A-41: One hour of service or paid leave under the plan is one hour
of service or paid leave recognized or required to be recognized under
the plan for any purpose, e.g., participation, vesting percentage, or
benefit accrual purposes. For plans that do not compute hours of
service, one hour of service or paid leave means any service or 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
[[Page 88]]
303(e). The plan must, however, satisfy those requirements in operation.
Q-43: Is a participant's election, or a spouse's consent to an
election, with respect to a QPSA, made before August 23, 1984, valid?
A-43: No.
Q-44: Is spousal consent required for certain survivor annuity
elections made by the participant after December 31, 1984, and before
the first plan year to which new sections 401(a)(11) and 417 apply?
A-44: Yes. Section 303(c)(3) of REA 1984 provides that any election
not to take a QJSA made after December 31, 1984, and before the date
sections 401(a)(11) and 417 apply to the plan by a participant who has 1
hour of service or leave under the plan after August 23, 1984, is not
effective unless the spousal consent requirements of section 417 are met
with respect to such election. Unless the participant's annuity starting
date occurred before January 1, 1985, the spousal consent required by
section 417 (a)(2) and (e) must be obtained even though the participant
elected the benefit prior to January 1, 1985. The plan is not required
to be amended to comply with section 303(c)(3) of REA 1984, but the plan
must satisfy this requirement in operation.
Q-45: Are there special rules for certain participants who separated
from service prior to August 23, 1984?
A-45: Yes. Section 303(e) of REA 1984 provides special rules for
certain participants who separated from service before August 23, 1984.
Section 303(e)(1), which applies only to plans subject to section
401(a)(11) of the Code (as in effect on August 22, 1984), provides that
participants whose annuity starting date did not occur before August 24,
1984, and who had one hour of service on or after September 2, 1974, but
not in a plan year beginning after December 31, 1975, may elect to
receive the benefits required to be provided under section 401(a)(11) of
the Code (as in effect on August 22, 1984). Section 303(e)(2) provides
that certain participants who had one hour of service in a plan year
beginning on or after January 1, 1976, but not after August 22, 1984,
may elect QPSA coverage under new sections 401(a)(11) and 417 in plans
subject to these provisions. Section 303(e)(4)(A) requires plans or plan
administrators to notify those participants of the provisions of section
303(e).
Q-46: When must a plan provide the notice required by section
303(e)(4)(A) of REA 1984?
A-46: The notice required by section 303(e)(4)(A) must be provided
no later than the earlier of:
(a) The date the first summary annual report provided after
September 17, 1985, is distributed to participants; or
(b) September 30, 1985.
A plan will not fail to satisfy the preceding sentence if the plan
provides a fully subsidized QPSA with respect to any participant
described in section 303(e) who dies on or after July 19, 1985, and
before the notice is received. If the plan ceases to fully subsidize the
QPSA, the cessation must not be effective until the notice is given. For
this purpose, an annuity payable to a nonspouse beneficiary elected by
the participant, in lieu of a spouse, shall satisfy the QPSA
requirement, so long as the survivor benefit is fully subsidized. The
notice required by this paragraph must be in writing and sent to the
participant's last known address.
Q-47: Is there another time when plans must provide notice of the
right, described in section 303(e)(1) of REA '84, to elect a pre-REA
1984 qualified joint and survivor annuity?
A-47: Yes. Notice of this right must also be provided to a
participant at the time the participant applies for benefit payments.
[53 FR 31842, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as amended by
T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891, 65 FR 44682, July 19,
2000; T.D. 9099, 68 FR 70144, Dec. 17, 2003; T.D. 9256, 71 FR 14802,
Mar. 24, 2006]
Sec. 1.401(a)-21 Rules relating to the use of an electronic medium
to provide applicable notices and to make participant elections.
(a) Introduction--(1) In general--(i) Permission to use an
electronic medium. This section provides rules relating to the use of an
electronic medium to provide applicable notices and to make participant
elections as defined in paragraph (e)(1) and (6) of this section
[[Page 89]]
with respect to retirement plans, employee benefit arrangements, and
individual retirement plans described in paragraph (a)(2) of this
section. The rules in this section reflect the provisions of the
Electronic Signatures in Global and National Commerce Act, Public Law
106-229 (114 Stat. 464 (2000) (E-SIGN)).
(ii) Notices and elections required to be in writing or in written
form--(A) In general. The rules of this section must be satisfied in
order to use an electronic medium to provide an applicable notice or to
make a participant election if the notice or election is required to be
in writing or in written form under the Internal Revenue Code,
Department of Treasury regulations, or other guidance issued by the
Commissioner.
(B) Rules relating to applicable notices. An applicable notice that
is provided using an electronic medium is treated as being provided in
writing or in written form if and only if the requirements of paragraph
(a)(5) of this section are satisfied and either the consumer consent
requirements of paragraph (b) of this section or the requirements for
exemption from the consumer consent requirements under paragraph (c) of
this section are satisfied. For example, in order to provide a section
402(f) notice electronically, a qualified plan must satisfy either the
consumer consent requirements of paragraph (b) of this section or the
requirements for exemption under paragraph (c) of this section. If a
plan fails to satisfy either of these requirements, the plan must
provide the section 402(f) notice using a written paper document in
order to satisfy the requirements of section 402(f).
(C) Rules relating to participant elections. A participant election
that is made using an electronic medium is treated as being provided in
writing or in written form if and only if the requirements of paragraphs
(a)(5) and (d) of this section are satisfied.
(iii) Safe harbor method for applicable notices and participant
elections that are not required to be in writing or written form. For an
applicable notice or a participant election that is not required to be
in writing or in written form, the rules of this section provide a safe
harbor method for using an electronic medium to provide the applicable
notice or to make the participant election.
(2) Application of rules--(i) Notices, elections, or consents under
retirement plans. The rules of this section apply to any applicable
notice or any participant election relating to the following retirement
plans: A qualified retirement plan under section 401(a) or 403(a); a
section 403(b) plan; a simplified employee pension (SEP) under section
408(k); a simple retirement plan under section 408(p); or an eligible
governmental plan under section 457(b).
(ii) Notices, elections, or consents under other employee benefit
arrangements. The rules of this section also apply to any applicable
notice or any participant election relating to the following employee
benefit arrangements: An accident and health plan or arrangement under
sections 104(a)(3) and 105; a cafeteria plan under section 125; an
educational assistance program under section 127; a qualified
transportation fringe program under section 132; an Archer MSA under
section 220; or a health savings account under section 223.
(iii) Notices, elections, or consents under individual retirement
plans. The rules of this section also apply to any applicable notice or
any participant election relating to individual retirement plans,
including a Roth IRA under section 408A; or a deemed IRA under a
qualified employer plan described in section 408(q).
(3) Limitation on application of rules--(i) In general. The rules of
this section do not apply to any notice, election, consent, disclosure,
or obligation required under the provisions of title I or IV of the
Employee Retirement Income Security Act of 1974, as amended (ERISA),
over which the Department of Labor or the Pension Benefit Guaranty
Corporation has interpretative and enforcement authority. For example,
the rules in 29 CFR 2520.104b-1 of the Department of Labor Regulations
apply with respect to an employee benefit plan providing disclosure
documents, such as a summary plan description or a summary annual
report. The rules in this section also do not apply to Internal Revenue
Code section 411(a)(3)(B) (relating to suspension of benefits), Internal
Revenue Code section 4980B(f)(6)
[[Page 90]]
(relating to an individual's COBRA rights), or any other Internal
Revenue Code provision over which Department of Labor or the Pension
Benefit Guaranty Corporation has similar interpretative authority.
(ii) Recordkeeping and other requirements. The rules in this section
only apply with respect to applicable notices and participant elections
relating to an individual's rights under a retirement plan, an employee
benefit arrangement, or an individual retirement plan. Thus, the rules
in this section do not alter the otherwise applicable requirements under
the Internal Revenue Code, such as the requirements relating to tax
reporting, tax records, or substantiation of expenses. See section 6001
for rules relating to the maintenance of records, statements, and
special returns. See also section 101(e) of E-SIGN, which provides that
if an electronic record of an applicable notice or a participant
election is not maintained in a form that is capable of being retained
and accurately reproduced for later reference, then the legal effect,
validity, or enforceability of such electronic record may be denied.
(4) General requirements related to applicable notices and
participant elections. The rules of this section supplement the general
requirements related to each applicable notice and participant election.
Thus, in addition to satisfying the rules for timing and content, the
rules in this section must be satisfied.
(5) Requirements related to the design of an electronic system used
to deliver applicable notices and to make participant elections--(i) The
electronic system must take into account the content of a notice. With
respect to the content of an applicable notice, the electronic system
must be reasonably designed to provide the information in the notice to
a recipient in a manner that is no less understandable to the recipient
than a written paper document.
(ii) Identification of the significance of information in the
notice. The electronic system must be designed to alert the recipient,
at the time an applicable notice is provided, to the significance of the
information in the notice (including identification of the subject
matter of the notice), and provide any instructions needed to access the
notice, in a manner that is readily understandable.
(b) Consumer consent requirements--(1) Requirements. With respect to
an applicable notice, the consumer consent requirements of this
paragraph (b) are satisfied if--
(i) The requirements in paragraphs (b)(2) through (4) of this
section are satisfied; and
(ii) In accordance with section 101(c)(6) of E-SIGN, the applicable
notice is not provided through the use of oral communication or a
recording of an oral communication.
(2) Consent--(i) In general. The recipient must affirmatively
consent to the delivery of the applicable notice using an electronic
medium. This consent must be either--
(A) Made electronically in a manner that reasonably demonstrates
that the recipient can access the applicable notice in the electronic
medium in the form that will be used to provide the notice; or
(B) Made using a written paper document (or using another form not
described in paragraph (b)(2)(i)(A) of this section), but only if the
recipient confirms the consent electronically in a manner that
reasonably demonstrates that the recipient can access the applicable
notice in the electronic medium in the form that will be used to provide
the notice.
(ii) Withdrawal of consumer consent. The consent to receive
electronic delivery requirement of this paragraph (b)(2) is not
satisfied if the recipient withdraws his or her consent before the
applicable notice is delivered.
(3) Required disclosure statement. The recipient, prior to
consenting under paragraph (b)(2)(i) of this section, must be provided
with a clear and conspicuous statement containing the disclosures
described in paragraphs (b)(3)(i) through (v) of this section:
(i) Right to receive paper document--(A) In general. The statement
informs the recipient of any right to have the applicable notice be
provided using a written paper document or other nonelectronic form.
(B) Post-consent request for paper copy. The statement informs the
recipient how, after having provided consent to
[[Page 91]]
receive the applicable notice electronically, the recipient may, upon
request, obtain a paper copy of the applicable notice and whether any
fee will be charged for such copy.
(ii) Right to withdraw consumer consent. The statement informs the
recipient of the right to withdraw consent to receive electronic
delivery of an applicable notice on a prospective basis at any time and
explains the procedures for withdrawing that consent and any conditions,
consequences, or fees in the event of the withdrawal.
(iii) Scope of the consumer consent. The statement informs the
recipient whether the consent to receive electronic delivery of an
applicable notice applies only to the particular transaction that gave
rise to the applicable notice or to other identified transactions that
may be provided or made available during the course of the parties'
relationship. For example, the statement may provide that a recipient's
consent to receive electronic delivery will apply to all future
applicable notices of the recipient relating to the employee benefit
arrangement until the recipient is no longer a participant in the
employee benefit arrangement (or withdraws the consent).
(iv) Description of the contact procedures. The statement describes
the procedures to update information needed to contact the recipient
electronically.
(v) Hardware or software requirements. The statement describes the
hardware and software requirements needed to access and retain the
applicable notice.
(4) Post-consent change in hardware or software requirements. If,
after a recipient provides consent to receive electronic delivery, there
is a change in the hardware or software requirements needed to access or
retain the applicable notice and such change creates a material risk
that the recipient will not be able to access or retain the applicable
notice in electronic format--
(i) The recipient must receive a statement of--
(A) The revised hardware or software requirements for access to and
retention of the applicable notice; and
(B) The right to withdraw consent to receive electronic delivery
without the imposition of any fees for the withdrawal and without the
imposition of any condition or consequence that was not previously
disclosed in paragraph (b)(3) of this section; and
(ii) The recipient must reaffirm consent to receive electronic
delivery in accordance with the requirements of paragraph (b)(2) of this
section.
(c) Exemption from consumer consent requirements--(1) In general.
This paragraph (c) is satisfied if the conditions in paragraphs (c)(2)
and (3) of this section are satisfied. This paragraph (c) constitutes an
exemption from the consumer consent requirements of section 101(c) of E-
SIGN pursuant to the authority granted in section 104(d)(1) of E-SIGN.
(2) Effective ability to access. For purposes of this paragraph (c),
the electronic medium used to provide an applicable notice must be a
medium that the recipient has the effective ability to access.
(3) Free paper copy of applicable notice. At the time the applicable
notice is provided, the recipient must be advised that he or she may
request and receive the applicable notice in writing on paper at no
charge, and, upon request, that applicable notice must be provided to
the recipient at no charge.
(d) Special rules for participant elections--(1) In general. This
paragraph (d) is satisfied if the conditions described in the following
paragraphs (d)(2) through (6) are satisfied:
(2) Effective ability to access. The electronic medium under an
electronic system used to make a participant election must be a medium
that the person who is eligible to make the election is effectively able
to access. If the appropriate individual is not effectively able to
access the electronic medium for making the participant election, the
participant election will not be treated as made available to that
individual. Thus, for example, the participant election will not be
treated as made available to that individual for purposes of the rules
under section 401(a)(4).
[[Page 92]]
(3) Authentication. The electronic system used in making participant
elections is reasonably designed to preclude any person other than the
appropriate individual from making the election. Whether this condition
is satisfied is based on facts and circumstances, including whether the
participant election has the potential for a conflict of interest
between the individuals involved in the election. See Examples 3, 4, and
5 of paragraph (f) of this section for illustrations of electronic
systems that satisfy the authentication requirement of this paragraph
(d)(3).
(4) Opportunity to review. The electronic system used in making
participant elections provides the person making the participant
election with a reasonable opportunity to review, confirm, modify, or
rescind the terms of the election before the election becomes effective.
(5) Confirmation of action. The person making the participant
election receives, within a reasonable time, a confirmation of the
effect of the election under the terms of the plan or arrangement
through either a written paper document or an electronic medium under a
system that satisfies the requirements of either paragraph (b) or (c) of
this section (as if the confirmation were an applicable notice).
(6) Participant elections, including spousal consents, that are
required to be witnessed by a plan representative or a notary public--
(i) In general. In the case of a participant election which is required
to be witnessed by a plan representative or a notary public (such as a
spousal consent under section 417), the signature of the individual
making the participant election is witnessed in the physical presence of
a plan representative or a notary public.
(ii) Electronic notarization permitted. If the requirements of
paragraph (d)(6)(i) of this section are satisfied, an electronic
notarization acknowledging a signature (in accordance with section
101(g) of E-SIGN and State law applicable to notary publics) will not be
denied legal effect if the signature of the individual is witnessed in
the physical presence of a notary public.
(iii) Delegation to Commissioner. In guidance published in the
Internal Revenue Bulletin, the Commissioner may provide that the use of
procedures under an electronic system is deemed to satisfy the physical
presence requirement under paragraph (d)(6)(i) of this section, but only
if those procedures with respect to the electronic system provide the
same safeguards for participant elections as are provided through the
physical presence requirement. See Sec. 601.601(d)(2)(ii)(b) of this
chapter.
(e) Definitions. The definitions in this paragraph (e) apply for
purposes of this section.
(1) Applicable notice. The term applicable notice includes any
notice, report, statement, or other document required to be provided to
a recipient under a retirement plan, employee benefit arrangement, or
individual retirement plan as described in paragraph (a)(2) of this
section.
(2) Electronic. The term electronic means technology having
electrical, digital, magnetic, wireless, optical, electromagnetic,
voice-recording systems, or similar capabilities.
(3) Electronic medium. The term electronic medium means an
electronic method of communication (e.g., Web site, electronic mail,
telephonic system, magnetic disk, and CD-ROM).
(4) Electronic record. The term electronic record means an
applicable notice or a participant election that is created, generated,
sent, communicated, received, or stored by electronic media.
(5) Electronic system. The term electronic system means a system
designed for creating, generating, sending, receiving, storing,
retrieving, displaying, or processing information that makes use of any
electronic medium.
(6) Participant election. The term participant election includes any
consent, election, request, agreement, or similar communication made by
or from a participant, beneficiary, alternate payee, or an individual
entitled to benefits under a retirement plan, employee benefit
arrangement, or individual retirement plan as described in paragraph
(a)(2) of this section.
(7) Recipient. The term recipient means a plan participant,
beneficiary, employee, alternate payee, or any other person to whom an
applicable notice is to be provided.
[[Page 93]]
(f) Examples. The following examples illustrate the rules of this
section. Examples 1, 2, 3, and 6 assume that the requirements of
paragraph (a)(4) and (5) of this section are satisfied.
Example 1. (i) Facts involving using the consumer consent
requirements to deliver a section 402(f) notice via e-mail. Plan A, a
qualified plan, permits participants to request benefit distributions
from the plan on Plan A's Internet Web site. Under Plan A's system for
such transactions, a participant must enter his or her account number,
personal identification number (PIN), and his or her e-mail address to
which the notice is to be sent. The participant's PIN and account number
must match the information in Plan A's records in order for the
transaction to proceed. Participant H requests a distribution from Plan
A on Plan A's Web site, and, at the time of the request for
distribution, a disclosure statement appears on the computer screen that
explains that Participant H can consent to receive the section 402(f)
notice electronically. The disclosure statement provides information
relating to the consent, including how to receive a paper copy of the
notice, how to withdraw consent, the hardware and software requirements,
and the procedures for accessing the section 402(f) notice, which is in
a file format from a specific spreadsheet program. After reviewing the
disclosure statement, which satisfies the requirements of paragraph
(b)(3) of this section, Participant H consents to receive the section
402(f) notice via e-mail by selecting the consent button at the end of
the disclosure statement. As a part of the consent procedure, an e-mail
is sent to Participant H's e-mail address in order to demonstrate that
Participant H can access the spreadsheet program. In the e-mail,
Participant H is prompted to answer a question from the spreadsheet
program, which is in an attachment to the e-mail. Once Participant H
correctly answers the question, the section 402(f) notice is then
delivered to Participant H via e-mail.
(ii) Conclusion. In this Example 1, Plan A's delivery of the section
402(f) notice to Participant H satisfies the requirements of paragraph
(b) of this section.
Example 2. (i) Facts--(A) Facts involving using the alternative
method to deliver a section 411(a)(11) notice via e-mail. Plan B, a
qualified plan, permits participants to request benefit distributions
from the plan on Plan B's Internet Web site. Under Plan B's system for
such transactions, a participant must enter his or her account number
and personal identification number (PIN), and his or her e-mail address
to which the notice is to be sent. The participant's PIN and account
number must match the information in Plan B's records in order for the
transaction to proceed. After Participant K, a single employee, requests
a distribution from Plan B on Plan B's Internet Web site, the plan
administrator provides Participant K with a section 411(a)(11) notice in
an attachment to an e-mail. Plan B sends the e-mail with a request for a
computer generated notification that the message was received and
opened. The e-mail instructs Participant K to read the attachment for
important information regarding the request for a distribution. In
addition, the e-mail also states that Participant K may request the
section 411(a)(11) notice on a written paper document and that, if
Participant K requests the notice on a written paper document, it will
be provided at no charge. Plan B receives notification indicating that
the e-mail was received and opened by Participant K.
(B) Facts involving making a participant's consent to a
distribution. In order to consent to a distribution, Plan B requires a
participant to enter the participant's account number and PIN in order
to preclude any person other than the participant from making the
election. After the authentication process, Participant K completes a
distribution request form on the Web site. After completing the request
form, the Web site provides a summary of the information entered on the
form and gives Participant K an opportunity to review or modify the
distribution request form before the transaction is completed. Within a
reasonable period of time after Participant K consents to the
distribution, the plan administrator, by e-mail, sends confirmation of
the terms (including the form) of the distribution to Participant K and
advises Participant K that, upon request, the confirmation may be
provided to Participant K on a written paper document at no charge. Plan
B retains an electronic copy of the consent to the distribution in a
form that is capable of being retained and accurately reproduced for
later reference by Participant K.
(ii) Conclusion. In this Example 2, Plan B's delivery of the section
411(a)(11) notice and the electronic system used to make Participant K's
consent to a distribution satisfy the requirements of paragraphs (a),
(c), and (d) of this section.
Example 3. (i) Facts involving the transmission of a spousal consent
via electronic notarization. Plan C, a qualified money purchase pension
plan, permits a married participant to request a plan loan through the
Plan C's Internet Web site with the notarized consent of the spouse.
Under Plan C's system for requesting a plan loan, a participant must
enter his or her account number, personal identification number (PIN),
and his or her e-mail address. The information entered by the
participant must match the information in Plan C's records in order for
the transaction to proceed. Participant M, a married participant, is
effectively able to access the Web site available to apply for a plan
loan. In order to apply for a loan, Plan C requires
[[Page 94]]
a participant to enter the participant's account number and PIN in order
to preclude any person other than the participant from making the
election. Participant M completes the loan application on Plan C's Web
site. Within a reasonable period of time after submitting the plan loan
application, the plan administrator, by e-mail, sends Participant M the
loan application, including all attachments setting forth the terms of
the loan agreement and all other required information. In the e-mail,
Plan C also notifies Participant M that, upon request, the loan
application may be provided to Participant M on a written paper document
at no charge. Plan C then instructs Participant M that, in order for the
loan application to proceed, Participant M must submit to the plan
administrator a notarized spousal consent form. Participant M and M's
spouse go to a notary public and the notary witnesses Participant M's
spouse signing the spousal consent for the loan agreement on an
electronic signature capture pad with adequate security. After
witnessing M's spouse signing the spousal consent, the notary public
sends an e-mail with an electronic acknowledgement that is attached to
or logically associated with the signature of M's spouse to the plan
administrator. The electronic acknowledgement is in accordance with
section 101(g) of E-SIGN and the relevant State law applicable to notary
publics. After the plan receives the e-mail, Plan C sends an e-mail to
Participant M, giving M a reasonable period to review and confirm the
completed loan application and to determine whether the loan application
should be modified or rescinded. In addition, the e-mail to Participant
M also provides that M may request the completed loan application on a
written paper document and that, if M requests the written paper
document, it will be provided at no charge. Plan C retains an electronic
copy of the loan agreement, including the spousal consent, in a form
that is capable of being retained and accurately reproduced for later
reference by all parties.
(ii) Conclusion. In this Example 3, the transmission of the plan
loan agreement satisfies the requirements of paragraphs (a), (c), and
(d) of this section. By requiring that the spouse sign the spousal
consent on an electronic signature capture pad in the physical presence
of a notary public, the electronic system satisfies the requirement that
the system be reasonably designed to preclude any person other than the
appropriate individual from making the election. Thus, the electronic
notarization of spousal consent satisfies the requirements of paragraphs
(a) and (d) of this section.
Example 4. (i) Facts--(A) Facts involving using the alternative
method of compliance to deliver a section 411(a)(11) notice via an
automated telephone system. A qualified profit-sharing plan (Plan D)
permits participants to request distributions through an automated
telephone system. Under Plan D's system for such transactions, a
participant must enter his or her account number and personal
identification number (PIN); this information must match the information
in Plan D's records in order for the transaction to proceed. Plan D
provides only the following distribution options: single-sum payment;
and annual installments over 5, 10, or 20 years. Participant N, a single
participant, requests a distribution from Plan D by following the
applicable instructions on the automated telephone system. After
Participant N has requested the distribution, the automated telephone
system recites the section 411(a)(11) notice over the phone. The
automated telephone system also advises Participant N that, upon
request, the notice may be provided on a written paper document and
that, if Participant N so requests, the notice will be provided on a
written paper document at no charge.
(B) Facts involving making a participant's consent to a distribution
via an automated telephone system. In order to consent to a
distribution, Plan D requires a participant to enter the participant's
account number and PIN in order to preclude any person other than the
participant from making the election. Participant N requests a
distribution by entering information on the automated telephone system.
After completing the request, the automated telephone system provides a
oral summary of the information entered and gives Participant N an
opportunity to review or modify the distribution request before the
transaction is completed. Plan D's automated telephone system confirms
the distribution request to Participant N and advises Participant N
that, upon request, a confirmation may be provided on a written paper
document at no charge. Plan D retains an electronic copy of the consent
to the distribution in a form that is capable of being retained and
accurately reproduced for later reference by Participant N.
(ii) Conclusion. In this Example 4, because Plan D has relatively
few and simple distribution options, the provision of the section
411(a)(11) notice through the automated telephone system is no less
understandable to the participant than a written paper notice for
purposes of paragraph (a)(5)(i) of this section. In addition, the
automated telephone procedures of Plan D satisfy the applicable
requirements of paragraphs (a), (c), and (d) of this section.
Example 5. (i) Facts. Same facts as Example 4 of this paragraph (f),
except that, pursuant to Plan D'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
[[Page 95]]
from a prepared text and processes the participant's distribution in
accordance with the predetermined instructions from the plan
administrator.
(ii) Conclusion. As in Example 4 of this paragraph (f), because Plan
D has relatively few and simple distribution options, the provision of
the section 411(a)(11) notice through the automated telephone system is
no less understandable to the participant than a written paper notice
for purposes of paragraph (a)(4) of this section. Further, in this
Example 5, the customer service telephone procedures of Plan D satisfy
the requirements of paragraphs (a), (c), and (d) of this section.
Example 6. (i) Facts. Plan E, a qualified plan, permits participants
to request distributions by e-mail on the employer's e-mail system.
Under this system, a participant must enter his or her account number,
personal identification number (PIN), and e-mail address. This
information must match that in Plan E's records in order for the
transaction to proceed. If a participant requests a distribution 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. Participant Q requests a distribution and receives the section
411(a)(11) notice from the plan administrator by reply e-mail. However,
before Participant Q elects a distribution, Q terminates employment.
Following termination of employment, Participant Q no longer has access
to the employer's e-mail system.
(ii) Conclusion. In this Example 6, Plan E does not satisfy the
participant election requirements under paragraph (d) of this section
because Participant Q is not effectively able to access the electronic
medium used to make the participant election. Plan E must provide
Participant Q with the opportunity to make the participant election
through a written paper document or another system that Participant Q is
effectively able to access, such as the automated telephone systems
described in Example 4 and Example 5 of this paragraph (f).
(g) Effective date. The rules provided in this section apply to
applicable notices provided, and to participant elections made, on or
after January 1, 2007. However, a retirement plan, an employee benefit
arrangement, or an individual retirement plan that provides an
applicable notice or makes a participant election that complies with the
requirements set forth in these regulations on or after October 1, 2000,
and before January 1, 2007, will not be treated as failing to provide an
applicable notice or to make a participant election merely because the
notice or election was not in writing or written form.
[T.D. 9294, 71 FR 61883, Oct. 20, 2006]
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
[[Page 96]]
contributions made pursuant to a collective bargaining agreement for
plan years beginning before the earlier of:
(i) The later of January 1, 1988, or the date on which the last
collective bargaining agreement terminates (determined without regard to
any extension thereof after February 28, 1986), or
(ii) January 1, 1989.
[T.D. 8357, 56 FR 40516, Aug. 15, 1991]
Sec. 1.401(a)-50 Puerto Rican trusts; election to be treated as
a domestic trust.
(a) In general. Section 401(a) requires, among other things, that a
trust forming part of a pension, profit-sharing, or stock bonus plan
must be created or organized in the United States to be a qualified
trust. Section 1022(i)(2) of the Employee Retirement Income Security Act
of 1974 (ERISA) (88 Stat. 942) provides that trusts under certain
pension, etc., plans created or organized in Puerto Rico whose
administrators have made the election referred to in section 1022(i)(2)
are to be treated as trusts created or organized in the United States
for purposes of section 401(a). Thus, if a plan otherwise satisfies the
qualification requirements of section 401(a), any trust forming part of
the plan for which an election is made will be treated as a qualified
trust under that section.
(b) Manner and effect of election. A plan administrator may make an
election under ERISA section 1022(i)(2) by filing a statement making the
election, along with a copy of the plan, with the Director's
Representative of the Internal Revenue Service in Puerto Rico. The
statement making the election must indicate that it is being made under
ERISA section 1022(i)(2). The statement may also be filed in conjunction
with a written request for a determination letter. If the election is
made with a written request for a determination letter, the election may
be conditioned upon issuance of a favorable determination letter and
will be irrevocable upon issuance of such letter. Otherwise, once made,
an election is irrevocable. It is generally effective for plan years
beginning after the date it has been made. However, an election made
before March 3, 1983 may, at the option of the plan administrator at the
time he or she makes the election, be considered to have been made on
any date between September 2, 1974, and the actual date of the election.
The election will then be effective for plan years beginning on or after
the date chosen by the plan administrator.
(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
[[Page 97]]
plan. The remaining portion of the distribution, that is, any amount
other than the portion of the distribution considered to be a return of
employer contributions, is not to be treated as income from sources
within the United States. For example, if a distribution consists of
amounts representing employer contributions, employee contributions, and
earnings on employer and employee contributions, no part of the portion
of the distribution attributable to employee contributions, or earnings
on employer and employee contributions, will be treated as income from
sources within the United States.
[T.D. 7859, 47 FR 54297, Dec. 2, 1982]
Sec. 1.401(a)(2)-1 Refund of mistaken employer contributions and
withdrawal liability payments to multiemployer plans.
(a) Introduction--(1) In general. Section 401(a)(2) provides that a
contribution or payment of withdrawal liability made to a multiemployer
plan due to a mistake of fact or mistake of law can be returned to the
employer under certain conditions. This section specifies the conditions
under which an employer's contribution or payment may be returned.
(2) Effective dates. This section applies to refunds made after July
22, 2002.
(b) Conditions for return of contribution--(1) In general. In the
case of a contribution or a withdrawal liability payment to a
multiemployer plan which was made because of a mistake of fact or a
mistake of law, the plan will not violate section 401(a)(2) merely
because the contribution or payment is returned within six months after
the date on which the plan administrator determines that the
contribution or payment was the result of a mistake of fact or law. The
contribution or payment is considered as returned within the required
period if the employer establishes a right to a refund of the amount
mistakenly contributed or paid by filing a claim with the plan
administrator within six months after the date on which the plan
administrator determines that a mistake did occur. For purposes of this
section, plan administrator is defined in section 414(g) and the
regulations thereunder.
(2) Applicable conditions--(i) In general. The employer making the
contribution or withdrawal liability payment to a multiemployer plan
must demonstrate that an excessive contribution or overpayment has been
made due to a mistake of fact or law. A mistake of fact or law relating
to plan qualification under section 401 or to trust exemption under
section 501 is not considered to be a mistake of fact or law which
entitles an employer to a refund under this section. For purposes of
this section, a multiemployer plan is defined in section 414(f) and the
regulations thereunder.
(ii) Amount to be returned--(A) General rule. The amount to be
returned to the employer is the excess of the amount contributed or paid
over the amount that would have been contributed or paid had no mistake
been made. This amount is the excess contribution or overpayment. Except
as provided in paragraph (b)(2)(ii)(B) of this section, interest or
earnings attributable to an excess contribution shall not be returned to
the employer, and any losses attributable to an excess contribution must
reduce the amount returned to the employer. For purposes of the previous
sentence, the application of plan-wide investment experience to the
excess contribution would be an acceptable method of calculating losses.
A refund of a mistaken contribution must in no event reduce a
participant's account balance in a defined contribution plan to an
amount less than that amount which would properly have been in that
participant's account had no mistake occurred. Thus, to the extent that
the refund of an excess contribution would reduce a participant's
account balance in a defined contribution plan to an amount less than
the amount which would properly be in the participant's account had no
mistake occurred, the return of the excess contribution would be
prohibited by this section.
(B) Overpayment of withdrawal liability. In the case of an
overpayment of withdrawal liability established by the plan sponsor
under section 4219(c)(2) of ERISA, the plan will not fail to satisfy
section 401(a)(2) if, in accordance with
[[Page 98]]
Pension Benefit Guaranty Corporation regulations regarding the
overpayments of withdrawal liability (29 CFR 4219.31(d)), the
overpayment, with interest, is returned to the employer.
(c) Amount refunded includible in employer's income. In general, the
amount of the excess contribution or overpayment must be included in
gross income by the employer if the excess contribution or overpayment
resulted in a tax benefit in a prior year. Any interest credited or paid
on the refund of mistaken withdrawal liability payments must also be
included in gross income by the employer.
(d) Application of section 412. An amount returned under paragraph
(b)(2)(ii) of this section is charged to the funding standard account
under section 412 in the year in which the amount is returned.
[T.D. 9005, 67 FR 47693, July 22, 2002]
Sec. 1.401(a)(4)-0 Table of contents.
This section contains a listing of the major headings of Sec. Sec.
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.
[[Page 99]]
(8) Adjustment for certain QPSA charges.
(9) Disregard of certain offsets.
(10) Special rule for multiemployer plans.
Sec. 1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights,
and features
(a) Introduction.
(b) Current availability.
(1) General rule.
(2) Determination of current availability.
(3) Benefits, rights, and features that are eliminated
prospectively.
(c) Effective availability.
(1) General rule.
(2) Examples.
(d) Special rules.
(1) Mergers and acquisitions.
(2) Frozen participants.
(3) Early retirement window benefits.
(4) Permissive aggregation of certain benefits, rights, or features.
(5) Certain spousal benefits.
(6) Special ESOP rules.
(7) Special testing rule for unpredictable contingent event
benefits.
(e) Definitions.
(1) Optional form of benefit.
(2) Ancillary benefit.
(3) Other right or feature.
Sec. 1.401(a)(4)-5 Plan amendments and plan terminations
(a) Introduction.
(1) Overview.
(2) Facts-and-circumstances determination.
(3) Safe harbor for certain grants of benefits for past periods.
(4) Examples.
(b) Pre-termination restrictions.
(1) Required provisions in defined benefit plans.
(2) Restriction of benefits upon plan termination.
(3) Restrictions on distributions.
(4) Operational restrictions on certain money purchase pension
plans.
Sec. 1.401(a)(4)-6 Contributory defined benefit plans
(a) Introduction.
(b) Determination of employer-provided benefit.
(1) General rule.
(2) Composition-of-work-force method.
(3) Minimum-benefit method.
(4) Grandfather rules for plans in existence on May 14, 1990.
(5) Government-plan method.
(6) Cessation of employee contributions.
(c) Rules applicable in determining whether employee-provided
benefits are nondiscriminatory in amount.
(1) In general.
(2) Same rate of contributions.
(3) Total-benefits method.
(4) Grandfather rule for plans in existence on May 14, 1990.
Sec. 1.401(a)(4)-7 Imputation of permitted disparity
(a) Introduction.
(b) Adjusting allocation rates.
(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.
[[Page 100]]
(3) Optional rules for demonstrating nondiscrimination in
availability of certain benefits, rights, and features.
(c) Plan restructuring.
(1) General rule.
(2) Identification of component plans.
(3) Satisfaction of section 401(a)(4) by a component plan.
(4) Satisfaction of section 410(b) by a component plan.
(5) Effect of restructuring under other sections.
(6) Examples.
Sec. 1.401(a)(4)-10 Testing of former employees
(a) Introduction.
(b) Nondiscrimination in amount of contributions or benefits.
(1) General rule.
(2) Permitted disparity.
(3) Examples.
(c) Nondiscrimination in availability of benefits, rights, or
features.
Sec. 1.401(a)(4)-11 Additional rules
(a) Introduction.
(b) Rollovers, transfers, and buybacks.
(1) Rollovers and elective transfers.
(2) Other transfers. [Reserved]
(3) Employee buybacks.
(c) Vesting.
(1) General rule.
(2) Deemed equivalence of statutory vesting schedules.
(3) Safe harbor for vesting schedules.
(4) Examples.
(d) Service-crediting rules.
(1) Overview.
(2) Manner of crediting service.
(3) Service-crediting period.
(e) Family aggregation rules. [Reserved]
(f) Governmental plans. [Reserved]
(g) Corrective amendments.
(1) In general.
(2) Scope of corrective amendments.
(3) Conditions for corrective amendments.
(4) Corrective amendments must have substance.
(5) Effect under other statutory requirements.
(6) Examples.
Sec. 1.401(a)(4)-12 Definitions
Sec. 1.401(a)(4)-13 Effective dates and fresh-start rules
(a) General effective dates.
(1) In general.
(2) Plans of tax-exempt organizations.
(3) Compliance during transition period.
(b) Effective date for governmental plans.
(c) Fresh-start rules for defined benefit plans.
(1) Introduction.
(2) General rule.
(3) Definition of frozen.
(4) Fresh-start formulas.
(5) Rules of application.
(6) Examples.
(d) Compensation adjustments to frozen accrued benefits.
(1) Introduction.
(2) In general.
(3) Plan requirements.
(4) Meaningful coverage as of fresh-start date.
(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.
[[Page 101]]
(ii) Defined contribution plans--(A) General rule. A defined
contribution plan satisfies this paragraph (b)(2) if the contributions
allocated under the plan (including forfeitures) are nondiscriminatory
in amount under Sec. 1.401(a)(4)-2. Alternatively, a defined
contribution plan (other than an ESOP) satisfies this paragraph (b)(2)
if the equivalent benefits provided under the plan are nondiscriminatory
in amount under Sec. 1.401(a)(4)-8(b). Section 1.401(a)(4)-8(b)
includes a safe-harbor testing method for contributions provided under a
target benefit plan.
(B) Section 401(k) plans and section 401(m) plans. A section 401(k)
plan is deemed to satisfy this paragraph (b)(2) because Sec. 1.410(b)-9
defines a section 401(k) plan as a plan consisting of elective
contributions under a qualified cash or deferred arrangement (i.e., one
that satisfies section 401(k)(3), the nondiscriminatory amount
requirement applicable to qualified cash or deferred arrangements). A
section 401(m) plan satisfies this paragraph (b)(2) only if the plan
satisfies Sec. Sec. 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)-2(a)(4)(i),
matching contributions that fail to satisfy Sec. 1.401(m)-2(a)(4)(iii),
and qualified nonelective contributions treated as elective or matching
contributions for certain purposes under Sec. Sec. 1.401(k)-2(a)(6) and
1.401(m)-2(a)(6), 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 Sec. Sec. 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
[[Page 102]]
that a plan benefit a nondiscriminatory group of employees, and section
401(a)(4) requires that the contributions or benefits provided to
employees benefiting under the plan not discriminate in favor of HCEs.
Consistent with this requirement, the definition of a plan subject to
testing under section 401(a)(4) is the same as the definition of a plan
subject to testing under section 410(b), i.e., the plan determined after
applying the mandatory disaggregation rules of Sec. 1.410(b)-7(c) and
the permissive aggregation rules of Sec. 1.410(b)-7(d). In addition,
whichever testing option is used for the plan year under Sec. 1.410(b)-
8(a) (e.g., quarterly testing) must also be used for purposes of
determining whether the plan satisfies section 401(a)(4) for the plan
year.
(ii) Special rules for certain aggregated plans. Special rules are
set forth in Sec. 1.401(a)(4)-9(b) for applying the nondiscriminatory
amount and availability requirements of paragraphs (b)(2) and (b)(3) of
this section to a plan that includes one or more defined benefit plans
and one or more defined contribution plans that have been permissively
aggregated under Sec. 1.410(b)-7(d).
(iii) Restructuring. In certain circumstances, a plan may be
restructured on the basis of employee groups and treated as comprising
two or more plans, each of which is treated as a separate plan that must
independently satisfy sections 401(a)(4) and 410(b). Rules relating to
restructuring plans for purposes of applying the requirements of
paragraph (b) of this section are set forth in Sec. 1.401(a)(4)-9(c).
(iv) References to section 410(b). Except as otherwise specifically
provided, references to satisfying section 410(b) in Sec. Sec.
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 Sec. Sec. 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
Sec. Sec. 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).
[[Page 103]]
(10) Vesting. A plan does not satisfy the nondiscriminatory amount
requirement of paragraph (b)(2) of this section unless it satisfies
Sec. 1.401(a)(4)-11(c) with respect to the manner in which employees
vest in their accrued benefits.
(11) Crediting service. A plan does not satisfy paragraphs (b)(2)
and (b)(3) of this section unless it satisfies Sec. 1.401(a)(4)-11(d)
with respect to the manner in which employees' service is credited under
the plan. Service other than actual service with the employer may not be
taken into account in determining whether the plan satisfies paragraphs
(b)(2) and (b)(3) of this section except as provided in Sec.
1.401(a)(4)-11(d).
(12) Governmental plans. The rules of this section apply to a
governmental plan within the meaning of section 414(d), except as
provided in Sec. Sec. 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, as amended by T.D. 9169, 69 FR
78153, Dec. 29, 2004 ]
Editorial Note: By T.D. 9169, 69 FR 78153, Dec. 29, 2004, the
Internal Revenue Service published a document in the Federal Register,
attempting to amend paragraph (b)(2)(ii)(B) of Sec. 1.401-1(a)(4)-1 by
removing ``1.401(k)-1(b)(4)'' and inserting ``1.401(k)-2(a)(5)(i)''.
However, because of inaccurate amendatory language, this amendment could
not be incorporated.
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).
[[Page 104]]
(2) Safe harbor for plans with uniform allocation formula--(i)
General rule. A defined contribution plan satisfies the safe harbor in
this paragraph (b)(2) for a plan year if the plan allocates all amounts
taken into account under paragraph (c)(2)(ii) of this section for the
plan year under an allocation formula that allocates to each employee
the same percentage of plan year compensation, the same dollar amount,
or the same dollar amount for each uniform unit of service (not to
exceed one week) performed by the employee during the plan year.
(ii) Permitted disparity. If a plan satisfies section 401(l) in
form, differences in employees' allocations under the plan attributable
to uniform disparities permitted under Sec. 1.401(l)-2 (including
differences in disparities that are deemed uniform under Sec. 1.401(l)-
2(c)(2)) do not cause the plan to fail to satisfy this paragraph (b)(2).
(3) Safe harbor for plans with uniform points allocation formula--
(i) General rule. A defined contribution plan (other than an ESOP)
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it
satisfies both of the following requirements:
(A) The plan must allocate amounts under a uniform points allocation
formula. A uniform points allocation formula defines each employee's
allocation for the plan year as the product of the total of all amounts
taken into account under paragraph (c)(2)(ii) of this section and a
fraction, the numerator of which is the employee's points for the plan
year and the denominator of which is the sum of the points of all
employees in the plan for the plan year. For this purpose, an employee's
points for a plan year equal the sum of the employee's points for age,
service, and units of plan year compensation for the plan year. Under a
uniform points allocation formula, each employee must receive the same
number of points for each year of age, the same number of points for
each year of service, and the same number of points for each unit of
plan year compensation. (See Sec. 1.401(a)(4)-11(d)(3) regarding
service that may be taken into account as years of service.) A uniform
points allocation formula need not grant points for both age and
service, but it must grant points for at least one of them. If the
allocation formula grants points for years of service, the plan is
permitted to limit the number of years of service taken into account to
a single maximum number of years of service. A uniform points allocation
formula need not grant points for units of plan year compensation, but
if it does, the unit used must be a single dollar amount for all
employees that does not exceed $200.
(B) For the plan year, the average of the allocation rates for the
HCEs in the plan must not exceed the average of the allocation rates for
the NHCEs in the plan. For this purpose, allocation rates are determined
in accordance with paragraph (c)(2) of this section, without imputing
permitted disparity and without grouping allocation rates under
paragraphs (c)(2) (iv) and (v) of this section, respectively.
(ii) Example. The following example illustrates the safe harbor in
this paragraph (b)(3):
Example. (a) Plan A has a single allocation formula that applies to
all employees, under which each employee's allocation for the 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
[[Page 105]]
N1............................................ 10 40,000 500 5,000 12.5
N2............................................ 5 35,000 400 4,000 11.4
N3............................................ 3 30,000 330 3,300 11.0
N4............................................ 1 25,000 260 2,600 10.4
-----------------------------------------------------------------
Total..................................... ........... ............ 7,120 71,200 ...........
----------------------------------------------------------------------------------------------------------------
(b) Under these facts, for the 1994 plan year, Plan A allocates
amounts under a uniform points allocation formula within the meaning of
paragraph (b)(3)(i)(A) of this section.
(c) For the 1994 plan year, the average allocation rate for the HCEs
(H1 through H4) is 11.3 percent, and the average allocation rate for
NHCEs (N1 through N4) is 11.3 percent. Because the average of the
allocation rates for the HCEs does not exceed the average of the
allocation rates for the NHCEs, Plan A satisfies paragraph (b)(3)(i)(B)
of this section and, thus, the safe harbor in this paragraph (b)(3) for
the 1994 plan year.
(4) Use of safe harbors not precluded by certain plan provisions--
(i) In general. A plan does not fail to satisfy this paragraph (b)
merely because the plan contains one or more of the provisions described
in this paragraph (b)(4). Unless otherwise provided, any such provision
must apply uniformly to all employees.
(ii) Entry dates. The plan provides one or more entry dates during
the plan year as permitted by section 410(a)(4).
(iii) Certain conditions on allocations. The plan provides that an
employee's allocation for the plan year is conditioned on either the
employee's employment on the last day of the plan year or the employee's
completion of a minimum number of hours of service during the plan year
(not to exceed 1,000), or both. Such a provision may include an
exception from this condition for all employees whose employment
terminates during the plan year or only for those employees whose
employment terminates during the plan year on account of one or more of
the following circumstances: retirement, disability, death, or military
service.
(iv) Certain limits on allocations. The plan limits allocations
otherwise provided under the allocation formula to a maximum dollar
amount or a maximum percentage of plan year compensation, limits the
dollar amount of plan year compensation taken into account in
determining the amount of allocations, or applies the restrictions of
section 409(n) or the limits of section 415.
(v) Lower allocations for HCEs. The allocations provided to one or
more HCEs under the plan are less than the allocations that would
otherwise be provided to those employees if the plan satisfied this
paragraph (b) (without regard to this paragraph (b)(4)(v)).
(vi) Multiple formulas--(A) General rule. The plan provides that an
employee's allocation under the plan is the greater of the allocations
determined under two or more formulas, or is the sum of the allocations
determined under two or more formulas. This paragraph (b)(4)(vi) does
not apply to a plan unless each of the formulas under the plan satisfies
the requirements of paragraph (b)(4)(vi) (B) through (D) of this
section.
(B) Sole formulas. The formulas must be the only formulas under the
plan.
(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
[[Page 106]]
available solely to all non-key employees on the same terms as all the
other formulas under the plan. Furthermore, the top-heavy formula does
not fail to be available on the same terms as the other formulas under
the plan merely because it is conditioned on the plan's being top-heavy
within the meaning of section 416(g). Finally, the top-heavy formula
does not fail to be available on the same terms as the other formulas
under the plan merely because it is available to all employees described
in Sec. 1.416-1, Q&A M-10 (i.e., all non-key employees who have not
separated from service as of the last day of the plan year). The
preceding sentence does not apply, however, unless the plan would
satisfy section 410(b) if all employees who are benefiting under the
plan solely as a result of receiving allocations under the top-heavy
formula were treated as not currently benefiting under the plan. For
purposes of this paragraph (b)(4)(vi)(D)(3), a top-heavy formula is a
formula that provides the minimum benefit described in section 416(c)(2)
(taking into account, if applicable, the modification in section
416(h)(2)(A)(ii)(II)).
(E) Provisions may be applied more than once. The provisions of this
paragraph (b)(4)(vi) may be applied more than once. For example, a plan
satisfies this paragraph (b) if an employee's allocation under the plan
is the greater of the allocations under two or more formulas, and one or
more of those formulas is the sum of the allocations under two or more
other formulas, provided that each of the formulas under the plan
satisfies the requirements of paragraph (b)(4)(vi) (B) through (D) of
this section.
(F) Examples. The following examples illustrate the rules in this
paragraph (b)(4)(vi):
Example 1. Under Plan A, each employee's allocation equals the sum
of the allocations determined under two formulas. The first formula
provides an allocation of five percent of plan year compensation. The
second formula provides an allocation of $100. Plan A satisfies this
paragraph (b)(4)(vi).
Example 2. Under Plan B, each employee's allocation equals the
greater of the allocations determined under two formulas. The first
formula provides an allocation of seven percent of plan year
compensation and is available to all employees who complete at least
1,000 hours of service during the plan year and who have not separated
from service as of the last day of the plan year. The second formula is
a top-heavy formula that provides an allocation of three percent of plan
year compensation and that is available to all employees described in
Sec. 1.416-1, Q&A M-10. Plan B does not satisfy the general rule in
paragraph (b)(4)(vi)(D)(1) of this section because the two formulas are
not available on the same terms to all employees (i.e., an employee is
required to complete 1,000 hours of service during the plan year to
receive an allocation under the first formula, but not under the second
formula). Nonetheless, because the second formula is a top-heavy
formula, the special availability rules for top-heavy formulas in
paragraph (b)(4)(vi)(D)(3) of this section apply. Thus, the second
formula does not fail to be available on the same terms as the first
formula merely because the second formula is available to all employees
described in Sec. 1.416-1, Q&A M-10, as long as the plan would satisfy
section 410(b) if all employees who are benefiting under the plan solely
as a result of receiving allocations under the top-heavy formula were
treated as not currently benefiting under the plan. This is true even if
the plan conditions the availability of the second formula on the plan's
being top-heavy for the plan year.
Example 3. The facts are the same as in Example 2, except that the
first formula is available to all employees who have not separated from
service as of the last day of the plan year, regardless of whether they
complete at least 1,000 hours of service during the plan year. Plan B
still does not satisfy the general rule in paragraph (b)(4)(vi)(D)(1) of
this section because the two formulas are 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
[[Page 107]]
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(c)-1(b)(4) (regarding amounts arising from certain
transactions between the plan and the employer). In the case of a
defined contribution plan subject to section 412, an employer
contribution is taken into account in the plan year for which it is
required to be contributed and allocated to employees' accounts under
the plan, even if all or part of the required contribution is not
actually made.
(iii) Allocations not taken into account. Allocations of income,
expenses, gains, and losses attributable to the balance in an employee's
account are not taken into account in determining allocation rates.
(iv) Imputation of permitted disparity. The disparity permitted
under section 401(l) may be imputed in accordance with the rules of
Sec. 1.401(a)(4)-7.
(v) Grouping of allocation rates--(A) General rule. An employer may
treat all employees who have allocation rates within a specified range
above and below a midpoint rate chosen by the employer as having an
allocation rate equal to the midpoint rate within that range. Allocation
rates within a given range may not be grouped under this paragraph
(c)(2)(v) if the allocation rates of HCEs within the range generally are
significantly higher than the allocation rates of NHCEs in the range.
The specified ranges within which all employees are treated as having
the same allocation rate may not overlap and may be no larger than
provided in paragraph (c)(2)(v)(B) of this section. Allocation rates of
employees that are not within any of these specified ranges are
determined without regard to this paragraph (c)(2)(v).
(B) Size of specified ranges. The lowest and highest allocation
rates in the range must be within five percent (not five percentage
points) of the midpoint rate. If allocation rates are determined as a
percentage of plan year compensation, the lowest and highest allocation
rates need not be within five percent of the midpoint rate, if they are
no more than one quarter of a percentage point above or below the
midpoint rate.
(vi) Consistency requirement. Allocation rates must be determined in
a consistent manner for all employees for the plan year.
(3) Satisfaction of section 410(b) by a rate group--(i) General
rule. For purposes of determining whether a rate group satisfies section
410(b), the rate group is treated as if it were a separate plan that
benefits only the employees included in the rate group for the plan
year. Thus, for example, under Sec. 1.401(a)(4)-1(c)(4)(iv), the ratio
percentage of the rate group is determined taking into account all
nonexcludable employees regardless of whether they benefit under the
plan. Paragraph (c)(3) (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
[[Page 108]]
plan that relies on Sec. 1.410(b)-5(f) to satisfy the average benefit
percentage test, each rate group under the plan satisfies the average
benefit percentage test (if applicable) only if the rate group
separately satisfies Sec. 1.410(b)-5(f).
(4) Examples. The following examples illustrate the general test in
this paragraph (c):
Example 1. Employer X maintains two defined contribution plans, Plan
A and Plan B, that are aggregated and treated as a single plan for
purposes of sections 410(b) and 401(a)(4) pursuant to Sec. 1.410(b)-
7(d). For the 1994 plan year, Employee M has plan year compensation of
$10,000 and receives an allocation of $200 under Plan A and an
allocation of $800 under Plan B. Employee M's allocation rate under the
aggregated plan for the 1994 plan year is 10 percent (i.e., $1,000
divided by $10,000).
Example 2. The employees in Plan C have the following allocation
rates (expressed as a percentage of plan year compensation): 2.75
percent, 2.80 percent, 2.85 percent, 3.25 percent, 6.65 percent, 7.33
percent, 7.34 percent, and 7.35 percent. Because the first four rates
are within a range of no more than one quarter of a percentage point
above and below 3.0 percent (a midpoint rate chosen by the employer),
under paragraph (c)(2)(v) of this section the employer may treat the
employees who have those rates as having an allocation rate of 3.0
percent (provided that the allocation rates of HCEs within the range
generally are not significantly higher than the allocation rates of
NHCEs within the range). Because the last four rates are within a range
of no more than five percent above and below 7.0 percent (a midpoint
rate chosen by the employer), the employer may treat the employees who
have those rates as having an allocation rate of 7.0 percent (provided
that the allocation rates of HCEs within the range generally are not
significantly higher than the allocation rates of NHCEs within the
range).
Example 3. (a) Employer Y has only six nonexcludable employees, all
of whom benefit under Plan D. The HCEs are H1 and H2, and the NHCEs are
N1 through N4. For the 1994 plan year, H1 and N1 through N4 have an
allocation rate of 5.0 percent of plan year compensation. For the same
plan year, H2 has an allocation rate of 7.5 percent of plan year
compensation.
(b) There are two rate groups under Plan D. Rate group 1 consists of
H1 and all those employees who have an allocation rate greater than or
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists
of H1, H2, and N1 through N4. Rate group 2 consists only of H2 because
no other employee has an allocation rate greater than or equal to H2's
allocation rate (7.5 percent).
(c) The ratio percentage for rate group 2 is zero percent--i.e.,
zero percent (the percentage of all nonhighly compensated nonexcludable
employees who are in the rate group) divided by 50 percent (the
percentage of all highly compensated nonexcludable employees who are in
the rate group). Therefore rate group 2 does not satisfy the ratio
percentage test under Sec. 1.410(b)-2(b)(2). Rate group 2 also does not
satisfy the nondiscriminatory classification test of Sec. 1.410(b)-4
(as modified by paragraph (c)(3) of this section). Rate group 2
therefore does not satisfy section 410(b) and, as a result, Plan D does
not satisfy the general test in paragraph (c)(1) of this section. This
is true regardless of whether rate group 1 satisfies Sec. 1.410(b)-
2(b)(2).
Example 4. (a) The facts are the same as in Example 3, except that
N4 has an allocation rate of 8.0 percent.
(b) There are two rate groups in Plan D. Rate group 1 consists of H1
and all those employees who have an allocation rate greater than or
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists
of H1, H2 and N1 through N4. Rate group 2 consists of H2, and all those
employees who have an allocation rate greater than or equal to H2's
allocation rate (7.5 percent). Thus, rate group 2 consists of H2 and N4.
(c) Rate group 1 satisfies the ratio percentage test under Sec.
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 100
percent--i.e., 100 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 100
percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(d) Rate group 2 does not satisfy the ratio percentage test of Sec.
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 50
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
[[Page 109]]
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, as amended by T.D. 9319, 72 FR
16894, Apr. 5, 2007]
Sec. 1.401(a)(4)-3 Nondiscrimination in amount of employer-provided
benefits under a defined benefit plan.
(a) Introduction--(1) Overview. This section provides rules for
determining whether the employer-provided benefits under a defined
benefit plan are nondiscriminatory in amount as required by Sec.
1.401(a)(4)-1(b)(2)(iii). Certain defined benefit plans that provide
uniform benefits are permitted to satisfy this requirement by meeting
one of the safe harbors in paragraph (b) of this section. Plans that do
not provide uniform benefits may satisfy this requirement by satisfying
the general test in paragraph (c) of this section. Paragraph (d) of this
section provides rules for determining the individual benefit accrual
rates needed for the general test. Paragraph (e) of this section
provides rules for determining compensation for purposes of applying the
requirements of this section. Paragraph (f) of this section provides
additional rules that apply generally for purposes of both the safe
harbors in paragraph (b) of this section and the general test in
paragraph (c) of this section. See Sec. 1.401(a)(4)-6 for rules for
determining the amount of employer-provided benefits under a
contributory DB plan, and for determining whether the employee-provided
benefits under such a plan are nondiscriminatory in amount.
(2) Alternative methods of satisfying nondiscriminatory amount
requirement. A defined benefit plan is permitted to satisfy paragraph
(b) or (c) of this section on a restructured basis pursuant to Sec.
1.401(a)(4)-9(c). Alternatively, a defined benefit plan is permitted to
satisfy the nondiscriminatory amount requirement of Sec. 1.401(a)(4)-
1(b)(2)(iii) on the basis of equivalent allocations pursuant to Sec.
1.401(a)(4)-8(c). In addition, a defined benefit plan that is part of a
floor-offset arrangement is permitted to satisfy this section pursuant
to Sec. 1.401(a)(4)-8(d).
(b) Safe harbors--(1) In general. The employer-provided benefits
under a defined benefit plan are nondiscriminatory in amount for a plan
year if the plan satisfies each of the uniformity requirements of
paragraph (b)(2) of this section and any one of the safe harbors in
paragraphs (b)(3) (unit credit plans), (b)(4) (fractional accrual
plans), and (b)(5) (insurance contract plans) of this section. Paragraph
(b)(6) of this section provides exceptions for certain plan provisions
that do not cause a plan to fail to satisfy this paragraph (b).
Paragraph (f) of this section provides additional rules that apply in
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
[[Page 110]]
411(a)(7)(A)(i)) and must be the normal retirement benefit under the
plan (within the meaning of section 411(a)(9)).
(ii) Uniform post-normal retirement benefit. With respect to an
employee with a given number of years of service at any age after normal
retirement age, the annual benefit commencing at that employee's age
must be the same percentage of average annual compensation or the same
dollar amount that would be payable commencing at normal retirement age
to an employee who had that same number of years of service at normal
retirement age.
(iii) Uniform subsidies. Each subsidized optional form of benefit
available under the plan must be currently available (within the meaning
of Sec. 1.401(a)(4)-4(b)(2)) to substantially all employees. Whether an
optional form of benefit is considered subsidized for this purpose may
be determined using any reasonable actuarial assumptions.
(iv) No employee contributions. The plan must not be a contributory
DB plan.
(v) Period of accrual. Each employee's benefit must be accrued over
the same years of service that are taken into account in applying the
benefit formula under the plan to that employee. For this purpose, any
year in which the employee benefits under the plan (within the meaning
of Sec. 1.410(b)-3(a)) is included as a year of service in which a
benefit accrues. Thus, for example, a plan does not satisfy the safe
harbor in paragraph (b)(4) of this section unless the plan uses the same
years of service to determine both the normal retirement benefit under
the plan's benefit formula and the fraction by which an employee's
fractional rule benefit is multiplied to derive the employee's accrued
benefit as of any plan year.
(vi) Examples. The following examples illustrate the rules in this
paragraph (b)(2):
Example 1. Plan A provides a normal retirement benefit equal to two
percent of average annual compensation times each year of service
commencing at age 65 for all employees. Plan A provides that employees
of Division S receive their benefit in the form of a straight life
annuity and that employees of Division T receive their benefit in the
form of a life annuity with an automatic cost-of-living increase. Plan A
does not provide a uniform normal retirement benefit within the meaning
of paragraph (b)(2)(i) of this section because the annual benefit is not
payable in the same form to all employees.
Example 2. Plan B provides a normal retirement benefit equal to 1.5
percent of average annual compensation times each year of service at
normal retirement age for all employees. The normal retirement age under
the plan is the earlier of age 65 or the age at which the employee
completes 10 years of service, but in no event earlier than age 62. Plan
B does not provide a uniform normal retirement benefit within the
meaning of paragraph (b)(2)(i) of this section because the same uniform
normal retirement age does not apply to all employees.
Example 3. Plan C is an accumulation plan under which the benefit
for each year of service equals one percent of plan year compensation
payable in the same form to all employees commencing at the same uniform
normal retirement age. Under paragraph (e)(2) of this section, an
accumulation plan may substitute plan year compensation for average
annual compensation. Plan C provides a uniform normal retirement benefit
within the meaning of paragraph (b)(2)(i) of this section, because all
employees with the same number of years of service at normal retirement
age will receive an annual benefit that is treated as the same
percentage of average annual compensation.
Example 4. The facts are the same as in Example 3, except that the
benefit for each year of service equals one percent of plan year
compensation increased by reference to the increase in the cost of
living from the year of service to normal retirement age. Plan C does
not provide a uniform normal retirement benefit, because the annual
benefit defined by the benefit formula can vary for employees with the
same number of years of 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
[[Page 111]]
until age 69 with 30 years of service will receive a benefit of 50
percent of average annual compensation. Plan D provides uniform post-
normal retirement benefits within the meaning of paragraph (b)(2)(ii) of
this section.
Example 6. (a) Plan E is amended on February 14, 1994, to provide an
early retirement window benefit that consists of an unreduced early
retirement benefit to employees who terminate employment after
attainment of age 55 with 10 years of service and between June 1, 1994,
and November 30, 1994. The early retirement window benefit is a single
subsidized optional form of benefit. Paragraph (b)(2)(iii) of this
section requires that the subsidized optional form of benefit be
currently available (within the meaning of Sec. 1.401(a)(4)-4(b)(2)) to
substantially all employees. Section 1.401(a)(4)-4(b)(2)(ii)(A)(2)
provides that age and service requirements are not disregarded in
determining the current availability of an optional form of benefit if
those requirements must be satisfied within a specified period of time.
Thus, the early retirement window benefit is not currently available to
an employee unless the employee will satisfy the eligibility
requirements for the early retirement window benefit by the close of the
early retirement window benefit period. Plan E will fail to satisfy
paragraph (b)(2)(iii) of this section unless substantially all of the
employees satisfy the eligibility requirements for the early retirement
window benefit by November 30, 1994. However, see Sec. 1.401(a)(4)-
9(c)(6), Example 2, for an example of how a plan with an early
retirement window benefit may be restructured into two component plans,
each of which satisfies the safe harbors of this paragraph (b).
(b) A similar analysis would apply if, instead of an unreduced early
retirement benefit, the early retirement window benefit consisted of a
special schedule of early retirement factors, defined by starting with
the plan's usual schedule and then treating each employee eligible for
the early retirement window benefit as being five years older than the
employee actually is, but not older than the employee's normal
retirement age.
Example 7. Plan F generally provides a normal retirement benefit of
1.5 percent of an employee's average annual compensation multiplied by
the employee's years of service with the employer. For employees
transferred outside of the group of employees covered by the plan, the
plan's benefit formula takes into account only years of service prior to
the transfer, but determines average annual compensation taking into
account section 414(s) compensation both before and after the transfer.
Plan F does not satisfy the requirements of paragraph (b)(2)(v) of this
section with respect to transferred employees, because their benefits
are accrued over years of service (i.e., after transfer) that are not
taken into account in applying the plan's benefit formula to them.
However, see Example 2 of paragraph (b)(6)(x)(B) of this section for an
example of how a plan that continues to take transferred employees'
section 414(s) compensation into account after their transfer may still
satisfy this paragraph (b).
(3) Safe harbor for unit credit plans--(i) General rule. A plan
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it
satisfies both of the following requirements:
(A) The plan must satisfy the 133\1/3\ percent accrual rule of
section 411(b)(1)(B).
(B) Each employee's accrued benefit under the plan as of any plan
year must be determined by applying the plan's benefit formula to the
employee's years of service and (if applicable) average annual
compensation, both determined as of that plan year.
(ii) Example. The following example illustrates the rules in this
paragraph (b)(3):
Example. Plan A provides that the accrued benefit of each employee
as of any plan year equals the employee's average annual compensation
times a percentage that depends on the employee's years of service
determined as of that plan year. The percentage is 2 percent for each of
the first 10 years of service, plus 1.5 percent for each of the next 10
years of service, plus 2 percent for all additional years of service.
Plan A satisfies this paragraph (b)(3).
(4) Safe harbor for plans using fractional accrual rule--(i) General
rule. A 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.
[[Page 112]]
(C) The plan must satisfy one of the following requirements:
(1) Under the plan, it must be impossible for any employee to accrue
in a plan year a portion of the normal retirement benefit described in
paragraph (b)(2)(i) of this section that is more than one-third larger
than the portion of the same benefit accrued in that or any other plan
year by any other employee, when each portion of the benefit is
expressed as a percentage of each employee's average annual compensation
or as a dollar amount. In making this determination, actual and
potential employees in the plan with any amount of service at normal
retirement must be taken into account (other than employees with more
than 33 years of service at normal retirement age). In addition, in the
case of a plan that satisfies section 401(l) in form, an employee is
treated as accruing benefits at a rate equal to the excess benefit
percentage in the case of a defined benefit excess plan or at a rate
equal to the gross benefit percentage in the case of an offset plan.
(2) The normal retirement benefit under the plan must be a flat
benefit that requires a minimum of 25 years of service at normal
retirement age for an employee to receive the unreduced flat benefit,
determined without regard to section 415. For this purpose, a flat
benefit is a benefit that is the same percentage of average annual
compensation or the same dollar amount for all employees who have a
minimum number of years of service at normal retirement age (e.g., 50
percent of average annual compensation), with a pro rata reduction in
the flat benefit for employees who have less than the minimum number of
years of service at normal retirement age. An employee is permitted to
accrue the maximum benefit permitted under section 415 over a period of
less than 25 years, provided that the flat benefit under the plan,
determined without regard to section 415, can accrue over no less than
25 years.
(3) The plan must satisfy the requirements of paragraph
(b)(4)(i)(C)(2) of this section (other than the requirement that the
minimum number of years of service for receiving the unreduced flat
benefit is at least 25 years), and, for the plan year, the average of
the normal accrual rates for all nonhighly compensated nonexcludable
employees must be at least 70 percent of the average of the normal
accrual rates for all highly compensated nonexcludable employees. The
averages in the preceding sentence are determined taking into account
all nonexcludable employees (regardless of whether they benefit under
the plan). In addition, contributions and benefits under other plans of
the employer are disregarded. For purposes of this paragraph
(b)(4)(i)(C)(3), normal accrual rates are determined under paragraph (d)
of this section.
(ii) Examples. The following examples illustrate the rules in this
paragraph (b)(4). In each example, it is assumed that the plan has never
permitted employee contributions.
Example 1. Plan A provides a normal retirement benefit equal to 1.6
percent of average annual compensation times each year of service up to
25. Plan A further provides that an employee's accrued benefit as of any
plan year equals the employee's fractional rule benefit multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service as of normal retirement age. The greatest
benefit that an employee could accrue in any plan year is 1.6 percent of
average annual compensation (this is the case for an employee with 25 or
fewer years of projected service at normal retirement age). Among
potential employees with 33 or fewer years of projected service at
normal retirement age, the lowest benefit that an employee could accrue
in any plan year is 1.212 percent of average annual compensation (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
[[Page 113]]
(b)(4)(i)(C)(1) of this section, because Plan B satisfies section 401(l)
in form, all employees with less than 35 projected years of service are
assumed to accrue benefits at the rate of 1.6 percent of average annual
compensation (the excess benefit percentage under the plan). Plan B
satisfies paragraph (b)(4)(i)(C) of this section because all employees
with 33 or fewer years of projected service at normal retirement age
accrue in each plan year a benefit of 1.6 percent of average annual
compensation.
Example 3. Plan C provides a normal retirement benefit equal to four
percent of average annual compensation times each year of service up to
10 and one percent of average annual compensation times each year of
service in excess of 10 and not in excess of 30. Plan C further provides
that an employee's accrued benefit as of any plan year equals the
employee's fractional rule benefit multiplied by a fraction, the
numerator of which is the employee's years of service as of the plan
year, and the denominator of which is the employee's projected years of
service as of normal retirement age. The greatest benefit that an
employee could accrue in any plan year is four percent of average annual
compensation (this is the case for an employee with 10 or fewer years of
projected service at normal retirement age). Among employees with 33 or
fewer years of projected service at normal retirement age, the lowest
benefit that an employee could accrue in a plan year is 1.82 percent of
average annual compensation (this is the case of an employee with 33
years of projected service at normal retirement age). Plan C fails to
satisfy this paragraph (b)(4) because four percent is more than one
third larger than 1.82 percent. See also Sec. 1.401(a)(4)-9(c)(6),
Example 3.
Example 4. Plan D provides a normal retirement benefit of 100
percent of average annual compensation, reduced by four percentage
points for each year of service below 25 the employee has at normal
retirement age. Plan D further provides that an employee's accrued
benefit as of any plan year is equal to the employee's fractional rule
benefit multiplied by a fraction, the numerator of which is the
employee's years of service as of the plan year, and the denominator of
which is the employee's projected years of service at normal retirement
age. In the case of an employee who has five years of service as of the
current plan year, and who is projected to have 10 years of service at
normal retirement age, the employee's fractional rule benefit would be
40 percent of average annual compensation, and the employee's accrued
benefit as of the current plan year would be 20 percent of average
annual compensation (the fractional rule benefit multiplied by a
fraction of five years over 10 years). Plan D satisfies this paragraph
(b)(4).
Example 5. The facts are the same as in Example 4, except that the
normal retirement benefit is 125 percent of average annual compensation,
reduced by five percentage points for each year of service below 25 that
the employee has at normal retirement age. Plan D satisfies this
paragraph (b)(4), even though an employee may accrue the maximum benefit
allowed under section 415 (i.e., 100 percent of the participant's
average compensation for the high three years of service) in less than
25 years.
Example 6. The facts are the same as in Example 1, except that the
plan determines each employee's accrued benefit by multiplying the
employee's projected normal retirement benefit (rather than the
fractional rule benefit) by the fraction described in Example 1. In
determining an employee's projected normal retirement benefit, the plan
defines each employee's average annual compensation as the average
annual compensation the employee would have at normal retirement age if
the employee's annual section 414(s) compensation in future plan years
equaled the employee's plan year compensation for the prior plan year.
Under these facts, Plan A does not satisfy paragraph (b)(4)(i)(B) of
this section because the employee's accrued benefit is determined on the
basis of a projected normal retirement benefit that is not the same as
the employee's fractional rule benefit determined in accordance with
Sec. 1.411(b)-1(b)(3)(ii)(A).
Example 7. Plan E provides a normal retirement benefit of 50 percent
of average annual compensation, with a pro rata reduction for employees
with less than 30 years of service at normal retirement age. Plan E
further provides that an employee's accrued benefit as of any plan year
is equal to the employee's fractional rule benefit multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service at normal retirement age. For purposes of
determining 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
[[Page 114]]
up to 25. Plan F further provides that an employee's accrued benefit as
of any plan year equals the sum of--
(1) The employee's fractional rule benefit (determined as if the
normal retirement benefit under the plan equaled 2.0 percent of average
annual compensation for each year of service up to 25) multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year and the denominator of which is the employee's
projected years of service as of normal retirement age; plus
(2) 0.65 percent of the employee's average annual compensation above
covered compensation multiplied by the employee's years of service (up
to 25) as of the current plan year.
(b) Although Plan F satisfies the fractional accrual rule of section
411(b)(1)(C), the plan fails to satisfy this paragraph (b)(4) because
the plan does not determine employees' accrued benefits in accordance
with paragraph (b)(4)(i)(B) of this section.
(5) Safe harbor for insurance contract plans. A plan satisfies the
safe harbor in this paragraph (b)(5) if it satisfies each of the
following requirements:
(i) The plan must satisfy the accrual rule of section 411(b)(1)(F).
(ii) The plan must be an insurance contract plan within the meaning
of section 412(i).
(iii) The benefit formula under the plan must be one that would
satisfy the requirements of paragraph (b)(4) of this section if the
stated normal retirement benefit under the formula accrued ratably over
each employee's period of plan participation through normal retirement
age in accordance with paragraph (b)(4)(i)(B) of this section. Thus, the
benefit formula may not recognize years of service before an employee
commenced participation in the plan because, otherwise, the definition
of years of service for determining the normal retirement benefit would
differ from the definition of years of service for determining the
accrued benefit under paragraph (b)(4)(i)(B) of this section. See
paragraph (b)(4)(ii), Example 7, of this section. Notwithstanding the
foregoing, an insurance contract plan adopted and in effect on September
19, 1991, may continue to recognize years of service prior to an
employee's participation in the plan for an employee who is a
participant in the plan on that date to the extent provided by the
benefit formula in the plan on such date.
(iv) The scheduled premium payments under an individual or group
insurance contract used to fund an employee's normal retirement benefit
must be level annual payments to normal retirement age. Thus, payments
may not be scheduled to cease before normal retirement age.
(v) The premium payments for an employee who continues benefiting
after normal retirement age must be equal to the amount necessary to
fund additional benefits that accrue under the plan's benefit formula
for the plan year.
(vi) Experience gains, dividends, forfeitures, and similar items
must be used solely to reduce future premiums.
(vii) All benefits must be funded through contracts of the same
series. Among other requirements, contracts of the same series must have
cash values based on the same terms (including interest and mortality
assumptions) and the same conversion rights. A plan does not fail to
satisfy this requirement, however, if any change in the contract series
or insurer applies on the same terms to all employees. But see Sec.
1.401(a)(4)-5(a)(4), Example 12 (change in insurer considered a plan
amendment subject to Sec. 1.401(a)(4)-5(a)).
(viii) If permitted disparity is taken into account, the normal
retirement benefit stated under the plan's benefit formula must satisfy
Sec. 1.401(l)-3. For this purpose, the 0.75-percent factor in the
maximum excess or offset allowance in Sec. 1.401(l)-3(b)(2)(i) or
(b)(3)(i), respectively, adjusted in accordance with Sec. 1.401(l)-
3(d)(9) and (e), is reduced by multiplying the factor by 0.80.
(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
[[Page 115]]
cause a plan to fail to satisfy this paragraph (b).
(iii) Different entry dates. The plan provides one or more entry
dates during the plan year as permitted by section 410(a)(4).
(iv) Certain conditions on accruals. The plan provides that an
employee's accrual for the plan year is less than a full accrual
(including a zero accrual) because of a plan provision permitted by the
year-of-participation rules of section 411(b)(4).
(v) Certain limits on accruals. The plan limits benefits otherwise
provided under the benefit formula or accrual method to a maximum dollar
amount or to a maximum percentage of average annual compensation (e.g.,
by limiting service taken into account in the benefit formula) or in
accordance with section 401(a)(5)(D), applies the limits of section 415,
or limits the dollar amount of compensation taken into account in
determining benefits.
(vi) Dollar accrual per uniform unit of service. The plan determines
accruals based on the same dollar amount for each uniform unit of
service (not to exceed one week) performed by each employee with the
same number of years of service under the plan during the plan year. The
preceding sentence applies solely for purposes of the unit credit safe
harbor in paragraph (b)(3) of this section.
(vii) Prior benefits accrued under a different formula. The plan
determines benefits for years of service after a fresh-start date for
all employees under a benefit formula and accrual method that differ
from the benefit formula and accrual method previously used to determine
benefit accruals for employees in a fresh-start group for years of
service before the fresh-start date. This paragraph (b)(6)(vii) applies
solely to plans that satisfy Sec. 1.401(a)(4)-13(c) with respect to the
fresh start.
(viii) Employee contributions. The plan is a contributory DB plan
that would satisfy the requirements of paragraph (b) of this section if
the plan's benefit formula provided benefits at employees' employer-
provided benefit rates determined under Sec. 1.401(a)(4)-6(b). This
paragraph (b)(6)(viii) does not apply to a plan tested under paragraph
(b)(4) or (b)(5) of this section unless the plan satisfies one of the
methods in Sec. 1.401(a)(4)-6 (b)(4) through (b)(6). A minimum benefit
added to the plan solely to satisfy Sec. 1.401(a)(4)-6(b)(3) is not
taken into account in determining whether this paragraph (b)(6)(viii) is
satisfied.
(ix) Certain subsidized optional forms. The plan provides a
subsidized optional form of benefit that is available to fewer than
substantially all employees because the optional form of benefit has
been eliminated prospectively as provided in Sec. 1.401(a)(4)-4(b)(3).
(x) Lower benefits for HCEs--(A) General rule. The benefits
(including any subsidized optional form of benefit) provided to one or
more HCEs under the plan are inherently less valuable to those HCEs
(determined by applying the principles of Sec. 1.401(a)(4)-4(d)(4))
than the benefits that would otherwise be provided to those HCEs if the
plan satisfied this paragraph (b) (determined without regard to this
paragraph (b)(6)(x)). These inherently less valuable benefits are deemed
to satisfy this paragraph (b).
(B) Examples. The following examples illustrate the rules in this
paragraph (b)(6)(x):
Example 1. Plan A would satisfy this paragraph (b) (determined
without regard to this paragraph (b)(6)(x)), except for the fact that it
fails to satisfy the requirement of paragraph (b)(2)(iii) of this
section (i.e., a subsidized optional form must be available to
substantially all employees on similar terms). Each subsidized optional
form in the plan is available to all the NHCEs on similar terms, but one
of the subsidized optional forms of benefit is not available to any of
the 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).
[[Page 116]]
(b) Plan B is restructured into two component plans under the
provisions of Sec. 1.401(a)(4)-9(c). One component plan (Component Plan
B1) consists of all NHCEs who are not being credited with years of
service under the plan's benefit formula but are continuing to accrue
benefits as a result of compensation increases, and the other component
plan (Component Plan B2) consists of the balance of the employees.
(c) Component Plan B1 satisfies this section and section 410(b),
because it benefits only NHCEs.
(d) Component Plan B2 is treated as satisfying this paragraph (b),
because Plan B would satisfy this paragraph (b) (determined without
regard to this paragraph (b)(6)(x)) with respect to the employees in
Component Plan B2 but for the fact that it provides inherently less
valuable benefits to some HCEs in that component plan (i.e., the
employees who are credited only with compensation increases rather than
both years of service and compensation increases).
(e) Under Sec. 1.401(a)(4)-9(c), if Component Plan B2 satisfies
section 410(b), then Plan B satisfies this section.
(xi) Multiple formulas--(A) General rule. The plan provides that an
employee's benefit under the plan is the greater of the benefits
determined under two or more formulas, or is the sum of the benefits
determined under two or more formulas. This paragraph (b)(6)(xi) does
not apply to a plan unless each of the formulas under the plan satisfies
the requirements of paragraph (b)(6)(xi) (B) through (D) of this
section.
(B) Sole formulas. The formulas must be the only formulas under the
plan.
(C) Separate testing. Each of the formulas must separately satisfy
the uniformity requirements of paragraph (b)(2) of this section and also
separately satisfy one of the safe harbors in paragraphs (b)(3) through
(b)(5) of this section. A formula that is available solely to some or
all NHCEs is deemed to satisfy this paragraph (b)(6)(xi)(C).
(D) Availability--(1) General rule. All of the formulas must be
available on the same terms to all employees.
(2) Formulas for NHCEs. A formula does not fail to be available on
the same terms to all employees merely because the formula is not
available to any HCEs, but is available to some or all NHCEs on the same
terms as all of the other formulas in the plan.
(3) Top-heavy formulas. Rules parallel to those in Sec.
1.401(a)(4)-2(b)(4)(vi)(D)(3) apply in the case of a plan that provides
the greater of the benefits under two or more formulas, one of which is
a top-heavy formula. For purposes of this paragraph (b)(6)(xi)(D)(3), a
top-heavy formula is a formula that provides a benefit equal to the
minimum benefit described in section 416(c)(1) (taking into account, if
applicable, the modification in section 416(h)(2)(A)(ii)(I)).
(E) Provisions may be applied more than once. The provisions of this
paragraph (b)(6)(xi) may be applied more than once. See Sec.
1.401(a)(4)-2(b)(4)(vi)(E) for an example of the application of these
provisions more than once.
(F) Examples. The following examples illustrate the rules in this
paragraph (b)(6)(xi):
Example 1. Under Plan A, each employee's benefit equals the sum of
the benefits determined under two formulas. The first formula provides
one percent of average annual compensation per year of service. The
second formula provides $10 per year of service. Plan A is eligible to
apply the rules in this paragraph (b)(6)(xi).
Example 2. Under Plan B, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula
provides $15 per year of service and is available to all employees who
complete at least 500 hours of service during the plan year. The second
formula provides 1.5 percent of average annual compensation per year of
service and is available to all employees who complete at least 1,000
hours of service during the plan year. Plan B does not satisfy this
paragraph (b)(6)(xi) because the two formulas are not available on the
same terms to all employees.
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
[[Page 117]]
merely because the second formula is available solely to all non-key
employees on the same terms. This is true even if the plan conditions
the availability of the second formula on the plan's being top-heavy for
the plan year.
Example 4. Under Plan D, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula is
available to all employees and provides a benefit equal to 1.5 percent
of average annual compensation per year of service. The second formula
is only available to NHCEs and provides a benefit equal to two percent
of average annual compensation per year of service, minus two percent of
the primary insurance amount per year of service. The amount of the
offset is not limited to the maximum permitted offset under Sec.
1.401(l)-3(b). Under paragraph (b)(6)(xi)(D)(2) of this section, both
formulas are treated as available to all employees on the same terms.
Furthermore, even though the second formula does not satisfy any of the
safe harbors in this paragraph (b), the formula is deemed to satisfy the
separate testing requirement under paragraph (b)(6)(xi)(C) of this
section, because the formula is available solely to some or all NHCEs.
Example 5. Plan E is a unit credit plan that provides a benefit of
one percent of average annual compensation per year of service to all
employees. In 1994, the plan is amended to provide a benefit of two
percent of average annual compensation per year of service after 1993,
while continuing to provide a benefit of one percent of average annual
compensation per year of service for all years of service before 1994.
Thus, the plan's amended benefit formula provides a benefit equal to the
sum of the benefits determined under two benefit formulas: one percent
of average annual compensation per year of service, plus one percent of
average annual compensation per year of service after 1993. Plan E
satisfies this paragraph (b)(6)(xi).
Example 6. The facts are the same as in Example 5, except that the
plan amendment in 1994 decreases the benefit to 0.75 percent of average
annual compensation per year of service after 1993, while retaining the
one-percent formula for all years of service before 1994. Thus, the
plan's amended benefit formula provides a benefit equal to the sum of
the benefits determined under two benefit formulas: 0.75 percent of
average annual compensation per year of service, plus 0.25 percent of
average annual compensation per year of service before 1994. Under these
facts, the second formula does not separately satisfy any of the safe
harbors in this paragraph (b) because the years of service over which
each employee's benefit accrues under the second formula (i.e., all
years of service) are not the same years of service that are taken into
account in applying the benefit formula under the plan to that employee
(i.e., years of service before 1994). See paragraph (b)(2)(v) of this
section. But see paragraph (b)(6)(vii) of this section and Sec.
1.401(a)(4)-13, which provide rules under which Plan E, as amended, may
be able to satisfy this paragraph (b).
Example 7. Plan F provides a benefit to all employees of one percent
of average annual compensation per year of service. Employee M was hired
as the president of the employer in December 1994 and was not a HCE
under section 414(q) during the 1994 calendar plan year. In 1994, Plan F
is amended to provide a benefit that is the greater of the benefit
determined under the pre-existing formula in the plan and a new formula
that is available solely to some NHCEs (including Employee M). The new
formula does not satisfy the uniformity requirements of paragraph (b)(2)
of this section, because it provides a different benefit for some NHCEs
than for other NHCEs. As a result of this change, Employee M receives a
higher accrual in 1994 than the NHCEs who are not eligible for the new
formula. In 1995, when Employee M first becomes a HCE, the second
formula no longer applies to Employee M. It would be inconsistent with
the purpose of preventing discrimination in favor of HCEs for Plan F to
use the special rule for a formula that is available solely to some or
all NHCEs to satisfy the separate testing requirement of paragraph
(b)(6)(xi)(C) of this section for the 1994 calendar plan year. See Sec.
1.401(a)(4)-1(c)(2).
(c) General test for nondiscrimination in amount of benefits--(1)
General rule. The employer-provided benefits under a defined benefit
plan are nondiscriminatory in amount for a plan year if each rate group
under the plan satisfies section 410(b). For purposes of this paragraph
(c)(1), a rate group exists 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),
[[Page 118]]
Example 3 through Example 5, for examples of this rule.
(3) Certain violations disregarded. A plan is deemed to satisfy
paragraph (c)(1) of this section if the plan would satisfy that
paragraph by treating as not benefiting no more than five percent of the
HCEs in the plan, and the Commissioner determines that, on the basis of
all of the relevant facts and circumstances, the plan does not
discriminate with respect to the amount of employer-provided benefits.
For this purpose, five percent of the number of HCEs may be determined
by rounding to the nearest whole number (e.g., 1.4 rounds to 1 and 1.5
rounds to 2). Among the relevant factors that the Commissioner may
consider in making this determination are--
(i) The extent to which the plan has failed the test in paragraph
(c)(1) of this section;
(ii) The extent to which the failure is for reasons other than the
design of the plan;
(iii) Whether the HCEs causing the failure are five-percent owners
or are among the highest paid nonexcludable employees;
(iv) Whether the failure is attributable to an event that is not
expected to recur (e.g., a plant closing); and
(v) The extent to which the failure is attributable to benefits
accrued under a prior benefit structure or to benefits accrued when a
participant was not a HCE.
(4) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. (a) Employer X has 1100 nonexcludable employees, N1
through N1000, who are NHCEs, and H1 through H100, who are HCEs.
Employer X maintains Plan A, a defined benefit plan that benefits all of
these nonexcludable employees. The normal and most valuable accrual
rates (determined as a percentage of average annual compensation) for
the employees in Plan A for the 1994 plan year are listed in the
following table.
------------------------------------------------------------------------
Most
Normal valuable
Employee accrual accrual
rate rate
------------------------------------------------------------------------
N1 through N100.................................. 1.0 1.4
N101 through N500................................ 1.5 3.0
N501 through N750................................ 2.0 2.65
N751 through N1000............................... 2.3 2.8
H1 through H50................................... 1.5 2.0
H51 through H100................................. 2.0 2.65
------------------------------------------------------------------------
(b) There are 100 rate groups in Plan A because there are 100 HCEs
in Plan A.
(c) Rate group 1 consists of H1 and all those employees who have a
normal accrual rate greater than or equal to H1's normal accrual rate
(1.5 percent) and who also have a most valuable accrual rate greater
than or equal to H1's most valuable accrual rate (2.0 percent). Thus,
rate group 1 consists of H1 through H100 and N101 through N1000.
(d) Rate group 1 satisfies the ratio percentage test of Sec.
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 90
percent, i.e., 90 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 100
percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(e) Because H1 through H50 have the same normal accrual rates and
the same most valuable accrual rates, the rate group with respect to
each of them is identical. Thus, because rate group 1 satisfies section
410(b), rate groups 2 through 50 also satisfy section 410(b).
(f) Rate group 51 consists of H51 and all those employees who have a
normal accrual rate greater than or equal to H51's normal accrual rate
(2.0 percent) and who also have a most valuable accrual rate greater
than or equal to H51's most valuable accrual rate (2.65 percent). Thus,
rate group 51 consists of H51 through H100 and N501 through N1000. (Even
though N101 through N500 have a most valuable accrual rate (3.0 percent)
greater than H51's most valuable accrual rate (2.65 percent), they are
not included in this rate group because their normal accrual rate (1.5
percent) is less than H51's normal accrual rate (2.0 percent).)
(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
[[Page 119]]
rate greater than 3.5. Because the plan would satisfy the test in
paragraph (c)(1) of this section by treating H96 (who constitutes less
than five percent of the HCEs in the plan) as not benefiting, the
Commissioner may determine under paragraph (c)(3) of this section that,
on the basis of all of the relevant facts and circumstances, the plan
does not discriminate with respect to the amount of benefits.
(d) Determination of accrual rates--(1) Definitions--(i) Normal
accrual rate. The normal accrual rate for an employee for a plan year is
the increase in the employee's accrued benefit (within the meaning of
section 411(a)(7)(A)(i)) during the measurement period, divided by the
employee's testing service during the measurement period, and expressed
either as a dollar amount or as a percentage of the employee's average
annual compensation.
(ii) Most valuable accrual rate. The most valuable accrual rate for
an employee for a plan year is the increase in the employee's most
valuable optional form of payment of the accrued benefit during the
measurement period, divided by the employee's testing service during the
measurement period, and expressed either as a dollar amount or as a
percentage of the employee's average annual compensation. The employee's
most valuable optional form of payment of the accrued benefit is
determined by calculating for the employee the normalized QJSA
associated with the accrued benefit that is potentially payable in the
current or any future plan year at any age under the plan and selecting
the largest (per year of testing service). If the plan provides a QSUPP,
the most valuable accrual rate also takes into account the QSUPP payable
in conjunction with the QJSA at each age under the plan. Thus, the most
valuable accrual rate reflects the value of all benefits accrued or
treated as accrued under section 411(d)(6) that are payable in any form
and at any time under the plan, including early retirement benefits,
retirement-type subsidies, early retirement window benefits, and QSUPPs.
In addition, the most valuable accrual rate must take into account any
such benefits that are available during a plan year, even if the
benefits cease to be available before the end of the current or any
future plan year.
(iii) Measurement period. The measurement period can be--
(A) The current plan year;
(B) The current plan year and all prior years; or
(C) The current plan year and all prior and future years.
(iv) Testing service--(A) General rule. Testing service means an
employee's years of service as defined in the plan for purposes of
applying the benefit formula under the plan, subject to the requirements
of paragraph (d)(1)(iv)(B) of this section. Alternatively, testing
service means service determined for all employees in a reasonable
manner that satisfies the requirements of paragraph (d)(1)(iv)(B) of
this section. For example, the number of plan years that an employee has
benefited under the plan within the meaning of Sec. 1.410(b)-3(a) is an
acceptable definition of testing service because it determines service
in a reasonable manner and satisfies paragraph (d)(1)(iv)(B) of this
section. See also Sec. 1.401(a)(4)-11(d)(3) (additional limits on
service that may be taken into account as testing service).
(B) Requirements for testing service--(1) Employees not credited
with years of service under the benefit formula. An employee must be
credited with testing service for any year in which the employee
benefits under the plan (within the meaning of Sec. 1.410(b)-3(a)),
unless that year is part of a period of service 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
[[Page 120]]
as straight life annuities beginning at employees' testing ages, they
must be normalized.
(ii) Determining plan benefits, service and compensation--(A) In
general. Potential plan benefits, testing service, and average annual
compensation must be determined in a reasonable manner, reflecting
actual or projected service and compensation only through the end of the
measurement period. The determination of potential plan benefits is not
reasonable if it incorporates an assumption that, in future years, an
employee's compensation will increase or the employee will terminate
employment before the employee's testing age (other than the assumptions
under paragraph (d)(1)(ii) of this section that the employee's service
will end in connection with the payment of each potential QJSA in future
years).
(B) Section 415 limits. For purposes of determining accrual rates
under this paragraph (d), plan benefits are generally determined without
regard to whether those benefits are permitted to be paid under section
415. However, plan provisions implementing any of the limits of section
415 may be taken into account in applying this paragraph (d) if the plan
does not provide for benefit increases resulting from section 415(d)(1)
adjustments for former employees who were employees in a plan year in
which such plan provisions were taken into account in applying this
paragraph (d). If the limits of section 415 are taken into account under
this paragraph (d)(2)(ii)(B) as of the end of the measurement period,
they must also be taken into account as of the beginning of the
measurement period. If the limits of section 415 are not taken into
account in testing the plan for the current plan year, but were taken
into account in testing the plan for the preceding plan year, any
resulting increase in the accrued benefits taken into account in testing
the plan is treated as an increase in accrued benefits during the
current plan year.
(iii) Requirements for measurement period that includes future
years--(A) Discriminatory pattern of accruals. A measurement period that
includes future years (as described in paragraph (d)(1)(iii)(C) of this
section) may not be used if the pattern of accruals under the plan
discriminates in favor of HCEs (i.e., if projected benefits for HCEs are
relatively frontloaded when compared to the degree of front loading or
backloading for NHCEs). This determination is made based on all of the
relevant facts and circumstances.
(B) Future-period limitation. Future years beginning after an
employee's attainment of the employee's testing age (or after the
employee's assumed termination in the case of most valuable accrual
rates) may not be included in the measurement period.
(3) Optional rules--(i) Imputation of permitted disparity. The
disparity permitted under section 401(l) may be imputed in accordance
with the rules of Sec. 1.401(a)(4)-7.
(ii) Grouping of accrual rates--(A) General rule. An employer may
treat all employees who have accrual rates within a specified range
above and below a midpoint rate chosen by the employer as having an
accrual rate equal to the midpoint rate within that range. Accrual rates
within a given range may not be grouped under this paragraph (d)(3)(ii)
if the accrual rates of HCEs within the range generally are
significantly higher than the accrual rates of NHCEs in the range. The
specified ranges within which all employees are treated as having the
same accrual rate may not overlap and may be no larger than provided in
paragraph (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.
[[Page 121]]
(iii) Fresh-start alternative--(A) General rule. Notwithstanding the
definition of measurement period provided in paragraph (d)(1)(iii) of
this section, a measurement period for a fresh-start group is permitted
to be limited to the period beginning after the fresh-start date with
respect to that group if the plan makes a fresh start that satisfies
Sec. 1.401(a)(4)-13(c) (without regard to Sec. 1.401(a)(4)-13(c)(2)(i)
and (ii)). If the measurement period is so limited or the measurement
period is the plan year (whether or not so limited), any compensation
adjustments during the measurement period to the frozen accrued benefit
as of the fresh-start date that are permitted under the rules of Sec.
1.401(a)(4)-13(d) may be disregarded in determining the increase in
accrued benefits during the measurement period, but only if--
(1) The plan makes a fresh start as of the fresh-start date that
satisfies Sec. 1.401(a)(4)-13(c) (without regard to Sec. 1.401(a)(4)-
13(c)(2)(ii)) in conjunction with a bona fide amendment to the benefit
formula or accrual method under the plan; and
(2) The amendment provides for adjustments to employees' frozen
accrued benefits as of the fresh-start date in accordance with the rules
of Sec. 1.401(a)(4)-13(d).
(B) Application of consistency requirements. Limiting the
application of the fresh-start alternative in this paragraph (d)(3)(iii)
to a fresh-start group that consists of fewer than all employees does
not violate the consistency requirement of paragraph (d)(2)(i) of this
section.
(iv) Floor on most valuable accrual rate. In lieu of determining an
employee's most valuable accrual rate in accordance with the definition
in paragraph (d)(1)(ii) of this section, an employer may determine an
employee's most valuable accrual rate for the current plan year as the
employee's highest most valuable accrual rate determined for any prior
plan year. This option may be used only if the employee's normal accrual
rate has not changed significantly from the normal accrual rate for the
relevant prior plan year and, there have been no plan amendments in the
interim period since that prior plan year that affect the determination
of most valuable accrual rates.
(4) Examples. The following examples illustrate the rules in this
paragraph (d):
Example 1. The employees in Plan A have the following normal accrual
rates (expressed as percentage of average annual compensation): 0.8
percent, 0.83 percent, 0.9 percent, 1.9 percent, 2.0 percent, and 2.1
percent. Because the first three rates are within a range of no more
than one twentieth of a percentage point above or below 0.85 percent (a
midpoint rate chosen by the employer), the employer may treat the
employees who have those rates as having an accrual rate of 0.85 percent
(provided that the accrual rates of HCEs within the range are not
significantly higher than the accrual rates for NHCEs within the range).
Because the last three rates are within a range of no more than five
percent above or below 2.0 percent (a midpoint rate chosen by the
employer), the employer may treat the employees who have those rates as
having an accrual rate of 2.0 percent (provided that the accrual rates
of HCEs within the range are not significantly higher than the accrual
rates for NHCEs within the range).
Example 2. Employer X maintains a plan under which headquarters
employees accrue a benefit of 1.25 percent of average compensation for
the first 10 years of service and 0.75 percent of average compensation
for subsequent years of service, while all other employees accrue a
benefit of one percent of compensation for all years of service. Assume
that the group of headquarters employees does not satisfy section
410(b). Under these facts, the pattern of accruals under the plan
discriminates in favor of HCEs, and, 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
[[Page 122]]
plans must be expressed either as a dollar amount or determined as a
percentage of each employee's average annual compensation.
(2) Average annual compensation--(i) General rule. An employee's
average annual compensation is the average of the employee's annual
section 414(s) compensation determined over the averaging period in the
employee's compensation history during which the average of the
employee's annual section 414(s) compensation is the highest. For this
purpose, an averaging period must consist of three or more consecutive
12-month periods, but need not be longer than the employee's period of
employment. An employee's compensation history may begin at any time,
but must be continuous, be no shorter than the averaging period, and end
in the current plan year.
(ii) Certain permitted modifications to average annual
compensation--(A) Use of plan year compensation. If the measurement
period for determination of accrual rates is the current plan year, or
the plan is an accumulation plan that satisfies paragraph (b) of this
section, then plan year compensation may be substituted for average
annual compensation.
(B) Drop-out years. Any of the following types of 12-month periods
in an employee's compensation history may be disregarded in determining
the employee's average annual compensation (including for purposes of
the requirement to average section 414(s) compensation over consecutive
12-month periods), but only if the plan disregards the employee's
compensation for those periods in determining benefits--
(1) The 12-month period in which the employee terminates employment;
(2) All 12-month periods in which the employee performs no services;
or
(3) All 12-month periods in which the employee performs services for
less than a specified number of hours or specified period of time in the
12-month period. The specified number of hours or specified period of
time may be selected by the employer, but may not exceed three quarters
of the time that an employee in the same job category working on a full-
time basis would perform services during that 12-month period.
(C) Drop-out months within 12-month periods. If a plan determines an
employee's average annual compensation using 12-month periods that do
not end on a fixed date (e.g., average annual compensation as of a date
is defined as the average of the employee's section 414(s) compensation
for the 60 consecutive months within the compensation history in which
the average is highest), then, for purposes of determining a 12-month
period, any of the following type of months may be disregarded
(including for purposes of the requirement to average section 414(s)
compensation over consecutive 12-month periods), but only if the plan
disregards the employee's compensation for those months in determining
benefits--
(1) The month in which the employee terminates employment;
(2) All months in which the employee performs no services; or
(3) All months in which the employee performs services for less than
a specified number of hours or specified period of time in the month.
The specified number of hours or specified period of time may be
selected by the employer, but may not exceed three quarters of the time
that an employee in the same job category working on a full-time basis
would perform services during that month.
(D) Employees working less than full-time. In the case of an
employee who normally works less than full-time, the rules in paragraphs
(e)(2)(ii)(B)(3) and (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
[[Page 123]]
are consecutive in determining average compensation for purposes of
calculating benefits.
(iii) Consistency requirements. Average annual compensation must be
determined in a consistent manner for all employees.
(3) Examples. The following examples illustrate the rules in this
paragraph (e):
Example 1. Plan A is a defined benefit plan. Plan A determines
benefits on the basis of the average of each employee's annual
compensation for the five consecutive plan years (or the employee's
period of employment, if shorter) during the employee's compensation
history in which the average of the employee's annual compensation is
the highest. The compensation history used for this purpose is the last
10 plan years, plus the current plan year. In determining compensation
for each plan year in the compensation history, Plan A defines
compensation using a single definition that satisfies section 414(s) as
a safe harbor definition under Sec. 1.414(s)-1(c). Plan A determines
benefits on the basis of average annual compensation.
Example 2. Plan B is a defined benefit plan. Plan B determines
benefits on the basis of the average of each employee's compensation for
the five consecutive 12-month periods (or the employee's period of
employment, if shorter) during the employee's compensation history in
which the average of the employee's annual compensation is the highest.
The compensation history used for this purpose is the 10 consecutive 12-
month periods ending on the employee's termination date. In determining
the average, Plan B disregards all months in which the employee performs
services for less than 100 hours (60 percent of a full-time work
schedule of 173 hours). In the case of an employee whose normal work
schedule is less than a full-time schedule, Plan B disregards all months
in which that employee performs services for less than 60 percent of the
employee's normal work schedule. Plan B defines compensation for each
12-month period using a single definition that satisfies Sec. 1.414(s)-
1. Plan B determines benefits on the basis of average annual
compensation.
Example 3. (a) The facts are the same as in Example 1, except that,
for plan years prior to 1996, the compensation for a plan year was
determined under a rate of pay definition of compensation that satisfies
section 414(s), while, for plan years after 1995, the compensation for a
plan year is determined using a definition that satisfies section 414(s)
as a safe harbor definition under Sec. 1.414(s)-1(c).
(b) The underlying definition of compensation for each plan year in
the employee's compensation history is section 414(s) compensation,
because for each plan year the definition satisfies the requirements for
section 414(s) compensation under Sec. 1.401(a)(4)-12. Therefore, Plan
A determines benefits on the basis of average annual compensation, even
though the underlying definition used to measure the amount of
compensation for each plan year in an employee's compensation history is
not the same for all plan years.
Example 4. The facts are the same as in Example 1, except that Plan
A determines benefits on the basis of the average of the employee's
annual section 414(s) compensation for the five consecutive 12-month
periods ending on June 30 during the employee's compensation history in
which the average is highest. An employee's compensation history begins
when the employee commences participation in the plan and ends in the
current plan year. In the case of an employee with less than five
consecutive years of plan participation as of June 30, the compensation
history is extended prior to the employee's commencement of
participation to include the five consecutive 12-month periods ending on
June 30 of the current plan year (or the employee's total period of
employment, if shorter). Plan A determines benefits on the basis of
average annual compensation.
Example 5. The facts are the same as in Example 4, except that Plan
A determines benefits on the basis of the average of each employee's
compensation for the employee's entire compensation history. Plan A
determines benefits on the basis of average annual compensation.
(f) Special rules--(1) In general. The special rules in this
paragraph (f) apply for purposes of applying the provisions of this
section to a defined benefit plan. Any special rule provided in this
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.
[[Page 124]]
(3) Accruals after normal retirement age--(i) General rule. An
employee's accruals for any plan year after the plan year in which the
employee attains normal retirement age are taken into account for
purposes of this section. However, any plan provision that provides for
increases in an employee's accrued benefit solely because the employee
has delayed commencing benefits beyond the normal retirement age
applicable to the employee under the plan may be disregarded, but only
if--
(A) The same uniform normal retirement age applies to all employees;
and
(B) The percentage factor used to increase the employee's accrued
benefit is no greater than the largest percentage factor that could be
applied to increase actuarially the employee's accrued benefit using any
standard mortality table and any standard interest rate.
(ii) Examples. The following examples illustrate the rules of this
paragraph (f)(3). In each example, it is assumed that the plan satisfies
the requirements of paragraph (f)(3)(i)(A) and (B) of this section.
Example 1. Plan A provides a benefit of two percent of average
annual compensation per year of service for all employees. In addition,
Plan A provides an actuarial increase in an employee's accrued benefit
of six percent for each year that an employee defers commencement of
benefits beyond normal retirement age. For employees who continue in
service beyond normal retirement age, the employee's two-percent accrual
for the current plan year is offset by the six-percent actuarial
increase, as permitted under section 411(b)(1)(H)(iii)(II). For purposes
of this section, the actuarial increase (and hence the offset) may be
disregarded, and thus all employees may be treated as if they were
accruing at the rate of two percent of average annual compensation per
year.
Example 2. The facts are the same as in Example 1, except that the
employee's two- percent accrual for the current plan year is not offset
by the six-percent actuarial increase. The employer may disregard the
actuarial increase and thus may treat all employees as if they were
accruing at the rate of two percent of average annual compensation per
year.
(4) Early retirement window benefits--(i) General rule. In applying
the requirements of this section, all early retirement benefits,
retirement-type subsidies, QSUPPs, and other optional forms of benefit
under a plan, and changes in the plan's benefit formula, are taken into
account regardless of whether they are permanent features of the plan or
are offered only to employees whose employment terminates within a
limited period of time. Additional rules and examples relevant to the
testing of early retirement window benefits are found in Example 6 of
paragraph (b)(2)(vi) of this section; paragraph (b)(2)(ii)(A)(2),
Example 2 of paragraph (c)(2), paragraph (d)(3), and Example 3 of
paragraph (e)(1)(iii) of Sec. 1.401(a)(4)-4; paragraph (c)(4)(i) and
Example 2 of paragraph (c)(6) of Sec. 1.401(a)(4)-9; and the definition
of benefit formula in Sec. 1.401(a)(4)-12.
(ii) Special rules--(A) Year in which early retirement window
benefit taken into account. Notwithstanding paragraph (f)(4)(i) of this
section, an early retirement window benefit is disregarded for purposes
of determining whether a plan satisfies this section with respect to an
employee for all plan years other than the first plan year in which the
benefit is currently available (within the meaning of Sec. 1.401(a)(4)-
4(b)(2)) to the employee. For purposes of this paragraph (f)(4)(ii)(A),
in determining which plan years the benefit is currently available, an
early retirement window benefit that consists of a temporary change in
the plan's benefit formula is treated as an optional form of benefit.
(B) Treatment of early retirement window benefit that consists of
temporary 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
[[Page 125]]
accrued benefit (which is used in determining the employee's most
valuable accrual rate under paragraphs (d)(1)(ii) and (f)(4)(i) of this
section), an early retirement window benefit that is currently available
to the employee (within the meaning of paragraph (f)(4)(ii)(A) of this
section) and that is not disregarded for a plan year under paragraph
(f)(4)(ii)(A) of this section is taken into account in that plan year
with respect to the employee's accrued benefit as of the earliest of the
employee's date of termination, the close of the early retirement
window, or the last day of that plan year.
(D) Effect of early retirement window benefit on average benefit
percentage test. Notwithstanding paragraph (c)(2) of this section, a
rate group under a plan that provides an early retirement window benefit
is deemed to satisfy the average benefit percentage test of Sec.
1.410(b)-5 if--
(1) All rate groups under the plan would satisfy the ratio
percentage test of Sec. 1.410(b)-2(b)(2) if the early retirement window
benefit were disregarded; and
(2) The group of employees to whom the early retirement window
benefit is currently available (within the meaning of paragraph
(f)(4)(ii)(A) of this section) satisfies section 410(b) without regard
to the average benefit percentage test of Sec. 1.410(b)-5.
(iii) Early retirement window benefit defined. For purposes of this
paragraph (f)(4), an early retirement window benefit is an early
retirement benefit, retirement-type subsidy, QSUPP, or other optional
form of benefit under a plan that is available, or a change in the
plan's benefit formula that is applicable, only to employees who
terminate employment within a limited period specified by the plan (not
to exceed one year) under circumstances specified by the plan. A benefit
does not fail to be described in the preceding sentence merely because
the plan contains provisions under which certain employees may receive
the benefit even though, for bona fide business reasons, they terminate
employment within a reasonable period after the end of the limited
period. An amendment to an early retirement window benefit that merely
extends the periods in the preceding sentences is not treated as a
separate early retirement window benefit, provided that the periods, as
extended, satisfy the preceding sentences. However, any other amendment
to an early retirement window benefit creates a separate early
retirement window benefit.
(iv) Examples. The following examples illustrate the rules of this
paragraph (f)(4):
Example 1. (a) Plan A provides a benefit of one percent of average
annual compensation per year of service and satisfies the requirements
of paragraph (b)(2) of this section. Thus, the plan provides the same
benefit to all employees with the same years of service under the Plan.
Plan A is amended to treat all employees with ten or more years of
service who terminate employment after attainment of age 55 and between
March 1, 1999, and January 31, 2000, as if they had an additional five
years of service under the benefit formula. However, in order to ensure
the orderly implementation of the early retirement window, the plan
amendment provides that designated employees in the human resources
department who would otherwise be eligible for the early retirement
window benefit are eligible to be treated as having the additional five
years of service only if they terminate between January 1, 2000, and
April 30, 2000.
(b) The additional benefits provided under this amendment are tested
as benefits provided to employees rather than former employees. The
effect of this amendment is temporarily to change the benefit formula
for employees who are eligible for the early retirement window benefit
because the amendment changes (albeit temporarily) the 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
[[Page 126]]
employees who are not eligible for the early retirement window benefit
and all of their accruals and benefits, rights, and features under the
plan, and Component Plan A2, consisting of all employees who are
eligible for the early retirement window benefit (including the
designated employees in the human resource department) and all of their
accruals and benefits, rights, and features under the plan.
(d) Component Plan A1 still satisfies paragraph (b) of this section,
because there has been no change for the employees in that component
plan. Similarly, Component Plan A2 satisfies paragraph (b) of this
section disregarding the change in the benefit formula.
(e) Because the early retirement window benefit consists of a
temporary change in the benefit formula, paragraph (f)(4)(ii)(B) of this
section requires that the plan satisfy the requirements of paragraph (b)
of this section reflecting the change in order to remain a safe harbor
plan. After reflecting the change, Component Plan A2 still provides the
same benefit (albeit higher than under the regular benefit formula) to
all employees with the same years of service that may be taken into
account in testing the plan, and thus the benefit formula (as
temporarily amended) satisfies the requirements of paragraphs (b)(2) (i)
and (ii) of this section.
(f) Since Component Plan A2 also satisfies all of the other
requirements of paragraph (b)(2) of this section and the safe harbor of
paragraph (b)(3) of this section reflecting the change in the benefit
formula, Component Plan A2 satisfies this paragraph (b) both reflecting
and disregarding the change in the benefit formula. Thus, Component Plan
A2 satisfies paragraph (b) of this section.
Example 2. The facts are the same as in Example 1, except that Plan
A's benefit formula used the maximum amount of permitted disparity under
section 401(l) prior to the amendment. The analysis is the same as in
paragraphs (a) through the first sentence of paragraph (e) of Example 1.
In order to satisfy the requirements of paragraph (b)(2) of this
section, a plan that uses permitted disparity must satisfy the
requirements of section 401(l) after reflecting the change in the
benefit formula. Because, as stated in Example 1, the additional five
years of service may not be taken into account for purposes of
satisfying paragraph (b) of this section, the disparity that results
from crediting that service exceeds the maximum permitted disparity
under section 401(l). Thus, Component Plan A2 does not satisfy the
requirements of paragraph (b) of this section.
Example 3. The facts are the same as in Example 1, except that Plan
A is tested under the general test in paragraph (c) of this section. The
early retirement window benefit is disregarded for purposes of
determining the normal accrual rates, but is taken into account in 1999
for purposes of determining the most valuable accrual rates, of
employees who were eligible for the early retirement window benefit
(regardless of whether they elected to receive it). As stated in Example
1, the additional five years of service do not represent past service,
pre-participation service, or imputed service, and thus under Sec.
1.401(a)(4)-11(d)(3)(i)(A) may not be taken into account as testing
service.
(5) Unpredictable contingent event benefits--(i) General rule. In
general, an unpredictable contingent event benefit (within the meaning
of section 412(l)(7)(B)(ii)) is not taken into account under this
section until the occurrence of the contingent event. Thus, the special
rule in Sec. 1.401(a)(4)-4(d)(7) (treating the contingent event as
having occurred) does not apply for purposes of this section. In the
case of an unpredictable contingent event that is expected to result in
the termination from employment of certain employees within a period of
time consistent with the rules for defining an early retirement window
benefit in paragraph (f)(4)(iii) of this section, the unpredictable
contingent event benefit available to those employees is permitted to be
treated as an early retirement window benefit, thus permitting the rules
of paragraph (f)(4) of this section to be applied to it.
(ii) Example. The following example illustrates the rules of this
paragraph (f)(5):
Example. (a) Employer X operates various manufacturing plants and
maintains Plan A, 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.
[[Page 127]]
(c) During the 1998 plan year, Employer X begins to close one plant.
Employees M through Z, who are employees at the plant that is closing,
are expected to terminate employment with Employer X during the plan
year and will satisfy the conditions for the plant-closing benefit.
Therefore, in testing Plan A under this section for the 1998 plan year,
the availability of the plant-closing benefit to Employees M through Z
must be taken into account in determining their accrual rates or in
determining whether the plan satisfies one of the safe harbors under
paragraph (b) of this section.
(d) Because the employees eligible for the unpredictable contingent
event benefit are expected to terminate employment with Employer X
during a period consistent with the rules for defining an early
retirement window benefit, in testing Plan A under this section for the
1998 plan year, the special rules in paragraph (f)(4)(ii) of this
section may be applied. Thus, for example, normal accrual rates may be
determined without reference to the unpredictable contingent event
benefit.
(e) Despite the closing of the plant, Employee Q remains an employee
into the 1999 plan year. Under paragraph (f)(4)(ii)(A) of this section,
the availability of the plant-closing benefit to Employee Q may be
disregarded in the 1999 plan year.
(6) Determination of benefits on other than plan-year basis. For
purposes of this section, accruals are generally determined based on the
plan year. Nevertheless, an employer may determine accruals on the basis
of any period ending within the plan year as long as the period is at
least 12 months in duration. For example, accruals for all employees may
be determined based on accrual computation periods ending within the
plan year.
(7) Adjustments for certain plan distributions. For purposes of this
section, an employee's accrued benefit includes the actuarial equivalent
of prior distributions of accrued benefits from the plan to the employee
if the years of service taken into account in determining the accrued
benefits that were distributed continue to be taken into account under
the plan for purposes of determining the employee's current accrued
benefit. For purposes of this paragraph (f)(7), actuarial equivalence
must be determined in a uniform manner for all employees using
reasonable actuarial assumptions. A standard interest rate and a
standard mortality table are among the assumptions considered reasonable
for this purpose. Thus, for example, if an employee has commenced
receipt of benefits in accordance with the minimum distribution
requirements of section 401(a)(9), and the plan reduces the employee's
accrued benefit to take into account the amount of the distributions,
the employee's accrued benefit for purposes of this section is restored
to the value it would have had if the distributions had not occurred.
(8) Adjustment for certain QPSA charges. For purposes of this
section, an employee's accrued benefit includes the cost of a qualified
preretirement survivor annuity (QPSA) that reduces the employee's
accrued benefit otherwise determined under the plan, as permitted under
Sec. 1.401(a)-20, Q&A-21. Thus, an employee's accrued benefit for
purposes of this section is determined as if the cost of the QPSA had
not been charged against the accrued benefit. This paragraph (f)(8)
applies only if the QPSA charges apply uniformly to all employees.
(9) Disregard of certain offsets--(i) General rule. For purposes of
this section, an employee's accrued benefit under a plan includes that
portion of the benefit that is offset under an offset provision
described in Sec. 1.401(a)(4)-11(d)(3)(i)(D). The rule in the preceding
sentence applies only to the extent that the benefit by which the
benefit under the plan being tested is offset is attributable to periods
for which the 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).
[[Page 128]]
(ii) Examples. The following examples illustrate the rules in this
paragraph (f)(9):
Example 1. (a) Employer X maintains two qualified defined benefit
plans, Plan A and Plan B. Plan B provides that, whenever an employee
transfers to Plan B from Plan A, the service that was credited under
Plan A is credited in determining benefits under Plan B. The Plan A
service credited under Plan B is pre-participation service that
satisfies Sec. 1.401(a)(4)-11(d)(3)(iii). Plan B offsets the benefits
determined under Plan B by the employee's vested benefits under Plan A.
Plan A does not credit additional benefit service or accrual service
after employees transfer to Plan B.
(b) The Plan B provision providing for an offset of benefits under
Plan A satisfies Sec. 1.401(a)(4)-11(d)(3)(i)(D). This is because the
provision applies to similarly-situated employees and the benefits under
Plan A that are offset against the Plan B benefits are attributable to
pre-participation service taken into account under Plan B.
(c) This paragraph (f)(9) applies in determining the benefits that
are taken into account under this section for employees in Plan B who
are transferred from Plan A. This is because the offset provision is
described in Sec. 1.401(a)(4)-11(d)(3)(i)(D), the benefits under the
other plan by which the benefits under the plan being tested are offset
are attributable solely to pre-participation service that satisfies
Sec. 1.401(a)(4)-11(d)(3)(iii), and the benefits are offset solely by
vested benefits under another qualified plan. Thus, for example, the
accrual rates of employees in Plan B are determined as if there were no
offset, i.e., by adding back the benefits that are offset to the net
benefits under Plan B.
(d) The result would be the same even if Plan A continued to
recognize compensation paid after the transfer in the determination of
benefits under Plan A. However, if Plan A continued to credit benefit or
accrual service after the transfer, then, to the extent that Plan B's
offset of benefits under Plan A increased as a result, the additional
benefits offset under Plan B would not be added back in determining the
benefits under Plan B that are taken into account under this section.
Example 2. The facts are the same as in Example 1, except that Plan
A is not a plan described in paragraph (f)(9)(i)(A) of this section.
None of the benefits under Plan B that are offset by benefits under Plan
A may be added back in determining the benefits under Plan B that are
taken into account under this section. Thus, benefits under Plan B are
tested on a net basis.
(10) Special rule for multiemployer plans. For purposes of this
section, if a multiemployer plan increases benefits for service prior to
a specific date subject to a plan provision requiring employees to
complete a specified amount of service (not to exceed five years) after
that date, then benefits are permitted to be determined disregarding the
service condition, provided that the condition is applicable to all
employees in the multiemployer plan (including collectively bargained
employees).
[T.D. 8485, 58 FR 46785, Sept. 3, 1993]
Sec. 1.401(a)(4)-4 Nondiscriminatory availability of benefits,
rights, and features.
(a) Introduction. This section provides rules for determining
whether the benefits, rights, and features provided under a plan (i.e.,
all optional forms of benefit, ancillary benefits, and other rights and
features available to any employee under the plan) are made available in
a nondiscriminatory manner. Benefits, rights, and features provided
under a plan are made available to employees in a nondiscriminatory
manner only if each benefit, right, or feature satisfies the current
availability requirement of paragraph (b) of this section and the
effective availability requirement of paragraph (c) of this section.
Paragraph (d) of this section provides special rules for applying these
requirements. Paragraph (e) of this section defines optional form of
benefit, ancillary benefit, and other right or feature.
(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
[[Page 129]]
compensation, accrued benefit, position, or net worth).
(ii) Certain conditions disregarded--(A) Certain age and service
conditions--(1) General rule. Notwithstanding paragraph (b)(2)(i) of
this section, any specified age or service condition with respect to an
optional form of benefit or a social security supplement is disregarded
in determining whether the optional form of benefit or the social
security supplement is currently available to an employee. Thus, for
example, an optional form of benefit that is available to all employees
who terminate employment on or after age 55 with at least 10 years of
service is treated as currently available to an employee, without regard
to the employee's current age or years of service, and without regard to
whether the employee could potentially meet the age and service
conditions prior to attaining the plan's normal retirement age.
(2) Time-limited age or service conditions not disregarded.
Notwithstanding paragraph (b)(2)(ii)(A)(1) of this section, an age or
service condition is not disregarded in determining the current
availability of an optional form of benefit or social security
supplement if the condition must be satisfied within a limited period of
time. However, in determining the current availability of an optional
form of benefit or a social security supplement subject to such an age
or service condition, the age and service of employees may be projected
to the last date by which the age condition or service condition must be
satisfied in order to be eligible for the optional form of benefit or
social security supplement under the plan. Thus, for example, an
optional form of benefit that is available only to employees who
terminate employment between July 1, 1995, and December 31, 1995, after
attainment of age 55 with at least 10 years of service is treated as
currently available to an employee only if the employee could satisfy
those age and service conditions by December 31, 1995.
(B) Certain other conditions. Specified conditions on the
availability of a benefit, right, or feature requiring a specified
percentage of the employee's accrued benefit to be nonforfeitable,
termination of employment, death, satisfaction of a specified health
condition (or failure to meet such condition), disability, hardship,
family status, default on a plan loan secured by a participant's account
balance, execution of a covenant not to compete, application for
benefits or similar ministerial or mechanical acts, election of a
benefit form, execution of a waiver of rights under the Age
Discrimination in Employment Act or other federal or state law, or
absence from service, are disregarded in determining the employees to
whom the benefit, right, or feature is currently available. In addition,
if a multiemployer plan includes a reasonable condition that limits
eligibility for an ancillary benefit, or other right or feature, to
those employees who have recent service under the plan (e.g., a
condition on a death benefit that requires an employee to have a minimum
number of hours credited during the last two years) and the condition
applies to all employees in the multiemployer plan (including the
collectively bargained employees) to whom the ancillary benefit, or
other right or feature, is otherwise currently available, then the
condition is disregarded in determining the employees to whom the
ancillary benefit, or other right or feature, is currently available.
(C) Certain conditions relating to mandatory cash-outs. In the case
of a plan that provides for mandatory cash-outs of all terminated
employees who have 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
[[Page 130]]
the employees to whom the benefit, right, or feature is currently
available.
(E) Certain conditions on plan loans. In the case of an employee's
right to a loan from the plan, the condition that an employee must have
an account balance sufficient to be eligible to receive a minimum loan
amount specified in the plan (not to exceed $1,000) is disregarded in
determining the employees to whom the right is currently available.
(3) Benefits, rights, and features that are eliminated
prospectively--(i) Special testing rule. Notwithstanding paragraph
(b)(1) of this section, a benefit, right, or feature that is eliminated
with respect to benefits accrued after the later of the eliminating
amendment's adoption or effective date (the elimination date), but is
retained with respect to benefits accrued as of the elimination date,
and that satisfies this paragraph (b) as of the elimination date, is
treated as satisfying this paragraph (b) for all subsequent periods.
This rule does not apply if the terms of the benefit, right, or feature
(including the employees to whom it is available) are changed after the
elimination date.
(ii) Elimination of a benefit, right, or feature--(A) General rule.
For purposes of this paragraph (b)(3), a benefit, right, or feature
provided to an employee is eliminated with respect to benefits accrued
after the elimination date if the amount or value of the benefit, right,
or feature depends solely on the amount of the employee's accrued
benefit (within the meaning of section 411(a)(7)) as of the elimination
date, including subsequent income, expenses, gains, and losses with
respect to that benefit in the case of a defined contribution plan.
(B) Special rule for benefits, rights, and features that are not
section 411(d)(6)-protected benefits. Notwithstanding paragraph
(b)(3)(ii)(A) of this section, in the case of a benefit, right, or
feature under a defined contribution plan that is not a section
411(d)(6)-protected benefit (within the meaning of Sec. 1.411(d)-4,
Q&A-1), e.g., the availability of plan loans, for purposes of this
paragraph (b)(3)(ii) each employee's accrued benefit as of the
elimination date may be treated, on a uniform basis, as consisting
exclusively of the dollar amount of the employee's account balance as of
the elimination date.
(C) Special rule for benefits, rights, and features that depend on
adjusted accrued benefits. For purposes of this paragraph (b)(3), a
benefit, right, or feature provided to an employee under a plan that has
made a fresh start does not fail to be eliminated as of an elimination
date that is the fresh-start date merely because it depends solely on
the amount of the employee's adjusted accrued benefit (within the
meaning of Sec. 1.401(a)(4)-13(d)(8)).
(c) Effective availability--(1) General rule. Based on all of the
relevant facts and circumstances, the group of employees to whom a
benefit, right, or feature is effectively available must not
substantially favor HCEs.
(2) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. Employer X maintains Plan A, a defined benefit plan that
covers both of its highly compensated nonexcludable employees and nine
of its 12 nonhighly compensated nonexcludable employees. Plan A provides
for a normal retirement benefit payable as an annuity and based on a
normal retirement age of 65, and an early retirement benefit payable
upon termination in the form of an annuity to employees who terminate
from service with the employer on or after age 55 with 30 or more years
of service. Both HCEs of Employer X currently meet the age and service
requirement, or will have 30 years of service by the time they reach age
55. All but two of the nine NHCEs of Employer X who are covered by Plan
A were hired on or after 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
[[Page 131]]
that all employees were hired prior to attaining age 25 and that the
group of employees who have, or will have, attained age 55 with 30 years
of service by December 15, 1998, satisfies the ratio percentage test of
Sec. 1.410(b)-2(b)(2). Assume, further, that the employer takes no
steps to inform all eligible employees of the early retirement option on
a timely basis and that the only employees who terminate from employment
with the employer during the two-week period in which the early
retirement benefit is available are HCEs. Under these facts, the group
of employees to whom this early retirement window benefit is effectively
available substantially favors HCEs.
Example 3. Employer Z amends Plan C on June 30, 1999, to provide for
a single sum optional form of benefit for employees who terminate from
employment with Employer Z after June 30, 1999, and before January 1,
2000. The availability of this single sum optional form of benefit is
conditioned on the employee's having a particular disability at the time
of termination of employment. The only employee of the employer who
meets this disability requirement at the time of the amendment and
thereafter through December 31, 1999, is a HCE. Under paragraph
(b)(2)(ii)(B) of this section, the disability condition is disregarded
in determining the current availability of the single sum optional form
of benefit. Nevertheless, under these facts, the group of employees to
whom the single sum optional form of benefit is effectively available
substantially favors HCEs.
(d) Special rules--(1) Mergers and acquisitions--(i) Special testing
rule. A benefit, right, or feature available under a plan solely to an
acquired group of employees is treated as satisfying paragraphs (b) and
(c) of this section during the period that each of the following
requirements is satisfied:
(A) The benefit, right, or feature must satisfy paragraphs (b) and
(c) of this section (determined without regard to the special rule in
section 410(b)(6)(C)) on the date that is selected by the employer as
the latest date by which an employee must be hired or transferred into
the acquired trade or business for an employee to be included in the
acquired group of employees. This determination is made with reference
to the plan of the current employer and its nonexcludable employees.
(B) The benefit, right, or feature must be available under the plan
of the current employer after the transaction on the same terms as it
was available under the plan of the prior employer before the
transaction. This requirement is not violated merely because of a change
made to the benefit, right, or feature that is permitted by section
411(d)(6), provided that--
(1) The change is a replacement of the benefit, right, or feature
with another benefit, right, or feature that is available to the same
employees as the original benefit, right, or feature, and the original
benefit, right, or feature is of inherently equal or greater value
(within the meaning of paragraph (d)(4)(i)(A) of this section) than the
benefit, right, or feature that replaces it; or
(2) The change is made before January 12, 1993.
(ii) Scope of special testing rule. This paragraph (d)(1) applies
only to benefits, rights, and features with respect to benefits accruing
under the plan of the current employer, and not to benefits, rights, and
features with respect to benefits accrued under the plan of the prior
employer (unless, pursuant to the transaction, the plan of the prior
employer becomes the plan of the current employer, or the assets and
liabilities with respect to the acquired group of employees under the
plan of the prior employer are transferred to the plan of the current
employer in a plan merger, consolidation, or other transfer described in
section 414(l)).
(iii) Example. The following example illustrates the rules of this
paragraph (d)(1):
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
[[Page 132]]
of benefit for the plan year of the transaction and all subsequent plan
years.
(2) Frozen participants. A plan must satisfy the nondiscriminatory
availability requirement of this section not only with respect to
benefits, rights, and features provided to employees who are currently
benefiting under the plan, but also separately with respect to benefits,
rights, and features provided to nonexcludable employees with accrued
benefits who are not currently benefiting under the plan (frozen
participants). Thus, each benefit, right, and feature available to any
frozen participant under the plan is separately subject to the
requirements of this section. A plan satisfies paragraphs (b) and (c) of
this section with respect to a benefit, right, or feature available to
any frozen participant under the plan only if one or more of the
following requirements is satisfied:
(i) The benefit, right, or feature must be one that would satisfy
paragraphs (b) and (c) of this section if it were not available to any
employee currently benefiting under the plan.
(ii) The benefit, right, or feature must be one that would satisfy
paragraphs (b) and (c) of this section if all frozen participants were
treated as employees currently benefiting under the plan.
(iii) No change in the availability of the benefit, right, or
feature may have been made that is first effective in the current plan
year with respect to a frozen participant.
(iv) Any change in the availability of the benefit, right, or
feature that is first effective in the current plan year with respect to
a frozen participant must be made in a nondiscriminatory manner. Thus,
any expansion in the availability of the benefit, right, or feature to
any highly compensated frozen participant must be applied on a
consistent basis to all nonhighly compensated frozen participants.
Similarly, any contraction in the availability of the benefit, right, or
feature that affects any nonhighly compensated frozen participant must
be applied on a consistent basis to all highly compensated frozen
participants.
(3) Early retirement window benefits. If a benefit, right, or
feature meets the definition of an early retirement window benefit in
Sec. 1.401(a)(4)-3(f)(4)(iii) (or would meet that definition if the
definition applied to all benefits, rights, and features), the benefit,
right, or feature is disregarded for purposes of applying this section
with respect to an employee for all plan years other than the first plan
year in which the benefit is currently available to the employee.
(4) Permissive aggregation of certain benefits, rights, or
features--(i) General rule. An optional form of benefit, ancillary
benefit, or other right or feature may be aggregated with another
optional form of benefit, ancillary benefit, or other right or feature,
respectively, and the two may be treated as a single optional form of
benefit, ancillary benefit, or other right or feature, if both of the
following requirements are satisfied:
(A) One of the two optional forms of benefit, ancillary benefit, or
other rights or features must in all cases be of inherently equal or
greater value than the other. For this purpose, one benefit, right, or
feature is of inherently equal or greater value than another benefit,
right, or feature only if, at any time and under any conditions, it is
impossible for any employee to receive a smaller amount or a less
valuable right under the first benefit, right, or feature than under the
second benefit, right, or feature.
(B) The optional form of benefit, ancillary benefit, or other right
or feature of inherently equal or greater 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
[[Page 133]]
same terms to all employees, except that, for employees in Division S, a
five-percent discount factor is applied and, for employees of Division
T, a seven-percent discount factor is applied. Under paragraph (e)(1) of
this section, the single sum optional form of benefit constitutes two
separate optional forms of benefit. Assume that the single sum optional
form of benefit available to employees of Division S separately
satisfies paragraphs (b) and (c) of this section without taking into
account this paragraph (d)(4). Because a lower discount factor is
applied in determining the single sum optional form of benefit available
to employees of Division S than is applied in determining the single sum
optional form of benefit available to employees of Division T, the first
single sum optional form of benefit is of inherently greater value than
the second single sum optional form of benefit. Under these facts, these
two single sum optional forms of benefit may be aggregated and treated
as a single optional form of benefit for purposes of this section.
Example 2. The facts are the same as in Example 1, except that, in
order to receive the single sum optional form of benefit, employees of
Division S (but not employees of Division T) must have completed at
least 20 years of service. The single sum optional form of benefit
available to employees of Division S is not of inherently equal or
greater value than the single sum optional form of benefit available to
employees of Division T, because an employee of Division S who
terminates employment with less than 20 years of service would receive a
smaller single sum amount (i.e., zero) than a similarly-situated
employee of Division T who terminates employment with less than 20 years
of service. Under these facts, the two single sum optional forms of
benefit may not be aggregated and treated as a single optional form of
benefit for purposes of this section.
(5) Certain spousal benefits. In the case of a plan that includes
two or more plans that have been permissively aggregated under Sec.
1.410(b)-7(d), the aggregated plan satisfies this section with respect
to the availability of any nonsubsidized qualified joint and survivor
annuities, qualified preretirement survivor annuities, or spousal death
benefits described in section 401(a)(11), if each plan that is part of
the aggregated plan satisfies section 401(a)(11). Whether a benefit is
considered subsidized for this purpose may be determined using any
reasonable actuarial assumptions. For purposes of this paragraph (d)(5),
a qualified joint and survivor annuity, qualified preretirement survivor
annuity, or spousal death benefit is deemed to be nonsubsidized if it is
provided under a defined contribution plan.
(6) Special ESOP rules. An ESOP does not fail to satisfy paragraphs
(b) and (c) of this section merely because it makes an investment
diversification right or feature or a distribution option available
solely to all qualified participants (within the meaning of section
401(a)(28)(B)(iii)), or merely because the restrictions of section
409(n) apply to certain individuals.
(7) Special testing rule for unpredictable contingent event
benefits. A benefit, right, or feature that is contingent on the
occurrence of an unpredictable contingent event (within the meaning of
section 412(l)(7)(B)(ii)) is tested under this section as if the event
had occurred. Thus, the current availability of a benefit that becomes
an optional form of benefit upon the occurrence of an unpredictable
contingent event is tested by deeming the event to have occurred and by
disregarding age and service conditions on the eligibility for that
benefit to the extent permitted for optional forms of benefit under
paragraph (b)(2) of this section.
(e) Definitions--(1) Optional form of benefit--(i) General rule. The
term optional form of benefit means a distribution alternative
(including the normal form of benefit) that is available under a plan
with respect to benefits described in section 411(d)(6)(A) or a
distribution alternative that is an early 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
[[Page 134]]
rights, differences in eligibility requirements, or the portion of the
benefit to which the distribution alternative applies.
(ii) Exceptions--(A) Differences in benefit formula or accrual
method. A distribution alternative available under a defined benefit
plan does not fail to be a single optional form of benefit merely
because the benefit formulas, accrual methods, or other factors
(including service-computation methods and definitions of compensation)
underlying, or the manner in which employees vest in, the accrued
benefit that is paid in the form of the distribution alternative are
different for different employees to whom the distribution alternative
is available. Notwithstanding the foregoing, differences in the normal
retirement ages of employees or in the form in which the accrued benefit
of employees is payable at normal retirement age under a plan are taken
into account in determining whether a distribution alternative
constitutes one or more optional forms of benefit.
(B) Differences in allocation formula. A distribution alternative
available under a defined contribution plan does not fail to be a single
optional form of benefit merely because the allocation formula or other
factors (including service-computation methods, definitions of
compensation, and the manner in which amounts described in Sec.
1.401(a)(4)-2(c)(2)(iii) are allocated) underlying, or the manner in
which employees vest in, the accrued benefit that is paid in the form of
the distribution alternative are different for different employees to
whom the distribution alternative is available.
(C) Distributions subject to section 417(e). A distribution
alternative available under a defined benefit plan does not fail to be a
single optional form of benefit merely because, in determining the
amount of a distribution, the plan applies a lower interest rate to
determine the distribution for employees with a vested accrued benefit
having an actuarial present value not in excess of $25,000, as required
by section 417(e)(3) and Sec. 1.417(e)-1.
(D) Differences attributable to uniform normal retirement age. A
distribution alternative available under a defined benefit plan does not
fail to be a single optional form of benefit, to the extent that the
differences are attributable to differences in normal retirement dates
among employees, provided that the differences do not prevent the
employees from having the same uniform normal retirement age under the
definition of uniform normal retirement age in Sec. 1.401(a)(4)-12.
(iii) Examples. The following examples illustrate the rules in this
paragraph (e)(1):
Example 1. Plan A is a defined benefit plan that benefits all
employees of Divisions S and T. The plan offers a qualified joint and
50-percent survivor annuity at normal retirement age, calculated by
multiplying an employee's single life annuity payment by a factor. For
an employee of Division S whose benefit commences at age 65, the plan
provides a factor of 0.90, but for a similarly-situated employee of
Division T the plan provides a factor of 0.85. The qualified joint and
survivor annuity is not available to employees of Divisions S and T on
substantially the same terms, and thus it constitutes two separate
optional forms of benefit.
Example 2. Plan B is a defined benefit plan that benefits all
employees of Divisions U and V. The plan offers a single sum
distribution alternative available on the same terms and determined
using the same actuarial assumptions, to all employees. However,
different benefit formulas apply to employees of each division. Under
the exception provided in paragraph (e)(1)(ii)(A) of this section, the
single sum optional form of benefit available to employees of Division U
is not a separate optional form of benefit from the single sum optional
form of benefit available to employees of Division V.
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.
[[Page 135]]
(2) Ancillary benefit. The term ancillary benefit means social
security supplements (other than QSUPPs), disability benefits not in
excess of a qualified disability benefit described in section 411(a)(9),
ancillary life insurance and health insurance benefits, death benefits
under a defined contribution plan, preretirement death benefits under a
defined benefit plan, shut-down benefits not protected under section
411(d)(6), and other similar benefits. Different ancillary benefits
exist if an ancillary benefit is not available on substantially the same
terms as another ancillary benefit. Principles similar to those in
paragraph (e)(1)(ii) of this section apply in making this determination.
(3) Other right or feature--(i) General rule. The term other right
or feature generally means any right or feature applicable to employees
under the plan. Different rights or features exist if a right or feature
is not available on substantially the same terms as another right or
feature.
(ii) Exceptions to definition of other right or feature.
Notwithstanding paragraph (e)(3)(i) of this section, a right or feature
is not considered an other right or feature if it--
(A) Is an optional form of benefit or an ancillary benefit under the
plan;
(B) Is one of the terms that are taken into account in determining
whether separate optional forms of benefit or ancillary benefits exist,
or that would be taken into account but for paragraph (e)(1)(ii) of this
section (e.g., benefit formulas or the manner in which benefits vest);
or
(C) Cannot reasonably be expected to be of meaningful value to an
employee (e.g., administrative details).
(iii) Examples. Other rights and features include, but are not
limited to--
(A) Plan loan provisions (other than those relating to a
distribution of an employee's accrued benefit upon default under a
loan);
(B) The right to direct investments;
(C) The right to a particular form of investment, including, for
example, a particular class or type of employer securities (taking into
account, in determining whether different forms of investment exist, any
differences in conversion, dividend, voting, liquidation preference, or
other rights conferred under the security);
(D) The right to make each rate of elective contributions described
in Sec. 1.401(k)-6 (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(a)(3) (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(a)(2) (determining the rate using the
amount of matching, elective, and after-tax employee contributions
determined after any corrections under Sec. Sec. 1.401(k)-2(b)(1)(i),
1.401(m)-2(b)(1)(i), 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; T.D. 9169,
69 FR 78153, Dec. 29, 2004]
[[Page 136]]
Sec. 1.401(a)(4)-5 Plan amendments and plan terminations.
(a) Introduction--(1) Overview. This paragraph (a) provides rules
for determining whether the timing of a plan amendment or series of
amendments has the effect of discriminating significantly in favor of
HCEs or former HCEs. For purposes of this section, a plan amendment
includes, for example, the establishment or termination of the plan, and
any change in the benefits, rights, or features, benefit formulas, or
allocation formulas under the plan. Paragraph (b) of this section sets
forth additional requirements that must be satisfied in the case of a
plan termination.
(2) Facts-and-circumstances determination. Whether the timing of a
plan amendment or series of plan amendments has the effect of
discriminating significantly in favor of HCEs or former HCEs is
determined at the time the plan amendment first becomes effective for
purposes of section 401(a), based on all of the relevant facts and
circumstances. These include, for example, the relative numbers of
current and former HCEs and NHCEs affected by the plan amendment, the
relative length of service of current and former HCEs and NHCEs, the
length of time the plan or plan provision being amended has been in
effect, and the turnover of employees prior to the plan amendment. In
addition, the relevant facts and circumstances include the relative
accrued benefits of current and former HCEs and NHCEs before and after
the plan amendment and any additional benefits provided to current and
former HCEs and NHCEs under other plans (including plans of other
employers, if relevant). In the case of a plan amendment that provides
additional benefits based on an employee's service prior to the
amendment, the relevant facts and circumstances also include the
benefits that employees and former employees who do not benefit under
the amendment would have received had the plan, as amended, been in
effect throughout the period on which the additional benefits are based.
(3) Safe harbor for certain grants of benefits for past periods. The
timing of a plan amendment that credits (or increases benefits
attributable to) years of service for a period in the past is deemed not
to have the effect of discriminating significantly in favor of HCEs or
former HCEs if the period for which the service credit (or benefit
increase) is granted does not exceed the five years immediately
preceding the year in which the amendment first becomes effective, the
service credit (or benefit increase) is granted on a reasonably uniform
basis to all employees, benefits attributable to the period are
determined by applying the current plan formula, and the service
credited is service (including pre-participation or imputed service)
with the employer or a previous employer that may be taken into account
under Sec. 1.401(a)(4)-11(d)(3) (without regard to Sec. 1.401(a)(4)-
11(d)(3)(i)(B)). However, this safe harbor is not available if the plan
amendment granting the service credit (or increasing benefits) is part
of a pattern of amendments that has the effect of discriminating
significantly in favor of HCEs or former HCEs.
(4) Examples. The following examples illustrate the rules in this
paragraph (a):
Example 1. Plan A is a defined benefit plan that covered both HCEs
and NHCEs for most of its existence. The employer decides to wind up its
business. In the process of ceasing operations, but at a time when the
plan covers only HCEs, Plan A is amended to increase benefits and
thereafter is terminated. The timing of this plan amendment has the
effect of discriminating significantly in favor of HCEs.
Example 2. Plan B is a defined benefit plan that provides a social
security supplement that is not a QSUPP. After substantially all of the
HCEs of the employer have benefited from the supplement, but before a
substantial number of NHCEs have become eligible for the supplement,
Plan B is amended to reduce significantly the amount of the supplement.
The timing of this plan amendment 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.
[[Page 137]]
Example 4. Plan D provides for a benefit of one percent of average
annual compensation per year of service. Ten years after Plan D is
adopted, it is amended to provide a benefit of two percent of average
annual compensation per year of service, including years of service
prior to the amendment. The amendment is effective only for employees
currently employed at the time of the amendment. The ratio of HCEs to
former HCEs is significantly higher than the ratio of NHCEs to former
NHCEs. In the absence of any additional factors, the timing of this plan
amendment has the effect of discriminating significantly in favor of
HCEs.
Example 5. The facts are the same as in Example 4, except that, in
addition, the years of prior service are equivalent between HCEs and
NHCEs who are current employees, and the group of current employees with
prior service would satisfy the nondiscriminatory classification test of
Sec. 1.410(b)-4 in the current and all prior plan years for which past
service credit is granted. The timing of this plan amendment does not
have the effect of discriminating significantly in favor of HCEs or
former HCEs.
Example 6. Employer V maintains Plan E, an accumulation plan. In
1994, Employer V amends Plan E to provide that the compensation used to
determine an employee's benefit for all preceding plan years shall not
be less than the employee's average annual compensation as of the close
of the 1994 plan year. The years of service and percentage increases in
compensation for HCEs are reasonably comparable to those of NHCEs. In
addition, the ratio of HCEs to former HCEs is reasonably comparable to
the ratio of NHCEs to former NHCEs. The timing of this plan amendment
does not have the effect of discriminating significantly in favor of
HCEs or former HCEs.
Example 7. Employer W currently has six nonexcludable employees, two
of whom, H1 and H2, are HCEs, and the remaining four of whom, N1 through
N4, are NHCEs. The ratio of HCEs to former HCEs is significantly higher
than the ratio of NHCEs to former NHCEs. Employer W establishes Plan F,
a defined benefit plan providing a benefit of one percent of average
annual compensation per year of service, including years of service
prior to the establishment of the plan. H1 and H2 each have 15 years of
prior service, N1 has nine years of past service, N2 has five years, N3
has three years, and N4 has one year. The timing of this plan
establishment has the effect of discriminating significantly in favor of
HCEs.
Example 8. Assume the same facts as in Example 7, except that N1
through N4 were hired in the current year, and Employer W never employed
any NHCEs prior to the current year. Thus, no NHCEs would have received
additional benefits had Plan F been in existence during the preceding 15
years. The timing of this plan establishment does not have the effect of
discriminating significantly in favor of HCEs or former HCEs.
Example 9. The facts are the same as in Example 7, except that Plan
F limits the grant of past service credit to five years, and the grant
of past service otherwise satisfies the safe harbor in paragraph (a)(3)
of this section. The timing of this plan establishment is deemed not to
have the effect of discriminating significantly in favor of HCEs or
former HCEs.
Example 10. The facts are the same as in Example 9, except that,
five years after the establishment of Plan F, Employer W amends the plan
to provide a benefit equal to two percent of average annual compensation
per year of service, taking into account all years of service since the
establishment of the plan. The ratio of HCEs to former HCEs who
terminated employment during the five-year period since the
establishment of the plan is significantly higher than the ratio of
NHCEs to former NHCEs who terminated employment during the five-year
period since the establishment of the plan. Although the amendment
described in this example might separately satisfy the safe harbor in
paragraph (a)(3) of this section, the safe harbor is not available with
respect to the amendment because, under these facts, the amendment is
part of a pattern of amendments that has the effect of discriminating
significantly in favor of HCEs.
Example 11. Employer Y maintains Plan G, a defined benefit plan,
covering all its employees. In 1995, Employer Y acquires Division S from
Employer Z. Some of the employees of Division S had been covered under a
defined benefit plan maintained by Employer Z. Soon after the
acquisition, Employer Y amends Plan G to cover all employees of Division
S and to credit those who were in Division S's defined benefit plan with
years of service for years of employment with Employer Z. Because the
timing of the plan amendment was determined by the timing of the
transaction, the timing of this plan amendment does not have the effect
of discriminating significantly in favor of HCEs or former HCEs. See
also Sec. 1.401(a)(4)-11(d)(3) for other rules regarding the crediting
of pre-participation service.
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
[[Page 138]]
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 Sec. Sec. 1.401(a)(4)-1 through 1.401(a)(4)-13
apply to the plan under Sec. 1.401(a)(4)-13(a) or (b). This paragraph
(b) does not apply if the Commissioner determines that such provisions
are not necessary to prevent the prohibited discrimination that may
occur in the event of an early termination of the plan. The restrictions
in this paragraph (b) apply to a plan within the meaning of Sec.
1.410(b)-7(b) (i.e., a section 414(l) plan). Any plan containing a
provision described in this paragraph (b) satisfies section 411(d)(2)
and does not fail to satisfy section 411(a) or (d)(3) merely because of
the provision.
(2) Restriction of benefits upon plan termination. A plan must
provide that, in the event of plan termination, the benefit of any HCE
(and any former HCE) is limited to a benefit that is nondiscriminatory
under section 401(a)(4).
(3) Restrictions on distributions--(i) General rule. A plan must
provide that, in any year, the payment of benefits to or on behalf of a
restricted employee shall not exceed an amount equal to the payments
that would be made to or on behalf of the restricted employee in that
year under--
(A) A straight life annuity that is the actuarial equivalent of the
accrued benefit and other benefits to which the restricted employee is
entitled under the plan (other than a social security supplement); and
(B) A social security supplement, if any, that the restricted
employee is entitled to receive.
(ii) Restricted employee defined. For purposes of this paragraph
(b), the term restricted employee generally means any HCE or former HCE.
However, an HCE or former HCE need not be treated as a restricted
employee in the current year if the HCE or former HCE is not one of the
25 (or a larger number chosen by the employer) nonexcludable employees
and former employees of the employer with the largest amount of
compensation in the current or any prior year. Plan provisions defining
or altering this group can be amended at any time without violating
section 411(d)(6).
(iii) Benefit defined. For purposes of this paragraph (b), the term
benefit includes, among other benefits, loans in excess of the amounts
set forth in section 72(p)(2)(A), any periodic income, any withdrawal
values payable to a living employee or former employee, and any death
benefits not provided for by insurance on the employee's or former
employee's life.
(iv) Nonapplicability in certain cases. The restrictions in this
paragraph (b)(3) do not apply, however, if any one of the following
requirements is satisfied:
(A) After taking into account payment to or on behalf of the
restricted employee of all benefits payable to or on behalf of that
restricted employee under the plan, the value of plan assets must equal
or exceed 110 percent of the value of current liabilities, as defined in
section 412(l)(7).
(B) The value of the benefits payable to or on behalf of the
restricted employee must be less than one percent of the value of
current liabilities before distribution.
(C) The value of the benefits payable to or on behalf of the
restricted employee must not exceed the amount described in section
411(a)(11)(A) (restrictions on certain mandatory distributions).
(v) Determination of current liabilities. For purposes of this
paragraph (b), any reasonable and consistent method may be used for
determining the value of current liabilities and the value of plan
assets.
(4) Operational restrictions on certain money purchase pension
plans. A money purchase pension plan that has an accumulated funding
deficiency, within the meaning of section 412(a), or an 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]
[[Page 139]]
Sec. 1.401(a)(4)-6 Contributory defined benefit plans.
(a) Introduction. This section provides rules necessary for
determining whether a contributory DB plan satisfies the
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2).
Paragraph (b) of this section provides rules for determining the amount
of benefits derived from employer contributions (employer-provided
benefits) under a contributory DB plan for purposes of determining
whether the plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to
such amounts. Paragraph (c) of this section provides the exclusive rules
for determining whether a contributory DB plan satisfies Sec.
1.401(a)(4)-1(b)(2) with respect to the amount of benefits derived from
employee contributions not allocated to separate accounts (employee-
provided benefits). See Sec. 1.401(a)(4)-1(b)(2)(ii)(B) for the
exclusive tests applicable to employee contributions allocated to
separate accounts under a section 401(m) plan.
(b) Determination of employer-provided benefit--(1) General rule. An
employee's employer-provided benefit under a contributory DB plan for
purposes of section 401(a)(4) equals the difference between the
employee's total benefit and the employee's employee-provided benefit
under the plan. The rules of section 411(c) generally must be used to
determine the employee's employer-provided benefit for this purpose.
However, paragraphs (b)(2) through (b)(6) of this section provide
alternative methods for determining the employee's employer-provided
benefit.
(2) Composition-of-workforce method--(i) General rule. A
contributory DB plan that satisfies paragraph (b)(2)(ii) (A) and (B) of
this section may determine employees' employer-provided benefit rates
under the rules of paragraph (b)(2)(iii) of this section.
(ii) Eligibility requirements--(A) Uniform rate of employee
contributions. A contributory DB plan satisfies this paragraph
(b)(2)(ii)(A) if all employees make employee contributions at the same
rate, expressed as a percentage of plan year compensation (the employee
contribution rate). A plan does not fail to satisfy this paragraph
(b)(2)(ii)(A) merely because it eliminates employee contributions for
all employees with plan year compensation below a specified contribution
breakpoint that is either a stated dollar amount or a stated percentage
of covered compensation (within the meaning of Sec. 1.401(l)-1(c)(7));
or merely because all employees make employee contributions at the same
rate (expressed as a percentage of plan year compensation) with respect
to plan year compensation up to the contribution breakpoint (base
employee contribution rate) and at a higher rate (expressed as a
percentage of plan year compensation) that is the same for all employees
with respect to plan year compensation above the contribution breakpoint
(excess employee contribution rate). A plan described in paragraph
(c)(4)(i) of this section that satisfies paragraph (c)(4)(iii) of this
section is deemed to satisfy this paragraph.
(B) Demographic requirements--(1) In general. A contributory DB plan
satisfies this paragraph (b)(2)(ii)(B) if it satisfies either of the
demographic tests in paragraph (b)(2)(ii)(B) (2) or (3) of this section.
(2) Minimum percentage test. This test is satisfied only if more
than 40 percent of the NHCEs in the plan have attained ages at least
equal to the plan's target age, and more than 20 percent of the NHCEs in
the plan have attained ages at least equal to the average attained age
of the HCEs in the plan. For this purpose, a plan's target age is the
lower of age 50 or the average attained age of the HCEs in the plan
minus X years, where X equals 20 minus the product of five times the
employee contribution rate under the plan. In no case, however, may X
years be fewer than zero (0) years. Thus, for example, if the average
attained age of the HCEs in the plan is 53 and the employee contribution
rate is two percent of plan year compensation, the plan's target age is
43 years (i.e., 53-(20-(5x2))).
(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
[[Page 140]]
of the HCEs in the plan. Attained ages must be determined as of the
beginning of the plan year. In lieu of determining the actual
distribution of the attained ages of the HCEs, an employer may assume
that 50 percent of all HCEs have attained ages at least equal to the
average attained age of the HCEs.
(iii) Determination of employer-provided benefit--(A) Safe harbor
plans other than section 401(l) plans. For purposes of applying the
exception to the safe harbor in Sec. 1.401(a)(4)-3(b)(6)(viii) with
respect to employer-provided benefits under a plan other than a section
401(l) plan, the employee's entire accrued benefit is treated as
employer-provided.
(B) Section 401(l) plans--(1) General rule. For purposes of applying
the exception to the safe harbor in Sec. 1.401(a)(4)-3(b)(6)(viii) with
respect to employer-provided benefits under a section 401(l) plan, an
employee's base benefit percentage and excess benefit percentage are
reduced, or an employee's gross benefit percentage is reduced, by
subtracting the product of the employee contribution rate and the factor
determined under paragraph (b)(2)(iv) of this section from the
respective percentages for the plan year. For this purpose, the employee
contribution rate is the highest rate of employee contributions
applicable to any potential level of plan year compensation for that
plan year under the plan.
(2) Excess plans with varying contribution rates. In the case of a
defined benefit excess plan described in the second sentence of
paragraph (b)(2)(ii)(A) of this section, solely for purposes of reducing
an employee's base benefit percentage as required under paragraph
(b)(2)(iii)(B)(1) of this section, it may be assumed that the employee's
employee contribution rate equals the weighted average of the base
employee contribution rate and the excess employee contribution rate. In
determining this weighted average, the weight of the base employee
contribution rate is equal to a fraction, the numerator of which is the
lesser of the integration level and the contribution breakpoint and the
denominator of which is the integration level. The weight of the excess
employee contribution rate is equal to the difference between one and
the weight of the base employee contribution rate.
(3) Offset plans with varying contribution rates. In the case of an
offset plan described in the second sentence of paragraph (b)(2)(ii)(A)
of this section, an equivalent adjustment to the alternative method in
paragraph (b)(2)(iii)(B)(2) of this section may be made to the offset
percentage.
(C) Employer-provided benefits under the general test. For purposes
of applying the general test of Sec. 1.401(a)(4)-3(c) with respect to
employer-provided benefits, an employee's normal and most valuable
accrual rates otherwise determined under Sec. 1.401(a)(4)-3(d) (without
applying any of the options under Sec. 1.401(a)(4)-3(d)(3) other than
the fresh-start alternative of Sec. 1.401(a)(4)-3(d)(3)(iii)) are each
reduced by subtracting the product of the employee's contributions
(expressed as a percentage of plan year compensation) and the factor
determined under paragraph (b)(2)(iv) of this section from the
respective accrual rates. A plan may then apply the optional rules in
Sec. 1.401(a)(4)-3(d)(3) (i) and (ii) to this resulting accrual rate.
(D) Additional limitation. A plan may not use the composition-of-
workforce method provided in this paragraph (b)(2) to determine an
employee's base benefit percentage, excess benefit percentage, gross
benefit percentage, offset percentage, or accrual rates unless employee
contributions have been made at the same rate (or rates) throughout the
period after the fresh-start date or throughout the measurement period
used to determine accrual rates.
(iv) Determination of plan factor. The factor for a plan is
determined under the following table based on the average entry age of
the employees in the 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
[[Page 141]]
averaged over a specified period not exceeding five consecutive years
(or the employee's entire period of employment with the employer, if
shorter).
Table of Factors
------------------------------------------------------------------------
Factors
--------------------------
Average
Average entry age compensation Other
benefit formulas
formula
------------------------------------------------------------------------
Less than 30................................. 0.5 0.75
30 to 40..................................... 0.4 0.6
Over 40...................................... 0.2 0.3
------------------------------------------------------------------------
(v) Examples. The following examples illustrate the rules of this
paragraph (b)(2):
Example 1. Plan A is a contributory DB plan that is a defined
benefit excess plan providing a benefit equal to 2.0 percent of
employees' average annual compensation at or below covered compensation,
plus 2.5 percent of average annual compensation above covered
compensation, times years of service up to 35. Under the plan, average
annual compensation is determined using a five-consecutive-year period
for purposes of Sec. 1.401(a)(4)-3(e)(2). The plan requires employee
contributions at a rate of four percent of plan year compensation for
all employees. Assume that the plan satisfies the demographic
requirements of paragraph (b)(2)(ii)(B) of this section. Under these
facts, the plan satisfies the eligibility requirements of paragraph
(b)(2)(ii) of this section. Assume, further, that the average attained
age for all employees in the plan is 55, and that the average years of
participation of all employees in the plan is 10. The average entry age
for the plan is therefore 45, and, accordingly, the appropriate factor
under the table is 0.2. Thus, in applying the safe harbor requirements
of Sec. 1.401(a)(4)-3(b) to this plan for the plan year (including the
requirements of Sec. 1.401(l)-3), the employee's base benefit
percentage and excess benefit percentage are each reduced by 0.8 percent
(4 percentx0.2) and equal 1.2 percent and 1.7 percent, respectively.
Example 2. The facts are the same as in Example 1, except that the
employee contribution rate is two percent of plan year compensation up
to the covered compensation level, and four percent for plan year
compensation at or above that contribution breakpoint. The employer
elects to apply the alternative method in paragraph (b)(2)(iii)(B)(2) of
this section to determine the reduction in the base benefit percentage.
Because the contribution breakpoint is equal to the integration level,
the weight of the employee contribution rate below the contribution
breakpoint is 100 percent, and the weight of the employee contribution
rate above the contribution breakpoint is zero. Thus, the weighted
average of employee contribution rates is two percent. Under the
alternative method in paragraph (b)(2)(iii)(B)(2) of this section, the
reduction in the employee's base benefit percentage is 0.4. In applying
the safe harbor requirements of Sec. 1.401(a)(4)-3(b) to this plan
(including the requirements of Sec. 1.401(l)-3), the employee's base
benefit percentage is 1.6 percent, and the employee's excess benefit
percentage is 1.7.
Example 3. The facts are the same as in Example 1, except that the
employee contribution rate is two percent of plan year compensation up
to 50 percent of the covered compensation level, and four percent for
plan year compensation at or above that contribution breakpoint. Because
the contribution breakpoint is equal to 50 percent of the integration
level, the weight of the employee contribution rate below the
contribution breakpoint is 50 percent, and the weight of the employee
contribution rate above the contribution breakpoint is 50 percent. Thus,
the weighted average of employee contribution rates is three percent.
Under the alternative method in paragraph (b)(2)(iii)(B)(2) of this
section, the reduction in the employee's base benefit percentage is 0.6.
In applying the safe harbor requirements of Sec. 1.401(a)(4)-3(b) to
this plan (including the requirements of Sec. 1.401(l)-3), the
employee's base benefit percentage is 1.4 percent, and the employee's
excess benefit percentage is 1.7.
Example 4. The facts are the same as in Example 1, except that the
plan is tested using the general test in Sec. 1.401(a)(4)-3(c). Assume
Employee M benefits under Plan A and has a normal accrual rate for the
plan year (calculated with respect to Employee M's total accrued
benefit) of 2.2 percent of average annual compensation. In applying the
general test in Sec. 1.401(a)(4)-3(c) with respect to employer-provided
benefits, this rate is reduced by 0.8 to yield a normal accrual rate of
1.4 percent. This rate may then be adjusted using either of the optional
rules in Sec. 1.401(a)(4)-3(d)(3)(i) or (ii).
(3) Minimum-benefit method--(i) Application of uniform factors. A
contributory DB plan that satisfies the uniform rate requirement of
paragraph (b)(2)(ii)(A) 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.
[[Page 142]]
(ii) Minimum benefit requirement. This requirement is satisfied if
the plan provides that, in plan years beginning on or after the
effective date of these regulations, as set forth in Sec. 1.401(a)(4)-
13(a) and (b), each employee will accrue a benefit that equals or
exceeds the sum of--
(A) The accrued benefit derived from employee contributions made for
plan years beginning on or after the effective date of these
regulations, determined in accordance with section 411(c); and
(B) Fifty percent of the total benefit accrued in plan years
beginning on or after the effective date of these regulations, as
determined under the plan benefit formula without regard to that portion
of the formula designed to satisfy the minimum benefit requirement of
this paragraph (b)(3)(ii).
(iii) Example. The following example illustrates the minimum-benefit
method of this paragraph (b)(3):
Example. Plan A is contributory DB plan. For the plan year beginning
in 1994, Employee M participates in Plan A and accrues a benefit under
the terms of the plan (without regard to the minimum benefit requirement
of paragraph (b)(3)(ii) of this section) of $3,000. The portion of
Employee M's benefit accrual for the plan year beginning in 1994 derived
from employee contributions is $2,000, determined by applying the rules
of section 411(c) to such contributions. The requirement of paragraph
(b)(3)(ii) of this section is not satisfied for the plan year beginning
in 1994 unless the plan provides that Employee M's benefit accrual for
the plan year beginning in 1994 is equal to $3,500 ($2,000+(50
percentx$3,000)).
(4) Grandfather rule for plans in existence on May 14, 1990. A
contributory DB plan that satisfies paragraph (c)(4) of this section may
determine an employee's employer-provided benefit by subtracting from
the employee's total benefit the employee-provided benefits determined
using any reasonable method set forth in the plan, provided that it is
the same method used in determining whether the plan satisfies paragraph
(c)(4)(ii)(D) of this section.
(5) Government-plan method. A contributory DB plan that is
established and maintained for its employees by the government of any
state or political subdivision or by any agency or instrumentality
thereof may treat an employee's total benefit as entirely employer-
provided.
(6) Cessation of employee contributions. If a contributory DB plan
provides that no employee contributions may be made to the plan after
the last day of the first plan year beginning on or after the effective
date of these regulations, as set forth in Sec. 1.401(a)(4)-13 (a) and
(b), the plan may treat an employee's total benefit as entirely
employer-provided.
(c) Rules applicable in determining whether employee-provided
benefits are nondiscriminatory in amount--(1) In general. A contributory
DB plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to the amount
of employee-provided benefits for a plan year only if the plan satisfies
the requirements of paragraph (c)(2), (c)(3), or (c)(4) of this section
for the plan year. This requirement applies regardless of the method
used to determine the amount of employer-provided benefits under
paragraph (b) of this section.
(2) Same rate of contributions. This requirement is satisfied for a
plan year if the employee contribution rate (within the meaning of
paragraph (b)(2)(ii)(A) of this section) is the same for all employees
for the plan year.
(3) Total-benefits method. This requirement is satisfied for a plan
year if--
(i) The total benefits (i.e., the sum of employer-provided and
employee-provided benefits) under the plan would satisfy Sec.
1.401(a)(4)-3 if all benefits were treated as employer-provided
benefits; and
(ii) The plan's contribution requirements satisfy paragraph
(b)(2)(ii)(A) of this section.
(4) Grandfather rules for plans in existence on May 14, 1990--(i) In
general. This requirement is satisfied for a plan year if the plan
contained provisions as of May 14, 1990, that meet the requirements of
paragraph (c)(4)(ii) or (c)(4)(iii) of this section.
(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.
[[Page 143]]
(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 Sec. Sec. 1.401(a)(4)-2(b)(2) and 1.401(a)(4)-3(b),
permitted disparity may be taken into account only by satisfying section
401(l) in form in accordance with Sec. 1.401(l)-2 or 1.401(l)-3,
respectively. For purposes of the general tests of Sec. Sec.
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
[[Page 144]]
paragraph (b)(4) (i) and (ii) of this section, respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.012
(4) Definitions. In applying this paragraph (b), the following
definitions govern--
(i) Allocations. Allocations means the amount determined by
multiplying the employee's plan year compensation by the employee's
unadjusted allocation rate.
(ii) Permitted disparity rate--(A) General rule. Permitted disparity
rate means the rate in effect as of the beginning of the plan year under
section 401(l)(2)(A)(ii) (e.g., 5.7 percent for plan years beginning in
1990).
(B) Cumulative permitted disparity limit. Notwithstanding paragraph
(b)(4)(ii)(A) of this section, the permitted disparity rate is zero for
an employee who has benefited under a defined benefit plan taken into
account under Sec. 1.401(l)-5(a)(3) for a plan year that begins on or
after one year from the first day of the first plan year to which these
regulations apply, as set forth in Sec. 1.401(a)(4)-13 (a) and (b), if
imputing permitted disparity would result in a cumulative disparity
fraction for the employee, as defined in Sec. 1.401(l)-5(c)(2), that
exceeds 35. See Sec. 1.401(l)-5(c)(1) for special rules for determining
whether an employee has benefited under a defined benefit plan for this
purpose.
(iii) Taxable wage base. Taxable wage base means the taxable wage
base, as defined in Sec. 1.401(l)-1(c)(32), in effect as of the
beginning of the plan year.
(iv) Unadjusted allocation rate. Unadjusted allocation rate means
the employee's allocation rate determined under Sec. 1.401(a)(4)-
2(c)(2)(i) for the plan year (expressed as a percentage of plan year
compensation), without imputing permitted disparity under this section.
(5) Example. The following example illustrates the rules in this
paragraph (b):
Example. (a) Employees M and N participate in a defined contribution
plan maintained by Employer X. Employee M has plan year compensation of
$30,000 in the 1990 plan year and has an unadjusted allocation rate of
five percent. Employee N has plan year compensation of $100,000 in the
1990 plan year and has an unadjusted allocation rate of eight percent.
The taxable wage base in 1990 is $51,300.
(b) Because Employee M's plan year compensation does not exceed the
taxable wage base, Employee M's A rate is 10 percent (2x5 percent), and
Employee M's B rate is 10.7 percent (5 percent+5.7 percent). Thus,
Employee M's adjusted allocation rate is 10 percent, the lesser of the A
rate and the B rate.
(c) Employee N's allocations are $8,000 (8 percentx$100,000).
Because Employee N's plan year compensation exceeds the taxable wage
base, Employee N's C rate is 10.76 percent ($8,000 divided by ($100,000-
(\1/2\x$51,300))), and Employee N's D rate is 10.92 percent (($8,000+
(5.7 percentx$51,300)) divided by $100,000). Thus, Employee N's adjusted
allocation rate is 10.76 percent, the lesser of the C rate and the D
rate.
(c) Adjusting accrual rates--(1) In general. The rules in this
paragraph (c) produce an adjusted accrual rate for each employee by
determining the excess benefit percentage under the hypothetical plan
formula that would yield the employer-provided accrual actually received
by the employee, if the plan took into account the full permitted
disparity under section 401(l)(3)(A) in 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-
[[Page 145]]
provided benefits under the plan satisfies the alternative safe harbor
for flat benefit plans under Sec. 1.401(a)(4)-3(b)(4)(i)(C)(3) or the
general test of Sec. 1.401(a)(4)-3(c), and to apply the average benefit
percentage test on the basis of benefits under Sec. 1.410(b)-5.
Paragraphs (c)(2) and (c)(3) of this section apply to employees whose
average annual compensation does not exceed and does exceed,
respectively, covered compensation, and paragraph (c)(4) of this section
provides definitions. Paragraph (c)(5) of this section provides a
special rule for employees with negative unadjusted accrual rates.
(2) Employees whose average annual compensation does not exceed
covered compensation. If an employee's average annual compensation does
not exceed the employee's covered compensation, the employee's adjusted
accrual rate is the lesser of the A rate and the B rate determined under
the formulas below, where the permitted disparity factor and the
unadjusted accrual rate are determined under paragraph (c)(4)(iii) and
(v) of this section, respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.013
(3) Employees whose average annual compensation exceeds covered
compensation. If an employee's average annual compensation exceeds the
employee's covered compensation, the employee's adjusted accrual rate is
the lesser of the C rate and D rate determined under the formulas below,
where the employer-provided accrual and the permitted disparity factor
are determined under paragraph (c)(4)(ii) and (iii) of this section,
respectively.
[GRAPHIC] [TIFF OMITTED] TC05OC91.014
(4) Definitions. For purposes of this paragraph (c), the following
definitions apply.
(i) Covered compensation. Covered compensation means covered
compensation as defined in Sec. 1.401(l)-1(c)(7). Notwithstanding Sec.
1.401(l)-1(c)(7)(iii), an employee's covered compensation must be
automatically adjusted each plan year for purposes of applying this
paragraph (c).
(ii) Employer-provided accrual. Employer-provided accrual means the
amount determined by multiplying the employee's average annual
compensation by the employee's unadjusted accrual rate.
(iii) Permitted disparity factor--(A) General rule. Permitted
disparity factor for an employee means the sum of the employee's annual
permitted disparity factors determined under paragraph (c)(4)(iii)(B) of
this section for each of the years in the measurement period used for
determining the employee's accrual rate in Sec. 1.401(a)(4)-3(d)(1),
divided by the employee's testing service during that measurement
period.
(B) Annual permitted disparity factor--(1) Definition. An employee's
annual permitted disparity factor is generally 0.75 percent adjusted,
pursuant to Sec. 1.401(l)-3(e), using as the age at which benefits
commence the lesser of age 65 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
[[Page 146]]
the employee's social security retirement age. An annual permitted
disparity factor that is less than the annual permitted disparity factor
described in the first sentence of this paragraph (c)(4)(iii)(B)(1) may
be used if it is a uniform percentage of that factor (e.g., 50 percent
of the annual permitted disparity factor) or a fixed percentage (e.g.,
0.65 percent) for all employees.
(2) Annual permitted disparity factor after 35 years. For purposes
of determining the sum described in paragraph (c)(4)(iii)(A) of this
section, the annual permitted disparity factor for each of the
employee's first 35 years of testing service is the amount described in
paragraph (c)(4)(iii)(B)(1) of this section, and the annual permitted
disparity factor in any subsequent year equals zero. This rule applies
regardless of whether the end of the measurement period extends beyond
an employee's first 35 years of testing service. Thus, for example, if
the measurement period is the current plan year and the employee
completed 35 years of testing service prior to the beginning of the
current plan year, under this paragraph (c)(4)(iii)(B)(2) the annual
permitted disparity factor in the current plan year (and hence the sum
of the annual permitted disparity factors for each year in the
measurement period) is zero.
(3) Cumulative permitted disparity limit. The 35 years used in
paragraph (c)(4)(iii)(B)(2) of this section must be reduced by the
employee's cumulative disparity fraction, as defined in Sec. 1.401(l)-
5(c)(2), but determined solely with respect to the employee's total
years of service under all plans taken into account under Sec.
1.401(l)-5(a)(3) during the measurement period, other than the plan
being tested.
(iv) Social security retirement age. Social security retirement age
means social security retirement age as defined in section 415(b)(8).
(v) Unadjusted accrual rate. Unadjusted accrual rate means the
normal or most valuable accrual rate, whichever is being determined for
the employee under Sec. 1.401(a)(4)-3(d), expressed as a percentage of
average annual compensation, without imputing permitted disparity under
this section.
(5) Employees with negative unadjusted accrual rates.
Notwithstanding the formulas in paragraph (c)(2) and (c)(3) of this
section, if an employee's unadjusted accrual rate is less than zero, the
employee's adjusted accrual rate is deemed to be the employee's
unadjusted accrual rate.
(6) Example. The following example illustrates the rules in this
paragraph (c):
Example. (a) Employees M and N participate in a defined benefit plan
that uses a normal retirement age of 65. The plan is being tested for
the plan year under Sec. 1.401(a)(4)-3(c), using unadjusted accrual
rates determined using a plan year measurement period under Sec.
1.401(a)(4)-3(d)(1)(iii)(A). Employee M has an unadjusted normal accrual
rate of 1.48 percent, average annual compensation of $21,000, and an
employer-provided accrual of $311 (1.48 percentx$21,000). Employee N has
an unadjusted normal accrual rate of 1.7 percent, average annual
compensation of $106,000, and an employer-provided accrual of $1,802
(1.7 percentx$106,000). The covered compensation of both Employees M and
N is $25,000, and social security retirement age for both employees is
65. Neither employee has testing service of more than 35 years and
neither has ever participated in another plan.
(b) Because Employee M's average annual compensation does not exceed
covered compensation, Employee M's A rate is 2.96 percent (2.0x1.48
percent), and Employee M's B rate is 2.23 percent (1.48 percent+0.75
percent). Thus, Employee M's adjusted accrual rate is 2.23 percent, the
lesser of the A rate and the B rate.
(c) Because Employee N's average annual compensation exceeds covered
compensation, Employee N's C rate is 1.93 percent ($1,802/($106,000-
(0.5x$25,000))), and Employee N's D rate is 1.88 percent (($1,802+(0.75
percentx$25,000))/$106,000). Thus, Employee N's adjusted accrual rate is
1.88 percent, the lesser of the C rate and the D rate.
(d) Rules of general application--(1) Eligible plans. The rules in
this section may be used only for those plans to which the permitted
disparity rules of section 401(l) are available. See Sec. 1.401(l)-
1(a)(3).
(2) Exceptions from consistency requirements. A plan does not fail
to satisfy the consistency requirements of Sec. 1.401(a)(4)-2(c)(2)(vi)
or Sec. 1.401(a)(4)-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
[[Page 147]]
because the plan does not impute disparity for any employees (including
self-employed individuals within the meaning of section 401(c)(1)) who
are not covered by any of the taxes under section 3111(a), section 3221,
or section 1401.
(3) Overall permitted disparity. The annual overall permitted
disparity limits of Sec. 1.401(l)-5(b) apply to the employer-provided
contributions and benefits for an employee under all plans taken into
account under Sec. 1.401(l)-5(a)(3). Thus, if an employee who benefits
under the plan for the current plan year also benefits under a section
401(l) plan for the plan year ending with or within the current plan
year, permitted disparity may not be imputed for that employee for the
plan year. See Sec. 1.401(l)-5(b)(9), Example 4. Similarly, if an
employee who benefits under the plan for the current plan year also
benefits under another plan of the employer for the plan year ending
with or within the current plan year, disparity may be imputed for that
employee under only one of the plans.
[T.D. 8485, 58 FR 46804, Sept. 3, 1993]
Sec. 1.401(a)(4)-8 Cross-testing.
(a) Introduction. This section provides rules for testing defined
benefit plans on the basis of equivalent employer-provided contributions
and defined contribution plans on the basis of equivalent employer-
provided benefits under Sec. 1.401(a)(4)-1(b)(2). Paragraphs (b)(1) and
(c)(1) of this section provide general tests for nondiscrimination based
on individual equivalent accrual or allocation rates determined under
paragraphs (b)(2) and (c)(2) of this section, respectively. Paragraphs
(b)(3), (c)(3), and (d) of this section provide additional safe-harbor
testing methods for target benefit plans, cash balance plans, and
defined benefit plans that are part of floor-offset arrangements,
respectively, that generally may be satisfied on a design basis.
(b) Nondiscrimination in amount of benefits provided under a defined
contribution plan--(1) General rule and gateway--(i) General rule.
Equivalent benefits under a defined contribution plan (other than an
ESOP) are nondiscriminatory in amount for a plan year if--
(A) The plan would satisfy Sec. 1.401(a)(4)-2(c)(1) for the plan
year if an equivalent accrual rate, as determined under paragraph (b)(2)
of this section, were substituted for each employee's allocation rate in
the determination of rate groups; and
(B) For plan years beginning on or after January 1, 2002, the plan
satisfies one of the following conditions--
(1) The plan has broadly available allocation rates (within the
meaning of paragraph (b)(1)(iii) of this section) for the plan year;
(2) The plan has age-based allocation rates that are based on either
a gradual age or service schedule (within the meaning of paragraph
(b)(1)(iv) of this section) or a uniform target benefit allocation
(within the meaning of paragraph (b)(1)(v) of this section) for the plan
year; or
(3) The plan satisfies the minimum allocation gateway of paragraph
(b)(1)(vi) of this section for the plan year.
(ii) Allocations after testing age. A plan does not fail to satisfy
paragraph (b)(1)(i)(A) of this section merely because allocations are
made at the same rate for employees who are older than their testing age
(determined without regard to the current-age rule in paragraph (4) of
the definition of testing age in Sec. 1.401(a)(4)-12) as they are made
for employees who are at that age.
(iii) Broadly available allocation rates--(A) In general. A plan has
broadly available allocation rates for the plan year if each allocation
rate under the plan is currently available during the plan year (within
the meaning of Sec. 1.401(a)(4)-4(b)(2)), to a group of employees that
satisfies section 410(b) (without regard to the average benefit
percentage test of Sec. 1.410(b)-5). For this purpose, if two
allocation rates could be permissively aggregated under Sec.
1.401(a)(4)-4(d)(4), assuming the allocation rates were treated as
benefits, rights or features, they may be aggregated and treated as a
single allocation rate. In addition, the disregard of age and service
conditions described in Sec. 1.401(a)(4)-4(b)(2)(ii)(A) does not apply
for purposes of this paragraph (b)(1)(iii)(A).
[[Page 148]]
(B) Certain transition allocations. In determining whether a plan
has broadly available allocation rates for the plan year within the
meaning of paragraph (b)(1)(iii)(A) of this section, an employee's
allocation may be disregarded to the extent that the allocation is a
transition allocation for the plan year. In order for an allocation to
be a transition allocation, the allocation must comply with the
requirements of paragraph (b)(1)(iii)(C) of this section and must be
either--
(1) A defined benefit replacement allocation within the meaning of
paragraph (b)(1)(iii)(D) of this section; or
(2) A pre-existing replacement allocation or pre-existing merger and
acquisition allocation, within the meaning of paragraph (b)(1)(iii)(E)
of this section.
(C) Plan provisions relating to transition allocations--(1) In
general. Plan provisions providing for transition allocations for the
plan year must specify both the group of employees who are eligible for
the transition allocations and the amount of the transition allocations.
(2) Limited plan amendments. Allocations are not transition
allocations within the meaning of paragraph (b)(1)(iii)(B) of this
section for the plan year if the plan provisions relating to the
allocations are amended after the date those plan provisions are both
adopted and effective. The preceding sentence in this paragraph
(b)(1)(iii)(C)(2) does not apply to a plan amendment that reduces
transition allocations to HCEs, makes de minimis changes in the
calculation of the transition allocations (such as a change in the
definition of compensation to include section 132(f) elective
reductions), or adds or removes a provision permitted under paragraph
(b)(1)(iii)(C)(3) of this section.
(3) Certain permitted plan provisions. An allocation does not fail
to be a transition allocation within the meaning of paragraph
(b)(1)(iii)(B) of this section merely because the plan provides that
each employee who is eligible for a transition allocation receives the
greater of such allocation and the allocation for which the employee
would otherwise be eligible under the plan. In a plan that contains such
a provision, for purposes of determining whether the plan has broadly
available allocation rates within the meaning of paragraph
(b)(1)(iii)(A) of this section, the allocation for which an employee
would otherwise be eligible is considered currently available to the
employee, even if the employee's transition allocation is greater.
(D) Defined benefit replacement allocation. An allocation is a
defined benefit replacement allocation for the plan year if it is
provided in accordance with guidance prescribed by the Commissioner
published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) and satisfies the following
conditions--
(1) The allocations are provided to a group of employees who
formerly benefitted under an established nondiscriminatory defined
benefit plan of the employer or of a prior employer that provided age-
based equivalent allocation rates;
(2) The allocations for each employee in the group were reasonably
calculated, in a consistent manner, to replace the retirement benefits
that the employee would have been provided under the defined benefit
plan if the employee had continued to benefit under the defined benefit
plan;
(3) Except as provided in paragraph (b)(1)(iii)(C) of this section,
no employee who receives the allocation receives any other allocations
under the plan for the plan year; and
(4) The composition of the group of employees who receive the
allocations is nondiscriminatory.
(E) Pre-existing transition allocations--(1) Pre-existing
replacement allocations. An allocation is a pre-existing replacement
allocation for the plan year if the allocation satisfies the following
conditions--
(i) The allocations are provided pursuant to a plan provision
adopted before June 29, 2001;
(ii) The allocations are provided to employees who formerly
benefitted under a defined benefit plan of the employer; and
(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
[[Page 149]]
received under the defined benefit plan and any other plan or
arrangement of the employer if the employee had continued to benefit
under such defined benefit plan and such other plan or arrangement.
(2) Pre-existing merger and acquisition allocations. An allocation
is a pre-existing merger and acquisition allocation for the plan year if
the allocation satisfies the following conditions--
(i) The allocations are provided solely to employees of a trade or
business that has been acquired by the employer in a stock or asset
acquisition, merger, or other similar transaction occurring prior to
August 28, 2001, involving a change in the employer of the employees of
the trade or business;
(ii) The allocations are provided only to employees who were
employed by the acquired trade or business before a specified date that
is no later than two years after the transaction (or January 1, 2002, if
earlier);
(iii) The allocations are provided pursuant a plan provision adopted
no later than the specified date; and
(iv) The allocations for each employee in the group are reasonably
calculated, in a consistent manner, to replace some or all of the
retirement benefits that the employee would have received under any plan
of the employer if the new employer had continued to provide the
retirement benefits that the prior employer was providing for employees
of the trade or business.
(F) Successor employers. An employer that accepts a transfer of
assets (within the meaning of section 414(l)) from the plan of a prior
employer may continue to treat any transition allocations provided under
that plan as transition allocations under paragraph (b)(1)(iii)(B) of
this section, provided that the successor employer continues to satisfy
the applicable requirements set forth in paragraphs (b)(1)(iii)(C)
through (E) of this section for the plan year.
(iv) Gradual age or service schedule--(A) In general. A plan has a
gradual age or service schedule for the plan year if the allocation
formula for all employees under the plan provides for a single schedule
of allocation rates under which--
(1) The schedule defines a series of bands based solely on age,
years of service, or the number of points representing the sum of age
and years of service (age and service points), under which the same
allocation rate applies to all employees whose age, years of service, or
age and service points are within each band; and
(2) The allocation rates under the schedule increase smoothly at
regular intervals, within the meaning of paragraphs (b)(1)(iv)(B) and
(C) of this section.
(B) Smoothly increasing schedule of allocation rates. A schedule of
allocation rates increases smoothly if the allocation rate for each band
within the schedule is greater than the allocation rate for the
immediately preceding band (i.e., the band with the next lower number of
years of age, years of service, or age and service points) but by no
more than 5 percentage points. However, a schedule of allocation rates
will not be treated as increasing smoothly if the ratio of the
allocation rate for any band to the rate for the immediately preceding
band is more than 2.0 or if it exceeds the ratio of allocation rates
between the two immediately preceding bands.
(C) Regular intervals. A schedule of allocation rates has regular
intervals of age, years of service or age and service points, if each
band, other than the band associated with the highest age, years of
service, or age and service points, is the same length. For this
purpose, if the schedule is based on age, the first band is deemed to be
of the same length as the other bands if it ends at or before age 25. If
the first age band ends after age 25, then, in determining whether the
length of the first band is the same as the length of other bands, the
starting age for the first age band is permitted to be treated as age 25
or any age earlier than 25. For a schedule of allocation rates based on
age and service points, the rules of the preceding two sentences are
applied by substituting 25 age and service points for age 25. For a
schedule of allocation rates based on service, the starting service for
the first service band is permitted to be treated as one year of service
or any lesser amount of service.
[[Page 150]]
(D) Minimum allocation rates permitted. A schedule of allocation
rates under a plan does not fail to increase smoothly at regular
intervals, within the meaning of paragraphs (b)(1)(iv)(B) and (C) of
this section, merely because a minimum uniform allocation rate is
provided for all employees or the minimum benefit described in section
416(c)(2) is provided for all non-key employees (either because the plan
is top heavy or without regard to whether the plan is top heavy) if the
schedule satisfies one of the following conditions--
(1) The allocation rates under the plan that are greater than the
minimum allocation rate can be included in a hypothetical schedule of
allocation rates that increases smoothly at regular intervals, within
the meaning of paragraphs (b)(1)(iv)(B) and (C) of this section, where
the hypothetical schedule has a lowest allocation rate no lower than 1%
of plan year compensation; or
(2) For a plan using a schedule of allocation rates based on age,
for each age band in the schedule that provides an allocation rate
greater than the minimum allocation rate, there could be an employee in
that age band with an equivalent accrual rate that is less than or equal
to the equivalent accrual rate that would apply to an employee whose age
is the highest age for which the allocation rate equals the minimum
allocation rate.
(v) Uniform target benefit allocations. A plan has allocation rates
that are based on a uniform target benefit allocation for the plan year
if the plan fails to satisfy the requirements for the safe harbor
testing method in paragraph (b)(3) of this section merely because the
determination of the allocations under the plan differs from the
allocations determined under that safe harbor testing method for any of
the following reasons--
(A) The interest rate used for determining the actuarial present
value of the stated plan benefit and the theoretical reserve is lower
than a standard interest rate;
(B) The stated benefit is calculated assuming compensation increases
at a specified rate; or
(C) The plan computes the current year contribution using the actual
account balance instead of the theoretical reserve.
(vi) Minimum allocation gateway--(A) General rule. A plan satisfies
the minimum allocation gateway of this paragraph (b)(1)(vi) if each NHCE
has an allocation rate that is at least one third of the allocation rate
of the HCE with the highest allocation rate.
(B) Deemed satisfaction. A plan is deemed to satisfy the minimum
allocation gateway of this paragraph (b)(1)(vi) if each NHCE receives an
allocation of at least 5% of the NHCE's compensation within the meaning
of section 415(c)(3), measured over a period of time permitted under the
definition of plan year compensation.
(vii) Determination of allocation rate. For purposes of paragraph
(b)(1)(i)(B) of this section, allocations and allocation rates are
determined under Sec. 1.401(a)(4)-2(c)(2), but without taking into
account the imputation of permitted disparity under Sec. 1.401(a)(4)-7.
However, in determining whether the plan has broadly available
allocation rates as provided in paragraph (b)(1)(iii) of this section,
differences in allocation rates attributable solely to the use of
permitted disparity described in Sec. 1.401(l)-2 are disregarded.
(viii) Examples. The following examples illustrate the rules in this
paragraph (b)(1):
Example 1. (i) Plan M, a defined contribution plan without a minimum
service requirement, provides an allocation formula under which
allocations are provided to all employees according to the following
schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Completed years of service rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
0-5........................................... 3.0 (\1\)
6-10.......................................... 4.5 1.50
11-15......................................... 6.5 1.44
16-20......................................... 8.5 1.31
21-25......................................... 10.0 1.18
26 or more.................................... 11.5 1.15
------------------------------------------------------------------------
\1\ Not applicable.
(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
[[Page 151]]
under the schedule increase smoothly at regular intervals as described
in paragraph (b)(1)(iv)(A)(2) of this section, then the plan has a
gradual age or service schedule described in paragraph (b)(1)(iv) of
this section.
(iii) The schedule of allocation rates under Plan M does not
increase by more than 5 percentage points between adjacent bands and the
ratio of the allocation rate for any band to the allocation rate for the
immediately preceding band is never more than 2.0 and does not increase.
Therefore, the allocation rates increase smoothly as described in
paragraph (b)(1)(iv)(B) of this section. In addition, the bands (other
than the highest band) are all 5 years long, so the increases occur at
regular intervals as described in paragraph (b)(1)(iv)(C) of this
section. Thus, the allocation rates under the plan's schedule increase
smoothly at regular intervals as described in paragraph (b)(1)(iv)(A)(2)
of this section. Accordingly, the plan has a gradual age or service
schedule described in paragraph (b)(1)(iv) of this section.
(iv) Under paragraph (b)(1)(i) of this section, Plan M satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section, regardless of whether it satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
Example 2. (i) The facts are the same as in Example 1, except that
the 4.5% allocation rate applies for all employees with 10 years of
service or less.
(ii) Plan M provides that allocation rates for all employees are
determined using a single schedule based solely on service, as described
in paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the
allocation rates under the schedule increase smoothly at regular
intervals as described in paragraph (b)(1)(iv)(A)(2) of this section,
then the plan has a gradual age or service schedule described in
paragraph (b)(1)(iv) of this section.
(iii) The bands (other than the highest band) in the schedule are
not all the same length, since the first band is 10 years long while
other bands are 5 years long. Thus, the schedule does not have regular
intervals as described in paragraph (b)(1)(iv)(C) of this section.
However, under paragraph (b)(1)(iv)(D) of this section, the schedule of
allocation rates does not fail to increase smoothly at regular intervals
merely because the minimum allocation rate of 4.5% results in a first
band that is longer than the other bands, if either of the conditions of
paragraph (b)(1)(iv)(D)(1) or (2) of this section is satisfied.
(iv) In this case, the schedule of allocation rates satisfies the
condition in paragraph (b)(1)(iv)(D)(1) of this section because the
allocation rates under the plan that are greater than the 4.5% minimum
allocation rate can be included in the following hypothetical schedule
of allocation rates that increases smoothly at regular intervals and has
a lowest allocation rate of at least 1% of plan year compensation:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Completed years of service rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
0-5........................................... 2.5 (\1\)
6-10.......................................... 4.5 1.80
11-15......................................... 6.5 1.44
16-20......................................... 8.5 1.31
21-25......................................... 10.0 1.18
26 or more.................................... 11.5 1.15
------------------------------------------------------------------------
\1\ Not applicable.
(v) Accordingly, the plan has a gradual age or service schedule
described in paragraph (b)(1)(iv) of this section. Under paragraph
(b)(1)(i) of this section, Plan M satisfies the nondiscrimination in
amount requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits
if it satisfies paragraph (b)(1)(i)(A) of this section, regardless of
whether it satisfies the minimum allocation gateway of paragraph
(b)(1)(vi) of this section.
Example 3. (i) Plan N, a defined contribution plan, provides an
allocation formula under which allocations are provided to all employees
according to the following schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Age rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
Under 25...................................... 3.0 (\1\)
25-34......................................... 6.0 2.00
35-44......................................... 9.0 1.50
45-54......................................... 12.0 1.33
55-64......................................... 16.0 1.33
65 or older................................... 21.0 1.31
------------------------------------------------------------------------
\1\ Not applicable.
(ii) Plan N provides that allocation rates for all employees are
determined using a single schedule based solely on age, as described in
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation
rates under the schedule increase smoothly at regular intervals as
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan
has a gradual 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
[[Page 152]]
rates increase smoothly as described in paragraph (b)(1)(iv)(B) of this
section. In addition, the bands (other than the highest band and the
first band, which is deemed to be the same length as the other bands
because it ends prior to age 25) are all 5 years long, so the increases
occur at regular intervals as described in paragraph (b)(1)(iv)(C) of
this section. Thus, the allocation rates under the plan's schedule
increase smoothly at regular intervals as described in paragraph
(b)(1)(iv)(A)(2) of this section. Accordingly, the plan has a gradual
age or service schedule described in paragraph (b)(1)(iv) of this
section.
(iv) Under paragraph (b)(1)(i) of this section, Plan N satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section, regardless of whether it satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
Example 4. (i) Plan O, a defined contribution plan, provides an
allocation formula under which allocations are provided to all employees
according to the following schedule:
------------------------------------------------------------------------
Ratio of
allocation
rate for
Allocation band to
Age rate (in allocation
percent) rate for
immediately
preceding
band
------------------------------------------------------------------------
Under 40...................................... 3 (\1\)
40-44......................................... 6 2.00
45-49......................................... 9 1.50
50-54......................................... 12 1.33
55-59......................................... 16 1.33
60-64......................................... 20 1.25
65 or older................................... 25 1.25
------------------------------------------------------------------------
\1\ Not applicable.
(ii) Plan O provides that allocation rates for all employees are
determined using a single schedule based solely on age, as described in
paragraph (b)(1)(iv)(A)(1) of this section. Therefore, if the allocation
rates under the schedule increase smoothly at regular intervals as
described in paragraph (b)(1)(iv)(A)(2) of this section, then the plan
has a gradual age or service schedule described in paragraph (b)(1)(iv)
of this section.
(iii) The bands (other than the highest band) in the schedule are
not all the same length, since the first band is treated as 15 years
long while other bands are 5 years long. Thus, the schedule does not
have regular intervals as described in paragraph (b)(1)(iv)(C) of this
section. However, under paragraph (b)(1)(iv)(D) of this section, the
schedule of allocation rates does not fail to increase smoothly at
regular intervals merely because the minimum allocation rate of 3%
results in a first band that is longer than the other bands, if either
of the conditions of paragraph (b)(1)(iv)(D)(1) or (2) of this section
is satisfied.
(iv) In this case, in order to define a hypothetical schedule that
could include the allocation rates in the actual schedule of allocation
rates, each of the bands below age 40 would have to be 5 years long (or
be treated as 5 years long). Accordingly, the hypothetical schedule
would have to provide for a band for employees under age 30, a band for
employees in the range 30-34 and a band for employees age 35-39.
(v) The ratio of the allocation rate for the age 40-44 band to the
next lower band is 2.0. Accordingly, in order for the applicable
allocations rates under this hypothetical schedule to increase smoothly,
the ratio of the allocation rate for each band in the hypothetical
schedule below age 40 to the allocation rate for the immediately
preceding band would have to be 2.0. Thus, the allocation rate for the
hypothetical band applicable for employees under age 30 would be .75%,
the allocation rate for the hypothetical band for employees in the range
30-34 would be 1.5% and the allocation rate for employees in the range
35-39 would be 3%.
(vi) Because the lowest allocation rate under any possible
hypothetical schedule is less than 1% of plan year compensation, Plan O
will be treated as satisfying the requirements of paragraphs
(b)(1)(iv)(B) and (C) of this section only if the schedule of allocation
rates satisfies the steepness condition described in paragraph
(b)(1)(iv)(D)(2) of this section. In this case, the steepness condition
is not satisfied because the equivalent accrual rate for an employee age
39 is 2.81%, but there is no hypothetical employee in the band for ages
40-44 with an equal or lower equivalent accrual rate (since the lowest
equivalent accrual rate for hypothetical employees within this band is
3.74% at age 44).
(vii) Since the schedule of allocation rates under the plan does not
increase smoothly at regular intervals, Plan O's schedule of allocation
rates is not a gradual age or service schedule. Further, Plan O does not
provide uniform target benefit allocations. Therefore, under paragraph
(b)(1)(i) of this section, Plan O cannot satisfy the nondiscrimination
in amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on
the basis of benefits unless either Plan O provides for broadly
available allocation rates for the plan year as described in paragraph
(b)(1)(iii) of this section (i.e., the allocation rate at each age is
provided to a group of employees that satisfies 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
[[Page 153]]
X's compensation is $170,000 and Employee Y's compensation is $150,000.
The allocation for Employees X and Y is $30,000 each, resulting in an
allocation rate of 17.65% for Employee X and 20% for Employee Y. Under
Plan P, each NHCE receives an allocation of 5% of compensation within
the meaning of section 415(c)(3), measured over a period of time
permitted under the definition of plan year compensation.
(ii) Because the allocation rate for X is not currently available to
any NHCE, Plan P does not have broadly available allocation rates within
the meaning of paragraph (b)(1)(iii) of this section. Furthermore, Plan
P does not provide for age based-allocation rates within the meaning of
paragraph (b)(1)(iv) or (v) of this section. Thus, under paragraph
(b)(1)(i) of this section, Plan P can satisfy the nondiscrimination in
amount requirement of Sec. 1.401(a)(4)-1(b)(2) for the plan year on the
basis of benefits only if Plan P satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section for the plan year.
(iii) The highest allocation rate for any HCE under Plan P is 20%.
Accordingly, Plan P would satisfy the minimum allocation gateway of
paragraph (b)(1)(vi) of this section if all NHCEs have an allocation
rate of at least 6.67%, or if all NHCEs receive an allocation of at
least 5% of compensation within the meaning of section 415(c)(3)
(measured over a period of time permitted under the definition of plan
year compensation).
(iv) Under Plan P, each NHCE receives an allocation of 5% of
compensation within the meaning of section 415(c)(3) (measured over a
period of time permitted under the definition of plan year
compensation). Accordingly, Plan P satisfies the minimum allocation
gateway of paragraph (b)(1)(vi) of this section.
(v) Under paragraph (b)(1)(i) of this section, Plan P satisfies the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits if it satisfies paragraph (b)(1)(i)(A) of this
section.
(2) Determination of equivalent accrual rates--(i) Basic definition.
An employee's equivalent accrual rate for a plan year is the annual
benefit that is the result of normalizing the increase in the employee's
account balance during the measurement period, divided by the number of
years in which the employee benefited under the plan during the
measurement period, and expressed either as a dollar amount or as a
percentage of the employee's average annual compensation. A measurement
period that includes future years may not be used for this purpose.
(ii) Rules of application--(A) Determination of account balance. The
increase in the account balance during the measurement period taken into
account under paragraph (b)(2)(i) of this section does not include
income, expenses, gains, or losses allocated during the measurement
period that are attributable to the account balance as of the beginning
of the measurement period, but does include any additional amounts that
would have been included in the increase in the account balance but for
the fact that they were previously distributed (including a reasonable
adjustment for interest). In the case of a measurement period that is
the current plan year, an employer may also elect to disregard the
income, expenses, gains, and losses allocated during the current plan
year that are attributable to the increase in account balance since the
beginning of the year, and thus, determine the increase in account
balance during the plan year taking into account only the allocations
described in Sec. 1.401(a)(4)-2(c)(2)(ii). In addition, an employer may
disregard distributions made to a NHCE as well as distributions made to
any employee in plan years beginning before a selected date no later
than January 1, 1986.
(B) Normalization. The account balances determined under paragraph
(b)(2)(ii)(A) of this section are normalized by treating them as single-
sum benefits that are immediately and unconditionally payable to the
employee. A standard interest rate, and a straight life annuity factor
that is based on the same or a different standard interest rate and on a
standard mortality table, must be used in normalizing these benefits. In
addition, no mortality may be assumed prior to the employee's testing
age.
(iii) Options. Any of the optional rules in Sec. 1.401(a)(4)-
3(d)(3) (e.g., imputation of permitted disparity) may be applied in
determining an employee's equivalent accrual rate by substituting the
employee's equivalent accrual rate (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
[[Page 154]]
last sentence of the fresh-start alternative in Sec. 1.401(a)(4)-
3(d)(3)(iii)(A) (dealing with compensation adjustments to the frozen
accrued benefit) is not applicable. No other options are available in
determining an employee's equivalent accrual rate except those (e.g.,
selection of alternative measurement periods) specifically provided in
this paragraph (b)(2). Thus, for example, none of the optional special
rules in Sec. 1.401(a)(4)-3(f) (e.g., determination of benefits on
other than a plan year basis under Sec. 1.401(a)(4)-3(f)(6)) is
available.
(iv) Consistency rule. Equivalent accrual rates must be determined
in a consistent manner for all employees for the plan year. Thus, for
example, the same measurement periods and standard interest rates must
be used, and any available options must be applied consistently if at
all.
(3) Safe-harbor testing method for target benefit plans--(i) General
rule. A target benefit plan is a money purchase pension plan under which
contributions to an employee's account are determined by reference to
the amounts necessary to fund the employee's stated benefit under the
plan. Whether a target benefit plan satisfies section 401(a)(4) with
respect to an equivalent amount of benefits is generally determined
under paragraphs (b)(1) and (b)(2) of this section. A target benefit
plan is deemed to satisfy section 401(a)(4) with respect to an
equivalent amount of benefits, however, if each of the following
requirements is satisfied:
(A) Stated benefit formula. Each employee's stated benefit must be
determined as the straight life annuity commencing at the employee's
normal retirement age under a formula that would satisfy the
requirements of Sec. 1.401(a)(4)-3(b)(4)(i)(C) (1) or (2), and that
would satisfy each of the uniformity requirements in Sec. 1.401(a)(4)-
3(b)(2) (taking into account the relevant exceptions provided in Sec.
1.401(a)(4)-3(b)(6)), if the plan were a defined benefit plan with the
same benefit formula. In determining whether these requirements are
satisfied, the rules of Sec. 1.401(a)(4)-3(f) do not apply, and, in
addition, except as provided in paragraph (b)(3)(vii) of this section,
an employee's stated benefit at normal retirement age under the stated
benefit formula is deemed to accrue ratably over the period ending with
the plan year in which the employee is projected to reach normal
retirement age and beginning with the latest of: the first plan year in
which the employee benefited under the plan, the first plan year taken
into account in the stated benefit formula, and any plan year
immediately following a plan year in which the plan did not satisfy this
paragraph (b)(3). Thus, except as provided in paragraph (b)(3)(vii) of
this section, under Sec. 1.401(a)(4)-3(b)(2)(v) an employee's stated
benefit may not take into account service in years prior to the first
plan year that the employee benefited under the plan, and an employee's
stated benefit may not take into account service in plan years prior to
the current plan year unless the plan satisfied this paragraph (b)(3) in
all of those prior plan years.
(B) Employer and employee contributions. Employer contributions with
respect to each employee must be based exclusively on the employee's
stated benefit using the method provided in paragraph (b)(3)(iv) of this
section, and forfeitures and any other amounts under the plan taken into
account under Sec. 1.401(a)(4)-2(c)(2)(ii) (other than employer
contributions) are used exclusively to reduce employer contributions.
Employee contributions (if any) may not be used to fund the stated
benefit.
(C) Permitted disparity. If permitted disparity is taken into
account, the stated benefit formula must satisfy Sec. 1.401(l)-3. For
this purpose, the 0.75-percent factor in the maximum excess or offset
allowance in Sec. 1.401(l)-3(b)(2)(i) or (b)(3)(i), respectively, as
adjusted in accordance with Sec. 1.401(l)-3(d)(9) (and, if the
employee's normal retirement age is not the employee's social security
retirement age, Sec. 1.401(l)-3(e)), is further reduced by multiplying
the factor by 0.80.
(ii) Changes in stated benefit formula. A plan does not fail to
satisfy paragraph (b)(3)(i) of this section merely because the plan
determines each employee's stated benefit in the current
[[Page 155]]
plan year under a stated benefit formula that differs from the stated
benefit formula used to determine the employee's stated benefit in prior
plan years.
(iii) Stated benefits after normal retirement age. A target benefit
plan may limit increases in the stated benefit after normal retirement
age consistent with the requirements applicable to defined benefit plans
under section 411(b)(1)(H) (without regard to section
411(b)(1)(H)(iii)), provided that the limitation applies on the same
terms to all employees. Thus, post-normal retirement benefits required
under Sec. 1.401(a)(4)-3(b)(2)(ii) must be provided under the stated
benefit formula, subject to any uniformly applicable service cap under
the formula.
(iv) Method for determining required employer contributions--(A)
General rule. An employer's required contribution to the account of an
employee for a plan year is determined based on the employee's stated
benefit and the amount of the employee's theoretical reserve as of the
date the employer's required contribution is determined for the plan
year (the determination date). Paragraph (b)(3)(iv)(B) of this section
provides rules for determining an employee's theoretical reserve.
Paragraph (b)(3)(iv) (C) and (D) of this section provides rules for
determining an employer's required contributions.
(B) Theoretical reserve--(1) Initial theoretical reserve. An
employee's theoretical reserve as of the determination date for the
first plan year in which the employee benefits under the plan, the first
plan year taken into account under the stated benefit formula (if that
is the current plan year), or the first plan year immediately following
any plan year in which the plan did not satisfy this paragraph (b)(3),
is zero.
(2) Theoretical reserve in subsequent plan years. An employee's
theoretical reserve as of the determination date for a plan year (other
than a plan year described in paragraph (b)(3)(iv)(B)(1) of this
section) is the employee's theoretical reserve as of the determination
date for the prior plan year, plus the employer's required contribution
for the prior plan year (as limited by section 415, but without regard
to the additional contributions described in paragraph (b)(3)(v) of this
section) both increased by interest from the determination date for the
prior plan year through the determination date for the current plan
year, but not beyond the determination date for the plan year that
includes the employee's normal retirement date. (Thus, an employee's
theoretical reserve as of the determination date for a plan year does
not include the amount of the employer's required contribution for the
plan year.) The interest rate for determining employer contributions
that was in effect on the determination date in the prior plan year must
be applied to determine the required interest adjustment for this
period. For plan years beginning after the effective date applicable to
the plan under Sec. 1.401(a)(4)-13(a) or (b), a standard interest rate
must be used, and may not be changed except on the determination date
for a plan year.
(C) Required contributions for employees under normal retirement
age. The required employer contributions with respect to an employee
whose attained age is less than the employee's normal retirement age
must be determined for each plan year as follows:
(1) Determine the employee's fractional rule benefit (within the
meaning of Sec. 1.411(b)-1(b)(3)(ii)(A)) under the plan's stated
benefit formula as if the plan were a defined benefit plan with the same
benefit formula.
(2) Determine the actuarial present value of the fractional rule
benefit determined in paragraph (b)(3)(iv)(C)(1) of this section as of
the determination date for the current plan year, using a standard
interest rate and a standard mortality table that are set forth in the
plan and that are the same for all employees, and assuming no mortality
before the employee's normal retirement age.
(3) Determine the excess, if any, of the amount determined in
paragraph (b)(3)(iv)(C)(2) of this section over the employee's
theoretical reserve for the current plan year determined under paragraph
(b)(3)(iv)(B) of this section.
(4) Determine the required employer contribution for the current
plan year by amortizing on a level annual basis, using the same interest
rate used for
[[Page 156]]
paragraph (b)(3)(iv)(C)(2) of this section, the result in paragraph
(b)(3)(iv)(C)(3) of this section over the period beginning with the
determination date for the current plan year and ending with the
determination date for the plan year in which the employee is projected
to reach normal retirement age.
(D) Required contributions for employees over normal retirement age.
The required employer contributions with respect to an employee whose
attained age equals or exceeds the employee's normal retirement age is
the excess, if any, of the actuarial present value, as of the
determination date for the current plan year, of the employee's stated
benefit for the current plan year (determined using an immediate
straight life annuity factor based on a standard interest rate and a
standard mortality table, for an employee whose attained age equals the
employee's normal retirement age) over the employee's theoretical
reserve as of the determination date.
(v) Effect of section 415 and 416 requirements. A target benefit
plan does not fail to satisfy this paragraph (b)(3) merely because
required contributions under the plan are limited by section 415 in a
plan year. Similarly, a target benefit plan does not fail to satisfy
this paragraph (b)(3) merely because additional contributions are made
consistent with the requirements of section 416(c)(2) (regardless of
whether the plan is top-heavy).
(vi) Certain conditions on allocations. A target benefit plan does
not fail to satisfy this paragraph (b)(3) merely because required
contributions under the plan are subject to the conditions on
allocations permitted under Sec. 1.401(a)(4)-2(b)(4)(iii).
(vii) Special rules for target benefit plans qualified under prior
law--(A) Service taken into account prior to satisfaction of this
paragraph. For purposes of determining whether the stated benefit
formula satisfies paragraph (b)(3)(i)(A) of this section (e.g., whether
the period over which an employee's stated benefit is deemed to accrue
is the same as the period taken into account under the stated benefit
formula as required by paragraph (b)(3)(i)(A) of this section), a target
benefit plan that was adopted and in effect on September 19, 1991, is
deemed to have satisfied this paragraph (b)(3), and an employee is
treated as benefiting under the plan, in any year prior to the effective
date applicable to the plan under Sec. 1.401(a)(4)-13 (a) or (b) that
was taken into account in the stated benefit formula under the plan on
September 19, 1991, if the plan satisfied the applicable
nondiscrimination requirements for target benefit plans for that prior
year.
(B) Initial theoretical reserve. Notwithstanding paragraph
(b)(3)(iv)(B)(1) of this section, a target benefit plan under which the
stated benefit formula takes into account service for an employee for
plan years prior to the first plan year in which the plan satisfied this
paragraph (b)(3), as permitted under paragraph (b)(3)(vii)(A) of this
section, must determine an initial theoretical reserve for the employee
as of the determination date for the last plan year beginning before
such plan year under the rules of Sec. 1.401(a)(4)-13(e).
(C) Satisfaction of prior law. In determining whether a plan
satisfied the applicable nondiscrimination requirements for target
benefit plans for any period prior to the effective date applicable to
the plan under Sec. 1.401(a)(4)-13 (a) or (b), no amendments after
September 19, 1991, other than amendments necessary to satisfy section
401(l), are taken into account.
(viii) Examples. The following examples illustrate the rules in this
paragraph (b)(3):
Example 1. (a) Employer X maintains a target benefit plan with a
calendar plan year that bases contributions on a stated benefit equal to
40 percent of each employee's average annual compensation, reduced pro
rata for years of participation less than 25, payable annually as a
straight life annuity commencing at normal retirement age. The UP-84
mortality table and an interest rate of 7.5 percent are used to
calculate the contributions necessary to fund the stated benefit.
Required contributions are determined on the last day of each plan year.
The normal retirement age under the plan is 65. Employee M is 39 years
old in 1994, has participated in the plan for six years, and has average
annual compensation equal to $60,000 for the 1994 plan year. Assume that
Employee M's theoretical reserve as of the last day of the 1993 plan
year is $13,909, determined under Sec. 1.401(a)(4)-13(e), and that
required
[[Page 157]]
employer contributions for 1993 were determined using an interest rate
of six percent.
(b) Under these facts, Employer X's 1994 required contribution to
fund Employee M's stated benefit is $1,318, calculated as follows:
(1) Employee M's fractional rule benefit is $24,000 (40 percent of
Employee M's average annual compensation of $60,000).
(2) The actuarial present value of Employee M's fractional rule
benefit as of the last day of the 1994 plan year is $30,960 (Employee
M's fractional rule benefit of $24,000 multiplied by 1.290, the
actuarial present value factor for an annual straight life annuity
commencing at age 65 applicable to a 39-year-old employee, determined
using the stated interest rate of 7.5 percent and the UP-84 mortality
table, and assuming no mortality before normal retirement age).
(3) The actuarial present value of Employee M's fractional rule
benefit ($30,960) is reduced by Employee M's theoretical reserve as of
the last day of the 1994 plan year. The theoretical reserve on that day
is $14,744--the $13,909 theoretical reserve as of the last day of the
1993 plan year, increased by interest for one year at the rate of six
percent. Because the required contribution for the 1993 plan year is
taken into account under Sec. 1.401(a)(4)-13(e)(2) in determining the
theoretical reserve as of the last day of the 1993 plan year, it is not
added to the theoretical reserve again in this paragraph (b)(3) of this
Example 1. The resulting difference is $16,216 ($30,960-$14,744).
(4) The $16,216 excess of the actuarial present value of Employee
M's fractional rule benefit over Employee M's theoretical reserve is
multiplied by 0.0813, the amortization factor applicable to a 39-year-
old employee determined using the stated interest rate of 7.5 percent.
The product of $1,318 is the amount of the required employer
contribution for Employee M for the 1994 plan year.
Example 2. (a) The facts are the same as in Example 1, except that
as of January 1, 1995, the plan's stated benefit formula is amended to
provide for a stated benefit equal to 45 percent of average annual
compensation, reduced pro rata for years of participation less than 25,
payable annually as a straight life annuity commencing at normal
retirement age. For the 1995 plan year, Employee M's average annual
compensation continues to be $60,000. The mortality table used for the
calculation of the employer's required contributions remains the same as
in the prior plan year, but the plan's stated interest rate is changed
to 8.0 percent effective as of December 31, 1995.
(b) Under these facts, Employer X's required contribution for
Employee M is $1,290, calculated as follows:
(1) Employee M's fractional rule benefit is $27,000 (45 percent of
$60,000).
(2) The actuarial present value of Employee M's fractional rule
benefit as of the last day of the 1995 plan year is $32,319 ($27,000
multiplied by 1.197, the actuarial present value factor for an annuity
commencing at age 65 applicable to a 40-year-old employee, determined
using the stated interest rate of 8.0 percent and the UP-84 mortality
table, and assuming no mortality before normal retirement age).
(3) The actuarial present value of Employee M's fractional rule
benefit ($32,319) is reduced by Employee M's theoretical reserve as of
the last day of the 1995 plan year. The theoretical reserve as of that
day is $17,267--the $14,744 theoretical reserve as of the last day of
the 1994 plan year plus the $1,318 required contribution for the 1994
plan year, both increased by interest for one year at the rate of 7.5
percent. The resulting difference is $15,052 ($32,319-$17,267).
(4) The result in paragraph (b)(3) of this Example 2 is multiplied
by 0.0857, the amortization factor applicable to a 40-year-old employee
determined using the stated interest rate of 8.0 percent. The product,
$1,290, is the amount of the required employer contribution for Employee
M for the 1995 plan year.
(c) Nondiscrimination in amount of contributions under a defined
benefit plan--(1) General rule. Equivalent allocations under a defined
benefit plan are nondiscriminatory in amount for a plan year if the plan
would satisfy Sec. 1.401(a)(4)-3(c)(1) (taking into account Sec.
1.401(a)(4)-3(c)(3)) for the plan year if an equivalent normal and most
valuable allocation rate, as determined under paragraph (c)(2) of this
section, were substituted for each employee's normal and most valuable
accrual rate, respectively, in the determination of rate groups.
(2) Determination of equivalent allocation rates--(i) Basic
definitions. An employee's equivalent normal and most valuable
allocation rates for a plan year are, respectively, the actuarial
present value of the increase over the plan year in the benefit that
would be taken into account in determining the employee's normal and
most valuable accrual rates for the plan year, expressed either as a
dollar amount or as a percentage of the employee's plan year
compensation. In the case of a contributory DB plan, the rules in Sec.
1.401(a)(4)-6(b)(1), (b)(5), or (b)(6) must be used to determine the
amount of each employee's employer-provided benefit that would be taken
into account for this purpose.
[[Page 158]]
(ii) Rules for determining actuarial present value. The actuarial
present value of the increase in an employee's benefit must be
determined using a standard interest rate and a standard mortality
table, and no mortality may be assumed prior to the employee's testing
age.
(iii) Options. The optional rules in Sec. 1.401(a)(4)-2(c)(2)(iv)
(imputation of permitted disparity) and (v) (grouping of rates) may be
applied to determine an employee's equivalent normal and most valuable
allocation rates by substituting those rates (determined without regard
to the option) for the employee's allocation rate in that section where
appropriate. In addition, the limitations under section 415 may be taken
into account under Sec. 1.401(a)(4)-3(d)(2)(ii)(B), and qualified
disability benefits may be taken into account as accrued benefits under
Sec. 1.401(a)(4)-3(f)(2), in determining the increase in an employee's
accrued benefit during a plan year for purposes of paragraph (c)(2)(i)
of this section, if those rules would otherwise be available. No other
options are available in determining an employee's equivalent normal and
most valuable allocations rate except those (e.g., selection of
alternative standard interest rates) specifically provided in this
paragraph (c)(2). Thus, while all of the mandatory rules in Sec.
1.401(a)(4)-3(d) and (f) for determining the amount of benefits used to
determine an employee's normal and most valuable accrual rates (e.g.,
the treatment of early retirement window benefits in Sec. 1.401(a)(4)-
3(f)(4)) are applicable in determining an employee's equivalent normal
and most valuable allocation rates, none of the optional rules under
Sec. 1.401(a)(4)-3 is available (except the options relating to the
section 415 limits and qualified disability benefits noted above).
(iv) Consistency rule. Equivalent allocation rates must be
determined in a consistent manner for all employees for the plan year.
Thus, for example, the same standard interest rates must be used, and
any available options must be applied consistently if at all.
(3) Safe harbor testing method for cash balance plans--(i) General
rule. A cash balance plan is a defined benefit plan that defines
benefits for each employee by reference to the employee's hypothetical
account. An employee's hypothetical account is determined by reference
to hypothetical allocations and interest adjustments that are analogous
to actual allocations of contributions and earnings to an employee's
account under a defined contribution plan. Because a cash balance plan
is a defined benefit plan, whether it satisfies section 401(a)(4) with
respect to the equivalent amount of contributions is generally
determined under paragraphs (c)(1) and (c)(2) of this section. However,
a cash balance plan that satisfies each of the requirements in
paragraphs (c)(3)(ii) through (xi) of this section is deemed to satisfy
section 401(a)(4) with respect to an equivalent amount of contributions.
(ii) Plan requirements in general. The plan must be an accumulation
plan. The benefit formula under the plan must provide for hypothetical
allocations for each employee in the plan that satisfy paragraph
(c)(3)(iii) of this section, and interest adjustments to these
hypothetical allocations that satisfy paragraph (c)(3)(iv) of this
section. The benefit formula under the plan must provide that these
hypothetical allocations and interest adjustments are accumulated as a
hypothetical account for each employee, determined in accordance with
paragraph (c)(3)(v) of this section. The plan must provide that an
employee's accrued benefit under the plan as of any date is an annuity
that is the actuarial equivalent of the employee's projected
hypothetical account as of normal retirement age, determined in
accordance with paragraph (c)(3)(vi) of this section. In addition, the
plan must satisfy paragraphs (c)(3)(vii) through (xi) of this section
(to the extent applicable) regarding optional forms of benefit, past
service credits, post-normal retirement age benefits, certain uniformity
requirements, and changes in the plan's benefit formula, respectively.
(iii) Hypothetical allocations--(A) In general. The hypothetical
allocations provided under the plan's benefit formula must satisfy
either paragraph (c)(3)(iii)(B) or (C) of this section. Paragraph
(c)(3)(iii)(B) of this section provides a design-based safe harbor that
[[Page 159]]
does not require the annual comparison of hypothetical allocations under
the plan. Paragraph (c)(3)(iii)(C) of this section requires the annual
comparison of hypothetical allocations.
(B) Uniform hypothetical allocation formula. To satisfy this
paragraph (c)(3)(iii)(B), the plan's benefit formula must provide for
hypothetical allocations for all employees in the plan for all plan
years of amounts that would satisfy Sec. 1.401(a)(4)-2(b)(3) for each
such plan year if the hypothetical allocations were the only allocations
under a defined contribution plan for the employees for those plan
years. Thus, the plan's benefit formula must provide for hypothetical
allocations for all employees in the plan for all plan years that are
the same percentage of plan year compensation or the same dollar amount.
In determining whether the hypothetical allocations satisfy Sec.
1.401(a)(4)-2(b)(3), the only provisions of Sec. 1.401(a)(4)-2(b)(5)
that apply are Sec. 1.401(a)(4)-2(b)(5)(ii) (section 401(l) permitted
disparity, (iii) (entry dates), (vi) (certain limits on allocations),
and (vii) (dollar allocation per uniform unit of service). Thus, for
example, the plan's benefit formula may take permitted disparity into
account in a manner allowed under Sec. 1.401(l)-2 for defined
contribution plans.
(C) Modified general test. To satisfy this paragraph (c)(3)(iii)(C),
the plan's benefit formula must provide for hypothetical allocations for
all employees in the plan for the plan year that would satisfy the
general test in Sec. 1.401(a)(4)-2(c) for the plan year, if the
hypothetical allocations were the only allocations for the employees
taken into account under Sec. 1.401(a)(4)-2(c)(2)(ii) under a defined
contribution plan for the plan year. In determining whether the
hypothetical allocations satisfy Sec. 1.401(a)(4)-2(c), the provisions
of Sec. 1.401(a)(4)-2(c)(2)(iii) through (v) apply. Thus, for example,
permitted disparity may be imputed under Sec. 1.401(a)(4)-2(c)(2)(iv)
in accordance with the rules of Sec. 1.401(a)(4)-7(b) applicable to
defined contribution plans.
(iv) Interest adjustments to hypothetical allocations--(A) General
rule. The plan benefit formula must provide that the dollar amount of
the hypothetical allocation for each employee for a plan year is
automatically adjusted using an interest rate that satisfies paragraph
(c)(3)(iv)(B) of this section, compounded no less frequently than
annually, for the period that begins with a date in the plan year and
that ends at normal retirement age. This requirement is not satisfied if
any portion of the interest adjustments to a hypothetical allocation are
contingent on the employee's satisfaction of any requirement. Thus, for
example, the interest adjustments to a hypothetical allocation must be
provided through normal retirement age, even though the employee
terminates employment or commences benefits before that age.
(B) Requirements with respect to interest rates. The interest rate
must be a single interest rate specified in the plan that is the same
for all employees in the plan for all plan years. The interest rate must
be either a standard interest rate or a variable interest rate. If the
interest rate is a variable interest rate, it must satisfy paragraph
(c)(3)(iv)(C) of this section.
(C) Variable interest rates--(1) General rule. The plan must specify
the variable interest rate, the method for determining the current value
of the variable interest rate, and the period (not to exceed 1 year) for
which the current value of the variable interest rate applies.
Permissible variable interest rates are listed in paragraph
(c)(3)(iv)(C)(2) of this section. Permissible methods for determining
the current value of the variable interest rate are provided in
paragraph (c)(3)(iv)(C)(3) of this section.
(2) Permissible variable interest rates. The variable interest rate
specified in the plan must be one of the following--
(i) The rate on 3-month Treasury Bills,
(ii) The rate on 6-month Treasury Bills,
(iii) The rate on 1-year Treasury Bills,
(iv) The yield on 1-year Treasury Constant Maturities,
(v) The yield on 2-year Treasury Constant Maturities,
(vi) The yield on 5-year Treasury Constant Maturities,
(vii) The yield on 10-year Treasury Constant Maturities,
[[Page 160]]
(viii) The yield on 30-year Treasury Constant Maturities, or
(ix) The single interest rate such that, as of a single age
specified in the plan, the actuarial present value of a deferred
straight life annuity of an amount commencing at the normal retirement
age under the plan, calculated using that interest rate and a standard
mortality table but assuming no mortality before normal retirement age,
is equal to the actuarial present value, as of the single age specified
in the plan, of the same annuity calculated using the section 417(e)
rates applicable to distributions in excess of $25,000 (determined under
Sec. 1.417(e)-1(d)), and the same mortality assumptions.
(3) Current value of variable interest rate. The current value of
the variable interest rate that applies for a period must be either the
value of the variable interest rate determined as of a specified date in
the period or the immediately preceding period, or the average of the
values of the variable interest rate as of two or more specified dates
during the current period or the immediately preceding period. The value
as of a date of the rate on a Treasury Bill is the average auction rate
for the week or month in which the date falls, as reported in the
Federal Reserve Bulletin. The value as of a date of the yield on a
Treasury Constant Maturity is the average yield for the week, month, or
year in which the date falls, as reported in the Federal Reserve
Bulletin. (The Federal Reserve Bulletin is published by the Board of
Governors of the Federal Reserve System and is available from
Publication Services, Mail Stop 138, Board of Governors of the Federal
Reserve System, Washington DC 20551.) The plan may limit the current
value of the variable interest rate to a maximum (not less than the
highest standard interest rate), or a minimum (not more than the lowest
standard interest rate), or both.
(v) Hypothetical account--(A) Current value of hypothetical account.
As of any date, the current value of an employee's hypothetical account
must equal the sum of all hypothetical allocations and the respective
interest adjustments to each such hypothetical allocation provided
through that date for the employee under the plan's benefit formula
(without regard to any interest adjustments provided under the plan's
benefit formula for periods after that date).
(B) Value of hypothetical account as of normal retirement age. Under
paragraph (c)(3)(vi) of this section, the value of an employee's
hypothetical account must be determined as of normal retirement age in
order to determine the employee's accrued benefit as of any date at or
before normal retirement age. As of any date at or before normal
retirement age, the value of an employee's hypothetical account as of
normal retirement age must equal the sum of each hypothetical allocation
provided through that date for the employee under the plan's benefit
formula, plus the interest adjustments provided through normal
retirement age on each of those hypothetical allocations for the
employee under the plan's benefit formula (without regard to any
hypothetical allocations that might be provided after that date under
the plan's benefit formula). If the interest rate specified in the plan
is a variable interest rate, the plan must specify that the
determination in the preceding sentence is made by assuming that the
current value of the variable interest rate for all future periods is
either the current value of the variable interest rate for the current
period or the average of the current values of the variable interest
rate for the current period and one or more periods immediately
preceding the current period (not to exceed 5 years in the aggregate).
(vi) Determination of accrued benefit--(A) Definition of accrued
benefit. The plan must provide that at any date at or before normal
retirement age the accrued benefit (within the meaning of section
411(a)(7)(A)(i)) of each employee in the plan is an annuity commencing
at normal retirement age that is the actuarial equivalent of the
employee's hypothetical account as of normal retirement age (as
determined under paragraph (c)(3)(v)(B) of this section). The separate
benefit that each employee accrues for a plan year is an annuity that is
the actuarial equivalent of the employee's hypothetical allocation for
that plan year, including the
[[Page 161]]
automatic adjustments for interest through normal retirement age
required under paragraph (c)(3)(iv) of this section.
(B) Normal form of benefit. The annuity specified in paragraph
(c)(3)(vi)(A) of this section must provide an annual benefit payable in
the same form at the same uniform normal retirement age for all
employees in the plan. The annual benefit must be the normal retirement
benefit under the plan (within the meaning of section 411(a)(9)) under
the plan.
(C) Determination of actuarial equivalence. For purposes of this
paragraph (c)(3)(vi) and paragraph (c)(3)(ix) of this section, actuarial
equivalence must be determined using a standard mortality table and
either a standard interest rate or the interest rate specified in the
plan for making interest adjustments to hypothetical allocations. If the
interest rate used is the interest rate specified in the plan, and that
rate is a variable interest rate, the assumed value of the variable
interest rate for all future periods must be the same value that would
be assumed for purposes of paragraph (c)(3)(v)(B) of this section. The
same actuarial assumptions must be used for all employees in the plan.
(D) Effect of section 415 and 416 requirements. A plan does not fail
to satisfy this paragraph (c)(3)(vi) merely because the accrued benefits
under the plan are limited by section 415, or merely because the accrued
benefits under the plan are the greater of the accrued benefits
otherwise determined under the plan and the minimum benefit described in
section 416(c)(1) (regardless of whether the plan is top-heavy).
(vii) Optional forms of benefit--(A) In general. The plan must
satisfy the uniform subsidies requirement of Sec. 1.401(a)(4)-
3(b)(2)(iv) with respect to all subsidized optional forms of benefit.
(B) Limitation on subsidies. Unless hypothetical allocations are
determined under a uniform hypothetical allocation formula that
satisfies paragraph (c)(3)(iii)(B) of this section, the actuarial
present value of any QJSA provided under the plan must not be greater
than the single sum distribution to the employee that would satisfy
paragraph (c)(3)(vii)(C) of this section assuming that it was
distributed to the employee on the date of commencement of the QJSA.
(C) Distributions subject to section 417(e). Except as otherwise
required under section 415(b), if the plan provides for a distribution
alternative that is subject to the interest rate restrictions under
section 417(e), the actuarial present value of the benefit paid to an
employee under the distribution alternative must equal the
nonforfeitable percentage (determined under the plan's vesting schedule)
of the greater of the following two amounts--
(1) The current value of the employee's hypothetical account as of
the date the distribution commences, calculated in accordance with
paragraph (c)(3)(v)(A) of this section.
(2) The actuarial present value (calculated in accordance with Sec.
1.417(e)-1(d)) of the employee's accrued benefit.
(D) Determination of actuarial present value. For purposes of this
paragraph (c)(3)(vii), actuarial present value must be determined using
a reasonable interest rate and mortality table. A standard interest rate
and a standard mortality table are considered reasonable for this
purpose.
(viii) Past service credit. The benefit formula under the plan may
not provide for hypothetical allocations in the curent plan year that
are attributable to years of service before the current plan year,
unless each of the following requirements is satisfied--
(A) The years of past service credit are granted on a uniform basis
to all current employees in the plan.
(B) Hypothetical allocations for the current plan year are
determined under a uniform hypothetical allocation formula that
satisfies paragraph (c)(3)(iii)(B) of this section.
(C) The hypothetical allocations attributable to the years of past
service would have satisfied the uniform hypothetical allocation formula
requirement of paragraph (c)(3)(iii)(B) of this section, and the
interest adjustments to those hypothetical allocations would have
satisfied paragraph (c)(3)(iv)(A) of this section, if the plan provision
granting past service had been in effect for the entire period for which
years of past service are granted
[[Page 162]]
to any employee. In order to satisfy this requirement, the hypothetical
allocation attributable to a year of past service must be adjusted for
interest in accordance with paragraph (c)(3)(iv) of this section for the
period (including the retroactive period) beginning with the year of
past service to which the hypothetical allocation is attributable and
ending at normal retirement age. If the interest rate specified in the
plan is a variable interest rate, the interest adjustments for the
period prior to the current plan year either must be based on the
current value of the variable interest rate for the period in which the
grant of past service first becomes effective or must be reconstructed
based on the then current value of the variable interest rate that would
have applied during each prior period.
(ix) Employees beyond normal retirement age. In the case of an
employee who commences receipt of benefits after normal retirement age,
the plan must provide that interest adjustments continue to be made to
an employee's hypothetical account until the employee's benefit
commencement date. In the case of an employee described in the previous
sentence, the employee's accrued benefit is defined as an annuity that
is the actuarial equivalent of the employee's hypothetical account
determined in accordance with paragraph (c)(3)(v)(A) of this section as
of the date of benefit commencement.
(x) Additional uniformity requirements. In addition to any
uniformity requirements provided elsewhere in this paragraph (c)(3), the
plan must satisfy the uniformity requirements in Sec. 1.401(a)(4)-
3(b)(2)(v) (uniform vesting and service requirements) and (vi) (no
employee contributions). A plan does not fail to satisfy the uniformity
requirements of this paragraph (c)(3)(x) or any other uniformity
requirement provided in this paragraph (c)(3) merely because the plan
contains one or more of the provisions described in Sec. 1.401(a)(4)-
3(b)(8)(iv) (prior vesting schedules), (v) (certain conditions on
accruals), or (xi) (multiple definitions of service).
(xi) Changes in benefit formula, allocation formula, or interest
rates. A plan does not fail to satisfy this paragraph (c)(3) merely
because the plan is amended to change the benefit formula, hypothetical
allocation formula, or the interest rate used to adjust hypothetical
allocations for plan years after a fresh-start date, provided that the
accrued benefits for plan years beginning after the fresh-start date are
determined in accordance with Sec. 1.401(a)(4)-13(c), as modified by
Sec. 1.401(a)(4)-13(f).
(d) Safe-harbor testing method for defined benefit plans that are
part of a floor-offset arrangement--(1) General rule. A defined benefit
plan that is part of a floor-offset arrangement is deemed to satisfy the
nondiscriminatory amount requirement of Sec. 1.401(a)(4)-1(b)(2) if all
of the following requirements are satisfied:
(i) Under the floor-offset arrangement, the accrued benefit (as
defined in section 411(a)(7)(A)(i)) that would otherwise be provided to
an employee under the defined benefit plan must be reduced solely by the
actuarial equivalent of all or part of the employee's account balance
attributable to employer contributions under a defined contribution plan
maintained by the same employer (plus the actuarial equivalent of all or
part of any prior distributions from that portion of the account
balance). If any portion of the benefit that is being offset is
nonforfeitable, that portion may be offset only by a benefit (or portion
of a benefit) that is also nonforfeitable. In determining the actuarial
equivalent of amounts provided under the defined contribution plan, an
interest rate no higher than the highest standard interest rate must be
used, and no mortality may be assumed in determining the actuarial
equivalent of any prior distributions from the defined contribution plan
or for periods prior to the benefit commencement date under the defined
benefit plan.
(ii) The defined benefit plan may not be a contributory DB plan
(unless it satisfies Sec. 1.401(a)(4)-6(b)(6)), and benefits under the
defined benefit plan may not be reduced by any portion of the employee's
account balance under the defined contribution plan (or prior
distributions from that account) that are attributable to employee
contributions.
[[Page 163]]
(iii) The defined benefit plan and the defined contribution plan
must benefit the same employees.
(iv) The offset under the defined benefit plan must be applied to
all employees on the same terms.
(v) All employees must have available to them under the defined
contribution plan the same investment options and the same options with
respect to the timing of preretirement distributions.
(vi) The defined benefit plan must satisfy the uniformity
requirements of Sec. 1.401(a)(4)-3(b)(2) and the unit credit safe
harbor in Sec. 1.401(a)(4)-3(b)(3) without taking into account the
offset described in paragraph (d)(1)(i) of this section (i.e., on a
gross-benefit basis), and the defined contribution plan must satisfy any
of the tests in Sec. 1.401(a)(4)-2(b) or (c). Alternatively, the
defined benefit plan must satisfy any of the tests in Sec. 1.401(a)(4)-
3(b) or (c) without taking into account the offset described in
paragraph (d)(1)(i) of this section, and the defined contribution plan
must satisfy the uniform allocation safe harbor in Sec. 1.401(a)(4)-
2(b)(2).
(vii) The defined contribution plan may not be a section 401(k) plan
or a section 401(m) plan.
(2) Application of safe-harbor testing method to qualified offset
arrangements. A defined benefit plan that is part of a qualified offset
arrangement as defined in section 1116(f)(5) of the Tax Reform Act of
1986, Public Law No. 99-514, is deemed to satisfy the requirements of
paragraph (d)(1)(vi) and (vii) of this section, if the only defined
contribution plans included in the qualified offset arrangement are
section 401(k) plans, section 401(m) plans, or both, and the defined
benefit plan would satisfy the requirements of paragraph (d)(1)(vi) of
this section assuming the elective contributions for each employee under
the defined contribution plan were the same (either as a dollar amount
or as a percentage of compensation) for all plan years since the
establishment of the plan.
[T.D. 8360, 56 FR 47580, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992; 57 FR
10952, 10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46807, Sept.
3, 1993; T.D. 8954, 66 FR 34540, June 29, 2001]
Sec. 1.401(a)(4)-9 Plan aggregation and restructuring.
(a) Introduction. Two or more plans that are permissively aggregated
and treated as a single plan under Sec. Sec. 1.410(b)-7(d) must also be
treated as a single plan for purposes of section 401(a)(4). See Sec.
1.401(a)(4)-12 (definition of plan). An aggregated plan is generally
tested under the same rules applicable to single plans. Paragraph (b) of
this section, however, provides special rules for determining whether a
plan that consists of one or more defined contribution plans and one or
more defined benefit plans (a DB/DC plan) satisfies section 401(a)(4)
with respect to the amount of employer-provided benefits and the
availability of benefits, rights, and features. Paragraph (c) of this
section provides rules allowing a plan to be treated as consisting of
separate component plans and allowing the component plans to be tested
separately under section 401(a)(4).
(b) Application of nondiscrimination requirements to DB/DC plans--
(1) General rule. Except as provided in paragraph (b)(2) of this
section, whether a DB/DC plan satisfies section 401(a)(4) is determined
using the same rules applicable to a single plan. In addition, paragraph
(b)(3) of this section provides an optional rule for demonstrating
nondiscrimination in availability of benefits, rights, and features
provided under a DB/DC plan.
(2) Special rules for demonstrating nondiscrimination in amount of
contributions or benefits--(i) Application of general tests. A DB/DC
plan satisfies section 401(a)(4) with respect to the amount of
contributions or benefits for a plan year if it would satisfy Sec.
1.401(a)(4)-3(c)(1) (without regard to the special rule in Sec.
1.401(a)(4)-3(c)(3)) for the plan year if an employee's aggregate normal
and most valuable allocation rates, as determined under paragraph
(b)(2)(ii)(A) of this section, or an employee's aggregate normal and
most valuable accrual rates, as determined under paragraph (b)(2)(ii)(B)
of this section, were substituted for each employee's normal and most
valuable accrual rates, respectively, in the determination of rate
groups.
[[Page 164]]
(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 Sec. Sec. 1.401(a)(4)-2(c)(2)
and 1.401(a)(4)-8(c)(2), respectively. The employee's aggregate normal
allocation rate is the sum of the employee's allocation rate and
equivalent normal allocation rate determined in this manner, and the
employee's aggregate most valuable allocation rate is the sum of the
employee's allocation rate and equivalent most valuable allocation rate
determined in this manner.
(B) Aggregate accrual rates. An employee's aggregate normal and most
valuable accrual rates are determined by treating all defined
contribution plans that are part of the DB/DC plan as a single plan, and
all defined benefit plans that are part of the DB/DC plan as a separate
single plan; and determining an equivalent accrual rate and normal and
most valuable accrual rates for the employee under each plan under
Sec. Sec. 1.401(a)(4)-8(b)(2) and 1.401(a)(4)-3(d), respectively. The
employee's aggregate normal accrual rate is the sum of the employee's
equivalent accrual rate and the normal accrual rate determined in this
manner, and the employee's aggregate most valuable accrual rate is the
sum of the employee's equivalent accrual rate and most valuable accrual
rate determined in this manner.
(iii) Options applied on an aggregate basis. The optional rules in
Sec. 1.401(a)(4)-2(c)(2)(iv) (imputation of permitted disparity) and
(v) (grouping of rates) may not be used to determine an employee's
allocation or equivalent allocation rate, but may be applied to
determine an employee's aggregate normal and most valuable allocation
rates by substituting those rates (determined without regard to the
option) for the employee's allocation rate in that section where
appropriate. The optional rules in Sec. 1.401(a)(4)-3(d)(3) (e.g.,
imputation of permitted disparity) may not be used to determine an
employee's accrual or equivalent accrual rate, but may be applied to
determine an employee's aggregate normal and most valuable accrual rate
by substituting those rates (determined without regard to the option)
for the employee's normal and most valuable accrual rates, respectively,
in that section where appropriate.
(iv) Consistency rule--(A) General rule. Aggregate normal and most
valuable allocation rates and aggregate normal and most valuable accrual
rates must be determined in a consistent manner for all employees for
the plan year. Thus, for example, the same measurement periods and
interest rates must be used, and any available options must be applied
consistently, if at all, for the entire DB/DC plan. Consequently,
options that are not permitted to be used under Sec. 1.401(a)(4)-8 in
cross-testing a defined contribution plan or a defined benefit plan
(such as measurement periods that include future periods, non-standard
interest rates, the option to disregard compensation adjustments
described in Sec. 1.401(a)(4)-13(d), or the option to disregard plan
provisions providing for actuarial increases after normal retirement age
under Sec. 1.401(a)(4)-3(f)(3)) may not be used in testing a DB/DC plan
on either a benefits or contributions basis, because their use would
inevitably result in inconsistent determinations under the defined
contribution and defined benefit portions of the plan.
(B) Exception for section 415 alternative. A DB/DC plan does not
fail to satisfy the consistency rule in paragraph (b)(2)(iv)(A) of this
section merely because the limitations under section 415 are not taken
into account, or may not be taken into account, under Sec. 1.401(a)(4)-
3(d)(2)(ii)(B) in determining employees' accrual or equivalent
allocation rates under the defined benefit portion of the plan, even
though those limitations are applied in determining employees'
allocation and equivalent accrual rates under the defined contribution
portion of the plan.
(v) Eligibility for testing on a benefits basis--(A) General rule.
For plan years beginning on or after January 1, 2002, unless, for the
plan year, a DB/DC plan
[[Page 165]]
is primarily defined benefit in character (within the meaning of
paragraph (b)(2)(v)(B) of this section) or consists of broadly available
separate plans (within the meaning of paragraph (b)(2)(v)(C) of this
section), the DB/DC plan must satisfy the minimum aggregate allocation
gateway of paragraph (b)(2)(v)(D) of this section for the plan year in
order to be permitted to demonstrate satisfaction of the
nondiscrimination in amount requirement of Sec. 1.401(a)(4)-1(b)(2) on
the basis of benefits.
(B) Primarily defined benefit in character. A DB/DC plan is
primarily defined benefit in character if, for more than 50% of the
NHCEs benefitting under the plan, the normal accrual rate for the NHCE
attributable to benefits provided under defined benefit plans that are
part of the DB/DC plan exceeds the equivalent accrual rate for the NHCE
attributable to contributions under defined contribution plans that are
part of the DB/DC plan.
(C) Broadly available separate plans. A DB/DC plan consists of
broadly available separate plans if the defined contribution plan and
the defined benefit plan that are part of the DB/DC plan each would
satisfy the requirements of section 410(b) and the nondiscrimination in
amount requirement of Sec. 1.401(a)(4)-1(b)(2) if each plan were tested
separately and assuming that the average benefit percentage test of
Sec. 1.410(b)-5 were satisfied. For this purpose, all defined
contribution plans that are part of the DB/DC plan are treated as a
single defined contribution plan and all defined benefit plans that are
part of the DB/DC plan are treated as a single defined benefit plan. In
addition, if permitted disparity is used for an employee for purposes of
satisfying the separate testing requirement of this paragraph
(b)(2)(v)(C) for plans of one type, it may not be used in satisfying the
separate testing requirement for plans of the other type for the
employee.
(D) Minimum aggregate allocation gateway--(1) General rule. A DB/DC
plan satisfies the minimum aggregate allocation gateway if each NHCE has
an aggregate normal allocation rate that is at least one third of the
aggregate normal allocation rate of the HCE with the highest such rate
(HCE rate), or, if less, 5% of the NHCE's compensation, provided that
the HCE rate does not exceed 25% of compensation. If the HCE rate
exceeds 25% of compensation, then the aggregate normal allocation rate
for each NHCE must be at least 5% increased by one percentage point for
each 5-percentage-point increment (or portion thereof) by which the HCE
rate exceeds 25% (e.g., the NHCE minimum is 6% for an HCE rate that
exceeds 25% but not 30%, and 7% for an HCE rate that exceeds 30% but not
35%).
(2) Deemed satisfaction. A plan is deemed to satisfy the minimum
aggregate allocation gateway of this paragraph (b)(2)(v)(D) if the
aggregate normal allocation rate for each NHCE is at least 7\1/2\% of
the NHCE's compensation within the meaning of section 415(c)(3),
measured over a period of time permitted under the definition of plan
year compensation.
(3) Averaging of equivalent allocation rates for NHCEs. For purposes
of this paragraph (b)(2)(v)(D), a plan is permitted to treat each NHCE
who benefits under the defined benefit plan as having an equivalent
normal allocation rate equal to the average of the equivalent normal
allocation rates under the defined benefit plan for all NHCEs
benefitting under that plan.
(E) Determination of rates. For purposes of this paragraph
(b)(2)(v), the normal accrual rate and the equivalent normal allocation
rate attributable to defined benefit plans, the equivalent accrual rate
attributable to defined contribution plans, and the aggregate normal
allocation rate are determined under paragraph (b)(2)(ii) of this
section, but without taking into account the imputation of permitted
disparity under Sec. 1.401(a)(4)-7, except as otherwise permitted under
paragraph (b)(2)(v)(C) of this section.
(F) Examples. The following examples illustrate the application of
this paragraph (b)(2)(v):
Example 1. (i) Employer A maintains Plan M, a defined benefit plan,
and Plan N, a defined contribution plan. All HCEs of Employer A are
covered by Plan M (at a 1% accrual rate), but are not covered by Plan N.
All NHCEs of Employer A are covered by Plan N (at a 3% allocation rate),
but are not covered by Plan M. Because Plan M does not satisfy section
410(b) standing alone, Plans M
[[Page 166]]
and N are aggregated for purposes of satisfying sections 410(b) and
401(a)(4).
(ii) Because none of the NHCEs participate in the defined benefit
plan, the aggregated DB/DC plan is not primarily defined benefit in
character within the meaning of paragraph (b)(2)(v)(B) of this section
nor does it consist of broadly available separate plans within the
meaning of paragraph (b)(2)(v)(C) of this section. Accordingly, the
aggregated Plan M and Plan N must satisfy the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section in order be
permitted to demonstrate satisfaction of the nondiscrimination in amount
requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of benefits.
Example 2. (i) Employer B maintains Plan O, a defined benefit plan,
and Plan P, a defined contribution plan. All of the six employees of
Employer B are covered under both Plan O and Plan P. Under Plan O, all
employees have a uniform normal accrual rate of 1% of compensation.
Under Plan P, Employees A and B, who are HCEs, receive an allocation
rate of 15%, and participants C, D, E and F, who are NHCEs, receive an
allocation rate of 3%. Employer B aggregates Plans O and P for purposes
of satisfying sections 410(b) and 401(a)(4). The equivalent normal
allocation and normal accrual rates under Plans O and P are as follows:
------------------------------------------------------------------------
Equivalent Equivalent
normal normal
allocation accural
rates for rates for
the 1% the 15%/3%
Employee accural allocation
under plan under plan P
O (defined (defined
benefit contribution
plan) (in plan) (in
percent) percent)
------------------------------------------------------------------------
HCE A (age 55)............................... 3.93 3.82
HCE B (age 50)............................... 2.61 5.74
C (age 60)................................... 5.91 .51
D (age 45)................................... 1.74 1.73
E (age 35)................................... .77 3.90
F (age 25)................................... .34 8.82
------------------------------------------------------------------------
(ii) Although all of the NHCEs benefit under Plan O (the defined
benefit plan), the aggregated DB/DC plan is not primarily defined
benefit in character because the normal accrual rate attributable to
defined benefit plans (which is 1% for each of the NHCEs) is greater
than the equivalent accrual rate under defined contribution plans only
for Employee C. In addition, because the 15% allocation rate is
available only to HCEs, the defined contribution plan cannot satisfy the
requirements of Sec. 1.401(a)(4)-2 and does not have broadly available
allocation rates within the meaning of Sec. 1.401(a)(4)-8(b)(1)(iii).
Further, the defined contribution plan does not satisfy the minimum
allocation gateway of Sec. 1.401(a)(4)-8(b)(1)(vi) (3% is less than \1/
3\ of the 15% HCE rate). Therefore, the defined contribution plan within
the DB/DC plan cannot separately satisfy Sec. 1.401(a)(4)-1(b)(2) and
does not constitute a broadly available separate plan within the meaning
of paragraph (b)(2)(v)(C) of this section. Accordingly, the aggregated
plans are permitted to demonstrate satisfaction of the nondiscrimination
in amounts requirement of Sec. 1.401(a)(4)-1(b)(2) on the basis of
benefits only if the aggregated plans satisfy the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section.
(iii) Employee A has an aggregate normal allocation rate of 18.93%
under the aggregated plans (3.93% from Plan O plus 15% from Plan P),
which is the highest aggregate normal allocation rate for any HCE under
the plans. Employee F has an aggregate normal allocation rate of 3.34%
under the aggregated plans (.34% from Plan O plus 3% from Plan P) which
is less than the 5% aggregate normal allocation rate that Employee F
would be required to have to satisfy the minimum aggregate allocation
gateway of paragraph (b)(2)(v)(D) of this section.
(iv) However, for purposes of satisfying the minimum aggregate
allocation gateway of paragraph (b)(2)(v)(D) of this section, Employer B
is permitted to treat each NHCE who benefits under Plan O (the defined
benefit plan) as having an equivalent allocation rate equal to the
average of the equivalent allocation rates under Plan O for all NHCEs
benefitting under that plan. The average of the equivalent allocation
rates for all of the NHCEs under Plan O is 2.19% (the sum of 5.91%,
1.74%, .77%, and .34%, divided by 4). Accordingly, Employer B is
permitted to treat all of the NHCEs as having an equivalent allocation
rate attributable to Plan O equal to 2.19%. Thus, all of the NHCEs can
be treated as having an aggregate normal allocation rate of 5.19% for
this purpose (3% from the defined contribution plan and 2.19% from the
defined benefit plan) and the aggregated DB/DC plan satisfies the
minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this
section.
(3) Optional rules for demonstrating nondiscrimination in
availability of certain benefits, rights, and features--(i) Current
availability. A DB/DC plan is deemed to satisfy Sec. 1.401(a)(4)-
4(b)(1) with respect to the current availability of a benefit, right, or
feature other than a single sum benefit, loan, ancillary benefit, or
benefit commencement date (including the availability of in-service
withdrawals), that is provided under only one type of plan (defined
benefit or defined contribution) included in the DB/DC plan, if the
benefit, right, or feature is currently available to all NHCEs in all
plans of
[[Page 167]]
the same type as the plan under which it is provided.
(ii) Effective availability. The fact that it may be difficult or
impossible to provide a benefit, right, or feature described in
paragraph (b)(3)(i) of this section under a plan of a different type
than the plan or plans under which it is provided is one of the factors
taken into account in determining whether the plan satisfies the
effective availability requirement of Sec. 1.401(a)(4)-4(c)(1).
(c) Plan restructuring--(1) General rule. A plan may be treated, in
accordance with this paragraph (c), as consisting of two or more
component plans for purposes of determining whether the plan satisfies
section 401(a)(4). If each of the component plans of a plan satisfies
all of the requirements of sections 401(a)(4) and 410(b) as if it were a
separate plan, then the plan is treated as satisfying section 401(a)(4).
(2) Identification of component plans. A plan may be restructured
into component plans, each consisting of all the allocations, accruals,
and other benefits, rights, and features provided to a selected group of
employees. The employer may select the group of employees used for this
purpose in any manner, and the composition of the groups may be changed
from plan year to plan year. Every employee must be included in one and
only one component plan under the same plan for a plan year.
(3) Satisfaction of section 401(a)(4) by a component plan--(i)
General rule. The rules applicable in determining whether a component
plan satisfies section 401(a)(4) are the same as those applicable to a
plan. Thus, for this purpose, any reference to a plan in section
401(a)(4) and the regulations thereunder (other than this paragraph (c))
is interpreted as a reference to a component plan. As is true for a
plan, whether a component plan satisfies the uniformity and other
requirements applicable to safe harbor plans under Sec. Sec.
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 Sec. Sec.
1.401(k)-1(b)(3)(iii) and 1.401(m)-1(b)(3)(ii) for rules regarding the
inapplicability of restructuring to section 401(k) plans and section
401(m) plans.
(4) Satisfaction of section 410(b) by a component plan--(i) General
rule. The rules applicable in determining whether a component plan
satisfies section 410(b) are generally the same as those applicable to a
plan. However, a component plan is deemed to satisfy the average benefit
percentage test of Sec. 1.410(b)-5 if the plan of which it is a part
satisfies Sec. 1.410(b)-5 (without regard to Sec. 1.410(b)-5(f)). In
the case of a component plan that is part of a plan that relies on Sec.
1.410(b)-5(f) to satisfy the average benefit percentage test, the
component plan is deemed to satisfy the average benefit percentage test
only if the component plan separately satisfies Sec. 1.410(b)-5(f). In
addition, all component plans of a plan are deemed to satisfy the
average benefit percentage test if the plan makes an early retirement
window benefit (within the meaning of Sec. 1.401(a)(4)-3(f)(4)(iii))
currently available (within the meaning of Sec. 1.401(a)(4)-
3(f)(4)(ii)(A)) to a group of employees that satisfies section 410(b)
[[Page 168]]
(without regard to the average benefit percentage test), and if it would
not be necessary for the plan or any rate group or component plan of the
plan to satisfy that test in order for the plan to satisfy sections
401(a)(4) and 410(b) in the absence of the early retirement window
benefit.
(ii) Relationship to satisfaction of section 410(b) by the plan.
Satisfaction of section 410(b) by a component plan is relevant solely
for purposes of determining whether the plan of which it is a part
satisfies section 401(a)(4), and not for purposes of determining whether
the plan satisfies section 410(b) itself. The plan must still
independently satisfy section 410(b) in order to be a qualified plan.
Similarly, satisfaction of section 410(b) by a plan is relevant solely
for purposes of determining whether the plan, and not the component
plan, satisfies section 410(b). Thus, for example, a component plan that
does not satisfy the ratio percentage test of Sec. 1.410(b)-2(b)(2)
must still satisfy the average benefit test of Sec. 1.410(b)-2(b)(3),
even though the plan of which it is a part satisfies the ratio
percentage test.
(5) Effect of restructuring under other sections. The restructuring
rules provided in this paragraph (c) apply solely for purposes of
sections 401(a)(4) and 401(l), and those portions of sections 410(b),
414(s), and any other provisions that are specifically applicable in
determining whether the requirements of section 401(a)(4) are satisfied.
Thus, for example, a component plan is not treated as a separate plan
under section 401(a)(26).
(6) Examples. The following examples illustrate the rules in this
paragraph (c):
Example 1. Employer X maintains a defined benefit plan. The plan
provides a normal retirement benefit equal to 1.0 percent of average
annual compensation times years of service to employees at Plant S, and
1.5 percent of average annual compensation times years of service to
employees at Plant T. Under paragraph (c)(2) of this section, the plan
may be treated as consisting of two component defined benefit plans, one
providing retirement benefits equal to 1.0 percent of average annual
compensation times years of service to the employees at Plant S, and
another providing benefits equal to 1.5 percent of average annual
compensation times years of service to employees at Plant T. If each
component plan satisfies sections 401(a)(4) and 410(b) as if it were a
separate plan under the rules of this paragraph (c), then the entire
plan satisfies section 401(a)(4).
Example 2. (a) Employer Y maintains Plan A, a defined benefit plan,
for its Employees M, N, O, P, Q, and R. Plan A provides benefits under a
uniform formula that satisfies the requirements of Sec. 1.401(a)(4)-3
(b)(2) and (b)(3) before it is amended on February 14, 1994. The
amendment provides an early retirement window benefit that is a
subsidized optional form of benefit under Sec. 1.401(a)(4)-3(b)(2)(iii)
and that is available on the same terms to all employees who satisfy the
eligibility requirements for the window. The early retirement window
benefit is available only to employees who retire between June 1, 1994,
and November 30, 1994.
(b) Assume that Employees M, N, and O will be eligible to receive
the window benefit by the end of the window period and Employees P, Q,
and R will not. Because substantially all employees will not satisfy the
eligibility requirements for the early retirement window benefit by the
close of the early retirement window benefit period, Plan A fails to
satisfy the uniform subsidies requirement of Sec. 1.401(a)(4)-
3(b)(2)(iii). See Sec. 1.401(a)(4)-3(b)(2)(vi), Example 6.
(c) Under paragraph (c)(2) of this section, Employees M, N, O, P, Q,
and R may be grouped into two component plans, one consisting of
Employees M, N, and O, and all their accruals and other benefits,
rights, and features under the plan (including the early retirement
window benefit), and another consisting of Employees P, Q, and R, and
all their accruals and other benefits, rights, and features under the
plan. Each of the component plans identified in this manner satisfies
the uniform subsidies requirement of Sec. 1.401(a)(4)-3(b)(2)(iii), and
thus satisfies Sec. 1.401(a)(4)-3(b). The entire plan satisfies section
401(a)(4) under the rules of this paragraph (c), if each of these
component plans also satisfies section 410(b) as if it were a separate
plan (including, if applicable, the reasonable classification
requirement of Sec. 1.410(b)-4(b), and taking into account the special
rule of paragraph (c)(4)(i) of this section that forgives the average
benefit percentage test in certain situations in which the average
benefit percentage test would be required solely as a result of the
early retirement window benefit).
Example 3. (a) Employer Z maintains Plan B, a defined benefit plan
with a benefit formula that provides two percent of average annual
compensation for each year of service up to 20 to each employee. Assume
that Plan B would satisfy the fractional accrual rule safe harbor in
Sec. 1.401(a)(4)-3(b)(4), except that some employees accrue a portion
of their normal retirement benefit in the current
[[Page 169]]
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]
Editorial Note: By T.D. 9169, 69 FR 78153, Dec. 29, 2004, the
Internal Revenue Service published a document in the Federal Register,
attempting to amend paragraph (c)(3)(ii) of Sec. 1.401-(a)(4)-9 by
removing ``1.401(k)-1(b)(3)(ii) and 1.401(m)-1(b)(3)(ii)'' and inserting
``1.401(k)-1(b)(4)(vi)(B) and 1.401(m)-1(b)(4)(iv)''. However, because
of inaccurate amendatory language, this amendment could not be
incorporated.
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
[[Page 170]]
HCEs retired, Plan A discriminates significantly in favor of former
HCEs, and thus does not satisfy this paragraph (b).
Example 3. The facts are the same as in Example 1, except that Plan
A is only amended to increase the benefits of former employees in pay
status who terminated employment with Employer X after attaining early
retirement age. The determination of whether the amendment causes Plan A
to fail to satisfy this paragraph (b) must take into account the
relative numbers of former HCEs and former NHCEs who have terminated
employment with Employer X after attaining early retirement age.
(c) Nondiscrimination in availability of benefits, rights, or
features. A plan satisfies section 401(a)(4) with respect to the
availability of benefits, rights, and features provided to former
employees if any change in the availability of any benefit, right, or
feature to any former employee is applied in a manner that, under all of
the relevant facts and circumstances, does not discriminate
significantly in favor of former HCEs. For purposes of demonstrating
that a plan satisfies section 401(a)(4) with respect to the availability
of loans provided to former employees, an employer may treat former
employees who are parties in interest within the meaning of section
3(14) of the Employee Retirement Income Security Act of 1974 as
employees.
[T.D. 8485, 58 FR 46812, Sept. 3, 1993]
Sec. 1.401(a)(4)-11 Additional rules.
(a) Introduction. This section provides additional rules for
determining whether a plan satisfies section 401(a)(4). Paragraph (b) of
this section provides rules for the treatment of the portion of an
employee's accrued benefit or account balance that is attributable to
rollovers, transfers between plans, and employee buybacks. Paragraph (c)
of this section provides rules regarding 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 Sec. Sec. 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
[[Page 171]]
would otherwise have been credited under the plan and that preceded
their participation in the plan.
(c) Vesting--(1) General rule. A plan satisfies this paragraph (c)
if the manner in which employees vest in their accrued benefits under
the plan does not discriminate in favor of HCEs. Whether the manner in
which employees vest in their accrued benefits under a plan
discriminates in favor of HCEs is determined under this paragraph (c)
based on all of the relevant facts and circumstances, taking into
account any relevant provisions of sections 401(a)(5)(E), 411(a)(10),
411(d)(1), 411(d)(2), 411(d)(3), 411(e), and 420(c)(2), and taking into
account any plan provisions that affect the nonforfeitability of
employees' accrued benefits (e.g., plan provisions regarding suspension
of benefits permitted under section 411(a)(3)(B)), other than the method
of crediting years of service for purposes of applying the vesting
schedule provided in the plan.
(2) Deemed equivalence of statutory vesting schedules. For purposes
of this paragraph (c), the manner in which employees vest in their
accrued benefits under the vesting schedules in section 411(a)(2) (A)
and (B) are treated as equivalent to one another, and the manner in
which employees vest in their accrued benefits under the vesting
schedules in section 416(b)(1) (A) and (B) are treated as equivalent to
one another.
(3) Safe harbor for vesting schedules. The manner in which employees
vest in their accrued benefits under a plan is deemed not to
discriminate in favor of HCEs if each combination of plan provisions
that affect the nonforfeitability of any employee's accrued benefit
would satisfy the nondiscriminatory availability requirements of 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
[[Page 172]]
discriminate in favor of HCEs merely because, based on Employer Y's
reasonable belief that the sale will cause a partial termination, Plan B
is amended to vest fully the accrued benefits of each of the employees
it reasonably believes to be an affected employee.
(d) Service-crediting rules--(1) Overview--(i) In general. A defined
benefit plan or a defined contribution plan does not satisfy this
paragraph (d) with respect to the manner in which service is credited
under the plan unless the plan satisfies paragraph (d)(2) of this
section. Paragraph (d)(3) of this section provides rules for determining
whether service other than actual service with the employer may be taken
into account in determining whether a defined benefit plan or a defined
contribution plan satisfies Sec. 1.401(a)(4)-1 (b)(2) or (b)(3).
(However, for purposes of cross-testing a defined contribution plan,
only years in which the employee benefited under the plan may be taken
into account in determining equivalent accrual rates. See Sec.
1.401(a)(4)-8(b)(2)(i).) The rules of this paragraph (d) apply
separately to service credited under a plan for each different purpose
under the plan, including, but not limited to: application of the
benefit formula (benefit service), application of the accrual method
(accrual service), application of the vesting schedule (vesting
service), entitlement to benefits, rights, and features (entitlement
service), application of the requirements for eligibility to participate
in the plan (eligibility service).
(ii) Special rule for pre-effective date service. A plan is deemed
to satisfy this paragraph (d) with respect to service credited for
periods prior to the effective date applicable to the plan under Sec.
1.401(a)(4)-13 (a) or (b) under a plan provision adopted and in effect
as of February 11, 1993 (and any such service may be taken into account
for purposes 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).
[[Page 173]]
Example 2. (a) The facts are the same as in Example 1, except Plan A
requires hourly employees to complete 2,000 hours of service in order to
be credited with a full year of service, with a pro rata reduction for
hourly employees who complete fewer than 2,000 hours of service.
(b) Plan A does not fail to satisfy this paragraph (d)(2) merely
because different service-crediting provisions are applied to salaried
and hourly employees for administrative convenience. The service-
crediting provisions for hourly employees in Plan A are reasonably
comparable to the service-crediting provisions for salaried employees.
This is because the amount of service credited to hourly employees whose
employment terminates (i.e., quit, retire, are discharged, or die)
during the plan year is reasonably comparable to the amount of service
credited to salaried employees whose employment is terminated during the
plan year with the same period of employment during the plan year.
(3) Service-crediting period--(i) Limitation on service taken into
account--(A) General rule. Except as otherwise provided in this
paragraph (d)(3), service for periods in which an employee does not
perform services as an employee of the employer or in which the employee
did not participate in the plan may not be taken into account in
determining whether the plan satisfies Sec. 1.401(a)(4)-1 (b)(2) and
(b)(3). In addition, in determining whether a plan satisfies Sec.
1.401(a)(4)-1 (b)(2) and (b)(3), no more than one year of service may be
taken into account with respect to any 12-consecutive-month period (with
adjustments for shorter periods, if appropriate) unless the additional
service is required to be credited under section 410 or 411, whichever
is applicable.
(B) Past service. Notwithstanding paragraph (d)(3)(i)(A) of this
section, 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
[[Page 174]]
for another employer, e.g., a joint venture), or while the employee has
a reduced work schedule and would not otherwise be credited with service
at the level being credited under the general terms of the plan.
(iii) Requirements for pre-participation and imputed service--(A)
Provision applied to all similarly-situated employees--(1) General rule.
A plan provision crediting pre-participation service or imputed service
to any HCE must apply on the same terms to all similarly-situated NHCEs.
Whether two employees are similarly situated for this purpose must be
determined based on reasonable business criteria, generally taking into
account only the circumstances resulting in the employees being covered
under the plan or being granted imputed service and on the situation of
the employees (e.g., the plan in which the employees benefit or the
employer by which they are employed) during the period for which the
pre-participation service or imputed service is credited. For example,
employees who enter a plan as a result of a particular merger and who
participated in the same plan of a prior employer are generally
similarly situated. As another example, employees who are transferred to
different joint ventures or different spun-off divisions are generally
not similarly situated.
(2) Examples. The following examples illustrate the rules in this
paragraph (d)(3)(iii)(A):
Example 1. Employer X maintains defined benefit Plans A and B and
defined contribution Plan C. Plan A covers all employees who work at the
headquarters of Employer X. Plan B covers some employees in Division M
of Employer X, and Plan C covers the other employees of Division M.
Plans B and C have not been aggregated for purposes of satisfying
section 401(a)(4) or 410(b) for the period 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
[[Page 175]]
relationship and the type of service being credited (e.g., vesting
service as compared to benefit service or accrual service). A legitimate
business reason is deemed to exist for a plan to credit military service
as service with the employer.
(3) Examples. The following examples illustrate the rules in this
paragraph (d)(3)(iii)(B):
Example 1. Twenty unrelated employers jointly sponsor a multiple-
employer plan that covers all employees of the employers. From time to
time, employees transfer employment among the employers. There is a
legitimate business reason for a disaggregated portion of the plan that
benefits the employees of one of the employers to treat service with any
of the other employers as service with the employer.
Example 2. Employer X owns 20 percent of the outstanding stock of
Employer Y. From time to time, employees transfer from Employer X to
Employer Y at the request of Employer X. Employer X maintains defined
benefit Plan A. Plan A provides that years of service include an
employee's years of service with Employer Y. There is a legitimate
business reason for Plan A to credit service with Employer Y because
Employer X, through its 20-percent ownership interest, benefits from the
service that the transferred employees provide to Employer Y.
Example 3. Employer Z manufactures widgets and belongs to the
National Widget Manufacturers' Association. From time to time, Employer
Z hires employees from other widget manufacturers. Employer Z maintains
a defined benefit plan, Plan B, which credits pre-participation service
for periods of service with all other members of the Association located
in the western half of the United States as service with Employer Z.
There is a legitimate business reason for Plan B to treat service with
other members of the Association as service with Employer Z.
(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.
[[Page 176]]
(b) The Plan A provision crediting service under Plan B does not
discriminate significantly in favor of HCEs. The provision is designed
only to prevent employees from being disadvantaged by being transferred
from Division M to the headquarters, and a meaningful number of NHCEs
can be expected to benefit from it.
Example 2. (a) The facts are the same as in Example 1, except that
the only employees transferred from Division M to the headquarters of
Employer U are HCEs (but not the most highly-paid HCEs of Employer U).
(b) Employer U determines that Plan A would have satisfied sections
401(a)(4) and 410(b) for the period for which the transferred employees
are being credited with pre-participation service had the employees
participated in Plan A during that period. This determination is based
on test results under sections 401(a)(4) and 410(b) for the current
year, taking into account significant demographic changes over this
period.
(c) The Plan A provision crediting service under Plan B does not
significantly discriminate in favor of HCEs in the current year. This
conclusion is based on the fact that the circumstances underlying the
transfers indicate that they were made for bona fide business reasons,
that Plan A would have satisfied sections 401(a)(4) and 410(b) had the
transferred employees participated in Plan A during the period for which
the pre-participation service is credited, and that the transferred
employees are not the most highly-paid HCEs of Employer U.
Example 3. (a) The facts are the same as in Example 1, except that
the only employee who is transferred from Division M to the headquarters
of Employer U is Employee P, who is among the most highly-paid HCEs of
Employer U. Plan A provides an unreduced early retirement benefit at age
55 for employees with 20 years of service, but Plan B's early retirement
benefits are not subsidized. Employee P is transferred to the
headquarters with 20 years of service credited under Plan B and shortly
before attainment of age 55. Employee P is expected to retire upon
reaching age 55.
(b) The Plan A provision crediting service under Plan B
discriminates significantly in 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
[[Page 177]]
ever been transferred are HCEs. Employer W maintains a defined benefit
plan, Plan D, which credits employees transferred to Employer X with
imputed benefit and accrual service while employed by Employer X.
Employer X maintains no qualified plan. Plan D would fail either section
401(a)(4) or section 410(b) in the current plan year if the individuals
employed by Employer X were treated as employed by Employer W. In
addition, Plan D would fail either section 401(a)(4) or section 410(b)
in the current plan year if the portion of Plan D covering the
transferred employees were treated as maintained by Employer X. The Plan
D provision crediting imputed benefit and accrual service to employees
transferred to Employer X significantly discriminates in favor of HCEs
in the current plan year.
Example 6. The facts are the same as in Example 5, except that Plan
D credits the individuals who transfer to Employer X only with imputed
vesting and entitlement service. The Plan D provision crediting imputed
vesting and entitlement service to individuals transferred to Employer X
does not significantly discriminate in favor of HCEs in the current plan
year, because there is less potential for discrimination when the only
types of service being imputed are vesting and entitlement service.
(iv) Additional rules for imputed service--(A) Legitimate business
reasons for crediting imputed service--(1) General rule. A legitimate
business reason does not exist for a plan to impute service after an
individual has permanently ceased to perform services as an employee
(within the meaning of Sec. 1.410(b)-9) for the employer maintaining
the plan, i.e., is not expected to resume performing services as an
employee for the employer. The preceding sentence does not apply in the
case of an individual who is not performing services for the employer
because of disability or is performing services for 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.
[[Page 178]]
(v) Satisfaction of other service-crediting rules. A plan does not
fail to satisfy this paragraph (d)(3) merely because it credits service
to the extent necessary to satisfy the service-crediting rules in
section 410(a), 411(a), 413, or 414(a), Sec. 1.410(a)-7 (elapsed-time
method of service-crediting) or 29 CFR 2530.200b-2 (regarding hours of
service to be credited), whichever is applicable, or 29 CFR Sec.
2530.204-2(d) (regarding double proration of service and compensation).
(e) Family aggregation rules. [Reserved]
(f) Governmental plans. [Reserved]
(g) Corrective amendments--(1) In general. A corrective amendment
that satisfies the rules of this paragraph (g) is taken into account for
purposes of satisfying certain section 401(a) requirements for a plan
year, by treating the corrective amendment as if it were adopted and
effective as of the first day of the plan year. These rules apply in
addition to the rules of section 401(b). Paragraph (g)(2) of this
section describes the scope of the corrective amendments that are
permitted to be made. Paragraph (g)(3) of this section specifies the
conditions under which a corrective amendment may be made. Paragraph
(g)(4) of this section provides a rule prohibiting a corrective
amendment from being taken into account to the extent that it does not
have substance. Paragraph (g)(5) of this section discusses the effect of
the corrective amendments permitted under this paragraph (g) under
provisions other than section 401(a).
(2) Scope of corrective amendments. For purposes of satisfying the
minimum coverage requirements of section 410(b), the nondiscriminatory
amount requirement of Sec. 1.401(a)(4)-1(b)(2), or 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
[[Page 179]]
available to those employees before that date.
(iv) Time when amendment must be adopted and put into effect--(A)
General rule. Any corrective amendment intended to apply to the
preceding plan year must be adopted and implemented on or before the
15th day of the 10th month after the close of the plan year in order to
be taken into account for the preceding plan year.
(B) Determination letter requested by employer or plan
administrator. If, on or before the end of the period set forth in
paragraph (g)(3)(iv)(A) of this section, the employer or plan
administrator files a request pursuant to Sec. 601.201(o) of this
chapter (Statement of Procedural Rules) for a determination letter on
the amendment, the initial or continuing qualification of the plan, or
the trust that is part of the plan, the period set forth in paragraph
(g)(3)(iv)(A) of this section is extended in the same manner as provided
for an extension of the remedial amendment period under Sec. 1.401(b)-
1(d)(3).
(v) Corrective amendment for coverage or amounts testing--(A)
Retroactive benefits must be provided to nondiscriminatory group. Except
as provided in paragraph (g)(3)(v)(B) of this section, if the corrective
amendment is adopted after the close of the plan year, the additional
allocations or accruals for the preceding year resulting from the
corrective amendment must separately satisfy section 401(a)(4) for the
preceding plan year and must benefit a group of employees that
separately satisfies section 410(b) (determined by applying the same
rules as are applied in determining whether a component plan separately
satisfies section 410(b) under Sec. 1.401(a)(4)-9(c)(4)). Thus, for
example, in applying the rules of this paragraph (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.
[[Page 180]]
(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)-6 (QNECs) to nonhighly compensated nonexcludable employees who
were not eligible employees within the meaning of Sec. 1.401(k)-6 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)-5 for the given plan year, and the amount of
the QNECs granted to each nonhighly compensated nonexcludable employee
equals the product of the nonhighly compensated nonexcludable employee's
plan year compensation and the actual contribution percentage (within
the meaning of section 401(m)(3)) for the given plan year for the group
of NHCEs who are eligible employees.
(B) Correction of rate of match. In the case of a section 401(m)
plan, allocations for a given plan year granted under a corrective
amendment to NHCEs who made contributions for the plan year eligible for
a matching contribution may be treated as matching contributions. These
allocations treated as matching contributions may be taken into account
for purposes of satisfying the current availability requirement of Sec.
1.401(a)(4)-4(b) with respect to the right to a rate of match, but may
not be taken into account for satisfying other amounts testing.
(4) Corrective amendments must have substance. A corrective
amendment is not taken into account in determining whether a plan
satisfies section 401(a)(4) or 410(b) to the extent the amendment
affects nonvested employees whose employment with the employer
terminated on or before the close of the preceding year, and who
therefore would not have received any economic benefit from the
amendment if it had been made in the prior year. Similarly, in
determining whether the requirements of paragraph (g)(3)(vi)(C)(1) of
this section are satisfied, a corrective amendment making a benefit,
right, or feature available to employees is not taken into account to
the extent the benefit, right, or feature is not currently available to
any of those employees immediately after the amendment. However, a plan
will not fail to satisfy the requirements of paragraph (g)(3)(vi)(C)(1)
of this section by operation of the provisions in this paragraph (g)(4)
if the benefit, right, or feature is made available to all employees in
the plan as of the date of the amendment.
(5) Effect under other statutory requirements. A corrective
amendment under this paragraph (g) is treated as if it were adopted and
effective as of the first day of the plan year only for the specific
purposes described in this paragraph (g). Thus, for example, the
corrective amendment is taken into account not only for purposes of
sections 401(a)(4) and 410(b), but also for purposes of determining
whether the plan satisfies sections 401(l). By contrast, the amendment
is not given retroactive effect for purposes of section 404 (deductions
for employer contributions) or section 412 (minimum funding standards),
unless otherwise provided for in rules applicable to those sections.
(6) Examples. The following examples illustrate the rules in this
paragraph (g):
Example 1. Employer U maintains a calendar year defined benefit plan
that in 1994 is tested using the safe harbor for flat benefit plans in
Sec. 1.401(a)(4)-3(b)(4). In 1996, Employer U is concerned that the
plan will not satisfy the demographic requirement in Sec. 1.401(a)(4)-
[[Page 181]]
3(b)(4)(i)(C)(3) for the 1995 plan year because the average of the
normal accrual rates for all NHCEs is less than 70 percent of the
average of the normal accrual rates for all HCEs. Provided the
corrective amendment would otherwise satisfy this paragraph (g),
Employer U may make a corrective amendment to the plan to increase the
number of NHCEs so that the amended plan satisfies the safe harbor for
the 1995 plan year. The corrective amendment need not satisfy paragraph
(g)(3)(v)(A) of this section because Employer U is retroactively
amending the plan to conform to a safe harbor in Sec. 1.401(a)(4)-3(b).
See paragraph (g)(3)(v)(B) of this section.
Example 2. (a) Employer V maintains a calendar year defined
contribution plan covering all the employees in Division M and Division
N. Under the plan, only employees in Division M have the right to direct
the investments in their account. For plan years prior to 1996, the plan
met the current availability requirement of Sec. 1.401(a)(4)-4(b)
because the employees in Division M were a group of employees that
satisfied the nondiscriminatory classification test of Sec. 1.410(b)-4.
Because of attrition in the employee population in Division M in 1996,
the group of employees to whom the right to direct investments is
available during that plan year no longer meets the nondiscriminatory
classification test of Sec. 1.410(b)-4. Thus, the right to direct
investments under the plan does not meet the current availability
requirement of Sec. 1.401(a)(4)-4(b) during the 1996 plan year.
(b) Employer V may amend the plan in 1997 (but on or before October
15) to make the right to direct investments available from the date of
the corrective amendment to a larger group of employees and the
corrective amendment may be taken into account for purposes of
satisfying the current availability requirement of Sec. 1.401(a)(4)-
4(b) for 1996 if the amendment satisfies this paragraph (g). Thus, for
example, the group of employees to whom the right to direct investments
is currently available, after taking into account the corrective
amendment, must satisfy the nondiscriminatory classification test of
Sec. 1.410(b)-4 for 1996 using a safe harbor percentage (or if lower,
the ratio 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
[[Page 182]]
even if, after taking the amendment into account, the plan would satisfy
sections 410(b) and 401(a)(4) for the 1998 plan year.
Example 5. Employer X maintains two plans--Plan A and Plan B. Plan A
satisfies the ratio percentage test of Sec. 1.410(b)-2(b)(2), but Plan
B does not. Thus, in order to satisfy section 410(b), Plan B must
satisfy the average benefits test of Sec. 1.410(b)-2(b)(3). The average
benefit percentage of Plan B is 60 percent. Employer X may take into
account a corrective amendment that increases the accruals under either
Plan A or Plan B so that the average benefit percentage meets the 70
percent requirement of the average benefits test, if the amendment
satisfies paragraph (g)(3)(v) of this section.
Example 6. Employer Y maintains Plan C, which does not satisfy
section 401(a)(4) in a plan year. Under the terms of paragraph (g)(2) of
this section, Employer Y amends Plan C to increase the benefits of
certain employees retroactively. In designing the amendment, Employer Y
identifies those employees who have terminated without vested benefits
during the period after the end of the prior plan year and before the
adoption date of the amendment, and the amendment provides increases in
benefits primarily to those employees. It would be inconsistent with the
purpose of preventing discrimination in favor of HCEs for Plan C to
treat the amendment as retroactively effective under this paragraph (g).
See Sec. 1.401(a)(4)-1(c)(2).
Example 7. Employer Z maintains both a section 401(k) plan and a
section 401(m) plan that provides matching contributions at a rate of 50
percent with respect to elective contributions under the section 401(k)
plan. In plan year 1995, the section 401(k) plan fails to satisfy the
actual deferral percentage test of section 401(k)(3). In order to
satisfy section 401(k)(3), Employer Z makes corrective distributions to
HCEs H1 through H10 of their excess contributions as provided under
Sec. 1.401(k)-2(b). 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, as amended by T.D. 9169, 69 FR
78153, Dec. 29, 2004]
Sec. 1.401(a)(4)-12 Definitions.
Unless otherwise provided, the definitions in this section govern in
applying the provisions of Sec. Sec. 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
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the same actuarial assumptions) at that time is the same.
Actuarial present value. Actuarial present value means the value as
of a specified date of an amount or series of amounts due thereafter,
where each amount is--
(1) Multiplied by the probability that the condition or conditions
on which payment of the amount is contingent will be satisfied; and
(2) Discounted according to an assumed rate of interest to reflect
the time value of money.
Ancillary benefit. Ancillary benefit is defined in Sec.
1.401(a)(4)-4(e)(2).
Average annual compensation. Average annual compensation is defined
in Sec. 1.401(a)(4)-3(e)(2).
Base benefit percentage. Base benefit percentage is defined in Sec.
1.401(l)-1(c)(3).
Benefit formula. Benefit formula means the formula a defined benefit
plan applies to determine the accrued benefit (within the meaning of
section 411(a)(7)(A)(i)) in the form of an annual benefit commencing at
normal retirement age of an employee who continues in service until
normal retirement age. Thus, for example, the benefit formula does not
include the accrual method the plan applies (in conjunction with the
benefit formula) to determine the accrued benefit of an employee who
terminates employment before normal retirement age. For purposes of this
definition, a change in plan provisions that applies only to certain
employees who terminate within a limited period of time (e.g., an early
retirement window benefit) is treated as a change in the plan's benefit
formula for the employees to whom the change is potentially applicable
during the period that the change is potentially applicable to them. The
preceding sentence applies only to the 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
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within the meaning of Sec. 1.410(b)-9, other than an excludable
employee with respect to the plan as determined under Sec. 1.410(b)-6.
A nonexcludable employee may be either a highly or nonhighly compensated
nonexcludable employee, depending on the nonexcludable employee's status
under section 414(q).
Normalize. With respect to a benefit payable to an employee in a
particular form, normalize means to convert the benefit to an
actuarially equivalent straight life annuity commencing at the
employee's testing age. The actuarial assumptions used in normalizing a
benefit must be reasonable and must be applied on a gender-neutral
basis. A standard interest rate and a standard mortality table are among
the assumptions considered reasonable for this purpose.
Offset plan. Offset plan is defined in Sec. 1.401(l)-1(c)(24).
Optional form of benefit. Optional form of benefit is defined in
Sec. 1.401(a)(4)-4(e)(1).
Other right or feature. Other right or feature is defined in Sec.
1.401(a)(4)-4(e)(3).
Plan. Plan means a plan within the meaning of Sec. 1.410(b)-7 (a)
and (b), after application of the mandatory disaggregation rules of
Sec. 1.410(b)-7(c) and the permissive aggregation rules of Sec.
1.410(b)-7(d).
Plan year. Plan year is defined in Sec. 1.410(b)-9.
Plan year compensation--(1) In general. Plan year compensation means
section 414(s) compensation for the plan year determined by measuring
section 414(s) compensation during one of the periods described in
paragraphs (2) through (4) of this definition. Whichever period is
selected must be applied uniformly to determine the plan year
compensation of every employee.
(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
[[Page 185]]
accrued social security supplement equals the employee's average annual
compensation up to the integration level, multiplied by the disparity
provided by the plan for the employee's years of service used in
determining the employee's accrued benefit under the plan. In the case
of a section 401(l) plan that is an offset plan, each employee's accrued
social security supplement equals the dollar amount of the offset
accrued for the employee under the plan.
(iii) PIA offset plan. In the case of a PIA offset plan, each
employee's accrued social security supplement equals the dollar amount
of the offset accrued for the employee under the plan. For this purpose,
a PIA offset plan is a plan that reduces an employee's benefit by an
offset based on a stated percentage of the employee's primary insurance
amount under the Social Security Act.
(iv) Other plans. In the case of any other plan, each employee's
social security supplement accrues ratably over the period beginning
with the later of the employee's commencement of participation in the
plan or the effective date of the social security supplement and ending
with the earliest age at which the social security supplement is payable
to the employee. The effective date of the social security supplement is
the later of the effective date of the amendment adding the social
security supplement or the effective date of the amendment modifying an
existing social security supplement to comply with the requirements of
this definition. If, by the end of the first plan year to which these
regulations apply, as set forth in Sec. 1.401(a)(4)-13 (a) and (b), 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
[[Page 186]]
the social security supplement after plan termination.
Qualified plan. Qualified plan means a plan that satisfies section
401(a). For this purpose, a qualified plan includes an annuity plan
described in section 403(a).
Rate group. Rate group is defined in Sec. 1.401(a)(4)-2(c)(1) or is
defined in Sec. 1.401(a)(4)-3(c)(1).
Ratio percentage. Ratio percentage is defined in Sec. 1.410(b)-9.
Section 401(a)(17) employee. Section 401(a)(17) employee is defined
in Sec. 1.401(a)(17)-1(e)(2)(ii).
Section 401(k) plan. Section 401(k) plan is defined in Sec.
1.410(b)-9.
Section 401(l) plan. Section 401(l) plan is defined in Sec.
1.410(b)-9.
Section 401(m) plan. Section 401(m) plan is defined in Sec.
1.410(b)-9.
Section 414(s) compensation--(1) General rule. When used with
reference to compensation for a plan year, 12-month period, or other
specified period, section 414(s) compensation means compensation
measured using an underlying definition that satisfies section 414(s)
for the applicable plan year. Whether an underlying definition of
compensation satisfies section 414(s) is determined on a year-by-year
basis, based on the provisions of section 414(s) in effect for the
applicable plan year and, if relevant, the employer's HCEs and NHCEs for
that plan year. See Sec. 1.414(s)-1(i) for transition rules for plan
years beginning before the effective date applicable to the plan under
Sec. 1.401(a)(4)-13 (a) or (b). For a plan year or 12-month period
beginning before January 1, 1988, any underlying definition of
compensation may be used to measure the amount of employees'
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
[[Page 187]]
any adjustment to reflect the equivalent of full-time compensation
required by 29 CFR 2530.204-2(d).
Social security supplement. Social security supplement is defined in
Sec. 1.411(a)-7(c)(4)(ii).
Standard interest rate. Standard interest rate means an interest
rate that is neither less than 7.5 percent nor greater than 8.5 percent,
compounded annually. The Commissioner may, in revenue rulings, notices,
and other guidance of general applicability, change the definition of
standard interest rate.
Standard mortality table. Standard mortality table means one of the
following tables: the UP-1984 Mortality Table (Unisex); the 1983 Group
Annuity Mortality Table (1983 GAM) (Female); the 1983 Group Annuity
Mortality Table (1983 GAM) (Male); the 1983 Individual Annuity Mortality
Table (1983 IAM) (Female); the 1983 Individual Annuity Mortality Table
(1983 IAM) (Male); the 1971 Group Annuity Mortality Table (1971 GAM)
(Female); the 1971 Group Annuity Mortality Table (1971 GAM) (Male); the
1971 Individual Annuity Mortality Table (1971 IAM) (Female); or the 1971
Individual Annuity Mortality Table (1971 IAM) (Male). These standard
mortality tables are available from the Society of Actuaries, 475 N.
Martingale Road, Suite 800, Schaumberg, Illinois 60173. The Commissioner
may, in revenue rulings, notices, and other guidance of general
applicability, change the definition of standard mortality table. See
Sec. 601.601(d)(2)(ii)(b) of this Chapter. 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
[[Page 188]]
than the fifth anniversary of the time each employee commenced
participation in the plan. For employees who commenced participation in
the plan before the first plan year beginning on or after January 1,
1988, the stated anniversary date may be later than the anniversary
described in the preceding sentence if it is no later than the earlier
of the tenth anniversary of the date the employee commenced
participation in the plan (or such earlier anniversary selected by the
employer, if less than 10) or the fifth anniversary of the first day of
the first plan year beginning on or after January 1, 1988.
(ii) Use of service other than anniversary of commencement of
participation. In lieu of using a stated anniversary date as permitted
under paragraph (3)(i) of this definition, a plan may use a stated
number of years of service measured on another basis, provided that the
determination is made on a basis that satisfies section 411(a)(8) and
that the stated number of years of service does not exceed the number of
anniversaries permitted under paragraph (3)(i) of this definition. For
example, a uniform normal retirement age could be based on the earlier
of the fifth anniversary of the commencement of participation and the
completion of five years of vesting service.
(4) Conversion of normal retirement age to normal retirement date. A
group of employees does not fail to have a uniform normal retirement age
merely because a defined benefit plan provides for the commencement of
normal retirement benefits on different retirement dates for different
employees if each employee's normal retirement date is determined on a
reasonable basis with reference to an otherwise uniform normal
retirement age and the 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, Sec. Sec. 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), Sec. Sec. 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 Sec. Sec. 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), Sec. Sec. 1.401(a)(4)-
1 through 1.401(a)(4)-13 apply to plan years beginning on or
[[Page 189]]
after the later of January 1, 1996, or 90 days after the opening of the
first legislative session beginning on or after January 1, 1996, of the
governing body with authority to amend the plan, if that body does not
meet continuously. Such plans are deemed to satisfy section 401(a)(4)
for plan years before that effective date. For purposes of this
paragraph (b), the governing body with authority to amend the plan is
the legislature, board, commission, council, or other governing body
with authority to amend the plan.
(c) Fresh-start rules for defined benefit plans--(1) Introduction.
This paragraph (c) provides rules that must be satisfied in order to use
the fresh-start testing options for defined benefit plans in Sec.
1.401(a)(4)-3(b)(6)(vii) and (d)(3)(iii), relating to the safe harbors
and the general test, respectively. Those fresh-start options are
designed to allow a plan to be tested without regard to benefits accrued
before a selected fresh-start date. To the extent provided in paragraph
(d) of this section, those options also may be used to disregard certain
increases in benefits attributable to compensation increases after a
fresh-start date. Although this paragraph (c) generally requires a plan
to be amended to freeze employees' accrued benefits as of a fresh-start
date and to provide any additional accrued benefits after the fresh-
start date solely in accordance with certain specified formulas, certain
of these requirements do not apply to a plan that is tested under the
general test of Sec. 1.401(a)(4)-3(c). See Sec. 1.401(a)(4)-
3(b)(6)(vii) and (d)(3)(iii).
(2) General rule. A defined benefit plan satisfies this paragraph
(c) if--
(i) Accrued benefits of employees in the fresh-start group are
frozen as of the fresh-start date in accordance with paragraph (c)(3) of
this section;
(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
[[Page 190]]
fresh-start date, an employee's accrued benefit as of the fresh-start
date does not fail to be frozen merely because the actuarial equivalent
of the account balance in the defined contribution plan that is offset
against the defined benefit plan varies as a result of investment return
that is different from the assumed interest rate used to determine the
actuarial equivalent of the account balance.
(4) Fresh-start formulas--(i) Formula without wear-away. An
employee's accrued benefit under the plan is equal to the sum of--
(A) The employee's frozen accrued benefit; and
(B) The employee's accrued benefit determined under the formula
applicable to benefit accruals in the current plan year (current
formula) as applied to the employee's years of service after the fresh-
start date.
(ii) Formula with wear-away. An employee's accrued benefit under the
plan is equal to the greater of--
(A) The employee's frozen accrued benefit; or
(B) The employee's accrued benefit determined under the current
formula as applied to the employee's total years of service (before and
after the fresh-start date) taken into account under the current
formula.
(iii) Formula with extended wear-away. An employee's accrued benefit
under the plan is equal to the greater of--
(A) The amount determined under paragraph (c)(4)(i) of this section;
or
(B) The amount determined under paragraph (c)(4)(ii)(B) of this
section.
(5) Rules of application--(i) Consistency requirement. This
paragraph (c)(5) is not satisfied unless the fresh-start rules in this
paragraph (c) (and paragraph (d) of this section, if applicable) are
applied consistently to all employees in the 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):
[[Page 191]]
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--
(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
[[Page 192]]
(d)(7) of this section are satisfied. Of course, any increases in
accrued benefits exceeding these adjustments must be taken into account
under the general test, and a plan providing such excess increases
generally will fail to satisfy the safe harbor requirements of Sec.
1.401(a)(4)-3(b). Where paragraphs (d)(3) through (d)(7) of this section
are satisfied with respect to a plan as of the fresh-start date, but one
or more of those paragraphs fail to be satisfied for a later plan year,
further compensation adjustments described in paragraph (d)(8) of this
section may not be disregarded in testing the plan under Sec.
1.401(a)(4)-3.
(3) Plan requirements--(i) Pre-fresh-start date. As of the fresh-
start date, the plan must have contained a benefit formula under which
benefits of each employee in the fresh-start group that are accrued as
of the fresh-start date and are attributable to service before the
fresh-start date would be affected by the employee's compensation after
the fresh-start date. A plan satisfies this requirement, for example, if
it based benefits on an employee's highest average pay over a fixed
period of years or on an employee's average pay over the employee's
entire career with the employer. A plan does not satisfy this paragraph
(d)(3)(i) if the Commissioner determines, based on all of the relevant
facts and circumstances, that the plan provision described in the first
sentence of this paragraph (d)(3) was added primarily in order to
provide additional benefits to HCEs that are disregarded under the
special testing rules described in this paragraph (d).
(ii) Post-fresh-start date. The plan by its terms must provide that
the accrued benefits of each employee in the 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.
[[Page 193]]
(D) Fresh start before applicable effective date. The fresh-start
date with respect to the fresh-start group must have been on or before
the effective date applicable to the plan under paragraph (a) or (b) of
this section.
(6) Meaningful current benefit accruals. The benefit formula and
accrual method under the plan that applies to the fresh-start group in
the aggregate must provide benefit accruals in the current plan year
(other than increases in benefits accrued as of the fresh-start date) at
a rate that is meaningful in comparison to the rate at which benefits
accrued for the fresh-start group in plan years beginning before the
fresh-start date. Whether this requirement is satisfied with respect to
a fresh-start group that does not include all employees in the plan with
an hour of service after the fresh-start date may be determined taking
into account the rate at which benefits are provided to other employees
in the plan.
(7) Minimum benefit adjustment--(i) In general. In the case of a
section 401(l) plan or a plan that imputes disparity under Sec.
1.401(a)(4)-7, the plan must make the minimum benefit adjustment
described in paragraph (d)(7)(ii) or (iii) of this section.
(ii) Excess or offset plans. In the case of a plan that is a defined
benefit excess plan as of the fresh-start date, each employee's frozen
accrued benefit is adjusted so that the base benefit percentage is not
less than 50 percent of the excess benefit percentage. In the case of a
plan that is a PIA offset plan (as defined in paragraph (2)(iii) of the
definition of QSUPP in Sec. 1.401(a)(4)-12) as of the fresh-start date,
each employee's offset as applied to determine the frozen accrued
benefit is adjusted so 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
[[Page 194]]
benefit and the denominator of which is the employee's compensation for
the selected plan year determined under the compensation definition and
formula used to determine the employee's frozen accrued benefit.
(iii) Effect of section 401(a)(17). In determining the numerators
and the denominators of the fractions described in this paragraph
(d)(8), the annual compensation limit under section 401(a)(17) generally
applies. See, however, Sec. 1.401(a)(17)-1(e)(4) for special rules
applicable to section 401(a)(17) employees.
(iv) Option to make less than the full permitted adjustment. A plan
may limit the increase in an employee's frozen accrued benefit for the
current and all future years to a percentage (not more than 100 percent)
of the increase otherwise provided under this paragraph (d)(8).
Furthermore, the plan may, at any time, terminate all future adjustments
permitted under this paragraph (d).
(v) Alternative determination of adjusted accrued benefit. In lieu
of applying the fractions in paragraph (d)(8)(i) or (ii) of this
section, a plan may determine an employee's adjusted accrued benefit by
substituting the employee's compensation for the current plan year
(determined under the same compensation formula and underlying
definition of compensation used to determine the employee's frozen
accrued benefit) in the benefit formula used to determine the frozen
accrued benefit. For this purpose, insignificant changes in the
underlying definition of compensation to reflect current compensation
practices will not be treated as a change in the definition of
compensation. A plan may apply the alternative in this paragraph
(d)(8)(v), only if it is reasonable 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
[[Page 195]]
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
(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.
[[Page 196]]
(b) Under these facts, Employee M's theoretical reserve is equal to
$13,909, calculated as follows:
(1) The actuarial present value of Employee M's stated benefit is
calculated using the actuarial assumptions, provisions of the plan and
Employee M's compensation as of the determination date for the 1993 plan
year. This amount is equal to $46,512, Employee M's stated benefit of
$24,000 ($60,000 multiplied by 40 percent), multiplied by 1.938, the
actuarial present value factor applicable to a participant who is 38
years old using a stated interest rate of six percent.
(2) The actuarial present value of future employer contributions is
calculated assuming that the required contribution in each future year
will be equal to the required contribution for the 1993 plan year and
assuming the same interest rate as was used in determining that
contribution. This amount is equal to $32,603, which is equal to the
amount of the level annual employer contribution ($2,468) multiplied by
a factor of 13.2105 (the temporary annuity factor for a period of 27
years, assuming the six percent interest rate that was used to determine
the required employer contribution).
(3) Employee M's theoretical reserve is $13,909, the excess of the
amount determined in paragraph (b)(1) of this Example over the amount
determined in paragraph (b)(2) of this Example.
(f) Special fresh-start rules for cash balance plans--(1) In
general. In order to satisfy the optional testing method of Sec.
1.401(a)(4)-8(c)(3) after a fresh-start date, a cash balance plan must
apply the rules of paragraph (c) of this section as modified under this
paragraph (f). Paragraph (f)(2) of this section provides an alternative
formula that may be used in addition to the formulas in paragraphs
(c)(2) through (c)(4) of this section. Paragraph (f)(3) of this section
sets forth certain limitations on use of the formulas in paragraph (c)
or (f)(2) of this section.
(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
[[Page 197]]
satisfy the uniform hypothetical allocation formula requirement of Sec.
1.401(a)(4)-8(c)(3)(iii)(B) as of the fresh-start date, under Sec.
1.401(a)(4)-8(c)(3)(viii) the plan may not provide for past service
credits, and thus may not use the formula in paragraph (c)(3) of this
section (formula with wear-away), the formula in paragraph (c)(4) of
this section (formula with extended wear-away), or the alternative
determination of the opening hypothetical account in paragraph
(f)(2)(iii)(B) of this section.
(ii) Change in interest rate. If the interest rate used to adjust
employees' hypothetical allocations under Sec. 1.401(a)(4)-8(c)(3)(iv)
for the plan year is different from the interest rate used for this
purpose in the immediately preceding plan year, the plan must use the
formula in paragraph (c)(2) of this section (formula without wear-away).
(iii) Meaningful benefit requirement. A plan is permitted to use the
formula provided in paragraph (f)(2) of this section only if the plan
satisfies paragraphs (d)(3) through (d)(5) of this section (regarding
coverage as of fresh-start date, current benefit accruals, and minimum
benefit adjustment, respectively).
[T.D. 8360, 56 FR 47598, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992; 57 FR
10953, Mar. 31, 1992, as amended by T.D. 8485, 58 FR 46823, Sept. 3,
1993]
Sec. 1.401(a)(5)-1 Special rules relating to nondiscrimination
requirements.
(a) In general. Section 401(a)(5) sets out certain provisions that
will not of themselves be discriminatory within the meaning of section
410(b)(2)(A)(i) or 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 Sec. Sec. 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
Sec. Sec. 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--
[[Page 198]]
(i) The employee's final pay from the employer, over
(ii) The employer-provided retirement benefit created under the
Social Security Act and attributable to service by the employee for the
employer.
(2) Final pay. For purposes of paragraph (e)(1)(i) of this section,
an employee's final pay from the employer as of a plan year is the
employee's compensation (as defined in section 414(q)(7)) for the year
(ending with or within the 5-plan-year period ending with the plan year
in which the employee terminates from employment with the employer) in
which the employee receives the highest compensation from the employer.
Notwithstanding the preceding sentence, final pay for each employee
under the plan may be determined with reference to the 5-plan-year
period ending with the plan year before the plan year in which the
employee terminates from employment with the employer. In determining an
employee's final pay, the plan may specify any 12-month period (ending
with or within the applicable 5-plan-year period) as a year provided the
specified 12-month period is uniformly and consistently applied with
respect to all employees. In determining an employee's final pay,
compensation for any year in excess of the applicable limit under
section 401(a)(17) for the year may not be taken into account.
(3) Rules for determining amount of employer-provided social
security retirement benefit. For purposes of paragraph (e)(1)(ii) of
this section, the following rules apply.
(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
[[Page 199]]
that the employee can obtain the actual compensation history from the
Social Security Administration. In determining the employee's projected
primary insurance amount, the employer may not take into account any
compensation from any other employer while the employee is employed by
the employer.
(ii) As of a plan year, the employer-provided portion of the
employee's projected primary insurance amount under the Social Security
Act is 50 percent of the employee's projected primary insurance amount
(as determined under paragraph (e)(4)(i) of this section).
(5) Employer-provided accrued retirement benefit. For purposes of
this section, the employee's employer-provided accrued retirement
benefit as of a plan year is the employee's accrued retirement benefit
under the plan (determined on an actual basis and not on a projected
basis) attributable to employer contributions under the plan. With
respect to plans that provide for employee contributions, see section
411(c) for rules relating to the allocation of accrued benefits between
employer contributions and employee contributions.
(6) Additional rules. (i) As of a plan year, paragraph (e)(1) of
this section does not apply to the extent that its application would
result in a decrease in an employee's accrued benefit. See sections
411(b)(1)(G) and 411(d)(6).
(ii) Section 401(a)(5)(D) and this paragraph (e) do not apply to a
plan maintained by an employer, determined for 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
[[Page 200]]
1993 plan year................................................ $18,000
1992 plan year................................................ $17,000
1991 plan year................................................ $16,500
A's annual primary insurance amount under social security,
determined as of A's social security retirement age, is $9,000, of which
$4,500 is the employer-provided portion attributable to A's service for
Z ($9,000x50 percentx35/35). Under the plan's benefit formula
(disregarding the final pay limitation), A would be entitled to receive
a normal retirement benefit of $17,500 ($500x35 years). However, under
the plan, A's otherwise determined normal retirement benefit of $17,500
is limited to the excess of the amount of A's final pay from Z over A's
employer-provided primary insurance amount under social security
attributable to A's service for Z. Accordingly, A's normal retirement
benefit is determined to be $15,500 ($20,000 (A's final pay from Z) less
$4,500 (A's employer-provided primary insurance amount attributable to
A's service for Z)) rather than $17,500. The final pay limitation in Z's
plan satisfies section 401(a)(5)(D) and this paragraph (e). Accordingly,
the plan maintained by Z does not discriminate in favor of highly
compensated employees within the meaning of section 401(a)(4) merely
because of the final pay limitation contained in the plan.
Example 2. Assume the same facts as in Example 1, except that A has
32 years of service for Z when A retires at A's social security
retirement age. Under the plan's benefit formula (disregarding the final
pay limitation), A would be entitled to receive an annual normal
retirement benefit of $16,000 ($500x32 years). However, the plan
provides that A's normal retirement benefit of $16,000 will be limited
to $15,500 ($20,000 (the amount of A's final pay from Z) less $4,500
(\1/2\ of A's primary insurance amount under the Social Security Act)).
The final pay limitation does not satisfy this paragraph (e). The
portion of A's employer-provided primary insurance amount under the
Social Security Act attributable to A's service for Z is 32/35x$4,500,
or $4,114. Therefore, to satisfy this paragraph (e), the final pay
provision in Z's plan may not limit A's otherwise determined normal
retirement benefit of $16,000 to less than $15,886 ($20,000 (the amount
of X's final pay) minus $4,114 (the portion of A's employer-provided
primary insurance amount attributable to A's service for Z)).
Example 3. (a) Employer X maintains a noncontributory defined
benefit plan that uses the calendar year as its plan year. The formula
for determining benefits under the plan provides a normal retirement
benefit at age 65 equal to 90 percent of an employee's final average
compensation, with the benefit reduced by \1/30\th for each year of the
employee's service less than 30 and limited to the employee's final pay
(as determined in accordance with paragraph (e)(2) of this section) less
the employee's employer-provided primary insurance amount under social
security attributable to the employee's service for X. The plan
determines an employee's employer-provided projected primary insurance
amount under social security attributable to the employee's service for
X in accordance with paragraph (e)(3) of this section and applies the
reductions applicable under paragraph (e)(6)(iii) of this section if
benefits commence before social security retirement age. The plan
determines an employee's accrued benefit under the fractional accrual
method of section 411(b)(1)(C).
(b) Employee A commences participation in the plan on January 1,
1990, when A is 35 years of age. A's social security retirement age is
67. As of the close of the 2014 plan year, A's final average
compensation from X is $15,000; A's final pay from X is $15,400, and A's
projected employer-provided annual primary insurance amount under social
security attributable to A's service for X is $4,000 (after the
reduction applicable under paragraph (e)(6)(iii) of this section). Under
the plan formula, A's accrued benefit as of the close of the 2014 plan
year is $11,250 (90 percentx$15,000x25/30). As of the close of the 2014
plan year, the plan's final pay limitation does not affect A's benefit
because A's benefit under the plan as of the close of the plan year and
before application of the final pay limitation ($11,250) does not exceed
A's final pay of $15,400 from X, determined as of the close of the plan
year, less A's employer-provided projected primary insurance amount
under social security attributable to A's service for X ($4,000).
(c) Assume that, as of the close of the 2015 plan year, A's final
average compensation from X is $14,500 and A's final pay from X is
$15,400. Assume also that as of the close of the 2015 plan year, A's
employer-provided primary insurance amount attributable to A's service
for X is $4,200 (after the reduction applicable under paragraph
(e)(6)(iii) of this section). Accordingly, A's benefit as of the close
of the 2015 plan year and before application of the final pay limitation
is $11,310 (90 percentx$14,500x26/30). Under the plan's final pay
limitation, A's benefit of $11,310 would be limited to $11,200, the
amount of A's final pay from X ($15,400), less A's employer-provided
projected primary insurance amount under social security attributable to
A's service for X ($4,200). However, the plan's final pay limitation may
not be applied to limit A's accrued benefit for the 2015 plan year to an
amount below $11,250, which was A's accrued benefit under the plan at
the close of the prior plan year. The foregoing is further illustrated
in the following table for the plan years presented above and for
additional years of service performed by A for X.
[[Page 201]]
Table
[In dollar amounts]
----------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7
----------------------------------------------------------------------------------------------------------------
Employer- Benefit to
provided which A is
Benefit projected Benefit if entitled
under plan primary final pay (smaller of
Final formula insurance reduction Column 6 or
Years of service average (Column 2 x Final pay amount under is applied Column 3,
compensation 0.9 x years social in full but not
of service/ security (Column 4 - less than
30) attributable Column 5) Column 7
to service for prior
for employer year)
----------------------------------------------------------------------------------------------------------------
25.............................. $15,000 $11,250 $15,400 $4,000 $11,400 $11,250
26.............................. 14,500 11,310 15,400 4,200 11,200 11,250
27.............................. 15,500 12,555 15,800 4,400 11,400 11,400
28.............................. 15,500 13,020 16,000 4,500 11,500 11,500
29.............................. 15,000 13,050 16,000 4,800 11,200 11,500
30.............................. 14,500 13,050 16,000 5,000 11,000 11,500
----------------------------------------------------------------------------------------------------------------
(f) Certain benefits not taken into account. In determining whether
a plan satisfies section 401(a)(4) and this section, other benefits
created under state or federal law (e.g., worker's compensation benefits
or black lung benefits) may not be taken into account.
(g) More than one plan treated as single plan. [Reserved]
(h) Effective date--(1) In general. Except as provided in paragraph
(h)(2) of this section, this section is effective for plan years
beginning on or after January 1, 1994.
(2) Plans of tax-exempt organizations. In the case of plans
maintained by organizations exempt from income taxation under section
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective
plans), this section is effective for plan years beginning on or after
January 1, 1996.
(3) Compliance during transition period. For plan years beginning
before the effective date of these regulations, as set forth in
paragraphs (h)(1) and (h)(2) of this section, and on or after the first
day of the first plan year to which the amendments made to section
401(a)(5) by section 1111(b) of the Tax Reform Act of 1986 (TRA '86)
apply, a plan must be operated in accordance with a reasonable, good
faith interpretation of section 401(a)(5), taking into account pre-
existing guidance and the amendments made by TRA '86 to related
provisions of the Code. Whether a plan is operated in accordance with a
reasonable, good faith interpretation of section 401(a)(5) will
generally be determined based on all of the relevant facts and
circumstances, including the extent to which an employer has resolved
unclear issues in its favor. A plan will be deemed to be operated in
accordance with a reasonable, good faith interpretation of section
401(a)(5) if it is operated in accordance with the terms of this
section.
[T.D. 8359, 56 FR 47614, Sept. 19, 1991; 57 FR 10817, 10818, 10951, Mar.
31, 1992, as amended by T.D. 8486, 58 FR 46830, Sept. 3, 1993]
Sec. 1.401(a)(9)-0 Required minimum distributions; table of
contents.
This table of contents lists the regulations relating to required
minimum distributions under section 401(a)(9) of the Internal Revenue
Code as follows:
Sec. 1.401(a)(9)-0 Required minimum distributions; table of contents.
Sec. 1.401(a)(9)-1 Minimum distribution requirement in general.
Sec. 1.401(a)(9)-2 Distributions commencing during an employee's
lifetime.
Sec. 1.401(a)(9)-3 Death before required beginning date.
Sec. 1.401(a)(9)-4 Determination of the designated beneficiary.
Sec. 1.401(a)(9)-5 Required minimum distributions from defined
contribution plans.
Sec. 1.401(a)(9)-6 Required minimum distributions for defined benefit
plans and annuity contracts.
Sec. 1.401(a)(9)-7 Rollovers and transfers.
Sec. 1.401(a)(9)-8 Special rules.
Sec. 1.401(a)(9)-9 Life expectancy and distribution period tables.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004]
[[Page 202]]
Sec. 1.401(a)(9)-1 Minimum distribution requirement in general.
Q-1. What plans are subject to the minimum distribution requirement
under section 401(a)(9), this section, and Sec. Sec. 1.401(a)(9)-2
through 1.401(a)(9)-9?
A-1. Under section 401(a)(9), all stock bonus, pension, and profit-
sharing plans qualified under section 401(a) and annuity contracts
described in section 403(a) are subject to required minimum distribution
rules. See this section and Sec. Sec. 1.401(a)(9)-2 through
1.401(a)(9)-9 for the distribution rules applicable to these plans.
Under section 403(b)(10), annuity contracts or custodial accounts
described in section 403(b) are subject to required minimum distribution
rules. See Sec. 1.403(b)-6e for the distribution rules applicable to
these annuity contracts or custodial accounts. Under section 408(a)(6)
and 408(b)(3), individual retirement plans (including, for some
purposes, Roth IRAs under section 408A) are subject to required minimum
distribution rules. See Sec. 1.408-8 for the distribution rules
applicable to individual retirement plans and see Sec. 1.408A-6 for the
distribution rules applicable to Roth IRAs under section 408A. Under
section 457(d)(2), certain deferred compensation plans for employees of
tax exempt organizations or state and local government employees are
subject to required minimum distribution rules.
Q-2. Which employee account balances and benefits held under
qualified trusts and plans are subject to the distribution rules of
section 401(a)(9), this section, and Sec. Sec. 1.401(a)(9)-2 through
1.401(a)(9)-9?
A-2. (a) In general. The distribution rules of section 401(a)(9)
apply to all account balances and benefits in existence on or after
January 1, 1985. This section and Sec. Sec. 1.401(a)(9)-2 through
1.401(a)(9)-9 apply for purposes of determining required minimum
distributions for calendar years beginning on or after January 1, 2003.
(b) Beneficiaries. (1) The distribution rules of this section and
Sec. Sec. 1.401(a)(9)-2 through 1.401(a)(9)-9 apply to account balances
and benefits held for the benefit of a beneficiary for calendar years
beginning on or after January 1, 2003, even if the employee died prior
to January 1, 2003. Thus, in the case of an employee who died prior to
January 1, 2003, the designated beneficiary must be redetermined in
accordance with the provisions of Sec. 1.401(a)(9)-4 and the applicable
distribution period (determined under Sec. 1.401(a)(9)-5 or
1.401(a)(9)-6, whichever is applicable) must be reconstructed for
purposes of determining the amount required to be distributed for
calendar years beginning on or after January 1, 2003.
(2) A designated beneficiary that is receiving payments under the 5-
year rule of section 401(a)(9)(B)(ii), either by affirmative election or
default provisions, may, if the plan so provides, switch to using the
life expectancy rule of section 401(a)(9)(B)(iii) provided any amounts
that would have been required to be distributed under the life
expectancy rule of section 401(a)(9)(B)(iii) for all distribution
calendar years before 2004 are distributed by the earlier of December
31, 2003 or the end of the 5-year period determined under A-2 of Sec.
1.401(a)(9)-3.
(c) Trust documentation. If a trust fails to meet the rule of A-5 of
Sec. 1.401(a)(9)-4 (permitting the beneficiaries of the trust, and not
the trust itself, to be treated as the employee's designated
beneficiaries) solely because the trust documentation was not provided
to the plan administrator by October 31 of the calendar year following
the calendar year in which the employee died, and such documentation is
provided to the plan administrator by October 31, 2003, the
beneficiaries of the trust will be treated as designated beneficiaries
of the employee under the plan for purposes of determining the
distribution period under section 401(a)(9).
(d) Special rule for governmental plans. Notwithstanding anything to
the contrary in this A-2, a governmental plan (within the meaning of
section 414(d)), or an eligible governmental plan described in Sec.
1.457-2(f), is treated as having complied with section 401(a)(9) for all
years to which section 401(a)(9) applies to the plan if the plan
complies with a reasonable and good faith interpretation of section
401(a)(9).
Q-3. What specific provisions must a plan contain in order to
satisfy section 401(a)(9)?
[[Page 203]]
A-3. (a) Required provisions. In order to satisfy section 401(a)(9),
the plan must include the provisions described in this paragraph
reflecting section 401(a)(9). First, the plan must generally set forth
the statutory rules of section 401(a)(9), including the incidental death
benefit requirement in section 401(a)(9)(G). Second, the plan must
provide that distributions will be made in accordance with this section
and Sec. Sec. 1.401(a)(9)-2 through 1.401(a)(9)-9. The plan document
must also provide that the provisions reflecting section 401(a)(9)
override any distribution options in the plan inconsistent with section
401(a)(9). The plan also must include any other provisions reflecting
section 401(a)(9) that are prescribed by the Commissioner in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
(b) Optional provisions. The plan may also include written
provisions regarding any optional provisions governing plan
distributions that do not conflict with section 401(a)(9) and the
regulations thereunder.
(c) Absence of optional provisions. Plan distributions commencing
after an employee's death will be required to be made under the default
provision set forth in Sec. 1.401(a)(9)-3 for distributions unless the
plan document contains optional provisions that override such default
provisions. Thus, if distributions have not commenced to the employee at
the time of the employee's death, distributions after the death of an
employee are to be made automatically in accordance with the default
provisions in A-4(a) of Sec. 1.401(a)(9)-3 unless the plan either
specifies in accordance with A-4(b) of Sec. 1.401(a)(9)-3 the method
under which distributions will be made or provides for elections by the
employee (or beneficiary) in accordance with A-4(c) of Sec.
1.401(a)(9)-3 and such elections are made by the employee or
beneficiary.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004; T.D. 9340, 72 FR 41159, July 26, 2007; T.D. 9459,
74 FR 45994, Sept. 8, 2009]
Sec. 1.401(a)(9)-2 Distributions commencing during an employee's
lifetime.
Q-1. In the case of distributions commencing during an employee's
lifetime, how must the employee's entire interest be distributed in
order to satisfy section 401(a)(9)(A)?
A-1. (a) In order to satisfy section 401(a)(9)(A), the entire
interest of each employee must be distributed to such employee not later
than the required beginning date, or must be distributed, beginning not
later than the required beginning date, over the life of the employee or
joint lives of the employee and a designated beneficiary or over a
period not extending beyond the life expectancy of the employee or the
joint life and last survivor expectancy of the employee and the
designated beneficiary.
(b) Section 401(a)(9)(G) provides that lifetime distributions must
satisfy the incidental death benefit requirements.
(c) The amount required to be distributed for each calendar year in
order to satisfy section 401(a)(9)(A) and (G) generally depends on
whether a distribution is in the form of distributions under a defined
contribution plan or annuity payments under a defined benefit plan or
under an annuity contract. For the method of determining the required
minimum distribution in accordance with section 401(a)(9)(A) and (G)
from an individual account under a defined contribution plan, see Sec.
1.401(a)(9)-5. For the method of determining the required minimum
distribution in accordance with section 401(a)(9)(A) and (G) in the case
of annuity payments from a defined benefit plan or an annuity contract,
see Sec. 1.401(a)(9)-6.
Q-2. For purposes of section 401(a)(9)(C), what does the term
required beginning date mean?
A-2. (a) Except as provided in paragraph (b) of this A-2 with
respect to a 5-percent owner, as defined in paragraph (c) of this A-2,
the term required beginning date means April 1 of the calendar year
following the later of the calendar year in which the employee attains
age 70\1/2\ or the calendar year in which the employee retires from
employment with the employer maintaining the plan.
[[Page 204]]
(b) In the case of an employee who is a 5-percent owner, the term
required beginning date means April 1 of the calendar year following the
calendar year in which the employee attains age 70\1/2\ .
(c) For purposes of section 401(a)(9), a 5-percent owner is an
employee who is a 5-percent owner (as defined in section 416) with
respect to the plan year ending in the calendar year in which the
employee attains age 70\1/2\.
(d) Paragraph (b) of this A-2 does not apply in the case of a
governmental plan (within the meaning of section 414(d)) or a church
plan. For purposes of this paragraph, the term church plan means a plan
maintained by a church for church employees, and the term church means
any church (as defined in section 3121(w)(3)(A)) or qualified church-
controlled organization (as defined in section 3121(w)(3)(B)).
(e) A plan is permitted to provide that the required beginning date
for purposes of section 401(a)(9) for all employees is April 1 of the
calendar year following the calendar year in which an employee attains
age 70\1/2\ regardless of whether the employee is a 5-percent owner.
Q-3. When does an employee attain age 70\1/2\?
A-3. An employee attains age 70\1/2\ as of the date six calendar
months after the 70th anniversary of the employee's birth. For example,
if an employee's date of birth was June 30, 1933, the 70th anniversary
of such employee's birth is June 30, 2003. Such employee attains age
70\1/2\ on December 30, 2003. Consequently, if the employee is a 5-
percent owner or retired, such employee's required beginning date is
April 1, 2004. However, if the employee's date of birth was July 1,
1933, the 70th anniversary of such employee's birth would be July 1,
2003. Such employee would then attain age 70\1/2\ on January 1, 2004 and
such employee's required beginning date would be April 1, 2005.
Q-4. Must distributions made before the employee's required
beginning date satisfy section 401(a)(9)?
A-4. Lifetime distributions made before the employee's required
beginning date for calendar years before the employee's first
distribution calendar year, as defined in A-1(b) of Sec. 1.401(a)(9)-5,
need not be made in accordance with section 401(a)(9). However, if
distributions commence before the employee's required beginning date
under a particular distribution option, such as in the form of an
annuity, the distribution option fails to satisfy section 401(a)(9) at
the time distributions commence if, under terms of the particular
distribution option, distributions to be made for the employee's first
distribution calendar year or any subsequent distribution calendar year
will fail to satisfy section 401(a)(9).
Q-5. If distributions have begun to an employee during the
employee's lifetime (in accordance with section 401(a)(9)(A)(ii)), how
must distributions be made after an employee's death?
A-5. Section 401(a)(9)(B)(i) provides that if the distribution of
the employee's interest has begun in accordance with section
401(a)(9)(A)(ii) and the employee dies before his entire interest has
been distributed to him, the remaining portion of such interest must be
distributed at least as rapidly as under the distribution method being
used under section 401(a)(9)(A)(ii) as of the date of his death. The
amount required to be distributed for each distribution calendar year
following the calendar year of death generally depends on whether a
distribution is in the form of distributions from an individual account
under a defined contribution plan or annuity payments under a defined
benefit plan. For the method of determining the required minimum
distribution in accordance with section 401(a)(9)(B)(i) from an
individual account, see Sec. 1.401(a)(9)-5. In the case of annuity
payments from a defined benefit plan or an annuity contract, see Sec.
1.401(a)(9)-6.
Q-6. For purposes of section 401(a)(9)(B), when are distributions
considered to have begun to the employee in accordance with section
401(a)(9)(A)(ii)?
A-6. (a) General rule. Except as otherwise provided in A-10 of Sec.
1.401(a)(9)-6, distributions are not treated as having begun to the
employee in accordance with section 401(a)(9)(A)(ii) until the
employee's required beginning date, without regard to whether payments
have been made before that date. Thus, section 401(a)(9)(B)(i) only
applies if an
[[Page 205]]
employee dies on or after the employee's required beginning date. For
example, if employee A retires in 2003, the calendar year A attains age
65\1/2\, and begins receiving installment distributions from a profit-
sharing plan over a period not exceeding the joint life and last
survivor expectancy of A and A's spouse, benefits are not treated as
having begun in accordance with section 401(a)(9)(A)(ii) until April 1,
2009 (the April 1 following the calendar year in which A attains age
70\1/2\). Consequently, if A dies before April 1, 2009 (A's required
beginning date), distributions after A's death must be made in
accordance with section 401(a)(9)(B)(ii) or (iii) and (iv) and Sec.
1.401(a)(9)-3, and not section 401(a)(9)(B)(i). This is the case without
regard to whether the plan has distributed the minimum distribution for
the first distribution calendar year (as defined in A-1(b) of Sec.
1.401(a)(9)-5) before A's death.
(b) If a plan provides, in accordance with A-2(e) of this section,
that the required beginning date for purposes of section 401(a)(9) for
all employees is April 1 of the calendar year following the calendar
year in which an employee attains age 70\1/2\, an employee who dies on
or after the required beginning date determined under the plan terms is
treated as dying after the employee's distributions have begun for
purposes of this A-6 even though the employee dies before the April 1
following the calendar year in which the employee retires.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004]
Sec. 1.401(a)(9)-3 Death before required beginning date.
Q-1. If an employee dies before the employee's required beginning
date, how must the employee's entire interest be distributed in order to
satisfy section 401(a)(9)?
A-1. (a) Except as otherwise provided in A-10 of Sec. 1.401(a)(9)-
6, if an employee dies before the employee's required beginning date
(and, thus, before distributions are treated as having begun in
accordance with section 401(a)(9)(A)(ii)), distribution of the
employee's entire interest must be made in accordance with one of the
methods described in section 401(a)(9)(B)(ii) or (iii) and (iv). One
method (the 5-year rule in section 401(a)(9)(B)(ii)) requires that the
entire interest of the employee be distributed within 5 years of the
employee's death regardless of who or what entity receives the
distribution. Another method (the life expectancy rule in section
401(a)(9)(B)(iii) and (iv)) requires that any portion of an employee's
interest payable to (or for the benefit of) a designated beneficiary be
distributed, commencing within one year of the employee's death, over
the life of such beneficiary (or over a period not extending beyond the
life expectancy of such beneficiary). Section 401(a)(9)(B)(iv) provides
special rules where the designated beneficiary is the surviving spouse
of the employee, including a special commencement date for distributions
under section 401(a)(9)(B)(iii) to the surviving spouse.
(b) See A-4 of this section for the rules for determining which of
the methods described in paragraph (a) of this A-1 applies. See A-3 of
this section to determine when distributions under the exception to the
5-year rule in section 401(a)(9)(B)(iii) and (iv) must commence. See A-2
of this section to determine when the 5-year period in section
401(a)(9)(B)(ii) ends. For distributions using the life expectancy rule
in section 401(a)(9)(B)(iii) and (iv), see Sec. 1.401(a)(9)-4 in order
to determine the designated beneficiary under section 401(a)(9)(B)(iii)
and (iv), see Sec. 1.401(a)(9)-5 for the rules for determining the
required minimum distribution under a defined contribution plan, and see
Sec. 1.401(a)(9)-6 for required minimum distributions under defined
benefit plans.
Q-2. By when must the employee's entire interest be distributed in
order to satisfy the 5-year rule in section 401(a)(9)(B)(ii)?
A-2. In order to satisfy the 5-year rule in section
401(a)(9)(B)(ii), the employee's entire interest must be distributed by
the end of the calendar year which contains the fifth anniversary of the
date of the employee's death. For example, if an employee dies on
January 1, 2003, the entire interest must be distributed by the end of
2008, in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii).
[[Page 206]]
Q-3. When are distributions required to commence in order to satisfy
the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?
A-3. (a) Nonspouse beneficiary. In order to satisfy the life
expectancy rule in section 401(a)(9)(B)(iii), if the designated
beneficiary is not the employee's surviving spouse, distributions must
commence on or before the end of the calendar year immediately following
the calendar year in which the employee died. This rule also applies to
the distribution of the entire remaining benefit if another individual
is a designated beneficiary in addition to the employee's surviving
spouse. See A-2 and A-3 of Sec. 1.401(a)(9)-8, however, if the
employee's benefit is divided into separate accounts.
(b) Spousal beneficiary. In order to satisfy the rule in section
401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the
employee's surviving spouse, distributions must commence on or before
the later of--
(1) The end of the calendar year immediately following the calendar
year in which the employee died; and
(2) The end of the calendar year in which the employee would have
attained age 70\1/2\.
Q-4. How is it determined whether the 5-year rule in section
401(a)(9)(B)(ii) or the life expectancy rule in section
401(a)(9)(B)(iii) and (iv) applies to a distribution?
A-4. (a) No plan provision. If a plan does not adopt an optional
provision described in paragraph (b) or (c) of this A-4 specifying the
method of distribution after the death of an employee, distribution must
be made as follows:
(1) If the employee has a designated beneficiary, as determined
under Sec. 1.401(a)(9)-4, distributions are to be made in accordance
with the life expectancy rule in section 401(a)(9)(B)(iii) and (iv).
(2) If the employee has no designated beneficiary, distributions are
to be made in accordance with the 5-year rule in section
401(a)(9)(B)(ii).
(b) Optional plan provisions. A plan may adopt a provision
specifying either that the 5-year rule in section 401(a)(9)(B)(ii) will
apply to certain distributions after the death of an employee even if
the employee has a designated beneficiary or that distribution in every
case will be made in accordance with the 5-year rule in section
401(a)(9)(B)(ii). Further, a plan need not have the same method of
distribution for the benefits of all employees in order to satisfy
section 401(a)(9).
(c) Elections. A plan may adopt a provision that permits employees
(or beneficiaries) to elect on an individual basis whether the 5-year
rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section
401(a)(9)(B)(iii) and (iv) applies to distributions after the death of
an employee who has a designated beneficiary. Such an election must be
made no later than the earlier of the end of the calendar year in which
distribution would be required to commence in order to satisfy the
requirements for the life expectancy rule in section 401(a)(9)(B)(iii)
and (iv) (see A-3 of this section for the determination of such calendar
year) or the end of the calendar year which contains the fifth
anniversary of the date of death of the employee. As of the last date
the election may be made, the election must be irrevocable with respect
to the beneficiary (and all subsequent beneficiaries) and must apply to
all subsequent calendar years. If a plan provides for the election, the
plan may also specify the method of distribution that applies if neither
the employee nor the beneficiary makes the election. If neither the
employee nor the beneficiary elects a method and the plan does not
specify which method applies, distribution must be made in accordance
with paragraph (a) of this A-4.
Q-5. If the employee's surviving spouse is the employee's sole
designated beneficiary and such spouse dies after the employee, but
before distributions have begun to the surviving spouse under section
401(a)(9)(B)(iii) and (iv), how is the employee's interest to be
distributed?
A-5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving
spouse is the employee's sole designated beneficiary and dies after the
employee, but before distributions to such spouse have begun under
section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section
401(a)(9)(B)(ii) and the life expectancy rule in section
401(a)(9)(B)(iii) are to be applied as if
[[Page 207]]
the surviving spouse were the employee. In applying this rule, the date
of death of the surviving spouse shall be substituted for the date of
death of the employee. However, in such case, the rules in section
401(a)(9)(B)(iv) are not available to the surviving spouse of the
deceased employee's surviving spouse.
Q-6. For purposes of section 401(a)(9)(B)(iv)(II), when are
distributions considered to have begun to the surviving spouse?
A-6. Distributions are considered to have begun to the surviving
spouse of an employee, for purposes of section 401(a)(9)(B)(iv)(II), on
the date, determined in accordance with A-3 of this section, on which
distributions are required to commence to the surviving spouse, even
though payments have actually been made before that date. See A-11 of
Sec. 1.401(a)(9)-6 for a special rule for annuities.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004]
Sec. 1.401(a)(9)-4 Determination of the designated beneficiary.
Q-1. Who is a designated beneficiary under section 401(a)(9)(E)?
A-1. A designated beneficiary is an individual who is designated as
a beneficiary under the plan. An individual may be designated as a
beneficiary under the plan either by the terms of the plan or, if the
plan so provides, by an affirmative election by the employee (or the
employee's surviving spouse) specifying the beneficiary. A beneficiary
designated as such under the plan is an individual who is entitled to a
portion of an employee's benefit, contingent on the employee's death or
another specified event. For example, if a distribution is in the form
of a joint and survivor annuity over the life of the employee and
another individual, the plan does not satisfy section 401(a)(9) unless
such other individual is a designated beneficiary under the plan. A
designated beneficiary need not be specified by name in the plan or by
the employee to the plan in order to be a designated beneficiary so long
as the individual who is to be the beneficiary is identifiable under the
plan. The members of a class of beneficiaries capable of expansion or
contraction will be treated as being identifiable if it is possible, to
identify the class member with the shortest life expectancy. The fact
that an employee's interest under the plan passes to a certain
individual under a will or otherwise under applicable state law does not
make that individual a designated beneficiary unless the individual is
designated as a beneficiary under the plan. See A-6 of Sec.
1.401(a)(9)-8 for rules which apply to qualified domestic relation
orders.
Q-2. Must an employee (or the employee's spouse) make an affirmative
election specifying a beneficiary for a person to be a designated
beneficiary under section 40l(a)(9)(E)?
A-2. No, a designated beneficiary is an individual who is designated
as a beneficiary under the plan whether or not the designation under the
plan was made by the employee. The choice of beneficiary is subject to
the requirements of sections 401(a)(11), 414(p), and 417.
Q-3. May a person other than an individual be considered to be a
designated beneficiary for purposes of section 401(a)(9)?
A-3. No, only individuals may be designated beneficiaries for
purposes of section 401(a)(9). A person that is not an individual, such
as the employee's estate, may not be a designated beneficiary. If a
person other than an individual is designated as a beneficiary of an
employee's benefit, the employee will be treated as having no designated
beneficiary for purposes of section 401(a)(9), even if there are also
individuals designated as beneficiaries. However, see A-5 of this
section for special rules that apply to trusts and A-2 and A-3 of Sec.
1.401(a)(9)-8 for rules that apply to separate accounts.
Q-4. When is the designated beneficiary determined?
A-4. (a) General rule. In order to be a designated beneficiary, an
individual must be a beneficiary as of the date of death. Except as
provided in paragraph (b) and Sec. 1.401(a)(9)-6, the employee's
designated beneficiary will be determined based on the beneficiaries
designated as of the date of death who remain beneficiaries as of
September 30
[[Page 208]]
of the calendar year following the calendar year of the employee's
death. Consequently, except as provided in Sec. 1.401(a)(9)-6, any
person who was a beneficiary as of the date of the employee's death, but
is not a beneficiary as of that September 30 (e.g., because the person
receives the entire benefit to which the person is entitled before that
September 30), is not taken into account in determining the employee's
designated beneficiary for purposes of determining the distribution
period for required minimum distributions after the employee's death.
Accordingly, if a person disclaims entitlement to the employee's
benefit, pursuant to a disclaimer that satisfies section 2518 by that
September 30 thereby allowing other beneficiaries to receive the benefit
in lieu of that person, the disclaiming person is not taken into account
in determining the employee's designated beneficiary.
(b) Surviving spouse. As provided in A-5 of Sec. 1.401(a)(9)-3, if
the employee's spouse is the sole designated beneficiary as of September
30 of the calendar year following the calendar year of the employee's
death, and the surviving spouse dies after the employee and before the
date on which distributions have begun to the surviving spouse under
section 401(a)(9)(B)(iii) and (iv), the rule in section
40l(a)(9)(B)(iv)(II) will apply. Thus, for example, the relevant
designated beneficiary for determining the distribution period after the
death of the surviving spouse is the designated beneficiary of the
surviving spouse. Similarly, such designated beneficiary will be
determined based on the beneficiaries designated as of the date of the
surviving spouse's death and who remain beneficiaries as of September 30
of the calendar year following the calendar year of the surviving
spouse's death. Further, if, as of that September 30, there is no
designated beneficiary under the plan with respect to that surviving
spouse, distribution must be made in accordance with the 5-year rule in
section 401(a)(9)(B)(ii) and A-2 of Sec. 1.401(a)(9)-3.
(c) Deceased beneficiary. For purposes of this A-4, an individual
who is a beneficiary as of the date of the employee's death and dies
prior to September 30 of the calendar year following the calendar year
of the employee's death without disclaiming continues to be treated as a
beneficiary as of the September 30 of the calendar year following the
calendar year of the employee's death in determining the employee's
designated beneficiary for purposes of determining the distribution
period for required minimum distributions after the employee's death,
without regard to the identity of the successor beneficiary who is
entitled to distributions as the beneficiary of the deceased
beneficiary. The same rule applies in the case of distributions to which
A-5 of Sec. 1.401(a)(9)-3 applies so that, if an individual is
designated as a beneficiary of an employee's surviving spouse as of the
spouse's date of death and dies prior to September 30 of the year
following the year of the surviving spouse's death, that individual will
continue to be treated as a designated beneficiary.
Q-5. If a trust is named as a beneficiary of an employee, will the
beneficiaries of the trust with respect to the trust's interest in the
employee's benefit be treated as having been designated as beneficiaries
of the employee under the plan for purposes of determining the
distribution period under section 401(a)(9)?
A-5. (a) If the requirements of paragraph (b) of this A-5 are met
with respect to a trust that is named as the beneficiary of an employee
under the plan, the beneficiaries of the trust (and not the trust
itself) will be treated as having been designated as beneficiaries of
the employee under the plan for purposes of determining the distribution
period under section 401(a)(9).
(b) The requirements of this paragraph (b) are met if, during any
period during which required minimum distributions are being determined
by treating the beneficiaries of the trust as designated beneficiaries
of the employee, the following requirements are met--
(1) The trust is a valid trust under state law, or would be but for
the fact that there is no corpus.
(2) The trust is irrevocable or will, by its terms, become
irrevocable upon the death of the employee.
[[Page 209]]
(3) The beneficiaries of the trust who are beneficiaries with
respect to the trust's interest in the employee's benefit are
identifiable within the meaning of A-1 of this section from the trust
instrument.
(4) The documentation described in A-6 of this section has been
provided to the plan administrator.
(c) In the case of payments to a trust having more than one
beneficiary, see A-7 of Sec. 1.401(a)(9)-5 for the rules for
determining the designated beneficiary whose life expectancy will be
used to determine the distribution period and A-3 of this section for
the rules that apply if a person other than an individual is designated
as a beneficiary of an employee's benefit. However, the separate account
rules under A-2 of Sec. 1.401(a)(9)-8 are not available to
beneficiaries of a trust with respect to the trust's interest in the
employee's benefit.
(d) If the beneficiary of the trust named as beneficiary of the
employee's interest is another trust, the beneficiaries of the other
trust will be treated as being designated as beneficiaries of the first
trust, and thus, having been designated by the employee under the plan
for purposes of determining the distribution period under section
401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of
this A-5 are satisfied with respect to such other trust in addition to
the trust named as beneficiary.
Q-6. If a trust is named as a beneficiary of an employee, what
documentation must be provided to the plan administrator?
A-6. (a) Required minimum distributions before death. If an employee
designates a trust as the beneficiary of his or her entire benefit and
the employee's spouse is the sole beneficiary of the trust, in order to
satisfy the documentation requirements of this A-6 so that the spouse
can be treated as the sole designated beneficiary of the employee's
benefits (if the other requirements of paragraph (b) of A-5 of this
section are satisfied), the employee must either--
(1) Provide to the plan administrator a copy of the trust instrument
and agree that if the trust instrument is amended at any time in the
future, the employee will, within a reasonable time, provide to the plan
administrator a copy of each such amendment; or
(2) Provide to the plan administrator a list of all of the
beneficiaries of the trust (including contingent and remaindermen
beneficiaries with a description of the conditions on their entitlement
sufficient to establish that the spouse is the sole beneficiary) for
purposes of section 401(a)(9); certify that, to the best of the
employee's knowledge, this list is correct and complete and that the
requirements of paragraph (b)(1), (2), and (3) of A-5 of this section
are satisfied; agree that, if the trust instrument is amended at any
time in the future, the employee will, within a reasonable time, provide
to the plan administrator corrected certifications to the extent that
the amendment changes any information previously certified; and agree to
provide a copy of the trust instrument to the plan administrator upon
demand.
(b) Required minimum distributions after death. In order to satisfy
the documentation requirement of this A-6 for required minimum
distributions after the death of the employee (or spouse in a case to
which A-5 of Sec. 1.401(a)(9)-3 applies), by October 31 of the calendar
year immediately following the calendar year in which the employee died,
the trustee of the trust must either--
(1) Provide the plan administrator with a final list of all
beneficiaries of the trust (including contingent and remaindermen
beneficiaries with a description of the conditions on their entitlement)
as of September 30 of the calendar year following the calendar year of
the employee's death; certify that, to the best of the trustee's
knowledge, this list is correct and complete and that the requirements
of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied;
and agree to provide a copy of the trust instrument to the plan
administrator upon demand; or
(2) Provide the plan administrator with a copy of the actual trust
document for the trust that is named as a beneficiary of the employee
under the plan as of the employee's date of death.
(c) Relief for discrepancy between trust instrument and employee
certifications or earlier trust instruments. (1) If required minimum
distributions are determined
[[Page 210]]
based on the information provided to the plan administrator in
certifications or trust instruments described in paragraph (a) or (b) of
this A-6, a plan will not fail to satisfy section 401(a)(9) merely
because the actual terms of the trust instrument are inconsistent with
the information in those certifications or trust instruments previously
provided to the plan administrator, but only if the plan administrator
reasonably relied on the information provided and the required minimum
distributions for calendar years after the calendar year in which the
discrepancy is discovered are determined based on the actual terms of
the trust instrument.
(2) For purposes of determining the amount of the excise tax under
section 4974, the required minimum distribution is determined for any
year based on the actual terms of the trust in effect during the year.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004]
Sec. 1.401(a)(9)-5 Required minimum distributions from defined
contribution plans.
Q-1. If an employee's benefit is in the form of an individual
account under a defined contribution plan, what is the amount required
to be distributed for each calendar year?
A-1. (a) General rule. If an employee's accrued benefit is in the
form of an individual account under a defined contribution plan, the
minimum amount required to be distributed for each distribution calendar
year, as defined in paragraph (b) of this A-1, is equal to the quotient
obtained by dividing the account (determined under A-3 of this section)
by the applicable distribution period (determined under A-4 or A-5 of
this section, whichever is applicable). However, the required minimum
distribution amount will never exceed the entire account balance on the
date of the distribution. See A-8 of this section for rules that apply
if a portion of the employee's account is not vested. Further, the
minimum distribution required to be distributed on or before an
employee's required beginning date is always determined under section
401(a)(9)(A)(ii) and this A-1 and not section 401(a)(9)(A)(i).
(b) Distribution calendar year. A calendar year for which a minimum
distribution is required is a distribution calendar year. If an
employee's required beginning date is April 1 of the calendar year
following the calendar year in which the employee attains age 70\1/2\,
the employee's first distribution calendar year is the year the employee
attains age 70\1/2\. If an employee's required beginning date is April 1
of the calendar year following the calendar year in which the employee
retires, the employee's first distribution calendar year is the calendar
year in which the employee retires. In the case of distributions to be
made in accordance with the life expectancy rule in Sec. 1.401(a)(9)-3
and in section 401(a)(9)(B)(iii) and (iv), the first distribution
calendar year is the calendar year containing the date described in A-
3(a) or A-3(b) of Sec. 1.401(a)(9)-3, whichever is applicable.
(c) Time for distributions. The distribution required to be made on
or before the employee's required beginning date shall be treated as the
distribution required for the employee's first distribution calendar
year (as defined in paragraph (b) of this A-1). The required minimum
distribution for other distribution calendar years, including the
required minimum distribution for the distribution calendar year in
which the employee's required beginning date occurs, must be made on or
before the end of that distribution calendar year.
(d) Minimum distribution incidental benefit requirement. If
distributions of an employee's account balance under a defined
contribution plan are made in accordance with this section, the minimum
distribution incidental benefit requirement of section 401(a)(9)(G) is
satisfied. Further, with respect to the retirement benefits provided by
that account balance, to the extent the incidental benefit requirement
of Sec. 1.401-1(b)(1)(i) requires a distribution, that requirement is
deemed to be satisfied if distributions satisfy the minimum distribution
incidental benefit requirement of section 401(a)(9)(G) and this section.
[[Page 211]]
(e) Annuity contracts. Instead of satisfying this A-1, the minimum
distribution requirement may be satisfied by the purchase of an annuity
contract from an insurance company in accordance with A-4 of Sec.
1.401(a)(9)-6 with the employee's entire individual account. If such an
annuity is purchased after distributions are required to commence (the
required beginning date, in the case of distributions commencing before
death, or the date determined under A-3 of Sec. 1.401(a)(9)-3, in the
case of distributions commencing after death), payments under the
annuity contract purchased will satisfy section 401(a)(9) for
distribution calendar years after the calendar year of the purchase if
payments under the annuity contract are made in accordance with Sec.
1.401(a)(9)-6T. In such a case, payments under the annuity contract will
be treated as distributions from the individual account for purposes of
determining if the individual account satisfies section 401(a)(9) for
the calendar year of the purchase. An employee may also purchase an
annuity contract with a portion of the employee's account under the
rules of A-2(a)(3) of Sec. 1.401(a)(9)-8.
Q-2. If an employee's benefit is in the form of an individual
account and, in any calendar year, the amount distributed exceeds the
minimum required, will credit be given in subsequent calendar years for
such excess distribution?
A-2. If, for any distribution calendar year, the amount distributed
exceeds the minimum required, no credit will be given in subsequent
calendar years for such excess distribution.
Q-3. What is the amount of the account of an employee used for
determining the employee's required minimum distribution in the case of
an individual account?
A-3. (a) In the case of an individual account, the benefit used in
determining the required minimum distribution for a distribution
calendar year is the account balance as of the last valuation date in
the calendar year immediately preceding that distribution calendar year
(valuation calendar year) adjusted in accordance with paragraphs (b),
(c), and (d) of this A-3.
(b) The account balance is increased by the amount of any
contributions or forfeitures allocated to the account balance as of
dates in the valuation calendar year after the valuation date. For this
purpose, contributions that are allocated to the account balance as of
dates in the valuation calendar year after the valuation date, but that
are not actually made during the valuation calendar year, are permitted
to be excluded.
(c) The account balance is decreased by distributions made in the
valuation calendar year after the valuation date.
(d) The account balance does not include the value of any qualifying
longevity annuity contract (QLAC), defined in A-17 of Sec. 1.401(a)(9)-
6, that is held under the plan. This paragraph (d) applies only to
contracts purchased on or after July 2, 2014.
(e) If an amount is distributed from a plan and rolled over to
another plan (receiving plan), A-2 of Sec. 1.401(a)(9)-7 provides
additional rules for determining the benefit and required minimum
distribution under the receiving plan. If an amount is transferred from
one plan (transferor plan) to another plan (transferee plan) in a
transfer to which section 414(l) applies, A-3 and A-4 of Sec.
1.401(a)(9)-7 provide additional rules for determining the amount of the
required minimum distribution and the benefit under both the transferor
and transferee plans.
Q-4. For required minimum distributions during an employee's
lifetime, what is the applicable distribution period?
A-4. (a) General rule. Except as provided in paragraph (b) of this
A-4, the applicable distribution period for required minimum
distributions for distribution calendar years up to and including the
distribution calendar year that includes the employee's date of death is
determined using the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-
9 for the employee's age as of the employee's birthday in the relevant
distribution calendar year. If an employee dies on or after the required
beginning date, the distribution period applicable for calculating the
amount that must be distributed during the distribution calendar year
that includes the employee's death is determined as if the
[[Page 212]]
employee had lived throughout that year. Thus, a minimum required
distribution, determined as if the employee had lived throughout that
year, is required for the year of the employee's death and that amount
must be distributed to a beneficiary to the extent it has not already
been distributed to the employee.
(b) Spouse is sole beneficiary--(1) General rule. Except as
otherwise provided in paragraph (b)(2) of this A-4, if the sole
designated beneficiary of an employee is the employee's surviving
spouse, for required minimum distributions during the employee's
lifetime, the applicable distribution period is the longer of the
distribution period determined in accordance with paragraph (a) of this
A-4 or the joint life expectancy of the employee and spouse using the
employee's and spouse's attained ages as of the employee's and the
spouse's birthdays in the distribution calendar year. The spouse is sole
designated beneficiary for purposes of determining the applicable
distribution period for a distribution calendar year during the
employee's lifetime only if the spouse is the sole beneficiary of the
employee's entire interest at all times during the distribution calendar
year.
(2) Change in marital status. If the employee and the employee's
spouse are married on January 1 of a distribution calendar year, but do
not remain married throughout that year (i.e., the employee or the
employee's spouse die or they become divorced during that year), the
employee will not fail to have a spouse as the employee's sole
beneficiary for that year merely because they are not married throughout
that year. If an employee's spouse predeceases the employee, the spouse
will not fail to be the employee's sole beneficiary for the distribution
calendar year that includes the date of the spouse's death solely
because, for the period remaining in that year after the spouse's death,
someone other than the spouse is named as beneficiary. However, the
change in beneficiary due to the death or divorce of the spouse will be
effective for purposes of determining the applicable distribution period
under section 401(a)(9) in the distribution calendar year following the
distribution calendar year that includes the date of the spouse's death
or divorce.
Q-5. For required minimum distributions after an employee's death,
what is the applicable distribution period?
A-5. (a) Death on or after the employee's required beginning date.
If an employee dies after distribution has begun as determined under A-6
of Sec. 1.401(a)(9)-2 (generally on or after the employee's required
beginning date), in order to satisfy section 401(a)(9)(B)(i), the
applicable distribution period for distribution calendar years after the
distribution calendar year containing the employee's date of death is
either--
(1) If the employee has a designated beneficiary as of the date
determined under A-4 of Sec. 1.401(a)(9)-4, the longer of--
(i) The remaining life expectancy of the employee's designated
beneficiary determined in accordance with paragraph (c)(1) or (2) of
this A-5; and
(ii) The remaining life expectancy of the employee determined in
accordance with paragraph (c)(3) of this A-5; or
(2) If the employee does not have a designated beneficiary as of the
date determined under A-4 of Sec. 1.401(a)(9)-4, the remaining life
expectancy of the employee determined in accordance with paragraph
(c)(3) of this A-5.
(b) Death before an employee's required beginning date. If an
employee dies before distribution has begun, as determined under A-5 of
Sec. 1.401(a)(9)-2 (generally before the employee's required beginning
date), in order to satisfy section 401(a)(9)(B)(iii) or (iv) and the
life expectancy rule described in A-1 of Sec. 1.401(a)(9)-3, the
applicable distribution period for distribution calendar years after the
distribution calendar year containing the employee's date of death is
determined in accordance with paragraph (c) of this A-5. See A-4 of
Sec. 1.401(a)(9)-3 to determine when the 5-year rule in section
401(a)(9)(B)(ii) applies (e.g., there is no designated beneficiary or
the 5-year rule is elected or specified by plan provision).
(c) Life expectancy--(1) Nonspouse designated beneficiary. Except as
otherwise provided in paragraph (c)(2), the applicable distribution
period measured by the beneficiary's remaining life expectancy is
determined using the beneficiary's age as of the beneficiary's
[[Page 213]]
birthday in the calendar year immediately following the calendar year of
the employee's death. In subsequent calendar years, the applicable
distribution period is reduced by one for each calendar year that has
elapsed after the calendar year immediately following the calendar year
of the employee's death.
(2) Spouse designated beneficiary. If the surviving spouse of the
employee is the employee's sole beneficiary, the applicable distribution
period is measured by the surviving spouse's life expectancy using the
surviving spouse's birthday for each distribution calendar year after
the calendar year of the employee's death up through the calendar year
of the spouse's death. For calendar years after the calendar year of the
spouse's death, the applicable distribution period is the life
expectancy of the spouse using the age of the spouse as of the spouse's
birthday in the calendar year of the spouse's death, reduced by one for
each calendar year that has elapsed after the calendar year of the
spouse's death.
(3) No designated beneficiary. If the employee does not have a
designated beneficiary, the applicable distribution period measured by
the employee's remaining life expectancy is the life expectancy of the
employee using the age of the employee as of the employee's birthday in
the calendar year of the employee's death. In subsequent calendar years
the applicable distribution period is reduced by one for each calendar
year that has elapsed after the calendar year of the employee's death.
Q-6. What life expectancies must be used for purposes of determining
required minimum distributions under section 401(a)(9)?
A-6. Life expectancies for purposes of determining required minimum
distributions under section 401(a)(9) must be computed using the Single
Life Table in A-1 of Sec. 1.401(a)(9)-9 and the Joint and Last Survivor
Table in A-3 of Sec. 1.401(a)(9)-9.
Q-7. If an employee has more than one designated beneficiary, which
designated beneficiary's life expectancy will be used to determine the
applicable distribution period?
A-7. (a) General rule--(1) Except as otherwise provided in paragraph
(c) of this A-7, if more than one individual is designated as a
beneficiary with respect to an employee as of the applicable date for
determining the designated beneficiary under A-4 of Sec. 1.401(a)(9)-4,
the designated beneficiary with the shortest life expectancy will be the
designated beneficiary for purposes of determining the applicable
distribution period.
(2) See A-3 of Sec. 1.401(a)(9)-4 for rules that apply if a person
other than an individual is designated as a beneficiary and see A-2 and
A-3 of Sec. 1.401(a)(9)-8 for special rules that apply if an employee's
benefit under a plan is divided into separate accounts and the
beneficiaries with respect to a separate account differ from the
beneficiaries of another separate account.
(b) Contingent beneficiary. Except as provided in paragraph (c)(1)
of this A-7, if a beneficiary's entitlement to an employee's benefit
after the employee's death is a contingent right, such contingent
beneficiary is nevertheless considered to be a beneficiary for purposes
of determining whether a person other than an individual is designated
as a beneficiary (resulting in the employee being treated as having no
designated beneficiary under the rules of A-3 of Sec. 1.401(a)(9)-4)
and which designated beneficiary has the shortest life expectancy under
paragraph (a) of this A-7.
(c) Successor beneficiary--(1) A person will not be considered a
beneficiary for purposes of determining who is the beneficiary with the
shortest life expectancy under paragraph (a) of this A-7, or whether a
person who is not an individual is a beneficiary, merely because the
person could become the successor to the interest of one of the
employee's beneficiaries after that beneficiary's death. However, the
preceding sentence does not apply to a person who has any right
(including a contingent right) to an employee's benefit beyond being a
mere potential successor to the interest of one of the employee's
beneficiaries upon that beneficiary's death. Thus, for example, if the
first beneficiary has a right to all income with respect to an
employee's individual account during that beneficiary's life and a
second beneficiary has a right to the principal but only
[[Page 214]]
after the death of the first income beneficiary (any portion of the
principal distributed during the life of the first income beneficiary to
be held in trust until that first beneficiary's death), both
beneficiaries must be taken into account in determining the beneficiary
with the shortest life expectancy and whether only individuals are
beneficiaries.
(2) If the individual beneficiary whose life expectancy is being
used to calculate the distribution period dies after September 30 of the
calendar year following the calendar year of the employee's death, such
beneficiary's remaining life expectancy will be used to determine the
distribution period without regard to the life expectancy of the
subsequent beneficiary.
(3) This paragraph (c) is illustrated by the following examples:
Example 1. (i) Employer M maintains a defined contribution plan,
Plan X. Employee A, an employee of M, died in 2005 at the age of 55,
survived by spouse, B, who was 50 years old. Prior to A's death, M had
established an account balance for A in Plan X. A's account balance is
invested only in productive assets. A named a testamentary trust (Trust
P) established under A's will as the beneficiary of all amounts payable
from A's account in Plan X after A's death. A copy of the Trust P and a
list of the trust beneficiaries were provided to the plan administrator
of Plan X by October 31 of the calendar year following the calendar year
of A's death. As of the date of A's death, the Trust P was irrevocable
and was a valid trust under the laws of the state of A's domicile. A's
account balance in Plan X was includible in A's gross estate under Sec.
2039.
(ii) Under the terms of Trust P, all trust income is payable
annually to B, and no one has the power to appoint Trust P principal to
any person other than B. A's children, who are all younger than B, are
the sole remainder beneficiaries of the Trust P. No other person has a
beneficial interest in Trust P. Under the terms of the Trust P, B has
the power, exercisable annually, to compel the trustee to withdraw from
A's account balance in Plan X an amount equal to the income earned on
the assets held in A's account in Plan X during the calendar year and to
distribute that amount through Trust P to B. Plan X contains no
prohibition on withdrawal from A's account of amounts in excess of the
annual required minimum distributions under section 401(a)(9). In
accordance with the terms of Plan X, the trustee of Trust P elects, in
order to satisfy section 401(a)(9), to receive annual required minimum
distributions using the life expectancy rule in section
401(a)(9)(B)(iii) for distributions over a distribution period equal to
B's life expectancy. If B exercises the withdrawal power, the trustee
must withdraw from A's account under Plan X the greater of the amount of
income earned in the account during the calendar year or the required
minimum distribution. However, under the terms of Trust P, and
applicable state law, only the portion of the Plan X distribution
received by the trustee equal to the income earned by A's account in
Plan X is required to be distributed to B (along with any other trust
income.)
(iii) Because some amounts distributed from A's account in Plan X to
Trust P may be accumulated in Trust P during B's lifetime for the
benefit of A's children, as remaindermen beneficiaries of Trust P, even
though access to those amounts are delayed until after B's death, A's
children are beneficiaries of A's account in Plan X in addition to B and
B is not the sole designated beneficiary of A's account. Thus the
designated beneficiary used to determine the distribution period from
A's account in Plan X is the beneficiary with the shortest life
expectancy. B's life expectancy is the shortest of all the potential
beneficiaries of the testamentary trust's interest in A's account in
Plan X (including remainder beneficiaries). Thus, the distribution
period for purposes of section 401(a)(9)(B)(iii) is B's life expectancy.
Because B is not the sole designated beneficiary of the testamentary
trust's interest in A's account in Plan X, the special rule in
401(a)(9)(B)(iv) is not available and the annual required minimum
distributions from the account to Trust M must begin no later than the
end of the calendar year immediately following the calendar year of A's
death.
Example 2. (i) The facts are the same as Example 1 except that the
testamentary trust instrument provides that all amounts distributed from
A's account in Plan X to the trustee while B is alive will be paid
directly to B upon receipt by the trustee of Trust P.
(ii) In this case, B is the sole designated beneficiary of A's
account in Plan X for purposes of determining the designated beneficiary
under section 401(a)(9)(B)(iii) and (iv). No amounts distributed from
A's account in Plan X to Trust P are accumulated in Trust P during B's
lifetime for the benefit of any other beneficiary. Therefore, the
residuary beneficiaries of Trust P are mere potential successors to B's
interest in Plan X. Because B is the sole beneficiary of the
testamentary trust's interest in A's account in Plan X, the annual
required minimum distributions from A's account to Trust P must begin no
later than the end of the calendar year in which A would have attained
age 70\1/2\, rather than the calendar year immediately following the
calendar year of A's death.
[[Page 215]]
Q-8. If a portion of an employee's individual account is not vested
as of the employee's required beginning date, how is the determination
of the required minimum distribution affected?
A-8. If the employee's benefit is in the form of an individual
account, the benefit used to determine the required minimum distribution
for any distribution calendar year will be determined in accordance with
A-1 of this section without regard to whether or not all of the
employee's benefit is vested. If any portion of the employee's benefit
is not vested, distributions will be treated as being paid from the
vested portion of the benefit first. If, as of the end of a distribution
calendar year (or as of the employee's required beginning date, in the
case of the employee's first distribution calendar year), the total
amount of the employee's vested benefit is less than the required
minimum distribution for the calendar year, only the vested portion, if
any, of the employee's benefit is required to be distributed by the end
of the calendar year (or, if applicable, by the employee's required
beginning date). However, the required minimum distribution for the
subsequent distribution calendar year must be increased by the sum of
amounts not distributed in prior calendar years because the employee's
vested benefit was less than the required minimum distribution.
Q-9. Which amounts distributed from an individual account are taken
into account in determining whether section 401(a)(9) is satisfied and
which amounts are not taken into account in determining whether section
401(a)(9) is satisfied?
A-9. (a) General rule. Except as provided in paragraph (b), all
amounts distributed from an individual account are distributions that
are taken into account in determining whether section 401(a)(9) is
satisfied, regardless of whether the amount is includible in income.
Thus, for example, amounts that are excluded from income as recovery of
investment in the contract under section 72 are taken into account for
purposes of determining whether section 401(a)(9) is satisfied for a
distribution calendar year. Similarly, amounts excluded from income as
net unrealized appreciation on employer securities also are amounts
distributed for purposes of determining if section 401(a)(9) is
satisfied.
(b) Exceptions. The following amounts are not taken into account in
determining whether the required minimum amount has been distributed for
a calendar year:
(1) Elective deferrals (as defined in section 402(g)(3)) and
employee contributions that, pursuant to rules prescribed by the
Commissioner in revenue rulings, notices, or other guidance published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter),
are returned to the employee (together with the income allocable
thereto) in order to comply with the section 415 limitations.
(2) Corrective distributions of excess deferrals as described in
Sec. 1.402(g)-1(e)(3), together with the income allocable to these
distributions.
(3) Corrective distributions of excess contributions under a
qualified cash or deferred arrangement under section 401(k)(8) and
excess aggregate contributions under section 401(m)(6), together with
the income allocable to these distributions.
(4) Loans that are treated as deemed distributions pursuant to
section 72(p).
(5) Dividends described in section 404(k) that are paid on employer
securities. (Amounts paid to the plan that, pursuant to section
404(k)(2)(A)(iii)(II), are included in the account balance and
subsequently distributed from the account lose their character as
dividends.)
(6) The costs of life insurance coverage (P.S. 58 costs).
(7) Similar items designated by the Commissioner in revenue rulings,
notices, and other guidance published in the Internal Revenue Bulletin.
See Sec. 601.601(d)(2)(ii)(b) of this chapter.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004; T.D. 9319, 72 FR 16894, Apr. 5, 2007;T.D. 9673, 79
FR 37639, July 2, 2014]
Sec. 1.401(a)(9)-6 Required minimum distributions for defined benefit
plans and annuity contracts.
Q-1. How must distributions under a defined benefit plan be paid in
order to satisfy section 401(a)(9)?
[[Page 216]]
A-1. (a) General rules. In order to satisfy section 401(a)(9),
except as otherwise provided in this section, distributions of the
employee's entire interest under a defined benefit plan must be paid in
the form of periodic annuity payments for the employee's life (or the
joint lives of the employee and beneficiary) or over a period certain
that does not exceed the maximum length of the period certain determined
in accordance with A-3 of this section. The interval between payments
for the annuity must be uniform over the entire distribution period and
must not exceed one year. Once payments have commenced over a period,
the period may only be changed in accordance with A-13 of this section.
Life (or joint and survivor) annuity payments must satisfy the minimum
distribution incidental benefit requirements of A-2 of this section.
Except as otherwise provided in this section (such as permitted
increases described in A-14 of this section), all payments (whether paid
over an employee's life, joint lives, or a period certain) also must be
nonincreasing.
(b) Life annuity with period certain. The annuity may be a life
annuity (or joint and survivor annuity) with a period certain if the
life (or lives, if applicable) and period certain each meet the
requirements of paragraph (a) of this A-1. For purposes of this section,
if distributions are permitted to be made over the lives of the employee
and the designated beneficiary, references to a life annuity include a
joint and survivor annuity.
(c) Annuity commencement. (1) Annuity payments must commence on or
before the employee's required beginning date (within the meaning of A-2
of Sec. 1.401(a)(9)-2). The first payment, which must be made on or
before the employee's required beginning date, must be the payment which
is required for one payment interval. The second payment need not be
made until the end of the next payment interval even if that payment
interval ends in the next calendar year. Similarly, in the case of
distributions commencing after death in accordance with section
401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or
before the date determined under A-3(a) or (b) (whichever is applicable)
of Sec. 1.401(a)(9)-3, must be the payment which is required for one
payment interval. Payment intervals are the periods for which payments
are received, e.g., bimonthly, monthly, semi-annually, or annually. All
benefit accruals as of the last day of the first distribution calendar
year must be included in the calculation of the amount of annuity
payments for payment intervals ending on or after the employee's
required beginning date.
(2) This paragraph (c) is illustrated by the following example:
Example. A defined benefit plan (Plan X) provides monthly annuity
payments of $500 for the life of unmarried participants with a 10-year
period certain. An unmarried, retired participant (A) in Plan X attains
age 70\1/2\ in 2005. In order to meet the requirements of this
paragraph, the first monthly payment of $500 must be made on behalf of A
on or before April 1, 2006, and the payments must continue to be made in
monthly payments of $500 thereafter for the life and 10-year period
certain.
(d) Single sum distributions. In the case of a single sum
distribution of an employee's entire accrued benefit during a
distribution calendar year, the amount that is the required minimum
distribution for the distribution calendar year (and thus not eligible
for rollover under section 402(c)) is determined using either the rule
in paragraph (d)(1) or the rule in paragraph (d)(2) of this A-1.
(1) The portion of the single sum distribution that is a required
minimum distribution is determined by treating the single sum
distribution as a distribution from an individual account plan and
treating the amount of the single sum distribution as the employee's
account balance as of the end of the relevant valuation calendar year.
If the single sum distribution is being made in the calendar year
containing the required beginning date and the required minimum
distribution for the employee's first distribution calendar year has not
been distributed, the portion of the single sum distribution that
represents the required minimum distribution for the employee's first
and second distribution calendar years is not eligible for rollover.
(2) The portion of the single sum distribution that is a required
minimum
[[Page 217]]
distribution is permitted to be determined by expressing the employee's
benefit as an annuity that would satisfy this section with an annuity
starting date as of the first day of the distribution calendar year for
which the required minimum distribution is being determined, and
treating one year of annuity payments as the required minimum
distribution for that year, and not eligible for rollover. If the single
sum distribution is being made in the calendar year containing the
required beginning date and the required minimum distribution for the
employee's first distribution calendar year has not been made, the
benefit must be expressed as an annuity with an annuity starting date as
of the first day of the first distribution calendar year and the
payments for the first two distribution calendar years would be treated
as required minimum distributions, and not eligible for rollover.
(e) Death benefits. The rule in paragraph (a) of this A-1,
prohibiting increasing payments under an annuity applies to payments
made upon the death of an employee. However, for purposes of this
section, an ancillary death benefit described in this paragraph (e) may
be disregarded in applying that rule. Such an ancillary death benefit is
excluded in determining an employee's entire interest and the rules
prohibiting increasing payments do not apply to such an ancillary death
benefit. A death benefit with respect to an employee's benefit is an
ancillary death benefit for purposes of this A-1 if--
(1) It is not paid as part of the employee's accrued benefit or
under any optional form of the employee's benefit; and
(2) The death benefit, together with any other potential payments
with respect to the employee's benefit that may be provided to a
survivor, satisfy the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i).
(f) Additional guidance. Additional guidance regarding how
distributions under a defined benefit plan must be paid in order to
satisfy section 401(a)(9) may be issued by the Commissioner in revenue
rulings, notices, or other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
Q-2. How must distributions in the form of a life (or joint and
survivor) annuity be made in order to satisfy the minimum distribution
incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the
distribution component of the incidental benefit requirement of Sec.
1.401-1(b)(1)(i)?
A-2. (a) Life annuity for employee. If the employee's benefit is
paid in the form of a life annuity for the life of the employee
satisfying section 401(a)(9) without regard to the MDIB requirement, the
MDIB requirement of section 401(a)(9)(G) will be satisfied.
(b) Joint and survivor annuity, spouse beneficiary. If the
employee's sole beneficiary, as of the annuity starting date for annuity
payments, is the employee's spouse and the distributions satisfy section
401(a)(9) without regard to the MDIB requirement, the distributions to
the employee will be deemed to satisfy the MDIB requirement of section
401(a)(9)(G). For example, if an employee's benefit is being distributed
in the form of a joint and survivor annuity for the lives of the
employee and the employee's spouse and the spouse is the sole
beneficiary of the employee, the amount of the periodic payment payable
to the spouse would not violate the MDIB requirement if it was 100
percent of the annuity payment payable to the employee, regardless of
the difference in the ages between the employee and the employee's
spouse.
(c) Joint and survivor annuity, nonspouse beneficiary--(1)
Explanation of rule. If distributions commence under a distribution
option that is in the form of a joint and survivor annuity for the joint
lives of the employee and a beneficiary other than the employee's
spouse, the minimum distribution incidental benefit requirement will not
be satisfied as of the date distributions commence unless under the
distribution option, the annuity payments to be made on and after the
employee's required beginning date will satisfy the conditions of this
paragraph (c). The periodic annuity payment payable to the survivor must
not at any time on
[[Page 218]]
and after the employee's required beginning date exceed the applicable
percentage of the annuity payment payable to the employee using the
table in paragraph (c)(2) of this A-2. The applicable percentage is
based on the adjusted employee/beneficiary age difference. The adjusted
employee/beneficiary age difference is determined by first calculating
the excess of the age of the employee over the age of the beneficiary
based on their ages on their birthdays in a calendar year. Then, if the
employee is younger than age 70, the age difference determined in the
previous sentence is reduced by the number of years that the employee is
younger than age 70 on the employee's birthday in the calendar year that
contains the annuity starting date. In the case of an annuity that
provides for increasing payments, the requirement of this paragraph (c)
will not be violated merely because benefit payments to the beneficiary
increase, provided the increase is determined in the same manner for the
employee and the beneficiary.
(2) Table.
------------------------------------------------------------------------
Applicable
Adjusted employee/beneficiary age difference percentage
------------------------------------------------------------------------
10 years or less.......................................... 100
11........................................................ 96
12........................................................ 93
13........................................................ 90
14........................................................ 87
15........................................................ 84
16........................................................ 82
17........................................................ 79
18........................................................ 77
19........................................................ 75
20........................................................ 73
21........................................................ 72
22........................................................ 70
23........................................................ 68
24........................................................ 67
25........................................................ 66
26........................................................ 64
27........................................................ 63
28........................................................ 62
29........................................................ 61
30........................................................ 60
31........................................................ 59
32........................................................ 59
33........................................................ 58
34........................................................ 57
35........................................................ 56
36........................................................ 56
37........................................................ 55
38........................................................ 55
39........................................................ 54
40........................................................ 54
41........................................................ 53
42........................................................ 53
43........................................................ 53
44 and greater............................................ 52
------------------------------------------------------------------------
(3) Example. This paragraph (c) is illustrated by the following
example:
Example. Distributions commence on January 1, 2003 to an employee
(Z), born March 1, 1937, after retirement at age 65. Z's daughter (Y),
born February 5, 1967, is Z's beneficiary. The distributions are in the
form of a joint and survivor annuity for the lives of Z and Y with
payments of $500 a month to Z and upon Z's death of $500 a month to Y,
i.e., the projected monthly payment to Y is 100 percent of the monthly
amount payable to Z. Accordingly, under A-10 of this section, compliance
with the rules of this section is determined as of the annuity starting
date. The adjusted employee/beneficiary age difference is calculated by
taking the excess of the employee's age over the beneficiary's age and
subtracting the number of years the employee is younger than age 70. In
this case, Z is 30 years older than Y and is commencing benefit 4 years
before attaining age 70 so the adjusted employee-beneficiary age
difference is 26 years. Under the table in the paragraph (c)(2) of this
A-2, the applicable percentage for a 26-year adjusted employee/
beneficiary age difference is 64 percent. As of January 1, 2003 (the
annuity starting date) the plan does not satisfy the MDIB requirement
because, as of such date, the distribution option provides that, as of
Z's required beginning date, the monthly payment to Y upon Z's death
will exceed 66 percent of Z's monthly payment.
(d) Period certain and annuity features. If a distribution form
includes a period certain, the amount of the annuity payments payable to
the beneficiary need not be reduced during the period certain, but in
the case of a joint and survivor annuity with a period certain, the
amount of the annuity payments payable to the beneficiary must satisfy
paragraph (c) of this A-2 after the expiration of the period certain.
(e) Deemed satisfaction of incidental benefit rule. Except in the
case of distributions with respect to an employee's benefit that include
an ancillary death benefit described in paragraph A-1(e) of this
section, to the extent the incidental benefit requirement of Sec.
1.401-1(b)(1)(i) requires a distribution, that requirement is deemed to
be satisfied if distributions satisfy the minimum distribution
incidental benefit requirement of this A-2. If the employee's benefits
include an ancillary death benefit described in paragraph A-1(e) of this
section, the benefits (including the
[[Page 219]]
ancillary death benefit) must be distributed in accordance with the
incidental benefit requirement described in Sec. 1.401-1(b)(1)(i) and
the benefits (excluding the ancillary death benefit) must also satisfy
the minimum distribution incidental benefit requirement of this A-2.
Q-3. How long is a period certain under a defined benefit plan
permitted to extend?
A-3. (a) Distributions commencing during the employee's life. The
period certain for any annuity distributions commencing during the life
of the employee with an annuity starting date on or after the employee's
required beginning date generally is not permitted to exceed the
applicable distribution period for the employee (determined in
accordance with the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-
9) for the calendar year that contains the annuity starting date. See A-
10 of this section for the rule for annuity payments with an annuity
starting date before the required beginning date. However, if the
employee's sole beneficiary is the employee's spouse, the period certain
is permitted to be as long as the joint life and last survivor
expectancy of the employee and the employee's spouse, if longer than the
applicable distribution period for the employee, provided the period
certain is not provided in conjunction with a life annuity under A-1(b)
of this section.
(b) Distributions commencing after the employee's death. (1) If
annuity distributions commence after the death of the employee under the
life expectancy rule (under section 401(a)(9)(B)(iii) or (iv)), the
period certain for any distributions commencing after death cannot
exceed the applicable distribution period determined under A-5(b) of
Sec. 1.401(a)(9)-5 for the distribution calendar year that contains the
annuity starting date.
(2) If the annuity starting date is in a calendar year before the
first distribution calendar year, the period certain may not exceed the
life expectancy of the designated beneficiary using the beneficiary's
age in the year that contains the annuity starting date.
Q-4. Will a plan fail to satisfy section 401(a)(9) merely because
distributions are made from an annuity contract which is purchased from
an insurance company?
A-4. A plan will not fail to satisfy section 401(a)(9) merely
because distributions are made from an annuity contract which is
purchased with the employee's benefit by the plan from an insurance
company, as long as the payments satisfy the requirements of this
section. If the annuity contract is purchased after the required
beginning date, the first payment interval must begin on or before the
purchase date and the payment required for one payment interval must be
made no later than the end of such payment interval. If the payments
actually made under the annuity contract do not meet the requirements of
section 401(a)(9), the plan fails to satisfy section 401(a)(9). See also
A-14 of this section permitting certain increases under annuity
contracts.
Q-5. In the case of annuity distributions under a defined benefit
plan, how must additional benefits that accrue after the employee's
first distribution calendar year be distributed in order to satisfy
section 401(a)(9)?
A-5. (a) In the case of annuity distributions under a defined
benefit plan, if any additional benefits accrue in a calendar year after
the employee's first distribution calendar year, distribution of the
amount that accrues in the calendar year must commence in accordance
with A-1 of this section beginning with the first payment interval
ending in the calendar year immediately following the calendar year in
which such amount accrues.
(b) A plan will not fail to satisfy section 401(a)(9) merely because
there is an administrative delay in the commencement of the distribution
of the additional benefits accrued in a calendar year, provided that the
actual payment of such amount commences as soon as practicable. However,
payment must commence no later than the end of the first calendar year
following the calendar year in which the additional benefit accrues, and
the total amount paid during such first calendar year must be no less
than the total amount that was required to be paid during that year
under A-5(a) of this section.
[[Page 220]]
Q-6. If a portion of an employee's benefit is not vested as of
December 31 of a distribution calendar year, how is the determination of
the required minimum distribution affected?
A-6. In the case of annuity distributions from a defined benefit
plan, if any portion of the employee's benefit is not vested as of
December 31 of a distribution calendar year, the portion that is not
vested as of such date will be treated as not having accrued for
purposes of determining the required minimum distribution for that
distribution calendar year. When an additional portion of the employee's
benefit becomes vested, such portion will be treated as an additional
accrual. See A-5 of this section for the rules for distributing benefits
which accrue under a defined benefit plan after the employee's first
distribution calendar year.
Q-7. If an employee (other than a 5-percent owner) retires after the
calendar year in which the employee attains age 70\1/2\, for what period
must the employee's accrued benefit under a defined benefit plan be
actuarially increased?
A-7. (a) Actuarial increase starting date. If an employee (other
than a 5-percent owner) retires after the calendar year in which the
employee attains age 70\1/2\, in order to satisfy section
401(a)(9)(C)(iii), the employee's accrued benefit under a defined
benefit plan must be actuarially increased to take into account any
period after age 70\1/2\ in which the employee was not receiving any
benefits under the plan. The actuarial increase required to satisfy
section 401(a)(9)(C)(iii) must be provided for the period starting on
the April 1 following the calendar year in which the employee attains
age 70\1/2\, or January 1, 1997, if later.
(b) Actuarial increase ending date. The period for which the
actuarial increase must be provided ends on the date on which benefits
commence after retirement in an amount sufficient to satisfy section
401(a)(9).
(c) Nonapplication to plan providing same required beginning date
for all employees. If, as permitted under A-2(e) of Sec. 1.401(a)(9)-2,
a plan provides that the required beginning date for purposes of section
401(a)(9) for all employees is April 1 of the calendar year following
the calendar year in which the employee attains age 70\1/2\ (regardless
of whether the employee is a 5-percent owner) and the plan makes
distributions in an amount sufficient to satisfy section 401(a)(9) using
that required beginning date, no actuarial increase is required under
section 401(a)(9)(C)(iii).
(d) Nonapplication to governmental and church plans. The actuarial
increase required under this A-7 does not apply to a governmental plan
(within the meaning of section 414(d)) or a church plan. For purposes of
this paragraph, the term church plan means a plan maintained by a church
for church employees, and the term church means any church (as defined
in section 3121(w)(3)(A)) or qualified church-controlled organization
(as defined in section 3121(w)(3)(B)).
Q-8. What amount of actuarial increase is required under section
401(a)(9)(C)(iii)?
A-8. In order to satisfy section 401(a)(9)(C)(iii), the retirement
benefits payable with respect to an employee as of the end of the period
for actuarial increases (described in A-7 of this section) must be no
less than: the actuarial equivalent of the employee's retirement
benefits that would have been payable as of the date the actuarial
increase must commence under paragraph (a) of A-7 of this section if
benefits had commenced on that date; plus the actuarial equivalent of
any additional benefits accrued after that date; reduced by the
actuarial equivalent of any distributions made with respect to the
employee's retirement benefits after that date. Actuarial equivalence is
determined using the plan's assumptions for determining actuarial
equivalence for purposes of satisfying section 411.
Q-9. How does the actuarial increase required under section
401(a)(9)(C)(iii) relate to the actuarial increase required under
section 411?
A-9. In order for any of an employee's accrued benefit to be
nonforfeitable as required under section 411, a defined benefit plan
must make an actuarial adjustment to an accrued benefit, the payment of
which is deferred past normal retirement age. The only exception to this
rule is that generally no
[[Page 221]]
actuarial adjustment is required to reflect the period during which a
benefit is suspended as permitted under section 203(a)(3)(B) of the
Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829).
The actuarial increase required under section 401(a)(9)(C)(iii) for the
period described in A-7 of this section is generally the same as, and
not in addition to, the actuarial increase required for the same period
under section 411 to reflect any delay in the payment of retirement
benefits after normal retirement age. However, unlike the actuarial
increase required under section 411, the actuarial increase required
under section 401(a)(9)(C)(iii) must be provided even during any period
during which an employee's benefit has been suspended in accordance with
ERISA section 203(a)(3)(B).
Q-10. What rule applies if distributions commence to an employee on
a date before the employee's required beginning date over a period
permitted under section 401(a)(9)(A)(ii) and the distribution form is an
annuity under which distributions are made in accordance with the
provisions of A-1 of this section?
A-10. (a) General rule. If distributions commence to an employee on
a date before the employee's required beginning date over a period
permitted under section 401(a)(9)(A)(ii) and the distribution form is an
annuity under which distributions are made in accordance with the
provisions of A-1 of this section, the annuity starting date will be
treated as the required beginning date for purposes of applying the
rules of this section and Sec. 1.401(a)(9)-2. Thus, for example, the
designated beneficiary distributions will be determined as of the
annuity starting date. Similarly, if the employee dies after the annuity
starting date but before the required beginning date determined under A-
2 of Sec. 1.401(a)(9)-2, after the employee's death, the remaining
portion of the employee's interest must continue to be distributed in
accordance with this section over the remaining period over which
distributions commenced. The rules in Sec. 1.401(a)(9)-3 and section
401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
(b) Period certain. If, as of the employee's birthday in the year
that contains the annuity starting date, the age of the employee is
under 70, the following rule applies in applying the rule in paragraph
(a) of A-3 of this section. The applicable distribution period for the
employee is the distribution period for age 70, determined in accordance
with the Uniform Lifetime Table in A-2 of Sec. 1.401(a)(9)-9, plus the
excess of 70 over the age of the employee as of the employee's birthday
in the year that contains the annuity starting date.
(c) Adjustment to employee/beneficiary age difference. See A-2(c)(1)
of this section for the determination of the adjusted employee/
beneficiary age difference in the case of an employee whose age on the
annuity starting date is less than 70.
Q-11. What rule applies if distributions commence to the surviving
spouse of an employee over a period permitted under section
401(a)(9)(B)(iii)(II) before the date on which distributions are
required to commence and the distribution form is an annuity under which
distributions are made as of the date distributions commence in
accordance with the provisions of A-1 of this section.
A-11. If distributions commence to the surviving spouse of an
employee over a period permitted under section 401(a)(9)(B)(iii)(II)
before the date on which distributions are required to commence and the
distribution form is an annuity under which distributions are made as of
the date distributions commence in accordance with the provisions of A-1
of this section, distributions will be considered to have begun on the
actual commencement date for purposes of section 401(a)(9)(B)(iv)(II).
Consequently, in such case, A-5 of Sec. 1.401(a)(9)-3 and section
401(a)(9)(B)(ii) and (iii) will not apply upon the death of the
surviving spouse as though the surviving spouse were the employee.
Instead, the annuity distributions must continue to be made, in
accordance with the provisions of A-1 of this section, over the
remaining period over which distributions commenced.
Q-12. In the case of an annuity contract under an individual account
plan that has not yet been annuitized, how
[[Page 222]]
is section 401(a)(9) satisfied with respect to the employee's or
beneficiary's entire interest under the annuity contract for the period
prior to the date annuity payments so commence?
A-12. (a) General rule. Prior to the date that an annuity contract
under an individual account plan is annuitized, the interest of an
employee or beneficiary under that contract is treated as an individual
account for purposes of section 401(a)(9). Thus, the required minimum
distribution for any year with respect to that interest is determined
under Sec. 1.401(a)(9)-5 rather than this section. See A-1(e) of Sec.
1.401(a)(9)-5 for rules relating to the satisfaction of section
401(a)(9) in the year that annuity payments commence, A-3(d) of Sec.
1.401(a)(9)-5 for rules relating to qualifying longevity annuity
contracts (QLACs), defined in A-17 of this section, and A-2(a)(3) of
Sec. 1.401(a)(9)-8 for rules relating to the purchase of an annuity
contract with a portion of an employee's account balance.
(b) Entire interest. For purposes of applying the rules in Sec.
1.401(a)(9)-5, the entire interest under the annuity contract as of
December 31 of the relevant valuation calendar year is treated as the
account balance for the valuation calendar year described in A-3 of
Sec. 1.401(a)(9)-5. The entire interest under an annuity contract is
the dollar amount credited to the employee or beneficiary under the
contract plus the actuarial present value of any additional benefits
(such as survivor benefits in excess of the dollar amount credited to
the employee or beneficiary) that will be provided under the contract.
However, paragraph (c) of this A-12 describes certain additional
benefits that may be disregarded in determining the employee's entire
interest under the annuity contract. The actuarial present value of any
additional benefits described under this A-12 is to be determined using
reasonable actuarial assumptions, including reasonable assumptions as to
future distributions, and without regard to an individual's health.
(c) Exclusions. (1) The actuarial present value of any additional
benefits provided under an annuity contract described in paragraph (b)
of this A-12 may be disregarded if the sum of the dollar amount credited
to the employee or beneficiary under the contract and the actuarial
present value of the additional benefits is no more than 120 percent of
the dollar amount credited to the employee or beneficiary under the
contract and the contract provides only for the following additional
benefits:
(i) Additional benefits that, in the case of a distribution, are
reduced by an amount sufficient to ensure that the ratio of such sum to
the dollar amount credited does not increase as a result of the
distribution, and
(ii) An additional benefit that is the right to receive a final
payment upon death that does not exceed the excess of the premiums paid
less the amount of prior distributions.
(2) If the only additional benefit provided under the contract is
the additional benefit described in paragraph (c)(1)(ii) of this A-12,
the additional benefit may be disregarded regardless of its value in
relation to the dollar amount credited to the employee or beneficiary
under the contract.
(3) The Commissioner in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter) may provide additional guidance on additional benefits
that may be disregarded.
(d) Examples. The following examples, which use a 5 percent interest
rate and the Mortality Table provided in Rev. Rul. 2001-62 (2001-2 C.B.
632), illustrate the application of the rules in this A-12:
Example 1. (i) G is the owner of a variable annuity contract
(Contract S) under an individual account plan which has not been
annuitized. Contract S provides a death benefit until the end of the
calendar year in which the owner attains the age of 84 equal to the
greater of the current Contract S notional account value (dollar amount
credited to G under the contract) and the largest notional account value
at any previous policy anniversary reduced proportionally for subsequent
partial distributions (High Water Mark). Contract S provides a death
benefit in calendar years after the calendar year in which the owner
attains age 84 equal to the current notional account value. Contract S
provides that assets within the contract may be invested in a Fixed
Account at a guaranteed rate of 2 percent. Contract S provides no other
additional benefits.
[[Page 223]]
(ii) At the end of 2008, when G has an attained age of 78 and 9
months the notional account value of Contract S (after the distribution
for 2008 of 4.93% of the notional account value as of December 31, 2007)
is $550,000, and the High Water Mark, before adjustment for any
withdrawals from Contract S in 2008 is $1,000,000. Thus, Contract S will
provide additional benefits (i.e. the death benefits in excess of the
notional account value) through 2014, the year S turns 84. The actuarial
present value of these additional benefits at the end of 2008 is
determined to be $84,300 (15 percent of the notional account value). In
making this determination, the following assumptions are made: on the
average, deaths occur mid-year; the investment return on his notional
account value is 2 percent per annum; and minimum required distributions
(determined without regard to additional benefits under the Contract S)
are made at the end of each year. The following table summarizes the
actuarial methodology used in determining the actuarial present value of
the additional benefit.
----------------------------------------------------------------------------------------------------------------
End-of-year End-of-year
Death benefit notional Average Withdrawal at notional
Year during year account before notional end of year account after
withdrawal account withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................ $1,000,000 .............. .............. .............. $550,000
2009............................ \1\ 950,739 \2\ $561,000 \3\ $555,500 \4\ $28,205 532,795
2010............................ 901,983 543,451 538,123 28,492 514,959
2011............................ 853,749 525,258 520,109 28,769 496,490
2012............................ 806,053 506,419 501,454 29,034 477,385
2013............................ 758,916 486,933 482,159 29,287 457,645
2014............................ 712,356 466,798 462,222 29,525 437,273
----------------------------------------------------------------------------------------------------------------
\1\ $1,000,000 death benefit reduced 4.93 percent for withdrawal during 2008.
\2\ Notional account value at end of prior year (after distribution) increased by 2 percent return for year.
\3\ Average of $550,000 notional account value at end of prior year (after distribution) and $561,000 notional
account value at end of current year (before distribution).
\4\ December 31, 2008 notional account (before distribution) divided by uniform lifetime table age 79 factor of
19.5.
----------------------------------------------------------------------------------------------------------------
Discounted
Survivorship Interest Mortality rate additional
Year to start of discount to during year benefits
year end of 2008 within year
----------------------------------------------------------------------------------------------------------------
2008............................................
2009............................................ 1.00000 .97590 \5\ .04426 17,070
2010............................................ .95574 \6\ .92943 .04946 \7\ 15,987
2011............................................ \8\ .90847 .88517 .05519 14,807
2012............................................ .85833 .84302 .06146 13,546
2013............................................ .80558 .80288 .06788 12,150
2014............................................ .75090 .76464 .07477 10,739
---------------
.............. .............. .............. $84,300
----------------------------------------------------------------------------------------------------------------
\5\ One-quarter age 78 rate plus three-quarters age 79 rate.
\6\ Five percent discounted 18 months (1.05+(-1.5)).
\7\ Blended age 79/age 80 mortality rate (.04946) multiplied by the $363,860 excess of death benefit over the
average notional account value (901,983 less 538,123) multiplied by .95574 probability of survivorship to the
start of 2010 multiplied by 18 month interest discount of .92943.
\8\ Survivorship to start of preceding year (.95574) multiplied by probability of survivorship during prior year
(1-.04946).
(iii) Because Contract S provides that, in the case of a
distribution, the value of the additional death benefit (which is the
only additional benefit available under the contract) is reduced by an
amount that is at least proportional to the reduction in the notional
account value and, at age 78 and 9 months, the sum of the notional
account value (dollar amount credited to the employee under the
contract) and the actuarial present value of the additional death
benefit is no more than 120 percent of the notional account value, the
exclusion under paragraph (c)(2) of this A-12 is applicable for 2009.
Therefore, for purposes of applying the rules in Sec. 1.401(a)(9)-5,
the entire interest under Contract S may be determined as the notional
account value (i.e. without regard to the additional death benefit).
Example 2. (i) The facts are the same as in (Example 1 except that
the notional account value is $450,000 at the end of 2008. In this
instance, the actuarial present value of the death benefit in excess of
the notional account value in 2008 is determined to be $108,669 (24
percent of the notional account value). The following table summarizes
the actuarial methodology used in determining the actuarial present
value of the additional benefit.
[[Page 224]]
----------------------------------------------------------------------------------------------------------------
End-of-year End-of-year
Death benefit notional Average Withdrawal at notional
Year during year account before notional end of year account after
withdrawal account withdrawal
----------------------------------------------------------------------------------------------------------------
2008............................ $1,000,000 .............. .............. .............. $450,000
2009............................ 950,739 $459,000 $454,500 $23,077 435,923
2010............................ 901,983 444,642 440,282 23,311 421,330
2011............................ 853,749 429,757 425,543 23,538 406,219
2012............................ 806,053 414,343 410,281 23,755 390,588
2013............................ 758,916 398,399 394,494 23,962 374,437
2014............................ 712,356 381,926 378,181 24,157 357,768
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Discounted
Survivorship Interest Mortality rate additional
Year to start of discount to during year benefits
year end of 2008 within year
----------------------------------------------------------------------------------------------------------------
2008............................................
2009............................................ 1.00000 .97590 .04426 $21,432
2010............................................ .95574 .92943 .04946 20,286
2011............................................ .90847 .88517 .05519 19,004
2012............................................ .85833 .84302 .06146 17,601
2013............................................ .80558 .80288 .06788 15,999
2014............................................ .75090 .76464 .07477 14,347
---------------
.............. .............. .............. $108,669
----------------------------------------------------------------------------------------------------------------
(ii) Because the sum of the notional account balance and the
actuarial present value of the additional death benefit is more than 120
percent of the notional account value, the exclusion under paragraph
(b)(1) of this A-12 does not apply for 2009. Therefore, for purposes of
applying the rules in Sec. 1.401(a)(9)-5, the entire interest under
Contract S must include the actuarial present value of the additional
death benefit.
Q-13: When can an annuity payment period be changed?
A-13. (a) In general. An annuity payment period may be changed in
accordance with the provisions set forth in paragraph (b) of this A-13
or in association with an annuity payment increase described in A-14 of
this section.
(b) Reannuitization. If, in a stream of annuity payments that
otherwise satisfies section 401(a)(9), the annuity payment period is
changed and the annuity payments are modified in association with that
change, this modification will not cause the distributions to fail to
satisfy section 401(a)(9) provided the conditions set forth in paragraph
(c) of this A-13 are satisfied, and either--
(1) The modification occurs at the time that the employee retires or
in connection with a plan termination;
(2) The annuity payments prior to modification are annuity payments
paid over a period certain without life contingencies; or
(3) The annuity payments after modification are paid under a
qualified joint and survivor annuity over the joint lives of the
employee and a designated beneficiary, the employee's spouse is the sole
designated beneficiary, and the modification occurs in connection with
the employee becoming married to such spouse.
(c) Conditions. In order to modify a stream of annuity payments in
accordance with paragraph (b) of this A-13, the following conditions
must be satisfied--
(1) The future payments under the modified stream satisfy section
401(a)(9) and this section (determined by treating the date of the
change as a new annuity starting date and the actuarial present value of
the remaining payments prior to modification as the entire interest of
the participant);
(2) For purposes of sections 415 and 417, the modification is
treated as a new annuity starting date;
(3) After taking into account the modification, the annuity stream
satisfies section 415 (determined at the original annuity starting date,
using the interest rates and mortality tables applicable to such date);
and
[[Page 225]]
(4) The end point of the period certain, if any, for any modified
payment period is not later than the end point available under section
401(a)(9) to the employee at the original annuity starting date.
(d) Examples. For the following examples in this A-13, assume that
the Applicable Interest Rate throughout the period from 2005 through
2008 is 5 percent and throughout 2009 is 4 percent, the Applicable
Mortality Table throughout the period from 2005 to 2009 is the table
provided in Rev. Rul. 2001-62 (2001-C.B. 632) and the section 415 limit
in 2005 at age 70 for a straight life annuity is $255,344:
Example 1. (i) A participant (D), who has 10 years of participation
in a frozen defined benefit plan (Plan W), attains age 70\1/2\ in 2005.
D is not retired and elects to receive distributions from Plan W in the
form of a straight life (i.e. level payment) annuity with annual
payments of $240,000 per year beginning in 2005 at a date when D has an
attained age of 70. Plan W offers non-retired employees in pay status
the opportunity to modify their annuity payments due to an associated
change in the payment period at retirement. Plan W treats the date of
the change in payment period as a new annuity starting date for the
purposes of sections 415 and 417. Thus, for example, the plan provides a
new qualified and joint survivor annuity election and obtains spousal
consent.
(ii) Plan W determines modifications of annuity payment amounts at
retirement such that the present value of future new annuity payment
amounts (taking into account the new associated payment period) is
actuarially equivalent to the present value of future pre-modification
annuity payments (taking into account the pre-modification annuity
payment period). Actuarial equivalency for this purpose is determined
using the Applicable Interest Rate and the Applicable Mortality Table as
of the date of modification.
(iii) D retires in 2009 at the age of 74 and, after receiving four
annual payments of $240,000, elects to receive his remaining
distributions from Plan W in the form of an immediate final lump sum
payment (calculated at 4 percent interest) of $2,399,809.
(iv) Because payment of retirement benefits in the form of an
immediate final lump sum payment satisfies (in terms of form) section
401(a)(9), the condition under paragraph (c)(1) of this A-13 is met.
(v) Because Plan W treats a modification of an annuity payment
stream at retirement as a new annuity starting date for purposes of
sections 415 and 417, the condition under paragraph (c)(2) of this A-13
is met.
(vi) After taking into account the modification, the annuity stream
determined as of the original annuity starting date consists of annual
payments beginning at age 70 of $240,000, $240,000, $240,000, $240,000,
and $2,399,809. This benefit stream is actuarially equivalent to a
straight life annuity at age 70 of $250,182, an amount less than the
section 415 limit determined at the original annuity starting date,
using the interest and mortality rates applicable to such date. Thus,
the condition under paragraph (c)(3) of this A-13 is met.
(vii) Thus, because a stream of annuity payments in the form of a
straight life annuity satisfies section 401(a)(9), and because each of
the conditions under paragraph (c) of this A-13 are satisfied, the
modification of annuity payments to D described in this example meets
the requirements of this A-13.
Example 2. The facts are the same as in Example 1 except that the
straight life annuity payments are paid at a rate of $250,000 per year
and after D retires the lump sum payment at age 75 is $2,499,801. Thus,
after taking into account the modification, the annuity stream
determined as of the original annuity starting date consists of annual
payments beginning at age 70 of $250,000, $250,000, $250,000, $250,000,
and $2,499,801. This benefit stream is actuarially equivalent to a
straight life annuity at age 70 of $260,606, an amount greater than the
section 415 limit determined at the original annuity starting date,
using the interest and mortality rates applicable to such date. Thus,
the lump sum payment to D fails to satisfy the condition under paragraph
(c)(3) of this A-13. Therefore, the lump sum payment to D fails to meet
the requirements of this A-13 and thus fails to satisfy the requirements
of section 401(a)(9).
Example 3. (i) A participant (E), who has 10 years of participation
in a frozen defined benefit plan (Plan X), attains age 70\1/2\ and
retires in 2005 at a date when his attained age is 70. E was born in
1935. E elects to receive annual distributions from Plan X in the form
of a 27 year period certain annuity (i.e., a 27 year annuity payment
period without a life contingency) paid at a rate of $37,000 per year
beginning in 2005 with future payments increasing at a rate of 4 percent
per year (i.e., the 2006 payment will be $38,480, the 2007 payment will
be $40,019 and so on). Plan X offers participants in pay status whose
annuity payments are in the form of a term-certain annuity the
opportunity to modify their payment period at any time and treats such
modifications as a new annuity starting date for the purposes of
sections 415 and 417. Thus, for example, the plan provides a new
qualified and joint survivor annuity election and obtains spousal
consent.
(ii) Plan X determines modifications of annuity payment amounts such
that the present value of future new annuity payment
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amounts (taking into account the new associated payment period) is
actuarially equivalent to the present value of future pre-modification
annuity payments (taking into account the pre-modification annuity
payment period). Actuarial equivalency for this purpose is determined
using 5 percent and the Applicable Mortality Table as of the date of
modification.
(iii) In 2008, E, after receiving annual payments of $37,000,
$38,480, and $40,019, elects to receive his remaining distributions from
Plan W in the form of a straight life annuity paid with annual payments
of $92,133 per year.
(iv) Because payment of retirement benefits in the form of a
straight life annuity satisfies (in terms of form) section 401(a)(9),
the condition under paragraph (c)(1) of this A-13 is met.
(v) Because Plan X treats a modification of an annuity payment
stream at retirement as a new annuity starting date for purposes of
sections 415 and 417, the condition under paragraph (c)(2) of this A-13
is met.
(vi) After taking into account the modification, the annuity stream
determined as of the original annuity starting date consists of annual
payments beginning at age 70 of $37,000, $38,480, $40,019, and a
straight life annuity beginning at age 73 of $92,133. This benefit
stream is equivalent to a straight life annuity at age 70 of $82,539, an
amount less than the section 415 limit determined at the original
annuity starting date, using the interest and mortality rates applicable
to such date. Thus, the condition under paragraph (c)(3) of this A-13 is
met.
(vii) Thus, because a stream of annuity payments in the form of a
straight life annuity satisfies section 401(a)(9), and because each of
the conditions under paragraph (c) of this A-13 are satisfied, the
modification of annuity payments to E described in this example meets
the requirements of this A-13.
Q-14. Are annuity payments permitted to increase?
A-14. (a) General rules. Except as otherwise provided in this
section, all annuity payments (whether paid over an employee's life,
joint lives, or a period certain) must be nonincreasing or increase only
in accordance with one or more of the following--
(1) With an annual percentage increase that does not exceed the
percentage increase in an eligible cost-of-living index as defined in
paragraph (b) of this A-14 for a 12-month period ending in the year
during which the increase occurs or the prior year;
(2) With a percentage increase that occurs at specified times (e.g.,
at specified ages) and does not exceed the cumulative total of annual
percentage increases in an eligible cost-of-living index as defined in
paragraph (b) of this A-14 since the annuity starting date, or if later,
the date of the most recent percentage increase. However, in cases
providing such a cumulative increase, an actuarial increase may not be
provided to reflect the fact that increases were not provided in the
interim years;
(3) To the extent of the reduction in the amount of the employee's
payments to provide for a survivor benefit, but only if there is no
longer a survivor benefit because the beneficiary whose life was being
used to determine the period described in section 401(a)(9)(A)(ii) over
which payments were being made dies or is no longer the employee's
beneficiary pursuant to a qualified domestic relations order within the
meaning of section 414(p);
(4) To pay increased benefits that result from a plan amendment;
(5) To allow a beneficiary to convert the survivor portion of a
joint and survivor annuity into a single sum distribution upon the
employee's death; or
(6) To the extent increases are permitted in accordance with
paragraph (c) or (d) of this A-14.
(b) (1) For purposes of this A-14, an eligible cost-of-living index
means an index described in paragraphs (b)(2), (b)(3), or (b)(4) of this
A-14.
(2) A consumer price index that is based on prices of all items (or
all items excluding food and energy) and issued by the Bureau of Labor
Statistics, including an index for a specific population (such as urban
consumers or urban wage earners and clerical workers) and an index for a
geographic area or areas (such as a given metropolitan area or state).
(3) A percentage adjustment based on a cost-of-living index
described in paragraph (b)(2) of this A-14, or a fixed percentage if
less. In any year when the cost-of-living index is lower than the fixed
percentage, the fixed percentage may be treated as an increase in an
eligible cost-of-living index, provided it does not exceed the sum of:
(i) The cost-of-living index for that year, and
(ii) The accumulated excess of the annual cost-of-living index from
each
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prior year over the fixed annual percentage used in that year (reduced
by any amount previously utilized under this paragraph (b)(3)(ii)).
(4) A percentage adjustment based on the increase in compensation
for the position held by the employee at the time of retirement, and
provided under either the terms of a governmental plan within the
meaning of section 414(d) or under the terms of a nongovernmental plan
as in effect on April 17, 2002.
(c) Additional permitted increases for annuity payments under
annuity contracts purchased from insurance companies. In the case of
annuity payments paid from an annuity contract purchased from an
insurance company, if the total future expected payments (determined in
accordance with paragraph (e)(3) of this A-14) exceed the total value
being annuitized (within the meaning of paragraph (e)(1) of this A-14) ,
the payments under the annuity will not fail to satisfy the
nonincreasing payment requirement in A-1(a) of this section merely
because the payments are increased in accordance with one or more of the
following--
(1) By a constant percentage, applied not less frequently than
annually;
(2) To provide a final payment upon the death of the employee that
does not exceed the excess of the total value being annuitized (within
the meaning of paragraph (e)(1) of this A-14) over the total of payments
before the death of the employee;
(3) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if actuarial gain is measured no less frequently than
annually and the resulting dividend payments or other payments are
either paid no later than the year following the year for which the
actuarial experience is measured or paid in the same form as the payment
of the annuity over the remaining period of the annuity (beginning no
later than the year following the year for which the actuarial
experience is measured); and
(4) An acceleration of payments under the annuity (within the
meaning of paragraph (e)(4) of this A-14).
(d) Additional permitted increases for annuity payments from a
qualified trust. In the case of annuity payments paid under a defined
benefit plan qualified under section 401(a) (other than annuity payments
under an annuity contract purchased from an insurance company that
satisfy paragraph (c) of this section), the payments under the annuity
will not fail to satisfy the nonincreasing payment requirement in A-1(a)
of this section merely because the payments are increased in accordance
with one of the following--
(1) By a constant percentage, applied not less frequently than
annually, at a rate that is less than 5 percent per year;
(2) To provide a final payment upon the death of the employee that
does not exceed the excess of the actuarial present value of the
employee's accrued benefit (within the meaning of section 411(a)(7))
calculated as the annuity starting date using the applicable interest
rate and the applicable mortality table under section 417(e) (or, if
greater, the total amount of employee contributions) over the total of
payments before the death of the employee; or
(3) As a result of dividend payments or other payments that result
from actuarial gains (within the meaning of paragraph (e)(2) of this A-
14), but only if--
(i) Actuarial gain is measured no less frequently than annually;
(ii) The resulting dividend payments or other payments are either
paid no later than the year following the year for which the actuarial
experience is measured or paid in the same form as the payment of the
annuity over the remaining period of the annuity (beginning no later
than the year following the year for which the actuarial experience is
measured);
(iii) The actuarial gain taken into account is limited to actuarial
gain from investment experience;
(iv) The assumed interest used to calculate such actuarial gains is
not less than 3 percent; and
(v) The payments are not increasing by a constant percentage as
described in paragraph (d)(1) of this A-14.
(e) Definitions. For purposes of this A-14, the following
definitions apply--
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(1) Total value being annuitized means--
(i) In the case of annuity payments under a section 403(a) annuity
plan or under a deferred annuity purchased by a section 401(a) trust,
the value of the employee's entire interest (within the meaning of A-12
of this section) being annuitized (valued as of the date annuity
payments commence);
(ii) In the case of annuity payments under an immediate annuity
contract purchased by a trust for a defined benefit plan qualified under
section 401(a), the amount of the premium used to purchase the contract;
and
(iii) In the case of a defined contribution plan, the value of the
employee's account balance used to purchase an immediate annuity under
the contract.
(2) Actuarial gain means the difference between an amount determined
using the actuarial assumptions (i.e., investment return, mortality,
expense, and other similar assumptions) used to calculate the initial
payments before adjustment for any increases and the amount determined
under the actual experience with respect to those factors. Actuarial
gain also includes differences between the amount determined using
actuarial assumptions when an annuity was purchased or commenced and
such amount determined using actuarial assumptions used in calculating
payments at the time the actuarial gain is determined.
(3) Total future expected payments means the total future payments
expected to be made under the annuity contract as of the date of the
determination, calculated using the Single Life Table in A-1 of Sec.
1.401(a)(9)-9 (or, if applicable, the Joint and Last Survivor Table in
A-3 of in Sec. 1.401(a)(9)-9) for annuitants who are still alive,
without regard to any increases in annuity payments after the date of
determination, and taking into account any remaining period certain.
(4) Acceleration of payments means a shortening of the payment
period with respect to an annuity or a full or partial commutation of
the future annuity payments. An increase in the payment amount will be
treated as an acceleration of payments in the annuity only if the total
future expected payments under the annuity (including the amount of any
payment made as a result of the acceleration) is decreased as a result
of the change in payment period.
(f) Examples. Paragraph (c) of this A-14 is illustrated by the
following examples:
Example 1. Variable annuity. A retired participant (Z1) in defined
contribution plan X attains age 70 on March 5, 2005, and thus, attains
age 70\1/2\ in 2005. Z1 elects to purchase annuity Contract Y1 from
Insurance Company W in 2005. Contract Y1 is a single life annuity
contract with a 10-year period certain. Contract Y1 provides for an
initial annual payment calculated with an assumed interest rate (AIR) of
3 percent. Subsequent payments are determined by multiplying the prior
year's payment by a fraction the numerator of which is 1 plus the actual
return on the separate account assets underlying Contract Y1 since the
preceding payment and the denominator of which is 1 plus the AIR during
that period. The value of Z1's account balance in Plan X at the time of
purchase is $105,000, and the purchase price of Contract Y1 is $105,000.
Contract Y1 provides Z1 with an initial payment of $7,200 at the time of
purchase in 2005. The total future expected payments to Z1 under
Contract Y1 are $122,400, calculated as the initial payment of $7,200
multiplied by the age 70 life expectancy of 17 provided in the Single
Life Table in A-1 of Sec. 1.401(a)(9)-9. Because the total future
expected payments on the purchase date exceed the total value used to
purchase Contract Y1 and payments may only increase as a result of
actuarial gain, with such increases, beginning no later than the next
year, paid in the same form as the payment of the annuity over the
remaining period of the annuity, distributions received by Z1 from
Contract Y1 meet the requirements under paragraph (c)(3) of this A-14.
Example 2. Participating annuity. A retired participant (Z2) in
defined contribution plan X attains age 70 on May 1, 2005, and thus,
attains age 70\1/2\ in 2005. Z2 elects to purchase annuity Contract Y2
from Insurance Company W in 2005. Contract Y2 is a participating single
life annuity contract with a 10-year period certain. Contract Y2
provides for level annual payments with dividends paid in a lump sum in
the year after the year for which the actuarial experience is measured
or paid out levelly beginning in the year after the year for which the
actuarial gain is measured over the remaining lifetime and period
certain, i.e., the period certain ends at the same time as the original
period certain. Dividends are determined annually by the Board of
Directors of Company W based upon a comparison of actual actuarial
experience to expected actuarial experience in the past year. The value
of Z2's account balance in
[[Page 229]]
Plan X at the time of purchase is $265,000, and the purchase price of
Contract Y2 is $265,000. Contract Y2 provides Z2 with an initial payment
of $16,000 in 2005. The total future expected payments to Z2 under
Contract Y2 are calculated as the annual initial payment of $16,000
multiplied by the age 70 life expectancy of 17 provided in the Single
Life Table in A-1 of Sec. 1.401(a)(9)-9 for a total of $272,000.
Because the total future expected payments on the purchase date exceeds
the total value used to purchase Contract Y2 and payments may only
increase as a result of actuarial gain, with such increases, beginning
no later than the next year, paid in the same form as the payment of the
annuity over the remaining period of the annuity, distributions received
by Z2 from Contract Y2 meet the requirements under paragraph (c)(3) of
this A-14.
Example 3. Participating annuity with dividend accumulation. The
facts are the same as in Example 2 except that the annuity provides a
dividend accumulation option under which Z2 may defer receipt of the
dividends to a time selected by Z2. Because the dividend accumulation
option permits dividends to be paid later than the end of the year
following the year for which the actuarial experience is measured or as
a stream of payments that only increase as a result of actuarial gain,
with such increases beginning no later than the next year, paid in the
same form as the payment of the annuity over the remaining period of the
annuity in Example 2, the dividend accumulation option does not meet the
requirements of paragraph (c)(3) of this A-14. Neither does the dividend
accumulation option fit within any of the other increases described in
paragraph (c) of this A-14. Accordingly, the dividend accumulation
option causes the contract, and consequently any distributions from the
contract, to fail to meet the requirements of this A-14 and thus fail to
satisfy the requirements of section 401(a)(9).
Example 4. Participating annuity with dividends used to purchase
additional death benefits. The facts are the same as in Example 2 except
that the annuity provides an option under which actuarial gain under the
contract is used to provide additional death benefit protection for Z2.
Because this option permits payments as a result of actuarial gain to be
paid later than the end of the year following the year for which the
actuarial experience is measured or as a stream of payments that only
increase as a result of actuarial gain, with such increases beginning no
later than the next year, paid in the same form as the payment of the
annuity over the remaining period of the annuity in Example 2, the
option does not meet the requirements of paragraph (c)(3) of this A-14.
Neither does the option fit within any of the other increases described
in paragraph (c) of this A-14. Accordingly, the addition of the option
causes the contract, and consequently any distributions from the
contract, to fail to meet the requirements of this A-14 and thus fail to
satisfy the requirements of section 401(a)(9).
Example 5. Annuity with a fixed percentage increase. A retired
participant (Z3) in defined contribution plan X attains age 70\1/2\ in
2005. Z3 elects to purchase annuity contract Y3 from Insurance Company
W. Contract Y3 is a single life annuity contract with a 20-year period
certain (which does not exceed the maximum period certain permitted
under A-3(a) of this section) with fixed annual payments increasing 3
percent each year. The value of Z3's account balance in Plan X at the
time of purchase is $110,000, and the purchase price of Contract Y3 is
$110,000. Contract Y3 provides Z3 with an initial payment of $6,000 at
the time of purchase in 2005. The total future expected payments to Z3
under Contract Y3 are $120,000, calculated as the initial annual payment
of $6,000 multiplied by the period certain of 20 years. Because the
total future expected payments on the purchase date exceed the total
value used to purchase Contract Y3 and payments only increase as a
constant percentage applied not less frequently than annually,
distributions received by Z3 from Contract Y3 meet the requirements
under paragraph (c)(1) of this A-14.
Example 6. Annuity with excessive increases. The facts are the same
as in Example 5 except that the initial payment is $5,400 and the annual
rate of increase is 4 percent. In this example, the total future
expected payments are $108,000, calculated as the initial payment of
$5,400 multiplied by the period certain of 20 years. Because the total
future expected payments are less than the total value of $110,000 used
to purchase Contract Y3, distributions received by Z3 do not meet the
requirements under paragraph (c) of this A-14 and thus fail to meet the
requirements of section 401(a)(9).
Example 7. Annuity with full commutation feature. (i) A retired
participant (Z4) in defined contribution Plan X attains age 78 in 2005.
Z4 elects to purchase Contract Y4 from Insurance Company W. Contract Y4
provides for a single life annuity with a 10 year period certain (which
does not exceed the maximum period certain permitted under A-3(a) of
this section) with annual payments. Contract Y4 provides that Z4 may
cancel Contract Y4 at any time before Z4 attains age 84, and receive, on
his next payment due date, a final payment in an amount determined by
multiplying the initial payment amount by a factor obtained from Table M
of Contract Y4 using the Y4's age as of Y4's birthday in the calendar
year of the final payment. The value of Z4's account balance in Plan X
at the time of purchase is $450,000, and the purchase price of Contract
Y4 is $450,000. Contract Y4 provides Z4 with an initial payment
[[Page 230]]
in 2005 of $40,000. The factors in Table M are as follows:
------------------------------------------------------------------------
Age at final payment Factor
------------------------------------------------------------------------
79......................................................... 10.5
80......................................................... 10.0
81......................................................... 9.5
82......................................................... 9.0
83......................................................... 8.5
84......................................................... 8.0
------------------------------------------------------------------------
(ii) The total future expected payments to Z4 under ContractY4 are
$456,000, calculated as the initial payment of 40,000 multiplied by the
age 78 life expectancy of 11.4 provided in the Single Life Table in A-1
of Sec. 1.401(a)(9)-9. Because the total future expected payments on
the purchase date exceed the total value being annuitized (i.e., the
$450,000 used to purchase Contract Y4), the permitted increases set
forth in paragraph (c) of this A-14 are available. Furthermore, because
the factors in Table M are less than the life expectancy of each of the
ages in the Single Life Table provided in A-1 of Sec. 1.401(a)(9)-9,
the final payment is always less than the total future expected
payments. Thus, the final payment is an acceleration of payments within
the meaning of paragraph (c)(4) of this A-14.
(iii) As an illustration of the above, if Participant Z4 were to
elect to cancel Contract Y4 on the day before he was to attain age 84,
his contractual final payment would be $320,000. This amount is
determined as $40,000 (the annual payment amount due under Contract Y4)
multiplied by 8.0 (the factor in Table M for the next payment due date,
age 84). The total future expected payments under Contract Y4 at age 84
before the final payment is $324,000, calculated as the initial payment
amount multiplied by 8.1, the age 84 life expectancy provided in the
Single Life Table in A-1 of Sec. 1.401(a)(9)-9. Because $320,000 (the
total future expected payments under the annuity contract, including the
amount of the final payment) is less than $324,000 (the total future
expected payments under the annuity contract, determined before the
election), the final payment is an acceleration of payments within the
meaning of paragraph (c)(4) of this A-14.
Example 8. Annuity with partial commutation feature. (i) The facts
are the same as in Example 7 except that the annuity provides Z4 may
request, at any time before Z4 attains age 84, an ad hoc payment on his
next payment due date with future payments reduced by an amount equal to
the ad hoc payment divided by the factor obtained from Table M (from
Example 7) corresponding to Z4's age at the time of the ad hoc payment.
Because, at each age, the factors in Table M are less than the
corresponding life expectancies in the Single Life Table in A-1 of Sec.
1.401(a)(9)-9, total future expected payments under Contract Y4 will
decrease after an ad hoc payment. Thus, ad hoc distributions received by
Z4 from Contract Y4 will satisfy the requirements under paragraph (c)(4)
of this A-4.
(ii) As an illustration of paragraph (i) of this Example 8, if Z4
were to request, on the day before he was to attain age 84, an ad hoc
payment of $100,000 on his next payment due date, his recalculated
annual payment amount would be reduced to $27,500. This amount is
determined as $40,000 (the amount of Z4's next annual payment) reduced
by $12,500 (his $100,000 ad hoc payment divided by the Table M factor at
age 84 of 8.0). Thus, Z4's total future expected payments after the ad
hoc payment (and including the ad hoc payment) are equal to $322,750
($100,000 plus $27,500 multiplied by the Single Life Table value of
8.1). Note that this $322,750 amount is less than the amount of Z4's
total future expected payments before the ad hoc payment ($324,000,
determined as $40,000 multiplied by 8.1), and the requirements under
paragraph (c)(4) of this A-4 are satisfied.
Example 9. Annuity with excessive increases. (i) A retired
participant (Z5) in defined contribution plan X attains age 70\1/2\ in
2005. Z5 elects to purchase annuity Contract Y5 from Insurance Company W
in 2005 with a premium of $1,000,000. Contract Y5 is a single life
annuity contract with a 20-year period certain. Contract Y5 provides for
an initial payment of $200,000, a second payment one year from the time
of purchase of $40,000, and 18 succeeding annual payments each
increasing at a constant percentage rate of 4.5 percent from the
preceding payment.
(ii) Contract Y5 fails to meet the requirements of section 401(a)(9)
because the total future expected payments without regard to any
increases in the annuity payment, calculated as $200,000 in year one and
$40,000 in each of years two through twenty, is only $960,000 (i.e., an
amount that does not exceed the total value used to purchase the
annuity).
Q-15: Are there special rules applicable to payments made under a
defined benefit plan or annuity contract to a surviving child?
A-15: Yes, pursuant to section 401(a)(9)(F), payments under a
defined benefit plan or annuity contract that are made to an employee's
child until such child reaches the age of majority (or dies, if earlier)
may be treated, for purposes of section 401(a)(9), as if such payments
were made to the surviving spouse to the extent they become payable to
the surviving spouse upon cessation of the payments to the child. For
purposes of the preceding sentence, a child may be treated as having not
reached the age of majority if the child has not completed a specified
course of
[[Page 231]]
education and is under the age of 26. In addition, a child who is
disabled within the meaning of section 72(m)(7) when the child reaches
the age of majority may be treated as having not reached the age of
majority so long as the child continues to be disabled. Thus, when
payments described in this paragraph A-15 become payable to the
surviving spouse because the child attains the age of majority, recovers
from a disabling illness, dies, or completes a specified course of
education, there is not an increase in benefits under A-1 of this
section. Likewise, the age of child receiving such payments is not taken
into consideration for purposes of the minimum incidental benefit
requirement of A-2 of this section.
Q-16: What are the rules for determining required minimum
distributions for defined benefit plans and annuity contracts for
calendar years 2003, 2004, and 2005?
A-16: A distribution from a defined benefit plan or annuity contract
for calendar years 2003, 2004, and 2005 will not fail to satisfy section
401(a)(9) merely because the payments do not satisfy A-1 through A-15 of
this section, provided the payments satisfy section 401(a)(9) based on a
reasonable and good faith interpretation of the provisions of section
401(a)(9).
Q-17. What is a qualifying longevity annuity contract?
A-17. (a) Definition of qualifying longevity annuity contract. A
qualifying longevity annuity contract (QLAC) is an annuity contract that
is purchased from an insurance company for an employee and that, in
accordance with the rules of application of paragraph (d) of this A-17,
satisfies each of the following requirements--
(1) Premiums for the contract satisfy the requirements of paragraph
(b) of this A-17;
(2) The contract provides that distributions under the contract must
commence not later than a specified annuity starting date that is no
later than the first day of the month next following the 85th
anniversary of the employee's birth;
(3) The contract provides that, after distributions under the
contract commence, those distributions must satisfy the requirements of
this section (other than the requirement in A-1(c) of this section that
annuity payments commence on or before the required beginning date);
(4) The contract does not make available any commutation benefit,
cash surrender right, or other similar feature;
(5) No benefits are provided under the contract after the death of
the employee other than the benefits described in paragraph (c) of this
A-17;
(6) When the contract is issued, the contract (or a rider or
endorsement with respect to that contract) states that the contract is
intended to be a QLAC; and
(7) The contract is not a variable contract under section 817, an
indexed contract, or a similar contract, except to the extent provided
by the Commissioner in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin and made available by the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402 and on the IRS Web site at http://www.irs.gov.
(b) Limitations on premiums--(1) In general. The premiums paid with
respect to the contract on a date satisfy the requirements of this
paragraph (b) if they do not exceed the lesser of the dollar limitation
in paragraph (b)(2) of this A-17 or the percentage limitation in
paragraph (b)(3) of this A-17.
(2) Dollar limitation. The dollar limitation is an amount equal to
the excess of--
(i) $125,000 (as adjusted under paragraph (d)(2) of this A-17), over
(ii) The sum of--
(A) The premiums paid before that date with respect to the contract,
and
(B) The premiums paid on or before that date with respect to any
other contract that is intended to be a QLAC and that is purchased for
the employee under the plan, or any other plan, annuity, or account
described in section 401(a), 403(a), 403(b), or 408 or eligible
governmental plan under section 457(b).
(3) Percentage limitation. The percentage limitation is an amount
equal to the excess of--
(i) 25 percent of the employee's account balance under the plan
(including the value of any QLAC held under the plan for the employee)
as of that
[[Page 232]]
date, determined in accordance with paragraph (d)(1)(iii) of this A-17,
over
(ii) The sum of--
(A) The premiums paid before that date with respect to the contract,
and
(B) The premiums paid on or before that date with respect to any
other contract that is intended to be a QLAC and that is held or was
purchased for the employee under the plan.
(c) Payments after death of the employee--(1) Surviving spouse is
sole beneficiary--(i) Death on or after annuity starting date. If the
employee dies on or after the annuity starting date for the contract and
the employee's surviving spouse is the sole beneficiary under the
contract then, except as provided in paragraph (c)(4) of this A-17, the
only benefit permitted to be paid after the employee's death is a life
annuity payable to the surviving spouse where the periodic annuity
payment is not in excess of 100 percent of the periodic annuity payment
that is payable to the employee.
(ii) Death before annuity starting date--(A) Amount of annuity. If
the employee dies before the annuity starting date and the employee's
surviving spouse is the sole beneficiary under the contract then, except
as provided in paragraph (c)(4) of this A-17, the only benefit permitted
to be paid after the employee's death is a life annuity payable to the
surviving spouse where the periodic annuity payment is not in excess of
100 percent of the periodic annuity payment that would have been payable
to the employee as of the date that benefits to the surviving spouse
commence. However, the annuity is permitted to exceed 100 percent of the
periodic annuity payment that would have been payable to the employee to
the extent necessary to satisfy the requirement to provide a qualified
preretirement survivor annuity (as defined under section 417(c)(2) or
ERISA section 205(e)(2)) pursuant to section 401(a)(11)(A)(ii) or ERISA
section 205(a)(2).
(B) Commencement date for annuity. Any life annuity payable to the
surviving spouse under paragraph (c)(1)(ii)(A) of this A-17 must
commence no later than the date on which the annuity payable to the
employee would have commenced under the contract if the employee had not
died.
(2) Surviving spouse is not sole beneficiary--(i) Death on or after
annuity starting date. If the employee dies on or after the annuity
starting date for the contract and the employee's surviving spouse is
not the sole beneficiary under the contract then, except as provided in
paragraph (c)(4) of this A-17, the only benefit permitted to be paid
after the employee's death is a life annuity payable to the designated
beneficiary where the periodic annuity payment is not in excess of the
applicable percentage (determined under paragraph (c)(2)(iii) of this A-
17) of the periodic annuity payment that is payable to the employee.
(ii) Death before annuity starting date--(A) Amount of annuity. If
the employee dies before the annuity starting date and the employee's
surviving spouse is not the sole beneficiary under the contract then,
except as provided in paragraph (c)(4) of this A-17, the only benefit
permitted to be paid after the employee's death is a life annuity
payable to the designated beneficiary where the periodic annuity payment
is not in excess of the applicable percentage (determined under
paragraph (c)(2)(iii) of this A-17) of the periodic annuity payment that
would have been payable to the employee as of the date that benefits to
the designated beneficiary commence under this paragraph (c)(2)(ii).
(B) Commencement date for annuity. In any case in which the employee
dies before the annuity starting date, any life annuity payable to a
designated beneficiary under this paragraph (c)(2)(ii) must commence by
the last day of the calendar year immediately following the calendar
year of the employee's death.
(iii) Applicable percentage--(A) Contracts without pre-annuity
starting date death benefits. If, as described in paragraph (c)(2)(iv)
of this A-17, the contract does not provide for a pre-annuity starting
date non-spousal death benefit, the applicable percentage is the
percentage described in the table in A-2(c) of this section.
(B) Contracts with set beneficiary designation. If the contract
provides for a set non-spousal beneficiary designation
[[Page 233]]
as described in paragraph (c)(2)(v) (and is not a contract described in
paragraph (c)(2)(iv)) of this A-17, the applicable percentage is the
percentage described in the table set forth in paragraph (c)(2)(iii)(D)
of this A-17. A contract is still considered to provide for a set
beneficiary designation even if the surviving spouse becomes the sole
beneficiary before the annuity starting date. In such a case, the
requirements of paragraph (c)(1) of this A-17 apply and not the
requirements of this paragraph (c)(2).
(C) Contracts providing for return of premium. If the contract
provides for a return of premium as described in paragraph (c)(4) of
this A-17, the applicable percentage is 0.
(D) Applicable percentage table. The applicable percentage is based
on the adjusted employee/beneficiary age difference, determined in the
same manner as in A-2(c) of this section.
------------------------------------------------------------------------
Applicable
Adjusted employee/beneficiary age difference percentage
------------------------------------------------------------------------
2 years or less............................................ 100
3.......................................................... 88
4.......................................................... 78
5.......................................................... 70
6.......................................................... 63
7.......................................................... 57
8.......................................................... 52
9.......................................................... 48
10......................................................... 44
11......................................................... 41
12......................................................... 38
13......................................................... 36
14......................................................... 34
15......................................................... 32
16......................................................... 30
17......................................................... 28
18......................................................... 27
19......................................................... 26
20......................................................... 25
21......................................................... 24
22......................................................... 23
23......................................................... 22
24......................................................... 21
25 and greater............................................. 20
------------------------------------------------------------------------
(iv) No pre-annuity starting date non-spousal death benefit. A
contract is described in this paragraph (c)(2)(iv) if the contract
provides that no benefit is permitted to be paid to a beneficiary other
than the employee's surviving spouse after the employee's death--
(A) In any case in which the employee dies before the annuity
starting date under the contract; and
(B) In any case in which the employee selects an annuity starting
date that is earlier than the specified annuity starting date under the
contract and the employee dies less than 90 days after making that
election.
(v) Contracts permitting set non-spousal beneficiary designation. A
contract is described in this paragraph (c)(2)(v) if the contract
provides that if the beneficiary under the contract is not the
employee's surviving spouse, benefits are payable to the beneficiary
only if the beneficiary was irrevocably designated on or before the
later of the date of purchase or the employee's required beginning date.
(3) Calculation of early annuity payments. For purposes of
paragraphs (c)(1)(ii) and (c)(2)(ii) of this A-17, to the extent the
contract does not provide an option for the employee to select an
annuity starting date that is earlier than the date on which the annuity
payable to the employee would have commenced under the contract if the
employee had not died, the contract must provide a way to determine the
periodic annuity payment that would have been payable if the employee
were to have an option to accelerate the payments and the payments had
commenced to the employee immediately prior to the date that benefit
payments to the surviving spouse or designated beneficiary commence.
(4) Return of premiums--(i) In general. In lieu of a life annuity
payable to a designated beneficiary under paragraph (c)(1) or (2) of
this A-17, a QLAC is permitted to provide for a benefit to be paid to a
beneficiary after the death of the employee in an amount equal to the
excess of--
(A) The premium payments made with respect to the QLAC over
(B) The payments already made under the QLAC.
(ii) Payments after death of surviving spouse. If a QLAC is
providing a life annuity to a surviving spouse (or will provide a life
annuity to a surviving spouse) under paragraph (c)(1) of this A-17, it
is also permitted to provide for a benefit paid to a beneficiary after
the death of both the employee and the spouse in an amount equal to the
excess of--
(A) The premium payments made with respect to the QLAC over
(B) The payments already made under the QLAC.
[[Page 234]]
(iii) Other rules--(A) Timing of return of premium payment following
death of employee. A return of premium payment under this paragraph
(c)(4) must be paid no later than the end of the calendar year following
the calendar year in which the employee dies. If the employee's death is
after the required beginning date, the return of premium payment is
treated as a required minimum distribution for the year in which it is
paid and is not eligible for rollover.
(B) Timing of return of premium payment following death of surviving
spouse receiving life annuity. If the return of premium payment is paid
after the death of a surviving spouse who is receiving a life annuity
(or after the death of a surviving spouse who has not yet commenced
receiving a life annuity after the death of the employee), the return of
premium payment under this paragraph (c)(4) must be made no later than
the end of the calendar year following the calendar year in which the
surviving spouse dies. If the surviving spouse's death is after the
required beginning date for the surviving spouse, then the return of
premium payment is treated as a required minimum distribution for the
year in which it is paid and is not eligible for rollover.
(5) Multiple beneficiaries. If an employee has more than one
designated beneficiary under a QLAC, the rules in A-2(a) of Sec.
1.401(a)(9)-8 apply for purposes of paragraphs (c)(1) and (c)(2) of this
A-17.
(d) Rules of application--(1) Rules relating to premiums--(i)
Reliance on representations. For purposes of the limitation on premiums
described in paragraphs (b)(2) and (3) of this A-17, unless the plan
administrator has actual knowledge to the contrary, the plan
administrator may rely on an employee's representation (made in writing
or such other form as may be prescribed by the Commissioner) of the
amount of the premiums described in paragraphs (b)(2)(ii)(B) and
(b)(3)(ii)(B) of this A-17, but only with respect to premiums that are
not paid under a plan, annuity, or contract that is maintained by the
employer or an entity that is treated as a single employer with the
employer under section 414(b), (c), (m), or (o).
(ii) Consequences of excess premiums--(A) General Rule. If an
annuity contract fails to be a QLAC solely because a premium for the
contract exceeds the limits under paragraph (b) of this A-17, then the
contract is not a QLAC beginning on the date that premium payment is
made unless the excess premium is returned to the non-QLAC portion of
the employee's account in accordance with paragraph (d)(1)(ii)(B) of
this A-17. If the contract fails to be a QLAC, then the value of the
contract may not be disregarded under A-3(d) of Sec. 1.401(a)(9)-5 as
of the date on which the contract ceases to be a QLAC.
(B) Correction in year following year of excess. If the excess
premium is returned (either in cash or in the form of a contract that is
not intended to be a QLAC) to the non-QLAC portion of the employee's
account by the end of the calendar year following the calendar year in
which the excess premium was originally paid, then the contract will not
be treated as exceeding the limits under paragraph (b) of this A-17 at
any time, and the value of the contract will not be included in the
employee's account balance under A-3(d) of Sec. 1.401(a)(9)-5. If the
excess premium (including the fair market value of an annuity contract
that is not intended to be a QLAC, if applicable) is returned to the
non-QLAC portion of the employee's account after the last valuation date
for the calendar year in which the excess premium was originally paid,
then the employee's account balance for that calendar year must be
increased to reflect that excess premium in the same manner as an
employee's account balance is increased under A-2 of Sec. 1.401(a)(9)-7
to reflect a rollover received after the last valuation date.
(C) Return of excess premium not a commutation benefit. If the
excess premium is returned to the non-QLAC portion of the employee's
account as described in paragraph (d)(1)(ii)(B) of this A-17, it will
not be treated as a violation of the requirement in paragraph (a)(4) of
this A-17 that the contract not provide a commutation benefit.
(iii) Application of 25-percent limit. For purposes of the 25-
percent limit under paragraph (b)(3) of this A-17, an employee's account
balance on the date
[[Page 235]]
on which premiums for a contract are paid is the account balance as of
the last valuation date preceding the date of the premium payment,
adjusted as follows. The account balance is increased for contributions
allocated to the account during the period that begins after the
valuation date and ends before the date the premium is paid and
decreased for distributions made from the account during that period.
(2) Dollar and age limitations subject to adjustments--(i) Dollar
limitation. In the case of calendar years beginning on or after January
1, 2015, the $125,000 amount under paragraph (b)(2)(i) of this A-17 will
be adjusted at the same time and in the same manner as the limits are
adjusted under section 415(d), except that the base period shall be the
calendar quarter beginning July 1, 2013, and any increase under this
paragraph (d)(2)(i) that is not a multiple of $10,000 will be rounded to
the next lowest multiple of $10,000.
(ii) Age limitation. The maximum age set forth in paragraph (a)(2)
of this A-17 may be adjusted to reflect changes in mortality, with any
such adjusted age to be prescribed by the Commissioner in revenue
rulings, notices, or other guidance published in the Internal Revenue
Bulletin and made available by the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402 and on the IRS Web site
at http://www.irs.gov.
(iii) Prospective application of adjustments. If a contract fails to
be a QLAC because it does not satisfy the dollar limitation in paragraph
(b)(2) of this A-17 or the age limitation in paragraph (a)(2) of this A-
17, any subsequent adjustment that is made pursuant to paragraph
(d)(2)(i) or paragraph (d)(2)(ii) of this A-17 will not cause the
contract to become a QLAC.
(3) Determination of whether contract is intended to be a QLAC--(i)
Structural deficiency. If a contract fails to be a QLAC at any time for
a reason other than an excess premium described in paragraph (d)(1)(ii)
of this A-17, then as of the date of purchase the contract will not be
treated as a QLAC (for purposes of A-3(d) of Sec. 1.401(a)(9)-5) or as
a contract that is intended to be a QLAC (for purposes of paragraph (b)
of this A-17).
(ii) Roth IRAs. A contract that is purchased under a Roth IRA is not
treated as a contract that is intended to be a QLAC for purposes of
applying the dollar and percentage limitation rules in paragraphs
(b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-17. See A-14(d) of Sec.
1.408A-6. If a QLAC is purchased or held under a plan, annuity, account,
or traditional IRA, and that contract is later rolled over or converted
to a Roth IRA, the contract is not treated as a contract that is
intended to be a QLAC after the date of the rollover or conversion.
Thus, premiums paid with respect to the contract will not be taken into
account under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this
A-17 after the date of the rollover or conversion.
(4) Certain contracts not treated as similar contracts--(i)
Participating annuity contract. An annuity contract is not treated as a
contract described in paragraph (a)(7) of this A-17 merely because it
provides for the payment of dividends described in A-14(c)(3) of Sec.
1.401(a)(9)-6.
(ii) Contracts with cost-of-living adjustments. An annuity contract
is not treated as a contract described in paragraph (a)(7) of this A-17
merely because it provides for a cost-of-living adjustment as described
in A-14(b) of Sec. 1.401(a)(9)-6.
(5) Group annuity contract certificates. The requirement under
paragraph (a)(6) of this A-17 that the contract state that it is
intended to be a QLAC when issued is satisfied if a certificate is
issued under a group annuity contract and the certificate, when issued,
states that the employee's interest under the group annuity contract is
intended to be a QLAC.
(e) Effective/applicability date--(1) General applicability date.
This A-17 and Sec. 1.403(b)-6(e)(9) apply to contracts purchased on or
after July 2, 2014 If on or after July 2, 2014 an existing contract is
exchanged for a contract that satisfies the requirements of this A-17,
the new contract will be treated as purchased on the date of the
exchange and the fair market value of the contract that is exchanged for
a QLAC will be treated as a premium paid with respect to the QLAC.
[[Page 236]]
(2) Delayed applicability date for requirement that contract state
that it is intended to be QLAC. An annuity contract purchased before
January 1, 2016, will not fail to be a QLAC merely because the contract
does not satisfy the requirement of paragraph (a)(6) of this A-17,
provided that--
(i) When the contract (or a certificate under a group annuity
contract) is issued, the employee is notified that the annuity contract
is intended to be a QLAC; and
(ii) The contract is amended (or a rider, endorsement or amendment
to the certificate is issued) no later than December 31, 2016, to state
that the annuity contract is intended to be a QLAC.
[T.D. 9130, 69 FR 33293, June 15, 2004; 69 FR 68077, Nov. 23, 2004; T.D.
9459, 74 FR 45994, Sept. 8, 2009; T.D. 9673, 79 FR 37639, July 2, 2014;
79 FR 45683, Aug. 6, 2014]
Sec. 1.401(a)(9)-7 Rollovers and transfers.
Q-1. If an amount is distributed by one plan (distributing plan) and
is rolled over to another plan, is the required minimum distribution
under the distributing plan affected by the rollover?
A-1. No, if an amount is distributed by one plan and is rolled over
to another plan, the amount distributed is still treated as a
distribution by the distributing plan for purposes of section 401(a)(9),
notwithstanding the rollover. See A-1 of Sec. 1.402(c)-2 for the
definition of a rollover and A-7 of Sec. 1.402(c)-2 for rules for
determining the portion of any distribution that is not eligible for
rollover because it is a required minimum distribution.
Q-2. If an amount is distributed by one plan (distributing plan) and
is rolled over to another plan (receiving plan), how are the benefit and
the required minimum distribution under the receiving plan affected?
A-2. If an amount is distributed by one plan (distributing plan) and
is rolled over to another plan (receiving plan), the benefit of the
employee under the receiving plan is increased by the amount rolled over
for purposes of determining the required minimum distribution for the
calendar year immediately following the calendar year in which the
amount rolled over is distributed. If the amount rolled over is received
after the last valuation date in the calendar year under the receiving
plan, the benefit of the employee as of such valuation date, adjusted in
accordance with A-3 of Sec. 1.401(a)(9)-5, will be increased by the
rollover amount valued as of the date of receipt. In addition, if the
amount rolled over is received in a different calendar year from the
calendar year in which it is distributed, the amount rolled over is
deemed to have been received by the receiving plan in the calendar year
in which it was distributed.
Q-3. In the case of a transfer of an amount of an employee's benefit
from one plan (transferor plan) to another plan (transferee plan), are
there any special rules for satisfying section 401(a)(9) or determining
the employee's benefit under the transferor plan?
A-3. (a) In the case of a transfer of an amount of an employee's
benefit from one plan (transferor plan) to another (transferee plan),
the transfer is not treated as a distribution by the transferor plan for
purposes of section 401(a)(9). Instead, the benefit of the employee
under the transferor plan is decreased by the amount transferred.
However, if any portion of an employee's benefit is transferred in a
distribution calendar year with respect to that employee, in order to
satisfy section 401(a)(9), the transferor plan must determine the amount
of the required minimum distribution with respect to that employee for
the calendar year of the transfer using the employee's benefit under the
transferor plan before the transfer. Additionally, if any portion of an
employee's benefit is transferred in the employee's second distribution
calendar year but on or before the employee's required beginning date,
in order to satisfy section 401(a)(9), the transferor plan must
determine the amount of the minimum distribution requirement for the
employee's first distribution calendar year based on the employee's
benefit under the transferor plan before the transfer. The transferor
plan may satisfy the minimum distribution requirement for the calendar
year of the transfer (and the prior year if applicable) by segregating
the amount which
[[Page 237]]
must be distributed from the employee's benefit and not transferring
that amount. Such amount may be retained by the transferor plan and must
be distributed on or before the date required under section 401(a)(9).
(b) For purposes of determining any required minimum distribution
for the calendar year immediately following the calendar year in which
the transfer occurs, in the case of a transfer after the last valuation
date for the calendar year of the transfer under the transferor plan,
the benefit of the employee as of such valuation date, adjusted in
accordance with A-3 of Sec. 1.401(a)(9)-5, will be decreased by the
amount transferred, valued as of the date of the transfer.
Q-4. If an amount of an employee's benefit is transferred from one
plan (transferor plan) to another plan (transferee plan), how are the
benefit and the required minimum distribution under the transferee plan
affected?
A-4. In the case of a transfer from one plan (transferor plan) to
another (transferee plan), the benefit of the employee under the
transferee plan is increased by the amount transferred in the same
manner as if it were a plan receiving a rollover contribution under A-2
of this section.
Q-5. How is a spinoff, merger or consolidation (as defined in Sec.
1.414(l)-1) treated for purposes of determining an employee's benefit
and required minimum distribution under section 401(a)(9)?
A-5. For purposes of determining an employee's benefit and required
minimum distribution under section 401(a)(9), a spinoff, a merger, or a
consolidation (as defined in Sec. 1.414(l)-1) will be treated as a
transfer of the benefits of the employees involved. Consequently, the
benefit and required minimum distribution of each employee involved
under the transferor and transferee plans will be determined in
accordance with A-3 and A-4 of this section.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002]
Sec. 1.401(a)(9)-8 Special rules.
Q-1. What distribution rules apply if an employee is a participant
in more than one plan?
A-1. If an employee is a participant in more than one plan, the
plans in which the employee participates are not permitted to be
aggregated for purposes of testing whether the distribution requirements
of section 401(a)(9) are met. The distribution of the benefit of the
employee under each plan must separately meet the requirements of
section 401(a)(9). For this purpose, a plan described in section 414(k)
is treated as two separate plans, a defined contribution plan to the
extent benefits are based on an individual account and a defined benefit
plan with respect to the remaining benefits.
Q-2. If an employee's benefit under a defined contribution plan is
divided into separate accounts (or under a defined benefit plan is
divided into segregated shares), do the distribution rules in section
401(a)(9) and these regulations apply separately to each separate
account?
A-2. (a) Defined contribution plan. (1) Except as otherwise provided
in this A-2, if an employee's benefit under a defined contribution plan
is divided into separate accounts under the plan, the separate accounts
will be aggregated for purposes of satisfying the rules in section
401(a)(9). Thus, except as otherwise provided in this A-2, all separate
accounts, including a separate account for employee contributions under
section 72(d)(2), will be aggregated for purposes of section 401(a)(9).
(2) If the employee's benefit in a defined contribution plan is
divided into separate accounts and the beneficiaries with respect to one
separate account differ from the beneficiaries with respect to the other
separate accounts of the employee under the plan, for years subsequent
to the calendar year containing the date as of which the separate
accounts were established, or date of death if later, such separate
account under the plan is not aggregated with the other separate
accounts under the plan in order to determine whether the distributions
from such separate account under the plan satisfy section 401(a)(9).
Instead, the rules in section 401(a)(9) separately apply to such
separate account under the plan. However, the applicable distribution
period for
[[Page 238]]
each such separate account is determined disregarding the other
beneficiaries of the employee's benefit only if the separate account is
established on a date no later than the last day of the year following
the calendar year of the employee's death. For example, if, in the case
of a distribution described in section 401(a)(9)(B)(iii) and (iv), the
only beneficiary of a separate account under the plan established on a
date no later than the end of the year following the calendar year of
the employee's death is the employee's surviving spouse, and
beneficiaries other than the surviving spouse are designated with
respect to the other separate accounts with respect to the employee,
distribution of the spouse's separate account under the plan need not
commence until the date determined under the first sentence in A-3(b) of
Sec. 1.401(a)(9)-3, even if distribution of the other separate accounts
under the plan must commence at an earlier date. Similarly, in the case
of a distribution after the death of an employee to which section
401(a)(9)(B)(i) does not apply, distribution from a separate account of
an employee established on a date no later than the end of the year
following the year of the employee's death may be made over a
beneficiary's life expectancy in accordance with section
401(a)(9)(B)(iii) and (iv) even though distributions from other separate
accounts under the plan with different beneficiaries are being made in
accordance with the 5-year rule in section 401(a)(9)(B)(ii).
(3) A portion of an employee's account balance under a defined
contribution plan is permitted to be used to purchase an annuity
contract while another portion stays in the account. In that case, the
remaining account under the plan must be distributed in accordance with
Sec. 1.401(a)(9)-5 in order to satisfy section 401(a)(9) and the
annuity payments under the annuity contract must satisfy Sec.
1.401(a)(9)-6 in order to satisfy section 401(a)(9).
(b) Defined benefit plan. The rules of paragraph (a)(2) and (3) of
this A-2 also apply to benefits under a defined benefit plan where the
benefits under the plan are separated into separate identifiable
components which are separately distributed.
Q-3. What are separate accounts for purposes of section 401(a)(9)?
A-3. For purposes of section 401(a)(9), separate accounts in an
employee's account are separate portions of an employee's benefit
reflecting the separate interests of the employee's beneficiaries under
the plan as of the date of the employee's death for which separate
accounting is maintained. The separate accounting must allocate all
post-death investment gains and losses, contributions, and forfeitures,
for the period prior to the establishment of the separate accounts on a
pro rata basis in a reasonable and consistent manner among the separate
accounts. However, once the separate accounts are actually established,
the separate accounting can provide for separate investments for each
separate account under which gains and losses from the investment of the
account are only allocated to that account, or investment gain or losses
can continue to be allocated among the separate accounts on a pro rata
basis. A separate accounting must allocate any post-death distribution
to the separate account of the beneficiary receiving that distribution.
Q-4. If a distribution is required to be made to an employee by
section 401(a)(9)(A) or is required to be made to a surviving spouse
under section 401(a)(9)(B), must the distribution be made even if the
employee, or spouse where applicable, fails to consent to a distribution
while a benefit is immediately distributable?
A-4. Yes, section 411(a)(11) and section 417(e) (see Sec. Sec.
1.411(a)(11)-1(c)(2) and 1.417(e)-1(c)) require employee and spousal
consent to certain distributions of plan benefits while such benefits
are immediately distributable. If an employee's normal retirement age is
later than the employee's required beginning date and, therefore,
benefits are still immediately distributable, the plan must,
nevertheless, distribute plan benefits to the employee (or where
applicable, to the spouse) in a manner that satisfies the requirements
of section 401(a)(9). Section 401(a)(9) must be satisfied even though
the employee (or spouse, where applicable) fails to consent to the
distribution. In such a case, the plan may distribute in the form of a
qualified joint and survivor annuity
[[Page 239]]
(QJSA) or in the form of a qualified preretirement survivor annuity
(QPSA), as applicable, and the consent requirements of sections
411(a)(11) and 417(e) are deemed to be satisfied if the plan has made
reasonable efforts to obtain consent from the employee (or spouse if
applicable) and if the distribution otherwise meets the requirements of
section 417. If, because of section 401(a)(11)(B), the plan is not
required to distribute in the form of a QJSA to an employee or a QPSA to
a surviving spouse, the plan may distribute the required minimum
distribution amount to satisfy section 401(a)(9) and the consent
requirements of sections 411(a)(11) and 417(e) are deemed to be
satisfied if the plan has made reasonable efforts to obtain consent from
the employee (or spouse if applicable) and if the distribution otherwise
meets the requirements of section 417.
Q-5. Who is an employee's spouse or surviving spouse for purposes of
section 401(a)(9)?
A-5. Except as otherwise provided in A-6(a) of this section (in the
case of distributions of a portion of an employee's benefit payable to a
former spouse of an employee pursuant to a qualified domestic relations
order), for purposes of section 401(a)(9), an individual is a spouse or
surviving spouse of an employee if such individual is treated as the
employee's spouse under applicable state law. In the case of
distributions after the death of an employee, for purposes of
determining whether, under the life expectancy rule in section
401(a)(9)(B)(iii) and (iv), the provisions of section 401(a)(9)(B)(iv)
apply, the spouse of the employee is determined as of the date of death
of the employee.
Q-6. In order to satisfy section 401(a)(9), are there any special
rules which apply to the distribution of all or a portion of an
employee's benefit payable to an alternate payee pursuant to a qualified
domestic relations order as defined in section 414(p) (QDRO)?
A-6. (a) A former spouse to whom all or a portion of the employee's
benefit is payable pursuant to a QDRO will be treated as a spouse
(including a surviving spouse) of the employee for purposes of section
401(a)(9), including the minimum distribution incidental benefit
requirement, regardless of whether the QDRO specifically provides that
the former spouse is treated as the spouse for purposes of sections
401(a)(11) and 417.
(b)(1) If a QDRO provides that an employee's benefit is to be
divided and a portion is to be allocated to an alternate payee, such
portion will be treated as a separate account (or segregated share)
which separately must satisfy the requirements of section 401(a)(9) and
may not be aggregated with other separate accounts (or segregated
shares) of the employee for purposes of satisfying section 401(a)(9).
Except as otherwise provided in paragraph (b)(2) of this A-6,
distribution of such separate account allocated to an alternate payee
pursuant to a QDRO must be made in accordance with section 401(a)(9).
For example, in general, distribution of such account will satisfy
section 401(a)(9)(A) if required minimum distributions from such account
during the employee's lifetime begin not later than the employee's
required beginning date and the required minimum distribution is
determined in accordance with Sec. 1.401(a)(9)-5 for each distribution
calendar year (using an applicable distribution period determined under
A-4 of Sec. 1.401(a)(9)-5 for the employee in the distribution calendar
year either using the Uniform Lifetime Table in A-2 of Sec.
1.401(a)(9)-9 or using the joint life expectancy of the employee and a
spousal alternate payee in the distribution calendar year if the spousal
alternate payee is more than 10 years younger than the employee). The
determination of whether distribution from such account after the death
of the employee to the alternate payee will be made in accordance with
section 401(a)(9)(B)(i) or section 401(a)(9)(B)(ii) or (iii) and (iv)
will depend on whether distributions have begun as determined under A-6
of Sec. 1.401(a)(9)-2 (which provides, in general, that distributions
are not treated as having begun until the employee's required beginning
date even though payments may actually have begun before that date). For
example, if the alternate payee dies before the employee and
distribution of the separate account allocated to the alternate payee
pursuant to the QDRO is to be made to the alternate payee's beneficiary,
such
[[Page 240]]
beneficiary may be treated as a designated beneficiary for purposes of
determining the minimum distribution required from such account after
the death of the employee if the beneficiary of the alternate payee is
an individual and if such beneficiary is a beneficiary under the plan or
specified to or in the plan. Specification in or pursuant to the QDRO is
treated as specification to the plan.
(2) Distribution of the separate account allocated to an alternate
payee pursuant to a QDRO will satisfy the requirements of section
401(a)(9)(A)(ii) if such account is to be distributed, beginning not
later than the employee's required beginning date, over the life of the
alternate payee (or over a period not extending beyond the life
expectancy of the alternate payee). Also, if the plan permits the
employee to elect whether distribution upon the death of the employee
will be made in accordance with the 5-year rule in section
401(a)(9)(B)(ii) or the life expectancy rule in section
401(a)(9)(B)(iii) and (iv) pursuant to A-4(c) of Sec. 1.401(a)(9)-3,
such election is to be made only by the alternate payee for purposes of
distributing the separate account allocated to the alternate payee
pursuant to the QDRO. If the alternate payee dies after distribution of
the separate account allocated to the alternate payee pursuant to a QDRO
has begun (determined under A-6 of Sec. 1.401(a)(9)-2) but before the
employee dies, distribution of the remaining portion of that portion of
the benefit allocated to the alternate payee must be made in accordance
with the rules in Sec. 1.401(a)(9)-5 or 1.401(a)(9)-6 for distributions
during the life of the employee. Only after the death of the employee is
the amount of the required minimum distribution determined in accordance
with the rules of section 401(a)(9)(B).
(c) If a QDRO does not provide that an employee's benefit is to be
divided but provides that a portion of an employee's benefit (otherwise
payable to the employee) is to be paid to an alternate payee, such
portion will not be treated as a separate account (or segregated share)
of the employee. Instead, such portion will be aggregated with any
amount distributed to the employee and will be treated as having been
distributed to the employee for purposes of determining whether section
401(a)(9) has been satisfied with respect to that employee.
Q-7. Will a plan fail to satisfy section 401(a)(9) merely because it
fails to distribute an amount otherwise required to be distributed by
section 401(a)(9) during the period in which the issue of whether a
domestic relations order is a QDRO is being determined?
A-7. A plan will not fail to satisfy section 401(a)(9) merely
because it fails to distribute an amount otherwise required to be
distributed by section 401(a)(9) during the period in which the issue of
whether a domestic relations order is a QDRO is being determined
pursuant to section 414(p)(7), provided that the period does not extend
beyond the 18-month period described in section 414(p)(7)(E). To the
extent that a distribution otherwise required under section 401(a)(9) is
not made during this period, any segregated amounts, as defined in
section 414(p)(7)(A), will be treated as though the amounts are not
vested during the period and any distributions with respect to such
amounts must be made under the relevant rules for nonvested benefits
described in either A-8 of Sec. 1.401(a)(9)-5 or A-6 of Sec.
1.401(a)(9)-6, as applicable.
Q-8. Will a plan fail to satisfy section 401(a)(9) where an
individual's distribution from the plan is less than the amount
otherwise required to satisfy section 401(a)(9) because distributions
were being paid under an annuity contract issued by a life insurance
company in state insurer delinquency proceedings and have been reduced
or suspended by reasons of such state proceedings?
A-8. A plan will not fail to satisfy section 401(a)(9) merely
because an individual's distribution from the plan is less than the
amount otherwise required to satisfy section 401(a)(9) because
distributions were being paid under an annuity contract issued by a life
insurance company in state insurer delinquency proceedings and have been
reduced or suspended by reasons of such state proceedings. To the extent
that a distribution otherwise required
[[Page 241]]
under section 401(a)(9) is not made during the state insurer delinquency
proceedings, this amount and any additional amount accrued during this
period will be treated as though such amounts are not vested during the
period and any distributions with respect to such amounts must be made
under the relevant rules for nonvested benefits described in either A-8
of Sec. 1.401(a)(9)-5 or A-6 of Sec. 1.401(a)(9)-6, as applicable.
Q-9. Will a plan fail to qualify as a pension plan within the
meaning of section 401(a) solely because the plan permits distributions
to commence to an employee on or after April 1 of the calendar year
following the calendar year in which the employee attains age 70\1/2\
even though the employee has not retired or attained the normal
retirement age under the plan as of the date on which such distributions
commence?
A-9. No, a plan will not fail to qualify as a pension plan within
the meaning of section 401(a) solely because the plan permits
distributions to commence to an employee on or after April 1 of the
calendar year following the calendar year in which the employee attains
age 70\1/2\ even though the employee has not retired or attained the
normal retirement age under the plan as of the date on which such
distributions commence. This rule applies without regard to whether the
employee is a 5-percent owner with respect to the plan year ending in
the calendar year in which distributions commence.
Q-10. Is the distribution of an annuity contract a distribution for
purposes of section 401(a)(9)?
A-10. No, the distribution of an annuity contract is not a
distribution for purposes of section 401(a)(9).
Q-11. Will a payment by a plan after the death of an employee fail
to be treated as a distribution for purposes of section 401(a)(9) solely
because it is made to an estate or a trust?
A-11. A payment by a plan after the death of an employee will not
fail to be treated as a distribution for purposes of section 401(a)(9)
solely because it is made to an estate or a trust. As a result, the
estate or trust which receives a payment from a plan after the death of
an employee need not distribute the amount of such payment to the
beneficiaries of the estate or trust in accordance with section
401(a)(9)(B). Pursuant to A-3 of Sec. 1.401(a)(9)-4, an estate may not
be a designated beneficiary. Thus, pursuant to A-4 of Sec. 1.401(a)(9)-
3, distribution to the estate must satisfy the 5-year rule in section
401(a)(9)(B)(iii) if the distribution to the employee had not begun (as
defined in A-6 of Sec. 1.401(a)(9)-2) as of the employee's date of
death. However, see A-5 and A-6 of Sec. 1.401(a)(9)-4 for provisions
under which beneficiaries of a trust with respect to the trust's
interest in an employee's benefit are treated as having been designated
as beneficiaries of the employee under the plan.
Q-12. Will a plan fail to satisfy section 411(d)(6) if the plan is
amended to eliminate the availability of an optional form of benefit to
the extent that the optional form does not satisfy section 401(a)(9)?
A-12. No, pursuant to section 411(d)(6)(B), a plan will not fail to
satisfy section 411(d)(6) merely because the plan is amended to
eliminate the availability of an optional form of benefit to the extent
that the optional form does not satisfy section 401(a)(9). (See also A-3
of Sec. 1.401(a)(9)-1, which requires a plan to provide that,
notwithstanding any other plan provision, it will not distribute
benefits under any option that does not satisfy section 401(a)(9).)
Q-13. Is a plan disqualified merely because it pays benefits under a
designation made before January 1, 1984, in accordance with section
242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA)?
A-13. No, even though the distribution requirements added by TEFRA
were retroactively repealed by the Tax Reform Act of 1984 (TRA of 1984),
the transitional election rule in section 242(b) of TEFRA was preserved.
Satisfaction of the spousal consent requirements of section 417(a) and
(e) (added by the Retirement Equity Act of 1984) will not be considered
a revocation of the pre-1984 designation. However, sections 401(a)(11)
and 417 must be satisfied with respect to any distribution subject to
those sections. The election provided in section 242(b) of TEFRA is
[[Page 242]]
hereafter referred to as a section 242(b)(2) election.
Q-14. If an amount is transferred from one plan (transferor plan) to
another plan (transferee plan), may the transferee plan distribute the
amount transferred in accordance with a section 242(b)(2) election made
under either the transferor plan or under the transferee plan?
A-14. (a) If an amount is transferred from one plan (transferor
plan) to another plan (transferee plan), the amount transferred may be
distributed in accordance with a section 242(b)(2) election made under
the transferor plan if the employee did not elect to have the amount
transferred and if the amount transferred is separately accounted for by
the transferee plan. However, only the benefit attributable to the
amount transferred, plus earnings thereon, may be distributed in
accordance with the section 242(b)(2) election made under the transferor
plan. If the employee elected to have the amount transferred, the
transfer will be treated as a distribution and rollover of the amount
transferred for purposes of this section.
(b) In the case in which an amount is transferred from one plan to
another plan, the amount transferred may not be distributed in
accordance with a section 242(b)(2) election made under the transferee
plan. If a section 242(b)(2) election was made under the transferee
plan, the amount transferred must be separately accounted for. If the
amount transferred is not separately accounted for under the transferee
plan, the section 242(b)(2) election under the transferee plan is
revoked and section 401(a)(9) will apply to subsequent distributions by
the transferee plan.
(c) A merger, spinoff, or consolidation, as defined in Sec.
1.414(l)-1(b), will be treated as a transfer for purposes of the section
242(b)(2) election.
Q-15. If an amount is distributed by one plan (distributing plan)
and rolled over into another plan (receiving plan), may the receiving
plan distribute the amount rolled over in accordance with a section
242(b)(2) election made under either the distributing plan or the
receiving plan?
A-15. No, if an amount is distributed by one plan (distributing
plan) and rolled over into another plan (receiving plan), the receiving
plan must distribute the amount rolled over in accordance with section
401(a)(9) whether or not the employee made a section 242(b)(2) election
under the distributing plan. Further, if the amount rolled over was not
distributed in accordance with the election, the election under the
distributing plan is revoked and section 401(a)(9) will apply to all
subsequent distributions by the distributing plan. Finally, if the
employee made a section 242(b)(2) election under the receiving plan and
such election is still in effect, the amount rolled over must be
separately accounted for under the receiving plan and distributed in
accordance with section 401(a)(9). If amounts rolled over are not
separately accounted for, any section 242(b)(2) election under the
receiving plan is revoked and section 401(a)(9) will apply to subsequent
distributions by the receiving plan.
Q-16. May a section 242(b)(2) election be revoked after the date by
which distributions are required to commence in order to satisfy section
401(a)(9) and this section of the regulations?
A-16. Yes, a section 242(b)(2) election may be revoked after the
date by which distributions are required to commence in order to satisfy
section 401(a)(9) and this section of the regulations. However, if the
section 242(b)(2) election is revoked after the date by which
distributions are required to commence in order to satisfy section
401(a)(9) and this section of the regulations and the total amount of
the distributions which would have been required to be made prior to the
date of the revocation in order to satisfy section 401(a)(9), but for
the section 242(b)(2) election, have not been made, the plan must
distribute by the end of the calendar year following the calendar year
in which the revocation occurs the total amount not yet distributed
which was required to have been distributed to satisfy the requirements
of section 401(a)(9) and continue distributions in accordance with such
requirements.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, 33302, June 15, 2004]
[[Page 243]]
Sec. 1.401(a)(9)-9 Life expectancy and distribution period tables.
Q-1. What is the life expectancy for an individual for purposes of
determining required minimum distributions under section 401(a)(9)?
A-1 The following table, referred to as the Single Life Table, is
used for determining the life expectancy of an individual:
Single Life Table
------------------------------------------------------------------------
Life
Age expectancy
------------------------------------------------------------------------
0......................................................... 82.4
1......................................................... 81.6
2......................................................... 80.6
3......................................................... 79.7
4......................................................... 78.7
5......................................................... 77.7
6......................................................... 76.7
7......................................................... 75.8
8......................................................... 74.8
9......................................................... 73.8
10......................................................... 72.8
11......................................................... 71.8
12......................................................... 70.8
13......................................................... 69.9
14......................................................... 68.9
15......................................................... 67.9
16......................................................... 66.9
17......................................................... 66.0
18......................................................... 65.0
19......................................................... 64.0
20......................................................... 63.0
21......................................................... 62.1
22......................................................... 61.1
23......................................................... 60.1
24......................................................... 59.1
25......................................................... 58.2
26......................................................... 57.2
27......................................................... 56.2
28......................................................... 55.3
29......................................................... 54.3
30......................................................... 53.3
31......................................................... 52.4
32......................................................... 51.4
33......................................................... 50.4
34......................................................... 49.4
35......................................................... 48.5
36......................................................... 47.5
37......................................................... 46.5
38......................................................... 45.6
39......................................................... 44.6
40......................................................... 43.6
41......................................................... 42.7
42......................................................... 41.7
43......................................................... 40.7
44......................................................... 39.8
45......................................................... 38.8
46......................................................... 37.9
47......................................................... 37.0
48......................................................... 36.0
49......................................................... 35.1
50......................................................... 34.2
51......................................................... 33.3
52......................................................... 32.3
53......................................................... 31.4
54......................................................... 30.5
55......................................................... 29.6
56......................................................... 28.7
57......................................................... 27.9
58......................................................... 27.0
59......................................................... 26.1
60......................................................... 25.2
61......................................................... 24.4
62......................................................... 23.5
63......................................................... 22.7
64......................................................... 21.8
65......................................................... 21.0
66......................................................... 20.2
67......................................................... 19.4
68......................................................... 18.6
69......................................................... 17.8
70......................................................... 17.0
71......................................................... 16.3
72......................................................... 15.5
73......................................................... 14.8
74......................................................... 14.1
75......................................................... 13.4
76......................................................... 12.7
77......................................................... 12.1
78......................................................... 11.4
79......................................................... 10.8
80......................................................... 10.2
81......................................................... 9.7
82......................................................... 9.1
83......................................................... 8.6
84......................................................... 8.1
85......................................................... 7.6
86......................................................... 7.1
87......................................................... 6.7
88......................................................... 6.3
89......................................................... 5.9
90......................................................... 5.5
91......................................................... 5.2
92......................................................... 4.9
93......................................................... 4.6
94......................................................... 4.3
95......................................................... 4.1
96......................................................... 3.8
97......................................................... 3.6
98......................................................... 3.4
99......................................................... 3.1
100........................................................ 2.9
101........................................................ 2.7
102........................................................ 2.5
103........................................................ 2.3
104........................................................ 2.1
105........................................................ 1.9
106........................................................ 1.7
107........................................................ 1.5
108........................................................ 1.4
109........................................................ 1.2
110........................................................ 1.1
111+....................................................... 1.0
------------------------------------------------------------------------
Q-2. What is the applicable distribution period for an individual
account for purposes of determining required minimum distributions
during an employee's lifetime under section 401(a)(9)?
A-2. Table for determining distribution period. The following table,
referred to as the Uniform Lifetime Table, is used for determining the
distribution period
[[Page 244]]
for lifetime distributions to an employee in situations in which the
employee's spouse is either not the sole designated beneficiary or is
the sole designated beneficiary but is not more than 10 years younger
than the employee.
Uniform Lifetime Table
------------------------------------------------------------------------
Distribution
Age of employee period
------------------------------------------------------------------------
70...................................................... 27.4
71...................................................... 26.5
72...................................................... 25.6
73...................................................... 24.7
74...................................................... 23.8
75...................................................... 22.9
76...................................................... 22.0
77...................................................... 21.2
78...................................................... 20.3
79...................................................... 19.5
80...................................................... 18.7
81...................................................... 17.9
82...................................................... 17.1
83...................................................... 16.3
84...................................................... 15.5
85...................................................... 14.8
86...................................................... 14.1
87...................................................... 13.4
88...................................................... 12.7
89...................................................... 12.0
90...................................................... 11.4
91...................................................... 10.8
92...................................................... 10.2
93...................................................... 9.6
94...................................................... 9.1
95...................................................... 8.6
96...................................................... 8.1
97...................................................... 7.6
98...................................................... 7.1
99...................................................... 6.7
100..................................................... 6.3
101..................................................... 5.9
102..................................................... 5.5
103..................................................... 5.2
104..................................................... 4.9
105..................................................... 4.5
106..................................................... 4.2
107..................................................... 3.9
108..................................................... 3.7
109..................................................... 3.4
110..................................................... 3.1
111..................................................... 2.9
112..................................................... 2.6
113..................................................... 2.4
114..................................................... 2.1
115+.................................................... 1.9
------------------------------------------------------------------------
Q-3. What is the joint life and last survivor expectancy of an
individual and beneficiary for purposes of determining required minimum
distributions under section 401(a)(9)?
A-3. The following table, referred to as the Joint and Last Survivor
Table, is used for determining the joint and last survivor life
expectancy of two individuals:
Joint and Last Survivor Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 0 1 2 3 4 5 6 7 8 9
--------------------------------------------------------------------------------------------------------------------------------------------------------
0............................................................. 90.0 89.5 89.0 88.6 88.2 87.8 87.4 87.1 86.8 86.5
1............................................................. 89.5 89.0 88.5 88.1 87.6 87.2 86.8 86.5 86.1 85.8
2............................................................. 89.0 88.5 88.0 87.5 87.1 86.6 86.2 85.8 85.5 85.1
3............................................................. 88.6 88.1 87.5 87.0 86.5 86.1 85.6 85.2 84.8 84.5
4............................................................. 88.2 87.6 87.1 86.5 86.0 85.5 85.1 84.6 84.2 83.8
5............................................................. 87.8 87.2 86.6 86.1 85.5 85.0 84.5 84.1 83.6 83.2
6............................................................. 87.4 86.8 86.2 85.6 85.1 84.5 84.0 83.5 83.1 82.6
7............................................................. 87.1 86.5 85.8 85.2 84.6 84.1 83.5 83.0 82.5 82.1
8............................................................. 86.8 86.1 85.5 84.8 84.2 83.6 83.1 82.5 82.0 81.6
9............................................................. 86.5 85.8 85.1 84.5 83.8 83.2 82.6 82.1 81.6 81.0
10............................................................ 86.2 85.5 84.8 84.1 83.5 82.8 82.2 81.6 81.1 80.6
11............................................................ 85.9 85.2 84.5 83.8 83.1 82.5 81.8 81.2 80.7 80.1
12............................................................ 85.7 84.9 84.2 83.5 82.8 82.1 81.5 80.8 80.2 79.7
13............................................................ 85.4 84.7 84.0 83.2 82.5 81.8 81.1 80.5 79.9 79.2
14............................................................ 85.2 84.5 83.7 83.0 82.2 81.5 80.8 80.1 79.5 78.9
15............................................................ 85.0 84.3 83.5 82.7 82.0 81.2 80.5 79.8 79.1 78.5
16............................................................ 84.9 84.1 83.3 82.5 81.7 81.0 80.2 79.5 78.8 78.1
17............................................................ 84.7 83.9 83.1 82.3 81.5 80.7 80.0 79.2 78.5 77.8
18............................................................ 84.5 83.7 82.9 82.1 81.3 80.5 79.7 79.0 78.2 77.5
19............................................................ 84.4 83.6 82.7 81.9 81.1 80.3 79.5 78.7 78.0 77.3
20............................................................ 84.3 83.4 82.6 81.8 80.9 80.1 79.3 78.5 77.7 77.0
21............................................................ 84.1 83.3 82.4 81.6 80.8 79.9 79.1 78.3 77.5 76.8
22............................................................ 84.0 83.2 82.3 81.5 80.6 79.8 78.9 78.1 77.3 76.5
23............................................................ 83.9 83.1 82.2 81.3 80.5 79.6 78.8 77.9 77.1 76.3
24............................................................ 83.8 83.0 82.1 81.2 80.3 79.5 78.6 77.8 76.9 76.1
25............................................................ 83.7 82.9 82.0 81.1 80.2 79.3 78.5 77.6 76.8 75.9
26............................................................ 83.6 82.8 81.9 81.0 80.1 79.2 78.3 77.5 76.6 75.8
27............................................................ 83.6 82.7 81.8 80.9 80.0 79.1 78.2 77.4 76.5 75.6
28............................................................ 83.5 82.6 81.7 80.8 79.9 79.0 78.1 77.2 76.4 75.5
29............................................................ 83.4 82.6 81.6 80.7 79.8 78.9 78.0 77.1 76.2 75.4
30............................................................ 83.4 82.5 81.6 80.7 79.7 78.8 77.9 77.0 76.1 75.2
[[Page 245]]
31............................................................ 83.3 82.4 81.5 80.6 79.7 78.8 77.8 76.9 76.0 75.1
32............................................................ 83.3 82.4 81.5 80.5 79.6 78.7 77.8 76.8 75.9 75.0
33............................................................ 83.2 82.3 81.4 80.5 79.5 78.6 77.7 76.8 75.9 74.9
34............................................................ 83.2 82.3 81.3 80.4 79.5 78.5 77.6 76.7 75.8 74.9
35............................................................ 83.1 82.2 81.3 80.4 79.4 78.5 77.6 76.6 75.7 74.8
36............................................................ 83.1 82.2 81.3 80.3 79.4 78.4 77.5 76.6 75.6 74.7
37............................................................ 83.0 82.2 81.2 80.3 79.3 78.4 77.4 76.5 75.6 74.6
38............................................................ 83.0 82.1 81.2 80.2 79.3 78.3 77.4 76.4 75.5 74.6
39............................................................ 83.0 82.1 81.1 80.2 79.2 78.3 77.3 76.4 75.5 74.5
40............................................................ 82.9 82.1 81.1 80.2 79.2 78.3 77.3 76.4 75.4 74.5
41............................................................ 82.9 82.0 81.1 80.1 79.2 78.2 77.3 76.3 75.4 74.4
42............................................................ 82.9 82.0 81.1 80.1 79.1 78.2 77.2 76.3 75.3 74.4
43............................................................ 82.9 82.0 81.0 80.1 79.1 78.2 77.2 76.2 75.3 74.3
44............................................................ 82.8 81.9 81.0 80.0 79.1 78.1 77.2 76.2 75.2 74.3
45............................................................ 82.8 81.9 81.0 80.0 79.1 78.1 77.1 76.2 75.2 74.3
46............................................................ 82.8 81.9 81.0 80.0 79.0 78.1 77.1 76.1 75.2 74.2
47............................................................ 82.8 81.9 80.9 80.0 79.0 78.0 77.1 76.1 75.2 74.2
48............................................................ 82.8 81.9 80.9 80.0 79.0 78.0 77.1 76.1 75.1 74.2
49............................................................ 82.7 81.8 80.9 79.9 79.0 78.0 77.0 76.1 75.1 74.1
50............................................................ 82.7 81.8 80.9 79.9 79.0 78.0 77.0 76.0 75.1 74.1
51............................................................ 82.7 81.8 80.9 79.9 78.9 78.0 77.0 76.0 75.1 74.1
52............................................................ 82.7 81.8 80.9 79.9 78.9 78.0 77.0 76.0 75.0 74.1
53............................................................ 82.7 81.8 80.8 79.9 78.9 77.9 77.0 76.0 75.0 74.0
54............................................................ 82.7 81.8 80.8 79.9 78.9 77.9 76.9 76.0 75.0 74.0
55............................................................ 82.6 81.8 80.8 79.8 78.9 77.9 76.9 76.0 75.0 74.0
56............................................................ 82.6 81.7 80.8 79.8 78.9 77.9 76.9 75.9 75.0 74.0
57............................................................ 82.6 81.7 80.8 79.8 78.9 77.9 76.9 75.9 75.0 74.0
58............................................................ 82.6 81.7 80.8 79.8 78.8 77.9 76.9 75.9 74.9 74.0
59............................................................ 82.6 81.7 80.8 79.8 78.8 77.9 76.9 75.9 74.9 74.0
60............................................................ 82.6 81.7 80.8 79.8 78.8 77.8 76.9 75.9 74.9 73.9
61............................................................ 82.6 81.7 80.8 79.8 78.8 77.8 76.9 75.9 74.9 73.9
62............................................................ 82.6 81.7 80.7 79.8 78.8 77.8 76.9 75.9 74.9 73.9
63............................................................ 82.6 81.7 80.7 79.8 78.8 77.8 76.8 75.9 74.9 73.9
64............................................................ 82.5 81.7 80.7 79.8 78.8 77.8 76.8 75.9 74.9 73.9
65............................................................ 82.5 81.7 80.7 79.8 78.8 77.8 76.8 75.8 74.9 73.9
66............................................................ 82.5 81.7 80.7 79.7 78.8 77.8 76.8 75.8 74.9 73.9
67............................................................ 82.5 81.7 80.7 79.7 78.8 77.8 76.8 75.8 74.9 73.9
68............................................................ 82.5 81.6 80.7 79.7 78.8 77.8 76.8 75.8 74.8 73.9
69............................................................ 82.5 81.6 80.7 79.7 78.8 77.8 76.8 75.8 74.8 73.9
70............................................................ 82.5 81.6 80.7 79.7 78.8 77.8 76.8 75.8 74.8 73.9
71............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
72............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
73............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
74............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
75............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
76............................................................ 82.5 81.6 80.7 79.7 78.7 77.8 76.8 75.8 74.8 73.8
77............................................................ 82.5 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
78............................................................ 82.5 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
79............................................................ 82.5 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
80............................................................ 82.5 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
81............................................................ 82.4 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
82............................................................ 82.4 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
83............................................................ 82.4 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
84............................................................ 82.4 81.6 80.7 79.7 78.7 77.7 76.8 75.8 74.8 73.8
85............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.8 75.8 74.8 73.8
86............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
87............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
88............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
89............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
90............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
91............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
92............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
93............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
94............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
95............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
96............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
97............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
98............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
99............................................................ 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
100........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
101........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
102........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
[[Page 246]]
103........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
104........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
105........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
106........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
107........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
108........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
109........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
110........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
111........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
112........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
113........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
114........................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
115+.......................................................... 82.4 81.6 80.6 79.7 78.7 77.7 76.7 75.8 74.8 73.8
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[[Page 247]]
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Ages 10 11 12 13 14 15 16 17 18 19
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10........................................ 80.0 79.6 79.1 78.7 78.2 77.9 77.5 77.2 76.8 76.5
11........................................ 79.6 79.0 78.6 78.1 77.7 77.3 76.9 76.5 76.2 75.8
12........................................ 79.1 78.6 78.1 77.6 77.1 76.7 76.3 75.9 75.5 75.2
13........................................ 78.7 78.1 77.6 77.1 76.6 76.1 75.7 75.3 74.9 74.5
14........................................ 78.2 77.7 77.1 76.6 76.1 75.6 75.1 74.7 74.3 73.9
15........................................ 77.9 77.3 76.7 76.1 75.6 75.1 74.6 74.1 73.7 73.3
16........................................ 77.5 76.9 76.3 75.7 75.1 74.6 74.1 73.6 73.1 72.7
17........................................ 77.2 76.5 75.9 75.3 74.7 74.1 73.6 73.1 72.6 72.1
18........................................ 76.8 76.2 75.5 74.9 74.3 73.7 73.1 72.6 72.1 71.6
19........................................ 76.5 75.8 75.2 74.5 73.9 73.3 72.7 72.1 71.6 71.1
20........................................ 76.3 75.5 74.8 74.2 73.5 72.9 72.3 71.7 71.1 70.6
21........................................ 76.0 75.3 74.5 73.8 73.2 72.5 71.9 71.3 70.7 70.1
22........................................ 75.8 75.0 74.3 73.5 72.9 72.2 71.5 70.9 70.3 69.7
23........................................ 75.5 74.8 74.0 73.3 72.6 71.9 71.2 70.5 69.9 69.3
24........................................ 75.3 74.5 73.8 73.0 72.3 71.6 70.9 70.2 69.5 68.9
25........................................ 75.1 74.3 73.5 72.8 72.0 71.3 70.6 69.9 69.2 68.5
26........................................ 75.0 74.1 73.3 72.5 71.8 71.0 70.3 69.6 68.9 68.2
27........................................ 74.8 74.0 73.1 72.3 71.6 70.8 70.0 69.3 68.6 67.9
28........................................ 74.6 73.8 73.0 72.2 71.3 70.6 69.8 69.0 68.3 67.6
29........................................ 74.5 73.6 72.8 72.0 71.2 70.4 69.6 68.8 68.0 67.3
30........................................ 74.4 73.5 72.7 71.8 71.0 70.2 69.4 68.6 67.8 67.1
31........................................ 74.3 73.4 72.5 71.7 70.8 70.0 69.2 68.4 67.6 66.8
32........................................ 74.1 73.3 72.4 71.5 70.7 69.8 69.0 68.2 67.4 66.6
33........................................ 74.0 73.2 72.3 71.4 70.5 69.7 68.8 68.0 67.2 66.4
34........................................ 73.9 73.0 72.2 71.3 70.4 69.5 68.7 67.8 67.0 66.2
35........................................ 73.9 73.0 72.1 71.2 70.3 69.4 68.5 67.7 66.8 66.0
36........................................ 73.8 72.9 72.0 71.1 70.2 69.3 68.4 67.6 66.7 65.9
37........................................ 73.7 72.8 71.9 71.0 70.1 69.2 68.3 67.4 66.6 65.7
38........................................ 73.6 72.7 71.8 70.9 70.0 69.1 68.2 67.3 66.4 65.6
39........................................ 73.6 72.7 71.7 70.8 69.9 69.0 68.1 67.2 66.3 65.4
40........................................ 73.5 72.6 71.7 70.7 69.8 68.9 68.0 67.1 66.2 65.3
41........................................ 73.5 72.5 71.6 70.7 69.7 68.8 67.9 67.0 66.1 65.2
42........................................ 73.4 72.5 71.5 70.6 69.7 68.8 67.8 66.9 66.0 65.1
43........................................ 73.4 72.4 71.5 70.6 69.6 68.7 67.8 66.8 65.9 65.0
44........................................ 73.3 72.4 71.4 70.5 69.6 68.6 67.7 66.8 65.9 64.9
45........................................ 73.3 72.3 71.4 70.5 69.5 68.6 67.6 66.7 65.8 64.9
46........................................ 73.3 72.3 71.4 70.4 69.5 68.5 67.6 66.6 65.7 64.8
47........................................ 73.2 72.3 71.3 70.4 69.4 68.5 67.5 66.6 65.7 64.7
48........................................ 73.2 72.2 71.3 70.3 69.4 68.4 67.5 66.5 65.6 64.7
49........................................ 73.2 72.2 71.2 70.3 69.3 68.4 67.4 66.5 65.6 64.6
50........................................ 73.1 72.2 71.2 70.3 69.3 68.4 67.4 66.5 65.5 64.6
51........................................ 73.1 72.2 71.2 70.2 69.3 68.3 67.4 66.4 65.5 64.5
52........................................ 73.1 72.1 71.2 70.2 69.2 68.3 67.3 66.4 65.4 64.5
53........................................ 73.1 72.1 71.1 70.2 69.2 68.3 67.3 66.3 65.4 64.4
54........................................ 73.1 72.1 71.1 70.2 69.2 68.2 67.3 66.3 65.4 64.4
55........................................ 73.0 72.1 71.1 70.1 69.2 68.2 67.2 66.3 65.3 64.4
56........................................ 73.0 72.1 71.1 70.1 69.1 68.2 67.2 66.3 65.3 64.3
57........................................ 73.0 72.0 71.1 70.1 69.1 68.2 67.2 66.2 65.3 64.3
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58........................................ 73.0 72.0 71.0 70.1 69.1 68.1 67.2 66.2 65.2 64.3
59........................................ 73.0 72.0 71.0 70.1 69.1 68.1 67.2 66.2 65.2 64.3
60........................................ 73.0 72.0 71.0 70.0 69.1 68.1 67.1 66.2 65.2 64.2
61........................................ 73.0 72.0 71.0 70.0 69.1 68.1 67.1 66.2 65.2 64.2
62........................................ 72.9 72.0 71.0 70.0 69.0 68.1 67.1 66.1 65.2 64.2
63........................................ 72.9 72.0 71.0 70.0 69.0 68.1 67.1 66.1 65.2 64.2
64........................................ 72.9 71.9 71.0 70.0 69.0 68.0 67.1 66.1 65.1 64.2
65........................................ 72.9 71.9 71.0 70.0 69.0 68.0 67.1 66.1 65.1 64.2
66........................................ 72.9 71.9 70.9 70.0 69.0 68.0 67.1 66.1 65.1 64.1
67........................................ 72.9 71.9 70.9 70.0 69.0 68.0 67.0 66.1 65.1 64.1
68........................................ 72.9 71.9 70.9 70.0 69.0 68.0 67.0 66.1 65.1 64.1
69........................................ 72.9 71.9 70.9 69.9 69.0 68.0 67.0 66.1 65.1 64.1
70........................................ 72.9 71.9 70.9 69.9 69.0 68.0 67.0 66.0 65.1 64.1
71........................................ 72.9 71.9 70.9 69.9 69.0 68.0 67.0 66.0 65.1 64.1
72........................................ 72.9 71.9 70.9 69.9 69.0 68.0 67.0 66.0 65.1 64.1
73........................................ 72.9 71.9 70.9 69.9 68.9 68.0 67.0 66.0 65.0 64.1
74........................................ 72.9 71.9 70.9 69.9 68.9 68.0 67.0 66.0 65.0 64.1
75........................................ 72.8 71.9 70.9 69.9 68.9 68.0 67.0 66.0 65.0 64.1
76........................................ 72.8 71.9 70.9 69.9 68.9 68.0 67.0 66.0 65.0 64.1
77........................................ 72.8 71.9 70.9 69.9 68.9 68.0 67.0 66.0 65.0 64.1
78........................................ 72.8 71.9 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
79........................................ 72.8 71.9 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
80........................................ 72.8 71.9 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
81........................................ 72.8 71.8 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
82........................................ 72.8 71.8 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
83........................................ 72.8 71.8 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
84........................................ 72.8 71.8 70.9 69.9 68.9 67.9 67.0 66.0 65.0 64.0
85........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
86........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
87........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
88........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
89........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
90........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
91........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
92........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
93........................................ 72.8 71.8 70.9 69.9 68.9 67.9 66.9 66.0 65.0 64.0
94........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
95........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
96........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
97........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
98........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
99........................................ 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
100....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
101....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
102....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
103....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
104....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
105....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
[[Page 249]]
106....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
107....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
108....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
109....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
110....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
111....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
112....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
113....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
114....................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
115+...................................... 72.8 71.8 70.8 69.9 68.9 67.9 66.9 66.0 65.0 64.0
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--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 20 21 22 23 24 25 26 27 28 29
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20........................................ 70.1 69.6 69.1 68.7 68.3 67.9 67.5 67.2 66.9 66.6
21........................................ 69.6 69.1 68.6 68.2 67.7 67.3 66.9 66.6 66.2 65.9
22........................................ 69.1 68.6 68.1 67.6 67.2 66.7 66.3 65.9 65.6 65.2
23........................................ 68.7 68.2 67.9 67.1 66.6 66.2 65.7 65.3 64.9 64.6
24........................................ 68.3 67.7 67.2 66.6 66.1 65.6 65.2 64.7 64.3 63.9
25........................................ 67.9 67.3 66.7 66.2 65.6 65.1 64.6 64.2 63.7 63.3
26........................................ 67.5 66.9 66.3 65.7 65.2 64.6 64.1 63.6 63.2 62.8
27........................................ 67.2 66.6 65.9 65.3 64.7 64.2 63.6 63.1 62.7 62.2
28........................................ 66.9 66.2 65.6 64.9 64.3 63.7 63.2 62.7 62.1 61.7
29........................................ 66.6 65.9 65.2 64.6 63.9 63.3 62.8 62.2 61.7 61.2
30........................................ 66.3 65.6 64.9 64.2 63.6 62.9 62.3 61.8 61.2 60.7
31........................................ 66.1 65.3 64.6 63.9 63.2 62.6 62.0 61.4 60.8 60.2
32........................................ 65.8 65.1 64.3 63.6 62.9 62.2 61.6 61.0 60.4 59.8
33........................................ 65.6 64.8 64.1 63.3 62.6 61.9 61.3 60.6 60.0 59.4
34........................................ 65.4 64.6 63.8 63.1 62.3 61.6 60.9 60.3 59.6 59.0
35........................................ 65.2 64.4 63.6 62.8 62.1 61.4 60.6 59.9 59.3 58.6
36........................................ 65.0 64.2 63.4 62.6 61.9 61.1 60.4 59.6 69.0 58.3
37........................................ 64.9 64.0 63.2 62.4 61.6 60.9 60.1 59.4 58.7 58.0
38........................................ 64.7 63.9 63.0 62.2 61.4 60.6 59.9 59.1 58.4 57.7
39........................................ 64.6 63.7 62.9 62.1 61.2 60.4 59.6 58.9 58.1 57.4
40........................................ 64.4 63.6 62.7 61.9 61.1 60.2 59.4 58.7 57.9 57.1
41........................................ 64.3 63.5 62.6 61.7 60.9 60.1 59.3 58.5 57.7 56.9
42........................................ 64.2 63.3 62.5 61.6 60.8 59.9 59.1 58.3 57.5 56.7
43........................................ 64.1 63.2 62.4 61.5 60.6 59.8 58.9 58.1 57.3 56.5
44........................................ 64.0 63.1 62.2 61.4 60.5 59.6 58.8 57.9 57.1 56.3
45........................................ 64.0 63.0 62.2 61.3 60.4 59.5 58.6 57.8 56.9 56.1
46........................................ 63.9 63.0 62.1 61.2 60.3 59.4 58.5 57.7 56.8 56.0
47........................................ 63.8 62.9 62.0 61.1 60.2 59.3 58.4 57.5 56.7 55.8
48........................................ 63.7 62.8 61.9 61.0 60.1 59.2 58.3 57.4 56.5 55.7
49........................................ 63.7 62.8 61.8 60.9 60.0 59.1 58.2 57.3 56.4 55.6
50........................................ 63.6 62.7 61.8 60.8 59.9 59.0 58.1 57.2 56.3 55.4
51........................................ 63.6 62.6 61.7 60.8 59.9 58.9 58.0 57.1 56.2 55.3
52........................................ 63.5 62.6 61.7 60.7 59.8 58.9 58.0 57.1 56.1 55.2
53........................................ 63.5 62.5 61.6 60.7 59.7 58.8 57.9 57.0 56.1 55.2
54........................................ 63.5 62.5 61.6 60.6 59.7 58.8 57.8 56.9 56.0 55.1
55........................................ 63.4 62.5 61.5 60.6 59.6 58.7 57.8 56.8 55.9 55.0
56........................................ 63.4 62.4 61.5 60.5 59.6 58.7 57.7 56.8 55.9 54.9
[[Page 250]]
57........................................ 63.4 62.4 61.5 60.5 59.6 58.6 57.7 56.7 55.8 54.9
58........................................ 63.3 62.4 61.4 60.5 59.5 58.6 57.6 56.7 55.8 54.8
59........................................ 63.3 62.3 61.4 60.4 59.5 58.5 57.6 56.7 55.7 54.8
60........................................ 63.3 62.3 61.4 60.4 59.5 58.5 57.6 56.6 55.7 54.7
61........................................ 63.3 62.3 61.3 60.4 59.4 58.5 57.5 56.6 55.6 54.7
62........................................ 63.2 62.3 61.3 60.4 59.4 58.4 57.5 56.5 55.6 54.7
63........................................ 63.2 62.3 61.3 60.3 59.4 58.4 57.4 56.5 55.6 54.6
64........................................ 63.2 62.2 61.3 60.3 59.4 58.4 57.4 56.5 55.5 54.6
65........................................ 63.2 62.2 61.3 60.3 59.3 58.4 57.4 56.5 55.5 54.6
66........................................ 63.2 62.2 61.2 60.3 59.3 58.4 57.4 56.4 55.5 54.5
67........................................ 63.2 62.2 61.2 60.3 59.3 58.3 57.4 56.4 55.5 54.5
68........................................ 63.1 62.2 61.2 60.2 59.3 58.3 57.4 56.4 55.4 54.5
69........................................ 63.1 62.2 61.2 60.2 59.3 58.3 57.3 56.4 55.4 54.5
70........................................ 63.1 62.2 61.2 60.2 59.3 58.3 57.3 56.4 55.4 54.4
71........................................ 63.1 62.1 61.2 60.2 59.2 58.3 57.3 56.4 55.4 54.4
72........................................ 63.1 62.1 61.2 60.2 59.2 58.3 57.3 56.3 55.4 54.4
73........................................ 63.1 62.1 61.2 60.2 59.2 58.3 57.3 56.3 55.4 54.4
74........................................ 63.1 62.1 61.2 60.2 59.2 58.2 57.3 56.3 55.4 54.4
75........................................ 63.1 62.1 61.1 60.2 59.2 58.2 57.3 56.3 55.3 54.4
76........................................ 63.1 62.1 61.1 60.2 59.2 58.2 57.3 56.3 55.3 54.4
77........................................ 63.1 62.1 61.1 60.2 59.2 58.2 57.3 56.3 55.3 54.4
78........................................ 63.1 62.1 61.1 60.2 59.2 58.2 57.3 56.3 55.3 54.4
79........................................ 63.1 62.1 61.1 60.2 59.2 58.2 57.2 56.3 55.3 54.3
80........................................ 63.1 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
81........................................ 63.1 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
82........................................ 63.1 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
83........................................ 63.1 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
84........................................ 63.0 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
85........................................ 63.0 62.1 61.1 60.1 59.2 58.2 57.2 56.3 55.3 54.3
86........................................ 63.0 62.1 61.1 60.1 59.2 58.2 57.2 56.2 55.3 54.3
87........................................ 63.0 62.1 61.1 60.1 59.2 58.2 57.2 56.2 55.3 54.3
88........................................ 63.0 62.1 61.1 60.1 59.2 58.2 57.2 56.2 55.3 54.3
89........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
90........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
91........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
92........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
93........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
94........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
95........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
96........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
97........................................ 60.3 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
98........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
99........................................ 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
100....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
101....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
102....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
103....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
104....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
[[Page 251]]
105....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
106....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
107....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
108....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
109....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
110....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
111....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
112....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
113....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
114....................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
115+...................................... 63.0 62.1 61.1 60.1 59.1 58.2 57.2 56.2 55.3 54.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 30 31 32 33 34 35 36 37 38 39
--------------------------------------------------------------------------------------------------------------------------------------------------------
30........................................ 60.2 59.7 59.2 58.8 58.4 58.0 57.6 57.3 57.0 56.7
31........................................ 59.7 59.2 58.7 58.2 57.8 57.4 57.0 56.6 56.3 56.0
32........................................ 59.2 58.7 58.2 57.7 57.2 56.8 56.4 56.0 55.6 55.3
33........................................ 58.8 58.2 57.7 57.2 56.7 56.2 55.8 55.4 55.0 54.7
34........................................ 58.4 57.8 57.2 56.7 56.2 55.7 55.3 54.8 54.4 54.0
35........................................ 58.0 57.4 56.8 56.2 55.7 55.2 54.7 54.3 53.8 53.4
36........................................ 57.6 57.0 56.4 55.8 55.3 54.7 54.2 53.7 53.3 52.8
37........................................ 57.3 56.6 56.0 55.4 54.8 54.3 53.7 53.2 52.7 52.3
38........................................ 57.0 56.3 55.6 55.0 54.4 53.8 53.3 52.7 52.2 51.7
39........................................ 56.7 56.0 55.3 54.7 54.0 53.4 52.8 52.3 51.7 51.2
40........................................ 56.4 55.7 55.0 54.3 53.7 53.0 52.4 51.8 51.3 50.8
41........................................ 56.1 55.4 54.7 54.0 53.3 52.7 52.0 51.4 50.9 50.3
42........................................ 55.9 55.2 54.4 53.7 53.0 52.3 51.7 51.1 50.4 49.9
43........................................ 55.7 54.9 54.2 53.4 52.7 52.0 51.3 50.7 50.1 49.5
44........................................ 55.5 54.7 53.9 53.2 52.4 51.7 51.0 50.4 49.7 49.1
45........................................ 55.3 54.5 53.7 52.9 52.2 51.5 50.7 50.0 49.4 48.7
46........................................ 55.1 54.3 53.5 52.7 52.0 51.2 50.5 49.8 49.1 48.4
47........................................ 55.0 54.1 53.3 52.5 51.7 51.0 50.2 49.5 48.8 48.1
48........................................ 54.8 54.0 53.2 52.3 51.5 50.8 50.0 49.2 48.5 47.8
49........................................ 54.7 53.8 53.0 52.2 51.4 50.6 49.8 49.0 48.2 47.5
50........................................ 54.6 53.7 52.9 52.0 51.2 50.4 49.6 48.8 48.0 47.3
51........................................ 54.5 53.6 52.7 51.9 51.0 50.2 49.4 48.6 47.8 47.0
52........................................ 54.4 53.5 52.6 51.7 50.9 50.0 49.2 48.4 47.6 46.8
53........................................ 54.3 53.4 52.5 51.6 50.8 49.9 49.1 48.2 47.4 46.6
54........................................ 54.2 53.3 52.4 51.5 50.6 49.8 48.9 48.1 47.2 46.4
55........................................ 54.1 53.2 52.3 51.4 50.5 49.7 48.8 47.9 47.1 46.3
56........................................ 54.0 53.1 52.2 51.3 50.4 49.5 48.7 47.8 47.0 46.1
57........................................ 54.0 53.0 52.1 51.2 50.3 49.4 48.6 47.7 46.8 46.0
58........................................ 53.9 53.0 52.1 51.2 50.3 49.4 48.5 47.6 46.7 45.8
59........................................ 53.8 52.9 52.0 51.1 50.2 49.3 48.4 47.5 46.6 45.7
60........................................ 53.8 52.9 51.9 51.0 50.1 49.2 48.3 47.4 46.5 45.6
61........................................ 53.8 52.8 51.9 51.0 50.0 49.1 48.2 47.3 46.4 45.5
62........................................ 53.7 52.8 51.8 50.9 50.0 49.1 48.1 47.2 46.3 45.4
63........................................ 53.7 52.7 51.8 50.9 49.9 49.0 48.1 47.2 46.3 45.3
64........................................ 53.6 52.7 51.8 50.8 49.9 48.9 48.0 47.1 46.2 45.3
65........................................ 53.6 52.7 51.7 50.8 49.8 48.9 48.0 47.0 46.1 45.2
[[Page 252]]
66........................................ 53.6 52.6 51.7 50.7 49.8 48.9 47.9 47.0 46.1 45.1
67........................................ 53.6 52.6 51.7 50.7 49.8 48.8 47.9 46.9 46.0 45.1
68........................................ 53.5 52.6 51.6 50.7 49.7 48.8 47.8 46.9 46.0 45.0
69........................................ 53.5 52.6 51.6 50.6 49.7 48.7 47.8 46.9 45.9 45.0
70........................................ 53.5 52.5 51.6 50.6 49.7 48.7 47.8 46.8 45.9 44.9
71........................................ 53.5 52.5 51.6 50.6 49.6 48.7 47.7 46.8 45.9 44.9
72........................................ 53.5 52.5 51.5 50.6 49.6 48.7 47.7 46.8 45.8 44.9
73........................................ 53.4 52.5 51.5 50.6 49.6 48.6 47.7 46.7 45.8 44.8
74........................................ 53.4 52.5 51.5 50.5 49.6 48.6 47.7 46.7 45.8 44.8
75........................................ 53.4 52.5 51.5 50.5 49.6 48.6 47.7 46.7 45.7 44.8
76........................................ 53.4 52.4 51.5 50.5 49.6 48.6 47.6 46.7 45.7 44.8
77........................................ 53.4 52.4 51.5 50.5 49.5 48.6 47.6 46.7 45.7 44.8
78........................................ 53.4 52.4 51.5 50.5 49.5 48.6 47.6 46.6 45.7 44.7
79........................................ 53.4 52.4 51.5 50.5 49.5 48.6 47.6 46.6 45.7 44.7
80........................................ 53.4 52.4 51.4 50.5 49.5 48.5 47.6 46.6 45.7 44.7
81........................................ 53.4 52.4 51.4 50.5 49.5 48.5 47.6 46.6 45.7 44.7
82........................................ 53.4 52.4 51.4 50.5 49.5 48.5 47.6 46.6 45.6 44.7
83........................................ 53.4 52.4 51.4 50.5 49.5 48.5 47.6 46.6 45.6 44.7
84........................................ 53.4 52.4 51.4 50.5 49.5 48.5 47.6 46.6 45.6 44.7
85........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.7
86........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
87........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
88........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
89........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
90........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
91........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
92........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
93........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
94........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.6 45.6 44.6
95........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
96........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
97........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
98........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
99........................................ 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
100....................................... 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
101....................................... 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
102....................................... 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
103....................................... 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
104....................................... 53.3 52.4 51.4 50.4 49.5 48.5 47.5 46.5 45.6 44.6
105....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
106....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
107....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
108....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
109....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
110....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
111....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
112....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
113....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
[[Page 253]]
114....................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
115+...................................... 53.3 52.4 51.4 50.4 49.4 48.5 47.5 46.5 45.6 44.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 40 41 42 43 44 45 46 47 48 49
--------------------------------------------------------------------------------------------------------------------------------------------------------
40........................................ 50.2 49.8 49.3 48.9 48.5 48.1 47.7 47.4 47.1 46.8
41........................................ 49.8 49.3 48.8 48.3 47.9 47.5 47.1 46.7 46.4 46.1
42........................................ 49.3 48.8 48.3 47.8 47.3 46.9 46.5 46.1 45.8 45.4
43........................................ 48.9 48.3 47.8 47.3 46.8 46.3 45.9 45.5 45.1 44.8
44........................................ 48.5 47.9 47.3 46.8 46.3 45.8 45.4 44.9 44.5 44.2
45........................................ 48.1 47.5 46.9 46.3 45.8 45.3 44.8 44.4 44.0 43.6
46........................................ 47.7 47.1 46.5 45.9 45.4 44.8 44.3 43.9 43.4 43.0
47........................................ 47.4 46.7 46.1 45.5 44.9 44.4 43.9 43.4 42.9 42.4
48........................................ 47.1 46.4 45.8 45.1 44.5 44.0 43.4 42.9 42.4 41.9
49........................................ 46.8 46.1 45.4 44.8 44.2 43.6 43.0 42.4 41.9 41.4
50........................................ 46.5 45.8 45.1 44.4 43.8 43.2 42.6 42.0 41.5 40.9
51........................................ 46.3 45.5 44.8 44.1 43.5 42.8 42.2 41.6 41.0 40.5
52........................................ 46.0 45.3 44.6 43.8 43.2 42.5 41.8 41.2 40.6 40.1
53........................................ 45.8 45.1 44.3 43.6 42.9 42.2 41.5 40.9 40.3 39.7
54........................................ 45.6 44.8 44.1 43.3 42.6 41.9 41.2 40.5 39.9 39.3
55........................................ 45.5 44.7 43.9 43.1 42.4 41.6 40.9 40.2 39.6 38.9
56........................................ 45.3 44.5 43.7 42.9 42.1 41.4 40.7 40.0 39.3 38.6
57........................................ 45.1 44.3 43.5 42.7 41.9 41.2 40.4 39.7 39.0 38.3
58........................................ 45.0 44.2 43.3 42.5 41.7 40.9 40.2 39.4 38.7 38.0
59........................................ 44.9 44.0 43.2 42.4 41.5 40.7 40.0 39.2 38.5 37.8
60........................................ 44.7 43.9 43.0 42.2 41.4 40.6 39.8 39.0 38.2 37.5
61........................................ 44.6 43.8 42.9 42.1 41.2 40.4 39.6 38.8 38.0 37.3
62........................................ 44.5 43.7 42.8 41.9 41.1 40.3 39.4 38.6 37.8 37.1
63........................................ 44.5 43.6 42.7 41.8 41.0 40.1 39.3 38.5 37.7 36.9
64........................................ 44.4 43.5 42.6 41.7 40.8 40.0 39.2 38.3 37.5 36.7
65........................................ 44.3 43.4 42.5 41.6 40.7 39.9 39.0 38.2 37.4 36.6
66........................................ 44.2 43.3 42.4 41.5 40.6 39.8 38.9 38.1 37.2 36.4
67........................................ 44.2 43.3 42.3 41.4 40.6 39.7 38.8 38.0 37.1 36.3
68........................................ 44.1 43.2 42.3 41.4 40.5 39.6 38.7 37.9 37.0 36.2
69........................................ 44.1 43.1 42.2 41.3 40.4 39.5 38.6 37.8 36.9 36.0
70........................................ 44.0 43.1 42.2 41.3 40.3 39.4 38.6 37.7 36.8 35.9
71........................................ 44.0 43.0 42.1 41.2 40.3 39.4 38.5 37.6 36.7 35.9
72........................................ 43.9 43.0 42.1 41.1 40.2 39.3 38.4 37.5 36.6 35.8
73........................................ 43.9 43.0 42.0 41.1 40.2 39.3 38.4 37.5 36.6 35.7
74........................................ 43.9 42.9 42.0 41.1 40.1 39.2 38.3 37.4 36.5 35.6
75........................................ 43.8 42.9 42.0 41.0 40.1 39.2 38.3 37.4 36.5 35.6
76........................................ 43.8 42.9 41.9 41.0 40.1 39.1 38.2 37.3 36.4 35.5
77........................................ 43.8 42.9 41.9 41.0 40.0 39.1 38.2 37.3 36.4 35.5
78........................................ 43.8 42.8 41.9 40.9 40.0 39.1 38.2 37.2 36.3 35.4
79........................................ 43.8 42.8 41.9 40.9 40.0 39.1 38.1 37.2 36.3 35.4
80........................................ 43.7 42.8 41.8 40.9 40.0 39.0 38.1 37.2 36.3 35.4
81........................................ 43.7 42.8 41.8 40.9 39.9 39.0 38.1 37.2 36.2 35.3
82........................................ 43.7 42.8 41.8 40.9 39.9 39.0 38.1 37.1 36.2 35.3
83........................................ 43.7 42.8 41.8 40.9 39.9 39.0 38.0 37.1 36.2 35.3
84........................................ 43.7 42.7 41.8 40.8 39.9 39.0 38.0 37.1 36.2 35.3
[[Page 254]]
85........................................ 43.7 42.7 41.8 40.8 39.9 38.9 38.0 37.1 36.2 35.2
86........................................ 43.7 42.7 41.8 40.8 39.9 38.9 38.0 37.1 36.1 35.2
87........................................ 43.7 42.7 41.8 40.8 39.9 38.9 38.0 37.0 36.1 35.2
88........................................ 43.7 42.7 41.8 40.8 39.9 38.9 38.0 37.0 36.1 35.2
89........................................ 43.7 42.7 41.7 40.8 39.8 38.9 38.0 37.0 36.1 35.2
90........................................ 43.7 42.7 41.7 40.8 39.8 38.9 38.0 37.0 36.1 35.2
91........................................ 43.7 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.2
92........................................ 43.7 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
93........................................ 43.7 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
94........................................ 43.7 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
95........................................ 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
96........................................ 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
97........................................ 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.1 35.1
98........................................ 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
99........................................ 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
100....................................... 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
101....................................... 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
102....................................... 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
103....................................... 43.6 42.7 41.7 40.8 39.8 38.9 37.9 37.0 36.0 35.1
104....................................... 43.6 42.7 41.7 40.8 39.8 38.8 37.9 37.0 36.0 35.1
105....................................... 43.6 42.7 41.7 40.8 39.8 38.8 37.9 37.0 36.0 35.1
106....................................... 43.6 42.7 41.7 40.8 39.8 38.8 37.9 37.0 36.0 35.1
107....................................... 43.6 42.7 41.7 40.8 39.8 38.8 37.9 37.0 36.0 35.1
108....................................... 43.6 42.7 41.7 40.8 39.8 38.8 37.9 37.0 36.0 35.1
109....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
110....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
111....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
112....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
113....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
114....................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
115+...................................... 43.6 42.7 41.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 50 51 52 53 54 55 56 57 58 59
--------------------------------------------------------------------------------------------------------------------------------------------------------
50........................................ 40.4 40.0 39.5 39.1 38.7 38.3 38.0 37.6 37.3 37.1
51........................................ 40.0 39.5 39.0 38.5 38.1 37.7 37.4 37.0 36.7 36.4
52........................................ 39.5 39.0 38.5 38.0 37.6 37.2 36.8 36.4 36.0 35.7
53........................................ 39.1 38.5 38.0 37.5 37.1 36.6 36.2 35.8 35.4 35.1
54........................................ 38.7 38.1 37.6 37.1 36.6 36.1 35.7 35.2 34.8 34.5
55........................................ 38.3 37.7 37.2 36.6 36.1 35.6 35.1 34.7 34.3 33.9
56........................................ 38.0 37.4 36.8 36.2 35.7 35.1 34.7 34.2 33.7 33.3
57........................................ 37.6 37.0 36.4 35.8 35.2 34.7 34.2 33.7 33.2 32.8
58........................................ 37.3 36.7 36.0 35.4 34.8 34.3 33.7 33.2 32.8 32.3
59........................................ 37.1 36.4 35.7 35.1 34.5 33.9 33.3 32.8 32.3 31.8
60........................................ 36.8 36.1 35.4 34.8 34.1 33.5 32.9 32.4 31.9 31.3
61........................................ 36.6 35.8 35.1 34.5 33.8 33.2 32.6 32.0 31.4 30.9
62........................................ 36.3 35.6 34.9 34.2 33.5 32.9 32.2 31.6 31.1 30.5
63........................................ 36.1 35.4 34.6 33.9 33.2 32.6 31.9 31.3 30.7 30.1
[[Page 255]]
64........................................ 35.9 35.2 34.4 33.7 33.0 32.3 31.6 31.0 30.4 29.8
65........................................ 35.8 35.0 34.2 33.5 32.7 32.0 31.4 30.7 30.0 29.4
66........................................ 35.6 34.8 34.0 33.3 32.5 31.8 31.1 30.4 29.8 29.1
67........................................ 35.5 34.7 33.9 33.1 32.3 31.6 30.9 30.2 29.5 28.8
68........................................ 35.3 34.5 33.7 32.9 32.1 31.4 30.7 29.9 29.2 28.6
69........................................ 35.2 34.4 33.6 32.8 32.0 31.2 30.5 29.7 29.0 28.3
70........................................ 35.1 34.3 33.4 32.6 31.8 31.1 30.3 29.5 28.8 28.1
71........................................ 35.0 34.2 33.3 32.5 31.7 30.9 30.1 29.4 28.6 27.9
72........................................ 34.9 34.1 33.2 32.4 31.6 30.8 30.0 29.2 28.4 27.7
73........................................ 34.8 34.0 33.1 32.3 31.5 30.6 29.8 29.1 28.3 27.5
74........................................ 34.8 33.9 33.0 32.2 31.4 30.5 29.7 28.9 28.1 27.4
75........................................ 34.7 33.8 33.0 32.1 31.3 30.4 29.6 28.8 28.0 27.2
76........................................ 34.6 33.8 32.9 32.0 31.2 30.3 29.5 28.7 27.9 27.1
77........................................ 34.6 33.7 32.8 32.0 31.1 30.3 29.4 28.6 27.8 27.0
78........................................ 34.5 33.6 32.8 31.9 31.0 30.2 29.3 28.5 27.7 26.9
79........................................ 34.5 33.6 32.7 31.8 31.0 30.1 29.3 28.4 27.6 26.8
80........................................ 34.5 33.6 32.7 31.8 30.9 30.1 29.2 28.4 27.5 26.7
81........................................ 34.4 33.5 32.6 31.8 30.9 30.0 29.2 28.3 27.5 26.6
82........................................ 34.4 33.5 32.6 31.7 30.8 30.0 29.1 28.3 27.4 26.6
83........................................ 34.4 33.5 32.6 31.7 30.8 29.9 29.1 28.2 27.4 26.5
84........................................ 34.3 33.4 32.5 31.7 30.8 29.9 29.0 28.2 27.3 26.5
85........................................ 34.3 33.4 32.5 31.6 30.7 29.9 29.0 28.1 27.3 26.4
86........................................ 34.3 33.4 32.5 31.6 30.7 29.8 29.0 28.1 27.2 26.4
87........................................ 34.3 33.4 32.5 31.6 30.7 29.8 28.9 28.1 27.2 26.4
88........................................ 34.3 33.4 32.5 31.6 30.7 29.8 28.9 28.0 27.2 26.3
89........................................ 34.3 33.3 32.4 31.5 30.7 29.8 28.9 28.0 27.2 26.3
90........................................ 34.2 33.3 32.4 31.5 30.6 29.8 28.9 28.0 27.1 26.3
91........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.9 28.0 27.1 26.3
92........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 28.0 27.1 26.2
93........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 28.0 27.1 26.2
94........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.1 26.2
95........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.1 26.2
96........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2
97........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2
98........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2
99........................................ 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2
100....................................... 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.1
101....................................... 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.1
102....................................... 34.2 33.3 32.4 31.4 30.5 29.7 28.8 27.9 27.0 26.1
103....................................... 34.2 33.3 32.4 31.4 30.5 29.7 28.8 27.9 27.0 26.1
104....................................... 34.2 33.3 32.4 31.4 30.5 29.6 28.8 27.9 27.0 26.1
105....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1
106....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1
107....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1
108....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1
109....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
110....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
111....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
112....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
113....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
[[Page 256]]
114....................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
115+...................................... 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 60 61 62 63 64 65 66 67 68 69
--------------------------------------------------------------------------------------------------------------------------------------------------------
60........................................ 30.9 30.4 30.0 29.6 29.2 28.8 28.5 28.2 27.9 27.6
61........................................ 30.4 29.9 29.5 29.0 28.6 28.3 27.9 27.6 27.3 27.0
62........................................ 30.0 29.5 29.0 28.5 28.1 27.7 27.3 27.0 26.7 26.4
63........................................ 29.6 29.0 28.5 28.1 27.6 27.2 26.8 26.4 26.1 25.7
64........................................ 29.2 28.6 28.1 27.6 27.1 26.7 26.3 25.9 25.5 25.2
65........................................ 28.8 28.3 27.7 27.2 26.7 26.2 25.8 25.4 25.0 24.6
66........................................ 28.5 27.9 27.3 26.8 26.3 25.8 25.3 24.9 24.5 24.1
67........................................ 28.2 27.6 27.0 26.4 25.9 25.4 24.9 24.4 24.0 23.6
68........................................ 27.9 27.3 26.7 26.1 25.5 25.0 24.5 24.0 23.5 23.1
69........................................ 27.6 27.0 26.4 25.7 25.2 24.6 24.1 23.6 23.1 22.6
70........................................ 27.4 26.7 26.1 25.4 24.8 24.3 23.7 23.2 22.7 22.2
71........................................ 27.2 26.5 25.8 25.2 24.5 23.9 23.4 22.8 22.3 21.8
72........................................ 27.0 26.3 25.6 24.9 24.3 23.7 23.1 22.5 22.0 21.4
73........................................ 26.8 26.1 25.4 24.7 24.0 23.4 22.8 22.2 21.6 21.1
74........................................ 26.6 25.9 25.2 24.5 23.8 23.1 22.5 21.9 21.3 20.8
75........................................ 26.5 25.7 25.0 24.3 23.6 22.9 22.3 21.6 21.0 20.5
76........................................ 26.3 25.6 24.8 24.1 23.4 22.7 22.0 21.4 20.8 20.2
77........................................ 26.2 25.4 24.7 23.9 23.2 22.5 21.8 21.2 20.6 19.9
78........................................ 26.1 25.3 24.6 23.8 23.1 22.4 21.7 21.0 20.3 19.7
79........................................ 26.0 25.2 24.4 23.7 22.9 22.2 21.5 20.8 20.1 19.5
80........................................ 25.9 25.1 24.3 23.6 22.8 22.1 21.3 20.6 20.0 19.3
81........................................ 25.8 25.0 24.2 23.4 22.7 21.9 21.2 20.5 19.8 19.1
82........................................ 25.8 24.9 24.1 23.4 22.6 21.8 21.1 20.4 19.7 19.0
83........................................ 25.7 24.9 24.1 23.3 22.5 21.7 21.0 20.2 19.5 18.8
84........................................ 25.6 24.8 24.0 23.2 22.4 21.6 20.9 20.1 19.4 18.7
85........................................ 25.6 24.8 23.9 23.1 22.3 21.6 20.8 20.1 19.3 18.6
86........................................ 25.5 24.7 23.9 23.1 22.3 21.5 20.7 20.0 19.2 18.5
87........................................ 25.5 24.7 23.8 23.0 22.2 21.4 20.7 19.9 19.2 18.4
88........................................ 25.5 24.6 23.8 23.0 22.2 21.4 20.6 19.8 19.1 18.3
89........................................ 25.4 24.6 23.8 22.9 22.1 21.3 20.5 19.8 19.0 18.3
90........................................ 25.4 24.6 23.7 22.9 22.1 21.3 20.5 19.7 19.0 18.2
91........................................ 25.4 24.5 23.7 22.9 22.1 21.3 20.5 19.7 18.9 18.2
92........................................ 25.4 24.5 23.7 22.9 22.0 21.2 20.4 19.6 18.9 18.1
93........................................ 25.4 24.5 23.7 22.8 22.0 21.2 20.4 19.6 18.8 18.1
94........................................ 25.3 24.5 23.6 22.8 22.0 21.2 20.4 19.6 18.8 18.0
95........................................ 25.3 24.5 23.6 22.8 22.0 21.1 20.3 19.6 18.8 18.0
96........................................ 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.8 18.0
97........................................ 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.7 18.0
98........................................ 25.3 24.4 23.6 22.8 21.9 21.1 20.3 19.5 18.7 17.9
99........................................ 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9
100....................................... 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9
101....................................... 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.7 17.9
102....................................... 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.6 17.9
[[Page 257]]
103....................................... 25.3 24.4 23.6 22.7 21.9 21.0 20.2 19.4 18.6 17.9
104....................................... 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8
105....................................... 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8
106....................................... 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8
107....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
108....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
109....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
110....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
111....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
112....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
113....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
114....................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
115+...................................... 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 70 71 72 73 74 75 76 77 78 79
--------------------------------------------------------------------------------------------------------------------------------------------------------
70........................................ 21.8 21.3 20.9 20.6 20.2 19.9 19.6 19.4 19.1 18.9
71........................................ 21.3 20.9 20.5 20.1 19.7 19.4 19.1 18.8 18.5 18.3
72........................................ 20.9 20.5 20.0 19.6 19.3 18.9 18.6 18.3 18.0 17.7
73........................................ 20.6 20.1 19.6 19.2 18.8 18.4 18.1 17.8 17.5 17.2
74........................................ 20.2 19.7 19.3 18.8 18.4 18.0 17.6 17.3 17.0 16.7
75........................................ 19.9 19.4 18.9 18.4 18.0 17.6 17.2 16.8 16.5 16.2
76........................................ 19.6 19.1 18.6 18.1 17.6 17.2 16.8 16.4 16.0 15.7
77........................................ 19.4 18.8 18.3 17.8 17.3 16.8 16.4 16.0 15.6 15.3
78........................................ 19.1 18.5 18.0 17.5 17.0 16.5 16.0 15.6 15.2 14.9
79........................................ 18.9 18.3 17.7 17.2 16.7 16.2 15.7 15.3 14.9 14.5
80........................................ 18.7 18.1 17.5 16.9 16.4 15.9 15.4 15.0 14.5 14.1
81........................................ 18.5 17.9 17.3 16.7 16.2 15.6 15.1 14.7 14.2 13.8
82........................................ 18.3 17.7 17.1 16.5 15.9 15.4 14.9 14.4 13.9 13.5
83........................................ 18.2 17.5 16.9 16.3 15.7 15.2 14.7 14.2 13.7 13.2
84........................................ 18.0 17.4 16.7 16.1 15.5 15.0 14.4 13.9 13.4 13.0
85........................................ 17.9 17.3 16.6 16.0 15.4 14.8 14.3 13.7 13.2 12.8
86........................................ 17.8 17.1 16.5 15.8 15.2 14.6 14.1 13.5 13.0 12.5
87........................................ 17.7 17.0 16.4 15.7 15.1 14.5 13.9 13.4 12.9 12.4
88........................................ 17.6 16.9 16.3 15.6 15.0 14.4 13.8 13.2 12.7 12.2
89........................................ 17.6 16.9 16.2 15.5 14.9 14.3 13.7 13.1 12.6 12.0
90........................................ 17.5 16.8 16.1 15.4 14.8 14.2 13.6 13.0 12.4 11.9
91........................................ 17.4 16.7 16.0 15.4 14.7 14.1 13.5 12.9 12.3 11.8
92........................................ 17.4 16.7 16.0 15.3 14.6 14.0 13.4 12.8 12.2 11.7
93........................................ 17.3 16.6 15.9 15.2 14.6 13.9 13.3 12.7 12.1 11.6
94........................................ 17.3 16.6 15.9 15.2 14.5 13.9 13.2 12.6 12.0 11.5
95........................................ 17.3 16.5 15.8 15.1 14.5 13.8 13.2 12.6 12.0 11.4
96........................................ 17.2 16.5 15.8 15.1 14.4 13.8 13.1 12.5 11.9 11.3
97........................................ 17.2 16.5 15.8 15.1 14.4 13.7 13.1 12.5 11.9 11.3
98........................................ 17.2 16.4 15.7 15.0 14.3 13.7 13.0 12.4 11.8 11.2
99........................................ 17.2 16.4 15.7 15.0 14.3 13.6 13.0 12.4 11.8 11.2
100....................................... 17.1 16.4 15.7 15.0 14.3 13.6 12.9 12.3 11.7 11.1
101....................................... 17.1 16.4 15.6 14.9 14.2 13.6 12.9 12.3 11.7 11.1
102....................................... 17.1 16.4 15.6 14.9 14.2 13.5 12.9 12.2 11.6 11.0
103....................................... 17.1 16.3 15.6 14.9 14.2 13.5 12.9 12.2 11.6 11.0
[[Page 258]]
104....................................... 17.1 16.3 15.6 14.9 14.2 13.5 12.8 12.2 11.6 11.0
105....................................... 17.1 16.3 15.6 14.9 14.2 13.5 12.8 12.2 11.5 10.9
106....................................... 17.1 16.3 15.6 14.8 14.1 13.5 12.8 12.2 11.5 10.9
107....................................... 17.0 16.3 15.6 14.8 14.1 13.4 12.8 12.1 11.5 10.9
108....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.8 12.1 11.5 10.9
109....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.8 12.1 11.5 10.9
110....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.5 10.9
111....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.5 10.8
112....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.5 10.8
113....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.4 10.8
114....................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.4 10.8
115+...................................... 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 11.4 10.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 80 81 82 83 84 85 86 87 88 89
--------------------------------------------------------------------------------------------------------------------------------------------------------
80........................................ 13.8 13.4 13.1 12.8 12.6 12.3 12.1 11.9 11.7 11.5
81........................................ 13.4 13.1 12.7 12.4 12.2 11.9 11.7 11.4 11.3 11.1
82........................................ 13.1 12.7 12.4 12.1 11.8 11.5 11.3 11.0 10.8 10.6
83........................................ 12.8 12.4 12.1 11.7 11.4 11.1 10.9 10.6 10.4 10.2
84........................................ 12.6 12.2 11.8 11.4 11.1 10.8 10.5 10.3 10.1 9.9
85........................................ 12.3 11.9 11.5 11.1 10.8 10.5 10.2 9.9 9.7 9.5
86........................................ 12.1 11.7 11.3 10.9 10.5 10.2 9.9 9.6 9.4 9.2
87........................................ 11.9 11.4 11.0 10.6 10.3 9.9 9.6 9.4 9.1 8.9
88........................................ 11.7 11.3 10.8 10.4 10.1 9.7 9.4 9.1 8.8 8.6
89........................................ 11.5 11.1 10.6 10.2 9.9 9.5 9.2 8.9 8.6 8.3
90........................................ 11.4 10.9 10.5 10.1 9.7 9.3 9.0 8.6 8.3 8.1
91........................................ 11.3 10.8 10.3 9.9 9.5 9.1 8.8 8.4 8.1 7.9
92........................................ 11.2 10.7 10.2 9.8 9.3 9.0 8.6 8.3 8.0 7.7
93........................................ 11.1 10.6 10.1 9.6 9.2 8.8 8.5 8.1 7.8 7.5
94........................................ 11.0 10.5 10.0 9.5 9.1 8.7 8.3 8.0 7.6 7.3
95........................................ 10.9 10.4 9.9 9.4 9.0 8.6 8.2 7.8 7.5 7.2
96........................................ 10.8 10.3 9.8 9.3 8.9 8.5 8.1 7.7 7.4 7.1
97........................................ 10.7 10.2 9.7 9.2 8.8 8.4 8.0 7.6 7.3 6.9
98........................................ 10.7 10.1 9.6 9.2 8.7 8.3 7.9 7.5 7.1 6.8
99........................................ 10.6 10.1 9.6 9.1 8.6 8.2 7.8 7.4 7.0 6.7
100....................................... 10.6 10.0 9.5 9.0 8.5 8.1 7.7 7.3 6.9 6.6
101....................................... 10.5 10.0 9.4 9.0 8.5 8.0 7.6 7.2 6.9 6.5
102....................................... 10.5 9.9 9.4 8.9 8.4 8.0 7.5 7.1 6.8 6.4
103....................................... 10.4 9.9 9.4 8.8 8.4 7.9 7.5 7.1 6.7 6.3
104....................................... 10.4 9.8 9.3 8.8 8.3 7.9 7.4 7.0 6.6 6.3
105....................................... 10.4 9.8 9.3 8.8 8.3 7.8 7.4 7.0 6.6 6.2
106....................................... 10.3 9.8 9.2 8.7 8.2 7.8 7.3 6.9 6.5 6.2
107....................................... 10.3 9.8 9.2 8.7 8.2 7.7 7.3 6.9 6.5 6.1
108....................................... 10.3 9.7 9.2 8.7 8.2 7.7 7.3 6.8 6.4 6.1
109....................................... 10.3 9.7 9.2 8.7 8.2 7.7 7.2 6.8 6.4 6.0
110....................................... 10.3 9.7 9.2 8.6 8.1 7.7 7.2 6.8 6.4 6.0
111....................................... 10.3 9.7 9.1 8.6 8.1 7.6 7.2 6.8 6.3 6.0
112....................................... 10.2 9.7 9.1 8.6 8.1 7.6 7.2 6.7 6.3 5.9
[[Page 259]]
113....................................... 10.2 9.7 9.1 8.6 8.1 7.6 7.2 6.7 6.3 5.9
114....................................... 10.2 9.7 9.1 8.6 8.1 7.6 7.1 6.7 6.3 5.9
115+...................................... 10.2 9.7 9.1 8.6 8.1 7.6 7.1 6.7 6.3 5.9
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AGES
90
91
92
93
Ages 90 91 92 93 94 95 96 97 98 99 94
95
96
97
98
99
---------------------------------------------------------------------------------------------------------------------------------------------------- ------
90.................................... 7.8 7.6 7.4 7.2 7.1 6.9 6.8 6.6 6.5 6.4
91.................................... 7.6 7.4 7.2 7.0 6.8 6.7 6.5 6.4 6.3 6.1
92.................................... 7.4 7.2 7.0 6.8 6.6 6.4 6.3 6.1 6.0 5.9
93.................................... 7.2 7.0 6.8 6.6 6.4 6.2 6.1 5.9 5.8 5.6
94.................................... 7.1 6.8 6.6 6.4 6.2 6.0 5.9 5.7 5.6 5.4
95.................................... 6.9 6.7 6.4 6.2 6.0 5.8 5.7 5.5 5.4 5.2
96.................................... 6.8 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.2 5.0
97.................................... 6.6 6.4 6.1 5.9 5.7 5.5 5.3 5.2 5.0 4.9
98.................................... 6.5 6.3 6.0 5.8 5.6 5.4 5.2 5.0 4.8 4.7
99.................................... 6.4 6.1 5.9 5.6 5.4 5.2 5.0 4.9 4.7 4.5
100................................... 6.3 6.0 5.8 5.5 5.3 5.1 4.9 4.7 4.5 4.4
101................................... 6.2 5.9 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2
102................................... 6.1 5.8 5.5 5.3 5.1 4.8 4.6 4.4 4.3 4.1
103................................... 6.0 5.7 5.4 5.2 5.0 4.7 4.5 4.3 4.1 4.0
104................................... 5.9 5.6 5.4 5.1 4.9 4.6 4.4 4.2 4.0 3.8
105................................... 5.9 5.6 5.3 5.0 4.8 4.5 4.3 4.1 3.9 3.7
106................................... 5.8 5.5 5.2 4.9 4.7 4.5 4.2 4.0 3.8 3.6
107................................... 5.8 5.4 5.1 4.9 4.6 4.4 4.2 3.9 3.7 3.5
108................................... 5.7 5.4 5.1 4.8 4.6 4.3 4.1 3.9 3.7 3.5
109................................... 5.7 5.3 5.0 4.8 4.5 4.3 4.0 3.8 3.6 3.4
110................................... 5.6 5.3 5.0 4.7 4.5 4.2 4.0 3.8 3.5 3.3
111................................... 5.6 5.3 5.0 4.7 4.4 4.2 3.9 3.7 3.5 3.3
112................................... 5.6 5.3 4.9 4.7 4.4 4.1 3.9 3.7 3.5 3.2
113................................... 5.6 5.2 4.9 4.6 4.4 4.1 3.9 3.6 3.4 3.2
114................................... 5.6 5.2 4.9 4.6 4.3 4.1 3.9 3.6 3.4 3.2
115+.................................. 5.5 5.2 4.9 4.6 4.3 4.1 3.8 3.6 3.4 3.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ages 100 101 102 103 104 105 106 107 108 109
--------------------------------------------------------------------------------------------------------------------------------------------------------
100....................................... 4.2 4.1 3.9 3.8 3.7 3.5 3.4 3.3 3.3 3.2
101....................................... 4.1 3.9 3.7 3.6 3.5 3.4 3.2 3.1 3.1 3.0
102....................................... 3.9 3.7 3.6 3.4 3.3 3.2 3.1 3.0 2.9 2.8
103....................................... 3.8 3.6 3.4 3.3 3.2 3.0 2.9 2.8 2.7 2.6
104....................................... 3.7 3.5 3.3 3.2 3.0 2.9 2.7 2.6 2.5 2.4
105....................................... 3.5 3.4 3.2 3.0 2.9 2.7 2.6 2.5 2.4 2.3
106....................................... 3.4 3.2 3.1 2.9 2.7 2.6 2.4 2.3 2.2 2.1
107....................................... 3.3 3.1 3.0 2.8 2.6 2.5 2.3 2.2 2.1 2.0
108....................................... 3.3 3.1 2.9 2.7 2.5 2.4 2.2 2.1 1.9 1.8
109....................................... 3.2 3.0 2.8 2.6 2.4 2.3 2.1 2.0 1.8 1.7
110....................................... 3.1 2.9 2.7 2.5 2.3 2.2 2.0 1.9 1.7 1.6
111....................................... 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.8 1.6 1.5
112....................................... 3.0 2.8 2.6 2.4 2.2 2.0 1.9 1.7 1.5 1.4
113....................................... 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.5 1.3
[[Page 260]]
114....................................... 3.0 2.7 2.5 2.3 2.1 1.9 1.8 1.6 1.4 1.3
115+...................................... 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.4 1.2
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[[Page 261]]
----------------------------------------------------------------------------------------------------------------
Ages 110 111 112 113 114 115+
----------------------------------------------------------------------------------------------------------------
110..................................... 1.5 1.4 1.3 1.2 1.1 1.1
111..................................... 1.4 1.2 1.1 1.1 1.0 1.0
112..................................... 1.3 1.1 1.0 1.0 1.0 1.0
113..................................... 1.2 1.1 1.0 1.0 1.0 1.0
114..................................... 1.1 1.0 1.0 1.0 1.0 1.0
115+.................................... 1.1 1.0 1.0 1.0 1.0 1.0
----------------------------------------------------------------------------------------------------------------
Q-4. May the tables under this section be changed?
A-4. The Single Life Table, Uniform Lifetime Table and Joint and
Last Survivor Table provided in A-1 through A-3 of this section may be
changed by the Commissioner in revenue rulings, notices, and other
guidance published in the Internal Revenue Bulletin. See Sec.
601.601(d)(2)(ii)(b) of this chapter.
[T.D. 8987, 67 FR 18994, Apr. 17, 2002; 67 FR 36676, May 24, 2002]
Sec. 1.401(a)(17)-1 Limitation on annual compensation.
(a) Compensation limit requirement--(1) In general. In order to be a
qualified plan, a plan must satisfy section 401(a)(17). Section
401(a)(17) provides an annual compensation limit for each employee under
a qualified plan. This limit applies to a qualified plan in two ways.
First, a plan may not base allocations, in the case of a defined
contribution plan, or benefit accruals, in the case of a defined benefit
plan, on compensation in excess of the annual compensation limit.
Second, the amount of an employee's annual compensation that may be
taken into account in applying certain specified nondiscrimination rules
under the Internal Revenue Code is subject to the annual compensation
limit. These two limitations are set forth in paragraphs (b) and (c) of
this section, respectively. Paragraph (d) of this section provides the
effective dates of section 401(a)(17), the amendments made by section
13212 of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93), and
this section. Paragraph (e) of this section provides rules for
determining post-effective-date accrued benefits under the fresh-start
rules.
(2) Annual compensation limit for plan years beginning before
January 1, 1994. For purposes of this section, for plan years beginning
prior to the OBRA '93 effective date, annual compensation limit means
$200,000, adjusted as provided by the Commissioner. The amount of the
annual compensation limit is adjusted at the same time and in the same
manner as under section 415(d). The base period for the annual
adjustment is the calendar quarter ending December 31, 1988, and the
first adjustment is effective on January 1, 1990. Any increase in the
annual compensation limit is effective as of January 1 of a calendar
year and applies to any plan year beginning in that calendar year. In
any plan year beginning prior to the OBRA '93 effective date, if
compensation for any plan year beginning prior to the statutory
effective date is used for determining allocations or benefit accruals,
or when applying any nondiscrimination rule, then the annual
compensation limit for the first plan year beginning on or after the
statutory effective date (generally $200,000) must be applied to
compensation for that prior plan year.
(3) Annual compensation limit for plan years beginning on or after
January 1, 1994--(i) In general. For purposes of this 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.
[[Page 262]]
(ii) Cost of living adjustment. The $150,000 amount is adjusted for
changes in the cost of living by the Commissioner at the same time and
in the same manner as under section 415(d). The base period for the
annual adjustment is the calendar quarter ending December 31, 1993.
(iii) Rounding of adjusted compensation limit. After the $150,000,
adjusted in accordance with paragraph (a)(3)(ii) of this section,
exceeds the annual compensation limit for the prior calendar year by
$10,000 or more, the annual compensation limit will be increased by the
amount of such excess, rounded down to the next lowest multiple of
$10,000.
(4) Additional guidance. The Commissioner may, in revenue rulings
and procedures, notices, and other guidance, published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter),
provide any additional guidance that may be necessary or appropriate
concerning the annual limits on compensation under section 401(a)(17).
(b) Plan limit on compensation--(1) General rule. A plan does not
satisfy section 401(a)(17) unless it provides that the compensation
taken into account for any employee in determining plan allocations or
benefit accruals for any plan year is limited to the annual compensation
limit. For purposes of this rule, allocations and benefit accruals under
a plan include all benefits provided under the plan, including ancillary
benefits.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (b), the limit in effect for the current plan year applies
only to the compensation for that year that is taken into account in
determining plan allocations or benefit accruals for the year. The
compensation for any prior plan year taken into account in determining
an employee's allocations or benefit accruals for the current plan year
is subject to the applicable annual compensation limit in effect for
that prior year. Thus, increases in the annual compensation limit apply
only to compensation taken into account for the plan year in which the
increase is effective. In addition, if compensation for any plan year
beginning prior to the OBRA '93 effective date is used for determining
allocations or benefit accruals in a plan year beginning on or after the
OBRA '93 effective date, then the annual compensation limit for that
prior year is the annual compensation limit in effect for the first plan
year beginning on or after the OBRA '93 effective date (generally
$150,000).
(3) Application of limit to a plan year--(i) In general. For
purposes of applying this paragraph (b), the annual compensation limit
is applied to the compensation for the plan year on which allocations or
benefit accruals are based.
(ii) Compensation for the plan year. If a plan determines
compensation used in determining allocations or benefit accruals for a
plan year based on compensation for the plan year, then the annual
compensation limit that applies to the compensation for the plan year is
the limit in effect for the calendar year in which the plan year begins.
Alternatively, if a plan determines compensation used in determining
allocations or benefit accruals for the plan year on the basis of
compensation for a 12-consecutive-month period, or periods, ending no
later than the last day of the plan year, then the annual compensation
limit applies to compensation for each of those periods based on the
annual compensation limit in effect for the respective calendar year in
which each 12-month period begins.
(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
[[Page 263]]
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)-6, matching contributions (within the meaning of Sec.
1.401(m)-5, or employee contributions (within the meaning of Sec.
1.401(m)-5 that is contributed for each pay period during a plan year is
determined separately using compensation for that pay period.
(4) Limits on multiple employer and multiemployer plans. For
purposes of this paragraph (b), in the case of a plan described in
section 413(c) or 414(f) (a plan maintained by more than one employer),
the annual compensation limit applies separately with respect to the
compensation of an employee from each employer maintaining the plan
instead of applying to the employee's total compensation from all
employers maintaining the plan.
(5) Family aggregation. [Reserved]
(6) Examples. The following examples illustrate the rules in this
paragraph (b).
Example 1. Plan X is a defined benefit plan with a calendar year
plan year and bases benefits on the average of an employee's high 3
consecutive years' compensation. The OBRA '93 effective date for Plan X
is January 1, 1994. Employee A's high 3 consecutive years' compensation
prior to the application of the annual compensation limits is $160,000
(1994), $155,000 (1993), and $135,000 (1992). To satisfy this paragraph
(b), Plan X cannot base plan benefits for Employee A in 1994 on
compensation in excess of $145,000 (the average of $150,000 (A's 1994
compensation capped by the annual compensation limit), $150,000 (A's
1993 compensation capped by the $150,000 annual compensation limit
applicable to all years before 1994), and $135,000 (A's 1992
compensation capped by the $150,000 annual compensation limit applicable
to all years before 1994)). For purposes of determining the 1994
accrual, each year (1994, 1993, and 1992), not the average of the 3
years, is subject to the 1994 annual compensation limit of $150,000.
Example 2. Assume the same facts as Example 1, except that Employee
A's high 3 consecutive years' compensation prior to the application of
the limits is $185,000 (1997), $175,000 (1996), and $165,000 (1995).
Assume that the annual compensation limit is first adjusted to $160,000
for plan years beginning on or after January 1, 1997. Plan X cannot base
plan benefits for Employee A in 1997 on compensation in excess of
$153,333 (the average of $160,000 (A's 1997 compensation capped by the
1997 limit), $150,000 (A's 1996 compensation capped by the 1996 limit),
and $150,000 (A's 1995 compensation capped by the 1995 limit)).
Example 3. Plan Y is a defined benefit plan that bases benefits on
an employee's high consecutive 36 months of compensation ending within
the plan year. Employee B's high 36 months are the period September 1995
to August 1998, in which Employee B earned $50,000 in each month. Assume
that the annual compensation limit is first adjusted to $160,000 for
plan years beginning on or after January 1, 1997. The annual
compensation 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
[[Page 264]]
Plan Z is the calendar year. The OBRA '93 effective date for Plan Z is
January 1, 1994. In order to satisfy section 401(a)(17), as amended by
OBRA '93, the plan provides that, beginning with the 1994 plan year, the
plan year compensation used in determining the allocation of employer
contributions for each employee may not exceed the annual limit in
effect for the plan year under OBRA '93. Plan Z defines compensation for
self-employed individuals (employees within the meaning of section
401(c)(1)) as the self-employed individual's net profit from self-
employment attributable to Employer P minus the amount of the self-
employed individual's deduction under section 164(f) for one-half of
self-employment taxes. Plan Z defines compensation for all other
employees as wages within the meaning of section 3401(a). Employee C and
Employee D are partners of Employer P and thus are self-employed
individuals. Neither Employee C nor Employee D owns an interest in any
other business or is a common-law employee in any business. For the 1994
calendar year, Employee C has net profit from self-employment of
$80,000, and Employee D has net profit from self-employment of $175,000.
The deduction for Employee C under section 164(f) for one-half of self-
employment taxes is $4,828. The deduction for Employee D under section
164(f) for one-half of self-employment taxes is $6,101
(b) The plan year compensation under the plan formula for Employee C
is $75,172 ($80,000 minus $4,828). The allocation of employer
contributions under the plan allocation formula for 1994 for Employee C
is $9,805 ($75,172 (Employee C's plan year compensation for 1994)
multiplied by 13.0435%). The plan year compensation under the plan
formula before application of the annual limit under section 401(a)(17)
for Employee D is $168,899 ($175,000 minus $6101). After application of
the annual limit, the plan year compensation for the 1994 plan year for
Employee D is $150,000 (the annual limit for 1994). Therefore, the
allocation of employer contributions under the plan allocation formula
for 1994 for Employee D is $19,565 ($150,000 (Employee D's plan year
compensation after application of the annual limit for 1994) multiplied
by 13.0435%).
Example 5. The facts are the same as in Example 4, except that Plan
Z provides that plan year compensation for self-employed individuals is
defined as earned income within the meaning of section 401(c)(2)
attributable to Employer P. In addition, Plan Z provides for an annual
allocation of employer contributions of 15 percent of plan year
compensation for all employees in the plan, including self-employed
individuals, such as Employees C and D. The net profit from self-
employment for Employee C and the net profit from self-employment for
Employee D are the same as provided in Example 4. However, the earned
income of Employee C determined in accordance with section 401(c)(2) is
$65,367 ($80,000 minus $4,828 minus $9,805). The earned income of
Employee D determined in accordance with section 401(c)(2) is $146,869
($175,000 minus $6,101 minus $22,030). Therefore, the allocation of
employer contributions under the plan allocation formula for 1994 for
Employee C is $9,805 ($65,367 (Employee C's plan year compensation for
1994) multiplied by 15%). Employee D's earned income for 1994 does not
exceed the 1994 annual limit of $150,000. Therefore, the allocation of
employer contributions under the plan allocation formula for 1994 for
Employee D is $22,030 ($146,869 (Employee D's plan year compensation for
1994) multiplied by 15%).
(c) Limit on compensation for nondiscrimination rules--(1) General
rule. The annual compensation limit applies for purposes of applying the
nondiscrimination rules under sections 401(a)(4), 401(a)(5), 401(l),
401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2) and 410(b)(2). The annual
compensation limit also applies in determining whether an alternative
method of determining compensation impermissibly discriminates under
section 414(s)(3). Thus, for example, the annual compensation limit
applies when determining a self-employed individual's total earned
income that is used to determine the equivalent alternative compensation
amount under Sec. 1.414(s)-1(g)(1). This paragraph (c) provides rules
for applying the annual compensation limit for these purposes. For
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
[[Page 265]]
year beginning prior to the OBRA '93 effective date is used when
applying any nondiscrimination rule in a plan year beginning on or after
the OBRA '93 effective date, then the annual compensation limit for that
prior year is the annual compensation limit for the first plan year
beginning on or after the OBRA '93 effective date (generally $150,000).
(3) Plan-by-plan limit. For purposes of this paragraph (c), the
annual compensation limit applies separately to each plan (or group of
plans treated as a single plan) of an employer for purposes of the
applicable nondiscrimination requirement. For this purpose, the plans
included in the testing group taken into account in determining whether
the average benefit percentage test of Sec. 1.410(b)-5 is satisfied are
generally treated as a single plan.
(4) Application of limit to a plan year. The rules provided in
paragraph (b)(3) of this section regarding the application of the limit
to a plan year apply for purposes of this paragraph (c).
(5) Limits on multiple employer and multiemployer plans. The rule
provided in paragraph (b)(4) of this section regarding the application
of the limit to multiple employer and multiemployer plans applies for
purposes of this paragraph (c).
(d) Effective date--(1) Statutory effective date--(i) General rule.
Except as otherwise provided in this paragraph (d), section 401(a)(17)
applies to a plan as of the first plan year beginning on or after
January 1, 1989. For purposes of this section, statutory effective date
generally means the first day of the first plan year that section
401(a)(17) is applicable to a plan. In the case of governmental plans,
statutory effective date means the first day of the first plan year for
which the plan is not deemed to satisfy section 401(a)(17) by reason of
paragraph (d)(4) of this section.
(ii) Exception for collectively bargained plans. In the case of a
plan maintained pursuant to one or more collective bargaining agreements
between employee representatives and one or more employers ratified
before March 1, 1986, section 401(a)(17) applies to allocations and
benefit accruals for plan years beginning on or after the earlier of--
(A) January 1, 1991; or
(B) The later of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension or renegotiation of any agreement occurring
after February 28, 1986). For purposes of this paragraph (d)(1)(ii), the
rules of Sec. 1.410(b)-10(a)(2) apply for purposes of determining
whether a plan is maintained pursuant to one or more collective
bargaining agreements, and any extension or renegotiation of a
collective bargaining agreement, which extension or renegotiation is
ratified after February 28, 1986, is to be disregarded in determining
the date on which the agreement terminates.
(2) OBRA '93 effective date--(i) In general. For purposes of this
section, OBRA '93 effective date means the first day of the first plan
year beginning on or after January 1, 1994, except as provided in this
paragraph (d)(2).
(ii) Exception for collectively bargained plans--(A) In general. In
the case of a plan maintained pursuant to one or more collective
bargaining agreements between employee representatives and 1 or more
employers ratified before August 10, 1993, OBRA '93 effective date means
the first day of the first plan 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
[[Page 266]]
March 1, 1986, as the date before which the collective bargaining
agreements must be ratified.
(3) Regulatory effective date. This Sec. 1.401(a)(17)-1 applies to
plan years beginning on or after the OBRA '93 effective date. However,
in the case of a plan maintained by an organization that is exempt from
income taxation under section 501(a), including plans subject to section
403(b)(12)(A)(i) (nonelective plans), this Sec. 1.401(a)(17)-1 applies
to plan years beginning on or after January 1, 1996. For plan years
beginning before the effective date of these regulations and on or after
the statutory effective date, a plan must be operated in accordance with
a reasonable, good faith interpretation of section 401(a)(17), taking
into account, if applicable, the OBRA '93 reduction to the annual
compensation limit under section 401(a)(17).
(4) Special rules for governmental plans--(i) Deemed satisfaction by
governmental plans. In the case of governmental plans described in
section 414(d), including plans subject to section 403(b)(12)(A)(i)
(nonelective plans), section 401(a)(17) is considered satisfied for plan
years beginning before the later of January 1, 1996, or 90 days after
the opening of the first legislative session beginning on or after
January 1, 1996, of the governing body with authority to amend the plan,
if that body does not meet continuously. For purposes of this paragraph
(d)(4), the term governing body with authority to amend the plan means
the legislature, board, commission, council, or other governing body
with authority to amend the plan.
(ii) Transition rule for governmental plans--(A) In general. In the
case of an eligible participant in a governmental plan (within the
meaning of section 414(d)), the annual compensation limit under this
section shall not apply to the extent that the application of the
limitation would reduce the amount of compensation that is allowed to be
taken into account under the plan below the amount that was allowed to
be taken into account under the plan as in effect on July 1, 1993. Thus,
for example, if a plan as in effect on July 1, 1993, determined benefits
without any reference to a limit on compensation, then the annual
compensation limit in effect under this section will not apply to any
eligible participant in any future year.
(B) Eligible participant. For purposes of this paragraph (d)(4)(ii),
an eligible participant is an individual who first became a participant
in the plan prior to the first day of the first plan year beginning
after the earlier of--
(1) The last day of the plan year by which a plan amendment to
reflect the amendments made by section 13212 of OBRA '93 is both adopted
and effective; or
(2) December 31, 1995.
(C) Plan must be amended to incorporate limits. This paragraph
(d)(4)(ii) shall not apply to any eligible participant in a plan unless
the plan is amended so that the plan incorporates by reference the
annual compensation limit under section 401(a)(17), effective with
respect to noneligible participants for plan years beginning after
December 31, 1995 (or earlier, if the plan amendment so provides).
(5) Benefits earned prior to effective date--(i) In general.
Allocations under a defined contribution plan or benefits accrued under
a defined benefit plan for plan years beginning before the statutory
effective date are not subject 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))
[[Page 267]]
as of the day immediately preceding such specified date. Thus, for
example, benefits accrued for those plan years generally do not include
any benefits accrued under an amendment increasing prior benefits that
is adopted after the date on which the employee's benefits under the
plan must be treated as frozen.
(e) Determination of post-effective-date accrued benefits--(1) In
general. The plan formula that is used to determine the amount of
allocations or benefit accruals for plan years beginning on or after the
dates described in paragraph (d)(1) or (2) must comply with section
401(a)(17) as in effect on such date. This paragraph (e) provides rules
for applying section 401(a)(17) in the case of section 401(a)(17)
employees who accrue additional benefits under a defined benefit plan in
a plan year beginning on or after the relevant effective date. Paragraph
(e)(2) of this section contains definitions used in applying these
rules. Paragraphs (e)(3) and (e)(4) of this section explain the
application of the fresh-start rules in Sec. 1.401(a)(4)-13 to the
determination of the accrued benefits of section 401(a)(17) employees.
(2) Definitions. For purposes of this paragraph (e), the following
definitions apply:
(i) Section 401(a)(17) employee. An employee is a section 401(a)(17)
employee as of a date, on or after the statutory effective date, if the
employee's current accrued benefit as of that date is based on
compensation for a year prior to the statutory effective date that
exceeded the annual compensation limit for the first plan year beginning
on or after the statutory effective date. In addition, an employee is a
section 401(a)(17) employee as of a date, on or after the OBRA '93
effective date, if the employee's current accrued benefit as of that
date is based on compensation for a year prior to the OBRA '93 effective
date that exceeded the annual compensation limit for the first plan year
beginning on or after the OBRA '93 effective date. For this purpose, a
current accrued benefit is not treated as based on compensation that
exceeded the relevant annual compensation limit, if a plan makes a fresh
start using the formula with wear-away described in Sec. 1.401(a)(4)-
13(c)(4)(ii), and the employee's accrued benefit determined under Sec.
1.401(a)(4)-13(c)(4)(ii)(B), taking into account the annual compensation
limit, exceeds the employee's frozen accrued benefit (or, if applicable,
the employee's adjusted accrued benefit) as of the fresh-start date.
(ii) Section 401(a)(17) fresh-start date. Section 401(a)(17) fresh-
start date means a fresh-start date as defined in Sec. 1.401(a)(4)-12
not earlier than the last day of the last plan year beginning before the
statutory effective date, and not later than the last day of the last
plan year beginning before the effective date of these regulations.
(iii) OBRA '93 fresh-start date. OBRA '93 fresh-start date means a
fresh-start date as defined in Sec. 1.401(a)(4)-12 not earlier than the
last day of the last plan year beginning before the OBRA '93 effective
date, and not later than the last day of the last plan year beginning
before the effective date of these regulations.
(iv) Section 401(a)(17) frozen accrued benefit. Section 401(a)(17)
frozen accrued benefit means the accrued benefit for any section
401(a)(17) employee frozen (as defined in Sec. 1.401(a)(4)-13(c)(3)(i))
as of the last day of the last plan year beginning before the statutory
effective date.
(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
[[Page 268]]
compensation limit described in paragraph (a)(3) of this section, as the
formula applicable to benefit accruals in the current plan year.
(ii) Consistency rules in Sec. 1.401(a)(4)-13(c) and (d)--(A)
General rule. In applying the fresh-start rules of Sec. 1.401(a)(4)-
13(c) and (d), the group of section 401(a)(17) employees is a fresh-
start group. See Sec. 1.401(a)(4)-13(c)(5)(ii)(A). Thus, the
consistency rules of those sections govern, unless otherwise provided.
For example, if the plan is using a fresh-start date applicable to all
employees and is not adjusting frozen accrued benefits under Sec.
1.401(a)(4)-13(d) for employees who are not section 401(a)(17)
employees, then the frozen accrued benefits for section 401(a)(17)
employees may not be adjusted under Sec. 1.401(a)(4)-13(d) or this
paragraph (e).
(B) Determination of adjusted accrued benefit. If the fresh-start
rules of Sec. 1.401(a)(4)-13(c) and (d) are applied to determine the
benefits of all employees after a fresh-start date, the plan will not
fail to satisfy the consistency requirement of Sec. 1.401(a)(4)-
13(c)(5)(i) merely because the plan makes the adjustment described in
Sec. 1.401(a)(4)-13(d) to the frozen accrued benefits of employees who
are not section 401(a)(17) employees, but does not make the adjustment
to the frozen accrued benefits of section 401(a)(17) employees. In
addition, the plan does not fail to satisfy the consistency requirement
of Sec. 1.401(a)(4)-13(c)(5)(i) merely because the plan makes the
adjustment described in Sec. 1.401(a)(4)-13(d) for section 401(a)(17)
employees on the basis of the compensation formula that was used to
determine the frozen accrued benefit (as required under paragraph
(e)(4)(iii) of this section) but makes the adjustment for employees who
are not section 401(a)(17) employees on the basis of any other method
provided in Sec. 1.401(a)(4)-13(d)(8).
(4) Permitted adjustments to frozen accrued benefit of section
401(a)(17) employees--(i) General rule. Except as otherwise provided in
paragraphs (e)(4)(ii) and (iii) of this section, the rules in Sec.
1.401(a)(4)-13(c)(3) (permitting certain adjustments to frozen accrued
benefits) apply to section 401(a)(17) frozen accrued benefits or OBRA
'93 frozen accrued benefits.
(ii) Optional forms of benefit. After either the section 401(a)(17)
fresh-start date or the OBRA '93 fresh-start date, a plan may be amended
either to provide a new optional form of benefit or to make an optional
form of benefit available with respect to the section 401(a)(17) frozen
accrued benefit or the OBRA '93 frozen accrued benefit, provided that
the optional form of benefit is not subsidized. Whether an optional form
is subsidized may be determined using any reasonable actuarial
assumptions.
(iii) Adjusting section 401(a)(17) accrued benefits--(A) In general.
If the plan adjusts accrued benefits for employees under the rules of
Sec. 1.401(a)(4)-13(d) as of a fresh-start date, the adjusted accrued
benefit (within the meaning of section Sec. 1.401(a)(4)-13(d)) for each
section 401(a)(17) employee must be determined after the fresh-start
date by reference to the plan's compensation formula that was actually
used to determine the frozen accrued benefit as of the fresh-start date.
For this purpose, the plan's compensation formula incorporates the
plan's underlying compensation definition and compensation averaging
period. In 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
[[Page 269]]
applying the annual compensation limit) exceeds the compensation that
was used to determine the employee's frozen accrued benefit.
(B) Multiple fresh starts. If a plan makes more than one fresh start
with respect to a section 401(a)(17) employee, the employee's frozen
accrued benefit as of the latest fresh-start date will either be
determined by applying the current benefit formula to the employee's
total years of service as of that fresh-start date or will consist of
the sum of the employee's frozen accrued benefit (or adjusted accrued
benefit (as defined in Sec. 1.401(a)(4)-13(d)(8)(i))) as of the
previous fresh-start date plus additional frozen accruals since the
previous fresh start. If the frozen accrued benefit consists of such a
sum, in making the adjustments described in paragraph (e)(4)(iii)(A) of
this section, separate adjustments must be made to that previously
frozen accrued benefit (or adjusted accrued benefit) and the additional
frozen accruals to the extent that the frozen accrued benefit and the
additional accruals have been determined using different compensation
formulas or different compensation limits (i.e., the section 401(a)(17)
limit before and after the reduction in limit described in paragraph
(a)(3) of this section). In this case, if the plan is applying the
adjustment fraction of Sec. 1.401(a)(4)-13(d)(8)(i), the denominator of
the separate adjustment fraction for adjusting each portion of the
frozen accrued benefit must reflect the actual compensation formula,
and, if applicable, compensation limit, originally used for determining
that portion. For example, the frozen accrued benefit of a section
401(a)(17) employee as of the OBRA '93 fresh-start date may be based on
the sum of the section 401(a)(17) frozen accrued benefit (determined
without any annual compensation limit) plus benefit accruals in the
years between the statutory effective date and the OBRA '93 effective
date (based on compensation that was subject to the annual compensation
limits for those years). In this example, in adjusting the section
401(a)(17) frozen accrued benefit, the denominator of the adjustment
fraction does not reflect any annual compensation limit. Similarly, in
adjusting the frozen accruals for years between the statutory effective
date and the OBRA '93 effective date, the denominator of the adjustment
fraction reflects the level of the annual compensation limit in effect
for those years.
(5) Examples. The following examples illustrate the rules in this
paragraph (e).
Example 1. (a) Employer X maintains Plan Y, a calendar year defined
benefit plan providing an annual benefit for each year of service equal
to 2 percent of compensation averaged over an employee's high 3
consecutive calendar years' compensation. Section 401(a)(17) applies to
Plan Y in 1989. As of the close of the last plan year beginning before
January 1, 1989 (i.e., the 1988 plan year), Employee A, with 5 years of
service, had accrued a benefit of $25,000 which equals 10 percent (2
percent multiplied by 5 years of service) of average compensation of
$250,000. Employer X decides to comply with the provisions of this
section for plan years before the effective date of this section.
Employer X decides to make the amendment effective for plan years
beginning on or after January 1, 1989, and uses December 31, 1988 as the
section 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)-
[[Page 270]]
13(c)(4)(ii) (formula with wear-away). The fresh-start formula is
applied using a benefit formula for the 1989 plan year that satisfies
section 401(a)(17) and this section, and the December 31, 1988 fresh-
start date used for the plan is a section 401(a)(17) fresh-start date
within the meaning of paragraph (e)(2)(ii) of this section. Thus, Plan
Y, as amended, satisfies paragraph (e)(3)(i) of this section for plan
years commencing prior to the OBRA '93 effective date.
Example 2. Assume the same facts as in Example 1, except that the
plan formula provides that effective January 1, 1989, for section
401(a)(17) employees, an employee's benefit will equal the sum of the
employee's accrued benefit as of December 31, 1988 (determined as though
the employee terminated employment on that date and without regard to
any amendments after that date), and 2 percent of compensation averaged
over an employee's high 3 consecutive years' compensation times years of
service taking into account only years of service after December 31,
1988. Thus, under Plan Y's formula, Employee A's accrued benefit as of
December 31, 1989 is $29,000, which is equal to the sum of $25,000
(Employee A's accrued benefit as of December 31, 1988) plus $4,000
($200,000 multiplied by (2 percent multiplied by 1 year of service)).
The formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-13(c)(4)(i)
(formula without wear-away). The fresh-start formula is applied using a
benefit formula for the 1989 plan year that satisfies section 401(a)(17)
and this section, and the December 31, 1988 fresh-start date used for
the plan is a section 401(a)(17) fresh-start date within the meaning of
paragraph (e)(2)(ii) of this section. Thus, Plan Y, as amended,
satisfies paragraph (e)(3)(i) of this section for plan years commencing
prior to the OBRA '93 effective date.
Example 3. (a) Assume the same facts as in Example 1, except that
the plan formula provides that effective January 1, 1989, an employee's
benefit equals the greater of the plan formulas in Example 1 and Example
2. The formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-
13(c)(4)(iii) (formula with extended wear-away). The fresh-start formula
is applied using a benefit formula for the 1989 plan year that satisfies
section 401(a)(17) and this section, and the December 31, 1988 fresh-
start date used for the plan is a section 401(a)(17) fresh-start date
within the meaning of paragraph (e)(2)(ii) of this section. Thus, Plan
Y, as amended, satisfies paragraph (e)(3)(i) of this section for plan
years commencing prior to the OBRA '93 effective date.
(b) Assume that for each of the years 1991-93 Employee A's annual
compensation under the plan compensation formula, disregarding the
amendment to comply with section 401(a)(17) is $300,000. The annual
compensation limit is adjusted to $222,220, $228,860, and $235,840 for
plan years beginning January 1, 1991, 1992, and 1993, respectively.
Because Employer X has decided to amend Plan Y to comply with the
provisions of this section effective for plan years beginning on or
after January 1, 1989, and has used December 31, 1988 as the section
401(a)(17) fresh-start date, the compensation that may be taken into
account for plan benefits in 1993 cannot exceed $228,973 (the average of
$222,220, $228,860, and $235,840). Therefore, as of December 31, 1993,
the benefit determined under the fresh-start formula with wear-away
would be $45,795 ($228,973 multiplied by (2 percent multiplied by 10
years of service)). The benefit determined under the fresh-start formula
without wear-away would be $47,897, which is equal to $25,000 (Employee
A's section 401(a)(17) frozen accrued benefit) plus $22,897 ($228,973
multiplied by (2 percent multiplied by 5 years of service)). Because
Employee A's accrued benefit is being determined using the fresh-start
formula with extended wear-away, Employee A's accrued benefit as of
December 31, 1993, is equal to $47,897, the greater of the two amounts.
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
[[Page 271]]
401(a)(17) for plan years beginning on or after the OBRA '93 effective
date) and that for section 401(a)(17) employees, each employee's accrued
benefit will be determined under Sec. 1.401(a)(4)-13(c)(4)(i) (formula
without wear-away) using December 31, 1993 as the OBRA '93 fresh-start
date.
(b) Assume that for each of the years 1996-98 Employee A's annual
compensation under the plan compensation definition, disregarding the
amendment to comply with section 401(a)(17), is $400,000. Assume that
the annual compensation limit is first adjusted to $160,000 for plan
years beginning on or after January 1, 1997, and is not adjusted for the
plan year beginning on or after January 1, 1998. The compensation that
may be taken into account for the 1998 plan year cannot exceed $156,667
(the average of $150,000 for 1996, $160,000 for 1997, and $160,000 for
1998).
(c) Therefore, at the end of December 31, 1998, Employee A's accrued
benefit is $63,564, which is equal to $47,897 (Employee A's OBRA '93
frozen accrued benefit) plus $15,667 ($156,667 multiplied by (2 percent
multiplied by 5 years of service)).
Example 6. (a) Assume the same facts as in Example 5, except that,
for the fresh-start group (in this case the section 401(a)(17)
employees), the amendments to Plan Y provide for adjustments to the
section 401(a)(17) frozen accrued benefit and the OBRA '93 frozen
accrued benefit in accordance with Sec. 1.401(a)(4)-13(d) using the
fraction described in Sec. 1.401(a)(4)-13(d)(8)(i).
(b) Employee A's frozen accrued benefit as of December 31, 1993, is
adjusted as of December 31, 1998, as follows:
(1) Employee A's frozen accrued benefit as of December 31, 1993, is
the sum of Employee A's section 401(a)(17) frozen accrued benefit
($25,000) and Employee A's frozen accruals for the years 1989-93
($22,897).
(2) The numerator of Employee A's adjustment fraction is $156,667
(the average of $150,000, $160,000, and $160,000). The denominator of
Employee A's adjustment fraction with respect to Employee A's section
401(a)(17) frozen accrued benefit is $250,000, and the denominator of
Employee A's adjustment fraction with respect to the rest of Employee
A's frozen accrued benefit is $228,973 (the average of Employee A's
annual compensation for 1991, 1992, and 1993, as limited by the
respective annual limit for each of those years).
(3) Employee A's section 401(a)(17) frozen accrued benefit as
adjusted through December 31, 1998, remains $25,000. The compensation
adjustment fraction determined in accordance with paragraph (e)(4)(iii)
of this section is less than one ($156,667 divided by $250,000).
(4) Employee A's frozen accruals for the years 1989-93, as adjusted
through December 31, 1998, remain $22,897 because the adjustment
fraction is less than one ($156,667 divided by $228,973).
(5) Employee A's adjusted accrued benefit as of December 31, 1998,
equals $47,897 (the sum of the $25,000 and $22,897 amounts from
paragraphs (b)(3) and (b)(4), respectively, of this Example).
(c) Employee A's section 401(a)(17) frozen accrued benefit will not
be adjusted for compensation increases until the numerator of the
fraction used to adjust that frozen accrued benefit exceeds the
denominator of $250,000 used in determining those accruals.
Similarly, the portion of Employee A's OBRA '93 frozen accrued
benefit attributable to the frozen accruals for the years 1989-1993 will
not be adjusted for compensation increases until the numerator of the
fraction used to adjust those frozen accruals exceeds the denominator of
$228,973 used in determining those accruals.
[T.D. 8547, 59 FR 32905, June 27, 1994, as amended by T.D. 9169, 69 FR
78153, Dec. 29, 2004]
Editorial Note: By T.D. 9169, 69 FR 78153, Dec. 29, 2004, the
Internal Revenue Service published a document in the Federal Register,
attempting to amend paragraph (d)(5)(ii) of Sec. 1.401-(a)(17)-1 by
removing ``1.401(m)-(f)(6)'' and inserting ``1.401(m)-1(a)(3)''.
However, because of inaccurate language, this amendment could not be
incorporated.
Sec. 1.401(a)(26)-0 Table of contents.
This section contains a listing of the headings of Sec. Sec. 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.
[[Page 272]]
(iii) Definition of ``acquisition'' or ``disposition''.
(c) Additional rules.
Sec. 1.401(a)(26)-2 Minimum participation rule
(a) General rule.
(b) Frozen plans.
(c) Plan.
(d) Disaggregation of certain plans.
(1) Mandatory disaggregation.
(i) ESOPs and non-ESOPs.
(ii) Plans maintained by more than one employer.
(A) Multiple employer plans.
(B) Multiemployer plans.
(iii) Defined benefit plans with other arrangements.
(A) In general.
(B) Examples.
(iv) Plans benefiting employees of qualified separate lines of
business.
(2) Permissive disaggregation.
(i) Plans benefiting collectively bargained employees.
(ii) Plans benefiting otherwise excludable employees.
Sec. 1.401(a)(26)-3 Rules applicable to a defined benefit plan's prior
benefit structure
(a) General rule.
(b) Prior benefit structure.
(c) Testing a prior benefit structure.
(1) General rule.
(2) Meaningful benefits.
(d) Multiemployer plan rule.
Sec. 1.401(a)(26)-4 Testing former employees
(a) Scope.
(b) Minimum participation rule for former employees.
(c) Special rule.
(d) Excludable former employees.
(1) General rule.
(2) Exception.
Sec. 1.401(a)(26)-5 Employees who benefit under a plan
(a) Employees benefiting under a plan.
(1) In general.
(2) Sequential or concurrent benefit offset arrangements.
(i) In general.
(ii) Offset by sequential or grandfathered benefits.
(iii) Concurrent benefit offset arrangements.
(A) General rule.
(B) Special rules for certain section 414(n) employer-recipients.
(b) Former employees benefiting under a plan.
Sec. 1.401(a)(26)-6 Excludable employees
(a) In general.
(b) Excludable employees.
(1) Minimum age and service exclusions.
(i) In general.
(ii) Plans benefiting otherwise excludable employees.
(iii) Examples.
(2) Certain air pilots.
(3) Certain nonresident aliens.
(i) In general.
(ii) Special treaty rule.
(4) Employees covered pursuant to a collective bargaining agreement.
(5) Employees not covered pursuant to a collective bargaining
agreement.
(6) Examples.
(7) Certain terminating employees.
(i) In general.
(ii) Hours of service.
(8) Employees of qualified separate lines of business.
(c) Former employees.
(1) In general.
(2) Employees terminated before a specified date.
(3) Previously excludable employees.
(4) Vested accrued benefits eligible for mandatory distribution.
(d) Certain police or firefighters.
Sec. 1.401(a)(26)-7 Testing methods
(a) Testing on each day of the plan year.
(b) Simplified testing method.
(c) Retroactive correction.
Sec. 1.401(a)(26)-8 Definitions
Collective bargaining agreement.
Collectively bargained employee.
Covered by a collective bargaining agreement.
Defined benefit plan.
Defined contribution plan.
Employee.
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.
[[Page 273]]
(4) Certain plan terminations.
(i) In general.
(ii) Exception.
(5) ESOPs and non-ESOPs.
(c) Waiver of excise tax on reversions.
(1) In general.
(2) Termination date.
(3) Failure to satisfy section 401(a)(26).
(d) Special rule for collective bargaining agreements.
[T.D. 8375, 56 FR 63413, Dec. 4, 1991]
Sec. 1.401(a)(26)-1 Minimum participation requirements.
(a) General rule. A plan is a qualified plan for a plan year only if
the plan satisfies section 401(a)(26) for the plan year. A plan that
satisfies any of the exceptions described in paragraph (b) of this
section passes section 401(a)(26) automatically for the plan year. A
plan that does not satisfy one of the exceptions in paragraph (b) of
this section must satisfy Sec. 1.401(a)(26)-2(a). In addition, a
defined benefit plan must satisfy Sec. 1.401(a)(26)-3 with respect to
its prior benefit structure. Finally, a defined benefit plan that
benefits former employees (for example, a defined benefit plan that is
amended to provide an ad hoc cost-of-living adjustment to former
employees) must separately satisfy Sec. 1.401(a)(26)-4 with respect to
its former employees.
(b) Exceptions to section 401(a)(26)--(1) Plans that do not benefit
any highly compensated employees. A plan, other than a frozen defined
benefit plan as defined in Sec. 1.401(a)(26)-2(b), satisfies section
401(a)(26) for a plan year if the plan is not a top-heavy plan under
section 416 and the plan meets the following requirements:
(i) The plan benefits no highly compensated employee or highly
compensated former employee of the employer; and
(ii) The plan is not aggregated with any other plan of the employer
to enable the other plan to satisfy section 401(a)(4) or 410(b). The
plan may, however, be aggregated with the employer's other plans for
purposes of the average benefit percentage test in section
410(b)(2)(A)(ii).
(2) Multiemployer plans--(i) In genera1. The portion of a
multiemployer plan that benefits only employees included in a unit of
employees covered by a collective bargaining agreement may be treated as
a separate plan that satisfies section 401(a)(26) for a plan year.
(ii) Multiemployer plans covering noncollectively bargained
employees--(A) In general. The rule provided in paragraph (b)(2)(i) does
not apply to the portion of a multiemployer plan that benefits employees
who are not included in any collective bargaining unit covered by a
collective bargaining agreement. Thus, the portion of the plan
benefiting these employees must separately satisfy section 401(a)(26).
(B) Special testing rule. A multiemployer plan that benefits
employees who are not included in any collective bargaining unit covered
by a collective bargaining agreement satisfies section 401(a)(26) if the
plan benefits 50 employees. For purposes of this special testing rule,
employees who are included in a unit of employees covered by a
collective bargaining agreement may be included in determining whether
the plan benefits 50 employees.
(3) Certain underfunded defined benefit plans--(i) In general. A
defined benefit plan is deemed to satisfy section 401(a)(26) for a plan
year if all of the conditions of paragraphs (b)(3)(ii) through
(b)(3)(iv) of this section are satisfied with respect to the plan for
the plan year.
(ii) Eligible plans. This condition is satisfied for a plan year
only if the 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
[[Page 274]]
non-key employee receiving minimum benefit accruals required by section
416.
(4) Section 401(k) plan maintained by employers that include certain
governmental or tax-exempt entities. Section 401(k)(4)(B) prevents
certain State and local governments and tax-exempt organizations from
maintaining a qualified cash or deferred arrangement. A plan (or portion
of a plan) that is either a section 401(k) plan or a section 401(m) plan
that is provided under the same general arrangement as a section 401(k)
plan may be treated as a separate plan that satisfies section 401(a)(26)
for a plan year if the following requirements are satisfied:
(i) The section 401(k) plan is maintained by an employer who has
employees precluded from being eligible employees under the arrangement
by reason of section 401(k)(4)(B), and
(ii) More than 95 percent of the employees of the employer who are
not precluded from being eligible employees under a section 401(k) plan
by reason of section 401(k)(4)(B) benefit under the section 401(k) plan.
(5) Certain acquisitions or dispositions--(i) General rule. Rules
similar to the rules prescribed under section 410(b)(6)(C) apply under
section 401(a)(26). Pursuant to these rules, the requirements of section
401(a)(26) are treated as satisfied for certain plans of an employer
involved in an acquisition or disposition (transaction) for the
transition period. The transition period begins on the date of the
transaction and ends on the last day of the first plan year beginning
after the date of the transaction.
(ii) Special rule for transactions that occur in the plan year prior
to the first plan year to which section 401(a)(26) applies. Where there
has been a transaction described in section 410(b)(6)(C) in the plan
year prior to the first plan year in which section 401(a)(26) applies to
a plan, the plan satisfies section 401(a)(26) for the transition period
if the plan benefited 50 employees or 40 percent of the employees of the
employer immediately prior to the transaction.
(iii) Definition of ``acquisition'' and ``disposition.'' For
purposes of this paragraph (b)(5), the terms ``acquisition'' and
``disposition'' refer to an asset or stock acquisition, merger, or other
similar transaction involving a change in employer of the employees of a
trade or business.
(c) Additional rules. The Commissioner may, in revenue rulings,
notices, and other guidance of general applicability, provide any
additional rules that may be necessary or appropriate in applying the
minimum participation requirements of section 401(a)(26).
[T.D. 8375, 56 FR 63413, Dec. 4, 1991, as amended by T.D. 8487, 58 FR
46838, Sept. 3, 1993]
Sec. 1.401(a)(26)-2 Minimum participation rule.
(a) General rule. A plan satisfies this paragraph (a) for a plan
year only if the plan benefits at least the lesser of--
(1) 50 employees of the employer, or
(2) 40 percent of the employees of the employer.
(b) Frozen plans. A plan under which no employee or former employee
benefits (within the meaning of Sec. 1.401(a)(26)-5 (a) or (b)), is a
frozen plan for purposes of this section and satisfies paragraph (a) of
this section automatically. Thus, a frozen defined contribution plan
satisfies section 401(a)(26) automatically and a frozen defined benefit
plan satisfies section 401(a)(26) for a plan year by satisfying 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
[[Page 275]]
a plan benefits employees of more than one employer and those employees
are not included in a unit of employees covered by one or more
collective bargaining agreements, the plan is a multiple employer plan.
A multiple employer plan is treated as separate plans, each of which is
maintained by a separate employer and must separately satisfy section
401(a)(26) by reference only to that employer's employees.
(B) Multiemployer plans. The portion of a multiemployer plan that
benefits employees who are included in one or more units of employees
covered by one or more collective bargaining agreements and the portion
of that plan that benefits employees who are not included in a unit of
employees covered pursuant to any collective bargaining agreement are
treated as separate plans. The portion of a multiemployer plan that
benefits employees who are not included in a unit of employees covered
by a collective bargaining agreement is a multiple employer plan as
described in paragraph (d)(1)(ii)(A) of this section. This paragraph
(d)(1)(ii)(B) does not apply to the extent that the special testing rule
in Sec. 1.401(a)(26)-1(b)(2)(ii) applies. Also, this paragraph
(d)(1)(B)(2) does not apply for purposes of prior benefit structure
testing under Sec. 1.401 (a)(26)-3.
(iii) Defined benefit plans with other arrangements--(A) In general.
A defined benefit plan is treated as comprising separate plans if, under
the facts and circumstances, there is an arrangement (either under or
outside the plan) that has the effect of providing any employee with a
greater interest in a portion of the assets of a plan in a way that has
the effect of creating separate accounts. Separate plans are not
created, however, merely because a partnership agreement provides for
allocation among partners, in proportion to their partnership interests,
of either the cost of funding the plan or surplus assets upon plan
termination.
(B) Examples. The following examples illustrate certain situations
in which other arrangements relating to a defined benefit plan are or
are not treated as creating separate plans:
Example 1. Employer A maintains a defined benefit plan under which
each highly compensated employee can direct the investment of the
portion of the plan's assets that represents the accumulated
contributions with respect to that employee's plan benefits. In
addition, by agreement outside the plan, if the product of the
employee's investment direction exceeds the value needed to fund that
employee's benefits, Employer A agrees to make a special payment to the
participant. In this case, each separate portion of the pool of assets
over which an employee has investment authority is a separate plan for
the employee.
Example 2. Employer B is a partnership that maintains a defined
benefit plan. The partnership agreement provides that, upon termination
of the plan, a special allocation of any excess plan assets after
reversion is made to the partnership on the basis of partnership share.
This arrangement does not create separate plans with respect to the
partners.
(iv) Plans benefiting employees of qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business for purposes of section 401(a)(26) in accordance with
Sec. 1.414(r)-1(b), the portion of a plan that benefits employees of
one qualified separate line of business is treated as a separate plan
from the portions of the same plan that benefit employees of the other
qualified separate lines of business of the employer. See Sec. Sec.
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
[[Page 276]]
by another collective bargaining agreement.
(ii) Plans benefiting otherwise excludable employees. If an employer
applies section 401(a)(26) separately to the portion of a plan that
benefits only employees who satisfy age and service conditions under the
plan that are lower than the greatest minimum age and service conditions
permissible under section 410(a), the plan is treated as comprising
separate plans, one benefiting the employees who have not satisfied the
lower minimum age and service but not the greatest minimum age and
service conditions permitted under section 410(a) and one benefiting
employees who have satisfied the greatest minimum age and service
conditions permitted under section 410(a). See Sec. 1.401(a)(26)-
6(b)(1)(ii) for rules concerning testing of otherwise excludable
employees.
[T.D. 8375, 56 FR 63414, Dec. 4, 1991]
Sec. 1.401(a)(26)-3 Rules applicable to a defined benefit plan's
prior benefit structure.
(a) General rule. A defined benefit plan that does not meet one of
the exceptions in Sec. 1.401(a)(26)-1(b) must satisfy paragraph (c) of
this section with respect to its prior benefit structure. Defined
contribution plans are not subject to this section.
(b) Prior benefit structure. Each defined benefit plan has only one
prior benefit structure, and all accrued benefits under the plan as of
the beginning of a plan year (including benefits rolled over or
transferred to the plan) are included in the prior benefit structure for
the year.
(c) Testing a prior benefit structure--(1) General rule. A plan's
prior benefit structure satisfies this paragraph if the plan provides
meaningful benefits to a group of employees that includes the lesser of
50 employees or 40 percent of the employer's employees. Thus, a plan
satisfies the requirements of this paragraph (c) if at least 50
employees or 40 percent of the employer's employees currently accrue
meaningful benefits under the plan. Alternatively, a plan satisfies this
paragraph if at least 50 employees and former employees or 40 percent of
the employer's employees and former employees have meaningful accrued
benefits under the plan.
(2) Meaningful benefits. Whether a plan is providing meaningful
benefits, or whether individuals have meaningful accrued benefits under
a plan, is determined on the basis of all the facts and circumstances.
The relevant factors in making this determination include, but are not
limited to, the following: the level of current benefit accruals; the
comparative rate of accruals under the current benefit formula compared
to prior rates of accrual under the plan; the projected accrued benefits
under the current benefit formula compared to accrued benefits as of the
close of the immediately preceding plan year; the length of time the
current benefit formula has been in effect; the number of employees with
accrued benefits under the plan; and the length of time the plan has
been in effect. A rule for determining whether an offset plan provides
meaningful benefits is provided in Sec. 1.401(a)(26)-5(a)(2). A plan
does not satisfy this paragraph (c) if it exists primarily to preserve
accrued benefits for a small group of employees and thereby functions
more as an individual plan for the small group of employees or for the
employer.
(d) Multiemployer plan rule. A multiemployer plan is deemed to
satisfy the 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
[[Page 277]]
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 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:
[[Page 278]]
(1) The contributions or benefits under a plan that are used to
offset or reduce the benefits under the positive portion of the fomu1a
being tested accrued under such other plan;
(2) The employees who benefit under the formula being tested also
benefit under the other plan on a reasonable and uniform basis; and
(3) The contributions or benefits under the plan that are used to
offset or reduce the benefits under the formula being tested are not
used to offset or reduce that employee's benefits under any other plan
or any other formula.
(B) Special rules for certain section 414(n) employer-recipients.
The same employer requirement in the concurrent benefit offset rule in
paragraph (a)(2)(iii)(A) of this section is waived for certain section
414(n) employer-recipients. Under this exception, an employer-recipient
(within the meaning of sections 414 (n) and (o)) may treat contributions
or benefits under a plan maintained by a leasing organization as
contributions or benefits accrued under the recipient organization plan
provided the following requirements are met: the employer-recipient
maintains a plan covering leased employees (which employees are treated
as employees of the employer-recipient within the meaning of sections
414(n)(2) and 414(o)(2)); the leased employees are also covered under a
plan maintained by the leasing organization; and contributions or
benefits under the plan maintained by the employer-recipient are offset
or reduced by the contributions or benefits under the leasing
organization plan that are attributable to service with the recipient
organization. Also, for purposes of the benefiting condition requirement
in paragraph (a)(2)(iii)(A)(2) of this section, the employees of the
employer-recipient who are not leased from the leasing organization are
not required to benefit under the plan of the leasing organization.
(b) Former employees benefiting under a plan. A former employee is
treated as benefiting for a plan year if and only if the former employee
would be treated as benetiting under the rules in Sec. 1.410(b)-3(b).
[T.D. 8375, 56 FR 63416, Dec. 4, 1991]
Sec. 1.401(a)(26)-6 Excludable employees.
(a) In general. For purposes of applying section 401(a)(26) with
respect to either employees, former employees, or both employees and
former employees, as applicable, all employees other than excludable
employees described in paragraph (b) of this section, all former
employees other than excludable former employees described in paragraph
(c) of this section, or both, as the case may be, must be taken into
account. Except as specifically provided otherwise in this section, the
rules of this section are applied by reference only to the particular
plan and must be applied on a uniform and consistent basis.
(b) Excludable employees. An employee is an excludable employee if
the employee is covered by one or more of the following exclusions:
(1) Minimum age and service exclusions--(i) In general. If a plan
applies minimum age and service eligibility conditions permissible under
section 410(a)(1) and excludes all employees who do not meet those
conditions from benefiting under the plan, tbn all employees who fail to
satisfy those conditions may be treated as excludable employees with
respect to that plan. An employee is treated as meeting the age and
service requirements on the date any employee with the same age and
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
[[Page 279]]
benefits employees who are not otherwise excludable.
(B) The plan under which the otherwise excludable employees benefit
satisfies section 401(a)(26), both by reference only to otherwise
excludable employees and by reference only to employees who are not
otherwise excludable.
(C) The contributions or benefits provided to the otherwise
excludable employees (expressed as percentages of compensation) are not
greater than the contributions or benefits provided to the employees who
are not otherwise excludable under the plan.
(D) No highly compensated employee is included in the group of
otherwise excludable employees for more than one plan year.
(iii) Examples. The following examples illustrate some of the
minimum-age-and-service exclusion requirements:
Example 1. Employer X maintains a defined contribution plan, Plan X,
under which employees who have not completed 1 year of service are not
eligible to participate. Employer X has six employees. Two of the
employees participate in Plan X. The other four employees have not
completed 1 year of service and are therefore not eligible to
participate in Plan X. The four employees who have not completed 1 year
of service are excludable employees and may be disregarded for purposes
of applying the minimum participation test. Therefore, Plan X satisfies
section 401(a)(26) because both of the two employees who must be
considered are participants in Plan X.
Example 2. Employer Y has 100 employees and maintains two plans,
Plan 1 and Plan 2. Plan 1 provides that employees who have not completed
1 year of service are not eligible to participate. Plan 2 has no minimum
age or service requirement. Twenty of Y's employees do not meet the
minimum service requirement under Plan 1. Each plan satisfies the ratio
test under section 410(b)(1)(B). In testing Plan 1 to determine whether
it satisfies section 401(a)(26), the 20 employees not meeting the
minimum age and service requirement under Plan 1 are treated as
excludable employees. In testing Plan 2 to determine whether it
satisfies section 401(a)(26), no employees are treated as excludable
employees because Plan 2 does not have a minimum age or service
requirement.
(2) Certain air pilots. An employee who is excluded from
consideration under section 410(b)(3)(B) (relating to certain air
pilots) may be treated as an excludable employee.
(3) Certain nonresident aliens--(i) In general. An employee who is
excluded from consideration under section 410(b)(3)(C) (relating to
certain nonresident aliens) may be treated as an excludable employee.
(ii) Special treaty rule. In addition, an employee who is a
nonresident alien (within the meaning of section 7701(b)(1)(B)) and who
does receive earned income (within the meaning of section 911(d)(2))
from the employer that constitutes income from sources within the United
States (within the meaning of section 861(a)(3)) is permitted to be
excluded, if all of the employee's earned income from the employer from
sources within the United States is exempt from United States income tax
under an applicable income tax convention. This paragraph (b)(3)(ii)
applies only if all employees described in the preceding sentence are so
excluded.
(4) Employees covered pursuant to a collective bargaining agreement.
When testing a plan benefiting only noncollectively bargained employees,
an employee who is excluded from consideration under section
410(b)(3)(A) (exclusion for employees included in a unit of employees
covered by a collective bargaining agreement) may be treated as an
excludable employee. This rule may be applied separately to each
collective 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
[[Page 280]]
agreements. For purposes of these examples assume that no other
exclusion rules are applicable.
Example 1. Employer W has 70 collectively bargained employees and 30
non-collectively bargained employees. Employer W maintains Plan W, which
benefits only the 30 non-collectively bargained employees. The 70
collectively bargained employees may be treated as excludable employees
and thus may be disregarded in applying section 401(a)(26) to Plan W.
Example 2. Assume the same facts as Example I, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there are no ``collectively bargained employees.'' In this case, all
employees of W must be considered in determining whether section
401(a)(26) is met.
Example 3. Employer X has collectively bargained employees and 70
noncollectively bargained employees. Employer X maintains Plan X, which
benefits only the 30 collectively bargained employees. Employer X may
treat the non-collectively bargained employees as excludable employees
and disregard them in applying section 401(a)(26) to the collectively
bargained plan.
Example 4. Assume the same facts as Example 3, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there is no recognized collective bargaining agreement. In this case,
Employer X may not treat the non-collectively bargained employees of X
as excludable employees.
Example 5. Assume the same facts as Example 3, except that 3 percent
of the 30 collectively bargained employees are professionals. In this
case, Employer X may not treat the non-collectively bargained employees
of X as excludable employees.
Example 6. Employer Y has 100 collectively bargained employees.
Thirty of Y's employees are represented by Collective Bargaining Unit 1
and covered under Plan 1. Seventy of Y's employees are represented by
Collective Bargaining Unit 2 and covered under Plan 2. For purposes of
testing Plan 1, the employees of Collective Bargaining Unit 2 may be
treated as excludable employees. Similarly, for purposes of testing Plan
2, the employees of Collective Bargaining Unit 1 may be treated as
excludable employees.
(7) Certain terminating employees--(i) In general. An employee may
be treated as an excludable employee for a plan year with respect to a
particular plan if--
(A) The employee does not benefit under the plan for the plan year,
(B) The employee is eligible to participate in the plan,
(C) The plan has a minimum period of service requirement or a
requirement that an employee be employed on the last day of the plan
year (last-day requirement) in order for an employee to accrue a benefit
or receive an allocation for the plan year,
(D) The employee fails to accrue a benefit or receive an allocation
under the plan solely because of the failure to satisfy the minimum
period of service or last-day requirement,
(E) The employee terminates employment during the plan year with no
more than 500 hours of service, and the employee is not an employee as
of the last day of the plan year (for purposes of this paragraph
(b)(7)(i)(E), a plan that uses the elapsed time method of determining
years of service may use either 91 consecutive calendar days or 3
consecutive calendar months instead of 500 hours of service, provided it
uses the same convention for all employees during a plan year), and
(F) If this paragraph (b)(7) is applied with respect to any employee
with respect to a plan for a plan year, it is applied with respect to
all employees with respect to the plan for the plan year.
(ii) Hours of service. For purposes of this paragraph (b)(7), the
term ``hour of service'' has the same meaning as set forth in 29 CFR
2530.200b-2 under the general method of crediting service for 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 Sec. Sec. 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
[[Page 281]]
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).
(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
[[Page 282]]
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 Sec. Sec. 1.401(a)(26)-1 through
1.401(a)(26)-9 the definitions in this section govern unless otherwise
provided.
Collective bargaining agreement. Collective bargaining agreement
means an agreement that the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and the employer
that satisfies Sec. 301.7701-17T. Employees described in section
413(b)(8) who are employees of the union or the plan and are treated as
employees of an employer are not employees covered pursuant to a
collective bargaining agreement for purposes of section 401(a)(26)
unless the employees are actually covered pursuant to such an agreement.
Collectively bargained employee. Collectively bargained employee
means a collectively bargained employee within the meaning of Sec.
1.410(b)-6(d)(2).
Covered by a collective bargaining agreement. Covered by a
collective bargaining agreement means covered by a collective bargaining
agreement within the meaning of Sec. 1.410(b)-6(d)(2)(iii).
Defined benefit plan. Defined benefit plan means a defined benefit
plan within the meaning of Sec. 1.410(b)-9.
Defined contribution plan. Defined contribution plan means a defined
contribution plan within the meaning of Sec. 1.410(b)-9.
Employee. Employee means an employee, within the meaning of Sec.
1.410(b)-9.
Employer. Employer means the employer within the meaning of Sec.
1.410(b)-9.
ESOP. ESOP means an employee stock ownership plan within the meaning
of section 4975(e)(7) or a tax credit employee stock ownership plan
within the meaning of section 409(a).
Former employee. Former employee means a former employee within the
meaning of Sec. 1.410(b)-9.
Highly compensated employee. Highly compensated employee means an
employee who is highly compensated within the meaning of section 414(q).
Highly compensated former employee. Highly compensated former
employee means a former employee who is highly compensated within the
meaning of section 414(q)(9).
Multiemployer plan. Multiemployer plan means a multiemployer plan
within the meaning of section 414(f).
Noncollectively bargained employee. Noncollectively bargained
employee means an employee who is not a collectively bargained employee.
Nonhighly compensated employee. Nonhighly compensated employee means
an employee who is not a highly compensated employee.
Nonhighly compensated former employee. Nonhighly compensated former
employee means a former employee who is not a highly compensated former
employee.
Plan. Plan means plan as defined in Sec. 1.401(a)(26)-2(c).
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]
[[Page 283]]
Sec. 1.401(a)(26)-9 Effective dates and transition rules.
(a) In general. Except as provided in paragraphs (b), (c), and (d)
of this section, section 401(a)(26) and the regulations thereunder apply
to plan years beginning on or after January 1, 1989.
(b) Transition rules--(1) Governmental plans and certain section
403(b) annuities. Section 401(a)(26) is treated as satisfied for plan
years beginning before the later of January 1, 1996, or 90 days after
the opening of the first legislative session beginning on or after
January 1, 1996, of the governing body with authority to amend the plan,
if that body does not meet continuously, in the case of governmental
plans described in section 414(d), including plans subject to section
403(b)(12)(A)(i) (nonelective plans). For purposes of this paragraph
(b)(1), the term ``governing body with authority to amend the plan''
means the legislature, board, commission, council, or other governing
body with authority to amend the plan.
(2) Early retirement ``window-period'' benefits. Early retirement
benefits available under a plan only to employees who retire within a
limited period of time, not to exceed one year, are treated as
satisfying section 401(a)(26) if such benefits are provided under plan
terms that were adopted and in effect on or before March 14, 1989.
(3) Employees who do not benefit because of a minimum-period-of-
service requirement or a last-day requirement. For the first plan year
beginning after December 31, 1988, and before January 1, 1990, employees
who are eligible to participate under the plan and who fail to accrue a
benefit solely because of the failure to satisfy either a minimum-
period-of-service requirement of 1000 hours of service or less or a
last-day requirement may be treated as benefiting under the plan.
(4) Certain plan terminations--(i) In general. Except as provided in
paragraph (b)(4)(ii) of this section, if a plan terminates after section
401(a)(26) becomes effective with respect to the plan (as determined
under paragraph (a) of this section), the plan is not treated as a
qualified plan upon termination unless it complies with section
401(a)(26) and the regulations thereunder (to the extent they are
applicable) for all periods for which section 401(a)(26) is effective
with respect to the plan.
(ii) Exception. Notwithstanding paragraphs (a) and (b)(4)(i) of this
section, a plan does not fail to be treated as a qualified plan upon
termination merely because the plan fails to satisfy the requirements of
section 401(a)(26) and the regulations thereunder if the plan is
terminated with a termination date on or before December 31, 1989, and
either of the following conditions is satisfied:
(A) In the case of a defined benefit plan, no highly compensated
employee has an accrued benefit under the plan exceeding the lesser of
either the benefit the employee had accrued as of the close of the last
plan year beginning before January 1, 1989, or the benefit the employee
would have accrued as of the close of the last plan year under the terms
of the plan in effect and applicable with respect to the employee on
December 13, 1988.
(B) In the case of a defined contribution plan, no highly
compensated employee receives a contribution allocation for any plan
year beginning after December 31, 1988. For this purpose, a contribution
allocation with respect to an employee for a plan year beginning before
January 1, 1989, may be treated as a contribution allocation for a plan
year beginning after December 31, 1988, if the allocation for the prior
year exceeds the allocation that the employee 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
[[Page 284]]
(TRA '86), if certain conditions are satisfied, a waiver of the excise
tax under section 4980 applies with respect to any employer reversion
that occurs by reason of the termination or merger of a plan before the
first year to which section 401(a)(26) applies to the plan. In general,
the applicable conditions are that the plan must have been in existence
on August 16, 1986; that if section 401(a)(26) was in effect for the
plan year including August 16, 1986, the plan would have failed to
satisfy the requirements of section 401(a)(26) and would have continued
to fail the requirements at all times thereafter; that the plan
satisfies the applicable conditions in paragraph (b)(4)(ii)(A) or (B) of
this section; and that certain requirements regarding asset or liability
transfers and mergers and spinoffs involving the plan after August 16,
1986, are satisfied.
(2) Termination date. An employer reversion with respect to a plan
is eligible for the section 4980 excise tax waiver only if the employer
reversion occurs by reason of the termination of the plan with a
termination date prior to the first plan year for which section
401(a)(26) applies to the plan. Solely for purposes of this waiver, the
employer reversion is treated as satisfying this paragraph (c)(2) even
though the plan's termination date is during the first plan year for
which section 401(a)(26) applies to the plan if the plan's termination
date is on or before May 31, 1989. If the termination date occurs in the
first plan year for which section 401(a)(26) applied to the plan and the
employer receives a reversion that is eligible for the waiver of the
section 4980 tax, the plan is subject to the interest rate restriction
set forth in section 11 12(e)(3)(B) of TRA '86 as amended.
(3) Failure to satisfy section 401(a)(26). An employer reversion
with respect to a plan is eligible for the excise tax waiver only if the
plan was in existence on August 16, 1986, and, if section 401(a)(26) had
applied to the plan for the plan year including such date, the plan
would have failed to satisfy section 401(a)(26) for the plan year and
continuously thereafter until the plan's termination or merger. For
purposes of this paragraph (c)(3), a plan is treated as though it would
have failed to satisfy section 401(a)(26) before such section actually
applied to the plan only if the plan (as defined under section 414(1))
failed to benefit at least the lesser of 50 employees or 40 percent of
the employer's employees. In general, this determination is to be made
on the basis of only the applicable statutory provisions, without regard
to the regulations under section 401(a)(26). Thus, for example, the
prior benefit structure rules in Sec. 1.401(a)(26)-3 do not apply in
determining whether a plan would have failed to satisfy section
401(a)(26) for plan years beginning prior to the effective date of
section 401(a)(26) with respect to the plan.
(d) Special rule for collective bargaining agreements. In the case
of a plan maintained pursuant to one or more collective bargaining
agreements (as defined in Sec. 1.401(a)(26)-8(a)) that were ratified
before March 1, 1986, section 401(a)(26) and the regulations thereunder
shall not apply to plan years beginning before the earlier of--
(1) January 1, 1991, or
(2) The later of--
(i) January 1, 1989, or
(ii) The date on which the last of such collective bargaining
agreements terminates. For purposes of this paragraph (d), any extension
or renegotiation of any collective bargaining 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
[[Page 285]]
3405(c), see Sec. Sec. 1.402(c)-2, 1.402(f)-1, and 1.403(b)-7(b), and
Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What are the direct rollover requirements under section
401(a)(31)?
Q-2: Does section 401(a)(31) require that a qualified plan permit a
direct rollover to be made to a qualified trust that is not part of a
defined contribution plan?
Q-3: What is a direct rollover that satisfies section 401(a)(31),
and how is it accomplished?
Q-4: Is providing a distributee with a check for delivery to an
eligible retirement plan a reasonable means of accomplishing a direct
rollover?
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible in
gross income or subject to 20-percent withholding?
Q-6: What procedures may a plan administrator prescribe for electing
a direct rollover, and what information may the plan administrator
require a distributee to provide when electing a direct rollover?
Q-7: May the plan administrator treat a distributee as having made
an election under a default procedure where the distributee does not
affirmatively elect to make or not make a direct rollover within a
certain time period?
Q-8: May the plan administrator establish a deadline after which the
distributee may not revoke an election to make or not make a direct
rollover?
Q-9: Must the plan administrator permit a distributee to elect to
have a portion of an eligible rollover distribution paid to an eligible
retirement plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
Q-10: Must the plan administrator allow a distributee to divide an
eligible rollover distribution into two or more separate distributions
to be paid in direct rollovers to two or more eligible retirement plans?
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct rollover
if his or her eligible rollover distributions during a year are
reasonably expected to total less than $200?
Q-12: Is a plan administrator permitted to treat a distributee's
election to make or not make a direct rollover with respect to one
payment in a series of periodic payments as applying to all subsequent
payments in the series?
Q-13: Is the eligible retirement plan designated by a distributee to
receive a direct rollover distribution required to accept the
distribution?
Q-14. 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
[[Page 286]]
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)-7(b) for
guidance concerning the direct rollover requirements for distributions
from annuities described in section 403(b).
(c) Effective date--(1) Statutory effective date. Section 401(a)(31)
applies to eligible rollover distributions made on or after January 1,
1993.
(2) Regulatory effective date. This section applies to eligible
rollover distributions made on or after October 19, 1995. For eligible
rollover distributions made on or after January 1, 1993 and before
October 19, 1995, Sec. 1.401(a)(31)-1T (as it appeared in the April 1,
1995 edition of 26 CFR part 1), applies. However, for any distribution
made on or after January 1, 1993 but before October 19, 1995, a plan may
satisfy section 401(a)(31) by substituting any or all provisions of this
section for the corresponding provisions of Sec. 1.401(a)(31)-1T, if
any.
Q-2: Does section 401(a)(31) require that a qualified plan permit a
direct rollover to be made to a qualified trust that is not part of a
defined contribution plan?
A-2: No. Section 401(a)(31)(D) limits the types of qualified trusts
that are treated as eligible retirement plans to defined contribution
plans that accept eligible rollover distributions. Therefore, although a
plan is permitted, at a participant's election, to make a direct
rollover to any type of eligible retirement plan, as defined in section
402(c)(8)(B) (including a defined benefit plan), a plan will not fail to
satisfy section 401(a)(31) solely because the plan will not permit a
direct rollover to a qualified trust that is part of a defined benefit
plan. In contrast, if a distributee elects a direct rollover of an
eligible rollover distribution to an annuity plan described in section
403(a), that distribution must be paid to the annuity plan, even if the
recipient annuity plan is a defined benefit plan.
Q-3: What is a direct rollover that satisfies section 401(a)(31),
and how is it accomplished?
A-3: A direct rollover that satisfies section 401(a)(31) is an
eligible rollover distribution that is paid directly to an eligible
retirement plan for the benefit of the distributee. A direct rollover
may be accomplished by any reasonable means of direct payment to an
eligible retirement plan. Reasonable means of direct payment include,
for example, a wire transfer or the mailing of a check to the eligible
retirement plan. If payment is made by check, the check must be
negotiable only by the trustee of the eligible retirement plan. If the
payment is made by wire transfer, the wire transfer must be directed
only to the trustee of the eligible retirement plan. In the case of an
eligible retirement plan that does not have a trustee (such as a
custodial individual 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
[[Page 287]]
retirement plan is ``Individual Retirement Account of John Q. Smith,''
and the name of the trustee is ``ABC Bank,'' the payee line of a check
would read ``ABC Bank as trustee of Individual Retirement Account of
John Q. Smith.'' Unless the name of the distributee is included in the
name of the eligible retirement plan, the check also must indicate that
it is for the benefit of the distributee. If the eligible retirement
plan is not an individual retirement account or an individual retirement
annuity, the payee line of the check need not identify the trustee by
name. For example, the payee line of a check for the benefit of
distributee Jane Doe might read, ``Trustee of XYZ Corporation Savings
Plan FBO Jane Doe.''
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible in
gross income or subject to 20-percent withholding?
A-5: No. An eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover is not currently
includible in the distributee's gross income under section 402(c) and is
exempt from the 20-percent withholding imposed under section 3405(c)(2).
However, when any portion of the eligible rollover distribution is
subsequently distributed from the eligible retirement plan, that portion
will be includible in gross income to the extent required under section
402, 403, or 408.
Q-6: What procedures may a plan administrator prescribe for electing
a direct rollover, and what information may the plan administrator
require a distributee to provide when electing a direct rollover?
A-6: (a) Permissible procedures. Except as otherwise provided in
paragraph (b) of this Q&A-6, the plan administrator may prescribe any
procedure for a distributee to elect a direct rollover under section
401(a)(31), provided that the procedure is reasonable. The procedure may
include any reasonable requirement for information or documentation from
the distributee in addition to the items of adequate information
specified in Sec. 31.3405(c)-1(b), Q&A-7 of this chapter. For example,
it would be reasonable for the plan administrator to require that the
distributee provide a statement from the designated recipient plan that
the plan will accept the direct rollover for the benefit of the
distributee and that the recipient plan is, or is intended to be, an
individual retirement account, an individual retirement annuity, a
qualified annuity plan described in section 403(a), or a qualified trust
described in section 401(a), as applicable. In the case of a designated
recipient plan that is a qualified trust, it also would be reasonable
for the plan administrator to require a statement that the qualified
trust is not excepted from the definition of an eligible retirement plan
by section 401(a)(31)(D) (i.e., is not a defined benefit plan).
(b) Impermissible procedures. A plan will fail to satisfy section
401(a)(31) if the plan administrator prescribes any unreasonable
procedure, or requires information or documentation, that effectively
eliminates or substantially impairs the distributee's ability to elect a
direct rollover. For example, it would effectively eliminate or
substantially impair the distributee's ability to elect a direct
rollover if the recipient plan required the distributee to obtain an
opinion of counsel stating that the eligible retirement plan receiving
the rollover is a qualified plan or individual retirement account.
Similarly, it would effectively eliminate or substantially impair the
distributee's ability to elect a direct rollover if the distributing
plan required a letter from 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
[[Page 288]]
where the distributee does not affirmatively elect to make or not make a
direct rollover within a certain time period?
A-7: Yes, the plan administrator may establish a default procedure
whereby any distributee who fails to make an affirmative election is
treated as having either made or not made a direct rollover election.
However, the plan administrator may not make a distribution under any
default procedure unless the distributee has received an explanation of
the default procedure and an explanation of the direct rollover option
as required under section 402(f) and Sec. 1.402(f)-1, Q&A-1 and unless
the timing requirements described in Sec. 1.402(f)-1, Q&A-2 and Q&A-3
have been satisfied with respect to the explanations of both the default
procedure and the direct rollover option.
Q-8: May the plan administrator establish a deadline after which the
distributee may not revoke an election to make or not make a direct
rollover?
A-8: Yes, but the plan administrator is not permitted to prescribe
any deadline or time period with respect to revocation of a direct
rollover election that is more restrictive for the distributee than that
which otherwise applies under the plan to revocation of the form of
distribution elected by the distributee.
Q-9: Must the plan administrator permit a distributee to elect to
have a portion of an eligible rollover distribution paid to an eligible
retirement plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
A-9: Yes, the plan administrator must permit a distributee to elect
to have a portion of an eligible rollover distribution paid to an
eligible retirement plan in a direct rollover and to have the remainder
paid to the distributee. However, the plan administrator is permitted to
require that, if the distributee elects to have only a portion of an
eligible rollover distribution paid to an eligible retirement plan in a
direct rollover, that portion be equal to at least a specified minimum
amount, provided the specified minimum amount is less than or equal to
$500 or any greater amount as prescribed by the Commissioner in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter. If the entire
amount of the eligible rollover distribution is less than or equal to
the specified minimum amount, the plan administrator need not allow the
distributee to divide the distribution.
Q-10: Must the plan administrator allow a distributee to divide an
eligible rollover distribution into two or more separate distributions
to be paid in direct rollovers to two or more eligible retirement plans?
A-10: No. The plan administrator is not required (but is permitted)
to allow the distributee to divide an eligible rollover distribution
into separate distributions to be paid to two or more eligible
retirement plans in direct rollovers. Thus, the plan administrator may
require that the distributee select a single eligible retirement plan to
which the eligible rollover distribution (or portion thereof) will be
distributed in a direct rollover.
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct rollover
if his or her eligible rollover distributions during a year are
reasonably expected to total less than $200?
A-11: Yes. A plan will satisfy section 401(a)(31) even though the
plan administrator does not permit any distributee to elect a direct
rollover with respect to eligible rollover distributions during a year
that are reasonably 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
[[Page 289]]
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 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
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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 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
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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 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
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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; T.D. 9340, 72 FR 41159,
July 26, 2007]
Sec. 1.401(a)(35)-1 Diversification requirements for certain
defined contribution plans.
(a) General rule--(1) Diversification requirements. Section
401(a)(35) imposes diversification requirements on applicable defined
contribution plans. A trust that is part of an applicable defined
contribution plan is not a qualified trust under section 401(a) unless
the plan--
(i) Satisfies the diversification election requirements for elective
deferrals and employee contributions set forth in paragraph (b) of this
section;
(ii) Satisfies the diversification election requirements for
employer nonelective contributions set forth in paragraph (c) of this
section;
(iii) Satisfies the investment option requirement set forth in
paragraph (d) of this section; and
(iv) Does not apply any restrictions or conditions on investments in
employer securities that violate the requirements of paragraph (e) of
this section.
(2) Definitions, effective dates, and transition rules. The
definitions of applicable defined contribution plan, employer security,
parent corporation, and publicly traded are set forth in paragraph (f)
of this section. Applicability dates and transition rules are set forth
in paragraph (g) of this section.
(b) Diversification requirements for elective deferrals and employee
contributions invested in employer securities--(1) General rule. With
respect to any individual described in paragraph (b)(2) of this section,
if any portion of the individual's account under an applicable defined
contribution plan attributable to elective deferrals (as described in
section 402(g)(3)(A)), employee contributions, or rollover contributions
is invested in employer securities, then the plan satisfies the
requirements of this paragraph (b) if the individual may elect to divest
those employer securities and reinvest an equivalent amount in other
investment options. The plan may limit the time for divestment and
reinvestment to periodic, reasonable opportunities occurring no less
frequently than quarterly.
(2) Applicable individual with respect to elective deferrals and
employee contributions. An individual is described in this paragraph
(b)(2) if the individual is--
(i) A participant;
(ii) An alternate payee who has an account under the plan; or
(iii) A beneficiary of a deceased participant.
(c) Diversification requirements for employer nonelective
contributions invested in employer securities--(1) General rule. With
respect to any individual described in paragraph (c)(2) of this section,
if a portion of the individual's account under an applicable defined
contribution plan attributable to employer nonelective contributions is
invested in employer securities, then the plan
[[Page 293]]
satisfies the requirements of this paragraph (c) if the individual may
elect to divest those employer securities and reinvest an equivalent
amount in other investment options. The plan may limit the time for
divestment and reinvestment to periodic, reasonable opportunities
occurring no less frequently than quarterly.
(2) Applicable individual with respect to employer nonelective
contributions. An individual is described in this paragraph (c)(2) if
the individual is--
(i) A participant who has completed at least three years of service;
(ii) An alternate payee who has an account under the plan with
respect to a participant who has completed at least three years of
service; or
(iii) A beneficiary of a deceased participant.
(3) Completion of three years of service. For purposes of paragraph
(c)(2) of this section, a participant completes three years of service
on the last day of the vesting computation period provided for under the
plan that constitutes the completion of the third year of service under
section 411(a)(5). However, for a plan that uses the elapsed time method
of crediting service for vesting purposes (or a plan that provides for
immediate vesting without using a vesting computation period or the
elapsed time method of determining vesting), a participant completes
three years of service on the day immediately preceding the third
anniversary of the participant's date of hire.
(d) Investment options. An applicable defined contribution plan must
offer not less than three investment options, other than employer
securities, to which an individual who has the right to divest under
paragraph (b)(1) or (c)(1) of this section may direct the proceeds from
the divestment of employer securities. Each of the three investment
options must be diversified and have materially different risk and
return characteristics. For this purpose, investment options that
constitute a broad range of investment alternatives within the meaning
of Department of Labor Regulation section 2550.404c-1(b)(3) are treated
as being diversified and having materially different risk and return
characteristics.
(e) Restrictions or conditions on investments in employer
securities--(1) Impermissible restrictions or conditions--(i) General
rule. Except as provided in paragraph (e)(2) of this section, an
applicable defined contribution plan violates the requirements of this
paragraph (e) if the plan imposes restrictions or conditions with
respect to the investment of employer securities that are not imposed on
the investment of other assets of the plan. A restriction or condition
with respect to employer securities means--
(A) A restriction on an individual's right to divest an investment
in employer securities that is not imposed on an investment that is not
employer securities; or
(B) A benefit that is conditioned on investment in employer
securities.
(ii) Indirect restrictions or conditions--(A) Except as provided in
paragraph (e)(3) of this section, a plan violates the requirements of
this paragraph (e) if the plan imposes a restriction or condition
described in paragraph (e)(1)(i)(A) or (B) of this section either
directly or indirectly.
(B) A plan imposes an indirect restriction on an individual's right
to divest an investment in employer securities if, for example, the plan
provides that a participant who divests his or her account balance with
respect to the investment in employer securities is not permitted for a
period of time thereafter to reinvest in employer securities.
(C) A plan does not impose an indirect restriction or condition
merely because there are tax consequences that result from an
individual's divestment of an investment in employer securities. Thus,
the loss of the special treatment for net unrealized appreciation
provided under section 402(e)(4) with respect to employer securities is
disregarded. Similarly, a plan does not impose an impermissible
restriction or condition merely because it provides that an individual
may not reinvest divested amounts in the same employer securities
account but is permitted to invest such divested amounts in another
employer securities account where the only relevant difference between
the separate accounts is the section 402(e)(4) cost (or other basis) of
the
[[Page 294]]
trust in the shares held in each account. (See Sec. 1.402(a)-1(b) for
rules regarding section 402(e)(4).)
(2) Permitted restrictions or conditions--(i) In general. An
applicable defined contribution plan does not violate the requirements
of this paragraph (e) merely because it imposes a restriction or a
condition set forth in paragraph (e)(2)(ii) or (e)(2)(iii) of this
section.
(ii) Securities laws. A plan is permitted to impose a restriction or
condition on the divestiture of employer securities that is either
required in order to ensure compliance with applicable securities laws
or is reasonably designed to ensure compliance with applicable
securities laws. For example, it is permissible for a plan to limit
divestiture rights for participants who are subject to section 16(b) of
the Securities Exchange Act of 1934 (15 U.S.C. 78f) to a reasonable
period (such as 3 to 12 days) following publication of the employer's
quarterly earnings statements because it is reasonably designed to
ensure compliance with Rule 10b-5 of the Securities and Exchange
Commission.
(iii) Deferred application of the diversification requirements--(A)
Becoming an applicable defined contribution plan. An applicable defined
contribution plan is permitted to restrict the application of the
diversification requirements of section 401(a)(35) and this section for
up to 90 days after the plan becomes an applicable defined contribution
plan (for example, a plan becoming an applicable defined contribution
plan because the employer securities held under the plan become publicly
traded).
(B) Loss of exception for indirect investments. In the case where an
investment fund described in paragraph (f)(3)(ii)(A) of this section no
longer meets the requirement in paragraph (f)(3)(ii)(B) of this section
that the investment must be independent of the employer (including the
situation where the fund no longer meets the percentage limitation rule
in paragraph (f)(3)(ii)(C) of this section), the plan does not fail to
satisfy the diversification requirements of section 401(a)(35) and this
section merely because it does not offer those rights with respect to
that investment fund for up to 90 days after the investment fund ceases
to meet those requirements.
(3) Permitted indirect restrictions or conditions--(i) In general.
An applicable defined contribution plan does not violate the
requirements of this paragraph (e) merely because it imposes an indirect
restriction or condition set forth in this paragraph (e)(3).
(ii) Limitation on investment in employer securities. A plan is
permitted to limit the extent to which an individual's account balance
can be invested in employer securities, provided the limitation applies
without regard to a prior exercise of rights to divest employer
securities. For example, a plan does not impose a restriction that
violates this paragraph (e) merely because the plan prohibits a
participant from investing additional amounts in employer securities if
more than 10 percent of that participant's account balance is invested
in employer securities.
(iii) Trading frequency. A plan is permitted to impose reasonable
restrictions on the timing and number of investment elections that an
individual can make to invest in employer securities, provided that the
restrictions are designed to limit short-term trading in the employer
securities. For example, a plan could provide that a participant may not
elect to invest in employer securities if the employee has elected to
divest employer securities within a short period of time, such as seven
days, prior to the election to invest in employer securities.
(iv) Fees. The plan has not provided an indirect benefit that is
conditioned on investment in employer securities merely because the plan
imposes fees on other investment options that are not imposed on the
investment in employer securities. In addition, the plan has not
provided a restriction on the right to divest an investment in employer
securities merely because the plan imposes a reasonable fee for the
divestment of employer securities.
(v) Stable value or similar fund. A plan is permitted to allow
transfers to be made into or out of a stable value or similar fund more
frequently than a fund invested in employer securities for purposes of
paragraph (e)(1)(ii) of this section. Thus, a plan that includes
[[Page 295]]
a broad range of investment alternatives as described in paragraph (d)
of this section, including a stable value or similar fund, does not
impose an impermissible restriction under paragraph (e)(1)(ii) of this
section merely because it permits transfers into or out of that fund
more frequently than other funds under the plan, provided that the plan
would otherwise satisfy this paragraph (e) (taking into account any
restrictions or conditions imposed with respect to the other investment
options under the plan). For purposes of this section, a stable value
fund or similar fund means an investment product or fund designed to
preserve or guarantee principal and provide a reasonable rate of return,
while providing liquidity for benefit distributions or transfers to
other investment alternatives (such as a product or fund described in
Department of Labor Regulation Sec. 2550.404c-5(e)(4)(iv)(A) or
(v)(A)).
(vi) Transfers out of a qualified default investment alternative
(QDIA). A plan is permitted to provide for transfers out of a QDIA
within the meaning of Department of Labor Regulation section 2550.404c-
5(e) more frequently than a fund invested in employer securities.
(vii) Frozen funds--(A) General rule. A plan is permitted to
prohibit any further investment in employer securities. Thus, a plan is
not treated as imposing an indirect restriction merely because it
provides that an employee that divests an investment in employer
securities is not permitted to reinvest in employer securities, but only
if the plan does not permit additional contributions or other
investments to be invested in employer securities. For this purpose, a
plan does not provide for further investment in employer securities
merely because dividends paid on employer securities under the plan are
reinvested in employer securities.
(B) Transitional relief for certain leveraged employee stock
ownership plans (ESOPs). An employer stock fund does not fail to be a
frozen fund under this paragraph (e)(3)(vii) merely because of the
allocation of employer securities that are released as matching
contributions from the plan's suspense account that holds employer
securities acquired with an exempt loan under section 4975(d)(3). This
paragraph (e)(3)(vii)(B) only applies to employer securities that were
acquired in a plan year beginning before January 1, 2007, with the
proceeds of an exempt loan within the meaning of section 4975(d)(3)
which is not refinanced after the end of the last plan year beginning
before January 1, 2007.
(4) Delegation of authority to Commissioner. The Commissioner may
provide for additional permitted restrictions or conditions or permitted
indirect restrictions or conditions in revenue rulings, notices, or
other guidance published in the Internal Revenue Bulletin.
(f) Definitions--(1) Application of definitions. This paragraph (f)
contains definitions that are applicable for purposes of this section.
(2) Applicable defined contribution plan--(i) General rule. Except
as provided in this paragraph (f)(2), an applicable defined contribution
plan means any defined contribution plan which holds employer securities
that are publicly traded. See paragraph (f)(2)(iv) of this section for a
special rule that treats certain plans that hold employer securities
that are not publicly traded as applicable defined contribution plans
and paragraph (f)(3)(ii) of this section for a special rule that treats
certain plans as not holding publicly traded employer securities for
purposes of this section.
(ii) Exception for certain ESOPs. An employee stock ownership plan
(ESOP), as defined in section 4975(e)(7), is not an applicable defined
contribution plan if the plan is a separate plan for purposes of section
414(l) with respect to any other defined benefit plan or defined
contribution plan maintained by the same employer or employers and holds
no contributions (or earnings thereunder) that are (or were ever)
subject to section 401(k) or 401(m). Thus, an ESOP is an applicable
defined contribution plan if the ESOP is a portion of a larger plan
(whether or not that larger plan includes contributions that are subject
to section 401(k) or 401(m)). For purposes of this paragraph (f)(2)(ii),
a plan is not considered to hold amounts ever subject to section 401(k)
or 401(m) merely because the plan holds amounts attributable to rollover
amounts in a separate account
[[Page 296]]
that were previously subject to section 401(k) or 401(m).
(iii) Exception for one-participant plans. A one-participant plan,
as defined in section 401(a)(35)(E)(iv), is not an applicable defined
contribution plan.
(iv) Certain defined contribution plans treated as holding publicly
traded employer securities--(A) General rule. A defined contribution
plan holding employer securities that are not publicly traded is treated
as an applicable defined contribution plan if any employer maintaining
the plan or any member of a controlled group of corporations that
includes such employer has issued a class of stock which is publicly
traded. For purposes of this paragraph (f)(2)(iv), a controlled group of
corporations has the meaning given such term by section 1563(a), except
that ``50 percent'' is substituted for ``80 percent'' each place it
appears.
(B) Exception for certain plans. Paragraph (f)(2)(iv)(A) of this
section does not apply to a plan if--
(1) No employer maintaining the plan (or a parent corporation with
respect to such employer) has issued stock that is publicly traded; and
(2) No employer maintaining the plan (or parent corporation with
respect to such employer) has issued any special class of stock which
grants to the holder or issuer particular rights, or bears particular
risks for the holder or issuer, with respect to any employer maintaining
the plan (or any member of a controlled group of corporations that
includes such employer) which has issued any stock that is publicly
traded.
(3) Employer security--(i) General rule. Employer security has the
meaning given such term by section 407(d)(1) of the Employee Retirement
Income Security Act of 1974, as amended (ERISA).
(ii) Certain defined contribution plans or investment funds not
treated as holding employer securities--(A) Exception for certain
indirect investments. Subject to paragraphs (f)(3)(ii)(B) and (C) of
this section, a plan (and an investment option described in paragraph
(d) of this section) is not treated as holding employer securities for
purposes of this section to the extent the employer securities are held
indirectly as part of a broader fund that is--
(1) A regulated investment company described in section 851(a);
(2) A common or collective trust fund or pooled investment fund
maintained by a bank or trust company supervised by a State or a Federal
agency;
(3) A pooled investment fund of an insurance company that is
qualified to do business in a State;
(4) An investment fund managed by an investment manager within the
meaning of section 3(38) of ERISA for a multiemployer plan; or
(5) Any other investment fund designated by the Commissioner in
revenue rulings, notices, or other guidance published in the Internal
Revenue Bulletin.
(B) Investment must be independent. The exception set forth in
paragraph (f)(3)(ii)(A) of this section applies only if the investment
in the employer securities is held in a fund under which--
(1) There are stated investment objectives of the fund; and
(2) The investment is independent of the employer (or employers) and
any affiliate thereof.
(C) Percentage limitation rule. For purposes of paragraph
(f)(3)(ii)(B)(2) of this section, an investment in employer securities
in a fund is not considered to be independent of the employer (or
employers) and any affiliate thereof if the aggregate value of the
employer securities held in the fund is in excess of 10 percent of the
total value of all of the fund's investments for the plan year. The
determination of whether the value of employer securities exceeds 10
percent of the total value of the fund's investments for the plan year
is made as of the end of the preceding plan year. The determination can
be based on the information in the latest disclosure of the fund's
portfolio holdings that was filed with the Securities and Exchange
Commission (SEC) in that preceding plan year.
(4) Parent corporation. Parent corporation has the meaning given
such term by section 424(e).
(5) Publicly traded--(i) In general. A security is publicly traded
if it is readily tradable on an established securities market.
[[Page 297]]
(ii) Readily tradable on an established securities market. For
purposes of this paragraph (f)(5), except as provided by the
Commissioner in revenue rulings, notices, or other guidance published in
the Internal Revenue Bulletin, a security is readily tradable on an
established securities market if--
(A) The security is traded on a national securities exchange that is
registered under section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(B) The security is traded on a foreign national securities exchange
that is officially recognized, sanctioned, or supervised by a
governmental authority and the security is deemed by the SEC as having a
``ready market'' under SEC Rule 15c3-1 (17 CFR 240.15c3-1).
(g) Applicability date and transition rules--(1) Statutory effective
date--(i) General rule. Except as otherwise provided in this paragraph
(g) and section 901(c)(3)(A) and (B) of the Pension Protection Act of
2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA '06), section
401(a)(35) is effective for plan years beginning after December 31,
2006.
(ii) Collectively bargained plans--(A) Delayed statutory effective
date. In the case of a plan maintained pursuant to one or more
collective bargaining agreements between employee representatives and
one or more employers ratified on or before August 17, 2006, section
401(a)(35) is effective for plan years beginning after the earlier of--
(1) The later of--
(i) December 31, 2007; or
(ii) The date on which the last such collective bargaining agreement
terminates (determined without regard to any extension thereof); or
(2) December 31, 2008.
(B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. If a collective bargaining agreement
applies to some, but not all, of the plan participants, the definition
of whether the plan is considered a collectively bargained plan for
purposes of this paragraph (g)(1)(ii) is made in the same manner as the
definition of whether a plan is collectively bargained under section
436(f)(3).
(2) Regulatory effective/applicability date. This section is
effective and applicable for plan years beginning on or after January 1,
2011.
(3) Statutory transition rules--(i) General rule. Pursuant to
section 401(a)(35)(H), in the case of the portion of an account to which
paragraph (c) of this section applies and that consists of employer
securities acquired in a plan year beginning before January 1, 2007, the
requirements of paragraph (c) of this section only apply to the
applicable percentage of such securities.
(ii) Applicable percentage--(A) Phase-in percentage. For purposes of
this paragraph (g)(3), the applicable percentage is determined as
follows--
------------------------------------------------------------------------
Plan year to which paragraph (c) of this section The applicable
applies: percentage is:
------------------------------------------------------------------------
1st................................................... 33
2nd................................................... 66
3rd and following..................................... 100
------------------------------------------------------------------------
(B) Special rule. For a plan for which the special effective date
under section 901(c)(3) of PPA '06 applies, the applicable percentage
under this paragraph (g)(3)(ii) is determined without regard to the
delayed effective date in section 901(c)(3)(A) and (B) of PPA '06.
(iii) Nonapplication for participants age 55 with three years of
service. Paragraph (g)(3)(i) of this section does not apply to an
individual who is a participant who attained age 55 and had completed at
least three years of service (as defined in paragraph (c)(3) of this
section) before the first day of the first plan year beginning after
December 31, 2005.
(iv) Separate application by class of securities. This paragraph
(g)(3) applies separately with respect to each class of securities.
[T.D. 9484, 75 FR 27931, May 19, 2010]
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
[[Page 298]]
section) with respect to such disqualifying provision, all provisions of
the plan which are necessary to satisfy all requirements of sections
401(a), 403(a), or 405(a) are in effect and have been made effective for
all purposes for the whole of such period. Under some facts and
circumstances, it may not be possible to amend a plan retroactively so
that all provisions of the plan which are necessary to satisfy the
requirements of section 401(a) are in fact made effective for the whole
remedial amendment period. If it is not possible, the requirements of
this section will not be satisfied even if the employer adopts a
retroactive plan amendment which, in form, appears to satisfy such
requirements. Section 401(b) does not permit a plan to be made
retroactively effective, for qualification purposes, for a taxable year
prior to the taxable year of the employer in which the plan was adopted
by such employer.
(b) Disqualifying provisions. For purposes of this section, with
respect to a plan described in paragraph (a) of this section, the term
``disqualifying provision'' means:
(1) A provision of a new plan, the absence of a provision from a new
plan, or an amendment to an existing plan, which causes such plan to
fail to satisfy the requirements of the Code applicable to qualification
of such plan as of the date such plan or amendment is first made
effective.
(2) A plan provision which results in the failure of the plan to
satisfy the qualification requirements of the Code by reason of a change
in such requirements--
(i) Effected by the Employee Retirement Income Security Act of 1974
(Pub. L. 93-406, 88 Stat. 829), hereafter referred to as ``ERISA,'' or
the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248, 96
Stat. 324), hereafter referred to as ``TEFRA,'' or
(ii) Effective before the first day of the first plan year beginning
after December 31, 1989 and that is effected by the Tax Reform Act of
1986 (Pub. L. 99-514, 100 Stat. 2085, 2489), hereafter referred to as
``TRA '86,'' the Omnibus Budget Reconciliation Act of 1986, (Pub. L. 99-
509, 100 Stat. 1874), hereafter referred to as ``OBRA '86,'' or the
Omnibus Budget Reconciliation Act of 1987 (Pub. L. 100-203, 101 Stat.
1330), hereafter referred to as ``OBRA '87.'' For purposes of this
paragraph (b)(2)(ii), a disqualifying provision includes any plan
provision that is integral to a qualification requirement changed by TRA
'86, OBRA '86, or OBRA '87 or any requirement treated by the
Commissioner, directly or indirectly, as if section 1140 of TRA '86
applied to it, but only to the extent such provision is effective before
the first day of the first plan year beginning after December 31, 1989.
With respect to disqualifying provisions described in this paragraph
(b)(2)(ii) effective before the first day of the first plan year which
begins after December 31, 1988, there must be compliance with the
conditions of section 1140 of TRA '86 (other than the requirement that
the plan amendment be made on or before the last day of the first plan
year beginning after December 31, 1988), including operation in
accordance with the plan provision as of its effective date with respect
to the plan.
(3) A plan provision designated by the Commissioner, at the
Commissioner's discretion, as a disqualifying provision that either--
(i) Results in the failure of the plan to satisfy the qualification
requirements of the Internal Revenue Code by reason of a change in those
requirements; or
(ii) Is integral to a qualification requirement of the Internal
Revenue Code that has been changed.
(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.
[[Page 299]]
(3) Authority to impose limitations. In the case of a provision that
has been designated as a disqualifying provision by the Commissioner
pursuant to paragraph (b)(3) of this section, the Commissioner may
impose limits and provide additional rules regarding the amendments that
may be made with respect to that disqualifying provision during the
remedial amendment period. The Commissioner may provide guidance in
revenue rulings, notices, and other guidance published in the Internal
Revenue Bulletin. See Sec. 601.601(d)(2) of this chapter.
(d) Remedial amendment period. (1) The remedial amendment period
with respect to a disqualifying provision begins:
(i) In the case of a provision of, or absence of a provision from, a
new plan, described in paragraph (b)(1) of this section, the date the
plan is put into effect,
(ii) In the case of an amendment to an existing plan, described in
paragraph (b)(1) of this section, the date the plan amendment is adopted
or put into effect (whichever is earlier),
(iii) In the case of a disqualifying provision described in
paragraph (b)(2) of this section, the date on which the change effected
by ERISA, TEFRA, TRA '86, OBRA '86, OBRA '87, or a qualification
requirement that is treated, directly or indirectly, as subject to the
conditions of section 1140 of TRA '86 described in paragraph (b)(2) of
this section, became effective with respect to such plan or, in the case
of a provision, described in paragraph (b)(2)(ii) of this section, that
is integral to such qualification requirement, the first day on which
the plan was operated in accordance with such provision, or
(iv) In the case of a disqualifying provision described in paragraph
(b)(3)(i) of this section, the date on which the change effected by an
amendment to the Internal Revenue Code became effective with respect to
the plan; or
(v) In the case of a disqualifying provision described in paragraph
(b)(3)(ii) of this section, the first day on which the plan was operated
in accordance with such provision, as amended, unless another time is
specified by the Commissioner in revenue rulings, notices, and other
guidance published in the Internal Revenue Bulletin. See Sec.
601.601(d)(2) of this chapter.
(2) Unless further extended as provided by paragraph (e) of this
section, the remedial amendment period ends with the latest of:
(i) In the case of a plan maintained by one employer, the time
prescribed by law, including extensions, for filing the income tax
return (or partnership return of income) of the employer for the
employer's taxable year in which falls the latest of:
(A) The date on which the remedial amendment period begins.
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(ii) In the case of a plan maintained by one employer, the last day
of the plan year within which falls the latest of:
(A) The date on which the remedial amendment period begins,
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(iii) In the case of a plan maintained by more than one employer,
the last day of the tenth month following the last day of the plan year
in which falls the latest of:
(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
[[Page 300]]
with the first day of the first plan year which begins after December
31, 1988.
(4) For purposes of this paragraph (d)(2) of this section, a master
or prototype plan shall not be considered to be a plan maintained by
more than one employer, and whether or not a plan is maintained by more
than one employer, shall be determined without regard to section 414 (b)
and (c) except that if a plan is maintained solely by an affiliated
group of corporations (within the meaning of section 1504) which files a
consolidated income tax return pursuant to section 1501 for a taxable
year within which falls the latest of the dates described in paragraph
(d)(2)(i) of this section, such plan shall be deemed to be maintained by
one employer.
(e) Extensions of remedial amendment period--(1) Opinion letter
request by sponsoring organization of master or prototype plan. In the
case of an employer who has adopted a master or prototype plan, a
remedial amendment period that began on or after September 2, 1974,
shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The opinion letter with respect to the request of the sponsoring
organization is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph apply only if the
sponsoring organization of such master or prototype plan has, after
September 2, 1974, and on or before December 31, 1976, filed a request
for an opinion letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan). The
provisions of this paragraph (e)(1) apply to a master or prototype plan
adopted to replace another plan even though the remedial amendment
period applicable to the replaced plan has expired at the time of
adoption of the replacement plan.
(2) Notification letter request by law firm sponsor of district-
approved plan. In the case of an employer who has adopted a pattern
plan, a remedial amendment period that began on or after September 2,
1974, shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The notification letter with respect to the request of the
sponsoring law firm is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph shall apply only if
the sponsoring law firm of such pattern plan has, on or before December
31, 1976, filed a request for a notification letter with the Internal
Revenue Service with respect to the initial or continuing qualification
of the plan (or a trust which is part of the plan). The provisions of
this paragraph (e)(2) apply to a pattern plan adopted to replace another
plan even though the remedial amendment period applicable to the
replaced plan has expired at the time of the adoption of the replacement
plan.
(3) Determination letter request by employer or plan administrator.
If on or before the end of a remedial amendment period determined
without regard to this paragraph (e), or in a case to which paragraph
(e) (1) or (2) of this section applies, on or before the 90th day
following the later of the dates described in paragraph (e) (1) or (2)
of this section, the employer or plan administrator files a request
pursuant to 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)
[[Page 301]]
in response to such request, the date on which the decision of the
United States Tax Court in such proceeding becomes final.
(4) Transitional rule. In the case of a request for a determination
letter described in and filed within the time prescribed in paragraph
(e)(3) of this section with respect to which a final determination is
issued by the Internal Revenue Service on or before September 28, 1976
the remedial amendment period described in paragraph (d) of this section
shall not end prior to the expiration of 150 days beginning on the date
of such final determination by the Internal Revenue Service.
(5) Disqualifying provision prior to September 2, 1974. If the
remedial amendment period with respect to a disqualifying provision
described in paragraph (b)(1) of this section began prior to September
2, 1974, and the provisions of paragraphs (e)(5)(i), (ii) and (iii) of
this section are satisfied, the remedial amendment period described in
paragraph (d) shall not end prior to December 31, 1976. This
subparagraph shall apply only if--
(i) A request pursuant to Sec. 601.201 of this chapter for a
determination letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan) was
filed not later than the later of:
(A) The time prescribed by law, including extensions, for filing the
income tax return (or partnership return of income) of the employer for
the employer's taxable year in which falls the date on which the
remedial amendment period began, or
(B) The date 6 months after the close of such taxable year,
(ii) The employer, either:
(A) While such request for a determination letter is or was under
consideration by the Internal Revenue Service or,
(B) Promptly after the date on which notice of the final
determination with respect to such request for a determination letter is
issued by the Internal Revenue Service, such request is withdrawn, or
such request is otherwise finally disposed of by the Internal Revenue
Service, adopts or adopted either a plan amendment retroactive to the
date on which the remedial amendment period began, or a prospective plan
amendment, and
(iii) The amendment described in paragraph (e)(5)(ii) of this
section would have resulted in the plan's satisfying the requirements of
section 401(a) of the Code from the beginning of the remedial amendment
period to the date such amendment was made if this section had been in
effect during such period, and in the case of a prospective amendment,
if such amendment had been made retroactive to such beginning date.
(f) Discretionary extensions. At his discretion, the Commissioner
may extend the remedial amendment period or may allow a particular plan
to be amended after the expiration of its remedial amendment period and
any applicable extension of such period. In determining whether such an
extension will be granted, the Commissioner shall consider, among other
factors, whether substantial hardship to the employer would result if
such an extension were not granted, whether such an extension is in the
best interest of plan participants, and whether the granting of the
extension is adverse to the interests of the Government. The mere
absence of final regulations with respect to issues covered under the
Special Reliance Procedure announced by the Internal Revenue Service in
Technical Information Release 1416 on November 5, 1975, and as extended
by Internal Revenue Service News Release IR-1616 on May 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 302]]
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 Sec. Sec. 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 Sec. Sec.
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 Sec. Sec. 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 303]]
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 304]]
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 305]]
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 306]]
(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 307]]
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 308]]
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 309]]
Sec. 1.401(k)-0 Table of contents.
This section contains first a list of section headings and then a
list of the paragraphs in each section in Sec. Sec. 1.401(k)-1 through
1.401(k)-6.
List of Sections
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
Sec. 1.401(k)-2 ADP test.
Sec. 1.401(k)-3 Safe harbor requirements.
Sec. 1.401(k)-4 SIMPLE 401(k) plan requirements.
Sec. 1.401(k)-5 Special rules for mergers, acquisitions and similar
events. [Reserved]
Sec. 1.401(k)-6 Definitions.
List of Paragraphs
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 ESOP dividend election.
(iv) Treatment of elective contributions as plan assets.
(3) Rules applicable to cash or deferred elections generally.
(i) Definition of cash or deferred election.
(ii) Automatic enrollment.
(iii) Rules related to timing.
(A) Requirement that amounts not be currently available.
(B) Contribution may not precede election.
(C) Contribution may not precede services.
(iv) Current availability defined.
(v) Certain one-time elections not treated as cash or deferred
elections.
(vi) Tax treatment of employees.
(vii) 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.
(A) Exclusive means of amounts testing.
(B) Testing benefits, rights and features.
(C) Minimum coverage requirement.
(5) Rules applicable to nonqualified cash or deferred arrangements.
(i) Definition of nonqualified cash or deferred arrangement.
(ii) Treatment of elective contributions as nonelective
contributions.
(iii) Tax treatment of employees.
(iv) Qualification of plan that includes a nonqualified cash or
deferred arrangement.
(A) In general.
(B) Application of section 401(a)(4) to certain plans.
(v) Example.
(6) Rules applicable to cash or deferred arrangements of self-
employed individuals.
(i) Application of general rules.
(ii) Treatment of matching contributions made on behalf of self-
employed individuals.
(iii) Timing of self-employed individual's cash or deferred
election.
(iv) Special rule for certain payments to self-employed individuals.
(b) Coverage and nondiscrimination requirements.
(1) In general.
(2) Automatic satisfaction by certain plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
(ii) Aggregation of cash or deferred arrangements within a plan.
(iii) Aggregation of plans.
(A) In general.
(B) Plans with inconsistent ADP testing methods.
(iv) Disaggregation of plans and separate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Modifications to section 410(b) rules.
(A) Certain disaggregation rules not applicable.
(B) Permissive aggregation of collective bargaining units.
(C) Multiemployer plans.
(vi) Examples.
(c) Nonforfeitability requirements.
(1) General rule.
(2) Definition of immediately nonforfeitable.
(3) Example.
(d) Distribution limitation.
(1) General rule.
(2) Rules applicable to distributions upon severance from
employment.
(3) Rules applicable to hardship distributions.
(i) Distribution must be on account of hardship.
(ii) Limit on maximum distributable amount.
(A) General rule.
(B) Grandfathered amounts.
(iii) Immediate and heavy financial need.
(A) In general.
(B) Deemed immediate and heavy financial need.
[[Page 310]]
(iv) Distribution necessary to satisfy financial need.
(A) Distribution may not exceed amount of need.
(B) No alternative means available.
(C) Employer reliance on employee representation.
(D) Employee need not take counterproductive actions.
(E) Distribution deemed necessary to satisfy immediate and heavy
financial need.
(F) Definition of other plans.
(v) Commissioner may expand standards.
(4) Rules applicable to distributions upon plan termination.
(i) No alternative defined contribution plan.
(ii) Lump sum requirement for certain distributions.
(5) Rules applicable to all distributions.
(i) Exclusive distribution rules.
(ii) Deemed distributions.
(iii) ESOP dividend distributions.
(iv) Limitations apply after transfer.
(6) Examples.
(e) Additional requirements for qualified cash or deferred
arrangements.
(1) Qualified plan requirement.
(2) Election requirements.
(i) Cash must be available.
(ii) Frequency of elections.
(3) Separate accounting requirement.
(i) General rule.
(ii) Satisfaction of separate accounting requirement.
(4) Limitations on cash or deferred arrangements of state and local
governments.
(i) General rule.
(ii) Rural cooperative plans and Indian tribal governments.
(iii) Adoption after May 6, 1986.
(iv) Adoption before May 7, 1986.
(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) Plan provision requirement.
(f) Special rules for designated Roth contributions.
(1) In general.
(2) Inclusion treatment.
(3) Separate accounting required.
(4) Designated Roth contributions must satisfy rules applicable to
elective contributions.
(i) In general.
(ii) Special rules for direct rollovers.
(5) Rules regarding designated Roth contribution elections.
(i) Frequency of elections.
(ii) Default elections.
(6) Effective date.
(g) Effective dates.
(1) General rule.
(2) Early implementation permitted.
(3) Collectively bargained plans.
(4) Applicability of prior regulations.
Sec. 1.401(k)-2 ADP Test
(a) Actual deferral percentage (ADP) Test.
(1) In general.
(i) ADP test formula.
(ii) HCEs as sole eligible employees.
(iii) Special rule for early participation.
(2) Determination of ADP.
(i) General rule.
(ii) Determination of applicable year under current year and prior
year testing method.
(3) Determination of ADR.
(i) General rule.
(ii) ADR of HCEs eligible under more than one arrangement.
(A) General rule.
(B) Plans not permitted to be aggregated.
(iii) Examples.
(4) Elective contributions taken into account under the ADP test.
(i) General rule.
(ii) Elective contributions for partners and self-employed
individuals.
(iii) Elective contributions for HCEs.
(5) Elective contributions not taken into account under the ADP
test.
(i) General rule.
(ii) Elective contributions for NHCEs.
(iii) Elective contributions treated as catch-up contributions.
(iv) Elective contributions used to satisfy the ACP test.
(v) Additional elective contributions pursuant to section 414(u).
(vi) Default elective contributions pursuant to section 414(w).
(6) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the ADP test.
(i) Timing of allocation.
(ii) Requirement that amount satisfy section 401(a)(4).
(iii) Aggregation must be permitted.
(iv) Disporportionate contributions not taken into account.
(A) General rule.
(B) Definition of representative contribution rate.
(C) Definition of applicable contribution rate.
(D) Special rule for prevailing wage contributions.
(v) Qualified matching contributions.
(vi) Contributions only used once.
(7) Examples.
(b) Correction of excess contributions.
(1) Permissible correction methods.
(i) In general.
(A) Qualified nonelective contributions or qualified matching
contributions.
(B) Excess contributions distributed.
(C) Excess contributions recharacterized.
[[Page 311]]
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Corrections through distribution.
(i) General rule.
(ii) Calculation of total amount to be distributed.
(A) Calculate the dollar amount of excess contributions for each
HCE.
(B) Determination of the total amount of excess contributions.
(C) Satisfaction of ADP.
(iii) Apportionment of total amount of excess contributions among
the HCEs.
(A) Calculate the dollar amount of excess contributions for each
HCE.
(B) Limit on amount apportioned to any individual.
(C) Apportionment to additional HCEs.
(iv) Income allocable to excess contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating plan year income.
(D) Plan years before 2008.
(E) Alternative method for allocating plan year and gap period
income.
(v) Distribution.
(vi) Tax treatment of corrective distributions.
(A) Corrective distributions for plan years beginning on or after
January 1, 2008.
(B) Corrective distributions for plan years beginning before January
1, 2008.
(C) Corrective distributions attributable to designated Roth
contributions.
(vii) Other rules.
(A) No employee or spousal consent required.
(B) Treatment of corrective distributions as elective contributions.
(C) No reduction of required minimum distribution.
(D) Partial distributions.
(viii) Examples.
(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) Treatment of recharacterized excess contributions.
(4) Rules applicable to all corrections.
(i) Coordination with distribution of excess deferrals.
(A) Treatment of excess deferrals that reduce excess contributions.
(B) Treatment of excess contributions that reduce excess deferrals.
(ii) Forfeiture of match on distributed excess contributions.
(iii) Permitted forfeiture of QMAC.
(iv) No requirement for recalculation.
(v) Treatment of excess contributions that are catch-up
contributions.
(5) Failure to timely 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.
(iii) Special rule for eligible automatic contribution arrangements.
(c) Additional rules for prior year testing method.
(1) Rules for change in testing method.
(i) General rule.
(ii) Situations permitting a change to the prior year testing
method.
(2) Calculation of ADP under the prior year testing method for the
first plan year.
(i) Plans that are not successor plans.
(ii) First plan year defined.
(iii) Successor plans.
(3) Plans using different testing methods for the ADP and ACP test.
(4) Rules for plan coverage changes.
(i) In general.
(ii) Optional rule for minor plan coverage changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
(C) Weighted average of the ADPs for the prior year subgroups.
(iv) Examples.
Sec. 1.401(k)-3 Safe harbor requirement
(a) ADP test safe harbor.
(1) Section 401(k)(12) safe harbor.
(2) Section 401(k)(13) safe harbor.
(3) Requirements applicable to safe harbor contributions.
(b) Safe harbor nonelective contribution requirement.
(1) General rule.
(2) Safe harbor compensation defined.
(c) Safe harbor matching contribution requirement.
(1) In general.
(2) Basic matching formula.
(3) Enhanced matching formula.
(4) Limitation on HCE matching contributions.
(5) Use of safe harbor match not precluded by certain plan
provisions.
(i) Safe harbor matching contributions on employee contributions.
(ii) Periodic matching contributions.
(6) Permissible restrictions on elective contributions by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of elective contributions.
(iv) Restrictions on types of compensation that may be deferred.
(v) Restrictions due to limitations under the Internal Revenue Code.
(7) Examples.
(d) Notice requirement.
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(1) General rule.
(2) Content requirement.
(i) General rule.
(ii) Minimum content requirement.
(iii) References to SPD.
(3) Timing requirement.
(i) General rule.
(ii) Deemed satisfaction of timing requirement.
(e) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3) Change of plan year.
(4) Final plan year.
(f) Plan amendments adopting safe harbor nonelective contributions.
(1) General rule.
(2) Contingent notice provided.
(3) Follow-up notice requirement.
(g) Permissible reduction or suspension of safe harbor
contributions.
(1) General rule.
(i) Matching contributions.
(ii) Nonelective contributions.
(2) Supplemental notice.
(h) Additional rules.
(1) Contributions taken into account.
(2) Use of safe harbor nonelective contributions to satisfy other
nondiscrimination tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution requirement under another
defined contribution plan.
(5) Contributions used only once.
(i) [Reserved]
(j) Qualified automatic contribution arrangement.
(1) Automatic contribution requirement.
(i) In general.
(ii) Automatic contribution arrangement.
(iii) Exception to automatic enrollment for certain current
employees.
(2) Qualified percentage.
(i) In general.
(ii) Minimum percentage requirements.
(A) Initial-period requirement.
(B) Second-year requirement.
(C) Third-year requirement.
(D) Later years requirement.
(iii) Exception to uniform percentage requirement.
(iv) Treatment of periods without default contributions.
(k) Modifications to contribution requirements and notice
requirements for automatic contribution safe harbor.
(1) In general.
(2) Lower matching requirement.
(3) Modified nonforfeiture requirement.
(4) Additional notice requirements.
(i) In general.
(ii) Additional information.
(iii) Timing requirements.
Sec. 1.401(k)-4 SIMPLE 401(k) Plan Requirements
(a) General rule.
(b) Eligible employer.
(1) General rule.
(2) Special rule.
(c) Exclusive plan.
(1) General rule.
(2) Special rule.
(d) Election and notice.
(1) General rule.
(2) Employee elections.
(i) Initial plan year of participation.
(ii) Subsequent plan years.
(iii) Election to terminate.
(3) Employee notices.
(e) Contributions.
(1) General rule.
(2) Elective contributions.
(3) Matching contributions.
(4) Nonelective contributions.
(5) SIMPLE compensation.
(f) Vesting.
(g) Plan year.
(h) Other rules.
Sec. 1.401(k)-5 Special Rules for Mergers, Acquisitions and Similar
Events. [Reserved]
Sec. 1.401(k)-6 Definitions.
[T.D. 9169, 69 FR 78154, Dec. 29, 2004, as amended by T.D. 9237, 71 FR 9
Jan. 3, 2006; T.D. 9324, 72 FR 21109, Apr. 30, 2007; T.D. 9447, 74 FR
8207, Feb. 24, 2009; T.D. 9641, 78 FR 68737, Nov. 15, 2013]
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
paragraphs (a)(2)(ii) and (iii) 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
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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 treating the contributions as taxable income subject to
applicable withholding requirements). See also section 414(h)(1). A
designated Roth contribution, however, is not treated as an after-tax
contribution for purposes of this section, Sec. 1.401(k)-2 through
Sec. 1.401(k)-6 and Sec. 1.401(m)-1 through Sec. 1.401(m)-5. A
contribution can be an after-tax employee contribution under the rule of
this paragraph (a)(2)(ii) 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 ESOP dividend election. A cash or deferred
arrangement does not include an arrangement under an ESOP under which
dividends are either distributed or invested pursuant to an election
made by participants or their beneficiaries in accordance with section
404(k)(2)(A)(iii).
(iv) Treatment of elective contributions as plan assets. The extent
to which elective contributions constitute plan assets for purposes of
the prohibited transaction provisions of section 4975 and title I of the
Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public
Law 93-406, is determined in accordance with regulations and rulings
issued by the Department of Labor. See 29 CFR 2510.3-102.
(3) Rules applicable to cash or deferred elections generally--(i)
Definition of cash or deferred election. A cash or deferred election is
any direct or indirect 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.
(ii) Automatic enrollment. For purposes of determining whether an
election is a cash or deferred election, it is irrelevant whether the
default that applies in the absence of an affirmative election is
described in paragraph (a)(3)(i)(A) of this section (i.e., the employee
receives an amount in cash or some other taxable benefit) or in
paragraph (a)(3)(i)(B) of this section (i.e., the employer contributes
an amount to a trust or provides an accrual or other benefit under a
plan deferring the receipt of compensation).
(iii) Rules related to timing--(A) Requirement that amounts not be
currently available. A cash or deferred election can only be made with
respect to an amount that is not currently available to the employee on
the date of the election. Further, a cash or deferred election can only
be made with respect to amounts that would (but for the cash or deferred
election) become currently available after the later of the date on
which the employer adopts the cash or deferred arrangement or the date
on which the arrangement first becomes effective.
(B) Contribution may not precede election. A contribution is made
pursuant to a cash or deferred election only if the contribution is made
after the election is made.
(C) Contribution may not precede services--(1) General rule.
Contributions are made pursuant to a cash or deferred election only if
the contributions are made after the employee's performance of service
with respect to which the contributions are made (or when the cash or
other taxable benefit would be currently available, if earlier).
(2) Exception for bona fide administrative considerations. The
timing of contributions will not be treated as failing to satisfy the
requirements of this paragraph (a)(3)(iii)(C) merely because
contributions for a pay period are occasionally made before the services
with respect to that pay period are performed, provided the
contributions are made early in order to accommodate
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bona fide administrative considerations (for example, the temporary
absence of the bookkeeper with responsibility to transmit contributions
to the plan) and are not paid early with a principal purpose of
accelerating deductions.
(iv) Current availability defined. Cash or another taxable benefit
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 benefit 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.
(v) Certain one-time elections not treated as cash or deferred
elections. A cash or deferred election does not include a one-time
irrevocable election made no later than the employee's first becoming
eligible under the plan or any other plan or arrangement of the employer
that is described in section 219(g)(5)(A) (whether or not such other
plan or arrangement has terminated), 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 a specified amount or percentage of the employee's
compensation (including no amount of compensation) divided among all
other plans or arrangements of the employer (including plans or
arrangements 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 made 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 the case of an irrevocable election made on or before December
23, 1994--
(A) The election does not fail to be treated as a one-time
irrevocable election under this paragraph (a)(3)(v) merely because an
employee was previously eligible under another plan of the employer
(whether or not such other plan has terminated); and
(B) In the case of a plan in which partners may participate, the
election does not fail to be treated as a one-time irrevocable election
under this paragraph (a)(3)(v) merely because the election was made
after commencement of employment or after the employee's first becoming
eligible under any plan of the employer, provided that the election was
made before the first day of the first plan year beginning after
December 31, 1988, or, if later, March 31, 1989.
(vi) 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), an employee is treated as having received an amount that is
contributed to an exempt trust or plan described in section 401(a) or
403(a) 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).
(vii) Examples. The following examples illustrate the application of
this paragraph (a)(3):
Example 1. (i) 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% 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.
(ii) 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. (i) An employer maintains a profit-sharing plan which
provides for discretionary profit sharing contributions and
[[Page 315]]
under which each eligible employee may elect to reduce his compensation
by up to 10% and to have the employer contribute such amount to the
plan. The employer pays each employee every two weeks for services
during the immediately preceding two weeks. The employee's election to
defer compensation for a payroll period must be made prior to the date
the amount would otherwise be paid. The employer contributes to the plan
the amount of compensation that each employee elected to defer, at the
time it would otherwise be paid to the employee, and does not treat the
contribution as an after-tax employee contribution.
(ii) The election is a cash or deferred election and the
contributions are elective contributions.
Example 3. (i) The facts are the same as in Example 2, except that
the employer makes a $10,000 contribution on January 31 of the plan year
that is in addition to the contributions that satisfy the employer's
obligation to make contributions with respect to cash or deferred
elections for prior payroll periods. Employee A makes an election on
February 15 to defer $2,000 from compensation that is not currently
available and the employer reduces the employee's compensation to
reflect the election.
(ii) None of the additional $10,000 contributed January 31 is a
contribution made pursuant to Employee A's cash or deferred election,
because the contribution was made before the election was made.
Accordingly, the employer must make an additional contribution of $2,000
in order to satisfy its obligation to contribute an amount to the plan
pursuant to Employee A's election. The $10,000 contribution may be
allocated under the plan terms providing for discretionary profit
sharing contributions.
Example 4. (i) The facts are the same as in Example 3, except that
Employee A had an outstanding election to defer $500 from each payroll
period's compensation. The $10,000 additional payment that is
contributed early is not made early in order to accommodate bona fide
administrative considerations.
(ii) None of the additional $10,000 contributed January 31 is a
contribution made pursuant to Employee A's cash or deferred election for
future payroll periods, because the contribution was made before the
earlier of Employee A's performance of services to which the
contribution is attributable or when the compensation would be currently
available. Furthermore, the exception for early contributions in
paragraph (a)(3)(iii)(C)(2) of this section does not apply. Accordingly,
the employer must make an additional contribution of $500 per payroll
period in order to satisfy its obligation to contribute an amount to the
plan pursuant to Employee A's election. The $10,000 contribution may be
allocated under the plan terms providing for discretionary profit
sharing contributions.
Example 5. (i) Employer B establishes a money purchase pension plan
in 1986. This is the first qualified plan established by Employer B. All
salaried employees are eligible to participate under the plan. Hourly-
paid employees are not eligible to participate under the plan. In 2000,
Employer B establishes a profit-sharing plan under which all employees
(both salaried and hourly) are eligible. Employer B permits all
employees on the effective date of the profit-sharing plan to make a
one-time irrevocable election to have Employer B contribute 5% of
compensation on their behalf to the plan and make no other contribution
to any other plan of Employer B (including plans not yet established)
for the duration of the employee's employment with Employer B, and have
their salaries reduced by 5%.
(ii) The election provided under the profit-sharing plan is not a
one-time irrevocable election within the meaning of paragraph (a)(3)(v)
of this section with respect to the salaried employees of Employer B
who, 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 paragraph (a)(3)(v) of this
section 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.
(ii) Treatment of elective contributions as employer contributions.
Except as otherwise provided in Sec. 1.401(k)-2(b)(3), elective
contributions under a qualified cash or deferred arrangement (including
designated Roth contributions) are treated as employer contributions.
Thus, for example, elective contributions under such an arrangement are
treated as employer contributions for purposes of sections 401(a),
401(k), 402, 404, 409, 411, 412, 415, 416, and 417.
(iii) Tax treatment of employees. Except as provided in section
402(g), 402A (effective for taxable years beginning after December 31,
2005), or Sec. 1.401(k)-2(b)(3), elective contributions under a
qualified cash or deferred arrangement are neither includible in an
employee's
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gross income at the time the cash 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) Exclusive means
of amounts testing. Elective contributions (including elective
contributions that are designated Roth contributions) under a qualified
cash or deferred arrangement satisfy the requirements of section
401(a)(4) with respect to amounts if and only if the amount of elective
contributions satisfies the nondiscrimination test of section 401(k)
under paragraph (b)(1) of this section. See Sec. 1.401(a)(4)-
1(b)(2)(ii)(B).
(B) Testing benefits, rights and features. A plan that includes a
qualified cash or deferred arrangement must satisfy the requirements of
section 401(a)(4) with respect to benefits, rights and features in
addition to the requirements regarding amounts described in paragraph
(a)(4)(iv)(A) of this section. For example, the right to make each level
of elective contributions under a cash or deferred arrangement and the
right to make designated Roth contributions are rights or features
subject to the requirements of section 401(a)(4). 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 HCEs
with respect to the availability of elective contributions and thus will
generally not satisfy the requirements of section 401(a)(4).
(C) Minimum coverage requirement. A qualified cash or deferred
arrangement is treated as a separate plan that must satisfy the
requirements of section 410(b). See Sec. 1.410(b)-7(c)(1) for special
rules. The determination of whether a cash or deferred arrangement
satisfies the requirements of section 410(b) must be made without regard
to the modifications to the disaggregation rules set forth in paragraph
(b)(4)(v) of this section. 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 fails to satisfy one or more of the requirements in
paragraph (b), (c), (d) or (e) of this section.
(ii) Treatment of elective contributions as nonelective
contributions. Except as specifically provided otherwise, elective
contributions under a nonqualified cash or deferred arrangement are
treated as nonelective employer contributions. Thus, for example, the
elective contributions under such an arrangement 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) In general. 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 nondiscrimination tests of sections 401(k), paragraph
(b)(1) of this section, section 401(m)(2) and Sec. 1.401(m)-1(b) may
not be used. See Sec. Sec. 1.401(a)(4)-1(b)(2)(ii)(B) and 1.410(b)-9
(definition of section 401(k) plan).
(B) Application of section 401(a)(4) to certain plans. The amount of
employer contributions under a nonqualified
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cash or deferred arrangement is treated as satisfying section 401(a)(4)
if the arrangement is part of a collectively bargained plan that
automatically satisfies the requirements of section 410(b). See
Sec. Sec. 1.401(a)(4)-(c)(5) and 1.410(b)-2(b)(7). Additionally, the
requirements of sections 401(a)(4) and 410(b) do not apply to a
governmental plan (within the meaning of section 414(d)) maintained by a
State or local government or political subdivision thereof (or agency or
instrumentality thereof). See sections 401(a)(5) and 410(c)(1)(A).
(v) Example. The following example illustrates the application of
this paragraph (a)(5):
Example. (i) For the 2006 plan year, Employer A maintains a
collectively bargained plan that includes a cash or deferred
arrangement. Employer contributions under the cash or deferred
arrangement do not satisfy the nondiscrimination test of section 401(k)
and paragraph (b) of this section.
(ii) 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 paragraph (a)(5)(ii) of this section. Under paragraph (a)(5)(iii)
of this section and under Sec. 1.402(a)-1(d)(1), however, the elective
contributions are includible in each employee's gross income.
(6) Rules applicable to cash or deferred arrangements of self-
employed individuals--(i) Application of general rules. Generally, a
partnership or sole proprietorship is permitted to maintain a cash or
deferred arrangement, and individual partners or owners are permitted to
make cash or deferred elections with respect to compensation
attributable to services rendered to the entity, under the same rules
that apply to other cash or deferred arrangements. For example, any
contributions made on behalf of an individual partner or owner pursuant
to a cash or deferred arrangement of a partnership or sole
proprietorship are elective contributions unless they are designated or
treated as after-tax employee contributions. In the case of a
partnership, 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. Consistent with Sec.
1.402(a)-1(d), the elective contributions under such an arrangement are
includible in income and are not deductible under section 404(a) unless
the arrangement is a qualified cash or deferred arrangement (i.e., the
requirements of section 401(k) and this section are satisfied). 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) Treatment of matching contributions made on behalf of self-
employed individuals. Under section 402(g)(8), matching contributions
made on behalf of a self-employed individual are not treated as elective
contributions made pursuant to a cash or deferred election, without
regard to whether such matching contributions indirectly permit
individual partners to vary the amount of contributions made on their
behalf.
(iii) Timing of self-employed individual's cash or deferred
election. For purposes of paragraph (a)(3)(iv) of this section, a
partner's compensation is deemed currently available on the last day of
the partnership taxable year and a sole proprietor's compensation is
deemed currently available on the last day of the individual's taxable
year. Accordingly, a self-employed individual may not make a cash or
deferred election with respect to compensation for a partnership or sole
proprietorship taxable year after the last day of that year. See Sec.
1.401(k)-2(a)(4)(ii) for the rules regarding when these contributions
are treated as allocated.
(iv) Special rule for certain payments to self-employed individuals.
For purposes of sections 401(k) and 401(m), the earned income of a self-
employed individual for a taxable year constitutes payment for services
during that year. Thus, for example, if a partnership provides for cash
advance payments during the taxable year to be made to a partner based
on the value of the partner's services prior to the date of payment (and
which do not exceed a reasonable estimate of the partner's earned income
for the taxable year), a
[[Page 318]]
contribution of a portion of these payments to a profit sharing plan in
accordance with an election to defer the portion of the advance payments
does not fail to be made pursuant to a cash or deferred election within
the meaning of paragraph (a)(3)(iii) of this section merely because the
contribution is made before the amount of the partner's earned income is
finally determined and reported. However, see Sec. 1.401(k)-2(a)(4)(ii)
for rules on when earned income is treated as received.
(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 cash or deferred
arrangement (including any employees taken into account for purposes of
section 410(b) pursuant to Sec. 1.401(a)(4)-11(g)(3)(vii)(A)) satisfies
the requirements of section 410(b) (including the average benefit
percentage test, if applicable); and
(ii) The cash or deferred arrangement satisfies--
(A) The ADP test of section 401(k)(3) described in Sec. 1.401(k)-2;
(B) The ADP safe harbor provisions of section 401(k)(12) described
in Sec. 1.401(k)-3; or
(C) The ADP safe harbor provisions of section 401(k)(13) described
in Sec. 1.401(k)-3; or
(D) The SIMPLE 401(k) provisions of section 401(k)(11) described in
Sec. 1.401(k)-4.
(2) Automatic satisfaction by certain plans. Notwithstanding
paragraph (b)(1) of this section, a governmental plan (within the
meaning of section 414(d)) maintained by a State or local government or
political subdivision thereof (or agency or instrumentality thereof)
shall be treated as meeting the requirements of this paragraph (b).
(3) Anti-abuse provisions. This section and Sec. Sec. 1.401(k)-2
through 1.401(k)-6 are designed to provide simple, practical rules that
accommodate legitimate plan changes. At the same time, the rules are
intended to be applied by employers in a manner that does not make use
of changes in plan testing procedures or other plan provisions to
inflate inappropriately the ADP for NHCEs (which is used as a benchmark
for testing the ADP for HCEs) or to otherwise manipulate the
nondiscrimination testing requirements of this paragraph (b). Further,
this paragraph (b) is part of the overall requirement that benefits or
contributions not discriminate in favor of HCEs. Therefore, a plan will
not be treated as satisfying the requirements of this paragraph (b) if
there are repeated changes to plan testing procedures or plan provisions
that have the effect of distorting the ADP so as to increase
significantly the permitted ADP for HCEs, or otherwise manipulate the
nondiscrimination rules of this paragraph, if a principal purpose of the
changes was to achieve such a result.
(4) Aggregation and restructuring--(i) In general. This paragraph
(b)(4) contains the exclusive rules for aggregating and disaggregating
plans and cash or deferred arrangements for purposes of this section,
and Sec. Sec. 1.401(k)-2 through 1.401(k)-6.
(ii) Aggregation of cash or deferred arrangements within a plan.
Except as otherwise specifically provided in this paragraph (b)(4), all
cash or deferred arrangements included in a plan are treated as a single
cash or deferred arrangement and a plan must apply a single test under
paragraph (b)(1)(ii) of this section with respect to all such
arrangements within the plan. Thus, for example, if two groups of
employees are eligible for separate cash or deferred arrangements under
the same plan, all contributions under both cash or deferred
arrangements must be treated as made under a single cash or deferred
arrangement subject to a single test, even if they have significantly
different features, such as different limits on elective contributions.
(iii) Aggregation of plans--(A) In general. For purposes of this
section and Sec. Sec. 1.401(k)-2 through 1.401(k)-6, 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), as
modified by paragraph (b)(4)(v) 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
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single plan for purposes of sections 401(k) and (m).
(B) Plans with inconsistent ADP testing methods. Pursuant to
paragraph (b)(4)(ii) of this section, a single testing method must apply
with respect to all cash or deferred arrangements under a plan. Thus, in
applying the permissive aggregation rules of Sec. 1.410(b)-7(d), an
employer may not aggregate plans (within the meaning of Sec. 1.410(b)-
7(b)) that apply inconsistent testing methods. For example, a plan
(within the meaning of Sec. 1.410(b)-7(b)) that applies the current
year testing method may not be aggregated with another plan that applies
the prior year testing method. Similarly, an employer may not aggregate
a plan (within the meaning of Sec. 1.410(b)-7(b)) using the ADP safe
harbor provisions of section 401(k)(12) and another plan that is using
the ADP test of section 401(k)(3).
(iv) Disaggregation of plans and separate testing--(A) In general.
If a cash or deferred arrangement is included in a plan (within the
meaning of Sec. 1.410(b)-7(b)) that is mandatorily disaggregated under
the rules of section 410(b) (as modified by this paragraph (b)(4)), the
cash or deferred arrangement must be disaggregated in a consistent
manner. For example, in the case of an employer that is treated as
operating qualified separate lines of business under section 414(r), if
the eligible employees under a cash or deferred arrangement are in more
than one qualified separate line of business, only those employees
within each qualified separate line of business may be taken into
account in determining whether each disaggregated portion of the plan
complies with the requirements of section 401(k), unless the employer is
applying the special rule for employer-wide plans in Sec. 1.414(r)-
1(c)(2)(ii) with respect to the plan. Similarly, if a cash or deferred
arrangement under which employees are permitted to participate before
they have completed the minimum age and service requirements of section
410(a)(1) applies section 410(b)(4)(B) for determining whether the plan
complies with section 410(b)(1), then the arrangement must be treated as
two separate arrangements, one comprising all eligible employees who
have met the age and service requirements of section 410(a)(1) and one
comprising all eligible employees who have not met the age and service
requirements under section 410(a)(1), unless the plan is using the rule
in Sec. 1.401(k)-2(a)(1)(iii)(A).
(B) Restructuring prohibited. 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).
(v) Modifications to section 410(b) rules--(A) Certain
disaggregation rules not applicable. The mandatory disaggregation rules
relating to section 401(k) plans and section 401(m) plans set forth in
Sec. 1.410(b)-7(c)(1) and ESOP and non-ESOP portions of a plan set
forth in Sec. 1.410(b)-7(c)(2) shall not apply for purposes of this
section and Sec. Sec. 1.401(k)-2 through 1.401(k)-6. Accordingly,
notwithstanding Sec. 1.410(b)-7(d)(2), an ESOP and a non-ESOP which are
different plans (within the meaning of section 414(l), as described in
Sec. 1.410(b)-7(b)) are permitted to be aggregated for these purposes.
(B) Permissive aggregation of collective bargaining units.
Notwithstanding the general rule under section 410(b) and Sec.
1.410(b)-7(c) that 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 the collective bargaining unit is
treated as comprising separate plans, an employer can treat two or more
separate collective bargaining units as a single collective bargaining
unit for purposes of this section and Sec. Sec. 1.401(k)-2 through
1.401(k)-6, 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
(e.g., 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 as comprising only two separate plans, one benefiting all
employees
[[Page 320]]
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. Notwithstanding Sec. 1.410(b)-
7(c)(4)(ii)(C), 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 (b)(4)(v)(B) of this section
(including the permissive 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 that 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 noncollectively bargaining unit
employees who benefit under the plan are employed by one or more
employers.
(vi) Examples. The following examples illustrate the application of
this paragraph (b)(4):
Example 1. (i) Employer A maintains Plan V, a profit-sharing plan
that includes a cash or deferred arrangement in which all of the
employees of Employer A are eligible to participate. For purposes of
applying section 410(b), Employer A is treated as operating qualified
separate lines of business under section 414(r) in accordance with Sec.
1.414(r)-1(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).
(ii) Under these facts, the requirements of this section and
Sec. Sec. 1.401(k)-2 through 1.401(k)-6 must be applied on an employer-
wide rather than a qualified separate line of business basis.
Example 2. (i) Employer B maintains Plan W, a profit-sharing plan
that includes a cash or deferred arrangement in which all of the
employees of Employer B are eligible to participate. For purposes of
applying section 410(b), the plan treats the cash or deferred
arrangement as two separate plans, one for the employees who have
completed the minimum age and service eligibility conditions under
section 410(a)(1) and the other for employees who have not completed the
conditions. The plan provides that it will satisfy the section 401(k)
safe harbor requirement of Sec. 1.401(k)-3 with respect to the
employees who have met the minimum age and service conditions and that
it will meet the ADP test requirements of Sec. 1.401(k)-2 with respect
to the employees who have not met the minimum age and service
conditions.
(ii) Under these facts, the cash or deferred arrangement must be
disaggregated on a consistent basis with the disaggregation of Plan W.
Thus, the requirements of Sec. 1.401(k)-2 must be applied by comparing
the ADP for eligible HCEs who have not completed the minimum age and
service conditions with the ADP for eligible NHCEs for the applicable
year who have not completed the minimum age and service conditions.
Example 3. (i) Employer C maintains Plan X, a stock-bonus plan
including an ESOP. The plan also includes a cash or deferred arrangement
for participants in the ESOP and non-ESOP portions of the plan.
(ii) Pursuant to paragraph (b)(4)(v)(A) of this section the ESOP and
non-ESOP portions of the stock-bonus plan are a single cash or deferred
arrangement for purposes of this section and Sec. Sec. 1.401(k)-2
through 1.401(k)-6. However, as provided in paragraph (a)(4)(iv)(C) of
this section, the ESOP and non-ESOP portions of the plan are still
treated as separate plans for purposes of satisfying the requirements of
section 410(b).
(c) Nonforfeitability requirements--(1) General rule. A cash or
deferred arrangement satisfies this paragraph (c) only if the amount
attributable to an employee's elective contributions are immediately
nonforfeitable, within the meaning of paragraph (c)(2) of this section,
are disregarded for purposes of applying section 411(a)(2) to other
contributions or benefits, and the contributions remain nonforfeitable
even if the employee makes no additional
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elective contributions under a cash or deferred arrangement.
(2) Definition of immediately nonforfeitable. An amount is
immediately nonforfeitable if it 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. An amount that is subject to
forfeitures or suspensions permitted by section 411(a)(3) does not
satisfy the requirements of this paragraph (c).
(3) Example. The following example illustrates the application of
this paragraph (c):
Example. (i) Employees B and C are covered by Employer Y's stock
bonus plan, which includes a cash or deferred arrangement. All employees
participating in the plan have a nonforfeitable right to a percentage of
their account balance derived from all contributions (including elective
contributions) 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) The cash or deferred arrangement does not satisfy paragraph (c)
of this section because elective contributions are not immediately
nonforfeitable. Thus, the cash or deferred arrangement is a nonqualified
cash or deferred arrangement.
(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
additional requirements of paragraphs (d)(2) through (5) of this section
(to the extent applicable)--
(i) The employee's death, disability, or severance from employment;
(ii) In the case of a profit-sharing, stock bonus or rural
cooperative plan, the employee's attainment of age 59\1/2\, or the
employee's hardship; or
(iii) The termination of the plan.
(2) Rules applicable to distributions upon severance from
employment. An employee has a severance from employment when the
employee ceases to be an employee of the employer maintaining the plan.
An employee does not have a severance from employment if, in connection
with a change of employment, the employee's new employer maintains such
plan with respect to the employee. For example, a new employer maintains
a plan with respect to an employee by continuing or assuming sponsorship
of the plan or by accepting a transfer of plan assets and liabilities
(within the meaning of section 414(l)) with respect to the employee.
(3) 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 if and 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.
(ii) Limit on maximum distributable amount--(A) General rule. A
distribution on account of hardship must be limited to the maximum
distributable amount. The maximum distributable amount is equal to the
employee's total elective contributions as of the date of distribution,
reduced by the amount of previous distributions of elective
contributions. Thus, the maximum distributable amount does not include
earnings, QNECs or QMACs, unless grandfathered under paragraph
(d)(3)(ii)(B) of this section.
(B) Grandfathered amounts. If the plan so provides, the maximum
distributable amount may be increased for amounts credited to the
employee's 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 in the case of a collectively bargained
plan, the earlier of--
(1) The later of January 1, 1989, or the date on which the last of
the collective
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bargaining agreements in effect on March 1, 1986 terminates (determined
without regard to any extension thereof after February 28, 1986); or
(2) January 1, 1991 and consisting of--
(i) Income allocable to elective contributions;
(ii) Qualified nonelective contributions and allocable income; and
(iii) Qualified matching contributions and allocable income.
(iii) Immediate and heavy financial need--(A) In general. Whether an
employee has an immediate and heavy financial need is to be determined
based on all the 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) 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 (or necessary to obtain) medical care that would be
deductible under section 213(d) (determined without regard to whether
the expenses exceed 7.5% of adjusted gross income);
(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 up to the next 12 months of post-secondary education for
the employee, or the employee's spouse, children, or dependents (as
defined in section 152, and, for taxable years beginning on or after
January 1, 2005, without regard to section 152(b)(1), (b)(2) and
(d)(1)(B));
(4) Payments necessary to prevent the eviction of the employee from
the employee's principal residence or foreclosure on the mortgage on
that residence;
(5) Payments for burial or funeral expenses for the employee's
deceased parent, spouse, children or dependents (as defined in section
152, and, for taxable years beginning on or after January 1, 2005,
without regard to section 152(d)(1)(B)); or
(6) Expenses for the repair of damage to the employee's principal
residence that would qualify for the casualty deduction under section
165 (determined without regard to whether the loss exceeds 10% of
adjusted gross income).
(iv) Distribution necessary to satisfy financial need--(A)
Distribution may not exceed amount of need. A distribution is treated as
necessary to satisfy an immediate and heavy financial need of an
employee only to the extent the amount of the distribution is not in
excess of the amount required to satisfy the financial need. For this
purpose, the amount required to satisfy the 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.
(B) No alternative means available. A distribution is not treated as
necessary to satisfy an immediate and heavy financial need of an
employee to the extent the need may be relieved from other resources
that are reasonably available to the employee. This determination
generally is to be made on the basis of all the relevant facts and
circumstances. For purposes of this paragraph (d)(3)(iv), 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 (or
comparable State law) is not treated as a resource of the employee.
(C) Employer reliance on employee representation. For purposes of
paragraph
[[Page 323]]
(d)(3)(iv)(B) of this section, an immediate and heavy financial need
generally may be treated as not capable of being relieved from other
resources that are reasonably available to the employee, if the employer
relies upon the employee's representation (made in writing or such other
form as may be prescribed by the Commissioner), 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;
(4) By other currently available distributions (including
distribution of ESOP dividends under section 404(k)) and nontaxable (at
the time of the loan) loans, under plans maintained by the employer or
by any other employer; or
(5) By borrowing from commercial sources on reasonable commercial
terms in an amount sufficient to satisfy the need.
(D) Employee need not take counterproductive actions. For purposes
of this paragraph (d)(3)(iv), a need cannot reasonably be relieved by
one of the actions described in paragraph (d)(3)(iv)(C) of this section
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.
(E) Distribution deemed necessary to satisfy immediate and heavy
financial need. A distribution is deemed necessary to satisfy an
immediate and heavy financial need of an employee if each of the
following requirements are satisfied--
(1) The employee has obtained all other currently available
distributions (including distribution of ESOP dividends under section
404(k), but not hardship distributions) and nontaxable (at the time of
the loan) loans, under the plan and all other plans maintained by the
employer; and
(2) 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 6 months after receipt of the
hardship distribution.
(F) Definition of other plans. For purposes of paragraph
(d)(3)(iv)(C)(4) and (E)(1) of this section, the phrase plans maintained
by the employer means all qualified and nonqualified plans of deferred
compensation maintained by the employer, including 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 or a health or welfare
benefit plan (including one that is part of a cafeteria plan). In
addition, for purposes of paragraph (d)(3)(iv)(E)(2) of this section,
the phrase plans maintained by the employer also includes a stock
option, stock purchase, or similar plan maintained by the employer. See
Sec. 1.401(k)-6 for the continued treatment of suspended employees as
eligible employees.
(v) Commissioner may expand standards. The Commissioner may
prescribe additional guidance of general applicability, published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter),
expanding the list of deemed immediate and heavy financial needs and
prescribing additional methods for distributions to be deemed necessary
to satisfy an immediate and heavy financial need.
(4) Rules applicable to distributions upon plan termination--(i) No
alternative defined contribution plan. A distribution may not be made
under paragraph (d)(1)(iii) of this section if the employer establishes
or maintains an alternative defined contribution plan. For purposes of
the preceding sentence, the definition of the term ``employer''
contained in Sec. 1.401(k)-6 is applied as of the date of plan
termination, and a plan is an alternative defined contribution plan only
if it is a defined contribution plan that 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. However, if
at all times
[[Page 324]]
during the 24-month period beginning 12 months before the date of plan
termination, fewer than 2% 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 an alternative defined
contribution plan. In addition, a defined contribution plan is not
treated as an alternative defined contribution plan if it is an employee
stock ownership plan as defined in section 4975(e)(7) or 409(a), a
simplified employee pension as defined in section 408(k), a SIMPLE IRA
plan as defined in section 408(p), a plan or contract that satisfies the
requirements of section 403(b), or a plan that is described in section
457(b) or (f).
(ii) Lump sum requirement for certain distributions. A distribution
may be made under paragraph (d)(1)(iii) of this section only if it is a
lump sum distribution. The term lump sum distribution has the meaning
provided in section 402(e)(4)(D) (without regard to section
402(e)(4)(D)(i)(I), (II), (III) and (IV)). In addition, a lump sum
distribution includes a distribution of an annuity contract from a trust
that is part of a plan described in section 401(a) and which is exempt
from tax under section 501(a) or an annuity plan described in 403(a).
(5) Rules applicable to all distributions--(i) Exclusive
distribution rules. 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). Pursuant to section 401(k)(8), the prohibition on
distributions set forth in this section does not apply to a distribution
of excess contributions under Sec. 1.401(k)-2(b).
(ii) Deemed distributions. The cost of life insurance (determined
under section 72) is not treated as a distribution for purposes of
section 401(k)(2) and this paragraph (d). 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
paragraph (d) generally continue to apply to amounts attributable to
elective contributions (including QNECs and qualified matching
contributions taken into account for the ADP test under Sec. 1.401(k)-
2(a)(6)) 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). In addition, a cash or deferred arrangement fails to
satisfy the limitations of this paragraph (d) if it transfers amounts to
a plan that does not provide that the transferred amounts may not be
distributed before the times specified in this paragraph (d). The
transferor plan does not fail to comply with the preceding sentence if
it reasonably concludes that the transferee plan provides that the
transferred amounts may not be distributed before the times specified in
this paragraph (d). What constitutes a basis for a reasonable conclusion
is determined under standards comparable to those under the rules
related to acceptance of rollover distributions. See Sec. 1.401(a)(31)-
1, A-14. The limitations of this paragraph (d) 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 this paragraph (d) also do not apply to
[[Page 325]]
amounts that have been paid in a direct rollover to the plan after being
distributed by another plan.
(6) Examples. The following examples illustrate the application of
this paragraph (d):
Example 1. Employer M maintains Plan V, 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 cash or deferred arrangement is a
nonqualified cash or deferred arrangement and the elective contributions
are currently includible in income under section 402.
Example 2. (i) Employer N maintains Plan W, a profit-sharing plan
that includes a cash or deferred arrangement. Plan W provides for
distributions upon a participant's severance from employment, death or
disability. All employees of Employer N and its wholly owned subsidiary,
Employer O, are eligible to participate in Plan W. Employer N agrees to
sell all issued and outstanding shares of Employer O to an unrelated
entity, Employer T, effective on December 31, 2006. Following the
transaction, Employer O will be a wholly owned subsidiary of Employer T.
Additionally, individuals who are employed by Employer O on the
effective date of the sale continue to be employed by Employer O
following the sale. Following the transaction, all employees of Employer
O will cease to participate in Plan W and will become eligible to
participate in the cash or deferred arrangement maintained by Employer
T, Plan X. No assets will be transferred from Plan W to Plan X, except
in the case of a direct rollover within the meaning of section
401(a)(31).
(ii) Employer O ceases to be a member of Employer N's controlled
group as a result of the sale. Therefore, employees of Employer O who
participated in Plan W will have a severance from employment and are
eligible to receive a distribution from Plan W.
Example 3. (i) Employer Q maintains Plan Y, a profit-sharing plan
that includes a cash or deferred arrangement. Plan Y, the only plan
maintained by Employer Q, does not provide for loans. However, Plan Y
provides that elective contributions under the arrangement may be
distributed to an eligible employee on account of hardship using the
deemed immediate and heavy financial need provisions of paragraph
(d)(3)(iii)(B) of this section and provisions regarding distributions
necessary to satisfy financial need of paragraphs (d)(3)(iv)(A) through
(D) of this section. Employee A is an eligible employee in Plan Y with
an account balance of $50,000 attributable to elective contributions
made by Employee A. The total amount of elective contributions made by
Employee A, who has not previously received a distribution from Plan Y,
is $20,000. Employee A requests a $15,000 hardship distribution of his
elective contributions to pay 6 months of college tuition and room and
board expenses for his dependent. At the time of the distribution
request, the sole asset of Employee A (that is reasonably available to
Employee A within the meaning of paragraph (d)(3)(iv)(B) of this
section) is a savings account with an available balance of $10,000.
(ii) 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.
Under paragraph (d)(3)(iii)(B) of this section, a distribution for
payment of up to the next 12 months of post-secondary education and room
and board expenses for Employee A's dependent is deemed to be on account
of an immediate and heavy financial need of Employee A.
(iii) A distribution is treated as necessary to satisfy Employee A's
immediate and heavy financial need to the extent the need may not be
relieved from other resources reasonably available to Employee A. Under
paragraph (d)(3)(iv)(B) of this section, Employee A's $10,000 savings
account is a resource that is reasonably available to the employee and
must be taken into account in determining the amount necessary to
satisfy Employee A's immediate and heavy financial need. Thus, Employee
A may receive a distribution of only $5,000 of his elective
contributions on account of this hardship, plus an amount necessary to
pay any federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution.
Example 4. (i) The facts are the same as in Example 3. Employee B,
another employee of Employer Q has an account balance of $25,000,
attributable to Employee B's elective contributions. The total amount of
elective contributions made by Employee B, who has not previously
received a distribution from Plan Y, is $15,000. Employee B requests a
$10,000 distribution of his elective contributions to pay 6 months of
college tuition and room and board expenses for his child. Employee B
makes a written representation (with respect to which Employer Q has no
actual knowledge to the contrary) that the need cannot reasonably be
relieved:
(A) Through reimbursement or compensation by insurance or otherwise;
(B) By liquidation of the employee's assets;
(C) By cessation of elective contributions or employee contributions
under the plan;
(D) By other distributions or nontaxable (at the time of the loan)
loans from plans
[[Page 326]]
maintained by the employer or by any other employer; or
(E) By borrowing from commercial sources on reasonable commercial
terms in an amount sufficient to satisfy the need.
(ii) Under paragraph (d)(3)(iii)(B) of this section, a distribution
for payment of up to the next 12 months of post-secondary education and
room and board expenses for Employee B's child is deemed to be on
account of an Employee B's immediate and heavy financial need. In
addition, because Employer Q can rely on Employee B's written
representation, the distribution is considered necessary to satisfy
Employee B's immediate and heavy financial need. Therefore, Employee B
may receive a $10,000 distribution of his elective contributions on
account of hardship plus an amount necessary to pay any federal, state,
or local income taxes or penalties reasonably anticipated to result from
the distribution.
Example 5. (i) The facts are the same as in Example 3, except Plan Y
provides for hardship distributions using the safe harbor rule of
paragraph (d)(3)(iv)(E) of this section. Accordingly, Plan Y provides
for a 6 month suspension of an eligible employee's elective
contributions and employee contributions to the plan after the receipt
of a hardship distribution by such eligible employee.
(ii) Under paragraph (d)(3)(iii)(B) of this section, a distribution
for payment of up to the next 12 months of post-secondary education and
room and board expenses for Employee A's dependent is deemed to be on
account of an Employee A's immediate and heavy financial need. In
addition, because Employee A is not eligible for any other distribution
or loan from Plan Y and Plan Y suspends Employee A's elective
contributions and employee contributions following receipt of the
hardship distribution, the distribution will be deemed necessary to
satisfy Employee A's immediate and heavy financial need (and Employee A
is not required to first liquidate his savings account). Therefore,
Employee A may receive a $15,000 distribution of his elective
contributions on account of hardship plus an amount necessary to pay any
federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution.
Example 6. Employer R maintains a pre-ERISA money purchase pension
plan that includes a cash or deferred arrangement that is not a rural
cooperative plan. 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 permissible distribution event
only in a profit-sharing, stock bonus or rural cooperative plan. Since
elective contributions under the arrangement may be distributed before a
permissible 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 money purchase 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 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. However, except as
expressly permitted under section 401(m), 410(b)(2)(A)(ii) or
416(c)(2)(A), elective contributions and matching contributions taken
into account under Sec. 1.401(k)-2(a) may not be taken into account for
purposes of determining whether any other contributions under any plan
(including the plan to which the contributions are made) satisfy the
requirements of section 401(a).
(2) Election requirements--(i) Cash must be available. 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, but
[[Page 327]]
would be treated as a matching contribution. This cash availability
requirement applies even if the cash or deferred arrangement is part of
a cafeteria plan within the meaning of section 125.
(ii) Frequency of elections. A cash or deferred arrangement
satisfies this paragraph (e) only if the arrangement provides an
employee with an effective opportunity to make (or change) a cash or
deferred election at least once during each plan year. Whether an
employee has an effective opportunity is determined based on all the
relevant facts and circumstances, including the adequacy of notice of
the availability of the election, the period of time during which an
election may be made, and any other conditions on elections.
(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 contributions and withdrawals are attributed to the
separate accounts and gains, losses, 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. The separate
accounting requirement of this paragraph (e)(3)(i) applies at the time
the elective contribution is contributed to the plan and continues to
apply until the contribution is distributed under the plan.
(ii) Satisfaction of separate accounting requirement. The
requirements of paragraph (e)(3)(i) of this section are treated as
satisfied if all amounts held under a plan that includes a qualified
cash or deferred arrangement (and, if applicable, under another plan to
which QNECs and QMACs are made) are subject to the requirements of
paragraphs (c) and (d) of this section.
(4) Limitations on cash or deferred arrangements of state and local
governments--(i) General rule. A cash or deferred arrangement does not
satisfy the requirements of this paragraph (e) if the arrangement is
adopted after May 6, 1986, by a State or local government or political
subdivision thereof, or any agency or instrumentality thereof (a
governmental unit). 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.
(ii) Rural cooperative plans and Indian tribal governments. This
paragraph (e)(4) does not apply to a rural cooperative plan or to a plan
of an employer which is an Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of an Indian tribal government
(determined in accordance with section 7871(d)), an agency or
instrumentality of an Indian tribal government or subdivision thereof,
or a corporation chartered under Federal, State or tribal law which is
owned in whole or in part by any of the entities in this paragraph
(e)(4)(ii).
(iii) Adoption after May 6, 1986. A cash or deferred arrangement is
treated as adopted after May 6, 1986, with respect to all employees of
any employer that adopts the arrangement after such date.
(iv) Adoption before May 7, 1986. 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. If an employer adopted an arrangement prior to
such date, all employees of the employer may participate in the
arrangement.
(5) One-year eligibility requirement. A cash or deferred arrangement
satisfies this paragraph (e) only if no employee is required to complete
a period of service with the employer maintaining the plan extending
beyond the period permitted under section 410(a)(1) (determined without
regard to section 410(a)(1)(B)(i)) to be eligible to make a cash or
deferred election under the arrangement.
(6) Other benefits not contingent upon elective contributions--(i)
General rule. A cash or deferred arrangement satisfies
[[Page 328]]
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--
(A) Any matching contribution (as defined in Sec. 1.401(m)-1(a)(2))
made by reason of such an election;
(B) Any benefit, right or feature (such as a plan loan) that
requires, or results in, an amount to be withheld from an employee's pay
(e.g. to pay for the benefit or to repay the loan), to the extent the
cash or deferred arrangement restricts elective contributions to amounts
available after such withholding from the employee's pay (after
deduction of all applicable income and employment taxes);
(C) Any reduction in the employer's top-heavy contributions under
section 416(c)(2) because of matching contributions that resulted from
the elective contributions; or
(D) 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. For purposes of this paragraph
(e)(6), other benefits include, but are not limited to, benefits under a
defined benefit plan; nonelective 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,
bonuses or other cash remuneration (other than the amount that would be
contributed under 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 made. Additionally, 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. Any benefit under an
excess benefit plan described in section 3(36) of the Employee
Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-
406, that is dependent on the employee's electing to make or not to make
elective contributions is not treated as contingent. 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.
(iv) Nonqualified deferred compensation. Except as otherwise
provided in paragraph (e)(6)(iii) of this section, participation in a
nonqualified deferred compensation plan is treated as contingent for
purposes of this paragraph (e)(6) 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.
(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 following examples illustrate the application of
this paragraph (e)(6):
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
[[Page 329]]
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% 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%
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 this paragraph
(e)(6).
(7) Plan provision requirement. A plan that includes a cash or
deferred arrangement satisfies this paragraph (e) only if it provides
that the nondiscrimination requirements of section 401(k) will be met.
Thus, the plan must provide for satisfaction of one of the specific
alternatives described in paragraph (b)(1)(ii) of this section and, if
with respect to that alternative there are optional choices, which of
the optional choices will apply. For example, a plan that uses the ADP
test of section 401(k)(3), as described in paragraph (b)(1)(ii)(A) of
this section, must specify whether it is using the current year testing
method or prior year testing method. Additionally, a plan that uses the
prior year testing method must specify whether the ADP for eligible
NHCEs for the first plan year is 3% or the ADP for the eligible NHCEs
for the first plan year. Similarly, a plan that uses the safe harbor
method of section 401(k)(12), as described in paragraph (b)(1)(ii)(B) of
this section, must specify whether the safe harbor contribution will be
the nonelective safe harbor contribution or the matching safe harbor
contribution and is not permitted to provide that ADP testing will be
used if the requirements for the safe harbor are not satisfied. In
addition, a plan that uses the safe harbor method of section 401(k)(13),
as described in paragraph (b)(1)(ii)(C) of this section, must specify
the default percentages that apply for the plan year and whether the
safe harbor contribution will be the nonelective safe harbor
contribution or the matching safe harbor contribution, and is not
permitted to provide that ADP testing will be used if the requirements
for the safe harbor are not satisfied. For purposes of this paragraph
(e)(7), a plan may incorporate by reference the provisions of section
401(k)(3) and Sec. 1.401(k)-2 if that is the nondiscrimination test
being applied. The Commissioner may, in guidance of general
applicability, published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter), specify the options that will apply
under the plan if the nondiscrimination test is incorporated by
reference in accordance with the preceding sentence.
(8) Section 415 compensation required. With respect to compensation
that is paid (or would have been paid but for a cash or deferred
election) in plan years beginning on or after July 1, 2007, a cash or
deferred arrangement satisfies this paragraph (e) only if cash or
deferred elections can only be made with respect to amounts that are
compensation within the meaning of section 415(c)(3) and Sec. 1.415(c)-
2. Thus, for example, the arrangement is not a qualified cash or
deferred arrangement if an eligible employee who is not in qualified
military service (as that term is defined in section 414(u)) and who is
not permanently and totally disabled (as defined in section 22(e)(3))
can make a cash or deferred election with respect to an amount paid
after severance from employment, unless the amount is paid by the later
of 2\1/2\ months after severance from employment or the end of the year
that includes the date of severance from employment and is described in
Sec. 1.415(c)-2(e)(3)(ii) or (iii).
(f) Special rules for designated Roth contributions--(1) In general.
The term designated Roth contribution means an elective contribution
under a qualified cash or deferred arrangement that, to the extent
permitted under the plan, is--
(i) Designated irrevocably by the employee at the time of the cash
or deferred election as a designated Roth contribution that is being
made in lieu of all or a portion of the pre-tax elective contributions
the employee is otherwise eligible to make under the plan;
[[Page 330]]
(ii) Treated by the employer as not excludible from the employee's
gross income (in accordance with paragraph (f)(2) of this section);
(iii) Maintained by the plan in a separate account (in accordance
with paragraph (f)(3) of this section).
(2) Inclusion treatment. An elective contribution is generally
treated as not excludible from gross income if it is treated as
includible in gross income by the employer (e.g., by treating the
contribution as wages subject to applicable income tax withholding).
However, in the case of a self-employed individual, an elective
contribution is treated as not excludible from gross income only if the
individual does not claim a deduction for such amount. If an elective
contribution would not have been includible in gross income if the
amount had been paid directly to the employee (rather than being subject
to a cash or deferral election), the elective contribution is
nevertheless permitted to be a designated Roth contribution, provided
the employee is entitled to treat the amount as an investment in the
contract pursuant to section 72(f)(2).
(3) Separate accounting required. Under the separate accounting
requirement of this paragraph (f)(3), contributions and withdrawals of
designated Roth contributions must be credited and debited to a
designated Roth account maintained for the employee and the plan must
maintain a record of the employee's investment in the contract (that is,
designated Roth contributions that have not been distributed) with
respect to the employee's designated Roth account. In addition, gains,
losses, and other credits or charges must be separately allocated on a
reasonable and consistent basis to the designated Roth account and other
accounts under the plan. However, forfeitures may not be allocated to
the designated Roth account and no contributions other than designated
Roth contributions and rollover contributions described in section
402A(c)(3)(B) may be allocated to such account. The separate accounting
requirement applies at the time the designated Roth contribution is
contributed to the plan and must continue to apply until the designated
Roth account is completely distributed. A-13 of Sec. 1.402A-1 for
additional requirements for separate accounting.
(4) Designated Roth contributions must satisfy rules applicable to
elective contributions--(i) In general. A designated Roth contribution
must satisfy the requirements applicable to elective contributions made
under a qualified cash or deferred arrangement. Thus, for example, a
designated Roth contribution must satisfy the requirements of paragraphs
(c) and (d) of this section and is treated as an employer contribution
for purposes of sections 401(a), 401(k), 402, 404, 409, 411, 412, 415,
416 and 417. In addition, the designated Roth contributions are treated
as elective contributions for purposes of the ADP test. Similarly, the
designated Roth account under the plan is subject to the rules of
section 401(a)(9)(A) and (B) in the same manner as an account that
contains pre-tax elective contributions.
(ii) Special rules for direct rollovers. A direct rollover from a
designated Roth account under a qualified cash or deferred arrangement
may only be made to another designated Roth account under an applicable
retirement plan described in section 402A(e)(1) or to a Roth IRA
described in section 408A, and only to the extent the rollover is
permitted under the rules of section 402(c). Moreover, a participant's
designated Roth account and the participant's other accounts under a
plan are treated as accounts held under two separate plans (within the
meaning of section 414(l)) for purposes of applying the automatic
rollover rules for mandatory distributions under section
401(a)(31)(B)(i)(I) and the special rules in A-9 through A-11 of Sec.
1.401(a)(31)-1.
(5) Rules regarding designated Roth contribution elections--(i)
Frequency of elections. The rules under paragraph (e)(2)(ii) of this
section regarding frequency of elections apply in the same manner to
both pre-tax elective contributions and designated Roth contributions.
Thus, an employee must have an effective opportunity to make (or change)
an election to make designated Roth contributions at least once during
each plan year.
(ii) Default elections--(A) In the case of a plan that provides for
both pre-tax elective contributions and designated Roth contributions
and in which, under
[[Page 331]]
paragraph (a)(3)(ii) of this section, the default in the absence of an
affirmative election is to make a contribution under the cash or
deferred arrangement, the plan terms must provide the extent to which
the default contributions are pre-tax elective contributions and the
extent to which the default contributions are designated Roth
contributions.
(B) If the default contributions under the plan are designated Roth
contributions, then an employee who has not made an affirmative election
is deemed to have irrevocably designated the contributions (in
accordance with section 402A(c)(1)(B)) as designated Roth contributions.
(6) Effective date. Section 402A and the provisions of this section
1.401(k)-1(f) apply to taxable years beginning after December 31, 2005.
(g) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (g), this section and Sec. Sec. 1.401(k)-2 through
1.401(k)-6 apply to plan years that begin on or after January 1, 2006.
(2) Early implementation permitted. A plan is permitted to apply the
rules of this section and Sec. Sec. 1.401(k)-2 through 1.401(k)-6 to
any plan year that ends after December 29, 2004, provided the plan
applies all the rules of this section and Sec. Sec. 1.401(k)-2 through
1.401(k)-6 and all the rules of Sec. Sec. 1.401(m)-1 through 1.401(m)-
5, to the extent applicable, for that plan year and all subsequent plan
years.
(3) 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 in effect on the date
described in paragraph (g)(1) of this section, the provisions of this
section and Sec. Sec. 1.401(k)-2 through 1.401(k)-6 apply to the later
of the first plan year beginning after the termination of the last such
agreement or the first plan year described in paragraph (g)(1) of this
section.
(4) Applicability of prior regulations. For any plan year before a
plan applies this section and Sec. Sec. 1.401(k)-2 through 1.401(k)-6
(either the first plan year beginning on or after January 1, 2006, or
such earlier year, as provided in paragraph (g)(2) of this section),
Sec. 1.401(k)-1 (as it appeared in the April 1, 2004 edition of 26 CFR
part 1) applies to the plan to the extent that section, as it so
appears, reflects the statutory provisions of section 401(k) as in
effect for the relevant year.
[T.D. 9169, 69 FR 78154, Dec. 29, 2004, as amended by T.D. 9237, 71 FR 9
Jan. 3, 2006; T.D. 9319, 72 FR 16894, Apr. 5, 2007; T.D. 9324, 72 FR
21109, Apr. 30, 2007; T.D. 9447, 74 FR 8207, Feb. 24, 2009]
Sec. 1.401(k)-2 ADP test.
(a) Actual deferral percentage (ADP) test--(1) In general--(i) ADP
test formula. A cash or deferred arrangement satisfies the ADP test for
a plan year only if--
(A) The ADP for the eligible HCEs for the plan year is not more than
the ADP for the eligible NHCEs for the applicable year multiplied by
1.25; or
(B) The excess of the ADP for the eligible HCEs for the plan year
over the ADP for the eligible NHCEs for the applicable year is not more
than 2 percentage points, and the ADP for the eligible HCEs for the plan
year is not more than the ADP for the eligible NHCEs for the applicable
year multiplied by 2.
(ii) HCEs as sole eligible employees. If, for the applicable year
for determining the ADP of the NHCEs for a plan year, there are no
eligible NHCEs (i.e., all of the eligible employees under the cash or
deferred arrangement for the applicable year are HCEs), the arrangement
is deemed to satisfy the ADP test for the plan year.
(iii) Special rule for early participation. If a cash or deferred
arrangement provides that employees are eligible to participate before
they have completed the minimum age and service requirements of section
410(a)(1)(A), and if the plan applies section 410(b)(4)(B) in
determining whether the cash or deferred arrangement meets the
requirements of section 410(b)(1), then in determining whether the
arrangement meets the requirements under paragraph (a)(1) of this
section, either--
(A) Pursuant to section 401(k)(3)(F), the ADP test is performed
under the plan (determined without regard to disaggregation under Sec.
1.410(b)-7(c)(3)), using the ADP for all eligible HCEs for
[[Page 332]]
the plan year and the ADP of eligible NHCEs for the applicable year,
disregarding all NHCEs who have not met the minimum age and service
requirements of section 410(a)(1)(A); or
(B) Pursuant to Sec. 1.401(k)-1(b)(4), the plan is disaggregated
into separate plans and the ADP test is performed separately for all
eligible employees who have completed the minimum age and service
requirements of section 410(a)(1)(A) and for all eligible employees who
have not completed the minimum age and service requirements of section
410(a)(1)(A).
(2) Determination of ADP--(i) General rule. The ADP for a group of
eligible employees (either eligible HCEs or eligible NHCEs) for a plan
year or applicable year is the average of the ADRs of the eligible
employees in that group for that year. The ADP for a group of eligible
employees is calculated to the nearest hundredth of a percentage point.
(ii) Determination of applicable year under current year and prior
year testing method. The ADP test is applied using the prior year
testing method or the current year testing method. Under the prior year
testing method, the applicable year for determining the ADP for the
eligible NHCEs is the plan year immediately preceding the plan year for
which the ADP test is being performed. Under the prior year testing
method, the ADP for the eligible NHCEs is determined using the ADRs for
the eligible employees who were NHCEs in that preceding plan year,
regardless of whether those NHCEs are eligible employees or NHCEs in the
plan year for which the ADP test is being calculated. Under the current
year testing method, the applicable year for determining the ADP for the
eligible NHCEs is the same plan year as the plan year for which the ADP
test is being performed. Under either method, the ADP for eligible HCEs
is the average of the ADRs of the eligible HCEs for the plan year for
which the ADP test is being performed. See paragraph (c) of this section
for additional rules for the prior year testing method.
(3) Determination of ADR--(i) General rule. The ADR of an eligible
employee for a plan year or applicable year is the sum of the employee's
elective contributions taken into account with respect to such employee
for the year, determined under the rules of paragraphs (a)(4) and (5) of
this section, and the qualified nonelective contributions and qualified
matching contributions taken into account with respect to such employee
under paragraph (a)(6) of this section for the year, divided by the
employee's compensation taken into account for the year. The ADR is
calculated to the nearest hundredth of a percentage point. If no
elective contributions, qualified nonelective contributions, or
qualified matching contributions are taken into account under this
section with respect to an eligible employee for the year, the ADR of
the employee is zero.
(ii) ADR of HCEs eligible under more than one arrangement--(A)
General rule. Pursuant to section 401(k)(3)(A), the ADR of an HCE who is
an eligible employee in more than one cash or deferred arrangement of
the same employer is calculated by treating all contributions with
respect to such HCE under any such arrangement as being made under the
cash or deferred arrangement being tested. Thus, the ADR for such an HCE
is calculated by accumulating all contributions under any cash or
deferred arrangement (other than a cash or deferred arrangement
described in paragraph (a)(3)(ii)(B) of this section) that would be
taken into account under this section for the plan year, if the cash or
deferred arrangement under which the contribution was made applied this
section and had the same plan year. For example, in the case of a plan
with a 12-month plan year, the ADR for the plan year of that plan for an
HCE who participates in multiple cash or deferred arrangements of the
same employer is the sum of all contributions during such 12-month
period that would be taken into account with respect to the HCE under
all such arrangements in which the HCE is an eligible employee, divided
by the HCE's compensation for that 12-month period (determined using the
compensation definition for the plan being tested), without regard to
the plan year of the other plans and whether those plans are satisfying
this section or Sec. 1.401(k)-3.
[[Page 333]]
(B) Plans not permitted to be aggregated. Cash or deferred
arrangements under plans that are not permitted to be aggregated under
Sec. 1.401(k)-1(b)(4) (determined without regard to the prohibition on
aggregating plans with inconsistent testing methods set forth in Sec.
1.401(k)-1(b)(4)(iii)(B) and the prohibition on aggregating plans with
different plan years set forth in Sec. 1.410(b)-7(d)(5)) are not
aggregated under this paragraph (a)(3)(ii).
(iii) Examples. The following examples illustrate the application of
this paragraph (a)(3):
Example 1. (i) Employee A, an HCE with compensation of $120,000, is
eligible to make elective contributions under Plan S and Plan T, two
profit-sharing plans maintained by Employer H with calendar year plan
years, each of which includes a cash or deferred arrangement. During the
current plan year, Employee A makes elective contributions of $6,000 to
Plan S and $4,000 to Plan T.
(ii) Under each plan, the ADR for Employee A is determined by
dividing Employee A's total elective contributions under both
arrangements by Employee A's compensation taken into account under the
plan for the year. Therefore, Employee A's ADR under each plan is 8.33%
($10,000/$120,000).
Example 2. (i) The facts are the same as in Example 1, except that
Plan T defines compensation (for deferral and testing purposes) to
exclude all bonuses paid to an employee. Plan S defines compensation
(for deferral and testing purposes) to include bonuses paid to an
employee. During the current year, Employee A's compensation included a
$10,000 bonus. Therefore, Employee A's compensation under Plan T is
$110,000 and Employee A's compensation under Plan S is $120,000.
(ii) Employee A's ADR under Plan T is 9.09% ($10,000/$110,000) and
under Plan S, Employee A's ADR is 8.33% ($10,000/$120,000).
Example 3. (i) Employer J sponsors two profit-sharing plans, Plan U
and Plan V, each of which includes a cash or deferred arrangement. Plan
U's plan year begins on July 1 and ends on June 30. Plan V has a
calendar year plan year. Compensation under both plans is limited to the
participant's compensation during the period of participation. Employee
B is an HCE who participates in both plans. Employee B's monthly
compensation and elective contributions to each plan for the 2005 and
2006 calendar years are as follows:
------------------------------------------------------------------------
Monthly Monthly
Monthly elective elective
Calendar year compensation contribution contribution
to Plan U to Plan V
------------------------------------------------------------------------
2005.......................... $10,000 $500 $400
2006.......................... 11,500 700 550
------------------------------------------------------------------------
(ii) Under Plan U, Employee B's ADR for the plan year ended June 30,
2006, is equal to Employee B's total elective contributions under Plan U
and Plan V for the plan year ending June 30, 2006, divided by Employee
B's compensation for that period. Therefore, Employee B's ADR under Plan
U for the plan year ending June 30, 2006, is (($900 x 6) + ($1,250 x 6))
/ (($10,000 x 6) + ($11,500 x 6)), or 10%.
(iii) Under Plan V, Employee B's ADR for the plan year ended
December 31, 2005, is equal to total elective contributions under Plan U
and V for the plan year ending December 31, 2005, divided by Employee
B's compensation for that period. Therefore, Employee B's ADR under Plan
V for the plan year ending December 31, 2005, is ($10,800/$120,000), or
9%.
Example 4. (i) The facts are the same as Example 3, except that
Employee B first becomes eligible to participate in Plan U on January 1,
2006.
(ii) Under Plan U, Employee B's ADR for the plan year ended June 30,
2006, is equal to Employee B's total elective contributions under Plan U
and V for the plan year ending June 30, 2006, divided by Employee B's
compensation for that period. Therefore, Employee B's ADR under Plan U
for the plan year ending June 30, 2006, is (($400 x 6) + ($1,250 x 6)) /
(($10,000 x 6) + ($11,500 x 6)), or 7.67%.
(4) Elective contributions taken into account under the ADP test--
(i) General rule. An elective contribution is taken into account in
determining the ADR for an eligible employee for a plan year or
applicable year only if each of the following requirements is
satisfied--
(A) The elective contribution is allocated to the eligible
employee's account under the plan as of a date within that year. For
purposes of this rule, an elective contribution is considered allocated
as of a date within a year only if--
(1) The allocation is not contingent on 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 year to
which the contribution relates.
[[Page 334]]
(B) The elective contribution relates to compensation that either--
(1) Would have been received by the employee in the year but for the
employee's election to defer under the arrangement; or
(2) Is attributable to services performed by the employee in the
year and, but for the employee's election to defer, would have been
received by the employee within 2\1/2\ months after the close of the
year, but only if the plan provides for elective contributions that
relate to compensation that would have been received after the close of
a year to be allocated to such prior year rather than the year in which
the compensation would have been received.
(ii) Elective contributions for partners and self-employed
individuals. For purposes of this paragraph (a)(4), a partner's
distributive share of partnership income is treated as received on the
last day of the partnership taxable year and a sole proprietor's
compensation is treated as received on the last day of the individual's
taxable year. Thus, an elective contribution made on behalf of a partner
or sole proprietor 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 (a)(4)(i) of this section
are met.
(iii) Elective contributions for HCEs. Elective contributions of an
HCE must include any excess deferrals, as described in Sec. 1.402(g)-
1(a), even if those excess deferrals are distributed, pursuant to Sec.
1.402(g)-1(e).
(5) Elective contributions not taken into account under the ADP
test--(i) General rule. Elective contributions that do not satisfy the
requirements of paragraph (a)(4)(i) of this section may not be taken
into account in determining the ADR of an eligible employee for the plan
year or applicable 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 ADP test) for the plan year for which they are
allocated under the plan as if they were nonelective contributions and
were the only nonelective contributions for that year. See Sec. Sec.
1.401(a)(4)-1(b)(2)(ii)(B) and 1.410(b)-7(c)(1).
(ii) Elective contributions for NHCEs. Elective contributions of an
NHCE shall not include any excess deferrals, as described in Sec.
1.402(g)-1(a), to the extent the excess deferrals are prohibited under
section 401(a)(30). However, to the extent that the excess deferrals are
not prohibited under section 401(a)(30), they are included in elective
contributions even if distributed pursuant to Sec. 1.402(g)-1(e).
(iii) Elective contributions treated as catch-up contributions.
Elective contributions that are treated as catch-up contributions under
section 414(v) because they exceed a statutory limit or employer-
provided limit (within the meaning of Sec. 1.414(v)-1(b)(1)) are not
taken into account under paragraph (a)(4) of this section for the plan
year for which the contributions were made, or for any other plan year.
(iv) Elective contributions used to satisfy the ACP test. Except to
the extent necessary to demonstrate satisfaction of the requirement of
Sec. 1.401(m)-2(a)(6)(ii), elective contributions taken into account
for the ACP test under Sec. 1.401(m)-2(a)(6) are not taken into account
under paragraph (a)(4) of this section.
(v) Additional elective contributions pursuant to section 414(u).
Additional elective contributions made pursuant to section 414(u) by
reason of an eligible employee's qualified military service are not
taken into account under paragraph (a)(4) of this section for the plan
year for which the contributions are made, or for any other plan year.
(vi) Default elective contributions pursuant to section 414(w).
Default elective contributions made under an eligible automatic
contribution arrangement (within the meaning of Sec. 1.414(w)-1(b))
that are distributed pursuant to Sec. 1.414(w)-1(c) for plan years
beginning on or after January 1, 2008, are not taken into account under
paragraph (a)(4) of this section for the plan year for which the
contributions are made, or for any other plan year.
(6) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the ADP
[[Page 335]]
test. Qualified nonelective contributions and qualified matching
contributions may be taken into account in determining the ADR for an
eligible employee for a plan year or applicable year but only to the
extent the contributions satisfy the following requirements--
(i) Timing of allocation. The qualified nonelective contribution or
qualified matching contribution is allocated to the employee's account
as of a date within that year within the meaning of paragraph
(a)(4)(i)(A) of this section. Consequently, under the prior year testing
method, in order to be taken into account in calculating the ADP for the
eligible NHCEs for the applicable year, a qualified nonelective
contribution or qualified matching contribution must be contributed no
later than the end of the 12-month period immediately following the
applicable year even though the applicable year is different than the
plan year being tested.
(ii) Requirement that amount satisfy section 401(a)(4). The amount
of nonelective contributions, including those qualified nonelective
contributions taken into account under this paragraph (a)(6) and those
qualified nonelective contributions taken into account for the ACP test
of section 401(m)(2) under Sec. 1.401(m)-2(a)(6), satisfies the
requirements of section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2). The
amount of nonelective contributions, excluding those qualified
nonelective contributions taken into account under this paragraph (a)(6)
and those qualified nonelective contributions taken into account for the
ACP test of section 401(m)(2) under Sec. 1.401(m)-2(a)(6), satisfies
the requirements of section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2). In
the case of an employer that is applying the special rule for employer-
wide plans in Sec. 1.414(r)-1(c)(2)(ii) with respect to the cash or
deferred arrangement, the determination of whether the qualified
nonelective contributions satisfy the requirements of this paragraph
(a)(6)(ii) must be made on an employer-wide basis regardless of whether
the plans to which the qualified nonelective contributions are made are
satisfying the requirements of section 410(b) on an employer-wide basis.
Conversely, in the case of an employer that is treated as operating
qualified separate lines of business, and does not apply the special
rule for employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) with respect
to the cash or deferred arrangement, then the determination of whether
the qualified nonelective contributions satisfy the requirements of this
paragraph (a)(6)(ii) is not permitted to be made on an employer-wide
basis regardless of whether the plans to which the qualified nonelective
contributions are made are satisfying the requirements of section 410(b)
on that basis.
(iii) Aggregation must be permitted. The plan that contains the cash
or deferred arrangement and the plan or plans to which the qualified
nonelective contributions or qualified matching contributions are made,
are plans that would be permitted to be aggregated under Sec. 1.401(k)-
1(b)(4). If the plan year of the plan that contains the cash or deferred
arrangement is changed to satisfy the requirement under Sec. 1.410(b)-
7(d)(5) that aggregated plans have the same plan year, qualified
nonelective contributions and qualified matching contributions may be
taken into account in the resulting short plan year only if such
qualified nonelective contributions and qualified matching contributions
could have been taken into account under an ADP test for a plan with the
same short plan year.
(iv) Disproportionate contributions not taken into account--(A)
General rule. Qualified nonelective contributions cannot be taken into
account for a plan year for an NHCE to the extent such contributions
exceed the product of that NHCE's compensation and the greater of 5% or
two times the plan's representative contribution rate. Any qualified
nonelective contribution taken into account under an ACP test under
Sec. 1.401(m)-2(a)(6) (including the determination of the
representative contribution rate for purposes of Sec. 1.401(m)-
2(a)(6)(v)(B)), is not permitted to be taken into account for purposes
of this paragraph (a)(6) (including the determination of the
representative contribution rate under paragraph (a)(6)(iv)(B) of this
section).
[[Page 336]]
(B) Definition of representative contribution rate. For purposes of
this paragraph (a)(6)(iv), the plan's representative contribution rate
is the lowest applicable contribution rate of any eligible NHCE among a
group of eligible NHCEs that consists of half of all eligible NHCEs for
the plan year (or, if greater, the lowest applicable contribution rate
of any eligible NHCE in the group of all eligible NHCEs for the plan
year and who is employed by the employer on the last day of the plan
year).
(C) Definition of applicable contribution rate. For purposes of this
paragraph (a)(6)(iv), the applicable contribution rate for an eligible
NHCE is the sum of the qualified matching contributions taken into
account under this paragraph (a)(6) for the eligible NHCE for the plan
year and the qualified nonelective contributions made for the eligible
NHCE for the plan year, divided by the eligible NHCE's compensation for
the same period.
(D) Special rule for prevailing wage contributions. Notwithstanding
paragraph (a)(6)(iv)(A) of this section, qualified nonelective
contributions that are made in connection with an employer's obligation
to pay prevailing wages under the Davis-Bacon Act (46 Stat. 1494),
Public Law 71-798, Service Contract Act of 1965 (79 Stat. 1965), Public
Law 89-286, or similar legislation can be taken into account for a plan
year for an NHCE to the extent such contributions do not exceed 10
percent of that NHCE's compensation.
(v) Qualified matching contributions. Qualified matching
contributions satisfy this paragraph (a)(6) only to the extent that such
qualified matching contributions are matching contributions that are not
precluded from being taken into account under the ACP test for the plan
year under the rules of Sec. 1.401(m)-2(a)(5)(ii).
(vi) Contributions only used once. Qualified nonelective
contributions and qualified matching contributions cannot be taken into
account under this paragraph (a)(6) to the extent such contributions are
taken into account for purposes of satisfying any other ADP test, any
ACP test, or the requirements of Sec. 1.401(k)-3, 1.401(m)-3 or
1.401(k)-4. Thus, for example, matching contributions that are made
pursuant to Sec. 1.401(k)-3(c) cannot be taken into account under the
ADP test. Similarly, if a plan switches from the current year testing
method to the prior year testing method pursuant to Sec. 1.401(k)-2(c),
qualified nonelective contributions that are taken into account under
the current year testing method for a year may not be taken into account
under the prior year testing method for the next year.
(7) Examples. The following examples illustrate the application of
this paragraph (a):
Example 1. (i) Employer X has three employees, A, B, and C. Employer
X sponsors a profit-sharing plan (Plan Z) that includes a cash or
deferred arrangement. Each year, Employer X determines a bonus
attributable to the prior year. Under the cash or deferred arrangement,
each eligible employee may elect to receive none, all or any part of the
bonus in cash. X contributes the remainder to Plan Z. The portion of the
bonus paid in cash, if any, is paid 2 months after the end of the plan
year and thus is included in compensation for the following plan year.
Employee A is an HCE, while Employees B and C are NHCEs. The plan uses
the current year testing method and defines compensation to include
elective contributions and bonuses paid during each plan year. In
February of 2005, Employer X determined that no bonuses will be paid for
2004. In February of 2006, Employer X provided a bonus for each employee
equal to 10% of regular compensation for 2005. For the 2005 plan year,
A, B, and C have the following compensation and make the following
elections:
------------------------------------------------------------------------
Elective
Employee Compensation contribution
------------------------------------------------------------------------
A....................................... $100,000 $4,340
B....................................... 60,000 2,860
C....................................... 45,000 1,250
------------------------------------------------------------------------
(ii) For each employee, the ratio of elective contributions to the
employee's compensation for the plan year is:
------------------------------------------------------------------------
Ratio of elective
Employee contribution to ADR
compensation (percent)
------------------------------------------------------------------------
A....................................... $4,340/$100,000 4.34
B....................................... 2,860/60,000 4.77
C....................................... 1,250/45,000 2.78
------------------------------------------------------------------------
(iii) The ADP for the HCEs (Employee A) is 4.34%. The ADP for the
NHCEs is 3.78% ((4.77% + 2.78%)/2). Because 4.34% is less than 4.73%
(3.78% multiplied by 1.25), the plan satisfies the ADP test under
paragraph (a)(1)(i) of this section.
[[Page 337]]
Example 2. (i) The facts are the same as in Example 1, except that
elective contributions are made pursuant to a salary reduction agreement
throughout the plan year, and no bonuses are paid. As provided by
section 414(s)(2), Employer X includes elective contributions in
compensation. During the year, B and C defer the same amount as in
Example 1, but A defers $5,770. Thus, the compensation and elective
contributions for A, B, and C are:
----------------------------------------------------------------------------------------------------------------
Elective ADR
Employee Compensation contributions (percent)
----------------------------------------------------------------------------------------------------------------
A.................................................................. $100,000 $5,770 5.77
B.................................................................. 60,000 2,860 4.77
C.................................................................. 45,000 1,250 2.78
----------------------------------------------------------------------------------------------------------------
(ii) The ADP for the HCEs (Employee A) is 5.77%. The ADP for the
NHCEs is 3.78% ((4.77% + 2.78%)/2). Because 5.77% exceeds 4.73% (3.78% x
1.25), the plan does not satisfy the ADP test under paragraph (a)(1)(i)
of this section. However, because the ADP for the HCEs does not exceed
the ADP for the NHCEs by more than 2 percentage points and the ADP for
the HCEs does not exceed the ADP for the NHCEs multiplied by 2 (3.78% x
2 = 7.56%), the plan satisfies the ADP test under paragraph (a)(1)(ii)
of this section.
Example 3. (i) Employees D through L are eligible employees in Plan
T, a profit-sharing plan that contains a cash or deferred arrangement.
The plan is a calendar year plan that uses the prior year testing
method. Plan T provides that elective contributions are included in
compensation (as provided under section 414(s)(2)). Each eligible
employee may elect to defer up to 6% of compensation under the cash or
deferred arrangement. Employees D and E are HCEs. The compensation,
elective contributions, and ADRs of Employees D and E for the 2006 plan
year are shown below:
----------------------------------------------------------------------------------------------------------------
Elective
Compensation contributions ADR for 2006
Employee for 2006 plan for 2006 plan plan year
year year (percent)
----------------------------------------------------------------------------------------------------------------
D............................................................... $100,000 $10,000 10
E............................................................... 95,000 4,750 5
----------------------------------------------------------------------------------------------------------------
(ii) During the 2005 plan year, Employees F through L were eligible
NHCEs. The compensation, elective contributions and ADRs of Employees F
through L for the 2005 plan year are shown in the following table:
----------------------------------------------------------------------------------------------------------------
Elective
Compensation contributions ADR for 2005
Employee for 2005 plan for 2005 plan plan year
year year (percent)
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
(iii) The ADP for 2006 for the HCEs is 7.5%. Because Plan T is using
the prior year testing method, the applicable year for determining the
NHCE ADP is the prior plan year (i.e., 2005). The NHCE ADP is determined
using the ADRs for NHCEs eligible during the prior plan year (without
regard to whether they are eligible under the plan during the plan
year). The ADP for the NHCEs is 3.71% (the sum of the individual ADRs,
26%, divided by 7 employees). Because 7.5% exceeds 4.64% (3.71% x 1.25),
Plan T does not satisfy the ADP test under paragraph (a)(1)(i) of this
section. In addition, because the ADP for the HCEs exceeds the ADP for
the NHCEs by more than 2 percentage points, Plan T does not satisfy the
ADP test under paragraph (a)(1)(ii) of this section. Therefore, the cash
or deferred arrangement fails to be a qualified cash or deferred
arrangement unless the ADP failure is corrected under paragraph (b) of
this section.
Example 4. (i) Plan U is a calendar year profit-sharing plan that
contains a cash or deferred arrangement and uses the current year
testing method. Plan U provides that elective contributions are included
in compensation (as provided under section 414(s)(2)). The following
amounts are contributed under Plan U for the 2006 plan year: QNECs equal
to 2% of each employee's compensation; Contributions equal to 6% of each
employee's compensation that are not immediately vested under the terms
of the plan; 3% of each employee's compensation that the employee may
elect to receive as cash or to defer under the plan. Both types of
nonelective contributions are made for the HCEs (employees M and N) and
the NHCEs (employees O through S) for the plan year and are contributed
after the end of the plan year and before the end of the following plan
year. In addition, neither type of nonelective contributions is used for
any other ADP or ACP test.
(ii) For the 2006 plan year, the compensation, elective
contributions, and actual deferral ratios of employees M through S are
shown in the following table:
----------------------------------------------------------------------------------------------------------------
Actual
Employee Compensation Elective deferral ratio
contributions (percent)
----------------------------------------------------------------------------------------------------------------
M............................................................... $100,000 $3,000 3
N............................................................... 100,000 2,000 2
O............................................................... 60,000 1,800 3
P............................................................... 40,000 0 0
Q............................................................... 30,000 0 0
R............................................................... 5,000 0 0
S............................................................... 20,000 0 0
----------------------------------------------------------------------------------------------------------------
(iii) The elective contributions alone do not satisfy the ADP test
of section 401(k)(3) and paragraph (a)(1) of this section because the
ADP for the HCEs, consisting of employees M and N, is 2.5% and the ADP
for the NHCEs is 0.6%.
[[Page 338]]
(iv) The 2% QNECs satisfies the timing requirement of paragraph
(a)(6)(i) of this section because it is paid within 12-month after the
plan year for which allocated. All nonelective contributions also
satisfy the requirements relating to section 401(a)(4) set forth in
paragraph (a)(6)(ii) of this section (because all employees receive an
8% nonelective contribution and the nonelective contributions excluding
the QNECs is 6% for all employees). In addition, the QNECs are not
disproportionate under paragraph (a)(6)(iv) of this section because no
QNEC for an NHCE exceeds the product of the plan's applicable
contribution rate (2%) and that NHCE's compensation.
(v) Because the rules of paragraph (a)(6) of this section are
satisfied, the 2% QNECs may be taken into account in applying the ADP
test of section 401(k)(3) and paragraph (a)(1) of this section. The 6%
nonelective contributions, however, may not be taken into account
because they are not QNECs.
(vi) If the 2% QNECs are taken into account, the ADP for the HCEs is
4.5%, and the actual deferral percentage for the NHCEs is 2.6%. Because
4.5% is not more than two percentage points greater than 2.6 percent,
and not more than two times 2.6, the cash or deferred arrangement
satisfies the ADP test of section 401(k)(3) under paragraph (a)(1)(ii)
of this section.
Example 5. (i) The facts are the same as Example 4, except the plan
uses the prior year testing method. In addition, the NHCE ADP for the
2005 plan year (the prior plan year) is 0.8% and no QNECs are
contributed for the 2005 plan year during 2005 or 2006.
(ii) In 2007, it is determined that the elective contributions alone
do not satisfy the ADP test of section 401(k)(3) and paragraph (a)(1) of
this section for 2006 because the 2006 ADP for the eligible HCEs,
consisting of employees M and N, is 2.5% and the 2005 ADP for the
eligible NHCEs is 0.8%. An additional QNEC of 2% of compensation is made
for each eligible NHCE in 2007 and allocated for 2005.
(iii) The 2% QNECs that are made in 2007 and allocated for the 2005
plan year do not satisfy the timing requirement of paragraph (a)(6)(i)
of this section for the applicable year for the 2005 plan year because
they were not contributed before the last day of the 2006 plan year.
Accordingly, the 2% QNECs do not satisfy the rules of paragraph (a)(6)
of this section and may not be taken into account in applying the ADP
test of section 401(k)(3) and paragraph (a)(1) of this section for the
2006 plan year. The cash or deferred arrangement fails to be a qualified
cash or deferred arrangement unless the ADP failure is corrected under
paragraph (b) of this section.
Example 6. (i) The facts are the same as Example 4, except that the
ADP for the HCEs is 4.6% and there is no 6% nonelective contribution
under the plan. The employer would like to take into account the 2% QNEC
in determining the ADP for the NHCEs but not in determining the ADP for
the HCEs.
(ii) The elective contributions alone fail the requirements of
section 401(k) and paragraph (a)(1) of this section because the HCE ADP
for the plan year (4.6%) exceeds 0.75% (0.6% x 1.25) and 1.2% (0.6% x
2).
(iii) The 2% QNECs may not be taken into account in determining the
ADP of the NHCEs because they fail to satisfy the requirements relating
to section 401(a)(4) set forth in paragraph (a)(6)(ii) of this section.
This is because the amount of nonelective contributions, excluding those
QNECs that would be taken into account under the ADP test, would be 2%
of compensation for the HCEs and 0% for the NHCEs. Therefore, the cash
or deferred arrangement fails to be a qualified cash or deferred
arrangement unless the ADP failure is corrected under paragraph (b) of
this section.
Example 7. (i) The facts are the same as Example 6, except that
Employee R receives a QNEC in an amount of $500 and no QNECs are made on
behalf of the other employees.
(ii) If the QNEC could be taken into account under paragraph (a)(6)
of this section, the ADP for the NHCEs would be 2.6% and the plan would
satisfy the ADP test. The QNEC is disproportionate under paragraph
(a)(6)(iv) of this section, and cannot be taken into account under
paragraph (a)(6) of this section, to the extent it exceeds the greater
of 5% and two times the plan's representative contribution rate (0%),
multiplied by Employee R's compensation. The plan's representative
contribution rate is 0% because it is the lowest applicable contribution
rate among a group of NHCEs that is at least half of all NHCEs, or all
the NHCEs who are employed on the last day of the plan year. Therefore,
the QNEC may be taken into account under the ADP test only to the extent
it does not exceed 5% times Employee R's compensation (or $250) and the
cash or deferred arrangement fails to satisfy the ADP test and must
correct under paragraph (b) of this section.
Example 8. (i) The facts are the same as in Example 4 except that
the plan changes from the current year testing method to the prior year
testing method for the following plan year (2007 plan year). The ADP for
the HCEs for the 2007 plan year is 3.5%.
(ii) The 2% QNECs may not be taken into account in determining the
ADP for the NHCEs for the applicable year (2006 plan year) in satisfying
the ADP test for the 2007 plan year because they were taken into account
in satisfying the ADP test for the 2006 plan year. Accordingly, the NHCE
ADP for the applicable year is 0.6%. The elective contributions for the
plan year fail the requirements of section 401(k) and paragraph (a)(1)
[[Page 339]]
of this section because the HCE ADP for the plan year (3.5%) exceeds the
ADP limit of 1.2% (the greater of 0.75% (0.6% x 1.25) and 1.2% (0.6% x
2)), determined using the applicable year ADP for the NHCEs. Therefore,
the cash or deferred arrangement fails to be a qualified cash or
deferred arrangement unless the ADP failure is corrected under paragraph
(b) of this section.
Example 9. (i)(A) Employer N maintains Plan X, a profit sharing plan
that contains a cash or deferred arrangement and that uses the current
year testing method. Plan X provides for employee contributions,
elective contributions, and matching contributions. Matching
contributions on behalf of NHCEs are qualified matching contributions
(QMACs) and are contributed during the 2005 plan year. Matching
contributions on behalf of HCEs are not QMACs, because they fail to
satisfy the nonforfeitability requirement of Sec. 1.401(k)-1(c). The
elective contributions and matching contributions with respect to HCEs
for the 2005 plan year are shown in the following table:
----------------------------------------------------------------------------------------------------------------
Matching
Elective Total matching contributions
contributions contributions that are not QMACs
QMACs
----------------------------------------------------------------------------------------------------------------
Highly compensated employees........................... 15% 5% 5% 0%
----------------------------------------------------------------------------------------------------------------
(B) The elective contributions and matching contributions with
respect to the NHCEs for the 2005 plan year are shown in the following
table:
----------------------------------------------------------------------------------------------------------------
Matching
Elective Total matching contributions
contributions contributions that are not QMACs
QMACs
----------------------------------------------------------------------------------------------------------------
Nonhighly compensated employees........................ 11% 4% 0% 4%
----------------------------------------------------------------------------------------------------------------
(ii) The plan fails to satisfy the ADP test of section 401(k)(3)(A)
and paragraph (a)(1) of this section because the ADP for HCEs (15%) is
more than 125% of the ADP for NHCEs (11%), and more than 2 percentage
points greater than 11%. However, the plan provides that QMACs may be
used to meet the requirements of section 401(k)(3)(A)(ii) provided that
they are not used for any other ADP or ACP test. QMACs equal to 1% of
compensation are taken into account for each NHCE in applying the ADP
test. After this adjustment, the applicable ADP and ACP (taking into
account the provisions of Sec. 1.401(m)-2(a)(5)(ii)) for the plan year
are as follows:
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
HCEs.................................... 15 5
Nonhighly compensated employees......... 12 3
------------------------------------------------------------------------
(iii) The elective contributions and QMACs taken into account for
purposes of the ADP test of section 401(k)(3) satisfy the requirements
of section 401(k)(3)(A)(ii) under paragraph (a)(1)(ii) of this section
because the ADP for HCEs (15%) is not more than the ADP for NHCEs
multiplied by 1.25 (12% x 1.25 = 15%).
(b) Correction of excess contributions--(1) Permissible correction
methods--(i) In general. A cash or deferred arrangement does not fail to
satisfy the requirements of section 401(k)(3) and paragraph (a)(1) of
this section if the employer, in accordance with the terms of the plan
that includes the cash or deferred arrangement, uses any of the
following correction methods--
(A) Qualified nonelective contributions or qualified matching
contributions. The employer makes qualified nonelective contributions or
qualified matching contributions that are taken into account under this
section and, in combination with other amounts taken into account under
paragraph (a) of this section, allow the cash or deferred arrangement to
satisfy the requirements of paragraph (a)(1) of this section.
(B) Excess contributions distributed. Excess contributions are
distributed in accordance with paragraph (b)(2) of this section.
(C) Excess contributions recharacterized. Excess contributions are
recharacterized in accordance with paragraph (b)(3) of this section.
(ii) Combination of correction methods. A plan may provide for the
use of any of the correction methods described in
[[Page 340]]
paragraph (b)(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. A plan may permit an HCE to elect whether any excess
contributions are to be recharacterized or distributed. Similarly, a
plan may permit an HCE with elective contributions for a year that
includes both pre-tax elective contributions and designated Roth
contributions to elect whether the excess contributions are to be
attributed to pre-tax elective contributions or designated Roth
contributions. If the plan uses a combination of correction methods, any
contribution made under paragraph (b)(1)(i)(A) of this section must be
taken into account before application of the correction methods in
paragraph (b)(1)(i)(B) or (C) of this section.
(iii) Exclusive means of correction. A failure to satisfy the
requirements of paragraph (a)(1) of this section may not be corrected
using any method other than the ones described in paragraphs (b)(1)(i)
and (ii) of this section. Thus, 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).
(2) Corrections through distribution--(i) General rule. This
paragraph (b)(2) contains the rules for correction of excess
contributions through a distribution from the plan. Correction through a
distribution generally involves a 4-step process. First, the plan must
determine, in accordance with paragraph (b)(2)(ii) of this section, the
total amount of excess contributions that must be distributed under the
plan. Second, the plan must apportion the total amount of excess
contributions among HCEs in accordance with paragraph (b)(2)(iii) of
this section. Third, the plan must determine the income allocable to
excess contributions in accordance with paragraph (b)(2)(iv) of this
section. Finally, the plan must distribute the apportioned excess
contributions and allocable income in accordance with paragraph
(b)(2)(v) of this section. Paragraph (b)(2)(vi) of this section provides
rules relating to the tax treatment of these distributions. Paragraph
(b)(2)(vii) provides other rules relating to these distributions.
(ii) Calculation of total amount to be distributed. The following
procedures must be used to determine the total amount of the excess
contributions to be distributed--
(A) Calculate the dollar amount of excess contributions for each
HCE. The amount of excess contributions attributable to a given HCE for
a plan year is the amount (if any) by which the HCE's contributions
taken into account under this section must be reduced for the HCE's ADR
to equal the highest permitted ADR under the plan. To calculate the
highest permitted ADR under a plan, the ADR of the HCE with the highest
ADR is reduced by the amount required to cause that HCE's ADR to equal
the ADR of the HCE with the next highest ADR. If a lesser reduction
would enable the arrangement to satisfy the requirements of paragraph
(b)(2)(ii)(C) of this section, only this lesser reduction is used in
determining the highest permitted ADR.
(B) Determination of the total amount of excess contributions. The
process described in paragraph (b)(2)(ii)(A) of this section must be
repeated until the arrangement would satisfy the requirements of
paragraph (b)(2)(ii)(C) of this section. The sum of all reductions for
all HCEs determined under paragraph (b)(2)(ii)(A) of this section is the
total amount of excess contributions for the plan year.
(C) Satisfaction of ADP. A cash or deferred arrangement satisfies
this paragraph (b)(2)(ii)(C) if the arrangement would satisfy the
requirements of paragraph (a)(1)(ii) of this section if the ADR for each
HCE were determined after the reductions described in paragraph
(b)(2)(ii)(A) of this section.
(iii) Apportionment of total amount of excess contributions among
the HCEs. The following procedures must be used in apportioning the
total amount of excess contributions determined under paragraph
(b)(2)(ii) of this section among the HCEs:
[[Page 341]]
(A) Calculate the dollar amount of excess contributions for each
HCE. The contributions of the HCE with the highest dollar amount of
contributions taken into account under this section are reduced by the
amount required to cause that HCE's contributions to equal the dollar
amount of the contributions taken into account under this section for
the HCE with the next highest dollar amount of contributions taken into
account under this section. If a lesser apportionment to the HCE would
enable the plan to apportion the total amount of excess contributions,
only the lesser apportionment would apply.
(B) Limit on amount apportioned to any individual. For purposes of
this paragraph (b)(2)(iii), the amount of contributions taken into
account under this section with respect to an HCE who is an eligible
employee in more than one plan of an employer is determined by taking
into account all contributions otherwise taken into account with respect
to such HCE under any plan of the employer during the plan year of the
plan being tested as being made under the plan being tested. However,
the amount of excess contributions apportioned for a plan year with
respect to any HCE must not exceed the amount of contributions actually
contributed to the plan for the HCE for the plan year. Thus, in the case
of an HCE who is an eligible employee in more than one plan of the same
employer to which elective contributions are made and whose ADR is
calculated in accordance with paragraph (a)(3)(ii) of this section, the
amount required to be distributed under this paragraph (b)(2)(iii) shall
not exceed the contributions actually contributed to the plan and taken
into account under this section for the plan year.
(C) Apportionment to additional HCEs. The procedure in paragraph
(b)(2)(iii)(A) of this section must be repeated until the total amount
of excess contributions determined under paragraph (b)(2)(ii) of this
section has been apportioned.
(iv) Income allocable to excess contributions--(A) General rule. For
plan years beginning on or after January 1, 2008, the income allocable
to excess contributions is equal to the allocable gain or loss through
the end of the plan year. See paragraph (b)(2)(iv)(D) of this section
for rules that apply to plan years beginning before January 1, 2008.
(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 participant's accounts. See Sec. 1.401(a)(4)-1(c)(8). A plan
will not fail to use a reasonable method for computing the income
allocable to excess contributions merely because the income allocable to
excess contributions is determined on a date that is no more than 7 days
before the distribution.
(C) Alternative method of allocating plan year income. A plan may
allocate income to excess contributions for the plan year by multiplying
the income for the plan year allocable to the elective contributions and
other amounts taken into account under this section (including
contributions made for the plan year), by a fraction, the numerator of
which is the excess contributions for the employee for the plan year,
and the denominator of which is the sum of the--
(1) Account balance attributable to elective contributions and other
contributions taken into account under this section as of the beginning
of the plan year, and
(2) Any additional amount of such contributions made for the plan
year.
(D) Plan years before 2008. For plan years beginning before January
1, 2008, the income allocable to excess contributions is determined
under Sec. 1.401(k)-2(b)(2)(iv) (as it appeared in the April 1, 2007,
edition of 26 CFR part 1).
(v) Distribution. Within 12 months after the close of the plan year
in which the excess contribution arose, the plan must distribute to each
HCE the excess contributions apportioned to such HCE under paragraph
(b)(2)(iii) of this section and the allocable income. Except as
otherwise provided in this paragraph (b)(2)(v) and paragraph (b)(4)(i)
of this section, a distribution
[[Page 342]]
of excess contributions must be in addition to any other distributions
made during the year and must be designated as a corrective distribution
by the employer. 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 an HCE is distributed prior to when the plan makes a
distribution of excess contributions in accordance with this paragraph
(b)(2), 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.
(vi) Tax treatment of corrective distributions--(A) Corrective
distributions for plan years beginning on or after January 1, 2008.
Except as provided in this paragraph (b)(2)(vi), for plan years
beginning on or after January 1, 2008, a corrective distribution of
excess contributions (and allocable income) is includible in the
employee's gross income for the employee's taxable year in which
distributed. In addition, the corrective distribution is not subject to
the early distribution tax of section 72(t). See paragraph (b)(5) of
this section for additional rules relating to the employer excise tax on
amounts distributed more than 2\1/2\ months (6 months in the case of
certain plans that include an eligible automatic contribution
arrangement within the meaning of section 414(w)) after the end of the
plan year. See also Sec. 1.402(c)-2, A-4 for restrictions on rolling
over distributions that are excess contributions.
(B) Corrective distributions for plan years beginning before January
1, 2008. The tax treatment of corrective distributions for plan years
beginning before January 1, 2008, is determined under Sec. 1.401(k)-
2(b)(2)(vi) (as it appeared in the April 1, 2007, edition of 26 CFR Part
1).
(C) Corrective distributions attributable to designated Roth
contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this
section, a distribution of excess contributions is not includible in
gross income to the extent it represents a distribution of designated
Roth contributions. However, the income allocable to a corrective
distribution of excess contributions that are designated Roth
contributions is included in gross income in accordance with paragraph
(b)(2)(vi)(A) or (B) of this section (i.e., in the same manner as income
allocable to a corrective distribution of excess contributions that are
pre-tax elective contributions).
(vii) Other rules--(A) 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.
(B) Treatment of corrective distributions as elective contributions.
Excess contributions are treated as employer contributions for purposes
of sections 404 and 415 even if distributed from the plan.
(C) 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). See Sec. 1.401(a)(9)-5,
A-9(b).
(D) Partial distributions. Any distribution of less than the entire
amount of excess contributions (and allocable income) with respect to
any HCE is treated as a pro rata distribution of excess contributions
and allocable income.
(viii) Examples. The following examples illustrate the application
of this paragraph (b)(2). For purposes of these examples, none of the
plans provide for catch-up contributions under section 414(v). The
examples are as follows:
Example 1. (i) Plan P, a calendar year profit-sharing plan that
includes a cash or deferred arrangement, provides for distribution of
excess contributions to HCEs to the extent necessary to satisfy the ADP
test. For the 2006 plan year, Employee A, an HCE, has elective
contributions of $12,000 and $200,000 in compensation, for an ADR of 6%,
and Employee B, a second HCE, has elective contributions of $8,960 and
compensation of $128,000, for an ADR of 7%. The ADP for the NHCEs is 3%
for the 2006 plan year. Under the ADP test, the ADP of the two HCEs
[[Page 343]]
under the plan may not exceed 5% (i.e., 2 percentage points more than
the ADP of the NHCEs under the plan). The ADP for the 2 HCEs under the
plan is 6.5%. Therefore, there must be a correction of excess
contributions for the 2006 plan year.
(ii) The total amount of excess contributions for the HCEs is
determined under paragraph (b)(2)(ii) of this section as follows: the
elective contributions of Employee B (the HCE with the highest ADR) are
reduced by $1,280 in order to reduce his ADR to 6% ($7,680/$128,000),
which is the ADR of Employee A.
(iii) Because the ADP of the HCEs determined after the $1,280
reduction to Employee B still exceeds 5%, further reductions in elective
contributions are necessary in order to reduce the ADP of the HCEs to
5%. The elective contributions of Employee A and Employee B are each
reduced by 1% of compensation ($2,000 and $1,280 respectively). Because
the ADP of the HCEs determined after the reductions equals 5%, the plan
would satisfy the requirements of (a)(1)(ii) of this section.
(iv) The total amount of excess contributions ($4,560 =
$1,280+$2,000+$1,280) is apportioned among the HCEs under paragraph
(b)(2)(iii) of this section first to the HCE with the highest amount of
elective contributions. Therefore, Employee A is apportioned $3,040 (the
amount required to cause Employee A's elective contributions to equal
the next highest dollar amount of elective contributions).
(v) Because the total amount of excess contributions has not been
apportioned, further apportionment is necessary. The balance ($1,520) of
the total amount of excess contributions is apportioned equally among
Employee A and Employee B ($760 to each).
(vi) Therefore, the cash or deferred arrangement will satisfy the
requirements of paragraph (a)(1) of this section if, by the end of the
12 month period following the end of the 2006 plan year, Employee A
receives a corrective distribution of excess contributions equal to
$3,800 ($3,040 + $760) and allocable income and Employee B receives a
corrective distribution of $760 and allocable income.
Example 2. (i) The facts are the same as in Example 1, except
Employee A's ADR is based on $3,000 of elective contributions to this
plan and $9,000 of elective contributions to another plan of the
employer.
(ii) The total amount of excess contributions ($4,560 =
$1,280+$2,000+$1,280) is apportioned among the HCEs under paragraph
(b)(2)(iii) of this section first to the HCE with the highest amount of
elective contributions. The amount of elective contributions for
Employee A is $12,000. Therefore, Employee A is apportioned $3,040 (the
amount required to cause Employee A's elective contributions to equal
the next highest dollar amount of elective contributions). However,
pursuant to paragraph (b)(2)(iii)(B) of this section, no more than the
amount actually contributed to the plan may be apportioned to an HCE.
Accordingly, no more than $3,000 may be apportioned to Employee A.
Therefore, the remaining $1,560 must be apportioned to Employee B.
(iii) The cash or deferred arrangement will satisfy the requirements
of paragraph (a)(1) of this section if, by the end of the 12 month
period following the end of the 2006 plan year, Employee A receives a
corrective distribution of excess contributions equal to $3,000 (total
amount of elective contributions actually contributed to the plan for
Employee A) and allocable income and Employee B receives a corrective
distribution of $1,560 and allocable income.
(3) Recharacterization of excess contributions--(i) General rule.
Excess contributions are recharacterized in accordance with this
paragraph (b)(3) only if the excess contributions that would have to be
distributed under (b)(2) of this section if the plan was correcting
through distribution of excess contributions are recharacterized as
described in paragraph (b)(3)(ii) of this section, and all of the
conditions set forth in paragraph (b)(3)(iii) of this section are
satisfied.
(ii) Treatment of recharacterized excess contributions.
Recharacterized excess contributions are includible in the employee's
gross income as if such amounts were distributed under paragraph (b)(2)
of this section. The recharacterized excess contributions are treated as
employee contributions for purposes of section 72, sections 401(a)(4),
401(m), Sec. 1.401(k)-1(d) and Sec. 1.401(k)-2. This requirement is
not treated as satisfied unless the payor or plan administrator reports
the recharacterized excess contributions as employee contributions to
the Internal Revenue Service and the employee by timely providing such
Federal tax forms and accompanying instructions and timely taking such
other action as is prescribed 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) as well as the applicable
Federal tax forms and accompanying instructions.
(iii) Additional rules--(A) Time of recharacterization. Excess
contributions may not be recharacterized under this
[[Page 344]]
paragraph (b)(3) after 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 HCEs with excess
contributions to be recharacterized is notified in accordance with
paragraph (b)(3)(ii) of this section.
(B) Employee contributions must be permitted under plan. The amount
of recharacterized excess contributions, in combination with the
employee contributions actually made by the HCE, may not exceed the
maximum amount of employee contributions (determined without regard to
the ACP test of section 401(m)(2)) permitted under the provisions of the
plan as in effect on the first day of the plan year.
(C) Treatment of recharacterized excess contributions.
Recharacterized excess contributions continue to be treated as employer
contributions for all purposes under the Internal Revenue Code (other
than those specified in paragraph (b)(3)(ii) of this section), including
section 401(a) and sections 404, 409, 411, 412, 415, 416, and 417. Thus,
for example, recharacterized excess contributions remain subject to the
requirements of Sec. 1.401(k)-1(c); must be deducted under section 404;
and are treated as employer contributions described in section
415(c)(2)(A).
(4) Rules applicable to all corrections--(i) Coordination with
distribution of excess deferrals--(A) Treatment of excess deferrals that
reduce excess contributions. The amount of excess contributions (and
allocable income) to be distributed under paragraph (b)(2) of this
section or the amount of excess contributions recharacterized under
paragraph (b)(3) of this section with respect to an employee for a plan
year, is reduced by any amounts previously distributed to the employee
from the plan to correct excess deferrals 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 required to be distributed to
correct an excess deferral to an employee for a taxable year is reduced
by any excess contributions (and allocable income) previously
distributed or excess contributions 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 payer
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) Forfeiture of match on distributed excess contributions. A
matching contribution is taken into account under section 401(a)(4) even
if the match is with respect to an elective contribution that is
distributed or recharacterized under this paragraph (b). This requires
that, after correction of excess contributions, 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 elective contributions are distributed under this paragraph
(b) to HCEs to the extent needed to meet the requirements of section
401(k)(3), while matching contributions attributable to those elective
contributions remain allocated to the HCEs' accounts. Under section
411(a)(3)(G) and Sec. 1.411(a)-4(b)(7), a plan may forfeit matching
contributions attributable to excess contributions, excess aggregate
contributions or excess deferrals 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 NHCEs for the purpose of
correcting a discriminatory rate of matching contributions.
(iii) Permitted forfeiture of QMAC. Pursuant to section
401(k)(8)(E), a qualified matching contribution is not treated as
forfeitable under Sec. 1.401(k)-1(c) merely because under the plan it
is forfeited in accordance with paragraph (b)(4)(ii) of this section or
Sec. 1.414(w)-1(d)(2).
(iv) No requirement for recalculation. If excess contributions are
distributed or recharacterized in accordance with paragraphs (b)(2) and
(3) of this section, the cash or deferred arrangement is
[[Page 345]]
treated as meeting the nondiscrimination test of section 401(k)(3)
regardless of whether the ADP for the HCEs, if recalculated after the
distributions or recharacterizations, would satisfy section 401(k)(3).
(v) Treatment of excess contributions that are catch-up
contributions. A cash or deferred arrangement does not fail to meet the
requirements of section 401(k)(3) and paragraph (a)(1) of this section
merely because excess contributions that are catch-up contributions
because they exceed the ADP limit, as described in Sec. 1.414(v)-
1(b)(1)(iii), are not corrected in accordance with this paragraph (b).
(5) Failure to timely 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% excise tax on the amount of the excess contributions. See section
4979 and Sec. 54.4979-1 of this chapter. Qualified nonelective
contributions and qualified matching contributions properly taken into
account under paragraph (a)(6) 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 the 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.
(iii) Special rule for eligible automatic contribution arrangements.
In the case of excess contributions under a plan that includes an
eligible automatic contribution arrangement within the meaning of
section 414(w), 6 months is substituted for 2\1/2\ months in paragraph
(b)(5)(i) of this section. The additional time described in this
paragraph (b)(5)(iii) applies to a distribution of excess contributions
for a plan year beginning on or after January 1, 2010 only where all the
eligible NHCEs and eligible HCEs are covered employees under the
eligible automatic contribution arrangement (within the meaning of Sec.
1.414(w)-1(e)(3)) for the entire plan year (or for the portion of the
plan year that the eligible NHCEs and eligible HCEs are eligible
employees).
(c) Additional rules for prior year testing method--(1) Rules for
change in testing method--(i) General rule. A plan is permitted to
change from the prior year testing method to the current year testing
method for any plan year. A plan is permitted to change from the current
year testing method to the prior year testing method only in situations
described in paragraph (c)(1)(ii) of this section. For purposes of this
paragraph (c)(1), a plan that uses the safe harbor method described in
Sec. 1.401(k)-3 or a SIMPLE 401(k) plan is treated as using the current
year testing method for that plan year.
(ii) Situations permitting a change to the prior year testing
method. The situations described in this paragraph (c)(1)(ii) are:
(A) The plan is not the result of the aggregation of two or more
plans, and the current year testing method was used under the plan for
each of the 5 plan years preceding the plan year of the change (or if
lesser, the number of plan years the plan has been in existence,
including years in which the plan was a portion of another plan).
(B) The plan is the result of the aggregation of two or more plans,
and for each of the plans that are being aggregated (the aggregating
plans), the current year testing method was used for each of the 5 plan
years preceding the plan year of the change (or if lesser, the number of
plan years since that aggregating plan has been in existence, including
years in which the aggregating plan was a portion of another plan).
(C) A transaction described in section 410(b)(6)(C)(i) and Sec.
1.410(b)-2(f) occurs and--
(1) As a result of the transaction, the employer maintains both a
plan using the prior year testing method and a plan using the current
year testing method; and
[[Page 346]]
(2) The change from the current year testing method to the prior
year testing method occurs within the transition period described in
section 410(b)(6)(C)(ii).
(2) Calculation of ADP under the prior year testing method for the
first plan year--(i) Plans that are not successor plans. If, for the
first plan year of any plan (other than a successor plan), the plan uses
the prior year testing method, the plan is permitted to use either that
first plan year as the applicable year for determining the ADP for
eligible NHCEs, or use 3% as the ADP for eligible NHCEs, for applying
the ADP test for that first plan year. A plan (other than a successor
plan) that uses the prior year testing method but has elected for its
first plan year to use that year as the applicable year is not treated
as changing its testing method in the second plan year and is not
subject to the limitations on double counting on QNECs under paragraph
(a)(6)(vi) of this section for the second plan year.
(ii) First plan year defined. For purposes of this paragraph (c)(2),
the first plan year of any plan is the first year in which the plan
provides for elective contributions. Thus, the rules of this paragraph
(c)(2) do not apply to a plan (within the meaning of Sec. 1.410(b)-
7(b)) for a plan year if for such plan year the plan is aggregated under
Sec. 1.401(k)-1(b)(4) with any other plan that provided for elective
contributions in the prior year.
(iii) Successor plans. A plan is a successor plan if 50% or more of
the eligible employees for the first plan year were eligible employees
under a qualified cash or deferred arrangement maintained by the
employer in the prior year. If a plan that is a successor plan uses the
prior year testing method for its first plan year, the ADP for the group
of NHCEs for the applicable year must be determined under paragraph
(c)(4) of this section.
(3) Plans using different testing methods for the ADP and ACP test.
Except as otherwise provided in this paragraph (c)(3), a plan may use
the current year testing method or prior year testing method for the ADP
test for a plan year without regard to whether the current year testing
method or prior year testing method is used for the ACP test for that
year. For example, a plan may use the prior year testing method for the
ADP test and the current year testing method for its ACP test for the
plan year. However, plans that use different testing methods under this
paragraph (c)(3) cannot use--
(i) The recharacterization method of paragraph (b)(3) of this
section to correct excess contributions for a plan year;
(ii) The rules of Sec. 1.401(m)-2(a)(6)(ii) to take elective
contributions into account under the ACP test (rather than the ADP
test); or
(iii) The rules of paragraph (a)(6)(v) of this section to take
qualified matching contributions into account under the ADP test (rather
than the ACP test).
(4) Rules for plan coverage changes--(i) In general. A plan that
uses the prior year testing method and experiences a plan coverage
change during a plan year satisfies the requirements of this section for
that year only if the plan provides that the ADP for the NHCEs for the
plan year is the weighted average of the ADPs for the prior year
subgroups.
(ii) Optional rule for minor plan coverage changes. If a plan
coverage change occurs and 90% or more of the total number of the NHCEs
from all prior year subgroups are from a single prior year subgroup,
then, in lieu of using the weighted averages described in paragraph
(c)(4)(i) of this section, the plan may provide that the ADP for the
group of eligible NHCEs for the prior year under the plan is the ADP of
the NHCEs for the prior year of the plan under which that single prior
year subgroup was eligible.
(iii) Definitions. The following definitions apply for purposes of
this paragraph (c)(4):
(A) Plan coverage change. The term plan coverage change means a
change in the group or groups of eligible employees under a plan on
account of--
(1) The establishment or amendment of a plan;
(2) A plan merger or spinoff under section 414(l);
[[Page 347]]
(3) A change in the way plans (within the meaning of Sec. 1.410(b)-
7(b)) are combined or separated for purposes of Sec. 1.401(k)-1(b)(4)
(e.g., permissively aggregating plans not previously aggregated under
Sec. 1.410(b)-7(d), or ceasing to permissively aggregate plans under
Sec. 1.410(b)-7(d));
(4) A reclassification of a substantial group of employees that has
the same effect as amending the plan (e.g., a transfer of a substantial
group of employees from one division to another division); or
(5) A combination of any of paragraphs (c)(4)(iii)(A)(1) through (4)
of this section.
(B) Prior year subgroup. The term prior year subgroup means all
NHCEs for the prior plan year who, in the prior year, were eligible
employees under a specific plan maintained by the employer that included
a qualified cash or deferred arrangement and who would have been
eligible employees in the prior year under the plan being tested if the
plan coverage change had first been effective as of the first day of the
prior plan year instead of first being effective during the plan year.
The determination of whether an NHCE is a member of a prior year
subgroup is made without regard to whether the NHCE terminated
employment during the prior year.
(C) Weighted average of the ADPs for the prior year subgroups. The
term weighted average of the ADPs for the prior year subgroups means the
sum, for all prior year subgroups, of the adjusted ADPs for the plan
year. The term adjusted ADP with respect to a prior year subgroup means
the ADP for the prior plan year of the specific plan under which the
members of the prior year subgroup were eligible employees on the first
day of the prior plan year, multiplied by a fraction, the numerator of
which is the number of NHCEs in the prior year subgroup and denominator
of which is the total number of NHCEs in all prior year subgroups.
(iv) Examples. The following examples illustrate the application of
this paragraph (c)(4):
Example 1. (i) Employer B maintains two calendar year plans, Plan O
and Plan P, each of which includes a cash or deferred arrangement. The
plans were not permissively aggregated under Sec. 1.410(b)-7(d) for the
2005 plan year. Both plans use the prior year testing method. Plan O had
300 eligible employees who were NHCEs for the 2005 plan year, and their
ADP for that year was 6%. Sixty of the eligible employees who were NHCEs
for the 2005 plan year under Plan O, terminated their employment during
that year. Plan P had 100 eligible employees who were NHCEs for 2005,
and the ADP for those NHCEs for that plan was 4%. Plan O and Plan P are
permissively aggregated under Sec. 1.410(b)-7(d) for the 2006 plan
year.
(ii) The permissive aggregation of Plan O and Plan P for the 2006
plan year under Sec. 1.410(b)-7(d) is a plan coverage change that
results in treating the plans as one plan (Plan OP) for purposes of
Sec. 1.401(k)-1(b)(4). Therefore, the prior year ADP for the NHCEs
under Plan OP for the 2006 plan year is the weighted average of the ADPs
for the prior year subgroups: the Plan O prior year subgroup and the
Plan P prior year subgroup.
(iii) The Plan O prior year subgroup consists of the 300 employees
who, in the 2005 plan year, were eligible NHCEs under Plan O and who
would have been eligible under Plan OP for the 2005 plan year if Plan O
and Plan P had been permissively aggregated for that plan year. The Plan
P prior year subgroup consists of the 100 employees who, in the 2005
plan year, were eligible NHCEs under Plan P and would have been eligible
under Plan OP for the 2005 plan year if Plan O and Plan P had been
permissively aggregated for that plan year.
(iv) The weighted average of the ADPs for the prior year subgroups
is the sum of the adjusted ADP for the Plan O prior year subgroup and
the adjusted ADP for the Plan P prior year subgroup. The adjusted ADP
for the Plan O prior year subgroup is 4.5%, calculated as follows: 6%
(the ADP for the NHCEs under Plan O for the 2005 plan year) x 300/400
(the number of NHCEs in the Plan O prior year subgroup divided by the
total number of NHCEs in all prior year subgroups). The adjusted ADP for
the Plan P prior year subgroup is 1%, calculated as follows: 4% (the ADP
for the NHCEs under Plan P for the 2005 plan year) x 100/400 (the number
of NHCEs in the Plan P prior year subgroup divided by the total number
of NHCEs in all prior year subgroups). Thus, the prior year ADP for
NHCEs under Plan OP for the 2006 plan year is 5.5% (the sum of adjusted
ADPs for the prior year subgroups, 4.5% plus 1%).
(v) As provided in paragraph (c)(4)(iii)(B) of this section, the
determination of whether an NHCE is a member of a prior year subgroup is
made without regard to whether that NHCE terminated employment during
the prior year. Thus, the prior ADP for the NHCEs under Plan OP for the
2006 plan year is unaffected by the termination of the 60 NHCEs covered
by Plan O during the 2005 plan year.
[[Page 348]]
Example 2. (i) The facts are the same as Example 1, except that the
60 employees who terminated employment during the 2005 plan are instead
spun-off to another plan.
(ii) The permissive aggregation of Plan O and Plan P for the 2006
plan year under Sec. 1.410(b)-7(d) is a plan coverage change that
results in treating the plans as one plan (Plan OP) for purposes of
Sec. 1.401(k)-1(b)(4) and the spin-off of the 60 employees is a plan
coverage change. Therefore, the prior year ADP for the NHCEs under Plan
OP for the 2006 plan year is the weighted average of the ADPs for the
prior year subgroups: the Plan O prior year subgroup and the Plan P
prior year subgroup.
(iii) For purposes of determining the prior year subgroups, the
employees who would have been eligible employees in the prior year under
the plan being tested are determined as if both plan coverage changes
had first been effective as of the first day of the prior plan year. The
Plan O prior year subgroup consists of the 240 employees who, in the
2005 plan year, were eligible NHCEs under Plan O and would have been
eligible under Plan OP for the 2005 plan year if the spin-off had
occurred at the beginning of the 2005 plan year and Plan O and Plan P
had been permissively aggregated under Sec. 1.410(b)-7(d) for that plan
year. The Plan P prior year subgroup consists of the 100 employees who,
in the 2005 plan year, were eligible NHCEs under Plan P and would have
been eligible under Plan OP for the 2005 plan year if Plan O and Plan P
had been permissively aggregated under Sec. 1.410(b)-7(d) for that plan
year.
(iv) The weighted average of the ADPs for the prior year subgroups
is the sum of the adjusted ADP with respect to the prior year subgroup
consisting of eligible NHCEs from Plan O and the adjusted ADP with
respect to the prior year subgroup consisting of eligible NHCEs from
Plan P. The adjusted ADP for the prior year subgroup consisting of
eligible NHCEs under Plan O is 4.23%, calculated as follows: 6% (the ADP
for the NHCEs under Plan O for the 2005 plan year) x 240/340 (the number
of NHCEs in that prior year subgroup divided by the total number of
NHCEs in all prior year subgroups). The adjusted ADP for the prior year
subgroup consisting of the eligible NHCEs from Plan P is 1.18%,
calculated as follows: 4% (the ADP for the NHCEs under Plan P for the
2005 plan year) x 100/340 (the number of NHCEs in that prior year
subgroup divided by the total number of NHCEs in all prior year
subgroups). Thus, the prior year ADP for NHCEs under Plan OP for the
2006 plan year is 5.41% (the sum of adjusted ADPs for the prior year
subgroups, 4.23% plus 1.18%).
Example 3. (i) The facts are the same as in Example 1, except that
instead of Plan O and Plan P being permissively aggregated for the 2006
plan year, 200 of the employees eligible under Plan O were spun-off from
Plan O and merged into Plan P.
(ii) The spin-off from Plan O and merger to Plan P for the 2006 plan
year are plan coverage changes for Plan P. Therefore, the prior year ADP
for the NHCEs under Plan P for the 2006 plan year is the weighted
average of the ADPs for the prior year subgroups under Plan P. There are
2 subgroups under Plan P for the 2006 plan year. The Plan O prior year
subgroup consists of the 200 employees who, in the 2005 plan year, were
eligible NHCEs under Plan O and who would have been eligible under Plan
P for the 2005 plan year if the spin-off and merger had occurred on the
first day of the 2005 plan year. The Plan P prior year subgroup consists
of the 100 employees who, in the 2005 plan year, were eligible NHCEs
under Plan P for the 2005 plan year.
(iii) The weighted average of the ADPs for the prior year subgroups
is the sum of the adjusted ADP for the Plan O prior year subgroup and
the adjusted ADP for the Plan P prior year subgroup. The adjusted ADP
for the Plan O prior year subgroup is 4.0%, calculated as follows: 6%
(the ADP for the NHCEs under Plan O for the 2005 plan year) x 200/300
(the number of NHCEs in the Plan O prior year subgroup divided by the
total number of NHCEs in all prior year subgroups). The adjusted ADP for
the Plan P prior year subgroup is 1.33%, calculated as follows: 4% (the
ADP for the NHCEs under Plan P for the 2005 plan year) x 100/300 (the
number of NHCEs in the Plan P prior year subgroup divided by the total
number of NHCEs in all prior year subgroups). Thus, the prior year ADP
for NHCEs under Plan P for the 2006 plan year is 5.33% (the sum of
adjusted ADPs for the 2 prior year subgroups, 4.0% plus 1.33%).
(iv) The spin-off from Plan O for the 2006 plan year is a plan
coverage change for Plan O. Therefore, the prior year ADP for the NHCEs
under Plan O for the 2006 plan year is the weighted average of the ADPs
for the prior year subgroups under Plan O. In this case, there is only
one prior year subgroup under Plan O, the employees who were NHCEs of
Employer B for the 2005 plan year and who were eligible for the 2005
plan year under Plan O. Because there is only one prior year subgroup
under Plan O, the weighted average of the ADPs for the prior year
subgroup under Plan O is equal to the NHCE ADP for the prior year (2005
plan year) under Plan O, or 6%.
Example 4. (i) Employer C maintains a calendar year plan, Plan Q,
which includes a cash or deferred arrangement that uses the prior year
testing method. Plan Q covers employees of Division A and Division B. In
2005, Plan Q had 500 eligible employees who were NHCEs, and the ADP for
those NHCEs for 2005 was 2%. Effective January 1, 2006, Employer C
amends the eligibility provisions
[[Page 349]]
under Plan Q to exclude employees of Division B effective January 1,
2006. In addition, effective on that same date, Employer C establishes a
new calendar year plan, Plan R, which includes a cash or deferred
arrangement that uses the prior year testing method. The only eligible
employees under Plan R are the 100 employees of Division B who were
eligible employees under Plan Q.
(ii) Plan R is a successor plan, within the meaning of paragraph
(c)(2)(iii) of this section (because all of the employees were eligible
employees under Plan Q in the prior year). Therefore, Plan R cannot use
the first plan year rule set forth in paragraph (c)(2)(i) of this
section.
(iii) The amendment to the eligibility provisions of Plan Q and the
establishment of Plan R are plan coverage changes within the meaning of
paragraph (c)(4)(iii)(A) of this section for Plan Q and Plan R.
Accordingly, each plan must determine the NHCE ADP for the 2006 plan
year under the rules set forth in paragraph (c)(4) of this section.
(iv) The prior year ADP for NHCEs under Plan Q is the weighted
average of the ADPs for the prior year subgroups. Plan Q has only one
prior year subgroup (because the only NHCEs who would have been eligible
employees under Plan Q for the 2005 plan year if the amendment to the
Plan Q eligibility provisions had occurred as of the first day of that
plan year were eligible employees under Plan Q). Therefore, for purposes
of the 2006 plan year under Plan Q, the ADP for NHCEs for the prior year
is the weighted average of the ADPs for the prior year subgroups, or 2%,
the same as if the plan amendment had not occurred.
(v) Similarly, Plan R has only one prior year subgroup (because the
only NHCEs who would have been eligible employees under Plan R for the
2005 plan year if the plan were established as of the first day of that
plan year were eligible employees under Plan Q). Therefore, for purposes
of the 2006 testing year under Plan R, the ADP for NHCEs for the prior
year is the weighted average of the ADPs for the prior year subgroups,
or 2%, the same as that of Plan Q.
Example 5. (i) The facts are the same as in Example 4, except that
the provisions of Plan R extend eligibility to 50 hourly employees who
previously were not eligible employees under any qualified cash or
deferred arrangement maintained by Employer C.
(ii) Plan R is a successor plan (because 100 of Plan R's 150
eligible employees were eligible employees under another qualified cash
or deferred arrangement maintained by Employer C in the prior year).
Therefore, Plan R cannot use the first plan year rule set forth in
paragraph (c)(2)(i) of this section.
(iii) The establishment of Plan R is a plan coverage change that
affects Plan R. Because the 50 hourly employees were not eligible
employees under any qualified cash or deferred arrangement of Employer C
for the prior plan year, they do not comprise a prior year subgroup.
Accordingly, Plan R still has only one prior year subgroup. Therefore,
for purposes of the 2006 testing year under Plan R, the ADP for NHCEs
for the prior year is the weighted average of the ADPs for the prior
year subgroups, or 2%, the same as that of Plan Q.
[T.D. 9169, 69 FR 78154, Dec. 29, 2004, as amended by T.D. 9237, 71 FR
10, Jan. 3, 2006; T.D. 9447, 74 FR 8207, Feb. 24, 2009]
Sec. 1.401(k)-3 Safe harbor requirements.
(a) ADP test safe harbor--(1) Section 401(k)(12) safe harbor. A cash
or deferred arrangement satisfies the ADP safe harbor provision of
section 401(k)(12) for a plan year if the arrangement satisfies the safe
harbor contribution requirement of paragraph (b) or (c) of this section
for the plan year, the notice requirement of paragraph (d) of this
section, the plan year requirements of paragraph (e) of this section,
and the additional rules of paragraphs (f), (g), and (h) of this
section, as applicable.
(2) Section 401(k)(13) safe harbor. For plan years beginning on or
after January 1, 2008, a cash or deferred arrangement satisfies the ADP
safe harbor provision of section 401(k)(13) for a plan year if the
arrangement is described in paragraph (j) of this section and satisfies
the safe harbor contribution requirement of paragraph (k) of this
section for the plan year, the notice requirement of paragraph (d) of
this section (modified to include the information set forth in paragraph
(k)(4) of this section), the plan year requirements of paragraph (e) of
this section, and the additional rules of paragraphs (f), (g), and (h)
of this section, as applicable. A cash or deferred arrangement that
satisfies the requirements of this paragraph (a)(2) is referred to as a
qualified automatic contribution arrangement.
(3) Requirements applicable to safe harbor contributions. Pursuant
to section 401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), the safe
harbor contribution requirement of paragraph (b), (c), or (k) of this
section must be satisfied without regard to section 401(l). The
contributions made under paragraph (b) or (c) of this section (and the
corresponding contributions under
[[Page 350]]
paragraph (k) of this section) are referred to as safe harbor
nonelective contributions and safe harbor matching contributions.
(b) Safe harbor nonelective contribution requirement--(1) General
rule. The safe harbor nonelective contribution requirement of this
paragraph is satisfied if, under the terms of the plan, the employer is
required to make a qualified nonelective contribution on behalf of each
eligible NHCE equal to at least 3% of the employee's safe harbor
compensation.
(2) Safe harbor compensation defined. For purposes of this section,
safe harbor compensation means compensation as defined in Sec.
1.401(k)-6 (which incorporates the definition of compensation in Sec.
1.414(s)-1); provided, however, that the rule in the last sentence of
Sec. 1.414(s)-1(d)(2)(iii) (which generally permits a definition of
compensation to exclude all compensation in excess of a specified dollar
amount) does not apply in determining the safe harbor compensation of
NHCEs. Thus, for example, the plan may limit the period used to
determine safe harbor compensation to the eligible employee's period of
participation.
(c) Safe harbor matching contribution requirement--(1) In general.
The safe harbor matching contribution requirement of this paragraph (c)
is satisfied if, under the plan, qualified matching contributions are
made on behalf of each eligible NHCE in an amount determined under the
basic matching formula of section 401(k)(12)(B)(i)(I), as described in
paragraph (c)(2) of this section, or under an enhanced matching formula
of section 401(k)(12)(B)(i)(II), as described in paragraph (c)(3) of
this section.
(2) Basic matching formula. Under the basic matching formula, each
eligible NHCE receives qualified matching contributions in an amount
equal to the sum of--
(i) 100% of the amount of the employee's elective contributions that
do not exceed 3% of the employee's safe harbor compensation; and
(ii) 50% of the amount of the employee's elective contributions that
exceed 3% of the employee's safe harbor compensation but that do not
exceed 5% of the employee's safe harbor compensation.
(3) Enhanced matching formula. Under an enhanced matching formula,
each eligible NHCE receives a matching contribution under a formula
that, at any rate of elective contributions by the employee, provides an
aggregate amount of qualified matching contributions at least equal to
the aggregate amount of qualified matching contributions that would have
been provided under the basic matching formula of paragraph (c)(2) of
this section. In addition, under an enhanced matching formula, the ratio
of matching contributions on behalf of an employee under the plan for a
plan year to the employee's elective contributions may not increase as
the amount of an employee's elective contributions increases.
(4) Limitation on HCE matching contributions. The safe harbor
matching contribution requirement of this paragraph (c) is not satisfied
if the ratio of matching contributions made on account of an HCE's
elective contributions under the cash or deferred arrangement for a plan
year to those elective contributions is greater than the ratio of
matching contributions to elective contributions that would apply with
respect to any eligible NHCE with elective contributions at the same
percentage of safe harbor compensation.
(5) Use of safe harbor match not precluded by certain plan
provisions--(i) Safe harbor matching contributions on employee
contributions. The safe harbor matching contribution requirement of this
paragraph (c) will not fail to be satisfied merely because safe harbor
matching contributions are made on both elective contributions and
employee contributions if safe harbor matching contributions are made
with respect to the sum of elective contributions and employee
contributions on the same terms as safe harbor matching contributions
are made with respect to elective contributions. Alternatively, the safe
harbor matching contribution requirement of this paragraph (c) will not
fail to be satisfied merely because safe harbor matching
[[Page 351]]
contributions are made on both elective contributions and employee
contributions if safe harbor matching contributions on elective
contributions are not affected by the amount of employee contributions.
(ii) Periodic matching contributions. The safe harbor matching
contribution requirement of this paragraph (c) will not fail to be
satisfied merely because the plan provides that safe harbor matching
contributions will be made separately with respect to each payroll
period (or with respect to all payroll periods ending with or within
each month or quarter of a plan year) taken into account under the plan
for the plan year, provided that safe harbor matching contributions with
respect to any elective contributions made during a plan year quarter
are contributed to the plan by the last day of the immediately following
plan year quarter.
(6) Permissible restrictions on elective contributions by NHCEs--(i)
General rule. The safe harbor matching contribution requirement of this
paragraph (c) is not satisfied if elective contributions by NHCEs are
restricted, unless the restrictions are permitted by this paragraph
(c)(6).
(ii) Restrictions on election periods. A plan may limit the
frequency and duration of periods in which eligible employees may make
or change cash or deferred elections under a plan. However, an employee
must have a reasonable opportunity (including a reasonable period after
receipt of the notice described in paragraph (d) of this section) to
make or change a cash or deferred election for the plan year. For
purposes of this paragraph (c)(6)(ii), a 30-day period is deemed to be a
reasonable period to make or change a cash or deferred election.
(iii) Restrictions on amount of elective contributions. A plan is
permitted to limit the amount of elective contributions that may be made
by an eligible employee under a plan, provided that each NHCE who is an
eligible employee is permitted (unless the employee is restricted under
paragraph (c)(6)(v) of this section) to make elective contributions in
an amount that is at least sufficient to receive the maximum amount of
matching contributions available under the plan for the plan year, and
the employee is permitted to elect any lesser amount of elective
contributions. However, a plan may require eligible employees to make
cash or deferred elections in whole percentages of compensation or whole
dollar amounts.
(iv) Restrictions on types of compensation that may be deferred. A
plan may limit the types of compensation that may be deferred by an
eligible employee under a plan, provided that each eligible NHCE is
permitted to make elective contributions under a definition of
compensation that would be a reasonable definition of compensation
within the meaning of Sec. 1.414(s)-1(d)(2). Thus, the definition of
compensation from which elective contributions may be made is not
required to satisfy the nondiscrimination requirement of Sec. 1.414(s)-
1(d)(3).
(v) Restrictions due to limitations under the Internal Revenue Code.
A plan may limit the amount of elective contributions made by an
eligible employee under a plan--
(A) Because of the limitations of section 402(g) or 415; or
(B) Because, on account of a hardship distribution, an employee's
ability to make elective contributions has been suspended for 6 months
in accordance with Sec. 1.401(k)-1(d)(3)(iv)(E).
(7) Examples. The following examples illustrate the safe harbor
contribution requirement of this paragraph (c):
Example 1. (i) Beginning January 1, 2006, Employer A maintains Plan
L covering employees in Divisions D and E, each of which includes HCEs
and NHCEs. Plan L contains a cash or deferred arrangement and provides
qualified matching contributions equal to 100% of each eligible
employee's elective contributions up to 3% of compensation and 50% of
the next 2% of compensation. For purposes of the matching contribution
formula, safe harbor compensation is defined as all compensation within
the meaning of section 415(c)(3) (a definition that satisfies section
414(s)). Also, each employee is permitted to make elective contributions
from all safe harbor compensation within the meaning of section
415(c)(3) and may change a cash or deferred election at any time. Plan L
limits the amount of an employee's elective contributions for purposes
of section 402(g) and section 415, and, in the case of a hardship
distribution, suspends an employee's ability to make elective
contributions for 6 months in accordance with Sec. 1.401(k)-
1(d)(3)(iv)(E). All
[[Page 352]]
contributions under Plan L are nonforfeitable and are subject to the
withdrawal restrictions of section 401(k)(2)(B). Plan L provides for no
other contributions and Employer A maintains no other plans. Plan L is
maintained on a calendar-year basis, and all contributions for a plan
year are made within 12 months after the end of the plan year.
(ii) Based on these facts, matching contributions under Plan L are
safe harbor matching contributions because they are qualified matching
contributions equal to the basic matching formula. Accordingly, Plan L
satisfies the safe harbor contribution requirement of this paragraph
(c).
Example 2. (i) The facts are the same as in Example 1, except that
instead of providing a basic matching contribution, Plan L provides a
qualified matching contribution equal to 100% of each eligible
employee's elective contributions up to 4% of safe harbor compensation.
(ii) Plan L's formula is an enhanced matching formula because each
eligible NHCE receives safe harbor matching contributions at a rate
that, at any rate of elective contributions, provides an aggregate
amount of qualified matching contributions at least equal to the
aggregate amount of qualified matching contributions that would have
been received under the basic safe harbor matching formula, and the rate
of matching contributions does not increase as the rate of an employee's
elective contributions increases. Accordingly, Plan L satisfies the safe
harbor contribution requirement of this paragraph (c).
Example 3. (i) The facts are the same as in Example 2, except that
instead of permitting each employee to make elective contributions from
all compensation within the meaning of section 415(c)(3), each
employee's elective contributions under Plan L are limited to 15% of the
employee's basic compensation. Basic compensation is defined under Plan
L as compensation within the meaning of section 415(c)(3), but excluding
overtime pay.
(ii) The definition of basic compensation under Plan L is a
reasonable definition of compensation within the meaning of Sec.
1.414(s)-1(d)(2).
(iii) Plan L will not fail to satisfy the safe harbor contribution
requirement of this paragraph (c) merely because Plan L limits the
amount of elective contributions and the types of compensation that may
be deferred by eligible employees, provided that each eligible NHCE may
make elective contributions equal to at least 4% of the employee's safe
harbor compensation.
Example 4. (i) The facts are the same as in Example 1, except that
Plan L provides that only employees employed on the last day of the plan
year will receive a safe harbor matching contribution.
(ii) Even if the plan that provides for employee contributions and
matching contributions satisfies the minimum coverage requirements of
section 410(b)(1) taking into account this last-day requirement, Plan L
would not satisfy the safe harbor contribution requirement of this
paragraph (c) because safe harbor matching contributions are not made on
behalf of all eligible NHCEs who make elective contributions.
(iii) The result would be the same if, instead of providing safe
harbor matching contributions, Plan L provides for a 3% safe harbor
nonelective contribution that is restricted to eligible employees under
the cash or deferred arrangement who are employed on the last day of the
plan year.
Example 5. (i) The facts are the same as in Example 1, except that
instead of providing qualified matching contributions under the basic
matching formula to employees in both Divisions D and E, employees in
Division E are provided qualified matching contributions under the basic
matching formula, while safe harbor matching contributions continue to
be provided to employees in Division D under the enhanced matching
formula described in Example 2.
(ii) Even if Plan L satisfies Sec. 1.401(a)(4)-4 with respect to
each rate of matching contributions available to employees under the
plan, the plan would fail to satisfy the safe harbor contribution
requirement of this paragraph (c) because the rate of matching
contributions with respect to HCEs in Division D at a rate of elective
contributions between 3% and 5% would be greater than that with respect
to NHCEs in Division E at the same rate of elective contributions. For
example, an HCE in Division D who would have a 4% rate of elective
contributions would have a rate of matching contributions of 100% while
an NHCE in Division E who would have the same rate of elective
contributions would have a lower rate of matching contributions.
(d) Notice requirement--(1) General rule. The notice requirement of
this paragraph (d) is satisfied for a plan year if each eligible
employee is given notice of the employee's rights and obligations under
the plan and the notice satisfies the content requirement of paragraph
(d)(2) of this section and the timing requirement of paragraph (d)(3) of
this section. The notice must be in writing or in such other form as may
be approved by the Commissioner. See Sec. 1.401(a)-21 of this chapter
for rules permitting the use of electronic media to provide applicable
notices to recipients with respect to retirement plans.
(2) Content requirement--(i) General rule. The content requirement
of this
[[Page 353]]
paragraph (d)(2) is satisfied if the notice is--
(A) Sufficiently accurate and comprehensive to inform the employee
of the employee's rights and obligations under the plan; and
(B) Written in a manner calculated to be understood by the average
employee eligible to participate in the plan.
(ii) Minimum content requirement. Subject to the requirements of
paragraph (d)(2)(iii) of this section, a notice is not considered
sufficiently accurate and comprehensive unless the notice accurately
describes--
(A) The safe harbor matching contribution or safe harbor nonelective
contribution formula used under the plan (including a description of the
levels of safe harbor matching contributions, if any, available under
the plan);
(B) Any other contributions under the plan or matching contributions
to another plan on account of elective contributions or employee
contributions under the plan (including the potential for discretionary
matching contributions) and the conditions under which such
contributions are made;
(C) The plan to which safe harbor contributions will be made (if
different than the plan containing the cash or deferred arrangement);
(D) The type and amount of compensation that may be deferred under
the plan;
(E) How to make cash or deferred elections, including any
administrative requirements that apply to such elections;
(F) The periods available under the plan for making cash or deferred
elections;
(G) Withdrawal and vesting provisions applicable to contributions
under the plan; and
(H) Information that makes it easy to obtain additional information
about the plan (including an additional copy of the summary plan
description) such as telephone numbers, addresses and, if applicable,
electronic addresses, of individuals or offices from whom employees can
obtain such plan information.
(iii) References to SPD. A plan will not fail to satisfy the content
requirements of this paragraph (d)(2) merely because, in the case of
information described in paragraph (d)(2)(ii)(B) of this section
(relating to any other contributions under the plan), paragraph
(d)(2)(ii)(C) of this section (relating to the plan to which safe harbor
contributions will be made) or paragraph (d)(2)(ii)(D) of this section
(relating to the type and amount of compensation that may be deferred
under the plan), the notice cross-references the relevant portions of a
summary plan description that provides the same information that would
be provided in accordance with such paragraphs and that has been
provided (or is concurrently provided) to employees.
(3) Timing requirement--(i) General rule. The timing requirement of
this paragraph (d)(3) is satisfied if the notice is provided within a
reasonable period before the beginning of the plan year (or, in the year
an employee becomes eligible, within a reasonable period before the
employee becomes eligible). The determination of whether a notice
satisfies the timing requirement of this paragraph (d)(3) is based on
all of the relevant facts and circumstances.
(ii) Deemed satisfaction of timing requirement. The timing
requirement of this paragraph (d)(3) is deemed to be satisfied if at
least 30 days (and no more than 90 days) before the beginning of each
plan year, the notice is given to each eligible employee for the plan
year. In the case of an employee who does not receive the notice within
the period described in the previous sentence because the employee
becomes eligible after the 90th day before the beginning of the plan
year, the timing requirement is deemed to be satisfied if the notice is
provided no more than 90 days before the employee becomes eligible (and
no later than the date the employee becomes eligible). Thus, for
example, the preceding sentence would apply in the case of any employee
eligible for the first plan year under a newly established plan that
provides for elective contributions, or would apply in the case of the
first plan year in which an employee becomes eligible under an existing
plan that provides for elective contributions. If it is not practicable
for the notice to be provided on or before the date specified in the
plan that an employee becomes eligible, the notice will
[[Page 354]]
nonetheless be treated as provided timely if it is provided as soon as
practicable after that date and the employee is permitted to elect to
defer from all types of compensation that may be deferred under the plan
earned beginning on the date the employee becomes eligible.
(e) Plan year requirement--(1) General rule. Except as provided in
this paragraph (e) or in paragraph (f) of this section, a plan will fail
to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this
section unless plan provisions that satisfy the rules of this section
are adopted before the first day of the plan year and remain in effect
for an entire 12-month plan year. In addition, except as provided in
paragraph (g) of this section or in guidance of general applicability
published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions
that satisfy the rules of this section will not satisfy the requirements
of Sec. 1.401(k)-1(b) if it is amended to change such provisions for
that plan year. Moreover, if, as described under paragraph (h)(4) of
this section, safe harbor matching or nonelective contributions will be
made to another plan for a plan year, provisions under that other plan
specifying that the safe harbor contributions will be made and providing
that the contributions will be QNECs or QMACs must also be adopted
before the first day of that plan year.
(2) Initial plan year. A newly established plan (other than a
successor plan within the meaning of Sec. 1.401(k)-2(c)(2)(iii)) will
not be treated as violating the requirements of this paragraph (e)
merely because the plan year is less than 12 months, provided that the
plan year is at least 3 months long (or, in the case of a newly
established employer that establishes the plan as soon as
administratively feasible after the employer comes into existence, a
shorter period). Similarly, a cash or deferred arrangement will not fail
to satisfy the requirement of this paragraph (e) if it is added to an
existing profit sharing, stock bonus, or pre-ERISA money purchase
pension plan for the first time during that year provided that--
(i) The plan is not a successor plan; and
(ii) The cash or deferred arrangement is made effective no later
than 3 months prior to the end of the plan year.
(3) Change of plan year. A plan that has a short plan year as a
result of changing its plan year will not fail to satisfy the
requirements of paragraph (e)(1) of this section merely because the plan
year has less than 12 months, provided that--
(i) The plan satisfied the requirements of this section for the
immediately preceding plan year; and
(ii) The plan satisfies the requirements of this section (determined
without regard to paragraph (g) of this section) for the immediately
following plan year (or for the immediately following 12 months if the
immediately following plan year is less than 12 months).
(4) Final plan year. A plan that terminates during a plan year will
not fail to satisfy the requirements of paragraph (e)(1) of this section
merely because the final plan year is less than 12 months, provided that
the plan satisfies the requirement of this section through the date of
termination and either--
(i) The plan would satisfy the requirements of paragraph (g) of this
section, treating the termination of the plan as a reduction or
suspension of safe harbor contributions, other than the requirements of
paragraph (g)(1)(i)(A) or (g)(1)(ii)(A) of this section (relating to the
employer's financial condition and information included in the initial
notice for the plan year) and paragraph (g)(1)(i)(D) or (g)(1)(ii)(D) of
this section (requiring that employees have a reasonable opportunity to
change their cash or deferred elections and, if applicable, employee
contribution elections); or
(ii) The plan termination is in connection with a transaction
described in section 410(b)(6)(C) or the employer incurs a substantial
business hardship comparable to a substantial business hardship
described in section 412(c).
(f) Plan amendments adopting safe harbor nonelective contributions--
(1) General rule. Notwithstanding paragraph (e)(1) of this section, a
plan that provides for
[[Page 355]]
the use of the current year testing method may be amended after the
first day of the plan year and no later than 30 days before the last day
of the plan year to adopt the safe harbor method of this section,
effective as of the first day of the plan year, using nonelective
contributions under paragraph (b) of this section, but only if the plan
provides the contingent and follow-up notices described in this section.
A plan amendment made pursuant to this paragraph (f)(1) for a plan year
may provide for the use of the safe harbor method described in this
section solely for that plan year and a plan sponsor is not limited in
the number of years for which it is permitted to adopt an amendment
providing for the safe harbor method of this section using nonelective
contributions under paragraph (b) of this section and this paragraph
(f).
(2) Contingent notice provided. A plan satisfies the requirement to
provide the contingent notice under this paragraph (f)(2) if it provides
a notice that would satisfy the requirements of paragraph (d) of this
section, except that, in lieu of setting forth the safe harbor
contributions used under the plan as set forth in paragraph
(d)(2)(ii)(A) of this section, the notice specifies that the plan may be
amended during the plan year to include the safe harbor nonelective
contribution and that, if the plan is amended, a follow-up notice will
be provided.
(3) Follow-up notice requirement. A plan satisfies the requirement
to provide a follow-up notice under this paragraph (f)(3) if, no later
than 30 days before the last day of the plan year, each eligible
employee is given a notice that states that the safe harbor nonelective
contributions will be made for the plan year. The notice must be in
writing or in such other form as may be prescribed by the Commissioner
and is permitted to be combined with a contingent notice provided under
paragraph (f)(2) of this section for the next plan year.
(g) Permissible reduction or suspension of safe harbor
contributions--(1) General rule--(i) Matching contributions. A plan that
provides for safe harbor matching contributions intended to satisfy the
requirements of paragraph (c) of this section for a plan year will not
fail to satisfy the requirements of section 401(k)(3) merely because the
plan is amended during the plan year to reduce or suspend safe harbor
matching contributions on future elective contributions (and, if
applicable, employee contributions) provided that--
(A) In the case of plan years beginning on or after January 1, 2015,
the employer either--
(1) Is operating at an economic loss as described in section
412(c)(2)(A) for the plan year; or
(2) Includes in the notice described in paragraph (d) of this
section a statement that the plan may be amended during the plan year to
reduce or suspend safe harbor matching contributions and that the
reduction or suspension will not apply until at least 30 days after all
eligible employees are provided notice of the reduction or suspension;
(B) All eligible employees are provided a supplemental notice that
satisfies the requirements of paragraph (g)(2) of this section;
(C) The reduction or suspension of safe harbor matching
contributions is effective no earlier than the later of the date the
amendment is adopted or 30 days after eligible employees are provided
the supplemental notice described in paragraph (g)(2) of this section;
(D) Eligible employees are given a reasonable opportunity (including
a reasonable period after receipt of the supplemental notice) prior to
the reduction or suspension of safe harbor matching contributions to
change their cash or deferred elections and, if applicable, their
employee contribution elections;
(E) The plan is amended to provide that the ADP test will be
satisfied for the entire plan year in which the reduction or suspension
occurs using the current year testing method described in Sec.
1.401(k)-2(a)(2)(ii); and
(F) The plan satisfies the requirements of this section (other than
this paragraph (g)) with respect to amounts deferred through the
effective date of the amendment.
(ii) Nonelective contributions. For amendments adopted after May 18,
[[Page 356]]
2009, a plan that provides for safe harbor nonelective contributions
intended to satisfy the requirements of paragraph (b) of this section
for the plan year will not fail to satisfy the requirements of section
401(k)(3) merely because the plan is amended during the plan year to
reduce or suspend safe harbor nonelective contributions provided that--
(A) The employer either--
(1) Is operating at an economic loss, as described in section
412(c)(2)(A) for the plan year; or
(2) Includes in the notice described in paragraph (d) of this
section a statement that the plan may be amended during the plan year to
reduce or suspend safe harbor nonelective contributions and that the
reduction or suspension will not apply until at least 30 days after all
eligible employees are provided notice of the reduction or suspension;
(B) All eligible employees are provided a supplemental notice that
satisfies the requirements of paragraph (g)(2) of this section;
(C) The reduction or suspension of safe harbor nonelective
contributions is effective no earlier than the later of the date the
amendment is adopted or 30 days after eligible employees are provided
the supplemental notice described in paragraph (g)(2) of this section;
(D) Eligible employees are given a reasonable opportunity (including
a reasonable period after receipt of the supplemental notice) prior to
the reduction or suspension of nonelective contributions to change their
cash or deferred elections and, if applicable, their employee
contribution elections;
(E) The plan is amended to provide that the ADP test will be
satisfied for the entire plan year in which the reduction or suspension
occurs using the current year testing method described in Sec.
1.401(k)-2(a)(2)(ii); and
(F) The plan satisfies the requirements of this section (other than
this paragraph (g)) with respect to safe harbor compensation paid
through the effective date of the amendment.
(2) Supplemental notice. The supplemental notice requirement of this
paragraph (g)(2) is satisfied if each eligible employee is given a
notice (in writing or such other form as prescribed by the Commissioner)
that explains--
(i) The consequences of the amendment that reduces or suspends
future safe harbor contributions;
(ii) The procedures for changing their cash or deferred elections
and, if applicable, their employee contribution elections; and
(iii) The effective date of the amendment.
(h) Additional rules--(1) Contributions taken into account. A
contribution is taken into account for purposes of this section for a
plan year if and only if the contribution would be taken into account
for such plan year under the rules of Sec. 1.401(k)-2(a) or 1.401(m)-
2(a). Thus, for example, a safe harbor matching contribution must be
made within 12 months of the end of the plan year. Similarly, an
elective contribution that would be taken into account for a plan year
under Sec. 1.401(k)-2(a)(4)(i)(B)(2) must be taken into account for
such plan year for purposes of this section, even if the compensation
would have been received after the close of the plan year.
(2) Use of safe harbor nonelective contributions to satisfy other
nondiscrimination tests. A safe harbor nonelective contribution used to
satisfy the nonelective contribution requirement under paragraph (b) of
this section may also be taken into account for purposes of determining
whether a plan satisfies section 401(a)(4). Thus, these contributions
are not subject to the limitations on qualified nonelective
contributions under Sec. 1.401(k)-2(a)(6)(ii), but are subject to the
rules generally applicable to nonelective contributions under section
401(a)(4). See Sec. 1.401(a)(4)-1(b)(2)(ii). However, pursuant to
section 401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), to the extent
they are needed to satisfy the safe harbor contribution requirement of
paragraph (b) of this section, safe harbor nonelective contributions may
not be taken into account under any plan for purposes of section 401(l)
(including the imputation of permitted disparity under Sec.
1.401(a)(4)-7).
(3) Early participation rules. Section 401(k)(3)(F) and Sec.
1.401(k)-2(a)(1)(iii)(A),
[[Page 357]]
which provide an alternative nondiscrimination rule for certain plans
that provide for early participation, do not apply for purposes of
section 401(k)(12), section 401(k)(13), and this section. Thus, a plan
is not treated as satisfying this section with respect to the eligible
employees who have not completed the minimum age and service
requirements of section 410(a)(1)(A) unless the plan satisfies the
requirements of this section with respect to such eligible employees.
However, a plan is permitted to apply the rules of section 410(b)(4)(B)
to treat the plan as two separate plans for purposes of section 410(b)
and apply the safe harbor requirements of this section to one plan and
apply the requirements of Sec. 1.401(k)-2 to the other plan. See Sec.
1.401(k)-1(b)(4)(vi), Example 2.
(4) Satisfying safe harbor contribution requirement under another
defined contribution plan. Safe harbor matching or nonelective
contributions may be made to the plan that contains the cash or deferred
arrangement or to another defined contribution plan that satisfies
section 401(a) or 403(a). If safe harbor contributions are made to
another defined contribution plan, the safe harbor plan must specify the
plan to which the safe harbor contributions are made and the
contribution requirement of paragraph (b) or (c) of this section must be
satisfied in the other defined contribution plan in the same manner as
if the contributions were made to the plan that contains the cash or
deferred arrangement. Consequently, the plan to which the contributions
are made must have the same plan year as the plan containing the cash
and deferred arrangement and each employee eligible under the plan
containing the cash or deferred arrangement must be eligible under the
same conditions under the other defined contribution plan. The plan to
which the safe harbor contributions are made need not be a plan that can
be aggregated with the plan that contains the cash or deferred
arrangement.
(5) Contributions used only once. Safe harbor matching or
nonelective contributions cannot be used to satisfy the requirements of
this section with respect to more than one plan.
(i) [Reserved]
(j) Qualified automatic contribution arrangement--(1) Automatic
contribution requirement--(i) In general. A cash or deferred arrangement
is described in this paragraph (j) if it is an automatic contribution
arrangement described in paragraph (j)(1)(ii) of this section where the
default election under that arrangement is a contribution equal to the
qualified percentage described in paragraph (j)(2) of this section
multiplied by the eligible employee's compensation from which elective
contributions are permitted to be made under the cash or deferred
arrangement. For plan years beginning on or after January 1, 2010, the
compensation used for this purpose must be safe harbor compensation as
defined under paragraph (b)(2) of this section.
(ii) Automatic contribution arrangement. An automatic contribution
arrangement is a cash or deferred arrangement within the meaning of
Sec. 1.401(k)-1(a)(2) that provides that, in the absence of an eligible
employee's affirmative election, a default election applies under which
the employee is treated as having made an election to have a specified
contribution made on his or her behalf under the plan. The default
election begins to apply with respect to an eligible employee no earlier
than a reasonable period of time after receipt of the notice describing
the automatic contribution arrangement. The default election ceases to
apply with respect to an eligible employee for periods of time with
respect to which the employee has an affirmative election that is
currently in effect to--
(A) Have elective contributions made in a different amount on his or
her behalf (in a specified amount or percentage of compensation); or
(B) Not have any elective contributions made on his or her behalf.
(iii) Exception to automatic enrollment for certain current
employees. An automatic contribution arrangement will not fail to be a
qualified automatic contribution arrangement merely because the default
election provided under paragraph (j)(1)(i) of this section is not
applied to an employee who was an eligible employee under the cash or
deferred arrangement (or a predecessor arrangement) immediately prior to
the
[[Page 358]]
effective date of the qualified automatic contribution arrangement and
on that effective date had an affirmative election in effect (that
remains in effect) to--
(A) Have elective contributions made on his or her behalf (in a
specified amount or percentage of compensation); or
(B) Not have elective contributions made on his or her behalf.
(2) Qualified percentage--(i) In general. A percentage is a
qualified percentage only if it--
(A) Is uniform for all employees (except to the extent provided in
paragraph (j)(2)(iii) of this section);
(B) Does not exceed 10 percent; and
(C) Satisfies the minimum percentage requirements of paragraph
(j)(2)(ii) of this section.
(ii) Minimum percentage requirements--(A) Initial-period
requirement. The minimum percentage requirement of this paragraph
(j)(2)(ii)(A) is satisfied only if the percentage that applies for the
initial period is at least 3 percent. For this purpose, the initial
period begins when the employee first has contributions made pursuant to
a default election under an arrangement that is intended to be a
qualified automatic contribution arrangement for a plan year and ends on
the last day of the following plan year.
(B) Second-year requirement. The minimum percentage requirement of
this paragraph (j)(2)(ii)(B) is satisfied only if the percentage that
applies for the plan year immediately following the last day described
in paragraph (j)(2)(ii)(A) of this section is at least 4 percent.
(C) Third-year requirement. The minimum percentage requirement of
this paragraph (j)(2)(ii)(C) is satisfied only if the percentage that
applies for the plan year immediately following the plan year described
in paragraph (j)(2)(ii)(B) of this section is at least 5 percent.
(D) Later years requirement. A percentage satisfies the minimum
percentage requirement of this paragraph (j)(2)(ii)(D) only if the
percentage that applies for all plan years following the plan year
described in paragraph (j)(2)(ii)(C) of this section is at least 6
percent.
(iii) Exception to uniform percentage requirement. A plan does not
fail to satisfy the uniform percentage requirement of paragraph
(j)(2)(i)(A) of this section merely because--
(A) The percentage varies based on the number of years (or portions
of years) since the beginning of the initial period for an eligible
employee;
(B) The rate of elective contributions under a cash or deferred
election that is in effect for an employee immediately prior to the
effective date of the default percentage under the qualified automatic
contribution arrangement is not reduced;
(C) The rate of elective contributions is limited so as not to
exceed the limits of sections 401(a)(17), 402(g) (determined with or
without catch-up contributions described in section 402(g)(1)(C) or
402(g)(7)), and 415; or
(D) The default election provided under paragraph (j)(1)(i) of this
section is not applied during the period an employee is not permitted to
make elective contributions in order for the plan to satisfy the
requirements of Sec. 1.401(k)-3(c)(6)(v)(B).
(iv) Treatment of periods without default contributions. The minimum
percentages described in paragraph (j)(2)(ii) of this section are based
on the date the initial period begins, regardless of whether the
employee is eligible to make elective contributions under the plan after
that date. Thus, for example, if an employee is ineligible to make
contributions under the plan for 6 months because the employee had a
hardship withdrawal and the 6-month period includes a date as of which
the default minimum percentage is increased, then the default percentage
must reflect that increase when the employee is permitted to resume
contributions. However, for purposes of determining the date the initial
period described in paragraph (j)(2)(ii)(A) of this section begins, a
plan is permitted to treat an employee who for an entire plan year did
not have contributions made pursuant to a default election under the
qualified automatic contribution arrangement as if the employee had not
had such contributions made for any prior plan year as well.
(k) Modifications to contribution requirements and notice
requirements for
[[Page 359]]
automatic contribution safe harbor--(1) In general. A cash or deferred
arrangement satisfies the contribution requirements of this paragraph
(k) only if it satisfies the contribution requirements of either
paragraph (b) or (c) of this section, as modified by the rules of
paragraphs (k)(2) and (k)(3) of this section. In addition, a cash or
deferred arrangement satisfies the notice requirement of section
401(k)(13)(E) only if the notice satisfies the additional requirements
of paragraph (k)(4) of this section.
(2) Lower matching requirement. In applying the requirement of
paragraph (c) of this section in the case of a cash or deferred
arrangement, the basic matching formula is modified so that each
eligible NHCE must receive the sum of--
(i) 100 percent of the employee's elective contributions that do not
exceed 1 percent of the employee's safe harbor compensation; and
(ii) 50 percent of the employee's elective contributions that exceed
1 percent of the employee's safe harbor compensation but that do not
exceed 6 percent of the employee's safe harbor compensation.
(3) Modified nonforfeiture requirement. A cash or deferred
arrangement described in paragraph (j) of this section will not fail to
satisfy the requirements of paragraph (b) or (c) of this section, as
applicable, merely because the safe harbor contributions are not
qualified nonelective contributions or qualified matching contributions
provided that--
(i) The contributions are subject to the withdrawal restrictions
that apply to QNECs and QMACs, as set forth in Sec. 1.401(k)-1(d); and
(ii) Any employee who has completed 2 years of service (within the
meaning of section 411(a)) has a nonforfeitable right to the account
balance attributable to the safe harbor contributions.
(4) Additional notice requirements--(i) In general. A notice
satisfies the requirements of this paragraph (k)(4) only if it includes
the additional information described in paragraph (k)(4)(ii) of this
section and satisfies the timing requirements of paragraph (k)(4)(iii)
of this section.
(ii) Additional information. A notice satisfies the additional
information requirement of this paragraph (k)(4)(ii) only if it
explains--
(A) The level of elective contributions which will be made on the
employee's behalf if the employee does not make an affirmative election;
(B) The employee's right under the arrangement to elect not to have
elective contributions made on the employee's behalf (or to elect to
have such contributions made in a different amount or percentage of
compensation); and
(C) How contributions under the arrangement will be invested
(including, in the case of an arrangement under which the employee may
elect among 2 or more investment options, how contributions will be
invested in the absence of an investment election by the employee).
(iii) Timing requirements. A notice satisfies the timing
requirements of this paragraph (k)(4)(iii) only if it is provided
sufficiently early so that the employee has a reasonable period of time
after receipt of the notice to make the elections described under
paragraph (k)(4)(ii)(B) and (C) of this section. However, the
requirement in the preceding sentence that an employee have a reasonable
period of time after receipt of the notice to make an alternative
election does not permit a plan to make the default election effective
any later than the earlier of--
(A) The pay date for the second payroll period that begins after the
date the notice is provided; and
(B) The first pay date that occurs at least 30 days after the notice
is provided.
[T.D. 9169, 69 FR 78154, Dec. 29, 2004, as amended by T.D. 9294, 71 FR
61887, Oct. 20, 2006; T.D. 9447, 74 FR 8208, Feb. 24, 2009; T.D. 9641,
78 FR 68737, Nov. 15, 2013]
Sec. 1.401(k)-4 SIMPLE 401(k) plan requirements.
(a) General rule. A cash or deferred arrangement satisfies the
SIMPLE 401(k) plan provision of section 401(k)(11) for a plan year if
the arrangement satisfies the requirements of paragraphs (b) through (i)
of this section for that year. A plan that contains a cash or deferred
arrangement that satisfies this section is referred to as a SIMPLE
401(k) plan. Pursuant to section
[[Page 360]]
401(k)(11), a SIMPLE 401(k) plan is treated as satisfying the ADP test
of section 401(k)(3)(A)(ii) for that year.
(b) Eligible employer--(1) General rule. A SIMPLE 401(k) plan must
be established by an eligible employer. Eligible employer for purposes
of this section means, with respect to any plan year, an employer that
had no more than 100 employees who each received at least $5,000 of
SIMPLE compensation, as defined in paragraph (e)(5) of this section,
from the employer for the prior calendar year.
(2) Special rule. An eligible employer that establishes a SIMPLE
401(k) plan for a plan year and that fails to be an eligible employer
for any subsequent plan year, is treated as an eligible employer for the
2 plan years following the last plan year the employer was an eligible
employer. If the failure is due to any acquisition, disposition, or
similar transaction involving an eligible employer, the preceding
sentence applies only if the provisions of section 410(b)(6)(C)(i) are
satisfied.
(c) Exclusive plan--(1) General rule. The SIMPLE 401(k) plan must be
the exclusive plan for each SIMPLE 401(k) plan participant for the plan
year. This requirement is satisfied if there are no contributions made,
or benefits accrued, for services during the plan year on behalf of any
SIMPLE 401(k) plan participant under any other qualified plan maintained
by the employer. Other qualified plan for purposes of this section means
any plan, contract, pension, or trust described in section 219(g)(5)(A)
or (B).
(2) Special rule. A SIMPLE 401(k) plan will not be treated as
failing the requirements of this paragraph (c) merely because any SIMPLE
401(k) plan participant receives an allocation of forfeitures under
another plan of the employer.
(d) Election and notice--(1) General rule. An eligible employer
establishing or maintaining a SIMPLE 401(k) plan must satisfy the
election and notice requirements in paragraphs (d)(2) and (3) of this
section.
(2) Employee elections--(i) Initial plan year of participation. For
the plan year in which an employee first becomes eligible under the
SIMPLE 401(k) plan, the employee must be permitted to make a cash or
deferred election under the plan during a 60-day period that includes
either the day the employee becomes eligible or the day before.
(ii) Subsequent plan years. For each subsequent plan year, each
eligible employee must be permitted to make or modify his cash or
deferred election during the 60-day period immediately preceding such
plan year.
(iii) Election to terminate. An eligible employee must be permitted
to terminate his cash or deferred election at any time. If an employee
does terminate his cash or deferred election, the plan is permitted to
provide that such employee cannot have elective contributions made under
the plan for the remainder of the plan year.
(3) Employee notices. The employer must notify each eligible
employee within a reasonable time prior to each 60-day election period,
or on the day the election period starts, that he or she can make a cash
or deferred election, or modify a prior election, if applicable, during
that period. The notice must state whether the eligible employer will
make the matching contributions described in paragraph (e)(3) of this
section or the nonelective contributions described in paragraph (e)(4)
of this section.
(e) Contributions--(1) General rule. A SIMPLE 401(k) plan satisfies
the contribution requirements of this paragraph (e) for a plan year only
if no contributions may be made to the SIMPLE 401(k) plan during such
year, other than contributions described in this paragraph (e) and
rollover contributions described in Sec. 1.402(c)-2, Q&A-1(a).
(2) Elective contributions. Subject to the limitations on annual
additions under section 415, each eligible employee must be permitted to
make an election to have up to $10,000 of elective contributions made on
the employee's behalf under the SIMPLE 401(k) plan for a plan year. The
$10,000 limit is increased beginning in 2006 in the same manner as the
$160,000 amount is adjusted under section 415(d), except that pursuant
to section 408(p)(2)(E)(ii) the base period shall be the calendar
quarter beginning July 1, 2004 and any increase which is not a multiple
of $500 is rounded to the next lower multiple of $500.
[[Page 361]]
(3) Matching contributions. Each plan year, the eligible employer
must contribute a matching contribution to the account of each eligible
employee on whose behalf elective contributions were made for the plan
year. The amount of the matching contribution must equal the lesser of
the eligible employee's elective contributions for the plan year or 3%
of the eligible employee's SIMPLE compensation for the entire plan year.
(4) Nonelective contributions. For any plan year, in lieu of
contributing matching contributions described in paragraph (e)(3) of
this section, an eligible employer may, in accordance with plan terms,
contribute a nonelective contribution to the account of each eligible
employee in an amount equal to 2% of the eligible employee's SIMPLE
compensation for the entire plan year. The eligible employer may limit
the nonelective contributions to those eligible employees who received
at least $5,000 of SIMPLE compensation from the employer for the entire
plan year.
(5) SIMPLE compensation. Except as otherwise provided, the term
SIMPLE compensation for purposes of this section means the sum of wages,
tips, and other compensation from the eligible employer subject to
federal income tax withholding (as described in section 6051(a)(3)) and
the employee's elective contributions made under any other plan, and if
applicable, elective deferrals under a section 408(p) SIMPLE IRA plan, a
section 408(k)(6) SARSEP, or a plan or contract that satisfies the
requirements of section 403(b), and compensation deferred under a
section 457 plan, required to be reported by the employer on Form W-2
(as described in section 6051(a)(8)). For self-employed individuals,
SIMPLE compensation means net earnings from self-employment determined
under section 1402(a) prior to subtracting any contributions made under
the SIMPLE 401(k) plan on behalf of the individual.
(f) Vesting. All benefits attributable to contributions described in
paragraph (e) of this section must be nonforfeitable at all times.
(g) Plan year. The plan year of a SIMPLE 401(k) plan must be the
whole calendar year. Thus, in general, a SIMPLE 401(k) plan can be
established only on January 1 and can be terminated only on December 31.
However, in the case of an employer that did not previously maintain a
SIMPLE 401(k) plan, the establishment date can be as late as October 1
(or later in the case of an employer that comes into existence after
October 1 and establishes the SIMPLE 401(k) plan as soon as
administratively feasible after the employer comes into existence).
(h) Other rules. A SIMPLE 401(k) plan is not treated as a top-heavy
plan under section 416. See section 416(g)(4)(G).
[T.D. 9169, 69 FR 78154, Dec. 29, 2004]
Sec. 1.401(k)-5 Special rules for mergers, acquisitions and
similar events. [Reserved]
[T.D. 9169, 69 FR 78154, Dec. 29, 2004]
Sec. 1.401(k)-6 Definitions.
Unless otherwise provided, the definitions of this section govern
for purposes of section 401(k) and the regulations thereunder.
Actual contribution percentage (ACP) test. Actual contribution
percentage test or ACP test means the test described in Sec. 1.401(m)-
2(a)(1).
Actual deferral percentage (ADP). Actual deferral percentage or ADP
means the ADP of the group of eligible employees as defined in Sec.
1.401(k)-2(a)(2).
Actual deferral percentage (ADP) test. Actual deferral percentage
test or ADP test means the test described in Sec. 1.401(k)-2(a)(1).
Actual deferral ratio (ADR). Actual deferral ratio or ADR means the
ADR of an eligible employee as defined in Sec. 1.401(k)-2(a)(3).
Cash or deferred arrangement. Cash or deferred arrangement is
defined in Sec. 1.401(k)-1(a)(2).
Cash or deferred election. Cash or deferred election is defined in
Sec. 1.401(k)-1(a)(3).
Compensation. 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
[[Page 362]]
to determine the compensation of every eligible employee under the plan
for that plan year. A plan 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. In the case of an HCE whose ADR is determined under Sec.
1.401(k)-2(a)(3)(ii), period of participation includes periods under
another plan for which elective contributions are aggregated under Sec.
1.401(k)-2(a)(3)(ii). See also section 401(a)(17) and Sec.
1.401(a)(17)-1(c)(1).
Current year testing method. Current year testing method means the
testing method described in Sec. 1.401(k)-2(a)(2)(ii) or 1.401(m)-
2(a)(2)(ii) under which the applicable year is the current plan year.
Designated Roth account. Designated Roth account means a separate
account maintained by a plan to which only designated Roth contributions
(including income, expenses, gains and losses attributable thereto) are
made.
Designated Roth contributions. Designated Roth contributions means
designated Roth contributions as defined in Sec. 1.401(k)-1(f)(1).
Elective contributions. Elective contributions means employer
contributions made to a plan pursuant 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 Sec. 1.401(k)-1(a)(4)).
Eligible employee--(1) General rule. 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.
(2) Conditions on eligibility. 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 Sec.
1.401(k)-1(e)(5), 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).
(3) Certain one-time elections. An employee is not an eligible
employee merely because the employee, no later than the employee's first
becoming eligible to make a cash or deferred election under any plan or
arrangement of the employer (described in section 219(g)(5)(A)), 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 or arrangement 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 Sec. 1.401(k)-1(a)(3)(v) 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 or arrangement (whether or not terminated) of the employer.
Eligible HCE. Eligible HCE means an eligible employee who is an HCE.
Eligible NHCE. Eligible NHCE means an eligible employee who is not
an HCE.
[[Page 363]]
Employee. Employee means an employee within the meaning of Sec.
1.410(b)-9.
Employee stock ownership plan (ESOP). Employee stock ownership plan
or ESOP means the portion of a plan that is an ESOP within the meaning
of Sec. 1.410(b)-7(c)(2).
Employer. Employer means an employer within the meaning of Sec.
1.410(b)-9.
Excess contributions. Excess contributions means, with respect to a
plan year, the amount of total excess contributions apportioned to an
HCE under Sec. 1.401(k)-2(b)(2)(iii).
Excess deferrals. Excess deferrals means excess deferrals as defined
in Sec. 1.402(g)-1(e)(3).
Highly compensated employee (HCE). Highly compensated employee or
HCE has the meaning provided in section 414(q).
Matching contributions. Matching contributions means matching
contributions as defined in Sec. 1.401(m)-1(a)(2).
Nonelective contributions. Nonelective contributions 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.
Non-employee stock ownership plan (non-ESOP). Non-employee stock
ownership plan or non-ESOP means the portion of a plan that is not an
ESOP within the meaning of Sec. 1.410(b)-7(c)(2).
Non-highly compensated employee (NHCE). Non-highly compensated
employee or NHCE means an employee who is not an HCE.
Plan. Plan is defined in Sec. 1.401(k)-1(b)(4).
Pre-ERISA money purchase pension plan. (1) Pre-ERISA money purchase
pension plan is a pension plan--
(i) That is a defined contribution plan (as defined in section
414(i));
(ii) That was in existence on June 27, 1974, and as in effect on
that date, included a salary reduction agreement; and
(iii) 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.
(2) 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.
Pre-tax elective contributions. Pre-tax elective contributions means
elective contributions under a qualified cash or deferred arrangement
that are not designated Roth contributions.
Prior year testing method. Prior year testing method means the
testing method under which the applicable year is the prior plan year,
as described in Sec. 1.401(k)-2(a)(2)(ii) or 1.401(m)-2(a)(2)(ii).
Qualified matching contributions (QMACs). Qualified matching
contributions or QMACs means matching contributions that, except as
provided otherwise in Sec. 1.401(k)-1(c) and (d), satisfy the
requirements of Sec. 1.401(k)-1(c) and (d) as though the contributions
were elective contributions, without regard to whether the contributions
are actually taken into account under the ADP test under Sec. 1.401(k)-
2(a)(6) or the ACP test under Sec. 1.401(m)-2(a)(6). Thus, the matching
contributions must satisfy the vesting requirements of Sec. 1.401(k)-
1(c) and be subject to the distribution requirements of Sec. 1.401(k)-
1(d) when they are contributed to the plan. See also Sec. 1.401(k)-
2(b)(4)(iii) for a rule providing that a matching contribution does not
fail to qualify as a QMAC solely because it is forfeitable under section
411(a)(3)(G) as a result of being a matching contribution with respect
to an excess deferral, excess contribution, or excess aggregate
contribution, or it is forfeitable under Sec. 1.414(w)-1(d)(2).
Qualified nonelective contributions (QNECs). Qualified nonelective
contributions or QNECs means employer contributions, other than elective
contributions or matching contributions, that, except as provided
otherwise in Sec. 1.401(k)-1(c) and (d), satisfy the requirements of
Sec. 1.401(k)-1(c) and (d) as though the contributions were elective
contributions, without regard to whether the contributions are actually
taken into account under the ADP test under Sec. 1.401(k)-2(a)(6) or
the ACP test under Sec. 1.401(m)-2(a)(6). Thus, the nonelective
contributions must satisfy the
[[Page 364]]
vesting requirements of Sec. 1.401(k)-1(c) and be subject to the
distribution requirements of Sec. 1.401(k)-1(d) when they are
contributed to the plan.
Rural cooperative plans. Rural cooperative plan means a plan
described in section 401(k)(7).
[T.D. 9169, 69 FR 78154, Dec. 29, 2004, as amended by T.D. 9237, 71 FR
10, Jan. 3, 2006; T.D. 9447, 74 FR 8210, Feb. 24, 2009]
Sec. 1.401(l)-0 Table of contents.
This section contains a listing of the headings of Sec. Sec.
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.
(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.
[[Page 365]]
(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.
(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.
[[Page 366]]
(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 Sec. Sec. 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 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-
[[Page 367]]
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)-6 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(a)(3) or (a)(2), 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 Sec. Sec. 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
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
[[Page 368]]
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 Sec. Sec. 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
(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
[[Page 369]]
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 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
[[Page 370]]
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 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; T.D. 9169, 69
FR 78153, Dec. 29, 2004]
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.
[[Page 371]]
(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 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.
[[Page 372]]
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.
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
[[Page 373]]
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
(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.
[[Page 374]]
(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 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
[[Page 375]]
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\x1 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 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.
[[Page 376]]
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 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
[[Page 377]]
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
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
[[Page 378]]
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 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
[[Page 379]]
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 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
[[Page 380]]
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.
(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.
[[Page 381]]
(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 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
[[Page 382]]
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
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
[[Page 383]]
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 percentx0.69 percent/0.75 percent) or
(0.69 percentx0.7 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 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
[[Page 384]]
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 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
------------------------------------------------------------------------
[[Page 385]]
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 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
[[Page 386]]
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 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
[[Page 387]]
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
percentx$16,000)+(45 percentx$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 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
[[Page 388]]
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 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
[[Page 389]]
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, 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
[[Page 390]]
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--
(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).
[[Page 391]]
(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.
(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
[[Page 392]]
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).
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
[[Page 393]]
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
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
[[Page 394]]
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 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.
[[Page 395]]
(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 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.
[[Page 396]]
(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 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
[[Page 397]]
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 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
[[Page 398]]
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 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
[[Page 399]]
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 (0.67x45).
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.
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
[[Page 400]]
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 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,
[[Page 401]]
Sec. Sec. 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), Sec. Sec. 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 Sec. Sec. 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
Sec. Sec. 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
Sec. Sec. 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 Sec. Sec. 1.401(l)-1 through
1.401(l)-5.
[T.D. 8486, 58 FR 46835, Sept. 3, 1993]
Sec. 1.401(m)-0 Table of contents.
This section contains first a list of section headings and then a
list of the paragraphs in each section in Sec. Sec. 1.401(m)-1 through
1.401(m)-5.
List of Sections
Sec. 1.401(m)-1 Employee contributions and matching contributions.
Sec. 1.401(m)-2 ACP test.
Sec. 1.401(m)-3 Safe harbor requirements.
Sec. 1.401(m)-4 Special rules for mergers, acquisitions and similar
events. [Reserved]
Sec. 1.401(m)-5 Definitions.
List of Paragraphs
Sec. 1.401(m)-1 Employee contributions and matching contributions.
(a) General nondiscrimination rules.
(1) Nondiscriminatory amount of contributions.
(i) Exclusive means of amounts testing.
(ii) Testing benefits, rights and features.
(2) Matching contributions.
(i) In general.
(ii) Employer contributions made on account of an employee
contribution or elective deferral.
(iii) Employer contributions not on account of an employee
contribution or elective deferral.
(A) General rule.
(B) Special rule for forfeitures and released ESOP shares.
(C) Exception for bona fide administrative considerations.
(3) Employee contributions.
(i) In general.
(ii) Certain contributions not treated as employee contributions.
(iii) Qualified cost-of-living arrangements.
(b) Nondiscrimination requirements for amount of contributions.
(1) Matching contributions and employee contributions.
(2) Automatic satisfaction by certain plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
[[Page 402]]
(ii) Aggregation of employee contributions and matching
contributions within a plan.
(iii) Aggregation of plans.
(A) In general.
(B) Arrangements with inconsistent ACP testing methods.
(iv) Disaggregation of plans and separate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Certain disaggregation rules not applicable.
(c) Additional requirements.
(1) Separate testing for employee contributions and matching
contributions.
(2) Plan provision requirement.
(d) Effective date.
(1) General rule.
(2) Early implementation permitted.
(3) Applicability of prior regulations.
Sec. 1.401(m)-2 ACP test.
(a) Actual contribution percentage (ACP) test.
(1) In general.
(i) ACP test formula.
(ii) HCEs as sole eligible employees.
(iii) Special rule for early participation.
(2) Determination of ACP.
(i) General rule.
(ii) Determination of applicable year under current year and prior
year testing method.
(3) Determination of ACR.
(i) General rule.
(ii) ACR of HCEs eligible under more than one plan.
(A) General rule.
(B) Plans not permitted to be aggregated.
(iii) Example.
(4) Employee contributions and matching contributions taken into
account under the ACP test.
(i) Employee contributions.
(ii) Recharacterized elective contributions.
(iii) Matching contributions.
(5) Employee contributions and matching contributions not taken into
account under the ACP test.
(i) General rule.
(ii) Disproportionate matching contributions.
(A) Matching contributions in excess of 100%.
(B) Representative matching rate.
(C) Definition of matching rate.
(iii) Qualified matching contributions used to satisfy the ADP test.
(iv) Matching contributions taken into account under safe harbor
provisions.
(v) Treatment of forfeited matching contributions.
(vi) Additional employee contributions or matching contributions
pursuant to section 414(u).
(6) Qualified nonelective contributions and elective contributions
that may be taken into account under the ACP test.
(i) Timing of allocation.
(ii) Elective contributions taken into account under the ACP test.
(iii) Requirement that amount satisfy section 401(a)(4).
(iv) Aggregation must be permitted.
(v) Disproportionate contributions not taken into account.
(A) General rule.
(B) Definition of representative contribution rate.
(C) Definition of applicable contribution rate.
(D) Special rule for prevailing wage contributions.
(vi) Contribution only used once.
(7) Examples.
(b) Correction of excess aggregate contributions.
(1) Permissible correction methods.
(i) In general.
(A) Additional contributions.
(B) Excess aggregate contributions distributed or forfeited.
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Correction through distribution.
(i) General rule.
(ii) Calculation of total amount to be distributed.
(A) Calculate the dollar amount of excess aggregate contributions
for each HCE.
(B) Determination of the total amount of excess aggregate
contributions.
(C) Satisfaction of ACP.
(iii) Apportionment of total amount of excess aggregate
contributions among the HCEs.
(A) Calculate the dollar amount of excess aggregate contributions
for each HCE.
(B) Limit on amount apportioned to any HCE.
(C) Apportionment to additional HCEs.
(iv) Income allocable to excess aggregate contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating income for the plan year.
(D) Plan years before 2008.
(E) Alternative method of allocating plan year and gap period
income.
(F) Allocable income for recharacterized elective contributions.
(v) Distribution and forfeiture.
(vi) Tax treatment of corrective distributions.
(A) Corrective distributions for plan years beginning on or after
January 1, 2008.
(B) Corrective distributions for plan years beginning before January
1, 2008.
(C) Corrective distributions attributable to designated Roth
contributions.
(3) Other rules.
(i) No employee or spousal consent required.
[[Page 403]]
(ii) Treatment of corrective distributions and forfeited
contributions as employer contributions.
(iii) No reduction of required minimum distribution.
(iv) Partial correction.
(v) Matching contributions on excess contributions, excess deferrals
and excess aggregate contributions.
(A) Corrective distributions not permitted.
(B) Coordination with section 401(a)(4).
(vi) No requirement for recalculation.
(4) Failure to timely 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.
(iii) Special rule for eligible automatic contribution arrangements.
(5) Examples.
(c) Additional rules for prior year testing method.
(1) Rules for change in testing method.
(2) Calculation of ACP under the prior year testing method for the
first plan year.
(i) Plans that are not successor plans.
(ii) First plan year defined.
(iii) Plans that are successor plans.
(3) Plans using different testing methods for the ACP and ADP test.
(4) Rules for plan coverage change.
(i) In general.
(ii) Optional rule for minor plan coverage changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
(C) Weighted average of the ACPs for the prior year subgroups.
(iv) Examples.
Sec. 1.401(m)-3 Safe harbor requirements.
(a) ACP test safe harbor.
(1) Section 401(m)(11) safe harbor.
(2) Section 401(m)(12) safe harbor.
(3) Requirements applicable to safe harbor contributions.
(b) Safe harbor nonelective contribution requirement.
(c) Safe harbor matching contribution requirement.
(d) Limitation on contributions.
(1) General rule.
(2) Matching rate must not increase.
(3) Limit on matching contributions.
(4) Limitation on rate of match.
(5) HCEs participating in multiple plans.
(6) Permissible restrictions on elective deferrals by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of contributions.
(iv) Restrictions on types of compensation that may be deferred.
(v) Restrictions due to limitations under the Internal Revenue Code.
(e) Notice requirement.
(f) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3) Change of plan year.
(4) Final plan year.
(g) Plan amendments adopting nonelective safe harbor contributions.
(h) Permissible reduction or suspension of safe harbor
contributions.
(1) General rule.
(i) Matching contributions.
(ii) Nonelective contributions.
(2) Supplemental notice.
(j) Other rules.
(1) Contributions taken into account.
(2) Use of safe harbor nonelective contributions to satisfy other
nondiscrimination tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution requirement under another
defined contribution plan.
(5) Contributions used only once.
(6) Plan must satisfy ACP with respect to employee contributions.
Sec. 1.401(m)-4 Special rules for mergers, acquisitions and similar
events. [Reserved]
Sec. 1.401(m)-5 Definitions.
[T.D. 9169, 69 FR 78184, Dec. 29, 2004, as amended by T.D. 9237, 71 FR
10, Jan. 3, 2006; T.D. 9447, 74 FR 8210, Feb. 24, 2009; T.D. 9641, 78 FR
68738, Nov. 15, 2013]
Sec. 1.401(m)-1 Employee contributions and matching contributions.
(a) General nondiscrimination rules--(1) Nondiscriminatory amount of
contributions--(i) Exclusive means of amounts testing. A defined
contribution plan does not satisfy section 401(a) for a plan year unless
the amount of employee contributions and matching contributions to the
plan for the plan year satisfies section 401(a)(4). The amount of
employee contributions and matching contributions under a plan satisfies
the requirements of section 401(a)(4) with respect to amounts if and
only if the amount of employee contributions and matching contributions
satisfies the nondiscrimination test of section 401(m) under paragraph
(b) of this section and the plan satisfies the additional requirements
of paragraph (c) of this section. See Sec. 1.401(a)(4)-1(b)(2)(ii)(B).
[[Page 404]]
(ii) Testing benefits, rights and features. A plan that provides for
employee contributions or matching contributions must satisfy the
requirements of section 401(a)(4) relating to benefits, rights and
features in addition to the requirement regarding amounts described in
paragraph (a)(1)(i) of this section. For example, the right to make each
level of employee contributions and the right to each level of matching
contributions under the plan are benefits, rights or features subject to
the requirements of section 401(a)(4). See Sec. 1.401(a)(4)-4(e)(3)(i)
and (iii)(F) through (G).
(2) Matching contributions--(i) In general. For purposes of section
401(m), this section and Sec. Sec. 1.401(m)-2 through 1.401(m)-5,
matching contributions are--
(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; and
(C) Any forfeiture allocated on the basis of employee contributions,
matching contributions, or elective deferrals.
(ii) Employer contributions made on account of an employee
contribution or elective deferral. Whether an employer contribution is
made on account of an employee contribution or an elective deferral is
determined on the basis of all the relevant facts and circumstances,
including the relationship between the employer contribution and
employee actions outside the plan. 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 other
arrangement described in Sec. 1.402(g)-1(b) is not a matching
contribution.
(iii) Employer contributions not on account of an employee
contribution or elective deferral--(A) General rule. Employer
contributions are not matching contributions made on account of elective
deferrals if they are contributed before the cash or deferred election
is made or before the employees' performance of services with respect to
which the elective deferrals are made (or when the cash that is subject
to the cash or deferred elections would be currently available, if
earlier). In addition, an employer contribution is not a matching
contribution made on account of an employee contribution if it is
contributed before the employee contribution.
(B) Exceptions for forfeitures and released ESOP shares. The rule of
paragraph (a)(3)(iii)(A) of this section does not apply to a forfeiture
that is allocated as a matching contribution. In addition, an allocation
of shares from an ESOP loan suspense account described in Sec. 54.4975-
11(c) and (d) of this chapter will not fail to be treated as a matching
contribution solely because the employer contribution that resulted in
the release and allocation of those shares from the suspense account is
made before the employees' performance of services with respect to which
the elective deferrals are made (or when the cash that is subject to the
cash or deferred elections would be currently available, if earlier)
provided that--
(1) The contribution is for a required payment that is due under the
loan terms; and
(2) The contribution is not made early with a principal purpose of
accelerating deductions.
(C) Exception for bona fide administrative considerations. The
timing of contributions will not be treated as failing to satisfy the
requirements of this paragraph (a)(3)(iii) merely because contributions
are occasionally made before the employees' performance of services with
respect to which the elective deferrals are made (or when the cash that
is subject to the cash or deferred elections would be currently
available, if earlier) in order to accommodate bona fide administrative
considerations and are not paid early with a principal purpose of
accelerating deductions.
(3) Employee contributions--(i) In general. For purposes of section
401(m), this section and Sec. Sec. 1.401(m)-2 through 1.401(m)-5,
employee contributions are
[[Page 405]]
contributions to a plan that are designated or treated at the time of
contribution as after-tax employee contributions (e.g., by treating the
contributions as taxable income subject to applicable withholding
requirements) and are allocated to an individual account for each
eligible employee to which attributable earnings and losses are
allocated. See Sec. 1.401(k)-1(a)(2)(ii). The term employee
contributions includes--
(A) Employee contributions to the defined contribution portion of a
plan described in section 414(k);
(B) Employee contributions applied to the purchase of whole life
insurance protection or survivor benefit protection under a defined
contribution plan;
(C) Amounts attributable to excess contributions within the meaning
of section 401(k)(8)(B) that are recharacterized as employee
contributions under Sec. 1.401(k)-2(b)(3); and
(D) Employee contributions to a plan or contract that satisfies the
requirements of section 403(b).
(ii) Certain contributions not treated as employee contributions.
The term employee contributions does not include designated Roth
contributions, repayment of loans, rollover contributions, repayment of
distributions described in section 411(a)(7)(C), or employee
contributions that are transferred to the plan from another plan.
(iii) Qualified cost-of-living arrangements. Employee contributions
to a qualified cost-of-living arrangement described in section
415(k)(2)(B) are treated as employee contributions to a defined
contribution plan, without regard to the requirement that the employee
contributions be allocated to an individual account to which
attributable earnings and losses are allocated.
(b) Nondiscrimination requirements for amount of contributions--(1)
Matching contributions and employee contributions. The matching
contributions and employee contributions under a plan satisfy this
paragraph (b) for a plan year only if the plan satisfies--
(i) The ACP test of section 401(m)(2) described in Sec. 1.401(m)-2;
(ii) The ACP safe harbor provisions of section 401(m)(11) described
in Sec. 1.401(m)-3; or
(iii) The ACP safe harbor provisions of section 401(m)(12) described
in Sec. 1.401(m)-3; or
(iv) The SIMPLE 401(k) provisions of sections 401(k)(11) and
401(m)(10) described in Sec. 1.401(k)-4.
(2) Automatic satisfaction by certain plans. Notwithstanding
paragraph (b)(1) of this section, the requirements of this section are
treated as satisfied with respect to employee contributions and matching
contributions under a collectively bargained plan (or the portion of a
plan) that automatically satisfies section 410(b). See Sec. Sec.
1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7). Additionally, the requirements
of sections 401(a)(4) and 410(b) do not apply to a governmental plan
(within the meaning of section 414(d)) maintained by a State or local
government or political subdivision thereof (or agency or
instrumentality thereof) and, accordingly such plans are not required to
comply with this section. See sections 401(a)(5)(G), 403(b)(12)(C) and
410(c)(1)(A).
(3) Anti-abuse provisions. Sections 1.401(m)-1 through 1.401(m)-5
are designed to provide simple, practical rules that accommodate
legitimate plan changes. At the same time, the rules are intended to be
applied by employers in a manner that does not make use of changes in
plan testing procedures or other plan provisions to inflate
inappropriately the ACP for NHCEs (which is used as a benchmark for
testing the ACP for HCEs) or to otherwise manipulate the
nondiscrimination testing requirements of this paragraph (b). Further,
this paragraph (b) is part of the overall requirement that benefits or
contributions not discriminate in favor of HCEs. Therefore, a plan will
not be treated as satisfying the requirements of this paragraph (b) if
there are repeated changes to plan testing procedures or plan provisions
that have the effect of distorting the ACP so as to increase
significantly the permitted ACP for HCEs, or otherwise manipulate the
nondiscrimination rules of this paragraph, if a principal purpose of the
changes was to achieve such a result.
[[Page 406]]
(4) Aggregation and restructuring--(i) In general. This paragraph
(b)(4) contains the exclusive rules for aggregating and disaggregating
plans that provide for employee contributions and matching contributions
for purposes of this section and Sec. Sec. 1.401(m)-2 through 1.401(m)-
5.
(ii) Aggregation of employee contributions and matching
contributions within a plan. Except as otherwise specifically provided
in this paragraph (b)(4) and Sec. 1.401(m)-3(j)(6), a plan must be
subject to a single test under paragraph (b)(1) of this section with
respect to all employee contributions and matching contributions and all
eligible employees under the plan. Thus, for example, if two groups of
employees are eligible for matching contributions under a plan, all
employee contributions and matching contributions under the plan must be
subject to a single test, even if they have significantly different
features, such as different rates of match.
(iii) Aggregation of plans--(A) In general. 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), as
modified by paragraph (b)(4)(v) 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 sections
401(k) and 401(m).
(B) Arrangements with inconsistent ACP testing methods. Pursuant to
paragraph (b)(4)(ii) of this section, a single testing method must apply
with respect to all employee contributions and matching contributions
and all eligible employees under a plan. Thus, in applying the
permissive aggregation rules of Sec. 1.410(b)-7(d), an employer may not
aggregate plans (within the meaning of Sec. 1.410(b)-7(b)) that apply
inconsistent testing methods. For example, a plan (within the meaning of
Sec. 1.410(b)-7) that applies the current year testing method may not
be aggregated with another plan that applies the prior year testing
method. Similarly, an employer may not aggregate a plan (within the
meaning of Sec. 1.410(b)-7) that is using the ACP safe harbor
provisions of section 401(m)(11) or 401(m)(12) and another plan that is
using the ACP test of section 401(m)(2).
(iv) Disaggregation of plans and separate testing--(A) In general.
If employee contributions or matching contributions are included in a
plan (within the meaning of Sec. 1.410(b)-7(b)) that is mandatorily
disaggregated under the rules of section 410(b) (as modified by this
paragraph (b)(4)), the matching contributions and employee contributions
under that plan must be disaggregated in a consistent manner. For
example, in the case of an employer that is treated as operating
qualified separate lines of business under section 414(r), if the
eligible employees under a plan which provides for employee
contributions or matching contributions are in more than one qualified
separate line of business, only those employees within each qualified
separate line of business may be taken into account in determining
whether each disaggregated portion of the plan complies with the
requirements of section 401(m), unless the employer is applying the
special rule for employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) with
respect to the plan. Similarly, if a plan that provides for employee
contributions or matching contributions under which employees are
permitted to participate before they have completed the minimum age and
service requirements of section 410(a)(1) applies section 410(b)(4)(B)
for determining whether the plan complies with section 410(b)(1), then
the plan must be treated as two separate plans, one comprising all
eligible employees who have met the minimum age and service requirements
of section 410(a)(1) and one comprising all eligible employees who have
not met the minimum age and service requirements of section 410(a)(1),
unless the plan is using the rule in Sec. 1.401(m)-2(a)(1)(iii)(A).
(B) Restructuring prohibited. 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).
(v) Certain disaggregation rules not applicable. The mandatory
disaggregation rules relating to section 401(k) plans and section 401(m)
plans set forth in Sec. 1.410(b)-7(c)(1) and to ESOP and non-
[[Page 407]]
ESOP portions of a plan set forth in Sec. 1.410(b)-7(c)(2) shall not
apply for purposes of this section and Sec. Sec. 1.401(m)-2 through
1.401(m)-5. Accordingly, notwithstanding Sec. 1.410(b)-7(d)(2), an ESOP
and a non-ESOP which are different plans (within the meaning of section
414(l), as described in Sec. 1.410(b)-7(b)) are permitted to be
aggregated for these purposes.
(c) Additional requirements--(1) Separate testing for employee
contributions and matching contributions. Under Sec. 1.410(b)-7(c)(1),
the group of employees who are eligible to make employee contributions
or eligible to receive matching contributions must satisfy the
requirements of section 410(b) as if those employees were covered under
a separate plan. The determination of whether the separate plan
satisfies the requirements of section 410(b) must be made without regard
to the modifications to the disaggregation rules set forth in paragraph
(b)(4)(v) of this section. In addition, except as expressly permitted
under section 401(k), 410(b)(2)(A)(ii), or 416(c)(2)(A), employee
contributions, matching contributions and elective contributions taken
into account under Sec. 1.401(m)-2(a)(6) may not be taken into account
for purposes of determining whether any other contributions under any
plan (including the plan to which the employee contributions or matching
contributions are made) satisfy the requirements of section 401(a). See
also Sec. 1.401(a)(4)-11(g)(3)(vii) for special rules relating to
corrections of violations of the minimum coverage requirements or
discriminatory rates of matching contributions.
(2) Plan provision requirement. A plan that provides for employee
contributions or matching contributions satisfies this section only if
it provides that the nondiscrimination requirements of section 401(m)
will be met. Thus, the plan must provide for satisfaction of one of the
specific alternatives described in paragraph (b)(1) of this section and,
if with respect to that alternative there are optional choices, which of
the optional choices will apply. For example, a plan that uses the ACP
test of section 401(m)(2), as described in paragraph (b)(1)(i) of this
section, must specify whether it is using the current year testing
method or prior year testing method. Additionally, a plan that uses the
prior year testing method must specify whether the ACP for eligible
NHCEs for the first plan year is 3% or the ACP for the eligible NHCEs
for the first plan year. Similarly, a plan that uses the safe harbor
method of section 401(m)(11) or 401(m)(12), as described in paragraphs
(b)(1)(ii) and (b)(1)(iii) of this section, must specify the default
percentages that apply for the plan year and whether the safe harbor
contribution will be the nonelective safe harbor contribution or the
matching safe harbor contribution, and is not permitted to provide that
ACP testing will be used if the requirements for the safe harbor are not
satisfied. For purposes of this paragraph (c)(2), a plan may incorporate
by reference the provisions of section 401(m)(2) and Sec. 1.401(m)-2 if
that is the nondiscrimination test being applied. The Commissioner may,
in guidance of general applicability, published in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2) of this chapter), specify the options
that will apply under the plan if the nondiscrimination test is
incorporated by reference in accordance with the preceding sentence.
(d) Effective date--(1) General rule. Except as otherwise provided
in this paragraph (d), this section and Sec. Sec. 1.401(m)-2 through
1.401(m)-5 apply to plan years that begin on or after January 1, 2006.
(2) Early implementation permitted. A plan is permitted to apply the
rules of this section and Sec. Sec. 1.401(m)-2 through 1.401(m)-5 to
any plan year that ends after December 29, 2004, provided the plan
applies all the rules of this section and Sec. Sec. 1.401(m)-2 through
1.401(m)-5 and all the rules of Sec. Sec. 1.401(k)-1 through 1.401(k)-
6, to the extent applicable, for that plan year and all subsequent plan
years.
(3) Applicability of prior regulations. For any plan year, before a
plan applies this section and Sec. Sec. 1.401(m)-2 through 1.401(m)-5
(either the first plan year beginning on or after January 1, 2006 or
such earlier year, as provided in paragraph (d)(2) of this section),
Sec. 1.401(m)-1 and Sec. 1.401(m)-2 (as they appeared in the April 1,
2004 edition of 26 CFR part 1) apply to the plan to the extent those
sections, as they so appear, reflect the
[[Page 408]]
statutory provisions of section 401(m) as in effect for the relevant
year.
[T.D. 9169, 69 FR 78184, Dec. 29, 2004, as amended by T.D. 9447, 74 FR
8210, Feb. 24, 2009]
Sec. 1.401(m)-2 ACP test.
(a) Actual contribution percentage (ACP) test--(1) In general--(i)
ACP test formula. A plan satisfies the ACP test for a plan year only
if--
(A) The ACP for the eligible HCEs for the plan year is not more than
the ACP for the eligible NHCEs for the applicable year multiplied by
1.25; or
(B) The excess of the ACP for the eligible HCEs for the plan year
over the ACP for the eligible NHCEs for the applicable year is not more
than 2 percentage points, and the ACP for the eligible HCEs for the plan
year is not more than the ACP for the eligible NHCEs for the applicable
year multiplied by 2.
(ii) HCEs as sole eligible employees. If, for the applicable year
there are no eligible NHCEs (i.e., all of the eligible employees under
the plan for the applicable year are HCEs), the plan is deemed to
satisfy the ACP test.
(iii) Special rule for early participation. If a plan providing for
employee contributions or matching contributions provides that employees
are eligible to participate before they have completed the minimum age
and service requirements of section 410(a)(1)(A), and if the plan
applies section 410(b)(4)(B) in determining whether the plan meets the
requirements of section 410(b)(1), then in determining whether the plan
meets the requirements under paragraph (a)(1) of this section either--
(A) Pursuant to section 401(m)(5)(C), the ACP test is performed
under the plan (determined without regard to disaggregation under Sec.
1.410(b)-7(c)(3)), using the ACP for all eligible HCEs for the plan year
and the ACP of eligible NHCEs for the applicable year, disregarding all
NHCEs who have not met the minimum age and service requirements of
section 410(a)(1)(A); or
(B) Pursuant to Sec. 1.401(m)-1(b)(4), the plan is disaggregated
into separate plans and the ACP test is performed separately for all
eligible employees who have completed the minimum age and service
requirements of section 410(a)(1)(A) and for all eligible employees who
have not completed the minimum age and service requirements of section
410(a)(1)(A).
(2) Determination of ACP--(i) General rule. The ACP for a group of
eligible employees (either eligible HCEs or eligible NHCEs) for a plan
year or applicable year is the average of the ACRs of eligible employees
in the group for that year. The ACP for a group of eligible employees is
calculated to the nearest hundredth of a percentage point.
(ii) Determination of applicable year under current year and prior
year testing method. The ACP test is applied using the prior year
testing method or the current year testing method. Under the prior year
testing method, the applicable year for determining the ACP for the
eligible NHCEs is the plan year immediately preceding the plan year for
which the ACP test is being calculated. Under the prior year testing
method, the ACP for the eligible NHCEs is determined using the ACRs for
the eligible employees who were NHCEs in that preceding plan year,
regardless of whether those NHCEs are eligible employees or NHCEs in the
plan year for which the ACP test is being performed. Under the current
year testing method, the applicable year for determining the ACP for
eligible NHCEs is the same plan year as the plan year for which the ACP
test is being calculated. Under either method, the ACP for the eligible
HCEs is determined using the ACRs of eligible employees who are HCEs for
the plan year for which the ACP test is being performed. See paragraph
(c) of this section for additional rules for the prior year testing
method.
(3) Determination of ACR--(i) General rule. The ACR of an eligible
employee for the plan year or applicable year is the sum of the employee
contributions and matching contributions taken into account with respect
to such employee (determined under the rules of paragraphs (a)(4) and
(5) of this section), and the qualified nonelective and elective
contributions taken into account under paragraph (a)(6) of this section
for the year, divided by the employee's compensation taken into account
for the year. The ACR is calculated to the nearest hundredth of a
percentage
[[Page 409]]
point. If no employee contributions, matching contributions, elective
contributions, or qualified nonelective contributions are taken into
account under this section with respect to an eligible employee for the
year, the ACR of the employee is zero.
(ii) ACR of HCEs eligible under more than one plan--(A) General
rule. Pursuant to section 401(m)(2)(B), the ACR of an HCE who is an
eligible employee in more than one plan of an employer to which matching
contributions or employee contributions are made is calculated by
treating all contributions with respect to such HCE under any such plan
as being made under the plan being tested. Thus, the ACR for such an HCE
is calculated by accumulating all matching contributions and employee
contributions under any plan (other than a plan described in paragraph
(a)(3)(ii)(B) of this section) that would be taken into account under
this section for the plan year, if the plan under which the contribution
was made applied this section and had the same plan year. For example,
in the case of a plan with a 12-month plan year, the ACR for the plan
year of that plan for an HCE who participates in multiple plans of the
same employer that provide for matching contributions or employee
contributions is the sum of all such contributions during such 12-month
period that would be taken into account with respect to the HCE under
all plans in which the HCE is an eligible employee, divided by the HCE's
compensation for that 12-month period (determined using the compensation
definition for the plan being tested), without regard to the plan year
of the other plans and whether those plans are satisfying this section
or Sec. 1.401(m)-3.
(B) Plans not permitted to be aggregated. Contributions under plans
that are not permitted to be aggregated under Sec. 1.401(m)-1(b)(4)
(determined without regard to the prohibition on aggregating plans with
inconsistent testing methods set forth in Sec. 1.401(m)-1(b)(4)(iii)(B)
and the prohibition on aggregating plans with different plan years set
forth in Sec. 1.410(b)-7(d)(5)) are not aggregated under this paragraph
(a)(3)(ii).
(iii) Example. The following example illustrates the application of
paragraph (a)(3)(ii) of this section. See also Sec. 1.401(k)-
2(a)(3)(iii) for additional examples of the application of the parallel
rule under section 401(k)(3)(A). The example is as follows:
Example. Employee A, an HCE with compensation of $120,000, is
eligible to make employee contributions under Plan S and Plan T, two
calendar-year profit-sharing plans of Employer H. Plan S and Plan T use
the same definition of compensation. Plan S provides a match equal to
50% of each employee's contributions and Plan T has no match. During the
current plan year, Employee A elects to contribute $4,000 in employee
contributions to Plan T and $4,000 in employee contributions to Plan S.
There are no other contributions made on behalf of Employee A. Each plan
must calculate Employee A's ACR by dividing the total employee
contributions by Employee A and matching contributions under both plans
by $120,000. Therefore, Employee A's ACR under each plan is 8.33%
($4,000 + $4,000 + $2,000/$120,000).
(4) Employee contributions and matching contributions taken into
account under the ACP test--(i) Employee contributions. An employee
contribution is taken into account in determining the ACR for an
eligible employee for the plan year or applicable year in which the
contribution is made. For purposes of the preceding sentence, an amount
withheld from an employee's pay (or a payment by the employee to an
agent of the plan) is treated as contributed at the time of such
withholding (or payment) if the funds paid are transmitted to the trust
within a reasonable period after the withholding (or payment).
(ii) Recharacterized elective contributions. Excess contributions
recharacterized in accordance with Sec. 1.401(k)-2(b)(3) are taken into
account as employee contributions 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)-2(b)(3)(ii).
(iii) Matching contributions. A matching contribution is taken into
account in determining the ACR for an eligible employee for a plan year
or applicable year only if each of the following requirements is
satisfied--
(A) The matching contribution is allocated to the employee's account
[[Page 410]]
under the terms of the plan as of a date within that year;
(B) The matching contribution is made on account of (or the matching
contribution is allocated on the basis of) the employee's elective
deferrals or employee contributions for that year; and
(C) The matching contribution is actually paid to the trust no later
than the end of the 12-month period immediately following the year that
contains that date.
(5) Employee contributions and matching contributions not taken into
account under the ACP test--(i) General rule. Matching contributions
that do not satisfy the requirements of paragraph (a)(4)(iii) of this
section may not be taken into account in the ACP test for the plan year
with respect to which the contributions were made, or for any other plan
year. Instead, the amount of the matching contributions must satisfy the
requirements of section 401(a)(4) (without regard to the ACP test) for
the plan year for which they are allocated under the plan as if they
were nonelective contributions and were the only nonelective
contributions for that year. See Sec. Sec. 1.401(a)(4)-1(b)(2)(ii)(B)
and 1.410(b)-7(c)(1).
(ii) Disproportionate matching contributions--(A) Matching
contributions in excess of 100%. A matching contribution with respect to
an elective deferral for an NHCE is not taken into account under the ACP
test to the extent it exceeds the greatest of:
(1) 5% of compensation;
(2) the employee's elective deferrals for a year; and
(3) the product of 2 times the plan's representative matching rate
and the employee's elective deferrals for a year.
(B) Representative matching rate. For purposes of this paragraph
(a)(5)(ii), the plan's representative matching rate is the lowest
matching rate for any eligible NHCE among a group of NHCEs that consists
of half of all eligible NHCEs in the plan for the plan year who make
elective deferrals for the plan year (or, if greater, the lowest
matching rate for all eligible NHCEs in the plan who are employed by the
employer on the last day of the plan year and who make elective
deferrals for the plan year).
(C) Definition of matching rate. For purposes of this paragraph
(a)(5)(ii), the matching rate for an employee generally is the matching
contributions made for such employee divided by the employee's elective
deferrals for the year. If the matching rate is not the same for all
levels of elective deferrals for an employee, the employee's matching
rate is determined assuming that an employee's elective deferrals are
equal to 6 percent of compensation.
(D) Application to matching contributions that match employee
contributions. If a plan provides a match with respect to the sum of the
employee's employee contributions and elective deferrals, that sum is
substituted for the amount of the employee's elective deferrals in
paragraphs (a)(5)(ii) (A) and (C) of this section and employees who make
either employee contributions or elective deferrals are taken into
account under paragraph (a)(5)(ii)(B) of this section. Similarly, if a
plan provides a match with respect to the employee's employee
contributions, but not elective deferrals, the employee's employee
contributions are substituted for the amount of the employee's elective
deferrals in paragraphs (a)(5)(ii) (A) and (C) of this section and
employees who make employee contributions are taken into account under
paragraph (a)(5)(ii)(B) of this section.
(iii) Qualified matching contributions used to satisfy the ADP test.
Qualified matching contributions that are taken into account for the ADP
test of section 401(k)(3) under Sec. 1.401(k)-2(a)(6) are not taken
into account in determining an eligible employee's ACR.
(iv) Matching contributions taken into account under safe harbor
provisions. A plan that satisfies the ACP safe harbor requirements of
section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must
satisfy the requirements of this section because it provides for
employee contributions for such plan year is permitted to apply this
section disregarding all matching contributions with respect to all
eligible employees. In addition, a plan that satisfies the ADP safe
harbor requirements of Sec. 1.401(k)-3 for a plan year using qualified
matching contributions but does
[[Page 411]]
not satisfy the ACP safe harbor requirements of section 401(m)(11) or
401(m)(12) for such plan year is permitted to apply this section by
excluding matching contributions with respect to all eligible employees
that do not exceed 4 percent (3\1/2\ percent in the case of a plan that
satisfies the ADP safe harbor under section 401(k)(13)) of each
employee's compensation. If a plan disregards matching contributions
pursuant to this paragraph (a)(5)(iv), the disregard must apply with
respect to all eligible employees.
(v) Treatment of forfeited matching contributions. A matching
contribution that is forfeited because the contribution to which it
relates is treated as an excess contribution, excess deferral, excess
aggregate contribution, or default elective contribution that is
distributed under section 414(w), is not taken into account for purposes
of this section.
(vi) Additional employee contributions or matching contributions
pursuant to section 414(u). Additional employee contributions and
matching contributions made by reason of an eligible employee's
qualified military service under section 414(u) are not taken into
account under paragraph (a)(4) of this section for the plan year for
which the contributions are made, or for any other plan year.
(6) Qualified nonelective contributions and elective contributions
that may be taken into account under the ACP test. Qualified nonelective
contributions and elective contributions may be taken into account in
determining the ACR for an eligible employee for a plan year or
applicable year, but only to the extent the contributions satisfy the
following requirements--
(i) Timing of allocation. The qualified nonelective contribution is
allocated to the employee's account as of a date within that year
(within the meaning of Sec. 1.401(k)-2(a)(4)(i)(A)) and the elective
contribution satisfies Sec. 1.401(k)-2(a)(4)(i). Consequently, under
the prior year testing method, in order to be taken into account in
calculating the ACP for the group of eligible NHCEs for the applicable
year, a qualified nonelective contribution must be contributed no later
than the end of the 12-month period following the applicable year even
though the applicable year is different than the plan year being tested.
(ii) Elective contributions taken into account under the ACP test.
Elective contributions may be taken into account for the ACP test only
if the cash or deferred arrangement under which the elective
contributions are made is required to satisfy the ADP test in Sec.
1.401(k)-2(a)(1) and, then only to the extent that the cash or deferred
arrangement would satisfy that test, including such elective
contributions in the ADP for the plan year or applicable year. Thus, for
example, elective deferrals made pursuant to a salary reduction
agreement under an annuity described in section 403(b) are not permitted
to be taken into account in an ACP test. Similarly, elective
contributions under a cash or deferred arrangement that is using the
section 401(k) safe harbor described in Sec. 1.401(k)-3 cannot be taken
into account in an ACP test. In addition, for plan years ending on or
after November 8, 2007, elective contributions which are not permitted
to be taken into account for the ADP test for the plan year under Sec.
1.401(k)-2(a)(5)(ii), (iii), (v), or (vi) are not permitted to be taken
into account for the ACP test.
(iii) Requirement that amount satisfy section 401(a)(4). The amount
of nonelective contributions, including those qualified nonelective
contributions taken into account under this paragraph (a)(6) and those
qualified nonelective contributions taken into account for the ADP test
under paragraph Sec. 1.401(k)-2(a)(6), and the amount of nonelective
contributions, excluding those qualified nonelective contributions taken
into account under this paragraph (a)(6) for the ACP test and those
qualified nonelective contributions taken into account for the ADP test
under paragraph Sec. 1.401(k)-2(a)(6), satisfies the requirements of
section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2). In the case of an
employer that is applying the special rule for employer-wide plans in
Sec. 1.414(r)-1(c)(2)(ii) with respect to the plan, the determination
of whether the qualified nonelective contributions satisfy the
requirements of this paragraph (a)(6)(iii) must be made on an employer-
wide basis regardless of
[[Page 412]]
whether the plans to which the qualified nonelective contributions are
made are satisfying the requirements of section 410(b) on an employer-
wide basis. Conversely, in the case of an employer that is treated as
operating qualified separate lines of business, and does not apply the
special rule for employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) with
respect to the plan, then the determination of whether the
qualifiednonelective contributions satisfy the requirements of this
paragraph (a)(6)(iii) is not permitted to be made on an employer-wide
basis regardless of whether the plans to which the qualified nonelective
contributions are made are satisfying the requirements of section 410(b)
on that basis.
(iv) Aggregation must be permitted. The plan that provides for
employee or matching contributions and the plan or plans to which the
qualified nonelective contributions or elective contributions are made
are plans that would be permitted to be aggregated under Sec. 1.401(m)-
1(b)(4). If the plan year of the plan that provides for employee or
matching contributions is changed to satisfy the requirement under Sec.
1.410(b)-7(d)(5) that aggregated plans have the same plan year,
qualified nonelective contributions and elective contributions may be
taken into account in the resulting short plan year only if such
qualified nonelective and elective contributions could have been taken
into account under an ADP test for a plan with that same short plan
year.
(v) Disproportionate contributions not taken into account--(A)
General rule. Qualified nonelective contributions cannot be taken into
account for an applicable year for an NHCE to the extent such
contributions exceed the product of that NHCE's compensation and the
greater of 5% and 2 times the plan's representative contribution rate.
Any qualified nonelective contribution taken into account in an ADP test
under Sec. 1.401(k)-2(a)(6) (including the determination of the
representative contribution rate for purposes of Sec. 1.401(k)-
2(a)(6)(iv)(B)) is not permitted to be taken into account for purposes
of this paragraph (a)(6) (including the determination of the
representative contribution rate for purposes of paragraph (a)(6)(v)(B)
of this section).
(B) Definition of representative contribution rate. For purposes of
this paragraph (a)(6)(v), the plan's representative contribution rate is
the lowest applicable contribution rate of any eligible NHCE among a
group of eligible NHCEs that consists of half of all eligible NHCEs for
the plan year (or, if greater, the lowest applicable contribution rate
of any eligible NHCE in the group of all eligible NHCEs for the
applicable year and who is employed by the employer on the last day of
the applicable year).
(C) Definition of applicable contribution rate. For purposes of this
paragraph (a)(6)(v), the applicable contribution rate for an eligible
NHCE is the sum of the matching contributions taken into account under
this section for the employee for the plan year and the qualified
nonelective contributions made for that employee for the plan year,
divided by that employee's compensation for the same period.
(D) Special rule for prevailing wage contributions. Notwithstanding
paragraph (a)(6)(v)(A) of this section, qualified nonelective
contributions that are made in connection with an employer's obligation
to pay prevailing wages under the Davis-Bacon Act (46 Stat. 1494), Pub.
L. 71-798, Service Contract Act of 1965 (79 Stat. 1965), Pub. L. 89-286,
or similar legislation can be taken into account for a plan year for an
NHCE to the extent such contributions do not exceed 10 percent of that
NHCE's compensation.
(vi) Contribution only used once. Qualified nonelective
contributions cannot be taken into account under this paragraph (a)(6)
to the extent such contributions are taken into account for purposes of
satisfying any other ACP test, any ADP test, or the requirements of
Sec. 1.401(k)-3, 1.401(m)-3 or 1.401(k)-4. Thus, for example, qualified
nonelective contributions that are made pursuant to Sec. 1.401(k)-3(b)
cannot be taken into account under the ACP test. Similarly, if a plan
switches from the current year testing method to the prior year testing
method pursuant to Sec. 1.401(m)-2(c)(1), qualified nonelective
contributions that are taken into account under the current year testing
method for a plan year may not be taken into account under the prior
[[Page 413]]
year testing method for the next plan year.
(7) Examples. The following examples illustrate the application of
this paragraph (a). See Sec. 1.401(k)-2(a)(6) for additional examples
of the parallel rules under section 401(k)(3)(A). The examples are as
follows:
Example 1. (i) Employer L maintains Plan U, a profit-sharing plan
under which $.50 matching contributions are made for each dollar of
employee contributions. Plan U uses the current year testing method. The
chart below shows the average employee contributions (as a percentage of
compensation) and matching contributions (as a percentage of
compensation) for Plan U's HCEs and NHCEs for the 2006 plan year:
----------------------------------------------------------------------------------------------------------------
Employee Matching
contributions contributions Actual contribution
(percentage) (percentage) (percentage)
----------------------------------------------------------------------------------------------------------------
Highly compensated employees...................... 4 2 6
Nonhighly compensated employees................... 3 1.5 4.5
----------------------------------------------------------------------------------------------------------------
(ii) The matching rate for all NHCEs is 50% and thus the matching
contributions are not disproportionate under paragraph (a)(5)(ii) of
this section. Accordingly, they are taken into account in determining
the ACR of eligible employees.
(iii) Because the ACP for the HCEs (6.0%) exceeds 5.63% (4.5%x1.25),
Plan U does not satisfy the ACP test under paragraph (a)(1)(i)(A) of
this section. However, because the ACP for the HCEs does not exceed the
ACP for the NHCEs by more than 2 percentage points and the ACP for the
HCEs does not exceed the ACP for the NHCEs multiplied by 2 (4.5%x2 =
9%), the plan satisfies the ACP test under paragraph (a)(1)(i)(B) of
this section.
Example 2. (i) Employees A through F are eligible employees in Plan
V, a profit-sharing plan of Employer M that includes a cash or deferred
arrangement and permits employee contributions. Under Plan V, a $.50
matching contribution is made for each dollar of elective contributions
and employee contributions. Plan V uses the current year testing method
and does not provide for elective contributions to be taken into account
in determining an eligible employee's ACR. For the 2006 plan year,
Employees A and B are HCEs and the remaining employees are NHCEs. The
compensation, elective contributions, employee contributions, and
matching contributions for the 2006 plan year are shown in the following
table:
----------------------------------------------------------------------------------------------------------------
Elective Employee Matching
Employee Compensation contributions contributions contributions
----------------------------------------------------------------------------------------------------------------
A....................................... $190,000 $15,000 $3,500 $9,250
B....................................... 100,000 5,000 10,000 7,500
C....................................... 85,000 12,000 0 6,000
D....................................... 70,000 9,500 0 4,750
E....................................... 40,000 10,000 0 5,000
F....................................... 10,000 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) The matching rate for all NHCEs is 50% and thus the matching
contributions are not disproportionate under paragraph (a)(5)(ii) of
this section. Accordingly, they are taken into account in determining
the ACR of eligible employees, as shown in the following table:
----------------------------------------------------------------------------------------------------------------
Employee Matching
Employee Compensation contributions contributions ACR (percent)
----------------------------------------------------------------------------------------------------------------
A.................................... $190,000 $3,500 $9,250 6.71
B.................................... 100,000 10,000 7,500 17.50
C.................................... 85,000 0 6,000 7.06
D.................................... 70,000 0 4,750 6.79
E.................................... 40,000 0 5,000 12.50
F.................................... 10,000 0 0 0
----------------------------------------------------------------------------------------------------------------
(iii) The ACP for the HCEs is 12.11% ((6.71% + 17.50%)/2). The ACP
for the NHCEs is 6.59% ((7.06% + 6.79% + 12.50% + 0.%)/4). Plan V fails
to satisfy the ACP test under paragraph (a)(1)(i)(A) of this section
because the ACP of HCEs is more than 125% of the ACP of the NHCEs
(6.59%x1.25=8.24%). In addition, Plan
[[Page 414]]
V fails to satisfy the ACP test under paragraph (a)(1)(i)(B) of this
section because the ACP for the HCEs exceeds the ACP of the other
employees by more than 2 percentage points (6.59% + 2% = 8.59%).
Therefore, the plan fails to satisfy the requirements of section
401(m)(2) and paragraph (a)(1) of this section unless the ACP failure is
corrected under paragraph (b) of this section.
Example 3. (i) The facts are the same as Example 2, except that the
plan provides that the NHCEs' elective contributions may be used to meet
the requirements of section 401(m) to the extent needed under that
section.
(ii) Pursuant to paragraph (a)(6)(ii) of this section, the $10,000
of elective contributions for Employee E may be taken into account in
determining the ACP rather than the ADP to the extent that the plan
satisfies the requirements of Sec. 1.401(k)-2(a)(1) excluding from the
ADP this $10,000. In this case, if the $10,000 were excluded from the
ADP for the NHCEs, the ADP for the HCEs is 6.45% (7.89% + 5.00%) /2 and
the ADP for the NHCEs would be 6.92% (14.12% + 13.57% + 0% +0%)/4) and
the plan would satisfy the requirements of Sec. 1.401(k)-2(a)(1)
excluding from the ADP the elective contributions for NHCEs that are
taken into account under section 401(m).
(iii) After taking into account the $10,000 of elective
contributions for Employee E in the ACP test, the ACP for the NHCEs is
12.84% (7.06% + 6.79% + 37.50 % + 0%) /4. Therefore the plan satisfies
the ACP test because the ACP for the HCEs (12.11%) is less than 1.25
times the ACP for the NHCEs.
Example 4. (i) The facts are the same as Example 2, except that Plan
V provides for a higher than 50% match rate on the elective
contributions and employee contributions for all NHCEs. The match rate
is defined as the rate, rounded up to the next whole percent, necessary
to allow the plan to satisfy the ACP test, but not in excess of 100%. In
this case, an increase in the match rate from 50% to 74% will be
sufficient to allow the plan to satisfy the ACP test. Thus, for the 2006
plan year, the compensation, elective contributions, employee
contributions, matching contributions at a 74% match rate of the
eligible NHCEs (employees C through F) are shown in the following table:
----------------------------------------------------------------------------------------------------------------
Elective Employee Matching
Employee Compensation contributions contributions contributions
----------------------------------------------------------------------------------------------------------------
C....................................... $85,000 $12,000 $0 $8,880
D....................................... 70,000 9,500 0 7,030
E....................................... 40,000 10,000 0 7,400
F....................................... 10,000 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) The matching rate for all NHCEs is 74% and thus the matching
contributions are not disproportionate under paragraph (a)(5)(ii) of
this section. Therefore, the matching contributions may be taken into
account in determining the ACP for the NHCEs.
(iii) The ACP for the NHCEs is 9.75% (10.45% + 10.04% + 18.50% +
0%)/4. Because the ACP for the HCEs (12.11%) is less than 1.25 times the
ACP for the NHCEs, the plan satisfies the requirements of section
401(m).
Example 5. (i) The facts are the same as Example 4, except that:
Employee E's elective contributions are $2,000 (rather than $10,000) and
pursuant to paragraph (a)(6)(ii) of this section, the $2,000 of elective
contributions for Employee E are taken into account in determining the
ACP rather than the ADP. In addition, Plan V provides that the higher
match rate is not limited to 100% and applies only for a specified group
of NHCEs. The only member of that group is Employee E. Under the plan
provision, the higher match rate is a 400% match. Thus, for the 2006
plan year, the compensation, elective contributions, employee
contributions, matching contributions of the eligible NHCEs (employees C
through F) are shown in the following table:
----------------------------------------------------------------------------------------------------------------
Elective Employee Matching
Employee Compensation contributions contributions contributions
----------------------------------------------------------------------------------------------------------------
C....................................... $85,000 $12,000 $0 $6,000
D....................................... 70,000 9,500 0 4,750
E....................................... 40,000 2,000 0 8,000
F....................................... 10,000 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) If the entire matching contribution made on behalf of Employee
E were taken into account under the ACP test, Plan V would satisfy the
test, because the ACP for the NHCEs would be 9.71% (7.06% + 6.79% +
25.00% + 0%)/4. Because the ACP for the HCEs (12.11%) is less than 1.25
times what the ACP for the NHCEs would be, the plan would satisfy the
requirements of section 401(m).
[[Page 415]]
(iii) Pursuant to paragraph (a)(5)(ii) of this section, however,
matching contributions for an eligible NHCE that exceed the greatest of
5% of compensation, the employee's elective deferrals and 2 times the
product of the plan's representative matching rate and the employee's
elective deferrals cannot be taken into account in applying the ACP
test. The plan's representative matching rate is the lowest matching
rate for any eligible employee in a group of NHCEs that is at least half
of all eligible employees who are NHCEs in the plan for the plan year
who make elective contributions for the plan year. For Plan V, the group
of NHCEs who make such contributions consists of Employees C, D and E.
The matching rates for these three employees are 50%, 50% and 400%
respectively. The lowest matching rate for a group of NHCEs that is at
least half of all the NHCEs who make elective contributions (or 2 NHCEs)
is 50%. Because 400% is more than twice the plan's representative
matching rate and the matching contributions exceed 5% of compensation,
the full amount of matching contributions is not taken into account.
Only $2,000 of the matching contributions made on behalf of Employee E
(matching contributions that do not exceed the greatest of 5% of
compensation, the employee's elective deferrals, or the product of 100%
(2 times the representative matching rate) and the employee's elective
deferrals) satisfy the requirements of paragraph (a)(5)(ii) of this
section and may be taken into account under the ACP test. Accordingly,
the ACP for the NHCEs is 5.96% (7.06% + 6.79% + 10% + 0%)/4 and the plan
fails to satisfy the requirements of section 401(m)(2) and paragraph
(a)(1) of this section unless the ACP failure is corrected under
paragraph (b) of this section.
Example 6. (i) The facts are the same as Example 2, except that Plan
V provides a QNEC equal to 13% of pay for Employee F that will be taken
into account under the ACP test to the extent the contributions satisfy
the requirements of paragraph (a)(6) of this section.
(ii) Pursuant to paragraph (a)(6)(v) of this section, a QNEC cannot
be taken into account in determining an NHCE's ACR to the extent it
exceeds the greater of 5% and the product of the employee's compensation
and the plan's representative contribution rate. The plan's
representative contribution rate is two times the lowest applicable
contribution rate for any eligible employee in a group of NHCEs that is
at least half of all eligible employees who are NHCEs in the plan for
the plan year. For Plan V, the applicable contribution rates for
Employees C, D, E and F are 7.06%, 6.79%, 12.5% and 13% respectively.
The lowest applicable contribution rate for a group of NHCEs that is at
least half of all the NHCEs is 12.50% (the lowest applicable
contribution rate for the group of NHCEs that consists of Employees E
and F).
(iii) Under paragraph (a)(6)(v)(B) of this section, the plan's
representative contribution rate is 2 times 12.50% or 25.00%.
Accordingly, the QNECs for Employee F can be taken into account under
the ACP test only to the extent they do not exceed 25.00% of
compensation. In this case, all of the QNECs for Employee F may be taken
into account under the ACP test.
(iv) After taking into account the QNECs for Employee F, the ACP for
the NHCEs is 9.84% (7.06% + 6.79% + 12.50% + 13%)/4. Because the ACP for
the HCEs (12.11%) is less than 1.25 times the ACP for the NHCEs, the
plan satisfies the requirements of section 401(m)(2) and paragraph
(a)(1) of this section.
(b) Correction of excess aggregate contributions--(1) Permissible
correction methods--(i) In general. A plan that provides for employee
contributions or matching contributions does not fail to satisfy the
requirements of section 401(m)(2) and paragraph (a)(1) of this section
if the employer, in accordance with the terms of the plan, uses either
of the following correction methods--
(A) Additional contributions. The employer makes additional
contributions that are taken into account for the ACP test under this
section that, in combination with the other contributions taken into
account under this section, allow the plan to satisfy the requirements
of paragraph (a)(1) of this section.
(B) Excess aggregate contributions distributed or forfeited. Excess
aggregate contributions are distributed or forfeited in accordance with
paragraph (b)(2) of this section.
(ii) Combination of correction methods. A plan may provide for the
use of either of the correction methods described in paragraph (b)(1)(i)
of this section, may limit employee contributions or matching
contributions in a manner that prevents excess aggregate contributions
from being made, or may use a combination of these methods, to avoid or
correct excess aggregate contributions. If a plan uses a combination of
correction methods, any contributions made under paragraph (b)(1)(i)(A)
of this section must be taken into account before application of the
correction method in paragraph (b)(1)(i)(B) of this section.
(iii) Exclusive means of correction. A failure to satisfy the
requirements of
[[Page 416]]
paragraph (a)(1) of this section may not be corrected using any method
other than one described in paragraph (b)(1)(i) or (ii) of this section.
Thus, excess aggregate contributions for a plan year may not be
corrected by forfeiting vested matching contributions, distributing
nonvested matching contributions, recharacterizing matching
contributions, or not making matching contributions required under the
terms of the plan. Similarly, 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).
(2) Correction through distribution--(i) General rule. This
paragraph (b)(2) contains the rules for correction of excess aggregate
contributions through a distribution from the plan. Correction through a
distribution generally involves a 4-step process. First, the plan must
determine, in accordance with paragraph (b)(2)(ii) of this section, the
total amount of excess aggregate contributions that must be distributed
under the plan. Second, the plan must apportion the total amount of
excess aggregate contributions among the HCEs in accordance with
paragraph (b)(2)(iii) of this section. Third, the plan must determine
the income allocable to excess aggregate contributions in accordance
with paragraph (b)(2)(iv) of this section. Finally, the plan must
distribute the apportioned contributions, together with allocable income
(or forfeit the apportioned matching contributions, if forfeitable) in
accordance with paragraph (b)(2)(v) of this section. Paragraph
(b)(2)(vi) of this section provides rules relating to the tax treatment
of these distributions.
(ii) Calculation of total amount to be distributed. The following
procedures must be used to determine the total amount of the excess
aggregate contributions to be distributed--
(A) Calculate the dollar amount of excess aggregate contributions
for each HCE. The amount of excess aggregate contributions attributable
to an HCE for a plan year is the amount (if any) by which the HCE's
contributions taken into account under this section must be reduced for
the HCE's ACR to equal the highest permitted ACR under the plan. To
calculate the highest permitted ACR under a plan, the ACR of the HCE
with the highest ACR is reduced by the amount required to cause that
HCE's ACR to equal the ACR of the HCE with the next highest ACR. If a
lesser reduction would enable the plan to satisfy the requirements of
paragraph (b)(2)(ii)(C) of this section, only this lesser reduction
applies.
(B) Determination of the total amount of excess aggregate
contributions. The process described in paragraph (b)(2)(ii)(A) of this
section must be repeated until the plan would satisfy the requirements
of paragraph (b)(2)(ii)(C) of this section. The sum of all reductions
for all HCEs determined under paragraph (b)(2)(ii)(A) of this section is
the total amount of excess aggregate contributions for the plan year.
(C) Satisfaction of ACP. A plan satisfies this paragraph
(b)(2)(ii)(C) if the plan would satisfy the requirements of paragraph
(a)(1)(i) of this section if the ACR for each HCE were determined after
the reductions described in paragraph (b)(2)(ii)(A) of this section.
(iii) Apportionment of total amount of excess aggregate
contributions among the HCEs. The following procedures must be used in
apportioning the total amount of excess aggregate contributions
determined under paragraph (b)(2)(ii) of this section among the HCEs--
(A) Calculate the dollar amount of excess aggregate contributions
for each HCE. The contributions with respect to the HCE with the highest
dollar amount of contributions taken account under this section are
reduced by the amount required to cause that HCE's contributions to
equal the dollar amount of contributions taken into account under this
section for the HCE with the next highest dollar amount of such
contributions. If a lesser apportionment to the HCE would enable the
plan to apportion the total amount of excess aggregate contributions,
only the lesser apportionment would apply.
(B) Limit on amount apportioned to any HCE. For purposes of this
paragraph (b)(2)(iii), the contributions for an HCE
[[Page 417]]
who is an eligible employee in more than one plan of an employer to
which matching contributions and employee contributions are made is
determined by adding together all contributions otherwise taken into
account in determining the ACR of the HCE under the rules of paragraph
(a)(3)(ii) of this section. However, the amount of contributions
apportioned with respect to an HCE must not exceed the amount of
contributions taken into account under this section that were actually
made on behalf of the HCE to the plan for the plan year. Thus, in the
case of an HCE who is an eligible employee in more than one plan of the
same employer to which employee contributions or matching contributions
are made and whose ACR is calculated in accordance with paragraph
(a)(3)(ii) of this section, the amount distributed under this paragraph
(b)(2)(iii) will not exceed such contributions actually contributed to
the plan for the plan year that are taken into account under this
section for the plan year.
(C) Apportionment to additional HCEs. The procedure in paragraph
(b)(2)(iii)(A) of this section must be repeated until the total amount
of excess aggregate contributions have been apportioned.
(iv) Income allocable to excess aggregate contributions--(A) General
rule. For plan years beginning on or after January 1, 2008, the income
allocable to excess aggregate contributions is equal to the allocable
gain or loss through the end of the plan year. See paragraph
(b)(2)(iv)(D) of this section for rules that apply to plan years
beginning before January 1, 2008.
(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). A plan will not fail to use a reasonable method for
computing the income allocable to excess contributions merely because
the income allocable to excess aggregate contributions is determined on
a date that is no more than 7 days before the distribution.
(C) Alternative method of allocating income for the plan year. A
plan may allocate income to excess aggregate contributions for the plan
year by multiplying the income for the plan year allocable to employee
contributions, matching contributions and other amounts taken into
account under this section (including the contributions for the year),
by a fraction, the numerator of which is the excess aggregate
contributions for the employee for the plan year, and the denominator of
which is the sum of the--
(1) Account balance attributable to employee contributions and
matching contributions and other amounts taken into account under this
section as of the beginning of the plan year; and
(2) Any additional such contributions for the plan year.
(D) Plan years before 2008. For plan years beginning before January
1, 2008, the income allocable to excess aggregate contributions is
determined under Sec. 1.401(m)-2(b)(2)(iv) (as it appeared in the April
1, 2007, edition of 26 CFR part 1).
(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)-2(b)(2)(iv).
(v) Distribution and forfeiture. Within 12 months after the close of
the plan year in which the excess aggregate contribution arose, the plan
must distribute to each HCE the contributions apportioned to such HCE
under paragraph (b)(2)(iii) of this section (and the allocable income)
to the extent they are vested or forfeit such amounts, if forfeitable.
Except as otherwise provided in this paragraph (b)(2)(v), a distribution
of excess aggregate contributions must be in addition to any other
distributions made during the year and must be designated as a
corrective distribution by the employer. In the event of a complete
termination of the plan
[[Page 418]]
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 an HCE is distributed prior to when the plan makes a
distribution of excess aggregate contributions in accordance with this
paragraph (b)(2), 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.
(vi) Tax treatment of corrective distributions--(A) Corrective
distributions for plan years beginning on or after January 1, 2008.
Except as otherwise provided in this paragraph (b)(2)(vi), for plan
years beginning on or after January 1, 2008, a corrective distribution
of excess aggregate contributions (and allocable income) 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 and is therefore not subject to tax 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). See paragraph (b)(4) of this section
for additional rules relating to the employer excise tax on amounts
distributed more than 2\1/2\ months (6 months in the case of certain
plans that include an eligible automatic contribution arrangement within
the meaning of section 414(w)) after the end of the plan year. See also
Sec. 1.402(c)-2, A-4, prohibiting rollover of distributions that are
excess aggregate contributions.
(B) Corrective distributions for plan years beginning before January
1, 2008. The tax treatment of corrective distributions for plan years
beginning before January 1, 2008, is determined under Sec. 1.401(m)-
2(b)(2)(vi) (as it appeared in the April 1, 2007, edition of 26 CFR Part
1). If the total amount of excess aggregate contributions determined
under this paragraph (b)(2), and excess contributions determined under
Sec. 1.401(k)-2(b)(2) distributed to a recipient under a plan for any
plan year is 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, except to the extent the corrective
distribution is a return of employee contributions, or as provided in
paragraph (b)(2)(vi)(C) of this section.
(C) Corrective distributions attributable to designated Roth
contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this
section, a distribution of excess aggregate contributions is not
includible in gross income to the extent it represents a distribution of
designated Roth contributions. However, the income allocable to a
corrective distribution of excess aggregate contributions that are
designated Roth contributions is taxed in accordance with paragraph
(b)(2)(vi)(A) or (B) of this section (i.e., in the same manner as income
allocable to a corrective distribution of excess aggregate contributions
that are not designated Roth contributions).
(3) Other rules--(i) 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.
(ii) Treatment of corrective distributions and forfeited
contributions as employer contributions. Excess aggregate contributions
(other than amounts attributable to employee 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 annual additions for the participants to
whose accounts they are reallocated and for the participants from whose
accounts they are forfeited.
[[Page 419]]
(iii) 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). See Sec.
1.401(a)(9)-5, A-9(b).
(iv) Partial correction. Any distribution of less than the entire
amount of excess aggregate contributions (and allocable income) is
treated as a pro rata distribution of excess aggregate contributions and
allocable income.
(v) Matching contributions on excess contributions, excess deferrals
and excess aggregate contributions--(A) Corrective distributions not
permitted. 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.
(B) Coordination with section 401(a)(4). A matching contribution is
taken into account under section 401(a)(4) even if the match is
distributed, unless the distributed contribution is an excess aggregate
contribution. This requires that, after correction of excess aggregate
contributions, 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 (b) to HCEs to the extent needed to
meet the requirements of section 401(m)(2), while matching contributions
attributable to employee contributions remain allocated to the HCEs'
accounts. This is because the level of matching contributions will be
higher for a group of employees that consists entirely of HCEs. Under
section 411(a)(3)(G) and Sec. 1.411(a)-4(b)(7), a plan may forfeit
matching contributions attributable to excess contributions, excess
aggregate contributions and excess deferrals 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 NHCEs for the
purpose of correcting a discriminatory rate of matching contributions. A
plan is permitted to provide for which contributions are to be
distributed to satisfy the ACP test so as to avoid discriminatory
matching rates that would otherwise violate section 401(a)(4). For
example, the plan may provide that unmatched employee contributions will
be distributed before matched employee contributions.
(vi) No requirement for recalculation. If the distributions and
forfeitures described in paragraph (b)(2) of this section are made, the
employee contributions and matching contributions are treated as meeting
the nondiscrimination test of section 401(m)(2) regardless of whether
the ACP for the HCEs, if recalculated after the distributions and
forfeitures, would satisfy section 401(m)(2).
(4) Failure to timely 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% excise tax on the amount of the excess
aggregate contributions. See section 4979 and Sec. 54.4979-1 of this
chapter. Qualified nonelective contributions properly taken into account
under paragraph (a)(6) 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
trust.
(iii) Special rule for eligible automatic contribution arrangements.
In the case of excess aggregate contributions under a plan that includes
an eligible automatic contribution arrangement (within the meaning of
section 414(w)), 6 months is substituted for 2\1/2\ months in paragraph
(b)(4)(i) of this section. The
[[Page 420]]
additional time described in this paragraph (b)(4)(iii) applies to a
distribution of excess aggregate contributions for a plan year beginning
on or after January 1, 2010 only where all the eligible NHCEs and
eligible HCEs are covered employees under the eligible automatic
contribution arrangement (within the meaning of Sec. 1.414(w)-1(e)(3))
for the entire plan year (or for the portion of the plan year that the
eligible NHCEs and eligible HCEs are eligible employees).
(5) Examples. The following examples illustrate the application of
this paragraph. See also Sec. 1.401(k)-2(b) for additional examples of
the parallel correction rules applicable to cash or deferred
arrangements. For purposes of these examples, none of the plans provide
for catch-up contributions under section 414(v). The examples are as
follows:
Example 1. (i) Employer L maintains a plan that provides for
employee contributions and fully vested matching contributions. The plan
provides that failures of the ACP test are corrected by distribution. In
2006, the ACP for the eligible NHCEs is 6%. Thus, the ACP for the
eligible HCEs may not exceed 8%. The three HCEs who participate have the
following compensation, contributions, and ACRs:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employee contributions and
Employee Compensation matching contributions Actual contribution ratio (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
A............................................. 200,000 14,000 7
B............................................. 150,000 13,500 9
C............................................. 100,000 12,000 12
.......................... .......................... Average 9.33
--------------------------------------------------------------------------------------------------------------------------------------------------------
(ii) The total amount of excess aggregate contributions for the HCEs
is determined under paragraph (b)(2)(ii) of this section as follows: the
matching and employee contributions of Employee C (the HCE with the
highest ACR) is reduced by 3% of compensation (or $3,000) in order to
reduce the ACR of that HCE to 9%, which is the ACR of Employee B.
(iii) Because the ACP of the HCEs determined after the $3,000
reduction still exceeds 8%, further reductions in matching contributions
and employee contributions are necessary in order to reduce the ACP of
the HCEs to 8%. The employee contributions and matching contributions
for Employees B and C are reduced by an additional .5% of compensation
or $1,250 ($750 and $500 respectively). Because the ACP of the HCEs
determined after the reductions now equals 8%, the plan would satisfy
the requirements of (a)(1)(ii) of this section.
(iv) The total amount of excess aggregate contributions ($4,250) is
apportioned among the HCEs under paragraph (b)(2)(iii) of this section
first to the HCE with the highest amount of matching contributions and
employee contributions. Therefore, Employee A is apportioned $500 (the
amount required to cause A's matching contributions and employee
contributions to equal the next highest dollar amount of matching
contributions and employee contributions).
(v) Because the total amount of excess aggregate contributions has
not been apportioned, further apportionment is necessary. The balance
($3,750) of the total amount of excess aggregate contributions is
apportioned equally among Employees A and B ($1,500 to each, the amount
required to cause their contributions to equal the next highest dollar
amount of matching contributions and employee contributions).
(vi) Because the total amount of excess aggregate contributions has
not been apportioned, further apportionment is necessary. The balance
($750) of the total amount of excess aggregate contributions is
apportioned equally among Employees A, B and C ($250 to each, the amount
required to allocate the total amount of excess aggregate contributions
for the plan).
(vii) Therefore, the plan will satisfy the requirements of paragraph
(a)(1) of this section if, by the end of the 12 month period following
the end of the 2006 plan year, Employee A receives a corrective
distribution of excess aggregate contributions equal to $2,250 ($500 +
$1,500 + $250) and allocable income, Employee B receives a corrective
distribution of $250 and allocable income and Employee C receives a
corrective distribution of $1,750 ($1,500 + $250) and allocable income.
Example 2. (i) Employee D is the sole HCE who is eligible to
participate in a cash or deferred arrangement maintained by Employer M.
The plan that includes the arrangement, Plan X, permits employee
contributions and provides a fully vested matching contribution equal to
50% of elective contributions. Plan X is a calendar year plan. Plan X
corrects excess contributions by recharacterization and provides that
failures of the ACP test are corrected by distribution. For the 2006
plan year, D's compensation is $200,000,
[[Page 421]]
and D's elective contributions are $15,000. The actual deferral
percentages and actual contribution percentages for Employee D and the
other eligible employees under Plan X are shown in the following table:
------------------------------------------------------------------------
Actual
Actual deferral contribution
percentage percentage
------------------------------------------------------------------------
Employee D......................... 7.5 3.75
NHCEs.............................. 4 2
------------------------------------------------------------------------
(ii) In February 2007, Employer M determines that D's actual
deferral ratio must be reduced to 6%, or $12,000, which requires a
recharacterization of $3,000 as an employee contribution. This increases
D's actual contribution ratio to 5.25% ($7,500 in matching contributions
plus $3,000 recharacterized as employee contributions, divided by
$200,000 in compensation). Since D's actual contribution ratio must be
limited to 4% for Plan X to satisfy the actual contribution percentage
test, Plan X must distribute 1.25% or $2,500 of D's employee
contributions and matching contributions together with allocable income.
If $2,500 in matching contributions and allocable income 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. (i) The facts are the same as in Example 2, except that
Employee D also had elective contributions under Plan Y, maintained by
an employer unrelated to M. In January 2007, D requests and receives a
distribution of $1,200 in excess deferrals from Plan X. Pursuant to the
terms of Plan X, D forfeits the $600 match on the excess deferrals to
correct a discriminatory rate of match.
(ii) The $3,000 that would otherwise have been recharacterized for
Plan X to satisfy the actual deferral percentage test is reduced by the
$1,200 already distributed as an excess deferral, leaving $1,800 to be
recharacterized. See Sec. 1.401(k)-2(b)(4)(i)(A). D's actual
contribution ratio is now 4.35% ($7,500 in matching contributions plus
$1,800 in recharacterized contributions less $600 forfeited matching
contributions attributable to the excess deferrals, divided by $200,000
in compensation).
(iii) The matching and employee contributions for Employee D must be
reduced by .35% of compensation in order to reduce the ACP of the HCEs
to 4%. The plan must provide for forfeiture of additional matching
contributions to prevent a discriminatory rate of matching
contributions. See Example 8.
Example 4. (i) The facts are the same as in Example 3, except that D
does not request a distribution of excess deferrals until March 2007.
Employer X has already recharacterized $3,000 as employee contributions.
(ii) 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. (i) For the 2006 plan year, Employee F defers $10,000
under Plan M and $6,000 under Plan N. Plans M and N, which have calendar
plan years are maintained by unrelated employers. Plan M provides a
fully vested, 100% matching contribution, does not take elective
contributions into account under section 401(m) or take matching
contributions into account under section 401(k) and provides that excess
contributions and excess aggregate contributions are corrected by
distribution. Under Plan M, Employee F is allocated excess contributions
of $600 and excess aggregate contributions of $1,600. Employee F timely
requests and receives a distribution of the $1,000 excess deferral from
Plan M and, pursuant to the terms of Plan M, forfeits the corresponding
$1,000 matching contribution.
(ii) No distribution is required or permitted to correct the excess
contributions because $1,000 has been distributed by Plan M 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 Employee F had corrected the excess
deferrals of $1,000 by withdrawing $1,000 from Plan N, Plan M would have
had to correct the $600 excess contributions in Plan M by distributing
$600. Since Employee F then would have forfeited $600 (instead of
$1,000) in matching contributions, Employee F would have had $1,000
($1,600 in excess aggregate contributions minus $600 in forfeited
matching contributions) remaining of excess aggregate contributions in
Plan M. These would have been corrected by distributing an additional
$1,000 from Plan M.
Example 6. (i) Employee G is the sole HCE in a profit sharing plan
under which the employer matches 100% of employee contributions up to 2%
of compensation, and 50% of employee contributions up to the next 4% of
compensation. For the 2008 plan year, Employee G has compensation of
$100,000 and makes a 7% employee contribution of $7,000. Employee G
receives a 4% matching contribution or $4,000. Thus, Employee G's actual
contribution ratio (ACR) is 11%. The actual contribution percentage for
the NHCEs is 5%, and the employer determines that Employee G's ACR must
be reduced to 7% to comply with the rules of section 401(m).
(ii) In this case, the plan satisfies the requirements of section if
it distributes the unmatched employee contributions of $1,000,
[[Page 422]]
and $2,000 of matched employee contributions with their related matches
of $1,000. This would leave Employee G with 4% employee contributions,
and 3% matching contributions, for an ACR of 7%. Alternatively, the plan
could distribute all matching contributions and satisfy this section.
However, the plan could not distribute $4,000 of Employee G's employee
contributions without forfeiting the related matching contributions
because this would result in a discriminatory rate of matching
contributions. See also Example 7.
Example 7. (i) Employee H is an HCE in Employer X's profit sharing
plan, which matches 100% of employee contributions up to 5% of
compensation. The matching contribution is vested at the rate of 20% per
year. In 2006, Employee H makes $5,000 in employee contributions and
receives $5,000 of matching contributions. Employee H is 60% vested in
the matching contributions at the end of the 2006 plan year. In February
2007, Employer X determines that Employee H has excess aggregate
contributions of $1,000. The plan provides that only matching
contributions will be distributed as excess aggregate contributions.
(ii) Employer X has two options available in distributing Employee
H's excess aggregate 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 Employee H'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.
(iii) 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% must vest in each of the next 2 years.
(iv) The plan will not satisfy the nondiscriminatory availability
requirement of section 401(a)(4) if only nonvested matching
contributions are forfeited because the effect is that matching
contributions for HCEs vest more rapidly than those for NHCEs. See Sec.
1.401(m)-2(b)(3)(v)(B).
Example 8. (i) Employer Y maintains a calendar year profit sharing
plan that includes a cash or deferred arrangement. Elective
contributions are matched at the rate of 100%. After-tax employee
contributions are permitted under the plan only for NHCEs and are
matched at the same rate. No employees make excess deferrals. Employee
J, an HCE, makes an $8,000 elective contribution and receives an $8,000
matching contribution.
(ii) Employer Y performs the actual deferral percentage (ADP) and
the actual contribution percentage (ACP). 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,
Employee J's contributions for the year are $7,000 of elective
contributions and $7,500 of matching contributions. As a result,
Employee J has received a higher effective rate of matching
contributions than NHCEs ($7,000 of elective contributions matched by
$7,500 is an effective matching rate of 107 percent). If this amount
remains in Employee J's account without correction, it will cause the
plan to fail to satisfy section 401(a)(4), because only an HCE 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 NHCEs. See Sec. 1.401(a)(4)-
11(g)(3)(vii)(B) and (6), Example 7.
(c) Additional rules for prior year testing method--(1) Rules for
change in testing method. A plan is permitted to change from the prior
year testing method to the current year testing method for any plan
year. A plan is permitted to change from the current year testing method
to the prior year testing method only in situations described in Sec.
1.401(k)-2(c)(1)(ii). For purposes of this paragraph (c)(1), a plan that
uses the safe harbor method described in Sec. 1.401(m)-3 or a SIMPLE
401(k) plan is treated as using the current year testing method for that
plan year
(2) Calculation of ACP under the prior year testing method for the
first plan year--(i) Plans that are not successor plans. If, for the
first plan year of any plan (other than a successor plan), a plan uses
the prior year testing method, the plan is permitted to use either that
first plan year as the applicable year for determining the ACP for the
eligible NHCEs, or 3% as the ACP for eligible NHCEs, for applying the
ACP test for that first plan year. A plan (other than a successor plan)
that uses the prior year testing method but has elected for its first
plan year to use that year as the applicable year for determining the
ACP for the eligible NHCEs is not treated as changing its testing method
in the second plan year and is not subject to the limitations on double
counting under paragraph
[[Page 423]]
(a)(6)(vi) of this section for the second plan year.
(ii) First plan year defined. For purposes of this paragraph (c)(2),
the first plan year of any plan is the first year in which the plan
provides for employee contributions or matching contributions. Thus, the
rules of this paragraph (c)(2) do not apply to a plan (within the
meaning of Sec. 1.410(b)-7) for a plan year if for such plan year the
plan is aggregated under Sec. 1.401(m)-1(b)(4) with any other plan that
provides for employee or matching contributions in the prior year.
(iii) Plans that are successor plans. A plan is a successor plan if
50% or more of the eligible employees for the first plan year were
eligible employees under another plan maintained by the employer in the
prior year that provides for employee contributions or matching
contributions. If a plan that is a successor plan uses the prior year
testing method for its first plan year, the ACP for the group of NHCEs
for the applicable year must be determined under paragraph (c)(4) of
this section.
(3) Plans using different testing methods for the ACP and ADP test.
Except as otherwise provided in this paragraph (c)(3), a plan may use
the current year testing method or prior year testing method for the ACP
test for a plan year without regard to whether the current year testing
method or prior year testing method is used for the ADP test for that
year. For example, a plan may use the prior year testing method for the
ACP test and the current year testing method for its ADP test for the
plan year. However, plans that use different testing methods under this
paragraph (c)(3) cannot use--
(i) The recharacterization method of Sec. 1.401(k)-2(b)(3) to
correct excess contributions for a plan year;
(ii) The rules of paragraph (a)(6)(ii) of this section to take
elective contributions into account under the ACP test (rather than the
ADP test); or
(iii) The rules of paragraph Sec. 1.401(k)-2(a)(6) to take
qualified matching contributions into account under the ADP test (rather
than the ACP test).
(4) Rules for plan coverage change--(i) In general. A plan that uses
the prior year testing method that experiences a plan coverage change
during a plan year satisfies the requirements of this section for that
year only if the plan provides that the ACP for the NHCEs for the plan
year is the weighted average of the ACPs for the prior year subgroups.
(ii) Optional rule for minor plan coverage changes. If a plan
coverage change occurs and 90% or more of the total number of the NHCEs
from all prior year subgroups are from a single prior year subgroup,
then, in lieu of using the weighted averages described in paragraph
(c)(4)(i) of this section, the plan may provide that the ACP for the
group of eligible NHCEs for the prior year under the plan is the ACP of
the NHCEs for the prior year of the plan under which that single prior
year subgroup was eligible.
(iii) Definitions. The following definitions apply for purposes of
this paragraph (c)(4)--
(A) Plan coverage change. The term plan coverage change means a
change in the group or groups of eligible employees under a plan on
account of--
(1) The establishment or amendment of a plan;
(2) A plan merger or spinoff under section 414(l);
(3) A change in the way plans (within the meaning of Sec. 1.410(b)-
7) are combined or separated for purposes of Sec. 1.401(m)-1(b)(4)
(e.g., permissively aggregating plans not previously aggregated under
Sec. 1.410(b)-7(d), or ceasing to permissively aggregate plans under
Sec. 1.410(b)-7(d));
(4) A reclassification of a substantial group of employees that has
the same effect as amending the plan (e.g., a transfer of a substantial
group of employees from one division to another division); or
(5) A combination of any of paragraphs (c)(4)(iii)(A)(1) through (4)
of this section.
(B) Prior year subgroup. The term prior year subgroup means all
NHCEs for the prior plan year who, in the prior year, were eligible
employees under a specific plan that provides for employee contributions
or matching contributions maintained by the employer and who would have
been eligible employees in the prior year under
[[Page 424]]
the plan being tested if the plan coverage change had first been
effective as of the first day of the prior plan year instead of first
being effective during the plan year. The determination of whether an
NHCE is a member of a prior year subgroup is made without regard to
whether the NHCE terminated employment during the prior year.
(C) Weighted average of the ACPs for the prior year subgroups. The
term weighted average of the ACPs for the prior year subgroups means the
sum, for all prior year subgroups, of the adjusted ACPs for the plan
year. The term adjusted ACP with respect to a prior year subgroup means
the ACP for the prior plan year of the specific plan under which the
members of the prior year subgroup were eligible employees on the first
day of the prior plan year, multiplied by a fraction, the numerator of
which is the number of NHCEs in the prior year subgroup and denominator
of which is the total number of NHCEs in all prior year subgroups.
(iv) Example. The following example illustrate the application of
this paragraph (c)(4). See also Sec. 1.401(k)-2(c)(4) for examples of
the parallel rules applicable to the ADP test. The example is as
follows:
Example. (i) Employer B maintains two plans, Plan N and Plan P, each
of which provides for employee contributions or matching contributions.
The plans were not permissively aggregated under Sec. 1.410(b)-7(d) for
the 2005 testing year. Both plans use the prior year testing method.
Plan N had 300 eligible employees who were NHCEs for 2005, and their ACP
for that year was 6%. Plan P had 100 eligible employees who were NHCEs
for 2005, and the ACP for those NHCEs for that plan was 4%. Plan N and
Plan P are permissively aggregated under Sec. 1.410(b)-7(d) for the
2006 plan year.
(ii) The permissive aggregation of Plan N and Plan P for the 2006
testing year under Sec. 1.410(b)-7(d) is a plan coverage change that
results in treating the plans as one plan (Plan NP). Therefore, the
prior year ACP for the NHCEs under Plan NP for the 2006 testing year is
the weighted average of the ACPs for the prior year subgroups.
(iii) The first step in determining the weighted average of the ACPs
for the prior year subgroups is to identify the prior year subgroups.
With respect to the 2006 testing year, an employee is a member of a
prior year subgroup if the employee was an NHCE of Employer B for the
2005 plan year, was an eligible employee for the 2005 plan year under
any section 401(k) plan maintained by Employer B, and would have been an
eligible employee in the 2005 plan year under Plan NP if Plan N and Plan
P had been permissively aggregated under Sec. 1.410(b)-7(d) for that
plan year. The NHCEs who were eligible employees under separate plans
for the 2005 plan year comprise separate prior year subgroups. Thus,
there are two prior year subgroups under Plan NP for the 2006 testing
year: the 300 NHCEs who were eligible employees under Plan N for the
2005 plan year and the 100 NHCEs who were eligible employees under Plan
P for the 2005 plan year.
(iv) The weighted average of the ACPs for the prior year subgroups
is the sum of the adjusted ACP with respect to the prior year subgroup
that consists of the NHCEs who were eligible employees under Plan N, and
the adjusted ACP with respect to the prior year subgroup that consists
of the NHCEs who were eligible employees under Plan P. The adjusted ACP
for the prior year subgroup that consists of the NHCEs who were eligible
employees under Plan N is 4.5%, calculated as follows: 6% (the ACP for
the NHCEs under Plan N for the prior year) x 300/400 (the number of
NHCEs in that prior year subgroup divided by the total number of NHCEs
in all prior year subgroups), which equals 4.5%. The adjusted ACP for
the prior year subgroup that consists of the NHCEs who were eligible
employees under Plan P is 1%, calculated as follows: 4% (the ACP for the
NHCEs under Plan P for the prior year) x 100/400 (the number of NHCEs in
that prior year subgroup divided by the total number of NHCEs in all
prior year subgroups), which equals 1%. Thus, the prior year ACP for
NHCEs under Plan NP for the 2006 testing year is 5.5% (the sum of
adjusted ACPs for the prior year subgroups, 4.5% plus 1%).
[T.D. 9169, 69 FR 78184, Dec. 29, 2004, as amended by T.D. 9237, 71 FR
10, Jan. 3, 2006; T.D. 9447, 74 FR 8210, Feb. 24, 2009; 74 FR 12551,
Mar. 25, 2009]
Sec. 1.401(m)-3 Safe harbor requirements.
(a) ACP test safe harbor--(1) Section 401(m)(11) safe harbor.
Matching contributions under a plan satisfy the ACP safe harbor
provisions of section 401(m)(11) for a plan year if the plan satisfies
the safe harbor contribution requirement of paragraph (b) or (c) of this
section for the plan year, the limitations on matching contributions of
paragraph (d) of this section, the notice requirement of paragraph (e)
of this section, the plan year requirements of paragraph (f) of this
section, and the additional rules of paragraphs (g), (h) and (j) of this
section, as applicable.
[[Page 425]]
(2) Section 401(m)(12) safe harbor. For a plan year beginning on or
after January 1, 2008, matching contributions under a plan satisfy the
ACP safe harbor provisions of section 401(m)(12) for a plan year if the
matching contributions are made with respect to an automatic
contribution arrangement described in paragraph Sec. 1.401(k)-3(j) that
satisfies the safe harbor requirements of Sec. 1.401(k)-3, the
limitations on matching contributions of paragraph (d) of this section,
the notice requirement of paragraph (e) of this section, the plan year
requirements of paragraph (f) of this section, and the additional rules
of paragraphs (g), (h) and (j) of this section, as applicable.
(3) Requirements applicable to safe harbor contributions. Pursuant
to sections 401(k)(12)(E)(ii) and 401(k)(13)(D)(iv), the safe harbor
contribution requirement of paragraph (b) or (c) of this section and
Sec. 1.401(k)-3(k) must be satisfied without regard to section 401(l).
The contributions made under paragraphs (b) and (c) of this section and
Sec. 1.401(k)-3(k) are referred to as safe harbor nonelective
contributions and safe harbor matching contributions.
(b) Safe harbor nonelective contribution requirement. A plan
satisfies the safe harbor nonelective contribution requirement of this
paragraph (b) if it satisfies the safe harbor nonelective contribution
requirement of Sec. 1.401(k)-3(b).
(c) Safe harbor matching contribution requirement. A plan satisfies
the safe harbor matching contribution requirement of this paragraph (c)
if it satisfies the safe harbor matching contribution requirement of
Sec. 1.401(k)-3(c).
(d) Limitation on contributions--(1) General rule. A plan that
provides for matching contributions meets the requirements of this
section only if it satisfies the limitations on contributions set forth
in this paragraph (d).
(2) Matching rate must not increase. A plan that provides for
matching contributions meets the requirements of this paragraph (d) only
if the ratio of matching contributions on behalf of an employee under
the plan for a plan year to the employee's elective deferrals and
employee contributions, does not increase as the amount of an employee's
elective deferrals and employee contributions increases.
(3) Limit on matching contributions. A plan that provides for
matching contributions satisfies the requirements of this section only
if--
(i) Matching contributions are not made with respect to elective
deferrals or employee contributions that exceed 6% of the employee's
safe harbor compensation (within the meaning of Sec. 1.401(k)-3(b)(2));
and
(ii) Matching contributions that are discretionary do not exceed 4%
of the employee's safe harbor compensation.
(4) Limitation on rate of match. A plan meets the requirements of
this section only if the ratio of matching contributions on behalf of an
HCE to that HCE's elective deferrals or employee contributions (or the
sum of elective deferrals and employee contributions) for that plan year
is no greater than the ratio of matching contributions to elective
deferrals or employee contributions (or the sum of elective deferrals
and employee contributions) that would apply with respect to any NHCE
for whom the elective deferrals or employee contributions (or the sum of
elective deferrals and employee contributions) are the same percentage
of safe harbor compensation. An employee is taken into account for
purposes of this paragraph (d)(4) if the employee is an eligible
employee under the cash or deferred arrangement with respect to which
the contributions required by paragraph (b) or (c) of this section are
being made for a plan year. A plan will not fail to satisfy this
paragraph (d)(4) merely because the plan provides that matching
contributions will be made separately with respect to each payroll
period (or with respect to all payroll periods ending with or within
each month or quarter of a plan year) taken into account under the plan
for the plan year, provided that matching contributions with respect to
any elective deferrals or employee contributions made during a plan year
quarter are contributed to the plan by the last day of the immediately
following plan year quarter.
(5) HCEs participating in multiple plans. The rules of section
401(m)(2)(B)
[[Page 426]]
and Sec. 1.401(m)-2(a)(3)(ii) apply for purposes of determining the
rate of matching contributions under paragraph (d)(4) of this section.
However, a plan will not fail to satisfy the safe harbor matching
contribution requirements of this section merely because an HCE
participates during the plan year in more than one plan that provides
for matching contributions, provided that--
(i) The HCE is not simultaneously an eligible employee under two
plans that provide for matching contributions maintained by an employer
for a plan year; and
(ii) The period used to determine compensation for purposes of
determining matching contributions under each such plan is limited to
periods when the HCE participated in the plan.
(6) Permissible restrictions on elective deferrals by NHCEs--(i)
General rule. A plan does not satisfy the safe harbor requirements of
this section, if elective deferrals or employee contributions by NHCEs
are restricted, unless the restrictions are permitted by this paragraph
(d)(6).
(ii) Restrictions on election periods. A plan may limit the
frequency and duration of periods in which eligible employees may make
or change contribution elections under a plan. However, an employee must
have a reasonable opportunity (including a reasonable period after
receipt of the notice described in paragraph (e) of this section) to
make or change a contribution election for the plan year. For purposes
of this section, a 30-day period is deemed to be a reasonable period to
make or change a contribution election.
(iii) Restrictions on amount of contributions. A plan is permitted
to limit the amount of contributions that may be made by an eligible
employee under a plan, provided that each NHCE who is an eligible
employee is permitted (unless the employee is restricted under paragraph
(d)(6)(v) of this section) to make contributions in an amount that is at
least sufficient to receive the maximum amount of matching contributions
available under the plan for the plan year, and the employee is
permitted to elect any lesser amount of contributions. However, a plan
may require eligible employees to make contribution elections in whole
percentages of compensation or whole dollar amounts.
(iv) Restrictions on types of compensation that may be deferred. A
plan may limit the types of compensation that may be deferred or
contributed by an eligible employee under a plan, provided that each
eligible NHCE is permitted to make contributions under a definition of
compensation that would be a reasonable definition of compensation
within the meaning of Sec. 1.414(s)-1(d)(2). Thus, the definition of
compensation from which contributions may be made is not required to
satisfy the nondiscrimination requirement of Sec. 1.414(s)-1(d)(3).
(v) Restrictions due to limitations under the Internal Revenue Code.
A plan may limit the amount of contributions made by an eligible
employee under a plan--
(A) Because of the limitations of section 402(g) or section 415; or
(B) Because, on account of a hardship distribution, an employee's
ability to make contributions has been suspended for 6 months in
accordance with Sec. 1.401(k)-1(d)(3)(iv)(E).
(e) Notice requirement. A plan satisfies the notice requirement of
this paragraph (e) if it satisfies the notice requirement of Sec.
1.401(k)-3(d).
(f) Plan year requirement--(1) General rule. Except as provided in
this paragraph (f) or in paragraph (g) of this section, a plan will fail
to satisfy the requirements of section 401(m)(11), section 401(m)(12),
and this section unless plan provisions that satisfy the rules of this
section are adopted before the first day of that plan year and remain in
effect for an entire 12-month plan year. In addition, except as provided
in paragraph (h) of this section or in guidance of general applicability
published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions
that satisfy the rules of this section will not satisfy the requirements
of Sec. 1.401(m)-1(b) if it is amended to change such provisions for
that plan year. Moreover, if, as described in paragraph (j)(4) of this
section, safe harbor matching or nonelective contributions will be made
to another plan for a plan year, provisions under that other plan
specifying
[[Page 427]]
that the safe harbor contributions will be made and providing that the
contributions will be QNECs or QMACs must also be adopted before the
first day of that plan year.
(2) Initial plan year. A newly established plan (other than a
successor plan within the meaning of Sec. 1.401(m)-2(c)(2)(iii)) will
not be treated as violating the requirements of this paragraph (f)
merely because the plan year is less than 12 months, provided that the
plan year is at least 3 months long (or, in the case of a newly
established employer that establishes the plan as soon as
administratively feasible after the employer comes into existence, a
shorter period). Similarly, a plan will not fail to satisfy the
requirements of this paragraph (f) for the first plan year in which
matching contributions are provided under the plan provided that--
(i) The plan is not a successor plan; and
(ii) The amendment providing for matching contributions is made
effective at the same time as the adoption of a cash or deferred
arrangement that satisfies the requirements of Sec. 1.401(k)-3, taking
into account the rules of Sec. 1.401(k)-3(e)(2).
(3) Change of plan year. A plan that has a short plan year as a
result of changing its plan year will not fail to satisfy the
requirements of paragraph (f)(1) of this section merely because the plan
year has less than 12 months, provided that--
(i) The plan satisfied the requirements of this section for the
immediately preceding plan year; and
(ii) The plan satisfies the requirements of this section (determined
without regard to paragraph (h) of this section) for the immediately
following plan year or for the immediately following 12 months if the
immediately following plan year is less than 12 months.
(4) Final plan year. A plan that terminates during a plan year will
not fail to satisfy the requirements of paragraph (f)(1) of this section
merely because the final plan year is less than 12 months, provided that
the plan satisfies the requirement of this section through the date of
termination and either--
(i) The plan would satisfy the requirements of paragraph (h) of this
section, treating the termination of the plan as a reduction or
suspension of safe harbor contributions, other than the requirements of
paragraph (h)(1)(i)(A) or (h)(1)(ii)(A) of this section (relating to the
employer's financial condition and information included in the initial
notice for the plan year) and paragraph (h)(1)(i)(D) or (h)(1)(ii)(D) of
this section (requiring that employees have a reasonable opportunity to
change their cash or deferred elections and, if applicable, employee
contribution elections); or
(ii) The plan termination is in connection with a transaction
described in section 410(b)(6)(C) or the employer incurs a substantial
business hardship, comparable to a substantial business hardship
described in section 412(c).
(g) Plan amendments adopting nonelective safe harbor contributions.
Notwithstanding paragraph (f)(1) of this section, a plan that provides
for the use of the current year testing method may be amended after the
first day of the plan year and no later than 30 days before the last day
of the plan year to adopt the safe harbor method of this section,
effective as of the first day of the plan year, using nonelective
contributions under paragraph (b) of this section if the plan satisfies
the requirements of Sec. 1.401(k)-3(f).
(h) Permissible reduction or suspension of safe harbor
contributions--(1) General rule--(i) Matching contributions. A plan that
provides for safe harbor matching contributions intended to satisfy the
requirements of paragraph (c) of this section for a plan year will not
fail to satisfy the requirements of section 401(m)(2) merely because the
plan is amended during the plan year to reduce or suspend safe harbor
matching contributions on future elective deferrals (and, if applicable,
employee contributions) provided that--
(A) In the case of plan years beginning on or after January 1, 2015,
the employer either--
(1) Is operating at an economic loss as described in section
412(c)(2)(A) for the plan year; or
(2) Includes in the notice described in paragraph (e) of this
section, a statement that the plan may be amended
[[Page 428]]
during the plan year to reduce or suspend safe harbor matching
contributions and that the reduction or suspension will not apply until
at least 30 days after all eligible employees are provided notice of the
reduction or suspension;
(B) All eligible employees are provided a supplemental notice that
satisfies the requirements of paragraph (h)(2) of this section;
(C) The reduction or suspension of safe harbor matching
contributions is effective no earlier than the later of the date the
amendment is adopted or 30 days after eligible employees are provided
the supplemental notice described in paragraph (h)(2) of this section;
(D) Eligible employees are given a reasonable opportunity (including
a reasonable period after receipt of the supplemental notice) prior to
the reduction or suspension of safe harbor matching contributions to
change their cash or deferred elections and, if applicable, their
employee contribution elections;
(E) The plan is amended to provide that the ACP test will be
satisfied for the entire plan year in which the reduction or suspension
occurs using the current year testing method described in Sec.
1.401(m)-2(a)(2)(ii); and
(F) The plan satisfies the requirements of this section (other than
this paragraph (h)) with respect to amounts deferred through the
effective date of the amendment.
(ii) Nonelective contributions. For plan amendments adopted after
May 18, 2009, a plan that provides for safe harbor nonelective
contributions intended to satisfy the requirements of paragraph (b) of
this section will not fail to satisfy the requirements of section
401(m)(2) for the plan year merely because the plan is amended during
the plan year to reduce or suspend safe harbor nonelective contributions
provided that--
(A) The employer either--
(1) Is operating at an economic loss as described in section
412(c)(2)(A) for the plan year; or
(2) Includes in the notice described in paragraph (e) of this
section a statement that the plan may be amended during the plan year to
reduce or suspend safe harbor nonelective contributions and that the
reduction or suspension will not apply until at least 30 days after all
eligible employees are provided notice of the reduction or suspension;
(B) All eligible employees are provided a supplemental notice that
satisfies the requirements of paragraph (h)(2) of this section;
(C) The reduction or suspension of safe harbor nonelective
contributions is effective no earlier than the later of the date the
amendment is adopted or 30 days after eligible employees are provided
the supplemental notice described in paragraph (h)(2) of this section;
(D) Eligible employees are given a reasonable opportunity (including
a reasonable period after receipt of the supplemental notice) prior to
the reduction or suspension of nonelective contributions to change their
cash or deferred elections and, if applicable, their employee
contribution elections;
(E) The plan is amended to provide that the ACP test will be
satisfied for the entire plan year in which the reduction or suspension
occurs using the current year testing method described in Sec.
1.401(m)-2(a)(2)(ii); and
(F) The plan satisfies the requirements of this section (other than
this paragraph
(h)) with respect to safe harbor compensation paid through the
effective date of the amendment.
(2) Supplemental notice. The supplemental notice requirement of this
paragraph (h)(2) is satisfied if each eligible employee is given a
notice that satisfies the requirements of Sec. 1.401(k)-3(g)(2).
(i) [Reserved]
(j) Other rules--(1) Contributions taken into account. A
contribution is taken into account for purposes of this section for a
plan year under the same rules as Sec. 1.401(k)-3(h)(1).
(2) Use of safe harbor nonelective contributions to satisfy other
nondiscrimination tests. A safe harbor nonelective contribution used to
satisfy the nonelective contribution requirement under paragraph (b) of
this section may also be taken into account for purposes of determining
whether a plan satisfies
[[Page 429]]
section 401(a)(4) under the same rules as Sec. 1.401(k)-3(h)(2).
(3) Early participation rules. Section 401(m)(5)(C) and Sec.
1.401(m)-2(a)(1)(iii)(A), which provide an alternative nondiscrimination
rule for certain plans that provide for early participation, do not
apply for purposes of section 401(m)(11), section 401(m)(12), and this
section. Thus, a plan is not treated as satisfying this section with
respect to the eligible employees who have not completed the minimum age
and service requirements of section 410(a)(1)(A) unless the plan
satisfies the requirements of this section with respect to such eligible
employees.
(4) Satisfying safe harbor contribution requirement under another
defined contribution plan. Safe harbor matching or nonelective
contributions may be made to another defined contribution plan under the
same rules as Sec. 1.401(k)-3(h)(4). Consequently, each NHCE under the
plan providing for matching contributions must be eligible under the
same conditions under the other defined contribution plan and the plan
to which the contributions are made must have the same plan year as the
plan providing for matching contributions.
(5) Contributions used only once. Safe harbor matching or
nonelective contributions cannot be used to satisfy the requirements of
this section with respect to more than one plan.
(6) Plan must satisfy ACP with respect to employee contributions. If
the plan provides for employee contributions, in addition to satisfying
the requirements of this section, it must also satisfy the ACP test of
Sec. 1.401(m)-2. See Sec. 1.401(m)-2(a)(5)(iv) for special rules under
which the ACP test is permitted to be performed disregarding some or all
matching when this section is satisfied with respect to the matching
contributions.
[T.D. 9169, 69 FR 78184, Dec. 29, 2004, as amended by T.D. 9447, 74 FR
8211, Feb. 24, 2009; T.D. 9641, 78 FR 68738, Nov. 15, 2013]
Sec. 1.401(m)-4 Special rules for mergers, acquisitions and similar
events. [Reserved]
Sec. 1.401(m)-5 Definitions.
Unless otherwise provided, the definitions of this section govern
for purposes of section 401(m) and the regulations thereunder.
Actual contribution percentage (ACP). Actual contribution percentage
or ACP means the ACP of the group of eligible employees as defined in
Sec. 1.401(m)-2(a)(2)(i).
Actual contribution percentage (ACP) test. Actual contribution
percentage test or ACP test means the test described in Sec. 1.401(m)-
2(a)(1).
Actual contribution ratio (ACR). Actual contribution ratio or ACR
means the ACR of an eligible employee as defined in Sec. 1.401(m)-
2(a)(3).
Actual deferral percentage (ADP) test. Actual deferral percentage
test or ADP test means the test described in Sec. 1.401(k)-2(a)(1).
Compensation. 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. A plan 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. See also section
401(a)(17) and Sec. 1.401(a)(17)-1(c)(1). For this purpose, in case of
an HCE whose ACR is determined under Sec. 1.401(m)-2(a)(3)(ii), period
of participation includes periods under another plan for which matching
contributions or employee contributions are aggregated under Sec.
1.401(m)-2(a)(3)(ii).
Current year testing method. Current year testing method means the
testing method under which the applicable year is the current plan year,
as described in Sec. 1.401(k)-2(a)(2)(ii) or 1.401(m)-2(a)(2)(ii)
Designated Roth contributions. Designated Roth contributions means
designated Roth contributions as defined in Sec. 1.401(k)-1(f)(1).
Elective contributions. Elective contributions means elective
contributions as defined in Sec. 1.401(k)-6.
[[Page 430]]
Elective deferrals. Elective deferrals means elective deferrals
described in section 402(g)(3).
Eligible employee--(1) General rule. 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 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 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.
(2) Conditions on eligibility. An employee who is unable to make
employee contributions 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 treated as an
eligible employee for purposes of section 401(m) for a plan year even
though the employee may not make employee contributions or receive an
allocation of matching contributions 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).
(3) Certain one-time elections. An employee is not an eligible
employee merely because the employee, no later than the employee's first
becoming eligible under any plan or arrangement described in section
219(g)(5)(A) and providing for employee or matching contributions, is
given a one-time opportunity to elect, and the employee in fact does
elect, not to be eligible to make employee contributions or to receive
allocations of matching contributions under the plan or any other plan
or arrangement 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 or arrangement (whether or not terminated) of the employer.
Eligible HCE. Eligible HCE means an eligible employee who is an HCE.
Eligible NHCE. Eligible NHCE means an eligible employee who is not
an HCE.
Employee. Employee means an employee within the meaning of Sec.
1.410(b)-9.
Employee contributions. Employee contributions means employee
contributions as defined in Sec. 1.401(m)-1(a)(3).
Employee stock ownership plan (ESOP). Employee stock ownership plan
or ESOP the portion of a plan that is an ESOP within the meaning of
Sec. 1.410(b)-7(c)(2).
Employer. Employer means an employer within the meaning of Sec.
1.410(b)-9.
Excess aggregate contributions. Excess aggregate contributions
means, with respect to a plan year, the amount of excess aggregate
contributions apportioned to an HCE under Sec. 1.401(m)-2(b)(2)(iii).
Excess contributions. Excess contributions means with respect to a
plan year, the amount of excess contributions apportioned to an HCE
under Sec. 1.401(k)-2(b)(2)(iii).
Excess deferrals. Excess deferrals means excess deferrals as defined
in Sec. 1.402(g)-1(e)(3).
Highly compensated employee (HCE). Highly compensated employee or
HCE has the meaning provided in section 414(q).
Matching contributions. Matching contribution is defined in Sec.
1.401(m)-1(a)(2).
[[Page 431]]
Nonelective contributions. Nonelective contributions 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.
Non-employee stock ownership plan (non-ESOP). Non-employee stock
ownership plan or non-ESOP means the portion of a plan that is not an
ESOP within the meaning of Sec. 1.410(b)-7(c)(2).
Non-highly compensated employee (NHCE). Non-highly compensated
employee or NHCE means an employee who is not an HCE.
Plan. Plan means plan as defined in Sec. 1.401(m)-1(b)(4).
Prior year testing method. Prior year testing method means the
testing method under which the applicable year is the prior plan year,
as described in Sec. 1.401(k)-2(a)(2)(ii) or 1.401(m)-2(a)(2)(ii)
Qualified matching contributions (QMAC). Qualified matching
contributions or QMAC means matching contributions that satisfy the
requirements of Sec. 1.401(k)-1(c) and (d) at the time the contribution
is made, without regard to whether the contributions are actually taken
into account as elective contributions under Sec. 1.401(k)-2(a)(6). See
also Sec. 1.401(k)-2(b)(4)(iii) for a rule providing that a matching
contribution does not fail to qualify as a QMAC solely because it is
forfeitable under section 411(a)(3)(G) because it is a matching
contribution with respect to an excess deferral, excess contribution, or
excess aggregate contribution.
Qualified nonelective contributions (QNEC). Qualified nonelective
contributions or QNEC means employer contributions, other than elective
contributions or matching contributions, that satisfy the requirements
of Sec. 1.401(k)-1(c) and (d) at the time the contribution is made,
without regard to whether the contributions are actually taken into
account under the ADP test under Sec. 1.401(k)-2(a)(6) or the ADP test
under Sec. 1.401(m)-2(a)(6).
[T.D. 9169, 69 FR 78184, Dec. 29, 2004, as amended by T.D. 9237, 71 FR
10, Jan. 3, 2006]
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.
Paragraph (e) of this section provides rules relating to use of a
qualified pension, annuity, profit-sharing, or stock bonus plan to
provide
[[Page 432]]
accident or health benefits or coverage otherwise described in sections
104, 105, or 106.
(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. In the case of a distribution of a
life insurance contract, retirement income contract, endowment contract,
or other contract providing life insurance protection, or any interest
therein, the policy cash value and all other rights under such contract
(including any supplemental agreements thereto and whether or not
guaranteed) are included in determining the fair market value of the
contract. In addition, in the case of a transfer of property that occurs
on or after August 29, 2005 where a trust described in section 401(a)
and exempt under section 501(a) transfers property to a plan participant
or beneficiary in exchange for consideration and where the fair market
value of the property transferred exceeds the value of the
consideration, then the excess of the fair market value of the property
transferred by the trust over the value of the consideration received by
the trust is treated as a distribution to the distributee under the plan
for all purposes under the Internal Revenue Code. Where such a transfer
occurs before that date, the excess of the fair market value of the
property transferred by the trust over the value of the consideration
received by the trust is includible in the gross income of the
participant or beneficiary under section 61. However, such a transfer of
a life insurance contract, retirement income contract, endowment
contract, or other contract providing life insurance protection
occurring before that date is not treated as a distribution for purposes
of applying the requirements of subchapter D of chapter 1 of subtitle A
of the Internal Revenue Code.
(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 in which the trust is exempt, and the contract
contains 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
issued after 1962, see Sec. 1.401-9(b)(1). For additional requirements
regarding distributions of annuity contracts, see, e.g., Sec. Sec.
1.401(a)-20, Q&A-2, 1.401(a)(31)-1, Q&A-17, and 1.401(a)(9)-6, Q&A-4.
However, the distribution of an annuity contract must be treated as a
lump sum distribution for purposes of determining the amount of tax
under the 10-year averaging rule of section 402(e) (as in effect prior
to amendment by the Tax Reform Act of 1986, Public Law 99-514, 100 Stat.
2085). If, however, the contract distributed by such exempt trust is a
life insurance contract, retirement income contract, endowment contract,
or other contract providing life insurance protection, the fair market
value of the 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 the 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
[[Page 433]]
101(a) (relating to life insurance proceeds), or the contract is treated
as a rollover contribution under section 402(c). If the contract
distributed by such trust is a transferable annuity contract, or a
retirement income, endowment, or other life insurance contract and such
contract is not treated as a rollover contribution under section 402(c),
then, notwithstanding the preceding sentence, the fair market value of
the contract is includible in the distributee's gross income unless,
within such 60 days, such contract is 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 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
[[Page 434]]
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 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
[[Page 435]]
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 (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
[[Page 436]]
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 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
[[Page 437]]
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 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
[[Page 438]]
(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 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.......................................................
[[Page 439]]
(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)(iv)
and (2)(iv) 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)-6 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.
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)(5)(iv)(B).
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(a)(2) 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)(v) are not treated as contributed by
an employee. Similarly, amounts
[[Page 440]]
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)(3)(v)(B) 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)(5)(iv)(B), 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 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.
(e) Medical, accident, etc. benefits paid from a qualified pension,
annuity, profit-sharing, or stock bonus plan--(1) Payment of premiums--
(i) General rule. Except as provided in paragraph (e)(1)(iii) of this
section, a payment made from a qualified trust that is a premium for
accident or health insurance (including a qualified long-term care
insurance contract under section 7702B) constitutes a distribution under
section 402(a) to the participant for whose benefit the premium is
charged. The amount of the distribution equals the amount of the premium
charged against the participant's benefits under the plan. If a defined
contribution plan pays these premiums from a current year contribution
or forfeiture that has not been allocated to a participant's account,
then the amount of the premium for each participant is treated as first
being allocated to the participant
[[Page 441]]
and then charged against the participant's benefits under the plan, so
that the amount of the distribution is treated in the same manner as
determined under the preceding sentence. Except as provided in
paragraphs (e)(2) and (e)(3) of this section, a distribution described
in this paragraph (e)(1) is not excludable from gross income.
(ii) Treatment of amounts received through accident or health
insurance. To the extent that the payment of a premium for accident or
health insurance constitutes a distribution under this paragraph (e)(1),
amounts received through accident or health insurance are neither paid
by the employer nor attributable to contributions by the employer that
are excludable from the gross income of the employee. Accordingly, to
the extent the premium for accident or health insurance constitutes a
distribution under this paragraph (e)(1), amounts received through the
accident or health insurance for personal injuries or sickness are
excludable from gross income under section 104(a)(3) and are not treated
as distributions from the plan. If those amounts are paid to the plan
instead of to the employee, those amounts are treated as having been
paid to the employee and then contributed by the employee to the plan
(and must satisfy the qualification requirements applicable to employee
contributions).
(iii) Exception for disability insurance that replaces retirement
contributions. The rules of paragraph (e)(1)(i) of this section do not
apply to the payment made from a qualified trust that is a premium paid
to an insurance company for a contract providing for payment of benefits
to be made to the trust in the event of an employee's inability to
continue employment with the employer due to disability, provided that
the payment of benefits with respect to the employee's account for each
year does not exceed the reasonable expectation of the annual
contributions that would have been made to the plan on the employee's
behalf for the period of disability within that year, reduced by any
other contributions made on the employee's behalf for the period of
disability within that year. The payment of premiums described in the
preceding sentence is not treated as a distribution under section
402(a), but instead constitutes incidental accident or health insurance
as provided in Sec. 1.401-1(b)(1)(ii). The Commissioner may issue rules
of general applicability in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin further describing the tax
treatment of disability coverage described in this paragraph
(e)(1)(iii).
(2) Medical benefits for retired employees provided under an account
described in section 401(h). The payment of medical benefits under a
pension or annuity plan from an account described in section 401(h) is
treated in the same manner as a payment of accident or health benefits
attributable to employer contributions, or employer-provided coverage
under an accident or health plan. See Sec. 1.401-14(a) for the
definition of medical benefits described in section 401(h). Accordingly,
amounts applied for the payment of accident or health benefits, or for
the payment of accident or health coverage, from a section 401(h)
account are not includible in the gross income of the participant on
whose behalf such contributions are made to the extent they are
excludible from gross income under section 104, 105, or 106.
(3) Distributions to eligible retired public safety officers. See
section 402(l) (and any guidance issued under section 402(l)) for a
limited exclusion from gross income for distributions used to pay for
certain accident or health premiums (including premiums for qualified
long-term care insurance contracts). This limited exclusion applies to
eligible retired public safety officers, as defined in section
402(l)(4)(B).
(4) Effect of distribution of insurance premiums on plan
qualification. See Sec. 1.401-1(b)(1) for rules concerning the types
and amount of medical coverage and benefits that are permitted to be
provided under a plan that is part of a trust described in section
401(a). For example, Sec. 1.401-1(b)(1)(ii) provides that a profit-
sharing plan is primarily a plan of deferred compensation, but the
amounts allocated to the account of a participant may be used to provide
incidental accident or health insurance for the participant and the
participant's family. See also section 401(k)(2)(B) for certain
restrictions on
[[Page 442]]
the distribution of elective contributions.
(5) Applicability to beneficiaries and alternate payees. This
paragraph (e) applies to the payment of premiums charged against the
benefits of a beneficiary or an alternate payee in the same manner as
the payment of premiums charged against the account of a participant.
(6) Examples. The provisions of this paragraph (e) are illustrated
by the following examples:
Example 1. (i) Facts. Employer A sponsors a profit-sharing plan
qualified under section 401(a). The plan provides solely for non-
elective employer profit-sharing contributions. The plan's trustee
enters into a contract with a third-party insurance carrier to provide
health insurance for certain plan participants. The insurance contract
provides for the payment of medical expenses incurred by those
participants. The plan limits the amounts used to provide medical
benefits to comply with the incidental benefit rules. The trustee makes
monthly payments of $1,000 to pay the premiums due for Participant P's
health insurance and Participant P's account balance is reduced by
$1,000 at the time of each premium payment. In June 2015, Participant P
is admitted to the hospital for covered medical care, and in July 2015,
the health insurer pays the hospital $5,000 for the medical care
provided to Participant P in June.
(ii) Conclusion. Under paragraph (e)(1) of this section, each of the
trustee's payments of $1,000 constitutes a taxable distribution under
section 402(a) to Participant P on the date of each payment. The amount
of these distributions may constitute payments for medical care under
section 213. The $5,000 payment to the hospital is excludable from
Participant P's gross income under section 104(a)(3) and is not treated
as a distribution from the plan.
Example 2. (i) Facts. Employer B sponsors a profit-sharing plan
qualified under section 401(a). The plan provides for elective
contributions described in section 401(k) and matching contributions as
well as non-elective employer profit-sharing contributions. The plan
does not provide that a disabled participant's compensation for purposes
of determining plan contributions includes amounts that the participant
would have received in the absence of the disability, and accordingly
Employer B does not make any contributions to the plan for the benefit
of a disabled employee for the period of disability. The plan's trustee
enters into a contract with a third-party insurance carrier to provide
disability insurance for plan participants who elect to be covered under
the insurance contract. The insurance contract provides for the payment
of an amount to the trustee on a participant's behalf during the period
of the participant's disability. Amounts to be paid to the trustee from
the insurance contract with respect to a participant are equal to the
sum of the elective, matching, and non-elective employer profit-sharing
contributions that would have been made on the participant's behalf
during the participant's disability (based on the participant's rate of
compensation before becoming disabled) with the payments to continue for
the duration of the disability until age 65 (or 5 years after the
participant became disabled, if later). Participant Q elects to be
covered under the insurance contract, and the trustee makes the periodic
premium payments out of the account balance of Participant Q. In June
2015, Participant Q becomes disabled. During the period Participant Q is
absent from employment due to disability, the insurer pays the trust the
amount of the elective, matching, and non-elective employer profit-
sharing contributions that would have been made to the trust with
respect to Participant Q had Participant Q not been disabled. The amount
of the premiums for the insurance contract satisfies the limitations on
incidental benefits under Sec. 1.401-1(b)(1)(ii).
(ii) Conclusion. The payment of premiums from the trust is described
in paragraph (e)(1)(iii) of this section. Accordingly, none of the
premium payments under the contract constitute a distribution under
section 402(a) to Participant Q. Further, amounts paid from the
insurance contract to the trust also do not constitute a distribution to
Participant Q. However, when Participant Q's account balance is
distributed from the trust, the distribution will be subject to taxation
in the year of distribution in accordance with the rules in section 402.
(7) Effective/applicability date. This paragraph (e) applies for
taxable years beginning on or after January 1, 2015.
[T.D. 6500, 25 FR 11675, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting Sec.
1.402(a)-1, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
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
[[Page 443]]
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 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
[[Page 444]]
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 determinable or for any other reason is not known, then, except as
set forth in rules 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), such amount shall be
either--
(i) The excess of--
(A) The amount determined as of the end of such taxable year in
accordance with the formula described in Sec. 1.403(b)-1(d)(4), as it
appeared in the April 1, 2006, edition of 26 CFR Part 1; over
(B) The amount determined as of the end of the prior taxable year in
accordance with the formula described in paragraph (a)(2)(i)(A) of this
section; or
(ii) 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 the
employee's interest in such trust is determined in accordance with rules
prescribed by the Commissioner under the authority in paragraph (a)(2)
of this section.
(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
[[Page 445]]
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 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.
[[Page 446]]
(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.
(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
[[Page 447]]
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, as amended by T.D. 9340, 72 FR
41140, July 26, 2007]
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 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
[[Page 448]]
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 Sec. Sec.
1.401(a)(31)-1, 1.402(f)-1, and 1.403(b)-7(b), 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.
(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
[[Page 449]]
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)-7(b) 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
(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:
[[Page 450]]
(a) Elective deferrals (as defined in section 402(g)(3)) and
employee contributions that, pursuant to rules prescribed by the
Commissioner in revenue rulings, notices, or other guidance published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter),
are returned to the employee (together with the income allocable
thereto) in order to comply with the section 415 limitations.
(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)-
2(b)(2), 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) Prohibited allocations that are treated as deemed distributions
pursuant to section 409(p).
(h) A distribution that is a permissible withdrawal from an eligible
automatic contribution arrangement within the meaning of section 414(w).
(i) [Reserved]
(j) Distributions of premiums for accident or health insurance under
Sec. 1.402(a)-1(e)(1)(i). This paragraph A-4(j) applies for taxable
years beginning on or after January 1, 2015.
(k) 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 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
[[Page 451]]
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 substantially larger or smaller than the other
payments in the series. An independent payment is an eligible
[[Page 452]]
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 of $7,200 in that year, the first $5,000 distributed will be
treated as the required minimum distribution and will
[[Page 453]]
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 event of the employee's
termination of employment or request for a distribution, the loan be
repaid immediately or
[[Page 454]]
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 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
[[Page 455]]
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 relations order
(as defined in section 414(p)) to the employee's spouse or former spouse
who is an alternate
[[Page 456]]
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 the distribution that is actually
a required minimum distribution and thus not an eligible rollover
distribution is determined by taking into account the
[[Page 457]]
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; T.D. 9169, 69 FR 78153, Dec. 29, 2004; T.D. 9302,
71 FR 76137, Dec. 20, 2006; T.D. 9319, 72 FR 16894, Apr. 5, 2007; T.D.
9340, 72 FR 41159, July 26, 2007; T.D. 9447, 74 FR 8211, Feb. 24, 2009;
T.D. 9665, 79 FR 26843, May 12, 2014]
Editorial Note: By T.D. 9169, 69 FR 78153, Dec. 29, 2004, the
Internal Revenue Service published a document in the Federal Register,
attempting to amend Q&A-4(c) of Sec. 1.402(c)-2, by removing
``1.401(k)-1(f)'' and inserting ``1.401(k)-2(b)(2)''. However, because
of inaccurate language, this amendment could not be incorporated.
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
[[Page 458]]
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 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 Sec. Sec. 1.401(a)(31)-1, 1.402(c)-2, 1.403(b)-
7(b), 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)?
[[Page 459]]
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?
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
[[Page 460]]
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 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. Yes. See Sec. 1.401(a)-21 of this chapter for rules permitting
the use of electronic media to provide applicable notices to recipients
with respect to retirement plans.
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 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.
[[Page 461]]
(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.
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; T.D. 9294, 71 FR 61887, Oct. 20, 2006; T.D. 9340, 72
FR 41159, July 26, 2007]
[[Page 462]]
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 (that is,
the individual's excess deferrals for the year) must be included in
gross income for the year, except to the extent the excess deferrals are
comprised of designated Roth contributions, and thus, are already
includible in gross income. A designated Roth contribution is treated as
an excess deferral only to the extent that the total amount of
designated Roth contributions for an individual exceeds the applicable
limit for the taxable year or the designated Roth contributions are
identified as excess deferrals and the individual receives a
distribution of the excess deferrals and allocable income under
paragraph (e)(2) or (e)(3) of this section.
(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 463]]
(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.
(5) Any designated Roth contributions described in section 402A
(before applying the limits of section 402(g) or this section).
(6) Any elective employer contributions to a SIMPLE retirement
account, on behalf of an employee pursuant to a qualified salary
reduction arrangement as described in section 408(p)(2) (before applying
the limits of section 402(g) or this section).
(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)(v), 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 provided under
paragraph (d)(2) of this section, the applicable limit for an
individual's taxable year is the applicable dollar amount set forth in
section 402(g)(1)(B). This applicable dollar amount is increased for the
taxable year beginning in 2007 and later years in the same manner as the
dollar amount under section 415(b)(1)(A) is adjusted pursuant to section
415(d). See Sec. 1.402(g)-2 for the treatment of catch-up contributions
described in section 414(v).
(2) Special adjustment for elective deferrals with respect to
section 403(b) annuity contracts for certain long-term employees. The
applicable limit for an individual who is a qualified employee (as
defined in section 402(g)(7)(C)) and has elective deferrals described in
paragraph (b)(3) or (5) of this section for a taxable year is adjusted
by increasing the applicable limit otherwise determined under paragraph
(d)(1) of this section in accordance with section 402(g)(7).
(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 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
[[Page 464]]
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 an excess deferral under paragraph (a)
of this section:
(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 elective deferrals
were made of the amount of the excess deferrals received by the plan. If
any designated Roth contributions were made to a plan, the notification
must also identify the extent, if any, to which the excess deferrals are
comprised of designated Roth contributions. A plan may provide that an
individual is deemed to have notified the plan of excess deferrals
(including the portion of excess deferrals that are comprised of
designated Roth contributions) 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
and the plan may provide the extent to which such excess deferrals are
comprised of designated Roth contributions. 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.
If any designated Roth contributions were made to a plan, the
notification must identify the extent to which, if any, the excess
deferrals are comprised of designated Roth contributions. A plan may
provide that an individual is deemed to have notified the plan of excess
deferrals (including the portion of excess deferrals that are comprised
of designated Roth contributions) for the taxable year calculated by
taking into account only elective deferrals under the plan and other
plans of the same employer and the plan may provide the extent to which
such excess deferrals are comprised of designated Roth contributions.
(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 amount is an excess deferral. A plan need
not permit distribution of excess deferrals.
[[Page 465]]
(5) Income allocable to excess deferrals--(i) General rule. The
income allocable to excess deferrals for a taxable year that begins on
or after January 1, 2007 is equal to the sum of the allocable gain or
loss for the taxable year of the individual and, to the extent the
excess deferrals are or will be credited with gain or loss for the
period after the close of the taxable year and prior to the distribution
(the gap period) if the total account were to be distributed, the
allocable gain or loss during that period. The income allocable to
excess deferrals for a taxable year that begins before 2007 is
determined using the 1.402(g)-1(e)(5) (as it appeared in the April 1,
2006 edition of 26 CFR Part 1).
(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). A plan will not
fail to use a reasonable method for computing the income allocable to
excess deferrals merely because the income allocable to excess deferrals
is determined on a date that is no more than 7 days before the
distribution.
(iii) Alternative method of allocating taxable year income. A plan
may determine the income allocable to excess deferrals for the taxable
year by multiplying the income for the taxable year allocable to
elective deferrals 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 deferrals as of the beginning of the taxable year, plus
(B) The employee's elective deferrals for the taxable year.
(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.
(v) Alternative method for allocating taxable year and gap period
income. A plan may determine the allocable gain or loss for the
aggregate of the taxable year and the gap period by applying the
alternative method provided by paragraph (e)(5)(iii) of this section to
this aggregate period. This is accomplished by substituting the income
for the taxable year and the gap period for the income for the taxable
year and by substituting the elective deferrals for the taxable year and
the gap period for the elective deferrals for the taxable year in
determining the fraction that is multiplied by that income.
(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)-2(b)(4)(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
[[Page 466]]
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 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.
(iv) Distributions of excess deferrals from a designated Roth
account. The rules of paragraph (e)(8)(iii) of this section generally
apply to distributions of excess deferrals that are designated Roth
contributions and the attributable income. Thus, if a designated Roth
account described in section 402A includes any excess deferrals, any
distribution of amounts attributable to those excess deferrals are
includible in gross income (without adjustment for any return of
investment in the contract under section 72(e)(8)). In addition, such
distributions cannot be qualified distributions described in section
402A(d)(2) and are not eligible rollover distributions within the
meaning of section 402(c)(4). For this purpose, if a designated Roth
account includes any excess deferrals, any distributions from the
account are treated as attributable to those excess deferrals until the
total amount distributed from the designated Roth account equals the
total of such deferrals and attributable income.
(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
[[Page 467]]
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.
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
[[Page 468]]
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; T.D. 9169, 69 FR 78153, Dec. 29, 2004; T.D. 9324,
72 FR 21110, Apr. 30, 2007]
Sec. 1.402(g)-2 Increased limit for catch-up contributions.
(a) General rule. Under section 402(g)(1)(C), in determining the
amount of elective deferrals that are includible in gross income under
section 402(g) for a catch-up eligible participant (within the meaning
of Sec. 1.414(v)-1(g)), the otherwise applicable dollar limit under
section 402(g)(1)(B) (as increased under section 402(g)(7), to the
extent applicable) shall be further increased by the applicable dollar
catch-up limit as set forth under Sec. 1.414(v)-1(c)(2).
(b) Participants in multiple plans. Paragraph (a) of this section
applies without regard to whether the applicable employer plans (within
the meaning of section 414(v)(6)) treat the elective deferrals as catch-
up contributions. Thus, a catch-up eligible participant who makes
elective deferrals under applicable employer plans of two or more
employers that in total exceed the applicable dollar amount under
section 402(g)(1) by an amount that does not exceed the applicable
dollar catch-up limit under either plan may exclude the elective
deferrals from gross income, even if neither applicable employer plan
treats those elective deferrals as catch-up contributions.
(c) Effective date--(1) Statutory effective date. Section
402(g)(1)(C) applies to contributions in taxable years beginning on or
after January 1, 2002.
(2) Regulatory effective date. Paragraphs (a) and (b) of this
section apply to contributions in taxable years beginning on or after
January 1, 2004.
[T.D. 9072, 68 FR 40515, July 8, 2003]
Sec. 1.402(g)(3)-1 Employer contributions to purchase a
section 403(b) contract under a salary reduction agreement.
(a) General rule. With respect to an annuity contract under section
403(b), except as provided in paragraph (b) of this section, an elective
deferral means an employer contribution to purchase an annuity contract
under section 403(b) under a salary reduction agreement within the
meaning of section 3121(a)(5)(D).
(b) Special rule. Notwithstanding paragraph (a) of this section, for
purposes of section 403(b), an elective deferral only includes a
contribution that is made pursuant to a cash or deferred election (as
defined at Sec. 1.401(k)-1(a)(3)). Thus, for purposes of section
402(g)(3)(C), an elective deferral does not include a contribution that
is made pursuant to an employee's one-time irrevocable election made on
or before the employee's first becoming eligible to participate under
the employer's plans or a contribution made as a condition of employment
that reduces the employee's compensation.
(c) Applicable date. This section is applicable for taxable years
beginning after December 31, 2008.
[T.D. 9340, 72 FR 41140, July 26, 2007]
Sec. 1.402A-1 Designated Roth Accounts.
Q-1. What is a designated Roth account?
A-1. A designated Roth account is a separate account under a
qualified cash or deferred arrangement under a section 401(a) plan, or
under a section 403(b) plan, to which designated Roth contributions are
permitted to be made in lieu of elective contributions and that
satisfies the requirements of Sec. 1.401(k)-1(f) (in the case of a
section 401(a) plan) or Sec. 1.403(b)-3(c) (in the case of a section
403(b) plan).
Q-2. How is a distribution from a designated Roth account taxed?
A-2. (a) The taxation of a distribution from a designated Roth
account depends on whether or not the distribution is a qualified
distribution. A qualified distribution from a designated Roth account is
not includible in the distributee's gross income.
(b) Except as otherwise provided in paragraph (c) of this A-2, a
qualified distribution is a distribution that is both--
(1) Made after the 5-taxable-year period of participation defined in
A-4 of this section has been completed; and
(2) Made on or after the date the employee attains age 59\1/2\, made
to a beneficiary or the estate of the employee on
[[Page 469]]
or after the employee's death, or attributable to the employee's being
disabled within the meaning of section 72(m)(7).
(c) A distribution from a designated Roth account is not a qualified
distribution to the extent it consists of a distribution of excess
deferrals and attributable income described in Sec. 1.402(g)-1(e). See
A-11 of this section for other amounts that are not treated as qualified
distributions, including excess contributions described in section
401(k)(8), and excess aggregate contributions described in section
401(m)(8), and income, on any of these excess amounts.
Q-3. How is a distribution from a designated Roth account taxed if
it is not a qualified distribution?
A-3. Except as provided in A-11 of this section, a distribution from
a designated Roth account that is not a qualified distribution is
taxable to the distributee under section 402 in the case of a plan
qualified under section 401(a) and under section 403(b)(1) in the case
of a section 403(b) plan. For this purpose, a designated Roth account is
treated as a separate contract under section 72. Thus, except as
otherwise provided in A-5 of this section for a rollover, if a
distribution is before the annuity starting date, the portion of any
distribution that is includible in gross income as an amount allocable
to income on the contract and the portion not includible in gross income
as an amount allocable to investment in the contract is determined under
section 72(e)(8), treating the designated Roth account as a separate
contract. Similarly, in the case of any amount received as an annuity,
if a distribution is on or after the annuity starting date, the portion
of any annuity payment that is includible in gross income as an amount
allocable to income on the contract and the portion not includible in
gross income as an amount allocable to investment in the contract is
determined under section 72(b) or (d), as applicable, treating the
designated Roth account as a separate contract. For purposes of section
72, designated Roth contributions are described in section 72(f)(1) or
72(f)(2), to the extent applicable.
Q-4. What is the 5-taxable-year period of participation described in
A-2 of this section?
A-4. (a) The 5-taxable-year period of participation described in A-2
of this section for a plan is the period of 5 consecutive taxable years
that begins with the first day of the first taxable year in which the
employee makes a designated Roth contribution to any designated Roth
account established for the employee under the same plan and ends when 5
consecutive taxable years have been completed. For this purpose, the
first taxable year in which an employee makes a designated Roth
contribution is the year in which the amount is includible in the
employee's gross income. Notwithstanding the preceding, however, a
contribution that is returned as an excess deferral or excess
contribution does not begin the 5 taxable-year period of participation.
Similarly, a contribution returned as a permissible withdrawal under
section 414(w) does not begin the 5 taxable-year period of
participation.
(b) Generally, an employee's 5-taxable-year period of participation
is determined separately for each plan (within the meaning of section
414(l)) in which the employee participates. Thus, if an employee has
elective deferrals made to designated Roth accounts under two or more
plans, the employee may have two or more different 5-taxable-year
periods of participation, depending on when the employee first had
contributions made to a designated Roth account under each plan.
However, if a direct rollover contribution of a distribution from a
designated Roth account under another plan is made by the employee to
the plan, the 5-taxable-year period of participation begins on the first
day of the employee's taxable year in which the employee first had
designated Roth contributions made to such other designated Roth
account, if earlier than the first taxable year in which a designated
Roth contribution is made to the plan. See A-5(c) of this section for
additional rules on determining the start of the 5-taxable-year of
participation in the case of an indirect rollover.
[[Page 470]]
(c) The beginning of the 5-taxable-year period of participation is
not redetermined for any portion of an employee's designated Roth
account. This is true even if the entire designated Roth account is
distributed during the 5-taxable-year period of participation and the
employee subsequently makes additional designated Roth contributions
under the plan.
(d) The rule in paragraph (c) of this section applies if the
employee dies or the account is divided pursuant to a qualified domestic
relations order (QDRO), and thus, a portion of the account is not
payable to the employee and is payable to the employee's beneficiary or
an alternate payee. In the case of distribution to an alternate payee or
beneficiary, generally, the age, death, or disability of the employee is
used to determine whether the distribution to an alternate payee or
beneficiary is qualified. However, if an alternate payee or a spousal
beneficiary rolls the distribution into a designated Roth account in a
plan maintained by his or her own employer, such individual's age,
disability, or death is used to determine whether a distribution from
the recipient plan is qualified. In addition, if the rollover is a
direct rollover contribution to the alternate payee's or spousal
beneficiary's own designated Roth account, the 5-taxable-year period of
participation under the recipient plan begins on the earlier of the date
the employee's 5-taxable-year period of participation began under the
distributing plan or the date the 5-taxable-year period of participation
applicable to the alternate payee's or spousal beneficiary's designated
Roth account began under the recipient plan.
(e) If a designated Roth contribution is made by a reemployed
veteran for a year of qualified military service pursuant to section
414(u) that is before the year in which the contribution is actually
made, the contribution is treated as having been made in the year of
qualified military service to which the contribution relates, as
designated by the reemployed veteran. Reemployed veterans may identify
the year of qualified military service for which a contribution is made
for other purposes, such as for entitlement to a match, and the
treatment for the 5-taxable-year period of participation rule follows
that identification. In the absence of such designation, for purposes of
determining the first year of the five years of participation under
section 402A(d)(2)(B), the contribution is treated as relating to the
first year of qualified military service for which the reemployed
veteran could have made designated Roth contributions under the plan, or
if later the first taxable year in which designated Roth contributions
could be made under the plan.
Q-5. How do the taxation rules apply to a distribution from a
designated Roth account that is rolled over?
A-5. (a) An eligible rollover distribution from a designated Roth
account is permitted to be rolled over into another designated Roth
account or a Roth IRA, and the amount rolled over is not currently
includible in gross income. In accordance with section 402(c)(2), to the
extent that a portion of a distribution from a designated Roth account
is not includible in income (determined without regard to the rollover),
if that portion of the distribution is to be rolled over into a
designated Roth account, the rollover must be accomplished through a
direct rollover (i.e., a 60-day rollover to another designated Roth
account is not available for this portion of the distribution). For this
purpose, any amount paid in a direct rollover is treated as a separate
distribution from any amount paid directly to the employee. If a
distribution from a designated Roth account is instead made to the
employee, the employee would still be able to roll over the entire
amount (or any portion thereof) into a Roth IRA within the 60-day period
described in section 402(c)(3).
(b) In the case of an eligible rollover distribution from a
designated Roth account that is not a qualified distribution and not
paid as a direct rollover contribution, if less than the entire amount
of the distribution is rolled over, the part that is rolled over is
deemed to consist first of the portion of the distribution that is
attributable to income under section 72(e)(8).
(c) If an employee receives a distribution from a designated Roth
account, the portion of the distribution that
[[Page 471]]
would be includible in gross income is permitted to be rolled over into
a designated Roth account under another plan. In such a case, Sec.
1.402A-2, A-3, provides for additional reporting by the recipient plan.
In addition, the employee's period of participation under the
distributing plan is not carried over to the recipient plan for purposes
of satisfying the 5-taxable-year period of participation requirement
under the recipient plan. Generally, the taxable year in which the
recipient plan accepts such rollover contribution is the taxable year
that begins the participant's new 5-taxable-year period of
participation. However, if the participant is rolling over to a plan in
which the participant already has a pre-existing designated Roth account
with a longer period of participation, the starting date of the
recipient account is used to measure the participant's 5-taxable-year
period of participation.
(d) The following example illustrates the application of this A-5:
Example. Employee B receives a $14,000 eligible rollover
distribution that is not a qualified distribution from B's designated
Roth account, consisting of $11,000 of investment in the contract and
$3,000 of income. Within 60 days of receipt, Employee B rolls over
$7,000 of the distribution into a Roth IRA. The $7,000 is deemed to
consist of $3,000 of income and $4,000 of investment in the contract.
Because the only portion of the distribution that could be includible in
gross income (the income) is rolled over, none of the distribution is
includible in Employee B's gross income.
(e) This A-5 applies for taxable years beginning on or after January
1, 2006.
Q-6. In the case of a rollover contribution to a designated Roth
account, how is the amount that is treated as investment in the contract
under section 72 determined?
A-6. (a) If a distribution from a designated Roth account is rolled
over to another designated Roth account in a direct rollover, the amount
of the rollover contribution allocated to investment in the contract in
the recipient designated Roth account is the amount that would not have
been includible in gross income (determined without regard to section
402(e)(4)) if the distribution had not been rolled over. Thus, if an
amount that is a qualified distribution is rolled over, the entire
amount of the rollover contribution is allocated to investment in the
contract.
(b) If the entire account balance of a designated Roth account is
rolled over to another designated Roth account in a direct rollover,
and, at the time of the distribution, the investment in the contract
exceeds the balance in the designated Roth account, the investment in
the contract in the distributing plan is included in the investment in
the contract of the recipient plan.
Q-7. After a qualified distribution from a designated Roth account
has been made, how is the remaining investment in the contract of the
designated Roth account determined under section 72?
A-7. (a) The portion of any qualified distribution that is treated
as a recovery of investment in the contract is determined in the same
manner as if the distribution were not a qualified distribution. (See A-
3 of this section) Thus, the remaining investment in the contract in a
designated Roth account after a qualified distribution is determined in
the same manner after a qualified distribution as it would be determined
if the distribution were not a qualified distribution.
(b) The following example illustrates the application of this A-7:
Example. Employee C receives a $12,000 distribution, which is a
qualified distribution that is attributable to the employee being
disabled within the meaning of section 72(m)(7), from C's designated
Roth account. Immediately prior to the distribution, the account
consisted of $21,850 of investment in the contract (i.e., designated
Roth contributions) and $1,150 of income. For purposes of determining
recovery of investment in the contract under section 72, the
distribution is deemed to consist of $11,400 of investment in the
contract [$12,000 x 21,850/(1,150 + 21,850)], and $600 of income
[$12,000 x 1,150/(1,150 + 21,850)]. Immediately after the distribution,
C's designated Roth account consists of $10,450 of investment in the
contract and $550 of income. This determination of the remaining
investment in the contract will be needed if C subsequently is no longer
disabled and takes a nonqualified distribution from the designated Roth
account.
Q-8. What is the relationship between the accounting for designated
Roth contributions as investment in the contract for purposes of section
72 and their treatment as elective deferrals
[[Page 472]]
available for a hardship distribution under section 401(k)(2)(B)?
A-8. (a) There is no relationship between the accounting for
designated Roth contributions as investment in the contract for purposes
of section 72 and their treatment as elective deferrals available for a
hardship distribution under section 401(k)(2)(B). A plan that makes a
hardship distribution under section 401(k)(2)(B) from elective deferrals
that includes designated Roth contributions must separately determine
the amount of elective deferrals available for hardship and the amount
of investment in the contract attributable to designated Roth
contributions for purposes of section 72. Thus, the entire amount of a
hardship distribution is treated as reducing the otherwise maximum
distributable amount for purposes of applying the rule in section
401(k)(2)(B) and Sec. 1.401(k)-1(d)(3)(ii) that generally limits
hardship distributions to the principal amount of elective deferrals
made less the amount of elective deferrals previously distributed from
the plan, even if a portion of the distribution is treated as income
under section 72(e)(8).
(b) The following example illustrates the application of this A-8:
Example. The facts are the same as in the Example in A-7 of this
section, except that instead of being disabled, Employee C is receiving
a hardship distribution. In addition, Employee C has made elective
deferrals that are not designated Roth contributions totaling $20,000
and has received no previous distributions of elective deferrals from
the plan. The adjustment to the investment in the contract is the same
as in A-7 of this section, but for purposes of determining the amount of
elective deferrals available for future hardship distribution, the
entire amount of the distribution is subtracted from the maximum
distributable amount. Thus, Employee C has only $29,850 ($41,850-
$12,000) available for hardship distribution from C's designated Roth
account.
Q-9. Can an employee have more than one separate contract for
designated Roth contributions under a plan qualified under section
401(a) or a section 403(b) plan?
A-9. (a) Except as otherwise provided in paragraph (b) of this A-9,
for purposes of section 72, there is only one separate contract for an
employee with respect to the designated Roth contributions under a plan.
Thus, if a plan maintains one separate account for designated Roth
contributions made under the plan and another separate account for
rollover contributions received from a designated Roth account under
another plan (so that the rollover account is not required to be subject
to the distribution restrictions otherwise applicable to the account
consisting of designated Roth contributions made under the plan), both
separate accounts are considered to be one contract for purposes of
applying section 72 to the distributions from either account.
(b) If a separate account with respect to an employee's accrued
benefit consisting of designated Roth contributions is established and
maintained for an alternate payee pursuant to a qualified domestic
relations order and another designated Roth account is maintained for
the employee, each account is treated as a separate contract for
purposes of section 72. The alternate payee's designated Roth account is
also a separate contract for purposes of section 72 with respect to any
other account maintained for that alternate payee. Similarly, if
separate accounts are established and maintained for different
beneficiaries after the death of an employee, the separate account for
each beneficiary is treated as a separate contract under section 72 and
is also a separate contract with respect to any other account maintained
for that beneficiary under the plan that is not a designated Roth
account. When the separate account is established for an alternate payee
or for a beneficiary (after an employee's death), each separate account
must receive a proportionate amount attributable to investment in the
contract.
Q-10. What is the tax treatment of employer securities distributed
from a designated Roth account?
A-10. (a) If a distribution of employer securities from a designated
Roth account is not a qualified distribution, section 402(e)(4)(B)
applies. Thus, in the case of a lump-sum distribution that includes
employer securities, unless the taxpayer elects otherwise, net
unrealized appreciation attributable to
[[Page 473]]
the employer securities is not includible in gross income; and such net
unrealized appreciation is not included in the basis of the distributed
securities and is capital gain to the extent such appreciation is
realized in a subsequent taxable transaction.
(b) In the case of a qualified distribution of employer securities
from a designated Roth account, the distributee's basis in the
distributed securities for purposes of subsequent disposition is their
fair market value at the time of distribution.
Q-11. Can an amount described in A-4 of Sec. 1.402(c)-2 with
respect to a designated Roth account be a qualified distribution?
A-11. No. An amount described in A-4 of Sec. 1.402(c)-2 with
respect to a designated Roth account cannot be a qualified distribution.
Such an amount is taxable under the rules of Sec. Sec. 1.72-16(b),
1.72(p)-1, A-11 through A-13, 1.402(g)-1(e)(8), 1.401(k)-2(b)(2)(vi),
1.401(m)-2(b)(2)(vi), or 1.404(k)-1T. Thus, for example, loans that are
treated as deemed distributions pursuant to section 72(p), or dividends
paid on employer securities as described in section 404(k) are not
qualified distributions even if the deemed distributions occur or the
dividends are paid after the employee attains age 59\1/2\ and the 5-
taxable-year period of participation defined in A-4 of this section has
been satisfied. However, if a dividend is reinvested in accordance with
section 404(k)(2)(A)(iii)(II), the amount of such a dividend is not
precluded from being a qualified distribution if later distributed.
Further, an amount is not precluded from being a qualified distribution
merely because it is described in section 402(c)(4) as an amount not
eligible for rollover. Thus, a hardship distribution is not precluded
from being a qualified distribution.
Q-12. If any amount from a designated Roth account is included in a
loan to an employee, do the plan aggregation rules of section
72(p)(2)(D) apply for purposes of determining the total amount an
employee is permitted to borrow from the plan, even though the
designated Roth account generally is treated as a separate contract
under section 72?
A-12. Yes. If any amount from a designated Roth account is included
in a loan to an employee, notwithstanding the general rule that the
designated Roth account is treated as a separate contract under section
72, the plan aggregation rules of section 72(p)(2)(D) apply for purposes
of determining the maximum amount the employee is permitted to borrow
from the plan and such amount is based on the total of the designated
Roth contribution amounts and the other amounts under the plan. To the
extent a loan is from a designated Roth account, the repayment
requirement of section 72(p)(2)(C) must be satisfied separately with
respect to that portion of the loan and with respect to the portion of
the loan from other accounts under the plan.
Q-13. Does a transaction or accounting methodology involving an
employee's designated Roth account and any other accounts under the plan
or plans of an employer that has the effect of transferring value from
the other accounts into the designated Roth account violate the separate
accounting requirement of section 402A?
A-13. (a) Yes. Any transaction or accounting methodology involving
an employee's designated Roth account and any other accounts under the
plan or plans of an employer that has the effect of directly or
indirectly transferring value from another account into the designated
Roth account violates the separate accounting requirement under section
402A. However, any transaction that merely exchanges investments between
accounts at fair market value will not violate the separate accounting
requirement.
(b) In the case of an annuity contract which contains both a
designated Roth account and any other accounts, the Commissioner may
prescribe additional guidance of general applicability, published in the
Internal Revenue Bulletin (see 601.601(d)(2) of this chapter), to
provide additional rules for allocation of income, expenses, gains and
losses among the accounts under the contract.
(c) This A-13 applies to designated Roth accounts for taxable years
beginning on or after January 1, 2006.
Q-14. How is an annuity contract that is distributed from a
designated
[[Page 474]]
Roth account treated for purposes of section 402A?
A-14. A qualified plan distributed annuity contract within the
meaning of Sec. 1.402(c)-2, A-10(a) that is distributed from a
designated Roth account is not treated as a distribution for purposes of
section 402 or 402A. Instead, the amounts paid under the annuity
contract are treated as distributions for purposes of sections 402 and
402A. Thus, the period after the annuity contract is distributed and
before a payment from the annuity contract is made is included in
determining whether the five-year period of participation is satisfied.
Further, for purposes of determining if a distribution is a qualified
distribution, the determination of whether a distribution is made on or
after the date the employee attains age 59\1/2\, made to a beneficiary
or the estate of the employee on or after the employee's death, or
attributable to the employee's being disabled within the meaning of
section 72(m)(7) is made based on the facts at the time the distribution
is made from the annuity contract. Thus for example, if an employee
first makes a designated Roth contribution to a designated Roth account
in 2006 at age 56, receives a distributed annuity contract within the
meaning of Sec. 1.402(c)-2, A-10(a) in 2007 purchased only with assets
from the designated Roth account, and then receives a distribution from
the contract in 2011 at age 60, the distribution is a qualified
distribution.
Q-15. When are section 402A and this Sec. 1.402A-1 applicable?
A-15. Section 402A is applicable for taxable years beginning on or
after January 1, 2006. Except as otherwise provided in A-5 and A-13 of
this section, the rules of this Sec. 1.402A-1 apply for taxable years
beginning on or after January 1, 2007.
[T.D. 9324, 72 FR 21111, Apr. 30, 2007; 72 FR 30974, June 5, 2007, as
amended by T.D. 9340, 72 FR 41140, July 26, 2007]
Sec. 1.402A-2 Reporting and recordkeeping requirements with
respect to designated Roth accounts.
Q-1. Who is responsible for keeping track of the 5-taxable-year
period of participation and the investment in the contract, i.e., the
amount of unrecovered designated Roth contributions for the employee?
A-1. The plan administrator or other responsible party with respect
to a plan with a designated Roth account is responsible for keeping
track of the 5-taxable-year period of participation for each employee
and the amount of investment in the contract (unrecovered designated
Roth contributions) on behalf of such employee. For purposes of the
preceding sentence, in the absence of actual knowledge to the contrary,
the plan administrator or other responsible party is permitted to assume
that an employee's taxable year is the calendar year. In the case of a
direct rollover from another designated Roth account, the plan
administrator or other responsible party of the recipient plan can rely
on reasonable representations made by the plan administrator or
responsible party with respect to the plan with the other designated
Roth account. See A-2 of this section for statements required in the
case of rollovers.
Q-2. In the case of an eligible rollover distribution from a
designated Roth account, what additional information must be provided
with respect to such distribution?
A-2. (a) Pursuant to section 6047(f), if an amount is distributed
from a designated Roth account, the plan administrator or other
responsible party with respect to the plan must provide a statement as
described below in the following situations--
(1) In the case of a direct rollover of a distribution from a
designated Roth account under a plan to a designated Roth account under
another plan, the plan administrator or other responsible party must
provide to the plan administrator or responsible party of the recipient
plan either a statement indicating the first year of the 5-taxable-year
period described in A-1 of this section and the portion of the
distribution that is attributable to investment in the contract under
section 72, or a statement that the distribution is a qualified
distribution.
(2) If the distribution is not a direct rollover to a designated
Roth account under another plan, the plan administrator or responsible
party must provide to the employee, upon request, the
[[Page 475]]
same information described in paragraph (a)(1) of this A-2, except the
statement need not indicate the first year of the 5-taxable-year period
described in A-1 of this section.
(b) The statement described in paragraph (a) of this A-2 must be
provided within a reasonable period following the direct rollover or
distributee request but in no event later than 30 days following the
direct rollover or distributee request.
Q-3. If a plan qualified under section 401(a) or a section 403(b)
plan accepts a 60-day rollover of earnings from a designated Roth
account, what report to the IRS must be provided with respect to such
rollover contribution?
A-3. To the extent required in Forms and Instructions, if a plan
qualified under section 401(a), or a section 403(b) plan, accepts a
rollover contribution (other than a direct rollover contribution) under
section 402(c)(2), or section 403(b)(8)(B), of the portion of a
distribution from a designated Roth account that would have been
includable in gross income, the plan administrator or other responsible
party for the recipient plan must notify the Commissioner of its
acceptance of the rollover contribution no later than the due date for
filing Form 1099-R, `` Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,.''
The Forms and Instructions will specify the address to which the
notification is required to be sent and will require inclusion of the
employee's name and social security number, the amount rolled over, the
year in which the rollover contribution was made, and such other
information as the Commissioner may prescribe in order to determine that
the amount rolled over is a valid rollover contribution.
Q-4. When is this Sec. 1.402A-2 applicable?
A-4. The rules of this Sec. 1.402A-2 are applicable for taxable
years beginning on or after January 1, 2007.
[T.D. 9324, 72 FR 21111, Apr. 30, 2007; 72 FR 30974, June 5, 2007]
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 through
1.403(b)-10 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 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.
[[Page 476]]
(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 Sec. Sec. 1.404(a)-8 and 1.401-10 through 1.401-13.
(g) The rules of Sec. 1.402(a)-1(e) apply for purposes of
determining the treatment of amounts paid to provide accident and health
insurance benefits.
[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; T.D.
9340, 72 FR 41159, July 26, 2007; T.D. 9665, 79 FR 26843, May 12, 2014]
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 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
[[Page 477]]
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]
Sec. 1.403(b)-0 Taxability under an annuity purchased by a
section 501(c)(3) organization or a public school.
This section lists the headings that appear in Sec. Sec. 1.403(b)-1
through 1.403(b)-11.
[[Page 478]]
Sec. 1.403(b)-1 General overview of taxability under an annuity
contract purchased by a section 501(c)(3) organization or a public
school.
Sec. 1.403(b)-2 Definitions.
(a) Application of definitions.
(b) Definitions.
Sec. 1.403(b)-3 Exclusion for contributions to purchase section 403(b)
contracts.
(a) Exclusion for section 403(b) contracts.
(b) Application of requirements.
(c) Special rules for designated Roth section 403(b) contributions.
(d) Effect of failure.
Sec. 1.403(b)-4 Contribution limitations.
(a) Treatment of contributions in excess of limitations.
(b) Maximum annual contribution.
(c) Section 403(b) elective deferrals.
(d) Employer contributions for former employees.
(e) Special rules for determining years of service.
(f) Excess contributions of deferrals.
Sec. 1.403(b)-5 Nondiscrimination rules.
(a) Nondiscrimination rules for contributions other than section
403(b) elective deferrals.
(b) Universal availability required for section 403(b) elective
deferrals.
(c) Plan required.
(d) Church plans exception.
(e) Other rules.
Sec. 1.403(b)-6 Timing of distributions and benefits.
(a) Distributions generally.
(b) Distributions from contracts other than custodial accounts or
amounts attributable to section 403(b) elective deferrals.
(c) Distributions from custodial accounts that are not attributable
to section 403(b) elective deferrals.
(d) Distribution of section 403(b) elective deferrals.
(e) Minimum required distributions for eligible plans.
(f) Loans.
(g) Death benefits and other incidental benefits.
(h) Special rule regarding severance from employment.
Sec. 1.403(b)-7 Taxation of distributions and benefits.
(a) General rules for when amounts are included in gross income.
(b) Rollovers to individual retirement arrangements and other
eligible retirement plans.
(c) Special rules for certain corrective distributions.
(d) Amounts taxable under section 72(p)(1).
(e) Special rules relating to distributions from a designated Roth
account.
(f) Certain rules relating to employment taxes.
Sec. 1.403(b)-8 Funding.
(a) Investments.
(b) Contributions to the plan.
(c) Annuity contracts.
(d) Custodial accounts.
(e) Retirement income accounts.
(f) Combining assets.
Sec. 1.403(b)-9 Special rules for church plans.
(a) Retirement income accounts.
(b) Retirement income account defined.
(c) Special deduction rule for self-employed ministers.
Sec. 1.403(b)-10 Miscellaneous provisions.
(a) Plan terminations and frozen plans.
(b) Contract exchanges and plan-to-plan transfers.
(c) Qualified domestic relations orders.
(d) Rollovers to a section 403(b) contract.
(e) Deemed IRAs.
(f) Defined benefit plans.
(g) Other rules relating to section 501(c)(3) organizations.
Sec. 1.403(b)-11 Applicable date.
(a) General rule.
(b) Collective bargaining agreements.
(c) Church conventions.
(d) Special rules for plans that exclude certain types of employees
from elective deferrals.
(e) Special rules for plans that permit in-service distributions.
(f) Special rule for life insurance contracts.
(g) Special rule for contracts received in an exchange.
[T.D. 9340, 72 FR 41140, July 26, 2007]
Sec. 1.403(b)-1 General overview of taxability under an annuity
contract purchased by a section 501(c)(3) organization or a
public school.
Section 403(b) and Sec. Sec. 1.403(b)-2 through 1.403(b)-10 provide
rules for the Federal income tax treatment of an annuity purchased for
an employee by an employer that is either a tax-exempt entity under
section 501(c)(3) (relating to certain religious, charitable,
scientific, or other types of organizations) or a public school, or for
a minister described in section 414(e)(5)(A). See section 403(a)
(relating to qualified annuities) for rules regarding the taxation
[[Page 479]]
of an annuity purchased under a qualified annuity plan that meets the
requirements of section 404(a)(2), and see section 403(c) (relating to
nonqualified annuities) for rules regarding the taxation of other types
of annuities.
[T.D. 9340, 72 FR 41141, July 26, 2007]
Sec. 1.403(b)-2 Definitions.
(a) Application of definitions. The definitions set forth in this
section are applicable for purposes of Sec. 1.403(b)-1, this section
and Sec. Sec. 1.403(b)-3 through 1.403(b)-11.
(b) Definitions--(1) Accumulated benefit means the total benefit to
which a participant or beneficiary is entitled under a section 403(b)
contract, including all contributions made to the contract and all
earnings thereon.
(2) Annuity contract means a contract that is issued by an insurance
company qualified to issue annuities in a State and that includes
payment in the form of an annuity. See Sec. 1.401(f)-1(d)(2) and (e)
for the definition of an annuity, and see Sec. 1.403(b)-8(c)(3) for a
special rule for certain State plans. See also Sec. Sec. 1.403(b)-8(d)
and 1.403(b)-9(a) for additional rules regarding the treatment of
custodial accounts and retirement income accounts as annuity contracts.
(3) Beneficiary means a person who is entitled to benefits in
respect of a participant following the participant's death or an
alternate payee pursuant to a qualified domestic relations order, as
described in Sec. 1.403(b)-10(c).
(4) Catch-up amount or catch-up limitation for a participant for a
taxable year means a section 403(b) elective deferral permitted under
section 414(v) (as described in Sec. 1.403(b)-4(c)(2)) or section
402(g)(7) (as described in Sec. 1.403(b)-4(c)(3)).
(5) Church means a church as defined in section 3121(w)(3)(A) and a
qualified church-controlled organization as defined in section
3121(w)(3)(B).
(6) Church-related organization means a church or a convention or
association of churches, including an organization described in section
414(e)(3)(A).
(7) Elective deferral means an elective deferral under Sec.
1.402(g)-1 (with respect to an employer contribution to a section 403(b)
contract) and any other amount that constitutes an elective deferral
under section 402(g)(3).
(8) (i) Eligible employer means--
(A) A State, but only with respect to an employee of the State
performing services for a public school;
(B) A section 501(c)(3) organization with respect to any employee of
the section 501(c)(3) organization;
(C) Any employer of a minister described in section 414(e)(5)(A),
but only with respect to the minister; or
(D) A minister described in section 414(e)(5)(A), but only with
respect to a retirement income account established for the minister.
(ii) An entity is not an eligible employer under paragraph
(a)(8)(i)(A) of this section if it treats itself as not being a State
for any other purpose of the Internal Revenue Code, and a subsidiary or
other affiliate of an eligible employer is not an eligible employer
under paragraph (a)(8)(i) of this section if the subsidiary or other
affiliate is not an entity described in paragraph (a)(8)(i) of this
section.
(9) Employee means a common-law employee performing services for the
employer, and does not include a former employee or an independent
contractor. Subject to any rules in Sec. 1.403(b)-1, this section, and
Sec. Sec. 1.403(b)-3 through 1.403(b)-11 that are specifically
applicable to ministers, an employee also includes a minister described
in section 414(e)(5)(A) when performing services in the exercise of his
or her ministry.
(10) Employee performing services for a public school means an
employee performing services as an employee for a public school of a
State. This definition is not applicable unless the employee's
compensation for performing services for a public school is paid by the
State. Further, a person occupying an elective or appointive public
office is not an employee performing services for a public school unless
such office is one to which an individual is elected or appointed only
if the individual has received training, or is experienced, in the field
of education. The term public office includes any elective or appointive
office of a State.
(11) Includible compensation means the employee's compensation
received from an eligible employer that is includible in the
participant's gross income for Federal income tax purposes
[[Page 480]]
(computed without regard to section 911) for the most recent period that
is a year of service. Includible compensation for a minister who is
self-employed means the minister's earned income as defined in section
401(c)(2) (computed without regard to section 911) for the most recent
period that is a year of service. Includible compensation does not
include any compensation received during a period when the employer is
not an eligible employer. Includible compensation also includes any
elective deferral or other amount contributed or deferred by the
eligible employer at the election of the employee that would be
includible in the gross income of the employee but for the rules of
sections 125, 132(f)(4), 402(e)(2), 402(h)(1)(B), 402(k), or 457(b). The
amount of includible compensation is determined without regard to any
community property laws. See section 415(c)(3)(A) through (D) for
additional rules, and see Sec. 1.403(b)-4(d) for a special rule
regarding former employees.
(12) Participant means an employee for whom a section 403(b)
contract is currently being purchased, or an employee or former employee
for whom a section 403(b) contract has previously been purchased and who
has not received a distribution of his or her entire accumulated benefit
under the contract.
(13) Plan means a plan as described in Sec. 1.403(b)-3(b)(3).
(14) Public school means a State-sponsored educational organization
described in section 170(b)(1)(A)(ii) (relating to educational
organizations that normally maintain a regular faculty and curriculum
and normally have a regularly enrolled body of pupils or students in
attendance at the place where educational activities are regularly
carried on).
(15) Retirement income account means a defined contribution program
established or maintained by a church-related organization to provide
benefits under section 403(b) for its employees or their beneficiaries
as described in Sec. 1.403(b)-9.
(16) Section 403(b) contract; section 403(b) plan--(i) Section
403(b) contract means a contract that satisfies the requirements of
Sec. 1.403(b)-3. If for any taxable year an employer contributes to
more than one section 403(b) contract for a participant or beneficiary,
then, under section 403(b)(5), all such contracts are treated as one
contract for purposes of section 403(b) and Sec. 1.403(b)-1, this
section, and Sec. Sec. 1.403(b)-3 through 1.403(b)-11. See also Sec.
1.403(b)-3(b)(1).
(ii) Section 403(b) plan means the plan of the employer under which
the section 403(b) contracts for its employees are maintained.
(17) Section 403(b) elective deferral; designated Roth
contribution--(i) Section 403(b) elective deferral means an elective
deferral that is an employer contribution to a section 403(b) plan for
an employee. See Sec. 1.403(b)-5(b) for additional rules with respect
to a section 403(b) elective deferral.
(ii) Designated Roth contribution under a section 403(b) plan means
a section 403(b) elective deferral that satisfies Sec. 1.403(b)-3(c).
(18) Section 501(c)(3) organization means an organization that is
described in section 501(c)(3) (relating to certain religious,
charitable, scientific, or other types of organizations) and exempt from
tax under section 501(a).
(19) Severance from employment means that the employee ceases to be
employed by the employer maintaining the plan. See Sec. 1.401(k)-1(d)
for additional guidance concerning severance from employment. See also
Sec. 1.403(b)-6(h) for a special rule under which severance from
employment is determined by reference to employment with the eligible
employer.
(20) State means a State, a political subdivision of a State, or any
agency or instrumentality of a State. For this purpose, the District of
Columbia is treated as a State. In addition, for purposes of determining
whether an individual is an employee performing services for a public
school, an Indian tribal government is treated as a State, as provided
under section 7871(a)(6)(B). See also section 1450(b) of the Small
Business Job Protection Act of 1996 (110 Stat. 1755, 1814) for special
rules treating certain contracts purchased in a plan year beginning
before January 1, 1995, that include contributions by an Indian tribal
government as section 403(b) contracts, whether or not those
[[Page 481]]
contributions are for employees performing services for a public school.
(21) Year of service means each full year during which an individual
is a full-time employee of an eligible employer, plus fractional credit
for each part of a year during which the individual is either a full-
time employee of an eligible employer for a part of the year or a part-
time employee of an eligible employer. See Sec. 1.403(b)-4(e) for rules
for determining years of service.
[T.D. 9340, 72 FR 41141, July 26, 2007; 72 FR 54351, Sept. 25, 2007]
Sec. 1.403(b)-3 Exclusion for contributions to purchase
section 403(b) contracts.
(a) Exclusion for section 403(b) contracts. Amounts contributed by
an eligible employer for the purchase of an annuity contract for an
employee are excluded from the gross income of the employee under
section 403(b) only if each of the requirements in paragraphs (a)(1)
through (9) of this section is satisfied. In addition, amounts
contributed by an eligible employer for the purchase of an annuity
contract for an employee pursuant to a cash or deferred election (as
defined at Sec. 1.401(k)-1(a)(3)) are not includible in an employee's
gross income at the time the cash would have been includible in the
employee's gross income (but for the cash or deferred election) if each
of the requirements in paragraphs (a)(1) through (9) of this section is
satisfied. However, the preceding two sentences generally do not apply
to designated Roth contributions; see paragraph (c) of this section and
Sec. 1.403(b)-7(e) for special taxation rules that apply with respect
to designated Roth contributions under a section 403(b) plan.
(1) Not a contract issued under qualified plan or eligible
governmental plan. The annuity contract is not purchased under a
qualified plan (under section 401(a) or 403(a)) or an eligible
governmental plan under section 457(b).
(2) Nonforfeitability. The rights of the employee under the annuity
contract (disregarding rights to future premiums) are nonforfeitable. An
employee's rights under a contract fail to be nonforfeitable unless the
employee for whom the contract is purchased has at all times a fully
vested and nonforfeitable right (as defined in regulations under section
411) to all benefits provided under the contract. See paragraph (d)(2)
of this section for additional rules regarding the nonforfeitability
requirement of this paragraph (a)(2).
(3) Nondiscrimination. In the case of an annuity contract purchased
by an eligible employer other than a church, the contract is purchased
under a plan that satisfies section 403(b)(12) (relating to
nondiscrimination requirements, including universal availability). See
Sec. 1.403(b)-5.
(4) Limitations on elective deferrals. In the case of an elective
deferral, the contract satisfies section 401(a)(30) (relating to
limitations on elective deferrals). A contract does not satisfy section
401(a)(30) as required under this paragraph (a)(4) unless the contract
requires that all elective deferrals for an employee not exceed the
limits of section 402(g)(1), including elective deferrals for the
employee under the contract and any other elective deferrals under the
plan under which the contract is purchased and under all other plans,
contracts, or arrangements of the employer. See Sec. 1.401(a)-30.
(5) Nontransferability. The contract is not transferable. This
paragraph (a)(5) does not apply to a contract issued before January 1,
1963. See section 401(g).
(6) Minimum required distributions. The contract satisfies the
requirements of section 401(a)(9) (relating to minimum required
distributions). See Sec. 1.403(b)-6(e).
(7) Rollover distributions. The contract provides that, if the
distributee of an eligible rollover distribution elects to have the
distribution paid directly to an eligible retirement plan, as defined in
section 402(c)(8)(B), 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. See Sec.
1.403(b)-7(b)(2).
(8) Limitation on incidental benefits. The contract satisfies the
incidental benefit requirements of section 401(a). See Sec. 1.403(b)-
6(g).
(9) Maximum annual additions. The annual additions to the contract
do not exceed the applicable limitations of section 415(c) (treating
contributions
[[Page 482]]
and other additions as annual additions). See paragraph (b) of this
section and Sec. 1.403(b)-4(b) and (f).
(b) Application of requirements--(1) Aggregation of contracts. In
accordance with section 403(b)(5), for purposes of determining whether
this section is satisfied, all section 403(b) contracts purchased for an
individual by an employer are treated as purchased under a single
contract. Additional aggregation rules apply under section 402(g) for
purposes of satisfying paragraph (a)(4) of this section and under
section 415 for purposes of satisfying paragraph (a)(9) of this section.
(2) Disaggregation for excess annual additions. In accordance with
the last sentence of section 415(a)(2), if an excess annual addition is
made to a contract that otherwise satisfies the requirements of this
section, then the portion of the contract that includes such excess
annual addition fails to be a section 403(b) contract (as further
described in paragraph (d)(1) of this section) and the remaining portion
of the contract is a section 403(b) contract. This paragraph (b)(2) is
not satisfied unless, for the year of the excess and each year
thereafter, the issuer of the contract maintains separate accounts for
each such portion. Thus, the entire contract fails to be a section
403(b) contract if an excess annual addition is made and a separate
account is not maintained with respect to the excess.
(3) Plan in form and operation. (i) A contract does not satisfy
paragraph (a) of this section unless it is maintained pursuant to a
plan. For this purpose, a plan is a written defined contribution plan,
which, in both form and operation, satisfies the requirements of Sec.
1.403(b)-1, Sec. 1.403(b)-2, this section, and Sec. Sec. 1.403(b)-4
through 1.403(b)-11. For purposes of Sec. 1.403(b)-1, Sec. 1.403(b)-2,
this section, and Sec. Sec. 1.403(b)-4 through 1.403(b)-11, the plan
must contain all the material terms and conditions for eligibility,
benefits, applicable limitations, the contracts available under the
plan, and the time and form under which benefit distributions would be
made. For purposes of Sec. 1.403(b)-1, Sec. 1.403(b)-2, this section,
and Sec. Sec. 1.403(b)-4 through 1.403(b)-11, a plan may contain
certain optional features that are consistent with but not required
under section 403(b), such as hardship withdrawal distributions, loans,
plan-to-plan or annuity contract-to-annuity contract transfers, and
acceptance of rollovers to the plan. However, if a plan contains any
optional provisions, the optional provisions must meet, in both form and
operation, the relevant requirements under section 403(b), this section,
and Sec. Sec. 1.403(b)-4 through 1.403(b)-11.
(ii) The plan may allocate responsibility for performing
administrative functions, including functions to comply with the
requirements of section 403(b) and other tax requirements. Any such
allocation must identify responsibility for compliance with the
requirements of the Internal Revenue Code that apply on the basis of the
aggregated contracts issued to a participant under a plan, including
loans under section 72(p) and the conditions for obtaining a hardship
withdrawal under Sec. 1.403(b)-6. A plan is permitted to assign such
responsibilities to parties other than the eligible employer, but not to
participants (other than employees of the employer a substantial portion
of whose duties are administration of the plan), and may incorporate by
reference other documents, including the insurance policy or custodial
account, which thereupon become part of the plan.
(iii) This paragraph (b)(3) applies to contributions to an annuity
contract by a church only if the annuity is part of a retirement income
account, as defined in Sec. 1.403(b)-9.
(4) Exclusion limited for former employees--(i) General rule. Except
as provided in paragraph (b)(4)(ii) of this section and in Sec.
1.403(b)-4(d), the exclusion from gross income provided by section
403(b) does not apply to contributions made for former employees. For
this purpose, a contribution is not made for a former employee if the
contribution is with respect to compensation that would otherwise be
paid for a payroll period that begins before severance from employment.
(ii) Exceptions. The exclusion from gross income provided by section
403(b) applies to contributions made for former employees with respect
to compensation described in Sec. 1.415(c)-2(e)(3)(i) (relating to
certain compensation paid by the later of 2\1/2\ months
[[Page 483]]
after severance from employment or the end of the limitation year that
includes the date of severance from employment), and compensation
described in Sec. 1.415(c)-2(e)(4), Sec. 1.415(c)-2(g)(4), or Sec.
1.415(c)-2(g)(7) (relating to compensation paid to participants who are
permanently and totally disabled or relating to qualified military
service under section 414(u)).
(c) Special rules for designated Roth section 403(b) contributions.
(1) The rules of Sec. 1.401(k)-1(f)(1) and (2) for designated Roth
contributions under a qualified cash or deferred arrangement apply to
designated Roth contributions under a section 403(b) plan. Thus, a
designated Roth contribution under a section 403(b) plan is a section
403(b) elective deferral that is designated irrevocably by the employee
at the time of the cash or deferred election as a designated Roth
contribution that is being made in lieu of all or a portion of the
section 403(b) elective deferrals the employee is otherwise eligible to
make under the plan; that is treated by the employer as includible in
the employee's gross income at the time the employee would have received
the amount in cash if the employee had not made the cash or deferred
election (such as by treating the contributions as wages subject to
applicable withholding requirements); and that is maintained in a
separate account (within the meaning of Sec. 1.401(k)-1(f)(2)).
(2) A designated Roth contribution under a section 403(b) plan must
satisfy the requirements applicable to section 403(b) elective
deferrals. Thus, for example, designated Roth contributions under a
section 403(b) plan must satisfy the requirements of Sec. 1.403(b)-
6(d). Similarly, a designated Roth account under a section 403(b) plan
is subject to the rules of sections 401(a)(9)(A) and (B) and Sec.
1.403(b)-6(e).
(d) Effect of failure--(1) General rules. (i) If a contract includes
any amount that fails to satisfy the requirements of section 403(b),
Sec. 1.403(b)-1, Sec. 1.403(b)-2, this section, or Sec. Sec.
1.403(b)-4 through 1.403(b)-11, then, except as otherwise provided in
paragraph (d)(2) of this section (relating to failure to satisfy
nonforfeitability requirements) or Sec. 1.403(b)-4(f) (relating to
excess contributions under section 415 and excess deferrals under
section 402(g)), the contract is not a section 403(b) contract. In
addition, section 403(b)(5) and paragraph (b)(1) of this section provide
that, for purposes of determining whether a contract satisfies section
403(b), all section 403(b) contracts purchased for an individual by an
employer are treated as purchased under a single contract. Thus, except
as provided in paragraph (b)(2) of this section or as otherwise provided
in this paragraph (d), a failure to satisfy section 403(b) with respect
to any contract issued to an individual by an employer adversely affects
all contracts issued to that individual by that employer.
(ii) In accordance with paragraph (b)(3) of this section, a failure
to operate in accordance with the terms of a plan adversely affects all
of the contracts issued by the employer to the employee or employees
with respect to whom the operational failure occurred. Such a failure
does not adversely affect any other contract if the failure is neither a
failure to satisfy the nondiscrimination requirements of Sec. 1.403(b)-
5 (a nondiscrimination failure) nor a failure of the employer to be an
eligible employer as defined in Sec. 1.403(b)-2 (an employer
eligibility failure). However, any failure that is not an operational
failure adversely affects all contracts issued under the plan,
including: a failure to have contracts issued pursuant to a written
defined contribution plan which, in form, satisfies the requirements of
Sec. 1.403(b)-1, Sec. 1.403(b)-2, this section, and Sec. Sec.
1.403(b)-4 through 1.403(b)-11 (a written plan failure); a
nondiscrimination failure; or an employer eligibility failure.
(iii) See other applicable Internal Revenue Code provisions for the
treatment of a contract that is not a section 403(b) contract, such as
sections 61, 83, 402(b), and 403(c). Thus, for example, section 403(c)
(relating to nonqualified annuities) applies if any annuity contract
issued by an insurance company fails to satisfy section 403(b), based on
the value of the contract at the time of the failure. However, see
paragraph (d)(2) of this section for special rules with respect to the
nonforfeitability requirement of paragraph (a)(2) of this section.
[[Page 484]]
(2) Failure to satisfy nonforfeitability requirement--(i) Treatment
before contract becomes nonforfeitable. If an annuity contract issued by
an insurance company would qualify as a section 403(b) contract but for
the failure to satisfy the nonforfeitability requirement of paragraph
(a)(2) of this section, then the contract is treated as a contract to
which section 403(c) applies. See Sec. 1.403(b)-8(d)(4) for a rule
under which a custodial account that fails to satisfy the
nonforfeitability requirement of paragraph (a)(2) of this section is
treated as a section 401(a) qualified plan for certain purposes.
(ii) Treatment when contract becomes nonforfeitable--(A) In general.
Notwithstanding paragraph (d)(2)(i) of this section, on or after the
date on which the participant's interest in a contract described in
paragraph (d)(2)(i) of this section becomes nonforfeitable, the contract
may be treated as a section 403(b) contract if no election has been made
under section 83(b) with respect to the contract, the participant's
interest in the contract has been subject to a substantial risk of
forfeiture (as defined in section 83) before becoming nonforfeitable,
each contribution under the contract that is subject to a different
vesting schedule is maintained in a separate account, and the contract
has at all times satisfied the requirements of paragraph (a) of this
section other than the nonforfeitability requirement of paragraph (a)(2)
of this section. Thus, for example, for the current year and each prior
year, no contribution can have been made to the contract that would
cause the contract to fail to be a section 403(b) contract as a result
of contributions exceeding the limitations of section 415 (except to the
extent permitted under paragraph (b)(2) of this section) or to fail to
satisfy the nondiscrimination rules described in Sec. 1.403(b)-5. See
also Sec. 1.403(b)-10(a)(1) for a special rule in connection with
termination of a section 403(b) plan.
(B) Partial vesting. For purposes of applying this paragraph (d), if
only a portion of a participant's interest in a contract becomes
nonforfeitable in a year, then the portion that is nonforfeitable and
the portion that fails to be nonforfeitable are each treated as separate
contracts. In addition, for purposes of applying this paragraph (d), if
a contribution is made to an annuity contract in excess of the
limitations of section 415(c) and the excess is maintained in a separate
account, then the portion of the contract that includes the excess
contributions account and the remainder are each treated as separate
contracts. Thus, if an annuity contract that includes an excess
contributions account changes from forfeitable to nonforfeitable during
a year, then the portion that is not attributable to the excess
contributions account constitutes a section 403(b) contract (assuming it
otherwise satisfies the requirements to be a section 403(b) contract)
and is not included in gross income, and the portion that is
attributable to the excess contributions account is included in gross
income in accordance with section 403(c). See Sec. 1.403(b)-4(f) for
additional rules.
[T.D. 9340, 72 FR 41141, July 26, 2007; 72 FR 54352, Sept. 25, 2007]
Sec. 1.403(b)-4 Contribution limitations.
(a) Treatment of contributions in excess of limitations. The
exclusion provided under Sec. 1.403(b)-3(a) applies to a participant
only if the amounts contributed by the employer for the purchase of an
annuity contract for the participant do not exceed the applicable limit
under sections 415 and 402(g), as described in this section. Under Sec.
1.403(b)-3(a)(4), a section 403(b) contract is required to include the
limits on elective deferrals imposed by section 402(g), as described in
paragraph (c) of this section. See paragraph (f) of this section for
special rules concerning excess contributions and deferrals. Rollover
contributions made to a section 403(b) contract, as described in Sec.
1.403(b)-10(d), are not taken into account for purposes of the limits
imposed by section 415, Sec. 1.403(b)-3(a)(9), section 402(g), Sec.
1.403(b)-3(a)(4), and this section, but after-tax employee contributions
are taken into account under section 415, Sec. 1.403(b)-3(a)(9), and
paragraph (b) of this section.
(b) Maximum annual contribution--(1) General rule. In accordance
with section 415(a)(2) and Sec. 1.403(b)-3(a)(9), the contributions for
any participant under a
[[Page 485]]
section 403(b) contract (namely, employer nonelective contributions
(including matching contributions), section 403(b) elective deferrals,
and after-tax employee contributions) are not permitted to exceed the
limitations imposed by section 415. Under section 415(c), contributions
are permitted to be made for participants in a defined contribution
plan, subject to the limitations set forth therein (which are generally
the lesser of a dollar limit for a year or the participant's
compensation for the year). For purposes of section 415, contributions
made for a participant are aggregated to the extent applicable under
sections 414(b), (c), (m), (n), and (o). For purposes of section
415(a)(2), Sec. Sec. 1.403(b)-1 through 1.403(b)-3, this section, and
Sec. Sec. 1.403(b)-5 through 1.403(b)-11, a contribution means any
annual addition, as defined in section 415(c).
(2) Special rules. See section 415(k)(4) for a special rule under
which contributions to section 403(b) contracts are generally aggregated
with contributions under other arrangements in applying section 415. For
purposes of applying section 415(c)(1)(B) (relating to compensation)
with respect to a section 403(b) contract, except as provided in section
415(c)(3)(C), a participant's includible compensation (as defined in
Sec. 1.403(b)-2) is substituted for the participant's compensation, as
described in section 415(c)(3)(E). Any age 50 catch-up contributions
under paragraph (c)(2) of this section are disregarded in applying
section 415.
(c) Section 403(b) elective deferrals--(1) Basic limit under section
402(g)(1). In accordance with section 402(g)(1)(A), the section 403(b)
elective deferrals for any individual are included in the individual's
gross income to the extent the amount of such deferrals, plus all other
elective deferrals for the individual, for the taxable year exceeds the
applicable dollar amount under section 402(g)(1)(B). The applicable
annual dollar amount under section 402(g)(1)(B) is $15,000, adjusted for
cost-of-living after 2006 in the manner described in section 402(g)(4).
See Sec. 1.403(b)-5(b) for a universal availability rule that applies
if any employee is permitted to have any section 403(b) elective
deferrals made on his or her behalf.
(2) Age 50 catch-up--(i) In general. In accordance with section
414(v) and the regulations thereunder, a section 403(b) contract may
provide for catch-up contributions for a participant who is age 50 by
the end of the year, provided that such age 50 catch-up contributions do
not exceed the catch-up limit under section 414(v)(2) for the taxable
year. The maximum amount of additional age 50 catch-up contributions for
a taxable year under section 414(v) is $5,000, adjusted for cost-of-
living after 2006 in the manner described in section 414(v)(2)(C). For
additional requirements, see regulations under section 414(v).
(ii) Coordination with special section 403(b) catch-up. In
accordance with sections 414(v)(6)(A)(ii) and 402(g)(7)(A), the age 50
catch-up described in this paragraph (c)(2) may apply for any taxable
year in which a participant also qualifies for the special section
403(b) catch-up under paragraph (c)(3) of this section.
(3) Special section 403(b) catch-up for certain organizations--(i)
Amount of the special section 403(b) catch-up. In the case of a
qualified employee of a qualified organization for whom the basic
section 403(b) elective deferrals for any year are not less than the
applicable dollar amount under section 402(g)(1)(B), the section 403(b)
elective deferral limitation of section 402(g)(1) for the taxable year
of the qualified employee is increased by the least of--
(A) $3,000;
(B) The excess of--
(1) $15,000, over
(2) The total elective deferrals described in section
402(g)(7)(A)(ii) made for the qualified employee by the qualified
organization for prior years; or
(C) The excess of--
(1) $5,000 multiplied by the number of years of service of the
employee with the qualified organization, over
(2) The total elective deferrals (as defined at Sec. 1.403(b)-2)
made for the employee by the qualified organization for prior years.
(ii) Qualified organization. (A) For purposes of this paragraph
(c)(3), qualified organization means an eligible employer that is--
(1) An educational organization described in section
170(b)(1)(A)(ii);
[[Page 486]]
(2) A hospital;
(3) A health and welfare service agency (including a home health
service agency);
(4) A church-related organization; or
(5) Any organization described in section 414(e)(3)(B)(ii).
(B) All entities that are in a church-related organization or an
organization controlled by a church-related organization under section
414(e)(3)(B)(ii) are treated as a single qualified organization (so that
years of service and any special section 403(b) catch-up elective
deferrals previously made for a qualified employee for a church or other
entity within a church-related organization or an organization
controlled by the church-related organization are taken into account for
purposes of applying this paragraph (c)(3) to the employee with respect
to any other entity within the same church-related organization or
organization controlled by a church-related organization).
(C) For purposes of this paragraph (c)(3)(ii), a health and welfare
service agency means--
(1) An organization whose primary activity is to provide services
that constitute medical care as defined in section 213(d)(1) (such as a
hospice);
(2) A section 501(c)(3) organization whose primary activity is the
prevention of cruelty to individuals or animals;
(3) An adoption agency; or
(4) An agency that provides substantial personal services to the
needy as part of its primary activity (such as a section 501(c)(3)
organization that either provides meals to needy individuals, is a home
health service agency, provides services to help individuals who have
substance abuse, or provides help to the disabled).
(iii) Qualified employee. For purposes of this paragraph (c)(3),
qualified employee means an employee who has completed at least 15 years
of service (as defined under paragraph (e) of this section) taking into
account only employment with the qualified organization. Thus, an
employee who has not completed at least 15 years of service (as defined
under paragraph (e) of this section) taking into account only employment
with the qualified organization is not a qualified employee.
(iv) Coordination with age 50 catch-up. In accordance with sections
402(g)(1)(C) and 402(g)(7), any catch-up amount contributed by an
employee who is eligible for both an age 50 catch-up and a special
section 403(b) catch-up is treated first as an amount contributed as a
special section 403(b) catch-up to the extent a special section 403(b)
catch-up is permitted, and then as an amount contributed as an age 50
catch-up (to the extent the catch-up amount exceeds the maximum special
section 403(b) catch-up after taking into account sections 402(g) and
415(c), this paragraph (c)(3), and any limitations on the special
section 403(b) catch-up that are imposed by the terms of the plan).
(4) Coordination with designated Roth contributions. See regulations
under section 402A for rules for determining whether an elective
deferral is a pre-tax elective deferral or a designated Roth
contribution.
(5) Examples. The provisions of this paragraph (c) are illustrated
by the following examples:
Example 1. (i) Facts illustrating application of the basic dollar
limit. Participant B, who is 45, is eligible to participate in a State
university section 403(b) plan in 2006. B is not a qualified employee,
as defined in paragraph (c)(3)(iii) of this section. The plan permits
section 403(b) elective deferrals, but no other employer contributions
are made under the plan. The plan provides limitations on section 403(b)
elective deferrals up to the maximum permitted under paragraphs (c)(1)
and (3) of this section and the additional age 50 catch-up amount
described in paragraph (c)(2) of this section. For 2006, B will receive
includible compensation of $42,000 from the eligible employer. B desires
to elect to have the maximum section 403(b) elective deferral possible
contributed in 2006. For 2006, the basic dollar limit for section 403(b)
elective deferrals under paragraph (c)(1) of this section is $15,000 and
the additional dollar amount permitted under the age 50 catch-up is
$5,000.
(ii) Conclusion. B is not eligible for the age 50 catch-up in 2006
because B is 45 in 2006. B is also not eligible for the special section
403(b) catch-up under paragraph (c)(3) of this section because B is not
a qualified employee. Accordingly, the maximum section 403(b) elective
deferral that B may elect for 2006 is $15,000.
Example 2. (i) Facts illustrating application of the includible
compensation limitation. The facts are the same as in Example 1, except
B's includible compensation is $14,000.
[[Page 487]]
(ii) Conclusion. Under section 415(c), contributions may not exceed
100 percent of includible compensation. Accordingly, the maximum section
403(b) elective deferral that B may elect for 2006 is $14,000.
Example 3. (i) Facts illustrating application of the age 50 catch-
up. Participant C, who is 55, is eligible to participate in a State
university section 403(b) plan in 2006. The plan permits section 403(b)
elective deferrals, but no other employer contributions are made under
the plan. The plan provides limitations on section 403(b) elective
deferrals up to the maximum permitted under paragraphs (c)(1) and (c)(3)
of this section and the additional age 50 catch-up amount described in
paragraph (c)(2) of this section. For 2006, C will receive includible
compensation of $48,000 from the eligible employer. C desires to elect
to have the maximum section 403(b) elective deferral possible
contributed in 2006. For 2006, the basic dollar limit for section 403(b)
elective deferrals under paragraph (c)(1) of this section is $15,000 and
the additional dollar amount permitted under the age 50 catch-up is
$5,000. C does not have 15 years of service and thus is not a qualified
employee, as defined in paragraph (c)(3)(iii) of this section.
(ii) Conclusion. C is eligible for the age 50 catch-up in 2006
because C is 55 in 2006. C is not eligible for the special section
403(b) catch-up under paragraph (c)(3) of this section because C is not
a qualified employee (as defined in paragraph (c)(3)(iii) of this
section). Accordingly, the maximum section 403(b) elective deferral that
C may elect for 2006 is $20,000 ($15,000 plus $5,000).
Example 4. (i) Facts illustrating application of both the age 50 and
the special section 403(b) catch-up. The facts are the same as in
Example 3, except that C is a qualified employee for purposes of the
special section 403(b) catch-up provisions in paragraph (c)(3) of this
section. For 2006, the maximum additional section 403(b) elective
deferral for which C qualifies under the special section 403(b) catch-up
under paragraph (c)(3) of this section is $3,000.
(ii) Conclusion. The maximum section 403(b) elective deferrals that
C may elect for 2006 is $23,000. This is the sum of the basic limit on
section 403(b) elective deferrals under paragraph (c)(1) of this section
equal to $15,000, plus the $3,000 additional special section 403(b)
catch-up amount for which C qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up amount of $5,000.
Example 5. (i) Facts illustrating calculation of years of service
with a predecessor organization for purposes of the special section
403(b) catch-up. Participant A is an employee of hospital H and is
eligible to participate in a section 403(b) plan of H in 2006. A does
not have 15 years of service with H, but A has previously made special
section 403(b) catch-up deferrals to a section 403(b) plan maintained by
hospital P which has since been acquired by H.
(ii) Conclusion. The special section 403(b) catch-up amount for
which A qualifies under paragraph (c)(3) of this section must be
calculated taking into account A's prior years of service and section
403(b) elective deferrals with the predecessor hospital if and only if A
did not have any severance from service in connection with the
acquisition.
Example 6. (i) Facts illustrating application of the age 50 catch-up
and the section 415(c) dollar limitation. The facts are the same as in
Example 4, except that the employer makes a nonelective contribution for
each employee equal to 20 percent of C's compensation (which is
$48,000). Thus, the employer makes a nonelective contribution for C for
2006 equal to $9,600. The plan provides that a participant is not
permitted to make section 403(b) elective deferrals to the extent the
section 403(b) elective deferrals would result in contributions in
excess of the maximum permitted under section 415 and provides that
contributions are reduced in the following order: the special section
403(b) catch-up elective deferrals under paragraph (c)(3) of this
section are reduced first; the age 50 catch-up elective deferrals under
paragraph (c)(2) of this section are reduced second; and then the basic
section 403(b) elective deferrals under paragraph (c)(1) of this section
are reduced. For 2006, the applicable dollar limit under section
415(c)(1)(A) is $44,000.
(ii) Conclusion. The maximum section 403(b) elective deferral that C
may elect for 2006 is $23,000. This is the sum of the basic limit on
section 403(b) elective deferrals under paragraph (c)(1) of this section
equal to $15,000, plus the $3,000 additional special section 403(b)
catch-up amount for which C qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up amount of $5,000. The limit
in paragraph (b) of this section would not be exceeded because the sum
of the $9,600 nonelective contribution and the $23,000 section 403(b)
elective deferrals does not exceed the lesser of $49,000 (which is the
sum of $44,000 plus the $5,000 additional age 50 catch-up amount) or
$53,000 (which is the sum of C's includible compensation for 2006
($48,000) plus the $5,000 additional age 50 catch-up amount).
Example 7. (i) Facts further illustrating application of the age 50
catch-up and the section 415(c) dollar limitation. The facts are the
same as in Example 6, except that C's includible compensation for 2006
is $58,000 and the plan provides for a nonelective contribution equal to
50 percent of includible compensation, so that the employer nonelective
contribution for C for 2006 is $29,000 (50 percent of $58,000).
(ii) Conclusion. The maximum section 403(b) elective deferral that C
may elect for
[[Page 488]]
2006 is $20,000. A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in section 415(c)(1)(A) plus
the additional age 50 catch-up amount, because the sum of the employer's
nonelective contribution of $29,000 plus a section 403(b) elective
deferral in excess of $20,000 would exceed $49,000 (the sum of the
$44,000 limit in section 415(c)(1)(A) plus the $5,000 additional age 50
catch-up amount). (Note that a section 403(b) elective deferral in
excess of $20,000 would also exceed the limitations of section 402(g)
unless a special section 403(b) catch-up were permitted.)
Example 8. (i) Facts further illustrating application of the age 50
catch-up and the section 415(c) dollar limitation. The facts are the
same as in Example 7, except that the plan provides for a nonelective
contribution for C equal to $44,000 (which is the limit in section
415(c)(1)(A)).
(ii) Conclusion. The maximum section 403(b) elective deferral that C
may elect for 2006 is $5,000. A section 403(b) elective deferral in
excess of this amount would exceed the sum of the limit in section
415(c)(1)(A) plus the additional age 50 catch-up amount ($5,000),
because the sum of the employer's nonelective contribution of $44,000
plus a section 403(b) elective deferral in excess of $5,000 would exceed
$49,000 (the sum of the $44,000 limit in section 415(c)(1)(A) plus the
$5,000 additional age 50 catch-up amount).
Example 9. (i) Facts illustrating application of the age 50 catch-up
and the section 415(c) includible compensation limitation. The facts are
the same as in Example 7, except that C's includible compensation for
2006 is $28,000, so that the employer nonelective contribution for C for
2006 is $14,000 (50 percent of $28,000).
(ii) Conclusion. The maximum section 403(b) elective deferral that C
may elect for 2006 is $19,000. A section 403(b) elective deferral in
excess of this amount would exceed the sum of the limit in section
415(c)(1)(B) plus the additional age 50 catch-up amount, because C's
includible compensation is $28,000 and the sum of the employer's
nonelective contribution of $14,000 plus a section 403(b) elective
deferral in excess of $19,000 would exceed $33,000 (which is the sum of
100 percent of C's includible compensation plus the $5,000 additional
age 50 catch-up amount).
Example 10. (i) Facts illustrating that section 403(b) elective
deferrals cannot exceed compensation otherwise payable. Employee D is
age 60, has includible compensation of $14,000, and wishes to contribute
section 403(b) elective deferrals of $20,000 for the year. No
nonelective contributions are made for Employee D.
(ii) Conclusion. Because a contribution is a section 403(b) elective
deferral only if it relates to an amount that would otherwise be
included in the participant's compensation, the effective limitation on
section 403(b) elective deferrals for a participant whose compensation
is less than the basic dollar limit for section 403(b) elective
deferrals is the participant's compensation. Thus, D cannot make section
403(b) elective deferrals in excess of D's actual compensation, which is
$14,000, even though the basic dollar limit exceeds that amount.
Example 11. (i) Facts illustrating calculation of the special
section 403(b) catch-up. For 2006, employee E, who is age 53, is
eligible to participate in a section 403(b) plan of hospital H, which is
a section 501(c)(3) organization. H's plan permits section 403(b)
elective deferrals and provides for an employer contribution of 10
percent of a participant's compensation. The plan provides limitations
on section 403(b) elective deferrals up to the maximum permitted under
paragraphs (c)(1), (2), and (3) of this section. For 2006, E's
includible compensation is $50,000. E wishes to elect to have the
maximum section 403(b) elective deferral possible contributed in 2006. E
has previously made $62,000 of section 403(b) elective deferrals under
the plan, but has never made an election for a special section 403(b)
catch-up elective deferral. For 2006, the basic dollar limit for section
403(b) elective deferrals under paragraph (c)(1) of this section is
$15,000, the additional dollar amount permitted under the age 50 catch-
up is $5,000, E's employer will make a nonelective contribution of
$5,000 (10% of $50,000 compensation), and E is a qualified employee of a
qualified employer as defined in paragraph (c)(3) of this section.
(ii) Conclusion. The maximum section 403(b) elective deferrals that
E may elect under H's section 403(b) plan for 2006 is $23,000. This is
the sum of the basic limit on section 403(b) elective deferrals for 2006
under paragraph (c)(1) of this section equal to $15,000, plus the $3,000
maximum additional special section 403(b) catch-up amount for which D
qualifies in 2006 under paragraph (c)(3) of this section, plus the
additional age 50 catch-up amount of $5,000. The limitation on the
additional special section 403(b) catch-up amount is not less than
$3,000 because the limitation at paragraph (c)(3)(i)(B) of this section
is $15,000 ($15,000 minus zero) and the limitation at paragraph
(c)(3)(i)(C) of this section is $13,000 ($5,000 times 15, minus $62,000
of total deferrals in prior years). These conclusions would be
unaffected if H were an eligible governmental employer under section
457(b) that has a section 457(b) eligible governmental plan and E were
in the past to have made annual deferrals to that plan, because
contributions to a section 457(b) eligible governmental plan do not
constitute elective deferrals; and these conclusions would also be the
same if H had a section 401(k) plan and E were in the past to have made
elective deferrals to that plan, assuming that those elective deferrals
did not exceed $10,000 ($5,000 times 15, minus the sum of $62,000 plus
$10,000, equals $3,000), so as to
[[Page 489]]
result in the limitation at paragraph (c)(3)(i)(C) of this section being
less than $3,000.
Example 12. (i) Facts illustrating calculation of the special
section 403(b) catch-up in the next calendar year. The facts are the
same as in Example 11, except that, for 2007, E has includible
compensation of $60,000. For 2007, E now has previously made $85,000 of
section 403(b) elective deferrals ($62,000 deferred before 2006, plus
the $15,000 in basic section 403(b) elective deferrals in 2006, the
$3,000 maximum additional special section 403(b) catch-up amount in
2006, plus the $5,000 age 50 catch-up amount in 2006). However, the
$5,000 age 50 catch-up amount deferred in 2006 is disregarded for
purposes of applying the limitation at paragraph (c)(3)(i)(C) of this
section to determine the special section 403(b) catch-up amount. Thus,
for 2007, only $80,000 of section 403(b) elective deferrals are taken
into account in applying the limitation at paragraph (c)(3)(i)(C) of
this section. For 2007, the basic dollar limit for section 403(b)
elective deferrals under paragraph (c)(1) of this section is assumed to
be $16,000, the additional dollar amount permitted under the age 50
catch-up is assumed to be $5,000, and E's employer contributes $6,000
(10% of $60,000) as a non-elective contribution.
(ii) Conclusion. The maximum section 403(b) elective deferral that D
may elect under H's section 403(b) plan for 2007 is $21,000. This is the
sum of the basic limit on section 403(b) elective deferrals under
paragraph (c)(1) of this section equal to $16,000, plus the additional
age 50 catch-up amount of $5,000. E is not entitled to any additional
special section 403(b) catch-up amount for 2007 under paragraph (c)(3)
of this section due to the limitation at paragraph (c)(3)(i)(C) of this
section (16 times $5,000 equals $80,000, minus D's total prior section
403(b) elective deferrals of $80,000 equals zero).
(d) Employer contributions for former employees--(1) Includible
compensation deemed to continue for nonelective contributions. For
purposes of applying paragraph (b) of this section, a former employee is
deemed to have monthly includible compensation for the period through
the end of the taxable year of the employee in which he or she ceases to
be an employee and through the end of each of the next five taxable
years. The amount of the monthly includible compensation is equal to one
twelfth of the former employee's includible compensation during the
former employee's most recent year of service. Accordingly, nonelective
employer contributions for a former employee must not exceed the
limitation of section 415(c)(1) up to the lesser of the dollar amount in
section 415(c)(1)(A) or the former employee's annual includible
compensation based on the former employee's average monthly compensation
during his or her most recent year of service.
(2) Examples. The provisions of paragraph (d)(1) of this section are
illustrated by the following examples:
Example 1. (i) Facts. Private college M is a section 501(c)(3)
organization operated on the basis of a June 30 fiscal year that
maintains a section 403(b) plan for its employees. In 2004, M amends the
plan to provide for a temporary early retirement incentive under which
the college will make a nonelective contribution for any participant who
satisfies certain minimum age and service conditions and who retires
before June 30, 2006. The contribution will equal 110 percent of the
participant's rate of pay for one year and will be payable over a period
ending no later than the end of the fifth fiscal year that begins after
retirement. It is assumed for purposes of this Example 1 that, in
accordance with Sec. 1.401(a)(4)-10(b) and under the facts and
circumstances, the post-retirement contributions made for participants
who satisfy the minimum age and service conditions and retire before
June 30, 2006, do not discriminate in favor of former employees who are
highly compensated employees. Employee A retires under the early
retirement incentive on March 12, 2006, and A's annual includible
compensation for the period from March 1, 2005, through February 28,
2006 (which is A's most recent one year of service) is $30,000. The
applicable dollar limit under section 415(c)(1)(A) is assumed to be
$44,000 for 2006 and $45,000 for 2007. The college contributes $30,000
for A for 2006 and $3,000 for A for 2007 (totaling $33,000 or 110
percent of $30,000). No other contributions are made to a section 403(b)
contract for A for those years.
(ii) Conclusion. The contributions made for A do not exceed A's
includible compensation for 2006 or 2007.
Example 2. (i) Facts. Private college N is a section 501(c)(3)
organization that maintains a section 403(b) plan for its employees. The
plan provides for N to make monthly nonelective contributions equal to
20 percent of the monthly includible compensation for each eligible
employee. In addition, the plan provides for contributions to continue
for 5 years following the retirement of any employee after age 64 and
completion of at least 20 years of service (based on the employee's
average annual rate of base salary in the preceding 3 calendar years
ended before the date of retirement). It is assumed for purposes of this
Example 2 that, in accordance with
[[Page 490]]
Sec. 1.401(a)(4)-10(b) and under the facts and circumstances, the post-
retirement contributions made for participants who satisfy the minimum
age and service conditions do not discriminate in favor of former
employees who are highly compensated employees. Employee B retires on
July 1, 2006, at age 64 after completion of 20 or more years of service.
At that date, B's annual includible compensation for the most recently
ended fiscal year of N is $72,000 and B's average monthly rate of base
salary for 2003 through 2005 is $5,000. N contributes $1,200 per month
(20 percent of 1/12th of $72,000) from January of 2006 through June of
2006 and contributes $1,000 (20 percent of $5,000) per month for B from
July of 2006 through June of 2011. The applicable dollar limit under
section 415(c)(1)(A) is $44,000 for 2006 through 2011. No other
contributions are made to a section 403(b) contract for B for those
years.
(ii) Conclusion. The contributions made for B do not exceed B's
includible compensation for any of the years from 2006 through 2010.
Example 3. (i) Facts. A public university maintains a section 403(b)
under which it contributes annually 10% of compensation for
participants, including for the first 5 calendar years following the
date on which the participant ceases to be an employee. The plan
provides that if a participant who is a former employee dies during the
first 5 calendar years following the date on which the participant
ceases to be an employee, a contribution is made that is equal to the
lesser of--
(A) The excess of the individual's includible compensation for that
year over the contributions previously made for the individual for that
year; or
(B) The total contributions that would have been made on the
individual's behalf thereafter if he or she had survived to the end of
the 5-year period.
(ii) Individual C's annual includible compensation is $72,000 (so
that C's monthly includible compensation is $6,000). A $600 contribution
is made for C for January of the first taxable year following retirement
(10% of individual C's monthly includible compensation of $6,000).
Individual C dies during February of that year. The university makes a
contribution for individual C for February equal to $11,400 (C's monthly
includible compensation for January and February, reduced by $600).
(iii) Conclusion. The contribution does not exceed the amount of
individual C's includible compensation for the taxable year for purposes
of section 415(c), but any additional contributions would exceed C's
includible compensation for purposes of section 415(c).
(3) Disabled employees. See also section 415(c)(3)(C) which sets
forth a special rule under which compensation may be treated as
continuing for purposes of section 415 for certain former employees who
are disabled.
(e) Special rules for determining years of service--(1) In general.
For purposes of determining a participant's includible compensation
under paragraph (b)(2) of this section and a participant's years of
service under paragraphs (c)(3) (special section 403(b) catch-up for
qualified employees of certain organizations) and (d) (employer
contributions for former employees) of this section, an employee must be
credited with a full year of service for each year during which the
individual is a full-time employee of the eligible employer for the
entire work period, and a fraction of a year for each part of a work
period during which the individual is a full-time or part-time employee
of the eligible employer. An individual's number of years of service
equals the aggregate of the annual work periods during which the
individual is employed by the eligible employer.
(2) Work period. A year of service is based on the employer's annual
work period, not the employee's taxable year. For example, in
determining whether a university professor is employed full time, the
annual work period is the school's academic year. However, in no case
may an employee accumulate more than one year of service in a twelve-
month period.
(3) Service with more than one eligible employer--(i) General rule.
With respect to any section 403(b) contract of an eligible employer,
except as provided in paragraph (e)(3)(ii) of this section, any period
during which an individual is not an employee of that eligible employer
is disregarded for purposes of this paragraph (e).
(ii) Special rule for church employees. With respect to any section
403(b) contract of an eligible employer that is a church-related
organization, any period during which an individual is an employee of
that eligible employer and any other eligible employer that is a church-
related organization that has an association (as defined in section
414(e)(3)(D)) with that eligible employer is taken into account on an
aggregated basis, but any period during which an individual is not an
employee of a church-related organization or is
[[Page 491]]
an employee of a church-related organization that does not have an
association with that eligible employer is disregarded for purposes of
this paragraph (e).
(4) Full-time employee for full year. Each annual work period during
which an individual is employed full time by the eligible employer
constitutes one year of service. In determining whether an individual is
employed full-time, the amount of work which he or she actually performs
is compared with the amount of work that is normally required of
individuals performing similar services from which substantially all of
their annual compensation is derived.
(5) Other employees. (i) An individual is treated as performing a
fraction of a year of service for each annual work period during which
he or she is a full-time employee for part of the annual work period and
for each annual work period during which he or she is a part-time
employee either for the entire annual work period or for a part of the
annual work period.
(ii) In determining the fraction that represents the fractional year
of service for an individual employed full time for part of an annual
work period, the numerator is the period of time (such as weeks or
months) during which the individual is a full-time employee during that
annual work period, and the denominator is the period of time that is
the annual work period.
(iii) In determining the fraction that represents the fractional
year of service of an individual who is employed part time for the
entire annual work period, the numerator is the amount of work performed
by the individual, and the denominator is the amount of work normally
required of individuals who perform similar services and who are
employed full time for the entire annual work period.
(iv) In determining the fraction representing the fractional year of
service of an individual who is employed part time for part of an annual
work period, the fractional year of service that would apply if the
individual were a part-time employee for a full annual work period is
multiplied by the fractional year of service that would apply if the
individual were a full-time employee for the part of an annual work
period.
(6) Work performed. For purposes of this paragraph (e), in measuring
the amount of work of an individual performing particular services, the
work performed is determined based on the individual's hours of service
(as defined under section 410(a)(3)(C)), except that a plan may use a
different measure of work if appropriate under the facts and
circumstances. For example, a plan may provide for a university
professor's work to be measured by the number of courses taught during
an annual work period in any case in which that individual's work
assignment is generally based on a specified number of courses to be
taught.
(7) Most recent one-year period of service. For purposes of
paragraph (d) of this section, in the case of a part-time employee or a
full-time employee who is employed for only part of the year determined
on the basis of the employer's annual work period, the employee's most
recent periods of service are aggregated to determine his or her most
recent one-year period of service. In such a case, there is first taken
into account his or her service during the annual work period for which
the last year of service's includible compensation is being determined;
then there is taken into account his or her service during his or her
next preceding annual work period based on whole months; and so forth
until the employee's service equals, in the aggregate, one year of
service.
(8) Less than one year of service considered as one year. If, at the
close of a taxable year, an employee has, after application of all of
the other rules in this paragraph (e), some portion of one year of
service (but has accumulated less than one year of service), the
employee is deemed to have one year of service. Except as provided in
the previous sentence, fractional years of service are not rounded up.
(9) Examples. The provisions of this paragraph (e) are illustrated
by the following examples:
Example 1. (i) Facts. Individual G is employed half-time in 2004 and
2005 as a clerk by H, a hospital which is a section 501(c)(3)
organization. G earns $20,000 from H in each
[[Page 492]]
of those years, and retires on December 31, 2005.
(ii) Conclusion. For purposes of determining G's includible
compensation during G's last year of service under paragraph (d) of this
section, G's most recent periods of service are aggregated to determine
G's most recent one-year period of service. In this case, since D worked
half-time in 2004 and 2005, the compensation D earned in those two years
are aggregated to produce D's includible compensation for D's last full
year in service. Thus, in this case, the $20,000 that D earned in 2004
and 2005 for D's half-time work are aggregated, so that D has $40,000 of
includible compensation for D's most recent one-year of service for
purposes of applying paragraphs (b)(2), (c)(3), and (d) of this section.
Example 2. (i) Facts. Individual H is employed as a part-time
professor by public University U during the first semester of its two-
semester 2004-2005 academic year. While H teaches one course generally
for 3 hours a week during the first semester of the academic year, U's
full-time faculty members generally teach for 9 hours a week during the
full academic year.
(ii) Conclusion. For purposes of calculating how much of a year of
service H performs in the 2004-2005 academic year (before application of
the special rules of paragraphs (e)(7) and (8) of this section
concerning less than one year of service), paragraph (e)(5)(iv) of this
section is applied as follows: since H teaches one course at U for 3
hours per week for 1 semester and other faculty members at U teach 9
hours per week for 2 semesters, H is considered to have completed \3/18\
or \1/6\ of a year of service during the 2004-2005 academic year,
determined as follows:
(A) The fractional year of service if H were a part-time employee
for a full year is 3/9 (number of hours employed divided by the usual
number of hours of work required for that position).
(B) The fractional year of service if H were a full-time employee
for half of a year is \1/2\ (one semester, divided by the usual 2-
semester annual work period).
(C) These fractions are multiplied to obtain the fractional year of
service: \3/9\ times \1/2\, or \3/18\, equals \1/6\ of a year of
service.
(f) Excess contributions or deferrals--(1) Inclusion in gross
income. Any contribution made for a participant to a section 403(b)
contract for the taxable year that exceeds either the maximum annual
contribution limit set forth in paragraph (b) of this section or the
maximum annual section 403(b) elective deferral limit set forth in
paragraph (c) of this section constitutes an excess contribution that is
included in gross income for that taxable year. See Sec. 1.403(b)-
3(d)(1)(iii) and (2)(i) for additional rules, including special rules
relating to contracts that fail to be nonforfeitable. See also section
4973 for an excise tax applicable with respect to excess contributions
to a custodial account and section 4979(f)(2)(B) for a special rule
applicable if excess matching contributions, excess after-tax employee
contributions, and excess section 403(b) elective deferrals do not
exceed $100.
(2) Separate account required for certain excess contributions;
distribution of excess elective deferrals. A contract to which a
contribution is made that exceeds the maximum annual contribution limit
set forth in paragraph (b) of this section is not a section 403(b)
contract unless the excess contribution is held in a separate account
which constitutes a separate account for purposes of section 72. See
also Sec. 1.403(b)-3(a)(4) and paragraph (f)(4) of this section for
additional rules with respect to the requirements of section 401(a)(30)
and any excess deferral.
(3) Ability to distribute excess contributions. A contract does not
fail to satisfy the requirements of Sec. 1.403(b)-3, the distribution
rules of Sec. 1.403(b)-6 or 1.403(b)-9, or the funding rules of Sec.
1.403(b)-8 solely by reason of a distribution made from a separate
account under paragraph (f)(2) of this section or made under paragraph
(f)(4) of this section.
(4) Excess section 403(b) elective deferrals. A section 403(b)
contract may provide that any excess deferral as a result of a failure
to comply with the limitation under paragraph (c) of this section for a
taxable year with respect to any section 403(b) elective deferral made
for a participant by the employer will be distributed to the
participant, with allocable net income, no later than April 15 of the
following taxable year or otherwise in accordance with section 402(g).
See section 402(g)(2)(A) for rules permitting the participant to
allocate excess deferrals among the plans in which the participant has
made elective deferrals, and see section 402(g)(2)(C) for special rules
to determine the tax treatment of such a distribution.
(5) Examples. The provisions of this paragraph (f) are illustrated
by the following examples:
[[Page 493]]
Example 1. (i) Facts. Individual D's employer makes a $46,000
contribution for 2006 to an individual annuity insurance policy for
Individual D that would otherwise be a section 403(b) contract. The
contribution does not include any elective deferrals and the applicable
limit under section 415(c) is $44,000 for 2006. The $2,000 section
415(c) excess is put into a separate account under the policy. Employer
includes $2,000 in D's gross income as wages for 2006 and, to the extent
of the amount held in the separate account for the section 415(c) excess
contribution, does not treat the account as a contract to which section
403(b) applies.
(ii) Conclusion. The separate account for the section 415(c) excess
contribution is a contract to which section 403(c) applies, but the
excess contribution does not cause the rest of the contract to fail
section 403(b).
Example 2. (i) Facts. Same facts as Example 1, except that the
contribution is made to purchase mutual funds that are held in a
custodial account, instead of an individual annuity insurance policy.
(ii) Conclusion. The conclusion is the same as in Example 1, except
that the purchase constitutes a transfer described in section 83.
Example 3. (i) Facts. Same facts as Example 1, except that the
amount held in the separate account for the section 415(c) excess
contribution is subsequently distributed to D.
(ii) Conclusion. The distribution is included in gross income to the
extent provided under section 72 relating to distributions from a
section 403(c) contract.
Example 4. (i) Facts. Individual E makes section 403(b) elective
deferrals totaling $15,500 for 2006, when E is age 45 and the applicable
limit on section 403(b) elective deferrals is $15,000. On April 14,
2007, the plan refunds the $500 excess along with applicable earnings of
$65.
(ii) Conclusion. The $565 payment constitutes a distribution of an
excess deferral under paragraph (f)(4) of this section. Under section
402(g), the $500 excess deferral is included in E's gross income for
2006. The additional $65 is included in E's gross income for 2007 and,
because the distribution is made by April 15, 2007 (as provided in
section 402(g)(2)), the $65 is not subject to the additional 10 percent
income tax on early distributions under section 72(t).
[T.D. 9340, 72 FR 41144, July 26, 2007, as amended by 72 FR 54352, Sept.
25, 2007; 75 FR 65566, Oct. 26, 2010]
Sec. 1.403(b)-5 Nondiscrimination rules.
(a) Nondiscrimination rules for contributions other than section
403(b) elective deferrals--(1) General rule. Under section
403(b)(12)(A)(i), employer contributions and after-tax employee
contributions to a section 403(b) plan must satisfy all of the following
requirements (the nondiscrimination requirements) in the same manner as
a qualified plan under section 401(a):
(i) Section 401(a)(4) (relating to nondiscrimination in
contributions and benefits), taking section 401(a)(5) into account.
(ii) Section 401(a)(17) (limiting the amount of compensation that
can be taken into account).
(iii) Section 401(m) (relating to matching and after-tax employee
contributions).
(iv) Section 410(b) (relating to minimum coverage).
(2) Nonapplication to section 403(b) elective deferrals. The
requirements of this paragraph (a) do not apply to section 403(b)
elective deferrals.
(3) Compensation for testing. Except as may otherwise be
specifically permitted under the provisions referenced in paragraph
(a)(1) of this section, compliance with those provisions is tested using
compensation as defined in section 414(s) (and without regard to section
415(c)(3)(E)). In addition, for purposes of paragraph (a)(1) of this
section, there may be excluded employees who are permitted to be
excluded under paragraph (b)(4)(ii)(D) and (E) of this section. However,
as provided in paragraph (b)(4)(i) of this section, the exclusion of any
employee listed in paragraph (b)(4)(ii)(D) or (E) of this section is
subject to the conditions applicable under section 410(b)(4).
(4) Employer aggregation rules. See regulations under section
414(b), (c), (m), and (o) for rules treating entities as a single
employer for purposes of the nondiscrimination requirements.
(5) Special rules for governmental plans. Paragraphs (a)(1)(i),
(iii), and (iv) of this section do not apply to a governmental plan as
defined in section 414(d) (but contributions to a governmental plan must
comply with paragraphs (a)(1)(ii) and (b) of this section).
(b) Universal availability required for section 403(b) elective
deferrals--(1) General rule. Under section 403(b)(12)(A)(ii), all
employees of the eligible employer must be permitted to have section
403(b) elective deferrals contributed on their behalf if any employee of
the eligible employer may elect to have the
[[Page 494]]
organization make section 403(b) elective deferrals. Further, the
employee's right to make elective deferrals also includes the right to
designate section 403(b) elective deferrals as designated Roth
contributions.
(2) Effective opportunity required. For purposes of paragraph (b)(1)
of this section, an employee is not treated as being permitted to have
section 403(b) elective deferrals contributed on the employee's behalf
unless the employee is provided an effective opportunity that satisfies
the requirements of this paragraph (b)(2). Whether an employee has an
effective opportunity is determined based on all the relevant facts and
circumstances, including notice of the availability of the election, the
period of time during which an election may be made, and any other
conditions on elections. A section 403(b) plan satisfies the effective
opportunity requirement of this paragraph (b)(2) only if, at least once
during each plan year, the plan provides an employee with an effective
opportunity to make (or change) a cash or deferred election (as defined
at Sec. 1.401(k)-1(a)(3)) between cash or a contribution to the plan.
Further, an effective opportunity includes the right to have section
403(b) elective deferrals made on his or her behalf up to the lesser of
the applicable limits in Sec. 1.403(b)-4(c) (including any permissible
catch-up elective deferrals under Sec. 1.403(b)-4(c)(2) and (3)) or the
applicable limits under the contract with the largest limitation, and
applies to part-time employees as well as full-time employees. An
effective opportunity is not considered to exist if there are any other
rights or benefits (other than rights or benefits listed in Sec.
1.401(k)-1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or
indirectly) upon a participant making or failing to make a cash or
deferred election with respect to a contribution to a section 403(b)
contract.
(3) Special rules. (i) In the case of a section 403(b) plan that
covers the employees of more than one section 501(c)(3) organization,
the universal availability requirement of this paragraph (b) applies
separately to each common law entity (that is, applies separately to
each section 501(c)(3) organization). In the case of a section 403(b)
plan that covers the employees of more than one State entity, this
requirement applies separately to each entity that is not part of a
common payroll. An eligible employer may condition the employee's right
to have section 403(b) elective deferrals made on his or her behalf on
the employee electing a section 403(b) elective deferral of more than
$200 for a year.
(ii) For purposes of this paragraph (b)(3), an employer that
historically has treated one or more of its various geographically
distinct units as separate for employee benefit purposes may treat each
unit as a separate organization if the unit is operated independently on
a day-to-day basis. Units are not geographically distinct if such units
are located within the same Standard Metropolitan Statistical Area
(SMSA).
(4) Exclusions--(i) Exclusions for special types of employees. A
plan does not fail to satisfy the universal availability requirement of
this paragraph (b) merely because it excludes one or more of the types
of employees listed in paragraph (b)(4)(ii) of this section. However,
the exclusion of any employee listed in paragraph (b)(4)(ii)(D) or (E)
of this section is subject to the conditions applicable under section
410(b)(4). Thus, if any employee listed in paragraph (b)(4)(ii)(D) of
this section has the right to have section 403(b) elective deferrals
made on his or her behalf, then no employee listed in that paragraph
(b)(4)(ii)(D) of this section may be excluded under this paragraph
(b)(4) and, if any employee listed in paragraph (b)(4)(ii)(E) of this
section has the right to have section 403(b) elective deferrals made on
his or her behalf, then no employee listed in that paragraph
(b)(4)(ii)(E) of this section may be excluded under this paragraph
(b)(4).
(ii) List of special types of excludible employees. The following
types of employees are listed in this paragraph (b)(4)(ii):
(A) Employees who are eligible under another section 403(b) plan, or
a section 457(b) eligible governmental plan, of the employer which
permits an amount to be contributed or deferred at the election of the
employee.
[[Page 495]]
(B) Employees who are eligible to make a cash or deferred election
(as defined at Sec. 1.401(k)-1(a)(3)) under a section 401(k) plan of
the employer.
(C) Employees who are non-resident aliens described in section
410(b)(3)(C).
(D) Subject to the conditions applicable under section 410(b)(4)
(including section 410(b)(4)(B) permitting separate testing for
employees not meeting minimum age and service requirements), employees
who are students performing services described in section 3121(b)(10).
(E) Subject to the conditions applicable under section 410(b)(4),
employees who normally work fewer than 20 hours per week (or such lower
number of hours per week as may be set forth in the plan).
(iii) Special rules. (A) A section 403(b) plan is permitted to take
into account coverage under another plan, as permitted in paragraphs
(b)(4)(ii)(A) and (B) of this section, only if the rights to make
elective deferrals with respect to that coverage would satisfy
paragraphs (b)(2) and (4)(i) of this section if that coverage were
provided under the section 403(b) plan.
(B) For purposes of paragraph (b)(4)(ii)(E) of this section, an
employee normally works fewer than 20 hours per week if and only if--
(1) For the 12-month period beginning on the date the employee's
employment commenced, the employer reasonably expects the employee to
work fewer than 1,000 hours of service (as defined in section
410(a)(3)(C)) in such period; and
(2) For each plan year ending after the close of the 12-month period
beginning on the date the employee's employment commenced (or, if the
plan so provides, each subsequent 12-month period), the employee worked
fewer than 1,000 hours of service in the preceding 12-month period.
(See, however, section 202(a)(1) of the Employee Retirement Income
Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and
regulations under section 410(a) of the Internal Revenue Code applicable
with respect to plans that are subject to title I of ERISA.)
(c) Plan required. Contributions to an annuity contract do not
satisfy the requirements of this section unless the contributions are
made pursuant to a plan, as defined in Sec. 1.403(b)-3(b)(3), and the
terms of the plan satisfy this section.
(d) Church plans exception. This section does not apply to a section
403(b) contract purchased by a church (as defined in Sec. 1.403(b)-2).
(e) Other rules. This section only reflects requirements of the
Internal Revenue Code applicable for purposes of section 403(b) and does
not include other requirements. Specifically, this section does not
reflect the requirements of ERISA that may apply with respect to section
403(b) arrangements, such as the vesting requirements at 29 U.S.C. 1053.
[T.D. 9340, 72 FR 41144, July 26, 2007]
Sec. 1.403(b)-6 Timing of distributions and benefits.
(a) Distributions generally. This section provides special rules
regarding the timing of distributions from, and the benefits that may be
provided under, a section 403(b) contract, including limitations on when
early distributions can be made (in paragraphs (b) through (d) of this
section), required minimum distributions (in paragraph (e) of this
section), and special rules relating to loans (in paragraph (f) of this
section) and incidental benefits (in paragraph (g) of this section).
(b) Distributions from contracts other than custodial accounts or
amounts attributable to section 403(b) elective deferrals. Except as
provided in paragraph (c) of this section relating to distributions from
custodial accounts, paragraph (d) of this section relating to
distributions attributable to section 403(b) elective deferrals, Sec.
1.403(b)-4(f) (relating to correction of excess deferrals), or Sec.
1.403(b)-10(a) (relating to plan termination), a section 403(b) contract
is permitted to distribute retirement benefits to the participant no
earlier than upon the earlier of the participant's severance from
employment or upon the prior occurrence of some event, such as after a
fixed number of years, the attainment of a stated age, or disability.
See Sec. 1.401-1(b)(1)(ii) for additional guidance. This paragraph (b)
does not apply to after-tax employee contributions or earnings thereon.
(c) Distributions from custodial accounts that are not attributable
to section
[[Page 496]]
403(b) elective deferrals. Except as provided in Sec. 1.403(b)-4(f)
(relating to correction of excess deferrals) or Sec. 1.403(b)-10(a)
(relating to plan termination), distributions from a custodial account,
as defined in Sec. 1.403(b)-8(d)(2), may not be paid to a participant
before the participant has a severance from employment, dies, becomes
disabled (within the meaning of section 72(m)(7)), or attains age 59\1/
2\. Any amounts transferred out of a custodial account to an annuity
contract or retirement income account, including earnings thereon,
continue to be subject to this paragraph (c). This paragraph (c) does
not apply to distributions that are attributable to section 403(b)
elective deferrals.
(d) Distribution of section 403(b) elective deferrals--(1)
Limitation on distributions--(i) General rule. Except as provided in
Sec. 1.403(b)-4(f) (relating to correction of excess deferrals) or
Sec. 1.403(b)-10(a) (relating to plan termination), distributions of
amounts attributable to section 403(b) elective deferrals may not be
paid to a participant earlier than the earliest of the date on which the
participant has a severance from employment, dies, has a hardship,
becomes disabled (within the meaning of section 72(m)(7)), or attains
age 59\1/2\.
(ii) Special rule for pre-1989 section 403(b) elective deferrals.
For special rules relating to amounts held as of the close of the
taxable year beginning before January 1, 1989 (which does not apply to
earnings thereon), see section 1123(e)(3) of the Tax Reform Act of 1986
(100 Stat. 2085, 2475) Public Law 99-514, and section 1011A(c)(11) of
the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342,
3476) Public Law 100-647.
(2) Hardship rules. A hardship distribution under this paragraph (d)
has the same meaning as a distribution on account of hardship under
Sec. 1.401(k)-1(d)(3) and is subject to the rules and restrictions set
forth in Sec. 1.401(k)-1(d)(3) (including limiting the amount of a
distribution in the case of hardship to the amount necessary to satisfy
the hardship). In addition, a hardship distribution is limited to the
aggregate dollar amount of the participant's section 403(b) elective
deferrals under the contract (and may not include any income thereon),
reduced by the aggregate dollar amount of the distributions previously
made to the participant from the contract.
(3) Failure to keep separate accounts. If a section 403(b) contract
includes both section 403(b) elective deferrals and other contributions
and the section 403(b) elective deferrals are not maintained in a
separate account, then distributions may not be made earlier than the
later of--
(i) Any date permitted under paragraph (d)(1) of this section; and
(ii) Any date permitted under paragraph (b) or (c) of this section
with respect to contributions that are not section 403(b) elective
deferrals (whichever applies to the contributions that are not section
403(b) elective deferrals).
(e) Minimum required distributions for eligible plans--(1) In
general. Under section 403(b)(10), a section 403(b) contract must meet
the minimum distribution requirements of section 401(a)(9) (in both form
and operation). See section 401(a)(9) for these requirements.
(2) Treatment as IRAs. For purposes of applying the distribution
rules of section 401(a)(9) to section 403(b) contracts, the minimum
distribution rules applicable to individual retirement annuities
described in section 408(b) and individual retirement accounts described
in section 408(a) apply to section 403(b) contracts. Consequently,
except as otherwise provided in this paragraph (e), the distribution
rules in section 401(a)(9) are applied to section 403(b) contracts in
accordance with the provisions in Sec. 1.408-8 for purposes of
determining required minimum distributions.
(3) Required beginning date. The required beginning date for
purposes of section 403(b)(10) is April 1 of the calendar year following
the later of the calendar year in which the employee attains age 70\1/2\
or the calendar year in which the employee retires from employment with
the employer maintaining the plan. However, for any section 403(b)
contract that is not part of a governmental plan or church plan, the
required beginning date for a 5-percent owner is April 1 of the calendar
year following the calendar year in which the employee attains age 70\1/
2\.
[[Page 497]]
(4) Surviving spouse rule does not apply. The special rule in Sec.
1.408-8, A-5 (relating to spousal beneficiaries), does not apply to a
section 403(b) contract. Thus, the surviving spouse of a participant is
not permitted to treat a section 403(b) contract as the spouse's own
section 403(b) contract, even if the spouse is the sole beneficiary.
(5) Retirement income accounts. For purposes of Sec. 1.401(a)(9)-6,
A-4 (relating to annuity contracts), annuity payments provided with
respect to retirement income accounts do not fail to satisfy the
requirements of section 401(a)(9) merely because the payments are not
made under an annuity contract purchased from an insurance company,
provided that the relationship between the annuity payments and the
retirement income accounts is not inconsistent with any rules 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). See also Sec. 1.403(b)-9(a)(5)
for additional rules relating to annuities payable from a retirement
income account.
(6) Special rules for benefits accruing before December 31, 1986.
(i) The distribution rules provided in section 401(a)(9) do not apply to
the undistributed portion of the account balance under the section
403(b) contract valued as of December 31, 1986, exclusive of subsequent
earnings (pre-'87 account balance). The distribution rules provided in
section 401(a)(9) apply to all benefits under section 403(b) contracts
accruing after December 31, 1986 (post-'86 account balance), including
earnings after December 31, 1986. Consequently, the post-'86 account
balance includes earnings after December 31, 1986, on contributions made
before January 1, 1987, in addition to the contributions made after
December 31, 1986, and earnings thereon.
(ii) The issuer or custodian of the section 403(b) contract must
keep records that enable it to identify the pre-'87 account balance and
subsequent changes as set forth in paragraph (d)(6)(iii) of this section
and provide such information upon request to the relevant employee or
beneficiaries with respect to the contract. If the issuer or custodian
does not keep such records, the entire account balance is treated as
subject to section 401(a)(9).
(iii) In applying the distribution rules in section 401(a)(9), only
the post-'86 account balance is used to calculate the required minimum
distribution for a calendar year. The amount of any distribution from a
contract is treated as being paid from the post-'86 account balance to
the extent the distribution is required to satisfy the minimum
distribution requirement with respect to that contract for a calendar
year. Any amount distributed in a calendar year from a contract in
excess of the required minimum distribution for a calendar year with
respect to that contract is treated as paid from the pre-'87 account
balance, if any, of that contract.
(iv) If an amount is distributed from the pre-'87 account balance
and rolled over to another section 403(b) contract, the amount is
treated as part of the post-'86 account balance in that second contract.
However, if the pre-'87 account balance under a section 403(b) contract
is directly transferred to another section 403(b) contract (as permitted
under Sec. 1.403(b)-10(b)), the amount transferred retains its
character as a pre-'87 account balance, provided the issuer of the
transferee contract satisfies the recordkeeping requirements of
paragraph (e)(6)(ii) of this section.
(v) The distinction between the pre-'87 account balance and the
post-'86 account balance provided for under this paragraph (e)(6) of
this section has no relevance for purposes of determining the portion of
a distribution that is includible in income under section 72.
(vi) The pre-'87 account balance must be distributed in accordance
with the incidental benefit requirement of Sec. 1.401-1(b)(1)(i).
Distributions attributable to the pre-'87 account balance are treated as
satisfying this requirement if all distributions from the section 403(b)
contract (including distributions attributable to the post-'86 account
balance) satisfy the requirements of Sec. 1.401-1(b)(1)(i) without
regard to this section, and distributions attributable to the post-'86
account balance satisfy the rules of this paragraph (e) (without regard
to this paragraph
[[Page 498]]
(e)(6)). Distributions attributable to the pre-'87 account balance are
treated as satisfying the incidental benefit requirement if all
distributions from the section 403(b) contract (including distributions
attributable to both the pre-'87 account balance and the post-'86
account balance) satisfy the rules of this paragraph (e) (without regard
to this paragraph (e)(6)).
(7) Application to multiple contracts for an employee. The required
minimum distribution must be separately determined for each section
403(b) contract of an employee. However, because, as provided in
paragraph (e)(2) of this section, the distribution rules in section
401(a)(9) apply to section 403(b) contracts in accordance with the
provisions in Sec. 1.408-8, the required minimum distribution from one
section 403(b) contract of an employee is permitted to be distributed
from another section 403(b) contract in order to satisfy section
401(a)(9). Thus, as provided in Sec. 1.408-8, A-9, with respect to
IRAs, the required minimum distribution amount from each contract is
then totaled and the total minimum distribution taken from any one or
more of the individual section 403(b) contracts. However, consistent
with the rules in Sec. 1.408-8, A-9, only amounts in section 403(b)
contracts that an individual holds as an employee may be aggregated.
Amounts in section 403(b) contracts that an individual holds as a
beneficiary of the same decedent may be aggregated, but such amounts may
not be aggregated with amounts held in section 403(b) contracts that the
individual holds as the employee or as the beneficiary of another
decedent. Distributions from section 403(b) contracts do not satisfy the
minimum distribution requirements for IRAs, nor do distributions from
IRAs satisfy the minimum distribution requirements for section 403(b)
contracts.
(8) Special rule for governmental plans. A section 403(b) contract
that is part of a governmental plan (within the meaning of section
414(d)) is treated as having complied with section 401(a)(9) for all
years to which section 401(a)(9) applies to the contract, if the
contract complies with a reasonable and good faith interpretation of
section 401(a)(9).
(9) Special rule for qualifying longevity annuity contracts. The
rules in A-17(b) of Sec. 1.401(a)(9)-6 (relating to limitations on
premiums for a qualifying longevity annuity contract (QLAC), defined in
A-17 of Sec. 1.401(a)(9)-6) and A-17(d)(1) of Sec. 1.401(a)(9)-6
(relating to reliance on representations with respect to a QLAC) apply
to the purchase of a QLAC under a section 403(b) plan (rather than the
rules in A-12(b) and (c) of Sec. 1.408-8).
(f) Loans. The determination of whether the availability of a loan,
the making of a loan, or a failure to repay a loan made from an issuer
of a section 403(b) contract to a participant or beneficiary is treated
as a distribution (directly or indirectly) for purposes of this section,
and the determination of whether the availability of the loan, the
making of the loan, or a failure to repay the loan is in any other
respect a violation of the requirements of section 403(b) and Sec. Sec.
1.403(b)-1 through 1.403(b)-5, this section, and Sec. Sec. 1.403(b)-7
through 1.403(b)-11, depends on the facts and circumstances. Among the
facts and circumstances are whether the loan has a fixed repayment
schedule and bears a reasonable rate of interest, and whether there are
repayment safeguards to which a prudent lender would adhere. Thus, for
example, a loan must bear a reasonable rate of interest in order to be
treated as not being a distribution. However, a plan loan offset is a
distribution for purposes of this section. See Sec. 1.72(p)-1, Q&A-13.
See also Sec. 1.403(b)-7(d) relating to the application of section
72(p) with respect to the taxation of a loan made under a section 403(b)
contract. (Further, see section 408(b)(1) of title I of ERISA and 29 CFR
2550.408b-1 of the Department of Labor regulations concerning additional
requirements applicable with respect to plans that are subject to title
I of ERISA.)
(g) Death benefits and other incidental benefits. An annuity is not
a section 403(b) contract if it fails to satisfy the incidental benefit
requirement of Sec. 1.401-1(b)(1)(ii) (in form or in operation). For
purposes of this paragraph (g), to the extent the incidental benefit
requirement of Sec. 1.401-1(b)(1)(ii) requires a distribution of the
participant's or beneficiary's accumulated
[[Page 499]]
benefit, that requirement is deemed to be satisfied if distributions
satisfy the minimum distribution requirements of section 401(a)(9). In
addition, if a contract issued by an insurance company qualified to
issue annuities in a State includes provisions under which, in the event
a participant becomes disabled, benefits will be provided by the
insurance carrier as if employer contributions were continued until
benefit distribution commences, then that benefit is treated as an
incidental benefit (as insurance for a deferred annuity benefit in the
event of disability) that must satisfy the incidental benefit
requirement of Sec. 1.401-1(b)(1)(ii) (taking into account any other
incidental benefits provided under the plan). The rules of Sec.
1.402(a)-1(e) apply for purposes of determining when certain incidental
benefits are treated as distributed and included in gross income. See
Sec. Sec. 1.72-15 and 1.72-16.
(h) Special rule regarding severance from employment. For purposes
of this section, severance from employment occurs on any date on which
an employee ceases to be an employee of an eligible employer, even
though the employee may continue to be employed either by another entity
that is treated as the same employer where either that other entity is
not an entity that can be an eligible employer (such as transferring
from a section 501(c)(3) organization to a for-profit subsidiary of the
section 501(c)(3) organization) or in a capacity that is not employment
with an eligible employer (for example, ceasing to be an employee
performing services for a public school but continuing to work for the
same State employer). Thus, this paragraph (h) does not apply if an
employee transfers from one section 501(c)(3) organization to another
section 501(c)(3) organization that is treated as the same employer or
if an employee transfers from one public school to another public school
of the same State employer.
(i) Certain limitations do not apply to rollover contributions. The
limitations on distributions in paragraphs (b) through (d) of this
section do not apply to amounts held in a separate account for eligible
rollover distributions as described in Sec. 1.403(b)-10(d).
[T.D. 9340, 72 FR 41144, July 26, 2007, as amended by 72 FR 54352, Sept.
25, 2007; T.D. 9459, 74 FR 45994, Sept. 8, 2009; 75 FR 65566, Oct. 26,
2010; T.D. 9665, 79 FR 26843, May 12, 2014; T.D. 9673, 79 FR 37642, July
2, 2014]
Sec. 1.403(b)-7 Taxation of distributions and benefits.
(a) General rules for when amounts are included in gross income.
Except as provided in this section (or in Sec. 1.403(b)-10(c) relating
to payments pursuant to a qualified domestic relations order), amounts
actually distributed from a section 403(b) contract are includible in
the gross income of the recipient participant or beneficiary (in the
year in which so distributed) under section 72 (relating to annuities).
For an additional income tax that may apply to certain early
distributions that are includible in gross income, see section 72(t).
(b) Rollovers to individual retirement arrangements and other
eligible retirement plans--(1) Timing of taxation of rollovers. In
accordance with sections 402(c), 403(b)(8), and 403(b)(10), a direct
rollover in accordance with section 401(a)(31) is not includible in the
gross income of a participant or beneficiary in the year rolled over. In
addition, any payment made in the form of an eligible rollover
distribution (as defined in section 402(c)(4)) is not includible in
gross income in the year paid to the extent the payment is contributed
to an eligible retirement plan (as defined in section 402(c)(8)(B))
within 60 days, including the contribution to the eligible retirement
plan of any property distributed. For this purpose, the rules of section
402(c)(2) through (7) and (c)(9) apply. Thus, to the extent that a
portion of a distribution (including a distribution from a designated
Roth account) would be excluded from gross income if it were not rolled
over, if that portion of the distribution is to be rolled over into an
eligible retirement plan that is not an IRA, the rollover must be
accomplished through a direct rollover of the entire distribution to a
plan qualified under section 401(a) or a section 403(b) plan and that
plan must agree to separately account for the amount not includible in
income (so
[[Page 500]]
that a 60-day rollover to a plan qualified under section 401(a) or
another section 403(b) plan is not available for this portion of the
distribution).
(2) Requirement that contract provide rollover options for eligible
rollover distributions. As required in Sec. 1.403(b)-3(a)(7), an
annuity contract is not a section 403(b) contract unless the contract
provides that if the distributee of an eligible rollover distribution
elects to have the distribution paid directly to an eligible retirement
plan (as defined in section 402(c)(8)(B)) 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 contract satisfies this
requirement, the provisions of section 401(a)(31) apply to the annuity
as though it were a plan qualified under section 401(a) unless otherwise
provided in section 401(a)(31). Thus, the special rule in Sec.
1.401(k)-1(f)(3)(ii) with respect to distributions from a designated
Roth account that are expected to total less than $200 during a year
applies to designated Roth accounts under a section 403(b) plan. In
applying the provisions of this paragraph (b)(2), the payor of the
eligible rollover distribution from the contract is treated as the plan
administrator.
(3) Requirement that contract payor provide notice of rollover
option to distributees. To ensure that the distributee of an eligible
rollover distribution from a section 403(b) contract has a meaningful
right to elect a direct rollover, section 402(f) requires that the
distributee be informed of the option. Thus, within a reasonable time
period before making the initial 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 requirement, the plan timing rule provided in
section 402(f)(1) and Sec. 1.402(f)-1 applies to section 403(b)
contracts.
(4) Mandatory withholding upon certain eligible rollover
distributions from contracts. If a distributee of an eligible rollover
distribution from a section 403(b) contract 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
section 3405(c) and Sec. 31.3405(c)-1 of this chapter for provisions
regarding the withholding requirements relating to eligible rollover
distributions.
(5) Automatic rollover for certain mandatory distributions under
section 401(a)(31). In accordance with section 403(b)(10), a section
403(b) plan is required to comply with section 401(a)(31) (including
automatic rollover for certain mandatory distributions) in the same
manner as a qualified plan.
(c) Special rules. See section 402(g)(2)(C) for special rules to
determine the tax treatment of a distribution of excess deferrals, and
see Sec. 1.401(m)-1(e)(3)(v) for the tax treatment of corrective
distributions of after-tax employee contributions and matching
contributions to comply with section 401(m). See sections 402(l) and
403(b)(2) for a special rule regarding distributions for certain retired
public safety officers made from a governmental plan for the direct
payment of certain premiums.
(d) Amounts taxable under section 72(p)(1). In accordance with
section 72(p), the amount of any loan from a section 403(b) contract to
a participant or beneficiary (including any pledge or assignment treated
as a loan under section 72(p)(1)(B)) is treated as having been received
as a distribution from the contract under section 72(p)(1), except to
the extent set forth in section 72(p)(2) (relating to loans that do not
exceed a maximum amount and that are repayable in accordance with
certain terms) and Sec. 1.72(p)-1. See generally Sec. 1.72(p)-1. Thus,
except to the extent a loan satisfies section 72(p)(2), any amount
loaned from a section 403(b) contract to a participant or beneficiary
(including any pledge or assignment treated as a loan under section
72(p)(1)(B)) is includible in the gross income of the participant or
beneficiary for the taxable year in which the loan is made. A deemed
distribution is not an actual distribution for purposes of Sec.
1.403(b)-6, as provided at
[[Page 501]]
Sec. 1.72(p)-1, Q&A-12 and Q&A-13. (Further, see section 408(b)(1) of
title I of ERISA concerning the effect of noncompliance with title I
loan requirements for plans that are subject to title I of ERISA.)
(e) Special rules relating to distributions from a designated Roth
account. If an amount is distributed from a designated Roth account
under a section 403(b) plan, the amount, if any, that is includible in
gross income and the amount, if any, that may be rolled over to another
section 403(b) plan is determined under Sec. 1.402A-1. Thus, the
designated Roth account is treated as a separate contract for purposes
of section 72. For example, the rules of section 72(b) must be applied
separately to annuity payments with respect to a designated Roth account
under a section 403(b) plan and separately to annuity payments with
respect to amounts attributable to any other contributions to the
section 403(b) plan.
(f) Aggregation of contracts. In accordance with section 403(b)(5),
the rules of this section are applied as if all annuity contracts for
the employee by the employer are treated as a single contract.
(g) Certain rules relating to employment taxes. With respect to
contributions under the Federal Insurance Contributions Act (FICA) under
Chapter 21, see section 3121(a)(5)(D) for a special rule relating to
section 403(b) contracts. With respect to income tax withholding on
distributions from section 403(b) contracts, see section 3405 generally.
However, see section 3401 for income tax withholding applicable to
annuity contracts or custodial accounts that are not section 403(b)
contracts or for cases in which an annuity contract or custodial account
ceases to be a section 403(b) contract. See also Sec. 1.72(p)-1, Q&A-
15, and Sec. 35.3405(c)-1, Q&A-11 of this chapter, for special rules
relating to income tax withholding for loans made from certain employer
plans, including section 403(b) contracts.
[T.D. 9340, 72 FR 41144, July 26, 2007, as amended by 75 FR 65566, Oct.
26, 2010]
Sec. 1.403(b)-8 Funding.
(a) Investments. Section 403(b) and Sec. 1.403(b)-3(a) only apply
to amounts held in an annuity contract (as defined in Sec. 1.403(b)-2),
including a custodial account that is treated as an annuity contract
under paragraph (d) of this section, or a retirement income account that
is treated as an annuity contract under Sec. 1.403(b)-9.
(b) Contributions to the plan. Contributions to a section 403(b)
plan must be transferred to the insurance company issuing the annuity
contract (or the entity holding assets of any custodial or retirement
income account that is treated as an annuity contract) within a period
that is not longer than is reasonable for the proper administration of
the plan. For purposes of this requirement, the plan may provide for
section 403(b) elective deferrals for a participant under the plan to be
transferred to the annuity contract within a specified period after the
date the amounts would otherwise have been paid to the participant. For
example, the plan could provide for section 403(b) elective deferrals
under the plan to be contributed within 15 business days following the
month in which these amounts would otherwise have been paid to the
participant.
(c) Annuity contracts--(1) Generally. As defined in Sec. 1.403(b)-
2, and except as otherwise permitted under this section, an annuity
contract means a contract that is issued by an insurance company
qualified to issue annuities in a State and that includes payment in the
form of an annuity. This paragraph (c) sets forth additional rules
regarding annuity contracts.
(2) Certain insurance contracts. Neither a life insurance contract,
as defined in section 7702, an endowment contract, a health or accident
insurance contract, nor a property, casualty, or liability insurance
contract meets the definition of an annuity contract. See Sec.
1.401(f)-4(e). If a contract issued by an insurance company qualified to
issue annuities in a State provides death benefits as part of the
contract, then that coverage is permitted, assuming that those death
benefits do not cause the contract to fail to satisfy any requirement
applicable to section 403(b) contracts, for example, assuming that those
benefits satisfy the incidental benefit requirement of Sec. 1.401-
1(b)(1)(i), as required by Sec. 1.403(b)-6(g).
[[Page 502]]
(3) Special rule for certain contracts. This paragraph (c)(3)
applies in the case of a contract issued under a State section 403(b)
plan established on or before May 17, 1982, or for an employee who
becomes covered for the first time under the plan after May 17, 1982,
unless the Commissioner had before that date issued any written
communication (either to the employer or financial institution) to the
effect that the arrangement under which the contract was issued did not
meet the requirements of section 403(b). The requirement that the
contract be issued by an insurance company qualified to issue annuities
in a State does not apply to a contract described in the preceding
sentence if one of the following two conditions is satisfied and that
condition has been satisfied continuously since May 17, 1982--
(i) Benefits under the contract are provided from a separately
funded retirement reserve that is subject to supervision of the State
insurance department; or
(ii) Benefits under the contract are provided from a fund that is
separate from the fund used to provide statutory benefits payable under
a state retirement system and that is part of a State teachers
retirement system (including a state university retirement system) to
purchase benefits that are unrelated to the basic benefits provided
under the retirement system, and the death benefit provided under the
contract does not at any time exceed the larger of the reserve or the
contribution made for the employee.
(d) Custodial accounts--(1) Treatment as a section 403(b) contract.
Under section 403(b)(7), a custodial account is treated as an annuity
contract for purposes of Sec. Sec. 1.403(b)-1 through 1.403(b)-7, this
section and Sec. Sec. 1.403(b)-9 through 1.403(b)-11. See section
403(b)(7)(B) for special rules regarding the tax treatment of custodial
accounts and section 4973(c) for an excise tax that applies to excess
contributions to a custodial account.
(2) Custodial account defined. A custodial account means a plan, or
a separate account under a plan, in which an amount attributable to
section 403(b) contributions (or amounts rolled over to a section 403(b)
contract, as described in Sec. 1.403(b)-10(d)) is held by a bank or a
person who satisfies the conditions in section 401(f)(2), if--
(i) All of the amounts held in the account are invested in stock of
a regulated investment company (as defined in section 851(a) relating to
mutual funds);
(ii) The requirements of Sec. 1.403(b)-6(c) (imposing restrictions
on distributions with respect to a custodial account) are satisfied with
respect to the amounts held in the account;
(iii) The assets held in the account cannot be used for, or diverted
to, purposes other than for the exclusive benefit of plan participants
or their beneficiaries (for which purpose, assets are treated as
diverted to the employer if the employer borrows assets from the
account); and
(iv) The account is not part of a retirement income account.
(3) Effect of definition. The requirement in paragraph (d)(2)(i) of
this section is not satisfied if the account includes any assets other
than stock of a regulated investment company.
(4) Treatment of custodial account. A custodial account is treated
as a section 401 qualified plan solely for purposes of subchapter F of
subtitle A and subtitle F of the Internal Revenue Code with respect to
amounts received by it (and income from investment thereof). This
treatment only applies to a custodial account that constitutes a section
403(b) contract under Sec. Sec. 1.403(b)-1 through 1.403(b)-7, this
section and Sec. Sec. 1.403(b)-9 through 1.403(b)-11 or that would
constitute a section 403(b) contract under Sec. Sec. 1.403(b)-1 through
1.403(b)-7, this section and Sec. Sec. 1.403(b)-9 through 1.403(b)-11
if the amounts held in the account were to satisfy the nonforfeitability
requirement of Sec. 1.403(b)-3(a)(2).
(e) Retirement income accounts. See Sec. 1.403(b)-9 for special
rules under which a retirement income account for employees of a church-
related organization is treated as a section 403(b) contract for
purposes of Sec. Sec. 1.403(b)-1 through 1.403(b)-7, this section and
Sec. Sec. 1.403(b)-9 through 1.403(b)-11.
(f) Combining assets. To the extent permitted by the Commissioner in
revenue rulings, notices, or other guidance
[[Page 503]]
published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), trust assets held under a
custodial account and trust assets held under a retirement income
account, as described in Sec. 1.403(b)-9(a)(6), may be invested in a
group trust with trust assets held under a qualified plan or individual
retirement plan. For this purpose, a trust includes a custodial account
that is treated as a trust under section 401(f).
[T.D. 9340, 72 FR 41144, July 26, 2007]
Sec. 1.403(b)-9 Special rules for church plans.
(a) Retirement income accounts--(1) Treatment as a section 403(b)
contract. Under section 403(b)(9), a retirement income account for
employees of a church-related organization (as defined in Sec.
1.403(b)-2) is treated as an annuity contract for purposes of Sec. Sec.
1.403(b)-1 through 1.403(b)-8, this section, Sec. 1.403(b)-10 and Sec.
1.403(b)-11.
(2) Retirement income account defined--(i) In general. A retirement
income account means a defined contribution program established or
maintained by a church-related organization under which--
(A) There is separate accounting for the retirement income account's
interest in the underlying assets (namely, there must be sufficient
separate accounting in order for it to be possible at all times to
determine the retirement income account's interest in the underlying
assets and to distinguish that interest from any interest that is not
part of the retirement income account);
(B) Investment performance is based on gains and losses on those
assets; and
(C) The assets held in the account cannot be used for, or diverted
to, purposes other than for the exclusive benefit of plan participants
or their beneficiaries (and for this purpose, assets are treated as
diverted to the employer if there is a loan or other extension of credit
from assets in the account to the employer).
(ii) Plan required. A retirement income account must be maintained
pursuant to a program which is a plan (as defined in Sec. 1.403(b)-
3(b)(3)) and the plan document must state (or otherwise evidence in a
similarly clear manner) the intent to constitute a retirement income
account.
(3) Ownership or use constitutes distribution. Any asset of a
retirement income account that is owned or used by a participant or
beneficiary is treated as having been distributed to that participant or
beneficiary. See Sec. Sec. 1.403(b)-6 and 1.403(b)-7 for rules relating
to distributions.
(4) Coordination of retirement income account with custodial account
rules. A retirement income account that is treated as an annuity
contract is not a custodial account (as defined in Sec. 1.403(b)-
8(d)(2)), even if it is invested solely in stock of a regulated
investment company.
(5) Life annuities. A retirement income account may distribute
benefits in a form that includes a life annuity only if--
(i) The amount of the distribution form has an actuarial present
value, at the annuity starting date, equal to the participant's or
beneficiary's accumulated benefit, based on reasonable actuarial
assumptions, including regarding interest and mortality; and
(ii) The plan sponsor guarantees benefits in the event that a
payment is due that exceeds the participant's or beneficiary's
accumulated benefit.
(6) Combining retirement income account assets with other assets.
For purposes of Sec. 1.403(b)-8(f) relating to combining assets,
retirement income account assets held in trust (including a custodial
account that is treated as a trust under section 401(f)) are subject to
the same rules regarding combining of assets as custodial account
assets. In addition, retirement income account assets are permitted to
be commingled in a common fund with amounts devoted exclusively to
church purposes (such as a fund from which unfunded pension payments are
made to former employees of the church). However, unless otherwise
permitted by the Commissioner, no assets of the plan sponsor, other than
retirement income account assets, may be combined with custodial account
assets or any other assets permitted to be combined under Sec.
1.403(b)-8(f). This paragraph (a)(6) is subject to any additional rules
issued
[[Page 504]]
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).
(7) Trust treated as tax exempt. A trust (including a custodial
account that is treated as a trust under section 401(f)) that includes
no assets other than assets of a retirement income account is treated as
an organization that is exempt from taxation under section 501(a).
(b) No compensation limitation up to $10,000. See section 415(c)(7)
for special rules regarding certain annual additions not exceeding
$10,000.
(c) Special deduction rule for self-employed ministers. See section
404(a)(10) for a special rule regarding the deductibility of a
contribution made by a self-employed minister.
[T.D. 9340, 72 FR 41144, July 26, 2007]
Sec. 1.403(b)-10 Miscellaneous provisions.
(a) Plan terminations and frozen plans--(1) In general. An employer
is permitted to amend its section 403(b) plan to eliminate future
contributions for existing participants or to limit participation to
existing participants and employees (to the extent consistent with Sec.
1.403(b)-5). A section 403(b) plan is permitted to contain provisions
that provide for plan termination and that allow accumulated benefits to
be distributed on termination. However, in the case of a section 403(b)
contract that is subject to the distribution restrictions in Sec.
1.403(b)-6(c) or (d) (relating to custodial accounts and section 403(b)
elective deferrals), termination of the plan and the distribution of
accumulated benefits is permitted only if the employer (taking into
account all entities that are treated as the same employer under section
414(b), (c), (m), or (o) on the date of the termination) does not make
contributions to any section 403(b) contract that is not part of the
plan during the period beginning on the date of plan termination and
ending 12 months after distribution of all assets from the terminated
plan. However, if at all times during the period beginning 12 months
before the termination and ending 12 months after distribution of all
assets from the terminated plan, fewer than 2 percent of the employees
who were eligible under the section 403(b) plan as of the date of plan
termination are eligible under the alternative section 403(b) contract,
the alternative section 403(b) contract is disregarded. To the extent a
contract fails to satisfy the nonforfeitability requirement of Sec.
1.403(b)-3(a)(2) at the date of plan termination, the contact is not,
and cannot later become, a section 403(b) contract. In order for a
section 403(b) plan to be considered terminated, all accumulated
benefits under the plan must be distributed to all participants and
beneficiaries as soon as administratively practicable after termination
of the plan. For this purpose, delivery of a fully paid individual
insurance annuity contract is treated as a distribution. The mere
provision for, and making of, distributions to participants or
beneficiaries upon plan termination does not cause a contract to cease
to be a section 403(b) contract. See Sec. 1.403(b)-7 for rules
regarding the tax treatment of distributions, including Sec. 1.403(b)-
7(b)(1) under which an eligible rollover distribution is not included in
gross income if paid in a direct rollover to an eligible retirement plan
or if transferred to an eligible retirement plan within 60 days.
(2) Employers that cease to be eligible employers. An employer that
ceases to be an eligible employer may no longer contribute to a section
403(b) contract for any subsequent period, and the contract will fail to
satisfy Sec. 1.403(b)-3(a) if any further contributions are made with
respect to a period after the employer ceases to be an eligible
employer.
(b) Contract exchanges and plan-to-plan transfers--(1) Contract
exchanges and transfers--(i) General rule. If the conditions in
paragraph (b)(2) of this section are met, a section 403(b) contract held
under a section 403(b) plan is permitted to be exchanged for another
section 403(b) contract held under that section 403(b) plan. Further, if
the conditions in paragraph (b)(3) of this section are met, a section
403(b) plan is permitted to provide for the transfer of its assets
(including any assets held in
[[Page 505]]
a custodial account or retirement income account that are treated as
section 403(b) contracts) to another section 403(b) plan. In addition,
if the conditions in paragraph (b)(4) of this section (relating to
permissive service credit and repayments under section 415) are met, a
section 403(b) plan is permitted to provide for the transfer of its
assets to a qualified plan under section 401(a). However, neither a
qualified plan nor an eligible governmental plan under section 457(b)
may transfer assets to a section 403(b) plan, and a section 403(b) plan
may not accept such a transfer. In addition, a section 403(b) contract
may not be exchanged for an annuity contract that is not a section
403(b) contract. Neither a plan-to-plan transfer nor a contract exchange
permitted under this paragraph (b) is treated as a distribution for
purposes of the distribution restrictions at Sec. 1.403(b)-6.
Therefore, such a transfer or exchange may be made before severance from
employment or another distribution event. Further, no amount is
includible in gross income by reason of such a transfer or exchange.
(ii) ERISA rules. See Sec. 1.414(l)-1 for other rules that are
applicable to section 403(b) plans that are subject to section 208 of
the Employee Retirement Income Security Act of 1974 (88 Stat. 829, 865).
(2) Requirements for contract exchange within the same plan--(i)
General rule. A section 403(b) contract of a participant or beneficiary
may be exchanged under paragraph (b)(1) of this section for another
section 403(b) contract of that participant or beneficiary under the
same section 403(b) plan if each of the following conditions are met:
(A) The plan under which the contract is issued provides for the
exchange.
(B) The participant or beneficiary has an accumulated benefit
immediately after the exchange that is at least equal to the accumulated
benefit of that participant or beneficiary immediately before the
exchange (taking into account the accumulated benefit of that
participant or beneficiary under both section 403(b) contracts
immediately before the exchange).
(C) The other contract is subject to distribution restrictions with
respect to the participant that are not less stringent than those
imposed on the contract being exchanged, and the employer enters into an
agreement with the issuer of the other contract under which the employer
and the issuer will from time to time in the future provide each other
with the following information:
(1) Information necessary for the resulting contract, or any other
contract to which contributions have been made by the employer, to
satisfy section 403(b), including information concerning the
participant's employment and information that takes into account other
section 403(b) contracts or qualified employer plans (such as whether a
severance from employment has occurred for purposes of the distribution
restrictions in Sec. 1.403(b)-6 and whether the hardship withdrawal
rules of Sec. 1.403(b)-6(d)(2) are satisfied).
(2) Information necessary for the resulting contract, or any other
contract to which contributions have been made by the employer, to
satisfy other tax requirements (such as whether a plan loan satisfies
the conditions in section 72(p)(2) so that the loan is not a deemed
distribution under section 72(p)(1)).
(ii) Accumulated benefit. The condition in paragraph (b)(2)(i)(B) of
this section is satisfied if the exchange would satisfy section
414(l)(1) if the exchange were a transfer of assets.
(iii) Authority for future guidance. Subject to such conditions as
the Commissioner determines to be appropriate, the Commissioner may
issue rules of general applicability, in revenue rulings, notices, or
other guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), permitting an exchange of one
section 403(b) contract for another section 403(b) contract for an
exchange that does not satisfy paragraph (b)(2)(i)(C) of this section.
Any such rules must require the resulting contract to set forth
procedures that the Commissioner determines are reasonably designed to
ensure compliance with those requirements of section 403(b) or other tax
provisions that depend on either information concerning the
participant's employment or information that takes into account other
[[Page 506]]
section 403(b) contracts or other employer plans (such as whether a
severance from employment has occurred for purposes of the distribution
restrictions in Sec. 1.403(b)-6, whether the hardship withdrawal rules
of Sec. 1.403(b)-6(d)(2) are satisfied, and whether a plan loan
constitutes a deemed distribution under section 72(p)).
(3) Requirements for plan-to-plan transfers--(i) In general. A plan-
to-plan transfer under paragraph (b)(1) of this section from a section
403(b) plan to another section 403(b) plan is permitted if each of the
following conditions are met--
(A) In the case of a transfer for a participant, the participant is
an employee or former employee of the employer (or the business of the
employer) for the receiving plan.
(B) In the case of a transfer for a beneficiary of a deceased
participant, the participant was an employee or former employee of the
employer (or business of the employer) for the receiving plan.
(C) The transferor plan provides for transfers.
(D) The receiving plan provides for the receipt of transfers.
(E) The participant or beneficiary whose assets are being
transferred has an accumulated benefit immediately after the transfer
that is at least equal to the accumulated benefit of that participant or
beneficiary immediately before the transfer.
(F) The receiving plan provides that, to the extent any amount
transferred is subject to any distribution restrictions under Sec.
1.403(b)-6, the receiving plan imposes restrictions on distributions to
the participant or beneficiary whose assets are being transferred that
are not less stringent than those imposed on the transferor plan.
(G) If a plan-to-plan transfer does not constitute a complete
transfer of the participant's or beneficiary's interest in the section
403(b) plan, the transferee plan treats the amount transferred as a
continuation of a pro rata portion of the participant's or beneficiary's
interest in the section 403(b) plan (for example, a pro rata portion of
the participant's or beneficiary's interest in any after-tax employee
contributions).
(ii) Accumulated benefit. The condition in paragraph (b)(3)(i)(D) of
this section is satisfied if the transfer would satisfy section
414(l)(1).
(4) Purchases of permissive service credit by contract-to-plan
transfers from a section 403(b) contract to a qualified plan--(i)
General rule. If the conditions in paragraph (b)(4)(ii) of this section
are met, a section 403(b) plan may provide for the transfer of assets
held in the plan to a qualified defined benefit plan that is a
governmental plan (as defined in section 414(d)).
(ii) Conditions for plan-to-plan transfers. A transfer may be made
under this paragraph (b)(4) only if the transfer is either--
(A) For the purchase of permissive service credit (as defined in
section 415(n)(3)(A)) under the receiving defined benefit plan; or
(B) A repayment to which section 415 does not apply by reason of
section 415(k)(3).
(c) Qualified domestic relations orders. In accordance with the
second sentence of section 414(p)(9), any distribution from an annuity
contract under section 403(b) (including a distribution from a custodial
account or retirement income account that is treated as a section 403(b)
contract) pursuant to a qualified domestic relations order is treated in
the same manner as a distribution from a plan to which section
401(a)(13) applies. Thus, for example, a section 403(b) plan does not
fail to satisfy the distribution restrictions set forth in Sec.
1.403(b)-6(b), (c), or (d) merely as a result of distribution made
pursuant to a qualified domestic relations order under section 414(p),
so that such a distribution is permitted without regard to whether the
employee from whose contract the distribution is made has had a
severance from employment or another event permitting a distribution to
be made under section 403(b). In the case of a plan that is subject to
title I of ERISA, see also section 206(d)(3) of ERISA under which the
prohibition against assignment or alienation of plan benefits under
section 206(d)(1) of ERISA does not apply to an order that is determined
to be a qualified domestic relations order.
(d) Rollovers to a section 403(b) contract--(1) General rule. A
section 403(b)
[[Page 507]]
contract may accept a contribution that is an eligible rollover
distribution (as defined in section 402(c)(4)) made from another
eligible retirement plan (as defined in section 402(c)(8)(B)). Any
amount contributed to a section 403(b) contract as an eligible rollover
distribution is not taken into account for purposes of the limits in
Sec. 1.403(b)-4, but, except as otherwise specifically provided (for
example, at Sec. 1.403(b)-6(i)), is otherwise treated in the same
manner as an amount held under a section 403(b) contract for purposes of
Sec. Sec. 1.403(b)-3 through 1.403(b)-9 and this section.
(2) Special rules relating to after-tax employee contributions and
designated Roth contributions. A section 403(b) plan that receives an
eligible rollover distribution that includes after-tax employee
contributions or designated Roth contributions is required to obtain
information regarding the employee's section 72 basis in the amount
rolled over. A section 403(b) plan is permitted to receive an eligible
rollover distribution that includes designated Roth contributions only
if the plan permits employees to make elective deferrals that are
designated Roth contributions.
(e) Deemed IRAs. See regulations under section 408(q) for special
rules relating to deemed IRAs.
(f) Defined benefit plans--(1) Defined benefit plans generally.
Except for a TEFRA church defined benefit plan as defined in paragraph
(f)(2) of this section, section 403(b) does not apply to any
contributions or accrual under a defined benefit plan.
(2) TEFRA church defined benefit plans. See section 251(e)(5) of the
Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248, for
a provision permitting certain arrangements established by a church-
related organization and in effect on September 3, 1982 (a TEFRA church
defined benefit plan) to be treated as section 403(b) contract even
though it is a defined benefit arrangement. In accordance with section
403(b)(1), for purposes of applying section 415 to a TEFRA church
defined benefit plan, the accruals under the plan are limited to the
maximum amount permitted under section 415(c) when expressed as an
annual addition, and, for this purpose, the rules at Sec. 1.402(b)-
1(a)(2) for determining the present value of an accrual under a
nonqualified defined benefit plan also apply for purposes of converting
the accrual under a TEFRA church defined benefit plan to an annual
addition. See section 415(b) for additional limits applicable to TEFRA
church defined benefit plans.
(g) Other rules relating to section 501(c)(3) organizations. See
section 501(c)(3) and regulations thereunder for the substantive
standards for tax-exemption under that section, including the
requirement that no part of the organization's net earnings inure to the
benefit of any private shareholder or individual. See also sections 4941
(self dealing), 4945 (taxable expenditures), and 4958 (excess benefit
transactions), and the regulations thereunder, for rules relating to
excise taxes imposed on certain transactions involving organizations
described in section 501(c)(3).
[T.D. 9340, 72 FR 41144, July 26, 2007, as amended by 75 FR 65566, Oct.
26, 2010]
Sec. 1.403(b)-11 Applicable dates.
(a) General rule. Except as otherwise provided in this section,
Sec. Sec. 1.403(b)-1 through 1.403(b)-10 apply for taxable years
beginning after December 31, 2008.
(b) Collective bargaining agreements. In the case of a section
403(b) plan maintained pursuant to one or more collective bargaining
agreements that have been ratified and in effect on July 26, 2007,
Sec. Sec. 1.403(b)-1 through 1.403(b)-10 do not apply before the
earlier of--
(1) The date on which the last of the collective bargaining
agreements terminates (determined without regard to any extension
thereof after July 26, 2007); or
(2) July 26, 2010.
(c) Church conventions; retirement income account. (1) In the case
of a section 403(b) plan maintained by a church-related organization for
which the authority to amend the plan is held by a church convention
(within the meaning of section 414(e)), Sec. Sec. 1.403(b)-1 through
1.403(b)-10 do not apply before the first day of the first plan year
that begins after December 31, 2009.
(2) In the case of a loan or other extension of credit to the
employer that
[[Page 508]]
was entered into under a retirement income account before July 26, 2007,
the plan does not fail to satisfy Sec. 1.403(b)-9(a)(2)(i)(C) on
account of the loan or other extension of credit if the plan takes
reasonable steps to eliminate the loan or other extension of credit to
the employer before the applicable date for Sec. 1.403(b)-9(a)(2) or as
promptly as practical thereafter (including taking steps after July 26,
2007 and before the applicable date).
(d) Special rules for plans that exclude certain types of employees
from elective deferrals. (1) If, on July 26, 2007, a plan excludes any
of the following categories of employees, then the plan does not fail to
satisfy Sec. 1.403(b)-5(b) as a result of that exclusion before the
first day of the first taxable year that begins after December 31, 2009:
(i) Employees who make a one-time election to participate in a
governmental plan described in section 414(d) that is not a section
403(b) plan.
(ii) Professors who are providing services on a temporary basis to
another educational organization (as defined under section
170(b)(1)(A)(ii)) for up to one year and for whom section 403(b)
contributions are being made at a rate no greater than the rate each
such professor would receive under the section 403(b) plan of the
original educational organization.
(iii) Employees who are affiliated with a religious order and who
have taken a vow of poverty where the religious order provides for the
support of such employees in their retirement from eligibility to make
elective deferrals.
(2) If, on July 26, 2007, a plan excludes employees who are covered
by a collective bargaining agreement from eligibility to make elective
deferrals, the plan does not fail to satisfy Sec. 1.403(b)-5(b)
(relating to universal availability) as a result of that exclusion
before the later of--
(i) The first day of the first taxable year that begins after
December 31, 2008; or
(ii) The earlier of--
(A) The date on which the related collective bargaining agreement
terminates (determined without regard to any extension thereof after
July 26, 2007); or
(B) July 26, 2010.
(3) In the case of a governmental plan (as defined in section
414(d)) for which the authority to amend the plan is held by a
legislative body that meets in legislative session, the plan does not
fail to satisfy Sec. 1.403(b)-5(b) as a result of any exclusion in
paragraph (d)(1)(i), (d)(1)(ii),(d)(1)(iii), or (d)(2) of this section
before the earlier of --
(i) The close of the first regular legislative session of the
legislative body with the authority to amend the plan that begins on or
after January 1, 2009; or
(ii) January 1, 2011.
(e) Special rules for plans that permit in-service distributions.
(1) Section 1.403(b)-6(b) does not apply to a contract issued by an
insurance company before January 1, 2009.
(2) Any amendment to comply with the requirements of Sec. 1.403(b)-
6 (disregarding paragraph (e)(1) of this section) that is adopted before
January 1, 2009, or such later date as may be permitted under guidance
issued by the Commissioner in revenue rulings, notices, or other
guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), does not violate section 204(g)
of the Employee Retirement Income Security Act of 1974 to the extent the
amendment eliminates or reduces a right to receive benefit distributions
during employment.
(f) Special rule for life insurance contracts. Section 1.403(b)-
8(c)(2) does not apply to a contract issued before September 24, 2007.
(g) Special rule for contracts received in an exchange. Section
1.403(b)-10(b)(2) does not apply to a contract received in an exchange
that occurred on or before September 24, 2007 if the exchange (including
the contract received in the exchange) satisfies such rules as the
Commissioner has prescribed in guidance of general applicability at the
time of the exchange.
(h) Special rule for coordination with regulations under section
415. Section 1.403(b)-3(b)(4)(ii) is applicable for taxable years
beginning on or after July 1, 2007.
(i) Special rule for coordination with regulations under section
402A. Sections 1.403(b)-3(c), 1.403(b)-7(e), and 1.403(b)-
[[Page 509]]
10(d)(2) are applicable with respect to taxable years beginning on or
after January 1, 2007.
[T.D. 9340, 72 FR 41144, July 26, 2007; 72 FR 54352, Sept. 25, 2007]
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)-3. 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 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)-3. 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)-3(c) 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)-3, 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
[[Page 510]]
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
(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
[[Page 511]]
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.
(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, as amended by T.D. 9340, 72 FR
41159, July 26, 2007]
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
[[Page 512]]
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 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
Sec. Sec. 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]
[[Page 513]]
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 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
[[Page 514]]
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.
(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
[[Page 515]]
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.
(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.
[[Page 516]]
(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 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.
[[Page 517]]
(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,
(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
[[Page 518]]
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 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
[[Page 519]]
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
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
[[Page 520]]
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 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
[[Page 521]]
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 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
[[Page 522]]
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 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
[[Page 523]]
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 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
[[Page 524]]
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 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)
[[Page 525]]
(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 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
[[Page 526]]
404(a)(1). See Sec. Sec. 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 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
[[Page 527]]
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 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
[[Page 528]]
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
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
[[Page 529]]
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 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-
[[Page 530]]
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
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,
[[Page 531]]
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 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
[[Page 532]]
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 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......................
-----------------------------------
[[Page 533]]
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
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,
[[Page 534]]
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
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
[[Page 535]]
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 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
[[Page 536]]
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 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
[[Page 537]]
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
(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,
[[Page 538]]
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 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
[[Page 539]]
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 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
[[Page 540]]
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 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
[[Page 541]]
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, 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
[[Page 542]]
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 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
[[Page 543]]
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.
(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
[[Page 544]]
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
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
[[Page 545]]
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.
(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
[[Page 546]]
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--
(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
[[Page 547]]
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 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
[[Page 548]]
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 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
[[Page 549]]
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 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.
(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);
(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
[[Page 550]]
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 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
[[Page 551]]
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 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. 1.404(k)-3 Disallowance of deduction for reacquisition
payments.
Q-1: Are payments to reacquire stock held by an ESOP applicable
dividends that are deductible under section 404(k)(1)?
A-1: (a) Payments to reacquire stock held by an ESOP, including
reacquisition payments that are used to make benefit distributions to
participants or beneficiaries, are not deductible under section 404(k)
because--
(1) Those payments do not constitute applicable dividends under
section 404(k)(2); and
(2) The treatment of those payments as applicable dividends would
constitute, in substance, an avoidance or evasion of taxation within the
meaning of section 404(k)(5).
(b) See also Sec. 1.162(k)-1 concerning the disallowance of
deductions for amounts paid or incurred by a corporation in connection
with the reacquisition of its stock from an ESOP.
Q-2: What is the effective date of this section?
A-2: This section applies with respect to payments to reacquire
stock that are made on or after August 30, 2006.
[T.D. 9282, 71 FR 51474, Aug. 30, 2006]
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
[[Page 552]]
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.
(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 Sec. Sec. 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 Sec. Sec. 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 Sec. Sec. 1.404(a)-9 and
[[Page 553]]
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 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
[[Page 554]]
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 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
[[Page 555]]
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]
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.
[[Page 556]]
(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 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
[[Page 557]]
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 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).
[[Page 558]]
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]
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
[[Page 559]]
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;
(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
[[Page 560]]
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 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
[[Page 561]]
(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.
(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 Sec. Sec. 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).
[[Page 562]]
(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 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
[[Page 563]]
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).
(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
[[Page 564]]
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 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
[[Page 565]]
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 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
[[Page 566]]
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)).
(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.
[[Page 567]]
(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 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
[[Page 568]]
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.
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
[[Page 569]]
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 and for investments of accounts established
under section 408(q) on or after August 1, 2003, 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 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
[[Page 570]]
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 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
[[Page 571]]
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 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
[[Page 572]]
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.
(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.
(8) Special rules for governmental units--(i) In general. A
governmental unit that seeks to qualify as a nonbank trustee of a deemed
IRA that is part of its qualified employer plan must demonstrate to the
satisfaction of the Commissioner that it is able to administer the trust
in a manner that is consistent with the requirements of section 408. The
demonstration must be made by written application to the Commissioner.
Notwithstanding the requirement of paragraph (e)(1) of this section that
a person must demonstrate by written application that the requirements
of paragraphs (e)(2) through (e)(6) of this section will be met in order
to qualify as a nonbank trustee, a governmental unit that maintains a
plan qualified under section 401(a), 403(a), 403(b) or 457 need not
demonstrate that all of these requirements will be met with respect to
any individual retirement accounts maintained by that governmental unit
pursuant to section 408(q). For example, a
[[Page 573]]
governmental unit need not demonstrate that it satisfies the net worth
requirements of paragraph (e)(3)(ii) of this section if it demonstrates
instead that it possesses taxing authority under applicable law. The
Commissioner, in his discretion, may exempt a governmental unit from
certain other requirements upon a showing that the governmental unit is
able to administer the deemed IRAs in the best interest of the
participants. Moreover, in determining whether a governmental unit
satisfies the other requirements of paragraphs (e)(2) through (e)(6) of
this section, the Commissioner may apply the requirements in a manner
that is consistent with the applicant's status as a governmental unit.
(ii) Governmental unit. For purposes of this special rule, the term
governmental unit means a state, political subdivision of a state, and
any agency or instrumentality of a state or political subdivision of a
state.
(iii) Additional rules. The Commissioner may in revenue rulings,
notices, or other guidance of general applicability provide additional
rules for governmental units seeking approval as nonbank trustees.
(iv) Effective/applicability date. This section is applicable for
written applications made on or after June 18, 2007. The rules in this
section also may be relied on for applications submitted on or after
August 1, 2003 (or such earlier application as the Commissioner deems
appropriate) and before June 18, 2007.
[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; T.D. 9142, 69 FR
43739, July 22, 2004; T.D. 9331, 72 FR 33388, June 18, 2007]
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 employee pension described in section
[[Page 574]]
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
distribution from an individual retirement annuity. The remaining
portion,
[[Page 575]]
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. The rules in this paragraph (c) apply for purposes
of determining net income attributable to IRA contributions made before
January 1, 2004, and returned pursuant to section 408(d)(4).
[[Page 576]]
The rules in Sec. 1.408-11 apply for purposes of determining net income
attributable to IRA contributions made on or after January 1, 2004, and
returned pursuant to section 408(d)(4). For purposes of this paragraph,
excess contributions are the excess of 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. [$105x($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
[[Page 577]]
(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.
(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, as amended by T.D. 9056, 68 FR
23588, May 5, 2003]
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.
[[Page 578]]
(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]
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
[[Page 579]]
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 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.
[[Page 580]]
(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 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
[[Page 581]]
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 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
[[Page 582]]
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;
(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
[[Page 583]]
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 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.
[[Page 584]]
(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 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. However, for a distribution after December 31, 2008, the February
15 due date under section 6045 applies to the statement if the statement
is furnished in a consolidated reporting statement under section 6045.
See Sec. Sec. 1.6045-1(k)(3), 1.6045-2(d)(2), 1.6045-3(e)(2), 1.6045-
4(m)(3), and 1.6045-5(a)(3)(ii).
(e) Effective date. This section is effective for calendar years
beginning after December 31, 1977.
[T.D. 7714, 45 FR 52798, Aug. 8, 1980, as amended by T.D. 9504, 75 FR
64084, Oct. 18, 2010]
Sec. 1.408-8 Distribution requirements for individual retirement
plans.
The following questions and answers relate to the distribution rules
for IRAs provided in sections 408(a)(6) and 408(b)(3).
Q-1. Is an IRA subject to the distribution rules provided in section
401(a)(9) for qualified plans?
A-1. (a) Yes, an IRA is subject to the required minimum distribution
rules provided in section 401(a)(9). In order to satisfy section
401(a)(9) for purposes of determining required minimum distributions for
calendar years beginning on or after January 1, 2003, the rules of
Sec. Sec. 1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6 for
defined contribution plans must be applied, except as otherwise provided
in this section. For example, whether the 5-year rule or the life
expectancy rule applies to distributions after death occurring before
the IRA owner's required beginning date is determined in accordance with
Sec. 1.401(a)(9)-3 and the rules of Sec. 1.401(a)(9)-4 apply for
purposes of determining an IRA owner's designated beneficiary.
Similarly, the amount of the minimum distribution required for each
calendar year from an individual account is determined in accordance
with Sec. 1.401(a)(9)-5. For purposes of this section, the term IRA
means an individual retirement account or annuity described in section
408(a) or (b). The IRA owner is the individual for whom an IRA is
originally established by contributions for the benefit of that
individual and that individual's beneficiaries.
(b) For purposes of applying the required minimum distribution rules
in Sec. Sec. 1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6 for
qualified plans, the IRA trustee, custodian, or issuer is treated as the
plan administrator, and the IRA owner is substituted for the employee.
(c) See A-14 and A-15 of Sec. 1.408A-6 for rules under section
401(a)(9) that apply to a Roth IRA.
Q-2. Are IRAs that receive employer contributions under a simplified
employee pension (defined in section 408(k)) or a SIMPLE IRA (defined in
section 408(p)) treated as IRAs for purposes of section 401(a)(9)?
A-2. Yes, IRAs that receive employer contributions under a
simplified employee pension (defined in section 408(k)) or a SIMPLE plan
(defined in section 408(p)) are treated as IRAs, rather than employer
plans, for purposes of section 401(a)(9) and are, therefore, subject to
the distribution rules in this section.
Q-3. In the case of distributions from an IRA, what does the term
required beginning date mean?
A-3. In the case of distributions from an IRA, the term required
beginning date means April 1 of the calendar year following the calendar
year in which the individual attains age 70\1/2\.
Q-4. What portion of a distribution from an IRA is not eligible for
rollover because the amount is a required minimum distribution?
[[Page 585]]
A-4. The portion of a distribution that is a required minimum
distribution from an IRA and thus not eligible for rollover is
determined in the same manner as provided in A-7 of Sec. 1.402(c)-2 for
distributions from qualified plans. For example, if a minimum
distribution is required under section 401(a)(9) for a calendar year, an
amount distributed during a calendar year from an IRA is treated as a
required minimum distribution under section 401(a)(9) to the extent that
the total required minimum distribution for the year under section
401(a)(9) for that IRA has not been satisfied. This requirement may be
satisfied by a distribution from the IRA or, as permitted under A-9 of
this section, from another IRA.
Q-5. May an individual's surviving spouse elect to treat such
spouse's entire interest as a beneficiary in an individual's IRA upon
the death of the individual (or the remaining part of such interest if
distribution to the spouse has commenced) as the spouse's own account?
A-5. (a) The surviving spouse of an individual may elect, in the
manner described in paragraph (b) of this A-5, to treat the spouse's
entire interest as a beneficiary in an individual's IRA (or the
remaining part of such interest if distribution thereof has commenced to
the spouse) as the spouse's own IRA. This election is permitted to be
made at any time after the individual's date of death. In order to make
this election, the spouse must be the sole beneficiary of the IRA and
have an unlimited right to withdraw amounts from the IRA. If a trust is
named as beneficiary of the IRA, this requirement is not satisfied even
if the spouse is the sole beneficiary of the trust. If the surviving
spouse makes the election, the required minimum distribution for the
calendar year of the election and each subsequent calendar year is
determined under section 401(a)(9)(A) with the spouse as IRA owner and
not section 401(a)(9)(B) with the surviving spouse as the deceased IRA
owner's beneficiary. However, if the election is made in the calendar
year containing the IRA owner's death, the spouse is not required to
take a required minimum distribution as the IRA owner for that calendar
year. Instead, the spouse is required to take a required minimum
distribution for that year, determined with respect to the deceased IRA
owner under the rules of A-4(a) of Sec. 1.401(a)(9)-5, to the extent
such a distribution was not made to the IRA owner before death.
(b) The election described in paragraph (a) of this A-5 is made by
the surviving spouse redesignating the account as an account in the name
of the surviving spouse as IRA owner rather than as beneficiary.
Alternatively, a surviving spouse eligible to make the election is
deemed to have made the election if, at any time, either of the
following occurs--
(1) Any amount in the IRA that would be required to be distributed
to the surviving spouse as beneficiary under section 401(a)(9)(B) is not
distributed within the time period required under section 401(a)(9)(B);
or
(2) Any additional amount is contributed to the IRA which is
subject, or deemed to be subject, to the lifetime distribution
requirements of section 401(a)(9)(A).
(c) The result of an election described in paragraph (b) of this A-5
is that the surviving spouse shall then be considered the IRA owner for
whose benefit the trust is maintained for all purposes under the
Internal Revenue Code (e.g., section 72(t)).
Q-6. How is the benefit determined for purposes of calculating the
required minimum distribution from an IRA?
A-6. For purposes of determining the minimum distribution required
to be made from an IRA in any calendar year, the account balance of the
IRA as of December 31 of the calendar year immediately preceding the
calendar year for which distributions are required to be made is
substituted in A-3 of Sec. 1.401(a)(9)-5 for the account balance of the
employee. Except as provided in A-7 and A-8 of this section, no
adjustments are made for contributions or distributions after that date.
Q-7. What rules apply in the case of a rollover to an IRA of an
amount distributed by a qualified plan or another IRA?
A-7. If the surviving spouse of an employee rolls over a
distribution from a qualified plan, such surviving spouse may elect to
treat the IRA as the
[[Page 586]]
spouse's own IRA in accordance with the provisions in A-5 of this
section. In the event of any other rollover to an IRA of an amount
distributed by a qualified plan or another IRA, the rules in Sec.
1.401(a)(9)-7 will apply for purposes of determining the account balance
for the receiving IRA and the required minimum distribution from the
receiving IRA. However, because the value of the account balance is
determined as of December 31 of the year preceding the year for which
the required minimum distribution is being determined and not as of a
valuation date in the preceding year, the account balance of the
receiving IRA is only adjusted if the amount is not received in the
calendar year in which the amount rolled over is distributed. In that
case, for purposes of determining the required minimum distribution for
the calendar year in which such amount is actually received, the account
balance of the receiving IRA as of December 31 of the preceding year
must be adjusted by the amount received in accordance with A-2 of Sec.
1.401(a)(9)-7.
Q-8. What rules apply in the case of a transfer (including a
recharacterization) from one IRA to another?
A-8. (a) General rule. In the case of a trustee-to-trustee transfer
from one IRA to another IRA that is not a distribution and rollover, the
transfer is not treated as a distribution by the transferor IRA for
purposes of section 401(a)(9). Accordingly, the minimum distribution
requirement with respect to the transferor IRA must still be satisfied.
Except as provided in paragraph (b) of this A-8 for recharacterizations,
after the transfer the employee's account balance and the required
minimum distribution under the transferee IRA are determined in the same
manner as an account balance and required minimum distribution are
determined under an IRA receiving a rollover contribution under A-7 of
this section.
(b) Recharacterizations. If an amount is contributed to a Roth IRA
that is a conversion contribution or failed conversion contribution and
that amount (plus net income allocable to that amount) is transferred to
another IRA (transferee IRA) in a subsequent year as a recharacterized
contribution, the recharacterized contribution (plus allocable net
income) must be added to the December 31 account balance of the
transferee IRA for the year in which the conversion or failed conversion
occurred.
Q-9. Is the required minimum distribution from one IRA of an owner
permitted to be distributed from another IRA in order to satisfy section
401(a)(9)?
A-9. Yes, the required minimum distribution must be calculated
separately for each IRA. The separately calculated amounts may then be
totaled and the total distribution taken from any one or more of the
individual's IRAs under the rules set forth in this A-9. Generally, only
amounts in IRAs that an individual holds as the IRA owner may be
aggregated. However, amounts in IRAs that an individual holds as a
beneficiary of the same decedent and which are being distributed under
the life expectancy rule in section 401(a)(9)(B)(iii) or (iv) may be
aggregated, but such amounts may not be aggregated with amounts held in
IRAs that the individual holds as the IRA owner or as the beneficiary of
another decedent. Distributions from section 403(b) contracts or
accounts will not satisfy the distribution requirements from IRAs, nor
will distributions from IRAs satisfy the distribution requirements from
section 403(b) contracts or accounts. Distributions from Roth IRAs
(defined in section 408A) will not satisfy the distribution requirements
applicable to IRAs or section 403(b) accounts or contracts and
distributions from IRAs or section 403(b) contracts or accounts will not
satisfy the distribution requirements from Roth IRAs.
Q-10. Is any reporting required by the trustee, custodian, or issuer
of an IRA with respect to the minimum amount that is required to be
distributed from that IRA?
A-10. Yes, the trustee, custodian, or issuer of an IRA is required
to report information with respect to the minimum amount required to be
distributed from the IRA for each calendar year to individuals or
entities, at the time, and in the manner, prescribed by the Commissioner
in revenue rulings, notices, and other guidance published in the
Internal Revenue Bulletin (see
[[Page 587]]
Sec. 601.601(d)(2)(ii)(b) of this chapter) as well as the applicable
Federal tax forms and accompanying instructions.
Q-11. Which amounts distributed from an IRA are taken into account
in determining whether section 401(a)(9) is satisfied?
A-11. (a) General rule. Except as provided in paragraph (b) of this
A-11, all amounts distributed from an IRA are taken into account in
determining whether section 401(a)(9) is satisfied, regardless of
whether the amount is includible in income.
(b) Amounts not taken into account. The following amounts are not
taken into account in determining whether the required minimum amount
with respect to an IRA for a calendar year has been distributed--
(1) Contributions returned pursuant to section 408(d)(4), together
with the income allocable to these contributions;
(2) Contributions returned pursuant to section 408(d)(5);
(3) Corrective distributions of excess simplified employee pension
contributions under section 408(k)(6)(C), together with the income
allocable to these distributions; and
(4) 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-12. How does the special rule in A-3(d) of Sec. 1.401(a)(9)-5 for
a qualifying longevity annuity contract (QLAC) apply to an IRA?
A-12. (a) General rule. The special rule in A-3(d) of Sec.
1.401(a)(9)-5 for a QLAC, defined in A-17 of Sec. 1.401(a)(9)-6,
applies to an IRA, subject to the exceptions set forth in this A-12. See
A-14(d) of Sec. 1.408A-6 for special rules relating to Roth IRAs.
(b) Limitations on premiums--(1) In general. In lieu of the
limitations described in A-17(b) of Sec. 1.401(a)(9)-6, the premiums
paid with respect to the contract on a date are not permitted to exceed
the lesser of the dollar limitation in paragraph (b)(2) of this A-12 or
the percentage limitation in paragraph (b)(3) of this A-12.
(2) Dollar limitation. The dollar limitation is an amount equal to
the excess of--
(i) $125,000 (as adjusted under A-17(d)(2) of Sec. 1.401(a)(9)-6),
over
(ii) The sum of--
(A) The premiums paid before that date with respect to the contract,
and
(B) The premiums paid on or before that date with respect to any
other contract that is intended to be a QLAC and that is purchased for
the IRA owner under the IRA, or any other plan, annuity, or account
described in section 401(a), 403(a), 403(b), or 408 or eligible
governmental plan under section 457(b).
(3) Percentage limitation. The percentage limitation is an amount
equal to the excess of--
(i) 25 percent of the total account balances of the IRAs (other than
Roth IRAs) that an individual holds as the IRA owner (including the
value of any QLAC held under those IRAs) as of December 31 of the
calendar year immediately preceding the calendar year in which a premium
is paid, over
(ii) The sum of--
(A) The premiums paid before that date with respect to the contract,
and
(B) The premiums paid on or before that date with respect to any
other contract that is intended to be a QLAC and that is held or was
purchased for the individual under those IRAs.
(c) Reliance on representations. For purposes of the limitations
described in paragraphs (b)(2) and (3) of this A-12, unless the trustee,
custodian, or issuer of an IRA has actual knowledge to the contrary, the
trustee, custodian, or issuer may rely on the IRA owner's representation
(made in writing or such other form as may be prescribed by the
Commissioner) of--
(1) The amount of the premiums described in paragraphs (b)(2)(ii)(B)
and (b)(3)(ii)(B) of this A-12 that are not paid under the IRA, and
(2) The amount of the account balances described in paragraph
(b)(3)(i) of this A-12 (other than the account balance under the IRA).
(d) Permitted delay in setting beneficiary designation. In case of a
contract that is rolled over from a plan to an IRA before the required
beginning date under the plan, the contract will not violate the rule in
A-17(c)(2)(v) of Sec. 1.401(a)(9)-6 that a non-spouse beneficiary must
be irrevocably selected on
[[Page 588]]
or before the later of the date of purchase or the required beginning
date under the IRA, provided that the contract requires a beneficiary to
be irrevocably selected by the end of the year following the year of the
rollover.
(e) Roth IRAs. A contract that is purchased under a Roth IRA is not
treated as a contract that is intended to be a QLAC for purposes of
applying the dollar and percentage limitation rules in paragraphs
(b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-12. See A-14(d) of Sec.
1.408A-6. If a QLAC is purchased or held under a plan, annuity, account,
or traditional IRA, and that contract is later rolled over or converted
to a Roth IRA, the contract is not treated as a contract that is
intended to be a QLAC after the date of the rollover or conversion.
Thus, premiums paid with respect to the contract will not be taken into
account under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this
A-12 after the date of the rollover or conversion.
(f) Effective/applicability date. This A-12 applies to contracts
purchased on or after July 2, 2014.
[T.D. 8987, 67 FR 19024, Apr. 17, 2002, as amended by T.D. 9130, 69 FR
33293, June 15, 2004; T.D. 9673, 79 FR 37642, July 2, 2014]
Sec. 1.408-11 Net income calculation for returned or
recharacterized IRA contributions.
(a) Net income calculation for returned IRA contributions--(1)
General rule. For purposes of returned contributions under section
408(d)(4), the net income attributable to a contribution made to an IRA
is determined by allocating to the contribution a pro rata portion of
the earnings on the assets in the IRA during the period the IRA held the
contribution. This attributable net income is calculated by using the
following formula:
[GRAPHIC] [TIFF OMITTED] TR05MY03.002
(2) Special rule. If an IRA is established with a contribution and
no other contributions, distributions or transfers are made to or from
that IRA, then the subsequent distribution of the entire account balance
of the IRA pursuant to section 408(d)(4) will satisfy the requirement of
that Internal Revenue Code section that the return of a contribution be
accompanied by the amount of net income attributable to the
contribution.
(b) Definitions. For purposes of this section the following
definitions apply:
(1) Adjusted opening balance. The term adjusted opening balance
means the fair market value of the IRA at the beginning of the
computation period plus the amount of any contributions or transfers
(including the contribution that is distributed as a returned
contribution pursuant to section 408(d)(4) and recharacterizations of
contributions pursuant to section 408A(d)(6)) made to the IRA during the
computation period.
(2) Adjusted closing balance. The term adjusted closing balance
means the fair market value of the IRA at the end of the computation
period plus the amount of any distributions or transfers (including
recharacterizations of contributions pursuant to section 408A(d)(6))
made from the IRA during the computation period.
(3) Computation period. The term computation period means the period
beginning immediately prior to the time that the contribution being
returned was made to the IRA and ending immediately prior to the removal
of the contribution. If more than one contribution was made as a regular
contribution and is being returned from the IRA, the computation period
begins immediately prior to the time the first contribution being
returned was contributed.
(4) Regular contribution. The term regular contribution means an IRA
contribution made by the IRA owner that is neither a trustee-to-trustee
transfer from another IRA nor a rollover from another IRA or retirement
plan.
(c) Additional rules. (1) When an IRA asset is not normally valued
on a daily
[[Page 589]]
basis, the fair market value of the asset at the beginning of the
computation period is deemed to be the most recent, regularly
determined, fair market value of the asset, determined as of a date that
coincides with or precedes the first day of the computation period. In
addition, solely for purposes of this section, notwithstanding A-3 of
Sec. 1.408A-5, recharacterized contributions are taken into account for
the period they are actually held in a particular IRA.
(2) In the case of an IRA that has received more than one regular
contribution for a particular taxable year, the last regular
contribution made to the IRA for the year is deemed to be the
contribution that is distributed as a returned contribution under
section 408(d)(4), up to the amount of the contribution identified by
the IRA owner as the amount distributed as a returned contribution.
(3) In the case of an individual who owns multiple IRAs, the net
income calculation is performed only on the IRA containing the
contribution being returned, and that IRA is the IRA that must
distribute the contribution.
(d) Examples. The following examples illustrate the net income
calculation under section 408(d)(4) and this section:
Example 1. (i) On May 1, 2004, when her IRA is worth $4,800,
Taxpayer A makes a $1,600 regular contribution to her IRA. Taxpayer A
requests that $400 of the May 1, 2004, contribution be returned to her
pursuant to section 408(d)(4). Pursuant to this request, on February 1,
2005, when the IRA is worth $7,600, the IRA trustee distributes to
Taxpayer A the $400 plus attributable net income. During this time, no
other contributions have been made to the IRA and no distributions have
been made.
(ii) The adjusted opening balance is $6,400 [$4,800 + $1,600] and
the adjusted closing balance is $7,600. Thus, the net income
attributable to the $400 May 1, 2004, contribution is $75 [$400 x
($7,600-$6,400) / $6,400]. Therefore, the total to be distributed on
February 1, 2005, pursuant to Sec. 408(d)(4) is $475.
Example 2. (i) Beginning in January 2004, Taxpayer B contributes
$300 on the 15th of each month to an IRA for 2004, resulting in an
excess regular contribution of $600 for that year. Taxpayer B requests
that the $600 excess regular contribution be returned to her pursuant to
section 408(d)(4). Pursuant to this request, on March 1, 2005, when the
IRA is worth $16,000, the IRA trustee distributes to Taxpayer B the $600
plus attributable net income. The excess regular contributions to be
returned are deemed to be the last two made in 2004: the $300 December
15 contribution and the $300 November 15 contribution. On November 15
the IRA was worth $11,000 immediately prior to the contribution. No
distributions or transfers have been made from the IRA and no
contributions or transfers, other than the monthly contributions
(including $300 in January and February 2005), have been made.
(ii) As of the beginning of the computation period (November 15),
the adjusted opening balance is $12,200 [$11,000 + $300 + $300 + $300 +
$300] and the adjusted closing balance is $16,000. Thus, the net income
attributable to the excess regular contributions is $187 [$600 x
($16,000 - $12,200) / $12,200]. Therefore, the total to be distributed
as returned contributions on March 1, 2005, to correct the excess
regular contribution is $787 [$600 + $187].
[T.D. 9056, 68 FR 23588, May 5, 2003]
Sec. 1.408(q)-1 Deemed IRAs in qualified employer plans.
(a) In general. Under section 408(q), a qualified employer plan may
permit employees to make voluntary employee contributions to a separate
account or annuity established under the plan. If the requirements of
section 408(q) and this section are met, such account or annuity is
treated in the same manner as an individual retirement plan under
section 408 or 408A (and contributions to such an account or annuity are
treated as contributions to an individual retirement plan and not to the
qualified employer plan). The account or annuity is referred to as a
deemed IRA.
(b) Types of IRAs. If the account or annuity meets the requirements
applicable to traditional IRAs under section 408, the account or annuity
is deemed to be a traditional IRA, and if the account or annuity meets
the requirements applicable to Roth IRAs under section 408A, the account
or annuity is deemed to be a Roth IRA. Simplified employee pensions
(SEPs) under section 408(k) and SIMPLE IRAs under section 408(p) may not
be used as deemed IRAs.
(c) Separate entities. Except as provided in paragraphs (d) and (g)
of this section, the qualified employer plan
[[Page 590]]
and the deemed IRA are treated as separate entities under the Internal
Revenue Code and are subject to the separate rules applicable to
qualified employer plans and IRAs, respectively. Issues regarding
eligibility, participation, disclosure, nondiscrimination,
contributions, distributions, investments, and plan administration are
generally to be resolved under the separate rules (if any) applicable to
each entity under the Internal Revenue Code.
(d) Exceptions. The following exceptions to treatment of a deemed
IRA and the qualified employer plan as separate entities apply:
(1) The plan document of the qualified employer plan must contain
the deemed IRA provisions and a deemed IRA must be in effect at the time
the deemed IRA contributions are accepted. Notwithstanding the preceding
sentence, employers that provided deemed IRAs for plan years beginning
before January 1, 2004, (but after December 31, 2002) are not required
to have such provisions in their plan documents before the end of such
plan years.
(2) The requirements of section 408(a)(5) regarding commingling of
assets do not apply to deemed IRAs. Accordingly, the assets of a deemed
IRA may be commingled for investment purposes with those of the
qualified employer plan. However, the restrictions on the commingling of
plan and IRA assets with other assets apply to the assets of the
qualified employer plan and the deemed IRA.
(e) Application of distribution rules. (1) Rules applicable to
distributions from qualified employer plans under the Internal Revenue
Code and regulations do not apply to distributions from deemed IRAs.
Instead, the rules applicable to distributions from IRAs apply to
distributions from deemed IRAs. Also, any restrictions that a trustee,
custodian, or insurance company is permitted to impose on distributions
from traditional and Roth IRAs may be imposed on distributions from
deemed IRAs (for example, early withdrawal penalties on annuities).
(2) The required minimum distribution rules of section 401(a)(9)
must be met separately with respect to the qualified employer plan and
the deemed IRA. The determination of whether a qualified employer plan
satisfies the required minimum distribution rules of section 401(a)(9)
is made without regard to whether a participant satisfies the required
minimum distribution requirements with respect to the deemed IRA that is
established under such plan.
(f) Additional rules--(1) Trustee. The trustee or custodian of an
individual retirement account must be a bank, as required by section
408(a)(2), or, if the trustee is not a bank, as defined in section
408(n), the trustee must have received approval from the Commissioner to
serve as a nonbank trustee or nonbank custodian pursuant to Sec. 1.408-
2(e). For further guidance regarding governmental units serving as
nonbank trustees of deemed IRAs established under section 408(q), see
Sec. 1.408-2T(e)(8).
(2) Trusts. (i) General rule. Deemed IRAs that are individual
retirement accounts may be held in separate individual trusts, a single
trust separate from a trust maintained by the qualified employer plan,
or in a single trust that includes the qualified employer plan. A deemed
IRA trust must be created or organized in the United States for the
exclusive benefit of the participants. If deemed IRAs are held in a
single trust that includes the qualified employer plan, the trustee must
maintain a separate account for each deemed IRA. In addition, the
written governing instrument creating the trust must satisfy the
requirements of section 408(a) (1), (2), (3), (4), and (6).
(ii) Application of section 408(a)(3). If deemed IRAs are held in a
single trust that includes the qualified employer plan, section
408(a)(3) is treated as satisfied if no part of the separate accounts of
any of the deemed IRAs is invested in life insurance contracts,
regardless of whether the separate account for the qualified employer
plan invests in life insurance contracts.
(iii) Separate accounts for traditional and Roth deemed IRAs. The
rules of section 408A(b) and the regulations thereunder, requiring each
Roth IRA to be clearly designated as a Roth IRA, will not fail to be
satisfied solely because Roth deemed IRAs and traditional deemed IRAs
are held in a single trust, provided that the trustee maintains
[[Page 591]]
separate accounts for the Roth deemed IRAs and traditional deemed IRAs
of each participant, and each of those accounts is clearly designated as
such.
(3) Annuity contracts. Deemed IRAs that are individual retirement
annuities may be held under a single annuity contract or under separate
annuity contracts. However, the contract must be separate from any
annuity contract or annuity contracts of the qualified employer plan. In
addition, the contract must satisfy the requirements of section 408(b)
and there must be separate accounting for the interest of each
participant in those cases where the individual retirement annuities are
held under a single annuity contract.
(4) Deductibility. The deductibility of voluntary employee
contributions to a traditional deemed IRA is determined in the same
manner as if they were made to any other traditional IRA. Thus, for
example, taxpayers with compensation that exceeds the limits imposed by
section 219(g) may not be able to make contributions to deemed IRAs, or
the deductibility of such contributions may be limited in accordance
with sections 408 and 219(g). However, section 219(f)(5), regarding the
taxable year in which amounts paid by an employer to an individual
retirement plan are includible in the employee's income, is not
applicable to deemed IRAs.
(5) Rollovers and transfers. The same rules apply to rollovers and
transfers to and from deemed IRAs as apply to rollovers and transfers to
and from other IRAs. Thus, for example, the plan may provide that an
employee may request and receive a distribution of his or her deemed IRA
account balance and may roll it over to an eligible retirement plan in
accordance with section 408(d)(3), regardless of whether that employee
may receive a distribution of any other plan benefits.
(6) Nondiscrimination. The availability of a deemed IRA is not a
benefit, right or feature of the qualified employer plan under Sec.
1.401(a)(4)-4.
(7) IRA assets and benefits not taken into account in determining
benefits under or funding of qualified employer plan. Neither the assets
held in the deemed IRA portion of the qualified employer plan, nor any
benefits attributable thereto, shall be taken into account for purposes
of:
(i) Determining the benefits of employees and their beneficiaries
under the plan (within the meaning of section 401(a)(2)); or
(ii) Determining the plan's assets or liabilities for purposes of
section 404 or 412.
(g) Disqualifying defects--(1) Single trust. If the qualified
employer plan fails to satisfy the qualification requirements applicable
to it, either in form or operation, any deemed IRA that is an individual
retirement account and that is included as part of the trust of that
qualified employer plan does not satisfy section 408(q). Accordingly,
any account maintained under such a plan as a deemed IRA ceases to be a
deemed IRA at the time of the disqualifying event. In addition, the
deemed IRA also ceases to satisfy the requirements of sections 408(a)
and 408A. Also, if any one of the deemed IRAs fails to satisfy the
applicable requirements of sections 408 or 408A, and the assets of that
deemed IRA are included as part of the trust of the qualified employer
plan, section 408(q) does not apply and the plan will fail to satisfy
the plan's qualification requirements.
(2) Separate trusts and annuities. If the qualified employer plan
fails to satisfy its qualification requirements, either in form or
operation, but the assets of a deemed IRA are held in a separate trust
(or where a deemed IRA is an individual retirement annuity), then the
deemed IRA does not automatically fail to satisfy the applicable
requirements of section 408 or 408A. Instead, its status as an IRA will
be determined by considering whether the account or the annuity
satisfies the applicable requirements of sections 408 and 408A
(including, in the case of individual retirement accounts, the
prohibition against the commingling of assets under section 408(a)(5)).
Also, if a deemed IRA fails to satisfy the requirements of a qualified
IRA and the assets of the deemed IRA are held in a separate trust (or
where the deemed IRA is an individual retirement annuity), the qualified
employer plan will not fail
[[Page 592]]
the qualification requirements applicable to it under the Code solely
because of the failure of the deemed IRA.
(h) Definitions. The following definitions apply for purposes of
this section:
(1) Qualified employer plan. A qualified employer plan is a plan
described in section 401(a), an annuity plan described in section
403(a), a section 403(b) plan, or a governmental plan under section
457(b).
(2) Voluntary employee contribution. A voluntary employee
contribution is any contribution (other than a mandatory contribution
within the meaning of section 411(c)(2)(C)) which is made by an
individual as an employee under a qualified employer plan that allows
employees to elect to make contributions to deemed IRAs and with respect
to which the individual has designated the contribution as a
contribution to which section 408(q) applies.
(3) Employee. An employee includes any individual who is an employee
under the rules applicable to the qualified employer plan under which
the deemed IRA is established.
(i) Effective date. This section applies to accounts or annuities
established under section 408(q) on or after August 1, 2003.
[T.D. 9142, 69 FR 43739, July 22, 2004]
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
[[Page 593]]
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 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
[[Page 594]]
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--
(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?
[[Page 595]]
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).
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
[[Page 596]]
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 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
[[Page 597]]
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 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
[[Page 598]]
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 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.
Q-14. What is the amount that is treated as a distribution, for
purposes of determining income inclusion, when a conversion involves an
annuity contract?
A-14. (a) In general--(1) Distribution of Fair Market Value Upon
Conversion. Notwithstanding Sec. 1.408-4(e), when part
[[Page 599]]
or all of a traditional IRA that is an individual retirement annuity
described in section 408(b) is converted to a Roth IRA, for purposes of
determining the amount includible in gross income as a distribution
under Sec. 1.408A-4, A-7, the amount that is treated as distributed is
the fair market value of the annuity contract on the date the annuity
contract is converted. Similarly, when a traditional IRA that is an
individual retirement account described in section 408(a) holds an
annuity contract as an account asset and the traditional IRA is
converted to a Roth IRA, for purposes of determining the amount
includible in gross income as a distribution under Sec. 1.408A-4, A-7,
the amount that is treated as distributed with respect to the annuity
contract is the fair market value of the annuity contract on the date
that the annuity contract is distributed or treated as distributed from
the traditional IRA. The rules in this A-14 also apply to conversions
from SIMPLE IRAs.
(2) Annuity contract surrendered. Paragraph (a)(1) of this paragraph
A-14 does not apply to a conversion of a traditional IRA to the extent
the conversion is accomplished by the complete surrender of an annuity
contract for its cash value and the reinvestment of the cash proceeds in
a Roth IRA, but only if the surrender extinguishes all benefits and
other characteristics of the contract. In such a case, the cash from the
surrendered contract is the amount reinvested in the Roth IRA.
(3) Definitions. The definitions set forth in Sec. 1.408A-8 apply
for purposes of this paragraph A-14.
(b) Determination of fair market value--(1) Overview--(i) Use of
alternative methods. This paragraph (b) sets forth methods which may be
used to determine the fair market value of an individual retirement
annuity for purposes of paragraph (a)(1) of this paragraph A-14.
However, if, because of the unusual nature of the contract, the value
determined under one of these methods does not reflect the full value of
the contract, that method may not be used.
(ii) Additional guidance. Additional guidance regarding the fair
market value of an individual retirement annuity, including formulas to
be used for determining fair market value, may be issued by the
Commissioner in revenue rulings, notices, or other guidance published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b)).
(2) Gift tax method--(i) Cost of contract or comparable contract. If
with respect to an annuity, there is a comparable contract issued by the
company which sold the annuity, the fair market value of the annuity may
be established by the price of the comparable contract. If the
conversion occurs soon after the annuity was sold, the comparable
contract may be the annuity itself, and thus, the fair market value of
the annuity may be established through the sale of the particular
contract by the company (that is, the actual premiums paid for such
contract).
(ii) Use of reserves where no comparable contract available. If with
respect to an annuity, there is no comparable contract available in
order to make the comparison described in paragraph (b)(2)(i) of this
paragraph A-14, the fair market value may be established through an
approximation that is based on the interpolated terminal reserve at the
date of the conversion, plus the proportionate part of the gross premium
last paid before the date of the conversion which covers the period
extending beyond that date.
(3) Accumulation method. As an alternative to the gift tax method
described in paragraph (b)(2) of this paragraph A-14, this paragraph
(b)(3) provides a method that may be used for an annuity contract which
has not been annuitized. The fair market value of such an annuity
contract is permitted to be determined using the methodology provided in
Sec. 1.401(a)(9)-6, A-12, with the following modifications:
(i) All front-end loads and other non-recurring charges assessed in
the twelve months immediately preceding the conversion must be added to
the account value.
(ii) Future distributions are not to be assumed in the determination
of the actuarial present value of additional benefits.
(iii) The exclusions provided under Sec. 1.401(a)(9)-6, A-12(c)(1)
and (c)(2), are not to be taken into account.
(c) Effective/applicability date. The provisions of this paragraph
A-14 are applicable to any conversion in which
[[Page 600]]
an annuity contract is distributed or treated as distributed from a
traditional IRA on or after August 19, 2005. However, for annuity
contracts distributed or treated as distributed from a traditional IRA
on or before December 31, 2008, taxpayers may instead apply the
valuation methods in Sec. 1.408A-4T (as it appeared in the April 1,
2008, edition of 26 CFR part 1) and Revenue Procedure 2006-13 (2006-1 CB
315) (See Sec. 601.601(d)(2)(ii)(b)).
[T.D. 8816, 64 FR 5603, Feb. 4, 1999, as amended by T.D. 9220, 70 FR
48871, Aug. 22, 2005; T.D. 9418, 73 FR 43862, July 29, 2008]
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, 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)(1) If paragraph (b) of this A-2 does not apply, then, for
purposes of determining net income attributable to IRA contributions,
the net income attributable to the amount of a contribution is
determined by allocating to the contribution a pro rata portion of the
earnings on the assets in the IRA during the period the IRA held the
contribution. This attributable net income is calculated by using the
following formula:
[GRAPHIC] [TIFF OMITTED] TR05MY03.003
[[Page 601]]
(2) For purposes of this paragraph (c), the following definitions
apply:
(i) The term adjusted opening balance means the fair market value of
the IRA at the beginning of the computation period plus the amount of
any contributions or transfers (including the contribution that is being
recharacterized pursuant to section 408A(d)(6) and any other
recharacterizations) made to the IRA during the computation period.
(ii) The term adjusted closing balance means the fair market value
of the IRA at the end of the computation period plus the amount of any
distributions or transfers (including contributions returned pursuant to
section 408(d)(4) and recharacterizations of contributions pursuant to
section 408A(d)(6)) made from the IRA during the computation period.
(iii) The term computation period means the period beginning
immediately prior to the time the particular contribution being
recharacterized is made to the IRA and ending immediately prior to the
recharacterizing transfer of the contribution. If a series of regular
contributions was made to the IRA, and consecutive contributions in that
series are being recharacterized, the computation period begins
immediately prior to the time the first of the regular contributions
being recharacterized was made.
(3) When an IRA asset is not normally valued on a daily basis, the
fair market value of the asset at the beginning of the computation
period is deemed to be the most recent, regularly determined, fair
market value of the asset, determined as of a date that coincides with
or precedes the first day of the computation period. In addition, solely
for purposes of this paragraph (c), notwithstanding A-3 of this section,
recharacterized contributions are taken into account for the period they
are actually held in a particular IRA.
(4) In the case of an individual with multiple IRAs, the net income
calculation is performed only on the IRA containing the particular
contribution to be recharacterized, and that IRA is the IRA from which
the recharacterizing transfer must be made.
(5) In the case of multiple contributions made to an IRA for a
particular year that are eligible for recharacterization, the IRA owner
can choose (by date and by dollar amount, not by specific assets
acquired with those dollars) which contribution, or portion thereof, is
to be recharacterized.
(6) The following examples illustrate the net income calculation
under section 408A(d)(6) and this paragraph:
Example 1. (i) On March 1, 2004, when her Roth IRA is worth $80,000,
Taxpayer A makes a $160,000 conversion contribution to the Roth IRA.
Subsequently, Taxpayer A discovers that she was ineligible to make a
Roth conversion contribution in 2004 and so she requests that the
$160,000 be recharacterized to a traditional IRA pursuant to section
408A(d)(6). Pursuant to this request, on March 1, 2005, when the IRA is
worth $225,000, the Roth IRA trustee transfers to a traditional IRA the
$160,000 plus allocable net income. No other contributions have been
made to the Roth IRA and no distributions have been made.
(ii) The adjusted opening balance is $240,000 [$80,000 + $160,000]
and the adjusted closing balance is $225,000. Thus the net income
allocable to the $160,000 is - $10,000 [$160,000 x ($225,000 - $240,000)
/ $240,000]. Therefore, in order to recharacterize the March 1, 2004,
$160,000 conversion contribution on March 1, 2005, the Roth IRA trustee
must transfer from Taxpayer A's Roth IRA to her traditional IRA $150,000
[$160,000 - $10,000].
Example 2. (i) On April 1, 2004, when her traditional IRA is worth
$100,000, Taxpayer B converts the entire amount, consisting of 100
shares of stock in ABC Corp. and 100 shares of stock in XYZ Corp., by
transferring the shares to a Roth IRA. At the time of the conversion,
the 100 shares of stock in ABC Corp. are worth $50,000 and the 100
shares of stock in XYZ Corp. are also worth $50,000. Taxpayer B decides
that she would like to recharacterize the ABC Corp. shares back to a
traditional IRA. However, B may choose only by dollar amount the
contribution or portion thereof that is to be recharacterized. On the
date of transfer, November 1, 2004, the 100 shares of stock in ABC Corp.
are worth $40,000 and the 100 shares of stock in XYZ Corp. are worth
$70,000. No other contributions have been made to the Roth IRA and no
distributions have been made.
(ii) If B requests that $50,000 (which was the value of the ABC
Corp. shares at the time of conversion) be recharacterized, the net
income allocable to the $50,000 is $5,000 [$50,000 x ($110,000 -
$100,000) / $100,000]. Therefore, in order to recharacterize $50,000 of
the April 1, 2004, conversion contribution on November 1, 2004, the Roth
IRA trustee must transfer from Taxpayer B's Roth IRA to a traditional
IRA assets with a value of $55,000 [$50,000 + $5,000].
[[Page 602]]
(iii) If, on the other hand, B requests that $40,000 (which was the
value of the ABC Corp. shares on November 1) be recharacterized, the net
income allocable to the $40,000 is $4,000 [$40,000 x ($110,000 -
$100,000) / $100,000]. Therefore, in order to recharacterize $40,000 of
the April 1, 2004, conversion contribution on November 1, 2004, the Roth
IRA trustee must transfer from Taxpayer B's Roth IRA to a traditional
IRA assets with a value of $44,000 [$40,000 + $4,000].
(iv) Regardless of the amount of the contribution recharacterized,
the determination of that amount (or of the net income allocable
thereto) is not affected by whether the recharacterization is
accomplished by the transfer of shares of ABC Corp. or of shares of XYZ
Corp.
(7) This paragraph (c) applies for purposes of determining net
income attributable to IRA contributions, made on or after January 1,
2004. For purposes of determining net income attributable to IRA
contributions made before January 1, 2004, see paragraph (c) of this A-2
of Sec. 1.408A-5 (as it appeared in the April 1, 2003, edition of 26
CFR part 1).
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 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
[[Page 603]]
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 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
[[Page 604]]
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 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
[[Page 605]]
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, as amended by T.D. 9056, 68 FR
23589, May 5, 2003]
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 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
[[Page 606]]
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 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
[[Page 607]]
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 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
[[Page 608]]
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) 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
[[Page 609]]
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
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?
[[Page 610]]
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.
(d) The special rules in A-3 of Sec. 1.401(a)(9)-5 and A-12 of
Sec. 1.408-8 for a qualifying longevity annuity contract (QLAC),
defined in A-17 of Sec. 1.401(a)(9)-6, do not apply to a Roth IRA.
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 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
[[Page 611]]
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, as amended by T.D. 9673, 79 FR
37643, July 2, 2014]
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 Sec. Sec.
1.408A-1 through 1.408A-7 and this section:
Q-1. Are there any special definitions that govern in applying the
provisions of Sec. Sec. 1.408A-1 through 1.408A-7 and this section?
A-1. Yes, the following definitions govern in applying the
provisions of Sec. Sec. 1.408A-1 through 1.408A-7 and this section.
Unless the context indicates 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
[[Page 612]]
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 Sec. Sec. 1.408A-1 through 1.408A-8:
Q-1. To what taxable years do Sec. Sec. 1.408A-1 through 1.408A-8
apply?
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. 1.408A-10 Coordination between designated Roth accounts
and Roth IRAs.
Q-1. Can an eligible rollover distribution, within the meaning of
section 402(c)(4), from a designated Roth account, as defined in A-1 of
Sec. 1.402A-1, be rolled over to a Roth IRA?
A-1. Yes. An eligible rollover distribution, within the meaning of
section 402(c)(4), from a designated Roth account may be rolled over to
a Roth IRA. For purposes of this section, a designated Roth account
means a designated Roth account as defined in A-1 of Sec. 1.402A-1.
Q-2. Can an eligible rollover distribution from a designated Roth
account be rolled over to a Roth IRA even if the distributee is not
otherwise eligible to make regular or conversion contributions to a Roth
IRA?
A-2. Yes. An individual may establish a Roth IRA and roll over an
eligible
[[Page 613]]
rollover distribution from a designated Roth account to that Roth IRA
even if such individual is not eligible to make regular contributions or
conversion contributions (as described in section 408A(c)(2) and (d)(3),
respectively) because of the modified adjusted gross income limits in
section 408A(b)(3).
Q-3. For purposes of the ordering rules on distributions from Roth
IRAs, what portion of a distribution from a rollover contribution from a
designated Roth account is treated as contributions?
A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are
deemed to consist first of regular contributions, then of conversion
contributions, and finally, of earnings. For purposes of section
408A(d)(4), the amount of a rollover contribution that is treated as a
regular contribution is the portion of the distribution that is treated
as investment in the contract under A-6 of Sec. 1.402A-1, and the
remainder of the rollover contribution is treated as earnings. Thus, the
entire amount of any qualified distribution from a designated Roth
account that is rolled over into a Roth IRA is treated as a regular
contribution to the Roth IRA. Accordingly, a subsequent distribution
from the Roth IRA in the amount of that rollover contribution is not
includible in gross income under the rules of A-8 of Sec. 1.408A-6.
(b) If the entire account balance of a designated Roth account is
distributed to an employee and only a portion of the distribution is
rolled over to a Roth IRA within the 60-day period described in section
402(c)(3), and at the time of the distribution, the investment in the
contract exceeds the balance in the designated Roth account, the portion
of investment in the contract that exceeds the amount used to determine
the taxable amount of the distribution is treated as a regular
contribution for purposes of section 408A(d)(4).
Q-4. In the case of a rollover from a designated Roth account to a
Roth IRA, when does the 5-taxable-year period (described in section
408A(d)(2)(B) and A-1 of Sec. 1.408A-6) for determining qualified
distributions from a Roth IRA begin?
A-4. (a) The 5-taxable-year period for determining a qualified
distribution from a Roth IRA (described in section 408A(d)(2)(B) and A-1
of Sec. 1.408A-6) begins with the earlier of the taxable year described
in A-2 of Sec. 1.408A-6 or the taxable year in which a rollover
contribution from a designated Roth account is made to a Roth IRA. The
5-taxable-year period described in this A-4 and the 5-taxable-year
period of participation described in A-4 of Sec. 1.402A-1 are
determined independently.
(b) The following examples illustrate the application of this A-4:
Example 1. Employee D began making designated Roth contributions
under his employer's 401(k) plan in 2006. Employee D, who is over age
59\1/2\, takes a distribution from D's designated Roth account in 2008,
prior to the end of the 5-taxable-year period of participation used to
determine qualified distributions from a designated Roth account. The
distribution is an eligible rollover distribution and D rolls it over in
accordance with sections 402(c) and 402A(c)(3) to D's Roth IRA, which
was established in 2003. Any subsequent distribution from the Roth IRA
of the amount rolled in, plus earnings thereon, would not be includible
in gross income (because it would be a qualified distribution within the
meaning of section 408A(d)(2)).
Example 2. The facts are the same as in Example 1, except that the
Roth IRA is D's first Roth IRA and is established with the rollover in
2008, which is the only contribution made to the Roth IRA. If a
distribution is made from the Roth IRA prior to the end of the 5-
taxable-year period used to determine qualified distributions from a
Roth IRA (which begins in 2008, the year of the rollover which
established the Roth IRA) the distribution would not be a qualified
distribution within the meaning of section 408A(d)(2), and any amount of
the distribution that exceeded the portion of the rollover contribution
that consisted of investment in the contract is includible in D's gross
income.
Example 3. The facts are the same as in Example 2, except that the
distribution from the designated Roth account and the rollover to the
Roth IRA occur in 2011 (after the end of the 5-taxable-year period of
participation used to determine qualified distributions from a
designated Roth account). If a distribution is made from the Roth IRA
prior to the expiration of the 5-taxable-year period used to determine
qualified distributions from a Roth IRA, the distribution would not be a
qualified distribution within the meaning of section 408A(d)(2), and any
amount of the distribution that exceeded the amount rolled in is
includible in D's gross income.
[[Page 614]]
Q-5. Can amounts distributed from a Roth IRA be rolled over to a
designated Roth account as defined in A-1 of Sec. 1.402A-1?
A-5. No. Amounts distributed from a Roth IRA may be rolled over or
transferred only to another Roth IRA and are not permitted to be rolled
over to a designated Roth account under a section 401(a) or section
403(b) plan. The same rule applies even if all the amounts in the Roth
IRA are attributable to a rollover distribution from a designated Roth
account in a plan.
Q-6. When is this Sec. 1.408A-10 applicable?
A-6. The rules of this Sec. 1.408A-10 apply for taxable years
beginning on or after January 1, 2006.
[T.D. 9324, 72 FR 21115, Apr. 30, 2007]
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
[[Page 615]]
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
(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. 1.409A-0 Table of contents.
This section lists captions contained in Sec. Sec. 1.409A-1,
1.409A-2, 1.409A-3, 1.409A-4, 1.409A-5 and 1.409A-6.
Sec. 1.409A-1 Definitions and covered plans.
(a) Nonqualified deferred compensation plan.
(1) In general.
(2) Qualified employer plans.
(3) Certain foreign plans.
(i) Participation addressed by treaty.
(ii) Participation by nonresident aliens, certain resident aliens,
and bona fide residents of possessions.
(iii) Participation by U.S. citizens and lawful permanent residents.
(iv) Plans subject to a totalization agreement and similar plans.
(v) Broad-based foreign retirement plan.
(4) Section 457 plans.
(5) Certain welfare benefits.
(b) Deferral of compensation
(1) In general.
(2) Earnings.
(3) Compensation payable pursuant to the service recipient's
customary payment timing arrangement.
(4) Short-term deferrals.
(i) In general.
(ii) Certain delayed payments.
(iii) Examples.
(5) Stock options, stock appreciation rights, and other equity-based
compensation.
(i) Stock rights.
(A) Nonstatutory stock options not providing for the deferral of
compensation.
(B) Stock appreciation rights not providing for the deferral of
compensation.
(C) Stock rights that may provide for the deferral of compensation.
(D) Feature for the deferral of compensation.
(E) Rights to dividends.
(ii) Statutory stock options.
(iii) Service recipient stock.
(A) In general.
(B) American depositary receipts.
(C) Mutual company units.
(D) Other entities.
(E) Eligible issuer of service recipient stock.
(1) In general.
(2) Investment vehicles.
(3) Corporate structures established or transactions undertaken for
purposes of avoiding coverage under section 409A.
(4) Substitutions and assumptions by reason of a corporate
transaction.
(iv) Determination of the fair market value of service recipient
stock.
(A) Stock readily tradable on an established securities market.
(B) Stock not readily tradable on an established securities market.
(1) In general.
(2) Presumption of reasonableness.
(3) Use of alternative methods.
(v) Modifications, extensions, substitutions, and assumptions of
stock rights.
(A) Treatment of modified and extended stock rights.
(B) Modification in general.
(C) Extensions.
(1) In general.
(2) Certain extensions before April 10, 2007.
(3) Examples.
(D) Substitutions and assumptions of stock rights by reason of a
corporate transaction.
(E) Acceleration of date when exercisable.
(F) Discretionary added benefits.
(G) Change in underlying stock increasing value.
(H) Change in the number of shares purchasable.
(I) Rescission of changes.
(J) Successive modifications and extensions.
(K) Modifications and extensions in effect on October 23, 2004.
(vi) Meaning and use of certain terms.
(A) Option.
(B) Date of grant of option.
(C) Stock.
(D) Exercise price.
(E) Exercise.
(F) Transfer.
(G) Readily tradable.
(H) Application to stock appreciation rights.
(6) Restricted property, section 402(b) trusts, and section 403(c)
annuities.
(i) In general.
(ii) Promises to transfer property.
(7) Arrangements between partnerships and partners. [Reserved]
(8) Certain foreign plans.
(i) Plans with respect to compensation covered by treaty or other
international agreement.
(ii) Plans with respect to certain other compensation.
[[Page 616]]
(iii) Tax equalization agreements.
(iv) Certain limited deferrals of a nonresident alien.
(v) Additional foreign plans.
(vi) Earnings.
(9) Separation pay plans.
(i) In general.
(ii) Collectively bargained separation pay plans.
(iii) Separation pay due to involuntary separation from service or
participation in a window program.
(iv) Foreign separation pay plans.
(v) Reimbursements and certain other separation payments.
(A) In general.
(B) Medical benefits.
(C) In-kind benefits and direct service recipient payments.
(D) Limited payments.
(E) Limited period of time.
(vi) Window programs--definition.
(10) Certain indemnification and liability insurance plans.
(11) Legal settlements.
(12) Certain educational benefits.
(c) Plan.
(1) In general.
(2) Plan aggregation rules.
(i) In general.
(ii) Dual status.
(3) Establishment of plan.
(i) In general.
(ii) Initial deferral election provisions.
(iii) Subsequent deferral election provisions.
(iv) Payment accelerations.
(v) Six-month delay for specified employees.
(vi) Plan amendments.
(vii) Transition rule for written plan requirement.
(viii) Plan aggregation rules.
(d) Substantial risk of forfeiture.
(1) In general.
(2) Stock rights.
(3) Enforcement of forfeiture condition.
(i) In general.
(ii) Examples.
(e) Performance-based compensation.
(1) In general.
(2) Payments based upon subjective performance criteria.
(3) Equity-based compensation.
(f) Service provider.
(1) In general.
(2) Independent contractors.
(i) In general.
(ii) Related person.
(iii) Significant services.
(iv) Management services.
(v) Services provided to related persons.
(g) Service recipient.
(h) Separation from service.
(1) Employees.
(i) In general.
(ii) Termination of employment.
(2) Independent contractors.
(i) In general.
(ii) Special rule.
(3) Definition of service recipient and employer.
(4) Asset purchase transactions.
(5) Dual status.
(6) Collectively bargained plans covering multiple employers.
(i) Specified employee.
(1) In general.
(2) Definition of compensation.
(3) Specified employee identification date.
(4) Specified employee effective date.
(5) Alternative methods of satisfying the six-month delay rule.
(6) Corporate transactions.
(i) Mergers and acquisitions of public service recipients.
(ii) Mergers and acquisitions of nonpublic service recipients.
(iii) Spinoffs.
(iv) Public offerings and other corporate transactions.
(v) Alternative methods of compliance.
(7) Nonresident alien employees.
(8) Elections affecting the identification of specified employees.
(j) Nonresident alien.
(k) Established securities market.
(l) Stock right.
(m) Separation pay plan.
(n) Involuntary separation from service.
(1) In general.
(2) Separations from service for good reason.
(i) In general.
(ii) Safe harbor.
(3) Special rule for certain collectively bargained plans.
(o) Earnings.
(p) In-kind benefits.
(q) Application of definitions and rules.
Sec. 1.409A-2 Deferral elections.
(a) Initial elections as to the time and form of payment.
(1) In general.
(2) Service recipient elections.
(3) General rule.
(4) Initial deferral election with respect to short-term deferrals.
(5) Initial deferral election with respect to certain forfeitable
rights.
(6) Initial deferral election with respect to fiscal year
compensation.
(7) First year of eligibility.
(i) In general.
(ii) Eligibility to participate.
(iii) Application to excess benefit plans.
(8) Initial deferral election with respect to performance-based
compensation.
(9) Nonqualified deferred compensation plans linked to qualified
employer plans or certain other arrangements.
(10) Changes in elections under a cafeteria plan.
[[Page 617]]
(11) Initial deferral election with respect to certain separation
pay.
(12) Initial deferral election with respect to certain commissions.
(i) Sales commission compensation.
(ii) Investment commission compensation.
(iii) Commission compensation and related persons.
(13) Initial deferral election with respect to compensation paid for
final payroll period.
(i) In general.
(ii) Transition rule.
(14) Elections to annualize recurring part-year compensation.
(15) USERRA rights.
(b) Subsequent changes in time and form of payment.
(1) In general.
(2) Definition of payments for purposes of subsequent changes in the
time and form of payment.
(i) In general.
(ii) Life annuities.
(A) In general.
(B) Certain features disregarded.
(C) Subsidized joint and survivor annuities.
(D) Actuarial assumptions and methods.
(iii) Installment payments.
(iv) Transition rule.
(3) Beneficiaries.
(4) Domestic relations orders.
(5) Coordination with prohibition against acceleration of payments.
(6) Application to multiple payment events.
(7) Delay of payments under certain circumstances.
(i) Payments subject to section 162(m).
(ii) Payments that would violate Federal securities laws or other
applicable law.
(iii) Other events and conditions.
(8) USERRA rights.
(9) Examples.
(c) Special rules for certain resident aliens.
Sec. 1.409A-3 Permissible payments
(a) In general.
(b) Designation of payment upon a permissible payment event.
(c) Designation of alternative specified dates or payment schedules
based upon date of permissible event.
(d) When a payment is treated as made upon the designated payment
date.
(e) Designation of time and form of payment with respect to
earnings.
(f) Substitutions.
(g) Disputed payments and refusals to pay.
(h) Special rule for certain resident aliens.
(i) Definitions and special rules.
(1) Specified time or fixed schedule.
(i) In general.
(ii) Payment schedules with formula and fixed limitations.
(A) Individual limitations.
(B) Limitations on aggregate payments to all participants in
substantially identical plans.
(iii) Payment schedules determined by timing of payments received by
the service recipient.
(iv) Reimbursement or in-kind benefit plans.
(A) General rule.
(B) Medical reimbursement arrangements.
(v) Tax gross-up payments.
(vi) Examples.
(2) Separation from service--required delay in payment to a
specified employee pursuant to a separation from service.
(i) In general.
(ii) Application of payment rules to delayed payments.
(3) Unforeseeable emergency.
(i) Definition.
(ii) Amount of payment permitted upon an unforeseeable emergency.
(iii) Payments due to an unforeseeable emergency.
(4) Disability.
(i) In general.
(ii) Limited plan definition of disability.
(iii) Determination of disability.
(5) Change in the ownership or effective control of a corporation,
or a change in the ownership of a substantial portion of the assets of a
corporation.
(i) In general.
(ii) Identification of relevant corporation.
(A) In general.
(B) Majority shareholder.
(C) Example.
(iii) Attribution of stock ownership.
(iv) Special rules for certain delayed payments pursuant to a change
in control event.
(A) Certain transaction-based compensation.
(B) Certain nonvested compensation.
(v) Change in the ownership of a corporation.
(A) In general.
(B) Persons acting as a group.
(vi) Change in the effective control of a corporation.
(A) In general.
(B) Multiple change in control events.
(C) Acquisition of additional control.
(D) Persons acting as a group.
(vii) Change in the ownership of a substantial portion of a
corporation's assets.
(A) In general.
(B) Transfers to a related person.
(C) Persons acting as a group.
(6) Certain back-to-back arrangements.
(i) In general.
(ii) Example.
(j) Prohibition on acceleration of payments.
(1) In general.
(2) Application to multiple payment events.
(3) Beneficiaries.
[[Page 618]]
(4) Exceptions.
(i) In general.
(ii) Domestic relations order.
(iii) Conflicts of interest.
(A) Compliance with ethics agreements with the Federal government.
(B) Compliance with ethics laws or conflicts of interest laws.
(iv) Section 457 plans.
(v) Limited cashouts.
(vi) Payment of employment taxes.
(vii) Payment upon income inclusion under section 409A.
(viii) Cancellation of deferrals following an unforeseeable
emergency or hardship distribution.
(ix) Plan terminations and liquidations.
(x) Certain distributions to avoid a nonallocation year under
section 409(p).
(xi) Payment of state, local, or foreign taxes.
(xii) Cancellation of deferral elections due to disability.
(xiii) Certain offsets.
(xiv) Bona fide disputes as to a right to a payment.
(5) Nonqualified deferred compensation plans linked to qualified
employer plans or certain other arrangements.
(6) Changes in elections under a cafeteria plan.
Sec. 1.409A-4 Calculation of income inclusion. [Reserved]
Sec. 1.409A-5 Funding. [Reserved]
Sec. 1.409A-6 Application of section 409A and effective dates.
(a) Statutory application and effective dates
(1) Application to amounts deferred.
(i) In general.
(ii) Collectively bargained plans.
(2) Identification of date of deferral for statutory effective date
purposes.
(3) Calculation of amount of compensation deferred for statutory
effective date purposes.
(i) Nonaccount balance plans.
(ii) Account balance plans.
(iii) Equity-based compensation plans.
(iv) Earnings.
(v) Definition of plan.
(4) Material modifications.
(i) In general.
(ii) Adoptions of new plans.
(iii) Suspension or termination of a plan.
(iv) Changes to investment measures--account balance plans.
(v) Stock rights.
(vi) Rescission of modifications.
(vii) Definition of plan.
(b) Regulatory applicability date.
[T.D. 9321, 72 FR 19276, Apr. 17, 2007]
Sec. 1.409A-1 Definitions and covered plans.
(a) Nonqualified deferred compensation plan--(1) In general. Except
as otherwise provided in this paragraph (a), the term nonqualified
deferred compensation plan means any plan (within the meaning of
paragraph (c) of this section) that provides for the deferral of
compensation (within the meaning of paragraph (b) of this section).
Whether a plan provides for the deferral of compensation generally is
determined at the time the service provider obtains a legally binding
right to the compensation under the plan, and is not affected by any
retroactive change to the plan to characterize the right as one that
does not provide for the deferral of compensation. For example, amounts
deferred under a nonqualified deferred compensation plan do not become
an excluded death benefit if the plan is amended so that the amounts are
payable only upon the death of the service provider. If a principal
purpose of a plan is to achieve a result with respect to a deferral of
compensation that is inconsistent with the purposes of section 409A, the
Commissioner may treat the plan as a nonqualified deferred compensation
plan for purposes of section 409A and the regulations thereunder.
(2) Qualified employer plans. The term nonqualified deferred
compensation plan does not include a qualified employer plan. The term
qualified employer plan means any of the following plans:
(i) Any plan described in section 401(a) and a trust exempt from tax
under section 501(a) or that is described in section 402(d).
(ii) Any annuity plan described in section 403(a).
(iii) Any annuity contract described in section 403(b).
(iv) Any simplified employee pension (within the meaning of section
408(k)).
(v) Any simple retirement account (within the meaning of section
408(p)).
(vi) Any plan under which an active participant makes deductible
contributions to a trust described in section 501(c)(18).
(vii) Any eligible deferred compensation plan (within the meaning of
section 457(b)).
[[Page 619]]
(viii) Any plan described in section 415(m).
(ix) Any plan described in Sec. 1022(i)(2) of the Employee
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829,
942) (Sept. 2, 1974) (ERISA).
(3) Certain foreign plans--(i) Participation addressed by treaty.
With respect to an individual for a taxable year, the term nonqualified
deferred compensation plan does not include any scheme, trust,
arrangement, or plan maintained with respect to such individual, to the
extent contributions made by or on behalf of such individual to such
scheme, trust, arrangement, or plan, or credited allocations, accrued
benefits, earnings, or other amounts constituting income, of such
individual under such scheme, trust, arrangement, or plan, are
excludable by such individual for Federal income tax purposes pursuant
to any bilateral income tax convention, or other bilateral or
multilateral agreement, to which the United States is a party.
(ii) Participation by nonresident aliens, certain resident aliens,
and bona fide residents of possessions. With respect to an alien
individual for a taxable year during which such individual is a
nonresident alien, a resident alien classified as a resident alien
solely under section 7701(b)(1)(A)(ii) (and not section
7701(b)(1)(A)(i)), or a bona fide resident of a possession (within the
meaning of section 937(a)), the term nonqualified deferred compensation
plan does not include any broad-based foreign retirement plan (within
the meaning of paragraph (a)(3)(v) of this section).
(iii) Participation by U.S. citizens and lawful permanent residents.
With respect to an individual for a given taxable year during which such
individual is a U.S. citizen or a resident alien classified as a
resident alien under section 7701(b)(1)(A)(i), other than an individual
who is also a bona fide resident of a possession (within the meaning of
section 937(a)), the term nonqualified deferred compensation plan does
not include a broad-based foreign retirement plan (within the meaning of
paragraph (a)(3)(v) of this section), but only with respect to a plan,
or a portion of a plan where such portion may be distinguished,
providing for nonelective deferrals of modified foreign earned income,
and earnings with respect to such nonelective deferrals, and only to the
extent that the amounts deferred under all such plans of the service
recipient, or all portions of such plans, in which the service provider
participates in such taxable year, do not exceed the applicable limits
under section 415(b) (applied to nonaccount balance plans as defined in
paragraph (c)(2)(i)(C) of this section) and section 415(c) (applied to
account balance plans as defined in paragraph (c)(2)(i)(A) of this
section) that would be applicable if such plans were plans subject to
section 415 and the modified foreign earned income of such individual
were treated as compensation for purposes of applying section 415(b) and
(c). For purposes of this paragraph (a)(3)(iii), the term modified
foreign earned income means foreign earned income as defined in section
911(b)(1) without regard to section 911(b)(1)(B)(iv) and without regard
to the requirement that the income be attributable to services performed
during the period described in section 911(d)(1)(A) or (B). The
provisions of this paragraph (a)(3)(iii) do not apply to any individual
with respect to any taxable year in which the individual is
simultaneously eligible to participate in a broad-based foreign
retirement plan and a qualified employer plan described in paragraph
(a)(2) of this section. For purposes of this paragraph (a)(3)(iii), an
individual is eligible to participate in a qualified employer plan if
under the terms of the plan and without further amendment or action by
the plan sponsor, the individual is eligible to make or receive
contributions or accrue benefits under the plan (regardless of whether
the individual has elected to participate in the plan).
(iv) Plans subject to a totalization agreement and similar plans.
The term nonqualified deferred compensation plan does not include any
social security system of a jurisdiction to the extent that benefits
provided under or contributions made to the system are subject to an
agreement entered into pursuant to section 233 of the Social Security
Act (42 U.S.C. 433) with any foreign jurisdiction. In addition, the term
nonqualified deferred compensation plan does not include a social
security system of
[[Page 620]]
a foreign jurisdiction to the extent that benefits are provided under or
contributions are made to a government-mandated plan as part of that
foreign jurisdiction's social security system.
(v) Broad-based foreign retirement plan. The term broad-based
foreign retirement plan means a scheme, trust, arrangement, or plan
(regardless of whether sponsored by a U.S. person) that is written and
that, in the case of an employer-maintained plan, satisfies the
following conditions:
(A) The plan is nondiscriminatory insofar as the employees who,
under the terms of the plan (alone or in combination with other
comparable plans) and without further amendment or action by the
employer, are eligible to make or receive contributions or accrue
benefits under the plan other than earnings (regardless of whether the
employee has elected to participate in the plan), are a wide range of
employees, substantially all of whom are nonresident aliens, resident
aliens classified as resident aliens solely under section
7701(b)(1)(A)(ii) (and not section 7701(b)(1)(A)(i)), or bona fide
residents of a possession (within the meaning of section 937(a)),
including rank and file employees.
(B) The plan (alone or in combination with other comparable plans)
actually provides significant benefits for a substantial majority of
such covered employees.
(C) The benefits actually provided under the plan to such covered
employees are nondiscriminatory.
(D) The plan contains provisions or is the subject of tax law
provisions or other legal restrictions that generally discourage
employees from using plan benefits for purposes other than retirement or
restrict access to plan benefits before separation from service,
including (but not limited to), restricting in-service distributions
except in events similar to an unforeseeable emergency (as defined in
Sec. 1.409A-3(i)(3)(i)) or hardship (as defined for purposes of section
401(k)(2)(B)(i)(IV)), or for educational purposes or the purchase of a
primary residence.
(4) Section 457 plans. A nonqualified deferred compensation plan
under section 457(f) may constitute a nonqualified deferred compensation
plan for purposes of this paragraph (a). The rules of section 409A apply
to nonqualified deferred compensation plans separately and in addition
to any requirements applicable to such plans under section 457(f). In
addition, nonelective deferred compensation of non-employees described
in section 457(e)(12) and a grandfathered plan or arrangement described
in Sec. 1.457-2(k)(4) may constitute a nonqualified deferred
compensation plan for purposes of this paragraph (a). The term
nonqualified deferred compensation plan does not include a length of
service award to a bona fide volunteer under section 457(e)(11)(A)(ii).
For purposes of the application of section 409A to a plan to which
section 457 applies, a payment under the plan generally means the
provision of cash or property to the service provider, provided that for
purposes of the application of the short-term deferral rule set forth in
paragraph (b)(4) of this section, the inclusion in income of an amount
under section 457(f) is treated as a payment of the amount.
(5) Certain welfare benefits. The term nonqualified deferred
compensation plan does not include a plan, or a portion of a plan, to
the extent that the plan provides bona fide vacation leave, sick leave,
compensatory time, disability pay, or death benefits. For these
purposes, the terms ``disability pay'' and ``death benefits'' have the
same meanings as provided in Sec. 31.3121(v)(2)-1(b)(4)(iv)(C) of this
chapter, provided that for purposes of this paragraph, such disability
pay and death benefits may be provided through insurance and the
lifetime benefits payable under the plan are not treated as including
the value of any taxable term life insurance coverage or taxable
disability insurance coverage provided under the plan. The term
nonqualified deferred compensation plan also does not include any Archer
Medical Savings Account as described in section 220, any Health Savings
Account as described in section 223, or any other medical reimbursement
arrangement, including a health reimbursement arrangement, that
satisfies the requirements of section 105 and section 106 such that the
benefits or reimbursements provided
[[Page 621]]
under such arrangement are not includible in income.
(b) Deferral of compensation--(1) In general. Except as otherwise
provided in paragraphs (b)(3) through (b)(12) of this section, a plan
provides for the deferral of compensation if, under the terms of the
plan and the relevant facts and circumstances, the service provider has
a legally binding right during a taxable year to compensation that,
pursuant to the terms of the plan, is or may be payable to (or on behalf
of) the service provider in a later taxable year. Such compensation is
deferred compensation for purposes of section 409A, this section and
Sec. Sec. 1.409A-2 through 1.409A-6. A legally binding right to an
amount that will be excluded from income when and if received does not
constitute a deferral of compensation, unless the service provider has
received the right in exchange for, or has the right to exchange the
right for, an amount that will be includible in income (other than due
to participation in a cafeteria plan described in section 125). A
service provider does not have a legally binding right to compensation
to the extent that compensation may be reduced unilaterally or
eliminated by the service recipient or other person after the services
creating the right to the compensation have been performed. However, if
the facts and circumstances indicate that the discretion to reduce or
eliminate the compensation is available or exercisable only upon a
condition, or the discretion to reduce or eliminate the compensation
lacks substantive significance, a service provider will be considered to
have a legally binding right to the compensation. Whether the discretion
to reduce or eliminate the compensation lacks substantive significance
depends on all the relevant facts and circumstances. However, where the
service provider to whom the compensation may be paid has effective
control of the person retaining the discretion to reduce or eliminate
the compensation, or has effective control over any portion of the
compensation of the person retaining the discretion to reduce or
eliminate the compensation, or is a member of the family (as defined in
section 267(c)(4) applied as if the family of an individual includes the
spouse of any member of the family) of the person retaining the
discretion to reduce or eliminate the compensation, the discretion to
reduce or eliminate the compensation will not be treated as having
substantive significance. For this purpose, compensation is not
considered subject to unilateral reduction or elimination merely because
it may be reduced or eliminated by operation of the objective terms of
the plan, such as the application of a nondiscretionary, objective
provision creating a substantial risk of forfeiture. Similarly, a
service provider does not fail to have a legally binding right to
compensation merely because the amount of compensation is determined
under a formula that provides for benefits to be offset by benefits
provided under another plan (including a plan that is qualified under
section 401(a)), or because benefits are reduced due to actual or
notional investment losses, or, in a final average pay plan, subsequent
decreases in compensation.
(2) Earnings. References to the deferral of compensation or deferred
compensation include references to earnings. When the right to earnings
is specified under the terms of the plan, the legally binding right to
earnings arises at the time of the deferral of the compensation to which
the earnings relate. A plan may provide that the time and form of
payment of earnings is treated separately from the time and form of
payment of the underlying compensation, so that, provided that the rules
of section 409A are otherwise met, a plan may provide that earnings will
be paid at a separate time or in a separate form from the payment of the
underlying compensation. For the application of the deferral election
rules to current payments of earnings and dividend equivalents, see
Sec. 1.409A-3(e).
(3) Compensation payable pursuant to the service recipient's
customary payment timing arrangement. A deferral of compensation does
not occur solely because compensation is paid after the last day of the
service provider's taxable year pursuant to the timing arrangement under
which the service recipient normally compensates service providers for
services performed during a payroll period described in section 3401(b),
or
[[Page 622]]
with respect to a non-employee service provider, a period not longer
than the payroll period described in section 3401(b) or if no such
payroll period exists, a period not longer than the earlier of the
normal timing arrangement under which the service provider normally
compensates non-employee service providers or 30 days after the end of
the service provider's taxable year.
(4) Short-term deferrals--(i) In general. A deferral of compensation
does not occur under a plan with respect to any payment (as defined in
Sec. 1.409A-2(b)(2)) that is not a deferred payment, provided that the
service provider actually or constructively receives such payment on or
before the last day of the applicable 2\1/2\ month period. The following
rules apply for purposes of this paragraph (b)(4)(i):
(A) The applicable 2\1/2\ month period is the period ending on the
later of the 15th day of the third month following the end of the
service provider's first taxable year in which the right to the payment
is no longer subject to a substantial risk of forfeiture or the 15th day
of the third month following the end of the service recipient's first
taxable year in which the right to the payment is no longer subject to a
substantial risk of forfeiture.
(B) A payment is treated as actually or constructively received if
the payment is includible in income, including if the payment is
includible in income under section 83, the economic benefit doctrine,
section 402(b), or section 457(f).
(C) A right to a payment that is never subject to a substantial risk
of forfeiture is considered to be no longer subject to a substantial
risk of forfeiture on the first date the service provider has a legally
binding right to the payment.
(D) A payment is a deferred payment if it is made pursuant to a
provision of a plan that provides for the payment to be made or
completed on or after any date, or upon or after the occurrence of any
event, that will or may occur later than the end of the applicable 2\1/
2\ month period, such as a separation from service, death, disability,
change in control event, specified time or schedule of payment, or
unforeseeable emergency, regardless of whether an amount is actually
paid as a result of the occurrence of such a payment date or event
during the applicable 2\1/2\ month period. If a plan provides that the
service provider or service recipient may make an election under the
plan (including an election under Sec. 1.409A-2(a)(4)) of a different
payment date, schedule, or event, such right is disregarded for this
purpose. In such cases, whether a plan provides for a deferred payment
is determined based on the payment date, schedule, or event that would
apply if no such election were made, except that if the plan would not
provide for a deferred payment absent such an election, and the service
provider or service recipient makes such an election, whether the plan
provides for a deferred payment is determined based upon the payment
date, schedule, or event that the service provider or service recipient
in fact elected.
(E) A stock right provides for a deferred payment if such right
includes any provision pursuant to which the holder of the stock right
will or may have the right to exercise the stock right after the
applicable 2\1/2\ month period.
(F) This paragraph (b)(4)(i) is applied separately to each payment
(as defined in Sec. 1.409A-2(b)(2)) required to be made under a plan.
(G) If a plan provides for a deferred payment with respect to part
of a payment (for example a life annuity or a series of installment
amounts treated as a single payment), the plan provides for a deferred
payment with respect to the entire payment.
(ii) Certain delayed payments. A payment that otherwise qualifies as
a short-term deferral under paragraph (b)(4)(i) of this section but is
made after the applicable 2\1/2\ month period may continue to qualify as
a short-term deferral if the taxpayer establishes that it was
administratively impracticable to make the payment by the end of the
applicable 2\1/2\ month period and, as of the date upon which the
legally binding right to the compensation arose, such impracticability
was unforeseeable, or the taxpayer establishes that making the payment
by the end of the applicable 2\1/2\ month period would have jeopardized
the ability of
[[Page 623]]
the service recipient to continue as a going concern, and provided
further that the payment is made as soon as administratively practicable
or as soon as the payment would no longer have such effect. For purposes
of this paragraph (b)(4)(ii), an action or failure to act of the service
provider or a person under the service provider's control, such as a
failure to provide necessary information or documentation, is not an
unforeseeable event. In addition, a payment that otherwise qualifies as
a short-term deferral under paragraph (b)(4)(i) of this section but is
made after the applicable 2\1/2\ month period may continue to qualify as
a short-term deferral if the taxpayer establishes that the service
recipient reasonably anticipated that the service recipient's deduction
with respect to such payment otherwise would not be permitted by
application of section 162(m), and, as of the date the legally binding
right to the payment arose, a reasonable person would not have
anticipated the application of section 162(m) at the time of the
payment, and provided further that the payment is made as soon as
reasonably practicable following the first date on which the service
recipient anticipates or reasonably should anticipate that, if the
payment were made on such date, the service recipient's deduction with
respect to such payment would no longer be restricted due to the
application of section 162(m). For additional rules applicable to
certain transaction-based compensation, see Sec. 1.409A-3(i)(5)(iv)(A).
(iii) Examples. The following examples illustrate the provisions of
this paragraph (b)(4). In these examples, except as otherwise noted,
each employee and each employer has a calendar year taxable year and
each employee is an individual who is employed by the specified
employer.
Example 1. On November 1, 2008, Employer Z awards a bonus to
Employee A such that Employee A has a legally binding right to the
payment as of November 1, 2008, that is not subject to a substantial
risk of forfeiture. The bonus plan does not provide for a payment date
or a deferred payment. The bonus plan will not be considered to have
provided for a deferral of compensation if the bonus is paid or made
available to Employee A on or before March 15, 2009.
Example 2. Employer Y has a taxable year ending August 31. On
November 1, 2008, Employer Y awards a bonus to Employee B so that
Employee B has a legally binding right to the payment as of November 1,
2008, that is not subject to a substantial risk of forfeiture. The bonus
plan does not provide for a payment date or a deferred payment. The
bonus plan will not be considered to have provided for a deferral of
compensation if the bonus is paid or made available to Employee B on or
before November 15, 2009.
Example 3. On November 1, 2008, Employer X awards a bonus to
Employee C such that Employee C has a legally binding right to the
payment as of November 1, 2008. Under the bonus plan, Employee C will
forfeit the bonus unless Employee C continues performing services
through December 31, 2010. The right to the payment is subject to a
substantial risk of forfeiture through December 31, 2010. Employee C has
the right to make a written election not later than December 31, 2009,
to receive the bonus on or after December 31, 2015, but Employee C does
not make such election. The bonus plan does not provide for a default
payment date or a deferred payment in the absence of an election by
Employee C. The bonus plan will not be considered to have provided for a
deferral of compensation if the bonus is paid or made available to
Employee C on or before March 15, 2011.
Example 4. On November 1, 2008, Employer W awards a bonus to
Employee D such that Employee D has a legally binding right to the
payment as of November 1, 2008. Under the bonus plan, the bonus will be
determined based on services performed during the period from January 1,
2009 through December 31, 2010. The bonus is scheduled to be paid as a
lump sum payment on February 15, 2011. Under the bonus plan, Employee D
will forfeit the bonus unless Employee D continues performing services
through the scheduled payment date (February 15, 2011). Provided that at
all times before the scheduled payment date Employee D is required to
continue to perform services to retain the right to the bonus, and the
bonus is paid on or before March 15, 2012, the bonus plan will not be
considered to have provided for a deferral of compensation.
Example 5. On November 1, 2008, Employer V awards a bonus to
Employee E such that Employee E has a legally binding right to the
payment as of November 1, 2008. Under the bonus plan, Employee E will
forfeit the bonus unless Employee E continues performing services
through December 31, 2010. Under the bonus plan, the bonus is scheduled
to be paid as a lump sum payment on July 1, 2011. By specifying a
payment date after the applicable 2\1/2\ month period, the bonus plan
provides for a deferred payment. The bonus plan provides for a deferral
of compensation, and will not qualify as a short-term deferral
[[Page 624]]
regardless of whether the bonus is paid or made available on or before
March 15, 2011 (and generally any payment before June 1, 2011 would
constitute an impermissible acceleration of a payment).
Example 6. On November 1, 2008, Employer U awards a bonus to
Employee F such that Employee F has a legally binding right to the
payment as of November 1, 2008, that is not subject to a substantial
risk of forfeiture. The bonus plan provides for a lump sum payment upon
Employee F's separation from service. Because the separation from
service is an event that may occur after the applicable 2\1/2\ month
period, the bonus plan provides for a deferred payment and therefore
provides for a deferral of compensation. Accordingly, the bonus plan
will not qualify as a short-term deferral regardless of whether Employee
F separates from service and the bonus is paid or made available on or
before March 15, 2009.
Example 7. On November 1, 2008, Employer T grants Employee G a
legally binding right to the payment of a life annuity with the first
annuity payment on November 1, 2013, provided that Employee G continues
performing services for Employer T continuously through November 1,
2013. Because the life annuity is treated as a single payment, and
because all payments of the life annuity may not occur during the
applicable 2\1/2\ month period, the plan provides for a deferred payment
and none of the amounts payable under the annuity will qualify as a
short-term deferral, so that section 409A applies to all amounts that
are payable under the plan.
Example 8. On November 1, 2008, Employer S grants Employee H a stock
right providing for an exercise price less than the fair market value of
the underlying stock on November 1, 2008. The stock right is subject to
a substantial risk of forfeiture requiring services through November 1,
2010. The stock right becomes exercisable when the substantial risk of
forfeiture lapses and expires on November 1, 2013. Employee H continues
providing services through November 1, 2010, at which time the
substantial risk of forfeiture lapses. The stock right provides for a
deferred payment and will not qualify as a short-term deferral
regardless of whether Employee H exercises the stock right on or before
March 15, 2011.
(5) Stock options, stock appreciation rights, and other equity-based
compensation--(i) Stock rights--(A) Nonstatutory stock options not
providing for the deferral of compensation. An option to purchase
service recipient stock does not provide for a deferral of compensation
if--
(1) The exercise price may never be less than the fair market value
of the underlying stock (disregarding lapse restrictions as defined in
Sec. 1.83-3(i)) on the date the option is granted and the number of
shares subject to the option is fixed on the original date of grant of
the option;
(2) The transfer or exercise of the option is subject to taxation
under section 83 and Sec. 1.83-7; and
(3) The option does not include any feature for the deferral of
compensation other than the deferral of recognition of income until the
later of the following:
(i) The exercise or disposition of the option under Sec. 1.83-7.
(ii) The time the stock acquired pursuant to the exercise of the
option first becomes substantially vested (as defined in Sec. 1.83-
3(b)).
(B) Stock appreciation rights not providing for the deferral of
compensation. A right to compensation based on the appreciation in value
of a specified number of shares of service recipient stock occurring
between the date of grant and the date of exercise of such right (a
stock appreciation right) does not provide for a deferral of
compensation if--
(1) Compensation payable under the stock appreciation right cannot
be greater than the excess of the fair market value of the stock
(disregarding lapse restrictions as defined in Sec. 1.83-3(i)) on the
date the stock appreciation right is exercised over an amount specified
on the date of grant of the stock appreciation right (the stock
appreciation right exercise price), with respect to a number of shares
fixed on or before the date of grant of the right;
(2) The stock appreciation right exercise price may never be less
than the fair market value of the underlying stock (disregarding lapse
restrictions as defined in Sec. 1.83-3(i)) on the date the right is
granted; and
(3) The stock appreciation right does not include any feature for
the deferral of compensation other than the deferral of recognition of
income until the exercise of the stock appreciation right.
(C) Stock rights that may provide for the deferral of compensation.
An option to purchase stock other than service recipient stock, or a
stock appreciation right with respect to stock other than service
recipient stock, generally will
[[Page 625]]
provide for the deferral of compensation within the meaning of this
paragraph (b). If under the terms of an option to purchase service
recipient stock (other than an incentive stock option described in
section 422 or a stock option granted under an employee stock purchase
plan described in section 423), the exercise price is or could become
less than the fair market value of the stock (disregarding lapse
restrictions as defined in Sec. 1.83-3(i)) on the date of grant, the
grant of the option generally will provide for the deferral of
compensation within the meaning of this paragraph (b). If under the
terms of a stock appreciation right with respect to service recipient
stock, the compensation payable under the stock appreciation right is or
could be any amount greater than, with respect to a predetermined number
of shares, the excess of the fair market value of the stock
(disregarding lapse restrictions as defined in Sec. 1.83-3(i)) on the
date the stock appreciation right is exercised over the fair market
value of the stock (disregarding lapse restrictions as defined in Sec.
1.83-3(i)) on the date of grant of the stock appreciation right, the
grant of the stock appreciation right generally will provide for a
deferral of compensation within the meaning of this paragraph (b).
(D) Feature for the deferral of compensation. To the extent a stock
right provides a right other than the right to receive cash or stock on
the date of exercise and such additional right would otherwise allow
compensation to be deferred beyond the date of exercise, the entire
arrangement (including the underlying stock right) provides for the
deferral of compensation. For purposes of this paragraph (b)(5)(i),
neither the right to receive substantially nonvested stock (as defined
in Sec. 1.83-3(b)) upon the exercise of a stock right, nor the right to
pay the exercise price with previously acquired shares, constitutes a
feature for the deferral of compensation.
(E) Rights to dividends. For purposes of this paragraph (b)(5)(i),
the right, directly or indirectly contingent upon the exercise of a
stock right, to receive an amount equal to all or part of the dividends
or other distributions (other than stock dividends described in
paragraph (b)(5)(v)(H) of this section) declared and paid on the number
of shares underlying the stock right between the date of grant and the
date of exercise of the stock right constitutes an offset to the
exercise price of the stock option or an increase in the amount payable
under the stock appreciation right (generally causing such stock right
to be subject to section 409A). A plan providing a right to dividends or
other distributions declared and paid on the number of shares underlying
a stock right, the payment of which is not contingent upon, or otherwise
payable on, the exercise of the stock right, may provide for a deferral
of compensation, but the existence of the right to receive such an
amount will not be treated as a reduction to the exercise price of (or
an increase to the compensation payable under) the stock right. Thus, a
right to such dividends or distributions that is not contingent,
directly or indirectly, upon the exercise of a stock right will not
cause the related stock right to fail to satisfy the requirements of the
exclusion from the definition of a deferral of compensation provided in
paragraphs (b)(5)(i)(A) and (B) of this section.
(ii) Statutory stock options. The grant of an incentive stock option
as described in section 422, or the grant of an option under an employee
stock purchase plan described in section 423 (including the grant of an
option with an exercise price discounted in accordance with section
423(b)(6) and the accompanying regulations), does not constitute a
deferral of compensation. However, the exclusion for statutory stock
options under this paragraph (b)(5)(ii) does not apply to a
modification, extension, or renewal of a statutory option that is
treated as the grant of a new option that is not a statutory option. See
Sec. 1.424-1(e). In such event, the option is treated for purposes of
this paragraph (b) as if it had been a nonstatutory stock option from
the date of the original grant. Accordingly, if such modification,
extension, or renewal of the stock option would have been treated as the
grant of a new option or as causing the option to have had a deferral
feature from the date of grant under paragraph (b)(5)(v) of this
section, the modification, extension, or
[[Page 626]]
renewal of the stock option is treated as the grant of a new option or
as causing the option to have had a deferral feature from the date of
grant for purposes of this paragraph (b)(5).
(iii) Service recipient stock--(A) In general. Except as otherwise
provided in paragraphs (b)(5)(iii)(B), (C), and (D) of this section, the
term service recipient stock means a class of stock that, as of the date
of grant, is common stock for purposes of section 305 and the
regulations thereunder of a corporation that is an eligible issuer of
service recipient stock (as defined in paragraph (b)(5)(iii)(E) of this
section). Notwithstanding the foregoing, the term service recipient
stock does not include a class of stock that has any preference as to
distributions other than distributions of service recipient stock and
distributions in liquidation of the issuer. The term service recipient
stock also does not include any stock that is subject to a mandatory
repurchase obligation (other than a right of first refusal), or a put or
call right that is not a lapse restriction as defined in Sec. 1.83-
3(i), if the stock price under such right or obligation is based on a
measure other than the fair market value (disregarding lapse
restrictions as defined in Sec. 1.83-3(i)) of the equity interest in
the corporation represented by the stock.
(B) American depositary receipts. An American depositary receipt or
American depositary share may constitute service recipient stock, to the
extent that the stock traded on a foreign securities market to which the
American depositary receipt or American depositary share relates
qualifies as service recipient stock.
(C) Mutual company units. Mutual company units may constitute
service recipient stock. For this purpose, the term mutual company unit
means a fixed percentage of the overall value of a non-stock mutual
company or association. For purposes of determining the value of the
mutual company unit, the unit may be valued in accordance with the rules
set forth in paragraph (b)(5)(iv)(B) of this section governing valuation
of service recipient stock the shares of which are not traded on an
established securities market, applied as if the mutual company were a
stock corporation with one class of common stock and the number of
shares of such stock determined according to such fixed percentage. For
example, an appreciation right based on the appreciation of 10 mutual
company units, where each unit is defined as one percent of the overall
value of the mutual company, would be valued as if the appreciation
right were based upon 10 shares of a corporation, with 100 shares of
common stock (and no other class of stock), the shares of which are not
readily tradable on an established securities market.
(D) Other entities. An interest in an entity other than a
corporation or non-stock mutual company or association may constitute
service recipient stock to the extent designated by the Commissioner in
revenue procedures, notices, or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(E) Eligible issuer of service recipient stock--(1) In general. The
term eligible issuer of service recipient stock means only the
corporation for which the service provider provides direct services on
the date of grant of the stock right (if the entity receiving such
services is a corporation), and any corporation in a chain of
corporations or other entities in which each corporation or other entity
has a controlling interest in another corporation or other entity in the
chain, ending with the corporation or other entity that has a
controlling interest in the corporation or other entity for which the
service provider provides direct services on the date of grant of the
stock right. For this purpose, the term controlling interest has the
same meaning as provided in Sec. 1.414(c)-2(b)(2)(i), provided that the
language ``at least 50 percent'' is used instead of ``at least 80
percent'' each place it appears in Sec. 1.414(c)-2(b)(2)(i). In
addition, where the use of such stock with respect to the grant of a
stock right to such service provider is based upon legitimate business
criteria, the term controlling interest has the same meaning as provided
in Sec. 1.414(c)-2(b)(2)(i), provided that the language ``at least 20
percent'' is used instead of ``at least 80 percent'' each place it
appears in Sec. 1.414(c)-2(b)(2)(i). For purposes of determining
ownership
[[Page 627]]
of an interest in an organization, the rules of Sec. Sec. 1.414(c)-3
and 1.414(c)-4 apply. The determination of whether a grant is based on
legitimate business criteria is based on the facts and circumstances,
focusing primarily on whether there is a sufficient nexus between the
service provider and the issuer of the stock right so that the grant
serves a legitimate non-tax business purpose other than simply providing
compensation to the service provider that is excluded from the
requirements of section 409A. For example, stock of a corporation that
owns an interest in a joint venture involving an operating business,
used with respect to stock rights granted to service providers of the
joint venture who are former service providers of such corporation,
generally will constitute use of service recipient stock based upon
legitimate business criteria, and therefore could constitute service
recipient stock with respect to such service providers if the
corporation owns at least 20 percent of the joint venture and the other
requirements of this paragraph (b)(5)(iii) are met. Similarly, the
legitimate business criteria requirement generally would be met if the
corporate venturer issued such a right to an employee of the joint
venture who it reasonably expected would in the future become an
employee of the corporate venturer. However, where a service provider
has no real nexus with a corporate venturer, such as generally happens
when the corporate venturer is a passive investor in the service
recipient joint venture, a stock right issued to that employee on the
investor corporation's stock generally would not be based upon
legitimate business criteria. Similarly, where a corporation holds only
a minority interest in an entity that in turn holds a minority interest
in the entity for which the service provider performs services, such
that the corporation holds only an insubstantial indirect interest in
the entity receiving the services, legitimate business criteria
generally would not exist for issuing a stock right on the corporation's
stock to the service provider.
(2) Investment vehicles. Notwithstanding the provisions of paragraph
(b)(5)(iii)(E)(1) of this section, except as to a service provider
providing services directly to such corporation, for purposes of this
paragraph (b)(5), an eligible issuer of service recipient stock does not
include any corporation whose primary purpose is to serve as an
investment vehicle with respect to the corporation's minority ownership
interests in entities other than the service recipient.
(3) Corporate structures established or transactions undertaken for
purposes of avoiding coverage under section 409A. Notwithstanding the
provisions of paragraph (b)(5)(iii)(E)(1) of this section, an eligible
issuer of service recipient stock does not include any corporation
within a group of entities treated as a single service recipient if a
purpose of the establishment of the structure of the ownership, or a
purpose of a significant transaction between or among two or more
entities comprising a single service recipient, is to provide deferred
compensation not subject to the application of section 409A. If an
entity becomes a member of a group of corporations or other entities
treated as a single service recipient, and the primary source of income
or value of such entity arises from the provision of management services
to other members of the service recipient group, it is presumed that
such structure was established for purposes of avoiding the application
of section 409A if any stock rights are issued with respect to such
entity.
(4) Substitutions and assumptions by reason of a corporate
transaction. If the requirements of paragraph (b)(5)(v)(D) of this
section are met such that the substitution of a new stock right pursuant
to a corporate transaction for an outstanding stock right, or the
assumption of an outstanding stock right pursuant to a corporate
transaction, would not be treated as the grant of a new stock right or a
change in the form of payment for purposes of this section and
Sec. Sec. 1.409A-2 through 1.409A-6, the stock underlying the stock
right that replaced the stock right that is substituted or assumed will
be treated as service recipient stock for purposes of applying this
paragraph (b)(5) to the replacement stock rights if such underlying
stock otherwise satisfies the requirements of paragraph (b)(5)(iii)(A)
of
[[Page 628]]
this section. For example, if by reason of a spinoff transaction (under
which the stock of a subsidiary corporation is distributed to the
stockholders of a distributing corporation), a stock option to purchase
distributing corporation stock is replaced with a stock option to
purchase distributing corporation stock and a stock option to purchase
the spun off subsidiary corporation's stock (each otherwise satisfying
the requirements of paragraph (b)(5)(iii)(A) of this section), and where
such substitution is not treated as a modification of the original stock
option pursuant to paragraph (b)(5)(v)(D) of this section, both the
distributing corporation stock and the subsidiary corporation stock are
treated as service recipient stock for purposes of applying this
paragraph (b)(5) to the replacement stock options.
(iv) Determination of the fair market value of service recipient
stock--(A) Stock readily tradable on an established securities market.
For purposes of paragraph (b)(5)(i) of this section, in the case of
service recipient stock that is readily tradable on an established
securities market, the fair market value of the stock may be determined
based upon the last sale before or the first sale after the grant, the
closing price on the trading day before or the trading day of the grant,
the arithmetic mean of the high and low prices on the trading day before
or the trading day of the grant, or any other reasonable method using
actual transactions in such stock as reported by such market. The
determination of fair market value also may be determined using an
average selling price during a specified period that is within 30 days
before or 30 days after the applicable valuation date, provided that the
program under which the stock right is granted, including a program with
a single participant, must irrevocably specify the commitment to grant
the stock right with an exercise price set using such an average selling
price before the beginning of the specified period. For this purpose,
the term average selling price refers to the arithmetic mean of such
selling prices on all trading days during the specified period, or the
average of such prices over the specified period weighted based on the
volume of trading of such stock on each trading day during such
specified period. To satisfy this requirement, the service recipient
must designate the recipient of the stock right, the number and class of
shares of stock that are subject to the stock right, and the method for
determining the exercise price including the period over which the
averaging will occur, before the beginning of the specified averaging
period. Notwithstanding the forgoing provisions of this paragraph
(b)(5)(iv)(A), where applicable foreign law requires that a compensatory
stock right be priced based upon a specific price averaging method and
period, a stock right granted in accordance with such applicable foreign
law will be treated as meeting the requirements of this paragraph
(b)(5)(iv)(A), provided that the averaging period does not exceed 30
days.
(B) Stock not readily tradable on an established securities market--
(1) In general. For purposes of paragraph (b)(5)(i) of this section, in
the case of service recipient stock that is not readily tradable on an
established securities market, the fair market value of the stock as of
a valuation date means a value determined by the reasonable application
of a reasonable valuation method. The determination whether a valuation
method is reasonable, or whether an application of a valuation method is
reasonable, is made based on the facts and circumstances as of the
valuation date. Factors to be considered under a reasonable valuation
method include, as applicable, the value of tangible and intangible
assets of the corporation, the present value of anticipated future cash-
flows of the corporation, the market value of stock or equity interests
in similar corporations and other entities engaged in trades or
businesses substantially similar to those engaged in by the corporation
the stock of which is to be valued, the value of which can be readily
determined through nondiscretionary, objective means (such as through
trading prices on an established securities market or an amount paid in
an arm's length private transaction), recent arm's length transactions
involving
[[Page 629]]
the sale or transfer of such stock or equity interests, and other
relevant factors such as control premiums or discounts for lack of
marketability and whether the valuation method is used for other
purposes that have a material economic effect on the service recipient,
its stockholders, or its creditors. The use of a valuation method is not
reasonable if such valuation method does not take into consideration in
applying its methodology all available information material to the value
of the corporation. Similarly, the use of a value previously calculated
under a valuation method is not reasonable as of a later date if such
calculation fails to reflect information available after the date of the
calculation that may materially affect the value of the corporation (for
example, the resolution of material litigation or the issuance of a
patent) or the value was calculated with respect to a date that is more
than 12 months earlier than the date for which the valuation is being
used. The service recipient's consistent use of a valuation method to
determine the value of its stock or assets for other purposes, including
for purposes unrelated to compensation of service providers, is also a
factor supporting the reasonableness of such valuation method.
(2) Presumption of reasonableness. For purposes of this paragraph
(b)(5)(iv)(B), the use of any of the following methods of valuation is
presumed to result in a reasonable valuation, provided that the
Commissioner may rebut such a presumption upon a showing that either the
valuation method or the application of such method was grossly
unreasonable:
(i) A valuation of a class of stock determined by an independent
appraisal that meets the requirements of section 401(a)(28)(C) and the
regulations as of a date that is no more than 12 months before the
relevant transaction to which the valuation is applied (for example, the
date of grant of a stock option).
(ii) A valuation based upon a formula that, if used as part of a
nonlapse restriction (as defined in Sec. 1.83-3(h)) with respect to the
stock, would be considered to be the fair market value of the stock
pursuant to Sec. 1.83-5, provided that such stock is valued in the same
manner for purposes of any transfer of any shares of such class of stock
(or any substantially similar class of stock) to the issuer or any
person that owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the issuer (applying
the stock attribution rules of Sec. 1.424-1(d)), other than an arm's
length transaction involving the sale of all or substantially all of the
outstanding stock of the issuer, and such valuation method is used
consistently for all such purposes, and provided further that this
paragraph (b)(5)(iv)(B)(2)(ii) does not apply with respect to stock
subject to a stock right payable in stock, where the stock acquired
pursuant to the exercise of the stock right is transferable other than
through the operation of a nonlapse restriction.
(iii) A valuation, made reasonably and in good faith and evidenced
by a written report that takes into account the relevant factors
described in paragraph (b)(5)(iv)(B)(1) of this section, of illiquid
stock of a start-up corporation. For this purpose, illiquid stock of a
start-up corporation means service recipient stock of a corporation that
has no material trade or business that it or any predecessor to it has
conducted for a period of 10 years or more and has no class of equity
securities that are traded on an established securities market (as
defined in paragraph (k) of this section), where such stock is not
subject to any put, call, or other right or obligation of the service
recipient or other person to purchase such stock (other than a right of
first refusal upon an offer to purchase by a third party that is
unrelated to the service recipient or service provider and other than a
right or obligation that constitutes a lapse restriction as defined in
Sec. 1.83-3(i)), and provided that this paragraph (b)(5)(iv)(B)(2)(iii)
does not apply to the valuation of any stock if the service recipient or
service provider may reasonably anticipate, as of the time the valuation
is applied, that the service recipient will undergo a change in control
event as described in Sec. 1.409A-3(i)(5)(v) or Sec. 1.409A-
3(i)(5)(vii) within the 90 days following the action to which the
valuation is applied, or make a public offering of securities within
[[Page 630]]
the 180 days following the action to which the valuation is applied. For
purposes of this paragraph (b)(5)(iv)(B)(2)(iii), a valuation will not
be treated as made reasonably and in good faith unless the valuation is
performed by a person or persons that the corporation reasonably
determines is qualified to perform such a valuation based on the
person's or persons'' significant knowledge, experience, education, or
training. Generally, a person will be qualified to perform such a
valuation if a reasonable individual, upon being apprised of such
knowledge, experience, education, and training, would reasonably rely on
the advice of such person with respect to valuation in deciding whether
to accept an offer to purchase or sell the stock being valued. For this
purpose, significant experience generally means at least five years of
relevant experience in business valuation or appraisal, financial
accounting, investment banking, private equity, secured lending, or
other comparable experience in the line of business or industry in which
the service recipient operates.
(3) Use of alternative methods. For purposes of this paragraph
(b)(5), a different valuation method may be used for each separate
action for which a valuation is relevant, provided that a single
valuation method is used for each separate action and, once used, may
not retroactively be altered. For example, one valuation method may be
used to establish the exercise price of a stock option, and a different
valuation method may be used to determine the value at the date of the
repurchase of stock pursuant to a put or call right. However, once an
exercise price or amount to be paid has been established, the exercise
price or amount to be paid may not be changed through the retroactive
use of another valuation method. In addition, notwithstanding the
foregoing, where after the date of grant, but before the date of
exercise or transfer, of the stock right, the service recipient stock to
which the stock right relates becomes readily tradable on an established
securities market, the service recipient must use the valuation method
set forth in paragraph (b)(5)(iv)(A) of this section for purposes of
determining the payment at the date of exercise or the purchase of the
stock, as applicable.
(v) Modifications, extensions, substitutions, and assumptions of
stock rights--(A) Treatment of modified and extended stock rights. A
modification of the terms of a stock right within the meaning of
paragraph (b)(5)(v)(B) of this section is considered to be the grant of
a new stock right. The new stock right may or may not constitute a
deferral of compensation under paragraph (b)(5)(i) of this section,
determined at the date of grant of the new stock right. If there is an
extension of a stock right (within the meaning of paragraph (b)(5)(v)(C)
of this section), the stock right is treated as having had an additional
deferral feature from the original date of grant of the stock right, and
therefore will be treated as a plan providing for the deferral of
compensation from the original grant date for purposes of this paragraph
(b).
(B) Modification in general. Except as otherwise provided in
paragraph (b)(5)(v) of this section, the term modification means any
change in the terms of the stock right (or change in the terms of the
plan pursuant to which the stock right was granted or in the terms of
any other agreement governing the stock right) that may provide the
holder of the stock right with a direct or indirect reduction in the
exercise price of the stock right regardless of whether the holder in
fact benefits from the change in terms. A change in the terms of the
stock right shortening the period during which the stock right is
exercisable is not a modification. It is not a modification to add a
feature providing the ability to tender previously acquired stock for
the stock purchasable under the stock right, or to withhold or have
withheld shares of stock to facilitate the payment of the exercise price
or the employment taxes or required withholding taxes resulting from the
exercise of the stock right. In addition, it is not a modification for
the grantor to exercise discretion specifically reserved under a stock
right with respect to the transferability of the stock right.
(C) Extensions--(1) In general. An extension of a stock right refers
to the provision to the holder of an additional
[[Page 631]]
period of time within which to exercise the stock right beyond the time
originally prescribed under the terms of the stock right, the conversion
or exchange of a stock right for a legally binding right to compensation
in a future taxable year, or the addition of any feature for the
deferral of compensation not permitted in paragraph (b)(5)(i)(A)(3) of
this section (in the case of a stock option) or not permitted in
paragraph (b)(5)(i)(B)(3) of this section (in the case of a stock
appreciation right) to the terms of the stock right, other than at a
time when the exercise price of the stock right equals or exceeds the
fair market value of the service recipient stock that could be purchased
(in the case of an option) or the fair market value of the service
recipient stock used to determine the payment to the service provider
(in the case of a stock appreciation right), and includes a renewal of
such right that has such effect. It is not an extension if the exercise
period of a stock right is extended to a date no later than the earlier
of the latest date upon which the stock right could have expired by its
original terms under any circumstances or the 10th anniversary of the
original date of grant of the stock right. If the exercise period of a
stock right is extended at a time when the exercise price of the stock
right equals or exceeds the fair market value of the service recipient
stock that could be purchased (in the case of an option) or the fair
market value of the service recipient stock used to determine the
payment to the service provider (in the case of a stock appreciation
right), it is not an extension of the original stock right. Instead, in
such a case, the original stock right is treated as modified rather than
extended and a new stock right is treated as having been granted for
purposes of this section. In addition, it is not an extension of a stock
right if the expiration of the stock right is tolled while the holder
cannot exercise the stock right because such an exercise would violate
an applicable Federal, state, local, or foreign law, or would jeopardize
the ability of the service recipient to continue as a going concern,
provided that the period during which the stock right may be exercised
is not extended more than 30 days after the exercise of the stock right
first would no longer violate an applicable Federal, state, local, and
foreign laws or would first no longer jeopardize the ability of the
service recipient to continue as a going concern. For this purpose, a
provision of foreign law shall be considered applicable only to foreign
earned income (as defined under section 911(b)(1) without regard to
section 911(b)(1)(B)(iv) and without regard to the requirement that the
income be attributable to services performed during the period described
in section 911(d)(1)(A) or (B)) from sources within the foreign country
that promulgated such law.
(2) Certain extensions before April 10, 2007. An extension of a
stock right before April 10, 2007 solely in order to provide the holder
of such stock right an additional period of time beyond the time
originally prescribed under the terms of such stock right within which
to exercise the stock right is disregarded for purposes of applying the
rules contained in paragraph (b)(5)(v)(C)(1) of this section. For
purposes of applying the rules contained in paragraph (b)(5)(v)(C)(1) of
this section on and after April 10, 2007, such a stock right is treated
as having specified at the date of grant the time within which to
exercise such stock right that was prescribed under the terms of such
stock right in effect on April 10, 2007. Nothing in this paragraph
(b)(5)(v)(C)(2) affects any other action treated as the extension of a
stock right, including the addition of a deferral feature.
(3) Examples. The following examples illustrate the provisions of
this paragraph (b)(5)(v)(C). In the examples, each employee is an
individual employed by the specified employer, and each employee and
each employer has a calendar year taxable year.
Example 1. On July 1, 2009, Employer Z grants Employee A a
nonstatutory stock option that does not provide for the deferral of
compensation in accordance with paragraph (b)(5)(i)(A) of this section.
The terms of the nonstatutory stock option provide that the exercise
period of the stock option expires on the earlier of July 1, 2019, or 3
months after Employee A's separation from service. On
[[Page 632]]
July 1, 2011, Employee A separates from service. On the same day,
Employee A and Employer Z change the exercise period of the option so
that it expires on July 1, 2013. Because the exercise period of the
stock right is not extended beyond July 1, 2019, the change is not an
extension for purposes of this paragraph (b)(5)(v)(C).
Example 2. The facts are the same as in Example 1 except that
Employee A separates from service on July 1, 2018, and on the same day,
Employee A and Employer Z change the exercise period of the option so
that it expires on July 1, 2020. As of July 1, 2018, the fair market
value of the underlying stock exceeds the exercise price. Because the
exercise period of the stock right is extended beyond July 1, 2019, the
change is an extension for purposes of this paragraph (b)(5)(v)(C).
Example 3. The facts are the same as in Example 2 except that as of
July 1, 2018, the fair market value of the underlying stock is less than
the exercise price of the option. Because the exercise period of the
stock right is extended at a time when the fair market value of the
underlying stock is less than the exercise price, the change is not an
extension for purposes of this paragraph (b)(5)(v)(C) and the change is
treated as a modification of the option, resulting in the extension of
the exercise period being treated as the grant of a new option on July
1, 2018.
Example 4. On July 1, 2009, Employer Y grants to Employee B a stock
appreciation right with respect to 200 shares of Employer Y common stock
that does not provide for the deferral of compensation in accordance
with paragraph (b)(5)(i)(B) of this section. Upon exercise of the stock
appreciation right, Employee B is entitled to receive the excess of the
fair market value of a share of Employer Y common stock on the date of
exercise over $100 (the fair market value of a share of Employer Y
common stock on July 1, 2009), multiplied by the number of shares with
respect to which Employee B is exercising the right. The exercise period
of the right expires on the earlier of July 1, 2019, or 3 months after
Employee B separates from service. Employee B cannot exercise the stock
appreciation right with respect to more than 100 shares unless Employee
B continues to be employed by Employer Y through June 30, 2014. On July
1, 2011, when the fair market value of a share of Employer Y common
stock is $200, Employee B and Employer Y amend the stock appreciation
right to provide that the right will be exercisable only during calendar
year 2018, except that before January 1, 2017, Employee B may elect to
designate calendar year 2023 or any subsequent calendar year before 2033
as the year in which the right will be exercisable. The amendment
constitutes an extension of the stock appreciation right under paragraph
(b)(5)(v)(C)(1) of this section. Under paragraph (b)(5)(v)(A) of this
section, the stock appreciation right is treated as having had an
additional deferral feature from the original date of grant (July 1,
2009) of the right, and therefore is treated as a plan providing for the
deferral of compensation from that date. During the period from July 1,
2009, through June 30, 2011, the provisions of the stock appreciation
right relating to the time and form of payment did not satisfy the
requirements of Sec. 1.409A-3(a). Therefore, the stock appreciation
right provides for a deferral of compensation that does not comply with
section 409A.
(D) Substitutions and assumptions of stock rights by reason of a
corporate transaction. If the requirements of Sec. 1.424-1 (without
regard to the requirement described in Sec. 1.424-1(a)(2) that an
eligible corporation be the employer of the optionee) would be met if
the stock right were a statutory option, the substitution of a new stock
right pursuant to a corporate transaction (as defined in Sec. 1.424-
1(a)(3)) for an outstanding stock right or the assumption of an
outstanding stock right pursuant to a corporate transaction will not be
treated as the grant of a new stock right or a change in the form of
payment for purposes of this section and Sec. Sec. 1.409A-2 through
1.409A-6. For purposes of the preceding sentence, the requirement of
Sec. 1.424-1(a)(5)(iii) will be deemed to be satisfied if the ratio of
the exercise price to the fair market value of the shares subject to the
stock right immediately after the substitution or assumption is not
greater than the ratio of the exercise price to the fair market value of
the shares subject to the stock right immediately before the
substitution or assumption. In the case of a transaction described in
section 355 in which the stock of the distributing corporation and the
stock distributed in the transaction are both readily tradable on an
established securities market immediately after the transaction, for
purposes of this paragraph (b)(5)(v), the requirements of Sec. 1.424-
1(a)(5) related to the fair market value of the stock may be satisfied
by--
(1) Using the last sale before or the first sale after the specified
date as of which such valuation is being made, the closing price on the
last trading day before or the trading day of a specified date, the
arithmetic mean of the high and low prices on the last trading day
before or the trading day of such
[[Page 633]]
specified date, or any other reasonable method using actual transactions
in such stock as reported by such market on a specified date, for the
stock of the distributing corporation and the stock distributed in the
transaction, provided the specified date is designated before such
specified date, and such specified date is not more than 60 days after
the transaction;
(2) Using the arithmetic mean of such market prices on trading days
during a specified period designated before the beginning of such
specified period, where such specified period is not longer than 30 days
and ends no later than 60 days after the transaction; or
(3) Using an average of such prices during such prespecified period
weighted based on the volume of trading of such stock on each trading
day during such prespecified period.
(E) Acceleration of date when exercisable. Although with respect to
a stock right not immediately exercisable in full, a change in the terms
of the right solely to accelerate or delay, within the original term of
the stock right, the time at which the stock right (or any portion of
such stock right) may be exercised is not a modification for purposes of
this section, with respect to a stock right subject to section 409A,
such an acceleration may constitute an impermissible acceleration of a
payment date under Sec. 1.409A-3(j) or a subsequent deferral under
Sec. 1.409A-2(b).
(F) Discretionary added benefits. If a change to a stock right
provides, either by its terms or in substance, that the holder may
receive an additional benefit under the stock right at the future
discretion of the grantor, and the addition of such benefit would
constitute a modification or extension, then the addition of such
discretion is a modification or extension at the time that the stock
right is changed to provide such discretion.
(G) Change in underlying stock increasing value. A change in the
terms of the stock subject to a stock right that increases the value of
the stock is a modification of such stock right, except to the extent
that a new stock right is substituted for such stock right by reason of
the change in the terms of the stock in accordance with paragraph
(b)(5)(v)(D) of this section.
(H) Change in the number of shares purchasable. If a stock right is
amended solely to increase the number of shares subject to the stock
right, the increase is not considered a modification of the stock right
but is treated as the grant of a new additional stock right to which the
additional shares are subject. Notwithstanding the previous sentence, if
the exercise price and number of shares subject to a stock right are
proportionally adjusted to reflect a stock split (including a reverse
stock split) or stock dividend, and the only effect of the stock split
or stock dividend is to increase (or decrease) on a pro rata basis the
number of shares owned by each shareholder of the class of stock subject
to the stock right, then there is no modification of the stock right if
it is proportionally adjusted to reflect the stock split or stock
dividend and the aggregate exercise price of the stock right is not less
than the aggregate exercise price before the stock split or stock
dividend.
(I) Rescission of changes. A change to the terms of a stock right
(or change in the terms of the plan pursuant to which the stock right
was granted or in the terms of any other agreement governing the right)
is not considered a modification or extension of the stock right to the
extent the change in the terms of the stock right is rescinded by the
earlier of the date the stock right is exercised or the last day of the
service provider's taxable year during which such change occurred. Thus,
for example, if the terms of a stock right granted to an individual
employee with a calendar year taxable year are changed on March 1 in a
manner that would result in an extension of the stock right, and the
change is rescinded on November 1 of the same year, and the stock right
is not exercised before the change is rescinded, the stock right is not
considered extended under this paragraph (b)(5)(v).
(J) Successive modifications and extensions. The rules of this
paragraph (b)(5)(v) apply as well to successive modifications and
extensions.
(K) Modifications and extensions in effect on October 23, 2004. For
purposes of the application of section 409A and
[[Page 634]]
these regulations to a stock right, if a legally binding right to a
modification or extension of such stock right existed on October 23,
2004, such modification or extension is disregarded, and the stock right
is treated as if granted with the terms and conditions in effect on
October 23, 2004.
(vi) Meaning and use of certain terms--(A) Option. The term option
means 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 (b)(5)(vi)(D) of this section, such
individual being under no obligation to purchase. While no particular
form of words is necessary, the option must express an offer to sell at
the option price, the maximum number of shares purchasable under the
option, and the period of time during which the offer remains open. The
term option includes a warrant that meets the requirements of this
paragraph (b)(5)(vi)(A). An option may be granted as part of or in
conjunction with an employee stock purchase plan or subscription
contract. An option must be in writing (in paper or electronic form)
provided that such writing is adequate to establish an option right or
privilege that is enforceable under applicable law.
(B) Date of grant of option. (1) The language the date of grant of
the option, and similar phrases, refer to the date when the granting
corporation completes the corporate action necessary to create the
legally binding right constituting the option. A corporate action
creating the legally binding right constituting the option is not
considered complete until the date on which the maximum number of shares
that can be purchased under the option and the minimum exercise price
are fixed or determinable, and the class of underlying stock and the
identity of the service provider is designated. Ordinarily, if the
corporate action provides for an immediate offer of stock for sale to a
service provider, or provides for a particular date on which such offer
is to be made, the date of the granting of the option is the date of
such corporate action if the offer is to be made immediately, or the
date provided 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 service
provider will be taken into account as indicating that the corporation
provided that the offer was to be made at the subsequent date on which
such notice is given.
(2) If the corporation imposes a condition on the granting of an
option (as distinguished from a condition governing the exercise of the
option), such condition generally will be given effect in accordance
with the intent of the corporation. However, if the grant of an option
is subject to approval by stockholders, the date of grant of the option
will be determined as if the option had not been subject to such
approval. A condition that does not require corporate action, such as
the approval of, or registration with, some regulatory or government
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 has been satisfied.
(3) In general, a condition imposed upon the exercise of an option
will not operate to make ineffective the granting of the option. For
example, on June 1, 2008, Corporation A grants to X, an employee, an
option to purchase 5,000 shares of the corporation's common stock,
exercisable by X on or after June 1, 2009, provided X is employed by the
corporation on June 1, 2009, and provided that A's profits during the
fiscal year preceding the year of exercise exceed $200,000. Such an
option is granted to X on June 1, 2008, and will be treated as
outstanding as of such date.
(C) Stock. The term stock means capital stock of any class,
including voting or nonvoting common or preferred stock. Except as
otherwise provided, the term stock 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
for this purpose, provided such stock otherwise possesses the rights and
characteristics of capital stock.
[[Page 635]]
(D) Exercise price. The term exercise price means the consideration
in cash or property that, pursuant to the terms of the option, is the
price at which the stock subject to the option is purchased. The term
exercise price does not include any amounts paid as interest under a
deferred payment plan or treated as interest.
(E) Exercise. The term exercise, when used in reference to an
option, means the act of acceptance by the holder of the option 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. A promise to pay the exercise price does
not constitute an exercise of the option unless the holder of the option
is subject to personal liability on such promise. An agreement or
undertaking by the service provider to make payments under a stock
purchase plan does not constitute the exercise of an option to the
extent the payments made remain subject to withdrawal by or refund to
the service provider.
(F) Transfer. The term transfer, when used in reference to the
transfer to an individual of a share of stock pursuant to the exercise
of an 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. A transfer may occur even if a share of stock is subject to
a substantial risk of forfeiture or is not otherwise transferable
immediately after the date of exercise. A transfer does not fail to
occur merely because, under the terms of the arrangement, the individual
may not dispose of the share for a specified period of time, or the
share is subject to a right of first refusal or a right to acquire the
share at the share's fair market value at the time of the sale.
(G) Readily tradable. For purposes of this section and Sec. Sec.
1.409A-2 through 1.409A-6, stock is treated as readily tradable if it is
regularly quoted by brokers or dealers making a market in such stock.
(H) Application to stock appreciation rights. For purposes of this
section and Sec. Sec. 1.409A-2 through 1.409A-6, the definitions
provided in paragraphs (b)(5)(vi)(A) through (G) of this section may be
applied by analogy to the issuance of, exercise of, or payment upon the
exercise of, a stock appreciation right.
(6) Restricted property, section 402(b) trusts, and section 403(c)
annuities--(i) In general. If a service provider receives property from,
or pursuant to, a plan maintained by a service recipient, there is no
deferral of compensation merely because the value of the property is not
includible in income by reason of the property being substantially
nonvested (as defined in Sec. 1.83-3(b)), or is includible in income
solely due to a valid election under section 83(b). For purposes of this
paragraph (b)(6)(i), a transfer of property includes the transfer of a
beneficial interest in a trust or annuity plan, or a transfer to or from
a trust or under an annuity plan, to the extent such a transfer is
subject to section 83, section 402(b) or section 403(c). In addition,
for purposes of this paragraph (b), a right to compensation income that
will be required to be included in income under section 402(b)(4)(A) is
not a deferral of compensation.
(ii) Promises to transfer property. A plan under which a service
provider obtains a legally binding right to receive property in a future
taxable year where the property will be substantially vested (as defined
in Sec. 1.83-3(b)) at the time of transfer of the property may provide
for the deferral of compensation and, accordingly, may constitute a
nonqualified deferred compensation plan. A legally binding right to
receive property in a future taxable year where the property will be
substantially nonvested (as defined in Sec. 1.83-3(b)) at the time of
transfer of the property will not provide for the deferral of
compensation and, accordingly, will not constitute a nonqualified
deferred compensation plan unless offered in conjunction with another
legally binding right that constitutes a deferral of compensation.
(7) Arrangements between partnerships and partners. [Reserved]
(8) Certain foreign plans--(i) Plans with respect to compensation
covered by treaty or other international agreement. A plan in which a
service provider participates
[[Page 636]]
does not provide for a deferral of compensation for purposes of this
paragraph (b) to the extent that the compensation under the plan would
have been excluded from gross income for Federal income tax purposes
under the provisions of any bilateral income tax convention or other
bilateral or multilateral agreement to which the United States is a
party if the compensation had been paid to the service provider at the
time that the legally binding right to the compensation first arose or,
if later, the time that the legally binding right was no longer subject
to a substantial risk of forfeiture.
(ii) Plans with respect to certain other compensation. A plan in
which a service provider participates does not provide for a deferral of
compensation for purposes of this paragraph (b) to the extent that
compensation under the plan would not have been includible in gross
income for Federal tax purposes if it had been paid to the service
provider at the time that the legally binding right to the compensation
first arose or, if later, the time that the legally binding right was no
longer subject to a substantial risk of forfeiture, due to one of the
following:
(A) The service provider was a nonresident alien at such time and
the compensation would not have been includible in gross income under
section 872.
(B) The service provider was a qualified individual (as defined in
section 911(d)(1)) at such time, the compensation would have been
foreign earned income within the meaning of section 911(b)(1) (without
regard to section 911(b)(1)(B)(iv)) if paid at such time, and the amount
of such compensation was equal to or less than the excess (if any) of
the maximum exclusion amount under section 911(b)(2)(D) for such taxable
year over the amount of foreign earned income actually excluded from
gross income by such qualified individual for such taxable year under
section 911(a)(1).
(C) The compensation would have been excludible from gross income
under section 893.
(D) The compensation would have been excludible from gross income
under section 931 or section 933.
(iii) Tax equalization agreements. A tax equalization agreement does
not provide for a deferral of compensation if payments made under such
tax equalization agreement are made no later than the end of the second
taxable year of the service provider beginning after the taxable year of
the service provider in which the service provider's U.S. Federal income
tax return is required to be filed (including any extensions) for the
year to which the compensation subject to the tax equalization payment
relates, or, if later, the second taxable year of the service provider
beginning after the latest such taxable year in which the service
provider's foreign tax return or payment is required to be filed or made
for the year to which the compensation subject to the tax equalization
payment relates. Where such payments arise due to an audit, litigation
or similar proceeding, the right to the payments will not be treated as
resulting in a deferral of compensation if the payments are scheduled
and made in accordance with the provisions of Sec. 1.409A-3(i)(1)(v)
(timing of tax gross-up payments). For purposes of this paragraph
(b)(8)(iii), the term tax equalization agreement refers to an agreement,
method, program, or other arrangement that provides payments intended to
compensate the service provider for some or all of the excess of the
taxes actually imposed by a foreign jurisdiction on the compensation
paid by the service recipient to the service provider over the taxes
that would be imposed if the compensation were subject solely to United
States Federal, state, and local income tax, or some or all of the
excess of the United States Federal, state, and local income tax
actually imposed on the compensation paid by the service to the service
provider over the taxes that would be imposed if the compensation were
subject solely to taxes in the foreign jurisdiction, provided that the
payment made under such agreement, method, program, or other arrangement
may not exceed such excess and the amount necessary to compensate for
the additional taxes on the amount paid under the agreement, method,
program, or other arrangement.
[[Page 637]]
(iv) Certain limited deferrals of a nonresident alien. With respect
to a nonresident alien, a foreign plan does not provide for a deferral
of compensation if the amounts deferred under the foreign plan based
upon services performed by the nonresident alien in the United States
(including amounts deferred based upon service credits or compensation
received due to services performed in the United States) do not exceed
the applicable dollar amount under section 402(g)(1)(B) for the taxable
year. If the amounts deferred under the foreign plan based upon the
services performed by the nonresident alien in the United States exceed
the applicable dollar amount, an amount of such deferrals equal to such
amount is treated as not deferred under a nonqualified deferred
compensation plan. For purposes of this paragraph (b)(8)(iv), the term
foreign plan means a plan that, together with all substantially similar
plans, is maintained by a service recipient for a substantial number of
participants, substantially all of whom are nonresident aliens or
resident aliens classified as resident aliens solely under section
7701(b)(1)(A)(ii) (and not section 7701(b)(1)(A)(i)).
(v) Additional foreign plans. A plan in which a service provider
participates does not provide for a deferral of compensation for
purposes of this paragraph (b) to the extent designated by the
Commissioner in revenue procedures, notices, or other guidance published
in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this
chapter).
(vi) Earnings. Earnings on compensation excluded from the definition
of deferral of compensation pursuant to this paragraph (b)(8) are also
not treated as a deferral of compensation.
(9) Separation pay plans--(i) In general. A plan that otherwise
provides for a deferral of compensation under this paragraph (b) does
not fail to provide a deferral of compensation merely because the right
to payment of the compensation is conditioned upon a separation from
service. However, paragraphs (b)(9)(ii), (iii), (iv), and (v) of this
section provide rules concerning the extent to which certain separation
pay plans do not provide for the deferral of compensation. The
exceptions contained in paragraphs (b)(9)(ii), (iii), (iv), and (v) of
this section may be used in combination, such that compensation under a
plan that would be excepted under one of those paragraphs may be treated
as excepted under another of those paragraphs, so that other
compensation under a plan may be treated as excepted under the first of
such paragraphs. Notwithstanding any other provision of this paragraph
(b)(9), any payment or benefit, or entitlement to a payment or benefit,
that acts as a substitute for, or replacement of, amounts deferred by
the service recipient under a separate nonqualified deferred
compensation plan constitutes a payment or a deferral of compensation
under the separate nonqualified deferred compensation plan, and does not
constitute a payment or deferral of compensation under a separation pay
plan. If a service provider receives a payment at separation from
service and also has a legally binding right to an amount of deferred
compensation that would be forfeited upon the separation from service,
whether the payment acts as an acceleration of vesting and substitute
payment for the amount of deferred compensation forfeited, or whether
the deferred compensation is treated as forfeited and the amount paid is
treated as a separate payment of current compensation, is determined
based on the facts and circumstances, provided that, where the
separation from service is voluntary, it is presumed that the payment
results from an acceleration of vesting followed by a payment of the
deferred compensation that is subject to section 409A. Accordingly, any
change in the payment schedule to accelerate or defer the payments would
be subject to the rules of section 409A. The presumption that a right to
a payment is not a new right, but is instead a right substituted for a
pre-existing forfeited right, may be rebutted by demonstrating that the
service provider would have obtained the right to the payment regardless
of the forfeiture of the nonvested right. A factor indicating that the
service provider would have obtained a right to a payment regardless of
the forfeiture of the nonvested right is that the amount to which the
service provider obtains a right is materially less than an amount
[[Page 638]]
equal to the present value of the forfeited amount multiplied by a
fraction, the numerator of which is the period of service the service
provider actually completed, and the denominator of which is the full
period of service the service provider would have been required to
complete to receive the full amount of the payment. For example, where a
service provider is entitled to a future payment only if the service
provider completes three years of service and at the time of termination
the service provider has completed one year of service, the presumption
could be rebutted if the payment to the service provider is materially
less than the present value of one-third of the nonvested amount.
Another such factor is that the payment to the service provider is of a
type customarily made to service providers who separate from service
with the service recipient and do not forfeit nonvested rights to
deferred compensation (for example, a payment of accrued but unused
leave or a payment for a release of actual or potential claims).
(ii) Collectively bargained separation pay plans. A separation pay
plan does not provide for a deferral of compensation to the extent the
plan is a collectively bargained separation pay plan that provides for
separation pay only upon an involuntary separation from service or
pursuant to a window program. Only the portion of the separation pay
plan attributable to employees covered by a bona fide collective
bargaining agreement is considered to be provided under a collectively
bargained separation pay plan. A collectively bargained separation pay
plan is a separation pay plan that meets the following conditions:
(A) The separation pay plan is contained within an agreement that
the Secretary of Labor determines to be a collective bargaining
agreement.
(B) The separation pay provided by the collective bargaining
agreement was the subject of arm's length negotiations between employee
representatives and one or more employers, and the agreement between
employee representatives and one or more employers satisfies section
7701(a)(46).
(C) The circumstances surrounding the agreement evidence good faith
bargaining between adverse parties over the separation pay to be
provided under the agreement.
(iii) Separation pay due to involuntary separation from service or
participation in a window program. A separation pay plan that is not
described in paragraph (b)(9)(ii) of this section and that provides for
separation pay only upon an involuntary separation from service (as
defined in paragraph (n) of this section) or pursuant to a window
program does not provide for a deferral of compensation to the extent
that the separation pay, or portion of the separation pay, provided
under the plan meets the following requirements:
(A) The separation pay (other than amounts described in paragraphs
(b)(9)(iv) and (v) of this section) does not exceed two times the lesser
of--
(1) The sum of the service provider's annualized compensation based
upon the annual rate of pay for services provided to the service
recipient for the taxable year of the service provider preceding the
taxable year of the service provider in which the service provider has a
separation from service with such service recipient (adjusted for any
increase during that year that was expected to continue indefinitely if
the service provider had not separated from service); or
(2) The maximum amount that may be taken into account under a
qualified plan pursuant to section 401(a)(17) for the year in which the
service provider has a separation from service.
(B) The plan provides that the separation pay described in paragraph
(b)(9)(iii)(A) of this section must be paid no later than the last day
of the second taxable year of the service provider following the taxable
year of the service provider in which occurs the separation from
service.
(iv) Foreign separation pay plans. A separation pay plan (including
a plan providing payments upon a voluntary separation from service) does
not provide for deferred compensation to the extent the plan provides
for amounts of separation pay required to be provided under the
applicable law of a foreign jurisdiction. For this purpose, a provision
of foreign law shall be considered applicable only to foreign earned
income (as defined under section 911(b)(1)
[[Page 639]]
without regard to section 911(b)(1)(B)(iv) and without regard to the
requirement that the income be attributable to services performed during
the period described in section 911(d)(1)(A) or (B)) from sources within
the foreign country that promulgated such law.
(v) Reimbursements and certain other separation payments--(A) In
general. To the extent a separation pay plan (including a plan providing
payments upon a voluntary separation from service) entitles a service
provider to payment by the service recipient of reimbursements that are
not otherwise excludible from gross income for expenses that the service
provider could otherwise deduct under section 162 or section 167 as
business expenses incurred in connection with the performance of
services (ignoring any applicable limitation based on adjusted gross
income), or of reasonable outplacement expenses and reasonable moving
expenses actually incurred by the service provider and directly related
to the termination of services for the service recipient, such plan does
not provide for a deferral of compensation to the extent such rights
apply during a limited period of time (regardless of whether such rights
extend beyond the limited period of time). For purposes of this
paragraph (b)(9)(v)(A), the reimbursement of reasonable moving expenses
includes the reimbursement of all or part of any loss the service
provider actually incurs due to the sale of a primary residence in
connection with a separation from service.
(B) Medical benefits. To the extent a separation pay plan (including
a plan providing payments due to a voluntary separation from service)
entitles a service provider to reimbursement by the service recipient of
payments of medical expenses incurred and paid by the service provider
but not reimbursed by a person other than the service recipient and
allowable as a deduction under section 213 (disregarding the requirement
of section 213(a) that the deduction is available only to the extent
that such expenses exceed 7.5 percent of adjusted gross income), such
plan does not provide for a deferral of compensation to the extent such
rights apply during the period of time during which the service provider
would be entitled (or would, but for such plan, be entitled) to
continuation coverage under a group health plan of the service recipient
under section 4980B (COBRA) if the service provider elected such
coverage and paid the applicable premiums.
(C) In-kind benefits and direct service recipient payments. A
service provider's entitlement to in-kind benefits from the service
recipient, or a payment by the service recipient directly to the person
providing the goods or services to the service provider, is treated as
not providing for a deferral of compensation for purposes of this
paragraph (b), if a right to reimbursement by the service recipient for
a payment for such benefits, goods, or services by the service provider
would not be treated as providing for a deferral of compensation under
this paragraph (b)(9)(v).
(D) Limited payments. If not otherwise excluded, a taxpayer may
treat a right or rights under a separation pay plan to a payment or
payments as not providing for a deferral of compensation to the extent
such payments in the aggregate do not exceed the applicable dollar
amount under section 402(g)(1)(B) for the year of the separation from
service.
(E) Limited period of time. For purposes of paragraphs (b)(9)(v)(A)
and (C) of this section, a limited period of time in which expenses may
be incurred, or in which in-kind benefits may be provided by the service
recipient or a third party that the service recipient will pay, does not
include periods beyond the last day of the second taxable year of the
service provider following the taxable year of the service provider in
which the separation from service occurred, provided that the period
during which the reimbursements for such expenses must be paid may not
extend beyond the third taxable year of the service provider following
the taxable year of the service provider in which the separation from
service occurred.
(vi) Window programs--definition. The term window program refers to
a program established by a service recipient in connection with an
impending separation from service to provide separation pay, where such
program is made
[[Page 640]]
available by the service recipient for a limited period of time (no
longer than 12 months) to service providers who separate from service
during that period or to service providers who separate from service
during that period under specified circumstances. A program will not be
considered a window program if a service recipient establishes a pattern
of repeatedly providing for similar separation pay in similar situations
for substantially consecutive, limited periods of time. Whether the
recurrence of these programs constitutes a pattern is determined based
on the facts and circumstances. Although no one factor is determinative,
relevant factors include whether the benefits are on account of a
specific business event or condition, the degree to which the separation
pay relates to the event or condition, and whether the event or
condition is temporary or discrete or is a permanent aspect of the
employer's business.
(10) Certain indemnification and liability insurance plans. A plan
in which a service provider participates does not provide for a deferral
of compensation for purposes of this paragraph (b) to the extent that
the plan provides (to the extent permissible under applicable law), for
the indemnification of, or the purchase of an insurance policy providing
for payments of, all or part of the expenses incurred or damages paid or
payable by a service provider with respect to a bona fide claim against
the service provider or service recipient, including amounts paid or
payable by the service provider upon the settlement of a bona fide claim
against the service provider or service recipient, where such claim is
based on actions or failures to act by the service provider in his or
her capacity as a service provider of the service recipient.
(11) Legal settlements. An agreement to which a service provider is
a party does not provide for a deferral of compensation for purposes of
this paragraph (b) to the extent that the agreement provides for amounts
paid as settlements or awards resolving bona fide legal claims based on
wrongful termination, employment discrimination, the Fair Labor
Standards Act, or worker's compensation statutes, including claims under
applicable Federal, state, local, or foreign laws, or for reimbursements
or payments of reasonable attorneys fees or other reasonable expenses
incurred by the service provider related to such bona fide legal claims,
regardless of whether such settlements, awards, or reimbursement or
payment of expenses pursuant to such claims are treated as compensation
or wages for Federal tax purposes. Whether the execution of a waiver of
any or all of such types of claims indicates that the amounts are paid
as an award or settlement of an actual bona fide claim for damages under
applicable law is determined based on the facts and circumstances. This
paragraph (b)(11) does not apply to any deferred amounts that did not
arise as a result of an actual bona fide claim for damages under
applicable law, such as amounts that would have been deferred or paid
regardless of the existence of such claim, even if such amounts are paid
or modified as part of a settlement or award resolving an actual bona
fide claim. For this purpose, a provision of foreign law shall be
considered applicable only to foreign earned income (as defined under
section 911(b)(1) without regard to section 911(b)(1)(B)(iv) and without
regard to the requirement that the income be attributable to services
performed during the period described in section 911(d)(1)(A) or (B))
from sources within the foreign country that promulgated such law.
(12) Certain educational benefits. A plan in which a service
provider participates does not provide for a deferral of compensation to
the extent the plan provides for taxable educational benefits. For
purposes of this paragraph (b)(12), the term educational benefits refers
solely to benefits provided to a service provider, consisting solely of
educational assistance for the education of the service provider, as
defined in section 127(c) and the accompanying regulations, and does not
refer to any benefits provided for the education of any other person,
including any spouse, child, or other family member of the service
provider.
(c) Plan--(1) In general. The term plan includes any agreement,
method, program, or other arrangement, including an agreement, method,
program, or other arrangement that applies to one
[[Page 641]]
person or individual. A plan may be adopted unilaterally by the service
recipient or may be negotiated or agreed to by the service recipient and
one or more service providers or service provider representatives. An
agreement, method, program, or other arrangement may constitute a plan
regardless of whether it is an employee benefit plan under section 3(3)
of ERISA, as amended (29 U.S.C. 1002(3)). The requirements of section
409A are applied as if a separate plan or plans is maintained for each
service provider. For purposes of determining the terms of a plan,
general provisions of the plan that purport to nullify noncompliant plan
terms, or to supply any specific plan terms required by this section,
Sec. 1.409A-2 or Sec. 1.409A-3, are disregarded.
(2) Plan aggregation rules--(i) In general. Except as otherwise
provided, the following rules apply with respect to the application of
this section and Sec. Sec. 1.409A-2 through 1.409A-6 to deferrals of
compensation with respect to a service provider:
(A) All deferrals of compensation at the election of that service
provider under all plans of the service recipient that are account
balance plans, except to the extent that the plan is described in
paragraph (c)(2)(i)(D), (E), (F), (G), or (H) of this section, are
treated as deferred under a single plan. For purposes of this paragraph,
the term account balance plan means--
(1) An agreement, method, program, or other arrangement that is an
account balance plan as defined in Sec. 31.3121(v)(2)-1(c)(1)(ii)(A) of
this chapter, including mandatorily bifurcating the agreement, method,
program, or other arrangement in accordance with the rules provided in
Sec. 31.3121(v)-1(c)(1)(iii)(B) of this chapter; or
(2) An agreement, method, program, or other arrangement that would
be described in paragraph (c)(2)(i)(A)(1) of this section if the service
provider were an employee.
(B) All deferrals of compensation other than at the election of that
service provider, including deferrals reflecting matching by the service
recipient with respect to amounts a service provider elects to defer,
under all plans of the service recipient that are account balance plans,
except to the extent the plan is described in paragraph (c)(2)(i)(D),
(E), (F), (G), or (H) of this section, are treated as deferred under a
single plan. For purposes of this paragraph (c)(2)(i)(B), the term
``account balance plan'' has the same meaning as provided in paragraph
(c)(2)(i)(A) of this section.
(C) All deferrals of compensation with respect to that service
provider under all plans of the service recipient that are nonaccount
balance plans, except to the extent such plan is described in paragraph
(c)(2)(i)(D), (E), (F), (G), or (H) of this section, are treated as
deferred under a single plan. For purposes of this paragraph
(c)(2)(i)(C), the term nonaccount balance plan means--
(1) An agreement, method, program, or other arrangement that is a
nonaccount balance plan as defined in Sec. 31.3121(v)(2)-1(c)(2)(i) of
this chapter, including mandatorily bifurcating the agreement, method,
program, or other arrangement in accordance with the rules provided in
Sec. 31.3121(v)-1(c)(1)(iii)(B) of this chapter; or
(2) An agreement, method, program, or other arrangement that would
be described in paragraph (c)(2)(i)(C)(1) of this section if the service
provider were an employee.
(D) All deferrals of compensation with respect to that service
provider under all separation pay plans (as defined in paragraph (m) of
this section) of the service recipient to the extent an amount deferred
under the plans is not described in paragraph (c)(2)(i)(E) of this
section and is payable solely upon an involuntary separation from
service within the meaning of paragraph (n) of this section or as a
result of participation in a window program, are treated as deferred
under a single plan.
(E) All deferrals of compensation with respect to that service
provider under all plans of the service recipient to the extent such
amounts deferred consist of rights to in-kind benefits or reimbursements
of expenses, such as membership fees, or expenses related to aircraft or
vehicle usage, to the extent that the right to the in-kind benefit or
reimbursement, separately or in the aggregate, does not constitute a
[[Page 642]]
substantial portion of either the overall compensation earned by the
service provider for performing services for the service recipient or
the overall compensation received due to a separation from service, are
treated as deferred under a single plan.
(F) All deferrals of compensation with respect to that service
provider under all plans of the service recipient to the extent that the
taxation of such compensation is governed by Sec. 1.61-22 or Sec.
1.7872-15 (split-dollar life insurance arrangements), or the taxation of
such compensation would be governed by Sec. 1.61-22 or Sec. 1.7872-15
but for the operation of Sec. 1.61-22(j) (effective date provisions),
are treated as deferred under a single plan.
(G) All deferrals of compensation with respect to that service
provider under all agreements, methods, programs, or other arrangements
of the service recipient to the extent the deferrals under the
agreements, methods, programs, or other arrangements are deferrals of
amounts that would be treated as modified foreign earned income (meaning
foreign earned income as defined under section 911(b)(1) without regard
to section 911(b)(1)(B)(iv) and without regard to the requirement that
the income be attributable to services performed during the period
described in section 911(d)(1)(A) or (B)) if paid to the service
provider at the time the amount is first deferred, and provided further
that substantially all the participants in such agreements, methods,
programs, or other arrangements and any substantially similar
agreements, methods, programs, or other arrangements are nonresident
aliens and that the service provider does not participate in a
substantially identical agreement, method, program, or other arrangement
that does not meet the requirements of this paragraph (c)(2)(i)(G) (a
domestic arrangement), are treated as deferred under a single plan.
(H) All deferrals of compensation with respect to that service
provider under all plans of the service recipient to the extent such
plans are stock rights (as defined in paragraph (l) of this section)
subject to section 409A, are treated as deferred under a single plan.
(I) All deferrals of compensation with respect to that service
provider under all plans of the service recipient to the extent such
plans are not described in paragraph (c)(2)(i)(A), (B), (C), (D), (E),
(F), (G), or (H) of this section are treated as deferred under a single
plan.
(ii) Dual status. Agreements, methods, programs, and other
arrangements in which a service provider participates are not aggregated
with other agreements, methods, programs, and other arrangements to the
extent the service provider participates in one set of agreements,
methods, programs, and other arrangements due to status as an employee
of the service recipient (employee arrangements) and another set of
agreements, methods, programs, and other arrangements due to status as
an independent contractor of the service recipient (independent
contractor arrangements). For example, where a service provider deferred
amounts under an independent contractor arrangement while providing
services as an independent contractor, and then becomes eligible for and
defers amounts under a separate employee arrangement after being hired
as an employee, the two arrangements will not be aggregated for purposes
of this paragraph (c)(2). Where an employee also is a member of the
board of directors of the service recipient (or a similar position with
respect to a non-corporate service recipient), the arrangements under
which the employee participates as a director (director arrangements)
are not aggregated with employee arrangements, provided that the
director arrangements are substantially similar to arrangements provided
to service providers providing services only as directors (or similar
positions with respect to non-corporate service recipients). For
example, an employee director who participates in an employee
arrangement and a director arrangement generally may treat the two
arrangements as separate plans, provided that the director arrangement
is substantially similar to arrangements providing benefits to non-
employee directors. To the extent a plan in which an employee director
participates is not substantially similar to arrangements
[[Page 643]]
in which non-employee directors participate, such plan is treated as an
employee plan for purposes of this paragraph (c)(2). Director plans and
independent contractor plans are aggregated for purposes of this
paragraph (c)(2).
(3) Establishment of plan--(i) In general. A plan does not satisfy
the requirements of section 409A and this section and Sec. Sec. 1.409A-
2 through 1.409A-3 and Sec. Sec. 1.409A-5 through 1.409A-6, unless the
plan is established and maintained by a service recipient in accordance
with the requirements of this section, Sec. Sec. 1.409A-2 through
1.409A-3 and Sec. Sec. 1.409A-5 through 1.409A-6. For purposes of this
paragraph (c)(3), a plan is established on the latest of the date on
which it is adopted, the date on which it is effective, and the date on
which the material terms of the plan are set forth in writing. The
material terms of the plan may be set forth in writing in one or more
documents. For purposes of this paragraph (c)(3)(i), a plan will be
deemed to be set forth in writing if it is set forth in any other form
that is approved by the Commissioner. The material terms of the plan
include the amount (or the method or formula for determining the amount)
of deferred compensation to be provided under the plan and the time and
form of payment. Notwithstanding the foregoing, a plan will be deemed to
be established as of the date the participant obtains a legally binding
right to a deferral of compensation, provided that the plan is otherwise
established under the rules of this paragraph (c)(3)(i) by the end of
the taxable year of the service provider in which the legally binding
right arises, or with respect to an amount not payable in the year
immediately following the taxable year of the service provider in which
the legally binding right arises (the subsequent year), the 15th day of
the third month of the subsequent year.
(ii) Initial deferral election provisions. If a plan provides a
service provider or a service recipient with an initial deferral
election, the plan satisfies the requirements of this paragraph (c)(3)
if the plan sets forth in writing, on or before the date the applicable
election is required to be irrevocable to satisfy the requirements of
Sec. 1.409A-2(a), the conditions under which such election may be made.
(iii) Subsequent deferral election provisions. If a plan permits a
subsequent deferral election described in Sec. 1.409A-2(b), the plan
satisfies the requirements of this paragraph (c)(3) if the plan sets
forth in writing, on or before the date the election is required to be
irrevocable to meet the requirements of Sec. 1.409A-2(b), the
conditions under which such election may be made.
(iv) Payment accelerations. Except as explicitly provided in Sec.
1.409A-3, a plan is not required to set forth in writing the conditions
under which a payment may be accelerated if such acceleration is
permitted under Sec. 1.409A-3(j)(4).
(v) Six-month delay for specified employees. A plan must provide
that distributions to a specified employee may not be made before the
date that is six months after the date of separation from service or, if
earlier, the date of death (the six-month delay rule). The six-month
delay rule, required for payments due to the separation from service of
a specified employee, must be written in the plan. A plan does not fail
to be established and maintained merely because it does not contain the
six-month delay rule when the service provider who has a right to
compensation deferred under such plan is not a specified employee.
However, such provision must be set forth in writing on or before the
date such service provider first becomes a specified employee. In
general, this means the provision must be set forth in writing on or
before the specified employee effective date (as defined in paragraph
(i)(3) of this section) for the first list of specified employees that
includes such service provider.
(vi) Plan amendments. In the case of an amendment that increases the
amount deferred under a nonqualified deferred compensation plan, the
plan is not considered established with respect to the additional amount
deferred until the plan, as amended, is established in accordance with
paragraph (c)(3)(i) of this section.
(vii) Transition rule for written plan requirement. For purposes of
this paragraph (c)(3), a legally enforceable unwritten plan that was
adopted and effective before December 31, 2007, is
[[Page 644]]
treated as established under this section as of the later of the date on
which it was adopted or became effective, provided that the material
terms of the plan are set forth in writing on or before December 31,
2007.
(viii) Plan aggregation rules. The plan aggregation rules of
paragraph (c)(2)(i) of this section do not apply to the written plan
requirements of this paragraph (c)(3). Accordingly, deferrals of
compensation under an agreement, method, program, or other arrangement
that fails to meet the requirements of section 409A solely due to a
failure to meet the written plan requirements of this paragraph (c)(3)
are not aggregated with deferrals of compensation under other
agreements, methods, programs, or other arrangements that meet such
requirements.
(d) Substantial risk of forfeiture--(1) In general. Compensation is
subject to a substantial risk of forfeiture if entitlement to the amount
is conditioned on the performance of substantial future services by any
person or the occurrence of a condition related to a purpose of the
compensation, and the possibility of forfeiture is substantial. For
purposes of this paragraph (d), a condition related to a purpose of the
compensation must relate to the service provider's performance for the
service recipient or the service recipient's business activities or
organizational goals (for example, the attainment of a prescribed level
of earnings or equity value or completion of an initial public
offering). For purposes of this paragraph (d), if a service provider's
entitlement to the amount is conditioned on the occurrence of the
service provider's involuntary separation from service without cause,
the right is subject to a substantial risk of forfeiture if the
possibility of forfeiture is substantial. An amount is not subject to a
substantial risk of forfeiture merely because the right to the amount is
conditioned, directly or indirectly, upon the refraining from the
performance of services. Except as provided with respect to certain
transaction-based compensation under Sec. 1.409A-3(i)(5)(iv), the
addition of any risk of forfeiture after the legally binding right to
the compensation arises, or any extension of a period during which
compensation is subject to a risk of forfeiture, is disregarded for
purposes of determining whether such compensation is subject to a
substantial risk of forfeiture. An amount will not be considered subject
to a substantial risk of forfeiture beyond the date or time at which the
recipient otherwise could have elected to receive the amount of
compensation, unless the present value of the amount subject to a
substantial risk of forfeiture (disregarding, in determining the present
value, the risk of forfeiture) is materially greater than the present
value of the amount the recipient otherwise could have elected to
receive absent such risk of forfeiture. For this purpose, compensation
that the service provider would receive for continuing to perform
services regardless of whether the service provider elected to receive
the amount that is subject to a substantial risk of forfeiture is not
taken into account in determining whether the present value of the right
to the amount subject to a substantial risk of forfeiture is materially
greater than the amount the recipient otherwise could have elected to
receive absent such risk of forfeiture. For example, a salary deferral
generally may not be made subject to a substantial risk of forfeiture.
But, for example, where a bonus plan provides an election between a cash
payment or restricted stock units with a present value that is
materially greater (disregarding the risk of forfeiture) than the
present value of such cash payment and that will be forfeited absent
continued services for a period of years, the right to the restricted
stock units generally will be treated as subject to a substantial risk
of forfeiture.
(2) Stock rights. A stock right is not subject to a substantial risk
of forfeiture at the earlier of the first date the holder may exercise
the stock right and receive cash or property that is substantially
vested (as defined in Sec. 1.83-3(b)) or the first date that the stock
right is not subject to a forfeiture condition that would constitute a
substantial risk of forfeiture. Accordingly, a stock option that the
service provider may exercise immediately and receive substantially
vested stock is
[[Page 645]]
not subject to a substantial risk of forfeiture, even if the stock
option automatically terminates upon the service provider's separation
from service.
(3) Enforcement of forfeiture condition--(i) In general. In
determining whether the possibility of forfeiture is substantial in the
case of rights to compensation granted by a service recipient to a
service provider that owns a significant amount of the total combined
voting power or value of all classes of equity of the service recipient
(where the service provider's ownership is determined with application
of the attribution rules under section 318 if the service recipient is a
corporation, or if the service recipient is an entity that is not a
corporation, with application by analogy of the attribution rules under
section 318), all relevant facts and circumstances will be taken into
account in determining whether the probability of the service recipient
enforcing such condition is substantial, including--
(A) The service provider's relationship to other equity holders and
the extent of their control, potential control and possible loss of
control of the service recipient;
(B) The position of the service provider in the service recipient
and the extent to which the service provider is subordinate to other
service providers;
(C) The service provider's relationship to the officers and
directors of the service recipient (or similar positions with respect to
a noncorporate service recipient);
(D) The person or persons who must approve the service provider's
discharge; and
(E) Past actions of the service recipient in enforcing the
restrictions.
(ii) Examples. The following examples illustrate the rules of
paragraph (d)(3)(i) of this section:
Example 1. A service provider would be considered as having deferred
compensation subject to a substantial risk of forfeiture, but for the
fact that the service provider owns 20 percent of the single class of
stock in the transferor corporation. If the remaining 80 percent of the
class of stock is owned by an unrelated individual (or members of such
an individual's family) so that the possibility of the corporation
enforcing a restriction on such rights is substantial, then such rights
are subject to a substantial risk of forfeiture.
Example 2. A service provider would be considered as having deferred
compensation subject to a substantial risk of forfeiture, but for the
fact that the service provider, who is president of the corporation,
also owns 4 percent of the voting power of all the stock of a
corporation. If the remaining stock is so diversely held by the public
that the president, in effect, controls the corporation, then the
possibility of the corporation enforcing a restriction on the right to
deferred compensation of the president is not substantial, and such
rights are not subject to a substantial risk of forfeiture.
(e) Performance-based compensation--(1) In general. The term
performance-based compensation means compensation the amount of which,
or the entitlement to which, is contingent on the satisfaction of
preestablished organizational or individual performance criteria
relating to a performance period of at least 12 consecutive months.
Organizational or individual performance criteria are considered
preestablished if established in writing by not later than 90 days after
the commencement of the period of service to which the criteria relates,
provided that the outcome is substantially uncertain at the time the
criteria are established. Performance-based compensation may include
payments based on performance criteria that are not approved by a
compensation committee of the board of directors (or similar entity in
the case of a non-corporate service recipient) or by the stockholders or
members of the service recipient. Performance-based compensation does
not include any amount or portion of any amount that will be paid either
regardless of performance, or based upon a level of performance that is
substantially certain to be met at the time the criteria is established.
In addition, except as provided in paragraph (e)(3) of this section,
compensation is not performance-based compensation merely because the
amount of such compensation is determined by reference to the value of
the service recipient or the stock of the service recipient. Where a
portion of an amount of compensation would qualify as performance-based
compensation if the portion were the sole amount available under the
plan, that portion of the award will not fail to qualify as performance-
based compensation if that
[[Page 646]]
portion is designated separately or otherwise separately identifiable
under the terms of the plan, and the amount of each portion is
determined independently of the other. Compensation may be performance-
based compensation where the amount will be paid regardless of
satisfaction of the performance criteria due to the service provider's
death, disability, or a change in control event (as defined in Sec.
1.409A-3(i)(5)(i)), provided that a payment made under such
circumstances without regard to the satisfaction of the performance
criteria will not constitute performance-based compensation. For
purposes of this paragraph (e)(1), a disability refers to any medically
determinable physical or mental impairment resulting in the service
provider's inability to perform the duties of his or her position or any
substantially similar position, where such impairment can be expected to
result in death or can be expected to last for a continuous period of
not less than six months.
(2) Payments based upon subjective performance criteria. The term
performance-based compensation includes payments based upon subjective
performance criteria, provided that--
(i) The subjective performance criteria are bona fide and relate to
the performance of the participant service provider, a group of service
providers that includes the participant service provider, or a business
unit for which the participant service provider provides services (which
may include the entire organization); and
(ii) The determination that any subjective performance criteria have
been met is not made by the participant service provider or a family
member of the participant service provider (as defined in section
267(c)(4) applied as if the family of an individual includes the spouse
of any member of the family), or a person under the effective control of
the participant service provider or such a family member, and no amount
of the compensation of the person making such determination is
effectively controlled in whole or in part by the service provider or
such a family member.
(3) Equity-based compensation. Compensation is performance-based
compensation if it is based solely on an increase in the value of the
service recipient, or a share of stock in the service recipient, after
the date of a grant or award. However, compensation payable for a
service period that is equal to the value of a predetermined number of
shares of stock, and is variable only to the extent that the value of
such shares appreciates or depreciates, generally will not be
performance-based compensation. Notwithstanding the foregoing, the
attainment of a prescribed value for the service recipient (or a portion
thereof), or a share of stock in the service recipient, may be used as a
preestablished organizational criterion for purposes of providing
performance-based compensation, provided that the other requirements of
paragraph (e)(1) of this section are satisfied. In addition, an award of
equity-based compensation may constitute performance-based compensation
if entitlement to the compensation is subject to a condition that would
cause the award to otherwise qualify as performance-based compensation,
such as a performance-based vesting condition. A provision that allows a
service provider to defer compensation that would be realized upon the
exercise of a stock right generally constitutes an additional deferral
feature for purposes of the definition of a deferral of compensation
under paragraph (b)(5) of this section.
(f) Service provider--(1) In general. The term service provider
includes an individual, corporation, subchapter S corporation,
partnership, personal service corporation (as defined in section
269A(b)(1)), noncorporate entity that would be a personal service
corporation if it were a corporation, qualified personal service
corporation (as defined in section 448(d)(2)), and noncorporate entity
that would be a qualified personal service corporation if it were a
corporation, for any taxable year in which such individual, corporation,
subchapter S corporation, partnership, or other entity accounts for
gross income from the performance of services under the cash receipts
and disbursements method of accounting. The term service provider
generally includes a person who has separated from service (a former
service provider).
[[Page 647]]
(2) Independent contractors--(i) In general. Except as otherwise
provided in paragraph (f)(2)(iv) of this section, section 409A does not
apply to an amount deferred under a plan between a service provider and
service recipient with respect to a particular trade or business in
which the service provider participates, including earnings credited to
such deferred amount, if during the service provider's taxable year in
which the service provider obtains a legally binding right to the
payment of the amount deferred each of the following applies:
(A) The service provider is actively engaged in the trade or
business of providing services, other than as an employee or as a member
of the board of directors of a corporation (or similar position with
respect to an entity that is not a corporation).
(B) The service provider provides significant services to two or
more service recipients to which the service provider is not related and
that are not related to one another (as defined in paragraph (f)(2)(ii)
of this section).
(C) The service provider is not related to the service recipient,
applying the definition of related person contained in paragraph
(f)(2)(ii) of this section subject to the modification that the language
``20 percent'' is not used instead of ``50 percent'' each place ``50
percent'' appears in sections 267(b) and 707(b)(1).
(ii) Related person. For purposes of this paragraph (f)(2), a person
is related to another person if the persons bear a relationship to each
other that is specified in section 267(b) or 707(b)(1), subject to the
modifications that the language ``20 percent'' is used instead of ``50
percent'' each place it appears in sections 267(b) and 707(b)(1), and
section 267(c)(4) is applied as if the family of an individual includes
the spouse of any member of the family; or the persons are engaged in
trades or businesses under common control (within the meaning of section
52(a) and (b)). In addition, an individual is related to an entity if
the individual is an officer of an entity that is a corporation, or
holds a position substantially similar to an officer of a corporation
with an entity that is not a corporation.
(iii) Significant services. Whether a service provider is providing
significant services depends on the facts and circumstances of each
case. However, for purposes of paragraph (f)(2)(i) of this section, a
service provider who provides services to two or more service recipients
to which the service provider is not related and that are not related to
one another is deemed to be providing significant services to two or
more of such service recipients for a given taxable year, if the
revenues generated from the services provided to any service recipient
or group of related service recipients during such taxable year do not
exceed 70 percent of the total revenue generated by the service provider
from the trade or business of providing such services. In addition, in
the case of a service provider who has been providing services in a
trade or business for a period of not less than three consecutive years,
for purposes of paragraph (f)(2)(i) of this section, a service provider
who provides services to two or more service recipients to which the
service provider is not related and that are not related to one another
is deemed to be providing significant services to two or more of such
service recipients for a given taxable year if in each of the prior
three taxable years the revenues generated from the services provided to
any service recipient or group of related service recipients during such
prior taxable years did not exceed 70 percent of the total revenue
generated by the service provider from the trade or business of
providing such services and, at the time an amount is deferred, the
service provider does not know or have reason to anticipate that the
revenues generated from the services provided to any service recipient
or group of related service recipients during the current year will
exceed 70 percent of the total revenue generated by the service provider
from the trade or business of providing such services.
(iv) Management services. This paragraph (f)(2) does not apply to a
service provider to the extent the service provider provides management
services to a service recipient. For purposes of this paragraph
(f)(2)(iv), the term management services means services that involve the
actual or de facto direction
[[Page 648]]
or control of the financial or operational aspects of a trade or
business of the service recipient, or investment management or advisory
services provided to a service recipient whose primary trade or business
includes the investment of financial assets (including investments in
real estate), such as a hedge fund or a real estate investment trust.
(v) Services provided to related persons. Section 409A does not
apply to an amount deferred under a plan that is a bona fide agreement,
method, program, or other arrangement between a service provider and a
related service recipient arising in the ordinary course of a particular
trade or business in which the service provider is engaged to the extent
that--
(A) The service provider provides services to the service recipient
as an independent contractor;
(B) During the service provider's taxable year in which the amount
is deferred, the service provider qualifies for the safe harbor provided
in paragraph (f)(2)(iii) of this section with respect to such trade or
business; and
(C) Such agreement, method, program, or other arrangement and the
practices thereunder (including billing and collection practices), are
substantially similar to the agreements, methods, programs, or other
arrangements and practices applicable to one or more unrelated service
recipients to whom the service provider provides substantial services
and that produce a majority of the total revenue that the service
provider earns from the trade or business of providing such services
during the taxable year.
(g) Service recipient. Except as otherwise specifically provided in
these regulations, the term service recipient means the person for whom
the services are performed and with respect to whom the legally binding
right to compensation arises, and all persons with whom such person
would be considered a single employer under section 414(b) (employees of
controlled group of corporations), and all persons with whom such person
would be considered a single employer under section 414(c) (employees of
partnerships, proprietorships, etc., under common control). For example,
if the service provider is an employee, the service recipient generally
is the employer (including all persons treated as a single employer
under section 414(b) or (c)). Notwithstanding the foregoing, section
409A applies to a plan that provides for the deferral of compensation,
even if the payment of the compensation is not made by the person for
whom services are performed.
(h) Separation from service--(1) Employees--(i) In general. An
employee separates from service with the employer if the employee dies,
retires, or otherwise has a termination of employment with the employer.
However, for purposes of this paragraph (h)(1), the employment
relationship is treated as continuing intact while the individual is on
military leave, sick leave, or other bona fide leave of absence if the
period of such leave does not exceed six months, or if longer, so long
as the individual retains a right to reemployment with the service
recipient under an applicable statute or by contract. For purposes of
this paragraph (h)(1), a leave of absence constitutes a bona fide leave
of absence only if there is a reasonable expectation that the employee
will return to perform services for the employer. If the period of leave
exceeds six months and the individual does not retain a right to
reemployment under an applicable statute or by contract, the employment
relationship is deemed to terminate on the first date immediately
following such six-month period. Notwithstanding the foregoing, where a
leave of absence is due to any medically determinable physical or mental
impairment that can be expected to result in death or can be expected to
last for a continuous period of not less than six months, where such
impairment causes the employee to be unable to perform the duties of his
or her position of employment or any substantially similar position of
employment, a 29-month period of absence may be substituted for such
six-month period.
(ii) Termination of employment. Whether a termination of employment
has occurred is determined based on whether the facts and circumstances
indicate that the employer and employee reasonably anticipated that no
further services would be performed after a
[[Page 649]]
certain date or that the level of bona fide services the employee would
perform after such date (whether as an employee or as an independent
contractor) would permanently decrease to no more than 20 percent of the
average level of bona fide services performed (whether as an employee or
an independent contractor) over the immediately preceding 36-month
period (or the full period of services to the employer if the employee
has been providing services to the employer less than 36 months). Facts
and circumstances to be considered in making this determination include,
but are not limited to, whether the employee continues to be treated as
an employee for other purposes (such as continuation of salary and
participation in employee benefit programs), whether similarly situated
service providers have been treated consistently, and whether the
employee is permitted, and realistically available, to perform services
for other service recipients in the same line of business. An employee
is presumed to have separated from service where the level of bona fide
services performed decreases to a level equal to 20 percent or less of
the average level of services performed by the employee during the
immediately preceding 36-month period. An employee will be presumed not
to have separated from service where the level of bona fide services
performed continues at a level that is 50 percent or more of the average
level of service performed by the employee during the immediately
preceding 36-month period. No presumption applies to a decrease in the
level of bona fide services performed to a level that is more than 20
percent and less than 50 percent of the average level of bona fide
services performed during the immediately preceding 36-month period. The
presumption is rebuttable by demonstrating that the employer and the
employee reasonably anticipated that as of a certain date the level of
bona fide services would be reduced permanently to a level less than or
equal to 20 percent of the average level of bona fide services provided
during the immediately preceding 36-month period or full period of
services provided to the employer if the employee has been providing
services to the service recipient for a period of less than 36 months
(or that the level of bona fide services would not be so reduced). For
example, an employee may demonstrate that the employer and employee
reasonably anticipated that the employee would cease providing services,
but that, after the original cessation of services, business
circumstances such as termination of the employee's replacement caused
the employee to return to employment. Although the employee's return to
employment may cause the employee to be presumed to have continued in
employment because the employee is providing services at a rate equal to
the rate at which the employee was providing services before the
termination of employment, the facts and circumstances in this case
would demonstrate that at the time the employee originally ceased to
provide services, the employee and the service recipient reasonably
anticipated that the employee would not provide services in the future.
Notwithstanding the foregoing provisions of this paragraph (h)(1)(ii), a
plan may treat another level of reasonably anticipated permanent
reduction in the level of bona fide services as a separation from
service, provided that the level of reduction required must be
designated in writing as a specific percentage, and the reasonably
anticipated reduced level of bona fide services must be greater than 20
percent but less that 50 percent of the average level of bona fide
services provided in the immediately preceding 36 months. The plan must
specify the definition of separation from service on or before the date
on which a separation from service is designated as a time of payment of
the applicable amount deferred, and once designated, any change to the
definition of separation from service with respect to such amount
deferred will be subject to the rules regarding subsequent deferrals and
the acceleration of payments. For purposes of this paragraph (h)(1)(ii),
for periods during which an employee is on a paid bona fide leave of
absence (as defined in paragraph (h)(1)(i) of this section) and has not
otherwise terminated employment pursuant to paragraph (h)(1)(i) of this
section, the employee is treated as providing bona fide services
[[Page 650]]
at a level equal to the level of services that the employee would have
been required to perform to receive the compensation paid with respect
to such leave of absence. Periods during which an employee is on an
unpaid bona fide leave of absence (as defined in paragraph (h)(1)(i) of
this section) and has not otherwise terminated employment pursuant to
paragraph (h)(1)(i) of this section, are disregarded for purposes of
this paragraph (h)(1)(ii) (including for purposes of determining the
applicable 36-month (or shorter) period).
(2) Independent contractors--(i) In general. An independent
contractor is considered to have a separation from service with the
service recipient upon the expiration of the contract (or in the case of
more than one contract, all contracts) under which services are
performed for the service recipient if the expiration constitutes a
good-faith and complete termination of the contractual relationship. An
expiration does not constitute a good faith and complete termination of
the contractual relationship if the service recipient anticipates a
renewal of a contractual relationship or the independent contractor
becoming an employee. For this purpose, a service recipient is
considered to anticipate the renewal of the contractual relationship
with an independent contractor if it intends to contract again for the
services provided under the expired contract, and neither the service
recipient nor the independent contractor has eliminated the independent
contractor as a possible provider of services under any such new
contract. Further, a service recipient is considered to intend to
contract again for the services provided under an expired contract if
the service recipient's doing so is conditioned only upon incurring a
need for the services, the availability of funds, or both.
(ii) Special rule. Notwithstanding paragraph (h)(2)(i) of this
section, a plan is considered to satisfy the requirement described in
Sec. 1.409A-3(a)(1) with respect to an amount payable upon a separation
from service if, with respect to amounts payable to a service provider
who is an independent contractor, the plan provides that--
(A) No amount will be paid to the service provider before a date at
least 12 months after the day on which the contract expires under which
the service provider performs services for the service recipient (or, in
the case of more than one contract, all such contracts expire); and
(B) No amount payable to the service provider on that date will be
paid to the service provider if, after the expiration of the contract
(or contracts) and before that date, the service provider performs
services for the service recipient as an independent contractor or an
employee.
(3) Definition of service recipient and employer. For purposes of
this paragraph (h), the term service recipient or employer means the
service recipient as defined in paragraph (g) of this section, provided
that in applying section 1563(a)(1), (2), and (3) for purposes of
determining a controlled group of corporations under section 414(b), the
language ``at least 50 percent'' is used instead of ``at least 80
percent'' each place it appears in section 1563(a)(1), (2), and (3), and
in applying Sec. 1.414(c)-2 for purposes of determining trades or
businesses (whether or not incorporated) that are under common control
for purposes of section 414(c), ``at least 50 percent'' is used instead
of ``at least 80 percent'' each place it appears in Sec. 1.414(c)-2. A
plan may provide with respect to a deferral of compensation under the
plan that in applying sections 1563(a)(1), (2), and (3) for purposes of
determining a controlled group of corporations under section 414(b),
another defined percentage greater than 50 percent, but not greater than
80 percent, is used instead of ``at least 80 percent'' at each place it
appears in sections 1563(a)(1), (2), and (3), and in applying Sec.
1.414(c)-2 for purposes of determining trades or businesses (whether or
not incorporated) that are under common control for purposes of section
414(c), another defined percentage greater than 50 percent, but not
greater than 80 percent, is used instead of ``at least 80 percent'' at
each place it appears in Sec. 1.414(c)-2. In addition, where the use of
such definition of service recipient for purposes of determining a
separation from service is based upon legitimate business criteria, the
plan may provide that for purposes of a deferral of compensation under
the plan
[[Page 651]]
that in applying sections 1563(a)(1), (2), and (3) for purposes of
determining a controlled group of corporations under section 414(b), the
language ``at least 20 percent'' or another defined percentage not less
than 20 percent but not greater than 50 percent is used instead of ``at
least 80 percent'' at each place it appears in sections 1563(a)(1), (2),
and (3), and in applying Sec. 1.414(c)-2 for purposes of determining
trades or businesses (whether or not incorporated) that are under common
control for purposes of section 414(c), the language ``at least 20
percent'' or another defined percentage not less than 20 percent but not
greater than 50 percent is used instead of ``at least 80 percent'' at
each place it appears in Sec. 1.414(c)-2. Where a definition of service
recipient or employer other than the definition provided in the first
sentence of this paragraph (h)(3) (the 50 percent standard) is used, the
plan must designate in writing the alternate definition no later than
the last date at which the time and form of payment of the applicable
amount deferred must be elected in accordance with Sec. 1.409A-2(a),
and any change in the definition for such amounts deferred will
constitute a change in the time and form of payment subject to the rules
governing subsequent deferral elections under Sec. 1.409A-2(b) and the
acceleration of payments under Sec. 1.409A-3(j).
(4) Asset purchase transactions. Where as part of a sale or other
disposition of assets by one service recipient (seller) to an unrelated
service recipient (buyer), a service provider of the seller would
otherwise experience a separation from service with the seller, the
seller and the buyer may retain the discretion to specify, and may
specify, whether a service provider providing services to the seller
immediately before the asset purchase transaction and providing services
to the buyer after and in connection with the asset purchase transaction
has experienced a separation from service for purposes of this paragraph
(h), provided that the asset purchase transaction results from bona
fide, arm's length negotiations, all service providers providing
services to the seller immediately before the asset purchase transaction
and providing services to the buyer after and in connection with the
asset purchase transaction are treated consistently (regardless of
position at the seller) for purposes of applying the provisions of any
nonqualified deferred compensation plan, and such treatment is specified
in writing no later than the closing date of the asset purchase
transaction. For purposes of this paragraph (h)(4), references to a sale
or other disposition of assets, or an asset purchase transaction, refer
only to a transfer of substantial assets, such as a plant or division or
substantially all the assets of a trade or business. For purposes of
this paragraph (h)(4), whether a service recipient is related to another
service recipient is determined under the rules provided in paragraph
(f)(2)(ii) of this section.
(5) Dual status. If a service provider provides services both as an
employee of a service recipient and as an independent contractor of a
service recipient, the service provider must separate from service both
as an employee and as an independent contractor to be treated as having
separated from service. If a service provider ceases providing services
as an independent contractor and begins providing services as an
employee, or ceases providing services as an employee and begins
providing services as an independent contractor, the service provider
will not be considered to have a separation from service until the
service provider has ceased providing services in both capacities.
Notwithstanding the foregoing, if a service provider provides services
both as an employee of a service recipient and a member of the board of
directors of a corporate service recipient (or an analogous position
with respect to a non-corporate service recipient), the services
provided as a director are not taken into account in determining whether
the service provider has a separation from service as an employee for
purposes of a nonqualified deferred compensation plan in which the
service provider participates as an employee that is not aggregated with
any plan in which the service provider participates as a director under
paragraph (c)(2)(ii) of this section. In addition, if a service provider
provides services both as an employee of a service recipient and a
member of the
[[Page 652]]
board of directors of a corporate service recipient (or an analogous
position with respect to a non-corporate service recipient), the
services provided as an employee are not taken into account in
determining whether the service provider has a separation from service
as a director for purposes of a nonqualified deferred compensation plan
in which the service provider participates as a director that is not
aggregated with any plan in which the service provider participates as
an employee under paragraph (c)(2)(ii) of this section.
(6) Collectively bargained plans covering multiple employers.
Notwithstanding the foregoing provisions of this paragraph (h), to the
extent a plan is established pursuant to a bona fide collective
bargaining agreement covering services performed by employees for
multiple employers, such plan may define a separation from service in a
reasonable manner that treats the employee as not having separated from
service during periods in which the employee is not providing services
but is available to perform services covered by the collective
bargaining agreement for one or more employers, provided that the
definition also provides that the employee must be deemed to have
separated from service at a specified date not later than the end of any
period of at least 12 consecutive months during which the employee has
not provided any services covered by the collective bargaining agreement
to any participating employer. This paragraph (h)(6) applies only if the
definition of separation from service provided by the collective
bargaining agreement was the subject of arm's length negotiations
between employee representatives and two or more employers, the
agreement between employee representatives and such employers satisfies
section 7701(a)(46), and the circumstances surrounding the agreement
evidence good faith bargaining between adverse parties over such
definition.
(i) Specified employee--(1) In general. The term specified employee
means a service provider who, as of the date of the service provider's
separation from service, is a key employee of a service recipient any
stock of which is publicly traded on an established securities market or
otherwise. For purposes of this paragraph (i)(1), a service provider is
a key employee if the service provider meets the requirements of section
416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the
regulations thereunder and disregarding section 416(i)(5)) at any time
during the 12-month period ending on a specified employee identification
date. If a service provider is a key employee as of a specified employee
identification date, the service provider is treated as a key employee
for purposes of this paragraph (i) for the entire 12-month period
beginning on the specified employee effective date.
(2) Definition of compensation. For purposes of identifying a
specified employee by applying the requirements of section
416(i)(1)(A)(i), (ii), and (iii), the definition of compensation under
Sec. 1.415(c)-2(a) is used, applied as if the service recipient were
not using any safe harbor provided in Sec. 1.415(c)-2(d), were not
using any of the elective special timing rules provided in Sec.
1.415(c)-2(e), and were not using any of the elective special rules
provided in Sec. 1.415(c)-2(g). Notwithstanding the foregoing, a
service recipient may elect to use any available definition of
compensation under section 415 and the regulations thereunder in
accordance with the election requirements set forth in paragraph (i)(8)
of this section, including any available safe harbor and any available
election under the timing rules or special rules, provided that the
definition is applied consistently to all employees of the service
recipient for purposes of identifying specified employees. A service
recipient may elect to use such an alternative definition regardless of
whether another definition of compensation is being used for purposes of
a qualified plan sponsored by the service recipient. However, once a
list of specified employees has become effective, the service recipient
cannot change the definition of compensation for purposes of identifying
specified employees for the period with respect to which such list is
effective.
(3) Specified employee identification date. Unless another date is
designated in accordance with the requirements of this paragraph (i)(3)
and paragraph (i)(8) of this section, the specified employee
identification date is December
[[Page 653]]
31. A service recipient may designate in accordance with the
requirements of paragraph (i)(8) of this section any other date as the
specified employee identification date, provided that a service
recipient must use the same specified employee identification date with
respect to all nonqualified deferred compensation plans, and any change
to the specified employee identification date may not be effective for a
period of at least 12 months. The service recipient may designate a
specified employee identification date in each plan or in a separate
document applicable to all plans, provided that the service recipient
will not be treated as having designated a specified employee
identification date before the designation is legally binding on the
service recipient and all affected service providers. Any designation of
a specified employee identification date made on or before December 31,
2007, may be applied to any separation from service occurring on or
after January 1, 2005, unless and until subsequently changed pursuant to
this paragraph (i)(3).
(4) Specified employee effective date. Unless another date is
designated in accordance with the requirements of this paragraph (i)(4)
and paragraph (i)(8) of this section, the specified employee effective
date is the first day of the fourth month following the specified
employee identification date. A service recipient may designate in
accordance with the requirements of paragraph (i)(8) of this section any
date following the specified employee identification date as the
specified employee effective date, provided that such date may not be
later than the first day of the fourth month following the specified
employee identification date, and provided further that a service
recipient must use the same specified employee effective date with
respect to all nonqualified deferred compensation plans, and any change
to the specified employee effective date may not be effective for a
period of at least 12 months. The service recipient may designate a
specified employee effective date through inclusion in each plan
document or through a separate document applicable to all plans,
provided that the service recipient will not be treated as having
designated a specified employee effective date on any date before the
designation is legally binding on the service recipient and all affected
service providers. Any designation of a specified employee effective
date made on or before December 31, 2007, may be applied to any
separation from service occurring on or after January 1, 2005, unless
and until subsequently changed pursuant to this paragraph (i)(4).
(5) Alternative methods of satisfying the six-month delay rule. A
plan may provide, in accordance with the requirements of paragraph
(i)(8) of this section, for an alternative method to identify service
providers who will be subject to the six-month delay rule provided in
section 409A(a)(2)(B)(i), provided that the alternative method is
reasonably designed to include all specified employees (determined
without respect to any available service recipient elections), the
alternative method is an objectively determinable standard providing no
direct or indirect election to any service provider regarding its
application, and the alternative method results in either all service
providers or no more than 200 service providers being identified in the
class as of any date. Use of such an alternative method will not be
treated as a change in the time and form of payment for purposes of
Sec. 1.409A-2(b) (the subsequent deferral rules), even if the service
provider is not a specified employee when the payment is delayed.
(6) Corporate transactions--(i) Mergers and acquisitions of public
service recipients. If as a result of a corporate transaction, two or
more separate service recipients, more than one of which has stock
outstanding that is publicly traded on an established securities market
or otherwise immediately before the transaction, become one service
recipient, any stock of which is publicly traded on an established
securities market or otherwise immediately after the transaction
(resulting public service recipient), the resulting public service
recipient's next specified employee identification date and specified
employee effective date following the corporate transaction are the
specified employee identification date and specified employee effective
date that
[[Page 654]]
the acquiring service recipient would have been required to use absent
such transaction. For this purpose, in the case of a corporate merger,
the acquiring service recipient is the service recipient that included
the surviving corporation in such merger, in the case of an acquisition
by a corporation of the stock of another corporation, the acquiring
service recipient is the service recipient that included the corporation
that acquired such stock, and in all other cases, the surviving service
recipient is determined on the basis of all of the facts and
circumstances. For the period between the transaction and the next
specified employee effective date, the list of specified employees of
the resulting public service recipient is determined by combining the
lists of specified employees of all service recipients participating in
the transaction that were in effect at the date of the corporate
transaction, ranking such specified employees in order of the amount of
compensation used to determine each specified employee's status as a
specified employee, and treating the top 50 of such specified employees,
plus any employees described in section 416(i)(1)(ii) or section
416(i)(1)(iii) and the regulations thereunder (relating to 1-percent and
5-percent owners) who are not included in such top 50 specified
employees, as specified employees for the period between the corporate
transaction and the next specified employee effective date.
Alternatively, the resulting service recipient may elect in accordance
with the requirements of paragraph (i)(8) of this section to use any
reasonable method to determine the specified employees of the resulting
service recipient, including the use of an alternative method of
compliance described in paragraph (i)(5) of this section, provided that
such method is adopted no later than 90 days after the corporate
transaction and applied prospectively from the date the method is
adopted.
(ii) Mergers and acquisitions of nonpublic service recipients. If as
part of a corporate transaction a service recipient that does not have
outstanding stock that is publicly traded on an established securities
market or otherwise immediately before the transaction (initial private
service recipient), and a service recipient with stock outstanding that
is publicly traded on an established securities market or otherwise
immediately before the transaction (initial public service recipient),
become a single service recipient having stock that is publicly traded
on an established securities market or otherwise immediately after the
transaction (resulting public service recipient), the resulting public
service recipient's next specified employee identification date and
specified employee effective date following the corporate transaction
are the specified employee identification date and specified employee
effective date that the initial public service recipient would have been
required to use absent such transaction. For the period after the date
of the corporate transaction and before the next specified employee
effective date, the specified employees of the initial public service
recipient immediately before the transaction continue to be the
specified employees of the resulting public service recipient, and no
service providers of the initial private service recipient are required
to be treated as specified employees.
(iii) Spinoffs. If as part of a corporate transaction, a service
recipient with stock outstanding that is publicly traded on an
established securities market or otherwise immediately before the
transaction (initial public service recipient), becomes two or more
separate service recipients, each with stock outstanding that is
publicly traded on an established securities market or otherwise
immediately after the transaction (post-transaction public service
recipients), the next specified employee identification date of each of
the post-transaction public service recipients is the specified employee
identification date that the initial public service recipient would have
been required to use absent such transaction. For the period after the
date of the corporate transaction and before the next specified employee
effective date, the specified employees of the initial public service
recipient immediately before the transaction continue to be the
specified employees of the post-transaction public service recipients.
[[Page 655]]
(iv) Public offerings and other corporate transactions. If as part
of an initial public offering or corporate transaction not described in
paragraph (i)(6)(ii) or (iii) of this section, a service recipient with
no outstanding stock that is publicly traded on an established
securities market or otherwise immediately before such offering or other
transaction (initial private service recipient), becomes one or more
service recipients with stock outstanding that is publicly traded on an
established securities market or otherwise immediately after such
offering or other transaction (post-transaction public service
recipient), each post-transaction public service recipient has a
specified employee identification date of December 31 and a specified
employee effective date of April 1, effective retroactively to the
December 31 and April 1 next preceding the offering or other transaction
for purposes of identifying the specified employees between the
corporation transaction and the next December 31. Alternatively, a post-
transaction public service recipient may elect in accordance with the
requirements of paragraph (i)(8) of this section, a specified employee
identification date and specified employee effective date on or before
the date of the offering or other transaction. If a public service
recipient makes such an election, for the period after the offering or
other transaction and before the next specified employee effective date,
the specified employees of the post-transaction public service recipient
consist of the service providers that at the time of the offering or
other transaction would have been classified as specified employees of
the initial private service recipient, had the initial private service
recipient elected the same specified employee identification date and
specified employee effective date as selected by the post-transaction
public service recipient, and had such initial private service recipient
had stock publicly traded on an established securities market or
otherwise as of the specified employee identification date preceding the
transaction.
(v) Alternative methods of compliance. For purposes of this
paragraph (i)(6), references to specified employees as of a corporate
transaction or offering include any specified employees identified
through the use of an alternative method described in paragraph (i)(5)
of this section, where the use of such alternative method was
established and effective at the time of the corporate transaction or
offering.
(7) Nonresident alien employees. For purposes of determining whether
an employee meets the requirements of section 416(i)(1)(A)(i), (ii), or
(iii) (applied in accordance with the regulations thereunder and
disregarding section 416(i)(5)), and therefore is a key employee, the
incorporation of the rules of Sec. 1.415(c)-2(g)(5) regarding the
definition of compensation applies. Accordingly, the rule of Sec.
1.415(c)-2(g)(5)(i), generally requiring the treatment as compensation
of certain compensation excludible from an employee's gross income due
to the location of the services or the identity of the employer,
applies. In addition, a service recipient may elect in accordance with
paragraph (i)(8) of this section to apply the rule of Sec. 1.415(c)-
2(g)(5)(ii) to not treat as compensation certain compensation excludible
from an employee's gross income on account of the location of the
services or the identity of the employer that is not effectively
connected with the conduct of a trade or business within the United
States. A service recipient may elect to apply the rule of Sec. 1.415-
2(g)(5)(ii) regardless of whether the service recipient has elected to
apply the rule to a qualified plan sponsored by the service recipient;
however, once a list of specified employees has become effective, any
election of the rule for that period may not be changed. Notwithstanding
the foregoing, any election of the rule made before January 1, 2008, may
be effective with respect to any specified employee identification date
on or before December 31, 2007.
(8) Elections affecting the identification of specified employees.
The elections described in paragraphs (i)(2) through (7) of this section
are effective only as of the date that all necessary corporate action
has been taken to make such elections binding for purposes of all
affected nonqualified deferred compensation plans in which the service
providers of the service recipient that would become a specified
employee due
[[Page 656]]
to the application of such election participate. Where a taxpayer
attempts to make an election under paragraph (i)(2), (3), (4), (5), (6),
or (7) of this section but such election is not binding on all the
affected nonqualified deferred compensation plans and applied
consistently to all such service providers, the election is not
effective and the rule under paragraph (i)(2), (3), (4), (5), (6), or
(7) of this section, as applicable, that would apply absent an election
is applicable for identifying specified employees.
(j) Nonresident alien. (1) Except as provided in paragraph (j)(2) of
this section, the term nonresident alien means an individual who is--
(i) A nonresident alien within the meaning of section 7701(b)(1)(B);
or
(ii) A dual resident taxpayer within the meaning of Sec.
301.7701(b)-7(a)(1) of this chapter with respect to any taxable year in
which such individual is treated as a nonresident alien for purposes of
computing the individual's U.S. income tax liability.
(2) The term nonresident alien does not include--
(i) A nonresident alien with respect to whom an election is in
effect for the taxable year under section 6013(g) to be treated as a
resident of the United States;
(ii) A former citizen or long-term resident (within the meaning of
section 877(e)(2)) who expatriated after June 3, 2004, and has not
complied with the requirements of section 7701(n); or
(iii) An individual who is treated as a citizen or resident of the
United States for the taxable year under section 877(g).
(k) Established securities market. The term established securities
market means an established securities market within the meaning of
Sec. 1.897-1(m).
(l) Stock right. The term stock right means a stock option (other
than an incentive stock option described in section 422 or an option
granted pursuant to an employee stock purchase plan described in section
423) or a stock appreciation right.
(m) Separation pay plan. The term separation pay plan means any plan
that provides separation pay or, where a plan provides both amounts that
are separation pay and that are not separation pay, that portion of the
plan that provides separation pay. The term separation pay means any
deferral of compensation (before the application of the exclusions from
the definition of a deferral of compensation set forth in paragraph
(b)(9) of this section) that will not be paid under any circumstances
unless the service provider has had a separation from service, whether
voluntary or involuntary, including payments in the form of
reimbursements of expenses incurred, and the provision of in-kind
benefits. A deferral of compensation that the service provider may
receive without a separation from service does not become separation pay
merely because the service provider elects to receive or receives the
payment after or upon a separation from service. A deferral of
compensation does not fail to be separation pay merely because the
payment is conditioned upon the execution of a release of claims,
noncompetition or nondisclosure provisions, or other similar
requirements. Notwithstanding the foregoing, any amount, or entitlement
to any amount, that acts as a substitute for, or replacement of, amounts
deferred by the service recipient under a nonqualified deferred
compensation plan constitutes a payment of compensation or deferral of
compensation under such nonqualified deferred compensation plan.
(n) Involuntary separation from service--(1) In general. An
involuntary separation from service means a separation from service due
to the independent exercise of the unilateral authority of the service
recipient to terminate the service provider's services, other than due
to the service provider's implicit or explicit request, where the
service provider was willing and able to continue performing services.
An involuntary separation from service may include the service
recipient's failure to renew a contract at the time such contract
expires, provided that the service provider was willing and able to
execute a new contract providing terms and conditions substantially
similar to those in the expiring contract and to continue providing such
services. The determination of whether a separation from service is
involuntary is based on all the facts and circumstances. Any
[[Page 657]]
characterization of the separation from service as voluntary or
involuntary by the service provider and the service recipient in the
documentation of the separation from service is presumed to properly
characterize the nature of the separation from service. However, the
presumption may be rebutted where the facts and circumstances indicate
otherwise. For example, if a separation from service is designated as a
voluntary separation from service or resignation, but the facts and
circumstances indicate that absent such voluntary separation from
service the service recipient would have terminated the service
provider's services, and that the service provider had knowledge that
the service provider would be so terminated, the separation from service
is involuntary.
(2) Separations from service for good reason--(i) In general.
Notwithstanding paragraph (n)(1) of this section, a service provider's
voluntary separation from service will be treated for purposes of this
section and Sec. Sec. 1.409A-2 through 1.409A-6 as an involuntary
separation from service if the separation from service occurs under
certain limited bona fide conditions, where the avoidance of the
requirements of section 409A is not a purpose of the inclusion of these
conditions in the plan or of the actions by the service recipient in
connection with the satisfaction of these conditions, and a voluntary
separation from service under such conditions effectively constitutes an
involuntary separation from service. Generally such conditions will be
prespecified under an agreement to provide compensation upon a
separation from service for good reason. Such a good reason (or a
similar condition) must be defined to require actions taken by the
service recipient resulting in a material negative change to the service
provider in the service relationship, such as the duties to be
performed, the conditions under which such duties are to be performed,
or the compensation to be received for performing such services. Other
factors taken into account in determining whether a separation from
service for good reason effectively constitutes an involuntary
separation from service include the extent to which the payments upon a
separation from service for good reason are in the same amount and are
to be made at the same time and in the same form as payments available
upon an actual involuntary separation from service, and whether the
service provider is required to give the service recipient notice of the
existence of the condition that would result in treatment as a
separation from service for good reason and a reasonable opportunity to
remedy the condition.
(ii) Safe harbor. For purposes of this section and Sec. Sec.
1.409A-2 through 1.409A-6, if a plan provides that a voluntary
separation from service will be treated as an involuntary separation
from service if the separation from service occurs under certain express
conditions, a separation from service satisfying the conditions set
forth in the plan will be treated as an involuntary separation from the
service if the necessary conditions (or set of conditions) require the
following:
(A) The separation from service must occur during a pre-determined
limited period of time not to exceed two years following the initial
existence of one or more of the following conditions arising without the
consent of the service provider:
(1) A material diminution in the service provider's base
compensation.
(2) A material diminution in the service provider's authority,
duties, or responsibilities.
(3) A material diminution in the authority, duties, or
responsibilities of the supervisor to whom the service provider is
required to report, including a requirement that a service provider
report to a corporate officer or employee instead of reporting directly
to the board of directors of a corporation (or similar governing body
with respect to an entity other than a corporation).
(4) A material diminution in the budget over which the service
provider retains authority.
(5) A material change in the geographic location at which the
service provider must perform the services.
(6) Any other action or inaction that constitutes a material breach
by the service recipient of the agreement under which the service
provider provides services.
[[Page 658]]
(B) The amount, time, and form of payment upon the separation from
service must be substantially identical to the amount, time and form of
payment payable due to an actual involuntary separation from service, to
the extent such a right exists.
(C) The service provider must be required to provide notice to the
service recipient of the existence of the condition described in
paragraph (n)(2)(ii)(A) of this section within a period not to exceed 90
days of the initial existence of the condition, upon the notice of which
the service recipient must be provided a period of at least 30 days
during which it may remedy the condition and not be required to pay the
amount.
(3) Special rule for certain collectively bargained plans.
Notwithstanding the foregoing, for purposes of this paragraph (n), to
the extent a plan is subject to a bona fide collective bargaining
agreement covering services performed for multiple employers under which
an employee must separate from service with all such employers in order
to receive a payment, such plan may use any reasonable definition of
involuntary separation from service, provided that such definition is
consistent with any definition of a separation from service adopted
under paragraph (h)(6) of this section, and provided further that the
definition of an involuntary separation from service provided by the
collective bargaining agreement was the subject of arm's length
negotiations between employee representatives and two or more employers,
the agreement between employee representatives and such employers
satisfies section 7701(a)(46), and the circumstances surrounding the
agreement evidence good faith bargaining between adverse parties over
such definition.
(o) Earnings. Whether a deferred amount constitutes earnings on an
amount deferred, or actual or notional income attributable to an amount
deferred, is determined under the principles defining income
attributable to the amount taken into account under Sec. 31.3121(v)(2)-
1(d)(2) of this chapter. Accordingly, with respect to an account balance
plan, earnings on an amount deferred generally include an amount
credited on behalf of a service provider under the terms of the plan
that reflects a rate of return that does not exceed either the rate of
return on a predetermined actual investment or, if the income does not
reflect the rate of return on a predetermined actual investment, a
reasonable rate of interest. With respect to nonaccount balance plans,
earnings on an amount deferred generally include an increase, due solely
to the passage of time, in the present value of the future payments to
which the service provider has obtained a legally binding right, the
present value of which constituted the amount deferred (determined as of
the date such amount was deferred), but only if the amount deferred was
determined using reasonable actuarial assumptions and methods. A right
to earnings on an amount deferred generally is treated as a right to a
deferral of compensation for purposes of this section and Sec. Sec.
1.409A-2 through 1.409A-6. However, for purposes of any provision of
this section and Sec. Sec. 1.409A-2 through 1.409A-6 referring to
earnings on deferred compensation (or similar terms), the use of an
unreasonable rate of return, or unreasonable actuarial assumptions and
methods, generally will result in the treatment of some or all of such a
right to deferred compensation as a right only to deferred compensation,
and not a right to earnings on deferred compensation, so that the
provision will not be applicable. With respect to plans that are neither
account balance plans nor nonaccount balance plans, these rules apply by
analogy.
(p) In-kind benefits. The term in-kind benefits refers to services
provided to or on behalf of a service provider, such as financial
planning services, or tangible personal or real property made available
for use by or on behalf of the service provider, such as the use of an
aircraft or vehicle, and does not refer to a transfer of property within
the meaning of section 83 and the regulations thereunder, or a promise
to transfer, or an option to purchase or receive, property in the
future.
(q) Application of definitions and rules. The definitions and rules
set forth in paragraphs (a) through (p) of this section apply for
purposes of section 409A,
[[Page 659]]
this section, and Sec. Sec. 1.409A-2 through 1.409A-6.
[T.D. 9321, 72 FR 19276, Apr. 17, 2007; 72 FR 41620, July 31, 2007]
Sec. 1.409A-2 Deferral elections.
(a) Initial elections as to the time and form of payment--(1) In
general. A plan that is, or constitutes part of, a nonqualified deferred
compensation plan meets the requirements of section 409A(a)(4)(B) only
if under the terms of the plan, compensation for services performed
during a service provider's taxable year (the service year) may be
deferred at the service provider's election only if the election to
defer such compensation is made and becomes irrevocable not later than
the latest date permitted in this paragraph (a). An election will not be
considered to be revocable merely because the service provider or
service recipient may make an election to change the time and form of
payment pursuant to paragraph (b) of this section, or the service
recipient may accelerate the time of payment pursuant to Sec. 1.409A-
3(j)(4) (exceptions to prohibition on accelerated payments). Whether a
plan provides a service provider an opportunity to elect the time or
form of payment of compensation is determined based upon all the facts
and circumstances surrounding the determination of the time and form of
payment of the compensation. For purposes of this section, an election
to defer includes an election as to the time of the payment, an election
as to the form of the payment or an election as to both the time and the
form of the payment, but does not include an election as to the medium
of payment (for example, an election between a payment of cash or a
payment of property). Except as otherwise expressly provided in this
section, an election will not be considered made until such election
becomes irrevocable under the terms of the applicable plan. Accordingly,
a plan may provide that an election to defer may be changed at any time
before the last permissible date for making such an election. Where a
plan provides the service provider a right to make an initial deferral
election, and further provides that the election remains in effect until
terminated or modified by the service provider, the election will be
treated as made as of the date such election becomes irrevocable as to
compensation for services performed during the relevant service year.
For example, where a plan provides that a service provider's election to
defer a set percentage will remain in effect until changed or revoked,
but that as of each December 31 the election becomes irrevocable with
respect to salary payable in connection with services performed in the
immediately following year, the initial deferral election with respect
to salary payable with respect to services performed in the immediately
following year will be deemed to have been made as of the December 31
upon which the election became irrevocable. For purposes of this
paragraph (a), the reference to a service period or a performance period
refers to the period of service for which the right to the compensation
arises, and may include periods before the grant of a legally binding
right to the compensation. For example, where a service recipient grants
a bonus based upon services performed in the calendar year 2010, but
retains the discretion to rescind the bonus until 2011 such that the
promise of the bonus is not a legally binding right, the period of
service or performance period to which the compensation relates is the
calendar year 2010.
(2) Service recipient elections. A plan that provides for a deferral
of compensation for services performed during a service provider's
taxable year that does not provide the service provider with an
opportunity to elect the time or form of payment of such compensation
must designate the time and form of payment by no later than the later
of the time the service provider first has a legally binding right to
the compensation or, if later, the time the service provider would be
required under this section to make such an election if the service
provider were provided such an election. Such designation is treated as
an initial deferral election for purposes of this section. Where a plan
permits a service recipient to exercise discretion to disregard a
service provider election as to the time or form of a payment, any
service provider election that is subject to such discretion will be
treated
[[Page 660]]
as revocable so long as such discretion may be exercised.
(3) General rule. A plan that is, or constitutes part of, a
nonqualified deferred compensation plan meets the requirements of
section 409A(a)(4)(B) if under the terms of the plan, compensation for
services performed during a service provider's taxable year (the service
year) may be deferred at the service provider's election only if the
election to defer such compensation is made not later than the close of
the service provider's taxable year next preceding the service year.
(4) Initial deferral election with respect to short-term deferrals.
If a service provider has a legally binding right to a payment of
compensation in a subsequent taxable year that, absent a deferral
election, would be treated as a short-term deferral within the meaning
of Sec. 1.409A-1(b)(4), an election to defer such compensation may be
made in accordance with the requirements of paragraph (b) of this
section, applied as if the amount were a deferral of compensation and
the scheduled payment date for the amount were the date the substantial
risk of forfeiture lapses. Notwithstanding the requirements of paragraph
(b) of this section, such a deferral election may provide that the
deferred amounts will be payable upon a change in control event (as
defined in Sec. 1.409A-3(i)(5)) without regard to the five-year
additional deferral requirement in paragraph (b) of this section.
(5) Initial deferral election with respect to certain forfeitable
rights. If a service provider has a legally binding right to a payment
in a subsequent year that is subject to a condition requiring the
service provider to continue to provide services for a period of at
least 12 months from the date the service provider obtains the legally
binding right to avoid forfeiture of the payment, an election to defer
such compensation may be made on or before the 30th day after the
service provider obtains the legally binding right to the compensation,
provided that the election is made at least 12 months in advance of the
earliest date at which the forfeiture condition could lapse. For
purposes of this paragraph (a)(5), a condition will not be treated as
failing to require the service provider to continue to provide services
for a period of at least 12 months from the date the service provider
obtains the legally binding right merely because the condition
immediately lapses upon the death or disability (as defined in Sec.
1.409A-3(i)(4)) of the service provider, or upon a change in control
event (as defined in Sec. 1.409A-3(i)(5)), provided that if death,
disability, or a change in control event occurs and the condition lapses
before the end of such 12-month period, a deferral election may be given
effect only if the deferral election is permitted under this section
without regard to this paragraph (a)(5).
(6) Initial deferral election with respect to fiscal year
compensation. In the case of a service recipient with a taxable year
that is not the same as the taxable year of the service provider, a plan
may provide that fiscal year compensation may be deferred at the service
provider's election if the election to defer such compensation is made
not later than the close of the service recipient's taxable year
immediately preceding the first taxable year of the service recipient in
which any services are performed for which such compensation is payable.
For purposes of this paragraph (a)(6), the term fiscal year compensation
means compensation relating to a period of service coextensive with one
or more consecutive taxable years of the service recipient, of which no
amount is paid or payable during the service recipient's taxable year or
years constituting the period of service. For example, fiscal year
compensation generally would include a bonus to an individual employee
with a calendar year taxable year that is based on a service period
consisting of the service recipient's two consecutive taxable years
ending September 30, 2011, where the amount will be paid after the end
of the second of such taxable years, but would not include either a
bonus based on a service period consisting of one or more calendar years
or salary that would otherwise be paid during such taxable years of the
service recipient.
(7) First year of eligibility--(i) In general. In the case of the
first year in which a service provider becomes eligible to participate
in a plan, the service provider may make an initial deferral election
within 30 days after the date
[[Page 661]]
the service provider becomes eligible to participate in such plan, with
respect to compensation paid for services to be performed after the
election. In the case of a plan that does not provide for service
provider elections with respect to the time or form of a payment, the
time and form of the payment must be specified on or before the date
that is 30 days after the date the service provider first becomes
eligible to participate in such plan. For compensation that is earned
based upon a specified performance period (for example, an annual
bonus), where a deferral election is made in the first year of
eligibility but after the beginning of the performance period, the
election must apply only to the compensation paid for services performed
after the election. For this purpose, an election will be deemed to
apply to compensation paid for services performed after the election if
the election applies to no more than an amount equal to the total amount
of the compensation for the performance period multiplied by the ratio
of the number of days remaining in the performance period after the
election over the total number of days in the performance period.
(ii) Eligibility to participate. For purposes of this paragraph
(a)(7), a service provider is eligible to participate in a plan at any
time during which, under the plan's terms and without further amendment
or action by the service recipient, the service provider is eligible to
accrue an amount of deferred compensation under the plan other than
earnings on amounts previously deferred, even if the service provider
has elected not to accrue (or has not elected to accrue) an amount of
deferred compensation. Where a service provider has been paid all
amounts deferred under a plan, and on and before the date of the last
payment was not eligible to continue (or to elect to continue) to
participate in the plan for periods after the last payment (other than
through an election of a different time and form of payment with respect
to the amounts paid), the service provider may be treated as initially
eligible to participate in a plan as of the first date following such
payment that the service provider becomes eligible to accrue an
additional amount of deferred compensation. Where a service provider has
ceased being eligible to participate in a plan (other than the accrual
of earnings), regardless of whether all amounts deferred under the plan
have been paid, and subsequently becomes eligible to participate in the
plan again, the service provider may be treated as being initially
eligible to participate in the plan if the service provider had not been
eligible to participate in the plan (other than the accrual of earnings)
at any time during the 24-month period ending on the date the service
provider again becomes eligible to participate in the plan.
(iii) Application to excess benefit plans. For purposes of this
paragraph (a)(7), a service provider is treated as initially eligible to
participate in an excess benefit plan as of the first day of the service
provider's taxable year immediately following the first year the service
provider accrues a benefit under the excess benefit plan; and any
election made within 30 days following such date is treated as applying
to benefits accrued under such plan for services performed before the
election. For purposes of this paragraph (a)(7), the term excess benefit
plan means all nonqualified deferred compensation plans in which a
service provider participates, to the extent such plans do not provide
for an election between current compensation (including a short-term
deferral) and deferred compensation and solely provide deferred
compensation equal to the excess of the benefits the service provider
would have accrued under a qualified employer plan (as defined in Sec.
1.409A-1(a)(2)) in which the service provider also participates, in the
absence of one or more of the limits incorporated into the plan to
reflect one or more of the limits on contributions or benefits
applicable to the qualified employer plan under the Internal Revenue
Code, over the benefits the service provider actually accrues under the
qualified employer plan. For purposes of this paragraph (a)(7), once a
service provider has accrued a benefit or deferred compensation under a
plan in any year, the service provider will not become eligible for an
initial deferral election based upon an accrual or deferral under an
excess benefit plan in a subsequent year, even if the benefit
[[Page 662]]
or deferred compensation accrued in a previous year is forfeited or
eliminated.
(8) Initial deferral election with respect to performance-based
compensation. In the case of any performance-based compensation (as
defined in Sec. 1.409A-1(e)), an initial deferral election may be made
with respect to such performance-based compensation on or before the
date that is six months before the end of the performance period,
provided that the service provider performs services continuously from
the later of the beginning of the performance period or the date the
performance criteria are established through the date an election is
made under this paragraph (a)(8), and provided further that in no event
may an election to defer performance-based compensation be made after
such compensation has become readily ascertainable. For purposes of this
paragraph (a)(8), if the performance-based compensation is a specified
or calculable amount, the compensation is readily ascertainable if and
when the amount is first substantially certain to be paid. If the
performance-based compensation is not a specified or calculable amount
because, for example, the amount may vary based upon the level of
performance, the compensation, or any portion of the compensation, is
readily ascertainable when the amount is first both calculable and
substantially certain to be paid. For this purpose, the performance-
based compensation is bifurcated between the portion that is readily
ascertainable and the amount that is not readily ascertainable.
Accordingly, in general any minimum amount that is both calculable and
substantially certain to be paid will be treated as readily
ascertainable.
(9) Nonqualified deferred compensation plans linked to qualified
employer plans or certain other arrangements. If a nonqualified deferred
compensation plan provides that the amount deferred under the plan is
determined under the formula for determining benefits under a qualified
employer plan (as defined in Sec. 1.409A-1(a)(2)) or a broad-based
foreign retirement plan (as defined in Sec. 1.409A-1(a)(3)(v))
maintained by the service recipient but applied without regard to one or
more limitations applicable to the qualified employer plan under the
Internal Revenue Code or to the broad-based foreign retirement plan
under other applicable law, or that the amount deferred under the
nonqualified deferred compensation plan is determined as an amount
offset by some or all of the benefits provided under the qualified
employer plan or the broad-based foreign retirement plan, an increase in
amounts deferred under the nonqualified deferred compensation plan that
results directly from the operation of the qualified employer plan or
broad-based foreign retirement plan (other than service provider actions
described in paragraphs (a)(9)(iii) and (iv) of this section) including
changes in benefit limitations applicable to the qualified employer plan
or the broad-based foreign retirement plan under the Internal Revenue
Code or other applicable law does not constitute a deferral election
under the nonqualified deferred compensation plan, provided that such
operation does not otherwise result in a change in the time or form of a
payment under the nonqualified deferred compensation plan, and provided
further that such change in the amounts deferred under the nonqualified
deferred compensation plan does not exceed that change in the amounts
deferred under the qualified employer plan or the broad-based foreign
retirement plan, as applicable. In addition, with respect to such a
nonqualified deferred compensation plan, the following actions or
failures to act will not constitute a deferral election under the
nonqualified deferred compensation plan even if in accordance with the
terms of the nonqualified deferred compensation plan, the actions or
inactions result in an increase in the amounts deferred under the plan,
provided that such actions or inactions do not otherwise affect the time
or form of payment under the nonqualified deferred compensation plan and
provided further that with respect to actions or inactions described in
paragraphs (a)(9)(i) or (ii), the change in the amount deferred under
the nonqualified deferred compensation plan does not exceed the change
in the amounts deferred under the qualified employer plan or the broad-
based foreign retirement plan, as applicable:
[[Page 663]]
(i) A service provider's action or inaction under the qualified
employer plan or broad-based foreign retirement plan with respect to
whether to elect to receive a subsidized benefit or an ancillary benefit
under the qualified employer plan or broad-based foreign retirement
plan.
(ii) The amendment of a qualified employer plan or broad-based
foreign retirement plan to add or remove a subsidized benefit or an
ancillary benefit, or to freeze or limit future accruals of benefits
under the qualified plan or freeze or limit future accruals of benefits
or reduce existing benefits under the broad-based foreign retirement
plan.
(iii) A service provider's action or inaction under a qualified
employer plan with respect to elective deferrals and other employee pre-
tax contributions subject to the contribution restrictions under section
401(a)(30) or section 402(g), including an adjustment to a deferral
election under such qualified employer plan, provided that for any given
taxable year, the service provider's action or inaction does not result
in an increase in the amounts deferred under all nonqualified deferred
compensation plans in which the service provider participates (other
than amounts described in paragraph (a)(9)(iv) of this section) in
excess of the limit with respect to elective deferrals under section
402(g)(1)(A), (B), and (C) in effect for the taxable year in which such
action or inaction occurs.
(iv) A service provider's action or inaction under a qualified
employer plan with respect to elective deferrals and other employee pre-
tax contributions subject to the contribution restrictions under section
401(a)(30) or section 402(g), and after-tax contributions by the service
provider to a qualified employer plan that provides for such
contributions, that affects the amounts that are credited under one or
more nonqualified deferred compensation plans as matching amounts or
other similar amounts contingent on such elective deferrals, employee
pre-tax contributions, or after-tax contributions, provided that the
total of such matching or contingent amounts, as applicable, never
exceeds 100 percent of the matching or contingent amounts that would be
provided under the qualified employer plan absent any plan-based
restrictions that reflect limits on qualified plan contributions under
the Internal Revenue Code.
(10) Changes in elections under a cafeteria plan. A change in an
election under a cafeteria plan does not constitute a deferral election
with respect to an amount deferred under a nonqualified deferred
compensation plan to the extent that the change in the amount deferred
under the nonqualified deferred compensation plan results solely from
the application of the change in amount eligible to be treated as
compensation under the terms of the nonqualified deferred compensation
plan resulting from the election change under the cafeteria plan, to a
benefit formula under the nonqualified deferred compensation plan based
upon the service provider's eligible compensation, and only to the
extent that such change applies in the same manner as any other increase
or decrease in compensation would apply to such benefit formula.
(11) Initial deferral election with respect to certain separation
pay. In the case of separation pay (as defined in Sec. 1.409A-1(m)),
where such separation pay is the subject of bona fide, arm's length
negotiations at the time of the separation from service, an initial
deferral election may be made at any time up to the time the service
provider obtains a legally binding right to the payment. This paragraph
(a)(11) does not apply to any separation pay to which the service
provider obtained a legally binding right before the negotiations at the
time of the separation from service, including a right to a payment
subject to a condition such as that the service provider separate from
service other than for cause. In the case of separation pay due to
participation in a window program (as defined in Sec. 1.409A-
1(b)(9)(vi)), an initial deferral election may be made at any time
before the time the election to participate in the window program
becomes irrevocable.
(12) Initial deferral election with respect to certain commissions--
(i) Sales commission compensation. For purposes of this paragraph (a), a
service provider earning sales commission compensation is treated as
providing the services to
[[Page 664]]
which such compensation relates only in the service provider's taxable
year in which the customer remits payment to the service recipient or,
if applied consistently to all similarly situated service providers, the
service provider's taxable year in which the sale occurs. For purposes
of this paragraph (a)(12), the term sales commission compensation means
compensation or portions of compensation earned by a service provider if
a substantial portion of the services provided by such service provider
to a service recipient consist of the direct sale of a product or
service to an unrelated customer, the compensation paid by the service
recipient to the service provider consists of either a portion of the
purchase price for the product or service or an amount substantially all
of which is calculated by reference to the volume of sales, and payment
of the compensation is either contingent upon the service recipient
receiving payment from an unrelated customer for the product or services
or, if applied consistently to all similarly situated service providers,
is contingent upon the closing of the sales transaction and such other
requirements as may be specified by the service recipient before the
closing of the sales transaction. For this purpose, a customer is
treated as an unrelated customer only if the customer is not related to
either the service provider or the service recipient. A person is
treated as related to another person if the person would be treated as
related to the other person under Sec. 1.409A-1(f)(2)(ii) or the person
would be treated as providing management services to the other person
under Sec. 1.409A-1(f)(2)(iv).
(ii) Investment commission compensation. For purposes of this
paragraph (a), a service provider earning investment commission
compensation is treated as providing the services to which such
compensation relates over the 12 months preceding the date as of which
the overall value of the assets or asset accounts is determined for
purposes of the calculation of the investment commission compensation.
For purposes of this paragraph (a)(12), the term investment commission
compensation means the compensation or the portion of compensation
earned by a service provider if a substantial portion of the services
provided by such service provider to a service recipient to which such
compensation relates consists of sales of financial products or other
direct customer services to an unrelated customer with respect to
customer assets or customer asset accounts, the customer retains the
right to terminate the customer relationship and may move or liquidate
the assets or asset accounts without undue delay (which may be subject
to a reasonable notice period), such compensation consists of a portion
of the value of the overall assets or asset account balance, an amount
substantially all of which is calculated by reference to the increase in
the value of the overall assets or account balance during a specified
period, or both, and the value of the overall assets or account balance
and investment commission compensation is determined at least annually.
For this purpose, a customer is treated as an unrelated customer only if
the customer is not related to either the service provider or the
service recipient. A person is treated as related to another person if
the person would be treated as related to the other person under Sec.
1.409A-1(f)(2)(ii) or the person would be treated as providing
management services to the other person under Sec. 1.409A-1(f)(2)(iv).
(iii) Commission compensation and related persons. The rules of
paragraphs (a)(12)(i) and (ii) of this section apply to sales commission
compensation and investment commission compensation involving a related
customer, provided that substantial sales from which commission
compensation arises are made, or substantial services from which
commission compensation arises are provided, to unrelated customers by
the service recipient, the sales and service arrangement and the
commission arrangement with respect to the related customer are bona
fide, arise from the service recipient's ordinary course of business,
and are substantially the same, both in terms and in practice, as the
terms and practices applicable to unrelated customers (as defined in
such paragraphs) to which individually or in the aggregate substantial
sales are made or substantial services provided by the service
recipient.
[[Page 665]]
(13) Initial deferral election with respect to compensation paid for
final payroll period--(i) In general. Unless a plan provides otherwise,
compensation payable after the last day of the service provider's
taxable year solely for services performed during the final payroll
period described in section 3401(b) containing the last day of the
service provider's taxable year or, with respect to a non-employee
service provider, a period not longer than the payroll period described
in section 3401(b), where such amount is payable pursuant to the timing
arrangement under which the service recipient normally compensates
service providers for services performed during a payroll period
described in section 3401(b), or with respect to a non-employee service
provider, a period not longer than the payroll period described in
section 3401(b), is treated as compensation for services performed in
the subsequent taxable year in which the payment is made. The preceding
sentence does not apply to any compensation paid during such period for
services performed during any period other than such final payroll
period, such as a payment of an annual bonus. Any amendment of a plan
after December 31, 2007, to add a provision providing for a differing
treatment of such compensation may not be effective for 12 months from
the date the amendment is executed and enacted.
(ii) Transition rule. For purposes of this paragraph (a)(13), a plan
that was adopted and effective before December 31, 2007, whether written
or unwritten, will be treated as designating such compensation for
services performed in the taxable year in which the payroll period ends,
unless otherwise set forth in writing before December 31, 2007.
(14) Elections to annualize recurring part-year compensation. In the
case of a service provider receiving recurring part-year compensation,
an election to defer all or a portion of the recurring part-year
compensation to be earned during a particular service period is
considered to meet the requirements of this paragraph (a) if the
election is made before the services for which the recurring part-year
compensation is paid begin, and the election does not defer payment of
any of the recurring part-year compensation to a date beyond the last
day of the 13th month following the first date of the service period.
For purposes of this paragraph (a)(14), the term recurring part-year
compensation means compensation paid for services rendered in a position
that the service recipient and service provider reasonably anticipate
will continue on similar terms and conditions in subsequent years, and
will require services to be provided during successive service periods
each of which comprises less than 12 months (for example, a teacher
providing services during a school year comprised of 10 consecutive
months), and each of which periods begins in one taxable year of the
service provider and ends in the next such taxable year. The rules of
this paragraph (a)(14) apply to a particular amount of compensation only
once, so that an amount deferred under this rule may not again be
treated as recurring part-year compensation for purposes of this
paragraph and subject to a second deferral election under this paragraph
(a)(14).
(15) USERRA rights. The requirements of this paragraph (a) are
deemed satisfied to the extent an initial deferral election is provided
to satisfy the requirements of the Uniformed Service Employment and
Reemployment Rights Act of 1994, as amended, 38 U.S.C. 4301-4334.
(b) Subsequent changes in time and form of payment--(1) In general.
A plan that permits under a subsequent election a delay in a payment or
a change in the form of payment (a subsequent deferral election),
including a subsequent deferral election made by a service provider or a
service recipient, satisfies the requirements of section 409A(a)(4)(C)
only if the conditions of this paragraph (b) are met. For purposes of
this paragraph (b), except as otherwise expressly provided in this
section, a subsequent deferral election is not considered made until
such election becomes irrevocable under the terms of the plan.
Accordingly, a plan may provide that a subsequent deferral election may
be changed at any time before the last permissible date for making such
a subsequent deferral election. Where a plan permits a subsequent
deferral election, the requirements of this paragraph are satisfied
[[Page 666]]
only if the following conditions are met:
(i) The plan requires that such election not take effect until at
least 12 months after the date on which the election is made.
(ii) In the case of an election related to a payment not described
in Sec. 1.409A-3(a)(2) (payment on account of disability), Sec.
1.409A-3(a)(3) (payment on account of death), or Sec. 1.409A-3(a)(6)
(payment on account of the occurrence of an unforeseeable emergency),
the plan requires that the payment with respect to which such election
is made be deferred for a period of not less than five years from the
date such payment would otherwise have been paid (or in the case of a
life annuity or installment payments treated as a single payment, five
years from the date the first amount was scheduled to be paid).
(iii) The plan requires that any election related to a payment
described in Sec. 1.409A-3(a)(4) (payment at a specified time or
pursuant to a fixed schedule) be made not less than 12 months before the
date the payment is scheduled to be paid (or in the case of a life
annuity or installment payments treated as a single payment, 12 months
before the date the first amount was scheduled to be paid).
(2) Definition of payments for purposes of subsequent changes in the
time or form of payment--(i) In general. Except as provided in
paragraphs (b)(2)(ii) and (iii) of this section, the term payment refers
to each separately identified amount to which a service provider is
entitled to payment under a plan on a determinable date, and includes
amounts applied for the benefit of the service provider. An amount is
separately identified only if the amount may be objectively determined
under a nondiscretionary formula. For example, an amount identified as
10 percent of the account balance as of a specified payment date would
be a separately identified amount. A payment includes the provision of
any taxable benefit, including payment in cash or in kind. In addition,
a payment includes, but is not limited to, the transfer, cancellation,
or reduction of an amount of deferred compensation in exchange for
benefits under a welfare benefit plan, a fringe benefit excludible under
section 119 or section 132, or any other benefit that is excludible from
gross income. For additional rules relating to the application of this
paragraph (b) to amounts payable at a fixed time or pursuant to a fixed
schedule, see Sec. 1.409A-3(i)(1).
(ii) Life annuities--(A) In general. The entitlement to a life
annuity is treated as the entitlement to a single payment. Accordingly,
an election to delay payment of a life annuity, or to change the form of
payment of a life annuity, must be made at least 12 months before the
scheduled commencement of the life annuity, and must defer the payment
for a period of not less than five years from the originally scheduled
commencement of the life annuity. For purposes of Sec. 1.409A-1, this
section, and Sec. Sec. 1.409A-3 through 1.409A-6, the term life annuity
means a series of substantially equal periodic payments, payable not
less frequently than annually, for the life (or life expectancy) of the
service provider, or a series of substantially equal periodic payments,
payable not less frequently than annually, for the life (or life
expectancy) of the service provider, followed upon the death or end of
the life expectancy of the service provider by a series of substantially
equal periodic payments, payable not less frequently than annually, for
the life (or life expectancy) of the service provider's designated
beneficiary (if any). Notwithstanding the foregoing, a schedule of
payments does not fail to be an annuity solely because such plan
provides for an immediate payment of the actuarial present value of all
remaining annuity payments if the actuarial present value of the
remaining annuity payments falls below a predetermined amount, and the
immediate payment of such amount does not constitute an accelerated
payment for purposes of Sec. 1.409A-3(j), provided that such feature,
including the predetermined amount, is established by no later than the
time and form of payment is otherwise required to be established, and
provided further that any change in such feature, including the
predetermined amount, is a change in the time and form of payment. A
change in designated beneficiary before any annuity payment has been
made under the plan is not a change in the
[[Page 667]]
time or form of payment. A change in the form of a payment before any
annuity payment has been made under the plan, from one type of life
annuity to another type of life annuity with the same scheduled date for
the first annuity payment, is not considered a change in the time and
form of a payment, provided that the annuities are actuarially
equivalent applying reasonable actuarial methods and assumptions. For
purposes of this paragraph (b)(2)(ii), a requirement that a service
provider obtain the consent of a spouse or other potential recipient of
a survivor annuity to change a beneficiary or form of payment is
disregarded, so that any annuity form that the service recipient could
elect to receive with such consent is considered currently available.
(B) Certain features disregarded. Notwithstanding the foregoing
provisions of this paragraph (b)(2)(ii), the following features are
disregarded for purposes of determining whether a payment form is a life
annuity within the meaning of this paragraph (b)(2)(ii), but are not
disregarded for purposes of determining whether a life annuity is the
actuarial equivalent of another life annuity except as otherwise
provided in this paragraph (b)(2)(ii):
(1) Term certain features under which annuity payments continue for
the longer of the life of the annuitant or a fixed period of time.
(2) Pop-up features under which payments increase upon the death of
the beneficiary or another event that eliminates the right to a survivor
annuity.
(3) Cash refund features under which payment is provided upon the
death of the last annuitant in an amount that is not greater than the
excess of the present value of the annuity at the annuity starting date
over the total of payments before the death of the last annuitant.
(4) Features under which an annuity form of payment provides higher
periodic payments before the expected commencement of benefits under the
Social Security Act (42 U.S.C. ch. 7) or the Railroad Retirement Act (45
U.S.C. 231 et seq.) and lower periodic payments after such expected
commencement date, so that the combined periodic payments under the
arrangement and the Social Security Act or the Railroad Retirement Act,
as applicable, are approximately level before and after such expected
commencement date (Social Security or Railroad Retirement leveling
features).
(5) Features providing for an increase in the annuity payment in a
manner described in Sec. 1.401(a)(9)-6, Q&A-14(a)(1) or (2) (eligible
cost-of-living adjustments).
(C) Subsidized joint and survivor annuities. For purposes of this
paragraph (b)(2)(ii), a joint and survivor annuity will not fail to be
treated as actuarially equivalent to a single life annuity due solely to
the value of a subsidized survivor annuity benefit, provided that the
annual lifetime annuity benefit available to the service provider under
the joint and survivor annuity is not greater than the annual lifetime
annuity benefit available to the service provider under the single life
annuity alternative, and provided that the annual survivor annuity
benefit is not greater than the annual lifetime annuity benefit
available to the service provider under the joint and survivor annuity.
(D) Actuarial assumptions and methods. For purposes of this
paragraph (b)(2)(ii), at any given time the same actuarial assumptions
and methods must be used in valuing each annuity payment option, in
determining whether the payments are actuarially equivalent and such
assumptions must be reasonable. This requirement applies over the entire
term of the service provider's participation in the plan, such that the
annuity payment must be actuarially equivalent at all times for the
annuity payment options to be treated as one time and form of payment.
There is no requirement that the same actuarial methods and assumptions
be used over the term of a service provider's participation in a plan.
Accordingly, a plan may change the actuarial assumptions and methods
used to determine the life annuity payments provided that all of the
actuarial assumptions and methods are reasonable.
(iii) Installment payments. The entitlement to a series of
installment payments that is not a life annuity is treated as the
entitlement to a single payment, unless the plan provides at
[[Page 668]]
all times with respect to the amount deferred that the right to the
series of installment payments is to be treated as a right to a series
of separate payments. For purposes of Sec. 1.409A-1, this section, and
Sec. Sec. 1.409A-3 through 1.409A-6, a series of installment payments
refers to an entitlement to the payment of a series of substantially
equal periodic amounts to be paid over a predetermined period of years,
except to the extent any increase (or decrease) in the amount reflects
reasonable earnings (or losses) through the date the amount is paid. For
this purpose, a series of installment payments over a predetermined
period and a series of installment payments over a shorter or longer
period, or a series of installment payments over the same predetermined
period but with a different commencement date, are different times and
forms of payment. Accordingly, a change in the predetermined period or
the commencement date is a change in the time and form of payment.
Notwithstanding the foregoing, a schedule of payments does not fail to
be an installment payment solely because such plan provides for an
immediate payment of all remaining installments if the present value of
the deferred amount to be paid in the remaining installment payments
falls below a predetermined amount, and the immediate payment of such
amount does not constitute an accelerated payment for purposes of Sec.
1.409A-3(j), provided that such feature including the predetermined
amount is established by no later than the time and form of payment is
otherwise required to be established, and provided further that any
change in such feature including the predetermined amount is a change in
the time and form of payment.
(iv) Transition rule. For purposes of this section, a plan that was
adopted and effective before December 31, 2007, whether written or
unwritten, that fails to make a designation as to whether the
entitlement to a series of payments is to be treated as an entitlement
to a series of separate payments under paragraph (b)(2)(iii) of this
section, may make such designation on or before December 31, 2007,
provided such designation is set forth in writing on or before December
31, 2007.
(3) Beneficiaries. The rules of this paragraph (b) governing changes
in the time and form of payment apply to elections by beneficiaries with
respect to the time and form of payment, as well as elections by service
providers or service recipients with respect to the time and form of
payment to beneficiaries. An election to change the identity of a
beneficiary does not constitute a change in the time and form of payment
merely because the election changes the identity of the recipient of the
payment, if the time and form of the payment is not otherwise changed.
In addition, an election to change the identity of a beneficiary before
the initial payment of a life annuity does not constitute a change in
the time and form of payment if the change in the time of payments stems
solely from the different life expectancy of the new beneficiary, such
as in the case of a joint and survivor annuity.
(4) Domestic relations orders. The rules of this paragraph (b)
governing changes in the time and form of payment do not apply to
elections by individuals other than a service provider, with respect to
payments to a person other than the service provider, to the extent such
elections are reflected in, or made in accordance with, the terms of a
domestic relations order (as defined in section 414(p)(1)(B)).
(5) Coordination with prohibition against acceleration of payments.
For purposes of applying the prohibition against the acceleration of
payments in Sec. 1.409A-3(j), the definition of payment is the same as
the definition in paragraph (b)(2) of this section. Accordingly, a
change in the form of a payment that results in a more rapid schedule
for payments generally will not constitute an acceleration of a payment,
if the change in the form of payment is made in compliance with the
subsequent deferral rules. For example, a change in form from a 10-year
installment payment treated as a single payment to a lump-sum payment
would not constitute an acceleration if the change in the form of the
payment is made in compliance with the requirements of paragraph (b)(1)
of this section, generally meaning that the election to change to a
lump-sum payment
[[Page 669]]
must be made at least 12 months before the installment payments were
scheduled to commence and the lump-sum payment could not be made until
at least five years after the date the installment payments were
scheduled to commence. See Sec. 1.409A-3(j)(4)(i) with respect to
situations in which the failure to accelerate a payment or the
modification of a plan term relating to certain accelerated payments
will not be subject to the rules of this paragraph (b).
(6) Application to multiple payment events. In the case of a plan
that permits a payment upon each of a number of potential permissible
payment events, such as the earlier of a fixed date or separation from
service, the requirements of paragraph (b)(1) of this section are
applied separately to each payment (as defined in paragraph (b)(2) of
this section) due upon each payment event. Notwithstanding the
foregoing, the addition or deletion of a permissible payment event to a
plan under which amounts were previously deferred is subject to the
rules of this paragraph (b) where the addition or deletion of the
permissible payment event may result in a change in the time or form of
payment of the amount deferred. For application of the rules governing
accelerations of payments to the addition of a permissible payment event
to amounts deferred, see Sec. 1.409A-3(j).
(7) Delay of payments under certain circumstances. A payment may be
delayed to a date after the designated payment date under any of the
circumstances described in this paragraph (b)(7), and the provision will
not fail to meet the requirements of establishing a permissible payment
event and the delay in the payment will not constitute a subsequent
deferral election, so long as the service recipient treats all payments
to similarly situated service providers on a reasonably consistent
basis.
(i) Payments subject to section 162(m). A payment may be delayed to
the extent that the service recipient reasonably anticipates that if the
payment were made as scheduled, the service recipient's deduction with
respect to such payment would not be permitted due to the application of
section 162(m), provided that the payment is made either during the
service provider's first taxable year in which the service recipient
reasonably anticipates, or should reasonably anticipate, that if the
payment is made during such year, the deduction of such payment will not
be barred by application of section 162(m) or during the period
beginning with the date of the service provider's separation from
service and ending on the later of the last day of the taxable year of
the service recipient in which the service provider separates from
service or the 15th day of the third month following the service
provider's separation from service, and provided further that where any
scheduled payment to a specific service provider in a service
recipient's taxable year is delayed in accordance with this paragraph,
the delay in payment will be treated as a subsequent deferral election
unless all scheduled payments to that service provider that could be
delayed in accordance with this paragraph are also delayed. Where the
payment is delayed to a date on or after the service provider's
separation from service, the payment will be considered a payment upon a
separation from service for purposes of the rules under Sec. 1.409A-
3(i)(2) (payments to specified employees upon a separation from service)
and, in the case of a specified employee, the date that is six months
after a service provider's separation from service is substituted for
any reference to a service provider's separation from service in the
first sentence of this paragraph. No election may be provided to the
service provider with respect to the timing of the payment under this
paragraph (b)(7)(i).
(ii) Payments that would violate Federal securities laws or other
applicable law. A payment may be delayed where the service recipient
reasonably anticipates that the making of the payment will violate
Federal securities laws or other applicable law; provided that the
payment is made at the earliest date at which the service recipient
reasonably anticipates that the making of the payment will not cause
such violation. The making of a payment that would cause inclusion in
gross income or the application of any penalty provision or other
provision of the Internal Revenue
[[Page 670]]
Code is not treated as a violation of applicable law.
(iii) Other events and conditions. A service recipient may delay a
payment upon such other events and conditions as the Commissioner may
prescribe in generally applicable guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter). For
additional rules applicable to certain delayed payments pursuant to a
change in control event, see Sec. 1.409A-3(i)(5)(iv). For additional
rules applicable to amounts payable because of an unforeseeable
emergency, see Sec. 1.409A-3(i)(3).
(8) USERRA rights. The requirements of this paragraph (b) are deemed
met to the extent an election to change the time or form of a payment of
deferred compensation is provided to satisfy the requirements of the
Uniformed Services Employment and Reemployment Rights Act of 1994, as
amended, 38 U.S.C. 4301-4344.
(9) Examples. The following examples illustrate the application of
the provisions of this section. For purposes of these examples, each
employee is an individual with a calendar year taxable year, and is
employed by the specified employer:
Example 1. Initial election to defer salary. Employer ZZ sponsors a
plan under which Employee A may elect to defer a percentage of Employee
A's salary. Employee A has participated in the plan in prior years. To
satisfy the requirements of this section with respect to salary earned
in calendar year 2008, if Employee A elects to defer any amount of such
salary, the deferral election (including an election as to the time and
form of payment) must be made no later than December 31, 2007.
Example 2. Designation of time and form of payment where an initial
deferral election is not provided. Employer YY has a taxable year ending
September 30. On July 1, 2008, Employer YY enters into a legally binding
obligation to pay Employee B a $10,000 bonus. The amount is not subject
to a substantial risk of forfeiture and does not qualify as performance-
based compensation as described in Sec. 1.409A-1(e). Employer YY does
not provide Employee B an election as to the time and form of payment.
Unless the amount is to be paid in accordance with the short-term
deferral rule of Sec. 1.409A-1(b)(4), Employer YY must specify the time
and form of payment on or before July 1, 2008, to satisfy the
requirements of this section.
Example 3. Initial election to defer bonus payable based on services
during calendar year. Employer XX has a taxable year ending September
30. Employee C participates in a bonus plan under which Employee C is
entitled to a bonus for services performed during the calendar year
that, absent an election by Employee C, will be paid on March 15 of the
following year. The amount is not subject to a substantial risk of
forfeiture and does not qualify as performance-based compensation as
described in Sec. 1.409A-1(e). If Employee C elects to defer the
payment of the bonus with respect to services rendered during calendar
year 2008, Employee C must elect the time and form of payment not later
than December 31, 2007, to satisfy the requirements of this section.
Example 4. Initial election to defer bonus payable based on services
during fiscal year other than calendar year. Employer WW has a taxable
year ending September 30. Employee D participates in a bonus plan under
which Employee D is entitled to a bonus for services performed during
Employer WW's fiscal year that, absent an election by Employee D, will
be paid on December 15 of the calendar year in which the fiscal year
ends. The amount is not subject to a substantial risk of forfeiture and
does not qualify as performance-based compensation as described in Sec.
1.409A-1(e). The amount qualifies as fiscal year compensation. If
Employee D elects to defer the payment of the amount related to the
fiscal year ending September 30, 2009, to satisfy the requirements of
this section Employee D must elect the time and form of payment not
later than September 30, 2008.
Example 5. Initial election to defer bonus payable only if service
provider completes at least 12 months of services after the election.
Employer VV has a calendar year taxable year. On March 1, 2008, Employer
VV grants Employee E a $10,000 bonus, payable on March 1, 2010 (with
reasonable interest), provided that Employee E continues performing
services as an employee of Employer VV through March 1, 2010. The amount
does not qualify as performance-based compensation as described in Sec.
1.409A-1(e), and Employee E already participates in another account
balance nonqualified deferred compensation plan. Employee E may make an
initial deferral election on or before March 31, 2008 (within 30 days
after obtaining a legally binding right), because at least 12 months of
additional services are required after the date of election for the risk
of forfeiture to lapse.
Example 6. Initial election to defer bonus that would otherwise
constitute a short-term deferral. The same facts as Example 5, except
that Employee E does not make an initial deferral election on or before
March 31, 2008. Because the right to the compensation would not be
treated as a deferral of compensation pursuant to Sec. 1.409A-1(b)(4)
absent a deferral election (because the arrangement would be treated as
a short-term deferral), Employee
[[Page 671]]
E may make an initial deferral election provided that the election may
not become effective for 12 months and must defer the payment at least 5
years from March 1, 2010 (the first date the payment could become
substantially vested). Accordingly, Employee E may make an election
before March 1, 2009, provided that the election defers the payment to a
date on or after March 1, 2015 (other than a payment due to death,
disability, unforeseeable emergency, or a change in control event).
Example 7. Initial election to defer sales commissions. Employer UU
has a calendar year taxable year. As part of Employee F's services for
Employer UU, Employee F sells refrigerators to customers unrelated to
Employee F or Employer UU. Under the employment arrangement, Employee F
is entitled to 10% of the sales price of any refrigerator Employee F
sells, payable only upon the receipt of payment from the customer who
purchased the refrigerator. For purposes of the initial deferral rule,
Employee F is treated as performing the services related to each
refrigerator sale in the calendar year in which each customer pays for
the refrigerator.
Example 8. Initial election to defer renewal sales commissions. The
same facts as Example 7, except that Employee F also sells warranties
related to the refrigerators sold. Under the warranty arrangement,
refrigerator warranty customers are entitled in a future year to extend
the warranty for an additional cost to be paid at the time of the
extension. Under Employee F's arrangement with Employer UU, Employee F
is entitled to 10% of the amount paid for an extension of any warranty,
payable upon the receipt of payment from the customer extending the
warranty. For purposes of the initial deferral election rule, Employee F
is treated as performing the services related to the amount paid for the
extension of the warranty in the taxable year in which the customer pays
for the warranty extension.
Example 9. Initial election to defer investment commissions.
Employer TT is in the trade or business of managing financial assets for
customer accounts. Customers who deposit funds in an account with
Employer TT are entitled to remove the account balance of such account
upon 60 days notice to Employer TT. Employee G sells financial products
and provides continuing customer service to certain unrelated customers
involving the deposit and maintenance of funds in customer accounts
managed by Employer TT. Under the employment arrangement, Employee G is
entitled to a set percentage of the aggregate value of the assets held
in the accounts of customers to whom Employee G sold financial products
and provides customer service. Under the arrangement, the aggregate
value of the assets held in the accounts is determined as of June 30 of
each year, and unless Employee G elects to defer the payment, the amount
is payable to Employee G in a lump sum on December 31 of the year in
which the valuation is made. Employee G has no control over the
valuation of the assets held in the accounts, or the calculation of the
amount due Employee G. For purposes of the initial deferral rule,
Employee G is treated as providing the services to which a payment
relates during the July 1 through June 30 period ending on the June 30
date as of which the assets held in the account are valued.
Example 10. Initial election to defer part-year compensation.
Employee H provides services as a teacher to Employer SS, a school
system. The period of services routinely begins on the second Monday of
August of one year and ends on the first Friday of June of the
subsequent year. Employer SS provides an election to Employee H to
receive the compensation for the period of services ratably over the
period beginning on the second Monday of August of one year and ending
on the last day of August of the subsequent year. Because the
compensation constitutes recurring part-year compensation, as defined in
paragraph (a)(14) of this section, and because the schedule will provide
that all of the recurring part-year compensation is paid no later than
September 30 of the subsequent year, Employee H will be deemed to have
made a timely deferral election with respect to such recurring part-year
compensation if Employee H elects before the first day of the service
period to have the recurring part-year compensation paid under such
schedule.
Example 11. Initial election to defer negotiated separation pay.
Employer RR decides to terminate Employee J's employment involuntarily.
As part of the process of terminating Employee J, Employer RR enters
into bona fide, arm's length negotiations with respect to the terms of
Employee J's termination of employment. As part of the process, Employer
RR offers Employee J an amount that is in addition to any amounts to
which Employee J is otherwise entitled, payable either as a lump sum
payment at the end of 3 years or in 3 annual payments starting at the
date of termination of employment. The election of the time and form of
payment by Employee J may be made at any time before Employee J accepts
the offer and obtains a legally binding right to the additional amount.
The election may not apply to any amount to which Employee J already had
a legally binding right.
Example 12. Election of time and form of payments under a window
program. Employer QQ establishes a window program, as defined in Sec.
1.409A-1(b)(9)(vi). Individuals who elect to terminate employment under
the window program are entitled to receive an amount equal to 2 weeks
pay multiplied by every year of service with Employer QQ. The
individuals participating in the window program
[[Page 672]]
may elect to receive the payment as either a lump sum payment payable on
the first day of the month after making the election to participate in
the window program, or as a payment of 3 equal annual installments on
each January 1 of the first 3 years following the election to
participate in the window program. Employee K is eligible to participate
in the window program. Employee K will be treated as making a timely
deferral election if the election as to the time and form of payment is
made on or before the date Employee K's election to participate in the
window program becomes irrevocable.
Example 13. Initial election to defer salary earned during final
payroll period beginning in one calendar year and ending in the
subsequent calendar year. Employer PP pays the salary of its employees,
including Employee L, on a bi-weekly basis. One bi-weekly payroll period
runs from December 24, 2008, through January 6, 2009, with a scheduled
payment date of January 13, 2009. Employer PP sponsors, and Employee L
participates in, a nonqualified deferred compensation plan under which
Employee L may defer a specified percentage of his annual salary. The
plan does not specify that any salary compensation paid for the payroll
period in which falls January 1 is to be treated as compensation for
services performed during the year preceding the year in which falls
that January 1. For purposes of applying the initial deferral election
rules, Employee L is deemed to have performed the services for the
payroll period December 24, 2008, through January 6, 2009, during the
calendar year 2009.
Example 14. Application of deferral election rules and anti-
acceleration rules to a nonqualified deferred compensation plan linked
to a qualified plan. Employee M participates in a qualified retirement
plan that is a defined benefit plan that offers a subsidized early
retirement benefit to employees who have attained age 55 and completed
30 years of service. Employee M, who has attained age 55 and completed
30 years of service, also participates in a nonqualified deferred
compensation plan, under which the benefit payable is calculated under a
formula, with that benefit then reduced by any benefit that Employee M
has accrued under the qualified retirement plan. In 2008, Employee M
fails to elect the subsidized early retirement benefit under the
qualified retirement plan, with the effect that the amounts payable
under the nonqualified deferred compensation plan are increased by an
amount equal to the reduction in the benefit payable under the qualified
plan. In 2009, Employer NN amends the qualified retirement plan to
increase benefits under the plan, resulting in a decrease in the amounts
payable under the nonqualified deferred compensation plan equal to the
increase in the benefit payable under the qualified plan. Neither of
these actions constitutes a deferral election or an acceleration of a
payment under the nonqualified deferred compensation plan.
Example 15. Subsequent deferral election. Employee N participates in
a nonqualified deferred compensation plan. Employee N elects to be paid
in a lump sum payment at the earlier of age 65 or separation from
service. Employee N anticipates that he will work after age 65, and
wishes to defer payment to a later date. Provided that Employee N
continues in employment and makes the election by his 64th birthday,
Employee N may elect to receive a lump sum payment at the earlier of age
70 or separation from service.
Example 16. Subsequent deferral election rule--change in form of
payment from lump sum payment to life annuity. Employee P participates
in a nonqualified deferred compensation plan. Employee P elects to be
paid in a lump sum payment at age 65. Employee P wishes to change the
payment form to a life annuity. Provided that Employee P makes the
election on or before his 64th birthday, Employee P may elect to receive
a life annuity commencing at age 70.
Example 17. Subsequent deferral election rule--change in form of
payment from life annuity to lump sum payment. Employee Q participates
in a nonqualified deferred compensation plan. Employee Q elects to be
paid in a life annuity at age 65. Employee Q wishes to change the
payment form to a lump sum payment. Provided that Employee Q makes the
election on or before his 64th birthday, Employee Q may elect to receive
a lump sum payment at age 70.
Example 18. Subsequent deferral election rule--installment payments
designated as separate payments. Employee R, whose taxable year is the
calendar year, participates in a nonqualified deferred compensation plan
that provides for payment in a series of 5 equal annual amounts, each
designated as a separate payment. The first payment is scheduled to be
made on January 1, 2010. Provided that Employee R makes the election on
or before January 1, 2009, Employee R may elect for the first payment
scheduled to be made on January 1, 2010, to be made on January 1, 2015.
If Employee R makes that election, but does not elect to defer the
remaining payments, the remaining payments continue to be due upon
January 1 of the 4 consecutive calendar years commencing on January 1,
2011.
Example 19. Subsequent deferral election rule--change in form of
payment from installment payments not designated as separate payments to
lump sum payment. Employee S participates in a nonqualified deferred
compensation plan that provides for payment in a series of 5 equal
annual amounts that are not designated as a series of 5 separate
payments. The first amount is scheduled to be paid on January 1, 2010.
Employee S wishes to receive the entire amount equal to the sum of all 5
of the amounts to be paid as a
[[Page 673]]
lump sum payment. Provided that Employee S makes the election on or
before January 1, 2009, Employee S may elect to receive a lump sum
payment on or after January 1, 2015.
Example 20. Subsequent deferral election rule--change in form of
payment from installment payments designated as separate payments to
lump sum payment. Employee T participates in a nonqualified deferred
compensation plan that provides for payment in a series of 5 equal
annual amounts each of which is designated as a separate payment. The
first amount is scheduled to be paid on January 1, 2010. Employee T
wishes to receive the entire amount equal to the sum of all 5 of the
amounts in a single lump sum payment. Provided that Employee T makes the
election on or before January 1, 2009, Employee T may elect to receive a
lump sum payment on or after January 1, 2019.
Example 21. Subsequent deferral election rule--change in form of
payment from one life annuity form to another life annuity form.
Employee U participates in a nonqualified deferred compensation plan
that permits Employee U to elect before Employee U's separation from
service whether to be paid in the form of a single life annuity
beginning on the first day of the month following Employee U's
separation from service, or an annuity beginning on the first day of the
month following Employee U's separation from service under which annuity
payments continue for Employee U's lifetime but not less than 10 years.
The two types of annuities are actuarially equivalent at all times
applying reasonable actuarial methods and assumptions. For purposes of
this section, the two types of annuities are treated as a single form of
payment. Accordingly, the election provided under the plan is not
treated as providing a subsequent deferral election or accelerated
payment, and an election by Employee U under the plan between the two
annuity options made before the first scheduled payment date for an
annuity payment is not treated as a subsequent deferral election or an
acceleration of a payment.
Example 22. Subsequent deferral election rule--change in time of
payment from payment at specified age to payment at later of specified
age or separation from service. Employee V participates in a
nonqualified deferred compensation plan that provides for a lump sum
payment at age 65. Employee V wishes to modify the plan so that the
deferred amount will be payable upon the later of Employee V's
attainment of a specified age or separation from service. Provided that
Employee V makes such election on or before his 64th birthday, Employee
V may modify the plan so Employee V will receive a lump sum payment upon
the later of age 70 or separation from service.
Example 23. Subsequent deferral election rule--change in time of
payment from payment at separation from service to payment at later of
separation from service or specified age. Employee W participates in a
nonqualified deferred compensation plan that provides for a lump sum
payment at separation from service. Employee W wishes to make the
payment payable upon the later of separation from service or a
predetermined age. Provided that Employee W makes such election on or
before the date 1 year before a separation from service, Employee W may
elect to receive a lump sum payment upon the later of the date 5 years
following a separation from service or at a specified age.
Example 24. Subsequent deferral election rule--change in time of
payment from payment at separation from service to payment at a change
in control event. Employee X participates in a nonqualified deferred
compensation plan that provides for a lump sum payment at separation
from service. Employee X wishes to change the payment provision such
that the payment is payable upon a change in control event. A change in
the distribution provision to provide for a payment only upon a change
in control event will violate the rules governing payment provisions,
because the change could result in an acceleration if the change in
control event occurs before Employee X separates from service, or a
subsequent deferral if the change in control does not occur until after
Employee X separates from service. However, provided that Employee X
makes such election on or before the date 1 year before a separation
from service, Employee X may elect to receive a payment upon the later
of a change in control event or 5 years following a separation from
service.
(c) Special rules for certain resident aliens. For the first taxable
year of an individual in which such individual is a resident alien, a
nonqualified deferred compensation plan is deemed to meet the
requirements of paragraph (a) of this section if, with respect to
compensation payable for services performed during that first taxable
year or with respect to compensation the right to which is subject to a
substantial risk of forfeiture as of the first day of that first taxable
year, an initial deferral election is made by the end of such first
taxable year, provided that the initial deferral election may not apply
to amounts that have already been paid or made available to the service
provider before the election is made. For any year after the first
taxable year in which an individual is classified as a resident alien,
this paragraph (c) does not apply, provided that a taxable year may
again be treated as
[[Page 674]]
the first taxable year in which an individual is classified as a
resident alien if such individual is classified as a resident alien in
that taxable year and has not been classified as a resident alien for
the three consecutive taxable years immediately preceding that taxable
year.
[T.D. 9321, 72 FR 19276, Apr. 17, 2007; 72 FR 41621, July 31, 2007]
Sec. 1.409A-3 Permissible payments.
(a) In general. The requirements of section 409A(a)(2)(A) are met
only if the plan provides that an amount of deferred compensation under
the plan may be paid only upon an event or at a time set forth in this
paragraph (a):
(1) The service provider's separation from service (as defined in
Sec. 1.409A-1(h) and in accordance with paragraph (i)(2) of this
section).
(2) The service provider becoming disabled (in accordance with
paragraph (i)(4) of this section).
(3) The service provider's death.
(4) A time or a fixed schedule specified under the plan (in
accordance with paragraph (i)(1) of this section).
(5) A change in the ownership or effective control of the
corporation, or in the ownership of a substantial portion of the assets
of the corporation (in accordance with paragraph (i)(5) of this
section).
(6) The occurrence of an unforeseeable emergency (in accordance with
paragraph (i)(3) of this section).
(b) Designation of payment upon a permissible payment event. Except
as otherwise specified in this section, a plan provides for the payment
upon an event described in paragraph (a)(1), (2), (3), (5), or (6) of
this section if the plan provides the date of the event is the payment
date, or specifies another payment date that is objectively determinable
and nondiscretionary at the time the event occurs. A plan may also
provide that a payment upon an event described in paragraph (a)(1), (2),
(3), (5), or (6) of this section is to be made in accordance with a
schedule that is objectively determinable and nondiscretionary based on
the date the event occurs and that would qualify as a fixed schedule
under paragraph (i)(1) of this section if the payment event were instead
a fixed date, provided that the schedule must be fixed at the time the
permissible payment event is designated. In addition, a plan may provide
that a payment, including a payment that is part of a schedule, is to be
made during a designated taxable year of the service provider that is
objectively determinable and nondiscretionary at the time the payment
event occurs such as, for example, a schedule of three substantially
equal payments payable during the first three taxable years following
the taxable year in which a separation from service occurs. A plan may
also provide that a payment, including a payment that is part of a
schedule, is to be made during a designated period objectively
determinable and nondiscretionary at the time the payment event occurs,
but only if the designated period both begins and ends within one
taxable year of the service provider or the designated period is not
more than 90 days and the service provider does not have a right to
designate the taxable year of the payment (other than an election that
complies with the subsequent deferral election rules of Sec. 1.409A-
2(b)). Where a plan provides for a period of more than one day following
a payment event during which a payment may be made, such as within 90
days following the date of the event, the payment date for purposes of
the subsequent deferral rules under Sec. 1.409A-2(b) is treated as the
first possible date upon which a payment could be made under the terms
of the plan. A plan may provide for payment upon the earliest or latest
of more than one event or time, provided that each event or time is
described in paragraphs (a)(1) through (6) of this section. For examples
illustrating the provisions of this paragraph, see paragraph (i)(1)(vi)
of this section.
(c) Designation of alternative specified dates or payment schedules
based upon date of permissible event. Except as otherwise provided in
this paragraph (c), for an amount of deferred compensation under a plan,
the plan may designate only one time and form of payment upon the
occurrence of each event described in paragraph (a)(1), (2),
[[Page 675]]
(3), (5), or (6) of this section. For example, a plan does not satisfy
the requirements of this paragraph (c) if it provides for one payment
date or schedule of payments if a specified event occurs on a Monday,
but another payment date or schedule of payments if the event occurs on
any other day of the week. However, a plan that provides for a payment
upon an event described in paragraph (a)(2), (3), (5), or (6) of this
section may allow for an alternative payment schedule if the event
occurs on or before one (but not more than one) specified date, provided
that the addition or deletion of such a different time and form of
payment applicable to an existing deferral is subject to Sec. 1.409A-
2(b) (subsequent deferral elections) and paragraph (j) of this section
(accelerated payments). For example, a plan may provide that a service
provider will receive a lump sum payment of the service provider's
entire benefit under the plan on the first day of the month following a
change in control event that occurs before the service provider attains
age 55, but will receive 5 substantially equal annual payments
commencing on the first day of the month following a change in control
event that occurs on or after the service provider attains age 55. In
the case of a plan that provides that a payment upon an event described
in paragraph (a)(1) of this section (a payment upon a separation from
service), a different time and form of payment may be designated with
respect to a separation from service under each of the following
conditions, provided that the addition or deletion of such a different
time and form of payment applicable to an existing deferral is subject
to Sec. 1.409A-2(b) and paragraph (j) of this section:
(1) A separation from service during a limited period of time not to
exceed two years following a change in control event (as defined in
paragraph (i)(5) of this section).
(2) A separation from service before or after a specified date (for
example, the attainment of a specified age), or a separation from
service before or after a combination of a specified date, such as
attaining a specified age, and a specified period of service determined
under a predetermined, nondiscretionary, objective formula or pursuant
to the method for crediting service under a qualified plan sponsored by
the service recipient.
(3) A separation from service not described in paragraphs (c)(1) or
(c)(2) of this section.
(d) When a payment is treated as made upon the designated payment
date. Except as otherwise specified in this section, a payment is
treated as made upon the date specified under the plan (including a date
specified under paragraph (a)(4) of this section) if the payment is made
at such date or a later date within the same taxable year of the service
provider or, if later, by the 15th day of the third calendar month
following the date specified under the plan and the service provider is
not permitted, directly or indirectly, to designate the taxable year of
the payment. In addition, a payment is treated as made upon the date
specified under the plan (including a date specified under paragraph
(a)(4) of this section) and is not treated as an accelerated payment if
the payment is made no earlier than 30 days before the designated
payment date and the service provider is not permitted, directly or
indirectly to designate the taxable year of the payment. For purposes of
this paragraph, if the date specified is only a designated taxable year
of the service provider, or a period of time during such a taxable year,
the date specified under the plan is treated as the first day of such
taxable year or the first day of the period of time during such taxable
year, as applicable. The payment with respect to a stock right generally
occurs upon the exercise of the stock right, so that where a stock right
designates a fixed exercise date, the stock right will be deemed to have
been paid at such date if the exercise and payment occur on such date or
a later date within the same taxable year of the service provider or, if
later, by the 15th day of the third calendar month following the
exercise date specified under the plan. If calculation of the amount of
the payment is not administratively practicable due to events beyond the
control of the service provider (or service provider's beneficiary), the
payment will be treated as made upon the date specified under the
[[Page 676]]
plan if the payment is made during the first taxable year of the service
provider in which the calculation of the amount of the payment is
administratively practicable. For purposes of this paragraph, the
inability of a service recipient to calculate the amount or timing of a
payment due to a failure of a service provider (or service provider's
beneficiary) to provide reasonably available information necessary to
make such calculation does not constitute an event beyond the control of
the service provider. Similarly, if the making of the payment at the
date specified under the plan would jeopardize the ability of the
service recipient to continue as a going concern, the payment will be
treated as made upon the date specified under the plan if the payment is
made during the first taxable year of the service provider in which the
making of the payment would not have such effect.
(e) Designation of time and form of payment with respect to
earnings. A nonqualified deferred compensation plan that provides for
actual or notional earnings to be credited on amounts of deferred
compensation may specify, in accordance with the requirements of Sec.
1.409A-2(a) (initial deferral elections), that such earnings are treated
separately from the right to the other amounts deferred under the plan
for purposes of designating the time and form of payments under such
plan, provided that to satisfy the requirements of this paragraph (e),
actual or notional earnings must be credited at least annually. For
these purposes, a right to dividend equivalents may be treated
analogously to a right to actual or notional earnings on an amount of
deferred compensation. For purposes of this paragraph (e), the term
dividend equivalents means the right to an amount equal to all or a
specified portion of dividends declared and paid, if any, on a specified
number of shares of stock.
(f) Substitutions. Except as otherwise provided under these
regulations, the payment of an amount as a substitute for a payment of
deferred compensation will be treated as a payment of the deferred
compensation. A forfeiture or voluntary relinquishment of an amount of
deferred compensation will not be treated as a payment of the
compensation, but there is no forfeiture or voluntary relinquishment for
this purpose if an amount is paid, or a legally binding right to a
payment is created, that acts as a substitute for the forfeited or
voluntarily relinquished amount. Whether a payment or a right to a
payment acts as a substitute for a payment of deferred compensation is
determined based on all the facts and circumstances. However, where the
payment of an amount results in an actual or potential reduction of, or
current or future offset to, an amount of deferred compensation, or if
the service provider receives a loan the repayment of which is secured
by or may be accomplished through an offset of or a reduction in an
amount deferred under a nonqualified deferred compensation plan, the
payment or loan is a substitute for the deferred compensation. In
addition, where a service provider's right to deferred compensation is
made subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the
service provider or the service provider's beneficiary, the deferred
compensation is treated as having been paid. For the treatment of
certain offsets, see paragraph (j)(4)(xiii) of this section. Even where
there is no explicit reduction or offset, the payment of an amount or
creation of a new right to a payment proximate to the purported
forfeiture or voluntary relinquishment of a right to deferred
compensation is presumed to be a substitute for the deferred
compensation. The presumption is rebuttable by a showing that the
compensation paid would have been received regardless of the forfeiture
or voluntary relinquishment of the right to deferred compensation.
Factors indicating that a payment would have been received regardless of
such forfeiture or voluntarily relinquishment include that the amount
paid is materially less than the forfeited or relinquished amount, or
consists of a type of payment customarily made in the ordinary course of
business of the service recipient to service providers who do not
forfeit or relinquish deferred compensation (for example, a payment of
accrued but unused leave or a payment
[[Page 677]]
for a release of actual or potential claims). See Sec. 1.409A-
1(b)(9)(i) with respect to certain separation pay plans.
(g) Disputed payments and refusals to pay. If a service recipient
fails to make a payment in whole or in part as of the date specified
under a plan, either intentionally or unintentionally, other than with
the express or implied consent of the service provider, the payment will
be treated as made upon the date specified under the plan if the service
provider accepts the portion (if any) of the payment that the service
recipient is willing to make (unless such acceptance will result in a
relinquishment of the claim to all or part of the remaining amount),
makes prompt and reasonable, good faith efforts to collect the remaining
portion of the payment, and any further payment (including payment of a
lesser amount that satisfies the obligation to make the payment) is made
no later than the end of the first taxable year of the service provider
in which the service recipient and the service provider enter into a
legally binding settlement of such dispute, the service recipient
concedes that the amount is payable, or the service recipient is
required to make such payment pursuant to a final and nonappealable
judgment or other binding decision. For purposes of this paragraph (g),
efforts to collect the payment will be presumed not to be prompt,
reasonable, good faith efforts, unless the service provider provides
notice to the service recipient within 90 days of the latest date upon
which the payment could have been timely made in accordance with the
terms of the plan and these regulations, and unless, if not paid, the
service provider takes further enforcement measures within 180 days
after such latest date. For purposes of this paragraph (g), a service
recipient is not treated as having failed to make a payment where
pursuant to the terms of the plan the service provider is required to
request payment, or otherwise provide information or take any other
action, and the service provider has failed to take such action. In
addition, for purposes of this paragraph (g), the service provider is
deemed to have requested that a payment not be made, rather than the
service recipient having failed to make such payment, where the service
recipient's decision to refuse to make the payment is made by the
service provider or a member of the service provider's family (as
defined in section 267(c)(4) applied as if the family of an individual
includes the spouse of any member of the family), or any person or group
of persons over whom the service provider or service provider's family
member has effective control, or any person any portion of whose
compensation is controlled the service provider or service provider's
family member.
(h) Special rule for certain resident aliens. An agreement, method,
program, or other arrangement that is, or constitutes part of, a
nonqualified deferred compensation plan is deemed to meet the
requirements of this section with respect to any amount payable in the
first taxable year of the service provider in which a service provider
is a resident alien, and with respect to any amount payable in a
subsequent taxable year if no later than the last day of the first
taxable year of the service provider in which the service provider is a
resident alien, the plan is amended as necessary so that the times and
forms of payment of amounts payable in a subsequent year comply with the
provisions of this section. For any year after the first taxable year of
an individual in which the individual is a resident alien, this
paragraph (h) does not apply, provided that a taxable year may again be
treated as the first taxable year in which an individual is a resident
alien if such individual has not been a resident alien for at least
three consecutive taxable years immediately preceding the taxable year
in which the service provider is again a resident alien.
(i) Definitions and special rules--(1) Specified time or fixed
schedule--(i) In general. Amounts are payable at a specified time or
pursuant to a fixed schedule if objectively determinable amounts are
payable at a date or dates that are nondiscretionary and objectively
determinable at the time the amount is deferred. An amount is
objectively determinable for this purpose if the amount is specifically
identified or if the amount may be determined at the time payment is due
pursuant to
[[Page 678]]
an objective, nondiscretionary formula specified at the time the amount
is deferred (for example, 50 percent of a specified account balance).
Except as otherwise provided in paragraph (i)(1) of this section, an
amount is not objectively determinable if the amount of the payment is
based all or in part upon the occurrence of an event, including the
consummation of a transaction by, or a payment of an amount to, a
service recipient. If an amount is payable in a service provider's
taxable year (or pursuant to a fixed schedule of taxable years of the
service provider) that is designated at the time the amount is deferred
and that is objectively determinable, the amount is treated as payable
at a specified time (or pursuant to a fixed schedule), provided that for
purposes of the application of the subsequent deferral rules contained
in Sec. 1.409A-2(b), the specified time or fixed schedule of payments
is deemed to refer to the first day of the relevant taxable year or
years. A specified time or fixed schedule also includes the designation
at the time the amount is deferred of a defined period or periods within
the service provider's taxable year or taxable years that are
objectively determinable, provided that no such defined period may begin
within one taxable year and end within another taxable year, and
provided further that for purposes of the application of the subsequent
deferral rules contained in Sec. 1.409A-2(b), the specified time or
fixed schedule of payments is deemed to refer to the first day of the
relevant period in which the payment will be made. A plan may provide
that a payment upon the lapse of a substantial risk of forfeiture is to
be made in accordance with a fixed schedule that is objectively
determinable based on the date the substantial risk of forfeiture lapses
(disregarding any discretionary acceleration of the lapse of the
substantial risk of forfeiture), provided that the schedule must be
fixed on the date the time and form of payment are designated, and any
change in the fixed schedule will constitute a change in the time and
form of payment. For example, a plan that provides for a bonus payment
subject to the condition that the service provider complete three years
of service, and subject to the further condition that such requirement
of continued services will lapse upon the occurrence of an initial
public offering, which condition if applied alone would constitute a
substantial risk of forfeiture, may provide that a service provider is
entitled to substantially equal payments on each of the first three
anniversaries of the date the substantial risk of forfeiture lapses (the
earlier of three years of service or the date of an initial public
offering).
(ii) Payment schedules with formula and fixed limitations--(A)
Individual limitations. A schedule of payments does not fail to be a
fixed schedule of payments where the amount of a payment or payments
that may be paid at a specified time or during a specified period is
limited by an objective nondiscretionary formula or a specified amount
that is not under the effective control of the service provider and is
not subject to the exercise of discretion by the service recipient,
where such limitation is established on or before the date the time and
form of payment is otherwise required to be set under these regulations,
and the plan specifies the time and form of any payment that will be
made or completed after its original payment date due to the application
of the limitation. A change in the limitation or a change in the time
and form of any payment that exceeds the limitation is subject to the
requirements of Sec. 1.409A-2(b) (subsequent deferral elections) and
paragraph (j) of this section (accelerated payments). For purposes of
this paragraph, a plan provision that reduces a schedule of periodic
payments on a dollar-for-dollar basis by the amount of Social Security
payments received or receivable may be treated as a nondiscretionary,
objective formula limitation, if such reduction does not otherwise
affect the time of payment of the deferred compensation (other than a
forfeiture due to the reduction), including changes based on the service
provider's eligibility or elections related to Social Security benefits.
Similarly, a plan provision that reduces a schedule of periodic payments
on a dollar-for-dollar basis by the amount of bona fide disability pay
(within the meaning
[[Page 679]]
of Sec. 1.409A-1(a)(5)) received or receivable may be treated as a
nondiscretionary, objective formula limitation, if the disability
payments are made pursuant to a plan sponsored by the service recipient
that covers a substantial number of service providers and was
established before the service provider became disabled, and if such
reduction does not otherwise affect the time of payment of the deferred
compensation (other than a forfeiture due to the reduction). Whether an
amendment to, or other change in the benefit payable under, such bona
fide disability plan results in an acceleration of a payment for
purposes of paragraph (j) of this section or a subsequent election to
delay the time or change the form of payment for purposes of Sec.
1.409A-2(b) is determined based on all of the relevant facts and
circumstances.
(B) Limitations on aggregate payments to all participants in
substantially identical plans. A schedule of payments does not fail to
be a fixed schedule of payments where the amount of the aggregate
payments that will be made during a specified period of time to all
participants in substantially identical plans is limited by an objective
nondiscretionary formula or specified amount that is not under the
effective control of the service provider and is not subject to the
exercise of discretion by the service recipient, where the limit is
established on or before the date the time and form of payment of the
amount deferred is otherwise required to be set under these regulations,
the method of allocating payments among the participants where there is
an overall limitation on the aggregate amount that may be paid to a
group of service providers during a specified period is an objective
nondiscretionary allocation method that is not under the effective
control of the service provider and is not subject to the exercise of
discretion by the service recipient, the method is established on or
before the date the time and form of payment of the amount deferred is
otherwise required to be set, and the plan specifies the time and form
of any payment of any amount that will be paid after its original
payment date due to the application of the limitation. A change in the
limitation or a change in the time and form of payment of any payment
that is not otherwise made at the scheduled payment date due to
application of the formula limitation is subject to the requirements of
Sec. 1.409A-2(b) (subsequent deferral elections) and paragraph (j) of
this section (accelerated payments).
(iii) Payment schedules determined by timing of payments received by
the service recipient. A payment schedule determined by reference to the
timing of payments received by the service recipient (not including
payments from one entity to another entity where both entities are
treated as part of a single service recipient), meets the requirements
of a specified date or fixed schedule of payments if the following
conditions are met:
(A) The payments due to the service recipient arise from bona fide
and routine transactions in the ordinary course of business of the
service recipient.
(B) The service provider does not have effective control of the
service recipient, the person from whom such amounts are due, or the
collection of any of the amounts due to the service recipient.
(C) The payment schedule provides an objective, nondiscretionary
method of identification of the payments to the service recipient from
which the amount of the payment from the service recipient to the
service provider is determined.
(D) The payment schedule provides an objective, nondiscretionary
schedule under which the payments will be made to the service provider.
(E) The payments to the service recipient from which the amount of
the payments from service recipient to the service provider are
determined result from sales of a type that the service recipient is in
the trade or business of making and makes frequently, and either all
such sales by the service recipient are taken into account for purposes
of determining the payment to the service provider, or there is a
legitimate, non-tax business reason for identifying the specific sales
taken into account.
[[Page 680]]
(iv) Reimbursement or in-kind benefit plans--(A) General rule. A
plan that provides for reimbursements of expenses incurred by a service
provider, or in-kind benefits, meets the requirements of a specified
date or fixed schedule of payments with respect to such reimbursements
or benefits if the following conditions are met:
(1) The plan provides an objectively determinable nondiscretionary
definition of the expenses eligible for reimbursement or of the in-kind
benefits to be provided.
(2) The plan provides for the reimbursement of expenses incurred or
for the provision of the in-kind benefits during an objectively and
specifically prescribed period (including the lifetime of the service
provider).
(3) The plan provides that the amount of expenses eligible for
reimbursement, or in-kind benefits provided, during a service provider's
taxable year may not affect the expenses eligible for reimbursement, or
in-kind benefits to be provided, in any other taxable year.
(4) The reimbursement of an eligible expense is made on or before
the last day of the service provider's taxable year following the
taxable year in which the expense was incurred.
(5) The right to reimbursement or in-kind benefits is not subject to
liquidation or exchange for another benefit.
(B) Medical reimbursement arrangements. Notwithstanding the
foregoing, an arrangement providing for the reimbursement of expenses
referred to in section 105(b) will not be deemed to fail to meet the
requirements of paragraph (i)(1)(iv)(A)(3) of this section solely
because the arrangement provides for a limit on the amount of expenses
that may be reimbursed under such arrangement over some or all of the
period in which the reimbursement arrangement remains in effect.
(v) Tax gross-up payments. A plan providing a right to a tax gross-
up payment will be treated as providing for payment at a specified time
or on a fixed schedule of payments if the plan provides that payment
will be made, and the payment is made, by the end of the service
provider's taxable year next following the service provider's taxable
year in which the service provider remits the related taxes. For
purposes of this paragraph (i)(1)(v), the term tax gross-up payment
refers to a payment to reimburse the service provider in an amount equal
to all or a designated portion of the Federal, state, local, or foreign
taxes imposed upon the service provider as a result of compensation paid
or made available to the service provider by the service recipient,
including the amount of additional taxes imposed upon the service
provider due to the service recipient's payment of the initial taxes on
such compensation. In addition, a right to the reimbursement of expenses
incurred due to a tax audit or litigation addressing the existence or
amount of a tax liability, whether Federal, state, local, or foreign,
satisfies the requirement of a fixed time and form of payment if the
right to the reimbursement provides that payment will be made, and the
payment is made, by the end of the service provider's taxable year
following the service provider's taxable year in which the taxes that
are the subject of the audit or litigation are remitted to the taxing
authority, or where as a result of such audit or litigation no taxes are
remitted, the end of the service provider's taxable year following the
service provider's taxable year in which the audit is completed or there
is a final and nonappealable settlement or other resolution of the
litigation. Nothing in this paragraph (i)(1)(v) otherwise alters the
application of section 409A to the underlying compensation arrangement
or other arrangement that results in the taxes subject to the right to
the tax gross-up payment.
(vi) Examples. The following examples (in which each employee is an
individual whose taxable year is the calendar year) illustrate the
principles of paragraphs (a), (b), (c), (d), and (i)(1) of this section:
Example 1. Employee A provides services as an employee of Employer
Z, but is not a specified employee. Employee A participates in a
nonqualified deferred compensation plan providing for a lump sum payment
payable on or before December 31 of the calendar year in which Employee
A separates from service. The plan provides for a payment upon a
separation from service in compliance with this section.
[[Page 681]]
Example 2. Employee B provides services as an employee of Employer
Y, but is not a specified employee. Employee B participates in a
nonqualified deferred compensation plan providing for a lump sum payment
payable on or before the 90th day immediately following the date upon
which Employee B separates from service. Employer Y retains the sole
discretion to determine when during the 90-day period the payment will
be made. Although the plan does not specify a period during one calendar
year in which the payment will be made, the plan provides for a payment
upon a separation from service in compliance with this section because
the period over which the payment may be made is not longer than 90
days.
Example 3. Employee C provides services as an employee of Employer
X, but is not a specified employee. Employee C participates in a
nonqualified deferred compensation plan providing for a lump sum payment
payable on or before the 180th day following the date upon which
Employee C separates from service. Employer X retains the sole
discretion to determine when during the 180-day period the payment will
be made. Because the plan does not specify a period during one calendar
year in which the payment will be made, and because the period over
which the payment may be made is longer than 90 days, the plan does not
provide for a payment upon a separation from service that complies with
this section.
Example 4. Employee D provides services as an employee of Employer
W, but is not a specified employee. Employee D participates in a
nonqualified deferred compensation plan providing for 10 installment
payments payable on the first 10 anniversaries of the date Employee D
separates from service, provided that no installment payment in any year
may be more than 1% of Employer W's net income for the previous calendar
year, and provided further that the excess over such limit that would
otherwise be payable but is not paid due to application of the limit
will become payable as of the first installment payment date at which
time such amount, in combination with any installment payment otherwise
due Employee D, does not exceed 1% of Employer W's net income for the
previous calendar year. Provided that Employee D does not retain
effective control of the calculation of Employer W's net income or the
amount that Employee D will not be paid due to application of the limit,
the plan provides for a schedule of payments upon a separation from
service that complies with this section.
Example 5. Employee E and Employee F provide services as employees
of Employer V, but neither is a specified employee. Employee E and
Employee F both participate in substantially identical nonqualified
deferred compensation plans providing for 10 installment payments
payable on the first 10 anniversaries of the date the respective
employee separates from service, provided that the total amount of
installment payments in any year may not be more than 1% of Employer V's
net income for the previous year, that where any payments are not made
due to application of the limit the determination of the amount not paid
to a particular employee will be made by applying the overall limit
proportionately based upon the installment payment due the employee that
year, and that the excess over such limit that would otherwise be
payable but is not paid due to application of the limit will become
payable as of the first installment payment date at which time such
amount, in combination with any installment payments otherwise due the
participants, does not exceed 1% of Employer V's net income for the
previous calendar year. Provided that neither Employee E nor Employee F
retains effective control of the calculation of Employer V's net income
or the amount that the respective employee will not be paid due to
application of the limit, the plan provides for a schedule of payments
upon a separation from service that complies with this section.
Example 6. Employee G provides services as an employee of Employer
U, but is not a specified employee. As a bona fide part of this
employment relationship, Employee G provides professional services to
clients of Employer U as part of the bona fide, ordinary course of
Employer U's trade or business. Under an arrangement between Employee G
and Employer U, Employer U agrees to pay Employee G upon Employee G's
separation from service an amount equal to 5% of any amount collected
from Company T, a client of Employer U for which Employee G performed
services during his employment with Employer U, during the 36 months
following Employee G's separation from service. Under the arrangement,
the amounts due to Employee G based upon payments received by Employer U
during any calendar year are payable to Employee G on April 1 of the
subsequent calendar year. Provided that Employee G does not have
effective control of Employer U, Company T, or the collection of any
amounts due Employer Y from Company T, the arrangement provides for a
schedule of payments upon a separation from service that complies with
this section.
Example 7. Employee H provides services as an employee of Employer
S, but is not a specified employee. Under a plan sponsored by Employer
S, Employee H has a legally binding right upon a separation from service
to the reimbursement of country club dues paid in the calendar year of
the separation from service and each of the next 3 calendar years
following the separation from service in an amount not to exceed $30,000
in any calendar year, provided that the amount of
[[Page 682]]
dues paid in any calendar year that are eligible for reimbursement
equals only the amount actually expended during such calendar year, and
the maximum amount available for reimbursement in any calendar year will
not be increased or decreased to reflect the amount expended or
reimbursed in a prior or subsequent calendar year. The plan further
provides that any reimbursement must be paid to Employee H by December
31 of the calendar year following the year in which Employee H pays the
country club dues. The reimbursement plan provides for a schedule of
payments upon a separation from service that complies with this section.
Example 8. Employee J provides services as an employee of Employer
Q, but is not a specified employee. Under a plan sponsored by Employer
Q, Employee J has a legally binding right upon a separation from service
to the reimbursement of country club dues paid during the calendar year
in which the separation from service occurs and the next 3 calendar
years in a total amount not to exceed $90,000. The plan further provides
that any reimbursement must be paid to Employee J by December 31 of the
calendar year following the year in which Employee J pays the country
club dues. Because the reimbursement of a payment of country club dues
in one calendar year may affect the amount of country club dues
available for reimbursement in another calendar year, the plan does not
provide for a schedule of payments upon a separation from service that
complies with this section.
(2) Separation from service--required delay in payment to a
specified employee pursuant to a separation from service--(i) In
general. In the case of any service provider who is a specified employee
(as defined in Sec. 1.409A-1(i)) as of the date of a separation from
service, the requirements of paragraph (a)(1) of this section permitting
a payment upon a separation from service are satisfied only if payments
may not be made before the date that is six months after the date of
separation from service (or, if earlier than the end of the six-month
period, the date of death of the specified employee). For this purpose,
a service provider who is not a specified employee as of the date of a
separation from service will not be treated as subject to this
requirement even if the service provider would have become a specified
employee if the service provider had continued to provide services
through the next specified employee effective date. Similarly, a service
provider who is treated as a specified employee as of the date of a
separation from service will be subject to this requirement even if the
service provider would not have been treated as a specified employee
after the next specified employee effective date had the specified
employee continued providing services through the next specified
employee effective date. Notwithstanding the foregoing, this paragraph
(i)(2)(i) does not apply to a payment made under the circumstances
described in paragraph (j)(4)(ii) (domestic relations order),
(j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of
employment taxes) of this section.
(ii) Application of payment rules to delayed payments. The required
delay in payment is met if payments to which a specified employee would
otherwise be entitled during the first six months following the date of
separation from service are accumulated and paid on the first day of the
seventh month following the date of separation from service, or if each
payment to which a specified employee is otherwise entitled upon a
separation from service is delayed by six months. A service recipient
may retain discretion to choose which method will be implemented,
provided that no direct or indirect election as to the method may be
provided to the service provider. For an affected specified employee, a
date upon which the plan or the service recipient designates that the
payment will be made after the six-month delay is treated as a fixed
payment date for purposes of paragraph (d) of this section once the
separation from service has occurred.
(3) Unforeseeable emergency--(i) Definition. For purposes of
Sec. Sec. 1.409A-1 and 1.409A-2, this section, and Sec. Sec. 1.409A-4
through 1.409A-6, an unforeseeable emergency is a severe financial
hardship to the service provider resulting from an illness or accident
of the service provider, the service provider's spouse, the service
provider's beneficiary, or the service provider's dependent (as defined
in section 152, without regard to section 152(b)(1), (b)(2), and
(d)(1)(B)); loss of the service provider's property due to casualty
(including the need to rebuild a home following damage to a home not
otherwise covered by insurance, for example, not as a result of a
[[Page 683]]
natural disaster); or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
service provider. For example, the imminent foreclosure of or eviction
from the service provider's primary residence may constitute an
unforeseeable emergency. In addition, the need to pay for medical
expenses, including non-refundable deductibles, as well as for the costs
of prescription drug medication, may constitute an unforeseeable
emergency. Finally, the need to pay for the funeral expenses of a
spouse, a beneficiary, or a dependent (as defined in section 152,
without regard to section 152(b)(1), (b)(2), and (d)(1)(B)) may also
constitute an unforeseeable emergency. Except as otherwise provided in
this paragraph (i)(3)(i), the purchase of a home and the payment of
college tuition are not unforeseeable emergencies. Whether a service
provider is faced with an unforeseeable emergency permitting a
distribution under this paragraph (i)(3)(i) is to be determined based on
the relevant facts and circumstances of each case, but, in any case, a
distribution on account of unforeseeable emergency may not be made to
the extent that such emergency is or may be relieved through
reimbursement or compensation from insurance or otherwise, by
liquidation of the service provider's assets, to the extent the
liquidation of such assets would not cause severe financial hardship, or
by cessation of deferrals under the plan. A plan may provide for a
payment upon a specific type or types of unforeseeable emergency,
without providing for payment upon all unforeseeable emergencies,
provided that any event upon which a payment may be made qualifies as an
unforeseeable emergency.
(ii) Amount of payment permitted upon an unforeseeable emergency.
Distributions because of an unforeseeable emergency must be limited to
the amount reasonably necessary to satisfy the emergency need (which may
include amounts necessary to pay any Federal, state, local, or foreign
income taxes or penalties reasonably anticipated to result from the
distribution). Determinations of amounts reasonably necessary to satisfy
the emergency need must take into account any additional compensation
that is available if the plan provides for cancellation of a deferral
election upon a payment due to an unforeseeable emergency. See paragraph
(j)(4)(viii) of this section. However, the determination of amounts
reasonably necessary to satisfy the emergency need is not required to
take into account any additional compensation that is available from a
qualified employer plan as defined in Sec. 1.409A-1(a)(2) (including
any amount available by obtaining a loan under the plan), or that due to
the unforeseeable emergency is available under another nonqualified
deferred compensation plan (including a plan that would provide for
deferred compensation except due to the application of the effective
date provisions under Sec. 1.409A-6). The payment may be made from any
plan in which the service provider participates that provides for
payment upon an unforeseeable emergency, provided that the plan under
which the payment was made must be designated at the time of payment.
(iii) Payments due to an unforeseeable emergency. A service provider
may retain discretion with respect to whether to apply for a payment
upon an unforeseeable emergency, and a service recipient may retain
discretion with respect to whether to make a payment available under the
plan due to an unforeseeable emergency. A service provider who has
experienced an unforeseeable emergency will not be treated as making a
subsequent deferral election under Sec. 1.409A-2(b) (subsequent
deferral election rules) if the service provider does not apply for or
elect to receive a payment available under the plan. A service recipient
will not be treated as making a subsequent deferral election under Sec.
1.409A-2(b) (subsequent deferral election rules) if the service
recipient exercises its discretion not to make a payment otherwise
available due to an unforeseeable emergency.
(4) Disability--(i) In general. For purposes of Sec. Sec. 1.409A-1
and 1.409A-2, this section, and Sec. Sec. 1.409A-4 through 1.409A-6,
except as otherwise specifically provided, a service provider is
considered disabled if the service provider meets one of the following
requirements:
[[Page 684]]
(A) The service provider is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months.
(B) The service provider is, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or
can be expected to last for a continuous period of not less than 12
months, receiving income replacement benefits for a period of not less
than three months under an accident and health plan covering employees
of the service provider's employer.
(ii) Limited plan definition of disability. A plan may provide for a
payment upon any disability, and need not provide for a payment upon all
disabilities, provided that any disability upon which a payment may be
made under the plan complies with the provisions of this paragraph
(i)(4).
(iii) Determination of disability. A plan may provide that a service
provider will be deemed disabled if determined to be totally disabled by
the Social Security Administration or Railroad Retirement Board. A plan
may also provide that a service provider will be deemed disabled if
determined to be disabled in accordance with a disability insurance
program, provided that the definition of disability applied under such
disability insurance program complies with the requirements of this
paragraph (i)(4).
(5) Change in the ownership or effective control of a corporation,
or a change in the ownership of a substantial portion of the assets of a
corporation--(i) In general. Pursuant to section 409A(a)(2)(A)(v), a
plan may permit a payment upon the occurrence of a change in the
ownership of the corporation (as defined in paragraph (i)(5)(v) of this
section), a change in effective control of the corporation (as defined
in paragraph (i)(5)(vi) of this section), or a change in the ownership
of a substantial portion of the assets of the corporation (as defined in
paragraph (i)(5)(vii) of this section) (collectively referred to as a
change in control event). To qualify as a change in control event, the
occurrence of the event must be objectively determinable and any
requirement that any other person or group, such as a plan administrator
or compensation committee, certify the occurrence of a change in control
event must be strictly ministerial and not involve any discretionary
authority. The plan may provide for a payment on a particular type or
types of change in control events, and need not provide for a payment on
all such events, provided that each event upon which a payment is
provided qualifies as a change in control event. For rules regarding the
ability of the service recipient to terminate the plan and pay amounts
of deferred compensation upon a change in control event, see paragraph
(j)(4)(ix)(B) of this section.
(ii) Identification of relevant corporation--(A) In general. To
constitute a change in control event with respect to the service
provider, the change in control event must relate to--
(1) The corporation for whom the service provider is performing
services at the time of the change in control event;
(2) The corporation that is liable for the payment of the deferred
compensation (or all corporations liable for the payment if more than
one corporation is liable) but only if either the deferred compensation
is attributable to the performance of service by the service provider
for such corporation (or corporations) or there is a bona fide business
purpose for such corporation or corporations to be liable for such
payment and, in either case, no significant purpose of making such
corporation or corporations liable for such payment is the avoidance of
Federal income tax; or
(3) A corporation that is a majority shareholder of a corporation
identified in paragraph (i)(5)(ii)(A)(1) or (2) of this section, or any
corporation in a chain of corporations in which each corporation is a
majority shareholder of another corporation in the chain, ending in a
corporation identified in paragraph (i)(5)(ii)(A)(1) or (2) of this
section.
(B) Majority shareholder. For purposes of this paragraph (i)(5)(ii),
a majority shareholder is a shareholder owning more than 50 percent of
the total fair
[[Page 685]]
market value and total voting power of such corporation.
(C) Example. The following example illustrates the rules of this
paragraph (i)(5)(ii):
Example. Corporation A is a majority shareholder of Corporation B,
which is a majority shareholder of Corporation C. A change in ownership
of Corporation B constitutes a change in control event to service
providers performing services for Corporation B or Corporation C, and to
service providers for which Corporation B or Corporation C is solely
liable for payments under the plan (for example, former employees), but
is not a change in control event as to Corporation A or any other
corporation of which Corporation A is a majority shareholder unless the
sale constitutes a change in the ownership of a substantial portion of
Corporation A's assets (see paragraph (i)(5)(vii) of this section).
(iii) Attribution of stock ownership. For purposes of paragraph
(i)(5) of this section, section 318(a) applies to determine stock
ownership. Stock underlying a vested option is considered owned by the
individual who holds the vested option (and the stock underlying an
unvested option is not considered owned by the individual who holds the
unvested option). For purposes of the preceding sentence, however, if a
vested option is exercisable for stock that is not substantially vested
(as defined by Sec. 1.83-3(b) and (j)), the stock underlying the option
is not treated as owned by the individual who holds the option.
(iv) Special rules for certain delayed payments pursuant to a change
in control event--(A) Certain transaction-based compensation. Payments
of compensation related to a change in control event described in
paragraph (i)(5)(v) of this section (change in the ownership of a
corporation) or paragraph (i)(5)(vii) of this section (change in the
ownership of a substantial portion of a corporation's assets), that
occur because a service recipient purchases its stock held by the
service provider or because the service recipient or a third party
purchases a stock right held by a service provider, or that are
calculated by reference to the value of stock of the service recipient
(collectively, transaction-based compensation), may be treated as paid
at a designated date or pursuant to a payment schedule that complies
with the requirements of section 409A if the transaction-based
compensation is paid on the same schedule and under the same terms and
conditions as apply to payments to shareholders generally with respect
to stock of the service recipient pursuant to a change in control event
described in paragraph (i)(5)(v) of this section (change in the
ownership of a corporation) or as apply to payments to the service
recipient pursuant to a change in control event described in paragraph
(i)(5)(vii) of this section (change in the ownership of a substantial
portion of a corporation's assets), and to the extent that the
transaction-based compensation is paid not later than five years after
the change in control event, the payment of such compensation will not
violate the initial or subsequent deferral election rules set out in
Sec. 1.409A-2(a) and (b) solely as a result of such transaction-based
compensation being paid pursuant to such schedule and terms and
conditions. If before and in connection with a change in control event
described in paragraph (i)(5)(v) or (i)(5)(vii) of this section,
transaction-based compensation that would otherwise be payable as a
result of such event is made subject to a condition on payment that
constitutes a substantial risk of forfeiture (as defined in Sec.
1.409A-1(d), without regard to the provisions of that section under
which additions or extensions of forfeiture conditions are disregarded)
and the transaction-based compensation is payable under the same terms
and conditions as apply to payments made to shareholders generally with
respect to stock of the service recipient pursuant to a change in
control event described in paragraph (i)(5)(v) of this section or to
payments to the service recipient pursuant to a change in control event
described in paragraph (i)(5)(vii) of this section, for purposes of
determining whether such transaction-based compensation is a short-term
deferral the requirements of Sec. 1.409A-1(b)(4) are applied as if the
legally binding right to such transaction-based compensation arose on
the date that it became subject to such substantial risk of forfeiture.
(B) Certain nonvested compensation. Notwithstanding the provisions
of Sec. 1.409A-1(d) (definition of a substantial
[[Page 686]]
risk of forfeiture) that disregard the extension or modification of a
condition for purposes of determining whether a condition on payment
constitutes a substantial risk of forfeiture, a condition that is a
substantial risk of forfeiture that otherwise would lapse as a result of
a change in control event described in paragraph (i)(5)(v) or
(i)(5)(vii) of this section may be extended or modified before and in
connection with such event to provide for a condition on payment that
will not lapse as a result of such change in control event, and such
extended or modified condition will be treated as continuing to subject
the amount to a substantial risk of forfeiture, provided that the
transaction constituting the change in control event is a bona fide
arm's length transaction between the service recipient or its
shareholders and one or more parties who are unrelated to the service
recipient and service provider (applying the rules of Sec. 1.409A-
1(f)(2)(ii)) and the modified or extended condition to which the payment
is subject would otherwise be treated as a substantial risk of
forfeiture under Sec. 1.409A-1(d) (without regard to the provisions
disregarding additions or extensions of forfeiture conditions). In such
a case, the continued application of a fixed schedule of payments based
upon the lapse of the substantial risk of forfeiture, so that payments
commence upon the lapse of the modified or extended condition on
payment, will not be treated as a change in the fixed schedule of
payments for purposes of Sec. 1.409A-2(b) (subsequent deferral
elections) or paragraph (j) of this section (prohibition on the
acceleration of payments).
(v) Change in the ownership of a corporation--(A) In general. Except
as provided in paragraph (i)(5)(vi)(C) of this section, a change in the
ownership of a corporation occurs on the date that any one person, or
more than one person acting as a group (as defined in paragraph
(i)(5)(v)(B) of this section), acquires ownership of stock of the
corporation that, together with stock held by such person or group,
constitutes more than 50 percent of the total fair market value or total
voting power of the stock of such corporation. A nonqualified deferred
compensation plan may provide that amounts payable upon a change in the
ownership of a corporation will be paid only if the conditions in the
preceding sentence are satisfied but substituting a percentage specified
in the plan that is higher than 50 percent for the words ``50 percent''
in the preceding sentence, but only if the provision is set forth in the
plan no later than the date by which the time and form of payment must
be established under Sec. 1.409A-2. However, if any one person, or more
than one person acting as a group, is considered to own more than 50
percent of the total fair market value or total voting power of the
stock of a corporation (or such higher percentage specified in
accordance with the preceding sentence), the acquisition of additional
stock by the same person or persons is not considered to cause a change
in the ownership of the corporation (or to cause a change in the
effective control of the corporation (within the meaning of paragraph
(i)(5)(vi) of this section)). An increase in the percentage of stock
owned by any one person, or persons acting as a group, as a result of a
transaction in which the corporation acquires its stock in exchange for
property will be treated as an acquisition of stock for purposes of this
section. This section applies only when there is a transfer of stock of
a corporation (or issuance of stock of a corporation) and stock in such
corporation remains outstanding after the transaction (see paragraph
(i)(5)(vii) of this section for rules regarding the transfer of assets
of a corporation). See Sec. 1.280G-1, Q&A-27(d), Example 1, Example 2,
Example 5, and Example 6.
(B) Persons acting as a group. For purposes of paragraph
(i)(5)(v)(A) of this section, persons will not be considered to be
acting as a group solely because they purchase or own stock of the same
corporation at the same time, or as a result of the same public
offering. However, persons will be considered to be acting as a group if
they are owners of a corporation that enters into a merger,
consolidation, purchase or acquisition of stock, or similar business
transaction with the corporation. If a person, including an entity, owns
stock in both corporations that enter into a
[[Page 687]]
merger, consolidation, purchase or acquisition of stock, or similar
transaction, such shareholder is considered to be acting as a group with
other shareholders only with respect to the ownership in that
corporation before the transaction giving rise to the change and not
with respect to the ownership interest in the other corporation. See
Sec. 1.280G-1, Q&A-27(d), Example 3 and Example 4.
(vi) Change in the effective control of a corporation--(A) In
general. Notwithstanding that a corporation has not undergone a change
in ownership under paragraph (i)(5)(v) of this section, a change in the
effective control of the corporation occurs only on either of the
following dates:
(1) The date any one person, or more than one person acting as a
group (as determined under paragraph (i)(5)(v)(B) of this section),
acquires (or has acquired during the 12-month period ending on the date
of the most recent acquisition by such person or persons) ownership of
stock of the corporation possessing 30 percent or more of the total
voting power of the stock of such corporation. A nonqualified deferred
compensation plan may provide that amounts payable upon an effective
change in control of a corporation will be paid only if the conditions
in the preceding sentence are satisfied but substituting a percentage
specified in the plan that is higher than 30 percent for the word ``30
percent'' in the preceding sentence, but only if the percentage is set
forth in the plan no later than the date by which the time and form of
payment must be established under Sec. 1.409A-2).
(2) The date a majority of members of the corporation's board of
directors is replaced during any 12-month period by directors whose
appointment or election is not endorsed by a majority of the members of
the corporation's board of directors before the date of the appointment
or election, provided that for purposes of this paragraph (i)(5)(vi)(A)
the term corporation refers solely to the relevant corporation
identified in paragraph (i)(5)(ii) of this section for which no other
corporation is a majority shareholder for purposes of that paragraph.
For example, if Corporation A is a publicly held corporation with no
majority shareholder, and Corporation A is the majority shareholder of
Corporation B, which is the majority shareholder of Corporation C, the
term corporation for purposes of this paragraph (i)(5)(vi)(A)(2) would
refer solely to Corporation A. A nonqualified deferred compensation plan
may provide that amounts payable upon a change in the effective control
of a corporation will be paid only if the conditions in the first
sentence of this paragraph are satisfied substituting a portion of the
members of the corporation's board of directors that is higher than the
words ``a majority of the members of the corporation's board of
directors'' in the first sentence of this paragraph, but only if the
higher portion is set forth in the plan no later than the date by which
the time and form of payment must be established under Sec. 1.409A-
2(a)).
(B) Multiple change in control events. A change in effective control
may occur in a transaction in which one of the two corporations involved
in the transaction has a change in control event under paragraph
(i)(5)(v) or (i)(5)(vii) of this section. Thus, for example, assume
Corporation P transfers more than 40 percent of the total gross fair
market value of its assets to Corporation O in exchange for 35 percent
of O's stock. P has undergone a change in ownership of a substantial
portion of its assets under paragraph (i)(5)(vii) of this section and O
has a change in effective control under this paragraph (i)(5)(vi).
(C) Acquisition of additional control. If any one person, or more
than one person acting as a group, is considered to effectively control
a corporation (within the meaning of this paragraph (i)(5)(vi)), the
acquisition of additional control of the corporation by the same person
or persons is not considered to cause a change in the effective control
of the corporation (or to cause a change in the ownership of the
corporation within the meaning of paragraph (i)(5)(v) of this section).
(D) Persons acting as a group. Persons will not be considered to be
acting as a group solely because they purchase or own stock of the same
corporation at the same time, or as a result of the same public
offering. However, persons will be considered to be acting as a
[[Page 688]]
group if they are owners of a corporation that enters into a merger,
consolidation, purchase or acquisition of stock, or similar business
transaction with the corporation. If a person, including an entity, owns
stock in both corporations that enter into a merger, consolidation,
purchase or acquisition of stock, or similar transaction, such
shareholder is considered to be acting as a group with other
shareholders in a corporation only with respect to the ownership in that
corporation before the transaction giving rise to the change and not
with respect to the ownership interest in the other corporation. See
Sec. 1.280G-1, Q&A-27(d), Example 4.
(vii) Change in the ownership of a substantial portion of a
corporation's assets--(A) In general. A change in the ownership of a
substantial portion of a corporation's assets occurs on the date that
any one person, or more than one person acting as a group (as determined
in paragraph (i)(5)(v)(B) of this section), acquires (or has acquired
during the 12-month period ending on the date of the most recent
acquisition by such person or persons) assets from the corporation that
have a total gross fair market value equal to or more than 40 percent of
the total gross fair market value of all of the assets of the
corporation immediately before such acquisition or acquisitions (or such
higher amount specified by the plan no later than the date by which the
time and form of payment must be established under Sec. 1.409A-2). For
this purpose, gross fair market value means the value of the assets of
the corporation, or the value of the assets being disposed of,
determined without regard to any liabilities associated with such
assets.
(B) Transfers to a related person--(1) There is no change in control
event under this paragraph (i)(5)(vii) when there is a transfer to an
entity that is controlled by the shareholders of the transferring
corporation immediately after the transfer, as provided in this
paragraph (i)(5)(vii)(B). A transfer of assets by a corporation is not
treated as a change in the ownership of such assets if the assets are
transferred to--
(i) A shareholder of the corporation (immediately before the asset
transfer) in exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of the total value or voting
power of which is owned, directly or indirectly, by the corporation;
(iii) A person, or more than one person acting as a group, that
owns, directly or indirectly, 50 percent or more of the total value or
voting power of all the outstanding stock of the corporation; or
(iv) An entity, at least 50 percent of the total value or voting
power of which is owned, directly or indirectly, by a person described
in paragraph (i)(5)(vii)(B)(1)(iii) of this section.
(2) For purposes of this paragraph (i)(5)(vii)(B) and except as
otherwise provided in this paragraph (i), a person's status is
determined immediately after the transfer of the assets. For example, a
transfer to a corporation in which the transferor corporation has no
ownership interest before the transaction, but that is a majority-owned
subsidiary of the transferor corporation after the transaction is not
treated as a change in the ownership of the assets of the transferor
corporation.
(C) Persons acting as a group. Persons will not be considered to be
acting as a group solely because they purchase assets of the same
corporation at the same time. However, persons will be considered to be
acting as a group if they are owners of a corporation that enters into a
merger, consolidation, purchase or acquisition of assets, or similar
business transaction with the corporation. If a person, including an
entity shareholder, owns stock in both corporations that enter into a
merger, consolidation, purchase or acquisition of assets, or similar
transaction, such shareholder is considered to be acting as a group with
other shareholders in a corporation only to the extent of the ownership
in that corporation before the transaction giving rise to the change and
not with respect to the ownership interest in the other corporation. See
Sec. 1.280G-1, Q&A-27(d), Example 4.
(6) Certain back-to-back arrangements--(i) In general. This
paragraph (i)(6) applies where a service provider is
[[Page 689]]
providing services to a service recipient (the intermediate service
recipient), who in turn is providing services to another service
recipient (the ultimate service recipient), the services provided by the
service provider to the intermediate service recipient are closely
related to the services provided by the intermediate service recipient
to the ultimate service recipient, there is a nonqualified deferred
compensation plan providing for payments by the ultimate service
recipient to the intermediate service recipient (the ultimate service
recipient plan), there is a nonqualified deferred compensation plan or
other agreement, method, program, or other arrangement providing for
payments of compensation by the intermediate service recipient to the
service provider (the intermediate service recipient plan), and the
intermediate service recipient plan provides for a payment upon the
occurrence of an event described in paragraph (a)(1), (2), (3), (5), or
(6) of this section. In such a case, notwithstanding the generally
applicable limits on payments in paragraph (a) of this section, the
ultimate service recipient plan may provide for a payment to the
intermediate service recipient upon the occurrence of a payment event
under the intermediate service recipient plan described in paragraph
(a)(1), (2), (3), (5), or (6) of this section if the time and form of
payment is defined as the same time and form of payment provided under
the intermediate service recipient plan, the amount of the payment under
the ultimate service recipient plan does not exceed the amount of the
payment under the intermediate service recipient plan, and the ultimate
service recipient plan and the intermediate service recipient plan
otherwise satisfy the requirements of section 409A (regardless of
whether such plan is subject to section 409A).
(ii) Example. The provisions of paragraph (i)(6)(i) of this section
are illustrated by the following example:
Example. Company B (intermediate service recipient) provides
services to Company C (ultimate service recipient). Employee A (service
provider) provides services to Company B that are closely related to the
services Company B provides to Company C. Pursuant to a nonqualified
deferred compensation plan meeting the requirements of section 409A,
Employee A is entitled to a payment of deferred compensation upon a
separation from service with Company B (the intermediate service
recipient plan). Under an arrangement between Company B and Company C
(the ultimate service recipient plan), Company C agrees to pay an amount
of deferred compensation to Company B upon Employee A's separation from
service with Company B, in accordance with the time, form and amount of
payment provided in the intermediate service recipient plan. Provided
that the intermediate service recipient plan and the ultimate service
recipient plan otherwise comply with the requirements of section 409A
(regardless of whether such arrangements are subject to section 409A),
Company C's payment to Company B of the amount due under the ultimate
service recipient plan upon the separation from service of Employee A
from Company B may constitute a permissible payment event for purposes
of paragraph (a) of this section.
(j) Prohibition on acceleration of payments--(1) In general. Except
as provided in paragraph (j)(4) of this section, a nonqualified deferred
compensation plan may not permit the acceleration of the time or
schedule of any payment or amount scheduled to be paid pursuant to the
terms of the plan, and no such accelerated payment may be made whether
or not provided for under the terms of such plan. For purposes of
determining whether a payment of deferred compensation has been made,
the rules of paragraph (f) of this section (substituted payments) apply.
For purposes of this paragraph (j), an impermissible acceleration does
not occur if payment is made in accordance with plan provisions or an
election as to the time and form of payment in effect at the time of
initial deferral (or added in accordance with the rules applicable to
subsequent deferral elections under Sec. 1.409A-2(b)) pursuant to which
payment is required to be made on an accelerated schedule as a result of
an intervening event that is an event described in paragraph (a)(1),
(2), (3), (5), or (6) of this section. For example, a plan may provide
that a participant will receive six installment payments commencing at
separation from service, and also provide that if the participant dies
after such payments commence but before all payments have been made, all
remaining amounts will be paid in a lump sum
[[Page 690]]
payment. Additionally, it is not an acceleration of the time or schedule
of payment of a deferral of compensation if a service recipient waives
or accelerates the satisfaction of a condition constituting a
substantial risk of forfeiture applicable to such deferral of
compensation, provided that the requirements of section 409A (including
the requirement that the payment be made upon a permissible payment
event) are otherwise satisfied with respect to such deferral of
compensation. For example, if a nonqualified deferred compensation plan
provides for a lump sum payment of the vested benefit upon separation
from service, and the benefit vests under the plan only after 10 years
of service, it is not a violation of the requirements of section 409A if
the service recipient reduces the vesting requirement to five years of
service, even if a service provider becomes vested as a result and
receives a payment in connection with a separation from service before
the service provider would have completed 10 years of service. However,
if the plan in this example had provided for a payment at a fixed date,
rather than at separation from service, the date of payment could not be
accelerated due to the accelerated vesting. For the definition of a
payment for purposes of this paragraph (j), see Sec. 1.409A-2(b)(5)
(coordination of the subsequent deferral election rules with the
prohibition on acceleration of payments). For other permissible
payments, see Sec. 1.409A-2(b)(2)(iii) (certain immediate payments of
remaining installments) and paragraph (d) of this section (certain
payments made no more than 30 days before the designated payment date).
(2) Application to multiple payment events. Generally, the addition
of a permissible payment event, the deletion of a permissible payment
event, or the substitution of one permissible payment event for another
permissible payment event, results in an acceleration of a payment if
the addition, deletion, or substitution could result in the payment
being made at an earlier date than such payment would have been made
absent such addition, deletion, or substitution. Notwithstanding the
previous sentence, the addition of death, disability (as defined in
paragraph (i)(4) of this section), or an unforeseeable emergency (as
defined in paragraph (i)(3) of this section), as a potentially earlier
alternative payment event to an amount previously deferred will not be
treated as resulting in an acceleration of a payment, even if such
addition results in the payment being paid at an earlier time than such
payment would have been made absent the addition of the payment event.
However, the addition of such a payment event as a potentially later
alternative payment event generally is subject to the rules governing
changes in the time and form of payment (see Sec. 1.409A-2(b)).
(3) Beneficiaries. The rules of this paragraph (j) apply to
elections by beneficiaries with respect to the time and form of payment,
as well as elections by service providers or service recipients with
respect to the time and form of payment to beneficiaries. An election to
change the identity of a beneficiary does not constitute an acceleration
of a payment merely because the election changes the identity of the
recipient of the payment, if the time and form of the payment is not
otherwise changed. In addition, an election before the commencement of a
life annuity to change the identity of a beneficiary does not constitute
an acceleration of a payment if the change in the time of payments stems
solely from the different life expectancy of the new beneficiary, such
as in the case of a joint and survivor annuity, and does not change the
commencement date of the life annuity.
(4) Exceptions--(i) In general. Except as otherwise expressly
provided, a plan may provide for the acceleration of a payment in
accordance with paragraphs (j)(4)(ii) through (xiv) of this section, or
may provide a service recipient discretion to accelerate payments in
accordance with the provisions of paragraphs (j)(4)(ii) through (xiv) of
this section. A plan may not provide a service provider discretion with
respect to whether a payment will be accelerated, and a service
recipient may not provide a service provider a direct or indirect
election as to whether the service recipient's discretion to accelerate
a payment will be exercised, even if such acceleration would be
permitted under paragraphs (j)(4)(ii)
[[Page 691]]
through (xiv) of this section. Whether a service recipient has provided
a service provider an election as to whether the service recipient's
discretion to accelerate a payment will be exercised is determined based
on all the facts and circumstances, including whether similarly situated
service providers have been treated differently. Except as otherwise
provided in paragraphs (j)(4)(ii) through (xiv) of this section, the
plan need not set forth the exception in writing, and provided all other
requirements of this section are met, the making of such a payment or
the addition of a plan term permitting the making of such a payment will
not constitute the acceleration of a payment, and the failure to make
such a payment or the deletion or modification of a plan term permitting
the making of such a payment will not be subject to the rules regarding
a change in the time and form of payment under Sec. 1.409A-2(b).
(ii) Domestic relations order. A plan may provide for acceleration
of the time or schedule of a payment under the plan to an individual
other than the service provider, or a payment under such plan may be
made to an individual other than the service provider, to the extent
necessary to fulfill a domestic relations order (as defined in section
414(p)(1)(B)).
(iii) Conflicts of interest--(A) Compliance with ethics agreements
with the Federal government. A plan may provide for acceleration of the
time or schedule of a payment under the plan, or a payment may be made
under a plan, to the extent necessary for any Federal officer or
employee in the executive branch to comply with an ethics agreement with
the Federal government.
(B) Compliance with ethics laws or conflicts of interest laws. A
plan may provide for acceleration of the time or schedule of a payment
under the plan, or a payment may be made under a plan, to the extent
reasonably necessary to avoid the violation of an applicable Federal,
state, local, or foreign ethics law or conflicts of interest law
(including where such payment is reasonably necessary to permit the
service provider to participate in activities in the normal course of
his or her position in which the service provider would otherwise not be
able to participate under an applicable rule). A payment is reasonably
necessary to avoid the violation of a Federal, state, local, or foreign
ethics law or conflicts of interest law if the payment is a necessary
part of a course of action that results in compliance with a Federal,
state, local, or foreign ethics law or conflicts of interest law that
would be violated absent such course of action, regardless of whether
other actions would also result in compliance with the Federal, state,
local, or foreign ethics law or conflicts of interest law. For this
purpose, a provision of foreign law is considered applicable only to
foreign earned income (as defined under section 911(b)(1) without regard
to section 911(b)(1)(B)(iv) and without regard to the requirement that
the income be attributable to services performed during the period
described in section 911(d)(1)(A) or (B)) from sources within the
foreign country that promulgated such law.
(iv) Section 457 plans. A plan subject to section 457(f) may provide
for an acceleration of the time or schedule of a payment to a service
provider, or a payment may be made under such a plan, to pay Federal,
state, local, and foreign income taxes due upon a vesting event,
provided that the amount of such payment is not more than an amount
equal to the Federal, state, local, and foreign income tax withholding
that would have been remitted by the employer if there had been a
payment of wages equal to the income includible by the service provider
under section 457(f) at the time of the vesting.
(v) Limited cashouts. A plan may require or provide a service
recipient discretion to require (or be amended to require or to provide
a service recipient discretion to require), a mandatory lump sum payment
of amounts deferred under the plan that do not exceed a specified
amount, provided that such plan term or amendment is executed and
effective, and any required exercise of service recipient discretion is
evidenced in writing, no later than the date of such payment, and
provided that--
(A) The payment results in the termination and liquidation of the
entirety of the service provider's interest
[[Page 692]]
under the plan, including all agreements, methods, programs, or other
arrangements with respect to which deferrals of compensation are treated
as having been deferred under a single nonqualified deferred
compensation plan under Sec. 1.409A-1(c)(2); and
(B) The payment is not greater than the applicable dollar amount
under section 402(g)(1)(B).
(vi) Payment of employment taxes. A plan may provide for the
acceleration of the time or schedule of a payment, or a payment may be
made under the plan, to pay the Federal Insurance Contributions Act
(FICA) tax imposed under section 3101, section 3121(a), and section
3121(v)(2), or the Railroad Retirement Act tax imposed under section
3201, section 3211, section 3231(e)(1), and section 3231(e)(8), where
applicable, on compensation deferred under the plan (the FICA or RRTA
amount). Additionally, a plan may provide for the acceleration of the
time or schedule of a payment, or a payment may be made under the plan,
to pay the income tax at source on wages imposed under section 3401 or
the corresponding withholding provisions of applicable state, local, or
foreign tax laws as a result of the payment of the FICA or RRTA amount,
and to pay the additional income tax at source on wages attributable to
the pyramiding section 3401 wages and taxes. However, the total payment
under this acceleration provision must not exceed the aggregate of the
FICA or RRTA amount, and the income tax withholding related to such FICA
or RRTA amount.
(vii) Payment upon income inclusion under section 409A. A plan may
provide for the acceleration of the time or schedule of a payment, or a
payment under such plan may be made, at any time the plan fails to meet
the requirements of section 409A and these regulations. Such payment may
not exceed the amount required to be included in income as a result of
the failure to comply with the requirements of section 409A and these
regulations.
(viii) Cancellation of deferrals following an unforeseeable
emergency or hardship distribution. A plan may provide for a
cancellation of a service provider's deferral election, or such a
cancellation may be made, due to an unforeseeable emergency or a
hardship distribution pursuant to Sec. 1.401(k)-1(d)(3). The deferral
election must be cancelled, not merely postponed or otherwise delayed.
Accordingly, any later deferral election will be subject to the
provisions governing initial deferral elections. See Sec. 1.409A-2(a).
(ix) Plan terminations and liquidations. A plan may provide for the
acceleration of the time and form of a payment, or a payment under such
plan may be made, where the acceleration of the payment is made pursuant
to a termination and liquidation of the plan in accordance with one of
the following:
(A) The service recipient's termination and liquidation of the plan
within 12 months of a corporate dissolution taxed under section 331, or
with the approval of a bankruptcy court pursuant to 11 U.S.C. Sec.
503(b)(1)(A), provided that the amounts deferred under the plan are
included in the participants' gross incomes in the latest of the
following years (or, if earlier, the taxable year in which the amount is
actually or constructively received).
(1) The calendar year in which the plan termination and liquidation
occurs.
(2) The first calendar year in which the amount is no longer subject
to a substantial risk of forfeiture.
(3) The first calendar year in which the payment is administratively
practicable.
(B) The service recipient's termination and liquidation of the plan
pursuant to irrevocable action taken by the service recipient within the
30 days preceding or the 12 months following a change in control event
(as defined in paragraph (i)(5) of this section), provided that this
paragraph will only apply to a payment under a plan if all agreements,
methods, programs, and other arrangements sponsored by the service
recipient immediately after the time of the change in control event with
respect to which deferrals of compensation are treated as having been
deferred under a single plan under Sec. 1.409A-1(c)(2) are terminated
and liquidated with respect to each participant that experienced the
change in control event, so that under the terms
[[Page 693]]
of the termination and liquidation all such participants are required to
receive all amounts of compensation deferred under the terminated
agreements, methods, programs, and other arrangements within 12 months
of the date the service recipient irrevocably takes all necessary action
to terminate and liquidate the agreements, methods, programs, and other
arrangements. Solely for purposes of this paragraph (j)(4)(ix)(B), the
applicable service recipient with the discretion to liquidate and
terminate the agreements, methods, programs, and other arrangements is
the service recipient that is primarily liable immediately after the
transaction for the payment of the deferred compensation.
(C) The service recipient's termination and liquidation of the plan,
provided that--
(1) The termination and liquidation does not occur proximate to a
downturn in the financial health of the service recipient;
(2) The service recipient terminates and liquidates all agreements,
methods, programs, and other arrangements sponsored by the service
recipient that would be aggregated with any terminated and liquidated
agreements, methods, programs, and other arrangements under Sec.
1.409A-1(c) if the same service provider had deferrals of compensation
under all of the agreements, methods, programs, and other arrangements
that are terminated and liquidated;
(3) No payments in liquidation of the plan are made within 12 months
of the date the service recipient takes all necessary action to
irrevocably terminate and liquidate the plan other than payments that
would be payable under the terms of the plan if the action to terminate
and liquidate the plan had not occurred;
(4) All payments are made within 24 months of the date the service
recipient takes all necessary action to irrevocably terminate and
liquidate the plan; and
(5) The service recipient does not adopt a new plan that would be
aggregated with any terminated and liquidated plan under Sec. 1.409A-
1(c) if the same service provider participated in both plans, at any
time within three years following the date the service recipient takes
all necessary action to irrevocably terminate and liquidate the plan.
(D) Such other events and conditions as the Commissioner may
prescribe in generally applicable guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(x) Certain distributions to avoid a nonallocation year under
section 409(p). A plan may provide for an acceleration of the time and
form of a payment, or a payment may be made under such plan, to prevent
the occurrence of a nonallocation year (within the meaning of section
409(p)(3)) in the plan year of an employee stock ownership plan next
following the plan year in which such payment is made, provided that the
amount distributed may not exceed 125 percent of the minimum amount of
distribution necessary to avoid the occurrence of a nonallocation year.
Solely for purposes of determining permissible distributions under this
paragraph (j)(4)(x), synthetic equity (within the meaning of section
409(p)(6)(C) and Sec. 1.409(p)-1(f)) granted during the plan year of
the employee stock ownership plan in which such payment is made is
disregarded for purposes of determining whether the subsequent plan year
would result in a nonallocation year.
(xi) Payment of state, local, or foreign taxes. A plan may provide
for an acceleration of the time and form of a payment, or a payment may
be made under such plan, to reflect payment of state, local, or foreign
tax obligations arising from participation in the plan that apply to an
amount deferred under the plan before the amount is paid or made
available to the participant (the state, local, or foreign tax amount).
Such payment may not exceed the amount of such taxes due as a result of
participation in the plan. Such payment may be made by distributions to
the participant in the form of withholding pursuant to provisions of
applicable state, local, or foreign law or by distribution directly to
the participant. Additionally, an arrangement may provide for the
acceleration of the time or schedule of payment, or a payment may be
made under such arrangement, to pay the income tax at source on wages
imposed under section 3401 as
[[Page 694]]
a result of such payment and to pay the additional income tax at source
on wages imposed under section 3401 attributable to such additional
section 3401 wages and taxes. However, the total payment under this
acceleration provision must not exceed the aggregate of the state,
local, and foreign tax amount, and the income tax withholding related to
such state, local, and foreign tax amount.
(xii) Cancellation of deferral elections due to disability. A plan
may provide for a cancellation of a service provider's deferral
election, or a cancellation of such election may be made, where such
cancellation occurs by the later of the end of the taxable year of the
service provider or the 15th day of the third month following the date
the service provider incurs a disability. For purposes of this
paragraph, a disability refers to any medically determinable physical or
mental impairment resulting in the service provider's inability to
perform the duties of his or her position or any substantially similar
position, where such impairment can be expected to result in death or
can be expected to last for a continuous period of not less than six
months.
(xiii) Certain offsets. A plan may provide for the acceleration of
the time or schedule of a payment, or a payment may be made under such
plan, as satisfaction of a debt of the service provider to the service
recipient, where such debt is incurred in the ordinary course of the
service relationship between the service recipient and the service
provider, the entire amount of reduction in any of the service
recipient's taxable years does not exceed $5,000, and the reduction is
made at the same time and in the same amount as the debt otherwise would
have been due and collected from the service provider.
(xiv) Bona fide disputes as to a right to a payment. A plan may
provide for the acceleration of the time or schedule of one or more
payments, or a payment may be made under such plan, where such payments
occur as part of a settlement between the service provider and the
service recipient of an arm's length, bona fide dispute as to the
service provider's right to the deferred amount. Discretion to
accelerate payments, other than due to an arm's length settlement of a
bona fide dispute as to the service provider's right to the deferred
amount, is not permitted under this paragraph (j)(4)(xiv). Whether a
payment qualifies for the exception under this paragraph is based on all
relevant facts and circumstances. A payment will be presumed not to meet
this exception unless the payment is subject to a substantial reduction
in the value of the payment made in relation to the amount that would
have been payable had there been no dispute as to the service provider's
right to the payment. For this purpose, a reduction that is less than 25
percent of the present value of the deferred amount in dispute generally
is not a substantial reduction. In addition, a payment will be presumed
not to meet this exception if the payment is made proximate to a
downturn in the financial health of the service recipient.
(5) Nonqualified deferred compensation plans linked to qualified
employer plans or certain other arrangements. If a nonqualified deferred
compensation plan provides that the amount deferred under the plan is
the amount determined under the formula determining benefits under a
qualified employer plan (as defined in Sec. 1.409A-1(a)(2)), or a
broad-based foreign retirement plan (as defined in Sec. 1.409A-
1(a)(3)(v)) maintained by the service recipient but applied without
regard to one or more limitations applicable to the qualified employer
plan under the Internal Revenue Code or to the broad-based foreign
retirement plan under other applicable law, or that the amount deferred
under the nonqualified deferred compensation plan is determined as an
amount offset by some or all of the benefits provided under the
qualified employer plan or broad-based foreign retirement plan, a
decrease in amounts deferred under the nonqualified deferred
compensation plan that results directly from the operation of the
qualified employer plan or broad-based foreign retirement plan (other
than service provider actions described in paragraphs (j)(5)(iii) and
(iv) of this section) including changes in benefit limitations
applicable to the qualified employer plan or the broad-based foreign
retirement plan under
[[Page 695]]
the Internal Revenue Code or other applicable law does not constitute an
acceleration of a payment under the nonqualified deferred compensation
plan, provided that such operation does not otherwise result in a change
in the time or form of a payment under the nonqualified deferred
compensation plan, and provided further that the change in the amounts
deferred under the nonqualified deferred compensation plan does not
exceed such change in the amounts deferred under the qualified employer
plan or the broad-based foreign retirement plan, as applicable. In
addition, with respect to such a nonqualified deferred compensation
plan, the following actions or failures to act will not constitute an
acceleration of a payment under the nonqualified deferred compensation
plan even if in accordance with the terms of the nonqualified deferred
compensation plan, the actions or inactions result in a decrease in the
amounts deferred under the plan, provided that such actions or inactions
do not otherwise affect the time or form of payment under the
nonqualified deferred compensation plan, and provided further that with
respect to actions or inactions described in paragraphs (j)(5)(i) and
(ii) of this section, the change in the amount deferred under the
nonqualified deferred compensation plan does not exceed the change in
the amounts deferred under the qualified employer plan or the broad-
based foreign retirement plan, as applicable:
(i) A service provider's action or inaction under the qualified
employer plan or broad-based foreign retirement plan with respect to
whether to elect to receive a subsidized benefit or an ancillary benefit
under the qualified employer plan or broad-based foreign retirement
plan.
(ii) The amendment of a qualified employer plan or broad-based
foreign retirement plan to increase benefits provided under such plan,
or to add or remove a subsidized benefit or an ancillary benefit.
(iii) A service provider's action or inaction under a qualified
employer plan with respect to elective deferrals and other employee pre-
tax contributions subject to the contribution restrictions under section
401(a)(30) or section 402(g), including an adjustment to a deferral
election under such qualified employer plan, provided that for any given
taxable year, the service provider's action or inaction does not result
in a decrease in the amounts deferred under all nonqualified deferred
compensation plans in which the service provider participates (other
than amounts described in paragraph (j)(5)(iv) of this section) in
excess of the limit with respect to elective deferrals under section
402(g)(1)(A), (B), and (C) in effect for the taxable year in which such
action or inaction occurs.
(iv) A service provider's action or inaction under a qualified
employer plan with respect to elective deferrals and other employee pre-
tax contributions subject to the contributions restrictions under
section 401(a)(30) or section 402(g), and after-tax contributions by the
service provider to a qualified employer plan that provides for such
contributions, that affects the amounts that are credited under one or
more nonqualified deferred compensation plans as matching amounts or
other similar amounts contingent on such elective deferrals, pre-tax
contributions, or after-tax contributions, provided that the total of
such matching or contingent amounts, as applicable, never exceeds 100
percent of the matching or contingent amounts that would be provided
under the qualified employer plan absent any plan-based restrictions
that reflect limits on qualified plan contributions under the Internal
Revenue Code.
(6) Changes in elections under a cafeteria plan. A change in an
election under a cafeteria plan (as defined in section 125(d)) does not
result in an accelerated payment of an amount deferred under a
nonqualified deferred compensation plan to the extent that the change in
the amount deferred under the nonqualified deferred compensation plan
results solely from the application of the change in amount eligible to
be treated as compensation under the terms of the nonqualified deferred
compensation plan resulting from the election change under the cafeteria
plan, to a benefit formula under the nonqualified deferred compensation
plan based upon the service provider's eligible compensation, and only
to the
[[Page 696]]
extent that such change applies in the same manner as any other increase
or decrease in compensation would apply to such benefit formula.
[T.D. 9321, 72 FR 19276, Apr. 17, 2007; 72 FR 41622, July 31, 2007]
Sec. 1.409A-4 Calculation of income inclusion. [Reserved]
Sec. 1.409A-5 Funding. [Reserved]
Sec. 1.409A-6 Application of section 409A and effective dates.
(a) Statutory application and effective dates--(1) Application to
amounts deferred--(i) In general. Except as otherwise provided in this
section, section 409A applies with respect to amounts deferred in
taxable years beginning after December 31, 2004, and with respect to
amounts deferred in taxable years beginning before January 1, 2005, if
the plan under which the deferral is made is materially modified after
October 3, 2004. For amounts deferred in taxable years beginning before
January 1, 2005, under a plan that is materially modified after October
3, 2004, whether the plan complies with the requirements of section 409A
and these regulations is determined by reference to the terms of the
plan in effect as of, and any actions taken under the plan on or after,
the date of the material modification. Section 409A is applicable with
respect to earnings on amounts deferred only to the extent that section
409A is applicable with respect to the amounts deferred. Accordingly,
section 409A does not apply with respect to earnings on amounts deferred
before January 1, 2005, unless section 409A applies with respect to the
amounts deferred. For this purpose, a right to earnings that is subject
to a substantial risk of forfeiture (as defined in Sec. 1.83-3(c)) or a
requirement to perform further services, on an amount deferred that is
not subject to a substantial risk of forfeiture (as defined in Sec.
1.83-3(c)) or a requirement to perform further services, is not treated
as earnings on the amount deferred, but a separate right to
compensation. Except as otherwise provided in applicable guidance (see
Sec. 601.601(d)(2) of this chapter), the provisions of Sec. Sec.
1.409A-1 through 1.409A-5 and this section provide the exclusive means
of identifying agreements, methods, programs, or other arrangements
subject to section 409A, and the exclusive means of satisfying the
requirements of section 409A with respect to such agreements, methods,
programs, or other arrangements.
(ii) Collectively bargained plans. Section 409A does not apply with
respect to amounts deferred under a plan maintained pursuant to one or
more bona fide collective bargaining agreements in effect on October 3,
2004, for the period ending on the earlier of the date on which the last
of such collective bargaining agreements terminates (determined without
regard to any extension thereof after October 3, 2004) or December 31,
2009.
(2) Identification of date of deferral for statutory effective date
purposes. For purposes of determining whether section 409A is applicable
with respect to an amount, the amount is considered deferred before
January 1, 2005, if before January 1, 2005, the service provider had a
legally binding right to be paid the amount, and the right to the amount
was earned and vested. For purposes of this paragraph (a)(2), a right to
an amount was earned and vested only if the amount was not subject to a
substantial risk of forfeiture (as defined in Sec. 1.83-3(c)) or a
requirement to perform further services. Amounts to which the service
provider did not have a legally binding right before January 1, 2005
(for example, because the service recipient retained discretion to
reduce the amount), will not be considered deferred before January 1,
2005. In addition, amounts to which the service provider had a legally
binding right before January 1, 2005, but the right to which was subject
to a substantial risk of forfeiture or a requirement to perform further
services after December 31, 2004, are not considered deferred before
January 1, 2005, for purposes of the effective date. Notwithstanding the
foregoing, an amount to which the service provider had a legally binding
right before January 1, 2005, but for which the service provider was
required to continue performing services to retain the right only
through the completion of the payroll period (as defined in Sec.
1.409A-1(b)(3)) that includes December 31, 2004,
[[Page 697]]
is not treated as subject to a requirement to perform further services
(or a substantial risk of forfeiture) for purposes of the effective
date. For purposes of this paragraph (a)(2), a stock option, stock
appreciation right, or similar compensation that on or before December
31, 2004, was immediately exercisable for cash or substantially vested
property (as defined in Sec. 1.83-3(b)) is treated as earned and
vested, regardless of whether the right would terminate if the service
provider ceased providing services for the service recipient.
(3) Calculation of amount of compensation deferred for statutory
effective date purposes--(i) Nonaccount balance plans. The amount of
compensation deferred before January 1, 2005, under a nonqualified
deferred compensation plan that is a nonaccount balance plan (as defined
in Sec. 1.409A-1(c)(2)(i)(C)), equals the present value of the amount
to which the service provider would have been entitled under the plan if
the service provider voluntarily terminated services without cause on
December 31, 2004, and received a payment of the benefits available from
the plan on the earliest possible date allowed under the plan to receive
a payment of benefits following the termination of services, and
received the benefits in the form with the maximum value.
Notwithstanding the foregoing, for any subsequent taxable year of
the service provider, the grandfathered amount may increase to equal the
present value of the benefit the service provider actually becomes
entitled to, in the form and at the time actually paid, determined under
the terms of the plan (including applicable limits under the Internal
Revenue Code), as in effect on October 3, 2004, without regard to any
further services rendered by the service provider after December 31,
2004, or any other events affecting the amount of or the entitlement to
benefits (other than a participant election with respect to the time or
form of an available benefit). For purposes of calculating the present
value of a benefit under this paragraph (a)(3)(i), reasonable actuarial
assumptions and methods must be used. Whether assumptions and methods
are reasonable for this purpose is determined as of each date the
benefit is valued for purposes of determining the grandfathered benefit,
provided that any reasonable actuarial assumptions and methods that were
used by the service recipient with respect to such benefit as of
December 31, 2004, will continue to be treated as reasonable assumptions
and methods for purposes of calculating the grandfathered benefit.
Actuarial assumptions and methods will be presumed reasonable if
they are the same as those used to value benefits under a qualified plan
sponsored by the service recipient the benefits under which are part of
the benefit formula under, or otherwise impact the amount of benefits
under, the nonaccount balance nonqualified deferred compensation plan.
(ii) Account balance plans. The amount of compensation deferred
before January 1, 2005, under a nonqualified deferred compensation plan
that is an account balance plan (as defined in Sec. 1.409A-
1(c)(2)(i)(A)), equals the portion of the service provider's account
balance as of December 31, 2004, the right to which was earned and
vested (as defined in paragraph (a)(2) of this section) as of December
31, 2004, plus any future contributions to the account, the right to
which was earned and vested (as defined in paragraph (a)(2) of this
section) as of December 31, 2004, to the extent such contributions are
actually made.
(iii) Equity-based compensation plans. For purposes of determining
the amounts deferred before January 1, 2005, under an equity-based
compensation plan, the rules of paragraph (a)(3)(ii) of this section
governing account balance plans are applied except that the account
balance is deemed to be the amount of the payment available to the
service provider on December 31, 2004 (or that would be available to the
service provider if the right were immediately exercisable) the right to
which is earned and vested (as defined in paragraph (a)(2) of this
section) as of December 31, 2004. For this purpose, the payment
available to the service provider excludes any exercise price or other
amount that must be paid by the service provider.
(iv) Earnings. Earnings on amounts deferred under a plan before
January 1,
[[Page 698]]
2005, include only income (whether actual or notional) attributable to
the amounts deferred under a plan as of December 31, 2004, or to such
income. For example, notional interest earned under the plan on amounts
deferred in an account balance plan as of December 31, 2004, generally
will be treated as earnings on amounts deferred under the plan before
January 1, 2005. Similarly, an increase in the amount of payment
available pursuant to a stock option, stock appreciation right, or other
equity-based compensation above the amount of payment available as of
December 31, 2004, due to appreciation in the underlying stock after
December 31, 2004, or accrual of other earnings such as dividends, is
treated as earnings on the amount deferred. In the case of a nonaccount
balance plan, earnings include the increase, due solely to the passage
of time, in the present value of the future payments to which the
service provider has obtained a legally binding right, the present value
of which constituted the amounts deferred under the plan before January
1, 2005. Thus, for each year, there will be an increase (determined
using the same interest rate used to determine the amounts deferred
under the plan before January 1, 2005) resulting from the shortening of
the discount period before the future payments are made, plus, if
applicable, an increase in the present value resulting from the service
provider's survivorship during the year. However, an increase in the
potential benefits under a nonaccount balance plan due to, for example,
an application of an increase in compensation after December 31, 2004,
to a final average pay plan or subsequent eligibility for an early
retirement subsidy, does not constitute earnings on the amounts deferred
under the plan before January 1, 2005.
(v) Definition of plan. For purposes of paragraphs (a)(1), (2), and
(3) of this section, the term ``plan'' has the meaning provided in Sec.
1.409A-1(c), except that the plan aggregation rules do not apply for
purposes of the actuarial assumptions and methods used in paragraph
(a)(3)(i) of this section. Accordingly, different reasonable actuarial
assumptions and methods may be used to calculate the amounts deferred by
a service provider in two different agreements, methods, programs, or
other arrangements each of which constitutes a nonaccount balance plan.
(4) Material modifications--(i) In general. Except as otherwise
provided, a modification of a plan is a material modification if a
benefit or right existing as of October 3, 2004, is materially enhanced
or a new material benefit or right is added, and such material
enhancement or addition affects amounts earned and vested before January
1, 2005. Such material benefit enhancement or addition is a material
modification whether it occurs pursuant to an amendment or to the
service recipient's exercise of discretion under the terms of the plan.
For example, an amendment to a plan to add a provision that payments of
deferred amounts earned and vested before January 1, 2005, may be
allowed upon request if service providers are required to forfeit 20
percent of the amount of the payment (a haircut) would be a material
modification to the plan. Similarly, a material modification would occur
if a service recipient exercised discretion to accelerate vesting of a
benefit under the plan to a date on or before December 31, 2004.
However, it is not a material modification for a service recipient to
exercise discretion over the time and manner of payment of a benefit to
the extent such discretion is provided under the terms of the plan as of
October 3, 2004. It is not a material modification for a service
provider to exercise a right permitted under the plan as in effect on
October 3, 2004. The amendment of a plan to bring the plan into
compliance with the provisions of section 409A will not be treated as a
material modification. However, a plan amendment or the exercise of
discretion under the terms of the plan that materially enhances an
existing benefit or right or adds a new material benefit or right will
be considered a material modification even if the enhanced or added
benefit would be permitted under section 409A. For example, the addition
of a right to a payment upon an unforeseeable emergency of an amount
earned and vested before January 1, 2005, would be considered a material
modification. The reduction of an existing benefit is not a material
[[Page 699]]
modification. For example, the removal of a haircut provision generally
would not constitute a material modification. The following
modifications also are not material modifications for purposes of this
paragraph (a)(4)(i):
(A) The establishment of or contributions to a trust or other
arrangement from which benefits under the plan are to be paid is not a
material modification of the plan, provided that the contribution to the
trust or other arrangement would not otherwise cause an amount to be
includible in the service provider's gross income.
(B) The modification of a provision requiring the immediate
cancellation of a current deferral election, to require the cancellation
of deferrals for the same length of time beginning with the first date
at which the application of such cancellation would not violate section
409A (for example, the first date of the service provider's first
taxable year following the cancellation).
(C) Compliance with a domestic relations order (as defined in Sec.
1.409A-3(j)(4)(ii)) with respect to payments to an individual other than
the service provider, or an amendment to a plan to require compliance
with a domestic relations order with respect to payments to an
individual other than the service provider.
(D) The modification of a plan providing a life annuity form of
payment to permit an election between the existing life annuity form of
payment and other forms of annuity payments that would be treated as a
single form of payment with the existing life annuity form of payment
under Sec. 1.409A-2(b)(2)(ii).
(E) The modification of a grandfathered plan to add a limited
cashout feature consistent with Sec. 1.409A-3(j)(4)(v) (exception to
prohibition on accelerated payments).
(ii) Adoptions of new plans. It is presumed that the adoption of a
new plan or the grant of an additional benefit under an existing plan
after October 3, 2004, and before January 1, 2005, constitutes a
material modification of a plan. However, the presumption may be
rebutted by demonstrating that the adoption of the plan or grant of the
additional benefit was consistent with the service recipient's
historical compensation practices. For example, the presumption that the
grant of a discounted stock option on November 1, 2004, is a material
modification of a plan may be rebutted by demonstrating that the grant
was consistent with the historic practice of granting substantially
similar discounted stock options (both as to terms and amounts) each
November for a significant number of years. Notwithstanding paragraph
(a)(4)(i) of this section and this paragraph (a)(4)(ii), the grant of an
additional benefit under an existing plan that consists of a deferral of
additional compensation not otherwise provided under the plan as of
October 3, 2004, will be treated as a material modification of the plan
only as to the additional deferral of compensation, if the plan
explicitly identifies the additional deferral of compensation and
provides that the additional deferral of compensation is subject to
section 409A. Accordingly, amendments to conform a plan to the
requirements of section 409A with respect to deferrals under a plan
occurring after December 31, 2004, will not constitute a material
modification of the plan with respect to amounts deferred that are
earned and vested on or before December 31, 2004, provided that there is
no concurrent material modification with respect to the amount of, or
rights to, amounts deferred that were earned and vested on or before
December 31, 2004. Similarly, a grant of an additional benefit under a
new plan adopted after October 3, 2004, and before January 1, 2005, will
not be treated as a material modification of an existing plan to the
extent that the new plan explicitly identifies additional deferrals of
compensation and provides that the additional deferrals of compensation
are subject to section 409A.
(iii) Suspension or termination of a plan. A cessation of deferrals
under, or termination of, a plan, pursuant to the provisions of such
plan, is not a material modification. Amending a plan to provide
participants an election whether to terminate participation in a plan
generally constitutes a material modification of the plan.
(iv) Changes to investment measures--account balance plans. With
respect to an account balance plan (as defined in
[[Page 700]]
Sec. 1.409A-1(c)(2)(i)(A)), it is not a material modification to change
a notional investment measure to, or to add to an existing investment
measure, an investment measure that qualifies as a predetermined actual
investment within the meaning of Sec. 31.3121(v)(2)-1(d)(2) of this
chapter or, for any given taxable year, reflects a reasonable rate of
interest (determined in accordance with Sec. 31.3121(v)(2)-
1(d)(2)(i)(C) of this chapter).
(v) Stock rights. The modification, extension, or renewal of a stock
right will not constitute a material modification of the stock right, if
the modification, extension, or renewal would not be treated as the
grant of a new stock right under Sec. 1.409A-1(b)(5)(v)(A), and would
not result in the stock right being treated as having had a deferral
feature from the date of grant pursuant to Sec. 1.409A-1(b)(5)(v)(C).
(vi) Rescission of modifications. Any modification to the terms of a
plan that would inadvertently result in treatment as a material
modification under this section is not considered a material
modification of the plan to the extent the modification in the terms of
the plan is rescinded by the earlier of a date before the right is
exercised (if the change grants a discretionary right) or the last day
of the taxable year of the service provider during which such change
occurred. Thus, for example, if a service recipient modifies the terms
of a plan on March 1 to allow an individual employee to elect a new
change in the time or form of payment without realizing that such a
change constituted a material modification that would subject the plan
to the requirements of section 409A, and the modification is rescinded
on November 1, then if no change in the time or form of payment has been
made pursuant to the modification before November 1, the plan is not
considered materially modified under this section.
(vii) Definition of plan. For purposes of this paragraph (a)(4), the
term ``plan'' has the same meaning provided in Sec. 1.409A-1(c), except
that the plan aggregation rules of Sec. 1.409A-1(c)(2) do not apply.
(b) Regulatory applicability date. Sec. 1.409A-1, Sec. 1.409A-2,
Sec. 1.409A-3 and this section are applicable for taxable years
beginning on or after January 1, 2008.
[T.D. 9321, 72 FR 19276, Apr. 17, 2007; 72 FR 41623, July 31, 2007; 73
FR 54945, Sept. 24, 2008; 73 FR 58438, Oct. 7, 2008]
Sec. 1.409(p)-1 Prohibited allocation of securities in an S
corporation.
(a) Organization of this section and definition--(1) Organization of
this section. Section 409(p) applies if a nonallocation year occurs in
an ESOP that holds shares of stock of an S corporation that are employer
securities. Paragraph (b) of this section sets forth the general rule
under section 409(p)(1) and (2) prohibiting any accrual or allocation to
a disqualified person in a nonallocation year. Paragraph (c) of this
section sets forth rules under section 409(p)(3), (5), and (7) for
determining whether a year is a nonallocation year, generally based on
whether disqualified persons own at least 50 percent of the shares of
the S corporation, either taking into account only the outstanding
shares of the S corporation (including shares held by the ESOP) or
taking into account both the outstanding shares and synthetic equity of
the S corporation. Paragraphs (d), (e), and (f) of this section contain
definitions of disqualified person under section 409(p)(4) and (5),
deemed-owned ESOP shares under section 409(p)(4)(C), and synthetic
equity under section 409(p)(6)(C). Paragraph (g) of this section
contains a standard for determining when the principal purpose of the
ownership structure of an S corporation constitutes an avoidance or
evasion of section 409(p).
(2) Definitions. The following definitions apply for purposes of
section 409(p) and this section, as well as for purposes of section
4979A, which imposes an excise tax on certain events.
(i) Deemed-owned ESOP shares has the meaning set forth in paragraph
(e) of this section.
(ii) Disqualified person has the meaning set forth in paragraph (d)
of this section.
(iii) Employer has the meaning set forth in Sec. 1.410(b)-9.
(iv) Employer securities means employer securities within the
meaning of section 409(l).
[[Page 701]]
(v) ESOP means an employee stock ownership plan within the meaning
of section 4975(e)(7).
(vi) Prohibited allocation has the meaning set forth in paragraph
(b)(2) of this section.
(vii) S corporation means S corporation within the meaning of
section 1361.
(viii) Synthetic equity has the meaning set forth in paragraph (f)
of this section.
(b) Prohibited allocation in a nonallocation year--(1) General rule.
Section 409(p)(1) provides that an ESOP holding employer securities
consisting of stock in an S corporation must provide that no portion of
the assets of the plan attributable to (or allocable in lieu of) such
employer securities may, during a nonallocation year, accrue under the
ESOP, or be allocated directly or indirectly under any plan of the
employer (including the ESOP) meeting the requirements of section
401(a), for the benefit of any disqualified person.
(2) Additional rules--(i) Prohibited allocation definition. For
purposes of section 409(p) and this section, a prohibited allocation
means an impermissible accrual or an impermissible allocation. Whether
there is impermissible accrual is determined under paragraph (b)(2)(ii)
of this section and whether there is an impermissible allocation is
determined under paragraph (b)(2)(iii) of this section. The amount of
the prohibited allocation is equal to the sum of the amount of the
impermissible accrual plus the amount of the impermissible allocation.
(ii) Impermissible accrual. There is an impermissible accrual to the
extent that employer securities consisting of stock in an S corporation
owned by the ESOP and any assets attributable thereto are held under the
ESOP for the benefit of a disqualified person during a nonallocation
year. For this purpose, assets attributable to stock in an S corporation
owned by an ESOP include any distributions, within the meaning of
section 1368, made on S corporation stock held in a disqualified
person's account in the ESOP (including earnings thereon), plus any
proceeds from the sale of S corporation securities held for a
disqualified person's account in the ESOP (including any earnings
thereon). Thus, in the event of a nonallocation year, all S corporation
shares and all other ESOP assets attributable to S corporation stock,
including distributions, sales proceeds, and earnings on either
distributions or proceeds, held for the account of such disqualified
person in the ESOP during that year are an impermissible accrual for the
benefit of that person, whether attributable to contributions in the
current year or in prior years.
(iii) Impermissible allocation. An impermissible allocation occurs
during a nonallocation year to the extent that a contribution or other
annual addition (within the meaning of section 415(c)(2)) is made with
respect to the account of a disqualified person, or the disqualified
person otherwise accrues additional benefits, directly or indirectly
under the ESOP or any other plan of the employer qualified under section
401(a) (including a release and allocation of assets from a suspense
account, as described at Sec. 54.4975-11(c) and (d) of this chapter)
that, for the nonallocation year, would have been added to the account
of the disqualified person under the ESOP and invested in employer
securities consisting of stock in an S corporation owned by the ESOP but
for a provision in the ESOP that precludes such addition to the account
of the disqualified person, and investment in employer securities during
a nonallocation year.
(iv) Effects of prohibited allocation--(A) Deemed distribution. If a
plan year is a nonallocation year, the amount of any prohibited
allocation in the account of a disqualified person as of the first day
of the plan year, as determined under this paragraph (b)(2), is treated
as distributed from the ESOP (or other plan of the employer) to the
disqualified person on the first day of the plan year. In the case of an
impermissible accrual or impermissible allocation that is not in the
account of the disqualified person as of the first day of the plan year,
the amount of the prohibited allocation, as determined under this
paragraph (b)(2), is treated as distributed on the date of the
prohibited allocation. Thus, the fair market value of assets in the
disqualified person's account that constitutes an impermissible accrual
or allocation is included
[[Page 702]]
in gross income (to the extent in excess of any investment in the
contract allocable to such amount) and is subject to any additional
income tax that applies under section 72(t). A deemed distribution under
this paragraph (b)(2)(iv)(A) is not an actual distribution from the
ESOP. Thus, the amount of the prohibited allocation is not an eligible
rollover distribution under section 402(c). However, for purposes of
applying sections 72 and 402 with respect to any subsequent distribution
from the ESOP, the amount that the disqualified person previously took
into account as income as a result of the deemed distribution is treated
as investment in the contract.
(B) Other effects. If there is a prohibited allocation, then the
plan fails to satisfy the requirements of section 4975(e)(7) and ceases
to be an ESOP. In such a case, the exemption from the excise tax on
prohibited transactions for loans to leveraged ESOPs contained in
section 4975(d)(3) would cease to apply to any loan (with the result
that the employer would owe an excise tax with respect to the previously
exempt loan). As a result of these failures, the plan would lose the
prohibited transaction exemption for loans to an ESOP under section
4975(d)(3) of the Code and section 408(b)(3) of title I of the Employee
Retirement Income Security Act of 1974, as amended (ERISA). Finally, a
plan that does not operate in accordance with its terms to reflect
section 409(p) fails to satisfy the qualification requirements of
section 401(a), which would cause the corporation's S election to
terminate under section 1362. See also section 4979A(a) which imposes an
excise tax in certain events, including a prohibited allocation under
section 409(p).
(C) Example. The rules of this paragraph (b)(2)(iv) are illustrated
by the following example:
Example. (i) Facts. Corporation M, an S corporation under section
1361, establishes Plan P as an ESOP in 2006, with a calendar plan year.
Plan P is a qualified plan that includes terms providing that a
prohibited allocation will not occur during a nonallocation year in
accordance with section 409(p). On December 31, 2006, all of the 1,000
outstanding shares of stock of Corporation M, with a fair market value
of $30 per share, are contributed to Plan P and allocated among accounts
established within Plan P for the benefit of Corporation M's three
employees, individuals A, B, and C, based on their compensation for
2006. As a result, on December 31, 2006, participant A's account
includes 800 of the shares ($24,000); participant B's account includes
140 of the shares ($4,200); and participant C's account includes the
remaining 60 shares ($1,800). The plan year 2006 is a nonallocation
year, participants A and B are disqualified persons on December 31,
2006, and a prohibited allocation occurs for A and B on December 31,
2006.
(ii) Conclusion. On December 31, 2006, participants A and B each
have a deemed distribution as a result of the prohibited allocation,
resulting in income of $24,000 for participant A and $4,200 for
participant B. Corporation M owes an excise tax under section 4979A,
based on an amount involved of $28,200. Plan P ceases to be an ESOP on
the date of the prohibited allocation (December 31, 2006) and also fails
to satisfy the qualification requirements of section 401(a) on that date
due to the failure to comply with the provisions requiring compliance
with section 409(p). As a result of having an ineligible shareholder
under section 1361(b)(1)(B), Corporation M ceases to be an S corporation
under section 1361 on December 31, 2006.
(v) Prevention of prohibited allocation--(A) Transfer of account to
non-ESOP. An ESOP may prevent a nonallocation year or a prohibited
allocation during a nonallocation year by providing for assets
(including S corporation securities) allocated to the account of a
disqualified person (or a person reasonably expected to become a
disqualified person absent a transfer described in this paragraph
(b)(2)(v)(A)) to be transferred into a separate portion of the plan that
is not an ESOP, as described in Sec. 54.4975-11(a)(5) of this chapter,
or to another plan of the employer that satisfies the requirements of
section 401(a) and that is not an ESOP. Any such transfer must be
effectuated by an affirmative action taken no later than the date of the
transfer, and all subsequent actions (including benefit statements)
generally must be consistent with the transfer having occurred on that
date. In the event of such a transfer involving S corporation
securities, the recipient plan is subject to tax on unrelated business
taxable income under section 512.
(B) Relief from nondiscrimination requirement. Pursuant to this
paragraph (b)(2)(v)(B), if a transfer described in paragraph
(b)(2)(v)(A) of this section is
[[Page 703]]
made from an ESOP to a separate portion of the plan or to another
qualified plan of the employer that is not an ESOP, then both the ESOP
and the plan or portion of a plan that is not an ESOP do not fail to
satisfy the requirements of Sec. 1.401(a)(4)-4 merely because of the
transfer. Further, subsequent to the transfer, that plan will not fail
to satisfy the requirements of Sec. 1.401(a)(4)-4 merely because of the
benefits, rights, and features with respect to the transferred benefits
if those benefits, rights, and features would satisfy the requirements
of Sec. 1.401(a)(4)-4 if the mandatory disaggregation rule for ESOPs at
Sec. 1.410(b)-7(c)(2) did not apply.
(c) Nonallocation year. A year is a nonallocation year if it is
described in the general definition in paragraph (c)(1) of this section
or if the special rule of paragraph (c)(3) of this section applies.
(1) General definition. For purposes of section 409(p) and this
section, a nonallocation year means a plan year of an ESOP during which,
at any time, the ESOP holds any employer securities that are shares of
an S corporation and either--
(i) Disqualified persons own at least 50 percent of the number of
outstanding shares of stock in the S corporation (including deemed-owned
ESOP shares); or
(ii) Disqualified persons own at least 50 percent of the sum of:
(A) The outstanding shares of stock in the S corporation (including
deemed-owned ESOP shares); and
(B) The shares of synthetic equity in the S corporation owned by
disqualified persons.
(2) Attribution rules. For purposes of this paragraph (c), the rules
of section 318(a) apply to determine ownership of shares in the S
corporation (including deemed-owned ESOP shares) and synthetic equity.
However, for this purpose, section 318(a)(4) (relating to options to
acquire stock) is disregarded and, in applying section 318(a)(1), the
members of an individual's family include members of the individual's
family under paragraph (d)(2) of this section. In addition, an
individual is treated as owning deemed-owned ESOP shares of that
individual notwithstanding the employee trust exception in section
318(a)(2)(B)(i). If the attribution rules in paragraph (f)(1) of this
section apply, then the rules of paragraph (f)(1) of this section are
applied before (and in addition to) the rules of this paragraph (c)(2).
(3) Special rule for avoidance or evasion. (i) Any ownership
structure described in paragraph (g)(3) of this section results in a
nonallocation year. In addition, each individual referred to in
paragraph (g)(3) of this section is treated as a disqualified person and
the individual's interest in the separate entity described in paragraph
(g)(3) of this section is treated as synthetic equity.
(ii) Pursuant to section 409(p)(7)(B), 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), may provide
that a nonallocation year occurs in any case in which the principal
purpose of the ownership structure of an S corporation constitutes an
avoidance or evasion of section 409(p). For any year that is a
nonallocation year under this paragraph (c)(3), the Commissioner may
treat any person as a disqualified person. See paragraph (g) of this
section for guidance regarding when the principal purpose of an
ownership structure of an S corporation involving synthetic equity
constitutes an avoidance or evasion of section 409(p).
(4) Special rule for certain stock rights. (i) For purposes of
paragraph (c)(1) of this section, a person is treated as owning stock if
the person has an exercisable right to acquire the stock, the stock is
both issued and outstanding, and the stock is held by persons other than
the ESOP, the S corporation, or a related entity (as defined in
paragraph (f)(3) of this section).
(ii) This paragraph (c)(4) applies only if treating persons as
owning the shares described in paragraph (c)(4)(i) of this section
results in a nonallocation year. This paragraph (c)(4) does not apply to
a right to acquire stock of an S corporation held by a shareholder that
is subject to Federal income tax that, under Sec. 1.1361-
1(l)(2)(iii)(A) or (l)(4)(iii)(C), would not be taken into account in
determining if an S corporation has a second class of stock, provided
that a principal purpose of the right is not the avoidance or evasion of
[[Page 704]]
section 409(p). Under the last sentence of paragraph (f)(2)(i) of this
section, this paragraph (c)(4)(ii) does not apply for purposes of
determining ownership of deemed-owned ESOP shares or whether an interest
constitutes synthetic equity.
(5) Application with respect to shares treated as owned by more than
one person. For purposes of applying paragraph (c)(1) of this section,
if, by application of the rules of paragraph (c)(2), (c)(4), or (f)(1)
of this section, any share is treated as owned by more than one person,
then that share is counted as a single share and that share is treated
as owned by disqualified persons if any of the owners is a disqualified
person.
(6) Effect of nonallocation year. See paragraph (b) of this section
for a prohibition applicable during a nonallocation year. See also
section 4979A for an excise tax applicable in certain cases, including
section 4979A(a)(3) and (4) which applies during a nonallocation year
(whether or not there is a prohibited allocation during the year).
(d) Disqualified persons. A person is a disqualified person if the
person is described in paragraph (d)(1), (d)(2), or (d)(3) of this
section.
(1) General definition. For purposes of section 409(p) and this
section, a disqualified person means any person for whom--
(i) The number of such person's deemed-owned ESOP shares of the S
corporation is at least 10 percent of the number of the deemed-owned
ESOP shares of the S corporation;
(ii) The aggregate number of such person's deemed-owned ESOP shares
and synthetic equity shares of the S corporation is at least 10 percent
of the sum of--
(A) The total number of deemed-owned ESOP shares of the S
corporation; and
(B) The person's synthetic equity shares of the S corporation;
(iii) The aggregate number of the S corporation's deemed-owned ESOP
shares of such person and of the members of such person's family is at
least 20 percent of the number of deemed-owned ESOP shares of the S
corporation; or
(iv) The aggregate number of the S corporation's deemed-owned ESOP
shares and synthetic equity shares of such person and of the members of
such person's family is at least 20 percent of the sum of--
(A) The total number of deemed-owned ESOP shares of the S
corporation; and
(B) The synthetic equity shares of the S corporation owned by such
person and the members of such person's family.
(2) Treatment of family members; definition--(i) Rule. Each member
of the family of any person who is a disqualified person under paragraph
(d)(1)(iii) or (iv) of this section and who owns any deemed-owned ESOP
shares or synthetic equity shares is a disqualified person.
(ii) General definition. For purposes of section 409(p) and this
section, member of the family means, with respect to an individual--
(A) The spouse of the individual;
(B) An ancestor or lineal descendant of the individual or the
individual's spouse;
(C) A brother or sister of the individual or of the individual's
spouse and any lineal descendant of the brother or sister; and
(D) The spouse of any individual described in paragraph
(d)(2)(ii)(B) or (C) of this section.
(iii) Spouse. A spouse of an individual who is legally separated
from such individual under a decree of divorce or separate maintenance
is not treated as such individual's spouse under paragraph (d)(2)(ii) of
this section.
(3) Special rule for certain nonallocation years. See paragraph
(c)(3) of this section (relating to avoidance or evasion of section
409(p)) for special rules under which certain persons are treated as
disqualified persons.
(4) Example. The rules of this paragraph (d) are illustrated by the
following examples:
Example 1. (i) Facts. An S corporation has 800 outstanding shares,
of which 100 are owned by individual O and 700 are held in an employee
stock ownership plan (ESOP) during 2006, including 200 shares held in
the ESOP account of O, 65 shares held in the ESOP account of participant
P, 65 shares held in the ESOP account of participant Q who is P's
spouse, and 14 shares held in the ESOP account of R, who is the daughter
of P
[[Page 705]]
and Q. There are no unallocated suspense account shares in the ESOP. The
S corporation has no synthetic equity.
(ii) Conclusion. Under paragraph (d)(1)(i) of this section, O is a
disqualified person during 2006 because O's account in the ESOP holds at
least 10% of the shares owned by the ESOP (200 is 28.6% of 700). During
2006, neither P, Q, nor R is a disqualified person under paragraph
(d)(1)(i) of this section, because each of their accounts holds less
than 10% of the shares owned by the ESOP. However, each of P, Q, and R
is a disqualified person under paragraph (d)(1)(iii) of this section
because P and members of P's family own at least 20% of the deemed-owned
ESOP shares (144 (the sum of 65, 65 and 14) is 20.6% of 700). As a
result, disqualified persons own at least 50% of the outstanding shares
of the S corporation during 2006 (O's 100 directly owned shares, O's 200
deemed-owned shares, P's 65 deemed-owned shares, Q's 65 deemed-owned
shares, and R's 14 deemed-owned shares are 55.5% of 800).
Example 2. (i) Facts. An S corporation has shares that are owned by
an ESOP and various individuals. Individuals S and T are married and
have a son, U. Individuals V and W are married and have a daughter, X.
Individuals U and X are married. Individual V has a brother Y. Their
percentages of the deemed-owned ESOP shares of the S corporation are as
follows: T has 6%; U has 7%; and V has 8%. Neither S, W, X, nor Y has
any deemed-owned ESOP shares and the S corporation has no synthetic
equity. However, individual S and individual Y each own directly a
number of shares of the outstanding shares of the S corporation.
(ii) Conclusion. In this example, individual U is a disqualified
person under paragraph (d)(1) of this section (because U's family
consists of S, T, U, V, W, and X, and, in the aggregate, those persons
own more than 20% of the deemed-owned ESOP shares) and individual X is
also a disqualified person under paragraph (d)(1) of this section
(because T's family consists of S, T, U, V, W, and X, and, in the
aggregate, those persons own more than 20% of the deemed-owned ESOP
shares). Further, individuals T and V are each a disqualified person
under paragraph (d)(2) of this section because each is a member of a
family that includes one or more disqualified persons and each has
deemed-owned ESOP shares. However, individuals S, W, and Y are not
disqualified persons under this paragraph (d). For example, S does not
own more than 10% of the deemed-owned ESOP shares, and S's family, which
consists of S, T, U, and X, owns, in the aggregate, only 13% of the
deemed-owned ESOP shares (X's parents are not members of S's family
because the family members of a person do not include the parents-in-law
of the person's descendants). Further, note that, for purposes of
determining whether the ESOP has a nonallocation year under paragraph
(c) of this section, the shares directly owned by S and Y would be taken
into account as shares owned by disqualified persons under the
attribution rules in paragraph (c)(2) of this section.
(e) Deemed-owned ESOP shares. For purposes of section 409(p) and
this section, a person is treated as owning his or her deemed-owned ESOP
shares. Deemed-owned ESOP shares owned by a person mean, with respect to
any person--
(1) Any shares of stock in the S corporation constituting employer
securities that are allocated to such person's account under the ESOP;
and
(2) Such person's share of the stock in the S corporation that is
held by the ESOP but is not allocated to the account of any participant
or beneficiary (with such person's share to be determined in the same
proportion as the shares released and allocated from a suspense account,
as described at Sec. 54.4975-11(c) and (d) of the Excise Tax
Regulations, under the ESOP for the most recently ended plan year for
which there were shares released and allocated from a suspense account,
or if there has been no such prior release and allocation from a
suspense account, then determined in proportion to a reasonable estimate
of the shares that would be released and allocated in the first year of
a loan repayment).
(f) Synthetic equity and rights to acquire stock of the S
corporation--(1) Ownership of synthetic equity. For purposes of section
409(p) and this section, synthetic equity means the rights described in
paragraph (f)(2) of this section. Synthetic equity is treated as owned
by the person that has any of the rights specified in paragraph (f)(2)
of the section. In addition, the attribution rules as set forth in
paragraph (c)(2) of this section apply for purposes of attributing
ownership of synthetic equity.
(2) Synthetic equity--(i) Rights to acquire stock of the S
corporation--(A) General rule. Synthetic equity includes any stock
option, warrant, restricted stock, deferred issuance stock right, stock
appreciation right payable in stock, or similar interest or right that
gives the holder the right to acquire or receive stock of the S
corporation in the future. Rights to acquire stock in an S
[[Page 706]]
corporation with respect to stock that is, at all times during the
period when such rights are effective, both issued and outstanding, and
held by a person other than the ESOP, the S corporation, or a related
entity are not synthetic equity but only if that person is subject to
federal income taxes. (See also paragraph (c)(4) of this section.)
(B) Exception for certain rights of first refusal. A right of first
refusal to acquire stock held by an ESOP is not treated as a right to
acquire stock of an S corporation under this paragraph if the right to
acquire stock would not be taken into account under Sec. 1.1361-
1(l)(2)(iii)(A) in determining if an S corporation has a second class of
stock and the price at which the stock is acquired under the right of
first refusal is not less than the price determined under section
409(h). See Sec. 54.4975-11(d)(5) of the Excise Tax Regulations. The
right of first refusal must also comply with the requirements of Sec.
54.4975-7(b)(9) of the Excise Tax Regulations. This paragraph
(f)(2)(i)(B) does not apply if, based on the facts and circumstances,
the Commissioner finds that the right to acquire stock held by the ESOP
constitutes an avoidance or an evasion of section 409(p). See also
section 408(d) of ERISA, under which the exemption provided by section
408(e) of ERISA (and the related exemption at section 4975(d)(13) of the
Code) does not apply to an owner-employee, including an employee or
officer of an S corporation who is a 5 percent owner.
(ii) Special rule for certain stock rights. Synthetic equity also
includes a right to a future payment (payable in cash or any other form
other than stock of the S corporation) from an S corporation that is
based on the value of the stock of the S corporation, such as
appreciation in such value. Thus, for example, synthetic equity includes
a stock appreciation right with respect to stock of an S corporation
that is payable in cash or a phantom stock unit with respect to stock of
an S corporation that is payable in cash.
(iii) Rights to acquire interests in or assets of an S corporation
or a related entity. Synthetic equity includes a right to acquire stock
or other similar interests in a related entity to the extent of the S
corporation's ownership. Synthetic equity also includes a right to
acquire assets of an S corporation or a related entity other than either
rights to acquire goods, services, or property at fair market value in
the ordinary course of business or fringe benefits excluded from gross
income under section 132.
(iv) Special rule for nonqualified deferred compensation. (A)
Synthetic equity also includes any of the following with respect to an S
corporation or a related entity: any remuneration to which section
404(a)(5) applies; remuneration for which a deduction would be permitted
under section 404(a)(5) if separate accounts were maintained; any right
to receive property, as defined in Sec. 1.83-3(e) of the Income Tax
Regulations (including a payment to a trust described in section 402(b)
or to an annuity described in section 403(c)) in a future year for the
performance of services; any transfer of property in connection with the
performance of services to which section 83 applies to the extent that
the property is not substantially vested within the meaning of Sec.
1.83-3(i) by the end of the plan year in which transferred; and a split-
dollar life insurance arrangement under Sec. 1.61-22(b) entered into in
connection with the performance of services (other than one under which,
at all times, the only economic benefit that will be provided under the
arrangement is current life insurance protection as described in Sec.
1.61-22(d)(3)). Synthetic equity also includes any other remuneration
for services under a plan, method, or arrangement deferring the receipt
of compensation to a date that is after the 15th day of the 3rd calendar
month after the end of the entity's taxable year in which the related
services are rendered. However, synthetic equity does not include
benefits under a plan that is an eligible retirement plan within the
meaning of section 402(c)(8)(B).
(B) For purposes of applying paragraph (f)(2)(iv)(A) of this section
with respect to an ESOP, synthetic equity does not include any interest
described in such paragraph (f)(2)(iv)(A) of this section to the extent
that--
[[Page 707]]
(1) The interest is nonqualified deferred compensation (within the
meaning of section 3121(v)(2)) that was outstanding on December 17,
2004;
(2) The interest is an amount that was taken into account (within
the meaning of Sec. 31.3121(v)(2)-1(d) of this chapter) prior to
January 1, 2005, for purposes of taxation under chapter 21 of the
Internal Revenue Code (or income attributable thereto); and
(3) The interest was held before the first date on which the ESOP
acquires any employer securities.
(v) No overlap among shares of deemed-owned ESOP shares or synthetic
equity. Synthetic equity under this paragraph (f)(2) does not include
shares that are deemed-owned ESOP shares (or any rights with respect to
deemed-owned ESOP shares to the extent such rights are specifically
provided under section 409(h)). In addition, synthetic equity under a
specific subparagraph of this paragraph (f)(2) does not include anything
that is synthetic equity under a preceding provision of paragraph
(f)(2)(i), (ii), (iii), or (iv) of this section.
(3) Related entity. For purposes of this paragraph (f), related
entity means any entity in which the S corporation holds an interest and
which is a partnership, a trust, an eligible entity that is disregarded
as an entity that is separate from its owner under Sec. 301.7701-3 of
this chapter, or a qualified subchapter S subsidiary under section
1361(b)(3).
(4) Number of synthetic shares--(i) Synthetic equity determined by
reference to S corporation shares. In the case of synthetic equity that
is determined by reference to shares of stock of the S corporation, the
person who is entitled to the synthetic equity is treated as owning the
number of shares of stock deliverable pursuant to such synthetic equity.
In the case of synthetic equity that is determined by reference to
shares of stock of the S corporation, but for which payment is made in
cash or other property (besides stock of the S corporation), the number
of shares of synthetic equity treated as owned is equal to the number of
shares of stock having a fair market value equal to the cash or other
property (disregarding lapse restrictions as described in Sec. 1.83-
3(i)). Where such synthetic equity is a right to purchase or receive S
corporation shares, the corresponding number of shares of synthetic
equity is determined without regard to lapse restrictions as described
in Sec. 1.83-3(i) or to any amount required to be paid in exchange for
the shares. Thus, for example, if a corporation grants an employee of an
S corporation an option to purchase 100 shares of the corporation's
stock, exercisable in the future only after the satisfaction of certain
performance conditions, the employee is the deemed owner of 100
synthetic equity shares of the corporation as of the date the option is
granted. If the same employee were granted 100 shares of restricted S
corporation stock (or restricted stock units), subject to forfeiture
until the satisfaction of performance or service conditions, the
employee would likewise be the deemed owner of 100 synthetic equity
shares from the grant date. However, if the same employee were granted a
stock appreciation right with regard to 100 shares of S corporation
stock (whether payable in stock or in cash), the number of synthetic
equity shares the employee is deemed to own equals the number of shares
having a value equal to the appreciation at the time of measurement
(determined without regard to lapse restrictions).
(ii) Synthetic equity determined by reference to shares in a related
entity. In the case of synthetic equity that is determined by reference
to shares of stock (or similar interests) in a related entity, the
person who is entitled to the synthetic equity is treated as owning
shares of stock of the S corporation with the same aggregate value as
the number of shares of stock (or similar interests) of the related
entity (with such value determined without regard to any lapse
restriction as defined at Sec. 1.83-3(i)).
(iii) Other synthetic equity--(A) General rule. In the case of any
synthetic equity to which neither paragraph (f)(4)(i) of this section
nor paragraph (f)(4)(ii) of this section apply, the person who is
entitled to the synthetic equity is treated as owning on any date a
number of shares of stock in the S corporation equal to the present
value (on that date) of the synthetic equity (with such value determined
without regard to any lapse restriction as defined at
[[Page 708]]
Sec. 1.83-3(i)) divided by the fair market value of a share of the S
corporation's stock as of that date.
(B) Use of annual or more frequent determination dates. A year is a
nonallocation year if the thresholds in paragraph (c) of this section
are met at any time during that year. However, for purposes of this
paragraph (f)(4)(iii), an ESOP may provide that the number of shares of
S corporation stock treated as owned by a person who is entitled to
synthetic equity to which this paragraph (f)(4)(iii) applies is
determined annually (or more frequently), as of the first day of the
ESOP's plan year or as of any other reasonable determination date or
dates during a plan year. If the ESOP so provides, the number of shares
of synthetic equity to which this paragraph (f)(4)(iii) applies that are
treated as owned by that person for any period from a given
determination date through the date immediately preceding the next
following determination date is the number of shares treated as owned on
the given determination date.
(C) Use of triennial recalculations. (1) Although an ESOP must have
a determination date that is no less frequent than annually, if the
terms of the ESOP so provide, then the number of shares of synthetic
equity with respect to grants of synthetic equity to which this
paragraph (f)(4)(iii) applies may be fixed for a specified period from a
determination date identified under the ESOP through the day before a
determination date that is not later than the third anniversary of the
identified determination date. Thus, the ESOP must provide for the
number of shares of synthetic equity to which this paragraph (f)(4)(iii)
applies to be re-determined not less frequently than every three years,
based on the S corporation share value on a determination date that is
not later than the third anniversary of the identified determination
date and the aggregate present value of the synthetic equity to which
this paragraph (f)(4)(iii) applies (including all grants made during the
three-year period) on that determination date.
(2) However, additional accruals, allocations, or grants (to which
this paragraph (f)(4)(iii) applies) that are made during such three-year
period are taken into account on each determination date during that
period, based on the number of synthetic equity shares resulting from
the additional accrual, allocation, or grant (determined as of the
determination date on or next following the date of the accrual,
allocation, or grant). See Example 3 of paragraph (h) of this section
for an example illustrating this paragraph (f)(4)(iii)(C).
(3) If, as permitted under this paragraph (f)(4)(iii)(C), an ESOP
provides for the number of shares of synthetic equity to be fixed for a
specified period from a determination date to a subsequent determination
date, then that subsequent determination date can be changed to a new
determination date, subject to the following conditions:
(i) The change in the subsequent determination date must be
effectuated through a plan amendment adopted before the new
determination date;
(ii) The new determination date must be earlier than the prior
determination date (that is, the new determination date must be earlier
than the determination date applicable in the absence of the plan
amendment);
(iii) The conditions in paragraph (f)(4)(iii)(C)(2) of this section
must be satisfied measured from the new determination date; and
(iv) Except to the extent permitted 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 change
must be adopted in connection with either a change in the plan year of
the ESOP or a merger, consolidation, or transfer of plan assets of the
ESOP under section 414(l) (and the new determination date must
consistent with that plan year change or section 414(l) event).
(4) Conditions for application of rules. This paragraph
(f)(4)(iii)(C) only applies with respect to grants of synthetic equity
to which this paragraph (f)(4)(iii) applies. In addition, paragraph
(f)(4)(iii)(C) of this section applies only if the fair market value of
a share of the S corporation securities on any determination date is not
unrepresentative of the value of the S corporation securities throughout
the rest of the plan year and only if the terms of
[[Page 709]]
the ESOP include provisions conforming to paragraph (f)(4)(iii)(C)(1) of
this section which are consistently used by the ESOP for all persons. In
addition, paragraph (f)(4)(iii)(C)(1) of this section applies only if
the terms of the ESOP include provisions conforming to paragraphs
(f)(4)(iii)(C)(1) of this section which are consistently used by the
ESOP for all persons.
(iv) Adjustment of number of synthetic equity shares where ESOP owns
less than 100 percent of S corporation. The number of synthetic shares
otherwise determined under this paragraph (f)(4) is decreased ratably to
the extent that shares of the S corporation are owned by a person who is
not an ESOP and who is subject to Federal income taxes. For example, if
an S corporation has 200 outstanding shares, of which individual A owns
50 shares and the ESOP owns the other 150 shares, and individual B would
be treated under this paragraph (f)(4) as owning 100 synthetic equity
shares of the S corporation but for this paragraph (f)(4)(iv), then,
under the rule of this paragraph (f)(4)(iv), the number of synthetic
shares treated as owned by B under this paragraph (f)(4) is decreased
from 100 to 75 (because the ESOP only owns 75 percent of the outstanding
stock of the S corporation, rather than 100 percent).
(v) Special rule for shares with greater voting power than ESOP
shares. Notwithstanding any other provision of this paragraph (f)(4), if
a synthetic equity right includes (directly or indirectly) a right to
purchase or receive shares of S corporation stock that have per-share
voting rights greater than the per-share voting rights of one or more
shares of S corporation stock held by the ESOP, then the number of
shares of deemed owned synthetic equity attributable to such right is
not less than the number of shares that would have the same voting
rights if the shares had the same per-share voting rights as shares held
by the ESOP with the least voting rights. For example, if shares of S
corporation stock held by the ESOP have one voting right per share, then
an individual who holds an option to purchase one share with 100 voting
rights is treated as owning 100 shares of synthetic equity.
(g) Avoidance or evasion of section 409(p) involving synthetic
equity--(1) General rule. Paragraph (g)(2) of this section sets forth a
standard for determining whether the principal purpose of the ownership
structure of an S corporation involving synthetic equity constitutes an
avoidance or evasion of section 409(p). Paragraph (g)(3) of this section
identifies certain specific ownership structures that constitute an
avoidance or evasion of section 409(p). See also paragraph (c)(3) of
this section for a rule under which the ownership structures in
paragraph (g)(3) of this section result in a nonallocation year for
purposes of section 409(p).
(2) Standard for determining when there is an avoidance or evasion
of section 409(p) involving synthetic equity. For purposes of section
409(p) and this section, whether the principal purpose of the ownership
structure of an S corporation involving synthetic equity constitutes an
avoidance or evasion of section 409(p) is determined by taking into
account all the surrounding facts and circumstances, including all
features of the ownership of the S corporation's outstanding stock and
related obligations (including synthetic equity), any shareholders who
are taxable entities, and the cash distributions made to shareholders,
to determine whether, to the extent of the ESOP's stock ownership, the
ESOP receives the economic benefits of ownership in the S corporation
that occur during the period that stock of the S corporation is owned by
the ESOP. Among the factors indicating that the ESOP receives those
economic benefits include shareholder voting rights, the right to
receive distributions made to shareholders, and the right to benefit
from the profits earned by the S corporation, including the extent to
which actual distributions of profits are made from the S corporation to
the ESOP and the extent to which the ESOP's ownership interest in
undistributed profits and future profits is subject to dilution as a
result of synthetic equity. For example, the ESOP's ownership interest
is not subject to dilution if the total amount of synthetic equity is a
relatively small portion of the total number of shares and deemed-owned
shares of the S corporation.
[[Page 710]]
(3) Specific transactions that constitute an avoidance or evasion of
section 409(p) involving segregated profits. Taking into account the
standard in paragraph (g)(2) of this section, the principal purpose of
the ownership structure of an S corporation constitutes an avoidance or
evasion of section 409(p) in any case in which--
(i) The profits of the S corporation generated by the business
activities of a specific individual or individuals are not provided to
the ESOP, but are instead substantially accumulated and held for the
benefit of the individual or individuals on a tax-deferred basis within
an entity related to the S corporation, such as a partnership, trust, or
corporation (such as in a subsidiary that is a disregarded entity), or
any other method that has the same effect of segregating profits for the
benefit of such individual or individuals (such as nonqualified deferred
compensation described in paragraph (f)(2)(iv) of this section);
(ii) The individual or individuals for whom profits are segregated
have rights to acquire 50 percent or more of those profits directly or
indirectly (for example, by purchase of the subsidiary); and
(iii) A nonallocation year would occur if this section were
separately applied with respect to either the separate entity or
whatever method has the effect of segregating profits of the individual
or individuals, treating such entity as a separate S corporation owned
by an ESOP (or in the case of any other method of segregation of profits
by treating those profits as the only assets of a separate S corporation
owned by an ESOP).
(h) Examples. The rules of this section are illustrated by the
following examples:
Example 1. Relating to determination of disqualified persons and
nonallocation year if there is no synthetic equity. (i) Facts.
Corporation X is a calendar year S corporation that maintains an ESOP. X
has a single class of common stock, of which there are a total of 1,200
shares outstanding. X has no synthetic equity. In 2006, individual A,
who is not an employee of X (and is not related to any employee of X),
owns 100 shares directly, B, who is an employee of X, owns 100 shares
directly, and the remaining 1,000 shares are owned by an ESOP maintained
by X for its employees. The ESOP's 1,000 shares are allocated to the
accounts of individuals who are employees of X (none of whom are
related), as set forth in columns 1 and 2 in the following table:
----------------------------------------------------------------------------------------------------------------
2 3 4
-------------------------------------------------------------------------
1 Shareholders Deemed-owned ESOP
shares (total of Percentage deemed- Disqualified person
1,000) owned ESOP shares
----------------------------------------------------------------------------------------------------------------
B..................................... 330 33 Yes.
C..................................... 145 14.5 Yes.
D..................................... 75 7.5 No.
E..................................... 30 3 No.
F..................................... 20 2 No.
Other participants.................... \1\ 400 (\2\) No.
----------------------------------------------------------------------------------------------------------------
\1\ None exceed 10 shares.
\2\ 1% or less.
(ii) Conclusion with respect to disqualified persons. As shown in
column 4 in the table contained in paragraph (i) of Example 1,
individuals B and C are disqualified persons for 2006 under paragraph
(d)(1) of this section because each owns at least 10% of X's deemed-
owned ESOP shares. However, the synthetic equity shares owned by any
person do not affect the calculation for any other person's ownership of
shares.
(iii) Conclusion with respect to nonallocation year. 2006 is not a
nonallocation year under section 409(p) because disqualified persons do
not own at least 50% of X's outstanding shares (the 100 shares owned
directly by B, B's 330 deemed-owned ESOP shares, plus C's 145 deemed-
owned ESOP shares equal only 47.9% of the 1,200 outstanding shares of
X).
Example 2. Relating to determination of disqualified persons and
nonallocation year if there is synthetic equity. (i) Facts. The facts
are the same as in Example 1, except that, as shown in column 4 of the
table in this Example 2, individuals E and F have options to acquire 110
and 130 shares, respectively, of the common stock of X from X:
[[Page 711]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 Deemed-owned
ESOP shares 3 Percentage 4 Options 5 Shareholder percentage of
1 Shareholder (total of deemed-owned (240) deemed-owned ESOP plus 6 Disqualified person
1,000) ESOP shares synthetic equity shares
--------------------------------------------------------------------------------------------------------------------------------------------------------
B........................................ 330 33 .............. ........................... Yes (col. 3).
C........................................ 145 14.5 .............. ........................... Yes (col. 3).
D........................................ 75 7.5 .............. ........................... No.
E........................................ 30 3 110 11.1% ([30+ 91.7] divided Yes (col. 5).
by 1,091.7).
F........................................ 20 2 130 11.6% ([20 +108.3] divided Yes (col. 5).
by 1,108.3).
Other participants....................... \1\ 400 (\2\) .............. ........................... No.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ None exceeds 10 shares.
\2\ 1% or less.
(ii) Conclusion with respect to disqualified persons. Individual E's
synthetic equity shares are counted in determining whether E is a
disqualified person for 2006, and individual F's synthetic equity shares
are counted in determining whether F is a disqualified person for 2006.
Applying the rule of paragraph (f)(4)(iv) of this section, E's option to
acquire 110 shares of the S corporation converts under paragraph
(f)(4)(iv) of this section, into 91.7 shares of synthetic equity (110
times the ratio of the 1,000 deemed-owned ESOP shares to the sum of the
1,000 deemed-owned ESOP shares plus the 200 shares held outside the ESOP
by A and B). Similarly, F's option to acquire 130 shares of the S
corporation converts into 108.3 shares of synthetic equity (130 times
the ratio of the 1,000 deemed-owned ESOP shares to the sum of the 1,000
deemed-owned ESOP shares plus the 200 shares held outside the ESOP by A
and B). However, the synthetic equity shares owned by any person do not
affect the calculation for any other person's ownership of shares.
Accordingly, as shown in column 6 in the table contained in paragraph
(i) of Example 2, individuals B, C, E, and F are disqualified persons
for 2006.
(iii) Conclusion with respect to nonallocation year. The 100 shares
owned directly by B, B's 330 deemed-owned ESOP shares, C's 145 deemed-
owned ESOP shares, E's 30 deemed-owned ESOP shares, E's 91.7 synthetic
equity shares, F's 20 deemed-owned ESOP shares, plus F's 108.3 synthetic
equity shares total 825, which equals 58.9% of 1,400, which is the sum
of the 1,200 outstanding shares of X and the 200 shares of synthetic
equity shares of X held by disqualified persons. Thus, 2006 is a
nonallocation year for X's ESOP under section 409(p) because
disqualified persons own at least 50% of the total shares of outstanding
stock of X and the total synthetic equity shares of X held by
disqualified persons. In addition, independent of the preceding
conclusion, 2006 would be a nonallocation year because disqualified
persons own at least 50% of X's outstanding shares because the 100
shares owned directly by B, B's 330 deemed-owned ESOP shares, C's 145
deemed-owned ESOP shares, E's 30 deemed-owned ESOP shares, plus F's 20
deemed-owned ESOP shares equal 52.1% of the 1,200 outstanding shares of
X.
Example 3. Relating to determination of number of shares of
synthetic equity. (i) Facts. Corporation Y is a calendar year S
corporation that maintains an ESOP. Y has a single class of common
stock, of which there are a total of 1,000 shares outstanding, all of
which are owned by the ESOP. Y has no synthetic equity, except for four
grants of nonqualified deferred compensation that are made to an
individual during the period from 2005 through 2011, as set forth in
column 2 in the following table. The ESOP provides for the special rules
in paragraph (f)(4)(iii) of this section to determine the number of
shares of synthetic equity owned by that individual with a determination
date of January 1 and the triennial rule redetermining value, as shown
in columns 4 and 5:
----------------------------------------------------------------------------------------------------------------
1 2 3 4 5
----------------------------------------------------------------------------------------------------------------
Aggregate
New shares of number of
Present value of synthetic synthetic
Determination date nonqualified deferred Share value on equity on equity shares
compensation on determination date determination on
determination date date determination
date
----------------------------------------------------------------------------------------------------------------
January 1, 2005........... A grant is made on $10 per share............ 100 100
January 1, 2005, with a
present value of $1,000.
An additional grant of
nonqualified deferred
compensation with a
present value of $775 is
made on March 1, 2005.
[[Page 712]]
January 1, 2006........... An additional grant is $8 per share............. 200 300
made on December 31,
2005, which has a
present value of $800 on
January 1, 2006. The
March 1, 2005, grant has
a present value on
January 1, 2006, of $800.
January 1, 2007........... No new grants made....... $12 per share............ .............. 300
January 1, 2008........... An additional grant is $15 per share............ 200 450
made on December 31,
2007, which has a
present value of $3,000
on January 1, 2008. The
grants made during 2005
through 2007 have an
aggregate present value
on January 1, 2008, of
$3,750.
January 1, 2009........... No new grants are made... $11 per share............ .............. 450
January 1, 2010........... No new grants are made... $22 per share............ .............. 450
January 1, 2011........... No new grants are made. $20 per share............ .............. 380
The grants made during
2005 through 2008 have
an aggregate present
value on January 1,
2011, of $7,600.
----------------------------------------------------------------------------------------------------------------
(ii) Conclusion. The grant made on January 1, 2005, is treated as
100 shares until the determination date in 2008. The grant made on March
1, 2005, is not taken into account until the 2006 determination date and
its present value on that date, along with the then present value of the
grant made on December 31, 2005, is treated as a number of shares that
are based on the $8 per share value on the 2006 determination date, with
the resulting number of shares continuing to apply until the
determination date in 2008. On the January 1, 2008, determination date,
the grant made on the preceding day is taken into account at its present
value of $3,000 on January 1, 2008 and the $15 per share value on that
date with the resulting number of shares (200) continuing to apply until
the next determination date. In addition, on the January 1, 2008,
determination date, the number of shares determined under other grants
made between January 1, 2005 and December 31, 2007, must be revalued.
Accordingly, the aggregate value of all nonqualified deferred
compensation granted during that period is determined to be $3750 on
January 1, 2008, and the corresponding number of shares of synthetic
equity based on the $15 per share value is determined to be 250 shares
on the 2008 determination date, with the resulting aggregate number of
shares (450) continuing to apply until the determination date in 2011.
On the January 1, 2011, determination date, the aggregate value of all
nonqualified deferred compensation is determined to be $7,600 and the
corresponding number of shares of synthetic equity based on the $20 per
share value on the 2011 determination date is determined to be 380
shares (with the resulting number of shares continuing to apply until
the day before the determination date in 2014, assuming no further
grants are made).
(i) Effective dates--(1) Statutory effective date. (i) Except as
otherwise provided in paragraph (i)(1)(ii) of this section, section
409(p) applies for plan years ending after March 14, 2001.
(ii) If an ESOP holding stock in an S corporation was established on
or before March 14, 2001, and the election under section 1362(a) with
respect to that S corporation was in effect on March 14, 2001, section
409(p) applies for plan years beginning on or after January 1, 2005.
(2) Regulatory effective date. This section applies for plan years
beginning on or after January 1, 2006. For plan years beginning before
January 1, 2006, Sec. 1.409(p)-1T (as it appeared in the April 1, 2005,
edition of 26 CFR part 1) applies.
[T.D. 9302, 71 FR 76137, Dec. 20, 2006]
Sec. 1.409(p)-1T Prohibited allocations of securities in an S
corporation (temporary).
(a) Organization of this section. Section 409(p) applies if a
nonallocation year occurs in an employee stock ownership plan (ESOP), as
defined in section 4975(e)(7), that holds shares of stock of an S
corporation, as defined in section 1361, that are employer securities as
defined in section 409(l). Paragraph (b) of this section sets forth the
general rule under section 409(p)(1) and (2) prohibiting any accrual or
allocation to a disqualified person in a nonallocation year. Paragraph
(c) of this
[[Page 713]]
section sets forth rules under section 409(p)(3), (5), and (7) for
determining whether a year is a nonallocation year, generally based on
whether disqualified persons own at least 50 percent of the shares of
the S corporation, either taking into account only the outstanding
shares of the S corporation (including shares held by the ESOP) or
taking into account both the outstanding shares and synthetic equity of
the S corporation. Paragraphs (d), (e), and (f) of this section contain
definitions of disqualified person under section 409(p)(4) and (5),
deemed-owned ESOP shares under section 409(p)(4)(C), and synthetic
equity under section 409(p)(6)(C). Paragraph (g) of this section
contains a standard for determining when the principal purpose of the
ownership structure of an S corporation constitutes an avoidance or
evasion of section 409(p). The definitions used in section 409(p) and
this section are also applicable for purposes of section 4979A, which
imposes an excise tax on certain events, including a nonallocation year
under section 409(p).
(b) Prohibited allocation in a nonallocation year--(1) General rule.
An ESOP holding employer securities consisting of stock in an S
corporation must provide that no portion of the assets of the plan
attributable to (or allocable in lieu of) such employer securities may,
during a nonallocation year, accrue under the ESOP, or be allocated
directly or indirectly under any plan of the employer (including the
ESOP) meeting the requirements of section 401(a), for the benefit of any
disqualified person (a prohibited allocation).
(2) Additional rules--(i) Prohibited allocation definition. For
purposes of section 409(p)(2)(A) and paragraph (b)(1) of this section,
there is a prohibited allocation (i.e., assets accrue or are allocated
as prohibited under paragraph (b)(1) of this section) if there is either
an impermissible accrual as defined in paragraph (b)(2)(ii) of this
section or an impermissible allocation as defined in paragraph
(b)(2)(iii) of this section. The amount of the prohibited allocation is
equal to the sum of the impermissible accrual plus the amount of the
impermissible allocation (if any).
(ii) Impermissible accrual. There is an impermissible accrual to the
extent (and only to the extent) that employer securities consisting of
stock in an S corporation owned by the ESOP and any assets attributable
thereto are held under the ESOP for the benefit of a disqualified person
during a nonallocation year. For this purpose, assets attributable to S
corporation securities include any distributions, within the meaning of
section 1368, made on S corporation stock held in a disqualified
person's account in the ESOP (including earnings thereon), plus any
proceeds from the sale of S corporation securities held for a
disqualified person's account in the ESOP (including any earnings
thereon). Thus, for example, in the event of a nonallocation year, all S
corporation shares and all other ESOP assets attributable to S
corporation stock, including distributions, sales proceeds, and earnings
on either the distribution or proceeds, held for the account of such
disqualified person in the ESOP during that year are an impermissible
accrual for the benefit of that person, whether attributable to
contributions in the current year or in prior years.
(iii) Impermissible allocation. An impermissible allocation means
any allocation for a disqualified person directly or indirectly under
any plan of the employer qualified under section 401(a) that occurs
during a nonallocation year to the extent that a contribution or other
annual addition is made, or the disqualified person otherwise accrues
additional benefits, under the ESOP or any other plan of the employer
qualified under section 401(a) (including a release and allocation of
assets from a suspense account, as described at Sec. 54.4975-11(c) and
(d) of this chapter) that, for the nonallocation year, would otherwise
have been added to the account of the disqualified person under the ESOP
and invested in employer securities consisting of stock in an S
corporation owned by the ESOP but for a provision in the ESOP to comply
with section 409(p).
(iv) Effects of prohibited allocation--(A) Deemed distribution. If
there is a prohibited allocation, the amount of the prohibited
allocation, as determined under this paragraph (b)(2), is
[[Page 714]]
treated as distributed from the ESOP (or other plan of the employer) to
the disqualified person on the first day of the plan year on which there
is an impermissible accrual or on the date of the allocation in the case
of an additional impermissible accrual or impermissible allocation
during the plan year but after the first day of the plan year. Thus, the
fair market value of assets in the disqualified person's account that
constitutes an impermissible accrual or allocation is included in gross
income (to the extent in excess of any investment in the contract
allocable to such amount) and is subject to any additional income tax
that applies under section 72(t). A deemed distribution under this
paragraph (b)(2)(iv)(A) is not an actual distribution from the ESOP.
Thus, the amount of the prohibited allocation is not an eligible
rollover distribution under section 402(c). However, for purposes of
applying sections 72 and 402 with respect to any subsequent distribution
from the ESOP, the amount that the disqualified person previously took
into account as income as a result of the deemed distribution is treated
as an investment in the contract.
(B) Other effects. If there is a prohibited allocation, then the
plan fails to satisfy the requirements of section 4975(e)(7) and ceases
to be an ESOP. In such a case, the exemption from the excise tax on
prohibited transactions for loans to leveraged ESOPs contained in
section 4975(d)(3) would cease to apply to any loan (with the result
that the employer would owe an excise tax with respect to the previously
exempt loan) and, further, the exception in section 512(e)(3) would not
apply to the plan (with the result that the plan may owe income tax as a
result of unrelated business taxable income under section 512 with
respect to S corporation stock held by the plan). See also section
4979A(a) which imposes an excise tax in certain events, including a
prohibited allocation under section 409(p).
(v) Prevention of prohibited allocation--(A) Transfer of account to
non-ESOP. An ESOP may prevent a nonallocation year or a prohibited
allocation during a nonallocation year by permitting assets (including S
corporation securities) allocated to the account of a disqualified
person (or a person reasonably expected to become a disqualified person
absent a transfer described in this paragraph (b)(2)(v)(A)) to be
transferred into a separate portion of the plan that is not an ESOP, as
described in Sec. 54.4975-11(a)(5) of this chapter, or to another plan
of the employer that satisfies the requirements of section 401(a) (and
that is not an ESOP). In the event of such a transfer involving S
corporation securities, the recipient plan is subject to tax on
unrelated business taxable income under section 512.
(B) Relief from nondiscrimination requirement. Pursuant to this
paragraph (b)(2)(v)(B), if a transfer described in paragraph
(b)(2)(v)(A) of this section is made from an ESOP to a separate portion
of the plan or to another qualified plan of the employer that is not an
ESOP, then both the ESOP and the plan or portion of a plan that is not
an ESOP will not fail to satisfy the requirements of Sec. 1.401(a)(4)-4
merely because of the transfer. Further, subsequent to the transfer,
that plan will not fail to satisfy the requirements of Sec.
1.401(a)(4)-4 merely because of the benefits, rights, or features with
respect to the transferred benefits if those benefits, rights, or
features would satisfy the requirements of Sec. 1.401(a)(4)-4 if the
mandatory disaggregation rule for ESOPs at Sec. 1.410(b)-7(c)(2) did
not apply.
(c) Nonallocation year--(1) Definition generally. For purposes of
section 409(p) and this section, a nonallocation year means a plan year
of an ESOP during which, at any time, the ESOP holds any employer
securities that are shares of an S corporation and either--
(i) Disqualified persons own at least 50 percent of the number of
outstanding shares of stock in the S corporation (including deemed-owned
ESOP shares); or
(ii) Disqualified persons own at least 50 percent of the sum of:
(A) The outstanding shares of stock in the S corporation (including
deemed-owned ESOP shares), plus
(B) The shares of synthetic equity in the S corporation owned by
disqualified persons.
(2) Attribution rules. For purposes of this paragraph (c), the rules
of section 318(a) apply to determine ownership of
[[Page 715]]
shares in the S corporation (including deemed-owned ESOP shares) and
synthetic equity. However, for this purpose, section 318(a)(4) (relating
to options to acquire stock) is disregarded and, in applying section
318(a)(1), the members of an individual's family include members of the
individual's family under paragraph (d)(2) of this section. In addition,
an individual is treated as owning deemed-owned ESOP shares of that
individual notwithstanding the employee trust exception in section
318(a)(2)(B)(i). If the attribution rules in paragraph (f)(1) of this
section apply, then the rules of paragraph (f)(1) of this section are
applied before the rules of this paragraph (c)(2).
(3) Special rule for avoidance or evasion. (i) The ownership
structures described in paragraph (g)(3) of this section result in a
nonallocation year. In addition, under the ownership structures
described in paragraph (g)(3) of this section, the individual referred
to in paragraph (g)(3) of this section is treated as a disqualified
person and that person's interest in the separate entity is treated as
synthetic equity.
(ii) Under section 409(p)(7)(B), 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), may provide
that a nonallocation year occurs in any case in which the principal
purpose of the ownership structure of an S corporation constitutes an
avoidance or evasion of section 409(p). For any year that is a
nonallocation year under this paragraph (c)(3), the Commissioner may
treat any person as a disqualified person. See paragraph (g) of this
section for guidance regarding when the principal purpose of an
ownership structure of an S corporation involving synthetic equity
constitutes an avoidance or evasion of section 409(p).
(4) Special rule for certain stock rights. (i) For purposes of
paragraph (c)(1) of this section, a person is treated as owning stock
that the person has a right to acquire if, at all times during the
period when such right is effective, the stock that the person has the
right to acquire is both issued and outstanding and is held by persons
other than the ESOP, the S corporation, or a related entity (as defined
in paragraph (f)(3) of this section).
(ii) This paragraph (c)(4) applies only if treating persons as
owning the shares described in paragraph (c)(4)(i) of this section
results in a nonallocation year. This paragraph (c)(4) does not apply to
a right to acquire stock of an S corporation held by a shareholder
subject to Federal income tax that, under Sec. 1.1361-1(l)(2)(iii) or
(l)(4)(iii)(C), would not be taken into account in determining if an S
corporation has a second class of stock provided that a principal
purpose of the right is not the avoidance or evasion of section 409(p).
Under the last sentence of paragraph (f)(2)(i) of this section, this
paragraph (c)(4)(ii) does not apply for purposes of determining
ownership of deemed-owned ESOP shares or whether an interest constitutes
synthetic equity.
(5) Application with respect to shares treated as owned by more than
one person. For purposes of applying paragraph (c)(1) of this section,
if, by application of the rules of paragraph (c)(2), (c)(4), or (f)(1)
of this section, any share is treated as owned by more than one person,
then that share is counted as a single share and that share is treated
as owned by disqualified persons if any of the owners is a disqualified
person.
(6) Effect of nonallocation year. See paragraph (b) of this section
for a prohibition applicable during a nonallocation year. See also
section 4979A for an excise tax applicable in certain cases, including
section 4979A(a)(3) and (4) which applies during a nonallocation year
(whether or not there is a prohibited allocation during the year).
(d) Disqualified persons--(1) General definition. For purposes of
section 409(p) and this section, a disqualified person means any person
for whom--
(i) The number of such person's deemed-owned ESOP shares of the S
corporation is at least 10 percent of the number of the deemed-owned
ESOP shares of the S corporation;
(ii) The aggregate number of such person's deemed-owned ESOP shares
and synthetic equity shares of the S corporation is at least 10 percent
of the sum of:
(A) The total number of deemed-owned ESOP shares; and
[[Page 716]]
(B) The person's synthetic equity shares of the S corporation;
(iii) The aggregate number of the S corporation's deemed-owned ESOP
shares of such person and of the members of such person's family is at
least 20 percent of the number of deemed-owned ESOP shares of the S
corporation; or
(iv) The aggregate number of the S corporation's deemed-owned ESOP
shares and synthetic equity shares of such person and of the members of
such person's family is at least 20 percent of the sum of:
(A) The total number of deemed-owned ESOP shares, and
(B) The synthetic equity shares of the S corporation owned by such
person and the members of such person's family.
(2) Treatment of family members; definition--(i) Rule. Each member
of the family of any person who is a disqualified person under paragraph
(d)(1) (iii) or (iv) of this section is a disqualified person.
(ii) General definition. For purposes of section 409(p) and this
section, member of the family means, with respect to an individual--
(A) The spouse of the individual;
(B) An ancestor or lineal descendant of the individual or the
individual's spouse;
(C) A brother or sister of the individual or of the individual's
spouse and any lineal descendant of the brother or sister; and
(D) The spouse of any individual described in paragraph (d)(2)(ii)
(B) or (C) of this section.
(iii) Spouse. A spouse of an individual who is legally separated
from such individual under a decree of divorce or separate maintenance
is not treated as such individual's spouse under paragraph (d)(2)(ii)(A)
of this section.
(3) Special rule for certain nonallocation years. See paragraph
(c)(3) of this section (relating to avoidance or evasion of section
409(p)) for special rules permitting certain persons to be treated as
disqualified persons in certain nonallocation years.
(4) Example. The rules of this paragraph (d) are illustrated by the
following example:
Example. (i) Facts. An S corporation has 800 outstanding shares of
which 100 are owned by individual O and 700 are held in an employee
stock ownership plan (ESOP) during 2005, including 200 shares held in
the ESOP account of O, 65 shares held in the ESOP account of participant
P, and 40 shares held in the ESOP account of participant Q who is P's
spouse. The S corporation has no synthetic equity.
(ii) Conclusion. O is a disqualified person during 2005 because O's
account in the ESOP holds at least 10 percent of the shares owned by the
ESOP (200 is 28.6 percent of 700). In addition, P is a disqualified
person during 2005 because, under paragraph (d)(2) of this section, P is
treated as owning the shares held by Q and P's total deemed-owned shares
are thus at least 10 percent of the shares owned by the plan (65 plus 40
is more than 10 percent of 700). In addition, Q is a disqualified person
as a result of the rules in paragraph (d)(2) of this section. As a
result, disqualified persons own at least 50 percent of the outstanding
shares of the S corporation during 2005 (O's 100 directly owned shares,
O's 200 deemed-owned shares, P's 65 deemed-owned shares, plus Q's 40
deemed owned shares are 50.6 percent of 800).
(e) Deemed-owned ESOP shares. For purposes of section 409(p) and
this section, a person is treated as owning his or her deemed-owned ESOP
shares.
Deemed-owned ESOP shares mean, with respect to any person--
(1) Any shares of stock in the S corporation constituting employer
securities that are allocated to such person's account under the ESOP;
and
(2) Such person's share of the stock in the S corporation that is
held by the ESOP but is not allocated to the account of any participant
or beneficiary (with such person's share to be determined in the same
proportion as the shares released and allocated from a suspense account,
as described at Sec. 54.4975-11(c) and (d) of this chapter, under the
ESOP for the most recently ended plan year for which there were shares
released and allocated from a suspense account, or if there has been no
such prior release and allocation from a suspense account, then
determined in proportion to a reasonable estimate of the shares that
would be released and allocated in the first year of loan repayment).
(f) Synthetic equity--(1) Ownership of synthetic equity. For
purposes of section 409(p) and this section, synthetic equity is treated
as owned by a person in
[[Page 717]]
the same manner as stock is treated as owned by a person, directly or
under the rules of section 318(a)(2) and (3). Synthetic equity means the
rights described in paragraph (f)(2) of this section.
(2) Synthetic equity--(i) Rights to acquire stock of the S
corporation. Synthetic equity includes any stock option, warrant,
restricted stock, deferred issuance stock right, stock appreciation
right payable in stock, or similar interest or right that gives the
holder the right to acquire or receive stock of the S corporation in the
future. Rights to acquire stock in an S corporation with respect to
stock that is, at all times during the period when such rights are
effective, both issued and outstanding and held by persons (who are
subject to federal income taxes) other than the ESOP, the S corporation,
or a related entity are not synthetic equity (but see paragraph (c)(4)
of this section).
(ii) Special rule for certain stock rights. Synthetic equity also
includes a right to a future payment (payable in cash or any other form
other than stock of the S corporation) from an S corporation that is
based on the value of the stock of the S corporation, such as
appreciation in such value. Thus, synthetic equity includes a stock
appreciation right with respect to stock of an S corporation that is
payable in cash or a phantom stock unit with respect to stock of an S
corporation that is payable in cash.
(iii) Rights to acquire interests in or assets of an S corporation
or a related entity. Synthetic equity includes a right to acquire stock
or other similar interests in a related entity to the extent of the S
corporation's ownership. Synthetic equity also includes a right to
acquire assets of an S corporation or a related entity other than either
rights to acquire goods, services, or property at fair market value in
the ordinary course of business or fringe benefits excluded from gross
income under section 132.
(iv) Special rule for nonqualified deferred compensation. (A)
Synthetic equity also includes any of the following with respect to an S
corporation or a related entity: any remuneration to which section
404(a)(5) applies; remuneration for which a deduction would be permitted
under section 404(a)(5) if separate accounts were maintained; any right
to receive property to which section 83 applies (including a payment to
a trust described in section 402(b) or to an annuity described in
section 403(c)) in a future year for the performance of services; any
transfer of property (to which section 83 applies) in connection with
the performance of services to the extent that the property is not
substantially vested within the meaning of Sec. 1.83-3(i) by the end of
the plan year in which transferred; and a split-dollar life insurance
arrangement under Sec. 1.61-22(b) entered into in connection with the
performance of services (other than one under which, at all times, the
only economic benefit that will be provided under the arrangement is
current life insurance protection as described in Sec. 1.61-22(d)(3)).
Synthetic equity also includes any other remuneration for services under
a plan, or method or arrangement, deferring the receipt of compensation
to a date that is after the 15th day of the 3rd calendar month after the
end of the entity's taxable year in which the related services are
rendered. However, synthetic equity does not include benefits under a
plan that is an eligible retirement plan within the meaning of section
402(c)(8)(B).
(B) For purposes of applying paragraph (f)(2)(iv)(A) of this section
with respect to an ESOP, synthetic equity does not include any interest
described in such paragraph (f)(2)(iv)(A) of this section to the extent
that--
(1) The interest is nonqualified deferred compensation (within the
meaning of section 3121(v)(2)) that was outstanding on December 17,
2004;
(2) The interest is an amount that was taken into account (within
the meaning of Sec. 31.3121(v)(2)-1(d) of this chapter) prior to
January 1, 2005, for purposes of taxation under chapter 21 of the
Internal Revenue Code (or income attributable thereto); and
(3) The interest was held before the first date on which the ESOP
acquires any employer securities.
(v) No overlap among shares of deemed-owned ESOP shares or synthetic
equity. Synthetic equity under this paragraph
[[Page 718]]
(f)(2) does not include shares that are deemed-owned ESOP shares (or any
rights with respect to deemed-owned ESOP shares to the extent such
rights are specifically permitted under section 409(h)). In addition,
synthetic equity under a specific subparagraph of this paragraph (f)(2)
does not include anything that is synthetic equity under paragraph
(f)(2)(i), (ii), (iii) or (iv) of this section.
(3) Related entity. For purposes of this paragraph (f), related
entity means any entity in which the S corporation holds an interest and
which is a partnership, a trust, an eligible entity that is disregarded
as an entity that is separate from its owner under Sec. 301.7701-3 of
this chapter, or a Qualified Subchapter S Subsidiary under section
1361(b)(3).
(4) Number of synthetic shares--(i) Synthetic equity determined by
reference to S corporation shares. In the case of synthetic equity that
is determined by reference to shares of stock of the S corporation, the
person who is entitled to the synthetic equity is treated as owning the
number of shares of stock deliverable pursuant to such synthetic equity.
In the case of synthetic equity that is determined by reference to
shares of stock of the S corporation, but for which payment is made in
cash or other property (besides stock of the S corporation), the number
of shares of synthetic equity treated as owned is equal to the number of
shares of stock having a fair market value equal to the cash or other
property (disregarding lapse restrictions as described in Sec. 1.83-
3(i)). Where such synthetic equity is a right to purchase or receive S
corporation shares, the corresponding number of shares of synthetic
equity is determined without regard to lapse restrictions as described
in Sec. 1.83-3(i) or to any amount required to be paid in exchange for
the shares. Thus, for example, if a corporation grants an employee of an
S corporation an option to purchase 100 shares of the corporation's
stock, exercisable in the future only after the satisfaction of certain
performance conditions, the employee is the deemed owner of 100
synthetic equity shares of the corporation as of the date the option is
granted. If the same employee were granted 100 shares of restricted S
corporation stock (or restricted stock units), subject to forfeiture
until the satisfaction of performance or service conditions, the
employee would likewise be the deemed owner of 100 synthetic equity
shares from the grant date. However, if the same employee were granted a
stock appreciation right with regard to 100 shares of S corporation
stock (whether payable in stock or in cash), the number of synthetic
equity shares the employee is deemed to own equals the number of shares
having a value equal to the appreciation at the time of measurement
(determined without regard to lapse restrictions).
(ii) Synthetic equity determined by reference to shares in a related
entity. In the case of synthetic equity that is determined by reference
to shares of stock (or similar interests) in a related entity, the
person who is entitled to the synthetic equity is treated as owning
shares of stock of the S corporation with the same aggregate value as
the number of shares of stock (or similar interests) of the related
entity (with such value determined without regard to any lapse
restriction as defined at Sec. 1.83-3(i)).
(iii) Other synthetic equity--(A) General rule. In the case of any
synthetic equity to which neither paragraph (f)(4)(i) nor paragraph
(f)(4)(ii) of this section apply, the person who is entitled to the
synthetic equity is treated as owning on any date a number of shares of
stock in the S corporation equal to the present value (on that date) of
the synthetic equity (with such value determined without regard to any
lapse restriction as defined at Sec. 1.83-3(i)) divided by the fair
market value of a share of the S corporation's stock as of that date.
(B) Special rules--(1) Use of annual or more frequent determination
dates. For purposes of this paragraph (f)(4)(iii), while the
determination of whether there is a nonallocation year depends on day-
by-day determinations under paragraph (c) of this section, the number of
shares of S corporation stock treated as owned by a person who is
entitled to synthetic equity to which this paragraph (f)(4)(iii) applies
is permitted to be determined only annually (or more frequently), as of
the first day of the ESOP's plan year or as of any other
[[Page 719]]
reasonable determination date or dates during a plan year. If the ESOP
so provides, the number of shares of synthetic equity to which this
paragraph (f)(4)(iii) applies that are treated as owned by that person
for any period from a given determination date through the date
immediately preceding the next following determination date is the
number of shares treated as owned on the given determination date.
(2) Use of triannual recalculations. In addition, if the terms of
the ESOP so provide, then the number of shares of synthetic equity with
respect to grants of synthetic equity to which this paragraph
(f)(4)(iii) applies may be fixed for a specified period from a
determination date identified under the ESOP through a date that is not
later than the day before the determination date that is on or
immediately preceding the third anniversary of the identified
determination date. Additional accruals, allocations, or grants (to
which this paragraph (f)(4)(iii) applies) that are made during such
three-year period are taken into account on each determination date
during that period, based on the number of synthetic equity shares
resulting from the additional accrual, allocation, or grant (determined
as of the determination date on or next following the date of the
accrual, allocation, or grant). However, the ESOP must provide for the
number of shares of synthetic equity to which this paragraph (f)(4)(iii)
applies to be re-determined not less frequently than every three years,
based on the S corporation share value on a determination date that is
not later than the third anniversary of the identified determination
date and the aggregate present value of the synthetic equity to which
this paragraph (f)(4)(iii) applies (including all grants made during the
three-year period) on that determination date. See Example 3 of
paragraph (h) of this section for an example illustrating this paragraph
(f)(4)(iii)(B)(2).
(3) Conditions for application of rules. Paragraph (f)(4)(iii)(B) of
this section only applies with respect to grants of synthetic equity to
which this paragraph (f)(4)(iii) applies. In addition, paragraph
(f)(4)(iii)(B)(1) of this section applies only if the fair market value
of a share of the S corporation securities on any determination date is
not unrepresentative of the value of the S corporation securities
throughout the rest of the plan year and only if the terms of the ESOP
include provisions conforming to paragraph (f)(4)(iii)(B)(1) of this
section which are consistently used by the ESOP for all persons. In
addition, paragraph (f)(4)(iii)(B)(2) of this section applies only if
the terms of the ESOP include provisions conforming to paragraphs
(f)(4)(iii)(B)(1) and (2) of this section which are consistently used by
the ESOP for all persons.
(iv) Adjustment of number of synthetic equity shares where ESOP owns
less than 100% of S corporation. Under this paragraph (f)(4)(iv), the
number of synthetic shares otherwise determined under this paragraph
(f)(4) is decreased ratably to the extent that shares of the S
corporation are owned by a person who is not an ESOP (and who is subject
to Federal income taxes). For example, if an S corporation has 200
outstanding shares, of which individual A owns 50 shares and the ESOP
owns the other 150 shares, and individual B would be treated under this
paragraph (f)(4) as owning 200 synthetic equity shares of the S
corporation but for this paragraph (f)(4)(iv), then, under the rule of
this paragraph (f)(4)(iv), the number of synthetic shares treated as
owned by B under this paragraph (f)(4) is decreased from 200 to 150
(because the ESOP only owns 75% of the outstanding stock of the S
corporation, rather than 100%).
(v) Special rule for shares with greater voting power than ESOP
shares. Notwithstanding any other provision of this paragraph (f)(4), if
a synthetic equity right includes (directly or indirectly) a right to
purchase or receive shares of S corporation stock that have per-share
voting rights greater than the per-share voting rights of one or more
shares of S corporation stock held by the ESOP, then the number of
shares of deemed owned synthetic equity attributable to such right is
not less than the number of shares that would have the same voting
rights if the shares had the same per-share voting rights as shares held
by the ESOP
[[Page 720]]
with the least voting rights. For example, if shares of S corporation
stock held by the ESOP have one voting right per share, then an
individual who holds an option to purchase one share with 100 voting
rights is treated as owning 100 shares of synthetic equity.
(g) Avoidance or evasion of section 409(p) involving synthetic
equity--(1) General rule. Paragraph (g)(2) of this section sets forth a
standard for determining whether the principal purpose of the ownership
structure of an S corporation involving synthetic equity constitutes an
avoidance or evasion of section 409(p). Paragraph (g)(3) of this section
identifies certain specific ownership structures that constitute an
avoidance or evasion of section 409(p). See also paragraph (c)(3) of
this section for a rule under which the ownership structures in
paragraph (g)(3) result in a nonallocation year for purposes of section
409(p).
(2) Standard for determining when there is an avoidance or evasion
of section 409(p) involving synthetic equity--For purposes of section
409(p) and this section, whether the principal purpose of the ownership
structure of an S corporation involving synthetic equity constitutes an
avoidance or evasion of section 409(p) is determined by taking into
account all the surrounding facts and circumstances, including all
features of the ownership of the S corporation's outstanding stock and
related obligations (including synthetic equity), any shareholders who
are taxable entities, and the cash distributions made to shareholders,
to determine whether, to the extent of the ESOP's stock ownership, the
ESOP receives the economic benefits of ownership in the S corporation
that occur during the period that stock of the S corporation is owned by
the ESOP. Among the factors indicating that the ESOP receives these
economic benefits include shareholder voting rights, the right to
receive distributions made to shareholders, and the right to benefit
from the profits earned by the S corporation, including the extent to
which actual distributions of profits are made from the S corporation to
the ESOP and the extent to which the ESOP's ownership interest in
undistributed profits and future profits is subject to dilution as a
result of synthetic equity, for example, the ESOP's ownership interest
is not subject to dilution if the total amount of synthetic equity is a
relatively small portion of the total number of shares and deemed-owned
shares of the S corporation.
(3) Specific transactions that constitute an avoidance or evasion of
section 409(p) involving segregated profits. Taking into account the
standard in paragraph (g)(2) of this section, the principal purpose of
the ownership structure of an S corporation constitutes an avoidance or
evasion of section 409(p) in any case in which--
(i) The profits of the S corporation generated by the business
activities of a specific individual or individuals are not provided to
the ESOP, but are instead substantially accumulated and held for the
benefit of that individual or individuals on a tax-deferred basis within
an entity related to the S corporation, such as a partnership, trust, or
corporation (such as in a subsidiary that is a disregarded entity), or
any other method that has the same effect of segregating profits for the
benefit of such individual or individuals (such as nonqualified deferred
compensation described in paragraph (f)(2)(iv) of this section);
(ii) The individual or individuals for whom profits are segregated
have rights to acquire 50 percent or more of those profits directly or
indirectly (for example, by purchase of the subsidiary); and
(iii) A nonallocation year would occur if this section were
separately applied with respect to either the separate entity or
whatever method has the effect of segregating profits of the individual
or individuals, treating such entity as a separate S corporation owned
by an ESOP (or in the case of any other method of segregation of profits
by treating those profits as the only assets of a separate S corporation
owned by an ESOP).
(h) Examples. The rules of this section are illustrated by the
following examples:
Example 1. Relating to determination of disqualified persons and
nonallocation year if there is no synthetic equity. (i) Facts.
Corporation X is a calendar year S corporation that maintains an ESOP. X
has a single class of
[[Page 721]]
common stock, of which there are a total of 1,200 shares outstanding. X
has no synthetic equity. In 2006, individual A, who is not an employee
of X (and is not related to any employee of X), owns 100 shares
directly, individual B owns 100 shares directly, and the remaining 1,000
shares are owned by an ESOP maintained by X for its employees. The
ESOP's 1,000 shares are allocated to the accounts of individuals who are
employees of X (none of whom are related), as set forth in columns 1 and
2 in the following table:
----------------------------------------------------------------------------------------------------------------
2 Deemed-owned ESOP 3 Percentage deemed- 4 Disqualified person
1 Shareholders shares (total of 1,000) owned ESOP shares
----------------------------------------------------------------------------------------------------------------
B.................................... 330..................... 33...................... Yes.
C.................................... 145..................... 14.5.................... Yes.
D.................................... 75...................... 7.5..................... No.
E.................................... 30...................... 3....................... No.
F.................................... 20...................... 2....................... No.
Other participants................... 400 (none exceed 10 1 or less............... No.
shares).
----------------------------------------------------------------------------------------------------------------
(ii) Conclusion with respect to disqualified persons. As shown in
column 4 in the table above, individuals B and C are disqualified
persons for 2006 under paragraph (d)(1) of this section because each
owns at least 10% of X's deemed-owned ESOP shares.
(iii) Conclusion with respect to nonallocation year. However, 2006
is not a nonallocation year under section 409(p) because disqualified
persons do not own at least 50% of X's outstanding shares (the 100
shares owned directly by B, B's 330 deemed-owned ESOP shares, plus C's
145 deemed-owned ESOP shares equal only 47.9% of the 1,200 outstanding
shares of X).
Example 2. Relating to determination of disqualified persons and
nonallocation year if there is synthetic equity. (i) Facts. The facts
are the same as in Example 1, except that, as shown in column 4 of the
table in this example 2, individuals E and F have options to acquire 110
and 130 shares, respectively, of the common stock of X from X:
--------------------------------------------------------------------------------------------------------------------------------------------------------
5 Shareholder
2 Deemed-owned ESOP 3 Percentage deemed- 4 Options percentage of deemed-
1 Shareholders shares (total of 1,000) owned ESOP shares (240) owned ESOP plus 6 Disqualified person
synthetic equity shares
--------------------------------------------------------------------------------------------------------------------------------------------------------
B................................... 330.................... 33..................... .............. ....................... Yes (col. 3).
C................................... 145.................... 14.5................... .............. ....................... Yes (col. 3).
D................................... 75..................... 7.5.................... .............. ....................... No.
E................................... 30..................... 3...................... 110 11.1% ([30 + 91.7] Yes (col. 5).
divided by 1,091.7).
F................................... 20..................... 2...................... 130 11.6% ([20 + 108.3] Yes (col. 5).
divided by 1,108.3).
Other participants.................. 400 (none exceeds 10 1 or less.............. .............. ....................... No.
shares).
--------------------------------------------------------------------------------------------------------------------------------------------------------
(ii) Conclusion with respect to disqualified persons. Applying the
rule of paragraph (f)(4)(iv) of this section, E's option to acquire 110
shares of the S corporation converts into 91.7 shares of synthetic
equity (110 times the ratio of the 1,000 deemed-owned ESOP shares to the
sum of the 1,000 deemed-owned ESOP shares plus the 200 shares held
outside the ESOP by A and B). Similarly, F's option to acquire 130
shares of the S corporation converts into 108.3 shares of synthetic
equity (130 times the ratio of the 1,000 deemed-owned ESOP shares to the
sum of the 1,000 deemed-owned ESOP shares plus the 200 shares held
outside the ESOP by A and B). Accordingly, as shown in column 6 in the
table above, individual E's synthetic equity shares are counted in
determining whether E is a disqualified person for 2006, and individual
F's synthetic equity shares are counted in determining whether F is a
disqualified person for 2006, but the synthetic equity shares owned by
any person do not affect the calculation for any other person's
ownership of shares. Accordingly, individuals B, C, E, and F are
disqualified persons for 2006.
(iii) Conclusion with respect to nonallocation year. The 100 shares
owned directly by B, B's 330 deemed-owned ESOP shares, C's 145 deemed-
owned ESOP shares, E's 30 deemed-owned ESOP shares, E's 91.7 synthetic
equity shares, F's 20 deemed-owned ESOP shares, plus F's 108.3 synthetic
equity shares total 825, which equals 58.9% of 1,400, which is the sum
of the 1,200 outstanding shares of X and the 200 shares of synthetic
equity shares of X held by disqualified persons. Thus, 2006 is a
[[Page 722]]
nonallocation year for X's ESOP under section 409(p) because
disqualified persons own at least 50% of the total shares of outstanding
stock of X and the total synthetic equity shares of X held by
disqualified persons. In addition, independent of the preceding
conclusion, 2006 would be a nonallocation year because disqualified
persons own at least 50% of X's outstanding shares because the 100
shares owned directly by B, B's 330 deemed-owned ESOP shares, C's 145
deemed-owned ESOP shares, E's 30 deemed-owned ESOP shares, plus F's 20
deemed-owned ESOP shares equal 52.1% of the 1,200 outstanding shares of
X.
Example 3. Relating to determination of number of shares of
synthetic equity. (i) Facts. Corporation Y is a calendar year S
corporation that maintains an ESOP. Y has a single class of common
stock, of which there are a total of 1,000 shares outstanding, all of
which are owned by the ESOP. Y has no synthetic equity, except for four
grants of nonqualified deferred compensation that are made to an
individual during the period from 2005 through 2011, as set forth in
column 2 in the following table, and the ESOP uses the special rules in
paragraph (f)(4)(iii) of this section to determine the number of shares
of synthetic equity owned by that individual, as shown in columns 4 and
5:
----------------------------------------------------------------------------------------------------------------
5 Aggregate
4 New shares number of
2 Present value of of synthetic synthetic
1 Determination date nonqualified deferred 3 Share value on equity on equity shares
compenstion on determination date determination on
determination date date determination
date
----------------------------------------------------------------------------------------------------------------
January 1, 2005................... A grant is made on $10 per share........ 100 100
January 1, 2005 with
a present value of
$1,000. An
additional grant of
nonqualified
deferred
compensation with a
present value of
$775 is made on
March 1, 2005.
January 1, 2006................... An additional grant $8 per share......... 200 300
is made on December
31, 2005 which has a
present value of
$800 on January 1,
2006. The March 1,
2005 grant has a
present value on
January 1, 2006 of
$800.
January 1, 2007................... No new grants made... $12 per share........ .............. 300
January 1, 2008................... An additional grant $15 per share........ 200 450
is made on December
31, 2007 which has a
present value of
$3,000 on January 1,
2008. The grants
made during 2005
through 2007 have an
aggregate present
value on January 1,
2008 of $3,750.
January 1, 2009................... No new grants are $11 per share........ .............. 450
made.
January 1, 2010................... No new grants are $22 per share........ .............. 450
made.
January 1, 2011................... No new grants are $20 per share........ .............. 380
made. The grants
made during 2005
through 2008 have an
aggregate present
value on January 1,
2011 of $7,600.
----------------------------------------------------------------------------------------------------------------
(ii) Conclusion. The grant made on January 1, 2005, is treated as
100 shares until the determination date in 2008. The grant made on March
1, 2005, is not taken into account until the 2006 determination date and
its present value on that date, along with the then present value of the
grant made on the preceding day, is treated as a number of shares that
are based on the $8 per share value on the 2006 determination date, with
the resulting number of shares continuing to apply until the
determination date in 2008. On the January 1, 2008, determination date,
the grant made on the preceding day is taken into account at its present
value of $3,000 on January 1, 2008 and the $15 per share value on that
date with the resulting number of shares (200) continuing to apply until
the next determination date. In addition, on the January 1, 2008,
determination date, the number of shares determined under other grants
made between January 1, 2005 and December 31, 2007, must be revalued.
Accordingly, the aggregate value of all nonqualified deferred
compensation granted during that period is determined to be $3750 on
January 1, 2008, and the corresponding number of shares of synthetic
equity based on the $15 per share value is determined to be 250 shares
on the 2008 determination date, with the resulting aggregate number of
shares (450) continuing to apply until the determination date in 2011.
On the January 1, 2011, determination date, the aggregate value of all
nonqualified deferred compensation is determined to be $7,600 and the
corresponding number of shares of synthetic equity based on the $20 per
share value on the 2011 determination date is determined to be 380
shares
[[Page 723]]
(with the resulting number of shares continuing to apply until the
determination date in 2014, assuming no further grants are made).
(i) Effective dates--(1) Statutory effective date. (i) Except as
otherwise provided in paragraph (i)(1)(ii) of this section, section
409(p) applies for plan years ending after March 14, 2001.
(ii) If an ESOP holding stock in an S corporation was established on
or before March 14, 2001, and the election under section 1362(a) with
respect to that S corporation was in effect on March 14, 2001, section
409(p) applies for plan years beginning on or after January 1, 2005.
(2) Regulation effective date--(i) General effective date. Except as
otherwise provided in paragraph (i)(2)(ii) of this section, this section
applies for plan years beginning on or after January 1, 2005.
(ii) Rules for plan years beginning before January 1, 2005. (A)
Except as provided in this paragraph (i)(2)(ii), Sec. 1.409(p)-1T as in
effect prior to December 17, 2004 (see Sec. 1.409(p)-1T in 26 CFR part
1 revised as of April 1, 2004) applies for plan years ending after
October 20, 2003, and beginning before January 1, 2005.
(B) Paragraphs (c)(3) and (g) of this section apply for plan years
ending on or after December 31, 2004, but do not apply with respect to
an interest held in a qualified subchapter S subsidiary (QSUB) of an S
corporation or another entity to which paragraph (g)(3) of this section
applies before March 15, 2004 if:
(1) All interests in the entity held by individuals who would be
disqualified persons under paragraph (g)(3) of this section or under
guidance issued by the Commissioner before March 15, 2004 are
distributed to those individuals as compensation on or before March 15,
2004; and
(2) No such individual has been a participant in the ESOP of the S
corporation at any time after October 20, 2003 and before March 15,
2004.
(C) Paragraph (f)(2)(iv)(B) of this section (providing that
synthetic equity does not include certain preexisting nonqualified
deferred compensation) applies for plan years ending before January 1,
2005.
(D) Paragraph (f)(4)(iv) of this section (permitting an adjustment
of the number of synthetic equity shares where an ESOP owns less than
100% of an S corporation) applies for plan years ending before January
1, 2005.
(E) In no event does this paragraph (i)(2)(ii) apply for any plan
year ending before January 1, 2005, for an ESOP holding stock in an S
corporation that was established on or before March 14, 2001, if the
election under section 1362(a) with respect to that S Corporation was in
effect on March 14, 2001.
(iii) Transition rules. (A) Assets held in the account of a
disqualified person as of the last day of the first plan year beginning
before January 1, 2005, will not be treated as an impermissible accrual
with respect to that disqualified person under paragraph (b)(2)(ii) of
this section for the first plan year beginning on or after January 1,
2005, to the extent those assets are not held in that person's account
on or after July 1, 2005. Thus, for example, to the extent the assets
allocated to the account of a disqualified person as of the last day of
the first plan year beginning before January 1, 2005, are transferred to
a non-ESOP portion of the plan as described in paragraph (b)(2)(v)(A) of
this section before July 1, 2005, those assets will not be treated as an
impermissible accrual under paragraph (b)(2)(ii) of this section for the
period from the first day of the first plan year beginning on or after
January 1, 2005 through June 30, 2005. However, see section 4979A(a)(3),
(a)(4), and (e)(2)(C) for excise tax provisions that apply to all
deemed-owned shares during the first nonallocation year for the ESOP.
(B) An individual is not treated as a disqualified person during the
period from the first day of the first plan year beginning on or after
January 1, 2005 through June 30, 2005 if that person would not be a
disqualified person during that period under the modified rules of this
paragraph (i)(2)(iii)(B) as of any date during that same period.
Further, solely for the purpose of determining whether the first plan
year beginning on or after January 1, 2005 is a nonallocation year under
section 409(p) and this section, if that plan year would not have been a
nonallocation year under the modified rules of
[[Page 724]]
this paragraph (i)(2)(iii)(B), then synthetic equity that is not owned
by a person on July 1, 2005 is disregarded during the period from the
first day of the first plan year beginning on or after January 1, 2005
through June 30, 2005. For purposes of this paragraph (i)(2)(iii)(B),
the modified rules of this paragraph (i)(2)(iii)(B) are the rules in
Sec. 1.409(p)-1T as in effect prior to December 17, 2004 (see Sec.
1.409(p)-1T in 26 CFR Part 1 revised as of April 1, 2004), modified to
exclude from the definition of synthetic equity any stock option, stock
appreciation right (payable in cash or stock), or similar rights with
respect to shares of the S corporation or a related entity where the
facts and circumstances indicate that there is no reasonable likelihood
that the holder of the right will receive the shares (or equivalent
value). For this purpose, there is no reasonable likelihood that the
holder of the right will receive the shares (or equivalent value) in any
case in which the option is based on an exercise price that is more than
200% of the fair market value of the shares on the date of grant or the
right (in the case of a stock appreciation right or similar right to
acquire shares of the S corporation or a related entity) is payable only
if the appreciation exceeds 100% of the fair market value of the shares
on the date of grant.
(C) For the period from the first day of the first plan year
beginning on or after January 1, 2005 through June 30, 2005, there is no
nonallocation year under this section if there would be no nonallocation
year under this section during that period if this section were applied
without regard to paragraph (f)(4)(v) of this section (relating to
voting rights).
(D) This paragraph (iii) does not apply to an ESOP for which the
first plan year beginning on or after January 1, 2005 begins after June
30, 2005.
[T.D. 9164, 69 FR 75460, Dec. 17, 2004; 70 FR 11121, Mar. 8, 2005]
[[Page 725]]
FINDING AIDS
--------------------------------------------------------------------
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
[[Page 727]]
Table of CFR Titles and Chapters
(Revised as of April 1, 2015)
Title 1--General Provisions
I Administrative Committee of the Federal Register
(Parts 1--49)
II Office of the Federal Register (Parts 50--299)
III Administrative Conference of the United States (Parts
300--399)
IV Miscellaneous Agencies (Parts 400--500)
Title 2--Grants and Agreements
Subtitle A--Office of Management and Budget Guidance
for Grants and Agreements
I Office of Management and Budget Governmentwide
Guidance for Grants and Agreements (Parts 2--199)
II Office of Management and Budget Guidance (Parts 200--
299)
Subtitle B--Federal Agency Regulations for Grants and
Agreements
III Department of Health and Human Services (Parts 300--
399)
IV Department of Agriculture (Parts 400--499)
VI Department of State (Parts 600--699)
VII Agency for International Development (Parts 700--799)
VIII Department of Veterans Affairs (Parts 800--899)
IX Department of Energy (Parts 900--999)
X Department of the Treasury (Parts 1000--1099)
XI Department of Defense (Parts 1100--1199)
XII Department of Transportation (Parts 1200--1299)
XIII Department of Commerce (Parts 1300--1399)
XIV Department of the Interior (Parts 1400--1499)
XV Environmental Protection Agency (Parts 1500--1599)
XVIII National Aeronautics and Space Administration (Parts
1800--1899)
XX United States Nuclear Regulatory Commission (Parts
2000--2099)
XXII Corporation for National and Community Service (Parts
2200--2299)
XXIII Social Security Administration (Parts 2300--2399)
XXIV Housing and Urban Development (Parts 2400--2499)
XXV National Science Foundation (Parts 2500--2599)
XXVI National Archives and Records Administration (Parts
2600--2699)
XXVII Small Business Administration (Parts 2700--2799)
[[Page 728]]
XXVIII Department of Justice (Parts 2800--2899)
XXIX Department of Labor (Parts 2900--2999)
XXX Department of Homeland Security (Parts 3000--3099)
XXXI Institute of Museum and Library Services (Parts 3100--
3199)
XXXII National Endowment for the Arts (Parts 3200--3299)
XXXIII National Endowment for the Humanities (Parts 3300--
3399)
XXXIV Department of Education (Parts 3400--3499)
XXXV Export-Import Bank of the United States (Parts 3500--
3599)
XXXVI Office of National Drug Control Policy, Executive
Office of the President (Parts 3600--3699)
XXXVII Peace Corps (Parts 3700--3799)
LVIII Election Assistance Commission (Parts 5800--5899)
LIX Gulf COast Ecosystem Restoration Council (Parts 5900--
5999)
Title 3--The President
I Executive Office of the President (Parts 100--199)
Title 4--Accounts
I Government Accountability Office (Parts 1--199)
II Recovery Accountability and Transparency Board (Parts
200--299)
Title 5--Administrative Personnel
I Office of Personnel Management (Parts 1--1199)
II Merit Systems Protection Board (Parts 1200--1299)
III Office of Management and Budget (Parts 1300--1399)
V The International Organizations Employees Loyalty
Board (Parts 1500--1599)
VI Federal Retirement Thrift Investment Board (Parts
1600--1699)
VIII Office of Special Counsel (Parts 1800--1899)
IX Appalachian Regional Commission (Parts 1900--1999)
XI Armed Forces Retirement Home (Parts 2100--2199)
XIV Federal Labor Relations Authority, General Counsel of
the Federal Labor Relations Authority and Federal
Service Impasses Panel (Parts 2400--2499)
XVI Office of Government Ethics (Parts 2600--2699)
XXI Department of the Treasury (Parts 3100--3199)
XXII Federal Deposit Insurance Corporation (Parts 3200--
3299)
XXIII Department of Energy (Parts 3300--3399)
XXIV Federal Energy Regulatory Commission (Parts 3400--
3499)
XXV Department of the Interior (Parts 3500--3599)
XXVI Department of Defense (Parts 3600--3699)
XXVIII Department of Justice (Parts 3800--3899)
[[Page 729]]
XXIX Federal Communications Commission (Parts 3900--3999)
XXX Farm Credit System Insurance Corporation (Parts 4000--
4099)
XXXI Farm Credit Administration (Parts 4100--4199)
XXXIII Overseas Private Investment Corporation (Parts 4300--
4399)
XXXIV Securities and Exchange Commission (Parts 4400--4499)
XXXV Office of Personnel Management (Parts 4500--4599)
XXXVII Federal Election Commission (Parts 4700--4799)
XL Interstate Commerce Commission (Parts 5000--5099)
XLI Commodity Futures Trading Commission (Parts 5100--
5199)
XLII Department of Labor (Parts 5200--5299)
XLIII National Science Foundation (Parts 5300--5399)
XLV Department of Health and Human Services (Parts 5500--
5599)
XLVI Postal Rate Commission (Parts 5600--5699)
XLVII Federal Trade Commission (Parts 5700--5799)
XLVIII Nuclear Regulatory Commission (Parts 5800--5899)
XLIX Federal Labor Relations Authority (Parts 5900--5999)
L Department of Transportation (Parts 6000--6099)
LII Export-Import Bank of the United States (Parts 6200--
6299)
LIII Department of Education (Parts 6300--6399)
LIV Environmental Protection Agency (Parts 6400--6499)
LV National Endowment for the Arts (Parts 6500--6599)
LVI National Endowment for the Humanities (Parts 6600--
6699)
LVII General Services Administration (Parts 6700--6799)
LVIII Board of Governors of the Federal Reserve System
(Parts 6800--6899)
LIX National Aeronautics and Space Administration (Parts
6900--6999)
LX United States Postal Service (Parts 7000--7099)
LXI National Labor Relations Board (Parts 7100--7199)
LXII Equal Employment Opportunity Commission (Parts 7200--
7299)
LXIII Inter-American Foundation (Parts 7300--7399)
LXIV Merit Systems Protection Board (Parts 7400--7499)
LXV Department of Housing and Urban Development (Parts
7500--7599)
LXVI National Archives and Records Administration (Parts
7600--7699)
LXVII Institute of Museum and Library Services (Parts 7700--
7799)
LXVIII Commission on Civil Rights (Parts 7800--7899)
LXIX Tennessee Valley Authority (Parts 7900--7999)
LXX Court Services and Offender Supervision Agency for the
District of Columbia (Parts 8000--8099)
LXXI Consumer Product Safety Commission (Parts 8100--8199)
LXXIII Department of Agriculture (Parts 8300--8399)
LXXIV Federal Mine Safety and Health Review Commission
(Parts 8400--8499)
LXXVI Federal Retirement Thrift Investment Board (Parts
8600--8699)
[[Page 730]]
LXXVII Office of Management and Budget (Parts 8700--8799)
LXXX Federal Housing Finance Agency (Parts 9000--9099)
LXXXIII Special Inspector General for Afghanistan
Reconstruction (Parts 9300--9399)
LXXXIV Bureau of Consumer Financial Protection (Parts 9400--
9499)
LXXXVI National Credit Union Administration (Parts 9600--
9699)
XCVII Department of Homeland Security Human Resources
Management System (Department of Homeland
Security--Office of Personnel Management) (Parts
9700--9799)
XCVII Council of the Inspectors General on Integrity and
Efficiency (Parts 9800--9899)
XCIV Military Compensation and Retirement Modernization
Commission (Parts 9900--9999)
Title 6--Domestic Security
I Department of Homeland Security, Office of the
Secretary (Parts 1--199)
X Privacy and Civil Liberties Oversight Board (Parts
1000--1099)
Title 7--Agriculture
Subtitle A--Office of the Secretary of Agriculture
(Parts 0--26)
Subtitle B--Regulations of the Department of
Agriculture
I Agricultural Marketing Service (Standards,
Inspections, Marketing Practices), Department of
Agriculture (Parts 27--209)
II Food and Nutrition Service, Department of Agriculture
(Parts 210--299)
III Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 300--399)
IV Federal Crop Insurance Corporation, Department of
Agriculture (Parts 400--499)
V Agricultural Research Service, Department of
Agriculture (Parts 500--599)
VI Natural Resources Conservation Service, Department of
Agriculture (Parts 600--699)
VII Farm Service Agency, Department of Agriculture (Parts
700--799)
VIII Grain Inspection, Packers and Stockyards
Administration (Federal Grain Inspection Service),
Department of Agriculture (Parts 800--899)
IX Agricultural Marketing Service (Marketing Agreements
and Orders; Fruits, Vegetables, Nuts), Department
of Agriculture (Parts 900--999)
X Agricultural Marketing Service (Marketing Agreements
and Orders; Milk), Department of Agriculture
(Parts 1000--1199)
XI Agricultural Marketing Service (Marketing Agreements
and Orders; Miscellaneous Commodities), Department
of Agriculture (Parts 1200--1299)
[[Page 731]]
XIV Commodity Credit Corporation, Department of
Agriculture (Parts 1400--1499)
XV Foreign Agricultural Service, Department of
Agriculture (Parts 1500--1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts
1600--1699)
XVII Rural Utilities Service, Department of Agriculture
(Parts 1700--1799)
XVIII Rural Housing Service, Rural Business-Cooperative
Service, Rural Utilities Service, and Farm Service
Agency, Department of Agriculture (Parts 1800--
2099)
XX Local Television Loan Guarantee Board (Parts 2200--
2299)
XXV Office of Advocacy and Outreach, Department of
Agriculture (Parts 2500--2599)
XXVI Office of Inspector General, Department of Agriculture
(Parts 2600--2699)
XXVII Office of Information Resources Management, Department
of Agriculture (Parts 2700--2799)
XXVIII Office of Operations, Department of Agriculture (Parts
2800--2899)
XXIX Office of Energy Policy and New Uses, Department of
Agriculture (Parts 2900--2999)
XXX Office of the Chief Financial Officer, Department of
Agriculture (Parts 3000--3099)
XXXI Office of Environmental Quality, Department of
Agriculture (Parts 3100--3199)
XXXII Office of Procurement and Property Management,
Department of Agriculture (Parts 3200--3299)
XXXIII Office of Transportation, Department of Agriculture
(Parts 3300--3399)
XXXIV National Institute of Food and Agriculture (Parts
3400--3499)
XXXV Rural Housing Service, Department of Agriculture
(Parts 3500--3599)
XXXVI National Agricultural Statistics Service, Department
of Agriculture (Parts 3600--3699)
XXXVII Economic Research Service, Department of Agriculture
(Parts 3700--3799)
XXXVIII World Agricultural Outlook Board, Department of
Agriculture (Parts 3800--3899)
XLI [Reserved]
XLII Rural Business-Cooperative Service and Rural Utilities
Service, Department of Agriculture (Parts 4200--
4299)
Title 8--Aliens and Nationality
I Department of Homeland Security (Immigration and
Naturalization) (Parts 1--499)
V Executive Office for Immigration Review, Department of
Justice (Parts 1000--1399)
[[Page 732]]
Title 9--Animals and Animal Products
I Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 1--199)
II Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs),
Department of Agriculture (Parts 200--299)
III Food Safety and Inspection Service, Department of
Agriculture (Parts 300--599)
Title 10--Energy
I Nuclear Regulatory Commission (Parts 0--199)
II Department of Energy (Parts 200--699)
III Department of Energy (Parts 700--999)
X Department of Energy (General Provisions) (Parts
1000--1099)
XIII Nuclear Waste Technical Review Board (Parts 1300--
1399)
XVII Defense Nuclear Facilities Safety Board (Parts 1700--
1799)
XVIII Northeast Interstate Low-Level Radioactive Waste
Commission (Parts 1800--1899)
Title 11--Federal Elections
I Federal Election Commission (Parts 1--9099)
II Election Assistance Commission (Parts 9400--9499)
Title 12--Banks and Banking
I Comptroller of the Currency, Department of the
Treasury (Parts 1--199)
II Federal Reserve System (Parts 200--299)
III Federal Deposit Insurance Corporation (Parts 300--399)
IV Export-Import Bank of the United States (Parts 400--
499)
V Office of Thrift Supervision, Department of the
Treasury (Parts 500--599)
VI Farm Credit Administration (Parts 600--699)
VII National Credit Union Administration (Parts 700--799)
VIII Federal Financing Bank (Parts 800--899)
IX Federal Housing Finance Board (Parts 900--999)
X Bureau of Consumer Financial Protection (Parts 1000--
1099)
XI Federal Financial Institutions Examination Council
(Parts 1100--1199)
XII Federal Housing Finance Agency (Parts 1200--1299)
XIII Financial Stability Oversight Council (Parts 1300--
1399)
XIV Farm Credit System Insurance Corporation (Parts 1400--
1499)
XV Department of the Treasury (Parts 1500--1599)
XVI Office of Financial Research (Parts 1600--1699)
XVII Office of Federal Housing Enterprise Oversight,
Department of Housing and Urban Development (Parts
1700--1799)
[[Page 733]]
XVIII Community Development Financial Institutions Fund,
Department of the Treasury (Parts 1800--1899)
Title 13--Business Credit and Assistance
I Small Business Administration (Parts 1--199)
III Economic Development Administration, Department of
Commerce (Parts 300--399)
IV Emergency Steel Guarantee Loan Board (Parts 400--499)
V Emergency Oil and Gas Guaranteed Loan Board (Parts
500--599)
Title 14--Aeronautics and Space
I Federal Aviation Administration, Department of
Transportation (Parts 1--199)
II Office of the Secretary, Department of Transportation
(Aviation Proceedings) (Parts 200--399)
III Commercial Space Transportation, Federal Aviation
Administration, Department of Transportation
(Parts 400--1199)
V National Aeronautics and Space Administration (Parts
1200--1299)
VI Air Transportation System Stabilization (Parts 1300--
1399)
Title 15--Commerce and Foreign Trade
Subtitle A--Office of the Secretary of Commerce (Parts
0--29)
Subtitle B--Regulations Relating to Commerce and
Foreign Trade
I Bureau of the Census, Department of Commerce (Parts
30--199)
II National Institute of Standards and Technology,
Department of Commerce (Parts 200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV Foreign-Trade Zones Board, Department of Commerce
(Parts 400--499)
VII Bureau of Industry and Security, Department of
Commerce (Parts 700--799)
VIII Bureau of Economic Analysis, Department of Commerce
(Parts 800--899)
IX National Oceanic and Atmospheric Administration,
Department of Commerce (Parts 900--999)
XI Technology Administration, Department of Commerce
(Parts 1100--1199)
XIII East-West Foreign Trade Board (Parts 1300--1399)
XIV Minority Business Development Agency (Parts 1400--
1499)
Subtitle C--Regulations Relating to Foreign Trade
Agreements
[[Page 734]]
XX Office of the United States Trade Representative
(Parts 2000--2099)
Subtitle D--Regulations Relating to Telecommunications
and Information
XXIII National Telecommunications and Information
Administration, Department of Commerce (Parts
2300--2399)
Title 16--Commercial Practices
I Federal Trade Commission (Parts 0--999)
II Consumer Product Safety Commission (Parts 1000--1799)
Title 17--Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1--199)
II Securities and Exchange Commission (Parts 200--399)
IV Department of the Treasury (Parts 400--499)
Title 18--Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of
Energy (Parts 1--399)
III Delaware River Basin Commission (Parts 400--499)
VI Water Resources Council (Parts 700--799)
VIII Susquehanna River Basin Commission (Parts 800--899)
XIII Tennessee Valley Authority (Parts 1300--1399)
Title 19--Customs Duties
I U.S. Customs and Border Protection, Department of
Homeland Security; Department of the Treasury
(Parts 0--199)
II United States International Trade Commission (Parts
200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV U.S. Immigration and Customs Enforcement, Department
of Homeland Security (Parts 400--599)
Title 20--Employees' Benefits
I Office of Workers' Compensation Programs, Department
of Labor (Parts 1--199)
II Railroad Retirement Board (Parts 200--399)
III Social Security Administration (Parts 400--499)
IV Employees' Compensation Appeals Board, Department of
Labor (Parts 500--599)
V Employment and Training Administration, Department of
Labor (Parts 600--699)
[[Page 735]]
VI Office of Workers' Compensation Programs, Department
of Labor (Parts 700--799)
VII Benefits Review Board, Department of Labor (Parts
800--899)
VIII Joint Board for the Enrollment of Actuaries (Parts
900--999)
IX Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 1000--1099)
Title 21--Food and Drugs
I Food and Drug Administration, Department of Health and
Human Services (Parts 1--1299)
II Drug Enforcement Administration, Department of Justice
(Parts 1300--1399)
III Office of National Drug Control Policy (Parts 1400--
1499)
Title 22--Foreign Relations
I Department of State (Parts 1--199)
II Agency for International Development (Parts 200--299)
III Peace Corps (Parts 300--399)
IV International Joint Commission, United States and
Canada (Parts 400--499)
V Broadcasting Board of Governors (Parts 500--599)
VII Overseas Private Investment Corporation (Parts 700--
799)
IX Foreign Service Grievance Board (Parts 900--999)
X Inter-American Foundation (Parts 1000--1099)
XI International Boundary and Water Commission, United
States and Mexico, United States Section (Parts
1100--1199)
XII United States International Development Cooperation
Agency (Parts 1200--1299)
XIII Millennium Challenge Corporation (Parts 1300--1399)
XIV Foreign Service Labor Relations Board; Federal Labor
Relations Authority; General Counsel of the
Federal Labor Relations Authority; and the Foreign
Service Impasse Disputes Panel (Parts 1400--1499)
XV African Development Foundation (Parts 1500--1599)
XVI Japan-United States Friendship Commission (Parts
1600--1699)
XVII United States Institute of Peace (Parts 1700--1799)
Title 23--Highways
I Federal Highway Administration, Department of
Transportation (Parts 1--999)
II National Highway Traffic Safety Administration and
Federal Highway Administration, Department of
Transportation (Parts 1200--1299)
III National Highway Traffic Safety Administration,
Department of Transportation (Parts 1300--1399)
[[Page 736]]
Title 24--Housing and Urban Development
Subtitle A--Office of the Secretary, Department of
Housing and Urban Development (Parts 0--99)
Subtitle B--Regulations Relating to Housing and Urban
Development
I Office of Assistant Secretary for Equal Opportunity,
Department of Housing and Urban Development (Parts
100--199)
II Office of Assistant Secretary for Housing-Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 200--299)
III Government National Mortgage Association, Department
of Housing and Urban Development (Parts 300--399)
IV Office of Housing and Office of Multifamily Housing
Assistance Restructuring, Department of Housing
and Urban Development (Parts 400--499)
V Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 500--599)
VI Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 600--699) [Reserved]
VII Office of the Secretary, Department of Housing and
Urban Development (Housing Assistance Programs and
Public and Indian Housing Programs) (Parts 700--
799)
VIII Office of the Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Section 8 Housing Assistance
Programs, Section 202 Direct Loan Program, Section
202 Supportive Housing for the Elderly Program and
Section 811 Supportive Housing for Persons With
Disabilities Program) (Parts 800--899)
IX Office of Assistant Secretary for Public and Indian
Housing, Department of Housing and Urban
Development (Parts 900--1699)
X Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Interstate Land Sales
Registration Program) (Parts 1700--1799)
XII Office of Inspector General, Department of Housing and
Urban Development (Parts 2000--2099)
XV Emergency Mortgage Insurance and Loan Programs,
Department of Housing and Urban Development (Parts
2700--2799) [Reserved]
XX Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 3200--3899)
XXIV Board of Directors of the HOPE for Homeowners Program
(Parts 4000--4099) [Reserved]
XXV Neighborhood Reinvestment Corporation (Parts 4100--
4199)
Title 25--Indians
I Bureau of Indian Affairs, Department of the Interior
(Parts 1--299)
[[Page 737]]
II Indian Arts and Crafts Board, Department of the
Interior (Parts 300--399)
III National Indian Gaming Commission, Department of the
Interior (Parts 500--599)
IV Office of Navajo and Hopi Indian Relocation (Parts
700--799)
V Bureau of Indian Affairs, Department of the Interior,
and Indian Health Service, Department of Health
and Human Services (Part 900)
VI Office of the Assistant Secretary-Indian Affairs,
Department of the Interior (Parts 1000--1199)
VII Office of the Special Trustee for American Indians,
Department of the Interior (Parts 1200--1299)
Title 26--Internal Revenue
I Internal Revenue Service, Department of the Treasury
(Parts 1--End)
Title 27--Alcohol, Tobacco Products and Firearms
I Alcohol and Tobacco Tax and Trade Bureau, Department
of the Treasury (Parts 1--399)
II Bureau of Alcohol, Tobacco, Firearms, and Explosives,
Department of Justice (Parts 400--699)
Title 28--Judicial Administration
I Department of Justice (Parts 0--299)
III Federal Prison Industries, Inc., Department of Justice
(Parts 300--399)
V Bureau of Prisons, Department of Justice (Parts 500--
599)
VI Offices of Independent Counsel, Department of Justice
(Parts 600--699)
VII Office of Independent Counsel (Parts 700--799)
VIII Court Services and Offender Supervision Agency for the
District of Columbia (Parts 800--899)
IX National Crime Prevention and Privacy Compact Council
(Parts 900--999)
XI Department of Justice and Department of State (Parts
1100--1199)
Title 29--Labor
Subtitle A--Office of the Secretary of Labor (Parts
0--99)
Subtitle B--Regulations Relating to Labor
I National Labor Relations Board (Parts 100--199)
II Office of Labor-Management Standards, Department of
Labor (Parts 200--299)
III National Railroad Adjustment Board (Parts 300--399)
[[Page 738]]
IV Office of Labor-Management Standards, Department of
Labor (Parts 400--499)
V Wage and Hour Division, Department of Labor (Parts
500--899)
IX Construction Industry Collective Bargaining Commission
(Parts 900--999)
X National Mediation Board (Parts 1200--1299)
XII Federal Mediation and Conciliation Service (Parts
1400--1499)
XIV Equal Employment Opportunity Commission (Parts 1600--
1699)
XVII Occupational Safety and Health Administration,
Department of Labor (Parts 1900--1999)
XX Occupational Safety and Health Review Commission
(Parts 2200--2499)
XXV Employee Benefits Security Administration, Department
of Labor (Parts 2500--2599)
XXVII Federal Mine Safety and Health Review Commission
(Parts 2700--2799)
XL Pension Benefit Guaranty Corporation (Parts 4000--
4999)
Title 30--Mineral Resources
I Mine Safety and Health Administration, Department of
Labor (Parts 1--199)
II Bureau of Safety and Environmental Enforcement,
Department of the Interior (Parts 200--299)
IV Geological Survey, Department of the Interior (Parts
400--499)
V Bureau of Ocean Energy Management, Department of the
Interior (Parts 500--599)
VII Office of Surface Mining Reclamation and Enforcement,
Department of the Interior (Parts 700--999)
XII Office of Natural Resources Revenue, Department of the
Interior (Parts 1200--1299)
Title 31--Money and Finance: Treasury
Subtitle A--Office of the Secretary of the Treasury
(Parts 0--50)
Subtitle B--Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts
51--199)
II Fiscal Service, Department of the Treasury (Parts
200--399)
IV Secret Service, Department of the Treasury (Parts
400--499)
V Office of Foreign Assets Control, Department of the
Treasury (Parts 500--599)
VI Bureau of Engraving and Printing, Department of the
Treasury (Parts 600--699)
VII Federal Law Enforcement Training Center, Department of
the Treasury (Parts 700--799)
VIII Office of International Investment, Department of the
Treasury (Parts 800--899)
[[Page 739]]
IX Federal Claims Collection Standards (Department of the
Treasury--Department of Justice) (Parts 900--999)
X Financial Crimes Enforcement Network, Department of
the Treasury (Parts 1000--1099)
Title 32--National Defense
Subtitle A--Department of Defense
I Office of the Secretary of Defense (Parts 1--399)
V Department of the Army (Parts 400--699)
VI Department of the Navy (Parts 700--799)
VII Department of the Air Force (Parts 800--1099)
Subtitle B--Other Regulations Relating to National
Defense
XII Defense Logistics Agency (Parts 1200--1299)
XVI Selective Service System (Parts 1600--1699)
XVII Office of the Director of National Intelligence (Parts
1700--1799)
XVIII National Counterintelligence Center (Parts 1800--1899)
XIX Central Intelligence Agency (Parts 1900--1999)
XX Information Security Oversight Office, National
Archives and Records Administration (Parts 2000--
2099)
XXI National Security Council (Parts 2100--2199)
XXIV Office of Science and Technology Policy (Parts 2400--
2499)
XXVII Office for Micronesian Status Negotiations (Parts
2700--2799)
XXVIII Office of the Vice President of the United States
(Parts 2800--2899)
Title 33--Navigation and Navigable Waters
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Corps of Engineers, Department of the Army (Parts
200--399)
IV Saint Lawrence Seaway Development Corporation,
Department of Transportation (Parts 400--499)
Title 34--Education
Subtitle A--Office of the Secretary, Department of
Education (Parts 1--99)
Subtitle B--Regulations of the Offices of the
Department of Education
I Office for Civil Rights, Department of Education
(Parts 100--199)
II Office of Elementary and Secondary Education,
Department of Education (Parts 200--299)
III Office of Special Education and Rehabilitative
Services, Department of Education (Parts 300--399)
IV Office of Career, Technical and Adult Education,
Department of Education (Parts 400--499)
[[Page 740]]
V Office of Bilingual Education and Minority Languages
Affairs, Department of Education (Parts 500--599)
[Reserved]
VI Office of Postsecondary Education, Department of
Education (Parts 600--699)
VII Office of Educational Research and Improvement,
Department of Education (Parts 700--799)
[Reserved]
Subtitle C--Regulations Relating to Education
XI [Reserved]
XII National Council on Disability (Parts 1200--1299)
Title 35 [Reserved]
Title 36--Parks, Forests, and Public Property
I National Park Service, Department of the Interior
(Parts 1--199)
II Forest Service, Department of Agriculture (Parts 200--
299)
III Corps of Engineers, Department of the Army (Parts
300--399)
IV American Battle Monuments Commission (Parts 400--499)
V Smithsonian Institution (Parts 500--599)
VI [Reserved]
VII Library of Congress (Parts 700--799)
VIII Advisory Council on Historic Preservation (Parts 800--
899)
IX Pennsylvania Avenue Development Corporation (Parts
900--999)
X Presidio Trust (Parts 1000--1099)
XI Architectural and Transportation Barriers Compliance
Board (Parts 1100--1199)
XII National Archives and Records Administration (Parts
1200--1299)
XV Oklahoma City National Memorial Trust (Parts 1500--
1599)
XVI Morris K. Udall Scholarship and Excellence in National
Environmental Policy Foundation (Parts 1600--1699)
Title 37--Patents, Trademarks, and Copyrights
I United States Patent and Trademark Office, Department
of Commerce (Parts 1--199)
II U.S. Copyright Office, Library of Congress (Parts
200--299)
III Copyright Royalty Board, Library of Congress (Parts
300--399)
IV Assistant Secretary for Technology Policy, Department
of Commerce (Parts 400--599)
Title 38--Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0--199)
II Armed Forces Retirement Home (Parts 200--299)
[[Page 741]]
Title 39--Postal Service
I United States Postal Service (Parts 1--999)
III Postal Regulatory Commission (Parts 3000--3099)
Title 40--Protection of Environment
I Environmental Protection Agency (Parts 1--1099)
IV Environmental Protection Agency and Department of
Justice (Parts 1400--1499)
V Council on Environmental Quality (Parts 1500--1599)
VI Chemical Safety and Hazard Investigation Board (Parts
1600--1699)
VII Environmental Protection Agency and Department of
Defense; Uniform National Discharge Standards for
Vessels of the Armed Forces (Parts 1700--1799)
VIII Gulf Coast Ecosystem Restoration Council (Parts 1800--
1899)
Title 41--Public Contracts and Property Management
Subtitle A--Federal Procurement Regulations System
[Note]
Subtitle B--Other Provisions Relating to Public
Contracts
50 Public Contracts, Department of Labor (Parts 50-1--50-
999)
51 Committee for Purchase From People Who Are Blind or
Severely Disabled (Parts 51-1--51-99)
60 Office of Federal Contract Compliance Programs, Equal
Employment Opportunity, Department of Labor (Parts
60-1--60-999)
61 Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 61-1--61-999)
62--100 [Reserved]
Subtitle C--Federal Property Management Regulations
System
101 Federal Property Management Regulations (Parts 101-1--
101-99)
102 Federal Management Regulation (Parts 102-1--102-299)
103--104 [Reserved]
105 General Services Administration (Parts 105-1--105-999)
109 Department of Energy Property Management Regulations
(Parts 109-1--109-99)
114 Department of the Interior (Parts 114-1--114-99)
115 Environmental Protection Agency (Parts 115-1--115-99)
128 Department of Justice (Parts 128-1--128-99)
129--200 [Reserved]
Subtitle D--Other Provisions Relating to Property
Management [Reserved]
Subtitle E--Federal Information Resources Management
Regulations System [Reserved]
Subtitle F--Federal Travel Regulation System
300 General (Parts 300-1--300-99)
301 Temporary Duty (TDY) Travel Allowances (Parts 301-1--
301-99)
[[Page 742]]
302 Relocation Allowances (Parts 302-1--302-99)
303 Payment of Expenses Connected with the Death of
Certain Employees (Part 303-1--303-99)
304 Payment of Travel Expenses from a Non-Federal Source
(Parts 304-1--304-99)
Title 42--Public Health
I Public Health Service, Department of Health and Human
Services (Parts 1--199)
IV Centers for Medicare & Medicaid Services, Department
of Health and Human Services (Parts 400--599)
V Office of Inspector General-Health Care, Department of
Health and Human Services (Parts 1000--1999)
Title 43--Public Lands: Interior
Subtitle A--Office of the Secretary of the Interior
(Parts 1--199)
Subtitle B--Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior
(Parts 400--999)
II Bureau of Land Management, Department of the Interior
(Parts 1000--9999)
III Utah Reclamation Mitigation and Conservation
Commission (Parts 10000--10099)
Title 44--Emergency Management and Assistance
I Federal Emergency Management Agency, Department of
Homeland Security (Parts 0--399)
IV Department of Commerce and Department of
Transportation (Parts 400--499)
Title 45--Public Welfare
Subtitle A--Department of Health and Human Services
(Parts 1--199)
Subtitle B--Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs),
Administration for Children and Families,
Department of Health and Human Services (Parts
200--299)
III Office of Child Support Enforcement (Child Support
Enforcement Program), Administration for Children
and Families, Department of Health and Human
Services (Parts 300--399)
IV Office of Refugee Resettlement, Administration for
Children and Families, Department of Health and
Human Services (Parts 400--499)
V Foreign Claims Settlement Commission of the United
States, Department of Justice (Parts 500--599)
[[Page 743]]
VI National Science Foundation (Parts 600--699)
VII Commission on Civil Rights (Parts 700--799)
VIII Office of Personnel Management (Parts 800--899)
X Office of Community Services, Administration for
Children and Families, Department of Health and
Human Services (Parts 1000--1099)
XI National Foundation on the Arts and the Humanities
(Parts 1100--1199)
XII Corporation for National and Community Service (Parts
1200--1299)
XIII Office of Human Development Services, Department of
Health and Human Services (Parts 1300--1399)
XVI Legal Services Corporation (Parts 1600--1699)
XVII National Commission on Libraries and Information
Science (Parts 1700--1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800--
1899)
XXI Commission on Fine Arts (Parts 2100--2199)
XXIII Arctic Research Commission (Part 2301)
XXIV James Madison Memorial Fellowship Foundation (Parts
2400--2499)
XXV Corporation for National and Community Service (Parts
2500--2599)
Title 46--Shipping
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Maritime Administration, Department of Transportation
(Parts 200--399)
III Coast Guard (Great Lakes Pilotage), Department of
Homeland Security (Parts 400--499)
IV Federal Maritime Commission (Parts 500--599)
Title 47--Telecommunication
I Federal Communications Commission (Parts 0--199)
II Office of Science and Technology Policy and National
Security Council (Parts 200--299)
III National Telecommunications and Information
Administration, Department of Commerce (Parts
300--399)
IV National Telecommunications and Information
Administration, Department of Commerce, and
National Highway Traffic Safety Administration,
Department of Transportation (Parts 400--499)
Title 48--Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1--99)
2 Defense Acquisition Regulations System, Department of
Defense (Parts 200--299)
[[Page 744]]
3 Health and Human Services (Parts 300--399)
4 Department of Agriculture (Parts 400--499)
5 General Services Administration (Parts 500--599)
6 Department of State (Parts 600--699)
7 Agency for International Development (Parts 700--799)
8 Department of Veterans Affairs (Parts 800--899)
9 Department of Energy (Parts 900--999)
10 Department of the Treasury (Parts 1000--1099)
12 Department of Transportation (Parts 1200--1299)
13 Department of Commerce (Parts 1300--1399)
14 Department of the Interior (Parts 1400--1499)
15 Environmental Protection Agency (Parts 1500--1599)
16 Office of Personnel Management, Federal Employees
Health Benefits Acquisition Regulation (Parts
1600--1699)
17 Office of Personnel Management (Parts 1700--1799)
18 National Aeronautics and Space Administration (Parts
1800--1899)
19 Broadcasting Board of Governors (Parts 1900--1999)
20 Nuclear Regulatory Commission (Parts 2000--2099)
21 Office of Personnel Management, Federal Employees
Group Life Insurance Federal Acquisition
Regulation (Parts 2100--2199)
23 Social Security Administration (Parts 2300--2399)
24 Department of Housing and Urban Development (Parts
2400--2499)
25 National Science Foundation (Parts 2500--2599)
28 Department of Justice (Parts 2800--2899)
29 Department of Labor (Parts 2900--2999)
30 Department of Homeland Security, Homeland Security
Acquisition Regulation (HSAR) (Parts 3000--3099)
34 Department of Education Acquisition Regulation (Parts
3400--3499)
51 Department of the Army Acquisition Regulations (Parts
5100--5199)
52 Department of the Navy Acquisition Regulations (Parts
5200--5299)
53 Department of the Air Force Federal Acquisition
Regulation Supplement (Parts 5300--5399)
[Reserved]
54 Defense Logistics Agency, Department of Defense (Parts
5400--5499)
57 African Development Foundation (Parts 5700--5799)
61 Civilian Board of Contract Appeals, General Services
Administration (Parts 6100--6199)
63 Department of Transportation Board of Contract Appeals
(Parts 6300--6399)
99 Cost Accounting Standards Board, Office of Federal
Procurement Policy, Office of Management and
Budget (Parts 9900--9999)
[[Page 745]]
Title 49--Transportation
Subtitle A--Office of the Secretary of Transportation
(Parts 1--99)
Subtitle B--Other Regulations Relating to
Transportation
I Pipeline and Hazardous Materials Safety
Administration, Department of Transportation
(Parts 100--199)
II Federal Railroad Administration, Department of
Transportation (Parts 200--299)
III Federal Motor Carrier Safety Administration,
Department of Transportation (Parts 300--399)
IV Coast Guard, Department of Homeland Security (Parts
400--499)
V National Highway Traffic Safety Administration,
Department of Transportation (Parts 500--599)
VI Federal Transit Administration, Department of
Transportation (Parts 600--699)
VII National Railroad Passenger Corporation (AMTRAK)
(Parts 700--799)
VIII National Transportation Safety Board (Parts 800--999)
X Surface Transportation Board, Department of
Transportation (Parts 1000--1399)
XI Research and Innovative Technology Administration,
Department of Transportation (Parts 1400--1499)
[Reserved]
XII Transportation Security Administration, Department of
Homeland Security (Parts 1500--1699)
Title 50--Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of
the Interior (Parts 1--199)
II National Marine Fisheries Service, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 200--299)
III International Fishing and Related Activities (Parts
300--399)
IV Joint Regulations (United States Fish and Wildlife
Service, Department of the Interior and National
Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of
Commerce); Endangered Species Committee
Regulations (Parts 400--499)
V Marine Mammal Commission (Parts 500--599)
VI Fishery Conservation and Management, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 600--699)
[[Page 747]]
Alphabetical List of Agencies Appearing in the CFR
(Revised as of April 1, 2015)
CFR Title, Subtitle or
Agency Chapter
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Council on Historic Preservation 36, VIII
Advocacy and Outreach, Office of 7, XXV
Afghanistan Reconstruction, Special Inspector 22, LXXXIII
General for
African Development Foundation 22, XV
Federal Acquisition Regulation 48, 57
Agency for International Development 2, VII; 22, II
Federal Acquisition Regulation 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agriculture Department 2, IV; 5, LXXIII
Advocacy and Outreach, Office of 7, XXV
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Animal and Plant Health Inspection Service 7, III; 9, I
Chief Financial Officer, Office of 7, XXX
Commodity Credit Corporation 7, XIV
Economic Research Service 7, XXXVII
Energy Policy and New Uses, Office of 2, IX; 7, XXIX
Environmental Quality, Office of 7, XXXI
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Forest Service 36, II
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Institute of Food and Agriculture 7, XXXIV
Natural Resources Conservation Service 7, VI
Operations, Office of 7, XXVIII
Procurement and Property Management, Office of 7, XXXII
Rural Business-Cooperative Service 7, XVIII, XLII, L
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV, L
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII, L
Secretary of Agriculture, Office of 7, Subtitle A
Transportation, Office of 7, XXXIII
World Agricultural Outlook Board 7, XXXVIII
Air Force Department 32, VII
Federal Acquisition Regulation Supplement 48, 53
Air Transportation Stabilization Board 14, VI
Alcohol and Tobacco Tax and Trade Bureau 27, I
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
American Indians, Office of the Special Trustee 25, VII
[[Page 748]]
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers 36, XI
Compliance Board
Arctic Research Commission 45, XXIII
Armed Forces Retirement Home 5, XI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Blind or Severely Disabled, Committee for 41, 51
Purchase from People Who Are
Broadcasting Board of Governors 22, V
Federal Acquisition Regulation 48, 19
Census Bureau 15, I
Centers for Medicare & Medicaid Services 42, IV
Central Intelligence Agency 32, XIX
Chemical Safety and Hazardous Investigation 40, VI
Board
Chief Financial Officer, Office of 7, XXX
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Civil Rights, Commission on 5, LXVIII; 45, VII
Civil Rights, Office for 34, I
Council of the Inspectors General on Integrity 5, XCVIII
and Efficiency
Court Services and Offender Supervision Agency 5, LXX
for the District of Columbia
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Commerce Department 2, XIII; 44, IV; 50, VI
Census Bureau 15, I
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 13
Foreign-Trade Zones Board 15, IV
Industry and Security, Bureau of 15, VII
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II
National Marine Fisheries Service 50, II, IV
National Oceanic and Atmospheric 15, IX; 50, II, III, IV,
Administration VI
National Telecommunications and Information 15, XXIII; 47, III, IV
Administration
National Weather Service 15, IX
Patent and Trademark Office, United States 37, I
Productivity, Technology and Innovation, 37, IV
Assistant Secretary for
Secretary of Commerce, Office of 15, Subtitle A
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
Commercial Space Transportation 14, III
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 5, XLI; 17, I
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining 29, IX
Commission
Consumer Financial Protection Bureau 5, LXXXIV; 12, X
Consumer Product Safety Commission 5, LXXI; 16, II
Copyright Royalty Board 37, III
Corporation for National and Community Service 2, XXII; 45, XII, XXV
Cost Accounting Standards Board 48, 99
Council on Environmental Quality 40, V
Court Services and Offender Supervision Agency 5, LXX; 28, VIII
for the District of Columbia
Customs and Border Protection 19, I
Defense Contract Audit Agency 32, I
Defense Department 2, XI; 5, XXVI; 32,
Subtitle A; 40, VII
[[Page 749]]
Advanced Research Projects Agency 32, I
Air Force Department 32, VII
Army Department 32, V; 33, II; 36, III,
48, 51
Defense Acquisition Regulations System 48, 2
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, I, XII; 48, 54
Engineers, Corps of 33, II; 36, III
National Imagery and Mapping Agency 32, I
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 2, XI; 32, I
Defense Contract Audit Agency 32, I
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, XII; 48, 54
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
District of Columbia, Court Services and 5, LXX; 28, VIII
Offender Supervision Agency for the
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Economic Research Service 7, XXXVII
Education, Department of 2, XXXIV; 5, LIII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Civil Rights, Office for 34, I
Educational Research and Improvement, Office 34, VII
of
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, 34, III
Office of
Career, Technical, and Adult Education, Office 34, IV
of
Educational Research and Improvement, Office of 34, VII
Election Assistance Commission 2, LVIII; 11, II
Elementary and Secondary Education, Office of 34, II
Emergency Oil and Gas Guaranteed Loan Board 13, V
Emergency Steel Guarantee Loan Board 13, IV
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 2, IX; 5, XXIII; 10, II,
III, X
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 5, XXIV; 18, I
Property Management Regulations 41, 109
Energy, Office of 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 2, XV; 5, LIV; 40, I, IV,
VII
Federal Acquisition Regulation 48, 15
Property Management Regulations 41, 115
Environmental Quality, Office of 7, XXXI
Equal Employment Opportunity Commission 5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary 24, I
for
Executive Office of the President 3, I
Environmental Quality, Council on 40, V
Management and Budget, Office of 2, Subtitle A; 5, III,
LXXVII; 14, VI; 48, 99
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Security Council 32, XXI; 47, 2
Presidential Documents 3
[[Page 750]]
Science and Technology Policy, Office of 32, XXIV; 47, II
Trade Representative, Office of the United 15, XX
States
Export-Import Bank of the United States 2, XXXV; 5, LII; 12, IV
Family Assistance, Office of 45, II
Farm Credit Administration 5, XXXI; 12, VI
Farm Credit System Insurance Corporation 5, XXX; 12, XIV
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Commercial Space Transportation 14, III
Federal Claims Collection Standards 31, IX
Federal Communications Commission 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 5, XXII; 12, III
Federal Election Commission 5, XXXVII; 11, I
Federal Emergency Management Agency 44, I
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Federal Energy Regulatory Commission 5, XXIV; 18, I
Federal Financial Institutions Examination 12, XI
Council
Federal Financing Bank 12, VIII
Federal Highway Administration 23, I, II
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Enterprise Oversight Office 12, XVII
Federal Housing Finance Agency 5, LXXX; 12, XII
Federal Housing Finance Board 12, IX
Federal Labor Relations Authority 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Management Regulation 41, 102
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration 49, III
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Board of Governors 5, LVIII
Federal Retirement Thrift Investment Board 5, VI, LXXVI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 5, XLVII; 16, I
Federal Transit Administration 49, VI
Federal Travel Regulation System 41, Subtitle F
Financial Crimes Enforcement Network 31, X
Financial Research Office 12, XVI
Financial Stability Oversight Council 12, XIII
Fine Arts, Commission on 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of the 45, V
United States
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Services Administration 5, LVII; 41, 105
Contract Appeals, Board of 48, 61
[[Page 751]]
Federal Acquisition Regulation 48, 5
Federal Management Regulation 41, 102
Federal Property Management Regulations 41, 101
Federal Travel Regulation System 41, Subtitle F
General 41, 300
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death 41, 303
of Certain Employees
Relocation Allowances 41, 302
Temporary Duty (TDY) Travel Allowances 41, 301
Geological Survey 30, IV
Government Accountability Office 4, I
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Gulf Coast Ecosystem Restoration Council 2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 2, III; 5, XLV; 45,
Subtitle A,
Centers for Medicare & Medicaid Services 42, IV
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Human Development Services, Office of 45, XIII
Indian Health Service 25, V
Inspector General (Health Care), Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Homeland Security, Department of 2, XXX; 6, I; 8, I
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Customs and Border Protection 19, I
Federal Emergency Management Agency 44, I
Human Resources Management and Labor Relations 5, XCVII
Systems
Immigration and Customs Enforcement Bureau 19, IV
Transportation Security Administration 49, XII
HOPE for Homeowners Program, Board of Directors 24, XXIV
of
Housing and Urban Development, Department of 2, XXIV; 5, LXV; 24,
Subtitle B
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Equal Opportunity, Office of Assistant 24, I
Secretary for
Federal Acquisition Regulation 48, 24
Federal Housing Enterprise Oversight, Office 12, XVII
of
Government National Mortgage Association 24, III
Housing--Federal Housing Commissioner, Office 24, II, VIII, X, XX
of Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Inspector General, Office of 24, XII
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Secretary, Office of 24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of 24, II, VIII, X, XX
Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Human Development Services, Office of 45, XIII
Immigration and Customs Enforcement Bureau 19, IV
Immigration Review, Executive Office for 8, V
Independent Counsel, Office of 28, VII
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
[[Page 752]]
Indian Health Service 25, V
Industry and Security, Bureau of 15, VII
Information Resources Management, Office of 7, XXVII
Information Security Oversight Office, National 32, XX
Archives and Records Administration
Inspector General
Agriculture Department 7, XXVI
Health and Human Services Department 42, V
Housing and Urban Development Department 24, XII, XV
Institute of Peace, United States 22, XVII
Inter-American Foundation 5, LXIII; 22, X
Interior Department 2, XIV
American Indians, Office of the Special 25, VII
Trustee
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
Land Management, Bureau of 43, II
National Indian Gaming Commission 25, III
National Park Service 36, I
Natural Resource Revenue, Office of 30, XII
Ocean Energy Management, Bureau of 30, V
Reclamation, Bureau of 43, I
Safety and Enforcement Bureau, Bureau of 30, II
Secretary of the Interior, Office of 2, XIV; 43, Subtitle A
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Internal Revenue Service 26, I
International Boundary and Water Commission, 22, XI
United States and Mexico, United States
Section
International Development, United States Agency 22, II
for
Federal Acquisition Regulation 48, 7
International Development Cooperation Agency, 22, XII
United States
International Joint Commission, United States 22, IV
and Canada
International Organizations Employees Loyalty 5, V
Board
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 5, XL
Investment Security, Office of 31, VIII
James Madison Memorial Fellowship Foundation 45, XXIV
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 2, XXVIII; 5, XXVIII; 28,
I, XI; 40, IV
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 31, IX
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the 45, V
United States
Immigration Review, Executive Office for 8, V
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Property Management Regulations 41, 128
Labor Department 2, XXIX; 5, XLII
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office 41, 60
of
Federal Procurement Regulations System 41, 50
[[Page 753]]
Labor-Management Standards, Office of 29, II, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Office of Workers' Compensation Programs 20, VII
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Standards, Office of 29, II, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Royalty Board 37, III
U.S. Copyright Office 37, II
Local Television Loan Guarantee Board 7, XX
Management and Budget, Office of 5, III, LXXVII; 14, VI;
48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II, LXIV
Micronesian Status Negotiations, Office for 32, XXVII
Military Compensation and Retirement 5, XCIV
Modernization Commission
Millennium Challenge Corporation 22, XIII
Mine Safety and Health Administration 30, I
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Morris K. Udall Scholarship and Excellence in 36, XVI
National Environmental Policy Foundation
Museum and Library Services, Institute of 2, XXXI
National Aeronautics and Space Administration 22, XVIII; 5, LIX; 14, V
Federal Acquisition Regulation 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National and Community Service, Corporation for 2, XXII; 45, XII, XXV
National Archives and Records Administration 2, XXVI; 5, LXVI; 36, XII
Information Security Oversight Office 32, XX
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information 45, XVII
Science
National Council on Disability 34, XII
National Counterintelligence Center 32, XVIII
National Credit Union Administration 5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact 28, IX
Council
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Endowment for the Arts 2, XXXII
National Endowment for the Humanities 2, XXXIII
National Foundation on the Arts and the 45, XI
Humanities
National Highway Traffic Safety Administration 23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency 32, I
National Indian Gaming Commission 25, III
National Institute of Food and Agriculture 7, XXXIV
National Institute of Standards and Technology 15, II
National Intelligence, Office of Director of 32, XVII
National Labor Relations Board 5, LXI; 29, I
National Marine Fisheries Service 50, II, IV
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III, IV,
VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 2, XXV; 5, XLIII; 45, VI
Federal Acquisition Regulation 48, 25
[[Page 754]]
National Security Council 32, XXI
National Security Council and Office of Science 47, II
and Technology Policy
National Telecommunications and Information 15, XXIII; 47, III, IV
Administration
National Transportation Safety Board 49, VIII
Natural Resources Conservation Service 7, VI
Natural Resource Revenue, Office of 30, XII
Navajo and Hopi Indian Relocation, Office of 25, IV
Navy Department 32, VI
Federal Acquisition Regulation 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Northeast Interstate Low-Level Radioactive Waste 10, XVIII
Commission
Nuclear Regulatory Commission 2, XX; 5, XLVIII; 10, I
Federal Acquisition Regulation 48, 20
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Ocean Energy Management, Bureau of 30, V
Offices of Independent Counsel 28, VI
Office of Workers' Compensation Programs 20, VII
Oklahoma City National Memorial Trust 36, XV
Operations Office 7, XXVIII
Overseas Private Investment Corporation 5, XXXIII; 22, VII
Patent and Trademark Office, United States 37, I
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death of 41, 303
Certain Employees
Peace Corps 2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension Benefit Guaranty Corporation 29, XL
Personnel Management, Office of 5, I, XXXV; 45, VIII
Human Resources Management and Labor Relations 5, XCVII
Systems, Department of Homeland Security
Federal Acquisition Regulation 48, 17
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Pipeline and Hazardous Materials Safety 49, I
Administration
Postal Regulatory Commission 5, XLVI; 39, III
Postal Service, United States 5, LX; 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House 1, IV
Fellowships
Presidential Documents 3
Presidio Trust 36, X
Prisons, Bureau of 28, V
Privacy and Civil Liberties Oversight Board 6, X
Procurement and Property Management, Office of 7, XXXII
Productivity, Technology and Innovation, 37, IV
Assistant Secretary
Public Contracts, Department of Labor 41, 50
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation, Bureau of 43, I
Recovery Accountability and Transparency Board 4, II
Refugee Resettlement, Office of 45, IV
Relocation Allowances 41, 302
Research and Innovative Technology 49, XI
Administration
Rural Business-Cooperative Service 7, XVIII, XLII, L
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV, L
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII, L
Safety and Environmental Enforcement, Bureau of 30, II
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
[[Page 755]]
Science and Technology Policy, Office of, and 47, II
National Security Council
Secret Service 31, IV
Securities and Exchange Commission 5, XXXIV; 17, II
Selective Service System 32, XVI
Small Business Administration 2, XXVII; 13, I
Smithsonian Institution 36, V
Social Security Administration 2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, 34, III
Office of
State Department 2, VI; 22, I; 28, XI
Federal Acquisition Regulation 48, 6
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Surface Transportation Board 49, X
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
Tennessee Valley Authority 5, LXIX; 18, XIII
Thrift Supervision Office, Department of the 12, V
Treasury
Trade Representative, United States, Office of 15, XX
Transportation, Department of 2, XII; 5, L
Commercial Space Transportation 14, III
Contract Appeals, Board of 48, 63
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II
Federal Motor Carrier Safety Administration 49, III
Federal Railroad Administration 49, II
Federal Transit Administration 49, VI
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 47, IV; 49, V
Pipeline and Hazardous Materials Safety 49, I
Administration
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Surface Transportation Board 49, X
Transportation Statistics Bureau 49, XI
Transportation, Office of 7, XXXIII
Transportation Security Administration 49, XII
Transportation Statistics Bureau 49, XI
Travel Allowances, Temporary Duty (TDY) 41, 301
Treasury Department 2, X;5, XXI; 12, XV; 17,
IV; 31, IX
Alcohol and Tobacco Tax and Trade Bureau 27, I
Community Development Financial Institutions 12, XVIII
Fund
Comptroller of the Currency 12, I
Customs and Border Protection 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Claims Collection Standards 31, IX
Federal Law Enforcement Training Center 31, VII
Financial Crimes Enforcement Network 31, X
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Investment Security, Office of 31, VIII
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision, Office of 12, V
Truman, Harry S. Scholarship Foundation 45, XVIII
United States and Canada, International Joint 22, IV
Commission
United States and Mexico, International Boundary 22, XI
and Water Commission, United States Section
U.S. Copyright Office 37, II
Utah Reclamation Mitigation and Conservation 43, III
Commission
[[Page 756]]
Veterans Affairs Department 2, VIII; 38, I
Federal Acquisition Regulation 48, 8
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Vice President of the United States, Office of 32, XXVIII
Career, Technical and Adult Education, Office of 34, IV
Wage and Hour Division 29, V
Water Resources Council 18, VI
Workers' Compensation Programs, Office of 20, I
World Agricultural Outlook Board 7, XXXVIII
[[Page 757]]
Table of OMB Control Numbers
The OMB control numbers for chapter I of title 26 were consolidated into
Sec. Sec. 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR
58008, Nov. 12, 1996, Sec. 601.9000 was removed. Section 602.101 is
reprinted below for the convenience of the user.
PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents
Sec. 602.101 OMB Control numbers.
(a) Purpose. This part collects and displays the control numbers
assigned to collections of information in Internal Revenue Service
regulations by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980. The Internal Revenue Service intends
that this part comply with the requirements of Sec. Sec. 1320.7(f),
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations
implementing the Paperwork Reduction Act), for the display of control
numbers assigned by OMB to collections of information in Internal
Revenue Service regulations. This part does not display control numbers
assigned by the Office of Management and Budget to collections of
information of the Bureau of Alcohol, Tobacco, and Firearms.
(b) Display.
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control
No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................ 1545-1654
1.23-5..................................................... 1545-0074
1.25-1T.................................................... 1545-0922
1545-0930
1.25-2T.................................................... 1545-0922
1545-0930
1.25-3T.................................................... 1545-0922
1545-0930
1.25-4T.................................................... 1545-0922
1.25-5T.................................................... 1545-0922
1.25-6T.................................................... 1545-0922
1.25-7T.................................................... 1545-0922
1.25-8T.................................................... 1545-0922
1.25A-1.................................................... 1545-1630
1.28-1..................................................... 1545-0619
1.31-2..................................................... 1545-0074
1.32-2..................................................... 1545-0074
1.32-3..................................................... 1545-1575
1.36B-5.................................................... 1545-2232
1.37-1..................................................... 1545-0074
1.37-3..................................................... 1545-0074
1.41-2..................................................... 1545-0619
1.41-3..................................................... 1545-0619
1.41-4A.................................................... 1545-0074
1.41-4 (b) and (c)......................................... 1545-0074
1.41-8(b).................................................. 1545-1625
1.41-8(d).................................................. 1545-0732
1.41-9..................................................... 1545-0619
1.42-1T.................................................... 1545-0984
1545-0988
1.42-2..................................................... 1545-1005
1.42-5..................................................... 1545-1357
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
1.42-13.................................................... 1545-1357
1.42-14.................................................... 1545-1423
1.42-17.................................................... 1545-1357
1.42-18.................................................... 1545-2088
1.43-3(a)(3)............................................... 1545-1292
1.43-3(b)(3)............................................... 1545-1292
1.44B-1.................................................... 1545-0219
1.45D-1.................................................... 1545-1765
1.45G-1.................................................... 1545-2031
1.46-1..................................................... 1545-0123
1545-0155
1.46-3..................................................... 1545-0155
1.46-4..................................................... 1545-0155
1.46-5..................................................... 1545-0155
1.46-6..................................................... 1545-0155
1.46-8..................................................... 1545-0155
1.46-9..................................................... 1545-0155
1.46-10.................................................... 1545-0118
1.46-11.................................................... 1545-0155
1.47-1..................................................... 1545-0155
1545-0166
1.47-3..................................................... 1545-0155
1545-0166
1.47-4..................................................... 1545-0123
1.47-5..................................................... 1545-0092
1.47-6..................................................... 1545-0099
1.48-3..................................................... 1545-0155
1.48-4..................................................... 1545-0155
1545-0808
1.48-5..................................................... 1545-0155
1.48-6..................................................... 1545-0155
1.48-12.................................................... 1545-0155
1545-1783
1.50A-1.................................................... 1545-0895
1.50A-2.................................................... 1545-0895
1.50A-3.................................................... 1545-0895
1.50A-4.................................................... 1545-0895
1.50A-5.................................................... 1545-0895
1.50A-6.................................................... 1545-0895
1.50A-7.................................................... 1545-0895
1.50B-1.................................................... 1545-0895
1.50B-2.................................................... 1545-0895
1.50B-3.................................................... 1545-0895
[[Page 758]]
1.50B-4.................................................... 1545-0895
1.50B-5.................................................... 1545-0895
1.51-1..................................................... 1545-0219
1545-0241
1545-0244
1545-0797
1.52-2..................................................... 1545-0219
1.52-3..................................................... 1545-0219
1.56-1..................................................... 1545-0123
1.56(g)-1.................................................. 1545-1233
1.56A-1.................................................... 1545-0227
1.56A-2.................................................... 1545-0227
1.56A-3.................................................... 1545-0227
1.56A-4.................................................... 1545-0227
1.56A-5.................................................... 1545-0227
1.57-5..................................................... 1545-0227
1.58-1..................................................... 1545-0175
1.58-9(c)(5)(iii)(B)....................................... 1545-1093
1.58-9(e)(3)............................................... 1545-1093
1.59-1..................................................... 1545-1903
1.61-2..................................................... 1545-0771
1.61-2T.................................................... 1545-0771
1.61-4..................................................... 1545-0187
1.61-15.................................................... 1545-0074
1.62-2..................................................... 1545-1148
1.63-1..................................................... 1545-0074
1.66-4..................................................... 1545-1770
1.67-2T.................................................... 1545-0110
1.67-3..................................................... 1545-1018
1.67-3T.................................................... 1545-0118
1.71-1T.................................................... 1545-0074
1.72-4..................................................... 1545-0074
1.72-6..................................................... 1545-0074
1.72-9..................................................... 1545-0074
1.72-17.................................................... 1545-0074
1.72-17A................................................... 1545-0074
1.72-18.................................................... 1545-0074
1.74-1..................................................... 1545-1100
1.79-2..................................................... 1545-0074
1.79-3..................................................... 1545-0074
1.83-2..................................................... 1545-0074
1.83-5..................................................... 1545-0074
1.83-6..................................................... 1545-1448
1.103-10................................................... 1545-0123
1545-0940
1.103-15AT................................................. 1545-0720
1.103-18................................................... 1545-1226
1.103(n)-2T................................................ 1545-0874
1.103(n)-4T................................................ 1545-0874
1.103A-2................................................... 1545-0720
1.105-4.................................................... 1545-0074
1.105-5.................................................... 1545-0074
1.105-6.................................................... 1545-0074
1.108-4.................................................... 1545-1539
1.108-5.................................................... 1545-1421
1.108-7.................................................... 1545-2155
1.108(i)-1................................................. 1545-2147
1.108(i)-2................................................. 1545-2147
1.110-1.................................................... 1545-1661
1.117-5.................................................... 1545-0869
1.118-2.................................................... 1545-1639
1.119-1.................................................... 1545-0067
1.120-3.................................................... 1545-0057
1.121-1.................................................... 1545-0072
1.121-2.................................................... 1545-0072
1.121-3.................................................... 1545-0072
1.121-4.................................................... 1545-0072
1545-0091
1.121-5.................................................... 1545-0072
1.127-2.................................................... 1545-0768
1.132-1T................................................... 1545-0771
1.132-2.................................................... 1545-0771
1.132-2T................................................... 1545-0771
1.132-5.................................................... 1545-0771
1.132-5T................................................... 1545-0771
1545-1098
1.132-9(b)................................................. 1545-1676
1.141-1.................................................... 1545-1451
1.141-12................................................... 1545-1451
1.142-2.................................................... 1545-1451
1.142(f)(4)-1.............................................. 1545-1730
1.148-0.................................................... 1545-1098
1.148-1.................................................... 1545-1098
1.148-2.................................................... 1545-1098
1545-1347
1.148-3.................................................... 1545-1098
1545-1347
1.148-4.................................................... 1545-1098
1545-1347
1.148-5.................................................... 1545-1098
1545-1490
1.148-6.................................................... 1545-1098
1545-1451
1.148-7.................................................... 1545-1098
1545-1347
1.148-8.................................................... 1545-1098
1.148-11................................................... 1545-1098
1545-1347
1.149(e)-1................................................. 1545-0720
1.150-1.................................................... 1545-1347
1.151-1.................................................... 1545-0074
1.152-3.................................................... 1545-0071
1545-1783
1.152-4.................................................... 1545-0074
1.152-4T................................................... 1545-0074
1.162-1.................................................... 1545-0139
1.162-2.................................................... 1545-0139
1.162-3.................................................... 1545-0139
1.162-4.................................................... 1545-0139
1.162-5.................................................... 1545-0139
1.162-6.................................................... 1545-0139
1.162-7.................................................... 1545-0139
1.162-8.................................................... 1545-0139
1.162-9.................................................... 1545-0139
1.162-10................................................... 1545-0139
1.162-11................................................... 1545-0139
1.162-12................................................... 1545-0139
1.162-13................................................... 1545-0139
1.162-14................................................... 1545-0139
1.162-15................................................... 1545-0139
1.162-16................................................... 1545-0139
1.162-17................................................... 1545-0139
1.162-18................................................... 1545-0139
1.162-19................................................... 1545-0139
1.162-20................................................... 1545-0139
1.162-24................................................... 1545-2115
1.162-27................................................... 1545-1466
1.163-5.................................................... 1545-0786
1545-1132
1.163-8T................................................... 1545-0995
1.163-10T.................................................. 1545-0074
1.163-13................................................... 1545-1491
1.163(d)-1................................................. 1545-1421
1.165-1.................................................... 1545-0177
1.165-2.................................................... 1545-0177
1.165-3.................................................... 1545-0177
1.165-4.................................................... 1545-0177
1.165-5.................................................... 1545-0177
1.165-6.................................................... 1545-0177
1.165-7.................................................... 1545-0177
1.165-8.................................................... 1545-0177
1.165-9.................................................... 1545-0177
1.165-10................................................... 1545-0177
1.165-11................................................... 1545-0074
[[Page 759]]
1545-0177
1545-0786
1.165-12................................................... 1545-0786
1.166-1.................................................... 1545-0123
1.166-2.................................................... 1545-1254
1.166-4.................................................... 1545-0123
1.166-10................................................... 1545-0123
1.167(a)-5T................................................ 1545-1021
1.167(a)-7................................................. 1545-0172
1.167(a)-11................................................ 1545-0152
1545-0172
1.167(a)-12................................................ 1545-0172
1.167(d)-1................................................. 1545-0172
1.167(e)-1................................................. 1545-0172
1.167(f)-11................................................ 1545-0172
1.167(l)-1................................................. 1545-0172
1.168(d)-1................................................. 1545-1146
1.168(f)(8)-1T............................................. 1545-0923
1.168(i)-1................................................. 1545-1331
1.168-5.................................................... 1545-0172
1.169-4.................................................... 1545-0172
1.170-1.................................................... 1545-0074
1.170-2.................................................... 1545-0074
1.170-3.................................................... 1545-0123
1.170A-1................................................... 1545-0074
1.170A-2................................................... 1545-0074
1.170A-4(A)(b)............................................. 1545-0123
1.170A-8................................................... 1545-0074
1.170A-9................................................... 1545-0052
1545-0074
1.170A-11.................................................. 1545-0074
1545-0123
1545-1868
1.170A-12.................................................. 1545-0020
1545-0074
1.170A-13.................................................. 1545-0074
1545-0754
1545-0908
1545-1431
1.170A-13(f)............................................... 1545-1464
1.170A-14.................................................. 1545-0763
1.171-4.................................................... 1545-1491
1.171-5.................................................... 1545-1491
1.172-1.................................................... 1545-0172
1.172-13................................................... 1545-0863
1.173-1.................................................... 1545-0172
1.174-3.................................................... 1545-0152
1.174-4.................................................... 1545-0152
1.175-3.................................................... 1545-0187
1.175-6.................................................... 1545-0152
1.177-1.................................................... 1545-0172
1.179-2.................................................... 1545-1201
1.179-3.................................................... 1545-1201
1.179-5.................................................... 1545-0172
1545-1201
1.179B-1T.................................................. 1545-2076
1.179C-1................................................... 1545-2103
1.179C-1T.................................................. 1545-2103
1.180-2.................................................... 1545-0074
1.181-1.................................................... 1545-2059
1.181-2.................................................... 1545-2059
1.181-3.................................................... 1545-2059
1.182-6.................................................... 1545-0074
1.183-1.................................................... 1545-0195
1.183-2.................................................... 1545-0195
1.183-3.................................................... 1545-0195
1.183-4.................................................... 1545-0195
1.190-3.................................................... 1545-0074
1.194-2.................................................... 1545-0735
1.194-4.................................................... 1545-0735
1.195-1.................................................... 1545-1582
1.197-1T................................................... 1545-1425
1.197-2.................................................... 1545-1671
1.199-6.................................................... 1545-1966
1.213-1.................................................... 1545-0074
1.215-1T................................................... 1545-0074
1.217-2.................................................... 1545-0182
1.243-3.................................................... 1545-0123
1.243-4.................................................... 1545-0123
1.243-5.................................................... 1545-0123
1.248-1.................................................... 1545-0172
1.261-1.................................................... 1545-1041
1.263(a)-1................................................. 1545-2248
1.263(a)-3................................................. 1545-2248
1.263(a)-5................................................. 1545-1870
1.263(e)-1................................................. 1545-0123
1.263A-1................................................... 1545-0987
1.263A-1T.................................................. 1545-0187
1.263A-2................................................... 1545-0987
1.263A-3................................................... 1545-0987
1.263A-8(b)(2)(iii)........................................ 1545-1265
1.263A-9(d)(1)............................................. 1545-1265
1.263A-9(f)(1)(ii)......................................... 1545-1265
1.263A-9(f)(2)(iv)......................................... 1545-1265
1.263A-9(g)(2)(iv)(C)...................................... 1545-1265
1.263A-9(g)(3)(iv)......................................... 1545-1265
1.265-1.................................................... 1545-0074
1.265-2.................................................... 1545-0123
1.266-1.................................................... 1545-0123
1.267(f)-1................................................. 1545-0885
1.268-1.................................................... 1545-0184
1.274-1.................................................... 1545-0139
1.274-2.................................................... 1545-0139
1.274-3.................................................... 1545-0139
1.274-4.................................................... 1545-0139
1.274-5.................................................... 1545-0771
1.274-5A................................................... 1545-0139
1545-0771
1.274-5T................................................... 1545-0074
1545-0172
1545-0771
1.274-6.................................................... 1545-0139
1545-0771
1.274-6T................................................... 1545-0074
1545-0771
1.274-7.................................................... 1545-0139
1.274-8.................................................... 1545-0139
1.279-6.................................................... 1545-0123
1.280C-4................................................... 1545-1155
1.280F-3T.................................................. 1545-0074
1.280G-1................................................... 1545-1851
1.281-4.................................................... 1545-0123
1.302-4.................................................... 1545-0074
1.305-3.................................................... 1545-0123
1.305-5.................................................... 1545-1438
1.307-2.................................................... 1545-0074
1.312-15................................................... 1545-0172
1.316-1.................................................... 1545-0123
1.331-1.................................................... 1545-0074
1.332-4.................................................... 1545-0123
1.332-6.................................................... 1545-2019
1.336-2.................................................... 1545-2125
1.336-4.................................................... 1545-2125
1.337(d)-1................................................. 1545-1160
1.337(d)-2................................................. 1545-1160
1545-1774
1.337(d)-4................................................. 1545-1633
1.337(d)-5................................................. 1545-1672
1.337(d)-6................................................. 1545-1672
1.337(d)-7................................................. 1545-1672
1.338-2.................................................... 1545-1658
1.338-5.................................................... 1545-1658
1.338-10................................................... 1545-1658
1.338-11................................................... 1545-1990
[[Page 760]]
1.338(h)(10)-1............................................. 1545-1658
1.338(i)-1................................................. 1545-1990
1.341-7.................................................... 1545-0123
1.351-3.................................................... 1545-2019
1.355-5.................................................... 1545-2019
1.362-2.................................................... 1545-0123
1.362-4.................................................... 1545-2247
1.367(a)-1T................................................ 1545-0026
1.367(a)-2T................................................ 1545-0026
1.367(a)-3................................................. 1545-0026
1545-1478
1.367(a)-3T................................................ 1545-2183
1.367(a)-6T................................................ 1545-0026
1.367(a)-7................................................. 1545-2183
1.367(a)-7T................................................ 1545-2183
1.367(a)-8................................................. 1545-1271
1545-2056
1545-2183
1.367(b)-1................................................. 1545-1271
1.367(b)-3T................................................ 1545-1666
1.367(d)-1T................................................ 1545-0026
1.367(e)-1................................................. 1545-1487
1.367(e)-2................................................. 1545-1487
1.368-1.................................................... 1545-1691
1.368-3.................................................... 1545-2019
1.371-1.................................................... 1545-0123
1.371-2.................................................... 1545-0123
1.374-3.................................................... 1545-0123
1.381(b)-1................................................. 1545-0123
1.381(c)(4)-1.............................................. 1545-0123
1545-0152
1545-0879
1.381(c)(5)-1.............................................. 1545-0123
1545-0152
1.381(c)(6)-1.............................................. 1545-0123
1545-0152
1.381(c)(8)-1.............................................. 1545-0123
1.381(c)(10)-1............................................. 1545-0123
1.381(c)(11)-1(k).......................................... 1545-0123
1.381(c)(13)-1............................................. 1545-0123
1.381(c)(17)-1............................................. 1545-0045
1.381(c)(22)-1............................................. 1545-1990
1.381(c)(25)-1............................................. 1545-0045
1.382-1T................................................... 1545-0123
1.382-2.................................................... 1545-0123
1.382-2T................................................... 1545-0123
1.382-3.................................................... 1545-1281
1545-1345
1.382-4.................................................... 1545-1120
1.382-6.................................................... 1545-1381
1.382-8.................................................... 1545-1434
1.382-9.................................................... 1545-1120
1545-1260
1545-1275
1545-1324
1.382-11................................................... 1545-2019
1.382-91................................................... 1545-1260
1545-1324
1.383-1.................................................... 1545-0074
1545-1120
1.401-1.................................................... 1545-0020
1545-0197
1545-0200
1545-0534
1545-0710
1.401(a)-11................................................ 1545-0710
1.401(a)-20................................................ 1545-0928
1.401(a)-31................................................ 1545-1341
1.401(a)-50................................................ 1545-0710
1.401(a)(9)-1.............................................. 1545-1573
1.401(a)(9)-3.............................................. 1545-1466
1.401(a)(9)-4.............................................. 1545-1573
1.401(a)(9)-6.............................................. 1545-2234
1.401(a)(31)-1............................................. 1545-1341
1.401(b)-1................................................. 1545-0197
1.401(f)-1................................................. 1545-0710
1.401(k)-1................................................. 1545-1039
1545-1069
1545-1669
1545-1930
1.401(k)-2................................................. 1545-1669
1.401(k)-3................................................. 1545-1669
1.401(k)-4................................................. 1545-1669
1.401(m)-3................................................. 1545-1699
1.401-12(n)................................................ 1545-0806
1.401-14................................................... 1545-0710
1.402(c)-2................................................. 1545-1341
1.402(f)-1................................................. 1545-1341
1545-1632
1.402A-1................................................... 1545-1992
1.403(b)-1................................................. 1545-0710
1.403(b)-3................................................. 1545-0996
1.403(b)-7................................................. 1545-1341
1.403(b)-10................................................ 1545-2068
1.404(a)-4................................................. 1545-0710
1.404(a)-12................................................ 1545-0710
1.404A-2................................................... 1545-0123
1.404A-6................................................... 1545-0123
1.408-2.................................................... 1545-0390
1.408-5.................................................... 1545-0747
1.408-6.................................................... 1545-0203
1545-0390
1.408-7.................................................... 1545-0119
1.408(q)-1................................................. 1545-1841
1.408A-2................................................... 1545-1616
1.408A-4................................................... 1545-1616
1.408A-5................................................... 1545-1616
1.408A-7................................................... 1545-1616
1.410(a)-2................................................. 1545-0710
1.410(d)-1................................................. 1545-0710
1.411(a)-11................................................ 1545-1471
1545-1632
1.411(d)-4................................................. 1545-1545
1.411(d)-6................................................. 1545-1477
1.412(b)-5................................................. 1545-0710
1.412(c)(1)-2.............................................. 1545-0710
1.412(c)(2)-1.............................................. 1545-0710
1.412(c)(3)-2.............................................. 1545-0710
1.414(c)-5................................................. 1545-0797
1.414(r)-1................................................. 1545-1221
1.415-2.................................................... 1545-0710
1.415-6.................................................... 1545-0710
1.417(a)(3)-1.............................................. 1545-0928
1.417(e)-1................................................. 1545-1471
1545-1724
1.417(e)-1T................................................ 1545-1471
1.419A(f)(6)-1............................................. 1545-1795
1.422-1.................................................... 1545-0820
1.430(f)-1................................................. 1545-2095
1.430(g)-1................................................. 1545-2095
1.430(h)(2)-1.............................................. 1545-2095
1.436-1.................................................... 1545-2095
1.441-2.................................................... 1545-1748
1.442-1.................................................... 1545-0074
1545-0123
1545-0134
1545-0152
1545-0820
1545-1748
1.443-1.................................................... 1545-0123
1.444-3T................................................... 1545-1036
1.444-4.................................................... 1545-1591
1.446-1.................................................... 1545-0074
1545-0152
[[Page 761]]
1.446-4(d)................................................. 1545-1412
1.448-1(g)................................................. 1545-0152
1.448-1(h)................................................. 1545-0152
1.448-1(i)................................................. 1545-0152
1.448-2.................................................... 1545-1855
1.448-2T................................................... 1545-0152
1545-1855
1.451-1.................................................... 1545-0091
1.451-4.................................................... 1545-0123
1.451-5.................................................... 1545-0074
1.451-6.................................................... 1545-0074
1.451-7.................................................... 1545-0074
1.453-1.................................................... 1545-0152
1.453-2.................................................... 1545-0152
1.453-8.................................................... 1545-0152
1545-0228
1.453-10................................................... 1545-0152
1.453A-1................................................... 1545-0152
1545-1134
1.453A-2................................................... 1545-0152
1545-1134
1.453A-3................................................... 1545-0963
1.454-1.................................................... 1545-0074
1.455-2.................................................... 1545-0152
1.455-6.................................................... 1545-0123
1.456-2.................................................... 1545-0123
1.456-6.................................................... 1545-0123
1.456-7.................................................... 1545-0123
1.457-8.................................................... 1545-1580
1.458-1.................................................... 1545-0879
1.458-2.................................................... 1545-0152
1.460-1.................................................... 1545-1650
1.460-6.................................................... 1545-1031
1545-1572
1545-1732
1.461-1.................................................... 1545-0074
1.461-2.................................................... 1545-0096
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
1.463-1T................................................... 1545-0916
1.465-1T................................................... 1545-0712
1.466-1T................................................... 1545-0152
1.466-4.................................................... 1545-0152
1.468A-3................................................... 1545-1269
1545-1378
1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d)..................... 1545-2091
1.468A-4................................................... 1545-0954
1.468A-7................................................... 1545-0954
1545-1511
1.468A-8................................................... 1545-1269
1.468B-1................................................... 1545-1631
1.468B-1(j)................................................ 1545-1299
1.468B-2(k)................................................ 1545-1299
1.468B-2(l)................................................ 1545-1299
1.468B-3(b)................................................ 1545-1299
1.468B-3(e)................................................ 1545-1299
1.468B-5(b)................................................ 1545-1299
1.468B-9................................................... 1545-1631
1.469-1.................................................... 1545-1008
1.469-2T................................................... 1545-0712
1545-1091
1.469-4T................................................... 1545-0985
1545-1037
1.469-7.................................................... 1545-1244
1.471-2.................................................... 1545-0123
1.471-5.................................................... 1545-0123
1.471-6.................................................... 1545-0123
1.471-8.................................................... 1545-0123
1.471-11................................................... 1545-0123
1545-0152
1.472-1.................................................... 1545-0042
1545-0152
1.472-2.................................................... 1545-0152
1.472-3.................................................... 1545-0042
1.472-5.................................................... 1545-0152
1.472-8.................................................... 1545-0028
1545-0042
1545-1767
1.475(a)-4................................................. 1545-1945
1.475(b)-4................................................. 1545-1496
1.481-4.................................................... 1545-0152
1.481-5.................................................... 1545-0152
1.482-1.................................................... 1545-1364
1.482-4.................................................... 1545-1364
1.482-7.................................................... 1545-1364
1545-1794
1.482-9(b)................................................. 1545-2149
1.501(a)-1................................................. 1545-0056
1545-0057
1.501(c)(3)-1.............................................. 1545-0056
1.501(c)(9)-5.............................................. 1545-0047
1.501(c)(17)-3............................................. 1545-0047
1.501(e)-1................................................. 1545-0814
1.501(r)-3................................................. 1545-0047
1.501(r)-4................................................. 1545-0047
1.501(r)-6................................................. 1545-0047
1.503(c)-1................................................. 1545-0047
1545-0052
1.505(c)-1T................................................ 1545-0916
1.507-1.................................................... 1545-0052
1.507-2.................................................... 1545-0052
1.508-1.................................................... 1545-0052
1545-0056
1.509(a)-3................................................. 1545-0047
1.509(a)-4................................................. 1545-2157
1.509(a)-5................................................. 1545-0047
1.509(c)-1................................................. 1545-0052
1.512(a)-1................................................. 1545-0687
1.512(a)-4................................................. 1545-0047
1545-0687
1.521-1.................................................... 1545-0051
1545-0058
1.527-2.................................................... 1545-0129
1.527-5.................................................... 1545-0129
1.527-6.................................................... 1545-0129
1.527-9.................................................... 1545-0129
1.528-8.................................................... 1545-0127
1.533-2.................................................... 1545-0123
1.534-2.................................................... 1545-0123
1.542-3.................................................... 1545-0123
1.545-2.................................................... 1545-0123
1.545-3.................................................... 1545-0123
1.547-2.................................................... 1545-0045
1545-0123
1.547-3.................................................... 1545-0123
1.551-4.................................................... 1545-0074
1.552-3.................................................... 1545-0099
1.552-4.................................................... 1545-0099
1.552-5.................................................... 1545-0099
1.556-2.................................................... 1545-0704
1.561-1.................................................... 1545-0044
1.561-2.................................................... 1545-0123
1.562-3.................................................... 1545-0123
1.563-2.................................................... 1545-0123
1.564-1.................................................... 1545-0123
1.565-1.................................................... 1545-0043
1545-0123
1.565-2.................................................... 1545-0043
1.565-3.................................................... 1545-0043
1.565-5.................................................... 1545-0043
1.565-6.................................................... 1545-0043
1.585-1.................................................... 1545-0123
1.585-3.................................................... 1545-0123
[[Page 762]]
1.585-8.................................................... 1545-1290
1.586-2.................................................... 1545-0123
1.593-1.................................................... 1545-0123
1.593-6.................................................... 1545-0123
1.593-6A................................................... 1545-0123
1.593-7.................................................... 1545-0123
1.595-1.................................................... 1545-0123
1.597-2.................................................... 1545-1300
1.597-4.................................................... 1545-1300
1.597-6.................................................... 1545-1300
1.597-7.................................................... 1545-1300
1.611-2.................................................... 1545-0099
1.611-3.................................................... 1545-0007
1545-0099
1545-1784
1.612-4.................................................... 1545-0074
1.612-5.................................................... 1545-0099
1.613-3.................................................... 1545-0099
1.613-4.................................................... 1545-0099
1.613-6.................................................... 1545-0099
1.613-7.................................................... 1545-0099
1.613A-3................................................... 1545-0919
1.613A-3(e)................................................ 1545-1251
1.613A-3(l)................................................ 1545-0919
1.613A-5................................................... 1545-0099
1.613A-6................................................... 1545-0099
1.614-2.................................................... 1545-0099
1.614-3.................................................... 1545-0099
1.614-5.................................................... 1545-0099
1.614-6.................................................... 1545-0099
1.614-8.................................................... 1545-0099
1.617-1.................................................... 1545-0099
1.617-3.................................................... 1545-0099
1.617-4.................................................... 1545-0099
1.631-1.................................................... 1545-0007
1.631-2.................................................... 1545-0007
1.641(b)-2................................................. 1545-0092
1.642(c)-1................................................. 1545-0092
1.642(c)-2................................................. 1545-0092
1.642(c)-5................................................. 1545-0074
1.642(c)-6................................................. 1545-0020
1545-0074
1545-0092
1.642(g)-1................................................. 1545-0092
1.642(i)-1................................................. 1545-0092
1.645-1.................................................... 1545-1578
1.663(b)-2................................................. 1545-0092
1.664-1.................................................... 1545-0196
1.664-1(a)(7).............................................. 1545-1536
1.664-1(c)................................................. 1545-2101
1.664-2.................................................... 1545-0196
1.664-3.................................................... 1545-0196
1.664-4.................................................... 1545-0020
1545-0196
1.665(a)-0A through
1.665(g)-2A................................................ 1545-0192
1.666(d)-1A................................................ 1545-0092
1.671-4.................................................... 1545-1442
1.671-5.................................................... 1545-1540
1.701-1.................................................... 1545-0099
1.702-1.................................................... 1545-0074
1.703-1.................................................... 1545-0099
1.704-2.................................................... 1545-1090
1.706-1.................................................... 1545-0074
1545-0099
1545-0134
1.706-1T................................................... 1545-0099
1.707-3(c)(2).............................................. 1545-1243
1.707-5(a)(7)(ii).......................................... 1545-1243
1.707-6(c)................................................. 1545-1243
1.707-8.................................................... 1545-1243
1.708-1.................................................... 1545-0099
1.732-1.................................................... 1545-0099
1545-1588
1.736-1.................................................... 1545-0074
1.743-1.................................................... 1545-0074
1545-1588
1.751-1.................................................... 1545-0074
1545-0099
1545-0941
1.752-2.................................................... 1545-1905
1.752-5.................................................... 1545-1090
1.752-7.................................................... 1545-1843
1.754-1.................................................... 1545-0099
1.755-1.................................................... 1545-0099
1.761-2.................................................... 1545-1338
1.801-1.................................................... 1545-0123
1545-0128
1.801-3.................................................... 1545-0123
1.801-5.................................................... 1545-0128
1.801-8.................................................... 1545-0128
1.804-4.................................................... 1545-0128
1.811-2.................................................... 1545-0128
1.812-2.................................................... 1545-0128
1.815-6.................................................... 1545-0128
1.818-4.................................................... 1545-0128
1.818-5.................................................... 1545-0128
1.818-8.................................................... 1545-0128
1.819-2.................................................... 1545-0128
1.821-1.................................................... 1545-1027
1.821-3.................................................... 1545-1027
1.821-4.................................................... 1545-1027
1.822-5.................................................... 1545-1027
1.822-6.................................................... 1545-1027
1.822-8.................................................... 1545-1027
1.822-9.................................................... 1545-1027
1.823-2.................................................... 1545-1027
1.823-5.................................................... 1545-1027
1.823-6.................................................... 1545-1027
1.825-1.................................................... 1545-1027
1.826-1.................................................... 1545-1027
1.826-2.................................................... 1545-1027
1.826-3.................................................... 1545-1027
1.826-4.................................................... 1545-1027
1.826-6.................................................... 1545-1027
1.831-3.................................................... 1545-0123
1.831-4.................................................... 1545-0123
1.832-4.................................................... 1545-1227
1.832-5.................................................... 1545-0123
1.848-2(g)(8).............................................. 1545-1287
1.848-2(h)(3).............................................. 1545-1287
1.848-2(i)(4).............................................. 1545-1287
1.851-2.................................................... 1545-1010
1.851-4.................................................... 1545-0123
1.852-1.................................................... 1545-0123
1.852-4.................................................... 1545-0123
1545-0145
1.852-6.................................................... 1545-0123
1545-0144
1.852-7.................................................... 1545-0074
1.852-9.................................................... 1545-0074
1545-0123
1545-0144
1545-0145
1545-1783
1.852-11................................................... 1545-1094
1.853-3.................................................... 1545-2035
1.853-4.................................................... 1545-2035
1.854-2.................................................... 1545-0123
1.855-1.................................................... 1545-0123
1.856-2.................................................... 1545-0123
1545-1004
1.856-6.................................................... 1545-0123
1.856-7.................................................... 1545-0123
[[Page 763]]
1.856-8.................................................... 1545-0123
1.857-8.................................................... 1545-0123
1.857-9.................................................... 1545-0074
1.858-1.................................................... 1545-0123
1.860-2.................................................... 1545-0045
1.860-4.................................................... 1545-0045
1545-1054
1545-1057
1.860E-1................................................... 1545-1675
1.860E-2(a)(5)............................................. 1545-1276
1.860E-2(a)(7)............................................. 1545-1276
1.860E-2(b)(2)............................................. 1545-1276
1.860G-2................................................... 1545-2110
1.861-2.................................................... 1545-0089
1.861-3.................................................... 1545-0089
1.861-4.................................................... 1545-1900
1.861-8.................................................... 1545-0126
1.861-8(e)(6) and (g)...................................... 1545-1224
1.861-9T................................................... 1545-0121
1545-1072
1.861-18................................................... 1545-1594
1.863-1.................................................... 1545-1476
1.863-3.................................................... 1545-1476
1545-1556
1.863-3A................................................... 1545-0126
1.863-4.................................................... 1545-0126
1.863-7.................................................... 1545-0132
1.863-8.................................................... 1545-1718
1.863-9.................................................... 1545-1718
1.864-4.................................................... 1545-0126
1.871-1.................................................... 1545-0096
1.871-6.................................................... 1545-0795
1.871-7.................................................... 1545-0089
1.871-10................................................... 1545-0089
1545-0165
1.874-1.................................................... 1545-0089
1.881-4.................................................... 1545-1440
1.882-4.................................................... 1545-0126
1.883-0.................................................... 1545-1677
1.883-1.................................................... 1545-1677
1.883-2.................................................... 1545-1677
1.883-3.................................................... 1545-1677
1.883-4.................................................... 1545-1677
1.883-5.................................................... 1545-1677
1.884-0.................................................... 1545-1070
1.884-1.................................................... 1545-1070
1.884-2.................................................... 1545-1070
1.884-2T................................................... 1545-0126
1545-1070
1.884-4.................................................... 1545-1070
1.884-5.................................................... 1545-1070
1.892-1T................................................... 1545-1053
1.892-2T................................................... 1545-1053
1.892-3T................................................... 1545-1053
1.892-4T................................................... 1545-1053
1.892-5T................................................... 1545-1053
1.892-6T................................................... 1545-1053
1.892-7T................................................... 1545-1053
1.897-2.................................................... 1545-0123
1545-0902
1.897-3.................................................... 1545-0123
1.897-5T................................................... 1545-0902
1.897-6T................................................... 1545-0902
1.901-2.................................................... 1545-0746
1.901-2A................................................... 1545-0746
1.901-3.................................................... 1545-0122
1.902-1.................................................... 1545-0122
1545-1458
1.904-1.................................................... 1545-0121
1545-0122
1.904-2.................................................... 1545-0121
1545-0122
1.904-3.................................................... 1545-0121
1.904-4.................................................... 1545-0121
1.904-5.................................................... 1545-0121
1.904-7.................................................... 1545-2104
1.904-7T................................................... 1545-2104
1.904(f)-1................................................. 1545-0121
1545-0122
1.904(f)-2................................................. 1545-0121
1.904(f)-3................................................. 1545-0121
1.904(f)-4................................................. 1545-0121
1.904(f)-5................................................. 1545-0121
1.904(f)-6................................................. 1545-0121
1.904(f)-7................................................. 1545-1127
1.905-2.................................................... 1545-0122
1.905-3T................................................... 1545-1056
1.905-4T................................................... 1545-1056
1.905-5T................................................... 1545-1056
1.911-1.................................................... 1545-0067
1545-0070
1.911-2.................................................... 1545-0067
1545-0070
1.911-3.................................................... 1545-0067
1545-0070
1.911-4.................................................... 1545-0067
1545-0070
1.911-5.................................................... 1545-0067
1545-0070
1.911-6.................................................... 1545-0067
1545-0070
1.911-7.................................................... 1545-0067
1545-0070
1.913-13................................................... 1545-0067
1.921-1T................................................... 1545-0190
1545-0884
1545-0935
1545-0939
1.921-2.................................................... 1545-0884
1.921-3T................................................... 1545-0935
1.923-1T................................................... 1545-0935
1.924(a)-1T................................................ 1545-0935
1.925(a)-1T................................................ 1545-0935
1.925(b)-1T................................................ 1545-0935
1.926(a)-1T................................................ 1545-0935
1.927(a)-1T................................................ 1545-0935
1.927(b)-1T................................................ 1545-0935
1.927(d)-1................................................. 1545-0884
1.927(d)-2T................................................ 1545-0935
1.927(e)-1T................................................ 1545-0935
1.927(e)-2T................................................ 1545-0935
1.927(f)-1................................................. 1545-0884
1.931-1.................................................... 1545-0074
1545-0123
1.934-1.................................................... 1545-0782
1.935-1.................................................... 1545-0074
1545-0087
1545-0803
1.936-1.................................................... 1545-0215
1545-0217
1.936-4.................................................... 1545-0215
1.936-5.................................................... 1545-0704
1.936-6.................................................... 1545-0215
1.936-7.................................................... 1545-0215
1.936-10(c)................................................ 1545-1138
1.937-1.................................................... 1545-1930
1.952-2.................................................... 1545-0126
1.953-2.................................................... 1545-0126
1.954-1.................................................... 1545-1068
1.954-2.................................................... 1545-1068
1.955-2.................................................... 1545-0123
1.955-3.................................................... 1545-0123
1.955A-2................................................... 1545-0755
1.955A-3................................................... 1545-0755
[[Page 764]]
1.956-1.................................................... 1545-0704
1.956-2.................................................... 1545-0704
1.959-1.................................................... 1545-0704
1.959-2.................................................... 1545-0704
1.960-1.................................................... 1545-0122
1.962-2.................................................... 1545-0704
1.962-3.................................................... 1545-0704
1.962-4.................................................... 1545-0704
1.964-1.................................................... 1545-0126
1545-0704
1545-1072
1545-2104
1.964-3.................................................... 1545-0126
1.970-2.................................................... 1545-0126
1.985-2.................................................... 1545-1051
1545-1131
1.985-3.................................................... 1545-1051
1.988-0.................................................... 1545-1131
1.988-1.................................................... 1545-1131
1.988-2.................................................... 1545-1131
1.988-3.................................................... 1545-1131
1.988-4.................................................... 1545-1131
1.988-5.................................................... 1545-1131
1.988-6.................................................... 1545-1831
1.992-1.................................................... 1545-0190
1545-0938
1.992-2.................................................... 1545-0190
1545-0884
1545-0938
1.992-3.................................................... 1545-0190
1545-0938
1.992-4.................................................... 1545-0190
1545-0938
1.993-3.................................................... 1545-0938
1.993-4.................................................... 1545-0938
1.994-1.................................................... 1545-0938
1.995-5.................................................... 1545-0938
1.1001-1................................................... 1545-1902
1.1012-1................................................... 1545-0074
1545-1139
1.1014-4................................................... 1545-0184
1.1015-1................................................... 1545-0020
1.1017-1................................................... 1545-1539
1.1031(d)-1T............................................... 1545-1021
1.1033(a)-2................................................ 1545-0184
1.1033(g)-1................................................ 1545-0184
1.1034-1................................................... 1545-0072
1.1039-1................................................... 1545-0184
1.1041-1T.................................................. 1545-0074
1.1041-2................................................... 1545-1751
1.1042-1T.................................................. 1545-0916
1.1044(a)-1................................................ 1545-1421
1.1045-1................................................... 1545-1893
1.1060-1................................................... 1545-1658
1545-1990
1.1071-1................................................... 1545-0184
1.1071-4................................................... 1545-0184
1.1081-4................................................... 1545-0028
1545-0046
1545-0123
1.1081-11.................................................. 1545-2019
1.1082-1................................................... 1545-0046
1.1082-2................................................... 1545-0046
1.1082-3................................................... 1545-0046
1545-0184
1.1082-4................................................... 1545-0046
1.1082-5................................................... 1545-0046
1.1082-6................................................... 1545-0046
1.1083-1................................................... 1545-0123
1.1092(b)-1T............................................... 1545-0644
1.1092(b)-2T............................................... 1545-0644
1.1092(b)-3T............................................... 1545-0644
1.1092(b)-4T............................................... 1545-0644
1.1092(b)-5T............................................... 1545-0644
1.1211-1................................................... 1545-0074
1.1212-1................................................... 1545-0074
1.1221-2................................................... 1545-1480
1.1231-1................................................... 1545-0177
1545-0184
1.1231-2................................................... 1545-0177
1545-0184
1.1231-2................................................... 1545-0074
1.1232-3................................................... 1545-0074
1.1237-1................................................... 1545-0184
1.1239-1................................................... 1545-0091
1.1242-1................................................... 1545-0184
1.1243-1................................................... 1545-0123
1.1244(e)-1................................................ 1545-0123
1545-1447
1.1245-1................................................... 1545-0184
1.1245-2................................................... 1545-0184
1.1245-3................................................... 1545-0184
1.1245-4................................................... 1545-0184
1.1245-5................................................... 1545-0184
1.1245-6................................................... 1545-0184
1.1247-1................................................... 1545-0122
1.1247-2................................................... 1545-0122
1.1247-4................................................... 1545-0122
1.1247-5................................................... 1545-0122
1.1248-7................................................... 1545-0074
1.1248(f)-2................................................ 1545-2183
1.1248(f)-3T............................................... 1545-2183
1.1250-1................................................... 1545-0184
1.1250-2................................................... 1545-0184
1.1250-3................................................... 1545-0184
1.1250-4................................................... 1545-0184
1.1250-5................................................... 1545-0184
1.1251-1................................................... 1545-0184
1.1251-2................................................... 1545-0074
1545-0184
1.1251-3................................................... 1545-0184
1.1251-4................................................... 1545-0184
1.1252-1................................................... 1545-0184
1.1252-2................................................... 1545-0184
1.1254-1(c)(3)............................................. 1545-1352
1.1254-4................................................... 1545-1493
1.1254-5(d)(2)............................................. 1545-1352
1.1258-1................................................... 1545-1452
1.1272-3................................................... 1545-1353
1.1273-2(f)(9)............................................. 1545-1353
1.1273-2(h)(2)............................................. 1545-1353
1.1274-3(d)................................................ 1545-1353
1.1274-5(b)................................................ 1545-1353
1.1274A-1(c)............................................... 1545-1353
1.1275-2................................................... 1545-1450
1.1275-3................................................... 1545-0887
1545-1353
1545-1450
1.1275-4................................................... 1545-1450
1.1275-6................................................... 1545-1450
1.1287-1................................................... 1545-0786
1.1291-9................................................... 1545-1507
1.1291-10.................................................. 1545-1304
1545-1507
1.1294-1T.................................................. 1545-1002
1545-1028
1.1295-1................................................... 1545-1555
1.1295-3................................................... 1545-1555
1.1298-3................................................... 1545-1507
1.1301-1................................................... 1545-1662
1.1311(a)-1................................................ 1545-0074
1.1361-1................................................... 1545-0731
1545-1591
1545-2114
[[Page 765]]
1.1361-3................................................... 1545-1590
1.1361-5................................................... 1545-1590
1.1362-1................................................... 1545-1308
1.1362-2................................................... 1545-1308
1.1362-3................................................... 1545-1308
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1.1367-1(f)................................................ 1545-1139
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1.1368-1(f)(4)............................................. 1545-1139
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1.1402(h)-1................................................ 1545-0064
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25.6001-1.................................................. 1545-0020
1545-0022
25.6011-1.................................................. 1545-0020
25.6019-1.................................................. 1545-0020
25.6019-2.................................................. 1545-0020
25.6019-3.................................................. 1545-0020
25.6019-4.................................................. 1545-0020
25.6060-1(a)(1)............................................ 1545-1231
25.6061-1.................................................. 1545-0020
25.6065-1.................................................. 1545-0020
25.6075-1.................................................. 1545-0020
25.6081-1.................................................. 1545-0020
25.6091-1.................................................. 1545-0020
25.6091-2.................................................. 1545-0020
25.6107-1.................................................. 1545-1231
25.6151-1.................................................. 1545-0020
25.6161-1.................................................. 1545-0020
25.7520-1.................................................. 1545-1343
25.7520-2.................................................. 1545-1343
25.7520-3.................................................. 1545-1343
25.7520-4.................................................. 1545-1343
26.2601-1.................................................. 1545-0985
26.2632-1.................................................. 1545-0985
1545-1892
26.2642-1.................................................. 1545-0985
26.2642-2.................................................. 1545-0985
26.2642-3.................................................. 1545-0985
26.2642-4.................................................. 1545-0985
26.2642-6.................................................. 1545-1902
26.2652-2.................................................. 1545-0985
26.2654-1.................................................. 1545-1902
26.2662-1.................................................. 1545-0015
1545-0985
26.2662-2.................................................. 1545-0985
26.6060-1(a)(1)............................................ 1545-1231
26.6107-1.................................................. 1545-1231
31.3102-3.................................................. 1545-0029
1545-0059
1545-0065
31.3121(b)(19)-1........................................... 1545-0029
31.3121(d)-1............................................... 1545-0004
31.3121(i)-1............................................... 1545-0034
31.3121(k)-4............................................... 1545-0137
31.3121(r)-1............................................... 1545-0029
31.3121(s)-1............................................... 1545-0029
31.3121(v)(2)-1............................................ 1545-1643
31.3302(a)-2............................................... 1545-0028
31.3302(a)-3............................................... 1545-0028
31.3302(b)-2............................................... 1545-0028
31.3302(e)-1............................................... 1545-0028
31.3306(c)(18)-1........................................... 1545-0029
31.3401(a)-1............................................... 1545-0029
31.3401(a)(6).............................................. 1545-1484
31.3401(a)(6)-1............................................ 1545-0029
1545-0096
1545-0795
31.3401(a)(7)-1............................................ 1545-0029
31.3401(a)(8)(A)-1 ........................................ 1545-0029
1545-0666
31.3401(a)(8)(C)-1 ........................................ 1545-0029
31.3401(a)(15)-1........................................... 1545-0182
31.3401(c)-1............................................... 1545-0004
31.3402(b)-1............................................... 1545-0010
31.3402(c)-1............................................... 1545-0010
31.3402(f)(1)-1............................................ 1545-0010
31.3402(f)(2)-1............................................ 1545-0010
1545-0410
31.3402(f)(3)-1............................................ 1545-0010
31.3402(f)(4)-1............................................ 1545-0010
31.3402(f)(4)-2............................................ 1545-0010
31.3402(f)(5)-1............................................ 1545-0010
1545-1435
31.3402(h)(1)-1............................................ 1545-0029
31.3402(h)(3)-1............................................ 1545-0010
1545-0029
31.3402(h)(4)-1............................................ 1545-0010
31.3402(i)-(1)............................................. 1545-0010
31.3402(i)-(2)............................................. 1545-0010
31.3402(k)-1............................................... 1545-0065
31.3402(l)-(1)............................................. 1545-0010
31.3402(m)-(1)............................................. 1545-0010
31.3402(n)-(1)............................................. 1545-0010
31.3402(o)-2............................................... 1545-0415
31.3402(o)-3............................................... 1545-0008
1545-0010
1545-0415
1545-0717
31.3402(p)-1............................................... 1545-0415
1545-0717
31.3402(q)-1............................................... 1545-0238
1545-0239
31.3404-1.................................................. 1545-0029
31.3405(c)-1............................................... 1545-1341
31.3406(a)-1............................................... 1545-0112
31.3406(a)-2............................................... 1545-0112
31.3406(a)-3............................................... 1545-0112
31.3406(a)-4............................................... 1545-0112
31.3406(b)(2)-1............................................ 1545-0112
31.3406(b)(2)-2............................................ 1545-0112
31.3406(b)(2)-3............................................ 1545-0112
31.3406(b)(2)-4............................................ 1545-0112
31.3406(b)(2)-5............................................ 1545-0112
31.3406(b)(3)-1............................................ 1545-0112
31.3406(b)(3)-2............................................ 1545-0112
31.3406(b)(3)-3............................................ 1545-0112
31.3406(b)(3)-4............................................ 1545-0112
[[Page 770]]
31.3406(b)(4)-1............................................ 1545-0112
31.3406(c)-1............................................... 1545-0112
31.3406(d)-1............................................... 1545-0112
31.3406(d)-2............................................... 1545-0112
31.3406(d)-3............................................... 1545-0112
31.3406(d)-4............................................... 1545-0112
31.3406(d)-5............................................... 1545-0112
31.3406(e)-1............................................... 1545-0112
31.3406(f)-1............................................... 1545-0112
31.3406(g)-1............................................... 1545-0096
1545-0112
1545-1819
31.3406(g)-2............................................... 1545-0112
31.3406(g)-3............................................... 1545-0112
31.3406(h)-1............................................... 1545-0112
31.3406(h)-2............................................... 1545-0112
31.3406(h)-3............................................... 1545-0112
31.3406(i)-1............................................... 1545-0112
31.3501(a)-1T.............................................. 1545-0771
31.3503-1.................................................. 1545-0024
31.3504-1.................................................. 1545-0029
31.6001-1.................................................. 1545-0798
31.6001-2.................................................. 1545-0034
1545-0798
31.6001-3.................................................. 1545-0798
31.6001-4.................................................. 1545-0028
31.6001-5.................................................. 1545-0798
31.6001-6.................................................. 1545-0029
1459-0798
31.6011(a)-1............................................... 1545-0029
1545-0034
1545-0035
1545-0059
1545-0074
1545-0256
1545-0718
1545-2097
31.6011(a)-2............................................... 1545-0001
1545-0002
31.6011(a)-3............................................... 1545-0028
31.6011(a)-3A.............................................. 1545-0955
31.6011(a)-4............................................... 1545-0034
1545-0035
1545-0718
1545-1413
1545-2097
31.6011(a)-5............................................... 1545-0028
1545-0718
1545-2097
31.6011(a)-6............................................... 1545-0028
31.6011(a)-7............................................... 1545-0074
31.6011(a)-8............................................... 1545-0028
31.6011(a)-9............................................... 1545-0028
31.6011(a)-10.............................................. 1545-0112
31.6011(b)-1............................................... 1545-0003
31.6011(b)-2............................................... 1545-0029
31.6051-1.................................................. 1545-0008
1545-0182
1545-0458
1545-1729
31.6051-2.................................................. 1545-0008
31.6051-3.................................................. 1545-0008
31.6053-1.................................................. 1545-0029
1545-0062
1545-0064
1545-0065
1545-1603
31.6053-2.................................................. 1545-0008
31.6053-3.................................................. 1545-0065
1545-0714
31.6053-4.................................................. 1545-0065
1545-1603
31.6060-1(a)(1)............................................ 1545-1231
31.6065(a)-1............................................... 1545-0029
31.6071(a)-1............................................... 1545-0001
1545-0028
1545-0029
31.6071(a)-1A.............................................. 1545-0955
31.6081(a)-1............................................... 1545-0008
1545-0028
31.6091-1.................................................. 1545-0028
1545-0029
31.6107-1.................................................. 1545-1231
31.6157-1.................................................. 1545-0955
31.6205-1.................................................. 1545-0029
1545-2097
31.6301(c)-1AT............................................. 1545-0035
1545-0112
1545-0257
31.6302-1.................................................. 1545-1413
31.6302-2.................................................. 1545-1413
31.6302-3.................................................. 1545-1413
31.6302-4.................................................. 1545-1413
31.6302(c)-2............................................... 1545-0001
1545-0257
31.6302(c)-2A.............................................. 1545-0955
31.6302(c)-3............................................... 1545-0257
31.6402(a)-2............................................... 1545-0256
1545-2097
31.6413(a)-1............................................... 1545-0029
1545-2097
31.6413(a)-2............................................... 1545-0029
1545-0256
1545-2097
31.6413(c)-1............................................... 1545-0029
1545-0171
31.6414-1.................................................. 1545-0029
1545-2097
32.1....................................................... 1545-0029
1545-0415
32.2....................................................... 1545-0029
35a.3406-2................................................. 1545-0112
35a.9999-5................................................. 1545-0029
36.3121(l)(1)-1............................................ 1545-0137
36.3121(l)(1)-2............................................ 1545-0137
36.3121(l)(3)-1............................................ 1545-0123
36.3121(1)(7)-1............................................ 1545-0123
36.3121(1)(10)-1........................................... 1545-0029
36.3121(1)(10)-3........................................... 1545-0029
36.3121(1)(10)-4........................................... 1545-0257
40.6060-1(a)(1)............................................ 1545-1231
40.6107-1.................................................. 1545-1231
40.6302(c)-3(b)(2)(ii)..................................... 1545-1296
40.6302(c)-3(b)(2)(iii).................................... 1545-1296
40.6302(c)-3(e)............................................ 1545-1296
40.6302(c)-3(f)(2)(ii)..................................... 1545-1296
41.4481-1.................................................. 1545-0143
41.4481-2.................................................. 1545-0143
41.4483-3.................................................. 1545-0143
41.6001-1.................................................. 1545-0143
41.6001-2.................................................. 1545-0143
41.6001-3.................................................. 1545-0143
41.6060-1(a)(1)............................................ 1545-1231
41.6071(a)-1............................................... 1545-0143
41.6081(a)-1............................................... 1545-0143
41.6091-1.................................................. 1545-0143
41.6107-1.................................................. 1545-1231
41.6109-1.................................................. 1545-0143
41.6151(a)-1............................................... 1545-0143
41.6156-1.................................................. 1545-0143
41.6161(a)(1)-1............................................ 1545-0143
44.4401-1.................................................. 1545-0235
44.4403-1.................................................. 1545-0235
44.4412-1.................................................. 1545-0236
[[Page 771]]
44.4901-1.................................................. 1545-0236
44.4905-1.................................................. 1545-0236
44.4905-2.................................................. 1545-0236
44.6001-1.................................................. 1545-0235
44.6011(a)-1............................................... 1545-0235
1545-0236
44.6060-1(a)(1)............................................ 1545-1231
44.6071-1.................................................. 1545-0235
44.6091-1.................................................. 1545-0235
44.6107-1.................................................. 1545-1231
44.6151-1.................................................. 1545-0235
44.6419-1.................................................. 1545-0235
44.6419-2.................................................. 1545-0235
46.4371-4.................................................. 1545-0023
46.4374-1.................................................. 1545-0023
46.4375-1.................................................. 1545-2238
46.4376-1.................................................. 1545-2238
46.4701-1.................................................. 1545-0023
1545-0257
48.4041-4.................................................. 1545-0023
48.4041-5.................................................. 1545-0023
48.4041-6.................................................. 1545-0023
48.4041-7.................................................. 1545-0023
48.4041-9.................................................. 1545-0023
48.4041-10................................................. 1545-0023
48.4041-11................................................. 1545-0023
48.4041-12................................................. 1545-0023
48.4041-13................................................. 1545-0023
48.4041-18................................................. 1545-0023
48.4041-19................................................. 1545-0023
48.4041-20................................................. 1545-0023
48.4041-21................................................. 1545-1270
48.4042-2.................................................. 1545-0023
48.4052-1.................................................. 1545-1418
48.4061(a)-1............................................... 1545-0023
48.4061(a)-2............................................... 1545-0023
48.4061(b)-3............................................... 1545-0023
48.4064-1.................................................. 1545-0014
1545-0242
48.4071-1.................................................. 1545-0023
48.4073-1.................................................. 1545-0023
48.4073-3.................................................. 1545-0023
1545-1074
1545-1087
48.4081-2.................................................. 1545-1270
1545-1418
48.4081-3.................................................. 1545-1270
1545-1418
1545-1897
48.4081-4(b)(2)(ii)........................................ 1545-1270
48.4081-4(b)(3)(i)......................................... 1545-1270
48.4081-4(c)............................................... 1545-1270
48.4081-6(c)(1)(ii)........................................ 1545-1270
48.4081-7.................................................. 1545-1270
1545-1418
48.4082-1T................................................. 1545-1418
48.4082-2.................................................. 1545-1418
48.4082-6.................................................. 1545-1418
48.4082-7.................................................. 1545-1418
48.4091-3.................................................. 1545-1418
48.4101-1.................................................. 1545-1418
48.4101-1T................................................. 1545-1418
48.4101-2.................................................. 1545-1418
48.4161(a)-1............................................... 1545-0723
48.4161(a)-2............................................... 1545-0723
48.4161(a)-3............................................... 1545-0723
48.4161(b)-1............................................... 1545-0723
48.4216(a)-2............................................... 1545-0023
48.4216(a)-3............................................... 1545-0023
48.4216(c)-1............................................... 1545-0023
48.4221-1.................................................. 1545-0023
48.4221-2.................................................. 1545-0023
48.4221-3.................................................. 1545-0023
48.4221-4.................................................. 1545-0023
48.4221-5.................................................. 1545-0023
48.4221-6.................................................. 1545-0023
48.4221-7.................................................. 1545-0023
48.4222(a)-1............................................... 1545-0014
1545-0023
48.4223-1.................................................. 1545-0023
1545-0257
1545-0723
48.6302(c)-1............................................... 1545-0023
1545-0257
48.6412-1.................................................. 1545-0723
48.6416(a)-1............................................... 1545-0023
1545-0723
48.6416(a)-2............................................... 1545-0723
48.6416(a)-3............................................... 1545-0723
48.6416(b)(1)-1............................................ 1545-0723
48.6416(b)(1)-2............................................ 1545-0723
48.6416(b)(1)-3............................................ 1545-0723
48.6416(b)(1)-4............................................ 1545-0723
48.6416(b)(2)-1............................................ 1545-0723
48.6416(b)(2)-2............................................ 1545-0723
48.6416(b)(2)-3............................................ 1545-0723
1545-1087
48.6416(b)(2)-4............................................ 1545-0723
48.6416(b)(3)-1............................................ 1545-0723
48.6416(b)(3)-2............................................ 1545-0723
48.6416(b)(3)-3............................................ 1545-0723
48.6416(b)(4)-1............................................ 1545-0723
48.6416(b)(5)-1............................................ 1545-0723
48.6416(c)-1............................................... 1545-0723
48.6416(e)-1............................................... 1545-0023
1545-0723
48.6416(f)-1............................................... 1545-0023
1545-0723
48.6416(g)-1............................................... 1545-0723
48.6416(h)-1............................................... 1545-0723
48.6420(c)-2............................................... 1545-0023
48.6420(f)-1............................................... 1545-0023
48.6420-1.................................................. 1545-0162
1545-0723
48.6420-2.................................................. 1545-0162
1545-0723
48.6420-3.................................................. 1545-0162
1545-0723
48.6420-4.................................................. 1545-0162
1545-0723
48.6420-5.................................................. 1545-0162
1545-0723
48.6420-6.................................................. 1545-0162
1545-0723
48.6421-0.................................................. 1545-0162
1545-0723
48.6421-1.................................................. 1545-0162
1545-0723
48.6421-2.................................................. 1545-0162
1545-0723
48.6421-3.................................................. 1545-0162
1545-0723
48.6421-4.................................................. 1545-0162
1545-0723
48.6421-5.................................................. 1545-0162
1545-0723
48.6421-6.................................................. 1545-0162
1545-0723
48.6421-7.................................................. 1545-0162
1545-0723
48.6424-0.................................................. 1545-0723
48.6424-1.................................................. 1545-0723
48.6424-2.................................................. 1545-0723
48.6424-3.................................................. 1545-0723
[[Page 772]]
48.6424-4.................................................. 1545-0723
48.6424-5.................................................. 1545-0723
48.6424-6.................................................. 1545-0723
48.6427-0.................................................. 1545-0723
48.6427-1.................................................. 1545-0023
1545-0162
1545-0723
48.6427-2.................................................. 1545-0162
1545-0723
48.6427-3.................................................. 1545-0723
48.6427-4.................................................. 1545-0723
48.6427-5.................................................. 1545-0723
48.6427-8.................................................. 1545-1418
48.6427-9.................................................. 1545-1418
48.6427-10................................................. 1545-1418
48.6427-11................................................. 1545-1418
49.4251-1.................................................. 1545-1075
49.4251-2.................................................. 1545-1075
49.4251-4(d)(2)............................................ 1545-1628
49.4253-3.................................................. 1545-0023
49.4253-4.................................................. 1545-0023
49.4264(b)-1............................................... 1545-0023
1545-0224
1545-0225
1545-0226
1545-0230
1545-0257
1545-0912
49.4271-1(d)............................................... 1545-0685
49.5000B-1................................................. 1545-2177
51.2(f)(2)(ii)............................................. 1545-2209
51.7....................................................... 1545-2209
52.4682-1(b)(2)(iii)....................................... 1545-1153
52.4682-2(b)............................................... 1545-1153
1545-1361
52.4682-2(d)............................................... 1545-1153
1545-1361
52.4682-3(c)(2)............................................ 1545-1153
52.4682-3(g)............................................... 1545-1153
52.4682-4(f)............................................... 1545-0257
1545-1153
52.4682-5(d)............................................... 1545-1361
52.4682-5(f)............................................... 1545-1361
53.4940-1.................................................. 1545-0052
1545-0196
53.4942(a)-1............................................... 1545-0052
53.4942(a)-2............................................... 1545-0052
53.4942(a)-3............................................... 1545-0052
53.4942(b)-3............................................... 1545-0052
53.4945-1.................................................. 1545-0052
53.4945-4.................................................. 1545-0052
53.4945-5.................................................. 1545-0052
53.4945-6.................................................. 1545-0052
53.4947-1.................................................. 1545-0196
53.4947-2.................................................. 1545-0196
53.4948-1.................................................. 1545-0052
53.4958-6.................................................. 1545-1623
53.4961-2.................................................. 1545-0024
53.4963-1.................................................. 1545-0024
53.6001-1.................................................. 1545-0052
53.6011-1.................................................. 1545-0049
1545-0052
1545-0092
1545-0196
53.6060-1(a)(1)............................................ 1545-1231
53.6065-1.................................................. 1545-0052
53.6071-1.................................................. 1545-0049
53.6081-1.................................................. 1545-0066
1545-0148
53.6107-1.................................................. 1545-1231
53.6161-1.................................................. 1545-0575
54.4972-1.................................................. 1545-0197
54.4975-7.................................................. 1545-0575
54.4977-1T................................................. 1545-0771
54.4980B-6................................................. 1545-1581
54.4980B-7................................................. 1545-1581
54.4980B-8................................................. 1545-1581
54.4980F-1................................................. 1545-1780
54.4981A-1T................................................ 1545-0203
54.6011-1.................................................. 1545-0575
54.6011-1T................................................. 1545-0575
54.6060-1(a)(1)............................................ 1545-1231
54.6107-1.................................................. 1545-1231
54.9801-3.................................................. 1545-1537
54.9801-4.................................................. 1545-1537
54.9801-5.................................................. 1545-1537
54.9801-6.................................................. 1545-1537
54.9812-1T................................................. 1545-2165
54.9815-1251T.............................................. 1545-2178
54.9815-2711T.............................................. 1545-2179
54.9815-2712T.............................................. 1545-2180
54.9815-2714T.............................................. 1545-2172
54.9815-2715............................................... 1545-2229
54.9815-2719AT............................................. 1545-2181
54.9815-2719T.............................................. 1545-2182
55.6001-1.................................................. 1545-0123
55.6011-1.................................................. 1545-0123
1545-0999
1545-1016
55.6060-1(a)(1)............................................ 1545-1231
55.6061-1.................................................. 1545-0999
55.6071-1.................................................. 1545-0999
55.6107-1.................................................. 1545-1231
56.4911-6.................................................. 1545-0052
56.4911-7.................................................. 1545-0052
56.4911-9.................................................. 1545-0052
56.4911-10................................................. 1545-0052
56.6001-1.................................................. 1545-1049
56.6011-1.................................................. 1545-1049
56.6060-1(a)(1)............................................ 1545-1231
56.6081-1.................................................. 1545-1049
56.6107-1.................................................. 1545-1231
56.6161-1.................................................. 1545-0257
1545-1049
57.2(e)(2)(i).............................................. 1545-2249
145.4051-1................................................. 1545-0745
145.4052-1................................................. 1545-0120
1545-0745
1545-1076
145.4061-1................................................. 1545-0224
1545-0230
1545-0257
1545-0745
156.6001-1................................................. 1545-1049
156.6011-1................................................. 1545-1049
156.6060-1(a)(1)........................................... 1545-1231
156.6081-1................................................. 1545-1049
156.6107-1................................................. 1545-1231
156.6161-1................................................. 1545-1049
157.6001-1................................................. 1545-1824
157.6011-1................................................. 1545-1824
157.6060-1(a)(1)........................................... 1545-1231
157.6081-1................................................. 1545-1824
157.6107-1................................................. 1545-1231
157.6161-1................................................. 1545-1824
301.6011-2................................................. 1545-0225
1545-0350
1545-0387
1545-0441
1545-0957
301.6011(g)-1.............................................. 1545-2079
301.6017-1................................................. 1545-0090
301.6034-1................................................. 1545-0092
301.6035-1................................................. 1545-0123
[[Page 773]]
301.6036-1................................................. 1545-0013
1545-0773
301.6047-1................................................. 1545-0367
1545-0957
301.6056-1................................................. 1545-2251
301.6056-2................................................. 1545-2251
301.6057-1................................................. 1545-0710
301.6057-2................................................. 1545-0710
301.6058-1................................................. 1545-0710
301.6059-1................................................. 1545-0710
301.6103(c)-1.............................................. 1545-1816
301.6103(n)-1.............................................. 1545-1841
301.6103(p)(2)(B)-1........................................ 1545-1757
301.6104(a)-1.............................................. 1545-0495
301.6104(a)-5.............................................. 1545-0056
301.6104(a)-6.............................................. 1545-0056
301.6104(b)-1.............................................. 1545-0094
1545-0742
301.6104(d)-1.............................................. 1545-1655
301.6104(d)-2.............................................. 1545-1655
301.6104(d)-3.............................................. 1545-1655
301.6109-1................................................. 1545-0003
1545-0295
1545-0367
1545-0387
1545-0957
1545-1461
1545-2242
301.6109-3................................................. 1545-1564
301.6110-3................................................. 1545-0074
301.6110-5................................................. 1545-0074
301.6111-1T................................................ 1545-0865
1545-0881
301.6111-2................................................. 1545-0865
1545-1687
301.6112-1................................................. 1545-0865
1545-1686
301.6112-1T................................................ 1545-0865
1545-1686
301.6114-1................................................. 1545-1126
1545-1484
301.6222(a)-2.............................................. 1545-0790
301.6222(b)-1.............................................. 1545-0790
301.6222(b)-2.............................................. 1545-0790
301.6222(b)-3.............................................. 1545-0790
301.6223(b)-1.............................................. 1545-0790
301.6223(c)-1.............................................. 1545-0790
301.6223(e)-2.............................................. 1545-0790
301.6223(g)-1.............................................. 1545-0790
301.6223(h)-1.............................................. 1545-0790
301.6224(b)-1.............................................. 1545-0790
301.6224(c)-1.............................................. 1545-0790
301.6224(c)-3.............................................. 1545-0790
301.6227(c)-1.............................................. 1545-0790
301.6227(d)-1.............................................. 1545-0790
301.6229(b)-2.............................................. 1545-0790
301.6230(b)-1.............................................. 1545-0790
301.6230(e)-1.............................................. 1545-0790
301.6231(a)(1)-1........................................... 1545-0790
301.6231(a)(7)-1........................................... 1545-0790
301.6231(c)-1.............................................. 1545-0790
301.6231(c)-2.............................................. 1545-0790
301.6241-1T................................................ 1545-0130
301.6316-4................................................. 1545-0074
301.6316-5................................................. 1545-0074
301.6316-6................................................. 1545-0074
301.6316-7................................................. 1545-0029
301.6324A-1................................................ 1545-0015
301.6361-1................................................. 1545-0024
1545-0074
301.6361-2................................................. 1545-0024
301.6361-3................................................. 1545-0074
301.6402-2................................................. 1545-0024
1545-0073
1545-0091
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
301.6402-5................................................. 1545-0928
301.6404-1................................................. 1545-0024
301.6404-2T................................................ 1545-0024
301.6404-3................................................. 1545-0024
301.6405-1................................................. 1545-0024
301.6501(c)-1.............................................. 1545-1241
1545-1637
301.6501(d)-1.............................................. 1545-0074
1545-0430
301.6501(o)-2.............................................. 1545-0728
301.6511(d)-1.............................................. 1545-0024
1545-0582
301.6511(d)-2.............................................. 1545-0024
1545-0582
301.6511(d)-3.............................................. 1545-0024
1545-0582
301.6652-2................................................. 1545-0092
301.6685-1................................................. 1545-0092
301.6689-1T................................................ 1545-1056
301.6707-1T................................................ 1545-0865
1545-0881
301.6708-1T................................................ 1545-0865
301.6712-1................................................. 1545-1126
301.6723-1A(d)............................................. 1545-0909
301.6903-1................................................. 1545-0013
1545-1783
301.6905-1................................................. 1545-0074
301.7001-1................................................. 1545-0123
301.7101-1................................................. 1545-1029
301.7207-1................................................. 1545-0092
301.7216-2................................................. 1545-0074
301.7216-2(o).............................................. 1545-1209
301.7425-3................................................. 1545-0854
301.7430-2(c).............................................. 1545-1356
301.7502-1................................................. 1545-1899
301.7507-8................................................. 1545-0123
301.7507-9................................................. 1545-0123
301.7513-1................................................. 1545-0429
301.7517-1................................................. 1545-0015
301.7605-1................................................. 1545-0795
301.7623-1................................................. 1545-0409
1545-1534
301.7654-1................................................. 1545-0803
301.7701-3................................................. 1545-1486
301.7701-4................................................. 1545-1465
301.7701-7................................................. 1545-1600
301.7701-16................................................ 1545-0795
301.7701(b)-1.............................................. 1545-0089
301.7701(b)-2.............................................. 1545-0089
301.7701(b)-3.............................................. 1545-0089
301.7701(b)-4.............................................. 1545-0089
301.7701(b)-5.............................................. 1545-0089
301.7701(b)-6.............................................. 1545-0089
301.7701(b)-7.............................................. 1545-0089
1545-1126
301.7701(b)-9.............................................. 1545-0089
301.7805-1................................................. 1545-0805
301.9000-5................................................. 1545-1850
301.9001-1................................................. 1545-0220
301.9100-2................................................. 1545-1488
301.9100-3................................................. 1545-1488
301.9100-4T................................................ 1545-0016
1545-0042
1545-0074
[[Page 774]]
1545-0129
1545-0172
1545-0619
301.9100-6T................................................ 1545-0872
301.9100-7T................................................ 1545-0982
301.9100-8................................................. 1545-1112
301.9100-11T............................................... 1545-0123
301.9100-12T............................................... 1545-0026
1545-0074
1545-0172
1545-1027
301.9100-14T............................................... 1545-0046
301.9100-15T............................................... 1545-0046
301.9100-16T............................................... 1545-0152
302.1-7.................................................... 1545-0024
305.7701-1................................................. 1545-0823
305.7871-1................................................. 1545-0823
404.6048-1................................................. 1545-0160
420.0-1.................................................... 1545-0710
Part 509................................................... 1545-0846
Part 513................................................... 1545-0834
Part 514................................................... 1545-0845
Part 521................................................... 1545-0848
601.104.................................................... 1545-0233
601.105.................................................... 1545-0091
601.201.................................................... 1545-0019
1545-0819
601.204.................................................... 1545-0152
601.401.................................................... 1545-0257
601.504.................................................... 1545-0150
601.601.................................................... 1545-0800
601.602.................................................... 1545-0295
1545-0387
1545-0957
601.702.................................................... 1545-0429
------------------------------------------------------------------------
(26 U.S.C. 7805)
[T.D. 8011, 50 FR 10222, Mar. 14, 1985]
Editorial Note: For Federal Register citations affecting Sec.
602.101, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
[[Page 775]]
List of CFR Sections Affected
All changes in this volume of the Code of Federal Regulations (CFR) that
were made by documents published in the Federal Register since January
1, 2010 are enumerated in the following list. Entries indicate the
nature of the changes effected. Page numbers refer to Federal Register
pages. The user should consult the entries for chapters, parts and
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the
annual edition of the monthly List of CFR Sections Affected (LSA). The
LSA is available at www.fdsys.gov. For changes to this volume of the CFR
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The
``List of CFR Sections Affected 1986-2000'' is available at
www.fdsys.gov.
2010
26 CFR
75 FR
Page
Chapter I
1.401(a)(35)-1 Added...............................................27931
1.403(b)-4 (c)(5) Example 12 correctly amended.....................65566
1.403(b)-6 (e)(5) correctly amended................................65566
1.403(b)-7 (b)(1) correctly amended................................65566
1.403(b)-10 (b)(3) heading correctly revised; (b)(3)(i) heading
correctly added............................................65566
1.408-7 (d)(2) amended.............................................64084
2011 2012
(No regulations published)
2013
26 CFR
78 FR
Page
Chapter I
1.401(k)-0 Amended.................................................68737
1.401(k)-3 Authority citation and (e)(1) amended; (e)(4)(i), (ii),
(g), (1) and (2) revised...................................68737
1.401(m)-0 Amended.................................................68737
1.401(m)-3 (f)(1) amended; (f)(4)(i), (ii), (h), (1) and (2)
revised; (h)(1)(i) added...................................68738
2014
26 CFR
79 FR
Page
Chapter I
1.401-1 (b)(1)(ii) amended.........................................26842
1.401(a)(9)-5 Amended..............................................37639
1.401(a)(9)-6 Amended..............................................37639
(c)(4)(i) introductory text and (d)(3)(i) correctly revised;
(d)(1)(ii)(B) correctly amended....................................45683
1.402(a)-1 (a)(1)(ii) amended; (e) added...........................26842
(e)(6) Example 2 correctly amended.............................38247
1.402(c)-2 Amended.................................................26842
1.403(a)-1 (g) revised.............................................26842
1.403(b)-6 (g) amended.............................................26842
(e)(9) added...................................................37642
1.408-8 Amended....................................................37642
1.408A-6 Amended...................................................37643
2015
(No regulations published from January 1, 2015, through April 1, 2015)
[all]